Egypt Book 2008

November 11, 2008 EGYPT | TABLE OF CONTENTS

Sector/Co.

Page No.

STRATEGY

3 11

ECONOMY INDUSTRY BANKING CEMENT FERTILIZERS POULTRY REAL ESTATE STEEL SUGAR TELECOM WHITE CONSUMER GOODS

22 30 41 50 58 67 80 91 101

AL-EZZ CERAMICS & PORCELAIN (GEMMA) ARAB COTTON GINNING CO. (ACGC) COMMERCIAL INTERNATIONAL BANK (CIB) CREDIT AGRICOLE EGYPT (CAE) DELTA SUGAR EASTERN COMPANY (EC) EGYPTIAN FINANCIAL & INDUSTRIAL CO. (EFIC) EIPICO EZZ AL-DEKHEILA STEEL EZZ STEEL (ES) MARIDIVE & OIL SERVICES MISR BENI SUEF CEMENT (MBSC) MISR CEMENT (QENA) MOBINIL NASR CITY HOUSING & DEVELOPMENT (NCHD) NATIONAL SOCIETE GENERALE BANK (NSGB) OLYMPIC GROUP ORASCOM CONSTRUCTION INDUSTRIES (OCI) ORASCOM TELECOM (OT) ORIENTAL WEAVERS CARPETS (OWC) PAINTS & CHEMICAL INDUSTRIES (PACHIN) PALM HILLS DEVELOPMENTS RAYA HOLDING SINAI CEMENT TELECOM EGYPT (TE) TMG HOLDING

107 109 111 113 115 117 119 121 123 125 127 129 131 133 135 137 139 141 143 145 147 149 151 153 155 157

EQUITY

November 11, 2008

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November 11, 2008 EGYPT | STRATEGY

AN OASIS OF GROWTH AND VALUE THAT SURPASSES RISK Welcome to CI Capital Research (CICR)'s first Egypt Book, where we look from the top to drill down through 9 sectors and into 26 companies, which we think demonstrates a wide and deep knowledge of the market. WHY HERE? WHY NOW? The Egyptian market has been hit hard by factors not of its own making. Ever since its reformist government has been in place it has managed c.7% p.a. growth, and now, despite global events, is widely recognized as a market of least risk characteristics for its ability to continue delivering growth. Yet, as high commodity prices brought inflation to emerging markets and as the dawning realization that the global financial crisis would have a global economic impact, then the Egyptian market was hit by an outflow of (largely foreign) portfolio investments. This saw the market plummet some 50% year-to-date. This is despite the potential to grow, despite the robustness of its banking system, despite the lack of toxic financial products, and despite economic growth being driven nearly 3/4's by local demand. In short, this has left investors with a market with the potential to grow through these turbulent times, the potential for strong long-term growth, a market of low-cost production, and at valuations often lower than their developed and emerging market peers. We conclude, therefore, that whilst the Warren Buffet approach of buying value for the long-term at times like these is correct, it is entirely possible that the returns may be seen rather sooner. Compelling macro backdrop Egypt’s reformist government is determined to keep growth going, to minimize risk, and to complete a program to bring rising living standards to the masses. It is a consumer-led environment, stimulated by investments, and gradually lowering interest rates. Long-term growth is assured by demographics and geographic location. Summary macro snapshot 2005/6 6.8% 71,347 35,531 1,527 5.3% 8.0%

Real GDP Growth (%) Population (000) Avg. Population (>15<45 yrs old) GDP/Capita, Current (US$) Private Sector Credit Growth Fiscal Deficit % GDP

Actual 2006/7 7.1% 72,798 36,253 1,792 9.1% 7.3%

2007/8 7.2% 74,357 37,030 2,191 13.4% 6.6%

2008/9 5.0% 75,844 37,770 2,305 10.5% 6.5%

Forecasts 2009/10 2010/11 4.4% 5.7% 77,361 78,908 38,526 39,296 2,455 2,698 9.0% 12.3% 6.0% 5.7%

2011/12 6.3% 80,486 40,082 3,026 14.0% 5.3%

Source: CBE and CICR forecast

FIVE TOP PICKS We suggest below five interesting investments spread between a wealth of opportunities and investment requirements. We have chosen these from among the larger stocks, although within the body of the report there are exciting stories for those interested in smaller stocks. Top recommendations LE m

Name NSGB EFIC Mobinil Ezz Steel EIPICO

Source: CICR forecast

3

M.Cap 5,468 2,064 11,537 5,949 1,763

LE

Price 18.1 29.8 115.4 11.0 24.5

LE Up12M side FV % 35.8 98% 50.1 68% 206.0 79% 34.2 212% 43.7 79%

2008

2009

2008

2009

PER 5.4 9.7 6.2 3.3 6.6

PER 4.8 4.5 5.5 4.4 5.9

PBV 1.27 2.91 8.54 0.99 1.50

PBV 1.07 2.33 6.51 0.81 1.36

2008

2009

2008

2009

EV/ EV/ EBITDA EBITDA Yield Yield N/A N/A 2.8% 4.1% 6.5 3.3 2.9% 3.7% 3.9 3.6 13.9% 14.6% 1.8 2.1 2.7% 2.1% 3.2 2.6 7.8% 9.2%

November 11, 2008 EGYPT | STRATEGY VALUATION AND STOCK SELECTION Our analysts use one main method of valuation, namely a discounted cash flow (DCF) model. This discounts the explicitly forecast free cash flow for our 5 year forecast period, then a terminal value at an assumed long-term growth rate. For the real estate companies, the analyst discounts only the expected performance of the known projects. Our basic cost of equity (COE) is taking a risk-free rate of 11.5% (derived from a 10-year bond) and 8% equity risk premium, which is considerably higher than the traditional 5-5.5% seen in global equity research for emerging markets. Individual company models have different COE, adjusting for specific risk and leveraged beta. Basically we think you want to see at least 20% upside potential from a share price performance in the current environment. After the steep market fall, it is unsurprising that every stock has a significant upside potential to the thus-calculated methodology. Clearly in times like these, the sensitivities of DCF go awry, not least as the market perception is perhaps saying that the required rates of return have gone stratospheric. Whilst we are indeed debating changing the valuation methods (in addition to DCF) and how we choose a target price and recommendation, it is convenient to leave this in place, if nothing else to emphasize the fact that EGYPT is way below its long-term potential and indeed the whole market may be a “BUY”. For the purposes of this report, rather than a simple relative ranking between the stocks versus DCF upside potential, we have developed an “S” Score (or Subjective) rating in order to rank the stocks in some order of preference. We do this by looking at a number of “screens” for Profitability, Momentum and Valuation, and by looking at some charts to highlight this relative positioning. We bring this together by including a number of factors, with weights to then provide a ranking order of the stocks, and from this derive a focus list of five companies drawn from different sectors. The factors and weightings we use include our relative assessment of: management, size and tradability of the shares, valuation from PER, PBV and EV/EBITDA, profitability from ROE or ROIC, balance sheet risk from gearing, industry risk from our top-down view, and relative DCF upside. We weight the factors subjectively, having higher weights for management and industry risk than DCF upside potential. We also add a factor if we think the company may be an acquisition target. We only produce the result here in the form of a ranked chart and is only one factor in considering our assessment of our top recommendations. FROM THE TOP - SECTORS From our view on the sustainability of growth in the economy, and with reducing but high inflation, we try to think about which sectors are most and least at risk. Given that the economy is 70% driven by local consumption, and given the government’s desire to sustain economic growth, we generally think the least risky sectors should be the ones that would benefit from any investment program and are linked to domestic consumption. More risky In this global environment, it is perhaps easier to think about where nerves should settle, or where risks are increasing. The sectors below - we think - are relatively high risk: Housing & construction, particularly at the high-end of the market. Demand has been falling away here and the market looks somewhat saturated. If economic growth continues and inflation abates, then there should be reducing pressure on the middle classes, and this is reflected in the housing companies’ shift towards the middle classes away from the topend. It is worth noting that there has not been the property boom to the extent there has been in parts of the Middle East, and property is still consid-

4

November 11, 2008 EGYPT | STRATEGY ered more affordable in Egypt than in the Gulf. PALM HILLS DEVELOPMENTS, SODIC, and TMG HOLDING are companies in this segment Tourism: Falling global demand should place tourist receipts at risk. In recent years, tourists have been coming not only from Europe and the Middle East but increasingly from CIS. Egypt is a relatively low-cost location, with good-all-year weather. Nonetheless, in our macro estimates, we pare the growth of tourist receipts and think this sector potentially at risk. Export oriented: With the slowdown in global trade expected, so too exports, particularly of consumer goods, are at risk. Egypt has some advantage in that it is generally considered to be a low-cost producer. In addition, we expect some currency weakness and export incentives to mitigate this slowdown. Companies such as ORIENTAL WEAVERS CARPETS and OLYMPIC GROUP (the latter to a lesser extent; only 10% of sales come from exports to Arab and African countries) spring to mind as exporters in categories that may suffer from falling global consumption, and yet these companies will also spend efforts in focusing on domestic consumption as the export markets weaken. Less Risky Agriculture: We think food and food services is an interesting sector from the top-down. Firstly, food is needed whatever the economy. Secondly, after the rapid rise in basic food staples last year, Egypt realizes it has to make more of its fertile crescent, and we think this is a sector which will receive investment. Fertilizer, sugar, poultry ,and flour mills all make interesting sectors. Included in this report are EFIC (fertilizers), DELTA SUGAR, and EASTERN COMPANY (tobacco). (Our industry team would be happy to help with bespoke requests on sectors, such as the milling sector, and companies not included in this report.) Non-housing construction: Since we think that there will be investment in infrastructure and help for strategic sectors, then construction per se should still be an activity going on in Egypt. Included in this should also be building services and materials companies. OCI is the principal company in this sector, but the larger proportion of its construction activity is outside of Egypt (mainly GCC). However, its main profit growth driver comes from the fertilizer segment. Other construction-related companies include EZZ STEEL (virtual monopoly in Egypt). In addition, we include cement companies, which is a sector wrongly out of favor – in our view. Within this, there are speculative investments (MISR CEMENT – QENA) and totally mispriced (MISR BENI SUEF CEMENT) and which foreigners can buy.

Oil & oil services: We think the energy sector is also a strategic sector for further development. Mostly, we think this will benefit construction companies in the quoted sector. MARIDIVE & OIL SERVICES is an oil services company and has most of its earnings generated globally. Mostly, we think we shall see continuing foreign direct investments (FDIs) in this sector as indeed recent press articles have continued to highlight the foreign interest in the sector.

5

November 11, 2008 EGYPT | STRATEGY DRILLING DOWN In this section we drill down from the top, running several screens and charts for consideration. We only show the top and bottom companies in each screen, so our top picks, including our "S" Score chart, may have companies that have not featured in these tables, but nonetheless in our opinion do well. PE versus growth 12.0

09E PER

10.0 SUGR 8.0

OCIC

MCQE ETEL EAST

ACGC

6.0

EMOB

PHAR

ORWE CIEB

PACH ESRS

IRAX

RAYA4.0

MOIL OLGR

COMI MBSC

NSGB

SCEM

2.0 0.0 -10%

-5%

0%

5%

10% 15% 20% 3-year EPS CAGR

25%

30%

35%

40%

Source: CICR forecast

The downward sloping trend line perhaps indicates that growth is not the main factor on investors’ minds at the moment, or even that the very high growth rates are disbelieved. In any case, as the cycle goes round, growth should undoubtedly come back into fashion and now is the time to look at companies and markets with the potential for long-range growth – Egypt! Noteworthy above is Palm Hills Developments (PHDC), but this growth is coming off a very low base. We circled the "Sweet Spot" i.e. companies growing at a credible pace at under 6x earnings. ROE vs. PBV and ROIC vs. WACC The ROE versus PBV is in effect a diagram of the PER, and the slope of the line greatly affected by the outliers. The correlation is low, r-squared is just 0.25, but pictorially it does give a snapshot and prompt one to think about whether stocks in the bottom right hand corner really are cheap. The PBV, or Market Value to Invested Capital, compared to the ROIC/WACC, or in a banks case ROE/COE, allows some comparison across sectors, adjusted for risk. The ROE/COE implies the level at which the equity or book value or invested capital should trade, and then (ignoring growth) can be compared to the PBV. ROE vs. PBV

ROIC (ROE) vs. WACC (COE)

3.5 MCQE 09E PBV

2.5 2.0 1.5 1.0 0.5 -

EAST MOIL CIEB ORTE COMI PHAR ETEL NSGB PACH OLGR ECAP ESRS MBSC ORWE SCEM RAYA TMGH 0%

10%

Source: CICR forecast

6

EFIC

IRAX

SUGR

20%

30% 09E ROE

40%

PHDC

09E ROIC (ROE for banks)

45% OCIC

3.0

40%

EMOB

35%

EFIC

30%

IRAX

COMI CIEB

MCQE

25%

SCEM NSGB PHAR PHDC MBSC EAST MOIL OLGR ESRS RAYA ORTE TMGH ETEL ORWE ECAP MNHD ACGC SUGR

20% OCIC

15% 10% 5%

PACH

0% 50%

60%

7%

9%

11%

13%

15%

17%

WACC (COE for banks)

Source: CICR forecast

19%

21%

23%

November 11, 2008 EGYPT | STRATEGY VALUATION Company Cheapest Sinai Cement Palm Hills Developments TMG Holding Misr Beni Suef Cement Raya Holding Dearest Delta Sugar OCI Orascom Telecom Holding Al-Ezz Ceramics Nasr City Housing & Dev.

2008E PER 4.0 4.4 4.1 3.6 4.1 PER 9.0 9.5 12.3 13.4 36.4

2009E PER 2.5 2.9 3.4 3.5 3.6 PER 8.9 9.4 9.5 22.4 33.4

Company Cheapest TMG Holding Arab Cotton Ginning Raya Holding Oriental Weavers Sinai Cement Dearest EFIC Misr Cement (Qena) OCI Mobinil Nasr City Housing & Dev.

2008E PBV 0.35 0.48 0.55 0.65 0.83 PBV 2.91 2.95 2.82 8.54 15.31

2009E PBV 0.32 0.46 0.50 0.60 0.65 PBV 2.33 2.52 3.16 6.51 12.99

Company Highest Mobinil Credit Agricole Bank-Egypt Ezz Al-Dekheila Misr Beni Suef Cement Olympic Group Lowest Al-Ezz Ceramics Maridive & Oil Services PACHIN Palm Hills Developments TMG Holding

2008E Yield 14% 10% 14% 6% 7% Yield 0% 0% 0% 0% 0%

2009E Yield 15% 12% 11% 10% 9% Yield 0% 0% 0% 0% 0%

Company Cheapest Sinai Cement Palm Hills Developments Arab Cotton Ginning Misr Beni Suef Cement Ezz Steel Dearest Olympic Group Delta Sugar Misr Cement (Qena) OCI Nasr City Housing & Dev.

Company Fastest Palm Hills Developments EFIC TMG Holding Al-Ezz Ceramics OCI Slowest Nasr City Housing & Dev. Delta Sugar Arab Cotton Ginning Raya Holding Orascom Telecom Holding

2009E EPS 52% 116% 21% -40% 1% EPS 9% 1% 10% 14% 30%

3yr CAGR EPS 100% 69% 47% 42% 40% EPS -3% -5% -6% -6% -27%

Company Fastest Palm Hills Developments TMG Holding EFIC OCI Olympic Group Slowest Eastern Company Ezz Al-Dekheila Nasr City Housing & Dev. Misr Cement (Qena) Delta Sugar

2009E EBITDA 42% -1% 86% -12% 30% EBITDA 2% -20% 13% -4% -7%

3yr CAGR EBITDA 105% 95% 62% 41% 25% EBITDA 5% 5% 1% -2% -6%

Company Fastest Sinai Cement Maridive & Oil Services Palm Hills Developments EFIC TMG Holding Slowest Ezz Steel Misr Beni Suef Cement Ezz Al-Dekheila Raya Holding Nasr City Housing & Dev.

2009E CASH 1389% 5% -4% 70% 37% CASH -28% 1033% -12% 5% -14%

3yr CAGR CASH 244% 200% 78% 53% 45% CASH -2% -8% -11% -19% -24%

Company Fastest Maridive & Oil Services Ezz Steel CIB Ezz Al-Dekheila Misr Beni Suef Cement Slowest Delta Sugar Arab Cotton Ginning PACHIN Telecom Egypt Nasr City Housing & Dev.

2009E BVPS 29% 22% 28% 19% 20% BVPS 7% 5% 5% 4% 18%

3yr CAGR BVPS 48% 36% 29% 26% 25% BVPS 7% 5% 5% 4% 1%

2008E 2009E EV/EBITDA EV/EBITDA 3.3 1.5 2.2 1.6 2.5 1.9 2.9 2.0 1.8 2.1 EV/EBITDA EV/EBITDA 5.5 5.2 4.9 5.3 5.5 5.3 8.9 11.7 28.5 25.4

MOMENTUM

Source: CICR forecast

The cheapest rated stocks, (PER) tend to come from the sectors out of favor, such as cement, real estate, and IT services, with steel not far behind. Similarly the highest yields are found there. Dividend yields are approaching money market rates, which should enhance any total return for an investment. Whilst a sector like cement is out of favor with investors, there really appears a good longer-term opportunity. Consider that the government is trying to sustain growth through investment, and there continues to be much need for infrastructure investment in Egypt to such an extent that the companies are finding it necessary to increase their capacity (see the industry section), and there is some sector consolidation to consider.

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November 11, 2008 EGYPT | STRATEGY PROFITABILTY & RISK ROE Best Mobinil EFIC Ezz Al-Dekheila Palm Hills Developments Nasr City Housing & Dev. Worst Oriental Weavers Telecom Egypt TMG Holding Arab Cotton Ginning Al-Ezz Ceramics

2008

2009

120% 32% 74% 43% 36% 2008 13% 10% 9% 6% 7%

135% 58% 45% 43% 42% 2009 13% 12% 10% 6% 4%

NET DEBT/EQUITY Best Al-Ezz Ceramics Orascom Telecom Holding Olympic Group OCI

2008

2009

54% 78% 51% 52%

37% 50% 78% 113%

Worst PACHIN Palm Hills Developments EIPICO Misr Cement (Qena) Delta Sugar

2008 -20% -36% -41% -32% -48%

2009 -22% -33% -45% -45% -46%

EBITDA Margin Best Palm Hills Developments Misr Cement (Qena) Telecom Egypt TMG Holding Misr Beni Suef Cement Worst PACHIN Ezz Steel Oriental Weavers Olympic Group Raya Holding

2008

2009

66% 53% 50% 39% 56% 2008 20% 22% 17% 15% 6%

59% 53% 52% 51% 46% 2009 20% 20% 17% 16% 6%

Net Interest/Revenue Best Arab Cotton Ginning OCI TMG Holding EIPICO Misr Cement (Qena) Worst Oriental Weavers Mobinil Orascom Telecom Holding Raya Holding Olympic Group

2008

2009

33% 8% 8% 5% 2% 2008 -12% -9% -21% -25% -16%

35% 11% 11% 5% 4% 2009 -10% -10% -18% -19% -19%

Source: CICR forecast

Mobile telephony may start to benefit from sector rotation as recent results from MOBINIL suggest the concerns of a downturn in subscriber activity may have been overdone. Clearly, the market also fears the housing and real estate companies which seem already to be discounting a major downturn in real estate prices. This also is a sector where consolidation may occur, especially amongst smaller players, as in this environment the larger companies seek to acquire land banks. If our analysts are right there is considerable momentum still to be seen in Egypt. Even those ranking in the “worst section” have reasonable growth expectations. EZZ STEEL, almost a steel monopolist in Egypt, stands out as lowly rated and growing quickly. The catalyst again should be construction volumes as it can control its margin. MISR BENI SUEF CEMENT also falls into this category and looks potentially mispriced. EFIC has fast growing earnings and is cash generative, and a look at the company pages shows that it too is not highly rated. This is in a strategicallyimportant sector as the government wants to increase the agriculture capacity and is still benefiting from better pricing even if fertilizer prices are well off their peak. The lowly-rated housing and cement sector rank well on EBITDA margin, and MOBINIL in terms of returns on shareholders’ equity, but this latter is also one of the most highly leveraged, just escaping our list of bottom 5. Reducing interest rates, now that the cycle is turning may be of some help, but this is increased financial risk for the returns. Even the worst appear to have reasonable returns measured as EBITDA margin.

8

November 11, 2008 EGYPT | STRATEGY "S" SCORE Given the weightings and factors we include, the highest ranked stocks do not necessarily have the most compelling valuations. In this way, OCI has come out highly paced, and is indeed one of Egypt’s premier blue chips, with a wellregarded management. The banks as cheap and tradable come out well in this scoring too. “S” Score ranking 140 120 100 80 60 40 20 OCIC

NSGB

EFIC

CIEB

SCEM

PHDC

ESRS

TMGH

EAST

RAYA

MBSC

ETEL

PHAR

IRAX

ACGC

EMOB

MOIL

MCQE

ORTE

OLGR

ORWE

PACH

SUGR

ECAP

MNHD

0

Source: CICR forecast

CI Capital Research Universe LE m

Name Al-Ezz Ceramics Arab Cotton Ginning CIB Credit Agricole Bank-Egypt Delta Sugar Eastern Company EFIC EIPICO Ezz Al-Dekheila Ezz Steel Maridive & Oil Services Misr Beni Suef Cement Misr Cement (Qena) Mobinil Nasr City Housing & Dev. NSGB OCI Olympic Group Orascom Telecom Holding Oriental Weavers PACHIN Palm Hills Developments Raya Holding Sinai Cement Telecom Egypt TMG Holding

LE

Price M.Cap (11/6/08) 254 5.0 1,020 4.1 8,989 30.7 2,959 10.3 2,170 22.0 5,450 218.0 2,064 29.8 1,763 24.5 12,249 896.2 5,949 11.0 3,781 2.6 936 46.8 2,310 77.0 11,537 115.4 3,122 31.2 5,468 18.1 42,192 196.5 1,450 24.1 33,116 36.8 1,708 22.9 585 29.2 3,774 8.1 259 4.6 1,150 32.9 26,801 15.7 7,857 3.9

LE 12M FV 7.2 10.1 N/A 15.3 32.3 305.6 50.1 43.7 1,501.9 34.2 5.1 152.5 98.5 206.0 42.8 35.8 330.5 55.1 96.1 48.3 83.4 24.3 11.5 93.0 24.3 12.8

Source: CICR forecast *Maridive & Oil Services share price is in US dollar

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Upside % 45% 148% N/A 49% 47% 40% 68% 79% 68% 212% 99% 226% 28% 79% 37% 98% 68% 128% 161% 111% 185% 199% 152% 183% 55% 231%

2008

2009

2008

2009

2008

2009

2008

2009

PER 13.4 8.0 5.1 5.6 9.0 7.1 9.7 6.6 4.2 3.3 7.8 3.6 8.5 6.2 36.4 5.4 9.5 5.5 12.3 5.3 5.3 4.4 4.1 4.0 9.9 4.1

PER 22.4 7.3 4.3 4.9 8.9 7.1 4.5 5.9 5.4 4.4 6.5 3.5 7.8 5.5 33.4 4.8 9.4 4.2 9.5 4.6 4.5 2.9 3.6 2.5 7.9 3.4

PBV 0.80 0.48 1.69 1.68 2.42 1.75 2.91 1.50 2.62 0.99 1.85 1.11 2.95 8.54 15.31 1.27 2.82 1.51 1.46 0.65 1.14 1.25 0.55 0.83 1.00 0.35

PBV 0.78 0.46 1.32 1.52 2.27 1.54 2.33 1.36 2.21 0.81 1.44 0.92 2.52 6.51 12.99 1.07 3.16 1.23 1.28 0.60 1.09 1.20 0.50 0.65 0.96 0.32

EV/ EBITDA 5.6 2.5 N/A N/A 4.9 4.7 6.5 3.2 3.4 1.8 5.9 2.9 5.5 3.9 28.5 N/A 8.9 5.5 3.9 5.0 4.1 2.2 3.6 3.3 5.6 3.0

EV/ EBITDA 4.2 1.9 N/A N/A 5.3 4.4 3.3 2.6 4.1 2.1 4.6 2.0 5.3 3.6 25.4 N/A 11.7 5.2 3.3 4.2 3.4 1.6 3.0 1.5 4.8 2.4

Div. Yield 0.0% 3.8% 3.3% 9.7% 8.3% 6.7% 2.9% 7.8% 14.4% 2.7% 0.0% 5.5% 7.1% 13.9% 1.7% 2.8% 2.3% 7.2% 2.7% 6.8% 0.0% 0.0% 8.0% 5.0% 6.6% 0.0%

Div. Yield 0.0% 4.1% 4.1% 12.1% 8.4% 7.0% 3.7% 9.2% 11.2% 2.1% 0.0% 10.0% 7.7% 14.6% 1.8% 4.1% 2.9% 9.4% 3.5% 7.8% 0.0% 0.0% 9.1% 8.0% 8.2% 0.0%

November 11, 2008 EGYPT | STRATEGY CONCLUSIONS Summarizing the charts, tables and data above, these are the main conclusions we draw:

A. Mispriced in our opinion: SINAI CEMENT - Heavily sold off and half the value of its peers. RAYA HOLDING - Consumer electronics, slow growth, and its net debt ranking belies a liquid balance sheet and investments into a growing service sector. EIPICO – Low PER, high yield, decent (defensive - pharmaceutical) growth, good margins and profitability. The banks (see industry section) do not make most of the screens but are relatively well placed as well capitalized and liquid, profitable, growing, and cheaply rated. Now that the interest rate cycle has stabilized, interest may return to this segment, not least as it is one banking sector in the world capable of lending to a market with the potential to grow.

B. Speculative interest: RAYA HOLDING - Cheap liquid balance sheet could be made to sweat more. MISR CEMENT (QENA) - Cement in the right place at the right time, and ASEC is building a stake.

Our top five picks From the above and from our “S” Score, we highlight the following investment opportunities from different sectors and in no particular order: NSGB: profitable, good returns, sound balance sheet, and still gaining restructuring benefits, trading at 4.8x 2009E earnings, 1.1x 2009E BV, ROE 24%, while earnings growing at 31% over next three years. EFIC: Sound high returning growth in a strategically-important agricultural sector, valued at 4.5x 2009E earnings. EIPICO: Defensive play in the healthcare sector. Stable earnings with long-range potential as health becomes an increasingly important issue in Egypt. MOBINIL: Mobile operator which has just beat consensus 3Q08 earnings. It pays a generous dividend and sweats the equity. Interest rate and leverage risk should be declining and has ongoing cost efficiency program. We think there is some rotation back to Telcos, which should benefit from stimulated consumer. EZZ STEEL: Virtual monopoly position in Egypt, with controlled margins, cheaper than foreign competition. Benefit from any rally in commodity prices, and more fundamentally from the continued (non-housing) construction investment we think will continue in Egypt.

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November 11, 2008 EGYPT | ECONOMY

DEMAND & INVESTMENT: A DARING CHALLENGE

POTENTIALS Populous economy with inherent sizable demand. Domestic investments represent the bulk – around 60% - of implemented investments. Well capitalized, under leveraged Banking sector flushed with liquidity. Solid BOP position even with the weakening at the margins. Favorable factors of production and benign business environment that allows Egypt to act as an investment hub within the region. Underlying potential in a number of sectors including fertilizers, infrastructure, agribusiness and pharmaceutical.

From the beginning of 2008 emerging economies watched the global tornado from afar. Now with a vanishing confidence, foreign capital has fled compelling the waning of many emerging economies stock markets. Yet, we deem Egypt's economy will reveal distinguished resilience amidst the headwinds from the developed economies. Reinforced by its diversified GDP, liquid banking system, and an under-leveraged economy; Egypt is expected to maintain a modest GDP growth rate of 5% in FY08/09 – based on the GoE's ability to promote local investments, with a focus on SMEs. Consumer-led recovery “the guardian” for growth: Reaping the fruits of bold reforms implemented to date and a growing investors’ confidence, Egypt's economy has leapfrogged both on its economic and fiscal management platforms. Thanks to the export-led strategy adopted, which led to the witnessed domestic demand boom, GDP jumped to a growth rate of 7.2% in FY07/08.

RISKS The current global challenges that is expected to negatively impact exports growth. Highly affected FX earning sectors, namely tourism, Suez Canal and FDI. Inability to rely on fiscal pumping to promote growth with the prevailing fiscal deficit.

FDI, a perfect exhale: Given Egypt’s fertile business soil and the increasing investors’ confidence in a reformist government, FDI soared reaching US$13.2 bn in FY07/08 up from US$3.9 bn in FY04/05. Yet, it is expected to be hardly hit by the global downturn and exacerbated by investors’ panic all over the globe. Sustained high inflation jeopardy fading away: Like other open economies, Egypt was hit hard by the surge in international oil and food prices with inflation recording a double-digit growth of 11.7% in FY07/08. However, complying with the expected decline in international markets, we believe inflation to simmer down driving the wheel for strengthened domestic demand. BOP surplus maintained while current account deteriorates: Expenses of the robust domestic demand has been reflected in a deteriorating current account reaching US$0.9 bn in FY07/08 and turning into a deficit of US$ 3.3 bn in FY08/09 given the widening trade deficit and the relatively static services growth. Yet, still BOP reflects low vulnerability given the performance of the capital and financial account outweighing such pitfalls. Fiscal deficit restructuring, right on track: Despite the huge hike in expenditures due to increased subsidies, driven by the spiraling rise of oil prices; fiscal deficit to GDP narrowed to 6.6% in FY07/08 down from 7.3% in FY06/07. This is mainly attributable to the revenues growth, powered by tax revenues' increase as well as other revenues including proceeds from cement licenses worth of around LE 1.14 bn in FY07/08.

11

SELECTED MACRO INDICATORS 2006/7 744.8 7.1% 1,792 10.9% 11,053 155.3

GDP (Current, LE bn) Real GDP GR (%) GDP/Capita (Current, US$) Inflation (CPI %) FDI (US$ mn) Investments (LE bn)

2007/8 896.5 7.2% 2,191 11.7% 13,237 179.3

2008/9F 1,002.8 5.0% 2,305 17.0% 6,364 190.8

ALIA MAMDOUH [email protected]

EGYPT’S ECONOMIC PERFORMANCE Real GDP GR

Investment GR

8.0%

25.0%

7.0% 20.0% 6.0%

5.0%

15.0%

4.0% 10.0%

3.0%

2.0% 5.0% 1.0%

0.0%

0.0% 2003/4

2004/5

2005/6

2006/7

2007/8

2008/9

2009/10

2010/11

2011/12

November 11, 2008 EGYPT | ECONOMY

REAL SECTOR Economic growth in recent years has been aggravated by a diversified output strategy that was reflected in the strong growth in tourism, construction, real estate, communications, oil and gas and trade sectors. The inflow of foreign investments as DAMAC and Emaar helped flourishing the construction and real estate sectors that in turn fed the building materials industry. In addition, the entrance of the third mobile operator, Etisalat Misr, lifted up the communications sector. Export volumes, despite the strengthening of the Egyptian pound against the US$ helped the manufacturing sectors to record a growth of 8% in FY07/08 up from 5.9% in FY05/06. GDP growth by sector

Real GDP growth breakdown Private consumption Gross Capital Formation

Fueled by an expanded output strategy, economic growth has been maintained over the past years

Government consumption Net Exports

2006/7

2007/8

30.0%

100% 25.0%

90% 20.0%

80% 70%

15.0%

60% 10.0%

50% 5.0%

40% 30%

2004/5

2005/6

2006/7

2007/8

Others

Real Estate

Tourism

Financial services

Wholesale & Trade

Communications

0%

Construction

10%

Industries

Oil & Gas

0.0%

20%

Source: CBE

Source: CBE

SMEs have been one of the pillars of the Egyptian private sector, compromising the bulk - above 90% - of the operating private non-agricultural establishments. Micro, small and medium enterprises contribute with around 80% of total value added and attract 47% of total investments. Moreover, their input to the country’s exports reached around 20%; of which chemical products represent the lion’s share of 38%.

An economy with an increasing say for SME’s and the informal sector

SME’s contribution to Industrial GDP 2006E

2000 Small, 12%

Large, 38%

Small, 14%

Large, 48%

Medium, 40%

Source: CICR database

12

Medium, 50%

November 11, 2008 EGYPT | ECONOMY As SMEs provide affordable goods and services that suits the lower and lowermiddle income groups - which represents 57% of the population - they are highly interrelated to the informal economy. Such high level of informality limits SMEs access to a wide range of formal services, most importantly credit facilities. Recognizing their vital role, GoE launched an Exchange market for growing medium and small companies, Nilex, to facilitate access to capital as well as exposure to foreign investors. We highly believe that increasing SMEs support is crucial to sustain high growth levels by promoting entrepreneurship, job creation and attracting domestic investments.

High level of informality is the main impediment facing SMEs. Yet, they enjoy increasing GoE support

INVESTMENTS The package of bold reforms implemented on all fronts, namely (1) reducing the minimum capital requirement of incorporation to LE 1,000, (2) corporate tax cut by half reaching 20%, (3) reducing weighted average custom tariffs from 14% to 6.9%, (4) tariff bands streamlined and reduced from 27 to 6, and (5) customs on capital assets capped at 5% have created an attractive environment for investment. Moreover, with the country's favorable factors of production and competitive energy prices, both investment and FDI recorded buoyant growth.

Vibrant investment appetite

Based on weighted growth, the services sectors accounted for the bulk of new investments. In FY07/08, investment in transportation and communication witnessed the highest flow of 7.8%; followed by hydrocarbon investments, namely in the upstream activities which recorded a weighted growth of 7.1%. Infrastructure investments come next with a rate of 5% - especially in water and electricity stations.

Services sectors led investment growth

Investment breakdown FY07/08 Health, 2%

Others, 8%

Education, 3%

Investments weighted growth by sector 9.0%

Agriculture, 4%

8.0%

Crude Oil & NG, 17%

Real Estate, 7%

7.0% 6.0% 5.0%

Tourism, 3%

4.0%

Financial Intermediaries, 1%

3.0%

Manufacturing & Oil Products, 22%

Wholesale & Retail Trade, 3%

2.0% 1.0%

Source: CBE

Others

Health

Education

Real Estate

Tourism

Financial Sector

Wholesale Trade

Source: CBE

Rising confidence in the country's economic performance loosened the wheel for FDI flows which maintained their high growth levels reaching US$13.2 bn in FY07/08 up from US$3.9 bn in FY04/05. FDI constitutes around 8.2% of the country's GDP in FY07/08. The petroleum sector held the major chunk of 38% of such inflows, while the contribution of the real-estate still maintains a low level of 0.8% in FY07/08, despite its strong growth reaching US$90.6 mn up from US$39 mn in FY06/07. Within the non-petroleum investments, the financial sector accounted for the lion’s share of 40% followed by industrial activities (32%) and the services sectors (15%).

13

Suez Canal

Construction

Manuf.& Oil Products

Transp. & Com.

Electricity & Water, 8%

Electricity & Water

Construction & Building, 2%

Crude Oil & NG

Agriculture

0.0%

Transp. & Com., 20%

Mounting FDI inflows were reflected in a strengthened currency and an expanded output

November 11, 2008 EGYPT | ECONOMY Investment & FDI & Shares in GDP FDI FDI % of GDP

US$ mn

Non-Petroleum FDI Breakdown FY07/08

Implemented Investments Investment % of GDP

CIT, 0.3% Real Estate, 1.8% Tourism, 2.2%

25.0%

35,000 30,000

Services, 15.3% 20.0%

25,000 15.0%

20,000 15,000

Industry, 31.6%

10.0% Financial Sector, 40.1%

10,000

Agriculture, 1.4%

5.0% 5,000

Construction, 7.3%

0

0.0% 2004/5

2005/6

2006/7

2007/8

Source: CBE

Source: Ministry of Investment

However, sustaining such strong FDI levels is doubtful, especially after the removal of tax exemptions from the free zones for energy-intensive industries coupled with the increase in energy prices that were announced in May 2008. Moreover, the current global financial turmoil is expected to have a negative impact on the inflow of FDI, as 70% of such inflows comes from the US and EU countries. Yet, with GCC surplus such decline is expected to be mitigated. We expect net FDI inflows to reach US$6.4 bn in FY08/09, followed by US$5.9 bn in FY09/10. On a different note, GoE expects FDI to reach around US$10 bn in FY08/09.

However, sustaining such strong FDI inflows is of a concern

Despite the global gloom, announcements of new projects are still in the headlines: Al Kharafi Group confirmed plans to pump US$2 bn in new investments in the steel industry; Schneider Electric will establish a new electricity plant with an investment cost of around US$ 45.5 mn; GlaxoSmithkline plans to buy the Egyptian mature products business of Bristol-Myers Squibb Co. for US$210 mn, and Solvay SA, the world's largest soda- ash maker, bought Alexandria Sodium Carbonate Co. in a deal worth US$137.5 mn. Moreover, the fertilizers sector is to witness further investments including EBIC, Agrium and Egyphos.

A positive aspect is that announcements of new foreign investments are still in the headlines

Key pipeline projects over 2008-12 Sector Cement

Steel

Real Estate

Tourism

Fertilizers

Project

Investments US$350 mn LE 1,500 mn LE 1,600 mn LE 1,000 mn

Completion Date 2010 2010 2011 2012

Four new steel raw materials factories; Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron.

US$15 bn

NA

Almaza City Center by Al-Futtaim

US$0.5 bn

2008

Hyde Park by Damac

US$5.5 bn

2011

Cairo Nile Corniche Towers project by Qatari Diar

LE 5.75 bn

2011

West Town Cairo, in Sheikh Zayed by SODIC East Town Cairo, in Katameya

US$2.4 bn US$1.6 bn

2011 2011

Port Ghalib by El-kharafi Group Serrenia resort by Shaheen Bus.& Inv, Group

US$1.2 bn US$2.5 bn

2009 2010

El-Swedy Cement North Sinai Cement Al-Nahda Industries Al-Wady Cement

Porto Sokhna by Amer Group Marassi by Emaar

2010 2012

Almaza Bay Resort by Travco

2012

Egyptian Basic Industries Co. (EBIC)

US$432 mn

2008

US$250 - 300 mn

2010 2010

Egyptian Fertilzers Co. (EFC) Agrium Egyphos

Source: CICR

14

LE 1.5 bn US$1.74 bn LE 2.56 bn

US$1400 mn US$680 mn

2011

November 11, 2008 EGYPT | ECONOMY As domestic investments represent the bulk of total implemented investments in Egypt, of which SMEs bears a considerable contribution, the GoE's commitment to support SMEs investments as well as providing them with export facilities – through tapping new potential markets – is expected to mitigate a reduced FDI inflows. Moreover, the GoE's decision of freezing any increase in energy prices till the end of 2009 is another measure that can drive further investments. In addition to the continued infrastructural development with US$8.9 bn worth of transport investments expected to pour into the country over the coming three years. We expect total implemented investments to reach LE 190.8 bn in FY08/09. Against this backdrop and given the purchasing power resilience of the upper and upper middle classes of the society and their influence on the informal sector domestic demand growth will likely maintain its levels. Thus, we believe Egypt to maintain a modest growth amidst such turbulence and negative sentiments with expected GDP growth rates of 5% and 4.4% in FY08/09 and FY09/10, respectively. Said moderate setback in growth is to be also supported by the country’s diversified GDP, liquid banking system with loans to deposits ratio of 53% and an underleveraged economy.

Another positive aspect is the GoE's commitment to focus on SMEs and continuing infrastructural development

We highly believe a 5% GDP growth is still significantly higher than that witnessed during the slowdown early in the decade, reflecting a better-off economic structure with stronger spine and foundations. Overall, we believe economic slowdown will worsen in FY09/10 given the steep decline in oil prices and the maintained global slowdown affecting large emerging markets, including Russia and China. Our estimates are considered conservative, yet there might be upside surprises if the GoE succeeded to attract higher than expected FDI levels and support exportoriented industries.

FDI & Investment Outlook LE bn 300.0

Investment

FDI

US$ mn 14,000 12,000

250.0

10,000 200.0 8,000 150.0 6,000 100.0 4,000 50.0

2,000

0.0

2005/06

2006/07

2007/8

2008/9

2009/10

2010/11

Source: CICR forecast

Public-private partnerships (PPP) are integral to investments, as well as sustained economic growth as it aims at lifting-off some of the burden on the government budget, particularly in terms of infrastructural investments. PPP is considered an important supporting tool for the private sector as well benefiting from the government endorsement in fast-tracking the projects permits. One of the main sectors that witnessed PPP projects is the transport sector with Cairo-Alexandria highway project that will be awarded to a private firm under the PPP model in January 2009 with an estimated investment cost of LE 1.9 bn. In addition to the Mediterranean Coastal highway with an investment cost of LE 1.5 bn. There are still a number of PPP opportunities in infrastructure development, including water facilities and sanitation as well as electricity plants with Egyptian Contracting Co. (Mokhtar Ibrahim) winning a project for expanding a water utility in Obour City with an investment cost of LE 280 mn. We highly believe that endorsing PPP will enhance sustaining moderate economic growth levels without imperiling the existing fiscal deficit.

15

Public-private partnership, another mechanism for supporting investments

November 11, 2008 EGYPT | ECONOMY

MONETARY SECTOR INFLATION Rising global oil prices as well as international commodities prices, namely food – as Egypt is a net importer - lifted up local products' prices, leading CPI reading of 11.7% in FY07/08. Yet, the full impact should be reflected in FY08/09 by which CPI reading is expected to reach 17%. In an effort to curb inflationary pressure, the GoE raised up interest rates; reduced imports tariff to 6.9% from 9%; and imposed tariffs on certain export commodities (steel, cement, rice), yet, inflation maintained its increase – with CPI reading reaching the peak of 23.6% in August 2008. Bearing the highest weight in CPI (44%), food & non-alcoholic beverages drove up the hike being highly influenced by changes in oil prices. In an attempt to alleviate inflationary pressures on the public, as Egyptians spend around 45% of their income on food items expanding to 60% for the lowest income groups, GoE increased wages by 30% in May 2008. Yet, sustained high levels of inflation outweighed such efforts and eroded the Egyptian's purchasing power and real incomes.

High levels of inflation imposed a threat to growth

CPI, food & oil prices CPI

Food prices

Oil prices

35.0%

US$/barrel 160.0 140.0

30.0%

120.0

25.0%

100.0 20.0% 80.0 15.0% 60.0 10.0%

40.0 20.0

0.0%

0.0 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

5.0%

Source: CAPMAS & Bloomberg

16

The decline in global oil prices witnessed since July 2008 was filtered down to food commodities' prices which started to cool-off since September 2008, bringing down the CPI reading to 20.2% in October 2008. We believe inflation will not record its 2008 skyrocketing readings, not only due to the cool-off in international prices but also due to the absence of the low base of the consumer price index effect. We expect inflation to start exhibiting lower levels in FY09/10, enhancing the purchasing power and driving up domestic demand.

Yet, inflation started cooling-off

As a measure to counteract inflation, the Central Bank of Egypt (CBE) raised interest rates for six consecutive times starting February 2008. The overnight deposits and lending rates rose from 8.75% and 10.75% in December 2007 reaching 11.5% and 13.5%, respectively in September 2008. Consequently, broad money supply and liquidity (M2) witnessed slower growth of 15.7% in FY07/08 down from 18.2% in FY06/07. We do not believe that the monetary tightening have been totally effective in curbing inflation mainly due to the slow pass of changes in corridor interest rates to general interest rates in the banking system. In addition to, the relatively low loan-to-deposits ratio of 53% that flushed the banks with excess liquidity, along with the nature of the Egyptian economy – which bears a significant contribution from the informal sector.

Monetary tightening was the first response

November 11, 2008 EGYPT | ECONOMY With easing inflation readings coupled with expected risk of a downturn, the tightening monetary cycle seems to come to an end. The pressing need to support the economy in facing the impact of the global economic downturn should be through driving up local investments. Therefore, monetary policy is expected to be loosened with lending rates to decline to 12% in FY09/10.

CPI & interest rate

Policy rates is a tool to support growth

Money supply growth & lending rates

Deposits

Lending

CPI 25.0%

16.00%

LE bn 900.0

Domestic Liquidity (M2)

Lending Rates 14.0%

800.0

12.0%

14.00% 20.0%

700.0 10.0%

12.00% 600.0 10.00%

15.0%

8.00% 10.0%

6.00%

500.0

8.0%

400.0

6.0%

300.0 4.0% 200.0

4.00% 5.0%

2.0%

100.0 0.0% Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

0.00%

0.0

0.0%

Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-07 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08

2.00%

Source: CBE

Source: CAPMAS & CBE

EXTERNAL SECTOR The extensive growth in capital flows, exports revenues as well as FDI inflows, contributed to the rebound in the Egyptian pound’s confidence leading to the pound’s appreciation to an average of 5.503 LE/US$ in FY07/08 up from 5.710 LE/US$ in FY06/07. We believe such appreciation will not likely to continue with the strength gained by the US$ against the EUR and the declining oil prices. In addition to the decline in FDI flows and the expected current account deficit that will exert more pressure on the Egyptian pound. We expect the LE to depreciate reaching an average of 5.735 LE/US$ in FY08/09, followed by further depreciation in FY09/10 reaching an average of 5.819 LE/US. Exchange rates EUR/USD

US$ 1.60

LE/USD

LE 6.40

1.40

6.20

1.20

6.00

1.00 5.80 0.80 5.60 0.60 5.40

0.40

Source: Bloomberg & CICR forecasts

17

2011/12

2010/11

2009/10

2008/9

2007/8

2006/7

5.00

2005/6

0.00

2004/5

5.20

2003/4

0.20

Strong Egyptian pound, yet, not for long

November 11, 2008 EGYPT | ECONOMY Egypt's Balance of Payment (BoP) ran an overall surplus of US$5.4 bn in FY07/08 supported by the combined effect of a net inflow of US$7.1 bn on the capital and financial account, and a current account surplus of US$0.9 bn. On the other hand, Egypt’s trade balance reflected an increasing trade deficit despite exports’ growth recording 19% in FY06/07 and 33% in FY07/08 - mainly led by the 43% increase in oil exports. But, the hike in domestic consumption pushed imports growth higher recording 26% and 38% in FY06/07 and FY07/08, respectively. Imports growth was mainly attributed to petroleum payments registering the highest growth of 131% in FY07/08 due to the rising international oil prices. Yet, the services balance surmounted such deficit led by the strong growth of tourism revenues, which resulted in a current account surplus of US$888 mn in FY07/08. It is worth highlighting that the current account is experiencing a shrinking surplus with a declining share in GDP of 0.5% in FY07/08 down from 1.7% in FY06/07 exacerbated by the growing trade deficit.

Current account inflows

Current account & trade balance Trade Balacne Consumption

US$ mn

Consumption boom led to a higher trade deficit

Current account balance

LE bn

30,000.0

700.0

600.0

20,000.0

US$ mn 16,000

Oil Exports

Suez canal

Tourism

Remittances

14,000 12,000

500.0 10,000.0

10,000 400.0

8,000

0.0 300.0

6,000

(10,000.0)

(20,000.0)

200.0

4,000

100.0

2,000 0

0.0

(30,000.0) 2004/5

2005/6

2006/7

2004/5

2007/8

Source: CBE

2005/6

Trade Deficit & Current account US$ bn

Imports

Exports

Current Account

US$ bn 4.0

80.0 2.9

2.3

60.0

2.0 0.9

1.8

40.0

0.0

20.0

-2.0

0.0

(3.3)

-4.0 -20.0 -6.0 -40.0 -8.0

(8.5)

-60.0

-10.0

-80.0

(11.0)

-12.0

-100.0 -120.0

(13.7)

-140.0

-14.0 -16.0

2005/6

2006/7

2007/8

2008/9

Source: CBE & CICR forecasts

18

2007/8

Source: CBE

Even before we consider the impact of the global slowdown, trade balance has been on the edge with expectations of a growing deficit, given the extensive growth in imports driven, as previously mentioned, by the buoyant domestic demand. Looking ahead, the global shrinking demand, particularly hitting developed economies, especially the US and EU, our main trade partners, are expected to force exports to witness a notable setback in its previous strong growth levels. We believe exports to exhibit a growth of 14% in FY08/09 supported by the weaker pound, and the already signed contracts; while imports are expected to grow with 18% in the same year. As imports' growth is expected to continue exceeding that of exports, a growing trade deficit will remain a major drawback for the current account as it is not expected to be outweighed in the medium-term given the static services growth.

2004/5

2006/7

2009/10

2010/11

2011/12

Trade balance, the pitfall of the current account

November 11, 2008 EGYPT | ECONOMY Tourism, one of the main FX earnings pillars, witnessed dramatic growth over the past two years. Both, international tourist arrivals (ITA) and international tourism receipts (ITR) recorded significant respective growth of 18.3% and 32.3% in FY07/08. Such buoyancy has been mainly supported by the weakness of the Egyptian pound against the euro and GCC currencies, where Europe accounts for the bulk of ITA representing 69%, followed by the Middle East 18.8%. Yet, such exceptional tourism performance is expected to be at risk, being faced by the anticipated slowdown in the global economy with ITR expected to reach US$11.1 mn and US$11.8 mn in FY08/09 and FY09/10, respectively.

Tourism receipts is the first to be hit

Boosted by the rising global trade and high oil prices; Suez Canal receipts recorded magnificent growth of 17.2% and 23.6% in FY06/07 and FY07/08, reaching US$5.2 bn. Yet, the anticipated slowdown in global trade is expected to impact Suez Canal receipts leading to a lower growth levels reaching US$5.6 bn.

With expectation of a declining global trade, Suez canal receipts will be negatively impacted

Suez Canal Receipts & Traffic Number

No. of Vessels

Oil Tankers

International tourists arrivals & receipts US$ mn

Suez Canal Receipts

2,000.0

600.0

US$ mn

Tourism Reciepts

Visitor

Tourists Arrivals

12,000.0

14,000.0

1,800.0 500.0

1,600.0 1,400.0

400.0

1,200.0

12,000.0

10,000.0

10,000.0 8,000.0 8,000.0

1,000.0

300.0

6,000.0 800.0

6,000.0 200.0

600.0

4,000.0 4,000.0

400.0

100.0

2,000.0

200.0 0.0

2,000.0

Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 MayJun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 MayJun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 MayJun-08

0.0

Source: IDSC & CBE

0.0

0.0 2004/5

2005/6

Remittances GCC

US

Europe

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2004/5

Source: CBE

19

2007/8

Source: CBE

Remittances of Egyptian workers have been one of the main drivers to the current account surplus, through an extensive growth of 25.6% and 35.4% in FY06/07 and FY07/08, respectively. Growth in remittances has been mainly driven by inflows from GCC – the major contributor to remittances with 51% - which recorded a 42% growth in FY07/08 up from 19% in FY06/07. Given that GCC countries will maintain current account surplus, yet at lower levels due to lower oil prices, we expect that it will mitigate the risk of the anticipated decline of remittances from the US.

US$ mn

2006/7

2005/6

2006/7

2007/8

Remittances remains an important source for Egypt’s BOP

November 11, 2008 EGYPT | ECONOMY Provoked by the widening trade deficit and the declining growth in net services, the current account is expected to leave its surplus era, which has been prevailing since FY01/02, heading towards a growing deficit reaching US$3.3 bn in FY08/09 deteriorating further to US$8.5 bn in FY09/10. We believe current account deficit will reach 1.9% of GDP in FY08/09 shifting from a surplus of 0.5% of GDP in FY07/08. .

Current account exhibiting high vulnerability to growing trade deficit

FISCAL SECTOR With a committed government embarking on a restructuring scheme for revenues and expenditures targeting a fiscal deficit of 3% of GDP by FY10/11, it managed to ease fiscal deficit from a GDP share of 9.6% in FY04/05 to 6.6% in FY07/08. Backed by maintained economic growth and enhanced tax payers’ compliance, tax revenues witnessed strong growth of 16.9% and 20% in FY06/07 and FY07/08, respectively, pushing revenues to LE 218.5 bn in FY07/08. However, the surge in oil and food commodities prices exerted more pressure on subsides, besides the 30% increase in wages, putting more pressures on the expenditures side which grew by 25% in FY07/08. Even with the subsidies restructuring scheme (an average energy price increase of 27% July 2006 and 40% in May 2008) that was outlined to alleviate the increasing burden; expenditures reflected signs of rigidity with the oil subsidies accounting for around 48% of the total subsidies. Revenues & Expenditure Revenues

LE mn 300,000

Expenditures

Despite fiscal restructuring, subsidies is still a heavy burden

Expenditure Breakdown FY07/08 Fiscal Deficit/ GDP 12.0% Others 8%

250,000

10.0%

200,000

8.0%

150,000

6.0%

100,000

4.0%

50,000

2.0%

Purchase of NonFinancial Assets 12%

Purchase of Goods & Services 6%

Interest Payments 18%

0

Subsidies 34%

0.0% 2004/5

Source: MOF

2005/6

2006/7

2007/8

Source: MOF

Tax buoyancy has been improving and is expected to progress further with planned reforms in sales tax and the introduction of value-added tax, the newly introduced real estate tax law, and the new traffic law. We believe revenues will continue to grow reaching LE 269.9 bn in FY08/09. Bearing in mind, the decline in international oil prices that will simmer down subsidies’ growth and the new industrial energy policy that reduces fuel subsidies for energy-intensive industries as well as the reduction in imports payments, we believe expenditure will grow at a slower pace. We believe the GoE’s economy rescue package of increasing support for exports; offering financing and export-related facilities for SMEs; and expanding infrastructure investments could be implemented from expenditures' savings. We believe this will help reduce the fiscal deficit to 6.5% of GDP in FY08/09 and 5.3% in FY11/12. It is unlikely to hit the target of 3% of GDP unless more restructuring on the expenditures side takes place, which is unlikely to be attainable in the mean time.

20

Wages & Salaries 22%

Declining international oil prices trimming fiscal deficit share in GDP

November 11, 2008 EGYPT | ECONOMY Reforms also improved Egypt’s debt position with net domestic debt to GDP falling to 43.2% in FY07/08 down from 52.3% in FY04/05. Moreover, net budget sector debt declined reaching 53.4% in FY07/08 from 67.4% in FY04/05. Interest payment as well recorded significant improvement recording a growth of 5.6% in FY07/08 well down from its high levels of 29.6% in FY06/07.

A downsized public debt

Debt Growth & Debt-to-GDP Gross Domestic Public Debt Net Domestic Debt % GDP

LE mn 600,000

Net Domestic Public Debt 60.0%

500,000

50.0%

400,000

40.0%

300,000

30.0%

200,000

20.0%

100,000

10.0%

0

0.0% 2004/5

2005/6

2006/7

2007/8

Source: MOF

Egypt’s economic outlook 2005/6 Real Sector GDP, Current (LE bn) GDP, Current (US$ bn) Real GDP Growth (%) Population (000) GDP/Capita, Current (US$) Investments (LE bn) External Sector Balance of Goods & Services (US$ bn) Tourism Revenues (US$ bn) Suez Canal Revenues (US$ bn) Transfers (US$ bn) Current Account (US$ bn) Current Account % GDP Exports % GDP FDI (US$ mn) FDI % GDP LE/USD Exchange Rate (Period Avg) Monetary Sector Inflation (CPI %) Lending Rate (%) Credit Growth Fiscal Sector Expenditure % GDP Revenues % GDP Fiscal Deficit (LE mn) Fiscal Deficit % GDP Source: CBE, MOF & CICR forecasts

21

Actual 2006/7

2007/8

2008/9

Forecasts 2009/10 2010/11

2011/12

632.8 108.9 6.8% 71,347 1,527 85.0

744.8 130.4 7.1% 72,798 1,792 155.3

896.5 162.9 7.2% 74,357 2,191 179.3

1,002.8 174.8 5.0% 75,844 2,305 190.8

1,105.1 189.9 4.4% 77,361 2,455 205.3

1,243.2 212.9 5.7% 78,908 2,698 223.9

1,412.1 243.6 6.3% 80,486 3,026 251.6

(3.80) 7.23 3.56 5.55 1.8 1.6% 31.8% 6,111 5.6% 5.810

(4.79) 8.18 4.17 7.06 2.3 1.7% 33.0% 11,053 8.5% 5.710

(8.45) 10.83 5.16 9.34 0.9 0.5% 32.6% 13,237 8.1% 5.503

(13.27) 11.12 5.61 10.02 (3.3) -1.8% 34.7% 6,364 3.6% 5.735

(18.77) 11.84 6.00 10.25 (8.5) -4.3% 34.4% 5,865 3.1% 5.819

(22.24) 13.34 6.93 11.20 (11.0) -4.9% 34.6% 7,496 3.5% 5.840

(26.13) 14.81 8.02 12.40 (13.7) -5.3% 36.8% 10,118 4.2% 5.798

4.2% 12.71% 5.3%

10.9% 12.64% 9.1%

11.7% 12.22% 13.4%

17.0% 12.75% 10.5%

11.7% 12.00% 9.0%

12.9% 11.75% 12.3%

14.19% 11.50% 14.00%

32.8% 23.9% 50,385 8.0%

29.8% 24.2% 54,697 7.3%

30.9% 24.4% 59,234 6.6%

33.4% 26.9% 65,215 6.5%

32.7% 26.8% 66,455 6.0%

32.7% 27.2% 70,563 5.7%

32.6% 27.5% 74,299 5.3%

November 11, 2008 EGYPT | BANKING

RISING UP TO THE CHALLENGE Given the global financial crises and amid concerns of a global recession, the Egyptian banking sector is wellpositioned with its balanced loans/deposits ratio of 53% implying both high liquidity and funding surplus, vs. funding gaps in some credit crunch economies. Next to the mounting banking losses related to bad assets in the global market, Egypt has no significant exposure to subprime assets. Sitting in an under-penetrated emerging market like Egypt with inherent growth potential and achievable high profitability levels with a ROAE of 16% for the sector, and leveraging on the readily available liquidity suggested by the said level of loans/deposits, success is not far.

DRIVERS A highly profitable sector. Under-penetrated market with huge growth potential. A balanced total loans/deposits ratio at 53% implies a funding surplus and readily available liquidity. A real and non-inflated balance sheet. Improved asset quality through reforms and consolidations. No significant exposure to sub-prime crises places the sector at an advantage vs. others.

RISKS A large global recession and the risk of other exogenous factors that might impact the sector. A wider than expected GDP slowdown due to wider exports and FDI deceleration can trigger lower deposits’ growth and eventually weak loans’ growth. Lower GDP and GDP per capita could heighten corporate and retail default rates, negatively affecting asset quality. Increased liquidity pressures on foreign currency could create an FX squeeze. Currency depreciation could trigger some FX losses. Interest rate risks related to increased pricing pressures of funds.

Banking sector outperformed the economy since 2001: Banking assets outperformed the nominal GDP growth since 2001, with a total banking assets/GDP ratio reaching a multiple of 1.2x as at June 2008. A real & non-inflated balance sheet: Lending and other assets in the banking system are funded by existing core deposits, with minimal dependence on foreign inter-bank. Not highly exposed in an under-penetrated market: At a loans/deposits ratio of just 53%, the banking sector is not highly exposed and able to withstand expansions leveraging on only the readily available liquidity, in a market that is eager for growth and under-penetrated (15% penetration) . Faster deposits’ growth, yet high NIMs and ROAEs: Despite that deposits had been growing faster than loans for long, still, banks particularly major ones record high NIMs and ROAEs, as evidenced by an average NIM and ROAE of 3.2% and 33.4% for the 3 covered banks, respectively. Improving credit quality & a much stronger sector: With the termination of the CBE’s first phase of reforms that had started in 2003, including enhancing capitalization, provisional accumulation and consolidations, the banking sector now is much stronger. Opportunities include potential capital that used to migrate to distressed economies: If the banking sector working with the local investors rise up to the challenge, potential capital that previously targeted the currently distressed economies could be diverted to Egypt thereby generating further growth.

KEY PERFORMANCE INDICATORS Banking assets CAGR (02/3-07/8,%)

13.4

Deposits CAGR (02/3-07/8, %)

13.3

Loans CAGR (02/3-07/8, %)

7.1

Loans/deposits ratio (2007/8, %)

52.9

Equity/assets (2007/8,%)

5.3

ROAE (2007/8, %)

16

BANKS COVERED

PAGE #

CIB

111

CAE

113

NSGB

137 ALIA ABDOUN [email protected]

SECTOR PERFORMANCE | 2002/3 - 2007/8 Nominal GDP

Banking Assets

Banking Assets/GDP

In LE bn

Assets/GDP multiple

1.4x

1,200 1.4x

1.4x

1,000

1.3x 1.3x

1.2x

1.3x

1.3x

1.2x

800

1.3x

1.3x 600 1.2x

1.2x

400 1.2x 200

1.1x

-

1.1x 2000/1

22

2001/2

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

November 11, 2008 EGYPT | BANKING

BANKING SECTOR STRUCTURE ASSETS Looking back since 2001, Egypt’s banking assets had been growing at an average of 14.3%, outperforming the nominal GDP growth by an average of 27% over the same period, with a total banking assets/GDP ratio standing at a multiple of 1.2x as at June 2008. Banking assets to GDP Nominal GDP

The Egyptian banking sector outperformed the economy since 2001

Trend of Assets/GDP ratio

Banking Assets

Banking Assets/GDP

In LE bn

Assets/GDP

Assets/GDP multiple

1.4x

1,200

1.4x

1.4x 1.4x

1.4x

1.4x

1,000

1.3x 1.3x

1.2x

1.3x

1.3x

1.2x

800

1.3x

1.3x

1.3x

1.3x

1.3x

1.3x

1.3x

1.3x

600 1.2x

1.2x

400

200

2000/1

2001/2

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

Source: CICR & CBE

1.2x

1.2x

1.2x

1.1x

1.1x

1.1x

1.1x 2000/1

1.2x

1.2x

1.2x

2001/2

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

Source: CICR & CBE

Figures of June 2008 confirm the rich liquidity of the Egyptian banking system, Loans represent the with a loans/assets ratio of only 37.1%, followed by domestic inter-bank assets at main investment; at 25.7%. It is noteworthy that trading securities & T- Bills represent 18.6% of total only 37% of assets… assets, of which 73% representing 13% of total assets are in T-Bills, while foreign inter-bank represented only 11.3% of the total.

Banking assets by type, June 2008

Cash Balances banks abroad 100%

Securities & TBs Loans & discounts 6.3%

90% 80%

Funding by type, June 2008

Domestic Interbank Other assets

80%

60%

60% 11.3%

25.7%

30%

50%

30% 20%

20%

23

9.1% 7.9%

18.6%

10%

0.9%

0%

5.8% 3.4% 1.5%

Liabilities Assets

Source: CICR & CBE

69.0%

40%

40%

0%

Long term loans&Bonds 2.1% 1.2%

90% 37.1%

70%

10%

Capital Obligations to banks in Egypt

Obligations to banks abroad

100%

70%

50%

Reserves Other liabilities

Source: CICR & CBE

Provisions Total deposits

November 11, 2008 EGYPT | BANKING Not only does the banking system benefit from liquidity, but also its liquidity stems ….while core deposits from internal core deposits which capture 69% of total funding, whereas domestic generate the main and foreign inter-bank liabilities barely represent 9.1% and 1.2% of financing, re- funding at 69% spectively. Core internal deposit financing represents a safety haven against external shocks.

DEPOSITS Total banking sector deposits having been growing at an average of 13% for the Steady deposits growth, composing an past 5 years, an average multiple of 0.9x of GDP. average of 90% of GDP From the deposit breakdown by type, it is apparent that the household sector has long been the major depositor, the second place has shifted from the government deposits to private business sector starting 2006/7, indicating the wider role the private sector has been taking up, thanks to all the reform efforts taking place in Egypt during the last three decades including deregulation and privatization of the economy and the sector. Total deposits growth relative to GDP Total Deposits

Nominal GDP

Deposits breakdown by depositors

Deposits/GDP

In LE bn

1,000 900

1.0x 897 1.0x 0.9x

745

700

633

600 522

500

464

551

756

1.0x

Private sector business deposits

Household sector

Non-resident (external sector)

100%

0.9x

0.9x

485 0.8x

0.9x

300 200

0.8x

100

0.5%

0.4%

0.7%

65.3%

63.9%

65.1%

66.5%

63.8%

4.1%

4.1%

4.0%

13.6%

14.0%

16.7%

17.9%

16.8%

14.4%

11.7%

11.6%

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

40%

0.6%

59.3%

0.8x 2004/5

2005/6

2006/7

2007/8

5.1%

13.6%

20% 10%

-

Source: CICR & CBE

0.1%

60%

30%

2003/4

0.1%

50%

405 418

400

2002/3

Public sector business deposits

80% 70%

658

571 0.9x

Government deposits

90%

1.0x

800

Household sector as major depositor, followed by a strengthened private business sector

4.6% 14.1%

4.6%

19.2%

23.4%

0%

Source: CICR & CBE

Deposits dollarization had been easing in the aftermath of the complete currency Local currency domifloatation that took place in 2003, standing at only 25.8% of total deposits as at nates the deposits base June 2008.

Although the constitution of deposits is mainly captured by time and saving deposits, still, demand deposits and blocked deposits hold a significant 16%, offering an advantage for the banks to benefit from either interest free or low interest bearing deposits, partially cushioning against funding pricing pressures.

24

Household sector as major depositor, followed by a strengthened private business sector

November 11, 2008 EGYPT | BANKING Deposits breakdown by currency LCY

Breakdown by types of deposits

FCY

Demand deposits

100%

Time & Saving deposits

100%

90% 30.8%

28.8%

32.5%

25.8%

28.4%

29.4%

Blocked or retained deposits

4%

90%

80%

80%

70%

70%

60%

60%

50%

50%

84%

40% 69.2%

71.2%

67.5%

74.2%

71.6%

70.6%

40%

30%

30%

20%

20%

10%

10%

0%

0%

12%

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

Source: CICR & CBE

Total Deposits

Source: CICR & CBE

LOANS Total loans hovered around 50% of GDP during the last 5 years, with the industrial sector capturing the lion’s share, followed by the services sector. Loans dollarization rate reached 33.3% as at June 2008. Further, FCY loans/deposits ratio has started to exceed LCY loans/deposits ratio since 2006/7, indicating an increased activity on the foreign currency side. Loans growth relative to GDP Loans

Nominal GDP

Lending remained at an average of 50% of GDP, with the industry sector as main lender

Loans breakdown by lender

Loans/GDP

Government

Agriculture

Industry

Trade

Services

Household & external sector

In LE bn

100% 0.8x

1000 0.4x

900 0.5x

800

0.6x

0.5x

700

0.6x

600

17.2%

18.0%

485 418

0.5x

60%

0.4x

50%

399

400 295

307

25.6%

25.2%

25.5%

26.9%

21.4%

24.7%

70%

633

551

500

323

352

0.3x

20.7%

20.3%

25.5%

18.7% 17.7%

13.9%

31.4%

31.4%

29.4%

2.2%

14.4%

40% 30%

0.2x 200

34.4%

34.0%

33.3%

1.7% 4.7%

1.9% 5.5%

2.1% 7.2%

1.8% 6.5%

7.6%

1.5% 7.8%

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

20% 0.1x

100 0

0.0x 2002/3

2003/4

Source: CICR & CBE

25

14.1%

80%

745

0.6x

283

13.1%

0.7x

0.7x

300

12.8%

90%

897

2004/5

2005/6

2006/7

2007/8

10% 0%

Source: CICR & CBE

November 11, 2008 EGYPT | BANKING Loans breakdown by currency LCY

Loans/deposits ratio by currency LCY

FCY

100% 90%

FCY

90.0% 23.1%

22.9%

24.3%

26.2%

80.0% 29.7%

77.8% 72.7%

33.3%

80%

68.2%

70.0% 62.5%

70%

59.0%

60.0% 52.4%

60% 50.0%

56.0% 52.6%

50.5%

49.6%

47.5%

44.9%

50% 40.0% 40%

76.9%

77.1%

75.7%

73.8%

70.3%

66.7%

30%

30.0% 20.0%

20%

10.0%

10% 0%

0.0% 2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

Source: CICR & CBE

2002/3

2003/4

2004/5

2005/6

2006/7

2007/8

Source: CICR & CBE

With the commencement of the reform program around 2003, total loans/deposits ratio has declined from 70% to 52.9% in 2007/2008. Even at the current deposits level and without expanding the deposits base, the readily available liquidity level suggested by the system’s total loans/deposits ratio of just 52.9% as at June 2008, indicating that the sector can withstand further loan growth without jeopardizing a reasonable liquidity position.

Total loans/deposits of the system

Loans to deposits ratio at a favorably reasonable 53%, implies both liquidity and room for growth…

Egypt’s loans/deposits vs. others 140.0%

75.0%

121.3%

70.0%

120.0% 70.0% 99.9%

100.0%

91%

65.0%

94%

85% 63.6%

80.0% 60.0% 58.8%

60.0%

52.9%

56.5%

55.0%

40.0% 53.5%

32.8%

52.9%

20.0%

50.0%

0.0% 45.0%

Lebanon 2002/3

2003/4

Source: CICR & CBE

2004/5

2005/6

2006/7

Egypt

Turkey

2007/8

UAE

U.S.A

U.K

Source: CICR, Central Banks& Bloomberg

With the system’s LCY loans/deposits ratio of 47.5% and FCY loans/deposits ratio of 68.2% as at June 2008, it can be argued that in both cases funding is generated from actual core deposits; meaning, demand is still below supply, implying a funding surplus vs. a funding gap in some countries; according to the Bank of England, the UK for example had a funding gap worth around GBP740 bn as at June 2008, the same case as some other credit crunch economies. Egypt also is in a healthier position with no significant exposure to sub-prime markets and without a high exposure to real-estate; where real-estate represented 6.5% of total implemented investments in 2007/8, vs. many gulf countries that are relatively more exposed to global markets and some highly exposed to real-

26

Saudi Arabia

Better position; no funding gap in Egypt and insignificant exposure to distressed economies

November 11, 2008 EGYPT | BANKING estate, additional to having much higher loans/deposits ratios indicating lower liquidity - not a favorable situation concurrent with the easing of oil prices. Following the reforms through banking law no. 88/2003 and its amendments, the CBE had implemented strict supervision over banks including enhancing their provisioning base to hedge against low asset quality, to the extent of forcing some banks to book their entire returns in provisions and record nil profits. Reforms also included increasing capitalization, cleaning bad loan portfolios and consolidations, the banking sector now is considered much stronger. Unlike the private sector banks, non-performing loans are particularly concentrated in the public banks less the privatized Bank of Alexandria (BoA) which had gone through a strong clean up and restructure before its sale. The government is still considering the sale of Banque du Caire, but waiting for the right time.

Over the last 5 years, improving credit quality in Egypt & a much stronger sector

PROFITABILITY Being in an emerging market, Egyptian banks enjoy decent interest spreads, especially the leading banks with superior asset liability management which enables them to efficiently manage their spreads in both rising and declining interest rates environments.

Profitability of leading banks NIM

Deposits had been growing faster than loans, yet, Egyptian banks generate high NIMs & high ROAEs

Leading 2009 multiples ROAE

P/E 2009P

50.0%

P/BV 2009P

6.0x

45.0% 4.9x

5.0x

40.0%

4.3x

35.0% 4.0x

3.7x

30.0% 25.0%

ROAE, 42.6%

20.0%

3.0x ROAE, 32.0% ROAE, 25.6%

15.0%

2.0x 1.5x 1.3x

10.0%

0.9x

1.0x 5.0% NIM, 3.7%

NIM, 3.3%

NIM, 2.7%

CIB

NSGB

CAE

0.0%

Source: CICR & Banks’ financials as at June 2008 *NSGB’s ROAE is ex-goodwill

0.0x CIB

NSGB

CAE

Source: CICR projections *NSGB’s P/E is ex-goodwll

In June 2008 our analysis, using the maximum 3M USD deposit rate and the 1M LIBOR reveals an increased spread vs. June 2007. Since then there has been some reversal due to the international scene, and the increased demand on USD. However, this may not truly reflect the experience of the private banks, as our discussions with them indicate that especially in the case of fixed lending rates (unlike floating) related to long-term loans that were booked previously but not revalued, benefiting from larger spreads. Domestically, banks are still considered liquid in both currencies, so there are no liquidity pressures on the FCY yet.

Widening FCY spread until June 2008, partially narrowing in September 2008...

Meanwhile, the LCY side benefits from high spreads, despite funding pricing pres- …Significant LCY sures resulting from the consecutive CBE hikes the in the corridor rates totaling spread 2.75% since early 2008. Said rise in rates did not seem to filter with a large magnitude in the price of funds as evidenced from the 1H08 of the covered banks, particularly CIB and NSGB. Fortunately, Egyptian banks rely more on core de-

27

November 11, 2008 EGYPT | BANKING posit financing rather than inter-bank, therefore enjoy a cost advantage interval; as deposit rates’ rates’ adjustment to rises in interest rates lag behind inter-bank rates. Meanwhile, banks benefit from rate increases with regards to lending portfolios that are benchmarked to the discount rate. We expect the CBE to start reducing rates to boost economic activity starting 2009. LCY interest spread

FCY indicator of spread

LCY less 1-year deposit rate

USD 3M average deposit rate

LCY less 1-year lending rate

USD 1M libor rate

Lending rate

8.0%

14.0%

7.33% 12.6%

12%

12.0%

7.0%

12.0% 6.06%

6.0% 5.33%

10.0%

5.1%

4.93%

5.0% 8.0% 6.9%

7.2%

7.1%

4.06%

4.0% 3.06%

6.0%

3.0%

4.0%

2.0%

2.0%

1.0%

2.93%

2.7%

0.0%

0.0% 2006/7

2007/8

Jul-08

Source: CICR & CBE (July is the latest available)

2006/7

2007/8

Sep-08

Source: CICR, CBE, British Banking Association *Assumed lending rate as USD 1M libor plus 2%

BALANCE SHEET OUTLOOK In line with our internal forecast entailing the softening of nominal GDP growth rates in the coming two years, followed by a slight pick up over the subsequent years, we project slower deposits’ and banking assets’ growth in said years, followed by a smooth pick up. Starting 2010/11 as the consequences of the global crises on the local market become quantifiable, we project lending to slightly pick up leveraging on the already available liquidity, in view of the fact that it had originally fallen from the 70%-level in 2002/3.

Total loans/deposits to remain stable for the next two years followed by a slight rise…

Balance Sheet outlook for the sector In LE bn Assets Deposits Loans Loans/Deposits

2006/7 938 23.2% 658 15.2% 352 9.1% 53.5% -298 bps

2007/8 1,083 15.5% 756 14.8% 399 13.4% 52.9% -67 bps

2008/9P 2009/10P 2010/11P 2011/12P 1,197 1,305 1,455 1,651 10.5% 9.0% 11.5% 13.5% 835 910 1,015 1,152 10.5% 9.0% 11.5% 13.5% 441 481 540 616 10.5% 9.0% 12.3% 14.0% 52.9% 52.9% 53.3% 53.5% 0 bps 0 bps 38 bps 25 bps

Source: CBE & CICR projections

We expect the 3 covered private banks to outperform the sector thereby win mar- Comparative forecasts ket share starting 2009, then to continue steady growth in the following years. for the 3 covered banks

28

November 11, 2008 EGYPT | BANKING Deposits growth of the 3 banks Deposits Forecast CIB NSGB* CAE Average

2008P 27% 5% 14% 15%

2009P 13% 13% 16% 14%

2010P 13% 13% 16% 14%

2011P 12% 12% 16% 13%

2012P 12% 11% 14% 12%

Source: CICR projections *NSGB 2008 deposits’ growth is low due to the decline in 2Q08 partially related to the withdrawal of Asset Manager deposits.

Loans growth of the 3 banks Loans Forecast CIB NSGB CAE* Average

2008P 26.6% 21.7% 60.2% 36%

2009P 17.0% 18.1% 26.2% 20%

2010P 15.9% 15.9% 22.7% 18%

Source: CICR projections *CAE 2008 loans’ growth is 2008 is high due to strong growth in 1H08

29

2011P 13.6% 12.6% 20.6% 16%

2012P 12.6% 12.6% 18.1% 14%

November 11, 2008 EGYPT | CEMENT

SURVIVAL ON THE BACKLOG Given the current fears from the negative impact of the expected global recession, maybe the picture for the Egyptian cement industry is not that gloomy—supported by the massive backlog of real-estate projects which will secure cement consumption despite of some expected delays in these projects. Against the backdrop of an improved mortgage scheme, the middle-income group may exert some demand pressures for real-estate—especially that the mortgage loans almost doubled reaching LE 3 bn in October 2008 up from LE 1.4 bn in June 2007. In addition to the GoE’s commitment to push further local investments through building commercial and industrial zones in many governorates which will increase the demand for the retail segment. On the exports front, the GoE’s removal of the export ban and duties will give the local cement producers more competitive edge—namely that the Egyptian cement exports prices is considered one of the cheapest in the region. Most notably, the expanded foreign ownership reaching 79% in 2008, highlights the market’s growth potential. We believe that the industry with its current concentration level—3 cement groups controlling 62.1% of the local market—is capable of weathering the coming challenges, yet the market still sustains further consolidations. Availability & proximity to high-grade limestone: The abundant raw materials in Egypt, gives the industry a cost advantage compared to some of its regional peers that relies on imported clinker. The expanding potential of utilizing natural gas gives an edge to further reduce cost: The growing natural gas reserves expands the industry’s potential to utilize a relatively cheaper energy source and hence, enhance the margins of the companies utilizing natural gas. Moreover, it is an environmental friendly energy source compared to mazot.

DRIVERS Removal of export duties & export ban. Abundance of raw materials. High margins compared to regional peers. New capacities on stream. Outstanding real-estate projects secure demand for cement. The expanding existence of foreign companies in the local market allows for efficient operation and signals market potential.

RISKS Anticipated slowdown in construction activities. Rising cost on inputs. Sudden governmental decisions as imposing exports bans and duties. Massive regional capacity additions which intensifies rivalry.

KEY PERFORMANCE INDICATORS Cement production CAGR (04-07,%)

10.2

Cement consumption CAGR (04-07,%)

13.5

Cement exports CAGR (04-06,%)

20.9

Average surplus (04-07,mn tons)

5.1

Average utilization rate (04-07,%)

86.1

COMPANIES COVERED PAGE # Misr Beni Suef Cement

129

Misr Cement (Qena)

131

Sinai Cement

153

The industry enjoys higher margins: The local cement players enjoy higher margins averaging a gross profit margin of 54.6% in 1H08 versus a regional average of 36.3%. Cement demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand cement consumption is to be secured by the backlog of the developers projects. Yet, with the anticipated pick-up in the economy which will trigger the inflow of projects the demand for cement will regain its strength.

BASMA SHEBETA [email protected]

SECTOR PERFORMANCE | 2004-2008 Production Supply Growth

mn tons

Demand Demand Growth

45

25%

40 20% 35 15% 30

25

10%

20

5%

15 0% 10 -5% 5

0

-10% 2004

30

2005

2006

2007

8M08

November 11, 2008 EGYPT | CEMENT

CEMENT MARKET IN EGYPT Over the first eight months in 2008, Egypt's cement market reached 26 mn tons, up by 12.7% from the same period a year earlier. Yet, production growth lagged behind with a 3.5% increase reaching 26.8 mn tons.

Consumption outpaced production growth

MARKET STRUCTURE Currently, the designed grinding capacity is 46.1 mn tons, with foreign companies holding the bulk of 74%. The total companies operating in the cement sector is 13; 8 of which are foreign companies, 4 are private; and one is a public company. Moreover, total grinding capacity reached 46.1 mn tons split between gray cement (97.1%) and white cement (2.9%). It is worth highlighting that Arabian Cement company which started operations in 2008 is currently producing clinker only till its own grinding mills are up and running. Cement capacity by product in 2008

Designed capacity reached 46 mn tons with foreign companies bearing the bulk

Cement capacity by ownership in 2008

White 2.9%

Public 7.6%

Private 18.4%

Foreign 74.0%

Gray 97.1%

Source: CICR Database

Source: CICR Database

KEY MARKET FACTS The wave of acquisitions activity by foreign companies to local cement companies started since 1999 with Lafarge & Cemex acquiring 76% & 96%, respectively of Beni Suef Cement and Assiut Cement companies and ending with Lafarge acquiring 100% of OCI Cement Group namely, Egypt Cement Company (ECC). The deal became effective by the end of January 2008, moving up foreign ownership share – in terms of local sales- from 20.8% in 1999 to 78.9% in 2008 - hence, emphasizing the market's potential. Local cement market shares in 1999 & 8M08 1999

2008E

7.8%

Public 12.9%

13.3%

Private 66.3%

78.9%

Foreign 20.8%

0%

10%

20%

30%

40%

Source: Ministry of Investment

31

50%

60%

70%

80%

90%

An expanding foreign ownership confirms the market's potential

November 11, 2008 EGYPT | CEMENT The consolidation wave within Egypt's cement market increased the concentration level of the largest three players from 47.3% in 1999 to 62.1% in 2008.*

8M08 Local cement market shares

1999 Local cement market shares ECC 7.4%

Torah 15.6%

Misr Cement Qena 4.0% Sinai 5.5%

Suez 16.5%

Beni Suef 5.7%

Misr Beni Suef 3.8% Italicementi (Torah, Helwan & Suez) 29.4%

National 7.8%

Helwan 11.4%

Alexandria 4.3%

Amereyah 11.0%

Increasing market concentration

Lafarge (ECC) 19.6% Cemex (Assiut) 13.1%

National 12.9%

Titan (Beni-Suef & Alexandria) 8.1%

Cemex 15.2%

Source: Ministry of Investment

Cimpor (Ameriyah) 8.6%

Source: Ministry of Investment

A shrinking surplus

Boosted by the construction & real-estate boom within Egypt, cement market reversed its growth pattern with demand growth exceeding that of supply (14% vs. 6.2%, respectively) in 2007 and (12.7% vs. 3.5%) during the first eight months of 2008, hence depressing market surplus to 0.74 mn tons.

Cement market surplus pattern (2004-8M08)

Cement market development pattern (2004-8M08) Production Production Growth

mn tons 45

Demand Demand Growth 25%

mn tons 7 5.99

40

20%

6

15%

5

25

10%

4

20

5%

3

0%

2

-5%

1

5.21

35

5.05

30 4.01

15 10 5 0

0.74

-10% 0 2004

2005

Source: Ministry of Investment

2006

2007

8M08

2004

2005

32

2007

8M08

Source: Ministry of Investment

As demand has been following a higher growth pattern than that of supply, hence tighter utilization rates were achieved, reaching its peak of 92.2% in 2007.

* In terms of local sales

2006

… and tighter utilization rates

November 11, 2008 EGYPT | CEMENT Added capacity, demand & utilization rate (8M06-08)

Added capacity, demand & utilization rate (20042007) mn tons 6

Added Capacity

Added Demand

Utilization Rate 95%

Added Capacity

mn tons 3.5

Added Demand

Utilization Rate 63.0% 62.6%

5

92.2%

3.0

62.2%

62.0%

90%

4

87.0%

61.5%

2.5

3

61.0%

86.8%

85%

2.0

60.5%

2 1

62.5%

60.0%

1.5

78.3%

59.5%

80% 1.0

0 2004

2005

2006

59.5% 59.0%

2007

-1

58.5%

75%

0.5 58.0%

-2 57.5%

0.0 8M06

70%

-3

Source: Ministry of Investment

8M07

8M08

Source: Ministry of Investment

As demand has been boosted, triggered by the real-estate boom, cement prices have been following a rising trend. Cement ex-factory prices reached an average of LE 435/ton over the first eight months of 2008 up from an average price of LE 362/ton in 2007.

Prices are following higher levels

Cement prices by month* (Jan 2006-Aug 08)

Increasing the levied duties on cement exports to LE 85/ton

Imposing a ban of 6-month period on cement exports

LE 65/ton levied duties on cement exports First increase in energy prices

Second increase in energy prices

imposing fees on clay amounting to LE 35.1 per 1 ton of cement produced

Ja n Fe -06 b M -06 ar Ap -06 M r-06 ay Ju -06 nJu 0 6 Au l-06 g Se -06 pO 06 c N t-06 ov D -06 ec Ja -06 n Fe -07 b M -07 ar Ap -07 M r-07 ay Ju -07 nJu 07 Au l-07 g Se -07 pO 07 c N t-07 ov D -07 ec Ja -07 n Fe -08 bM 08 ar Ap -08 M r-08 ay Ju -08 nJu 0 8 Au l-08 g08

LE/ton 470 460 450 440 430 420 410 400 390 380 370 360 350 340 330 320 310 300

Source: Ministry of Investment

Energy accounted for the highest share in cement production costs, yet, varying based on the type of feedstock used. Energy contribution during 3Q08 registered a lower share of 51.2% in the cost structure of the companies using natural gas against 53.9% for those using mazot such as Misr Cement (Qena).

* Ex-factory including transportation cost

33

Energy is the major contributor to cost

November 11, 2008 EGYPT | CEMENT 3Q08E Cost structure for companies using natural 3Q08E Cost structure for the company using magas as feedstock zot Transportation Others 1.5% 1.1%

Raw materials 8.7%

Packaging 13.7%

Raw Materials 8.2%

Maintenance 18.8%

Resource Dev. Fees 10.2%

Packaging 19.1%

Asec 13.6%

Energy 53.9%

Energy 51.2%

Source: CICR estimates

Source: CICR estimates

MARKET DYNAMICS Domestic Market

Governmental Measures - Removal of export duties & export ban - Modifying anti-monopoly law - Raising energy prices - Raising raw materials prices - New licenses

Supply-Related Factors

Demand Driver - Construction boom

- Raw materials availability - Rising cost of inputs - Higher margins - Observed tight supply - Impact from export ban & duties - Impact of strict conditions on new capacities - Electricity availability

GOVERNMENTAL MEASURES Ever since the beginning of 2007, the government has taken several actions and decisions to regulate the cement industry's trading activity as well as new capacities. Recent governmental measures Measure

Date

Description

Impact

19-Oct-08

Calling-off the 6-month export ban previously imposed by the Ministry of Trade & Industry on cement exports starting from March 29, 2008. Soon after, the GoE decided to remove the LE 85/ton duties imposed on cement exports.

POSITIVE

Modifying Anti Monopoly Law

Jul-08

By raising the minimum level of fines charged per violator from LE 30k to LE 100k and the maximum level from LE 10 mn/violator to LE 300 mn.

NEGATIVE

Raising energy prices

Sep-07

Raising natural gas & electricity prices by 37.3% & 20.1% respectively.

NEGATIVE

Jan-08

Increasing mazot prices in early January 2008 by 100% to record LE 1000/ton.

NEGATIVE

Revoking the export ban & export duties

Source: CICR Database

34

November 11, 2008 EGYPT | CEMENT

Measure

Date

Description

Impact

6-May-08

Imposing on cement companies a resource development fees on the clay amounting to LE 35.1/ton of cement produced.

NEGATIVE

New licenses

Oct-07

Offering 7 licenses through a public auction: 5 licenses for Greenfield operations, and 2 licenses for expansion purposes of existing companies. In addtion, a license was offered for free to a Greenfield company namely, New Valley as it was the only bidder for New Valley license

POSITIVE

Raising duties on cement exports

Aug-07

Raising the duties previousely levied on cement exports by 31% to reach LE 85/ton

NEGATIVE

Imposing duties on cement exports

Mar-07

Imposing an export duty of LE 65/ton on cement exports

NEGATIVE

Increasing clay prices

Source: CICR Database

According to the GoE plan, planned capacity additions will be complete by 2012; raising local gray cement capacity to 62.5 mn tons up from its current level of 42.9 mn tons. The following table illustrates the details of the gray cement capacity additions over 2009-2011: Gray cement capacity additions over 2009-2011 Greenfield Licenses

Governorate

License Cost (LE mn)

Capacity in 000 tons

Beni Suef Suez El Meniah Qena North Sinai Assuit New Valley

251 201 200 83 44 22 Free

1500 1500 1500 1500 1500 1500 1500

Governorate

License Cost (LE mn)

Capacity in 000 tons

Assuit Beni Suef

202 135

1500 1500

Reconciliation Fees

Governorate

Fees Charged (LE mn)

Capacity in 000 tons

Arabian Cement Sinai Cement Medcom Aswan Misr Beni Suef Cement South Valley Cement

Suez Sinai Aswan Beni Suef Beni Suef

NA 44 NA 251 251

1500 1500 1000 1500 1500

Wadi Al Nile Cement Co. (WNCC) Al-Swedy Cement Arab National Cement Co. (ANCC) Al-Nahda Industries North Sinai Cement Building Materials Industries Al-Wadi Cement

Expansion Fees Assiut Cement Company Beni Suef Cement Company

Source: CICR Database and IDA

SUPPLY-RELATED FACTORS

35

Despite the minimal share of raw materials in the production cost of cement – an average of 8.45% in 3Q08E, their availability, proximity and quality are crucial to expanding cement production. The fact that Egypt has abundance of limestone, gypsum, and slag in moderate and high quality pushed the cement industry to expand and grow, and will even drive its potential further in the future.

Raw materials availability

Since cement is an energy-intensive industry – with energy estimated to constitute an average of 52.5% of total production cost in 3Q08– raising natural gas & electricity prices by 37.3% & 20.1% effective September 2007, followed by a 100% increase in mazot prices effective January 2008 have negatively impacted the industry's margin. Consequently, the average EBITDA margin for gray cement producers declined from 50.8% in 2006 to 46% in 2007; and from 50% in 1H07 to 47% in 1H08. It is worth noting that the impact of the LE 35.1/ton of resource development fees for clay imposed on May 6, 2008 was not yet significantly reflected on the 1H08 margins, however, it should be mirrored in 3Q08 margins.

Rising cost of inputs

November 11, 2008 EGYPT | CEMENT Average EBITDA margins for the cement industry (2006-2008) 52% 50.8%

51%

50.0% 50% 49% 48% 47.0% 47% 46.0% 46% 45% 44% 43% 2006

2007

1H07

Annual

1H08 Semi-Annual

Source: Company’s Reports

The high gross profit margins for the Egyptian cement industry compared with their regional peers played a key role in boosting the industry's expansions, in addition to encouraging a wave of acquisitions by foreign companies.

Yet, local producers enjoy higher margins compared

Regional gross profit margins in 1H08 80% 67.3%

70%

66.1%

63.1% 57.9%

60% 50%

50.2%

49.0%

45.8% 40.1%

40% 32.7% 30% 22.8% 20% 14.0% 10% 0% Arabian Cement

Yamama Cement

Gulf Cement

KSA

Fujairah Cement UAE

Ras AlKhaimah Cement

Sinai Misr Beni Misr Cement Suef Cement Cement (Qena)

Helwan Cement

Suez Cement

Torah cement

Egypt

Source: Company’s Reports

Despite witnessed capacity additions over 2004-2007 averaging 1.7 mn tons per annum, expanding cement consumption maintained the industry’s utilization rate at high levels - with an average of 86%. Over the aforementioned period, cement capacity increased by a CAGR of 4% to reach 42 mn tons in 2007 vs. a CAGR of 13.5% for demand recording 34.5 mn tons. It is worth highlighting that such tight market status led to further capacity additions in order to satisfy the market needs.

36

Despite capacity additions, still supply is tight

November 11, 2008 EGYPT | CEMENT Cement supply status (2004-2007) Capacity

mn tons 45

Production

Cement utilization rates (2004-2007)

Demand

95% 92.2%

40 90%

35 87.0%

30

85%

86.8%

25 20

80%

15

78.3% 75%

10 5

70%

0 2004

2005

2006

2004

2007

2005

2006

2007

Source: Ministry of Investment

Source: Ministry of Investment

Imposing tariffs on cement in 2007, followed by a 6-month export ban which started by the end March 2008, led to a 28% drop in 2007, followed by a further decline of 73.2% in 8M08 versus 8M07. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export ban and the export duties on cement exports.

Imposing the export ban and duties led to a huge drop in exports

Cement exports pattern (2004-8M08) mn tons 7 5.9

6 5.2 5

4.7 4.2

4 3.2 3

2

0.7

1

0 2004

2005

2006

2007

8M07

8M08

Source: Ministry of Investment

37

The GoE set strict standards for investors in order to participate in the Greenfield & expansions auctions. In addition, new licenses include strict terms in order to grant that new capacities start on schedule such as, the founder can not sell the Greenfield license until the production starts, yet the GoE allowed the investor to sell a stake, which may open the door for another wave of consolidation in the local market.

Strict conditions in new licenses to prevent any delay in the new capacities entrance

One of the major constraints facing any capacity additions is the electricity availability. It is worth mentioning that in order to implement the declared new capacities, companies will be required either to establish their own power stations to secure their needs from electricity or to pay the investment cost of the power station to the GoE which will handle its establishment. It is worth mentioning that the investment cost for establishing a power station may reach LE 125 mn.

Electricity availability

November 11, 2008 EGYPT | CEMENT

CONSTRUCTION DRIVER The massive construction activity witnessed in Egypt has triggered demand for cement. Over 2004-2007, the construction sector grew with a CAGR of 7.4%, pushing further cement consumption from 23.6 mn tons in 2004 to 34.5 mn tons in 2007 – reflecting the strong ties between both variables which is emphasized by the high coefficient correlation of 0.910. Construction activity vs. cement consumption (2004-2008) Construction

LE bn 40

Cement Consumption

mn tons 40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0 2004

2005

2006

2007

2008E

Source: CBE, Ministry of Investment & CICR estimates

FUTURE OUTLOOK Against the backdrop of the global economic turmoil and the expected slow down in construction and real-estate activities worldwide and in Egypt, the demand for cement is expected to grow at a slower pace, an AAGR of 1.36% over 2009 and 2010. Nevertheless, cement consumption is expected to gain back its momentum by 2011 with the anticipated pick-up in the economy and the expected inflow of new projects, concurrently cement consumption will grow by a AAGR of 9.4% over 2011-2012 reaching 47.9 mn tons by 2012. It is worth mentioning that demand for cement over 2009 & 2010 will be mainly secured by the outstanding real-estate contracts, as the existing contractors are expected to continue their construction works, yet at a slower pace. Future cement outlook mn tons 50 45 40 35 30 25 20 15 10 5 0 2006

2007

2008E

2009F

Source: CICR Database and estimates

38

2010F

2011F

2012F

Outstanding realestate projects will secure cement consumption over 2009 and 2010, with an anticipated pickup afterwards

November 11, 2008 EGYPT | CEMENT Planned grinding capacity additions is expected to expand gray cement capacities to 62.53 mn tons by 2012 up from its current level of 42.86 mn; of which year 2011 will witness the highest capacity additions of 9 mn tons. Most notably, Greenfield is to contribute with almost 51% of total additions, highlighting the market’s potential.

Huge capacity additions of 20 mn tons till 2012

Planned gray cement grinding capacities Company Name

2006

Torah Cement Helwan Cement National Cement Cemex Al-Amreyah+Cimpor Titan Suez Cement Lafarge Sinai Cement Misr Cement Qena Misr Beni Suef Cement Arabian Cement Madcom-Aswan Arab National Cement Co. (ANCC) Wadi Al Nile Cement Co. (WNCC) El-Sweedy Cement North Sinai Cement South Valley Cement Al-Nahda Industries Building Materials Industries Al-Wadi Cement

2007

3,330 4,500 3,500 5,000 3,700 3,000 4,200 10,000 1,500 1,500 1,500 -

Total Effective Capacities

41,730

3,330 4,500 3,500 5,000 3,700 3,000 4,200 10,000 1,500 1,500 1,500 41,730

2008E 3,330 4,500 3,500 5,000 3,700 3,000 4,200 10,000 1,750 1,500 1,500 875 42,855

2009F

2010F

3,330 4,500 3,500 5,000 3,700 3,375 4,200 10,300 3,000 1,500 2,250 750 1,500 -

2011F

3,330 4,500 3,500 5,375 3,700 4,500 4,200 10,300 3,000 1,500 3,000 1,500 1,000 1,375 375 125 1,500 -

46,905

52,780

2012F

3,330 4,500 3,500 6,500 3,700 4,500 4,200 10,300 3,000 1,500 3,000 1,500 1,000 1,125 1,500 1,500 1,500 1,500 1,500 1,125 1,500 61,780

3,330 4,500 3,500 6,500 3,700 4,500 4,200 10,300 3,000 1,500 3,000 1,500 1,000 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 62,530

Source: CICR Database and estimates

Expected slowdown in construction activity over 2009-2010, coupled with around 10 mn tons of capacity additions will ease utilization rates to 76% by 2010. Despite the expected pick-up in cement consumption starting 2011, utilization rate will further decline to 74% due to the huge capacity additions of 9 mn tons in that year. Yet, by 2012, utilization rate will rebound reaching 79%. Cement supply status (2006-2012) Cement Capacity

mn tons 70

Production

Utilization rate to strengthen by 2012

Market utilization rate (2006-2012)

Demand

100% 91.1%

90%

65 60

80%

92.2%

84.8%

86.8%

76.1%

55 50 45

78.7% 74.2%

70% 60%

40 35

50%

30

40%

25 20

30%

15

20%

10

10%

5 0

0% 2006

2007

2008E

2009F

Source: CICR Database and estimates

39

2010F

2011F

2012F

2006

2007

2008E

2009F

Source: CICR Database and estimates

2010F

2011F

2012F

November 11, 2008 EGYPT | CEMENT Local & export cement prices will continue increasing yet, at a decelerating rate over 2009-2010 due to the weakened demand for cement in the local and export markets over the aforementioned years. However, with the expected recovery in local & international economies, local & export cement prices will start increasing at an accelerating rate over 2011-2012, yet, still below historical growth rates due to the rising competition from regional peers. Local & export cement prices* (2006-2012) Local Prices

LE/ton 700

Exports Prices

US$/ton 120

600

100

500 80 400 60 300 40 200 20

100

0

0 2006

2007

2008E

2009F

2010F

2011F

2012F

Source: CICR estimates

* Local prices include transportation cost, while exports prices are ex-factory prices

40

Increased cement prices

November 11, 2008 EGYPT | FERTILIZERS

POUNCE AND ROAR Rising global food demand to support the increasing population, and the international move towards expanding sources of clean energy renders the need for fertilizers as a key supportive industry. With the developed region, namely Europe, restricting further set-up of environmental-polluting production units as fertilizers, investments are to shift to the developing regions. With Egypt being in central geographical location, and China's slashing of 30% of global fertilizers trade with its levied export tariff, Egypt's fertilizers exports are highly valued. On the local front, strong fertilizers demand is to be maintained as the GoE plans to expand the agricultural land and reclaim an additional 150k feddans/annum. Moreover, given the country's cheap cost of production coupled with the abundance of natural gas and phosphate rocks gives Egypt an edge in nitrogen and phosphate segments. Most notably the higher margins that the fertilizers industry enjoys compared to its global peers adds to the country's investment potential.

DRIVERS The abundance of cheap natural gas prices in the range of US$1.72 - 3/MMBtu compared with an international price of US$6.3/ MMBtu – based on Henry Hub – as well as phosphate rocks support magnified local companies' margins. Phosphate fertilizers enjoy no government interventions, whether in terms of export ban or price caps; which allows for cost passing ability. Egypt enjoys a strategic location for exporting to different regions and strong local distribution network.

RISKS Phosphate mines are state owned, which reflects the monopolistic stance of the government. The GoE intervenes in the nitrogen fertilizers sector (mainly companies located outside the free zones) in the form of export ban and price caps. Sulfur - a basic raw material for sulfuric acid production - is imported which subjects the industry to FX risk.

Good prospects in the local and export markets: Against the backdrop of the growing global food needs, and increasing bio-fuels demand the global fertilizers consumption is expected to maintain its strength. In the local scene, a sustained strong demand growth is anticipated driven by the expanding agricultural land. Cheap factors of production and availability of raw materials are key strengths: With significant price differential that Egypt offers to investors, as natural gas prices being maintained at US$1.25 – 3/MMBtu against the international prices of US$6-7/MMBtu, and the cheap abundant phosphate rocks at LE250/ton (less than US$46/ton) in 1Q08 versus c.US$200/ton – based on Casablanca benchmark –total fertilizers production reached 15.8 mn tons in FY07/08 (of which 7.5 mn tons targeted the export markets) up from 11.2 in FY05/06 (of which 2.8 mn tons targeted the export markets). Such growth was namely due to the Greenfield capacity of 3.9 mn tons/year from both, Helwan and Alexandria fertilizers companies.

KEY PERFORMANCE INDICATORS Fertilizers production CAGR (05-08,%)

10

N production CAGR (05-08,%)

11

Fertilizers exports CAGR (05-08,%)

26

Added annual capacities (2010,mn tons) 2.5

COMPANY COVERED

PAGE #

EFIC

Still more investment to come on stream: Egyptian Basic fertilizers Industries (EBIC) will launch its operations in 4Q08, with its full potential in 2009 with an annual ammonia production capacity of 750k. In addition the Canadian fertilizers company, Agrium is expected to start production by 2010 with a total annual capacity of 2.2 mn tons for urea and ammonia combined. Moreover, Egypt's fertilizers portfolio will include DAP/MAP production as the result of the growing global need and the availability of the required feed stock.

119 MUHAMMAD EL EBRASHI [email protected]

SECTOR PERFORMANCE | FY04/05-07/08 k tons

Production

Exports

Imports

Consumption

Sales

18,000 16,000 14,000

To capitalize on higher margins: With EBITDA margins registering higher levels than its global peers in both, nitrogen and phosphate fertilizers, Egypt has an edge in supporting future investments. As for nitrogen, free zone companies' EBITDA margin average 80% versus an average of 30% for the global margin; while phosphate fertilizers bear a local industry average EBITDA margin of 30% compared with 20% for the global margin in 2007.

41

12,000 10,000 8,000 6,000 4,000 2,000 2004/05

2007/08

November 11, 2008 EGYPT | FERTILIZERS

MARKET STRUCTURE Egypt represented 7.5% of the global fertilizers market and 4% of the phosphate fertilizers segment. Total fertilizers market in Egypt reached 12.4 mn tons in FY06/07, up 13% over FY05/06, of which phosphate fertilizers consumption contributed 1.6 mn tons. It is worth noting that the recommended NPK ratio is 1:1/3:1/6 ton for nitrogen (N)*, phosphate (P)**, and potassium (K), respectively.

A dominating nitrogen market

Egypt's fertilizers market structure

Source: Higher Council for Fertilizers

There are currently 10 fertilizers-producing companies; of which 8 are nitrogenbased, while 2 are phosphate-based entities. Concerning the former, 3 companies are located in the free-zone – by which their production is mostly targeting the international market – while the remaining 5 companies are directing their sales to the local market. It is worth noting that the nitrogen-based market is concentrated with the production of the top five companies (Abu Qir, Delta, EFC, Alexandria, Helwan) dominate 97% of total production in FY07/08. As for phosphate fertilizers, EFIC Group leads the market with 64% market share of total local sales of phosphate fertilizers in FY07/08, including its subsidiary SCFP. It is worth noting that EFIC's stand-alone market share amounted to 47%.

A concentrated market structure in both, nitrogen and phosphate fertilizers

Egyptian phosphate fertilizers producers Company Nitrogen

Phosphate

Ownership

Production

Establishment Year

Helwan Fertilizers

Private

Ammonia and urea

Alexfert

Private

Ammonia and urea

2004 2003

El Delta Fertilizers Company

Public

Ammonium nitrates and urea fertilizers

1999

Egyptian Fertilizers Company

Private (100% owned by OCI in 2008)

Ammonia and granular urea fertilizers

1998

Abu Qir Fertilizers & Chemical Industries

Public

Ammonia, urea, ammonium nitrate fertilizers

1976

El Nasr Coke and Chemicals Company

Public

Ammoniom nitrate, coal tar, and metallurgical coke

1964

Egyptian Chemical Industries (Kima)

Public

Ammonium nitrate and urea fertilizers

1956

El Nasr Fertilizer and Chemicals (SEMADCO)

Public

Ammonium nitrates and urea

1946

Soft and granulated SSP and TSP

2007

Soft and granulated SSP and TSP fertilizers

1990

Suez Company for Fertilizers Production

Public - (99.8% owned by EFIC)

Polyserve for Fertilizers and Chemicals

Private

Abu Zaabal Fertilizers and Chemicals Egyptian Financial & Industrial (EFIC)

Soft and granulated SSP and TSP fertilizers, Private- (99.03% owned by Polyserve for fertilizers and phosphate rock, phosphoric acid and sulfuric Chemicals) acid Public

Soft and granulated SSP fertilizers

1947 1929

Source: CICR database

* All nitrogen fertilizers weights are based on a (15.5%) basis. To translate urea to 15.5%, its weights had to be multiplied by a factor of (3). As for ammonium nitrate and ammonium sulphate, their factors are (2.16) and (1.33), respectively. ** All phosphate fertilizers weights are based on SSP (15%) basis. To translate TSP to SSP, its weights have to be multiplied by a factor of 2.46.

42

November 11, 2008 EGYPT | FERTILIZERS

MARKET KEY DEVELOPMENTS SUPPLY & DEMAND PATTERN Over FY04/05–07/08, local market production outpaced local consumption. Over the same period, nitrogen fertilizers production increased by an AAGR of 11.9% recording 14.3 mn tons in FY07/08 versus 11.7 mn tons of consumption which increased by an AAGR of 5.8%. Yet, due to the price cap set by the GoE (excluding companies in free zones), local fertilizers manufacturers endeavored to increase their exports at the expense of their local sales. In FY07/08, exports amounted to 49% of nitrogen fertilizers production. As a result of the excessive fertilizers export activities, manufacturers persistently did not meet local demand. Thus, the nitrogen fertilizers market was characterized with deficits, which grew by a CAGR of 37% during FY04/05–07/08, reaching a total deficit of c. 4.3 mn tons in FY07/08.

Nitrogen fertilizers' production covers consumption, yet due to price capping a considerable volume is directed to the international market

Egypt's nitrogen fertilizers market k tons

Production

Exports

Imports

Consumption

Sales

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 2004/05

2007/08

Source: Higher Council for Fertilizers

Over FY04/05-07/08 phosphate fertilizers consumption outpaced production in terms of growth, with 4-year AAGRs of 11.9% and 7.9%, respectively. Yet, local production covered 1.2x of consumption with local sales contributing 72% to the local phosphate fertilizers market in FY07/08. Such tendency towards satisfying local market needs is confirmed through the declining imports by a CAGR of 4% and increased exports levels by 5% over FY04/05-07/08. Egypt's phosphate fertilizers market k tons

Production

Exports

Imports

Consumption

Sales

1,600 1,400 1,200 1,000 800 600 400 200 2004/05

Source: Higher Council for Fertilizers

43

2007/08

Phosphate fertilizers enjoy higher contribution in local sales versus total production, since no price capping is applied

November 11, 2008 EGYPT | FERTILIZERS

MARKET DYNAMICS

DEMAND DRIVERS Rising fertilizers consumption is fueled by population growth - which followed an annual rate of 2% over FY03/04-07/08 - creating a growing need for food. The strong link between fertilizers consumption and population growth is illustrated in the high correlation coefficient of 0.731 over the same time span.

Population growth

To cope with the increasing need for food, agricultural land has been witnessing a rising pattern reaching 8.37 mn feddans in FY06/07. Consequently, demand for fertilizers expanded by a 3-year CAGR of 4.1%, with phosphate fertilizers growing by 6.4% over the same time span (FY03/04-06/07), surpassing the industry's growth rate. It is worth mentioning that phosphate fertilizers are highly associated with preparing the soil in reclaimed areas, especially those plots located in the desert areas. (The GoE's plan is to reclaim 150k feddans p.a.) In addition, phosphate fertilizers are utilized during the plant development phases and in plant cells division. Also, agricultural land and fertilizers demand exhibited a strong correlation coefficient of 0.717 over FY03/04-06/07.

Expanding agricultural land

Demand for all fertilizers is seasonal. Crops are cultivated in three agriculture seasons:

Demand seasonality

(1) Winter crops extend from November to May; (2) Summer crops extend from March to September; and Nile crops extend from May to October. Although Summer and Winter cropping zones are almost equal in terms of area (6.4 mn feddans for Summer and 6.6 mn feddans for Winter), the former are characterized by their heavy consumption of nitrogen fertilizers. Yet, the case is different for phosphate fertilizers, with consumption being heavier during September-December. Moreover, phosphate fertilizers are required during the early stages of treating and preparing alkaline soils in Upper Egypt (East Owaynat) and North Sinai.

44

November 11, 2008 EGYPT | FERTILIZERS

SUPPLY DRIVERS Natural gas: The potential for growth in the nitrogen fertilizers industry is heavily dependent on the availability of feedstock, namely natural gas. Egypt enjoys an increasing level of proven natural gas reserves which reached 2,060 bn cu.m in 2007. Phosphate rock: Phosphate rock and sulfuric acid are the basic raw materials for phosphate fertilizers production. In terms of volume, the former contributes 62-66% and the latter 34-38% of total inputs in SSP production – the main phosphate fertilizer produced in Egypt. Phosphate rock is extracted from the Red Sea coast with the government-owned El-Nasr Mining Co. controlling 80% of the market and Red Sea Co. and National Phosphate Co. (both private sector) producing 20%* collectively. It is worth noting that Egypt's phosphate rocks production capacity was close to 2.4 mn tons in FY06/07, of which 1.6 mn tons were P1. It was reported that around 80% of P1 phosphate rock grade is exported, while the remaining is used by the local fertilizers industry**.

Feedstock availability: an increasing pool of natural gas reserves and a broad base of phosphate rocks, yet sulfur is imported

Sulfuric acid: Sulfuric acid is a key input for phosphate fertilizers production, of which sulfur (the main raw material for its production) is imported. Starting 2004, sulfuric acid demand by other industries (such as water desalination projects, petrochemicals, glass, and pharmaceuticals) began to pick up. Hence, to achieve greater diversification, integration, and to meet the rising local needs, EFIC expanded its sulfuric acid production line in SCFP with an added annual capacity of 425k tons, which commenced its operations in the second half of December 2007***. In order to meet up with mounting demand, both, expansions and green-field developments took place in the fertilizers industry. Helwan fertilizers and Alexandria Fertilizers companies were established in 2006/07 adding 2.4 mn/year of production increasing to 3.9 mn tons/year after the Helwan's plant came to its full potential. EFIC increased its PSSP production capacity by 33% in 2005 to reach 1,200k tons/year. Moreover, the new SCFP ammonium sulphate production line started operation in 2007 with an annual capacity of 150k tons.

Added capacities boosts supply further

COST-RELATED DRIVERS Although the GoE scaled feed stock prices up to US$3/MMBtu, Egyptian companies are paying US$1.25 – 3/MMBtu, which is still less than there international peers paying US$6 – 7/MMBtu. Accordingly, natural gas cost Egyptian fertilizers plants 40 – 60% of total production costs compared with the international range of 75 – 90%. It is worth mentioning that an increase of US$1 MMBtu should result in a US$32.5 increase in ammonia per ton cost; thus emphasizing the cost advantage the Egyptian market offers to global investors. Although the GoE's decision to increase the natural gas prices starting September 2007 was applicable on local companies, excluding some companies in the free zones, affected their margins. This is because some of them have price caps by the GoE and/or prevented from exporting as highlighted later. However, some companies negotiated some export contracts to catch the hike in fertilizers prices.

* An interview with Eng. Yehia Kotb, Chairman, EFIC. ** An interview with Eng. Samir Abdul Naby, Production Manager, Abu Zaabal Fertilizers. *** Al-Alam Al-Youm newspaper, December 25, 2007.

45

Price capping for nitrogen fertilizers prevents cost passing

November 11, 2008 EGYPT | FERTILIZERS Nitrogen fertilizers financial highlights Sales - L Gross Margin - R

US$

Gross Profit - L EBIDTA Margin - R

EBIDTA - L Net Margin - R

NI - L

70%

450,000 400,000

60%

350,000 50% 300,000 250,000

40%

200,000

30%

150,000 20% 100,000 10%

50,000 -

0% 2006

2007

Source: Abu Qir Fertilizers Company financials

On a different note by Minister Rachid Mohamed on October 16, 2008, the GoE will temporarily freeze prices some industries pay for energy to help Egypt's economy withstand a global financial crisis.

…Energy prices are put on "hold"

Phosphate rocks and sulfuric acid, combined, represent the bulk of total cost of phosphate fertilizers production. Despite the c. 50% increase in local phosphate rock prices in 2007 vs. 2006, it is still lower than international prices (based on North Africa FOB export price). In 1H08, phosphate rocks were in the vicinity of LE 300/ton. As for sulfuric acid, it depends on the cost of imported sulfur, which increased by around 75% in 2007 vs. 2006. In 1H08, sulfur prices were in the range of US$700/ton. Such price hikes were driven by the rapid growth of the military industry, which created heavy international demand for sulfuric acid. In contrary to nitrogen fertilizers, phosphate fertilizers enjoy no price caps levied by the GoE, which allows producers to pass the cost to end customers. Indeed, EFIC's margins have expanded in 2007 versus 2006.

On the other hand, phosphate fertilizers enjoys cost passing ability, since no price capping is imposed

Phosphate fertilizers financial highlights Sales

Gross Profit

EBITDA

NI

Gross Margin

EBITDA MArgin

Net Margin

40%

600,000

35% 500,000 30% 400,000 25%

20%

300,000

15% 200,000 10% 100,000 5% 0%

0 2006

2007

Source: Egyptian Financial and Industrial Company financials (consolidated)

46

November 11, 2008 EGYPT | FERTILIZERS

REGULATORY DRIVERS The government’s spree to unify domestic and international prices has come to impact the fertilizers industry. Prime Minister, Dr. Ahmed Nazif, approved a 100% increase in nitrogen fertilizers prices effective March 1, 2008. Accordingly, the GoE will save LE 800 – 850/ton from the new price scheme, which will be used to subsidize imported nitrogen fertilizers, which we reckon will be partially sourced from companies located in Egypt's free zones.

An increased nitrogen fertilizers prices

The GoE is moving with steadfast steps towards the deregulation of the nitrogen fertilizers market. The Principal Bank for Development & Agriculture Credit (PBDAC) will increase its capital from LE 1.8 bn to LE 3 bn following the new Parliamentary cycle approval for changing the bank's name to the Egyptian Agriculture Bank, as a public specialized bank. Following the bank's regulatory law, the bank can establish agricultural projects including fertilizers. It is worth mentioning that the bank has finalized a study to establish a new nitrogen fertilizers project with expected investment cost of US$500 mn in Upper Egypt and with annual production capacity of 2.2 mn tons. It is believed that changing the bank's bylaws is one step towards diminishing its monopolistic distribution role in the local fertilizers market. Moreover, involving the bank in fertilizers manufacturing projects will increase the available capacities for the local market. Consequently, the export ban might be unleashed soon. This will give chance for local companies banned from exporting.

PBDAC restructuring

Nitrogen fertilizer price mechanism (LE/ton)

Nitrogen local market prices post 100% price ex factory price Pre GoE decision Customer price - Post GoE decision

Additions to ex factory price Post GoE decision

LE/ton

Factory

1,800 1,600

Pre-Government Decision

Post-Government Decision

1,400 1,200

LE 550-650

LE 700-800

1,000 800

PBDAC

600 400

Pre-Government Decision

Post-Government Decision

200 0 Prilled Urea

LE 1,500 - 1,650

Granulated Urea

LE 700 - 800

Consumer

Source: High Council of Fertilizers, CICR

47

Source: CICR database

Urea Zinc

Urea Magnesium

Ammonium Nitrate

Ammonium Sulphate

November 11, 2008 EGYPT | FERTILIZERS

FUTURE OUTLOOK GROWING DEMAND Against the backdrop of the growing need for food coupled with the GoE's plan to reclaim an additional 150k feddans p.a. – which requires the utilization of fertilizers, namely phosphate – the demand for fertilizers is expected to follow a strong growth pattern of 5-year CAGR of 4.1% and that of phosphate to follow an even higher growth of 12.7% over FY06/07-11/12. Future local fertilizers demand Nitrogen fertilizers demand

mn tons 20

Phosphate fertilizers demand 20

5-year CAGR

18

15.80

16

2.17

14

12.36

12

1.56

18 16

5.2% 7.0%

14 12 10

10

8

8 6

13.63

5.0%

10.80

6

4

4

2

2 -

0 2006/07

2011/12

Source: CICR estimates

CAPACITIES

Within the framework of the GoE's strategy to expand the phosphate fertilizers industry, fresh investments are expected to come on stream confirmed by the approval granted by the Minister of Trade & Industry to establish a phosphate fertilizers industrial zone in Aswan, including phosphate rock mines and 12 new phosphate fertilizers plants. The first phase includes 5 plants with an annual capacity of 3 mn tons and an investment cost of LE 1 bn.* It is worth highlighting that vertical integration with ensure a cost-efficient operation. For example, IndoEgyptian Fertilizers Company is building a phosphoric acid solution plant and sulfuric acid facility in Edfu with respective capacities of 1.5k/day and 4.5k/day to commence operations by 2010.** Future local fertilizers Ammonia 18,000,000

Urea

Other N Fertilizers

PSSP

Other P Fertilizers

tons

16,000,000 1,055k 14,000,000 12,000,000

1,055k

Phosphate fertilizers

1,800k 1,440k

1,800k 10,000,000

1,440k 6,040k

8,000,000 6,000,000

4,610k

Nitrogen fertilizers

4,000,000 2,000,000

4,145k

5,257k

2008

Source: CICR database

48

2010

New capacities on stream for the final products as well as raw materials to ensure vertical integration

November 11, 2008 EGYPT | FERTILIZERS It is worth mentioning that a DAP/MAP project is expected to be launched on two phases, the first is due in 2010, while the second is due in 2013. Thus increasing the production capacity for phosphate fertilizers starting the respective years.

PRICES Starting 2008, sustained high demand for phosphate fertilizers (driven by the strong demand for bio-fuels due to the flaring-up of oil prices) coupled with upbeat sulfur consumption (triggered by the tension in the Middle East) pushed prices to enormously high levels. According to EFIC, GSSP export prices reached a current level of c. US$400/ton, while PSSP local prices recorded LE 1,800/ton, hence driving up prices to much higher levels of US$299/ton and LE 1,101/ton on average for 2008 vs. US$91/ton and LE 512/ton in 2007, respectively. Prices are expected to reach their peak by 2010 and cool off starting 2011 when new capacities come on stream. Against the backdrop of an anticipated slowdown in oil prices growth pattern; a reduced pace of growth for bio-fuels demand; and the expected expansions in phosphate fertilizers capacities, phosphate fertilizers prices are to maintain their high level, yet growth is to follow a slower pace over 2009-2012. On the nitrogen fertilizers side, the local ex-factory prices will be locked for a 2year period to align with GoE's directions to maintain energy prices; however, once the situation is clearer, we expect ex-factory fertilizers prices to follow the implementation of the previously announced energy plan, with a possible increase in energy prices by 2010. Urea price forecast

Urea Middle East FoB price

PSSP and GSSP price forecast – based on EFIC prices Local Urea Caped price

Local Urea selling price

US$/ton 600

LE/ton 1,200

PSSP local prices

US$/ton 200

GSSP export prices

180 1,000

500

160 140

800

400

120 600

300

100 80

400

60

200

40

200 100

20 0

0

2007 2007

2008

2009

2010

2011

Source: Bloomberg and CI Capital Research estimates

*. Al-Ahram newspaper, January 1, 2008. ** IFC website and Higher Council for Fertilizers.

49

2008

2009

2010

2011

2012

2012

Source: Egyptian Financial and industrial Company, IFA and CICR estimates

November 11, 2008 EGYPT | POULTRY

CHEK-INS TO THE POULTRY INDUSTRY Poultry is considered a real support to the Egyptian Economy, through providing a healthy, cheap and self-sufficient kind of protein. As Europe and Asia restrict the establishment of poultry farms, future expansions will be shifted to South America and Africa. Egypt’s poultry industry has witnessed a remarkable increase in production reaching 700k tons in 2007 up from 195k tons in 1990. Yet, still potential exists as the country’s 2007 per capita consumption of poultry reached 10.2 kg/annum versus a global average of 12.5 kg/annum. With the country’s population growth, rising GDP/capita, and the diversification of diets the demand for poultry is expected to reach a per capita level of 13.4 kg/annum by 2012. As for poultry producers, the shift is towards vertical integration as to ensure a hygienic cycle and a cost-efficient operation.

DRIVERS The rising consumer health awareness, rising per capita income and growing population will further expand poultry consumption levels. GoE’s plan to locally cultivate yellow corn to minimize the effect of international price fluctuations. New International law preventing the establishment of poultry farms in Europe and Asia, will direct poultry production to South America and African countries.

RISKS The dependence on imported fodder exposes producer to international price fluctuations. Entrance of small-scale producers during peak prices disrupts the market balance, and leads to price decline. Disease breakout, as Avian Influenza (AI), impacts supply and demand for poultry. Tariffs reduction on Imported frozen chicken intensifies competition.

Rising Consumption/capita in developing countries: While per capita consumption in high income countries increases only marginally, rising incomes and the subsequent diversification of diets led to a shift towards significantly higher white meat consumption in developing countries. Poultry is still threatened by AI outbreak, yet is becoming more immune: The advent of the Avian Influenza (AI) at the end of 2006 heavily impacted poultry consumption and resulted in huge losses for poultry producers and the farms’ owners. Industry experts expect that it will not be before 2010 when the occurrence of such disease will end, yet the industry’s developed immune system should alleviate the impact of the AI disease. As fodder is a key contributor to cost, the witnessed decline in its prices is an advantage to poultry suppliers: As prices of yellow corn (the main component in poultry fodder) is strongly linked to the global oil prices—as factories shift to yellow corn for bio-fuel products as a cheap substitute for oil as oil prices kept rising—the current decline in oil prices decreased fodder prices reaching around LE 1,200/ton. The anticipated low levels of oil prices is expected to maintain fodder prices at reasonable levels, thus, enhancing the companies margins. Moreover, the GoE’s plan to locally cultivate yellow corn will minimize the effect of international price fluctuations. The industry’s shift towards vertical integration: To ensure the implementation of a more hygienic poultry cycle in order to avoid the outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated business model ensures a more cost-efficient operation. Thus, investment in slaughterhouses started to kick-off with “Al Wataneya Poultry” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day.

50

KEY PERFORMANCE INDICATORS Poultry production (2007, k tons)

700

Local consumption/capita (2007,kg p.a.)

10.2

Global consumption/capita (2007,kg p.a.)

12.5

Current fodder prices (LE/ton)

1,200

MARY MILAD [email protected]

SECTOR PERFORMANCE | 2004-2007 14 12 10 8 6 4 2 0

Consumption/capita Kg/annum

8.5

9.0

Growth rate 10%

8.9% 9.8

10.2

8% 6%

5.9% 2.4%

4.1%

4% 2% 0%

2004

2005

2006

2007

November 11, 2008 EGYPT | POULTRY

MARKET HIGHLIGHTS Since 1990, the poultry industry has witnessed a remarkable increase in production on the local level, as poultry companies increased their production by almost 301%, reaching 700K tons up from 195K tons over 1990-2007, following a CAGR of 7%. Yet, still Egypt’s production represents a minor share of 1% of global poultry production.

Expanding production levels

Local consumption followed the same increasing trend as that of Global Market. Consumption per capita reached around 10.2 Kg/annum in 2007 up from 7.9 Kg in 2000; reflecting the fact that the increase in poultry meat consumption mainly depends on the increase in income and not only related to population. Yet, still the country's per capita consumption is below the global average of 12.5 kg/annum.

Growing consumption, yet, still untapped potential

RECENT DEVELOPMENTS Though local production is currently sufficient to cover local consumption, however, around 25-30K tons of frozen chickens are imported from Europe and Brazil. Following the protection of the GoE to the industry, over 1986-2007, through the ban it imposed on imports, in July 1997 the ban was lifted up and imports were allowed with an 80% tariff (plus an additional charge of 4%) on imported frozen poultry and poultry products. Moreover, in September 2004 tariffs slashed to 32%, and then further reduced to 30%. Said act, is a government tool to control monopoly imposed by local producers on poultry prices. Hence, profit margins attract traders, who were unable to neither invest in poultry business nor bear the losses encountered in case of any disease outbreak; consequently trade is the optimum option to enter the poultry business. Such practice created an over supply, leading to a drop in selling prices. Ex-farm prices LE/KG 7.0

6.0

5.0

Slashing import tariff from 80% to 32% in

4.0

3.0

2.0

1.0

0.0 1999

2000

Source: Poultry Industry Experts

51

2001

2002

2003

2004

2005

2006

2007

Slashing import tariffs as a tool to reduce monopolistic power of suppliers

November 11, 2008 EGYPT | POULTRY

Poultry is considered a strategic industry – as the income of many families in Egypt depends on this industry – in addition to its importance as a source of protein to the Egyptian families. However, the advent of the Avian Influenza (AI) heavily impacted consumption and resulted in huge losses for poultry producers and the farms’ owners. It is worth noting that losses encountered by AI disease during the end of 2006 and the beginning of 2007 due to the AI disease reached around LE 3-4 bn (hitting 50% of parent chickens flocks and around 70% in layers flocks). Moreover, consumers started to shift to substitutes as fish and meat, as a safe meal to ensure their required protein intake. The impact of AI, which occurred during end 2006, was remarkable later in 2007, as consumption per capita growth dropped drastically from 9% to 4%.

The advent of the AI disease heavily hit the industry

Local consumption/capita Kg/annum

Consumption/capita

Growth rate

10.5

10% 8.9%

10.2 9%

10.0 8%

9.8

7% 9.5 5.9%

6%

9.0 5%

9.0

4.1%

8.5

4%

8.5 3% 2.4%

2%

8.0 1% 0%

7.5 2004

2005

2006

2007

Source: Poultry Industry Experts

MARKET STRUCTURE The poultry industry in Egypt is subdivided into 3 main segments: (1) commercial Commercial and Chickens; (2) Balady Chickens; and (3) other poultry. Both commercial & balady Balady Chickens are chickens are, in turn, subdivided into broilers & Layers leading to the following the main segments four sub-segments: Commercial Broilers: This segment concerns chickens (specifically international breeds) which are reared for the production of white meat. Commercial Chicken Layers: This segment concerns chickens (specifically international breeds) which are reared for the production of eggs for consumption. It partially contributes to the production of white meat. Balady Chicken Broilers & Layers: This segment concerns local breeds reared by individuals in their backyards. Other Poultry: This segment concerns birds, other than chickens, raised for meat production and it includes; ducks, geese, turkeys and pigeons. It is further subdivided into commercial and backyard operations

52

November 11, 2008 EGYPT | POULTRY

There are many players in the market; varying from small-scale producers and farmers to well established companies. Moreover, poultry business consists of several production phases; companies’ contribution to the market vary from one stage to another; accordingly, the contribution of market players, on average, can be summarized in the below pie chart. Poultry market players

Other Players 38%

Cairo Poultry 30%

Wataneya Poultry 4% Dakahleya Poultry 5%

Wadi Holdings 4%

Misr Arab Poultry 19%

Source: Poultry Industry Experts

MARKET DYNAMICS MARKET DYNAMICS

Socio-economic Drivers

Market-related Factors

Fodder-related Factors

Income/Capita

Seasonality

Fodder Availability

Population

Diseases

Fodder Prices

Substitutes

53

A fragmented market, yet, five key players control the field

November 11, 2008 EGYPT | POULTRY

SOCIO-ECONOMIC DRIVERS As the level of income increases, new social levels enter into the poultry consuming population, hence expand consumption.

Income/capita

Income/capita vs. consumption/capita LE

Income per Capita

Kg/annum

Consumption per Capita

6,000

12.0

5,000

10.0

4,000

8.0

3,000

6.0

2,000

4.0

1,000

2.0

0

0.0 2003

2004

2005

2006

2007

Source: Poultry Industry Experts

It has been witnessed that consumption of poultry increased over years with the growing population, as demand for poultry and population illustrate high correlation co-efficient of 0.94. Population vs. consumption ton 900,000

Consumption

mn 76

Population

800,000

74

700,000

72 70

600,000

68

500,000

66 400,000

64

300,000

62

200,000

60

100,000

58 56

-

07 20

06 20

05 20

04 20

03 20

02 20

54

01 20

00 20 Source: CICR Estimates

Population

November 11, 2008 EGYPT | POULTRY

MARKET-RELATED DRIVERS Poultry consumption is seasonal, as increased consumption levels are witnessed during religious occasions and summer vacations. On the supply level, the global production of fodder, which is the main input in poultry industry, vary according to climate conditions under which seeds (yellow corn and soybean) are cultivated.

Seasonality of demand and Supply

The emergence of diseases, such as Avian Influenza, impacts both supply and demand for poultry, evidenced by the decline in global production and consumption which occurred during 2003 and 2006 as a natural result of the discovery of AI cases. It is worth highlighting that the outbreak of the disease was witnessed late in 2006, thus, impacting 2007 levels.

Diseases impact both demand and supply

Global demand vs. supply

Demand

Supply

Demand Growth

Supply Growth

000' Tons 100,000

5.00%

80,000

4.00%

60,000

3.00%

40,000

2.00%

20,000

1.00%

-

0.00% 2000 2001 2002 2003 2004 2005 2006 2007

Source: FAO STAT Database

The rising consumer health awareness and the discovery of FMD (Foot and Mouth Disease) and BSE (Bovine Spongiform Encephalopathy, commonly known as Mad Cow Disease (MCD)) cases negatively affect red meat consumption, yet, boost the demand for poultry and fish – as they represent perfect substitutes for meat in terms of protein intake. Nevertheless, the occurrence of AI disease impacts the demand for poultry and expands consumption of substitutes – as meat and fish.

FODDER-RELATED DRIVERS Fodder constitutes the bulk of poultry production cost; the production of fodder relies, in turn, on yellow corn and soybean, the importation of which depends on the availability of seeds in the Global commodities market. Moreover, fodder prices are determined by commodities’ global prices. It is worth noting that yellow corn prices is strongly linked to oil global prices as factories shift to yellow corn for bio-fuel products as a cheap substitute for oil, which justifies the tremendous increase in fodder prices in the first half of 2008. However, with the decrease witnessed in oil prices, fodder prices declined reaching a current level of LE 1,200/ton; with an expectation of further decrease.

55

Substitutes

November 11, 2008 EGYPT | POULTRY

Oil vs. fodder prices

Oil prices

Fodder prices

160 140 120 100 80 60 40 20 0 Ja n Fe -0 b- 7 M 07 a A r-07 p M r-0 ay 7 Ju -07 n Ju -07 A l-0 u 7 S g-0 ep 7 O -07 c N t-07 ov D -0 ec 7 Ja -07 n Fe -0 b 8 M -08 a A r-08 pr M -0 ay 8 Ju -08 n08

3500 3000 2500 2000 1500 1000 500 0

Source: CICR Estimates & Poultry Industry Experts

Most notably, as fodder constitutes around 65% of poultry total production cost, volatility of fodder prices is consequently reflected in poultry selling prices as illustrated in the graph below.

Fodder vs. poultry selling prices

LE/ton 3500

Fodder prices

Selling prices

3000 2500

LE/Kg 12.00 10.00 8.00

2000 6.00 1500 1000 500

Ja Fen-0 7 M b-0 ar 7 Ap -0 7 M r-0 ay 7 Ju -0 n 7 Ju -07 Au l-0 7 Seg-0 p 7 O -0 c 7 N t-0 ov 7 D -0 ec 7 Ja -0 7 Fen-0 8 M b-0 a 8 A r-0 pr 8 M -0 ay 8 Ju -0 n- 8 08

0

Source: Poultry Industry Experts

56

4.00 2.00 -

November 11, 2008 EGYPT | POULTRY

FUTURE OUTLOOK Poultry is considered a real support to the Egyptian Economy, through providing a healthy, cheap and self-sufficient kind of protein. The anticipated decline in oil prices will be reflected on a reduced demand for yellow corn as a bio-fuel substitute, hence a downward slope for its prices which will be mirrored on the fodder prices. Moreover, the GoE plan to cultivate yellow corn will alleviate the exposure of poultry suppliers to the volatility of international prices, enhance their margins, and attract new market players.

Anticipated decline in yellow corn prices is a plus

Still the outbreak of AI represents a threat to the industry's supply and demand sides. As per industry specialists, the occurrence of the disease is still a risk until 2010. Therefore, we anticipated demand to be depressed during 2009 and 2010, yet, it will resume higher growth levels throughout the remaining period of our forecast. Given the growing population rate and increasing income per capita, poultry consumption is expected to grow over 2008-2012 by an average of 7.8% annually to reach a per capita consumption of 13.4 Kg/annum by 2012

Still fears from the outbreak of AI as a threat, yet it is anticipated to end by 2010

Future Consumption

000 ton

Consumption

Growth rate

1,200

12.0%

1,000

10.0%

800

8.0%

600

6.0%

400

4.0%

200

2.0%

0.0%

0 2006

2007

2008

2009

2010

2011

2012

Source: CICR Estimates

To ensure the implementation of a more hygienic poultry cycle in order to avoid the outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated business model ensures a more cost-efficient operation. Hence, investment in slaughterhouses started to kick-off with “Al Wataneya Poultry” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day.

57

More integration is anticipated

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE

SHELTERS ARE A MUST Given the strong ties linking the real estate market with the economy, the anticipated economic slowdown will be reflected on real estate prospects, which owes much of its boom to the boost in high-end segment demand. Yet, the cool-off in raw materials prices along with an expected decline in mortgage lending rates will shape up an affordable product to the middle-income group; thus, help materialize its unmet demand, and alleviate the expected simmering down of the high-end demand which is on the brink of saturation. Retail, is another key segment driven by the GoE's commitment to support local investments – namely SMEs – and building commercial and industrial zones in many governorates, thus, highlighting the positive prospects of office and commercial segments – which are still undersized. Moreover, the highly competitive property prices in Egypt versus its regional peers may foster foreign investments. Developers are to weather the storm with a solid ground: Developers are expected to withstand the anticipated slowdown in the real estate market with a much solid ground than earlier in the decade, capitalizing on their sell-off plan model. Other drivers may expand the added supply units beyond the completion of outstanding projects: The completion of outstanding projects is expected to ensure growth in supply. Yet, the negative sentiments for the financial market, may act as a potential for liquidity transfer from equity markets to the perceived safe real-estate market. Moreover, the expected growth in real GDP/capita leads to wealth accumulation and expands demand for real estate. Mortgage scheme development enhances affordability: The anticipated improvements in the mortgage scheme and the expected decline in mortgage lending rates along with the cooling off in raw materials prices are expected to create affordable residential units for the middle-income group. Hence, alleviate the expected cool off in high-end demand. A bright side for retail: The GoE's commitment to support local investments – namely SMEs – and building commercial and industrial zones in many governorates highlights the potential for office and commercial segments, which are still undersized. Highly competitive prices: The recent reforms that helped streamlining the process of property purchase in Egypt, facilitating the purchases for overseas buyers, may render the country's highly competitive real estate prices, compared to its regional peers, as a base to foster foreign investments.

DRIVERS Growing population, namely urban, coupled with growth in marriages are key engines to the expanding residential demand. Rising real GDP/Capita enriches wealth accumulation activities, which acts as a potential for real estate demand. The availability of land for projects development. The unmet demand, namely in the medium to lower income classes represents an opportunity for developers in these categories. Foreign ownership is allowed. Declining raw materials prices will increase affordability of real estate units for middle and lower income classes, hence will expand their demand potential.

RISKS The underdeveloped infrastructure and transportation facilities act as a limitation for potential real estate investments. The undeveloped mortgage finance scheme limits its full application. Lower oil prices might affect the liquidity flowing into the real estate from the GCC.

KEY PERFORMANCE INDICATORS Av. annual added residential urban demand (04-07,k units)

508

Av. annual added residential urban supply (04-07,k units)

134

Added urban supply units (2010,k units)

442

Cairo average residential selling prices (US$/sqm)

1,006

MENA average residential selling prices (US$/sqm)

3,068

COMPANIES COVERED PAGE # Nasr City H&D

135

Palm Hills Developments

149

TMG Holding

157

MUHAMMAD EL EBRASHI [email protected]

SECTOR PERFORMANCE | RESIDENTIAL SUPPLY Luxury

Medium

Lower Cost

Additional Units

140,000

120,000

100,000

80,000

60,000

40,000

20,000

2004/05

58

2005/06

2006/07

2007/08

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE

KEY MARKET FACTS The strong ties between real estate and economic performance drove up real estate investments by 77% over FY03/04-07/08 – the period when the economy was booming. Egypt's strengthening economy prompted investors to undertake residential, office, and retail developments, with total real estate investments reaching LE 13 bn in FY07/08, with Gulf investors being at the forefront of a considerable number of developments.

Real estate bears strong ties with the economy

Real estate investments versus economic growth

Real Estate Investment

Real Estate Growth

GDP Growth

14,000

40%

12,000

35% 30%

10,000 25% 8,000 20% 6,000 15% 4,000 10% 2,000

5% 0%

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

Source: Central Bank of Egypt bulletin

Despite the dramatic increase in real estate prices, they are still much lower compared to regional peers, hence adding to the sector's potential. Average selling prices US$/sqm during 2008 Cairo

MENA average

US$ per s.qm 6,000 5,175 5,000

4,000

3,000

3,068

2,960

2,000 1,006 1,000

Average office sales price

Source: Bank Audi

59

Average residential sales price

Highly competitive prices

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE

MARKET DEVELOPMENTS Sliding Phase

Recovery Phase

An Uptrend

2000 - 2003

2004 - 2005

2006 - Current

* The real estate market entered a downward phase.

* Real Estate started its recovery.

* Launch of the Real Estate tax law

* High-end supply outweighed demand.

* Intense development of new urban communities.

* Growing real estate market.

* Depreciated real estate prices.

* Appreciated real estate prices.

* Influx of international developers.

* Weak real estate demand.

* Strong real estate demand.

* Appreciating land and property prices.

* The initiation of the mortgage scheme concept.

* Mortgage law was put into effect.

* Increasing rental yields.

* Strict foreign ownership regulations.

* The first two mortgage companies started operation.

* Demand maintained its strength.

* Banks started to offer household credit to finance residential ownership.

* Banks started to offer seven to ten years loans.

* Laxed foreign ownership regulations.

* The establishment of the Egyptian Company for Mortgage Refinancing. * Reduction in property tax from 46% to 10%. * Reduction of property registration fees from 12% of property value to a max of LE 2000 per property.

* Increasing number of financing institutions. * Structural gap.

Source: CI Capital Research

The buoyant sentiment surrounding Egypt’s real-estate market growth coupled with a strengthened economy laid solid grounds for further expanded real-estate investments. With the announcement of billion of dollars worth of emergent projects including residential, offices, commercial and touristic projects that were introduced to the market through local and foreign investors, Egypt is introduced to a new era of intense activity designed to propel it to the global spot light.

Positive sentiments coupled with a strengthened economy encouraged foreign investments inflow

High oil prices have resulted in a dramatic increase in the wealth of the major oil producers. The GCC in particular are generating huge current account surplus reaching US$210 bn in 2007; which finds their way through local and overseas investments. With the downturn in the US and some European housing markets, which has already dented their economic performance through declines in residential investment and construction activities, along with Egypt undertaking an extensive development program, several Gulf investors have directed much of their appetite towards Egypt, developing several mega projects.

Led by GCC investment inflows which were further fostered by the boosted surplus from high oil prices

Key foreign real estate developers Developer Emaar Kharafi Group Barwa Qatari Diar Al Futtaim Group

Damac Total

Source: CICR

60

Project New Cairo City - Cairo Gate Marassi - Up town Cairo Port Ghalib

Investment (bn) EGP 42.67 EGP 9.20

Delivery Year Master planned - 2013 2013

Qatamiyya

EGP 7.50

2013

Cairo Nile Corniche Towers project Tourist Development

EGP 7.65

2012

Cairo festival city

EGP 20.10

2011

Gamsha bay - Park Avenue - Hyde Park

EGP 107.00

2011 - 2018

EGP 194.12

Master planned - 2018

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE New Cairo communities galloped ahead on their competitive tracks and experienced a dramatic increase in residential property supply especially in the construction of high-end properties. Commercial activity also picked up lately; however, the office market remains untapped. Moreover, the rising flow of tourist arrivals attracted investments not only in hotels but also in integrated touristic developments. Egypt's buoyant economic performance stimulated investors to set up retail developments illustrated by the inflow of hypermarkets as well as supermarkets, by both international and local chains. It is worth noting that there are about c. 26 shopping malls in Greater Cairo; by which the advent of professional retailing and mall construction started in 2005 through the development of the US$1-bn City Stars investment, including a shopping mall, two hotels, cinemas, as well as residential and commercial units according to internationally accepted standards.

The advent of the integrated project concept and new housing convention…

Such witnessed investment inflow increased the number of added units; by which the yearly additional residential units averaged 195k units over 2004-08 compared to an average of 159k units over 2000-03. Commercial activity witnessed growth as well, however, the office market remains untapped.

Residential and commercial additions were lifted up

Estimated Urban additions for Residential Units additional Units 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 1995-99

2000-03

2004-08

Source: CAPMAS & CICR estimates

The bulk of inflows were concentrated in the high-end property segment whose spiraling development dominates headlines in the sector, while the added housing units to medium and low-income inhabitants who constitute the vast majority of Egyptians are limited. As supply failed to keep apace with the rising demand of the medium and low- income housing units, the real-estate market is faced by a structural gap between the high-end property market and that of the medium to low-end segment. Estimated Urban Supply/Demand additions for Residential Units (by sector) Luxury

Medium

Lower Cost

Additional Units

140,000

120,000

100,000

80,000

60,000

40,000

20,000

2004/05

2005/06

Source: CAPMAS & CICR estimates

61

2006/07

2007/08

Yet, a structural gap exists

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE

MARKET DYNAMICS

Source: CICR

SOCIO-ECONOMIC FACTORS

62

Population growth coupled with rural urban migration is key engine for residential demand. Egypt's population reached 74 mn inhabitants by 2007; growing with 1.9% on average. Rural-urban migration coupled with the normal growth of urban inhabitants pushed urban population to contribute with a share of 42.9% of total inhabitants.

Population Growth with significant urban share

With the current age distribution, 50% of the population is below the age of 20, while c. 30% of the country's population lies within the age bracket of 20-39 years – this represents the marriage group that stimulates demand for new residential units. As for the 45-year and older age bracket, which represents around 16% of the population, it creates demand for new properties through relocating, or by buying a secondary property. Moreover, huge demand potential still lies ahead, fostered by the fact that 50% of the population is below 20 years, signaling future real-estate demand.

Population structure adds further to demand potential

Marriages have reached an estimated level of 669k contracts in 2007/08, and grew at an average annual rate of 5.6% over 2002/03-2007/08. Moreover, cases of divorce have recorded 73.1k cases in 2007/08. Both, marriages and divorces create demand for residential units.

Marriages & Divorces

Demand for property is closely tied to growth in per capita income. The rise in real GDP/capita averaging 5% annually throughout FY05/06-07/08, allowed for the accumulation of wealth, hence drove up the real-estate market by an annual average of 10%.

Per Capita Income

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE

REGAULATORY FRAMEWORK Currently, the property tax law is being amended, by which all unfinished units within the cities or in new urban areas will be subject to the property tax law. This will encourage the developers to accelerate the delivery of units to buyers. Passing this law will force owners to sell their properties to avoid paying property tax. It is believed that such law will increase the property sale turnover in Egypt; thus, residential property liquidity will surge, bringing prices to more competitive levels, and accordingly expands affordability. Moreover, a tax of 2.5% is charged on money earned from a property sale. In addition to taxes of 20% on rental income with a basis threshold for taxation of LE 10,800 per annum.

Property tax law

Recent reforms helped streamlining the process of property purchase in Egypt, facilitating the purchases for overseas buyers, and focusing investors' attention on Egypt as a prime location for real-estate buyers as well as developers.

Enhancing registration scheme

In an effort to boost the real-estate market and expand its base, in April 2005, Egypt revamped the property ownership law to extend identical ownership rights and privileges to foreigners as those enjoyed by native Egyptians. Ownership follows a freehold model with the only exception being in Sinai, where the ownership is based on a 99-year long lease system, usufruct system.*

Allowing foreign ownership

Although the mortgage finance scheme was initiated in 2000, it was not put in effect until 2004. Compared to the deferred installment system, a developed mortgage finance system makes purchasing a house more affordable for more people through longer amortization terms and lower prices, which ultimately stimulates and develops the property market. It is worth mentioning that total mortgage loans exceeded LE 2 bn in December 2007 compared with LE 1 bn in December 2006, fueling further the purchase of properties. The launch in the mortgage law was to catch the segment of population with annual salary ranging from LE 1.5 k to LE 6.2 k (22% of the population) and thus can afford to pay the 40% monthly installments of LE 0.6k to LE 2.5k. further improvements in the law could allow the mortgage finance companies and banks to address a further 20% of the population with wages in the range of LE 1 – 1.2 k month.

Mortgage law

MORTGAGE FINANCE Despite the introduction of the mortgage finance system to the market, it is still faced with some obstacles. Red tape; the limited number of mortgage finance providers; and the low amount of finance offered – a ceiling of LE 5 mn - hinder the efficient application of the mortgage finance scheme. Although mortgage loans experienced a two fold increase reaching LE 2.8 bn in 3Q08 vs. LE 1.9 bn in 3Q07, still it represents less than 1% of the country's GDP versus 8.1% in the UAE in December 2007. Mortgage Finance Market MFC

Banks

Mortgage loans as percentage of GDP (current)

LE mn

4,500

1.40%

4,000

1.20%

3,500

1.00% 3,000

0.80%

2,500 2,054

2,130

1,906

2,000

0.60%

1,369

1,500 871

1,000

1,000

0.40%

1,067

714 502

500

193

208

3Q05

4Q05

0.20%

0

0.00% 1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

Source: Ministry of Finance and Euromoney Conferences *

63

Usufruct system: It is the right to use and exploit property belonging to another person.

Limited application of mortgage finance scheme

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE Currently there are 10 key major players (banks and companies) in the mortgage finance market up from 9 in 2007. In addition, several investors, both local and regional, showed their interest to enter Egypt's mortgage market by setting their mortgage companies. For instance, Naeem Holding is preparing to submit a request to acquire a license to establish a mortgage finance company with an authorized and paid-in capital of LE 1 bn and LE 100 mn, respectively - pending finalization of license procedures with the Mortgage Finance Authority (MFA). In addition, Tamweel PJSC, the largest provider of real estate finance in the UAE, has announced that it has received a mortgage finance license from Egypt’s Mortgage Finance Authority (MFA) during March 2008 to launch operations in the Arab world’s most populous nation, with an authorized capital of LE 500 mn and a paid-in capital of LE 100 mn.

Rising number of players

Figure 15 Key operating Mortgage Finance Institutions Provider

Available to

Type of Unit

Mortgage Tenor

Interest Rate

Max. Loan Amount

Min Salary (LE)

Charges

Buy-To-Let

Amlak

Egyptians, Expatriates, and nonEgyptians

Residential

A maximum monthly installment of 20 years/maximum age of 65 years.

13.5%-decreasing

Min monthly salary LE1,000

LE 150 for application form, LE 1000 for the appraiser, and 2% administrative fee are paid once.

Requires Financer Approval

Egyptians, Expatriates, and nonEgyptians

Commercial

A maximum monthly installment of 20 years/maximum age of 65 years.

14%-decreasing

90% of property value (up to LE 5 mn) - monthly installment can not exceed 40% of 80% of property value (up to LE 5 mn) - monthly installment can not exceed 40% of

Min monthly salary LE2,000

LE 150 for application form, LE 1000 for the appraiser, and 2% administrative fee are paid once.

Requires Financer Approval

EHFC

Egyptians, Expatriates, and nonEgyptians

Residential

A maximum monthly installment of 15 years/maximum age of 65 years.

9.3% Fixed

80% of property value (up to LE 2.5 mn)

Min monthly salary LE2,000

LE150 for application form and LE1000 for the appraiser.

Requires Financer Approval

Taamir Mortgage company

Egyptians, Expatriates, and nonEgyptians

Residential

A maximum monthly installment of 20 years/maximum age of 65 years.

10% Fixed

85% of property value

Single person: min LE18,000 annually; Total family income: LE24,000

2% administrative fee from whole loan balance are paid once.

Requires Financer Approval

Bank of Alexandria

Egyptians, Expatriates, and nonEgyptians

Residential

A maximum monthly installment of 15 years/maximum age of 65 years.

12.4% declining for 2 years 13% declining for 13 years

90% of property value (up to LE 5 mn)

Min monthly salary LE2,000 & max loan installement is 40% of monthly salary.

1.5% administrative fee from whole loan balance are paid once.

Requires Financer Approval

Bloom Bank

Egyptians, Expatriates, and nonEgyptians

Residential

Monthly installment ranging from 5-15 years/maximum age of 60 years.

12.5% declining for 3 and 5 years and 13% declining for 10 and 15 years

70% of property value in Cairo and other governorate, 75% of property value in new Cairo, 80% construction activities, and 45% finishing activites.

Min monthly salary LE1,000 & max loan installement 40% of monthly salary.

1% administrative fee from whole loan balance are paid once (min LE 500 and max of LE 25K).

yes

CIB

Egyptians, Expatriates, and nonEgyptians

Residential

Monthly installment 11.5% fixed for five ranging from 5-15 years. 12% years/maximum age of 60 declining for the years. next 10 years

75% of property value (min LE 120k up to LE 5 mn)

Min monthly salary LE4,000.

LE1,000 is paid for apartments and LE2,000 for villas. In addition to 0.25% is paid annually on the remaining balance of the loan & 1.5% of loan amount is paid once (max LE 30,000) at the begining of the loan and deducted from the loan balance.

yes

Egyptian Saudi Finance Bank

Egyptians

Residential

A maximum monthly installment of 10 years/maximum age of 60 years.

90% of property value

Min monthly salary LE1000 & max loan installement 40% of monthly salary.

LE 500 and insurance 2.5% of loan

Requires Financer Approval

Egyptian Arab Land Bank

Egyptians

Residential

9% fixed for Cairo A maximum monthly installment of 15 years for 9.6% fixed for new cities cairo and 20 years for new cities/maximum age of 65

85% of property value

Min monthly salary LE1000 & max loan installement 40% of monthly salary.

NA

Requires Financer Approval

Housing & Development Bank

Egyptians, Expatriates, and nonEgyptians

A maximum monthly installment of 10 years/maximum age of 60 years.

75% of property value

Max loan installement 40% of monthly salary.

0.1% Administrative fees.

yes

NSGB

Egyptians

Min monthly salary LE2,000

one time administrative fee which is 1% of total loan.

Requires Financer Approval

Source: CICR database

64

Residential

Monthly installment ranging from 5-15 years/maximum age of 60 years.

8.2%

13 - 14%

12.5% declining for 80% of property 5 years - 13% value (min 50k - up declining for 10 to LE 5 mn) years - 13.5% monthly installment declining for 15 can not exceed years 40% of gross salary

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE Cost is now by far the most important selection criteria for the bulk of the resident workforce in Egypt. The witnessed inflationary pressures within 2008 had placed increasing emphasis on affordability, as rising interest rates limits an expanded application of the mortgage finance scheme. Given the decline in CPI readings starting September 2008 along with the anticipated lower inflationary levels going forward, interest rates are expected to adjust to the downside, thus, would bring down with it mortgage lending rates. A fact that is expected to enhance the affordability of such scheme and ensures an expanded utilization.

The anticipated lower inflationary levels is to have its positive impact on the mortgage finance scheme

OIL PRICES The witnessed strengthening of oil prices reflected growing surpluses in oil exporting countries, namely those of the GCC region, which registered a current account surplus of US$210 bn in 2007. Oil windfall pushed upward the private wealth which further boosted the recycling of the petrodollars in value added opportunities as the real-estate market of prospective destinations, including Egypt, thus, stretching further the demand potential as well as expanding the developers' capacities to invest in the real-estate sector. Moreover, the attractive realestate prices compared to those in traditional markets created demand for a second-home within Egypt. However, with the anticipated decline in oil prices, GCC surplus will be depressed, and will impact their investments inflow to Egypt. Yet, FDIs in real-estate remains untapped with a minimal share of less than 1% of total FDIs inflows to the country, and a contribution of around 4% to total realestate investments in FY07/08. Hence, we believe the impact will be limited.

Peaking oil prices enforced an upbeat for the real-estate market, yet their anticipated drop is expected to depress such growth

RAW MATERIALS The strong real-estate demand witnessed despite the hiking raw materials prices – reaching a peak of LE 6,600/ton in 2008 for steel and a high of LE 462/ton in 2008 for cement – proved the strong belief of the positive prospects of such sector by investors – local and international – and the outweighing of the demand drivers over those of supply, resembled in the dramatic increase in real estate prices caused by the rising steel and cement prices. Yet, the anticipated global economic slowdown which will be reflected on the Egyptian economy is expected to outweigh the anticipated decline in raw materials prices - leaving the real estate market cushioned by the outstanding projects.

Strong demand despite the hiking raw materials prices, yet, with the cooling off in steel and cement prices still demand is expected to be depressed

DEVELOPERS' SELF-FINANCING MODEL Capitalizing on their self financing model (sell-off plan), developers are to weather the slowdown in demand on a more solid ground than during the downturn that occurred earlier in the decade. Hence, reversing the previous high working capital needs with developers’ financial leverage averaging 0.9x in 2007.

With the de-leveraged standing of developers, they are to weather the storm with a solid ground

FUTURE OUTLOOK The coming two years are expected to witness a depressed demand with the pace of growth being based upon the completion of outstanding projects. Yet, a more developed mortgage scheme with expected lower interest rates – following the expected decline in lending rates as a measure to expand investments – coupled with the cool-off in raw materials prices could allow for the entry of the middle-income class, as residential units can become more affordable. We have accounted for a more conservative picture for demand on real estate to incorporate the impact of such economic slowdown. Real estate residential demand is expected to grow at a decelerated rate over 2009 and 2010, and a pick-up is to follow afterwards.

65

Depressed demand for residential units, yet, with expected lower mortgage lending rates units to the middle-income class could be affordable

November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE As supply mainly targets the high-end, its growth is expected to be based upon completing the outstanding projects. However, the unsatisfied demand that is expected to stem from the middle-income class is likely to alleviate the expected cool-off in the high-end demand.

Middle-income group; “every cloud has a silver lining”

Future additional demand and supply Additional Urban Supply

Additional Urban Demand

600,000

500,000

400,000

300,000

200,000

100,000

0 2006

2007

2008

2009

2010

2011

2012

The GoE's commitment to support local investments – namely SMEs - and building commercial and industrial zones in many governorates highlights the potential for office and commercial segments, which are still undersized.

66

A bright side for the retail segment

November 11, 2008 EGYPT | STEEL

REBARS IS MORE LIKELY TO WITHSTAND THE STORM THAN FLAT STEEL Against the backdrop of anticipated downturn in the global economy and a slowdown in trade activities, flat steel is expected to be more affected than rebars, as the former is highly involved in the export markets with 56% of its sales is directed internationally in 2007. On the other hand, the demand for rebars will be secured by the massive backlog of real-estate projects. In addition to the GoE’s commitment to push further local investments through building commercial and industrial zones in many governorates which will increase the demand for the retail segment. In an effort to give local steel products a competitive edge against competition in the global market, the GoE removed the LE 160/ton export tariffs on steel exports. Another forward move is the vertical integration enforcement through the GoE issuance of license for the production of billets, sponge iron and direct reduced iron (DRI), key raw materials in steel production. Such move should alleviate the impact of the volatile steel raw materials prices on the local product, as Egypt’s steel industry heavily relies on imported raw materials.

DRIVERS Outstanding real estate projects secure demand. Strengthened margins. Declining raw materials prices, coupled with declining freight costs. Removal of export ban. Foreign companies' entry is expected to improve the industry's efficiency.

RISKS Heavy reliance on imported raw materials. Sudden governmental decisions as imposing duties on steel exports. Anticipated slowdown in the global and local economies.

KEY PERFORMANCE INDICATORS Rebars production CAGR (04-07,%)

10.8

Rebars consumption CAGR (04-07,%)

11.6

Flat steel is expected to be highly affected: As 56% of flat steel sales is directed to the export markets, the anticipated global downturn is expected to highly affect the flat steel companies’ sales.

Flat production CAGR (04-07,%)

6.2

Flat consumption CAGR (04-07,%)

10.7

Removal of export tariffs will give steel products a competitive edge: In mid-October 2008, the levied LE 160/ton export tariff on steel exports was removed, in an effort to make steel prices more competitive in the international markets – against the backdrop of an anticipated global recession spurred by the financial turmoil.

Ezz Al-Dekheila Steel-Alex.

123

Ezz Steel

125

Local industry is moving towards more integration: Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 four licenses for the production of billets and sponge iron with a combined annual production capacity of 8 mn tons, and an investment cost of US$15 bn. The four winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Most notably, two licenses were offered to two foreign investors for the first time. With investments flowing to steel feeding industry, margins are expected to improve.

COMPANIES COVERED PAGE #

BASMA SHEBETA [email protected]

SECTOR PERFORMANCE|REBARS2003-2008 mn tons

Local Sales

Exports

Share of exports/ total sales

5.0

21%

4.5 18% 4.0 15%

3.5 3.0

12% 2.5 9%

2.0 1.5

6%

1.0 3% 0.5

Rebars demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand rebars consumption is to be secured by the backlog of the developers projects. Yet, with the anticipated pick-up in the economy which will trigger the inflow of projects the demand for rebars will regain its strength.

0%

0.0 2003

2004

2005

2006

2007

2008E

SECTOR PERFORMANCE|FLAT 2003-2008 Local Sales

mn tons

consumption

Imports

mn tons

1.2

0.25

1.0 0.20

0.8 0.15 0.6 0.10 0.4

0.05 0.2

0.0

0.00 2003

67

2004

2005

2006

2007

2008E

November 11, 2008 EGYPT | STEEL

STEEL GLOBAL DYNAMICS CRUDE STEEL Both sides of crude steel market – supply and demand – witnessed strong growth; with the former increasing by a CAGR of 7.6% and the latter growing by a CAGR of 7.4% over 2001-2008, reaching the respective levels of 1,420 mn tons and 1,279 mn tons in 2008.

Strong growth on both, demand and supply sides

Global crude steel demand & production (2001- Global added capacity, demand & operating rates 2008) (2002-2008) Production

mn tons 1,600

Demand

Added capacity Utilization Rate

mn tons 140

Added demand 87.0%

1,400

86.5% 120 86.0%

1,200 100

85.5%

1,000 85.0%

80 800

84.5% 60

600 400

40

200

20

0

0

84.0% 83.5% 83.0% 82.5%

2001

2002

2003

2004

2005

2006

2007

2008E

Source: www.worldsteel.org & CICR Database

82.0% 2002

2003

2004

2005

2006

2007

2008E

Source: www.worldsteel.org, Tata & CICR Database

Developing regions are the industry's growth engine

Over 2001-2007, Asia and the Middle East recorded the highest production growth rates with respective CAGRs of 13.4% & 5.8%. Moreover, in terms of consumption, both regions recorded the highest CAGRs of 11.2% and 10.3%, respectively, during the same time span. Asia was ranked as the largest steel producing & consuming region with respective shares of 56.1% & 56.7% of global steel production & consumption in 2007.

CAGRs of regional crude steel production & con- Regional share in global steel production & consumption (2001-2007) sumption in 2007 CAGR of Production

CAGR of Consumption

Share in Global Steel Production

Share in Global Steel Consumption

16% Oceania

14% 12%

Africa

10%

Middle East

8%

South America

6% North America

4% Europe

2% Asia

0% Asia

Middle East

South America

Source: www.worldsteel.org

Africa

Europe

Oceania

North America

World

0%

10%

20%

40%

50%

60%

Source: www.worldsteel.org

Asia's prominence in the world's steel industry was mainly attributable to the presence of China; which witnessed an outstanding growth in its steel production & consumption levels over 2001-2007 with the former growing by a CAGR of 21.6% and the latter enjoying a CAGR of 17.1%, thus, contributing with 36.4% & 33.8% respectively in global steel production & consumption in 2007. It is worth noting that steel is a considered a concentrated market, with the top 4 countries representing 54% of the global steel consumption.

68

30%

With China leading such growth

November 11, 2008 EGYPT | STEEL World's largest steel producing countries in 2007 Others 22.8%

World's largest steel consuming countries in 2007 Others 28.4%

China 36.3%

China 33.8%

Italy 2.4% Turkey 2.0%

Brazil 2.5%

Spain 2.0%

Ukraine 3.2%

Italy 3.1%

Germany 3.6% India 3.8%

Germany 3.2%

Japan 8.9% South Korea 3.8%

Russia 5.4%

United States 7.3%

Source: www.worldsteel.org

United States 9.0%

Russia 3.3%

India 4.2%

South Korea 4.5%

Japan 6.6%

Source: www.worldsteel.org

Towards the end of 2008, steel prices shifted their hiking trend that was witnessed throughout the first eight months of 2008, mimicking the pattern of the raw materials prices. It is worth noting that such declining pattern is namely due to the slowdown in global demand.

A shift in steel prices hiking trend

International steel prices vs. raw materials prices (Feb 2006-Oct 2008) US$/ton 1,200

US Hot Rolled Coils Scrap

US Import Rebar Price Pig Iron

1,100 1,000 900 800 700 600 500 400 300 200 100

Fe M b-0 ar 6 A -06 p M r-0 ay 6 Ju -06 n Ju -06 A l-0 ug 6 S -0 ep 6 O -06 c N t-0 o 6 D v-0 ec 6 Ja -06 n Fe -0 7 M b-0 ar 7 A 07 p M r-0 ay 7 Ju -07 nJu 07 A l-0 ug 7 S -0 ep 7 O -07 c N t-0 o 7 D v-0 ec 7 Ja -07 n Fe -0 8 M b-0 ar 8 A -08 p M r-0 ay 8 Ju -08 n Ju -08 A l-0 ug 8 S -0 ep 8 O -08 ct -0 8

0

Source: Bloomberg

STEEL MARKET IN EGYPT MARKET STRUCTURE At present, there are 20 steel producers in the local market with a total capacity of 9.60 mn tons split between rebars and flat steel products, with the former holding a share of 72.9% of local steel capacity in 2008 and the latter had a share of 27.1%.

69

Rebars segment bears the lion's share in local steel capacity

November 11, 2008 EGYPT | STEEL Local steel capacity by product type in 2008

Flat 27.1%

Rebars 72.9%

Source: ES

After acquiring a stake in Al Ezz Dekheila Steel Company-Alexandria (EDZK) and establishing a new steel company in Al-Sokhna free zone area namely Al Ezz Flat Steel (EFS), Al Ezz Steel (ES) -previously known as Al Ezz Steel Rebars (ESR) – became the largest player in the domestic market with respective shares of 65% & 60% of rebars & flat steel local sales during 9M08. Currently, ES owns 90.73% of Al Ezz Steel Mills (ESM); 75.15% of EFS and 53.24% of EDZK. It is worth mentioning that the Egyptian Iron & Steel Company (EISCO) is the only public sector player in the flat steel market, while Delta Steel Mills is the only state-owned company in the rebars steel market. 9M08 Local rebars market shares*

Ezz Steel has the upper hand in local steel market

9M08 Local flat steel market shares* Imports 18%

Others 14.0% Kouta 1.9% El Bourieni 2.1% Al Attal 5.0% EISCO 22% Beshay 12.0%

Source: ES

El EZZ Steel 65.0%

Source: ES

Raw materials account for the highest contribution to the total production cost, yet their shares vary depending upon the producer's level of integration. Raw materials accounted for the respective shares of 68% & 75% in EZDK & in ES of the total production cost in 1H08. The variance in feedstock's share in the cost structure between EZDK & ES is due to the variances between feedstock mixes used by EZDK and ESR & EFS, as the former uses a DRI/scrap mix of 80/20 while ESR & EFS use a DRI/scrap mix of 15/85 and 25/75, respectively. Worthy to mention is that local manufacturers fully import their raw materials either in the form of iron ore, scrap or billets exemplifying Egypt's heavy reliance on imported raw materials.

* market shares are in terms of local sales.

70

El EZZ Steel 60%

Raw materials, a key contributor to production cost

November 11, 2008 EGYPT | STEEL ES* –consolidated - cost structure in 1H08

EZDK cost structure in 1H08 Salaries 3%

Depreciation 8%

Depreciation 6%

Salaries 2%

Energy 7% Energy 10%

Overhead 10%

Overhead 11%

Raw Materials 68%

Source: ES

Raw Materiald 75%

Source: ES

REBARS SEGMENT Demand exceeded capacity

Rebars demand grew at a higher pace than that of capacity over 2003-2008 recording respective CAGRs of 7.6% and 1.6%. Hence, reaching 4.40 mn tons for the former & 7 mn tons in 2008 for the latter. Capacity expansion was due to the entrance of new players, such as Al Attal, Sarhan Steel, Al Megharbel, Fair Trade and Al Marakbi; in addition to the upgrading of one of the existing facilities namely, Beshay Steel raising its capacity from 400k tons in 2000 to 1.4 mn tons in 2002. In 2005, utilization rates started witnessing an up-trend triggered by an unmatched added demand.

Rebars added capacity, demand & utilization rate (2003-2008)

Rebars capacity & demand (2003-2008) Capacity

mn tons 8

growth that of

Demand

Added Capacity

mn tons 1.0

7

0.8

6

0.6

5

0.4

4

Added Demand

Utilization Rate % 80%

67.1%

72.0% 70.3%

62.8%

53.8%

60% 50%

50.7%

0.2

3

40%

0.0

30% 2003

2

70%

2004

2005

2006

2007

2008E

-0.2

20%

-0.4

10%

-0.6

0%

1 0 2003

2004

2005

Source: ES & CICR estimates

2006

2007

2008E

Source: ES & CICR estimates

About 85% on average approximately of steel rebars sales were directed to the local market over the period 2003-2006. Yet in 2007 & 2008, local sales share increased reaching 87% & 91% due to the flourishing of the real-estate activity over these two years. As for rebars exports, they reached their peak in 2006 with 950k tons, representing 20.7% of total market sales. However, exports' share decreased to 12.9% in 2007 and is estimated to reach 9% only in 2008, due the robust local demand on steel, and to the imposition of duties on steel exports in 2007 –which lasted from February 2007 until October 19, 2008.

*Al Ezz Steel is the consolidation of Al Ezz Dekheila, Al Ezz Steel Rebars & Al Ezz Flat Steel

71

The majority of rebars production is sold in the local market

November 11, 2008 EGYPT | STEEL Rebars local sales & exports (2003-2008) mn tons

Local Sales

Exports

Share of exports/ total sales 21%

5.0 4.5

18% 4.0 15%

3.5 3.0

12%

2.5 9%

2.0 1.5

6%

1.0 3% 0.5 0.0

0% 2003

2004

2005

2006

2007

2008E

Source: ES & CICR estimates

FLAT STEEL SEGMENT Exports represented a considerable share – an average of 59%- in total Flat steel sales over 2003-2007. Such high exports contribution is mainly attributed to the fact that flat steel is used in the advanced industries, besides EFS- the largest flat steel producer in the local market- is located in Al-Sokhna free zone directed around 82% of its sales to the international markets in 1H08. Yet since 2004, flat steel consumption have showed growth potentials growing by a CAGR of 10.7% over 2004-2007 compared with a CAGR of 5.2% over 2001-2004, thus increasing local sales from 0.49 mn tons in 2001 to 0.88 mn tons in 2007. Flat steel production vs. local sales (2003-2008) Production

mn tons 2.7

Local Sales

Exports dominate flat steel sales, yet potential growth appears locally

Flat steel exports and its contribution to total sales (2003-2008) Exports

mn tons 1.4

Share of Exports/Total sales 66%

2.4

64%

1.2 2.1

62% 1.0

1.8

60%

1.5 1.2

0.8

58%

0.6

56%

0.9

54% 0.4

0.6

52% 0.2

0.3 0.0

50% 48%

0.0 2003

2004

2005

Source: ES & CICR estimates

2006

2007

2008E

2003

2004

2005

2007

2008E

Source: ES & CICR estimates

Despite growing flat steel production, the gap between local sales & demand widened from 33k tons in 2003 to 167k tons in 2007, and an estimated gap of 193K tons in 2008. The widened gap is mainly attributed to the expanded demand in the local market by a CAGR of 13.3% over 2003-2007, in addition to an estimated growth of 2.5% in 2008. It is worth noting that such growth in local demand is driven by the country's strengthening economy, resulting in an increasing imports reaching 167k tons in 2007.

72

2006

Flat steel supply shortfall is widening

November 11, 2008 EGYPT | STEEL Flat steel consumption vs. local sales & imports (2003-2008) Local Sales

mn tons 1.2

consumption

Imports

mn tons 0.25

Flat steel utilization rates (2003-2008) 100% 90%

89.2% 85.4%

80%

1.0

80.5%

0.20 75.8%

70%

0.8 0.15

50%

0.6 0.10 0.4

67.2%

60%

57.0%

40% 30%

0.05

0.2

20% 10%

0.0

0.00 2003

2004

2005

Source: ES & CICR estimates

2006

2007

2008E

0% 2003

2004

2005

2006

2007

2008E

Source: ES & CICR estimates

RECENT DEVELOPMENTS

73

On October 19, 2008, the levied LE 160/ton tariff on steel exports was removed, in an effort to make steel prices more competitive in the international markets – against the backdrop of the anticipated global recession spurred by the financial turmoil.

Lifting up duties imposed on exports

Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 four licenses for the production of billets and sponge iron with a combined annual production capacity of 8 mn tons, and an investment cost of US$15 bn. The four winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Most notably, by the beginning of 2008, another two licenses were offered to two foreign investors for the first time. The first was awarded by Arcelor Mittal – the world's largest steel producer – won the bid in February 2008 with planned annual capacity of 3 mn tons in direct reduced iron (DRI) and billets. The former's capacity is set at 1.6 mn tons, while that of the latter is planned to reach 1.4 mn tons. The second license was awarded by MAC Holding for Industries; a subsidiary of the Kuwaiti-based Al Kharafi Group, for the production of direct reduced iron with planned capacity of 1.6 mn tons and at the same price at which Arcelor Mittal won the tender

Investment inflow in the feeding industry with a foreign tint, for the first time

Through its license acquisition, ES will establish, at EFS, an electric furnace to produce DRI with an annual capacity of 1.7 mn tons and a melt shop to produce 1.35 mn tons of molten steel distributed as follows: 0.8 mn tons for flat steel at EFS, and 0.55 mn tons for billets which will be directed to ESR to replace its imported billets. It is worth mentioning that said expansion is expected to commence operation by the beginning of 2011 and is expected to positively impact ESR relative margins.

A move towards integration

Local steel prices are closely tied with international raw materials trends, as around 85-90% of it are imported. The slowdown in global demand reversed the up-trend followed by international steel prices since July 2008; by which a drop of 56% & 42% respectively in scrap & pig iron prices was witnessed over the past three months. Consequently, a sharp decline of 41% occurred in local rebars prices during the same period, reaching LE 3,900/ton by the end of October

The decline in international raw materials prices reversed the steel prices' uptrend

November 11, 2008 EGYPT | STEEL Local rebars prices vs. international pig iron prices (Mar 08-Oct 08) Local Rebar Price

LE/ton 7,000

Pig Iron

US$/ton 1,100

Local rebars prices vs. international scrap prices (Mar 08-Oct 08) Local Rebar Price

LE/ton 7,000

Scrap

US$/ton 700

1,000 6,000

900 800

5,000

6,000

600

5,000

500

4,000

400

3,000

300

2,000

200

1,000

100

700 4,000

600 500

3,000

400 2,000

300 200

1,000

100 0

0

0 Mar-08 Apr-08 May-08 Jun-08

Source: ES & Bloomberg

0 Mar-08 Apr-08 May-08 Jun-08

Jul-08 Aug-08 Sep-08 24-Oct- 25-Oct08 08

Jul-08

Aug-08 Sep-08 24-Oct- 25-Oct08 08

Source: ES & Bloomberg

MARKET DYNAMICS Domestic Market

Governmental Measures

Supply-Related Factors

- Removal of export duties - Modifying anti-monopoly law

- Strengthening EBITDA - New capacities for steel feeding industries on stream - Impact from export tariffs

- Offering licenses for steel feeding industries

Demand Driver - Construction boom - Solid growth in dependant industries

GOVERNMENTAL MEASURES Since 2007, the government has been taking several actions and decisions to regulate the steel industry's expansions & trading activity which greatly influenced the steel industry. The following table summarized the recent actions taken by the GoE: Recent governmental measures Measure

Date

Description

Impact

19-Oct-08

Calling-off the LE 160/ ton duties previously imposed by the Ministry of Trade & Industry on steel exports.

POSITIVE

Modifying Anti Monopoly Law

Jul-08

Raising fines the minimum level of fines charged per violator from LE 30k to LE 100k and the maximum level from LE 10 mn/violator to LE 300 mn.

POSITIVE

Offering 2 licenses for steel feeding industries to foreign investors for the first time

Feb-08

the first to Arcelor Mittal and the second to MAC Holding for Industries in order to produce direct reduced iron & billets.

POSITIVE

Revoking the export duties

Source: CICR Database

74

November 11, 2008 EGYPT | STEEL

Measure

Date

Description

Impact

Offering 4 licenses for steel feeding industries

Oct-07

Lienses were offered to local producers for the production of billets and sponge iron.

POSITIVE

Imposing duties on steel exports

Feb-07

Imposing an export duty of LE 160/ton on steel exports.

NEGATIVE

Source: CICR database

SUPPLY-RELATED FACTORS Strengthening EBITDA

The monopolistic status of the steel industry, as ES currently controls 44.3% and 84.6% of rebars and flat steel capacities, respectively, enables the industry players to pass the increased production cost to the consumer. Despite that raw materials prices hiked by 55.3% during 1Q08, ES EBITDA margin increased to 26.7% vs 24.1% in 2007. Yet, the company's EBITDA margin decreased to 23.7% in 2Q08 due to the 58.6% increase in raw materials prices over the same period. Nevertheless, in terms of absolute values, the company's Earnings before Interest Taxes Depreciation & Amortization (EBITDA) grew by 32.7% and by 25% during 1Q08 and 2Q08 compared to the same period one year earlier, reaching the respective levels of LE 1.3 bn and LE 1.4 bn.

ES EBITDA margin vs. imported raw materials prices by quarter (1H07-1H08) Raw Materials Prices

US$/ton 800

EBITDA Margin 28%

ES EBITDA vs. raw materials prices by quarter (1H07-1H08) Raw Materials Prices

US$/ton 800

EBITDA

700

27%

27.3%

700

1.4

26.7% 600

1.2

600

26%

1.1 500

463

1.0

463 1.0

25%

0.8

400

400 314

323

0.6

200

0.4

22%

100

0.2

21%

0

23%

200 100 0 2Q07

Source: ES & Bloomberg

1Q08

2Q08

323

300

23.7%

1Q07

314

24%

300

1.4

1.3

26.3%

500

0.0 1Q07

2Q07

1Q08

2Q08

Source: ES & Bloomberg

The LE 160/ton export tariff which was levied on steel producers by the end of February 2007, led to a 34.6% drop in Egypt's rebars exports during 2007 reaching 0.62 mn tons. Similarly, after imposing said tariffs, the share of exports in ES total sales decreased from 47.4% in 1H07 to 26.4% by the end of 2007, followed by a further decline to 22.9% in 1H08. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export duties on steel exports on October 19, 2008.

75

LE bn 1.6 734

734

Imposing the export duties led to a huge drop in exports

November 11, 2008 EGYPT | STEEL Egyptian rebars export pattern (2006-1H08) mn tons 1.0

ES rebars export pattern (2006-1H08) 50%

0.95

47.4%

45% 0.9

40% 0.8

35%

0.7 0.62 0.6 0.5

30.8% 30%

26.4%

25%

22.9%

0.45

20%

0.4

15%

0.3

10%

0.2

5%

0.1

0%

0.0 2005

2006

2006

2007

Source: ES & CAPMAS

2007

1H07

1H08

Source: ES

DEMAND-PULL FORCES Steel consumption is closely tied to the mushrooming construction activity evidenced in the correlation co-efficient of 0.871 between both factors. Construction activity in Egypt grew by a CAGR of 7.4% over 2004-2007, triggering rebars consumption to grow by a CAGR of 15.9% over the same time span

Construction boom

Construction activity vs. rebars consumption (2004-2008) Construction Activity

LE bn 40

Rebars Consumption

mn tons 5.0 4.5

35

4.0 30 3.5 25

3.0 2.5

20

2.0

15

1.5 10 1.0 5

0.5

0

0.0 2004

2005

2006

2007

2008E

Source: ES & CAPMAS

Consumer goods and the locally assembled vehicles (Completely Knock down – CKD) are key consumers of flat steel, hence, exhibiting strong co-efficient correlation of 0.952 and 0.961, respectively. Growing production levels in both industries drove up the demand for flat steel which enjoyed a CAGR of 13.3% over 20042007.

76

Flat steel is closely tied with manufacturing industries

November 11, 2008 EGYPT | STEEL Flat steel consumption vs. consumer goods production (2004-2008) Consumer goods production

mn units 9.9

Flat Steel Consumption

Flat steel consumption vs. completely knockdown (CKD) vehicles (2004-2008)

mn tons 1.2

Locally Assembled Vehicles

000 units 45

Flat Steel Consumption

mn tons 1.2

40

9.6 1.0

1.0 35

9.3 0.8

0.8

30

9.0 25 8.7

0.6

0.6 20

8.4 0.4

0.4

15

8.1

10 0.2

0.2

7.8

5

7.5

0.0 2004

2005

2006

2007

0.0

0 2004

2008E

Source: ES & CICR estimates

2005

2006

2007

2008E

Source: ES & CICR estimates

FUTURE OUTLOOK With an anticipated slow down in economic activities over the coming two years, the real-estate market, the main driver for steel rebars, will witness depressed growth, as it will mainly depend on existing projects. Hence, the demand for steel rebars is expected to grow with an AAGR of % over 2009 and 2010. Yet, afterwards the market will resume higher growth levels of 9.7% over 2011 and 2012, as the economy regains its strength. It is worth noting, that as there is no stated capacity additions in the rebars segment, utilization rates are expected to strongly decline over 2009 & 2010, yet as the economy regains its strength utilization rates will record high levels.

Rebars market will be mainly targeting existing projects, as the economy slows down over the coming two years

Rebars consumption, production & utilization rate (2006-2012) mn tons 7

Rebars Production

Rebars Consumption

90% 83.8% 80%

6

72.0%

76.2%

69.8% 5

Utilization Rate

70.3%

70% 66.9%

67.1%

60%

4

50%

3

40% 30%

2 20% 1

10% 0%

0 2006

2007

2008E

2009F

2010F

2011F

2012F

Source: ES & CICR estimates

The coming two years will have much of an impact on flat steel rather than on rebars steel, as the former is extensively involved in the export market (around 56% of its sales is directed to the international markets in 2007) besides its sales to the local market. As the economy slows down, growth in manufacturing industries – namely consumer goods and CKD – will follow a depressed pace. Local flat steel market and exports are expected to decline by an average of 157k tons tons over 2009 and 2010, yet with an expected recovery in both, local and international markets, demand for flat steel is to gain its strength, with demand & exports growing by a CAGR of 13.5% & 17.4% respectively over 2011 and 2012. It is worth mentioning that the decrease in capacity utilization rate in 2011 is mainly due to the start of the commercial production of the added 0.8 mn tons of flat steel at EFS by the beginning of 2011.

77

The country's anticipated economic slowdown coupled with an expected decelerated global trade will have a dual impact on flat steel over the coming two years

November 11, 2008 EGYPT | STEEL Flat steel consumption, production & utilization rates (2006-2012) Flat Production

mn tons 2.5

Flat Consumption

Utilization Rate % 100%

89.2%

90%

85.4%

2.0

80%

80.5% 71.7%

70% 61.6%

62.3%

1.5

59.6%

60% 50%

1.0

40% 30%

0.5

20% 10%

0.0

0% 2006

2007

2008E

2009F

2010F

2011F

2012F

Source: ES & CICR estimates

As it has been the case in historical trends, local & export rebars and flat steel prices are expected to follow the same pattern as the international raw materials prices over 2008-2012. It is worth mentioning that international raw materials prices are expected to continue declining in 2009 due to the slow down in global demand, yet starting from 2010; their prices will pick up to grow by a CAGR of 15.5% with the global economy gaining back its momentum. Local & export rebars prices are expected to decline in 2009, then to grow by a CAGR of 10.8% & 8.7% respectively over 2010-2012. As for flat steel, its local & export prices are expected to decline in 2009, then to grow by a CAGR of 8.7% & 9.9% respectively over the same time span.

Local & export rebars and flat prices will follow international raw materials prices

Rebars local prices vs. international raw materials Rebars exports prices vs. international raw mateprices (2006-2012) rials prices (2006-2012) LE/ton 6,000

Rebars Local

US/ton 1,000

Raw Materials Prices

Raw Materials Prices

US$/ton 1,200

Rebars Exports

900 5,000

800 700

4,000

1,000

800

600 500

3,000

600

400

400

2,000

300 200

1,000

200

100 0

0 2006

2007

2008E

Source: ES & CICR estimates

78

2009F

2010F

2011F

2012F

0 2006

2007

2008E

Source: ES & CICR estimates

2009F

2010F

2011F

2012F

November 11, 2008 EGYPT | STEEL Flat local prices vs. international raw materials prices (2006-2012) Flat Local

LE/ton 7,000

Raw Materials Prices

US$/ton 1,000

Flat exports prices vs. international raw materials prices (2006-2012) Flat Exports

US$/ton 1,200

Raw Materials Prices

900 6,000 800 5,000

700

1,000

800

600

4,000

500 3,000

600

400 300

2,000

200 1,000

400

200

100 0

0 2006

2007

2008E

Source: ES & CICR estimates

79

2009F

2010F

2011F

2012F

0 2006

2007

2008E

Source: ES & CICR estimates

2009F

2010F

2011F

2012F

November 11, 2008 EGYPT | SUGAR

UPBEAT FOR BEET Despite the looming fear of global recession and the anticipated slowdown in the country’s economic performance, the demand for a strategic commodity as sugar counts as a safe bet. The GoE’s promotion for beet cultivation over cane as a means of mitigating the challenges posed by the scarce water resources and land; coupled with the former’s high tolerance to salinity and ability to produce high yields under saline soil, the focus has been directed to sugar beet. Hence, uplifting its share of total sugar production from 13% to 39% over 1998-2007. With the country’s growing population and expanding GDP/ capita, and the increasing demand for bio-fuels, further room for growth is anticipated—especially that around 42% of the country’s sugar demand is imported. Most notably, the current decline in wheat procurement prices add to the beet’s growth potential. It is worth noting that the local beet industry enjoys higher margins than its peers. A defensive industry with Strong demand drivers: Egypt’s growing population and strengthening GDP/capita ensures a strong demand for sugar. Good prospects for beet: Against the backdrop of a highly supportive government towards an expanded beet cultivation areas and higher productivity levels, beet cultivated areas grew with a CAGR of 12.7% over 2004-2008 reaching 228k feddans versus a declining trend in cane cultivated areas recording 310k feddans in 2008 down from 322k feddans in 2004. Enhanced yield and supply shortfall support an inflow of investments: Besides the government support to expand beet cultivation areas, higher yields are targeted. Moreover, supply shortfall—with imports covering almost 42% of sugar demand— encouraged fresh investments. A new license was granted to Nile Company for sugar beet production which will be located at Nubareya. The company's annual production capacity is 125k tons and is expected to commence operations by 2009, starting off with refining activities and then followed by sugar beet production by 2010. Another line is expected to come on-stream in 2010 by Dakahlia Sugar Co. with an annual capacity of 120K tons. Wheat is a key competing crop, yet beet’s increasing yield gives it a more competitive stance: The increase in wheat procurement price, definitely, has its negative impact on expanding beet cultivated areas. The rise in wheat procurement price in 2008 to LE 380/ardab versus LE 225/ton for beet procurement price dropped the beet cultivated areas by around 8%. Yet, the current decline in wheat procurement prices of LE 180/ardab versus an announced beet procurement price for 2009 of LE 335/ton adds to the beet’s potential. Moreover, the enhanced beet productivity by 8% throughout 2004-2007 compared with a declining pattern of 1.4% for wheat, fosters the beet’s future growth.

DRIVERS GoE’s plan to expand beet cultivated area (horizontal) and enhance beet productivity (vertical). The planned increase in automated beet planting will ensure higher yield. The growing sales of dependant-industries will ensure strong sugar demand. Growing population and GDP/Capita will maintain a strong demand for sugar. As sugar producers can shift to refining, it acts as a hedge in case the amount of crops supplied declines.

RISKS The ease of shifting to wheat cultivation forces producers to increase their beet procurement price, which impacts their margins, as procurement cost constitutes the bulk of sugar beet production cost. As beet seeds are imported, exposure to FX risk exists. Exogenous factors as bad weather and crop diseases can impact the amount of supplied crop to producers. The expected decline in shipping cost might intensify competition from imported sugar. The anticipated decline in sugar by-products prices may impact the overall margin.

KEY PERFORMANCE INDICATORS Total sugar production CAGR (04-07)

5.7

Sugar beet production CAGR (04-07)

19.5

Beet procurement price (2008,LE/ton)

225

Added annual capacities (2010,k tons)

245

Self-sufficiency ratio (2007,%)

67

COMPANY COVERED

PAGE #

Delta Sugar

115

BASMA SHEBETA [email protected] FADWA HOSSAM ISSA [email protected]

SECTOR PERFORMANCE | 2004-2008 Sugar Cane Production Growth in beet 000 tons 1,200

Sugar Beet Production Growth in cane 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15%

1,000 800 600 400

Higher margins than peers: EBITDA margin for the beet industry in Egypt enjoyed a strong average of 37% in 2007, registering a higher margin than that of its international peers that recorded 28% during the same year.

80

200 0 2004

2005

2006

2007

2008E

November 11, 2008 EGYPT | SUGAR

EGYPT SUGAR INDUSTRY IN EGYPT AN ADVANCED GLOBAL RANKING Ranked 2nd in terms of cane yield

Egypt's cane yield per feddan recorded 50.8 tons in 2007/08 - about 1.5 times as high as that of the world's cane yield-placing the country at the second rank after Peru, which achieved a yield of 51.1 tons per feddan Top 20 countries in cane yield per feddan in FY07/08 World

29.8

Swaziland

39.6

Ethiopia

41.5

Burkina Faso

42.0

Sudan

43.8

Zambia

43.8 45.7

Malawi

48.8

Senegal

50.2

Tanzania Egypt

50.8

Peru

51.1 0

10

20

30

40

50

60 Tons/Feddan

Source: USDA & CICR estimates

Egypt is ranked 15th worldwide, in terms of sugar per-capita consumption which recorded 36.1 Kg in FY07/08 - about 1.6 times as high as the worldwide's per capita consumption during the same year. Such manifested jump (from a rank of 21 in FY1997/98) of per capita consumption pushed Egypt to be among the world's top 20 sugar producing countries in FY07/08, with a total sugar production of 1.66 mn tons - representing a share of 1% in global sugar production. On the regional level, Egypt enjoys the highest contribution of 24.1% in terms of consumption, while is ranked 2nd with its 31.9% share in terms of sugar production, following Turkey Top 20 countries in sugar per capita consumption in FY07/08

Top 20 countries in sugar production in FY07/08

Kg 70

000 tons 35,000

60

Source: USDA & CICR estimates

Japan

Iran

Cuba

Egypt

Turkey

Indonesia

Argentina

Guatemala

Colombia

Philippines

Pakistan

South Africa

Australia

Mexico

Russia & Uraine

USA

Thailand

India

Brazil

World

USA

South Korea

Thailand

Indonesia

Colombia

Peru

Egypt

Venezuela

South Africa

Algeria

Morocco

Argentina

Russia & Ukraine

Mexico

Canada

0

Australia

5,000

0

Malaysia

10,000

10

Guatemala

15,000

20

Cuba

20,000

30

Brazil

25,000

40

China

30,000

50

Source: USDA & CICR estimates

81

Ranked 15th in terms of per capita consumption

November 11, 2008 EGYPT | SUGAR

MARKET STRUCTURE At present, the market consists of five public companies with a combined production capacity of 1.64 mn tons divided between cane & beet companies with the former holding a share of 61% and the latter a share of 39%. There is only a sole sugar cane producer in the local market namely, Sugar Integrated Industries Company (SIIC) which controls 62.83% of total sugar capacity, 61% through its sugar cane facility and 1.83% through its sugar beet facility. The remaining four companies in the market use beet in producing sugar and hold a combined share of 37.2% of total sugar capacities. It is worth mentioning that Delta sugar is the largest Egyptian sugar beet producer with a share of 38.3% in local sugar beet capacities.

Local sugar beet capacity in 2008

Local sugar capacity in 2008

Fayyoum Sugar 7.33%

Sugar beet 39%

Delta Sugar 14.94%

Source: CICR Database

SIIC 4.69%

Nubareyya Sugar 19.53%

Dakahlia Sugar 7.33%

Sugar cane SIIC 61%

Cane holds the lion's share

SIIC 1.83%

Nubareyya Sugar 7.57%

Delta Sugar 38.28% Fayyoum Sugar 18.75%

Dakahlia Sugar 18.75%

Source: CICR Database

MARKET DEVELOPMENTS Cane and beet cultivated areas grew by a CAGR of 3.8% during 2004-2008, triggered by the rise in beet cultivated areas which recorded a CAGR of 12.7% reaching approximately 228k feddans in 2008 up from 141k feddans in 2004, whereas cane cultivated areas decreased from 322k feddans to 310k feddans over the same time span primarily due to its low procurement price amounting to LE 182/ton, in addition to the continuous decline in the amount of water per capita in Egypt reaching 850cu.m in 2008 down from 927cu.m in 1995. Such growth pattern contributed in raising beet's share in both, cane and beet cultivated areas combined to 42.3% in 2008 up from 30.4% in 2004 and reducing cane's share from 69.6% in 2004 to 57.7% in 2008. Yet, in 2008 beet cultivated areas declined by 8.3% versus 2007 due to the significant rise in wheat procurement prices -the major competitor crop to beet- reaching LE 380/ardab (where 1 ton = 6.7 ardab) surpassing that of beet which amounted to LE 225/ ton. Therefore, farmers were more inclined to grow wheat than beet during that season

82

Beet cultivated areas were on the rise, yet a drop was witnessed in 2008

November 11, 2008 EGYPT | SUGAR Beet and cane cultivated areas (2004-2008) 000 feddans

Beet Cultivated Area Growth in Beet Cultivated Areas

Share of beet & cane in the combined (cane & beet) cultivated areas (2004-2008)

Cane Cultivated Area Growth in Cane Cultivated Areas

Cane Share

Beet Share

40%

400,000

35%

350,000

2008E

30% 300,000

25%

2007

20%

250,000

15% 200,000

2006

10% 150,000

5%

2005

0%

100,000

-5% 50,000

-10%

2004

-15%

0 2004

2005

2006

2007

0%

2008E

Source: Ministry of Agriculture & CICR estimates

10%

20%

30%

Sugar beet & sugar cane production growth pattern (2004-2008 Sugar Cane Production Growth in beet

1,200

50%

60%

70%

80%

Source: Ministry of Agriculture & CICR estimates

Over 2004-2007 sugar production grew by a CAGR of 5.7% over 2004-2007 to reach 1,757k tons in 2007, driven by the rising sugar beet production which increased by a CAGR of 19.5% over the same period to reach 682k tons in 2007; while sugar cane production declined by 0.4% reaching 1,075k tons in 2007, production is thus expected to record a decline of 5.5% in 2008 reaching 1,660K tons down from 1,757K tons in 2007. Said growth pattern of sugar beet & sugar cane over 2004-2008 contributed in raising the former's share from total sugar production to 37.8% in 2008 up from 26.9% in 2004 on the account of the latter's share in total sugar production which decreased from 73.1% to 62.2% over the same period

000 tons

40%

Sugar Beet Production Growth in cane

Rising sugar beet production drives up sugar production

Share of sugar beet & sugar cane production in total sugar production (2004-2008) Sugar Beet Share

Sugar Cane Share

40% 2008E 35%

1,000

30% 25%

800

2007

20% 15%

600

2006

10% 5%

400

2005 0% -5%

200

-10% 0

-15% 2004

2005

2006

2007

2008E

Source: Bloomberg, Al Ahram El Ektesady & CICR estimates

83

2004

0%

10%

20%

30%

40%

50%

60%

70%

Source: Bloomberg, Al Ahram El Ektesady & CICR estimates

80%

November 11, 2008 EGYPT | SUGAR Sugar consumption is not expected to follow suit production in 2008, growing by 2.5% to reach 2,682k tons vs. a 5.5% decline in sugar production to reach 1,660k tons; thus reducing local production coverage from sugar to 61.9% in 2008 down from 67.2% in 2007. It is worth noting that ever since 2005 production growth has been outstripping that of consumption with the former recording an AAGR of 5.8% vs. 2.3% for the latter. Concurrently, local production coverage from sugar has been on the rise reaching its peak of 67.2% in 2007

Local sugar production coverage ratio (2004-2008)

Sugar production & consumption growth pattern (2004-2008) 000 tons

Sugar Production Sugar Production Growth Rate

Sugar Consumption Sugar Consumption Growth Rate

3,000

Rising production coverage, with a drop in 2008

61.9%

2008E

14% 12%

2,500

10%

67.2%

2007

8% 2,000

6% 4%

61.6%

2006

1,500 2% 0%

1,000

61.1%

2005

-2% -4%

500

-6% 0

60.9%

2004

-8% 2004

2005

2006

2007

2008E 56%

58%

60%

62%

64%

66%

68%

Source: Bloomberg, Al Ahram El Ektesady & CICR estimates

Source: Bloomberg , Al Ahram El Ektesady & CICR estimates

In an attempt to meet up with rising demand, most sugar companies engage in sugar refining activities during the beet off season which starts from July till December amounting to a total capacity of 2 mn tons. It is worth mentioning that in early 2008, a new company specialized in sugar refining began operations namely the Saudi based Savola at Ain El Sokhna with an annual capacity of 750K tons

Beet companies engage in refining activity during off season

Egypt has been a major importer of sugar due to the widening gap between local production and consumption, which pushed the country to rely on imported raw & refined sugar to cover approximately 42% of its needs. Moreover, raw sugar used to hold the lion's share 75% of total sugar imports with the remaining 25% directed to refined sugar. Yet, 2008 witnessed a significant rise in refined imports reaching a share of 56% of total imported sugar, mainly due to the arrival of the heavily subsidized refined sugar from India which was sold locally at a cheaper price of LE 2,200/ton versus that of LE 2,500/ton for the Egyptian sugar

Imports cover approximately 42% of Egypt's sugar requirements

Share of refined & raw sugar imports in total sugar imports (2004-2008

Sugar imports pattern (2004-2008) 000 tons

Sugar Imports

Share of Raw Sugar Imports

Imports Growth Rate

Share of Refined Sugar Imports

25%

1,400

20%

2008E

1,200 15% 1,000

2007 10%

800

5% 2006 0%

600

-5% 2005

400 -10% 200 -15%

-20%

0 2004

2005

2006

Source:USDA & CICR estimates

84

2004

2007

2008E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Source: CAPMAS, Delta Sugar & CICR estimates

70.0%

80.0%

November 11, 2008 EGYPT | SUGAR

Market Dynamics Sugar Market

Cost-Related Factors

Supply Factors

Government Initiatives

Demand Factors

Facilities to Farmers

Beet Procurement Price

Population Growth

Promoting Beet over Cane

Wheat Competition

Cost of Beet Seeds

GDP per Capita

High Procurement Prices

Prices of Sugar By-products

Sugar Dependant Industries

Horizontal & Vertical Expansion

Supply-Push Forces Sugar beet production is closely tied to beet yield, evidenced in the correlation coefficient of 0.997 between both factors. Beet yield has been on the rise recording a CAGR of 2.7% during 2004-2007 to record 21.98 tons/feddan in 2007; thus boosting sugar beet production to grow by a CAGR of 19.5% over the same period reaching 682k tons in 2007. It is worth mentioning that sugar beet companies offer farmers several facilities to lure them to expand beet cultivation and prevent them from shifting into its main competing crops, namely wheat. Facilities offered include: providing farmers with beet seeds on credit to be repaid when the crop is harvested; supplying farmers with the needed pesticides and fertilizers' usage guide; and Beet yield development pattern (2004-2007)

Beet yield vs. sugar beet production (20042007) 000 tons 800

Tons/Feddan 22.5

Facilities offered by sugar beet companies triggered increase in beet yield

Sugar Beet Production

Tons/Feddan 22.5

Beet Yield

700

22.0

22.0

600

21.5 CAGR 2.7%

21.5

500 21.0

21.0 400

20.5

20.5 300 20.0 19.5

19.5

100

19.0

0 2004

2005

Source: Ministry of Agriculture

85

20.0

200

2006

2007

19.0 2004

2005

2006

2007

Source: Ministry of Agriculture & Al Ahram El Ektesady

November 11, 2008 EGYPT | SUGAR Over the last few years, wheat has become a major competitor to beet as they are both winter crops and farmers can easily shift between them. The relation between both crops is reflected in strong inverse correlation co-efficient of 0.9997, implying that the increase in the former's cultivated areas lead to a decrease in the latter's cultivated areas. In 2008, the decline in beet cultivated areas is mainly due to the significant rise in wheat procurement price by almost 73% over 2007 reaching LE 380/ardab compared with LE 225/ton for beet. A pattern that occurred before in 2006 when beet procurement price reached LE 188/ ton compared with LE 169/ardab for wheat, as such the former's cultivated areas recorded a growth of 11.4% vs a mere 2.6% growth for the latter. It is worth mentioning that in an attempt to enhance beet cultivation, sugar beet companies decided as of 2009 to increase beet procurement price by 49% to reach LE 335/ton. Growth in beet cultivated area vs. growth in wheat cultivated areas (2006-2008) Growth in Beet Cultivated Area

Growth in Wheat Cultivated Area

Wheat competes heavily with sugar beet, especially in 2008

Sugar beet production vs. wheat production (2006-2008) 000 tons

40%

800

35%

700

Sugar Beet Production

wheat production

000 tons 9,000

30%

8,500 Beet procurement price LE 191/ton

25% 20%

Beet procurement price LE 188/ton

600 Wheat procurement price LE 380/ardab

15%

500

8,000

400

10% 5%

200

0% -5% -10%

7,500

300

Wheat procurement price LE 169/ardab

2006

2007 Wheat procurement price LE 220/ardab

7,000

2008E 100 Beet procurement price LE 225/ton

-15%

Source: Ministry of Agriculture, FAPRI & CICR estimates

0

6,500 2006

2007

2008E

Source: Al Ahram El Ektesady, Ministry of Agriculture, FAPRI & CICR estimates

COST-RELATED FACTORS The rising costs of imported beet seeds, farmers cultivating beet witnessed an in- Beet procurement creasing cost of beet seeds/feddan over the period 2004-2007 recording a CAGR of price bears a key 8% reaching LE 285/feddan in 2007 compared with LE 226/feddan in 2004. More- contribution over, the cost of beet seeds per feddan coupled with the procurement price are the major factors farmers take into consideration while determining beet cultivation, thus exposing sugar beet companies to the consistent pressure of raising beet procurement price following the increase in the seeds' cost. Such link was illustrated in the strong correlation co-efficient of 0.723 between the change in beet procurement price and the cost of beet seed/feddan. As such beet procurement price holds the lion share in total sugar beet production cost amounting to 71% followed by industrial costs (which includes fuel cost and spare parts) holding a share of 10.6% while the remaining 18.4% falls to wages, transportation, subsidies, packaging and depreciation costs.

86

November 11, 2008 EGYPT | SUGAR Growth pattern of beet procurement price vs. seed cost/feddan (2003-2007) Change in Cost/feddan

Delta Sugar production cost breakdown (2007)

Change in Procurment Price/feddan

160%

45%

140%

40%

120%

Depreciation, 4.9% Packaging material, 2.4% Wages, 5.4%

35%

100%

Industrial costs (fuel+spare parts), 10.6%

30%

80% 25% 60% 20% 40% 15%

20%

Beet related cost (subsidy+transportat ion), 5.6%

Beet procurement price & bonus for early harvesting, 71.0%

10%

0% 2003

2004

2005

2006

2007

-20%

5%

-40%

0%

Source: CAPMAS & Ministry of Agriculture

Source: Delta Sugar Co

The rising prices of sugar beet by products-molasses and fodder- which took place Increasing prices of in 2007 helped sugar beet companies mitigate the squeeze in their margins resulting sugar beet byfrom the sugar beet production rise. Delta's gross profit from sugar declined from products 43% in 2006 to an expected 23% in 2008 yet, the company's overall gross profit margin (including molasses and fodder in addition to sugar) did not witness the same decline reaching 40% in 2008 down from 42% in 2006. It is worth mentioning that both molasses & fodder are directed mainly to the export market since the former is mainly used in the manufacturing of alcoholic beverages as well as in the manufacturing of bio-fuels namely, ethanol, while the latter is used in feeding livestock. Furthermore, the local industry's EBITDA margin scored an average of 37% over 2007, compared with an average of 28% for international peers. Sugar beet gross profit margins vs overall gross profit margins (2006-2008) Overall Gross Profit Margin 45%

42.0% 42.8%

Sugar beet margins vs. International Peers 2007

Sugar Beet Gross Profit Margin 40% 41.3%

40%

40%

37%

35%

35%

30%

30%

25%

26.4% 25%

28%

23% 20%

20% 15% 15% 10% 10% 5%

5%

0%

0% 2006

2007

Source: Delta Sugar Co

2008E

Local Margins

International Peers

Source: Delta Sugar Co & Bloomberg

DEMAND-PULL FORCES Rising sugar consumption has long been fueled by rising population and GDP per capita registering a strong correlation of 0.998 with the former and 0.984 with the later. Over the period 2005-2008, population increased to reach 75 mn in 2008 followed by a rising level of income reaching US$2,247 up from US$1,412 in 2005 stimulating sugar per capita consumption from 35 kg/annum to 36 kg/ annum over the same time span.

87

Population growth along with evolving GDP per Capita spur sugar consumption

November 11, 2008 EGYPT | SUGAR Population vs. sugar consumption (2005-2008)

GDP per capita vs. sugar consumption (20052008)

000 Inhabitants

US$

Population

Sugar Consumption

76,000

000 tons 2,700

GDP Per Capita

Sugar Consumption

2,500

2,650

75,000

000 tons 2,700 2,650

2,000 74,000

2,600

73,000

2,550

72,000

2,500

71,000

2,450

70,000

2,400

2,600 2,550

1,500

2,500 1,000

2,450 2,400

500 2,350

69,000

2,300

68,000 2005

2006

2007

2,350 0

2008E

2,300 2005

Source: IDSC, Bloomberg & CICR estimates

2006

Sugar Consumption

87.5

Expanded demand by sugar-dependant industries

Soft drinks sales vs. sugar consumption (20052008)

Confectionary sales vs. sugar consumption (2005-2008) Confectionary Sales

2008E

Source: CBE, Bloomberg & CICR estimates

Said increase in per capita income is mostly accompanied with a rise in the average consumer spending, thus boosting sales of confectionary products & soft drinks i.e. expanding sugar consumption. Correlation co-efficient between sugar consumption and the former is 0.993 while with the latter is 0.986.

000 tons

2007

000 tons

Soft Drink sales

US$ mn

Sugar Consumption

000 tons

2,700

800

2,700

2,650

700

2,650

2,600

600

2,600

2,550

500

2,550

2,500

400

2,500

2,450

300

2,450

2,400

200

2,400

2,350

100

2,350

2,300

0

87.0

86.5

86.0

85.5

85.0

84.5 2005

2006

2007

Source: BMI , Bloomberg & CICR estimates

2008E

2,300 2005

2006

2007

2008E

Source: BMI, Bloomberg & CICR estimates

GOVERNMENT-INITIATIVES

88

Despite that Egypt's cane yield is ranked among the highest worldwide, the GoE's policy has been recently promoting beet cultivation, in an attempt to mitigate the challenges posed by scarce water and land resources. The GoE is promoting beet cultivation through vertical (yield) and horizontal (acreage) expansions. Although beet crop is relatively new as it was first introduced in 1981; it has gained wide importance due to its tolerance to salinity along with its ability to produce high yields under saline soil compared with most other traditional winter crops

Promoting beet cultivation over that of cane

In order to endorse farmers to cultivate beet and to control cane cultivation, the government increased the former's procurement price from LE 191/ton in 2007 to LE 225/ton in 2008 whereas it increased the latter's procurement price by LE 17/ ton to LE 182/ton in 2008.

…through higher procurement prices

November 11, 2008 EGYPT | SUGAR It is worth mentioning that beet cultivated in newly reclaimed lands grew by a CAGR of 74.8% over the period 2004-2007 reaching 14.6k feddans, whereas cane cultivated areas in newly reclaimed land witnessed a CAGR of 5.7% over the same time span.

…horizontal expansion

Beet cultivated areas in newly reclaimed lands (2004-2007)

Cane cultivated areas in newly reclaimed lands (2004-2007)

Feddans 25,000

40,000

Feddans

39,000 38,000

20,000

37,000

CAGR 74.8%

CAGR 5.7%

36,000

15,000

35,000 34,000

10,000

33,000 32,000

5,000

31,000 30,000

0 2004

2005

Source: Ministry of Agriculture

2006

2007

2004

2005

2006

2007

Source: Ministry of Agriculture

FUTURE OUTLOOK

89

To meet unsatisfied demand plans are underway to establish new sugar beet production plants . By 2010 Dakahlia Sugar Company will begin operating its second production line with a capacity of 120K tons, while Nile Company (Sawiris) will start operating its 125K ton production line raising total sugar beet production capacities from 1,390K tons in 2008 to 1,635K tons in 2010 including the 750K tons of Savola's sugar beet refinning plant which began operation early 2008. Following the government plan to promote beet area over cane, no sugar cane capacity expansions are expected in the future thus total sugar capacities are expected to reach 2,635K tons by 2010 up from 2,390K tons in 2008 driven only by expansions in sugar beet

Beet drives future capacity expansions

The existence of a production-consumption gap amounting to 1,022K tons in 2008 being satisfied by imports, represents potential for further investments in the sugar industry – not only to meet up with the rising sugar consumption but also to eat up from the imports bulk. Given the GoE plans to expand beet cultivated areas, it is expected that over 2008-2012 beet cultivated areas will grow by a CAGR of 10.7% - pushing production to reach around 2 mn tons by 2012

Growth potential resides in sustainable sugar demand

November 11, 2008 EGYPT | SUGAR Sugar consumption vs. sugar imports (20062012)

Sugar production vs sugar deficit (2006-2012) 000 Tons

Sugar Production

000 Tons 3,500

Production-Consumption Deficit

2,500

Sugar Consumption

Sugar Imports

3,000 2,000 2,500 1,500

2,000 1,500

1,000

1,000 500 500 -

2006

2007

2008

2009

2010

2011

2006

2012

Source: CICR estimates

2007

2008

Beet procurement prices vs sugar beet ex-factory prices (2008-2012) Beet Procurment Prices

Sugar Beet Ex-Factory Prices

500

4,500

450

4,000

400

3,500

350

3,000

300 2,500 250 2,000 200 1,500

150

1,000

100

500

50

0

0 2009

Source: CICR estimates

90

2010

2011

2012

Source: CICR estimates

Sugar beet ex-factory prices are expected to record an upward trend over the coming five years recording a CAGR of 10.3% over 2008-2012 reaching LE 3,862/ton in 2012 up from LE 2,606/ton in 2008 driven by the increase in beet procurement prices recording an expected CAGR of 18.6% over the same period

2008

2009

2010

2011

2012

Beet procurement prices drive future sugar beet ex-factory prices

November 11, 2008 EGYPT | TELECOM

MOBILE, A RISING RING AMID AN ECONOMIC SWING The global telecom segment has been generating colossal revenues, which grew by a CAGR of 9% over 2004-2007 reaching US$1.8 trillion in 2007. Nevertheless, the outbreak of the global credit crunch and the subsequent regional economic slowdown are expected to derail the sector from its accelerating pace. However, the Egyptian telecom sector growth is expected to deviate from such path exhibiting resilience to the upcoming storm; driven by its competitive burgeoning mobile segment – registering a CAGR of 51% over 2003-2007 - which is expected to stimulate a spillover effect in the other segments; primarily growth in the internet segment, driven by the recent application of 3G technologies which enabled mobile operators to provide high speed internet services in new guise. Secondly, competition in the fixed-line segment which, despite its monopolistic status and delayed liberalization, has been witnessing successive promotions by its incumbent operator to counter the flow of fixed-mobile substitution (FMS). Subsequently, the sector's growth potential mainly resides in the mobile segment whose services are still not yet accessible to half of the population, and the under penetrated internet market, with its registered 13% penetration rate in 2Q08. Defensive demand sustained by socio-economic drivers: Escalating GDP per capita coupled with the expanding youth population have been generating sustainable demand for telecom services. Intensifying competition fuels growth in the mobile: The introduction of competition following the entrance of the third mobile operator, Etisalat Misr (EM), have triggered exceptional mobile subscribers growth registering a Y-o-Y growth of 47% reaching 41 mn subscribers and 54.4% penetration rate in 3Q08. 3G technology opens new battlegrounds for mobile operators: The acquisition of 3G license, which entails the transfer of non-voice data in addition to voice data, allowed mobile operators to enter the internet market and compete over the provision of high speed connection in new guise—via mobile internet and portable USB modems. Accordingly, Vodafone Egypt (VFE) revealed that around 12% of its mobile subscribers had used mobile internet in October 2008. Broadband stimulates internet growth: High-speed internet connections (broadband) have been the primary driver behind the growth in internet users registering a CAGR of 206% compared to 36% recorded by free users, over 2003-2007.

DRIVERS Egypt youth-based population secures a sustainable market for telecom services. Relatively low mobile penetration, compared to other regional peers, provides room for growth. Narrow broadband penetration rate provides significant growth potential. Acquisitions of 3G licenses by three operators will open door for the provision of new services.

RISKS Global credit crunch are likely to limit the inflow of investments. Fluctuating GDP per capita is expected to decelerate growth in internet subscribers. The delayed introduction of competition to the fixed-line market will sustain the diminishing growth rate of fixed-line subscribers.

KEY PERFORMANCE INDICATORS Mobile subscribers CAGR (03-07,%)

51

Internet Users CAGR (03-07,%)

30

Fixed-line subscribers CAGR (03-07,%)

7

Mobile penetration rate (3Q08,%)

54.4

Internet penetration rate (2Q08,%)

13

COMPANIES COVERED

PAGE#

Mobinil

133

Orascom Telecom (OT)

143

Telecom Egypt (TE)

155

NORAN ALI [email protected] MAYAN EL MENSHAWY [email protected]

SECTOR PERFORMANCE | 2004-2Q2008 60

mn subs

Telecom subs

Mobile GR

Fixed-line GR

Internet users GR

80%

70% 50 60%

Mobile mania sweeps fixed-line: The exceptional growth in mobile came at the expense of a contracting fixed-line market triggered by fixed to mobile substitution wave. Hence, TE has been launching a number of promotional campaigns to counter such trend.

40 50%

40%

30

30% 20 20% 10 10%

-

0% 2004

91

2005

2006

2007

2Q08

November 11, 2008 EGYPT | TELECOM

GLOBAL TELECOMMUNICATIONS INDUSTRY Telecommunications have played a vital role in spurring economic development through the generation of substantial revenues which grew by a CAGR of 9% in only three years time, reaching US$1.8 trillion in 2007 compared to US$1.4 trillion in 2004. Looming global recession started to impose some obstacles on the accelerating path of the telecom industry, most notably investments - given the capital-intensive nature of such industry. This was manifested in cases of major companies that started to reconsider expanding their activities in other area, such as Vodafone which decided to delay its service initiation in Qatar to 1Q09, due to lack of liquidity.

Telecom: a key role in the economy, yet such growth may be hindered by expected global recession

The telecommunications market has been driven by mobile and internet users; which scored above average growth records, registering a CAGR of 24% and 19%, respectively over 2000-2007. Fixed lines lagged way behind with its 4% CAGR during the same time span.

Mobile and internet, the engine for telecom growth

CAGRs of the global telecom market segments by number of subscribers over (2000-2007) 30%

24%

25%

19%

20% 16% 15%

10%

4%

5%

0% World Total subs.

Fixed line subs.

Mobile subs.

Internet subs.

Source: ITU

Despite the fact that the developed countries are the most penetrated region in mobile services with a rate of 95% in 2007, developing countries have been achieving a faster growth with subscribers base growing by a CAGR of 36.6% during 2000-2007 compared to 12.1% recorded by developed countries over the same time span. The same applies for the internet segment; by which developing region enjoyed a CAGR of 32% during 2000-2007, compared with 12% for developed countries.

Developing region is driving mobile and internet growth

EGYPT TELECOM MARKET PROFILE Over FY05/06-07/08, the exceptional telecommunications growth has been a key driving force to the Egyptian economy registering a CAGR of 51% - outpacing the 19% CAGR witnessed by the country's GDP, during the same period. Accordingly, telecom revenues surged by 42% reaching LE 27.2 bn in FY07/08 up from LE 11.9 bn in FY05/06 ; thus enlarging its share of GDP from 1.9% to 3 %, over the same time span

92

An engine for growth

November 11, 2008 EGYPT | TELECOM

In line with the global developments, mobile expansions led telecommunications growth with a CAGR of 51% over 2003-2007, followed by internet users.

Mobile, the flagship for telecom growth

Growth of telecom market segments' subscribers (CAGR 2003-2007)

Mobile subs.

51%

Internet users

30%

Fixed line subs.

7%

0%

10%

20%

30%

40%

50%

60%

Source: ITU; Telecom Operators, MCIT

KEY RECENT DEVELOPMENTS : THE MOBILE SEGMENT May 2007 witnessed the entrance of the third mobile operator - EM - following its license acquisition a year earlier for LE16.7 mn; entailing the provision of 2G/3G technologies. Such act triggered VFE to acquire the 3G license in January 2007 yet, operation started following EM. Eventually, Mobinil which launched its 3G service by September 2008. It is worth mentioning that the entrance of EM has eaten up the market shares of both operators with VFE incurring the largest drop of 5% compared to 3% in Mobinil’s share in 3Q08 compared to the same period a year earlier. Yet, Mobinil continues to dominate 46% of the market with 18.9 mn subscriber’s base, followed by VFE with 41% market share and a total of 16.6 mn subs, and then EM with its 13% market share and a total of 5.3 mn subs. Progressive market shares of mobile operators’ (2006-3Q08) EM

VFE

20.0%

30.0%

Mobinil

3Q08

2007

2006

0.0%

10.0%

Source: Telecom Operators

93

40.0%

50.0%

60.0%

The entrance of the third mobile operator with its 3G technology

November 11, 2008 EGYPT | TELECOM

The last obstacle on the path of free competition was removed in April 2008 with MNP paves the road the launch of Mobile Number Portability (MNP) service by the National Telecom for free competition Regulatory Authority (NTRA) for LE 75 service charge for subscribers who have at least one year subscription with a mobile operator, thus excluding EM subscribers*. Subsequently, MNP intensified subscribers transfer to the new operator, reflected in the growth in EM subscribers which registered an exceptional Q-o-Q growth of 110% in 3Q08, reaching 5.3 mn subscribers. Thus, nearly doubling its market share to 13% in 3Q08 compared to 7% a quarter earlier, in addition to the escalating churn rates borne by other operators, most notably Mobinil whose rate surged to 9.5% in 3Q08 up from 5.8% in 2Q08.** On the whole, subscribers recorded a 16% Q-o-Q growth reaching 40.8 mn subscribers, over the same time span. QoQ Mobile Subscribers by operator Mobinil

mn Subs. 45

VFE

EM

40 35 30 25 20 15 10 5 0 4Q07

1Q08

2Q08

3Q08

Source: Telecom Operators

MARKET DYNAMCIS

Internet Drivers

Basic Drivers

Expanding youth GPD per capita

Growing IT clubs & ISPs Broadband growth

Telecom Drivers

Mobile Drivers Pre-paid growth Intensified competition Technological advancement

*

Mobile Number Portability (MNP) is a newly-developed telecom service that enables the mobile subscriber to change his operator without changing his own number. The MNP gives the subscriber all freedom to port his number to another operator without forcing him to lose his number. ** Al Gomhuria, 30 October 2008

94

November 11, 2008 EGYPT | TELECOM

Egypt's favorable demographics acts as a driving force for mobile and internet services, especially that the country's innate demographic structure entails a significant share of youth within the age bracket of 15-45 years accounting for 50% of the total population. Powerful links exist between mobile subscribers, internet users and population growth, exhibited in strong co-efficient correlations of 0.88 and 0.98, respectively. In addition, the significant share of 21% held by the age group of 5-15 years lays solid potential for expanding demand.

Expanding youthdenominated population

Rising per capita income, namely following the cut in income tax to a flat rate of 20% in July 2006, fostered the affordability of telecom services. Accordingly GDP per capita has been strongly correlated with mobile subscribers' and internet users with a coefficient correlation of 0.99 for both factors.

Growing GDP per capita

Mobile subscribers & internet users vs. GDP per capita mn

35

Mob subs

Internet users

GDP per capita

US$ 2,000 1,800

30 1,600 25

1,400 1,200

20

1,000 15

800 600

10

400 5 200 -

2005

2006

2007

Source: IMF, Mobile Operators

MOBILE-RELATED DRIVERS The pre-paid segment is the key driving force behind increasing mobile subscribers, which recorded an extraordinary Y-o-Y growth of 74%, compared to 17% recorded by post-paid in 2007. Consequently, pre-paid segment held the lion’s share of 95% of the total mobile subscribers' base compared to 5% held by postpaid segment in 3Q08.* Pre-paid dominance is attributed to Egypt's low income level; in addition to the intensified competition initiated by EM’s price war on the pre-paid front by removing 15% sales taxes on recharge cards. Thereafter, the other two operators pursued the same price cuts on pre-paid cards to secure their wide pre-paid base. Mobile market subscribers quarterly market mix over 4Q07-3Q08 Prepaid

mn

40

Post-paid

35 30 25 20 15 10 5 0 4Q07

1Q08

2Q08

3Q08

Source: IMF, Mobile Operators *

95

Etisalat Misr subscribers mix is estimated from actual 3Q08 subscribers' figures.

Pre-paid driven market

November 11, 2008 EGYPT | TELECOM

Intensified competition characterizes the mobile market, namely in the pre-paid segment – offering lower per minute tariff and additional benefits in the form of free minutes, SMS and cheaper handsets; thus, fostering mobile affordability and widening the addressable mobile market. Yet, competition was extended to the international call market when the NTRA offered the license to operators in October 2007 for a payment of LE 100 for each existing subscriber and LE 20 for each additional subscriber in addition to revenue sharing fees at a maximum of 6%. EM was the only operator to acquire the license for LE 200 mn, while the other operators continued providing the services through Telecom Egypt (TE).

Intensified competition extends to the international market

Quarterly growth in mobile subscribers 20%

18%

16%

14%

Mobinil Alohat per sec. bill & removal of admin fees VFE Super

EM combined Options offer controlled monthly bill+ LE0.32 /min rate+free sms

VFE Free Bouquet LE 0.3/min+free mins Mobinil Star & Business offer LE0.22/min+free mins Mobinil & VFE Life time validity

Mobinil on-net promotion LE 0.20 mobile-to-mobile EM on-net promotion LE 0.15 mobile-to-mobile

EM Ahlan LE 0.39/min+removal of pre-paid card sales taxes VFE Easy Mobinil Ahsan nas LE0.20/min for selected nos.

12%

10%

8%

VFE on-net promotion LE 0.20 mobile-tomobile

6%

4%

2%

0% 2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

Source: Newspapers; Telecom operators

The adoption of advanced technology—namely the 3G - is another front through which mobile market growth was boosted. 3G technology is a key for upgrading operators’ capacities and the provision of data services such as mobile TV, video calling and high internet speed. EM initiated competition in technology adoption through adopting its 3.5G technology in May 2007, followed by its 3.75G adoption in November 2007. Launch date of 3G technologies in Egypt Operator

EM

VFE

EM

Mobinil

Technology

3.5G

3G

3.75G

3G

Operation Date

Source: CICR

96

May 07

May 07

Nov 07

Sept 08

Opting for technological edge

November 11, 2008 EGYPT | TELECOM

To accommodate the rapid technological advancement, mobile operators have been keen to allocate considerable investments. For instance, to expand its network that currently covers 95% of Egypt, EM is expected to pump LE 2.5 bn by * 2009.

Invest to grow

INTERNET DRIVERS Over 2003-2007, internet users grew by a 30% CAGR. 2007 witnessed a pick up in users' growth which surged by a 43% Y-o-Y growth to 8.6 mn subscribers and 12% penetration rate. Such growth was triggered by the rise in free users which grew by 52% in 2007 compared to 24% a year earlier, as a result of regained rise in the number of IT clubs that grew by 30% in 2007 compared to 14% a year earlier.** In 2Q08, internet users reached 9.7 mn and a 13% penetration rate. The growth in internet users was supported by increasing Internet Service Providers (ISPs) which reached 222 providers in 2007 up from 214 providers in 2004 and an expanding international internet bandwidth which grew by eight folds reaching 14866 Mb/s in 2007 up from 1595 Mb/s, over the same time span. Despite growth in numbers, internet adoption is still growing at a slow rate reflected in the drop in Egypt's e-readiness rank from the 55th rank in 2006, out of a total of 69 countries, with an index score of 4.30 to the 58th rank in 2007 with a score of 4.26.*** Limited adoption was attributed to low PC penetration rate estimated to be currently around 7% of the families****; the concentration of government initiative such as the PC for Every home and IT clubs initiatives in large metropolitans, Cairo and Alexandria; language barrier and the unavailability of enough Arabic content and the relatively expensive access fees. Internet users' growth pattern and penetration rate (2003-2007) 10

mn subs

Internet Users P t ti t

Internet Users GR 70%

9 60% 8 50%

7 6

40%

5 30%

4 3

20%

2 10% 1 0%

0 2003

2004

2005

2006

2007

Source: MCIT, ITU

*

Al-Gomhuria, October 30th 2008

**

IT Clubs are units established by MCIT, in collaboration with the private sector, to offer access to computers and the Internet at nominal fees, as well as IT training programs and electronic libraries. The purpose of the initiative is to offer communal solution to the problems of IT accessibility and awareness. *** E-readiness index is a ranking composed annually by the Economist Intelligence Unit EIU which measures the country’s information and communications technology (ICT) infrastructure and the ability of its consumers, businesses and governments to use ICT to their benefits. The e-readiness rankings are a weighted collection of nearly 100 quantitative and qualitative criteria, organized into six distinct categories measuring the various components of a country’s social, political, economic and of course technological development. ****

97

BMI, "Egypt Telecommunications Report Q32008."

A growing IT clubs and ISPs, the backbone for internet growth

November 11, 2008 EGYPT | TELECOM

Over 2003-2007, the growth in internet users have been fueled by broadband subscribers which recorded the highest growth rate of a CAGR of 206%, replacing dial-up users which grew by 36% CAGR. Broadband growth was stimulated by a number of government-led tariff restructuring initiatives. Recently, TE allowed customers to jointly apply for a fixed-line and broadband line through its partnership with TEData. *

High speed internet generates high growth

Broadband subscribers vs. internet users (2003-2007 ) 10

mn Users

Internet users

Broadband subs

000 subs 600

53% drop in monthly charge to LE 45

9

500

8 7 6 5

Broadband initiative 50% drop in monthly charge to LE 150

400

37% drop in monthly charge to LE 95

300

4 200 3 2 100 1 0

0 2003

2004

2005

2006

2007

Mar-08

Source: MCIT, ITU, NTRA

Mobile operators have recently entered the internet services market via the 3G technology, which entails the transfer of both voice data (a telephone call) and non-voice data (such as downloading information, exchanging email, and instant messaging). Accordingly, mobile operators started a wave of buying stakes in operating ISPs, mainly Class A **, exemplified in EM’s acquisition of leading stakes in Nile Online (NOL) and the Egyptian Company for Networks (EgyNet) in 2008; VFE's acquisition of 69.9% in Raya Telecommunications 2007; and Mobinil's strong affiliation to LINKdotNET through their common parent company, Orascom. Since May 2007, mobile operators have been racing in providing advanced services at competitive prices such as mobile internet, currently for LE1/day, USB modems and associated bundle services such as EM's offer which entails paying 6 or 12 months subscription fees and getting the USB for free; recent Mobinil's offer providing a laptop and USB modem for an average price of LE 1,600.*** Customers started to gravitate towards these services, in October 2008 VFE reported that almost 12% of its 17 mn customer base had used mobile internet service.

*

Al-Gomhuria, 30 October 2008

**

Three categories of license are granted to those ISPs as follows: Class A are entitled to points of presence (POPs) in TE’s exchanges and the right to lease ports to other ISPs; Class B data carriers are given the same rights as Class A except for the leasing rights of ports to other ISPs; Class C provide Internet services to customers.

***

98

Richard Daly, CEO Vodafone Egypt , Euro-money conference

Mobile operators, new comers to the internet market

November 11, 2008 EGYPT | TELECOM

FIXED LINE MARKET Fixed-line subscribers have been growing at a diminishing annual rate which significantly slumped to 3.8% in 2006 compared to 9.5% a year earlier. Such drop was fueled by the intensified competition between mobile operators which had taken its toll on Telecom Egypt (TE)'s retail revenues which witnessed escalating drops from 2% in 2007 to 3% in 2Q08. Contraction in fixed-line growth can be also attributed to low rural penetration reaching 7% in 2006, despite the concentration of the majority of 57% of the population in these areas. TE has launched a number of promotional campaigns to reduce the fixed-mobile substitution (FMS) trend ending with its recent offer to remove the installation and administrative fees for new residential and commercial fixed lines till end of November 2008. Previous offers had negligible impact on subscribers' growth, illustrated in its 70% discount on installation fees promotion offered till December 2007, after which subscribers grew by declining Y-o-Y rate of 3.7% compared to 3.8% a year earlier.

A diminishing growth due to FMS trend

Fixed line pattern (2001-2007) Fixed-line subs 16

Available lines

Penetration rate

mn subs

16%

14

14%

12

12%

10

10%

8

8%

6

6%

4

4%

2

2% 0%

0 2001

2002

2003

2004

2005

2006

2007

Jan-08

Source: Telecom Egypt (TE)

99

In July 2008, TE adopted a new fixed-line tariff rebalance that aimed to stimulate added fixed-lines by slashing installation fees by 50% for both residential and commercial lines to LE 250 and LE 500 respectively; cutting fixed-to-mobile minute tariff by 33% in peak times and 14% in off-peak times to LE 0.30/min lower than the average LE 0.40/min charged by the mobile operators on mobile-to-fixed calls; in addition to reducing long distance call per minute rate by 20% to reach LE 0.16 (for more than 60 km) and LE 0.08 ( for less than 60 km). Such tariff is expected to marginally lift up the number of added lines which was reflected in 1% growth recorded in September 2008 compared to July, two months after new tariffs implementation.

New tariff rebalance and a mild growth in fixed-line subscribers

In September 2008, the National Telecommunication Regulatory Authority (NTRA) decided to finally postpone the auction for the second fixed-line license, after several delays, for a year due to uprising inflation in addition to the recent financial turmoil which made lending more difficult, especially in sectors requiring huge investments as the telecom sector (initial investments reach around US$1 bn for fixed-line network). The delay is expected to be extended for a period of two years until the next upturn in the global economy which is projected to occur by 2010.

Delayed competition due to credit crunch

November 11, 2008 EGYPT | TELECOM

FUTURE OUTLOOK The recent entrance of the new operator and the subsequent aggressive competition has recently boosted mobile proliferation with penetration rate reaching 54.4% in 3Q08. Over 2008-2009, mobile subscribers are projected to strongly rise by an average of 33% , due to the rolling-out of 3G network and services coupled with the existence of a considerable addressable market. Such trend will be reversed by 2010, as the market reaches its saturation stage; accordingly mobile growth is projected to grow by a diminishing rate. By 2012, mobile subscribers will approach the addressable market level estimated to reach 84% of the population, due to existence of inaccessible impoverished segment; thus, reaching 66.2 mn subscribers and an 82% penetration rate.

Mobile growth on the peak for the short-run

Mobile outlook ( 2008-2012) Thousands 90,000

Population

Addressable subs

Mobile Subs.

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 2008

2009

2010

2011

2012

Source: CICR

Growth in internet users will be driven by the broadband segment, projected to grow by a CAGR of 34% compared to 15% by free users during the period of 2008-2012. Internet users' growth rate is expected to level off during 20082010, due to anticipated economic slowdown, growing by a projected annual growth rate of 18% compared to 31% recorded over 2005-2007; with internet users projected to reach 14.2 mn users and 18% penetration rate by 2010. Such trend will be reversed in 2011, driven by the anticipated pick-up in GDP per capita. Accordingly, internet penetration is expected to reach 24%, and that of broadband to reach 2.5% by 2012, given the existence of internet barriers manifested in high illiteracy rates and low income. Internet outlook ( 2008-2012) Internet users 25

Broadband subs

mn Users

mn Subs

20

2.00

15

1.50

10

1.00

5

0.50

-

0 2008

Source: CICR

100

2.50

2009

2010

2011

2012

Internet growth :an upward trend stifled by short downturn

November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) EGYPT | WHITE CONSUMER GOODS (WCG)

LIMITED EXPORTS IS A BLESSING Until recently, limited export potential has been one of the main deficiencies of the WCG industry and a key challenge. Yet, nowadays given the anticipated global downturn which is expected to reflect negatively on trade activities, limited exports seems to be the industry's life-jacket amid the global storm. The white consumer goods industry (WCG) is a defensive industry, gaining particular strength with Egypt's growing population and the developed base of feeding industries. However, driven by its strong correlation with GDP per capita and interrelation with the realestate market that are expected to witness lower growth levels; WCG demand is expected to continue growing yet with a slower pace registering 3% in 2009. Limited exports: Despite of the increasing WCG exports still they represent a minimal contribution averaging 6% of total local production over 2004-2007. Resilience stemming from targeting different social classes: The WCG market features a wide range of products with varying prices that suit the different social income classes, whereas imports - due to its relatively high price scheme - target mainly the high end consumers constituting class A that represents only 2% of the population. Real-estate boom pushed demand higher: The real-estate boom witnessed in the past couple of years along with the strengthened GDP per capita and increasing marriage contracts exerted a pull towards WCG demand that registered a CAGR of 4.5% over 2004-07. Electric water heaters, a star performer: The move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destinations diverted the demand from gas to electric water heaters that was ranked the first in terms of growth registering a CAGR of 12.4% over 2004-07.

POTENTIALS Growing population with favorable demographic structure, as 48% of the population is below the age of 45, thus expanding marriage rates prospects. Limited exposure to international markets. Well established base of feeding industries (components and packaging). Various products targeting different social classes. Despite the rising cost of energy it is still lower than the global average. GoE's plan to pump LE 300 mn new investments in stoves production.

RISKS Economic slowdown. Growing competition with a minimal cost passing ability. Decrease in propensity to purchase with the overall slowdown in the economy.

KEY PERFORMANCE INDICATORS WCG production CAGR (04-07,%)

4.6

WCG consumption CAGR (04-07,%)

4.5

Imports CAGR (04-07,%)

24

Coverage ratio (2007,%)

104

COMPANY COVERED

PAGE #

Olympic Group

139

ALIA MAMDOUH [email protected]

SECTOR PERFORMANCE | 2004-2008 WCG Demand

WCG Production

2008E

2007

2006

2005

2004

0

2,000

4,000

6,000 K Units

101

8,000

10,000

November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) The White Consumer Goods (WCG) market bears a number of special characteristics: A high level of seasonality by nature where the summer usually witnesses strong levels of demand due to the high marriage rates; the increasing demand for touristic real estate units. Moreover, the time span of religious feasts witness high levels of marriages. A relatively strong consumers' bargaining power due to the variety of products matching different income levels. On the other hand, the well-established feeding industries with various suppliers tend to give suppliers a low bargaining power before consumer goods manufacturers. A cyclical industry, driven by the health of the economy in general and activity in the real estate and housing sector in particular

A special industry enjoying a strong consumer leverage

Starting 2006 the WCG market leapfrogged by 5.1% versus a growth of 3.4% in 2005 – fueled namely by the jump in GDP/capita growth rate which recorded 8.2% in 2006 compared to 5.8% in 2005. 2007 followed through with an increase of 4.8% reaching 8.4 mn units. Electric water heaters led such growth with 18.9% in 2007— attributed to the move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destinations which diverted the demand from gas to electric water heaters.

Strong demand led by electric water heaters

WCG Market K Units

Demand Growth by segment WCG Production

Washing machines Stoves Gas Water Heaters

WCG Demand

9,000

Refrigerators Electric Water Heaters Total Market

20% 18%

8,500

16% 14%

8,000

12% 10%

7,500 8% 6%

7,000

4% 2%

6,500

0%

2004

Source: IDA & CAPMAS

2005

2006

2007

2006

2007

Source: IDA & CAPMAS

Due to the necessity of after-sales services and the need to have an easy access Demand is mostly to maintenance centers, production coverage maintained its high level of 1.04x. covered by local production 2007 imports registered higher growth rate of 52% - representing 83.5k of the 2007 witnessed a added units – compared to an increase of 36% in 2006. Yet, imports still hold a higher growth in imminimal share of 3% from the total WCG market. It is worth noting that the major- ports ity of imported products target the high-end consumers. Despite the minimal share of 8% in the total imports, stoves registered the highest growth of 108% in 2007 – driven by the modern hi-tech stoves. On the other hand, exports witnessed slower growth of 3.9% than that of 2006 (14%), led by the electric water heaters accounting for 38% of total exports. Generally, WCG market features a limited number of companies that bear a large size as it is the case in Olympic Group and El-Araby; followed by a second tier of companies as Kiriazi, Electrostar, Alaska, Universal and Fresh. Olympic Group and Kiriazi dominate the washing machines and refrigerators segments, while Olympic Group and Fresh dominate the electric water heaters segment. However, when it comes to stoves, the market is very fragmented giving consumers a relatively strong bargaining power due to the presence of a number of producers with products addressing different segments of the society.

102

A private sector oriented industry with different concentration levels throughout each segment

November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) WCG main players Refrigerators

Stoves

Water Heaters

Universal

One-door

Electric

Olympic Group

Olympic Group

Olympic Group

Alaska

Kiriazi

Fresh

Toshiba

Fresh

GMC

Washing Machines

Two-door

Gas

Kiriazi

Olympic Group

El Masanaa

Olympic Group

Kiriazi

Universal

Electro Star

Zanussi

Olympic Group

Alaska

GMC

Fresh National

Source: Kompass

GROWTH DRIVERS Urban housing demand—marriage contracts and the demand for 2nd housing units — highly affects WCG consumption . Urban demand has been witnessing a CAGR of 3.1% over 2004-07 which contributed to the growth in WCG market. It is worth highlighting that the expanding demand for second housing units – namely in the outskirt destinations – coupled with the demand for touristic realestate units in the coastal areas act as driver to the rising WCG consumption.

Urban housing demand affects the demand for WCG

Urban Demand vs. WCG Demand WCG Demand

K units 8,600

units 560,000

Total Urban Demand

8,400

550,000

8,200

540,000

8,000

530,000

7,800

520,000

7,600

510,000

7,400

500,000

7,200

490,000

7,000

480,000

6,800

470,000 2004

2005

2006

2007

Source: IDA& IDSC

Strong ties exist between WCG demand and levels of GDP/capita bearing a correlation coefficient of 0.997. Over 2004-07, levels of GDP/capita registered robust growth of 7% (CAGR) peaking in 2006 with a y-o-y growth of 8.2% - hence, strengthening consumer purchasing power where private consumption/head witnessed a CAGR of 15.4% over 2004-07. GDP/capita vs. WCG consumption US$

GDP per Capita

K units

WCG Demand

6,000

8,600 8,400

5,000 8,200 4,000

8,000 7,800

3,000 7,600 2,000

7,400 7,200

1,000 7,000 6,800

0 2004

2005

Source: IDA& CAPMAS

103

2006

2007

High GDP/capita strengthened the purchasing power

November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG)

KEY CHALLENGES Steel prices, one of the main components of the WCG cost of production, skyrocketed over 2003-07 where flat steel prices grew at a CAGR of 16% recording a high level in 2007, reaching LE 3,601/ton with a y-o-y growth of 19% driven by the increase in its raw materials prices (iron ore, scrap and billets). Over and above, WCG production utilizes a more fine tuned type of flat steel that is relatively more expensive. Combined with the increasing plastic prices, another raw material used in the production process, moving in line with the increase in polyethylene price level driven by the recent surge in oil prices, WCG producers face immense risk with respect to their margins. However, with the current decline in oil and commodities prices, production costs challenges should fade away.

Risk lies in rising raw materials prices, yet, not for long

Flat steel prices LE 3,700 3,600

Increase of 19% due to the hike in raw materials prices (iron ore, billets, ect..)

Decline of 3% due to the transformation of China from net importer to net exporter

3,500 3,400 3,300 3,200 3,100 3,000 2,900 2,800 2,700 2004

2005

2006

2007

Source: Bloomberg

104

Increasing competition is another threat facing both the concentrated and the fragmented segments of the WCG market. Within the concentrated segments of the market - washing machines, refrigerators and electric water heaters – the main players face competition from foreign producers in terms of high tech imported products. Nevertheless, stoves - one of the highly fragmented segments in the market - are relatively competitive as well due to the presence of a number of local producers offering different categories that match the varying income levels. Such expanding competition is the main reason behind the industry’s partial cost passing ability, where main players could not pass on the entire increase in production costs over the past year in order to ensure maintaining their market shares.

Growing competition and the minimal cost passing ability

Despite the slight improvement in the factors that hindered export contribution in the past years represented mainly in the inactive trade agreements, the market is still faced by a number of challenges within this respect. One of the main deficiencies within the produced goods is the limited designs within each segment along with the appreciating Egyptian pound versus the US$ which might exert more pressure on the industry's export potential. Yet, nowadays this pitfall turned out to be this industry’s life-jacket amidst the expected decline in exports driven by the global slowdown and shrinking external demand.

Limited export now acts as the only rescue

November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG)

FUTURE OUTLOOK Affected by the slowdown in urban housing units demand; the expected slow growth in GDP/capita shedding its reflections on marriages rate, demand on WCG is expected to continue growing, yet at a slower pace of 3% in 2009.

Demand outlook Washing Machines Elec Water Heat.

K units

Refrigerators Gas Water Heat.

Stoves

3,500

3,000

2,500

2,000

1,500

1,000

500

0 2007

2008

2009

Source: IDA, CAPMAS, CICR Forecasts

105

2010

2011

A growing industry serving domestic demand

November 11, 2008

THIS PAGE IS INTENTIONALLY LEFT BLANK

106

November 11, 2008 EGYPT | FURNISHING

12M FAIR VALUE | LE 7.59

AL-EZZ CERAMICS & PORCELAIN (GEMMA) Al-Ezz Ceramics & Porcelain (GEMMA) is a well-known brand of tiles in Egypt. Its main activities include producing ceramics and porcelain tiles in addition to trading sanitary ware. GEMMA targets the replacement market, with a 6% market share, so any expected slowdown in the real estate sector should have no effect on GEMMA's sales. Expansion of the company’s 6-mn sqm p.a. is underway and expected to start production early 2009. We believe said expansion will boost GEMMA's sales in both the local and international markets. Our DCF-led valuation indicates a 52% upside to LE 7.59, warranting a BUY with a MODERATE RISK rating.

New factory expansion expected to start in 2009 with LE 270 mn in capex: A 50% capacity increase from 12 mn sqm to 18 mn sqm is in process in order to meet expected local and international growth in demand for ceramic and porcelain products. Having reached the maximum production capacity with a utilization rate of around 91%, GEMMA was in need for expansion - as we noted in our report dated May 3, 2007. Exports are a strategic target: GEMMA’s strategic target is to penetrate new markets, such as the US - the largest importer of tiles all over the world, to benefit off higher selling prices in addition to maintain existing markets in Greece, Saudi Arabia, and the Middle East. Similar to other local companies, GEMMA has a comparative advantage of low manufacturing cost, especially labor. We believe said advantage will be a positive catalyst for GEMMA to penetrate these markets, especially the US which has a higher labor cost. Distribution channels: GEMMA’s sales are generated through four channels: showrooms, projects (such as hospitals, hotels, and touristic villages), agents, and exports. In 2007, said projects and showrooms accounted for around 14% of GEMMA's total sales.

BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

ECAP.CA , ECAP EY LE 4.98 51.1 mn LE 0,254.2 mn LE 19.62/ LE 3.2 0.46 mn / LE 6.62 mn

COMPANY SYNOPSIS Al-Ezz Porcelain (GEMMA) was established in 1981 under Law No. 159/1981 for the purpose of manufacturing, trading and distributing ceramics, porcelain, sanitary ware, taps and its related contracting works. Currently, it is specialized in the production and trade of high-quality ceramics and porcelain tiles. In 1998, Al-Ezz Porcelain bought a 97.82% stake in Al-Ezz Ceramics and, accordingly, its name was changed into Al-Ezz Ceramics & Porcelain (GEMMA). In 2004, Al-Ezz Ceramics was merged in Al-Ezz Ceramics & Porcelain (GEMMA). On the operational front, GEMMA has a 6% market share with a total production capacity of 12 mn sqm per annum. Currently, GEMMA has an authorized capital of LE 1.8 bn and an issued capital of LE 255.2 mn, distributed over 51.05 mn fully paid shares at a par value of LE 5/share.

SHAREHOLDER STRUCTURE Al-Ezz Holding Financial Holding Int'l Limited Others Free Float Total

63.9% 5.7% 0.1% 30.3% 100.0%

Has been a tax payer since 2007: GEMMA has historically benefited off a 10-year tax exemption (for its factory located in Al-Sadat City) which ended in December 2006. Starting 2007, GEMMA began paying income taxes.

STOCK PERFORMANCE | 52 WEEKS Volume

107

ECAP

CASE 30 - rebased

Oct-08

Aug-08

Jul-08

Jun-08

Apr-08

May-08

Mar-08

Jan-08

Feb-08

Sep-08

mn shares

LE

20 18 16 14 12 10 8 6 4 2 0 Nov-07

Valuation and recommendation: On a DCF basis, we reached a 12-month target fair value of LE 7.59/share for GEMMMA, implying a 52% upside potential. Traded at 12.6x 2009 expected earnings. Accordingly we rate this stock at BUY at MODERATE RISK.

AHMED ABDEL-GHANI [email protected]

Dec-07

Growth drivers: While demand for tiles should be driven in part by growth in the real estate sector, GEMMA mainly targets the replacement market. We believe that GEMMA's effective distribution channels, targeting exports, in addition to its capacity increase should all reflect positively on its sales growth.

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

November 11, 2008 EGYPT | FURNISHING | GEMMA Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of LTD Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liab. LTerm Spontaneous Fin. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Net worth Income Statement (LE mn) Capacity '000 Units Units Sold '000 Revenues COGS Gross Profits SG&A EBITDA Dep. & Amort. EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Inc. Other Non-Operating Exp. EBT Taxes (including deferred taxes) NPAT Minority Interest Extraordinary Items Attributable Profits

2007A

2008F

2009F

2010F

12.3 149.3 118.5 7.2 0.0 0.0 287.4 257.6 1.1 2.9 2.3 0.0 551.3

14.1 122.6 131.0 8.2 0.0 0.0 276.0 435.5 1.1 2.9 2.3 0.0 717.7

19.6 178.7 182.5 11.4 0.0 0.0 392.3 465.5 1.1 2.9 2.3 0.0 864.0

24.3 226.9 226.9 14.2 0.0 0.0 492.4 442.9 1.1 2.9 2.3 0.0 941.6

72.2 46.7 50.3 3.9 15.2 5.5 0.0 2.4 1.8 198.1 117.7 0.0 0.0 315.8 9.6 1.4 0.0 224.6 551.3

81.4 41.6 50.0 5.3 17.3 5.5 0.0 2.4 1.8 205.3 183.7 0.0 0.0 389.0 10.8 1.4 0.0 316.5 717.7

219.2 47.2 69.7 7.4 24.1 5.5 0.0 2.4 1.8 377.4 136.5 0.0 0.0 513.9 12.1 1.4 0.0 336.7 864.0

256.7 45.0 86.6 9.2 29.9 5.5 0.0 2.4 1.8 437.2 117.3 0.0 0.0 554.5 13.4 1.4 0.0 372.3 941.6

2007A 12,000 10,659 313.2 (201.0) 112.2 (46.2) 65.9 (19.1) 46.8 (32.1) 0.0 0.0 0.0 (0.6) (3.2) 10.9 (1.3) 9.7 0.0 0.0 9.7

2008F 12,000 11,326 357.5 (228.8) 128.7 (53.0) 75.7 (19.3) 56.4 (31.5) 0.0 0.0 0.0 0.0 0.0 25.0 (6.0) 19.0 0.0 0.0 19.0

2009F 18,000 14,820 495.9 (317.9) 178.0 (73.7) 104.3 (26.8) 77.5 (51.0) 0.0 0.0 0.0 0.0 0.0 26.5 (6.3) 20.2 0.0 0.0 20.2

2010F 18,000 17,496 615.6 (395.2) 220.4 (91.8) 128.5 (34.4) 94.1 (48.4) 0.0 0.0 0.0 0.0 0.0 45.7 (10.2) 35.6 0.0 0.0 35.6

Cash Flow NOPAT Dep. & Amor. COPAT WI Change Other Current Items CF After Current Oper. Financing Payments Cash Before LT. Use Net Plant Change FCFF Others CF Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

2007A 45.4 19.1 64.5 29.0 0.1 93.5 (65.1) 28.4 (40.7) 52.7 (2.0) (14.3) (5.1) 19.2 0.0 1.3 0.0 1.1

2008F 50.4 19.3 69.7 16.4 0.0 86.1 (78.2) 7.9 (197.1) (111.0) 0.0 (189.2) 9.2 107.6 72.9 1.3 0.0 1.8

2009F 71.2 26.8 98.0 (82.3) 0.0 15.7 (92.6) (76.9) (56.8) (41.1) 0.0 (133.7) 137.9 0.0 (0.0) 1.3 0.0 5.5

2010F 84.0 34.4 118.4 (70.8) 0.0 47.6 (95.6) (48.1) (11.9) 35.7 0.0 (59.9) 37.5 25.8 0.0 1.3 0.0 4.7

Fact Sheet ROE ROS ROA ROIC

2007A 4.3% 3.1% 1.8% 9.6%

2008F 6.0% 5.3% 2.6% 7.9%

2009F 6.0% 4.1% 2.3% 9.5%

2010F 9.6% 5.8% 3.8% 10.4%

EBITDA Margin ATO WI/ Sales ALEV

21.1% 0.6 65.8% 2.5

21.2% 0.5 53.1% 2.3

21.0% 0.6 54.8% 2.6

20.9% 0.7 55.7% 2.5

1.4 1.5

1.2 1.3

1.5 1.0

1.5 1.1

2007A 4.98 51,045 0.19 0.00 6.13 4.40

2008F 4.98 51,045 0.37 0.00 7.00 6.20

2009F 4.98 51,045 0.40 0.00 9.71 6.60

2010F 4.98 51,045 0.70 0.00 12.06 7.29

1.26 1.03 1.29 9.37

1.37 -2.17 1.48 10.71

1.92 -0.81 2.04 12.49

2.32 0.70 2.52 12.71

2007A 26.3 0.0% 0.8 1.5 3.9 7.4

2008F 13.4 0.0% 0.7 1.5 3.6 7.8

2009F 12.6 0.0% 0.5 1.3 2.6 6.5

2010F 7.1 0.0% 0.4 1.1 2.1 5.5

-2.3 -4.9 3.4 7.2 0.8

-6.2 -15.5 2.4 6.1 0.8

7.1 18.2 2.0 5.0 0.7

Debt/ Tangible Networth Current Ratio Per Share Ratios Share Price No. Of Shares '000 EPS Div/Share Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Multiples P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT

P/ FCFF 4.8 EV/ FCFF 9.1 P/ EBITDA 3.9 EV/ EBITDA 7.3 P/ BV 1.1 Source: Company reports and CICR estimates.

108

November 11, 2008 EGYPT | TEXTILES

12M FAIR VALUE | LE 10.1

ARAB COTTON GINNING CO. (ACGC) DNA change

Unlike other ginning companies, Arab Cotton Ginning Co. (ACGC) is now recognizing business opportunities that would be better achieved through a holding company. Indeed, ACGC revealed its intention to establish a holding company with ginning being one of the new entity's activities. We believe this “DNA change" will positively affect ACGC's share allocation in investors' portfolios. To press ahead, the company retained most of its 2007 profits for future planned expansions including c. 16% (direct and indirect) stakes in Upper Egypt Flour Mills (UEFM), which has a large base of unutilized assets. Excess liquidity: ACGC formed a consortium to acquire UEFM, which has unutilized assets - cash, land bank, warehouses, and cargo fleet. The latter allows UEFM to have a sizable market share in the shipping business in Upper Egypt. Also, ACGC is studying several other investment opportunities , including real estate, according to which the company will diversify its operations and to press ahead with its holding company concept. Simple company structure: ACGC acquired 56.75% of Amwal Al-Arabia through a share swap with Amwal El-Khaleej, bringing its total ownership in Amwal Al-Arabia to 100%. In addition, Amwal Al-Arabia acquired 39.64% of El-Nasr Clothes & Textiles (KABO) in June 2008 from its fully-owned subsidiary Modern Nile Cotton (MNC). Thus, ACGC had grouped its operations under two main subsidiaries: Amwal Al-Arabia and Egypt Cotton Ginning. Such a strategic move should further simplify the group's structure and management.

BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

ACGC.CA; ACGC EY LE 4.10 251.7 mn LE 1,032.0 mn LE 14.44/ LE 3.17 4.15 mn / LE 40.15 mn

COMPANY SYNOPSIS Arab Cotton Ginning Company is a shareholding service company established in 1977 according to ministerial decree #411/1963. The company’s main activities are cotton ginning, pressing, trading & marketing, exporting & importing, in addition to spinning synthetics, silk, and polyester. After a series of changes and capital increases, ACGC current authorized capital is LE 5,000 mn and the paid-in capital is LE 1,258.7 mn distributed over 251.7 mn shares with a par value of LE 5/share. According to its AGM dated October 8, 2008, the company announced its intent to establish a holding company by which ACGC’s management is considering changing its main activities from a pure ginning company to a holding company with ginning being one of its activities. It is expected that a share swap will be offered to existing company’s shareholders in the “will be” new formed holding company.

SHAREHOLDER STRUCTURE ACGC BoD Public sector Companies Employees shareholders Association Free Float Total

2.4% 3.9% 20.7% 5.0% 68.0% 100.0%

Vertical integration: Investment in Amwal Al-Arabia will facilitate ACGC’s both backward and forward integrations through its newly-restructured group of companies within the textiles and clothes industry. With this vertical integration, ACGC will be operating throughout the cotton value chain from ginning, exporting raw cotton, to spinning and weaving and textiles.

109

STOCK PERFORMANCE | 52 WEEKS Volume

ACGC

CASE 30 - rebased mn shares

LE

16 14 12 10

35.0 30.0 25.0 20.0

8 6 4 2 0

15.0 10.0 5.0 Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Apr-08

May-08

Mar-08

Jan-08

Feb-08

Dec-07

Valuation and recommendation: Based on our DCF valuation on a consolidated level, we reached a 12-month fair value of LE 10.1/share, hence we rate the stock a BUY. Said price implies an upside potential of 146%. Our DCF valuation includes consolidated operations, company’s investments, and land values. We believe the company’s land makes up over 50% of the stock’s value, which explains management’s intension to set-up its own real-estate company.

MUHAMMAD EL EBRASHI [email protected]

Nov-07

Financial summary: Separate revenues grew by 58% to LE 62.4 mn in FY07/08 ended June 30, 2008 vs. LE 39.5 mn in FY06/07. Said increase was driven by a 50% increase in the quantity ginned and pressed in addition to price increases. On a consolidated basis, the company’s financial results were not comparable to those of previous years’ as ACGC has undergone major restructuring.

November 11, 2008 EGYPT | TEXTILES | ACGC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets

786.4 168.6 398.5 8.7 36.6 24.0 1,422.8 1,115.7 87.2 40.1 0.8 511.3 3,177.9

902.0 211.1 395.8 2.4 36.6 24.0 1,571.9 1,040.8 87.2 38.2 0.8 511.3 3,250.1

1,031.5 268.2 475.6 13.6 36.6 24.0 1,849.5 914.8 87.2 38.2 0.8 511.3 3,401.6

1,157.7 326.0 527.0 14.5 36.6 24.0 2,085.8 779.8 87.2 38.2 0.8 511.3 3,503.0

Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity

317.3 25.8 45.8 0.0 0.1 17.0 13.0 0.0 85.2 504.3 91.0 9.7 0.0 605.0 15.1 56.3 482.9 2,018.5 3,177.8

307.4 18.9 47.9 0.0 0.1 0.0 13.0 0.0 85.2 472.5 73.3 1.2 0.0 547.0 15.1 90.8 482.9 2,114.3 3,250.1

331.3 21.3 52.0 0.0 0.1 0.0 13.0 0.0 85.2 502.9 52.3 1.2 0.0 556.4 15.1 128.0 482.9 2,219.2 3,401.6

293.9 18.9 55.4 0.0 0.1 0.0 13.0 0.0 85.2 466.4 33.5 0.0 0.0 499.9 15.1 167.5 482.9 2,337.7 3,502.9

Income Statement (LE mn) Revenues COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

Jun-08 1,154.5 (879.6) 274.9 (80.4) 194.4 (116.2) 78.3 (52.7) (31.3) 64.1 260.5 9.7 (11.9) 316.7 (22.4) 294.3 (7.5) 6.2 292.9

Jun-09 1,269.9 (916.8) 353.1 (88.4) 264.7 (117.9) 146.8 (52.4) (34.5) 86.3 15.6 9.7 (11.9) 159.6 (31.9) 127.7 0.0 0.0 127.7

Jun-10 1,371.5 (995.1) 376.4 (95.5) 280.9 (128.8) 152.1 (53.9) (37.2) 98.9 17.1 9.7 (11.9) 174.9 (35.0) 139.9 0.0 0.0 139.9

Jun-11 1,453.8 (1,060.1) 393.7 (101.3) 292.5 (138.0) 154.5 (46.5) (39.5) 112.2 18.8 9.7 (11.9) 197.4 (39.5) 157.9 0.0 0.0 157.9

110

Jun-08

Jun-09

Jun-10

Jun-11

Fact Sheet ROE ROS ROA ROIC EBITDA Margin

Jun-08 14.5% 25.4% 9.2% 0.1% 16.8%

Jun-09 6.0% 10.1% 3.9% 3.8% 20.8%

Jun-10 6.3% 10.2% 4.1% 4.3% 20.5%

Jun-11 6.8% 10.9% 4.5% 4.1% 20.1%

0.4 52.5%

0.4 50.1%

0.4 56.9%

0.4 61.0%

2.1 0.4 2.8

2.0 0.3 3.3

2.0 0.3 3.7

1.9 0.3 4.5

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

Jun-08 1.7 116.2 117.8 (497.4) 55.8 (323.8) (52.7) (376.5) (1,014.6) (1,394.1) 182.6 (1,208.5) 315.6 116.4 1,215.8 35.9 (194.4) 280.8

Jun-09 97.9 117.9 215.7 (31.5) 2.0 186.2 (78.2) 108.0 (42.9) 141.3 91.2 156.3 (10.0) 1.2 6.4 0.0 (38.3) 115.6

Jun-10 117.1 128.8 245.9 (143.9) 0.0 102.0 (72.8) 29.2 (2.8) 99.2 113.9 140.3 24.0 0.2 7.0 0.0 (42.0) 129.5

Jun-11 115.1 138.0 253.0 (106.8) 0.0 146.3 (67.8) 78.5 (3.0) 143.2 127.6 203.0 (37.4) 0.1 7.9 0.0 (47.4) 126.2

Per Share Ratios Share Price Actual No. Of Shares '000 New No. Of Shares '000 EPS Diluted EPS Div/Share Revenues/Share Units Sold/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Jun-08 4.10 251,744 251,744 1.16 1.16 0.30 4.59 2.4 8.02 0.47 (5.54) 0.77 1.22

Jun-09 4.10 251,744 251,744 0.51 0.51 0.15 5.04 2.2 8.40 0.86 0.56 1.05 1.22

Jun-10 4.10 251,744 251,744 0.56 0.56 0.17 5.45 2.2 8.82 0.98 0.39 1.12 1.22

Jun-11 4.10 251,744 251,744 0.63 0.63 0.19 5.78 2.0 9.29 1.01 0.57 1.16 1.22

Jun-08 3.5 3.5 7.3% 0.9 0.3 8.8 2.6 (0.7) (0.2) 5.3 1.6 0.5

Jun-09 8.1 8.1 3.7% 0.8 0.2 4.8 1.4 7.3 2.2 3.9 1.2 0.5

Jun-10 7.4 7.4 4.1% 0.8 0.2 4.2 1.2 10.4 3.1 3.7 1.1 0.5

Jun-11 6.5 6.5 4.6% 0.7 0.2 4.1 1.2 7.2 2.1 3.5 1.0 0.4

ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio

Multiples P/E Diluted P/E Div Yield % P/ Revenue EV/ Revenues [ EV/ Rev] P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: ACGC and CICR forecasts

November 11, 2008 EGYPT | BANKS

12M FAIR VALUE | NA*

COMMERCIAL INTERNATIONAL BANK (CIB) Re-asserting leadership

SHARE DATA Reuters; Bloomberg

Commercial International Bank (CIB) has successfully maintained its position as Egypt’s largest and most profitable private bank. Despite strong inflationary pressures, CIB has maintained a cost-to-income ratio of 31.9%. Amidst the global financial crisis, CIB is a bank that delivers double-digit growth with an ROAE of 42.6% vs. an industry average of around 16%. Against the looming global liquidity, CIB is highly liquid with a loans-todeposits ratio of 53%, holding the leading market share in both amongst private banks. The stock trades at 2009 PER and PBV of only 4.3x and 1.3x, respectively.

Growth across the board with an eye on the capital market: Following a stellar performance in 1H08 where the balance sheet revealed an 18% expansion in assets to in excess of LE 56 bn and bottom-line growth of 45% to LE 962 mn, CIB increased its stake in CI Capital Holding (CICH) from 50.09% to 100%. CICH is a full-fledged investment bank with brokerage, asset management, investment banking, and research arms.

COMI.CA/ COMIQ.L; COMI EY LE 30.73 292.5 mn LE 8,988.5 mn LE 65.99/ LE 23.87 0.88 mn / LE 46.5 mn

Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

COMPANY SYNOPSIS Commercial International Bank (CIB) was founded by National Bank of Egypt (NBE) and Chase Manhattan Bank (CMB) in 1975 under the Open Door Policy. CIB became the leading private-sector bank in Egypt, providing diversified services to multinationals along with privatesector industrial companies. Since its successful IPO in September 1993, the bank’s stock had represented one of the blue chips in the Egyptian stock market. CIB offers a high quality exposure to a full-fledged business varying among corporate and retail banking, investment banking, securities brokerage, mutual funds, asset management, and insurance. Global finance magazine recently accredited CIB with 3 awards namely “Best Bank in Egypt”, “Best Trade Finance Provider in Egypt” and “Best Foreign Exchange Provider in Egypt” for 2008. CIB is currently present with 147 branches and units and targets 155 by year-end 2008.

Efficient cost-to-income ratio despite slight upward pressures filtered through 1H08: In spite of pressures related to headcount increase, benefits adjustments, and inflation, the cost-to-income ratio still settled at a reasonable level of 31.9%.

STOCK PERFORMANCE | 52 WEEKS Volume

*We have discontinued making a recommendation or target price on CIB since CIB now owns 100% of CI Capital.

111

COMI

CASE 30 - rebased mn shares

LE

80 70 60 50

Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

Apr-08

May-08

Mar-08

40 30 20 10 0 Nov-07

We forecast YoY earnings growth of 37% for 2008: In line with strong 1H08 performance, we expect 2008 to exhibit a 37% growth to LE 1,759.3 mn. We project a 5-year CAGR of 25% for both net banking income (NBI) and earnings.

18.7% 81.3% 100.0%

ALIA ABDOUN [email protected]

Jan-08

Low multiples despite strong performance: CIB currently trades at 2009 PER and P/BV of 4.3x and 1.3x versus a MENA average of 10.6x and 2.2x, respectively.

Ripplewood Consortium Free Float Total

Feb-08

Regional agenda: CIB’s regional expansion plans include Algeria through two phases: (1) filing for the license which had been done and (2) start of operations pending the Algerian approval.

SHAREHOLDER STRUCTURE

Dec-07

Loan growth potential, high asset quality: With a CAR ratio of 12.8% (excluding interim profits), 1H08 showed a net loansto-deposits ratio of 53% - indicative of liquidity - next to a superb asset quality as evident in a 2.8% NPLs/loans ratio and a 167% provisions coverage ratio. As we expect a riskconscious growth in Egypt as inflationary pressures start easing, CIB is poised to benefit from its strict risk assessment policy which qualifies it for corner-to-corner loan growth including corporate, private, SMEs, retail, and mortgage loans. It is worth highlighting that CIB has neither sub-prime exposure nor any positions in banks currently under duress.

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

November 11, 2008 EGYPT | BANKS | CIB Balance Sheet (In LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Assets Cash & Due from Banks Interbank Assets T-Bills & Government Securities Net Trading Investments Available for Sale Investments Brokers-Debit Balances Reconcilation Accounts Net Loans & Advances Held-to-Maturity Investments Investments in Subsidiaries Accrued Income & Other Assets Deferred Tax Net Fixed Assets Good Will Total Assets

4,953.2 13,883.2 2,951.6 683.8 2,286.2 122.9 21.1 20,478.6 443.9 90.7 1,035.2 51.9 620.2 140.6 47,763.2

7,665.0 14,401.7 3,784.5 892.8 3,674.0 227.1 5.8 25,919.7 494.7 70.2 1,442.5 25.8 909.7 260.4 59,774.0

8,177.8 14,562.9 4,737.3 1,004.9 4,216.1 255.9 6.5 30,322.4 557.3 70.2 1,616.0 28.9 1,459.6 260.4 67,276.2

8,979.0 15,054.7 5,999.8 1,131.0 4,838.0 289.9 7.4 35,133.1 631.6 70.2 1,820.9 32.6 1,913.5 260.4 76,162.0

Liabilities and Shareholders' Equity Interbank Liabilities Customer Deposits Accrued Expenses & Other Liabilities Brokers-Credit Balances Reconcilation Accounts Dividends Payable Provisions Medium-/Long-Term Loans Debt Securities Total Liabilities Paid-in Capital Reserves Retained Earnings Minority Interest

2,378.6 39,476.1 798.4 162.4 1.3 336.7 397.9 161.4 0.0 43,712.7 1,950.0 2,095.2 0.0 5.3

2,400.3 49,941.7 827.3 234.3 0.0 486.4 441.0 119.7 0.0 54,450.6 2,925.0 2,389.7 0.0 8.7

1,713.3 56,466.3 832.3 260.2 0.0 594.2 499.0 108.2 0.0 60,473.4 2,925.0 3,859.5 0.0 18.2

1,309.1 63,589.3 889.4 290.3 0.0 728.0 559.2 97.7 0.0 67,463.0 2,925.0 5,745.2 0.0 28.7

8,670.2 0.0

Tier I Capital Tier II Capital

4,045.2 0.0

5,314.7 0.0

6,784.5 0.0

Total Shareholders' Equity Total Liabilities & Shareholders' Equity

4,050.5 47,763.2

5,323.4 59,774.0

6,802.8 67,276.2

8,699.0 76,162.0

Contingent Liabilities

11,529.0

13,664.4

15,985.4

18,700.6

Total Footing

59,292.2

73,438.3

83,261.5

94,862.6

Income Statement (In LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Total Interest Income Interest Paid to Clients & Banks Net Interest Income (NII)

2,998.4 1,797.8 1,200.5

3,574.9 1,938.1 1,636.7

4,320.4 2,258.6 2,061.8

5,105.4 2,520.5 2,584.9

Provisions Net Interest Income AP Fees and Commissions Income Investment Income Foreign Exchange Income Other Incomes Ownership profits from subidiary company Non-Interest Income Operating Income (BP) Operating Income (AP) G&A Expenses and Depreciation Other Expenses Non-Interest Expense Net Operating Income Taxation NPAT Unusual Items Net Profit Before Minority Interest Minority Interest Net Profit After Minority Interest Less: Non-Appropriation Items Net Attributable Income (NAI)

251.0 949.5 665.2 71.5 167.8 374.6 0.0 1,279.2 2,479.7 2,228.7 697.7 73.6 771.4 1,457.4 170.1 1,287.3 1.3 1,288.5 -2.7 1,285.8 0.0 1,285.8

317.0 1,319.8 883.1 274.5 384.2 410.4 0.0 1,952.2 3,589.0 3,272.0 973.7 254.9 1,228.7 2,043.3 282.9 1,760.5 5.0 1,765.5 -6.3 1,759.3 193.9 1,565.4

357.2 1,704.6 1,071.8 355.1 518.9 273.4 0.0 2,219.2 4,281.0 3,923.8 1,171.3 232.7 1,404.0 2,519.8 436.7 2,083.1 0.0 2,083.1 -9.5 2,073.6 228.5 1,845.0

377.6 2,207.3 1,289.0 444.2 615.5 293.6 0.0 2,642.4 5,227.2 4,849.7 1,393.1 255.7 1,648.8 3,200.9 566.2 2,634.7 0.0 2,634.7 -10.5 2,624.2 289.2 2,335.0

112

Profitability & Efficiency Ratios

Dec-07

Dec-08

Dec-09

Dec-10

Net Interest Margin (NIM) RoAA RoAE Cost/Income Earning Assets / Total Assets

3.23% 3.01% 34.62% 31.11% 85.46%

3.53% 3.27% 37.54% 34.23% 82.37%

3.81% 3.26% 34.20% 32.80% 82.45%

4.23% 3.66% 33.86% 31.54% 82.53%

Productivity & Asset Quality Ratios

Dec-07

Dec-08

Dec-09

Dec-10

Net Loans / Customer Deposits Interbank Ratio Liquid Assets / Total Deposits Assets Utilization Capitalization Ratio NPLs / Total Loans Provision Coverage Ratio

51.88% 5.8 62.72% 10.03% 8.48% 3.00% 166.3%

51.90% 6.0 60.91% 10.28% 8.91% 2.80% 176.7%

53.70% 8.5 57.91% 10.29% 10.11% 2.80% 176.5%

55.25% 11.5 56.62% 10.80% 11.42% 2.80% 175.3%

Growth & Market Ratios

Dec-07

Dec-08

Dec-09

Dec-10

17.0% 13.1% 7.09 4.3x 1.25 4% 23.26 1.3x

15.9% 12.6% 8.97 3.4x 1.50 5% 29.74 1.0x

Net Loans Growth 17.3% 26.6% Customer Deposits Growth 25.1% 26.5% EPS (LE) * 6.59 6.01 P/E 7.0x 5.1x DPS (LE) 1.00 1.00 Dividend Yield 2% 3% Retroactive BV/Share (LE) 13.85 18.20 P/BV 2.2x 1.7x * EPS based on NPAUI ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Source: CIB and CICR forecasts

November 11, 2008 EGYPT | BANKS

12M FAIR VALUE | LE 15.32

CREDIT AGRICOLE EGYPT (CAE)

CAE currently operates a network of 56 branches.

SHAREHOLDER STRUCTURE Crédit Agricole S. A. MMID Local institutions Retail Total

113

59.4% 17.1% 7.0% 16.6% 100.0%

ALIA ABDOUN [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

CIEB

CASE 30 - rebased mn shares

LE

30

6.0

2.0

5

1.0

0

Oct-08

3.0

10

Sep-08

15

Aug-08

4.0

Jul-08

5.0

20

Jun-08

25

Nov-07

Valuation and recommendation: We lowered our 12M target to LE 15.3/share mainly due to (1) a higher risk-free rate on the back recent hikes in benchmark rates by the Central Bank of Egypt (CBE) and (2) a higher risk premium to reflect the ongoing global financial crisis and potential consequences on Egypt. Still, the stock offers a 49% upside potential, urging us to maintain our BUY recommendation with its MODEARATE RISK rating.

Based on the decision of the EGM held on June 2006, the merge of the operations of EAB and CALYON Bank-Egypt under the name of Crédit Agricole Egypt (CAE) took place in September 2006.

Apr-08

Cheap multiples as growth reignites: CAE trades at 2009 PER and P/BV of 4.9x and 1.5x compared to a MENA average of 10.6x and 2.2x, respectively.

In 2005, Crédit Agricole Indosuez-Egypt merged with Crédit Lyonnais (Egypt Branch), thus jointly founding CALYON Bank-Egypt, this came after France’s Crédit Agricole acquired France’s Crédit Lyonnais. In February 2006, Crédit Agricole Group along with MMID acquired 74.6% of Egyptian American Bank (EAB).

May-08

Significant cost-to-income ratio, but benefited from provision reversals & tax losses carried forward: 1H08 unraveled a cost-to-income ratio of 58.8% (or 48.6% excluding one-off charges) vs. 48.2% in 1H07. We expect the ratio to start improving starting 2009 onwards. Counteracting this, CAE had been benefiting from some positive surprises in its P&L during 2H07 including provision reversals and nil tax charges triggered by tax losses carried forward.

Crédit Agricole Indosuez-Egypt started operations in 2001 when it acquired, along with El Mansour & El Maghraby for Investment & Development (MMID) 93.3% of Crédit International d’Egypte (CIE), previously owned by Crédit Commercial de France (CCF) and the National Bank of Egypt (NBE).

Mar-08

Loan growth opportunities for a highly liquid bank: CAE is well positioned for loan growth leveraging on a high CAR ratio of 19.3% and a strong liquidity position through a loans-todeposits ratio of only 35%. Its loans portfolio exhibited a strong expansion of 45% in 1H08. CAE targets full-fledged loan growth across all LoBs.

[CIEB.CA; CIEB EY] LE 10.31 287.0 mn LE 2,959.0 mn LE 28.48/ LE 8.94 0.29 mn / LE 6.7 mn

COMPANY SYNOPSIS

Jan-08

Gifted good; capturing the fundamentals: 1H08 witnessed tapering growth largely due to a one-off expense related to the restructuring cost of an interest rate SWAP transaction worth LE 48 mn. Yet, we believe CAE enjoys the necessary fundamentals to have a growth story. Apart from its high profitability ratios, CAE enjoys a reasonable asset quality including an NPLs/loans ratio of 6.5%, a provisions coverage ratio of 91%, and a CAR of 19.3% as of 1H08. With one-off costs behind, we believe CAE will start showing an improvement in 2009.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Feb-08

Crédit Agricole Egypt (CAE) is a successful medium sized Egyptian bank with an asset base of LE 22 bn and a NIM of 2.7%, generating a ROAE of 26% vs. a market average of 16%, amid concerns of a global recession. Despite global liquidity issues, CAE is highly liquid with a loansto-deposits ratio of only 35% which it plans to expand in an under-penetrated and profitable market. The bank’s stock trades at projected 2009 PER and PBV of 4.9x and 1.5x, respectively. Our DCF-based 12-month fair value implies a 49% upside potential, therefore we rate it BUY with MODERATE RISK.

SHARE DATA

Dec-07

Cheap rating as growth re-ignites

BUY | MODERATE RISK

November 11, 2008 EGYPT | BANKS | CAE Balance Sheet (In LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Assets Cash & Due from Banks Interbank Assets T-Bills & Government Securities Net Trading Investments Available for Sale Investments Net Loans & Advances Held-to-Maturity Investments Investments in Subsidiaries Accrued Income & Other Assets Net Fixed Assets Good Will Total Assets

1,703.9 10,700.1 3,421.1 223.8 46.1 4,662.3 232.6 25.3 334.7 145.7 0.0 21,495.6

2,691.4 10,722.5 2,438.5 301.7 88.0 7,471.1 263.6 25.7 364.7 166.8 0.0 24,534.1

3,076.0 11,191.1 3,155.7 339.6 107.0 9,432.2 321.2 25.7 417.6 196.5 0.0 28,262.4

3,523.0 12,053.9 3,850.0 382.2 130.0 11,574.4 371.0 25.7 479.0 230.9 0.0 32,620.2

Liabilities and Shareholders' Equity Interbank Liabilities Customer Deposits Accrued Expenses & Other Liabilities Dividends Payable Provisions Medium-/Long-Term Loans Debt Securities Total Liabilities Paid-in Capital Reserves Retained Earnings

284.9 18,735.2 434.7 336.8 130.8 0.0 0.0 19,922.4 1,148.0 162.2 262.9

355.0 21,376.7 562.5 337.2 138.3 0.0 0.0 22,769.7 1,148.0 353.5 262.9

370.5 24,756.3 618.9 416.2 147.7 0.0 0.0 26,309.6 1,148.0 541.9 262.9

399.1 28,720.6 689.1 497.1 157.4 0.0 0.0 30,463.3 1,148.0 746.0 262.9

Tier I Capital Tier II Capital

1,573.2 0.0

1,764.4 0.0

1,952.8 0.0

2,156.9 0.0

Total Shareholders' Equity Total Liabilities & Shareholders' Equity

1,573.2 21,495.6

1,764.4 24,534.1

1,952.8 28,262.4

2,156.9 32,620.2

Contingent Liabilities

16,363.6

10,581.6

12,862.0

15,633.9

Total Footing

37,859.2

35,115.7

41,124.5

48,254.1

Income Statement (In LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Total Interest Income Interest Paid to Clients & Banks Net Interest Income (NII)

1,320.7 811.7 509.1

1,572.6 971.4 601.2

1,820.5 1,102.7 717.8

2,093.5 1,245.3 848.3

-57.4 566.5 196.1 50.2 77.1 85.7 409.0 918.1 975.6 449.0 3.2 452.2 523.4 0.0 523.4 0.5 523.9 0.0 523.9

-3.2 604.4 229.3 9.2 144.0 74.9 457.3 1,058.5 1,061.7 494.5 36.9 531.4 530.4 2.0 528.4 0.1 528.4 50.2 478.2

23.0 694.8 266.5 10.1 173.2 100.5 550.3 1,268.2 1,245.1 556.4 2.7 559.2 686.0 81.4 604.6 0.0 604.6 57.4 547.1

40.3 808.0 306.5 11.1 199.2 107.1 623.9 1,472.2 1,431.9 630.7 2.9 633.6 798.3 97.1 701.2 0.0 701.2 66.6 634.6

Provisions Net Interest Income AP Fees and Commissions Income Investment Income Foreign Exchange Income Other Incomes Non-Interest Income Operating Income (BP) Operating Income (AP) G&A Expenses and Depreciation Other Expenses Non-Interest Expense Net Operating Income Taxation NPAT Unusual Items NPAUI Less: Non-Appropriation Items Net Attributable Income (NAI)

114

Profitability & Efficiency Ratios

Dec-07

Dec-08

Dec-09

Dec-10

Net Interest Margin (NIM) RoAA RoAE Cost/Income Earning Assets / Total Assets

2.99% 2.81% 35.18% 49.25% 89.84%

2.90% 2.30% 31.67% 50.20% 86.86%

3.05% 2.29% 32.53% 44.09% 86.94%

3.12% 2.30% 34.13% 43.04% 87.02%

Productivity & Asset Quality Ratios

Dec-07

Dec-08

Dec-09

Dec-10

Net Loans / Customer Deposits Interbank Ratio Liquid Assets / Total Deposits Assets Utilization Capitalization Ratio NPLs / Total Loans Provision Coverage Ratio

24.89% 37.6 85.91% 9.29% 7.32% 9.00% 101.0%

34.95% 30.2 75.98% 8.82% 7.19% 6.16% 94.6%

38.10% 30.2 72.18% 8.98% 6.91% 4.76% 97.2%

40.30% 30.2 69.42% 8.93% 6.61% 3.96% 99.0%

Growth & Market Ratios

Dec-07

Dec-08

Dec-09

Dec-10

26.2% 15.8% 2.11 4.9x 1.25 12% 6.80 1.5x

22.7% 16.0% 2.44 4.2x 1.50 15% 7.52 1.4x

Net Loans Growth 27.9% 60.2% Customer Deposits Growth 36.5% 14.1% EPS (LE) * 1.83 1.84 P/E 5.6x 5.6x DPS (LE) 1.00 1.00 Dividend Yield 10% 10% Retroactive BV/Share (LE) 5.48 6.15 P/BV 1.9x 1.7x * EPS based on NPAUI ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Source: CAE and CICR forecasts

November 11, 2008 EGYPT | FOOD & BEVERAGES

12M FAIR VALUE | LE 32.8

DELTA SUGAR Sugar beet leader taps the bio-fuel market

Delta Sugar (SUGR) is the local market leader in sugar beet manufacturing. The company managed over the last three years to operate above 100% utilization rate, while maintaining a low finished goods inventory level at yearends. With a global market that started to use agricultural crops for the production of bio-fuel, SUGR is conducting feasibility studies for the establishment of an ethanol unit to start operations in 2010. We estimate said new revenue stream directed to exports will add 3% increase to our DCF 12-month fair value to LE 32.8/share, which implies a 49% upside potential, hence we rate it a BUY at LOW RISK. An ongoing study for the establishment of an ethanol unit with an initial capex of US$15 mn, a new revenue stream directed to the export market. With rising oil prices and the global trend towards bio-fuel usage, SUGR is conducting feasibility studies for the establishment of an ethanol unit located in its current factory. According to its recent study, the unit will start operations by 2010 with an initial production capacity of 10k tons of ethanol manufactured from molasses and an initial investment cost of US$15 mn, entirely financed from the shareholders' equity. Investment update: SUGR has currently frozen its expansion for the establishment of a new sugar beet factory in Sharkia as the company did not obtain the regulatory approvals for the required land. Said freeze will jeopardize SUGR's market share in view of the entry of new capacities, namely Nubaria Sugar - 30% owned by SUGR - which started operations in 2008, Dakahlia Sugar's expansion of a second production line, and the Greenfield Nile Sugar starting in 2010.

BUY | LOW RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

SUGR.CA; SUGR EY LE 22.00 98.7 mn LE 2,170.3 mn LE 64.7/ LE 13.11 0.18 mn / LE 7.08 mn

COMPANY SYNOPSIS Delta Sugar was established in 1978 as an Egyptian joint stock company under the provision of investment law No. 230 of 1989 amended by Investment Guarantees and Incentives Law No. 8 of 1997 for the manufacturing of sugar beet and its byproducts namely molasses and fodder. SUGR contracts with farmers during the last quarter of the year for the quantity supplied of beet as it does not own cultivated lands and starts production from February to June, During its off-season period extending from July to December, SUGR refines raw sugar for others in exchange of a fee. SUGR operates one factory located in Kafr El-Sheikh comprising of two production lines with a combined annual production capacity of 245K tons of sugar beet, 100K tons of molasses and 100K tons of fodder. The company is the second key player in the Egyptian sugar market occupying 19% market share in 2007 following Sugar and Integrated Industries Co. (SIIC) - the sole sugar cane producer-while occupying the lion's share in sugar beet manufacturing with a market share of 48% in 2007. SUGR's authorized capital is LE 1 bn and an issued and paid-in capital of LE 493,252,500 distributed over 98,650,500 shares at a par value LE 5/share.

SHAREHOLDER STRUCTURE Sugar & Integrated Industries C Misr Insurance Company Public Banks Egyptian Endowment Auth. KIMA Free Float Total

55.7% 13.0% 9.6% 6.4% 6.3% 9.1% 100.0%

Growth drivers: As sugar is a strategic commodity with an inelastic demand, SUGR's revenues will grow at a 4-year CAGR of 14% over 2008-2012 with sugar beet sales leading the lion's share contributing with an average 72% of the sales mix.

115

STOCK PERFORMANCE | 52 WEEKS Volume

SUGR

CASE 30 - rebased mn shares

LE

70 60 50 40 30 20 10

Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

Apr-08

May-08

Mar-08

Jan-08

Feb-08

0 Dec-07

Valuation and recommendation: SUGR stock is traded at 8.9x expected 2009 earnings compared to a peer average of 10.2x. In our DCF, we used a WACC of 14.5%, suggesting a 49% upside potential to LE 32.8/share. This valuation takes into account the establishment of the ethanol unit which would add 3% upside potential to our valuation. Accordingly, we initiate coverage on the stock with a BUY at LOW RISK.

MIRETTE MOHAMED GHOZZI [email protected]

Nov-07

Risks: SUGR has encountered a harsh 2008 season due to the shortage of beet crop as farmers converted to wheat cultivation, enjoying a higher procurement price. Hence, sugar beet companies raised the beet procurement price for the following season, implying a 38% increase in beet costs per 1 ton of sugar. Said increase will be partially passed on through selling prices with the other part absorbed by the company, pressuring SUGR's margins downward.

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 -

November 11, 2008 EGYPT | FOOD & BEVERAGES | DELTA SUGAR Balance Sheet (LE mn)

Dec-07 A

Dec-08 F

Dec-09 F

Dec-10 F

Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets

310.0 3.1 143.1 3.6 0.0 41.4 501.2 481.6 235.4 0.0 0.0 0.0 1,218.1

427.1 3.1 147.6 10.4 0.0 41.4 629.5 466.1 240.4 0.0 0.0 0.0 1,335.9

443.5 4.2 178.3 17.1 0.0 41.4 684.5 510.8 240.4 0.0 0.0 0.0 1,435.6

520.7 4.4 187.7 18.0 0.0 41.4 772.2 527.4 240.4 0.0 0.0 0.0 1,539.9

Liabilities & Shareholders' Equity Short-Term Debt Current Portion of LT Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liab. Total liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity

0.0 0.0 4.0 0.0 64.0 0.0 171.1 91.8 330.9 0.0 0.0 330.9 15.0 35.5 0.0 836.7 1,218.1

0.0 0.0 4.4 0.0 72.1 0.0 180.5 91.8 348.8 0.0 0.0 348.8 24.8 65.5 0.0 896.9 1,335.9

0.0 0.0 7.2 0.0 98.2 0.0 183.1 91.8 380.3 0.0 0.0 380.3 31.5 65.9 0.0 957.9 1,435.6

0.0 0.0 7.6 0.0 104.8 0.0 203.4 91.8 407.6 0.0 0.0 407.6 40.2 66.4 0.0 1,025.7 1,539.9

Dec-07 A

Dec-08 F

Dec-09 F

Dec-10 F

1,075.5 (630.8) 444.7 (13.2) 431.5 (33.1) 398.4 (10.4) (0.4) 5.7 4.0 8.7 406.0 (85.5) 320.5 0.0 0.3 320.8

909.9 (544.6) 365.3 (11.0) 354.4 (33.9) 320.5 (4.3) (30.0) 12.0 4.0 8.7 310.9 (72.0) 238.9 0.0 1.8 240.7

1,236.5 (892.9) 343.6 (15.0) 328.6 (35.4) 293.3 (4.3) (0.4) 12.3 4.0 8.7 313.6 (69.5) 244.1 0.0 0.0 244.1

1,320.2 (940.1) 380.0 (16.0) 364.0 (36.7) 327.4 (4.3) (0.5) 14.6 4.0 8.7 349.9 (78.7) 271.2 0.0 0.0 271.2

Income Statement (LE mn) Revenues COGS Gross Profits SG&A EBITDA Dep. & Amort. EBIT Interest Expense Provisions Interest Income Investment Income Net Other Non-Operating Inc./(Exp.) EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

116

Cash Flow (LE mn) NOPAT Dep. & Amor. COPAT WI Change Other Current Items CF After Current Oper. Financing Payments Cash Before LT. Use Net Plant Change FCFF Others CF Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

Dec-07 A 312.9 33.1 346.0 (4.3) 16.6 358.3 (36.2) 322.1 (17.9) 323.8 (16.1) 288.0 0.0 (22.7) (37.9) 14.9 (69.5) 172.9

Dec-08 F 248.4 33.9 282.3 (2.7) 0.0 279.6 (4.3) 275.3 (17.1) 262.5 (9.7) 248.5 (0.0) 0.0 0.0 39.8 (171.1) 117.1

Dec-09 F 223.8 35.4 259.2 (9.6) 0.0 249.5 (4.3) 245.3 (80.1) 169.4 24.6 189.8 0.0 0.0 0.0 7.2 (180.5) 16.4

Dec-10 F 248.7 36.7 285.4 (3.5) 0.0 281.8 (4.3) 277.6 (53.3) 228.6 26.8 251.1 0.0 0.0 0.0 9.1 (183.1) 77.2

Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales Net Debt/EBITDA Debt/ Tangible Equity Current Ratio

Dec-07 A 38.3% 29.8% 26.3% 35.3% 41.3% 40.1% 0.9x 7.6% (0.7x) 0.4x 1.5x

Dec-08 F 26.8% 26.5% 18.0% 25.2% 40.1% 38.9% 0.7x 9.3% (1.2x) 0.4x 1.8x

Dec-09 F 25.5% 19.7% 17.0% 21.2% 27.8% 26.6% 0.9x 7.6% (1.3x) 0.4x 1.8x

Dec-10 F 26.4% 20.5% 17.6% 22.0% 28.8% 27.6% 0.9x 7.4% (1.4x) 0.4x 1.9x

Per-Share Ratios (LE) Share Price Recent no. of shares (000) EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Dec-07 A 22.00 98,651 3.25 1.35 10.90 8.48 3.51 3.28 4.37 18.86

Dec-08 F 22.00 98,651 2.44 1.37 9.22 9.09 2.86 2.66 3.59 17.67

Dec-09 F 22.00 98,651 2.47 1.39 12.53 9.71 2.63 1.72 3.33 17.50

Dec-10 F 22.00 98,651 2.75 1.55 13.38 10.40 2.89 2.32 3.69 16.72

Multiples Dec-07 A P/E 6.8x Div Yield % 6.1% P/ Revenue 2.0x EV/ Revenues 1.7x P/ COPAT 6.3x EV/ COPAT 5.4x P/ FCFF 6.7x EV/ FCFF 5.7x P/ EBITDA 5.0x EV/ EBITDA 4.3x P/ BV 2.6x Source: Company reports and CICR estimates.

Dec-08 F 9.0x 6.2% 2.4x 1.9x 7.7x 6.2x 8.3x 6.6x 6.1x 4.9x 2.4x

Dec-09 F 8.9x 6.3% 1.8x 1.4x 8.4x 6.7x 12.8x 10.2x 6.6x 5.3x 2.3x

Dec-10 F 8.0x 7.0% 1.6x 1.2x 7.6x 5.8x 9.5x 7.2x 6.0x 4.5x 2.1x

November 11, 2008 EGYPT | FOOD & BEVERAGES

12M FAIR VALUE | LE 306

EASTERN COMPANY (EC)

117

52.8% 5.3% 4.7% 37.2%

Holding Co. for Chemical Ind. Empl. Shareholders' Assoc. Public sector Free Float

INGY EL-DIWANY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume 600

EAST

CASE 30 - rebased mn shares

LE

500

0.8 0.7 0.6 0.5

400 300

0.4 0.3 0.2

200 100

0.1 Oct-08

Sep-08

Jul-08

Jun-08

0 Apr-08

Valuation and recommendation: We lowered our DCF valuation by 40% to LE 306/share vs. our previous 12-month fair value of LE 508/share dated November 28, 2007. This mainly came as a result of the 300-bps increase in risk-free rate and market risk premium apiece used in our DCF model in addition to the inclusion of debt and lease needed to finance the expansions. Our 12 month value under the sale of land scenario is LE 386/share. EC is traded at 7x 2008/09 earnings vs. a peer average of 12.6x, a 45% discount.

SHAREHOLDER STRUCTURE

Mar-08

An acquisition target? British American Tobacco (BAT), an international tobacco manufacturer, was said to be interested in Egyptian and Algerian cigarette monopolies as reported early 2008. BAT has effected a few M&A deals in 2008 for Turkish and Scandinavian tobacco companies, executed at an average of 11.3x 2007 EBITDA. We believe there is no intention to sell EC in the short- to medium-term having postponed the establishment of its real estate company - prerequisite to privatization - to manage the sale of its LE 2 bn-worth land plots till relocation is completed.

Eastern Company (EC) is a state monopoly tobacco producer with an 83% local market share for its own branded portfolio and the balance also catered through EC's toll manufacturing for foreign producers like Philip Morris (PM), British American Tobacco (BAT) and International Tobacco and Cigarette Company (ITCC) of Jordan. Its product range includes cigarettes, water pipe tobacco, cigars and minced tobacco. EC operates 20 factories in Giza, Talbeya, Alexandria, Monouf, Tanta, and Assuit. Currently, EC is establishing a new integrated industrial complex in the Sixth of October City over a land with a size of 357 acres. Total estimated investment cost of the said complex is LE 3.2 bn. EC's major raw material is imported tobacco leaf, which represents about 60% of EC's total cost. Forbidden by law from growing tobacco in Egypt, EC imports all its needs of tobacco leaves from Zimbabwe, Malawi, China, India, Europe and Brazil. Lately when the COMESA agreement became effective, EC started importing 35% of its leaf requirements from the COMESA region. EC is subject to the volatility in the cultivation environment, price fluctuations of the imported tobacco leaf, in addition to the intensifying exposure to FX risk.

Feb-08

Relocation to a new complex late 2010: Currently, EC is establishing a new industrial complex in the Sixth of October City with an estimated capex of LE 3.2 bn. New production techniques will be fully implemented once the factories are relocated, resulting in higher cost savings. Going forward, we believe demand for tobacco will be sustained, driven mostly by a low health awareness, a growing population, and increasing smoking habits among youth in the 15-35 age bracket, 34% of Egypt’s population.

EAST.CA; ESTC EY LE 217.99 25.0 mn LE 5,449.8 mn LE 530/ LE 177.91 0.02 mn / LE 5.8 mn

COMPANY SYNOPSIS

Jan-08

A defensive producer of a strategic commodity: Cigarettes (a cheap source of pleasure) are considered a strategic commodity in Egypt where a healthy growth potential for the tobacco business is provided even if the economy slows. Given the inelastic demand for its products, we expect top-line to maintain its growth post the recently-announced September price increase of LE 0.25/pack on eight local brands. However, a slight shift from foreign to local brands is anticipated this year in the wake of May 5 measures which applied an average of 22% sales tax on the former versus only 11% on the latter.

Reuters; Bloomberg Recent price as of 5-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Dec-07

Eastern Company (EC) is a state monopoly tobacco producer in Egypt, producing its own brands with an 83% market share. The remaining balance is covered by foreign brands also produced in EC through toll manufacturing for international producers. Owing to the non-cyclical nature of its goods, demand is expected to be maintained in the future. Yet, importing tobacco leaves remains the company's main concern. EC is expected to grow its net income at a 5-year CAGR of 11%. Trading at 7x 2008/09 earnings vs. a peer average of 12.6x, EC is trading at a 45% discount. We reached a 12-month DCF fair value of LE 306, implying a 40% upside potential, hence we reiterate our BUY recommendation at LOW RISK.

SHARE DATA

Nov-07

Back to a defensive company

BUY | LOW RISK

November 11, 2008 EGYPT | FOOD & BEVERAGES | EASTERN COMPANY Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of Long-Term Deb Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity

Income Statement (LE mn) Net Sales COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

118

Jun-08 A

Jun-09 P

Jun-10 P

Jun-11 P

224 36 2,043 0 0 0 2,304 3,288 53 0 49 0 5,694

726 33 2,054 0 0 0 2,814 3,679 53 0 52 0 6,598

746 35 2,085 0 0 0 2,866 4,010 53 0 55 0 6,984

1,080 37 2,151 0 0 0 3,268 4,085 53 0 58 0 7,463

538 0 208 90 9 1,086 24 0 467 2,423 0 0 0 2,423 241 363 0 2,667 5,694

0 120 220 92 10 1,086 372 0 494 2,395 480 0 0 2,875 244 363 0 3,117 6,598

0 120 234 98 10 1,086 389 0 520 2,457 360 0 0 2,817 246 363 0 3,559 6,984

0 120 242 101 11 1,086 443 0 547 2,550 240 0 0 2,790 248 363 0 4,062 7,463

Jun-08 A 3,819 (2,633) 1,186 (76) 1,110 (161) 949 (28) (2) 13 1 44 (44) 932 (181) 751 0 0 751

Jun-09 P 4,041 (2,802) 1,240 (80) 1,160 (161) 999 (48) (2) 13 1 44 (27) 978 (196) 783 0 0 783

Jun-10 P 4,249 (2,969) 1,280 (84) 1,196 (164) 1,032 (72) (2) 14 1 44 (27) 989 (198) 791 0 0 791

Jun-11 P 4,473 (3,062) 1,411 (89) 1,323 (167) 1,155 (58) (2) 14 1 44 (27) 1,127 (225) 901 0 0 901

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

Jun-08 A 1,314 161 1,475 (351) 18 1,142 (28) 1,113 (1,406) (282) 4 (288) 538.4 0 328 (24) (710) (156)

Jun-09 P 803 161 964 7 27 999 (48) 951 (553) 419 27 425 (538.4) 600 39 0 (24) 502

Jun-10 P 834 164 998 (13) 25 1,011 (192) 819 (495) 491 28 353 0.0 0 40 0 (372) 20

Jun-11 P 930 167 1,097 (56) 27 1,068 (178) 891 (242) 799 29 678 0.0 0 45 0 (389) 334

Fact Sheet ROE ROS ROA ROIC Gross Profit Margin EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio

Jun-08 A 28.2% 19.7% 13.2% 34.5% 31.1% 29.1% 0.7 46.4% 2.1 0.9 1.0

Jun-09 P 25.1% 19.4% 11.9% 18.6% 30.7% 28.7% 0.6 43.7% 2.1 0.9 1.2

Jun-10 P 22.2% 18.6% 11.3% 18.0% 30.1% 28.2% 0.6 41.8% 2.0 0.8 1.2

Jun-11 P 22.2% 20.2% 12.1% 18.5% 31.6% 29.6% 0.6 41.0% 1.8 0.7 1.3

Per Share Ratios Share Price Actual No. Of Shares '000 EPS Diluted EPS Div/Share Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Jun-08 A 217.99 25,000 30.1 30.1 14.0 152.8 106.7 59.0 -11.3 44.4 230.6

Jun-09 P 217.99 25,000 31.3 31.3 14.9 161.7 124.7 38.6 16.7 46.4 212.9

Jun-10 P 217.99 25,000 31.6 31.6 15.5 170.0 142.3 39.9 19.6 47.8 207.3

Jun-11 P 217.99 25,000 36.1 36.1 17.7 178.9 162.5 43.9 32.0 52.9 189.2

Multiples P/E Diluted P/E Div Yield % P/ Revenue EV/ Revenues [ EV/ Rev] P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; P = Projected Source: EC and CICR forecasts

Jun-08 A 7.3 7.3 6.4% 1.4 1.5 3.7 3.9 -19.3 -20.4 4.9 5.2 2.0

Jun-09 P 7.0 7.0 6.8% 1.3 1.3 5.7 5.5 13.0 12.7 4.7 4.6 1.7

Jun-10 P 6.9 6.9 7.1% 1.3 1.2 5.5 5.2 11.1 10.6 4.6 4.3 1.5

Jun-11 P 6.0 6.0 8.1% 1.2 1.1 5.0 4.3 6.8 5.9 4.1 3.6 1.3

November 11, 2008 EGYPT | CHEMICALS

12M FAIR VALUE | LE 50.10

EGYPTIAN FINANCIA & INDUSTRIAL CO. (EFIC)

119

EFIC has an authorized capital of LE 700 mn and an issued capital of LE 693 mn, distributed over 69.3 mn shares at a par value of LE 10/share.

SHAREHOLDER STRUCTURE Holding Company Banks Insurance Companies Others Free Float Total

25.3% 12.8% 0.9% 12.0% 49.0% 100.0%

AHMED ABDEL-GHANI [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

EFIC

CASE 30 - rebased mn shares

LE

80 70 60 50

3.0 2.5 2.0

40 30 20 10 0

1.5 1.0 0.5 Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

Valuation and recommendation: Our DCF-based model yielded a 12-month fair value of LE 50.1/share, implying a 68% upside potential. EFIC’s stock is currently traded at 4.5x 2009 expected earnings, a 41% discount to regional peers. Accordingly, we rate the stock a BUY with LOW RISK.

EFIC is the largest producer of phosphate fertilizers in Egypt, dominating around 70% of SSP local market sales volume in 2007. Such a market share takes into account sales from Suez Co. for Fertilizers Production (SCFP), EFIC's 99.88%owned subsidiary.

Apr-08

Growth drivers: While fertilizers consumption should be driven in part by population growth, EFIC's revenue growth should be positively affected by its diversified product mix and the Government of Egypt's plan to increase arable land over the coming few years. Moreover, growing demand for bio-fuels will drive demand for fertilizers as farmers look to improve land productivity and yield. In our opinion, this will be an opportunity for EFIC to take an advantage of, as the company embarks on a strategic plan to grow its exports.

ii.

Single super phosphate (SSP) in two forms powdered (PSSP) and granulated (GSSP) Sulfuric acid.

May-08

A new fertilizers project: With six other companies, EFIC signed a memorandum of understanding (MoU) to establish a new plant - Egyphos - to produce phosphate fertilizers in Egypt. The new plant will be established in the city of Edfu in two phases, the first of which has a total investment cost of US$680 mn (split US$300 mn and US$380 mn in equity and debt, respectively) and an authorized capital of US$1.5 bn.

i.

Mar-08

Diversifying the product mix: EFIC will start the production of di-calcium phosphate in November 2008 with a total capacity of 20k tpa, split evenly between the local and export markets.

Egyptian Financial & Industrial Company (EFIC) is a joint-stock company founded in 1929. EFIC's main activities are producing and trading phosphate fertilizers and chemicals. It produces two main products:

Jan-08

New factory expansion: In order to increase its capacity, EFIC acquired a 256k-sqm land plot in Ain Al-Sokhna through its wholly-owned subsidiary Suez Company for Fertilizers Production (SCFP) for LE 38.4 mn.

EFIC.CA; EFIC EY LE 29.79 69.3 mn LE 2,064.4 mn LE 75/ LE 21.08 0.5 mn / LE 23.29 mn

COMPANY SYNOPSIS

Feb-08

Locking sulfur cost: Global sulfur prices have decreased by 24.7% to US$550/ton in September 2008 vs. US$730 in July 2008. However , EFIC will not benefit from said decline having locked its sulfur requirements till June 2009 at US$700/ton. We believe that EFIC exports’ sales (around 30% of sales) will be slightly affected. On the local front, such a decrease in sulfur prices will not affect EFIC’s local sales, thanks to its 70% market share of SSP and no price caps levied by the government on phosphate fertilizers. Thus, we believe that local EBITDA margin will balance the export EBITDA decrease.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Dec-07

EFIC is a successful fertilizers company, specialized mainly in the production of phosphate fertilizers with a 70% local market share in SSP. In view of concerns over global recession, we believe slower sales growth would mostly be driven by selling prices rather than volumes, thanks to demand inelasticity of fertilizers. Moreover, Egypt is the largest country in the Middle East producing high-quality SSP, unlike other countries in the region which produce mainly other types of phosphate fertilizers. Hence, we do not expect demand for EFIC’s products to falter. Our DCF-based 12-month fair value indicates a 68% upside potential to LE 50.1, hence we rate the stock a BUY with LOW RISK.

SHARE DATA

Nov-07

Leading the way through expansion

BUY | LOW RISK

November 11, 2008 EGYPT | CHEMICALS | EFIC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of LTD Accounts Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liab. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Net worth Income Statement (LE mn) Revenues COGS Gross Profits SG&A EBITDA Dep. & Amort. EBIT Interest Expense Provisions Interest & Investment Income Other Non-Operating Inc. Other Non-Operating Exp. EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

120

Dec-07A

Dec-08F

Dec-09F

Dec-10F

69.1 48.0 110.5 3.1 56.2 286.9 923.4 179.2 1.5 0.0 1,390.9

127.3 107.2 262.7 7.5 56.2 560.8 1,025.4 195.7 1.5 0.0 1,783.4

216.2 183.6 436.6 12.4 56.2 905.0 1,036.8 213.8 1.5 0.0 2,157.1

246.1 209.2 489.2 13.9 56.2 1,014.5 1,045.4 233.5 1.5 0.0 2,294.9

295.6 60.3 74.5 84.4 25.0 539.8 175.7 0.0 715.5 10.5 36.0 0.1 628.7 1,390.9

515.1 47.2 177.1 132.0 25.0 896.3 130.9 0.0 1,027.2 10.5 36.0 0.1 709.6 1,783.4

492.9 44.8 294.4 285.3 25.0 1,142.4 83.5 0.0 1,225.9 10.5 36.0 0.1 884.5 2,157.1

366.7 44.8 329.8 458.2 25.0 1,224.5 38.7 0.0 1,263.2 10.5 36.0 0.1 985.1 2,294.9

Dec-07A 525.0 (335.6) 189.4 (25.1) 164.4 (15.9) 148.4 (31.5) 0.0 17.1 1.4 0.0 135.6 (19.3) 116.3 (0.0) 0.1 116.4

Dec-08F 1,157.0 (800.2) 356.8 (38.8) 318.0 (21.5) 296.5 (58.6) 0.0 19.2 1.4 0.0 258.5 (45.7) 212.9 0.0 0.0 212.9

Dec-09F 1,965.2 (1,326.4) 638.8 (46.9) 591.9 (44.3) 547.6 (52.8) 0.0 23.3 1.4 0.0 519.5 (59.3) 460.2 0.0 0.0 460.2

Dec-10F 2,237.2 (1,486.1) 751.1 (51.8) 699.4 (66.8) 632.6 (38.7) 0.0 26.7 1.4 0.0 622.1 (63.3) 558.7 0.0 0.0 558.7

Cash Flow NOPAT Dep. & Amor. COPAT WI Change Other Current Items CF After Current Oper. Financing Payments Cash Before LT. Use Net Plant Change FCFF Others CF Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

Dec-07A 129.2 15.9 145.1 14.5 3.0 162.6 (63.5) 99.0 (93.5) 66.1 0.1 5.7 (0.5) 18.5 (19.3) 0.2 (52.9) (48.3)

Dec-08F 250.8 21.5 272.3 (113.1) 0.0 159.2 (118.9) 40.3 (123.5) 35.7 4.1 (79.1) 219.4 2.3 (25.5) 0.0 (58.9) 58.2

Dec-09F 488.3 44.3 532.6 (138.0) 0.0 394.7 (100.0) 294.7 (55.7) 338.9 6.7 245.6 (22.2) (2.5) (55.2) 0.0 (76.8) 88.9

Dec-10F 569.3 66.8 636.1 (44.2) 0.0 591.9 (83.5) 508.3 (75.4) 516.5 8.5 441.4 (126.1) 0.0 (67.0) 0.0 (218.3) 29.9

Fact Sheet ROE ROS ROA ROIC Gross margin EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio

Dec-07A 18.5% 22.1% 8.4% 10.7% 36.1% 31.3% 0.4 16.6% 2.2 1.1 0.5

Dec-08F 30.0% 18.4% 11.9% 17.3% 30.8% 27.5% 0.6 17.3% 2.5 1.4 0.6

Dec-09F 52.0% 23.4% 21.3% 31.5% 32.5% 30.1% 0.9 17.2% 2.4 1.4 0.8

Dec-10F 56.7% 25.0% 24.3% 38.4% 33.6% 31.3% 1.0 17.1% 2.3 1.3 0.8

Per-Share Ratios Share Price No. Of Shares '000 EPS DPS Revenues/Share BV/Share

Dec-07A 29.79 69,302 1.68 5.00 7.58 9.07

Dec-08F 29.79 69,302 3.07 1.54 16.69 10.24

Dec-09F 29.79 69,302 6.64 3.32 28.36 12.76

Dec-10F 29.79 69,302 8.06 5.64 32.28 14.21

2.09 0.95 2.37 36.47

3.93 0.51 4.59 37.95

7.69 4.89 8.54 35.63

9.18 7.45 10.09 32.74

Dec-07A 17.7 16.8% 3.9 4.8 14.2 17.4

Dec-08F 9.7 5.2% 1.8 2.3 7.6 9.7

Dec-09F 4.5 11.1% 1.1 1.3 3.9 4.6

Dec-10F 3.7 18.9% 0.9 1.0 3.2 3.6

P/ FCFF 31.2 EV/ FCFF 38.2 P/ EBITDA 12.6 EV/ EBITDA 15.4 P/ BV 3.3 Source: Company reports and CICR estimates.

57.9 73.8 6.5 8.3 2.9

6.1 7.3 3.5 4.2 2.3

4.0 4.4 3.0 3.2 2.1

Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT

November 11, 2008 EGYPT | PHARMACEUTICALS

12M FAIR VALUE | LE 43.68

EIPICO Expansion underway

EIPICO is a successful generic pharmaceutical company. It is a low-cost producer in a sector of insensitive price demand, and is cash rich benefiting from high interest rates. In a highly volatile market amid concerns of a global recession, this company is capable of producing a steady double-digit growth, and an unrevealed ROE of 23% versus a WACC of 17.10%. With a PER of just 6x 2009 earnings it is undemanding to expect this to expand to 8x. Our DCF led target price indicates some 78% upside to LE 43.68, and our rating therefore is BUY at LOW RISK. Cash-rich, debt-free: EIPICO should benefit in a high interest environment. We also think that EIPICO's growth is robust even if the economy slows, thanks to the inelastic demand for its products. Hence, we do not expect demand for its products to falter; not least that its products are already competitively priced versus private sector peers.

BUY | LOW RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

PHAR.CA;PHAR EY LE 24.50 72.1 mn LE 1,766.5 mn LE 40.95/ LE 18 0.07 mn / LE 2.32 mn

COMPANY SYNOPSIS

EIPICO was established in 1980 but started production in 1985. Currently, the company's product mix is comprised of 247 products, with a generic/under-licensed mix of 80%/20%, respectively. The largest local private-sector pharmaceuticals producer, EIPICO’s market share hovers around 8%. It also exports to about 64 countries. Currently, EIPICO is in the process of expanding its factory. EIPICO has two subsidiaries: the first is the Egyptian International Ampoule Manufacturing Company (EIACO), a 99.7% ownership, and the second is Saudi Arabia-based Universal, a 30% ownership. EIPICO has an authorized capital of LE 850 mn and an issued capital of LE 721 mn, distributed over 72.1 mn shares at a par value of LE 10/share.

New factory expansion to start in 2010 with capex of only LE 80 mn – less than 10% of 2008 revenues: EIPICO's new expansion plans should require around LE 80 mn in capex with target start date in 2010. While management has not revealed which products will be produced in the new extension, we reckon that it will gradually add 30% of incremental revenues starting 2010.

121

43.1% 5.6% 0.4% 0.2% 50.7% 100.0%

AHMED ABDEL-GHANI [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

PHAR

CASE 30 - rebased

Oct-08

Aug-08

Jul-08

Jun-08

Apr-08

May-08

Mar-08

Jan-08

Sep-08

mn shares

LE

45 40 35 30 25 20 15 10 5 0

Feb-08

Valuation and recommendation: The stock is traded at a PER of 6x 2009 expected earnings with a current dividend yield of 7%, which we think attractive for defensive 5-year earnings CAGR of 14%. Shorter-term valuation techniques imply it is undemanding to see the price rise 30% to a 8x 2009 expected earnings, and our DCF-based fair value indicates an 78% upside to LE 43.68/share. Both the shorter-term and longer-term valuations are significantly above the 17.10% WACC we use. This valuation does not take into account its 30%-owned Saudi operation, which could indicate further upside potential when sufficient information is available. Accordingly we rate this stock a BUY at LOW RISK.

ACDIMA Medical Union Investment Banks & Insurance Companies Others Free Float Total

Dec-07

Growth drivers: While drug consumption should be driven in part by population growth, an increasing health awareness and Egypt's new comprehensive medical insurance program should reflect positively on EIPICO's revenues. Moreover , the inauguration of Technological Center for Pharmaceutical Industries & Cosmetics (TCPIC), will enhance drug companies to improve their research and development.

SHAREHOLDER STRUCTURE

Nov-07

Investments update: EIPICO has discontinued its 98.6%owned subsidiary EIPICO Tech, which was mainly established to develop research of incurable diseases (such as AIDS and cancer), due to its high investment cost required. Meanwhile, EIACO started production in July 2007 with an authorized capital of LE 200 mn and a paid-in capital of LE 80 mn. EIACO's current capacity is 100 mn ampoules p.a. and is expected to reach 800 mn ampoules p.a. over the next 3-4 years

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 -

November 11, 2008 EGYPT | PHARMACEUTICALS | EIPICO Balance Sheet (LE Millions) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to customers Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders Equity Total Liab. & Shareholders' Eq. Income Statement (LE Millions) Revenues COGS (incl. marketing expenses) Gross Profit G&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses Previous year gain/loss EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

122

Dec-07 A

Dec-08 F

Dec-09 F

Dec-10 F

416.9 227.9 338.8 0.0 0.0 0.0 983.5 339.4 39.3 0.0 27.5 217.4 1,607.1

483.3 249.0 354.1 0.0 0.0 0.0 1,086.4 413.9 39.3 0.0 27.5 198.9 1,765.9

582.8 281.0 395.1 0.0 0.0 0.0 1,259.0 436.8 39.3 0.0 27.5 180.4 1,942.9

709.0 323.2 449.2 0.0 0.0 0.0 1,481.3 437.7 39.3 0.0 27.5 161.9 2,147.7

0.0 0.0 26.2 0.0 0.0 0.0 137.4 73.7 237.2 0.0 0.0 0.0 237.2 73.8 227.4 0.2 1,068.4 1,607.1

0.0 0.0 24.3 0.0 0.0 0.0 162.0 73.7 260.0 0.0 0.0 0.0 260.0 73.8 255.5 0.2 1,176.3 1,765.9

0.0 0.0 26.9 0.0 0.0 0.0 183.2 73.7 283.8 0.0 0.0 0.0 283.8 73.8 286.6 0.2 1,298.5 1,942.9

0.0 0.0 30.3 0.0 0.0 0.0 209.7 73.7 313.7 0.0 0.0 0.0 313.7 73.8 321.7 0.2 1,438.2 2,147.7

Dec-07 A 850.2 (464.1) 386.1 (21.6) 364.4 (53.1) 311.3 (2.2) (25.2) 16.5 0.0 0.0 0.0 (5.0) 295.4 (63.5) 231.9 0.2 (0.0) 232.2

Dec-08 F 935.3 (505.0) 430.2 (25.3) 405.0 (53.9) 351.1 (2.2) (28.1) 21.2 0.0 0.0 0.0 0.0 342.0 (73.9) 268.1 0.0 0.0 268.1

Dec-09 F 1,035.8 (557.3) 478.5 (28.0) 450.6 (56.2) 394.4 (2.2) (31.1) 22.6 0.0 0.0 0.0 0.0 383.7 (83.6) 300.1 0.0 0.0 300.1

Dec-10 F 1,171.5 (627.9) 543.6 (31.6) 511.9 (60.8) 451.1 (2.2) (35.1) 23.0 0.0 0.0 0.0 0.0 436.8 (95.7) 341.1 0.0 0.0 341.1

Cash Flow (LE Millions) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

Dec-07 A 247.8 53.1 300.9 (93.6) (10.9) 196.4 (2.2) 194.2 (68.3) 139.0 48.1 174.0 0.0 0.0 (22.4) (10.2) (100.7) 40.7

Dec-08 F 277.1 53.9 331.0 (38.2) 0.0 292.8 (0.4) 292.4 (109.9) 182.9 21.3 203.8 0.0 0.0 0.0 0.0 (137.4) 66.4

Dec-09 F 310.7 56.2 367.0 (70.5) 0.0 296.5 3.0 299.5 (60.6) 235.9 22.7 261.5 0.0 0.0 0.0 0.0 (162.0) 99.5

Dec-10 F 355.4 60.8 416.2 (92.8) 0.0 323.4 6.1 329.5 (43.3) 280.2 23.1 309.3 0.0 0.0 0.0 0.0 (183.2) 126.2

Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Tangible Networth Current Ratio

Dec-07 A 21.7% 27.3% 14.4% 21.5% 45.4% 42.9% 0.5 63.6% 1.9 0.3 4.1

Dec-08 F 22.8% 28.7% 15.2% 21.2% 46.0% 43.3% 0.5 61.9% 1.8 0.3 4.2

Dec-09 F 23.1% 29.0% 15.4% 21.0% 46.2% 43.5% 0.5 62.7% 1.7 0.3 4.4

Dec-10 F 23.7% 29.1% 15.9% 21.3% 46.4% 43.7% 0.5 63.3% 1.7 0.2 4.7

Per Share Ratios Share Price No. Of Shares (mn) EPS Div/Share Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Dec-07 A 24.50 72.1 3.22 1.70 11.79 14.81 4.17 1.93 5.05 18.72

Dec-08 F 24.50 72.1 3.72 2.25 12.97 16.31 4.59 2.54 5.61 17.80

Dec-09 F 24.50 72.1 4.16 2.54 14.36 18.00 5.09 3.27 6.25 16.42

Dec-10 F 24.50 72.1 4.73 2.91 16.24 19.94 5.77 3.88 7.10 14.67

Multiples Dec-07 A P/E 7.6 Div Yield % 7% P/ Revenue 2.1 EV/ Revenues 1.6 EV/ FCFF 9.7 P/ EBITDA 4.8 EV/ EBITDA 3.7 P/ BV 1.7 Source: EIPICO and CICR estimates

Dec-08 F 6.6 9% 1.9 1.4 7.0 4.4 3.2 1.5

Dec-09 F 5.9 10% 1.7 1.1 5.0 3.9 2.6 1.4

Dec-10 F 5.2 12% 1.5 0.9 3.8 3.5 2.1 1.2

November 11, 2008 EGYPT | STEEL

12M FAIR VALUE | LE 1,502

EZZ AL-DEKHEILA STEEL - ALEXANDRIA (EZDK)

EZDK is the largest fully integrated steel factory in Egypt that produces both long and flat products with a total capacity of 2.8 mtpa, 64% of which is for long products with flat products making up the balance.

Ezz Steel owns a majority stake in EZDK amounting to 53.24%, which provided synergies for the whole group, created a strong entity that is capable of competing both locally and internationally.

SHAREHOLDER STRUCTURE Ezz Steel National Investment Bank Misr Insurance Co. General Petro. Association Banks, Ins Co. and Others Free Float

Industry dynamics: Because of international competition, the expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with lower bottom line figures.

* Please refer to our industry section.

123

STOCK PERFORMANCE | 52 WEEKS Volume

IRAX

CASE 30 - rebased mn shares

LE

1.4 1.2 1.0 0.8 0.6 0.4 0.2

Oct-08

Sep-08

Jul-08

Jan-08

Feb-08

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Nov-07

Valuation and recommendation: Our DCF model - using a perpetual growth rate of 1% and a WACC of 18% - yielded a 12-month fair value of LE 1502/share, implying a 68% upside potential. Commodity plays are currently out of favor, but EZDK is part of the steel quasi-monopoly, and maintains a stable margin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiterate our BUY recommendation on EZDK with a MODERATE RISK rating.

HANY MOHAMED SAMY, CFM [email protected]

Dec-07

Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on EZDK, where 15% of production was exported in 1H08.

53.2% 10.5% 7.8% 4.7% 18.6% 5.2%

Aug-08

Growth drivers: Given Egypt's demographics, local construction activity will always be the main growth driver for EZDK. Yet, we expect the current slowdown in real-estate activity to result in a mild slowdown in the construction activity which should take place over the coming years to fulfill the currentlycontracted real-estate projects. On the global front, we expect a slowdown in the industrialization process*, resulting in a lower rate of utilization.

Al-Ezz Dekheila for Steel - Alexandria (EZDK), previously known as Alexandria National Iron & Steel Company (ANSDK), was established in 1982 under the provisions of law no. 43 as a joint venture between Egyptian public sector companies, Nippon Kokan, Kobe Steel & Tomen, and the International Finance Corporation (IFC). EZDK currently operates under law no. 8/1997.

Jun-08

Synergies: EZDK is 53.24% owned by Ezz Steel (ES) in June 2008, resulting in synergies via increasing local market share, a better world ranking, strong product recognition, and a reduction in operational and administrative costs that would enhance financial position.

IRAX.CA; IRAX EY LE 896.23 13.7 mn LE 12,251.5 mn LE 1579.99/ LE 706.02 0.02 mn / LE 22.89 mn

COMPANY SYNOPSIS

Apr-08

Competitive advantage: EZDK is considered the lowest cost producer in Egypt with a gross, EBITDA, and net margins of 40.2%, 37.8%, and 26%, respectively. Said cost advantage comes on the back of: (1) utilizing iron ore as the main input in the production process, (2) a higher production per worker (883 tpa vs. an international average of 588 tpa), and (3) a lower labor cost (US$13/ton in 2006 vs. an international average of US$76/ton).

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

May-08

EZDK is the largest integrated steel plant in Egypt and the lowest cost producer of steel in Egypt and the region, giving the company an edge with the current expected slowdown in global economies. EZDK has a total capacity of 2.8 mtpa of long and flat steel, with no expansion plans. With the current turmoil over the short- to medium-term, we expect EZDK to face a reduction in utilization rates, yet a stable profit margin given the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 68% upside to a 12-month fair value of LE 1,502/share, thus retaining our BUY recommendation at a MODERATE RISK.

SHARE DATA

Mar-08

Company efficiency vs. market deficiency

BUY | MODERATE RISK

November 11, 2008 EGYPT | STEEL | EZDK Balance Sheet (LE mn)

2007A

2008F

2009F

2010F

Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Long-Term Loans Receivalbe Other Non-current Assets Intangibles Total Assets

1,674.6 326.8 1,390.9 0.0 0.0 0.0 3,392 5,664 62.9 6.0 0.0 0.0 9,125

514.3 455.2 2,045.6 0.0 0.0 0.0 3,015 5,835 48.9 5.7 0.0 0.0 8,905

450.7 397.8 1,871.1 0.0 0.0 0.0 2,720 5,907 48.9 5.7 0.0 0.0 8,681

1,189.7 433.5 2,013.7 0.0 0.0 0.0 3,637 5,983 48.9 5.7 0.0 0.0 9,675

Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Royalties Payables / Due to Sister Co. Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

1,353 376.2 427.4 44.7 0.0 579.9 478.8 5.4 22.5 3,288 2,064.7 460.0 5,813 0.0 51.9 0.0 3,260 9,125

783 372.1 628.5 65.8 0.0 140.7 0.0 5.4 22.5 2,018 1,602.4 85.9 3,706 472.6 51.6 0.0 4,675 8,905

724 372.1 574.9 60.2 0.0 140.7 0.0 5.4 22.5 1,900 1,230.3 0.0 3,130 0.0 0.0 0.0 5,551 8,681

1,056 372.1 618.7 64.8 0.0 140.7 0.0 5.4 22.5 2,280 858.3 0.0 3,139 0.0 0.0 0.0 6,536 9,675

Income Statement (LE mn)

2007A

2008F

2009F

2010F

Sales Cost of Sales Gross Profit SG&A EBITDA

8,826 (5,279) 3,547 (208) 3,339 (432) 2,908 (294) 0 109 0 216 (6) 2,931 (635) 2,296 0 0 2,296

12,295 (7,764) 4,531 (246) 4,285 (440) 3,845 (307) 0 30 0 103 0 3,671 (734) 2,937 0 0 2,937

10,774 (7,121) 3,653 (215) 3,437 (452) 2,985 (264) 0 34 0 103 0 2,858 (572) 2,287 0 0 2,287

11,708 (7,643) 4,065 (234) 3,831 (477) 3,354 (275) 0 33 0 103 0 3,215 (643) 2,572 0 0 2,572

Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

Fact Sheet ROE ROS ROA ROIC

2008F

2009F

2010F

2,671.4 440.2 3,111.6 (561.0) 0.0 2,550.6 (683.3) 1,867.3 (611.9) 1,938.7 (226) 1,029.2 (570.1) (90.2) 435.8 472.3 (2,437.3) (1,160,300)

2,413.3 452.4 2,865.7 172.7 0.0 3,038.4 (635.6) 2,402.8 (523.9) 2,514.5 51 1,929.9 (58.9) 0.0 114.3 (524.2) (1,524.8) (63,625)

2,710.8 477.2 3,188.1 (129.9) 0.0 3,058.2 (646.9) 2,411.3 (553.8) 2,504.4 136 1,993.5 332.1 0.0 128.6 0.0 (1,715.1) 739,079

2007A 70.4% 26.0% 25.2% 34.2%

2008F 62.8% 23.9% 33.0% 33.6%

2009F 41.2% 21.2% 26.3% 30.6%

2010F 39.4% 22.0% 26.6% 30.7%

37.8% 1.0 14.1% 2.8 1.8 1.0

34.9% 1.4 14.7% 1.9 0.8 1.5

31.9% 1.2 15.2% 1.6 0.6 1.4

32.7% 1.2 15.1% 1.5 0.5 1.6

Gross Profit Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share Price No. Of Shares (000) EPS DPS Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: EZDK and CICR forecasts

124

2007A 2,431.8 431.7 2,863.5 (17.7) 168.1 3,013.9 (789.3) 2,224.6 (38.0) 2,975.9 419 2,605.6 691.1 (214.5) (816.2) (156.4) (957.7) 1,151,769

2007A

2008F

2009F

2010F

896.23 13,668 22.96 14.25 88.26 N/A 32.60 28.63 29.76 33.39 143.7

896.23 13,668 29.37 19.58 122.94 N/A 46.74 31.11 19.39 42.85 144.9

896.23 13,668 22.87 15.25 107.73 N/A 55.51 28.66 25.14 34.37 141.2

896.23 13,668 25.72 17.15 117.07 N/A 65.36 31.88 25.04 38.31 133.5

2007A 39.0 2% 10.2 1.6 31.3 5.0 30.1 4.8 26.8 4.3 27.5

2008F 30.5 2% 7.3 1.2 28.8 4.7 46.2 7.5 20.9 3.4 19.2

2009F 39.2 2% 8.3 1.3 31.3 4.9 35.6 5.6 26.1 4.1 16.1

2010F 34.8 2% 7.7 1.1 28.1 4.2 35.8 5.3 23.4 3.5 13.7

November 11, 2008 EGYPT | STEEL

12M FAIR VALUE | LE 34.2 BUY | MODERATE RISK

EZZ STEEL (ES)

125

* Please refer to our industry section

Said structure created a strong entity that is capable of competing both locally (63% market share for long and flat products) and internationally (ranged within the top 60 steel producers worldwide

SHAREHOLDER STRUCTURE Al-Ezz Holding Egy Int'l Com Invest Co. Egy Int'l Ind Invest Dev Co For Metal Invest Banks, Ins Co. and others Free Float

38.1% 11.2% 7.4% 7.4% 1.1% 34.8%

HANY MOHAMED SAMY, CFM [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

ESRS

CASE 30 - rebased mn shares

LE

45 40 35 30 25 20 15 10 5 0

6.0 5.0 4.0 3.0 2.0 1.0

Oct-08

Sep-08

Aug-08

Jul-08

Valuation and recommendation: Our DCF model - using a perpetual growth rate of 1% and a WACC of 18% - yielded a 12-month fair value of LE 34.2/share, implying a 146% upside potential. Commodity plays are currently out of favor, but ES is a quasi-monopoly steel producer, and maintains a stable margin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiterate our BUY recommendation on ES with a MODERATE RISK rating.

ES is expanding regionally in Algeria with an additional 3 mn tpa of steel rebars. Finally, ES is planning to produce internally the imported billets as to enhance profitability margins.

Jun-08

Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on ES, where 24% of production was exported in 1H08.

ES owns a 53.24% stake in Al-Ezz Dekheila for SteelAlexandria (EZDK), previously known as Alexandria National Iron & Steel Company (ANSDK). EZDK is the largest integrated steel plant in Egypt with a capacity of 1.78 mn tpa of long products and 1 mn tpa of flat products.

Apr-08

Industry dynamics: Because of international competition, the expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with lower bottom line figures.

Furthermore, ES owns 75.15% stake in Al-Ezz Flat Steel (EFS), which was established in July 1998 under the provisions of Law no. 8 (free zone systems), with a capacity of 1.2 mn tpa of flat steel, most of which is directed to the export markets. EFS is planning to increase capacity by an additional 0.8 mn tpa by 2011.

May-08

Growth drivers: Given Egypt's demographics, local construction activity will always be the main growth driver for ES. Yet, we expect the current slowdown in real-estate activity to result in a mild slowdown in the construction activity which should take place over the coming years to fulfill the currentlycontracted real-estate projects. On the global front, we expect a slowdown in the industrialization process,* resulting in a lower rate of utilization.

Ezz Steel (ES) - previously known as Al-Ezz Steel Rebars Co. (ESR) - is a joint stock company established in April 1994, to manufacture steel rebars in Sadat City. In 1995, ES acquired 90.7% of National Al-Baraka for Iron & Steel, - currently known as Al-Ezz Rolling Mills (ERM) which produces straight and coiled rebars in 10th of Ramadan. ES facilities in Sadat and 10th of Ramadan have a combined production capacity of 1.4 mn tpa.

Mar-08

Expansion financing: During 3Q08, ES increased its capital via a 2-to-1 rights issue, representing 11% of total expansion costs with internal financing and external debt making up the balance. As ES has an excellent credit history, local banks will not be reluctant to finance expansions. Additionally, cost of machinery will be financed by the supplier via selling to ES on installment bases.

COMPANY SYNOPSIS

Jan-08

More long-term expansions: From a longer term perspective, ES is in the process of expanding capacities, both locally and regionally. Local expansion is intended to: (1) increase flat steel production by 0.8 mtpa and (2) replace the 0.55 mtpa of imported billets with locally-produced ones to enhance profit margins and reduce FX exposure. Regional expansion of 3 mtpa is intended to diversify markets to mitigate risks. Said expansions will take place over the coming five years, with a total estimated investment cost of US$3 bn.

ESRS.CA; /AEZDq.L | ALES EY LE 10.95 543.3 mn LE 5,948.7 mn LE 38.53/ LE 8.11 1.34 mn / LE 35.29 mn

Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Feb-08

More acquisitions: Continuing its expansion strategy, ES increased its stake in Ezz Al-Dekheila for Steel - Alexandria (EZDK) from 50.28% in December 2007 to 53.24% in June 2008 to increase its stake in EZDK's earnings, and to enhance the decision making process.

Reuters; Bloomberg

Dec-07

Ezz Steel (ES) is a leading local and regional steel producer with a 63% local market share. Even with the current global economic slowdown, ES is taking a longerterm perspective by expanding its capacities from a current 5.3 mtpa to 8 mtpa over the coming five years. Over the short- to medium-term, we expect ES to face a reduction in utilization rates, yet a stable profit margin, given the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 212% upside to a 12-month fair value of LE 34.2/share, thus retaining our BUY recommendation with a MODERATE RISK.

SHARE DATA

Nov-07

The long-term vision

November 11, 2008 EGYPT | STEEL | EZZ STEEL Balance Sheet (LE mn)

2007A

2008F

2009F

2010F

Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Long-Term Loans Receivalbe Other Non-current Assets Intangibles Total Assets

1,891.8 265.4 2,547.6 125.3 0.6 157.2 4,988 10,601 63.0 189.3 6.3 0.0 15,848

2,477.8 378.0 3,644.2 184.1 18.8 367.6 7,070 11,338 55.9 5.7 0.4 315.2 18,786

1,777.8 331.3 3,271.7 165.2 18.8 367.6 5,932 13,543 55.9 0.0 0.4 315.2 19,847

1,777.8 367.2 3,514.7 177.5 18.8 367.6 6,224 16,947 55.9 0.0 0.4 315.2 23,542

Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Royalties Payables / Due to Sister Co. Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

1,370 1,901.1 701.3 113.9 616.3 615.8 137.2 5.4 148.3 5,609 3,892.1 708.9 10,210 0.0 91.7 1,970.9 3,575 15,848

99 1,616.4 954.0 167.3 877.9 593.0 328.5 1.9 72.2 4,711 3,824.7 754.7 9,290 0.0 91.7 3,405.7 5,998 18,786

240 1,167.3 856.5 150.2 769.3 593.0 328.5 1.9 72.2 4,179 2,982.2 754.7 7,916 0.0 91.7 4,534.9 7,304 19,847

1,586 1,167.3 920.1 161.4 852.8 593.0 328.5 1.9 72.2 5,683 2,139.7 754.7 8,578 0.0 91.7 5,801.8 9,071 23,542

Income Statement (LE mn) Sales COGS x-dep Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

2007A

2008F

2009F

2010F

16,159 (11,852) 4,308 (371) 3,937 (659) 3,278 (710) (6) 67 (0) 246 0 2,875 (653) 2,222 (1,100) 0 1,122

23,016 (17,410) 5,606 (528) 5,078 (695) 4,383 (508) 0 37 0 147 0 4,060 (812) 3,248 (1,435) 0 1,813

20,225 (15,673) 4,552 (464) 4,088 (726) 3,362 (427) 0 32 0 147 0 3,114 (623) 2,491 (1,129) 0 1,362

22,359 (16,792) 5,568 (513) 5,055 (818) 4,236 (539) 0 27 0 147 0 3,871 (774) 3,097 (1,267) 0 1,830

Cash Flow (LE mn)

2007A

2008F

2009F

2010F

2,715 659 3,374 215 (43) 3,546 (1,529) 2,016.93 (18) 3,528 346 2,345 (203) 891 (1,292) (474) (58) 1,209

3,712 695 4,407 (700) (264) 3,442 (2,409) 1,033 (1,432) 2,010 (95) (494) (1,271) 1,549 (662) 1,435 29 586

2,739 726 3,465 215 0 3,680 (2,043) 1,636 (2,930) 749 185 (1,109) 141 325 (1,061) 1,129 (125) (700)

3,462 818 4,280 (133) 0 4,147 (1,706) 2,441 (4,222) (75) 174 (1,607) 1,346 325 (1,175) 1,267 (155) 0

Fact Sheet ROE ROS ROA ROIC

2007A 31.4% 6.9% 7.1% 21.2%

2008F 30.2% 7.9% 9.7% 25.2%

2009F 18.6% 6.7% 6.9% 17.1%

2010F 20.2% 8.2% 7.8% 17.7%

Gross Profit Margin

26.7%

24.4%

22.5%

24.9%

24.4% 1.0 10.5% 4.4 2.9 0.9

22.1% 1.2 9.6% 3.1 1.5 1.5

20.2% 1.0 9.9% 2.7 1.1 1.4

22.6% 0.9 9.5% 2.6 0.9 1.1

2007A 10.95 543,261 2.1 0.3 29.7 N/A 6.6 6.2 6.5 7.2 20.7

2008F 10.95 543,261 3.3 0.3 42.4 N/A 11.0 8.1 3.7 9.3 16.6

2009F 10.95 543,261 2.5 0.2 37.2 N/A 13.4 6.4 1.4 7.5 15.8

2010F 10.95 543,261 3.4 0.3 41.2 N/A 16.7 7.9 -0.1 9.3 16.7

2007A 5.3x 3% 0.4 0.7 1.8 3.3 1.7 3.2 1.5 2.8 1.7x

2008F 3.3x 3% 0.3 0.4 1.3 2.0 3.0 4.5 1.2 1.8 1.0x

2009F 4.4x 2% 0.3 0.4 1.7 2.5 7.9 11.4 1.5 2.1 0.8x

2010F 3.3x 3% 0.3 0.4 1.4 2.1 79.3(120.9) 1.2 1.8 0.7x

NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Note: A = Actual; F = Forecasted Source: ES and CIBC forecasts

EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

Per-Share Ratios Share Price No. Of Shares (000) EPS DPS Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Company reports and CICR estimates

126

November 11, 2008 EGYPT | OIL & GAS

12M FAIR VALUE | US$5.1

MARIDIVE & OIL SERVICES (MOS)

Valuation and recommendation: We used sum-of-the-parts (SOTP) valuation to value MOS’s businesses. We reached a 12-month fair value of US$5.1/share, implying a 99% upside potential and 45% above the IPO price. We initiate coverage on the stock with a BUY recommendation and MODERATE RISK. 127

Maridive's major objective is to provide Offshore Support Vessels (Marine services) and Offshore Construction Services (Project services) to oil exploration and production companies. The company's operations are executed through the mother company as well as its subsidiaries: Maritide Offshore Oil Services, Valentine Maritime, and Maridve Offshore Projects (MOP). Maridive, with an experience of over 30 years, is currently the largest Egyptian marine and offshore oil services company and one of the largest regional players in terms of fleet size owned. The company owns 57 marine units. The company contracted for 16 marine units (vessels and barges) which will be gradually delivered by 2011. Maridive's operations have widely expanded. The group won a number of contracts in the Gulf region, Persian Gulf, Caspian Sea, Gulf of Mexico as well as North, West, and East Africa in addition to the Far East.

SHAREHOLDER STRUCTURE Offshore Oil Projects Eleish Family Zeid Family Nadim Family CIB Horus PE Fund III Free Float Total

21.4% 13.2% 13.2% 13.2% 7.1% 2.9% 29.0% 100.0%

MOHAMED HAMDY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

MOIL

CASE 30 - rebased

US$ 8.0 7.0 6.0 5.0

mn shares 25.0 20.0 15.0

4.0 3.0 2.0 1.0 0.0

10.0 5.0 Nov-08

Difficult weather conditions: This industry can be affected by difficult weather conditions that could damage vessels and equipment and result in the suspension of operations. The industry is seasonal depending on the storms that hit the regions in different times. The monsoon hits India, where the bulk of the Far East revenues are generated from, starting June till end of September. However, this is mitigated by the company's geographical diversification, such as Australia where the monsoon hits from December till early March. It is worth highlighting that one barge sank in June 2007 south of Pakistan due to the monsoon.

Maridive & Oil Services Company (MOS) is a free-zone joint stock company established in 1978. MOS operates under Investment Law No. 8/1997. The company is located in Port Said with offices in Cairo, Alexandria, and Abu Dhabi.

Oct-08

Risks - global financial crisis and lower oil prices: The global financial crisis may have an impact on MOS's requirements for financial facilities and foreign currencies to finance its operations and expansion plans. Meanwhile, should oil prices continue in their downtrend, offshore operations could reduce their production. Thus, demand for oil services - provided by MOS - may feel the pinch.

COMPANY SYNOPSIS

Sep-08

Barriers to entry: There are high barriers prevailing against the entrance of potential players into the market owing to the capital-intensive nature of the industry with high initial investment and operational costs as well as strong technical capabilities required. Also, MOS has the edge to offer competitive daily rates than its competitors owing to its ability to source labor with lower packages compared to international markets.

MOIL.CA; MOIL EY US$ 2.57 256.0 mn US$ 0,657.9 mn US$ 7.3/ US$ 2.3 0.73 mn / US$ 1.75 mn

Aug-08

Highly-integrated business model: MOS is a horizontallyintegrated company providing offshore construction and support to oil E&P companies. These services cover a wide range of both operational and production levels.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Jul-08

Global demand: Global demand for oil as a primary source of energy triggered exploration and production (E&P) activities in untapped offshore oil and gas reserves. Accordingly, MOS contracted for 16 new marine units.

SHARE DATA

Jun-08

Maridive & Oil Services (MOS) sustained earnings growth with its fleet size growing from 3 vessels and 4 mooring boats in 1979 to 57 marine units in 2008. MOS continues to grow its fleet, having contracted for 16 new marine units, as well as upgrading its existing fleet to meet demand. MOS’s projects are global – with 80% of its revenues generated outside Egypt. Its share price, however, seems to have been suffering from waning oil prices, a risk - therefore - of lower E&P demand. Yet, MOS is well placed due to its relatively low-cost structure, offering competitive rates than its peers. As such it trades at 6.5x 2009e PER, and 99% below our SOTP 12-month fair value of US$5.1/share. We initiate coverage on the stock with a BUY and MODERATE RISK rating.

May-08

Competitive global player

BUY | MODERATE RISK

November 11, 2008 EGYPT | OIL & GAS | MARIDIVE Balance Sheet (US$ mn) Assets Cash Time Deposits Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets

2007A

2008F

2009F

2010F

6.3 3.1 98.9 5.8 0.3 0.3 38.8 153.6 192.3 0.0 1.9 0.1 9.8 357.7

163.9 4.1 81.9 6.0 0.4 0.3 10.8 267.4 326.1 0.0 1.9 0.8 9.8 606.0

170.4 5.5 113.6 8.3 0.5 0.3 14.6 313.2 404.0 0.0 1.9 0.8 9.8 729.8

246.7 7.5 158.3 12.0 0.7 0.3 19.9 445.4 451.8 0.0 1.9 0.8 9.8 909.7

Liabilities & Equity Short-Term Debt Current Portion of LT Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Paid-in capital Additional paid-in capital Treasury shares Reserves Retained earnings Shareholders' Equity Total Liab. & Equity

24.5 24.1 40.8 6.7 2.1 0.0 0.3 4.2 102.8 64.2 0.0 167.0 0.2 1.7 22.5 85.0 0.0 0.0 11.7 69.6 166.3 357.7

0.0 9.7 11.3 11.3 10.0 0.0 32.8 7.4 82.4 133.8 0.0 216.3 0.0 2.1 33.9 102.4 85.5 0.0 11.7 154.1 353.7 606.0

0.0 17.6 15.6 15.6 20.3 0.0 0.0 7.4 76.4 154.6 0.0 231.0 0.0 2.1 41.7 102.4 85.5 0.0 11.7 255.3 454.9 729.8

0.0 27.2 21.2 21.2 39.6 0.0 63.7 7.4 180.2 141.3 0.0 321.5 0.0 2.1 48.5 102.4 85.5 0.0 11.7 338.0 537.6 909.7

Income Statement (US$ mn) OCS OSV Revenues

2007A 216.8 47.3 264.1

2008F 187.8 74.7 262.5

2009F 245.1 108.2 353.3

2010F 346.0 135.2 481.3

OCS OSV Cost of Revenues (including provisions)

(117.7) (22.3) (140.0)

(102.1) (35.4) (137.5)

(140.4) (48.8) (189.2)

(198.4) (59.1) (257.5)

OCS OCS gross margin OSV OSV gross margin Gross Profit (including provisions) Gross Margin

99.1 45.7% 25.0 52.9% 124.1 47.0%

85.7 45.6% 39.3 52.7% 125.0 47.6%

104.7 42.7% 59.4 54.9% 164.0 46.4%

147.7 42.7% 76.1 56.3% 223.8 46.5%

OCS As a % of revenues OSV As a % of revenues SG&A As a % of revenues

(11.4) 5.2% (4.6) 9.7% (16.0) 6.0%

(11.7) 6.2% (6.5) 8.6% (18.2) 6.9%

(14.2) 5.8% (8.7) 8.1% (23.0) 6.5%

(18.1) 5.2% (10.7) 7.9% (28.7) 6.0%

OCS OCS EBITDA margin OSV OSV EBITDA margin EBITDA (including provisions) EBITDA Margin

87.7 40.5% 20.4 43.2% 108.1 41.0%

74.0 39.4% 32.9 44.0% 106.9 40.7%

90.4 36.9% 50.6 46.8% 141.0 39.9%

129.6 37.4% 65.5 48.4% 195.1 40.5%

EBITDA (excluding provisions) EBITDA Margin

110.6 41.9%

109.9 41.9%

145.7 41.2%

201.2 41.8%

Depreciation & Amortization EBIT Interest Expense Interest Income Investment Income Other Non-Operating Income Other Non-Operating Exp. EBT Taxes NPAT Minority Interest Extraordinary Items Net Profits Net Margin

(11.6) 96.5 (3.3) 0.2 0.0 0.5 (0.1) 93.8 (1.7) 92.2 (12.3) 0.2 80.1 30.3%

(16.0) 90.8 (6.1) 1.8 0.0 1.3 (0.5) 87.2 (1.4) 85.9 (11.4) 10.1 84.5 32.2%

(21.8) 119.2 (11.4) 3.4 0.0 0.0 (0.5) 110.7 (1.7) 109.0 (7.8) 0.0 101.3 28.7%

(28.1) 167.0 (10.7) 4.9 0.0 0.0 (0.5) 160.7 (2.3) 158.3 (12.0) 0.0 146.4 30.4%

128

Cash Flow (US$ mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

2007A 82.5 11.6 94.1 (28.0) (1.1) 65.0 (13.4) 51.6 (91.4) (25.3) 2.4 (37.5) 17.2 49.6 (33.5) 0.2 0.3 (3.8)

2008F 78.1 16.0 94.1 (0.3) 31.1 124.9 (28.6) 96.3 (139.8) (46.0) (0.8) (44.2) (24.5) 79.3 114.3 0.3 32.4 157.6

2009F 109.8 21.8 131.6 (15.3) (3.7) 112.6 (17.9) 94.6 (99.8) 16.6 (1.7) (6.9) 0.0 38.3 7.8 0.0 (32.8) 6.5

2010F 152.7 28.1 180.8 (18.1) (5.3) 157.4 (23.6) 133.7 (75.8) 86.8 (2.3) 55.6 0.0 13.9 6.8 0.0 0.0 76.3

Fact Sheet OCS revenue growth OSV revenue growth Revenue growth

2007A 2.6% 22.2% 5.6%

2008F -13.4% 58.0% -0.6%

2009F 30.5% 44.8% 34.6%

2010F 41.2% 25.0% 36.2%

OCS gross profit growth OSV gross profit growth Gross profit growth

20.8% 45.9% 25.1%

-13.5% 57.3% 0.8%

22.1% 50.9% 31.2%

41.1% 28.3% 36.4%

OCS EBITDA growth OSV EBITDA growth EBITDA growth

24.7% 51.9% 29.1%

-15.6% 60.9% -1.2%

22.2% 54.0% 32.0%

43.3% 29.4% 38.3%

Earnings growth

49.8%

5.5%

19.8%

44.6%

Revenue mix OCS OSV

82.1% 17.9%

71.5% 28.5%

69.4% 30.6%

71.9% 28.1%

EBITDA mix OCS OSV

81.1% 18.9%

69.2% 30.8%

64.1% 35.9%

66.4% 33.6%

ROE ROA ROIC

48.2% 22.4% 27.4%

23.9% 13.9% 14.7%

22.3% 13.9% 16.4%

27.2% 16.1% 20.2%

0.7 -10.6% 2.2 1.0 1.5

0.4 -0.1% 1.7 0.6 3.2

0.5 -4.3% 1.6 0.5 4.1

0.5 -3.8% 1.7 0.6 2.5

2007A $2.57 256,000

2008F $2.57 256,000

2009F $2.57 256,000

2010F $2.57 256,000

EPS DPS DIV./NPAUI Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

0.31 0.00 0% 1.03 0.65 0.37 (0.10) 0.43 2.97

0.33 0.00 0% 1.03 1.38 0.37 (0.18) 0.43 2.47

0.40 0.00 0% 1.38 1.78 0.51 0.06 0.57 2.56

0.57 0.25 44% 1.88 2.10 0.71 0.34 0.79 2.24

Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Maridive and CICR forecasts

2007A 8.2x 0.0% 2.5x 2.9x -26.0x -30.1x 5.9x 6.9x 4.0x

2008F 7.8x 0.0% 2.5x 2.4x -14.3x -13.8x 6.0x 5.8x 1.9x

2009F 6.5x 0.0% 1.9x 1.9x 39.7x 39.5x 4.5x 4.5x 1.4x

2010F 4.5x 9.7% 1.4x 1.2x 7.6x 6.6x 3.3x 2.8x 1.2x

ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share Price No. of Shares ('000)

November 11, 2008 EGYPT | CEMENT

12M FAIR VALUE | LE 153

MISR BENI SUEF CEMENT (MBSC)

MBSC reached 2% local market share in 2007, selling 837k tons and 4% in 8M08, selling 961k tons. Meanwhile, 21% export market share in 2007, exporting 869k tons (c. 51% of production) and 23% in 8M08, exporting 169k tons (c. 15% of production).

SHAREHOLDER STRUCTURE Top Management National Investment Bank Individuals Others Free Float Total

129

20.5% 20.1% 6.3% 2.6% 50.5% 100.0%

GHADA REFKY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

MBSC

CASE 30 - rebased mn shares

LE

0.5 0.4 0.3 0.2 0.1

Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

180 160 140 120 100 80 60 40 20 0

Nov-07

Valuation and recommendation: Based on a cost of equity of 17.6%, our DCF model resulted in a 12-month fair value of LE 152.5/share, implying a 226% upside potential. Accordingly we rate this stock a BUY at MODERATE RISK.

In December 2006, MBSC signed a supplying & installation contract with the French company Polysius to expand its daily clinker production to 10k tpd.

Apr-08

Temporary cost advantage: MBSC did not pay the LE 35.1/ cement ton produced clay resource development fees till date, awaiting for the authorities to reply to its appeal stating that (1) clay usage rate used to calculate said fee is incorrect, (2) a contract with the governorate was established to deliver clay at a fixed fee of LE 2.25/ton, and (3) several other industries use clay, such as the ceramics industry and - accordingly should be charged the same fee as well.

The company was established with a paid-in capital of LE 120 mn distributed over 12 mn shares at a par value of LE 10/share. Currently, MBSC has an authorized capital of LE 500 mn with a paid-in capital of LE 200 mn distributed over 20 mn shares with a par value of LE 10/share.

May-08

Competitive post ban export price: MBSC was one of the first two companies permitted to export to Sudan during the 6month export ban that ended in October 2008. MBSC had acquired a 16% export market share during April-August 2008, failing to obtain a better share relative to others permitted by the same time. We believe MBSC will be able to strengthen its export market share as exports resumed after the ban at US$75/ton - a competitive price compared to other local players exporting at a minimum of US$85/ton.

Misr Beni Suef Cement (MBSC) was incorporated under Law no. 8/1997 in November 1997 as a shareholding company, with the objective of producing all kinds of cement and all other associated products. In August 1999, MBSC had its shares listed on the Egyptian Exchange (EGX).

Mar-08

Overcapacity utilization to be hit by 2010: We expect MBSC to maintain the same trend, outpacing the market capacity utilization over 2008-12. Given the new capacities entering the cement market, we expect the 100%+ utilization rate by MBSC which registered 113% (the third highest rate) in 2007 to be hit gradually to 96% in 2012 - yet still higher than 79% for the market then.

MBSC.CA; MBSC EY LE 46.79 20.0 mn LE 935.8 mn LE 141.49/ LE 45 0.03 mn / LE 3.63 mn

COMPANY SYNOPSIS

Jan-08

New production line: Said new line is expected to release its initial production by H209, with a required investment cost estimated at LE 1.2 bn.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Feb-08

Misr Beni Suef Cement (MBSC), a grey cement producer since 2003, comprises a mono-production line cement factory of 1.5 mtpa capacity. In view of the imposed license fees of LE 251 mn for its new 1.5 mtpa production line, MBSC booked a significant provision of LE 156 mn in 2007. Yet, MBSC did not pay that fee till date awaiting the authorities' reply concerning its appeal stating that Beni Suef Cement (Titan Group) won at the auction held in October 2008 an expansion license in the same governorate for just LE 134.5 mn. The stock is traded at PER of 3.5x 2009 earnings vs. a peer average of 7.5x, which may imply acquisitive interest. Our DCF-based valuation of LE 152.5/ share suggests a 226% upside potential with a BUY at MODERATE RISK rating.

SHARE DATA

Dec-07

Very cheaply rated versus peer group

BUY | MODERATE RISK

November 11, 2008 EGYPT | CEMENT | MBSC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-current Assets Intangibles Total Assets

Dec-07

Dec-08

Dec-09

Dec-10

548.3 0.2 30.9 1.4 0.0 0.0 580.9 776.3 10.0 0.0 12.5 0.0 1,379.7

7.8 0.2 14.8 0.7 0.0 0.0 23.6 1,477.5 0.0 0.0 0.0 0.0 1,501.1

88.4 0.4 45.2 2.8 0.0 0.0 136.8 1,562.0 0.0 0.0 0.0 0.0 1,698.9

427.2 0.5 119.7 5.4 0.0 0.0 552.7 1,421.8 0.0 0.0 0.0 0.0 1,974.5

Liabilities & Shareholders' Equity Short-Tem Debt CP Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long Term Debts Other Non-Current Liabilities Long Term Spontaneous Finance Total Liabilities Tax Provision Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity

6.3 0.0 54.1 6.7 13.6 0.0 67.8 0.0 60.9 209.3 180.6 0.0 0.0 389.9 0.0 351.4 0.0 638.4 1,379.7

92.6 0.0 88.8 29.6 69.9 0.0 0.0 0.0 3.4 284.3 0.0 0.0 0.0 284.3 0.0 371.4 0.0 845.3 1,501.1

47.2 0.0 153.9 40.9 26.9 0.0 0.0 0.0 0.0 268.9 0.0 0.0 0.0 268.9 0.0 411.4 0.0 1,018.5 1,698.9

40.7 0.0 197.6 18.1 27.5 0.0 0.0 0.0 0.0 283.9 0.0 0.0 0.0 283.9 0.0 451.4 0.0 1,239.2 1,974.5

Income Statement (LE mn) Capacity '000 Tons Tons Sold '000 Revenues Cost of Goods Sold Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

Dec-07 1,500 1,706 588.3 (180.6) 407.7 (11.0) 396.7 (63.3) 333.4 (3.1) (156.5) 0.0 0.0 23.8 0.0 197.6 (4.5) 193.1 0.0 0.0 193

Dec-08 1,500 1,649 639.6 (270.9) 368.6 (11.7) 356.9 (64.7) 292.2 (11.6) (40.0) 0.2 0.0 23.8 0.0 264.7 (6.0) 258.7 0.0 0.0 259

Dec-09 Dec-10 2,250 3,000 2,258 2,780 980.8 1,255.0 (515.3) (661.8) 465.5 593.3 (18.0) (23.0) 447.5 570.3 (157.1) (190.8) 290.4 379.5 (5.9) (5.1) (40.0) (40.0) 4.3 18.1 0.0 0.0 23.8 23.8 0.0 0.0 272.6 376.3 (6.2) (8.5) 266.5 367.8 0.0 0.0 0.0 0.0 266 368

130

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investment Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net Worth Grey Area Dividends Change in Cash

Dec-07 321.0 63.3 384.3 14.4 17.3 416.1 (19.6) 396.5 (244.4) 154.4 (190.0) (37.9) 5.6 104.7 (7.7) (3.2) (54.3) 7.2

Dec-08 294.1 64.7 358.8 130.6 (57.5) 432.0 (11.6) 420.4 (765.8) (276.4) 567.1 221.7 86.3 (177.2) (0.0) (20.0) (119.5) (8.7)

Dec-09 284.2 157.1 441.3 0.8 (3.4) 438.7 (5.9) 432.8 (241.6) 200.4 (39.9) 151.3 (45.4) 0.0 0.0 0.0 (93.3) 12.6

Dec-10 371.0 190.8 561.7 (55.6) 0.0 506.1 (5.1) 501.0 (50.5) 455.5 (188.0) 262.5 (6.5) 0.0 0.0 0.0 (147.1) 108.9

Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Net worth Current Ratio

Dec-07 30.3% 32.8% 14.0% 27.3% 69.3% 67.4% 0.4 -7.1% 2.2 0.6 2.8

Dec-08 30.6% 40.5% 17.2% 22.5% 57.6% 55.8% 0.4 -27.0% 1.8 0.3 0.1

Dec-09 26.2% 27.2% 15.7% 19.2% 47.5% 45.6% 0.6 -17.7% 1.7 0.3 0.5

Dec-10 29.7% 29.3% 18.6% 21.4% 47.3% 45.4% 0.6 -9.4% 1.6 0.2 1.9

Per Share Ratios Share Price New No. Of Shares '000 Actual No. Of Shares '000 EPS Diluted EPS DPS Revenues/Share Tons Sold/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Dec-07 46.79 20,000 20,000 9.66 9.66 3.39 29.41 0.09 0.08 31.9 19.22 7.72 19.84 28.72

Dec-08 46.79 20,000 20,000 12.94 12.94 2.59 31.98 0.08 0.08 42.3 17.94 -13.82 17.85 51.03

Dec-09 46.79 20,000 20,000 13.32 13.32 4.66 49.04 0.11 0.11 50.9 22.07 10.02 22.38 44.73

Dec-10 46.79 20,000 20,000 18.39 18.39 7.36 62.75 0.14 0.15 62.0 28.09 22.78 28.51 27.47

Multiples Dec-07 P/E 4.84 Diluted P/E 4.84 Div Yield % 7.2% P/Revenues 1.59 EV/ Revenues 0.98 P/ COPAT 2.43 EV/ COPAT 1.49 P/ FCFF 6.06 EV/ FCFF 3.72 EV/ Ton 382.89 P/ EBITDA 2.36 EV/ EBITDA 1.45 P/ BV 1.47 Source: Misr Beni Suef Cement & CICR forecast

Dec-08 3.62 3.62 5.5% 1.46 1.60 2.61 2.84 -3.39 -3.69 680.39 2.62 2.86 1.11

Dec-09 3.51 3.51 10.0% 0.95 0.91 2.12 2.03 4.67 4.46 397.59 2.09 2.00 0.92

Dec-10 2.54 2.54 15.7% 0.75 0.44 1.67 0.98 2.05 1.21 183.11 1.64 0.96 0.76

November 11, 2008 EGYPT | CEMENT

12M FAIR VALUE | LE 99

MISR CEMENT (QENA) (MCQE)

131

The company was established with an authorized capital of LE 600 mn, and an issued and paid-in capital of LE 300 mn distributed over 30 mn shares with a par value of LE 10/share, maintaining said position till date. MCQE had provided FLSmidth in June 1999 the mechanical equipment supply, plant management, & equipment installation of its production line that had a total capacity of 1.4 mta. The plant had a total investment cost of LE 750 mn, releasing its production to the market in April 2002. The company had provided the technical management, the maintenance operations & supervising the operation & delivery of the queries' raw materials to Arab Swiss Engineering Company "ASEC" MCQE has reached 3% local market share in 2007, selling 1,199k tons and 4% in 8M08, selling 1,019k tons. Meanwhile, 14% export market share was achieved in 2007, exporting 585k tons (c. 33% of production) and 41% in 8M08, exporting 301k tons (c. 23% of production).

SHAREHOLDER STRUCTURE Asec Cement Misr Insurance Egyptian Investment Projects Egyptian Kuwaiti Investment Al-Ahly Capital Holding Co. Banque Misr Others Free Float Total

26.2% 20.1% 10.0% 9.8% 7.5% 7.5% 10.9% 8.0% 100.0%

GHADA REFKY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume 120

MCQE

CASE 30 - rebased mn shares

LE

0.15

100 0.10

80 60 40

0.05

20 0 Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Apr-08

May-08

Valuation and recommendation: Based on a cost of equity of 15.7%, our DCF model resulted in a 12-month fair value of LE 98.54/share. This valuation did not incorporate any of the recently-announced projects, which could indicate further upside potential. Although trading at higher multiples than its peers we think it is strategically placed and note the stake building by ASEC. Accordingly we rate this stock a BUY at MODERATE RISK.

Misr Cement (Qena) (MCQE) was incorporated under Law no. 159/1981 in May 1997 as a shareholding company, with the objective of producing and selling all kinds of cement and all other related construction products. In May 2000, MCQE had its shares listed on the Egyptian Exchange (EGX).

Mar-08

A new market and a new business: MCQE is eyeing cement expansion in Oman and a new phosphate fertilizer project in Egypt. Yet, we have not incorporated such developments in our DCF valuation till further details are made available.

MCQE.CA; MCQE EY LE 76.99 30.0 mn LE 2,309.7 mn LE 90/ LE 55 0.02 mn / LE 1.57 mn

COMPANY SYNOPSIS

Jan-08

Permanent cost advantage: In May 2008, a resource development fee for clay – an essential raw material for the cement production process – was imposed on cement producers amounting to LE 35.1/cement ton produced, which is expected to constitute around 10% of producers' cement cost bill in 3Q08. Since MCQE's extracted limestone contains the needed clay, MCQE has secured a cost advantage by not having to pay said fee.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Feb-08

Overcapacity utilization to be hit by 2010: We expect MCQE to maintain the same trend, outpacing the market capacity utilization over 2008-12. Given the new capacities entering the cement market with 41% heading to Upper Egypt, we expect the 100%+ utilization rate by MCQE which registered 119% (the second highest rate) in 2007 to be hit gradually to 92% in 2012 - yet still higher than 79% for the market then. Exports heading south: Benefiting from its location in Upper Egypt, MCQE exports mainly to Sudan and other neighboring countries, which we believe is currently a better export market than that of Europe given the recent global financial crisis. Confirming its location advantage (according to figures released by the Ministry of Investment), MCQE managed to obtain the highest export market share of 71% during AprilAugust 2008 period over the other players permitted to export during the 6-month export ban which ended in October 2008.

SHARE DATA

Nov-07

Misr Cement (Qena) (MCQE), a cement producer since 2002, comprises a mono-production line cement factory of 1.5 mtpa capacity, with no revealed intension to expand locally. Owing to its low capacity, no headway to its recently announced projects, forecasted significant low debt profile and cash-rich position, we believe MCQE could be a good acquisition target. ASEC Cement Holding has been increasing its stake in MCQE to 26.18% via direct purchases from the stock market. With an 8% free float, MCQE will be a fruitful target if the public stake is negotiated to be offered for sale. Although MCQE is traded at a PER of 7.8x 2009 earnings, 8% premium to a peer average of 7.3x due to current unfavourable markets' conditions, our DCF-based valuation suggest a 28% upside potential, hence we assign a BUY with a MODERATE RISK rating.

Dec-07

Strategically placed for acquisitive interest

BUY | MODERATE RISK

November 11, 2008 EGYPT | CEMENT | MISR CEMENT (QENA) Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets

2007A

2008F

2009F

2010F

293.5 3.5 36.5 0.3 0.0 0.0 333.8

251.4 3.8 47.7 1.6 0.0 0.0 304.5

412.0 3.5 46.6 1.6 0.0 0.0 463.6

571.1 2.7 44.9 1.5 0.0 0.0 620.2

Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-current Assets Intangibles

617.5 0.8 0.1 19.4 0.0

603.4 0.8 0.1 23.4 0.0

593.5 0.8 0.1 23.4 0.0

583.2 0.8 0.1 23.4 0.0

Total Assets

971.7

932.3

1,081.5

1,227.8

Liabilities & Equity Short-Tem Debt CP Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long Term Debts Other Non-Current Liabilities Long Term Spontaneous Finance Total Liabilities Tax Provision Other Provisions Minority Interest Shareholders' Equity

0.0 0.0 25.3 0.1 14.5 2.4 177.9 0.0 33.6 253.9 0.0 52.1 0.0 305.9 0.0 24.0 0.0 641.7

1.1 0.0 31.1 0.1 17.1 2.4 0.0 0.0 22.4 74.3 0.0 2.1 0.0 76.4 0.0 74.0 0.0 781.9

1.0 0.0 30.4 0.1 16.6 2.4 0.0 0.0 22.1 72.6 0.0 0.0 0.0 72.6 0.0 94.0 0.0 914.9

0.8 0.0 28.3 0.1 15.2 2.4 0.0 0.0 20.0 66.9 0.0 0.0 0.0 66.9 0.0 114.0 0.0 1,046.8

Total Liabilities & Equity

971.7

932.3

1,081.5

1,227.8

Income Statement (LE mn) Capacity '000 Tons

2007A 1,500

2008F 1,500

2009F 1,500

2010F 1,500

Tons Sold

1,784

1,759

1,575

1,386

597.3 (239.2) 358.1 (15.0) 343.2 (39.3) 303.8 (0.5) (21.8) 9.1 0.3 0.7 (4.7) 287.0 (10.5) 276.4 0.0 0.0 276.4

695.4 (299.8) 395.6 (24.3) 371.3 (41.1) 330.1 (0.1) (50.0) 8.3 0.0 0.7 (6.5) 282.5 (10.3) 272.2 0.0 0.0 272.2

673.0 (291.9) 381.1 (24.5) 356.6 (43.0) 313.7 (0.1) (20.0) 12.5 0.0 0.7 0.0 306.8 (11.2) 295.5 0.0 0.0 295.5

617.9 (272.2) 345.7 (22.9) 322.8 (44.9) 277.9 (0.1) (20.0) 15.4 0.0 0.7 0.0 273.9 (10.0) 263.9 0.0 0.0 263.9

'000

Revenues Cost of Goods Sold Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income (Expense FX Gains (Losses) EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

132

Fact Sheet ROE ROS ROA ROIC Gross Profit Margin EBITDA Margin ATO WI/ Sales Net Profit Margin ALEV Liabilities/Net worth Current Ratio

2007A 43.1% 46.3% 28.5% 43.8% 60.0% 57.5% 0.6 0.1% 46% 1.5 48% 1.3

2008F 34.8% 39.1% 29.2% 37.3% 56.9% 53.4% 0.7 0.7% 39% 1.2 10% 4.1

2009F 32.3% 43.9% 27.3% 29.9% 56.6% 53.0% 0.6 0.7% 44% 1.2 8% 6.4

2010F 25.2% 42.7% 21.5% 23.1% 55.9% 52.2% 0.5 0.9% 43% 1.2 6% 9.3

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investment Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net Worth Grey Area Dividends Change in Cash

2007A 291.5 39.3 330.9 2.5 11.2 344.6 (3.0) 341.6 (9.7) 323.7 (167.8) 164.1 0.0 (15.0) (46.6) (14.2) (81.5) 6.7

2008F 319.8 41.1 360.9 (4.3) (11.3) 345.3 (2.5) 342.8 (27.0) 329.6 (9.3) 306.5 1.1 0.0 31.3 0.0 (341.2) (2.3)

2009F 302.4 43.0 345.4 0.2 0.0 345.6 (2.5) 343.1 (33.1) 312.6 (126.5) 183.6 (0.1) 0.0 14.8 0.0 (177.3) 20.9

2010F 267.8 44.9 312.7 (0.9) 0.0 311.8 (2.2) 309.6 (34.6) 277.2 (93.4) 181.6 (0.1) 0.0 13.2 0.0 (145.2) 49.5

Per Share Ratios Share Price New No. Of Shares '000 Actual No. Of Shares '000 EPS Diluted EPS DPS Revenues/Share Units Sold/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

2007A 76.99 30,000 30,000 9.21 9.21 4.96 19.91 0.06 0.05 21.4 11.03 10.79 11.44 67.21

2008F 76.99 30,000 30,000 9.07 9.07 5.44 23.18 0.06 0.05 26.1 12.03 10.99 12.38 68.65

2009F 76.99 30,000 30,000 9.85 9.85 5.91 22.43 0.05 0.05 30.5 11.51 10.42 11.89 63.29

2010F 76.99 30,000 30,000 8.80 8.80 4.84 20.60 0.05 0.05 34.9 10.42 9.24 10.76 57.98

Multiples 2007A P/E 8.35 Diluted P/E 8.35 Div Yield % 6.4% P/Revenues 3.87 EV/ Revenues 3.38 P/ COPAT 6.98 EV/ COPAT 6.09 P/ FCFF 7.14 EV/ FCFF 6.23 EV/ Ton 1344 P/ EBITDA 6.73 EV/ EBITDA 5.88 P/ BV 3.60 Source Misr Cement (Qena) & CICR forecast

2008F 8.49 8.49 7.1% 3.32 2.96 6.40 5.71 7.01 6.25 1373 6.22 5.55 2.95

2009F 7.82 7.82 7.7% 3.43 2.82 6.69 5.50 7.39 6.07 1266 6.48 5.32 2.52

2010F 8.75 8.75 6.3% 3.74 2.81 7.39 5.56 8.33 6.27 1160 7.16 5.39 2.21

November 11, 2008 EGYPT | TMT

12M FAIR VALUE | LE 206

MOBINIL

133

Mobinil Telecom FT Orange Group OTH OTH Free Float Total

51.0% 71.3% 28.8% 20.0% 29.0% 100.0%

MOHAMED HAMDY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume 300

EMOB

CASE 30 - rebased mn shares

LE

1.4 1.2

250

1.0

200

0.8

150

0.6

100

0.4

50

0.2

0 Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Apr-08

May-08

Valuation and recommendation: We revised our model in view of 3Q08 results and now-lower management guidance for capex and reached a 12-month fair value of LE 206/share (+8% vs. our previous valuation), suggesting a 79% upside. Should Mobinil maintain its dividend policy - as we believe, a key investment catalyst for Mobinil would be its high dividend yield of around 14% vs. an EMEA average of 10.8%. The stock is traded at a PER of 6.2x 2008 expected earnings, a 37% discount to an EMEA average of 9.8x. As such, we reiterate our BUY recommendation with the same MODERATE RISK rating.

SHAREHOLDER STRUCTURE

Mar-08

Interconnection dispute: TE filed a complaint with the National Telecom Regulatory Authority (NTRA) to change interconnection prices with mobile operators, the result of which came in TE’s favor. Mobinil informed the NTRA of its rejection to the decision citing lack of a legal basis. Mobinil’s management confirmed that they will continue with the existing interconnection agreement with TE "for years".

Egyptian Company for Mobile Services “ECMS” (Mobinil) was established in November 1997 under the Investment Law No. 8/1997, granting it a 5-year tax holiday that ended in December 2003. The company started operation on May 21, 1998, when all the mobile-related assets of Telecom Egypt were sold off to Mobinil Telecommunications (Mobinil Telecom), a consortium comprised of one local and two international telecom giants, Orascom Telecom Holding (OTH), France Telecom Mobiles International (FTMI), and Motorola, respectively. Mobinil Telecom controls ECMS through its 51% combined stake. Early 2001, ownership of that consortium changed as Motorola divested its international mobile investments. Accordingly, both FTMI and OT purchased Motorola’s stake on a prorata basis. In July 2002, FTMI was replaced by Orange as a shareholder in the consortium, controlling 71.25% of Mobinil Telecom. On April 18, 1998, ECMS was formally awarded a 15-year license, renewable for a 5-year period to operate and expand the existing GSM 900 network. In 2005, ECMS was granted an access to 7.5 mhz of the 1800 mhz spectrum for a total payment of LE 1.24 bn. In July 2007, Mobinil decided to apply for 3G license for LE 3.4 bn to launch its commercial services in early September 2008. ECMS represents today the largest local GSM mobile operator in the Egyptian market in terms of subscribers (c. 19 mn subs). ECMS’s network currently covers most of the urban areas in Egypt. As of September 2008, Mobinil had 3,691 sites and 34 switches.

Jan-08

Enduring challenges: Blended ARPU stabilized at LE 47 QoQ on 5% higher usage. While this elasticity may be seen as a bear point for those concerned about inflation in Egypt, inflation rates seem to be coming down. In view of the global financial crisis, Mobinil is adequately liquid despite boasting the highest net debt/equity ratio of 4.5x; Mobinil’s interest coverage ratio stands at a comfortable 4.7x. It had secured all its financial requirements for 2008 and also has the flexibility to do so in 2009 due to its low net debt-to-EBITDA of 1.3x vs. an industry average of 2x.

EMOB.CA; EMOB EY LE 115.37 100.0 mn LE 11,537.0 mn LE 243/ LE 87 0.1 mn / LE 19.18 mn

COMPANY SYNOPSIS

Feb-08

Positive results: 3Q08 results beat our and consensus estimates by 26% and 32%, respectively. While no surprise came on the top-line performance, substantial bottom-line growth was driven by lower-than-expected cost of revenues and opex, thanks to on-net traffic growth and a "cost efficiency program". This allowed Mobinil to achieve the highest EBITDA margin in the last 2 years. However, such a level may not be sustainable going forward due to the 3G 2.5% revenue sharing. We believe at least the 45% target in 2008 is achievable.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Nov-07

Mobinil's 3Q08 results proved strong despite macro, regulatory, and market challenges. While revenues were in line, the driver for beating the bottom line forecast was lower costs, thanks to on-net traffic and a "cost efficiency program". This helped the company achieve its highest EBITDA margin in 2 years, albeit not sustainable going forward. One of the key investment catalysts for Mobinil is its high dividend yield of around 14% but with a high leverage. Having revised our model, we reached an 8% higher DCF value of LE 206 (+79% upside). With the stock traded at a 37% discount to EMEA peers, we rate it a BUY.

SHARE DATA

Dec-07

Two in one: high growth...high dividend yield

BUY | MODERATE RISK

November 11, 2008 EGYPT | TMT | MOBINIL Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Prepaid Exp. Other Non-current Assets Intangibles Total Assets

415 264 116 32 0 0 826 7,626 1 126 403 1,072 10,053

458 319 145 40 0 0 962 9,060 1 126 403 3,130 13,681

583 368 177 52 0 0 1,179 10,265 1 126 403 2,908 14,882

651 410 194 59 0 0 1,314 10,924 1 126 403 3,787 16,554

Liabilities & Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Current portion of License fees Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities LT creditors license fees Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

369 327 1,112 632 0 372 42 158 924 3,937 3,433 236 145 7,751 0 547 4 1,752 10,053

567 327 1,418 806 0 372 42 775 924 5,230 5,645 247 545 11,669 0 657 5 1,350 13,681

1,739 816 1,811 1,030 0 372 42 25 924 6,758 4,829 247 545 12,380 0 723 7 1,772 14,882

3,682 816 2,065 1,175 0 372 42 0 924 9,075 4,258 247 0 13,580 0 759 9 2,207 16,554

Income Statement (LE mn) Yearend Subs (k) Revenues Cost of Revenues Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Imputed Interest Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

2007A 15,118 8,200 (1,656) 6,545 (2,845) 3,700 (1,286) 2,414 (124) 0 0 30 0 3 (3) 2,319 (496) 1,823 (2) 3 1,824

2008F 20,283 9,950 (2,118) 7,832 (3,325) 4,507 (1,585) 2,922 (446) (200) 62 43 0 0 (37) 2,345 (478) 1,867 (2) 0 1,865

2009F 23,493 11,429 (2,697) 8,732 (3,705) 5,027 (1,760) 3,267 (535) (128) 0 44 0 0 0 2,647 (540) 2,108 (2) 0 2,106

2010F 25,606 12,766 (3,077) 9,689 (4,138) 5,551 (2,115) 3,436 (753) 0 0 49 0 0 0 2,732 (557) 2,175 (2) 0 2,173

(1,670.0)

(1,600.0)

(1,686.0)

(1,739.8)

Dividends

134

2007A

2008F

2009F

2010F

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before LT Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt* Networth Grey Area Dividends Change in Cash * Including LT creditors license fees Fact Sheet ROE ROS ROA ROIC EBITDA Margin

2007A 1,994 1,286 3,279 411 187 3,878 (548) 3,329 (3,581) 297 (72) (323) 217 1,984 (34) 57 (1,715) 185

2008F 2,622 1,585 4,208 387 0 4,595 (985) 3,609 (2,898) 1,697 (2,425) (1,713) 197 3,715 (668) 111 (1,600) 43

2009F 2,840 1,760 4,600 524 0 5,124 (1,750) 3,374 (2,743) 2,381 (84) 546 1,173 25 0 68 (1,686) 125

2010F 3,010 2,115 5,125 333 0 5,458 (1,725) 3,733 (2,553) 2,905 (1,051) 129 1,942 (301) 0 38 (1,740) 68

2007A 104.1% 22.2% 18.1% 37.2% 45.1%

2008F 138.1% 18.7% 13.6% 48.4% 45.3%

2009F 118.8% 18.4% 14.1% 40.7% 44.0%

2010F 98.5% 17.0% 13.1% 37.9% 43.5%

ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

0.8 -18.4% 5.7 4.4 0.2

0.7 -29.3% 10.1 8.6 0.2

0.8 -23.5% 8.4 7.0 0.2

0.8 -19.2% 7.5 6.2 0.1

2007A 115.37 100,000

2008F 115.37 100,000

2009F 115.37 100,000

2010F 115.37 100,000

18.24 16.70 92% 82.00 151.2 17.52 32.79 2.97 37.00 153

18.65 16.00 86% 99.50 202.8 13.50 42.08 16.97 45.07 176

21.06 16.86 80% 114.29 234.9 17.72 46.00 23.81 50.27 183

21.73 17.40 80% 127.66 256.1 22.07 51.25 29.05 55.51 196

2007A 6.3x 14.5% 1.4 1.9 3.5 4.7 38.9 51.4 $188 3.1 4.1x 6.6x

2008F 6.2x 13.9% 1.2 1.8 2.7 4.2 6.8 10.4 $162 2.6 3.9x 8.5x

2009F 5.5x 14.6% 1.0 1.6 2.5 4.0 4.8 7.7 $146 2.3 3.6x 6.5x

2010F 5.3x 15.1% 0.9 1.5 2.3 3.8 4.0 6.8 $143 2.1 3.5x 5.2x

Per-Share Ratios Share Price No. of Shares ('000) No. Of Shares (,000) EPS DPS DIV./NPAUI Revenues/Share Subscribers/1,000 Shares BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF EV/Sub (US$) P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: Mobinil and CICR forecasts

November 11, 2008 EGYPT | HOUSING & REAL ESTATE

12M FAIR VALUE | LE 42.7

NASR CITY HOUSING & DEVELOPMENT (NCHD)

135

Nat. Co. for Const. and Dev. Beltone Group Banks, Ins Co., Others ESOP Free Float Total

15.1% 30.9% 17.1% 5.0% 32.0% 100.0%

HANY MOHAMED SAMY, CFM [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

MNHD

CASE 30 - rebased

Oct-08

Jul-08

Aug-08

Sep-08

mn shares

LE

90 80 70 60 50 40 30 20 10 0

Jun-08

* Please refer to our report “Struggling for rights…struggling for wealth”, dated November 26, 2006, for a full description of NCHD's land problems.

SHAREHOLDER STRUCTURE

Apr-08

Valuation and recommendation: We valued NCHD using the DCF method, yielding a 12-month fair value of LE 42.7/share, suggesting a 37% upside potential. Hence, we rate the stock a BUY with a HIGH RISK rating.

NCHD’s main activities are real estate and land development. The former contributed on average 72% of total executed work during FY06/07 and FY07/08, while the latter makes up the balance. NCHD has c.10.2 mn sqm in Nasr City, New Cairo and Sixth of October City, 64% or c.6.5 mn sqm, of which, are sellable. Additionally, 92% of the current land bank is facing disputes.

May-08

Cash-rich, low-leverage company: As of June 30, 2008, NCHD had a cash position of LE 238 mn and receivables of LE 591 mn, representing 20% and 50% of total assets, respectively. On the other hand, total debt amounted to LE 29 mn, only 2% of total assets. As such, NCHD should benefit from the current high interest rate environment.

In 1995, NCHD’s shares were listed on Cairo and Alexandria Stock Exchanges (CASE), and in 1996, 75% of the company’s shares were floated, with NCHD becoming a shareholding company following Law No. 159/1981. Currently, NCHD has authorized capital of LE 150 mn, with issued capital of LE 100 mn distributed over 100 mn shares at a par value of LE 1/share.

Mar-08

More diversification: At the onset of 2008, NCHD announced a joint venture contract with New Cairo for Real Estate Investments (Katameya Heights) to construct a resort on ANG land owned by NCHD at a total cost of LE 5 bn. Said move would help NCHD diversify its clientele by targeting the high-end market to capitalize in its well-located land bank in the New Cairo area.

Nasr City Housing and Development was established in 1959 via presidential decree No. 815/1959 as a public company. With the issuance of Law No. 97/1983, the company became a subsidiary of the “Public Sector Housing Authority.” In 1991, the company followed law No. 203/1991, where the company became a subsidiary of “National Company for Construction and Development.”

Jan-08

Increasing its land bank and targeting the middle class: NCHD was able to acquire 179,634 sqm in the Sixth of October City, through the national housing project, for a total consideration of LE 37 mn. Said land bank is earmarked for economic housing projects that will embrace apartments of 63-80 sqm. An additional 555,366 sqm will be acquired in the same area over the coming years. Said transaction will help the company diversify its target clientele by approaching the lower end of the middle class that represents a huge market with unsatisfied demand.

MNHD.CA; NCHR EY LE 31.22 100.0 mn LE 3,122.0 mn LE 82.45/ LE 18.32 0.67 mn / LE 37.01 mn

COMPANY SYNOPSIS

Feb-08

Solving its land bank disputes: During 1Q08, the Egyptian Civil Aviation Authority granted NCHD a building heights license ranging between 12 and 18 meters for its land in AlNasr Gardens (ANG) amounting to 3.8 mn sqm. This will help the company pursue its development activities in a welllocated area in New Cairo. Regarding its conflicts with the Ministry of Defense over the Alternative Land which amounts to 5.6 mn sqm, negotiations are underway; however, no partial settlement has been reached yet*.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Dec-07

Nasr City Housing & Development (NCHD) is a one of the oldest local real-estate developer, targeting mainly the middle class. However, it is currently diversifying more into the luxurious market and the low-end housing. NCHD is a cash-rich, low-debt company with a well-located land bank, albeit with some disputes. With a WACC of 19%, our DCF model indicates a 37% upside to a 12-month fair value of LE 42.7/share, warranting a BUY recommendation with a HIGH RISK rating given its land disputes.

SHARE DATA

Nov-07

Surviving the storm

BUY | HIGH RISK

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 -

November 11, 2008 EGYPT | HOUSING & REAL ESTATE | NASR CITY H&D Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long Term Spontaneous Fin. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Shareholders' Equity

Income Statement (LE mn) Sales Cost of Sales Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items NPAUI

Jun-08 A

Jun-09 P

Jun-10 P

Jun-11 P

238.1 55.3 212.3 75.8 0.0 22.3 603.9 12.9 13.1 540.2 0.0 3.8 1,173.9

143.6 81.6 178.8 63.8 0.0 16.7 484.5 13.3 13.1 592.1 0.0 3.8 1,106.8

123.6 109.7 174.3 65.3 0.0 16.7 489.7 13.8 13.1 623.1 0.0 3.8 1,143.5

103.6 140.6 174.0 69.5 0.0 16.7 504.4 14.2 13.1 631.8 0.0 3.8 1,167.3

12.8 0.3 199.0 0.0 4.8 53.2 3.7 466.5 740.4 16.0 0.0 0.0 756.3 0.0 122.2 21.6 273.7 1,173.9

85.7 0.3 200.4 0.0 4.4 0.0 0.0 435.4 726.1 15.7 0.0 0.0 741.8 0.0 134.0 27.1 203.9 1,106.8

99.8 0.3 199.8 0.0 4.7 0.0 0.0 404.2 708.8 15.4 0.0 0.0 724.2 0.0 145.8 33.1 240.4 1,143.5

96.0 0.3 200.4 0.0 5.1 0.0 0.0 373.1 674.8 15.1 0.0 0.0 689.9 0.0 157.6 39.5 280.3 1,167.3

Jun-08 A 320.3 (165.1) 155.2 (27.3) 127.9 (0.9) 127.0 (3.8) (13.6) 13.3 7.9 13.0 (9.8) 133.9 (22.0) 111.9 (5.8) (1.1) 105.0

Jun-09 P 298.2 (166.3) 132.0 (23.9) 108.1 (1.2) 106.9 (12.0) (11.8) 15.3 9.1 12.1 (6.9) 112.6 (21.4) 91.2 (5.5) 0.0 85.7

Jun-10 P 319.0 (170.8) 148.2 (25.5) 122.6 (1.4) 121.3 (13.8) (11.8) 10.7 10.5 12.9 (6.9) 122.8 (23.4) 99.5 (5.9) 0.0 93.5

Jun-11 P 341.5 (181.2) 160.3 (27.3) 133.0 (1.4) 131.5 (13.3) (11.8) 9.1 12.0 13.8 (6.9) 134.5 (25.6) 108.9 (6.4) 0.0 102.5

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Note: A = Actual; F = Forecasted Source: NCHD and CIBC forecasts

Jun-08 A 84.9 0.9 85.8 7.7 (18.4) 75.1 (4.1) 71.0 4.1 97.6 (14.5) 60.6 (0.6) (7.7) 12.9 (47.1) (80.3) (62.3)

Jun-09 P 31.4 1.2 32.7 (36.4) (25.6) (29.3) (12.3) (41.6) (1.6) (5.3) 73.1 29.9 72.8 0.0 (103.3) 5.5 (56.0) (51.0)

Jun-10 P 92.0 1.4 93.3 (56.5) (31.2) 5.7 (14.1) (8.4) (1.8) 35.1 27.2 17.0 14.1 0.0 0.0 5.9 (57.0) (20.0)

Jun-11 P 99.5 1.4 101.0 (42.5) (31.2) 27.3 (13.6) 13.7 (1.9) 56.6 28.1 39.9 (3.8) 0.0 0.0 6.4 (62.5) (20.0)

Fact Sheet ROE ROS ROA ROIC EBITDA Margin

Jun-08 A 38.3% 32.8% 8.9% 19.2% 39.9%

Jun-09 P 42.0% 28.7% 7.7% 6.8% 36.3%

Jun-10 P 38.9% 29.3% 8.2% 17.3% 38.4%

Jun-11 P 36.5% 30.0% 8.8% 17.0% 38.9%

0.3 122.3%

0.3 93.9%

0.3 89.6%

0.3 87.9%

4.3 2.8 0.8

5.5 3.7 0.7

4.8 3.1 0.7

4.2 2.5 0.7

Share Ratios Share Price No. Of Shares '000 EPS Div/Share Revenues/Share BV/Share Gross CF/Share FCFF/Share EBITDA/Share EV/Share

Jun-08 A 31.22 100,000 1.05 0.80 3.20 2.74 0.86 0.98 1.28 29.13

Jun-09 P 31.22 100,000 0.86 0.52 2.98 2.04 0.33 -0.05 1.08 30.80

Jun-10 P 31.22 100,000 0.94 0.57 3.19 2.40 0.93 0.35 1.23 31.14

Jun-11 P 31.22 100,000 1.02 0.62 3.42 2.80 1.01 0.57 1.33 31.30

Multiples P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV

Jun-08 A 29.7 2.6% 9.7 9.1 36.4 33.9 32.0 29.8 24.4 22.8 11.4

Jun-09 P 36.4 1.7% 10.5 10.3 95.6 94.3 -584.0 -576.2 28.9 28.5 15.3

Jun-10 P 33.4 1.8% 9.8 9.8 33.5 33.4 89.0 88.8 25.5 25.4 13.0

Jun-11 P 30.5 2.0% 9.1 9.2 30.9 31.0 55.2 55.3 23.5 23.5 11.1

ATO WI/ Sales ALEV Debt/ Equity Current Ratio

Source: Company reports and CICR estimates

136

November 11, 2008 EGYPT | BANKS

12M FAIR VALUE | LE 35.76

NATIONAL SOCIETE GENERALE BANK (NSGB) Unleashing growth potential

National Société Générale Bank (NSGB) is the second largest private bank in Egypt following the successful acquisition of Misr International Bank (MIBank). Against the global financial issues and concerns of global recession, NSGB is able to steadily generate a double-digit ROAE of 24.1% that adjusts to 32% when excluding goodwill amortization vs. a market average of 16%. The stock is traded at 2009 PER and PBV of 4.8x - adjusts to 3.7x upon excluding goodwill expense - and 0.9x, respectively. Our DCF-based 12-month fair value suggests a 98% upside potential to LE 35.76, therefore we rate it a BUY with MODERATE RISK.

Strong 1H08; considering a half year dividend: NSGB demonstrated an outstanding 62% growth in bottom-line profits for 1H08, mostly driven by a one-off income worth LE 278.6 mn in reversed provisions and a 48% growth in total banking income. Conversely, the bank is also burdened with the annual amortization charge worth LE 362 mn related to the goodwill of MIBank, ending 3Q10. The bank called for an EGM and AGM on November 12, 2008, to amend articles of incorporation and accordingly approve the proposed half year DPS worth LE 0.25. Core lending capacity and asset quality: NSGB enjoys a CAR ratio of 13.35% and a decent liquidity demonstrated by a net loans/deposits ratio of 61%, following a 13% growth in the loans portfolio in 1H08. NSGB targets diversified loan growth across all LoBs. The NPLs/loans is 8.5% at end of 1H08, down from 16% post MIBank acquisition. Improved cost-to-income ratio in 2008: NSGB benefited from a positive surprise in its 1H08 P&L, namely one-off reversed provisions, which led to an improved cost-to-income ratio of 41% - adjusts to 34.2% when excluding the said oneoff item and ex-goodwill, compared to 56% - 35.1% exgoodwill—in 1H07. We expect the ratio to show an improved trend throughout the projected period. 2008 forecast implies very cheap leading multiples :We forecast an earnings growth rate of 51% in 2008 to LE 1,018.8 mn. NSGB trades at leading 2009 PER and PBV of 4.8x (3.7x ex-goodwill) and 0.9x, respectively, much cheaper than the 2009 MENA average of 10.6x and 2.2x, respectively. Valuation and recommendation: Using a risk-free rate of 11.5% and a market premium of 8% to reflect the contemporary global and local risks, we re-initiate our coverage on the bank with a 12-month fair value of LE 35.76/share, suggesting a 98% upside potential, therefore we rate it a BUY with MODEARATE RISK rating.

BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

NSGB.CA LE 18.05 302.9 mn LE 5,468.1 mn LE 45.45/ LE 17 0.15 mn / LE 5.76 mn

COMPANY SYNOPSIS National Société Générale Bank (NSGB) was established in April 1978, by the French Société Générale Bank (SGB); one of the largest financial services group in the Eurozone, and National Bank of Egypt (NBE); Egypt’s largest public bank. In September 2005, NSGB acquired 90.7% of Egypt’s second largest private bank at the time; Misr International Bank (MIBank). NSGB is currently one of the largest private banks in Egypt. The bank operates in key businesses including retail banking, corporate and investment banking, alongside other activities offered through its affiliates such as leasing via “Sogelease”, NSGB Life Insurance company and ALD Automotive specialized in car rentals and fleet management. Currently, Société Générale owns 77.2 % of NSGB after acquiring NBE’s 18% stake in addition to another 6% in August 2005. As at September 2008, NSGB runs a network of 121 branches.

SHAREHOLDER STRUCTURE Société Générale Bank (SGB) Free Float Total

77.2% 22.8% 100.0%

ALIA ABDOUN [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

NSGB

CASE 30 - rebased mn shares

LE

60

1.0

40

0.8

30

0.6

20

0.4

10

0.2

0 Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

Apr-08

May-08

Mar-08

Jan-08

Feb-08

Dec-07

Nov-07

137

1.4 1.2

50

November 11, 2008 EGYPT | BANKS | NSGB Balance Sheet (In LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Assets Cash & Due from Banks Interbank Assets T-Bills & Government Securities Net Trading Investments Available for Sale Investments Net Loans & Advances Held-to-Maturity Investments Investments in Subsidiaries Accrued Income & Other Assets Net Fixed Assets Good Will Total Assets

3,315.7 13,537.5 3,946.0 241.1 3,632.1 19,735.6 413.2 39.2 634.5 676.1 1,085.8 47,256.7

3,920.2 12,498.9 2,958.8 147.4 3,746.7 24,016.8 467.8 41.7 880.9 767.5 723.8 50,170.5

4,820.2 12,365.2 3,827.5 165.9 4,135.6 28,367.3 527.0 41.7 985.2 869.8 361.9 56,467.4

5,826.3 12,952.7 4,906.6 186.7 4,564.9 32,867.8 598.3 41.7 1,110.3 994.1 0.0 64,049.6

Liabilities and Shareholders' Equity Interbank Liabilities Customer Deposits Accrued Expenses & Other Liabilities Dividends Payable Provisions Medium-/Long-Term Loans Debt Securities Total Liabilities Paid-in Capital Reserves Retained Earnings

1,580.0 39,299.4 1,143.6 130.4 740.1 58.8 0.0 42,952.3 2,754.0 777.9 0.4

1,644.6 41,092.6 1,153.4 244.4 950.1 57.2 0.0 45,142.3 3,029.4 1,276.9 0.4

1,627.1 46,580.2 1,009.5 330.4 1,087.6 51.3 0.0 50,686.1 3,029.4 2,077.8 0.4

1,704.4 52,757.3 1,051.5 441.1 1,238.8 46.1 0.0 57,239.2 3,029.4 3,151.6 0.4

3,532.4 772.0

4,306.8 721.5

5,107.7 673.6

6,181.4 629.0

4,304.4 47,256.7

5,028.2 50,170.5

5,781.3 56,467.4

6,810.4 64,049.6

Contingent Liabilities

15,816.4

17,090.5

19,993.5

23,389.6

Total Footing

63,073.1

67,261.1

76,460.9

87,439.2

Tier I Capital Tier II Capital Total Shareholders' Equity Total Liabilities & Shareholders' Equity

Income Statement (In LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Total Interest Income Interest Paid to Clients & Banks Net Interest Income (NII)

3,047.3 1,834.4 1,212.9

3,317.4 1,818.3 1,499.1

4,030.0 2,201.3 1,828.7

4,745.5 2,496.2 2,249.3

Provisions Net Interest Income AP Fees and Commissions Income Investment Income Foreign Exchange Income Other Incomes Non-Interest Income Operating Income (BP) Operating Income (AP) G&A Expenses and Depreciation Other Expenses Non-Interest Expense Net Operating Income Taxation NPAT Unusual Items NPAUI Less: Non-Appropriation Items Net Attributable Income (NAI)

90.3 1,122.6 447.5 13.6 15.7 80.0 556.7 1,769.7 1,679.3 984.5 -6.8 977.7 701.6 29.3 672.3 1.8 674.2 0.0 674.2

305.0 1,194.1 599.3 16.8 28.2 378.6 1,022.9 2,522.0 2,217.0 1,094.7 -1.9 1,092.8 1,124.2 105.4 1,018.7 0.1 1,018.8 92.9 925.9

202.7 1,626.0 713.9 20.7 63.6 113.2 911.5 2,740.2 2,537.5 1,220.3 0.0 1,220.3 1,317.2 185.9 1,131.3 0.0 1,131.3 103.2 1,028.1

218.7 2,030.6 828.1 23.2 73.2 119.4 1,043.9 3,293.2 3,074.5 1,287.5 0.0 1,287.5 1,787.0 272.1 1,514.9 0.0 1,514.9 138.2 1,376.7

138

Profitability & Efficiency Ratios

Dec-07

Dec-08

Dec-09

Dec-10

Net Interest Margin (NIM) RoAA RoAE Cost/Income Earning Assets / Total Assets

3.16% 1.56% 17.65% 55.25% 87.91%

3.45% 2.09% 21.83% 43.33% 87.46%

3.84% 2.12% 20.93% 44.53% 87.54%

4.16% 2.51% 24.06% 39.10% 87.62%

Productivity & Asset Quality Ratios

Dec-07

Dec-08

Dec-09

Dec-10

Net Loans / Customer Deposits Interbank Ratio Liquid Assets / Total Deposits Assets Utilization Capitalization Ratio NPLs / Total Loans Provision Coverage Ratio

50.22% 8.6 62.78% 8.31% 9.11% 11.30% 82.7%

58.45% 7.6 56.63% 8.91% 10.02% 8.12% 95.4%

60.90% 7.6 54.35% 9.27% 10.24% 6.72% 99.2%

62.30% 7.6 53.90% 9.61% 10.63% 5.72% 102.2%

Growth & Market Ratios

Dec-07

Dec-08

Dec-09

Dec-10

18.1% 13.4% 3.73 4.8x 0.75 4% 19.08 0.9x

15.9% 13.3% 5.00 3.6x 1.00 6% 22.48 0.8x

Net Loans Growth 26.2% 21.7% Customer Deposits Growth 18.0% 4.6% EPS (LE) * 2.45 3.36 P/E 8.1x 5.4x DPS (LE) 0.25 0.50 Dividend Yield 1% 3% Retroactive BV/Share (LE) 14.21 16.60 P/BV 1.3x 1.1x * EPS based on NPAUI ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Source: NSGB and CICR forecasts

November 11, 2008 EGYPT | CONSUMER

12M FAIR VALUE | LE 55.1

OLYMPIC GROUP (OG)

139

SHAREHOLDER STRUCTURE Paradise Capital Foreign Institutions Local Institutions Retail

52.0% 37.0% 8.0% 3.0%

INGY EL-DIWANY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume 120

OLGR

CASE 30 - rebased mn shares

LE

0.7 0.6

100

0.5

80

0.4

60

0.3

40

0.2

20

0.1

0 Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Apr-08

May-08

Mar-08

Valuation and recommendation. We downgraded our 12month fair value using DCF to LE 55.1/share vs. LE 58.1/ share in our previous update, reflecting i) 50-bps and a 200 bps increase in the discount rate and the market risk premium to 11.5% and 8%, respectively ii) a 100 bps decrease in the perpetuity growth rate to 3% reflecting inflationary pressures. Given that OG is traded at a 56% discount to fair value, thus we still maintain our BUY recommendation. Yet, we need to highlight the downside risk to our valuation which is the slowdown in sales of consumer durables mirroring the global slowdown. It is worth highlighting that our valuation incorporates (1) lower estimates of steel prices and (2) OG's exact stakes in Namaa and B.Tech post spin-off, announced early September, where OG shareholders were given the option to request shares or cash. Since a larger than expected amount of shareholders requested cash, OG now has controlling stakes in Namaa and B.Tech. OG is traded at 5.5x 2008 expected earnings vs. peers traded at 7.6x expected earnings.

Established in 1995, Olympic Group (OG) dates back to the 1930s. It has factories in Cairo, the Tenth of Ramadan City, and the Sixth of October City. Since its acquisition of 79% of Ideal late 1997, OG has been maintaining a leading position in Egypt's white goods market. OG's portfolio is well segmented with products targeting different income classes. Exports contribute less that 10% of OG's top line. OG procures around 50% of the components used in manufacturing locally either from subsidiaries within the group or through other local suppliers. Meanwhile, OG procures 40% of its steel requirements locally, and the remaining balance is imported. Over the last five years, OG has been consolidating its business. In 2003 and 2004, OG consolidated five companies and increased its paid-in capital from LE 340 mn to LE 547.8 mn through (1) a stock dividend distribution and (2) a capital increase of LE 148 mn at par. In 2005, OG increased its stake in Ideal to 93% through a 1:2 share swap (one OG share to two Ideal shares). Accordingly, OG's paid-in capital increased by LE 52.9 mn to LE 600.7 mn. In early September 2008, OG announced the spin-off of Namaa and B.Tech through the distribution of 0.5 shares of Namaa and 0.4 shares of B.tech to OG shareholders as of September 9, 2008 for every 1 share owned in OG or the equivalent in cash (i.e. LE 5/OG share and LE 0.4/OG share, respectively).

Jan-08

Future cost savings ahead. We believe that the current slowdown in steel prices is expected to give the company an edge for future savings in light of its hedging strategy to purchase its steel requirements 3-6 months in advance.

OLGR.CA / OLGR EY LE 24.13 60.1 mn LE 1,450.2 mn LE 89/ LE 17.75 0.1 mn / LE 6.76 mn

COMPANY SYNOPSIS

Feb-08

Growth profile to be maintained. We believe that future demand will be driven from the delivery of most of the housing units of newly established compounds in 2010 in addition to growing urbanization and new marriages. Yet, inflationary pressures are expected to increase demand on lower priced brands and lower replacement market. Long-term earnings growth, estimated at a 5-year CAGR of 19%, is expected to be achieved on the back of alliance signed with Electrolux. More capacity is required to be added to expand with Electrolux with an estimated capex figure of LE 1.12 bn. The alliance, part of Electrolux's strategy to relocate its factories to low cost nations, is expected to add around LE 513 mn to EBITDA over the next 5 years. OG will export products produced on an OEM basis to Electrolux.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Nov-07

Olympic Group (OG) maintained a remarkable market share of 30% in 2007 owing to its well diversified portfolio. Classifying its products as durables associated with a one-time buy rather than replacement, we believe that the global slowdown will not have a serious impact on local demand. Yet, inflationary pressures remain a concern. Growth in the coming few years is expected to be sustained from the delivery of housing units in new compounds, while long-term growth is expected to be driven from the new agreement with Electrolux. OG is traded at 5.5x 2008 earnings vs. peers' average of 7.6x. Our 12 month fair value is LE 55.1/share, with a 128% upside potential. Thus, we reiterate our BUY recommendation with Moderate risk.

SHARE DATA

Dec-07

Away from global headache; yet inflation is a concern

BUY | MODERATE RISK

November 11, 2008 EGYPT | CONSUMER | OLYMPIC GROUP Balance Sheet (LE mn)* Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Non-Current Assets Other Non-current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Revenues Cost of Revenues Gross Profit SG&A EBITDA Adjusted EBITDA** Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

2007P

2008F

2009F

2010F

115 161 434 0 0 0 710 444 515 235 0 1 1,906

112 228 524 62 0 0 926 589 251 119 111 1 1,998

83 275 628 74 0 0 1,061 1,130 259 139 111 1 2,702

154 334 758 90 0 0 1,336 1,487 269 166 111 1 3,370

208 42 153 0 0 0 0 73 476 137 0 612 99 68 1,127 1,906 -0.99 2007P

312 62 190 14 20 7 0 67 672 228 6 905 68 64 962 1,998 -0.04 2008F

316 154 228 17 24 7 0 80 826 533 6 1,365 72 89 1,176 2,702 0.81 2009F

762 155 276 21 29 7 0 97 1,347 384 6 1,736 76 120 1,438 3,370 -0.96 2010F

1,899 (1,376) 523 (225) 298 326 (31) 266 (51) 0 2 (2) 47 (1) 261 (20) 241 (13) 228

2,385 (1,743) 642 (289) 353 378 (38) 316 (61) (4) 4 3 53 (0) 310 (25) 285 (20) 265

2,870 (2,085) 785 (327) 458 486 (41) 417 (91) (4) 3 7 70 (0) 401 (32) 369 (25) 344

3,481 (2,517) 964 (390) 574 611 (42) 532 (142) (4) 4 10 90 (0) 490 (39) 451 (31) 420

Cash Flow (LE mn)

2007P

2008F

2009F

2010F

245 31 276 (101) (7) 169 (89) 80 (82) 86 (3) (5) (1) 100 (112) 9 0 (10)

186 38 224 (147) (22) 54 (103) (49) (182) (128) 462 230 104 153 (556) (40) 106 (3)

385 41 425 (119) 14 320 (153) 167 (581) (261) 51 (363) 4 459 (284) 25 129 (29)

493 42 535 (148) 17 404 (295) 108 (398) 5 67 (223) 446 5 (347) 31 158 71

Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin Adjusted EBITDA Margin** ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

2007P 20.2% 12.0% 11.9% 14.6% 27.5% 15.7% 17.2% 1.0 35.7% 1.7 0.5 1.5

2008F 27.6% 11.1% 13.3% 11.0% 26.9% 14.8% 15.9% 1.2 29.7% 2.1 0.9 1.4

2009F 29.2% 12.0% 12.7% 16.4% 27.4% 16.0% 16.9% 1.1 29.5% 2.3 1.2 1.3

2010F 29.2% 12.1% 12.5% 16.8% 27.7% 16.5% 17.6% 1.0 29.4% 2.3 1.2 1.0

Per-Share Ratios

2007P

2008F

2009F

2010F

24.13 60,076 3.8 1.5 31.6 18.8 4.6 1.4 5.0 28.6

24.13 60,076 4.4 1.7 39.7 16.0 3.7 (2.1) 5.9 32.3

24.13 60,076 5.7 2.3 47.8 19.6 7.1 (4.3) 7.6 39.4

24.13 60,076 7.0 2.8 57.9 23.9 8.9 0.1 9.6 43.2

2007P 2008F 6.4x 5.5x 0.8x 0.6x 0.9x 0.8x 5.2x 6.5x 6.2x 8.7x 16.8x -11.3x 20.0x -15.1x 4.9x 4.1x 5.8x 5.5x 1.3x 1.5x NA= Not Available

2009F 4.2x 0.5x 0.8x 3.4x 5.6x -5.6x -9.1x 3.2x 5.2x 1.2x

2010F 3.5x 0.4x 0.7x 2.7x 4.9x 267.5x 479.2x 2.5x 4.5x 1.0x

NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

Share Price No. Of Shares (,000) EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: P = Pro forma; F = Forecast *Figures exclude Namaa and B.Tech

**Adjusted EBITDA excludes lease expense but includes export subsidies. Source: OG and CICR forecasts

140

November 11, 2008 EGYPT | CONSTRUCTION & FERTILIZERS

12M FAIR VALUE | LE 330.5

ORASCOM CONSTRUCTION INDUSTRIES (OCI)

141

60.0% 40.0% 100.0%

MUHAMMAD EL EBRASHI [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

CASE 30 - rebased mn shares

LE

1.6 1.4 1.2 1.0

Oct-08

Sep-08

0.8 0.6 0.4 0.2 Jul-08

500 450 400 350 300 250 200 150 100 50 0

OCIC

Aug-08

Valuation and recommendation: We valued OCI based on a sum-of-the-parts basis and using the DCF model for its two main lines of business: construction and fertilizers. We reached a 12-month fair value of LE 330/share, implying an upside potential of 68%.

Sawiris Family Free Float Total

Jun-08

Cheap natural gas prices: OCI's fertilizers business is backed by long-term gas agreements with prescribed gas volumes and price formulas in the range of US$1.25-2/MMBtu valid for 20 years in Egypt and US$0.57/MMBtu valid for a similar period in Algeria.

SHAREHOLDER STRUCTURE

Apr-08

Guaranteed output sales: OCI's fertilizers output is sold through both the retail and wholesale channels, with the latter backed with long-term take-or-pay agreements.

Starting 2008, OCI ventured in the fertilizers business by merging Egyptian Fertilizers Company (EFC), a subsidiary of ABRAAJ Capital (Abraaj) - a UAE company. The deal amounted to US$1.59 bn (cash and shares), also OCI assumed EFC's US$1.1 bn net debt. Through EFC, OCI owns a 20% stake in Notore Fertilizers, a Nigerian company. In addition, OCI established Egyptian Basic Industries Company (EBIC), another fertilizer plant in Egypt's Suez free zone, to be launched in 4Q08. A third fertilizers plant, Sorfert, is underway in Algeria, to be launched in 2H10. Also, OCI acquired 20% stake in Gavilon, a US fertilizer distribution company. Furthermore, OCI schemed a DAP/MAP project – phosphate fertilizers – in Algeria or Morocco.

May-08

Nitrogen fertilizers prices rally: Although urea prices reverted back to its normal levels (c. US$300/ton), ammonia prices are rallying up the scale reaching c. US$900/ton beginning 4Q08, just in time for the launch of EBIC - an ammonia producer. Thus, EBIC is expected to ride the ammonia peck.

In 1999, OCI joined in the cement business and had its shares listed on the Egyptian Exchange (EGX). Afterwards, it owned and operated a group including cement, ready-mix concrete and cement bag manufacturing operating in Egypt, Algeria, northern Iraq, Pakistan, UAE, Turkey and Spain, with a combined annual designed production capacity of 35 mn tons. In January 2008, OCI divested the cement LoB to Lafarge S.A., that paid EUR8.8 bn (US$12.9 bn) and assumed US$2 bn in debt, the deal was executed on the EGX.

Mar-08

Capacities ramp-up: New capacities are on schedule with Egyptian Basic Industries Co. (EBIC) and Nigeria-based Notore Fertilizers (NCIL) coming on stream in 4Q08 with full capacity starting 2009, helping OCI take advantage of the current slack in global nitrogen fertilizers capacities. In addition, EFC's production capacity will increase in 2010, concurrent with the launch of OCI's Algerian fertilizers plant, Sorfert.

Orascom Construction Industries is incorporated under Law no. 159/1981 in April 1998 as a shareholding company, to undertake contracting activities and other related activities. OCI's operations encompass construction, fertilizers (nitrogen), and previously cement in US, Europe, MENA, and GCC regions. Currently, OCIC has an authorized and paid-in capital of LE 1,073.8 mn distributed over 214.77 mn shares with a par value of LE 5.

Jan-08

Management vision: OCI's management believes in growth via establishing new fertilizers plants or acquiring stakes in existing ones (á la EFC type-of-deal). Hence, we should expect further expansion in 2008 and beyond, further boosting both revenues and investment income.

OCIC.CA; OCIC EY LE 197.00 214.8 mn LE 42,309.9 mn LE 485/ LE 182.09 0.27 mn / LE 88.23 mn

COMPANY SYNOPSIS

Feb-08

Modeling the fertilizers business: OCI's fertilizers business is evolving and should benefit from expected demand in the different fertilizers sub-segments (nitrogen and phosphate).

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Nov-07

Orascom Construction Industries (OCI) is one of the largest regional construction groups with diversified businesses and a shrewd management team. Besides its "conventional" construction business, it once had a global cement business that was cashed out early 2008 with good timing and valuation only to shift gears towards the high-growth fertilizers sector. OCI's current fertilizers business model focuses on nitrogen fertilizers in Egypt and Algeria with a low-cost advantage of natural gas prices (between US$0.57-2/MMBtu). OCI is also looking into the phosphate fertilizers as a complement. The stock is currently traded at a 40% discount to intrinsic value but a 30% premium vs. peers based on 2008 EV/EBITDA multiple due to asymmetric market conditions and the fact that Algeria’s operation is yet to start by 2010. We re-initiate coverage with a BUY.

SHARE DATA

Dec-07

Black pearl

BUY | MODERATE RISK

November 11, 2008 EGYPT | CONSTRUCTION & FETILIZERS | OCI Balance Sheet (in US$ mn)

Dec-07

Dec-08

Dec-09

Dec-10

Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets

4,260.7 959.8 130.3 0.0 13,843.3 0.0

1,678.3 1,346.6 201.5 3.8 233.1 5.4

1,222.6 1,548.0 234.0 4.0 292.7 5.4

1,232.2 1,791.0 307.5 9.1 335.4 5.4

19,194.1

3,468.6

3,306.6

3,680.7

614.0 558.7 129.2 0.0 11.5

2,267.1 602.5 38.6 0.0 278.0

2,868.8 653.8 45.1 0.0 278.0

3,628.1 703.4 50.5 0.0 278.0

20,507.5

6,654.8

7,152.3

8,340.8

1,888.9 46.9 817.6 0.0 0.0 33.8 11,146.6 161.0 239.0

0.0 0.0 976.8 0.0 9.0 33.8 0.0 177.8 259.8

276.5 0.0 1,103.6 0.0 8.3 33.8 0.0 207.5 259.8

315.3 46.9 1,270.9 0.0 17.5 33.8 0.0 231.2 259.8

14,333.8

1,457.3

1,889.6

2,175.5

6,211.7 0.0 0.0

1,650.0 0.0 0.0

2,025.0 0.0 0.0

2,353.1 0.0 0.0

20,545.6

3,107.3

3,914.6

4,528.6

0.0 409.3 0.0

0.0 409.3 373.9

0.0 409.3 452.3

0.0 411.0 633.7

1,776.7 22,731.6

2,764.3 6,654.8

2,376.2 7,152.3

2,767.5 8,340.8

Dec-07

Dec-08

Dec-09

Dec-10

2,391.7 (1,818.1)

3,799.4 (2,547.4)

4,261.4 (3,141.9)

4,913.6 (3,411.4)

573.6

1,252.0

1,119.5

1,502.2

Liabilities & Shareholders' Equity Short-Term Debt Current Portion of LT Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Sales Tax Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

Income Statement (in US$ mn) Revenues COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT

142

(135.5)

438.1 (163.9)

(215.3)

1,036.7 (98.3)

(244.7)

874.9 (102.1)

274.2

938.4

(107.3) (15.2) 57.3 22.9 20.6 8.0

(105.3) (20.4) 79.9 32.0 20.7 13.0

260.5

958.2

942.0

(139.8)

(143.4)

818.4

798.6

(14.5)

246.0

772.8 (54.7) (24.0) 96.9 112.0 23.9 15.1

(281.6)

1,220.7 (158.6)

1,062.0 (74.0) (28.5) 107.2 106.9 26.6 16.8

1,217.1 (155.8)

1,061.3

Fact Sheet

Dec-07

Dec-08

Dec-09

Dec-10

13.8% 10.3% 1.2% 8.6% 18%

29.6% 21.5% 12.3% 16.3% 27%

44.3% 24.7% 14.7% 11.4% 21%

47.6% 26.8% 15.8% 14.0% 25%

ATO WI/ Sales

0.1 588.9%

0.6 17.4%

0.6 18.9%

0.6 19.8%

ALEV Debt/ Equity Current Ratio

11.6 1164% 1.3

2.7 125% 2.4

3.4 187% 1.7

3.4 182% 1.7

Dec-07 693.1

Dec-08 803.6

Dec-09 602.4

Dec-10 876.7

163.9

98.3

102.1

158.6

857.0

901.9

704.5

1,035.3

ROE ROS ROA ROIC EBITDA Margin

Cash Flow (in US$ mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends

Share Ratios Share Price New No. Of Shares '000 Actual No. Of Shares '000 EPS Div/Share Revenues/Share Units Sold/Share BV/Share Gross CF/Share FCFF/Share EBITDA/Share EV/Share

Multiples* P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV

(272.5) (13,293.1)

(566.0) 199.1

(108.1) (29.8)

(145.1) (19.1)

(12,708.5)

535.0

566.6

871.0

(107.3)

(12,815.8)

(105.3)

(54.7)

(74.0)

429.7

511.9

797.1

(777.9) (193.3) 9,981.8

(2,108.3) (1,772.3) (1,005.1)

(446.7) 149.8 210.9

(660.8) 229.4 204.6

(3,611.9)

(2,683.7)

276.1

340.9

1,888.9 183.6 1,211.0 595.3 0.0

(580.1) 1,650.0 1,866.3 783.1 (175.5)

856.6 375.0 (1,224.0) 78.3 (217.9)

38.7 375.0 (674.1) 181.2 (251.0)

Dec-07 35.65 214,771 214,771 1.15 51.90 11.14 95.66 8.27 3.99 -0.90 2.04 42.56

Dec-08 35.65 214,771 214,771 3.81 0.82 17.69 14.47 12.87 4.20 -8.25 4.83 35.52

Dec-09 35.65 214,771 214,771 3.72 1.01 19.84 18.23 11.06 3.28 0.70 4.07 40.67

Dec-10 35.65 214,771 214,771 4.94 1.17 22.88 21.09 12.89 4.82 1.07 5.68 42.56

Dec-07 31.1 145.6% 3.2 3.8 8.9 10.7 -39.6 -47.3 17.5 20.9 4.3

Dec-08 9.4 2.3% 2.0 2.0 8.5 8.5 -4.3 -4.3 7.4 7.4 2.8

Dec-09 9.6 2.8% 1.8 2.0 10.9 12.4 51.1 58.3 8.8 10.0 3.2

Dec-10 7.2 3.3% 1.6 1.9 7.4 8.8 33.4 39.8 6.3 7.5 2.8

November 11, 2008 EGYPT | TMT

12M FAIR VALUE | LE 96.1

ORASCOM TELECOM (OT)

BUY | HIGH RISK

A strategy shift or no EM growth in sight? SHARE DATA

143

By end of January 2008, OTH has been granted the first 25-year commercial license to provide mobile services in the Democratic People’s Republic of Korea (DPRK) or North Korea, using 3G technology with an exclusivity period of four years. In partnership with Canada-based Globalive, OTH won an AWS spectrum in Canada to start operations by mid 2009.

SHAREHOLDER STRUCTURE Weather Investments Free Float Total

51.9% 48.1% 100.0%

MOHAMED HAMDY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume 120

ORTE

CASE 30 - rebased mn shares

LE

6.0

100

5.0

80

4.0

60

3.0

40

2.0

20

1.0

0 Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Apr-08

May-08

Mar-08

Valuation and recommendation: Following 2Q08 results we cut our sum-of-the-parts (SOTP) valuation by 9% to LE 96.1/ share (US$86.8/GDR), which still implies a 167% upside potential over the recent market price. The stock is down 60% YTD and appears oversold over negative news flow from Asian markets. However, it trades at a PER of 11.3x expected 2008 earnings (adjusted for one-time items), 6% below the regional operators, the likes of Etisalat, MTC, Vodafone Group, and MTN. Until there is a positive news catalyst the shares are unlikely to reach its longer-term potential in the current environment. Yet, our DCF-based recommendation matrix places the stock as a BUY, albeit with a HIGH RISK rating.

Orascom Telecom Holding (OTH) is one of the leading regional mobile operators and among the largest in the Middle East and Africa. OTH’s GSM networks cover 5 main countries with a total population of more than 430 mn. OTH operates GSM operations in Egypt, Pakistan, Algeria, Tunisia, and Bangladesh. In December 2005, OTH had acquired 19.3% of Hutchison Telecom International Limited (HTIL) for US$1.3 bn. After receiving US$793 mn in special dividends from HTIL's sale of Hutch Essar, OTH sold its entire stake in HTIL for a total value of US$1.3 bn. Historically, OTH had restructured its operation with a wave of divestiture, selling its stakes in the Jordanian mobile operator, Fastlink and nine GSM mobile operators in Africa, in addition to Loteny (Ivory Coast), Oasis Telecom (DRC), and Libertis Telecom (Congo Brazzaville). In December 2007, OTH sold its GSM operator in Iraq to MTC-Atheer (Zain) for US$1.2 bn.

Jan-08

Very few opportunities in emerging markets: We reckon that the scarcity of investment opportunities in emerging markets compelled OT to seek opportunities elsewhere in developed markets and to continue its share buyback program. However, if investment opportunities pop up, OT may find it difficult to shore up funds for acquisitions, especially in such battered global credit markets.

COMPANY SYNOPSIS

Feb-08

Building value through mobile banking and Africa: OT plans to further create value and develop its business through two key venues: (1) Mobile banking: Western Union (WU) and OT announced an alliance to introduce mobile remittance services in selected markets. Mobile banking is likely to appeal to a wide base of OT's users as it will ease financial and banking transactions. Consequently, we expect a positive impact on OT's ARPU over the medium- to long-term. (2) Targeting small-sized investments: OT's management is targeting small-sized investment opportunities in Africa via Telecel Global.

ORTE.CA/ORTEq.L; ORTE EY LE 35.98 899.4 mn LE 32,360.5 mn LE 94.46/ LE 27 1.11 mn / LE 74.42 mn

Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Nov-07

Canada - a key catalyst to rescue value: In partnership with Canada-based Globalive, OT has won AWS spectrum in Canada at a price of C$442 mn to provide its services in all provinces except the Quebec. OT intends to invest US$500-700 mn with an IRR of 20%. OTH will enjoy operating in a highincome market with low penetration of 61% and a high ARPU of US$55 vs. OT's global ARPU of US$6.6. We valued OT's share in Globalive at US$1,530 mn, representing 10% of OT's total value.

Reuters; Bloomberg

Dec-07

Orascom Telecom (OT) managed to maintain leading market positions in its key markets, Djezzy (73% of OT's value) enjoys a high market share of 63%. While Mobinil and Tunisiana continued their strong performance, margins and growth of Asian subsidiaries are affected by political, economic, and competitive factors. Thus, we cut our valuations for all GSM subsidiaries in the wake of the global financial crisis and a higher interest rate environment. Said downgrade was offset by the addition of OT's investments in Canada and North Korea. Longer term, OT will build value through mobile banking and investing in Africa. Our SOTP 12-month fair value is some 167% higher, trading at 11.3x adjusted earnings a 6% discount to other regional operators.

November 11, 2008 EGYPT | TMT | ORASCOM TELECOM Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Intangibles Other Non-current Assets Goodwill Total Assets

6,893 4,375 617 0 5,144 3,501 20,530 26,689 0 12,187 3,975 0 63,381

11,409 4,881 773 0 100 3,838 21,001 31,483 2,778 12,267 1,324 0 68,854

11,563 5,398 855 0 100 3,838 21,753 32,681 2,653 10,511 1,324 0 68,922

11,798 6,083 963 0 100 3,838 22,782 32,767 2,227 8,767 1,324 0 67,868

Liabilities & Equity ST Debt Payables Accrued Expenses Down Payments Put Option Liabilities Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities LT creditors license fees Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

10,234 13,277 0 0 0 378 23,890 18,792 2,877 0 45,559 0 0 521 17,301 63,381

4,634 12,704 0 0 0 362 17,701 24,515 3,078 0 45,293 0 0 817 22,743 68,854

4,581 13,867 0 0 0 362 18,810 19,905 3,078 0 41,794 0 0 1,200 25,928 68,922

3,130 15,410 0 0 0 362 18,902 15,286 3,078 0 37,267 0 0 1,735 28,865 67,868

2007A 70,089 57,861 26,754 9,955 7,138 3,997 0 1,499 1,091 0 23,679 3,075 11,699 6,346 3,163 1,816 0 776 (241) (28) 11,832 (133) (4,257)

2008F 83,538 67,726 29,773 11,414 6,963 4,757 14 1,875 1,569 0 26,593 3,180 12,886 7,032 2,891 2,128 1 1,042 (118) 0 12,977 (90) (5,206) (193) 7,488 (2,512) 0 0 0 149 (161) 4,964 (1,985) 2,978 (296) 0 2,682

2009F 94,732 76,436 32,836 12,407 6,610 5,384 550 2,056 2,051 0 29,059 3,777 13,991 7,444 2,775 2,263 99 1,028 244 0 13,853 137 (5,917)

2010F 105,041 84,950 37,008 13,354 7,072 5,911 1,381 2,131 2,582 0 32,430 4,578 15,628 7,879 3,041 2,455 410 1,023 556 0 15,364 264 (6,367)

8,073 (2,446) (125) 0 0 0 0 5,502 (1,626) 3,876 (383) 0 3,493

9,261 (1,825) (425) 0 0 0 0 7,011 (2,051) 4,960 (535) 0 4,425

Income Statement (LE mn) Yearend Subs (k) Proportionate Yearend Subs (k) Revenues Djezzy Mobilink Mobinil CHEO Tunisiana Banglalink Telecel GSM Non GSM EBITDA Djezzy Mobilink Mobinil CHEO Tunisiana Banglalink Telecel GSM Non GSM Depreciation & Amortization Others EBIT Net Interest Exp./Inc. Share of Income/(Loss) of Associates Net Profit from discont. operations Capital Gain Gain (loss) from sale of Inv. Non-Operating Inc., Net of Exp. EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

144

2007A

7,441 (2,731) 4,316 5,213 (1) (28) 298 14,507 (2,571) 11,935 (372) 0 11,563

2008F

2009F

2010F

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before LT Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

2007A 7,165 4,257 11,422 (287) (4,624) 6,511 (6,441) 70 (7,811) (1,300) 8,236 495 0 8,501 (4,776) (563) (1,100) 2,557

2008F 4,715 5,206 9,921 (417) (353) 9,151 (12,807) (3,656) (9,195) (44) 4,252 (8,599) 0 10,356 3,653 0 (893) 4,517

2009F 6,447 5,917 12,365 564 0 12,929 (7,257) 5,672 (6,310) 6,619 1,128 490 0 (29) 854 0 (1,163) 153

2010F 7,210 6,367 13,577 749 0 14,326 (6,769) 7,557 (5,648) 8,678 1,304 3,212 0 (1,489) (0) 0 (1,488) 235

Fact Sheet ROE ROS ROA ROIC EBITDA Margin

2007A 66.8% 43.2% 18.2% 15.3% 43.7%

2008F 11.8% 9.0% 3.9% 8.9% 43.3%

2009F 13.5% 10.6% 5.1% 12.5% 42.6%

2010F 15.3% 12.0% 6.5% 14.7% 42.2%

ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

0.4 14.6% 4 3 0.9

0.4 17.5% 3 2 1.2

0.5 8.8% 3 2 1.2

0.5 1.1% 2 1 1.2

2007A 35.98 899,403

2008F 35.98 899,403

2009F 35.98 899,403

2010F 35.98 899,403

EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

12.86 1.22 29.75 19.24 12.70 (1.45) 13.01 60.59

2.98 0.99 33.10 25.29 11.03 (0.05) 14.33 55.70

3.88 1.29 36.51 28.83 13.75 7.36 15.56 50.35

4.92 1.65 41.15 32.09 15.10 9.65 17.38 43.34

Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted

2007A 2.8x 3.4% 1.2 2.0 2.8 4.8 (24.9) (41.9) 2.8 4.7x 1.9x

2008F 12.1x 2.8% 1.1 1.7 3.3 5.0 (735) (1,137) 2.5 3.9x 1.4x

2009F 9.3x 3.6% 1.0 1.4 2.6 3.7 4.9 6.8 2.3 3.2x 1.2x

2010F 7.3x 4.6% 0.9 1.1 2.4 2.9 3.7 4.5 2.1 2.5x 1.1x

Per-Share Ratios Share price No. of shares ('000)

Source: OTH and CICR forecasts

November 11, 2008 EGYPT | CONSUMER

12M FAIR VALUE | LE 48.3

ORIENTAL WEAVERS CARPETS (OWC)

145

SHAREHOLDER STRUCTURE Moh.Farid Khamis & Family Institutions Fitaihi Holding Group Co. Amwal Al Khaleej Free float

66.0% 23.0% 5.0% 1.7% 4.3%

INGY EL-DIWANY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

ORWE

CASE 30 - rebased mn shares

LE

70 60 50 40

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 -

30 20 10 Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

Apr-08

May-08

0 Mar-08

Valuation and recommendation: We downgraded our latest valuation dated September 22, 2008 by 4% to LE 48.3/share. This reflected the following: (1) the 200-bps increase in the market risk premium to 8%, (2) the 100-bps reduction in the perpetuity growth to 3% on the back of the global slowdown, and (3) a slight reduction in the expected utilization rate of the new complex. We incorporated lower estimates of polypropylene prices than the estimates we previously used. Still, the stock offers 111% upside potential vs. current market price, hence we reiterate our BUY recommendation. However, the ongoing US slowdown - expected to pick up in 2010 - coupled with the gradual decline of export rebates are still our main concerns for the company. Thus, we still maintain our HIGH RISK profile for OWC. OWC is currently traded at 5.3x 2008 earnings versus an international peer average of 11.5x.

Oriental Weavers Carpets (OWC) was established in 1981 and is operating under Investment Law #8/1997. OWC is part of the Orientals Holding Co., which is involved in diversified fields including floor coverings, textiles, petrochemicals, real-estate development, and investment. OWC is the leading Egyptian carpet manufacturer with a local market share of 85%. Also, OWC has a very strong position in the global market, retaining a decent market share of 14% in 2006. In the US, OWC had a market share of 6% in the area rugs market in 2007, while MAC had around 19% market share. Exports contributed around 63% of OWC's top line in 1H08 with sales to the US and Europe constituted almost 79% of exports. OWC adopts the vertical and horizontal integration methods in its manufacturing process. OWC processes its own polypropylene fiber, which is converted into yarn, and it manufactures and distributes finished products. OPC, a 12% owned subsidiary, supplies 80-90% of OWC's requirement of polypropylene granules. Total fiber requirements are supplied through its subsidiaries OWF and EFCO. Carpets and rugs production processes are carried out through its main subsidiaries namely: Oriental Weavers Carpets (OWC), Oriental Weavers International (OWI), MAC, OW China, and OW USA. Lately, OWC diversified its portfolio to include new products, such tapestry and Axminster which are free of polypropylene. A series of developments took place in OWC's paid-in capital. Lately, in 2008 OWC distributed a 1:3 stock dividend, whereby the company’s paid-in capital reached LE 373 mn distributed over 74.6 mn shares.

Jan-08

Establishing an LE 1.3-bn complex with a capacity of 42 mn sqm. We believe that the new industrial complex, planned to partially commence operation in 2009, will add further growth to the company. The project, planned to be built over three phases in nine years' time till 2016, will be financed with 55% debt and 45% equity. Owing to the global turmoil, plans to proceed with the phases of the complex will more likely depend on the global market situation.

ORWE.CA; ORWE EY LE 22.89 74.6 mn LE 1,707.6 mn LE 52.87/ LE 17.12 0.17 mn / LE 6.95 mn

COMPANY SYNOPSIS

Feb-08

Tapping new channels – cooling-down of polypropylene prices. To offset the US and the European slowdown, OWC diverted unutilized capacities to the local market to meet strong demand. Also, OWC started penetrating new markets such as Chile, Brazil and Mexico. Furthermore, OWC opened new sales channels in the Gulf and Asia in addition to continuous diversification of its product mix towards high-end segments. However, the US market remains OWC's center of attention, where steps to increase distribution network are taken to achieve further growth once the market picks up. On a different front, gross margins were suppressed in 2007 on the back of the hike in polypropylene prices. However, polypropylene prices started to cool down, on falling oil prices, which will help improve the company's margins over the coming period.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Dec-07

Oriental Weavers Carpets (OWC), a vertically-integrated rug manufacturer, maintains a leading position in the local market and a strong footing in global markets. Faced with the challenges of a slowdown in its major markets, US and Europe, OWC started diverting unutilized capacities to the local market in addition to penetrating new markets. Improvement in the company's margins is foreseen on cooling-down of polypropylene prices. OWC’s earnings are expected to grow at a 5-year CAGR of 7%. The stock is traded at 5.3x 2008 earnings vs. a peer average of 11.5x. Our 12-month fair value is LE 48.3/share, implying a 111% upside potential. Hence, we reiterate our BUY recommendation with High risk.

SHARE DATA

Nov-07

Diverting to the local haven

BUY | HIGH RISK

November 11, 2008 EGYPT | CONSUMER | OWC Balance Sheet (LE mn)

2007A

2008F

2009F

2010F

Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Non-Current Assets Intangibles Total Assets

134 625 1,245 14 41 0 2,059 1,801 88 107 697 4,752

165 670 1,453 16 41 0 2,344 1,822 105 115 697 5,083

140 740 1,585 17 41 0 2,522 1,855 105 121 697 5,300

173 851 1,834 20 41 0 2,919 1,866 105 129 697 5,716

Liabilities & Shareholders' Equity Short-Term Debt CP of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

531 78 508 22 59 38 7 92 1,335 734 0 2,068 0 68 213 2,402 4,752

318 153 573 24 63 38 130 105 1,405 708 0 2,112 0 67 261 2,642 5,083

145 275 625 27 70 38 149 109 1,437 614 0 2,051 0 67 317 2,865 5,300

388 288 723 31 80 38 161 125 1,835 333 0 2,168 0 67 376 3,104 5,716

Income Statement (LE mn)

2007A

2008F

2009F

2010F

Revenues Cost of Revenues Gross Profit SG&A EBITDA

3,067 (1,859) 1,208 (690) 517 (163) 354 (97) 0 5 3 121 6 392 (13) 379 (51) 0 328

3,295 (2,102) 1,194 (649) 545 (200) 344 (70) 0 3 4 129 3 414 (43) 371 (48) 0 323

3,631 (2,286) 1,345 (726) 618 (219) 399 (66) 0 5 5 138 0 482 (55) 426 (56) 0 370

4,175 (2,646) 1,529 (835) 694 (237) 457 (93) 0 6 5 138 5 518 (58) 460 (59) 0 401

Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

2008F

2009F

2010F

314 163 477 (118) 94 454 (199) 254 (232) 222 102 125 9 51 (169) (3) (131) (119)

292 200 492 (183) 12 321 (148) 174 (221) 100 126 78 (212) 127 (1) 47 (7) 31

344 219 563 (143) 3 424 (219) 205 (253) 171 143 95 (173) 182 (55) 56 (130) (25)

399 237 636 (250) 16 402 (368) 34 (248) 155 146 (68) 243 7 (59) 59 (149) 34

Fact Sheet

2007A

2008F

2009F

2010F

ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

13.7% 10.7% 6.9% 9.4% 16.9% 0.6 45.7% 2.0 0.9 1.5

12.2% 9.8% 6.4% 8.4% 16.5% 0.6 48.4% 1.9 0.8 1.7

12.9% 10.2% 7.0% 9.6% 17.0% 0.7 48.0% 1.9 0.7 1.8

12.9% 9.6% 7.0% 10.3% 16.6% 0.7 47.9% 1.8 0.7 1.6

2007A 22.89 55,249 5.94 1.50 55.5 N/A 43.5 8.6 4.0 9.4 44.8

2008F 22.89 74,607 4.33 1.55 44.2 N/A 35.4 6.6 1.3 7.3 36.5

2009F 22.89 74,607 4.97 1.78 48.7 N/A 38.4 7.5 2.3 8.3 34.9

2010F 22.89 74,607 5.37 1.92 56.0 N/A 41.6 8.5 2.1 9.3 34.1

2007A 3.9x 0.4 0.8 2.7 5.2 5.7 11.1 2.4 4.8 0.5x

2008F 5.3x 0.5 0.8 3.5 5.5 17.1 27.3 3.1 5.0 0.6x

2009F 4.6x 0.5 0.7 3.0 4.6 10.0 15.2 2.8 4.2 0.6x

2010F 4.3x 0.4 0.6 2.7 4.0 11.0 16.4 2.5 3.7 0.6x

Per-Share Ratios Recent Share Price New No. Of Shares ('000)* EPS* DPS* Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV * Adjusted for 1-to-3 stock dividend. Note: A = Actual; F = Forecasted Source: Company reports and CICR forecasts

146

2007A

November 11, 2008 EGYPT | BUILDING MATERIALS

12M FAIR VALUE | LE 57.7 BUY | MODERATE RISK

PAINTS & CHEMICAL INDUSTRIES (PACHIN)

SHARE DATA Reuters; Bloomberg

Holding Co. for Chemical Ind. Insurance companies Funds & Instit. Investors (incl. 1% GDRs) Free Float

147

37.4% 3.4% 40.0% 19.2%

Total

100.0%

MARY MILAD [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

PACH

CASE 30 - rebased mn shares

LE

90 80 70 60 50 40 30 20 10 0

0.8 0.7 0.6 0.5

Oct-08

Sep-08

Aug-08

Jul-08

0.4 0.3 0.2 0.1 Nov-07

Valuation and recommendation: Applying our DCF valuation we reached a 12-month fair value of LE 57.7/share (US$3.4/ GDR), implying a hefty upside potential of 90%. Thus, we upgrade the stock from HOLD to BUY recommendation with a MODERATE RISK rating. It is worth mentioning that company officials had revealed their intent to eventually dispose of AlAmireya idle land post relocation to Al-Obour City. Incorporating this plot of land NAV of LE 80 mn into our valuation enhances our valuation by another LE 4/share.

SHAREHOLDER STRUCTURE

Apr-08

Solid operational performance: PACHIN showed a strong growth historically with an earnings 4-year CAGR of 15% over FY02/03-FY06/07. Moreover the company was able to sustain its profitability margins with an EBITDA margin ranging between 20-22% over the same periods. 9M FY07/08 revealed a bottom line profit of LE 85.8 mn, which is in line with our estimates of LE 110 mn for FY07/08.

animal charcoal, used in sugar refining. Furthermore, it produces resins and sells the surplus to its competitors.

May-08

Decorative paints' growth led by synthetic paints: PACHIN boasts the largest market share (52%) in synthetic paints, thanks to scattered sales outlets all over Egypt. As such, this segment is poised to post the highest profit margin in view of the company's cost-passing ability of any increase in raw materials prices.

Mar-08

Growth in the H&RE sector: The Egyptian real-estate sector is growing at an average annual growth rate of 7-9%. Said growth should positively impact the company's performance over the coming five years, especially in the decorative segment, which is PACHIN'S main sales contributor (by 81%).

PACHIN was established in 1958 as an Egyptian joint stock company with a paid-in capital of LE 15 mn distributed over 150k shares at a par value of LE 100/share. PACHIN was nationalized in 1961. In 1962 and 1963 the Ammonia & Chemical Co., the Hinshold Paints & Oil Co. and Bahari Paints Co. were merged within PACHIN. On August 21, 1993, PACHIN executive regulations were amended to be in accordance with Public Sector Law #203/1991 and became affiliated to the Holding Company for Chemical Industries. In January 1994, paid-in capital was increased to LE 80 mn. In May 1994, paid-in capital was further increased to LE 100 mn. In August 1996, a stock split at a ratio of 10-to-1 took place to bring the number of shares to 10 mn. In October 1997, the company's article of incorporation was amended, by virtue of which, it became under the umbrella of Law #159/1981 as PACHIN became a private sector company, with a 27% stake floated on London Stock Exchange (LSE) via a GDR offering. Finally, in February 2000, PACHIN paid-in capital was doubled to LE 200 mn distributed over 20 mn shares at a par value of LE 10/share financed from reserves. The main business of the company is the production of paints, varnishes, printing inks, and animal bone products. PACHIN monopolized the Egyptian paints' market till early 1990s when low barriers-to-entry enticed many players to step in. PACHIN’s product mix also includes

Jan-08

Enjoying a 10-year tax exemption: PACHIN for Ink was established before the new Income Tax Law came into effect, thus it enjoys a 10-year tax exemption starting 2009.

PACH.CA; PCLDq.L PACH EY LE 30.45 20.0 mn LE 609.0 mn LE 81/ LE 27.5 0.03 mn / LE 1.74 mn

COMPANY SYNOPSIS

Feb-08

Perpetual exclusivity license: PACHIN had acquired a perpetual exclusive license for the Danish DYRUP trademark back in December 2006, covering sale and production in Egypt, Sudan, Libya, and Ethiopia. Its existence in such diversified markets allows PACHIN to reap the fruits of the realestate booms in those markets, further balancing sales.

Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Dec-07

PACHIN remains Egypt’s largest paint producer with a diversified product portfolio of architectural and industrial paints, capturing a 42% market share. Furthermore it is the sole local printing ink producer with a market share of 10%. PACHIN is considered a lucrative investment opportunity, offering a 90% upside potential to our 12-month fair value. The stock is traded at 2007/08 P/E of 5.5x , with a 53% discount to an international peer average of 11.8x.

Jun-08

Wonders of colors

November 11, 2008 EGYPT | BUILDING MATERIALS| PACHIN Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity

Income Statement (LE mn) Net Sales COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Expense Extraordinary Items Attributable Profits

148

Jun-07 A Jun-08 P Jun-09 P Jun-10 P 114.6 65.6 165.1 0.0 0.0 0.0 345.3 208.1 1.3 33.8 9.5 16.0 613.9

8.0 0.0 35.2 8.4 11.6 7.1 0.0 0.0 9.9 80.3 0.0 3.8 0.0 84.0 39.2 0.6 0.0 490.0 613.9

118.8 64.9 171.0 0.0 0.0 0.0 354.7 228.0 2.3 34.8 9.5 14.4 643.4

17.5 0.0 33.1 9.4 12.9 7.1 0.0 0.0 9.9 89.9 0.0 0.0 0.0 89.9 40.8 0.6 0.0 512.0 643.4

124.9 62.9 198.9 0.0 0.0 0.0 386.8 225.1 2.3 33.8 9.5 12.8 670.0

7.1 0.0 38.5 10.9 15.0 7.1 0.0 0.0 9.9 88.6 0.0 0.0 0.0 88.6 42.8 0.6 0.0 538.0 670.0

136.6 69.4 218.9 0.0 0.0 0.0 424.8 222.3 2.3 33.8 9.5 11.2 703.6

3.0 0.0 42.3 12.0 16.5 7.1 0.0 0.0 9.9 90.9 0.0 0.0 0.0 90.9 45.0 0.6 0.0 566.9 703.6

Jun-07 A Jun-08 P Jun-09 P Jun-10 P 522.2 580.9 675.6 744.6 (399.5) (447.3) (520.2) (572.5) 122.6 133.6 155.4 172.2 (13.5) (15.0) (17.5) (19.2) 109.1 118.6 137.9 152.9 (11.9) (13.0) (14.2) (15.0) 97.28 105.6 123.7 137.9 (2.9) (1.9) (0.8) (0.3) (0.1) (0.5) (0.5) (0.5) 3.3 4.8 5.0 5.5 3.4 3.7 4.1 4.5 2.1 2.1 2.1 2.1 (0.5) (2.0) (2.0) (2.0) 102.5 111.8 131.6 147.2 (1.6) (1.7) (2.0) (2.2) 100.9 110.1 129.7 145.0 (0.0) (0.1) (0.1) (0.1) 0.0 0.0 0.0 0.0 100.9 110.1 129.6 144.9

Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio

Jun-07 A Jun-08 P Jun-09 P Jun-10 P 20.6% 21.5% 24.1% 25.6% 19.3% 18.9% 19.2% 19.5% 16.4% 17.1% 19.3% 20.6% 18.2% 18.7% 21.1% 22.4% 20.9% 20.4% 20.4% 20.5% 0.9 40.1%

0.9 37.1%

1.0 34.2%

1.1 33.7%

1.30 0.18 4.3

1.29 0.18 3.9

1.28 0.17 4.4

1.27 0.16 4.7

Cash Flow NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash

Jun-07 A Jun-08 P Jun-09 P Jun-10 P 95.0 103.9 121.7 135.7 11.9 13.0 14.2 15.0 106.8 116.9 135.9 150.6 (39.9) (5.1) (16.9) (19.9) (2.5) (1.0) 1.0 0.0 64.5 110.8 120.0 130.7 (2.9) (1.9) (0.8) (0.3) 61.6 108.8 119.2 130.4 (19.4) (32.8) (11.4) (12.1) 47.6 78.9 107.6 118.6 26.8 1.9 7.1 1.7 69.1 77.9 114.9 120.0 1.9 9.5 (10.4) (4.1) (3.0) 0.0 0.0 0.0 0.2 5.5 6.5 7.2 6.4 1.2 1.5 1.8 (70.2) (93.5) (110.2) (123.2) 4.3 0.6 2.4 1.7

Per Share Ratios Share Price Actual No. Of Shares '000 New No. Of Shares '000 EPS Diluted EPS Div/Share Revenues/Share Units Sold/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Jun-07 A Jun-08 P Jun-09 P Jun-10 P 30.45 30.45 30.45 30.45 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 5.04 5.50 6.48 7.25 5.04 5.50 6.48 7.25 3.50 4.68 5.51 6.16 26.11 29.05 33.78 37.23 4.20 4.50 4.43 4.55 24.50 25.60 26.90 28.35 5.34 5.84 6.79 7.53 2.38 3.95 5.38 5.93 5.46 5.93 6.90 7.65 26.43 26.43 26.43 26.43

Multiples Jun-07 A Jun-08 P Jun-09 P Jun-10 P P/E 6.0 5.5 4.7 4.2 Diluted P/E 6.0 5.5 4.7 4.2 Div Yield % 11.5% 15.4% 18.1% 20.2% P/ Revenue 1.2 1.0 0.9 0.8 EV/ Revenues [ EV/ Rev] 1.0 0.9 0.8 0.7 P/ COPAT 5.7 5.2 4.5 4.0 EV/ COPAT 4.9 4.5 3.9 3.5 P/ FCFF 12.8 7.7 5.7 5.1 EV/ FCFF 11.1 6.7 4.9 4.5 P/ EBITDA 5.6 5.1 4.4 4.0 EV/ EBITDA 4.8 4.5 3.8 3.5 P/ BV 1.24 1.19 1.13 1.07 Note: A = Actual; P = Projected Source: PACHIN & CICR estimates

November 11, 2008 EGYPT | HOUSING & REAL ESTATE

12M FAIR VALUE | LE 18.8

PALM HILLS DEVELOPMENTS

149

PHD was established as a sister company of Al Ethadia to benefit from Law No. 8/1997 provisions. In January 2008, PHD acquired all the assets of Al Ethadia that was established in 1997 with the objective of developing residential housing projects in 6th of October City. PHD's core activities includes construction of integrated projects and management of its residential compounds post completion, resorts and associated entertainment activities, investment in real estate, and sale and lease of properties. In this regards, PHD owns 11 subsidiaries, and entered into strategic partnerships to pursue its development projects over a land bank amounting to 48.3 mn sqm.

SHAREHOLDER STRUCTURE MMID Goldman Sachs Banks, Ins Co., Others Free Float Total

48.6% 5.3% 14.7% 31.4% 100.0%

HANY MOHAMED SAMY, CFM [email protected]

STOCK PERFORMANCE | SINCE IPO Volume

A vertically integrated business model: PHD has secured exclusive affiliation with Shehab Mazhar (a prominent designer), is cooperating with Coldwell Banker (a well-known real-estate broker), and signed a joint venture agreement with Hassan Allam Sons (a resourceful contractor). All above create a highly-efficient, vertically-integrated business model.

25

Valuation and recommendation: We used the DCF method to value PHD, yielding a 12-month fair value of LE 18.76/ share, implying a 132% upside potential. Hence, we initiate coverage on the stock with a BUY recommendation and a MODERATE RISK rating.

0

PHDC

CASE 30 - rebased mn shares

LE

20 15 10

Oct-08

5

Sep-08

Unrecognized revenues: 9M08 unit reservations grew by 54% to reach an all-time high of LE 3,668 mn compared to LE 2,377 mn in a year ago period. The increase in reservations had no effect on 9M08 consolidated net sales figure due to the revenue recognition method used by PHD where it recognizes its villas and town houses revenues from land upon signature of a contract, while revenues from construction are recognized on a percentage of completion basis with a minimum threshold of 50%. Revenues from apartments and multi tenant buildings are recognized upon delivery.

PHD was incorporated in 2005 as a joint stock company, working under the provisions of the Investment Guarantees and Incentives Law No. 8/1997 and the Companies' Law No. 159/1981, and the statutes of Capital Market Law No. 95/1992.

Aug-08

Increasing its land bank: since the beginning of the year, PHD was able to increase its land bank by 31%, to reach 48.3 mn sqm, by acquiring: (1) 6.6 mn sqm in Saudi Arabia, (2) 0.8 mn sqm in the Sixth of October City, (3) 0.2 mn sqm in New Cairo, (4) 1.3 mn sqm on the North Coast, and (5) 1 mn sqm in Aswan.

PHDC.CA; PHDC EY LE 8.10 465.9 mn LE 3,774.0 mn LE 25/ LE 7.06 0.6 mn / LE 5.16 mn

COMPANY SYNOPSIS

Jul-08

Diversifying into the middle class: As the luxurious market reaches saturation, PHD has targeted the middle class via Village Gate – Phase I project that encompasses residential apartments of 88 sqm. PHD was able to sell 62% of the project within 30 days of its lunch in June 2008. PHD is diversify more into the middle class to overcome the current saturation in the high-end. Regional expansion: To capitalize on the growing demand in Saudi Arabia, PHD announced the establishment of two projects in Riyadh and Jeddah with an estimated value of LE 3 bn, with PHD's share amounting to 51%. Both projects spread over 6.7 mn sqm. Such a regional expansion is expected to widen the company's scope of operation and enhance its value.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Jun-08

Palm Hills Developments (PHD) is an elite local real-estate developer, with its name associated with high-end residential real-estate and resort projects, targeting mainly the upper class. PHD's key strength lies in its experienced management, well-recognized designs and finishing, a well diversified land bank all over Egypt amounting to 48.3 mn sqm, and a vertically-integrated business model. With a WACC of 22.7%, our DCF model indicates a 132% upside to our 12-month fair value of LE 18.76/share. We initiate a BUY recommendation with a MODERATE RISK rating.

SHARE DATA

May-08

Excavation for diversification

BUY | HIGH RISK

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 -

November 11, 2008 EGYPT | HOUSING & REAL ESTATE | PALM HILLS DEVELOPMENTS Balance Sheet (LE mn)

2007A

2008F

2009F

2010F

Assets Cash & Cash Equivalents Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Fixed Assets Long-Term Investments Long -Term Real Estate Investments Long-Term Loans Other Non-Current Assets Intangibles Total Assets

386 287 3,768 15 0 74 4,531 480 109 0 0 626 0 5,746

1,106 1,088 3,797 49 0 0 6,041 509 120 0 0 4,158 0 10,828

1,066 1,753 4,561 98 0 0 7,478 508 120 0 0 6,679 0 14,786

2,166 2,293 4,654 310 0 0 9,423 507 120 0 0 8,447 0 18,497

Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Deferred Revenues Taxes Payable Dividends Payable Royalties Payables Other Current Liabilities Total Current Liabilities Long-Term Debt Long-Term Land Purchase Liability Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

486 183 789 1 1,000 33 0 0 265 2,757 3 1,856 0 4,616 0 0 99 1,032 5,746

20 1 274 2 5,171 1 0 0 621 6,089 3 1,455 0 7,547 0 178 90 3,014 10,828

28 1 283 4 8,886 1 0 0 621 9,823 2 1,198 0 11,023 0 536 81 3,146 14,786

28 1 350 14 10,371 1 0 0 621 11,385 1 929 0 12,315 0 1,670 72 4,440 18,497

Income Statement (LE mn)

2007A

2008F

2009F

2010F

535 (140) 395 (112) 283 (2) 281 (42) (47) 0 8 5 0 5 210 (30) 180 9 0 189

1,839 (446) 1,393 (184) 1,210 (4) 1,205 (19) (53) (178) 5 104 0 5 1,069 (214) 855 9 0 864

2,909 (895) 2,014 (291) 1,723 (8) 1,715 (4) (117) (358) 7 383 0 5 1,631 (326) 1,305 9 0 1,314

5,863 (2,835) 3,029 (586) 2,442 (8) 2,434 (4) (117) (1,134) 11 694 0 5 1,889 (378) 1,511 9 0 1,520

Net Revenues Cost of Revenues Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Interest on Land Purchase Liability Provisions Interest Income Amortization of Notes Receivables Discount Investment Income Other Non-Operating Income EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

Fact Sheet ROE ROS ROA ROIC

2008F

2009F

2010F

281 2 283 (866) 102 (481) (42) (523.88) (451) (933) (112) (1,087) 486 182 502 73 0 156

959 4 964 (1,092) 430 302 (202) 100 (33) 269 2 68 (466) 0 1,127 (9) 0 720

1,389 8 1,396 (529) 0 867 (5) 862 (7) 860 278 1,134 8 0 (911) (9) (261) (40)

2,056 8 2,064 (1,319) 0 746 (5) 741 (8) 738 593 1,326 (0) (0) 85 (9) (302) 1,100

2007A 18.3% 35.3% 3.3% 7.7%

2008F 28.7% 47.0% 8.0% 20.2%

2009F 41.8% 45.2% 8.9% 27.8%

2010F 34.2% 25.9% 8.2% 28.8%

Gross Profit Margin

73.8%

75.8%

69.2%

51.7%

EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

52.9% 0.1 426.3% 5.6 4.5 1.6

65.8% 0.2 -27.9% 3.6 2.5 1.0

59.2% 0.2 -94.9% 4.7 3.5 0.8

41.7% 0.3 -59.3% 4.2 2.8 0.8

Per-Share Ratios

2007A

2008F

2009F

2010F

8.10 465,920 0.4 0.0 1.1 N/A 2.2 0.6 (2.0) 0.6 8.7

8.10 465,920 1.9 0.0 3.9 N/A 6.5 2.1 0.6 2.6 5.8

8.10 465,920 2.8 0.6 6.2 N/A 6.8 3.0 1.8 3.7 5.9

8.10 465,920 3.3 0.6 12.6 N/A 9.5 4.4 1.6 5.2 3.5

2007A 20.0x 20.0 7.1 7.6 13.3 14.4 (4.0) (4.4) 13.3 14.4 3.7x

2008F 4.4x 4.4 2.1 1.5 3.9 2.8 14.0 10.0 3.1 2.2 1.3x

2009F 2.9x 2.9 1.3 0.9 2.7 2.0 4.4 3.2 2.2 1.6 1.2x

2010F 2.5x 2.5 0.6 0.3 1.8 0.8 5.1 2.2 1.5 0.7 0.8x

Share Price No. Of Shares (000) EPS DPS Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Diluted P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Company reports and CICR estimates

150

2007A

November 11, 2008 EGYPT | TMT

12M FAIR VALUE | LE 11.5

RAYA HOLDING

151

12.0% 4.1% 5.8% 9.4% 68.8%

INGY EL-DIWANY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

RAYA

CASE 30 - rebased mn shares

LE

20 18 16 14 12 10 8 6 4 2 0

8.0 7.0 6.0 5.0

Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

4.0 3.0 2.0 1.0 Apr-08

Valuation and recommendation: Our 12-month fair value is cut down from LE 15.2/share to LE 11.5/share after incorporating (1) a higher discount rate and (2) revising our forecasts going forward, still offering a 152% upside potential – hence we reiterate our BUY recommendation. Due to the recent market sell-off, RAYA is traded at 4.1x 2008 earnings vs. international peers' average of 10x expected earnings.

Financial Holding Int'l LTD Medhat Khalil & Family El-Tawil Family & others Public Sector Free float

May-08

A good acquisition target: We believe that RAYA could still be a potential target for acquisition, given that the stock is traded at 43% and 9% discount to book value and its par value of LE 5, respectively.

SHAREHOLDER STRUCTURE

Mar-08

Catalysts and risks: Participation in the contact center park and the penetration of its trade LoB to a new market are the main catalysts for further growth. Yet, competition remains the company's main risk. Competition is faced from local distributors and retailers in the trade LoB whereas RAYA's IT LoB faces competition from Indian suppliers in the gulf.

Raya Holding (RAYA) is initially the offspring of a merger conducted in 1999 between seven companies in the IT and mobile distribution fields. Operating under Law 95/1992, RAYA’s activities encompass currently three main lines of business (LoBs), namely retail & distribution, contributing to around 76% of the company’s operations, IT, and Contact Center business after the sale of the Telecom LoB. Since its inception, the company underwent four development phases: 1) a merger phase, 2) a diversification phase that occurred in 2000 and 2001 whereby three companies were acquired and seven new companies were established. 3) Streamlining phase where mergers between small companies were effected and subsidiaries were renamed to consolidate the RAYA brand name in 2002. 4) Expansion phase starting 2003 and onwards, in which RAYA set its eyes on regional and international expansion. Currently, RAYA stands as one of the flagships in Egypt’s CIT industry, commanding a high market share in the local mobile distribution market, and capturing a considerable part of the IT segment with a broad array of services offered. In the IT LoB, RAYA has presence in Algeria, Nigeria, Saudi Arabia, Kuwait, UAE, and lately the US. On the retail level, RAYA is currently planning to reach a total of 105 outlets in Egypt by end of 2009, up from 62 outlets in 2Q08. In 1H07, RAYA launched Kazza Mizza retail chain addressing C and D classes. With 5 outlets in Algeria, RAYA also shop-in-shop agreements with 25 shops of Nedjma, the third mobile operator in Algeria.

Jan-08

Tapping more growth channels that will add more value over the longer run: For further expansions in the call center business, RAYA is planning to bid for the establishment of the contact center park in Maadi. Also, RAYA opened a new contact center with a capacity of 1,000 agents. In June 2008. RAYA inaugurated Nokia Maintenance Center in Egypt. Said center is considered the largest regional maintenance hub. Also, RAYA started penetrating the outsourcing, the consumer bill payment and the lease businesses.

RAYA.CA; RAYA EY LE 4.55 56.9 mn LE 0,258.9 mn LE 16.4/ LE 3.8 0.71 mn / LE 8.83 mn

COMPANY SYNOPSIS

Feb-08

Trade: main revenue generator, but ex-growth: RAYA's core operations of mobile handsets retail and distribution, IT and call center businesses have been better reflected in bottom-line profits since 2007. We believe the Trade LoB (the major revenue generator with a 76% contribution) will continue to be RAYA's main segment. However, RAYA will be exposed to the forthcoming slower pace of net adds of mobile subscribers along with growing competition from other mobile retailers and distributors. We expect Trade LoB contribution to top line will decrease to 71% by end of 2012. We also reckon that RAYA's market share lies within the range of 30-35%.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Dec-07

Raya Holding (RAYA) maintains a high market share in the mobile distribution segment and is considered the largest contact center in Egypt. We believe that the contribution of the Trade LoB (76% contribution to top line) will decrease because of the forthcoming slower pace of net adds of mobile subscribers. Still, RAYA is tapping more growth channels that will add value over the longer run. Furthermore, an M&A scenario is quite possible given that the stock is traded at a 9% lower than its par value of LE 5. Traded at 4.1x 2008 earnings vs. a peer average of 10x yields a fair value that it is almost consistent with our DCF valuation of LE 11.5/share. Thus, we reiterate our BUY recommendation with MODERATE RISK.

SHARE DATA

Nov-07

An option on future growth

BUY | MODERATE RISK

November 11, 2008 EGYPT | TMT | RAYA HOLDING Balance Sheet (LE Millions) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders Equity Total Liab. & Shareholders' Equity Income Statement (LE Millions) Revenues Trade LoB IT LoB Call Center LoB intercompany sales Cost of Revenues Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

152

2007A

2008F

2009F

2010F

124 279 294 10 0 0 708 232 28 63 76 67 1,175

59 288 301 11 0 0 658 270 30 77 80 78 1,193

62 294 321 11 0 0 688 270 30 77 80 78 1,223

65 310 339 12 0 0 726 271 30 77 80 78 1,261

246 21 171 48 28 18 8 0 94 634 69 1 0.0 704 31.5 0 6 433 1,175

203 20 175 49 32 10 21 0 96 607 59 1 0 667 46 0 8 472 1,193

177 19 187 53 34 10 24 0 102 607 40 1 0 648 46 0 9 519 1,223

158 19 197 55 36 10 26 0 108 610 21 1 0 633 46 0 11 572 1,261

2007A 2,273 1,951 374 67 (119) (1,972) 301 (190) 110 (16) 94 (24) (13) 3 9 47 0 115 (21) 94 1 95

2008F 2,342 1,833 452 79 (22) (2,005) 337 (201) 135 (22) 113 (37) (8) 3 8 7 0 86 (22) 65 (2) 63

4% 2009F 2,493 1,912 505 98 (23) (2,133) 360 (216) 144 (27) 118 (31) (8) 4 8 7 0 97 (24) 73 (1) 72

3% 2010F 2,631 1,976 569 110 (24) (2,249) 382 (229) 153 (32) 121 (26) (8) 4 9 7 0 107 (27) 80 (2) 79

Cash Flow (LE mn)

2007A

2008F

2009F

2010F

NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross Margin Trade LoB IT LoB Call Center LoB EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

82.1 16 98 23 (48) 73 (33) 40 (94) (21) 94 41 15 32 (47) 27 (62) 6 0 2007A 21.9% 4.2% 8.1% 11.1% 13.2% 10.7% 17.3% 41.5% 4.9% 1.9 0.2 2.7 1.6 1.1

69.6 22 92 (6) 2 88 (57) 31 (60) 28 (2) (31) (43) 10 (4) 11 (8) (65) 0 2008F 13.4% 2.7% 5.3% 9.5% 14.4% 12.5% 16.7% 41.5% 5.8% 2.0 0.2 2.5 1.4 1.1

93.3 27 120 (9) 6 117 (51) 66 (27) 90 16 55 (25) 0 (1) (3) (21) 3 (0) 2009F 13.8% 2.9% 5.9% 12.7% 14.4% 12.5% 16.0% 40.7% 5.8% 2.0 0.2 2.4 1.2 1.1

94.7 32 126 (19) 6 113 (45) 67 (33) 80 16 51 (19) 0 (2) (3) (24) 3 0 2010F 13.7% 3.0% 6.2% 12.7% 14.5% 12.6% 15.8% 40.0% 5.8% 2.1 0.2 2.2 1.1 1.2

Per-Share Ratios Share Price No. Of Shares (mn) EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

2007A 4.6 57.0 1.7 1.2 39.9 7.6 1.7 (0.4) 1.9 8.3

2008F 4.6 57.0 1.1 0.4 41.1 8.3 1.6 0.5 2.4 8.5

2009F 4.6 57.0 1.3 0.4 43.7 9.1 2.1 1.6 2.5 7.6

2010F 4.6 57.0 1.4 0.5 46.2 10.0 2.2 1.4 2.7 6.9

Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Raya Holding and CICR estimates

2007A 2.7x 27% 0.1x 0.2x 2.6x 4.8x -12.5x -22.7x 2.3x 4.3x 0.6x

2008F 4.1x 8% 0.1x 0.2x 2.8x 5.2x 9.2x 17.2x 1.9x 3.6x 0.5x

2009F 3.6x 9% 0.1x 0.2x 2.2x 3.6x 2.9x 4.8x 1.8x 3.0x 0.5x

2010F 3.3x 10% 0.1x 0.1x 2.1x 3.1x 3.2x 4.9x 1.7x 2.6x 0.5x

November 11, 2008 EGYPT | CEMENT

12M FAIR VALUE | LE 93

SINAI CEMENT Awaiting nearby competition with vigilance

Sinai Cement (SCEM), a grey cement producer since 2001, comprises a mono-production line cement factory of 1.5 mtpa capacity with production off its second 1.5mtpa line expected by end of 2008. By 2010 we believe that the Sinai market will witness competition between two grey cement players as the new player North Sinai Cement, a Greenfield license winner in October 2007, enters the market. The stock is traded at a PER of 2.5x 2009 earnings, a 67% discount to a peer average of 7.6x. Our DCF concluded 183% upside potential with a BUY at MODERATE RISK rating.

New production line: Early August 2008, SCEM announced the completion of all installation activities for its second 1.5mpta production line. Total required investment cost is estimated at LE 950 mn.

SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

SCEM.CA; SCEM EY LE 32.86 35.0 mn LE 1,150.1 mn LE 78.89/ LE 29.02 0.05 mn / LE 3.45 mn

COMPANY SYNOPSIS Sinai Cement (SCEM) was incorporated under Law no. 8/1997 in 1998 as a shareholding company; with the objective of producing cement, packages and all other cement products. In July 2000, SCEM had its shares listed on the Egyptian Exchange (EGX). The company was established with a paid-in capital of LE 250 mn distributed over 25 mn shares at a par value of LE 10/share. Currently, SCEM has an authorized capital of LE 1 bn mn with a paid-in capital of LE 350 mn distributed over 35 mn shares with a par value of LE 10/share. In August 2006, SCEM signed a contract with ASEC, ARASCO and FL Smidth to install an additional clinker capacity of 4k tpd equivalent to a cement capacity of 1.5 mtpa, commencing construction in September 2006.

Overcapacity utilization to be hit by 2010: Given the new capacities entering the cement market, we expect SCEM’s utilization rate (132% in 2007 and the highest in the market) to decline gradually over 2008-12 to 100% in 2012 – yet still higher than 79% for the market then.

SCEM reached 5% local market share in 2007, selling 1,565k tons and 5% in 8M08, selling 1,404k tons. Meanwhile, 10% export market share in 2007 was reached, exporting 418k tons (c. 21% of production) and 4% in 8M08, exporting 31k tons (c. 2% of production).

Immediate post ban exports: Although not permitted to export during the 6-month export ban that ended in October 2008, SCEM was able to resume exporting as it immediately initiated export contracts at prices higher than SCEM's own expectations given the global slowdown. Said exports are mainly heading to the South (e.g. Eritrea, Djibouti, and Ethiopia), which we believe is currently a better export market than that of Europe given the recent global financial crisis.

SHAREHOLDER STRUCTURE

STOCK PERFORMANCE | 52 WEEKS Volume

CASE 30 - rebased mn shares

LE

0.5 0.4 0.3 0.2 0.1

Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Apr-08

May-08

Mar-08

Jan-08

100 90 80 70 60 50 40 30 20 10 0

SCEM

Feb-08

Valuation and recommendation: Based on a cost of equity of 17.7%, our DCF model resulted in a 12-month fair value of LE 92.97/share, implying a 183% upside potential. This valuation did not incorporate the ready-made concrete business, which could indicate further upside potential. Accordingly we rate this stock a BUY at MODERATE RISK.

39.6% 9.4% 9.4% 5.8% 9.6% 26.1% 100.0%

GHADA REFKY [email protected]

Nov-07

Acquisitions? We understand that winners of recent licenses are permitted to join others during the pre-production phase, then can sell the whole investment by the initial production release if desired so. As such, we believe that SCEM may consider buying if and when it came available to re-seize control of the whole area.

Vica Misr Cement Industries Sama Cement Socisl Insurance Fund Al-Arabia Co. for Indust. Inv. Others Free Float Total

Dec-07

Investments: SCEM holds a 25.4% stake in Sinai White Cement (SWCC), which comprises a production line of white cement, had acquired a license for a second production line in October 2007. Our DCF valuation includes such an investment. On the other hand, SCEM is currently considering the ready-made concrete business. Yet, we have not incorporated such development in our DCF valuation till further details are made available.

153

BUY | MODERATE RISK

November 11, 2008 EGYPT | CEMENT | SINAI CEMENT Balance Sheet (LE mn)

Dec-07

Dec-08

Dec-09

Dec-10

Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-current Assets Intangibles Total Assets

18.1 7.2 53.0 4.5 0.0 0.2 83.0 1,151.4 80.2 0.4 39.4 0.0 1,354.4

23.5 8.4 104.5 8.0 0.0 0.2 144.6 1,444.1 103.1 0.4 18.3 0.0 1,710.5

350.0 14.8 220.4 16.9 0.0 0.2 602.2 1,392.7 103.1 0.4 18.3 0.0 2,116.7

740.0 13.6 202.1 15.5 0.0 0.2 971.4 1,358.3 103.1 0.4 18.3 0.0 2,451.5

Liabilities & Equity Short-Tem Debt CP Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long Term Debts Other Non-Current Liabilities Long Term Spontaneous Finance Total Liabilities Tax Provision Other Provisions Minority Interest Shareholders' Equity

4.6 0.0 48.3 8.4 18.6 0.0 61.1 0.0 62.8 203.8 0.0 1.1 0.0 204.9 0.0 15.6 0.0 1,133.9

121.0 0.0 56.0 15.0 22.2 0.0 0.0 0.0 72.9 287.1 0.0 22.0 0.0 309.1 0.0 21.9 0.0 1,379.5

44.7 0.0 118.0 31.6 38.7 0.0 0.0 0.0 71.8 304.8 0.0 11.0 0.0 315.8 0.0 31.9 0.0 1,769.0

40.4 0.0 108.3 29.0 35.6 0.0 0.0 0.0 71.8 285.0 0.0 0.0 0.0 285.0 0.0 41.9 0.0 2,124.6

Total Liabilities & Equity

1,354.4

1,710.5

2,116.7

2,451.5

Income Statement (LE mn) Capacity '000 Tons

Dec-07 1,500

Dec-08 1,750

Dec-09 3,000

Dec-10 3,000

1,983

2,072

3,316

2,918

656.4 (191.3) 465.1 (84.2)

786.4 (341.7) 444.6 (65.9)

1,367.2 (717.9) 649.4 (95.4)

1,257.4 (658.5) 598.9 (95.9)

380.9 (37.2) 343.7 0.0 (6.3) 5.7 0.0 0.0 (1.7) 341.5 0.0 341.5 0.0 0.0

378.7 (50.0) 328.7 (15.1) (26.3) 2.2 0.0 0.2 0.4 290.1 0.0 290.1 0.0 (1.1)

554.0 (99.4) 454.6 (5.6) (10.0) 19.0 0.0 0.2 0.0 458.2 0.0 458.2 0.0 0.0

503.0 (103.1) 400.0 (5.0) (10.0) 33.3 0.0 0.2 0.0 418.4 0.0 418.4 0.0 0.0

341.5

289.0

458.2

418.4

Tons Sold

'000

Revenues Cost of Goods Sold Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

154

Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Net worth Current Ratio

Dec-07 30.1% 52.0% 25.2% 28.3% 70.86% 58.03% 0.5 -1.6% 1.2 0.2 0.4

Dec-08 20.9% 36.7% 16.9% 21.5% 56.54% 48.16% 0.5 3.6% 1.2 0.2 0.5

Dec-09 25.9% 33.5% 21.6% 24.6% 47.50% 40.52% 0.6 4.7% 1.2 0.2 2.0

Dec-10 19.7% 33.3% 17.1% 18.1% 47.63% 40.00% 0.5 4.7% 1.2 0.1 3.4

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investment Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net Worth Grey Area Dividends Change in Cash

Dec-07 326.1 37.2 363.3 20.1 55.1 438.4 0.0 438.4 (516.5) (133.2) 144.0 65.8 4.6 0.0 (17.4) (0.2) (42.3) 10.5

Dec-08 326.7 50.0 376.8 (38.3) 0.0 338.5 (15.1) 323.4 (342.7) (4.2) (1.2) (20.5) 116.4 11.0 14.4 (20.0) (118.9) (17.6)

Dec-09 453.5 99.4 552.9 (36.1) 0.0 516.8 (16.6) 500.2 (47.9) 468.9 (168.8) 283.5 (76.3) 11.0 22.9 0.0 (91.6) 149.5

Dec-10 400.0 103.1 503.0 5.4 0.0 508.4 (16.0) 492.3 (68.7) 439.7 (127.5) 296.1 (4.3) 11.0 20.9 0.0 (83.7) 240.0

Per Share Ratios Share Price New No. Of Shares '000* Actual No. Of Shares '000* EPS Diluted EPS DPS Revenues/Share Units Sold/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

Dec-07 32.86 35,000 35,000 9.76 9.76 1.25 18.75 0.06 0.04 32.4 10.38 -3.81 10.88 32.47

Dec-08 32.86 35,000 35,000 8.26 8.26 1.65 22.47 0.06 0.05 39.4 10.76 -0.12 10.82 35.65

Dec-09 32.86 35,000 35,000 13.09 13.09 2.62 39.06 0.09 0.09 50.5 15.80 13.40 15.83 24.14

Dec-10 32.86 35,000 35,000 11.95 11.95 2.39 35.93 0.08 0.09 60.7 14.37 12.56 14.37 12.87

Multiples Dec-07 Dec-08 P/E 3.37 3.98 Diluted P/E 3.37 3.98 Div Yield % 3.8% 5.0% P/Revenues 1.75 1.46 EV/ Revenues 1.73 1.59 P/ COPAT 3.17 3.05 EV/ COPAT 3.13 3.31 P/ FCFF -8.63 -272.51 EV/ FCFF -8.53 -295.61 EV/ Ton 757.73 712.91 P/ EBITDA 3.02 3.04 EV/ EBITDA 2.98 3.29 P/ BV 1.01 0.83 * Not counting for the recently announced 100% stock dividend Source Sinai Cement & CICR forecasts

Dec-09 2.51 2.51 8.0% 0.84 0.62 2.08 1.53 2.45 1.80 281.60 2.08 1.53 0.65

Dec-10 2.75 2.75 7.3% 0.91 0.36 2.29 0.90 2.62 1.02 150.16 2.29 0.90 0.54

November 11, 2008 EGYPT | TMT

12M FAIR VALUE | LE 24.3

TELECOM EGYPT (TE)

155

TE is the largest provider of fixed-line services in the Middle East & Africa with more than 11.3 mn subscribers as of June 2008, implying a penetration rate of c.15%. TE participates in the growth story of Egypt’s fast-growing mobile market through its 44.8% stake in Vodafone Egypt (VFE), the second largest mobile operator in Egypt in terms of subs.

SHAREHOLDER STRUCTURE Government of Egypt (GoE) Free Float Total

80.0% 20.0% 100.0%

MOHAMED HAMDY [email protected]

STOCK PERFORMANCE | 52 WEEKS Volume

ETEL

CASE 30 - rebased mn shares

LE

30

12.0

4.0

5

2.0

0

Oct-08

6.0

10

Sep-08

15

Jul-08

8.0

Aug-08

10.0

20

Jun-08

25

Apr-08

Valuation and recommendation: We revised our financial forecasts slightly. However, we lowered our 12-month fair value by 3% to LE 24.3/share, mainly on account of recent interest rate hikes by the Central Bank of Egypt (CBE). This compelled us to raise the risk-free rate by 200 bps from 9.5% to 11.5%. In our view, VFE investment accounts for around 34% of TE's value. Given the current deterioration of TE's market price, our fair value still implies an upside potential of 56%; hence, we reiterate our BUY recommendation with a MODERATE RISK rating.

Delivering on its promise to privatize its state-run telecom company, the Government of Egypt (GoE) first transformed its Arab Republic of Egypt National Telecommunication Organization (ARENTO) into a jointstock company in 1998 according to Law No. 19/1998. Separating the regulatory and operating bodies, National Telecommunication Regulatory Authority (NTRA) was established in the same year to oversee the legal environment in Egypt and grant the company independence to operate on a commercial basis. Subsequently, ARENTO became known as Telecom Egypt (TE), truly reflecting its scope of business. TE is Egypt's sole fixed-line telecommunication operator offering retail telecommunication services including access, voice, and internet and data through its subsidiary TE Data. Further, it is the sole provider of wholesale services including broadband capacity leasing to ISPs, national and international interconnection services.

May-08

It's time to go regional: At time when global telecoms are feeling the pinch from an overall negative sentiment and a looming global slowdown, we believe it's time for TE to go for regional expansion at currently low valuation multiples.

ETEL.CA/ETELq.L; ETEL EY LE 15.60 1707 mn LE 26,629.2 mn LE 23.9/ LE 10.7 1.85 mn / LE 35.18 mn

COMPANY SYNOPSIS

Mar-08

But TE is capitalizing on mobile market growth: Despite said competitive pressure from mobile operators, TE is leveraging on the mobile sector growth through its wholesale segment. TE exploits such growth through its mobile-to-fixed, mobile-to-international calls (mainly from Mobinil customers), and leasing infrastructure. Furthermore, the 44.8% investment in Vodafone Egypt (VFE) has a significant contribution to TE's bottom-line profits (as investment income) and cash flow (as dividends).

Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Jan-08

Wireless operators weigh down on revenues: TE is still the sole fixed-line operator in Egypt and should continue to be so for at least the next 1-2 years after the government postponed the second fixed-line auction till 2009. However, the company suffers from competition by mobile operators, particularly with the liberalization of the international market. All three mobile operators compete by offering lower tariffs for voice calls and launching wireless broadband offers, now a key threat to TE's ADSL services. On the other hand, we believe competitive roaming rates offered by mobile operators may also place further pressure on TE's international call revenues.

Reuters; Bloomberg

Feb-08

Tariff rebalancing to revive top-line growth: Despite the decelerated growth pattern of fixed-line business and fixedmobile substitution, thanks to noticeable competition from mobile operators, TE should start reaping the fruits of the tariff rebalancing applied effective July 2008 in addition to exploiting wireless traffic growth in its wholesale segment in 3Q08.

SHARE DATA

Dec-07

Telecom Egypt (TE) should benefit off tariff rebalancing starting 2H08, while its November promotion should have a positive impact beginning 2009. With the three mobile operators competing in voice calls and broadband services, TE is leveraging on the mobile sector growth passing through its network related infrastructure leasing. With TE’s investment in Vodafone Egypt (VFE) contributing significantly to the former’s bottom line. Capturing the growth in bandwidth demand, TE realized so far US$170 mn from its submarine cable project. Through its ISP provider, TE has a leading market share of 56%. TE is looking for acquisitions given its low financial leverage. We reiterate out BUY with 12M fair value of LE 24.3 (+56%).

Nov-07

It's time to go regional

BUY | MODERATE RISK

November 11, 2008 EGYPT | TMT | TELECOM EGYPT Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Total Current Assets Net Plant Long-Term Investments Prepaid Exp. Other Non-current Assets Intangibles Total Assets

1,397 3,101 508 79 0 5,085 20,216 7,027 0 2,039 224 34,591

2,379 3,213 565 85 0 6,242 18,923 7,020 0 2,243 149 34,576

1,926 3,453 613 92 0 6,084 17,772 7,562 0 2,467 114 33,999

2,474 3,743 638 96 0 6,952 16,224 8,131 0 2,714 79 34,099

Liabilities & Equity Short-Term Debt CP of Long-Term Debt Bonds Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Bonds Other Non-Current Liabilities Total Liabilities Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity

7 1,027 800 130 193 202 736 1 1,905 5,001 2,351 800 331 8,483 324 40 25,744 34,591

0 1,077 800 132 188 196 698 1 1,910 5,002 1,763 400 331 7,495 340 45 26,696 34,576

0 857 400 143 204 210 751 1 1,905 4,471 906 0 331 5,707 362 51 27,878 33,999

0 658 400 149 213 228 814 2 1,900 4,363 248 0 331 4,942 386 56 28,716 34,099

Income Statement (LE mn) Yearend ALIS ('000) Yearend ADSL ('000) Access Voice Internet & Data Retail Revenues Domestic* International Wholesale Revenues Sales of telephone sets Revenues Cost of Revenues Gross Profit SG&A EBITDA before provisions Provisions Release of unused provision Impairment loss EBITDA after provisions Depreciation & Amortization EBIT Interest Expense Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expense EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits

2007A 11,229 222 1,907 3,289 1,271 6,466 767 2,699 3,466 61 9,993 (3,306) 6,687 (1,298) 5,389 (0) 116 (281) 5,224 (2,923) 2,301 (600) 81 1,070 296 (94) 3,054 (513) 2,541 (7) 0 2,534

2008F 11,470 386 2,079 3,099 1,125 6,303 1,160 2,735 3,895

2009F 11,734 620 2,335 3,107 1,376 6,817 1,553 2,591 4,144

2010F 11,930 831 2,361 2,823 1,749 6,934 2,415 2,532 4,948

10,198 (3,437) 6,761 (1,589) 5,172 (16) 17 (124) 5,050 (2,811) 2,239 (501) 169 1,304 143 (67) 3,286 (552) 2,734 (14) 0 2,721

10,961 (3,727) 7,234 (1,523) 5,711 (22) 0 0 5,690 (2,914) 2,776 (265) 125 1,446 0 0 4,082 (686) 3,396 (19) 0 3,378

11,881 (3,884) 7,997 (1,560) 6,437 (24) 0 0 6,413 (3,005) 3,408 (83) 171 1,564 0 0 5,061 (851) 4,210 (23) 0 4,187

* Includes TE North revenues

-

-

156

2007A

2008F

2009F

693

2010F

711

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Curr. Ops. Financing Payments Cash Before LT Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash

2007A 1,960 2,923 4,883 (74) 251 5,060 (1,890) 3,170 (1,020) 4,040 1,263 3,413 (86) (1,127) 354 (152) (1,716) 685

2008F 1,776 2,811 4,587 (184) 0 4,403 (2,242) 2,161 (1,492) 2,911 1,195 1,864 (7) 889 0 5 (1,768) 982

2009F 2,159 2,914 5,073 (254) 0 4,819 (2,106) 2,713 (1,727) 3,092 750 1,736 0 (0) 0 7 (2,195) (453)

2010F 2,640 3,005 5,645 (287) 0 5,358 (1,265) 4,093 (1,422) 3,935 821 3,492 0 400 0 5 (3,349) 548

Fact Sheet ROE ROS ROA ROIC EBITDA Margin (pre prov.) EBITDA Margin (post prov.) ATO WI/ Sales ALEV Liabilities/Networth Current Ratio

2007A 9.8% 25.4% 7.3% 7.6% 53.9% 52.3% 0.3 31.7% 0.7 0.3 1.0

2008F 10.2% 26.7% 7.9% 6.8% 50.7% 49.5% 0.3 32.8% 0.8 0.3 1.2

2009F 12.1% 30.8% 9.9% 8.3% 52.1% 51.9% 0.3 32.8% 0.8 0.2 1.4

2010F 14.6% 35.2% 12.3% 10.1% 54.2% 54.0% 0.3 32.7% 0.8 0.2 1.6

Per-Share Ratios Share Price No. of Shares ('000)

2007A 2008F 2009F 2010F 15.60 15.60 15.60 15.60 1,707,072 1,707,072 1,707,072 1,707,072

EPS DPS DIV./NPAUI Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share

1.48 1.0 67% 5.85 15.08 2.86 2.37 3.06 17.23

1.59 1.0 65% 5.97 15.64 2.69 1.71 2.96 16.10

1.98 1.3 65% 6.42 16.33 2.97 1.81 3.33 15.50

2.45 2.0 80% 6.96 16.82 3.31 2.31 3.76 14.68

Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF EV/Sub (US$) P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecast Source: TE and CICR forecasts

2007A 10.5x 6.4% 2.7x 2.9x 5.5x 6.0x 6.6x 7.3x $489 5.1x 5.6x 1.0x

2008F 9.8x 6.6% 2.6x 2.7x 5.8x 6.0x 9.1x 9.4x $447 5.3x 5.4x 1.0x

2009F 7.9x 8.2% 2.4x 2.4x 5.2x 5.2x 8.6x 8.6x $421 4.7x 4.7x 1.0x

2010F 6.4x 12.6% 2.2x 2.1x 4.7x 4.4x 6.8x 6.4x $392 4.2x 3.9x 0.9x

November 11, 2008 EGYPT | HOUSING & REAL ESTATE

12M FAIR VALUE | LE 12.8

TMG HOLDING

The group also started a JV in KSA to develop 3.1 mn sqm. At a total cost of LE SAR 6 bn. In July 2006, the group started the “Madinaty” project, over 33.6 mn sqm of land, making it the biggest all-inclusive enclosed city in the Middle East.

SHAREHOLDER STRUCTURE MMID Goldman Sachs Banks, Ins Co., Others Free Float Total

157

48.6% 5.3% 14.7% 31.4% 100.0%

HANY MOHAMED SAMY, CFM [email protected]

STOCK PERFORMANCE | SINCE IPO Volume

TMGH

CASE 30 - rebased mn shares 140.0

LE

18 16 14 12 10 8 6 4 2 0

120.0 100.0 80.0 60.0 40.0 20.0 Oct-08

Sep-08

Jul-08

Aug-08

Jun-08

Nov-07

Valuation and recommendation: We used the DCF model in valuing TMG, yielding a 12-month fair value of LE 12.8/share and a 231% upside potential. Hence, we reiterate our BUY recommendation on TMG with a MODERATE RISK rating.

TMG's activities also extend to the Hotels & Resorts segment. Its three hotels, Nile Plaza in Cairo, San Stefano in Alexandria and Four Seasons in Sharm El Sheikh are managed by the internationally reputable Four Seasons chain. A fourth hotel, Nile Hotel, is still under development. Soft opening is scheduled for late 2008. Finally, Arab for Hotels & Tourism Investment (ICON), 74% owned by TMG signed a 50-year renewable concession right agreement for Sultana Malak land in Luxor earmarked for constructing a luxury hotel and a 5-star Nile cruiser, both to be managed by the Four Seasons Hotel management.

Apr-08

Expanding in Saudi Arabia: With the potential strong demand in Saudi Arabia, TMG announced a 50-50 joint venture with the Al-Ola Development Co. to establish a mega housing project with 4,200 units in Riyadh at a total cost of SAR 6 bn over 3.1 mn sqm. Additionally, TMG acquired an additional 1 mn sqm in Riyadh, and signed an agreement to buy a 3.8-mn sqm land plot in Jeddah to construct an integrated residential city over a 6-year period with a total investment cost of SAR 5.5 bn.

TMG is a fully fledged touristic, housing, and real-estate company. With more than 20 years of experience in the development industry, TMG is considered one of the leading businesses operating in Egypt. TMG's vision is "community development" through establishing selfsustained residential city and community complexes for the upper and middle classes.

May-08

Diversifying revenues: In July 2008, TMG signed a 50-year renewable concession right agreement for Sultana Malak land in Luxor in Upper Egypt earmarked for constructing a luxury hotel and a 5-star Nile cruiser, both to be managed by the Four Seasons Hotel management.

Talaat Mostafa Group Holding Company was incorporated in April 2007 and currently has a paid-in capital of LE 20.302 bn, of which 49.85% is owned by the Talaat Mostafa family.

Mar-08

Targeting the middle class: As the luxurious market reaches saturation, TMG is currently targeting unsatisfied housing needs of the middle class which represents 26% of total population. TMG introduced in June 2008 its new products for the middle class (residential apartments of 80-110 sqm) which were welcome by a high demand: 8,900 units sold generating LE 5.8 bn over 40 days.

TMGH.CA; TMGH EY LE 3.87 2030.2 mn LE 7,856.9 mn LE 15.5/ LE 3.03 10.05 mn / LE 84.13 mn

COMPANY SYNOPSIS

Jan-08

Sufficient sales to meet the slowdown: Assuming no other sales have taken place, which will not be the case, TMG will be able to overcome the current slowdown swiftly where total accumulated sales for undelivered units as of August 2008 reached LE 29.4 bn, to be recognized over the coming 3.5 years. This would translate into a net profit of LE 9 bn (a 30% net margin). We expect said figures to be achieved, considering that 7.5% of contracted value will be deducted as a penalty in case the client returns the unit which would be a deterrent.

Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover

Feb-08

TMG Holding (TMG) is a leading local and regional real estate developer, with a reputable track record and a 50mn sqm land bank. TMG is mitigating the current risk of a slowing local real-estate market by targeting the middle class, expanding regionally, and diversifying its operations. TMG’s reputation was the main reason behind increasing its sales over 1H08 even with a slower industry, leading to an LE 29.4 bn of almost secured, unrecognized sales to be booked onto the income statement over the coming 3.5 years. With a WACC of 16.3%, our DCF model indicates a 231% upside to our 12-month fair value of LE 12.8/share. Thus, we retain our BUY recommendation at a MODERATE RISK.

SHARE DATA

Dec-07

Stronghold in the face of the storm

BUY | MODERATE RISK

November 11, 2008 EGYPT | HOUSING & REAL ESTATE | TMG HOLDING Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long Term Spontaneous Fin. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Shareholders' Equity

Income Statement (LE mn) Revenues Cost of Revenues Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items NPAUI

Dec-07 A

Dec-08 P

Dec-09 P

Dec-10 P

3,490.0 1,730.6 4,013.8 716.4 0.0 0.0 9,950.8 2,839.9 1,024.9 7,832.0 4,754.4 16,579.4 42,981.4

4,345.2 3,838.5 12,917.9 0.0 28.5 1,040.7 22,170.9 3,653.6 967.7 10,422.5 10.3 15,418.2 52,643.3

5,945.2 3,196.0 10,074.1 0.0 28.5 1,160.7 20,404.5 3,274.9 1,236.7 10,008.2 10.3 14,257.0 49,191.7

10,645.2 3,412.7 10,826.8 0.0 28.5 540.7 25,454.0 3,423.8 1,505.6 10,287.5 10.3 13,095.8 53,777.0

51.8 357.1 301.8 0.0 13,243.4 3.3 0.0 0.0 1,068.8 15,026.3 3,858.8 0.0 0.0 18,885.1 0.0 6.0 2,266.5 21,823.9 42,981.4

219.5 414.2 14,633.9 6.8 8,098.2 150.4 0.0 1.5 1,176.7 24,701.1 3,684.4 0.0 0.0 28,385.5 0.0 0.0 1,870.2 22,387.6 52,643.3

761.8 338.1 5,153.5 6.3 11,761.5 150.4 0.0 1.5 1,176.7 19,349.8 3,229.7 0.0 0.0 22,579.4 0.0 0.0 1,793.5 24,818.7 49,191.7

1,072.3 300.8 2,732.4 9.0 14,522.9 150.4 0.0 1.5 1,176.7 19,966.0 2,831.5 0.0 0.0 22,797.5 0.0 0.0 1,687.2 29,292.3 53,777.0

Dec-07 A 1,875.7 (966.6) 909.2 (267.0) 642.2 (58.5) 583.7 (13.7) 0.0 78.3 1,097.8 40.6 (3.5) 1,783.2 (45.9) 1,737.3 (396.3) 0.0 1,341.0

Dec-08 P 6,791.3 (3,925.1) 2,866.2 (235.8) 2,630.4 (142.7) 2,487.7 (85.6) 0.0 304.2 108.3 0.0 4.1 2,818.7 (484.5) 2,334.3 (396.3) 0.0 1,937.9

Dec-09 P 5,072.9 (2,297.1) 2,775.8 (176.1) 2,599.7 (147.7) 2,452.0 (139.7) 0.0 416.2 268.9 0.0 4.1 3,001.5 (585.0) 2,416.5 (76.6) 0.0 2,339.9

Dec-10 P 7,830.1 (2,822.0) 5,008.0 (271.9) 4,736.2 (158.1) 4,578.1 (164.4) 0.0 745.2 268.9 0.0 4.1 5,431.9 (1,065.1) 4,366.8 (106.3) 0.0 4,260.5

Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Note: P = Projected Source: TMG and CIBC estimates

Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Debt/ Equity Current Ratio

Share Ratios Share Price No. Of Shares '000 EPS Div/Share Revenues/Share BV/Share Gross CF/Share FCFF/Share EBITDA/Share EV/Share

Multiples P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Company reports and CICR estimates

158

Dec-07 A 541.1 58.5 599.6 (747.5) 1,068.8 920.9 (13.7) 907.1 (2,898.4) (3,046.3) (24,971.1) (26,962.3) 51.8 4,215.9 20,482.9 2,272.5 0.0 60.7

Dec-08 P 2,150.3 142.7 2,293.0 (3,682.1) (970.2) (2,359.4) (442.7) (2,802.0) (956.5) (2,345.6) 7,766.7 4,008.3 167.6 239.9 (1,374.2) (402.3) 0.0 2,639.3

Dec-09 P 1,867.0 147.7 2,014.7 (1,916.9) (120.0) (22.2) (553.9) (576.1) 231.0 328.8 1,504.8 1,159.7 542.4 (116.7) 91.2 (76.6) 0.0 1,600.0

Dec-10 P 3,513.0 158.1 3,671.1 (905.7) 620.0 3,385.3 (502.5) 2,882.9 (306.9) 2,458.4 1,804.2 4,380.1 310.5 (97.3) 213.0 (106.3) 0.0 4,700.0

Dec-07 A 6.1% 71.5% 3.1% 4.6% 34.2%

Dec-08 P 8.7% 28.5% 3.7% 16.3% 38.7%

Dec-09 P 9.4% 46.1% 4.8% 11.2% 51.2%

Dec-10 P 14.5% 54.4% 7.9% 15.9% 60.5%

0.0 39.9%

0.1 65.8%

0.1 125.8%

0.1 93.1%

8.2 3.6 0.7

7.6 4.1 0.9

4.7 2.1 1.1

3.3 1.4 1.3

Dec-07 A 3.87 2,030,204 0.66 0.00 0.92 10.75 0.30 -1.50 0.32 4.25

Dec-08 P 3.87 2,030,204 0.95 0.00 3.35 11.03 1.13 -1.16 1.30 3.86

Dec-09 P 3.87 2,030,204 1.15 0.00 2.50 12.22 0.99 0.16 1.28 3.07

Dec-10 P 3.87 2,030,204 2.10 0.00 3.86 14.43 1.81 1.21 2.33 0.70

Dec-07 A 5.9 0.0 4.2 4.6 13.1 14.4 -2.6 -2.8 12.2 13.4 0.4

Dec-08 P 4.1 0.0 1.2 1.2 3.4 3.4 -3.3 -3.3 3.0 3.0 0.4

Dec-09 P 3.4 0.0 1.5 1.2 3.9 3.1 23.9 19.0 3.0 2.4 0.3

Dec-10 P 1.8 0.0 1.0 0.2 2.1 0.4 3.2 0.6 1.7 0.3 0.3