How to Position for Weaker Currency and Improved Investment Environment?


All eyes on CBE's next moves; Priority will be exchange rate followed by IMF assistance program

Since all eyes are on the CBE and what the next move will be, we assume that the exchange rate flexibility and unlocking the IMF support facility will be the number one priority.

What does this mean?

This means that the FX movement will be a key theme over the short term and we need to create positions within stocks that are key beneficiaries from a weaker local exchange rate but would not lose much from the gradual weakness in global commodity prices.

Stick with Oriental Weavers, ElSewedy Electric, Orascom  Development Egypt, and Commercial International Bank

Oriental Weavers is a key exporter whose export sales will surge with the weaker local exchange rate. We realize that volumes are suffering but the weakness in currency has been quite significant to compensate for any volume drop. The stock is a high-yielding one as well with DY at c.12%. The drop in PP prices will also bode well for margins which will gradually recover as low-cost raw materials start kicking in, and as the rise in local prices provides support to local sales value. ORWE is trading at 2022 P/E of 4.3x and EV/EBITDA of 4.4x.

ElSewedy Electric is well positioned for the weakness in local currency and the relative cooldown in the prices of copper and aluminum will alleviate some pressure on margins, albeit not a major one. The company has solid expansion plans over the next two years and the stock has been facing massive pressure over the last two years, creating room for a significant upside from current levels. SWDY is trading at 2022 P/E of 5.0x and EV/EBITDA of 4.0x.

Orascom  Development Egypt is a play on real assets and the repricing of real assets during times of high inflation. That is in addition to the fact that any weakness in local currency directly feeds into Gouna Residual Land Bank valuation. ORHD is trading at a 2022 P/E of 3.4x and EV/EBITDA of 2.5x.

Commercial International Bank
is a bet on an improved investment environment. If the economy and the environment is more conducive for investments, then capex lending will revive. In the current inflationary environment, retail lending will face higher demand. If we were to choose one banking sector stock, it will have to be COMI due to management, fundamentals, and current distressed multiples. COMI is trading at 2022 P/E of 4.8x and P/B of 0.9x. The runner-up within banks is ADIB, but we are waiting for the second round of capital increase to be concluded. ADIB is trading at 2022 P/E of 1.7x and P/B of 0.3x. 

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