Egypt’s new investment law aims to attract foreign investors and offers special incentives for companies launching projects in certain regions or industries. These include the food manufacturing sector, which is seen by analysts as both a defensive play – people will always need to eat – and a means to profit from Egypt’s demographics: its 94 million residents make it the most populous nation in the Middle East and North Africa.
The new law, signed by President Abdel Fattah al-Sisi in June, promises to introduce a series of reforms and incentives. These include many measures already included in other legislation and agreements, but incorporating them into a single law is still seen as a significant step.
“The government seems committed to its economic reforms plans, which gives investors confidence when it comes to adherence to the new investment law at least in the medium term,” said Kamila Bolbol, a financial analyst at Cairo’s Sigma Capital. “I believe that the new investment law will not only help attract foreign investments in food manufacturers but also in many other industries.”
Among the notable reforms are a guarantee of fair and equitable treatment of foreign investors, reduced customs duties, and tax breaks for investments in less developed regions and certain industries such as food and agricultural production, and also including tourism, renewable energy, automotive, engineering.
Separately, the government has ended restrictions on foreign investors repatriating profits, while perhaps the biggest mooted change included within the new law is a pledge to create a one-stop-shop for foreign investors to slash bureaucracy.
The all-important executive regulations that will dictate how the law will be implemented have yet to be published, and some experts remain sceptical as to how successful the government can be in arresting a stultifying bureaucratic culture among the dozens of state agencies competing for power and resources.
Yet even with that caveat, the food sector is alluring despite its recent travails that were sparked by November’s flotation of the Egyptian pound.
The pound was trading at 17.88 to the dollar on July 30, versus the previous fixed rate of 8.80. The flotation, although tough to accept by ordinary Egyptians, was essential to end a devastating foreign currency shortage that had made it tough for companies to operate in import-dependent Egypt.
The pound’s plunge sent annual inflation soaring to a three-decade high of 31.5 percent in April, while that month food prices were 43.6 percent higher than they were 12 months earlier. Inflation eased slightly in May.
Food manufacturers – bulk importers of commodities such as wheat, milk powder and corn – have raised prices by 80-90 percent, prompting a year-on-year decline in volume sales.
“I sense that company managements are more upbeat this year than in 2016 because last year their biggest problem was the sourcing of dollars to import raw materials,” said Mohamed Zein, an analyst at Renaissance Capital in Dubai. “This year they don’t have that problem so are now able to run their companies without the distraction.
“The biggest issue is falling volume sales because the consumer has been hurt, but companies, in general, know this is short-term pain for a longer-term gain of a recovery in consumption power in Egypt.”
Food manufacturers’ earnings have proved relatively resilient – Juhayna Food Industries, a dairy and juice producer supplying 65,000 retail outlets nationwide, made a net profit of 86 million pounds in the first six months of 2017, down 22 percent year-on-year. Revenue rose 17 percent over the same period to 2.86 billion pounds ($160 million), while the company’s profit margin fell to 3 percent from 4.5 percent.
Edita Food Industries, a cheese and juice producer, made a second-quarter loss of 1.7 million pounds, despite revenue increasing 11.2 percent to 611.6 million pounds. Total sales grew in value even though volumes declined, a reflection of higher prices.
“I think the food and beverage sector will be of most interest to foreign investors – we’re now at the bottom of the cycle, with demand low because of high inflation and high unemployment, so that’s the ideal time to invest,” said Noaman Khalid, Macro Economist at CI Capital Asset Management.
“Asset prices are cheaper and you’ll be established in the country to benefit as the first mover when there is a recovery in the wages of the population and consumption increases.”
Egypt’s food manufacturing sector is fragmented, making takeovers a preferred means for foreign companies to enter the market. In 2015, Kellogg Company acquired Egyptian cereal company, Mass Food Group. Archer-Daniels-Midland Co.’s Swiss unit is in the midst of buying a minority stake in Egypt’s National Co. for Maize Products (NCMP), Bloomberg reported in March.
“For multinationals, acquiring an Egyptian company rather than establish a greenfield, is the fastest way to enter the market,” said Zein.
Egypt Stock Exchange’s food and beverage index includes eleven companies, of which seven had a market capitalisation of more than $75 million as of July 26.
Edita, which is valued at $731 million and has a 21 percent weighting on the food and beverage index, and Juhayna, worth $382 million and with a 44 percent index weighting, dominate the sector in terms of valuations. Other notable names include Arabian Food Industries (Domty), Obour Land For Food Industries and Cairo Poultry.
The stock prices of some food companies have soared despite the sector headwinds. Juhayna is trading at a trailing price-to-earnings ratio (PE) of 117.91, bourse data shows, while DOMTY’s is 93.35. That compares with an average market PE of 16.43.
But the sector may not be overvalued, despite what those figures suggest.
“We prefer looking at forward multiples and believe that 2018 estimates can better demonstrate undistorted figures, after the absorption of economic uncertainty in light of current events,” said Sigma’s Bolbol.
“The 2018 forward multiples show much lower results, for example, Cairo Poultry, Domty and Obour Land are trading at lower multiples than the average of their peers including companies in other emerging markets.”
She cited Cairo Poultry as perhaps the best-priced potential takeover target, with the firm trading at a 2018 PE of 6 and an EBITDA multiple of 3.1 – both around one-third of emerging market norms for the food industry – and a 2018 price-to-book value of about 2 versus a sector average of 2.7.
Bolbol said intra-country consolidation was unlikely given that most food companies are family-run firms, although a recent spate of stock market listings suggest owners may be more amenable to mergers.
Renaissance Capital’s Zein offered a contrasting view.
“It could be one of the best times for M&A because during periods of severe cost inflation some smaller players are forced to exit the market – they can’t cope with the cost pressure and don’t have the pricing power to pass this onto consumers because they are up against bigger competitors,” he said. “So that’s usually the best time for larger companies to acquire smaller players. Consolidation is likely, not just in food but across industries.”
The pound’s slump, of course, has halved asset prices in foreign currency terms, although potential sellers of Egyptian assets will likely want any deals to be least in part priced in currencies other than the pound.
Most foreign money entering Egyptian since the flotation has been as investments in public debt, said Amr Adly, an Egyptian political economist.
“Foreign borrowing by the government has been expanding in the last year on a large scale. It's likely to bottom out in about two years,” said Adly.
“This is counted as investment, but it’s not Foreign Direct Investment (FDI) and doesn't help the wider economy in any meaningful way. The productive sectors have been negatively affected by the currency depreciation, because around 40 percent of Egypt’s imports are made up of capital goods and intermediate goods that are used to produce goods locally.”
Foreign investors are eyeing Egypt even if few deals have been completed, said Mohamed Hashish, a partner at Cairo’s Soliman, Hashish & Partners. His firm is working with food, education, finance, energy, construction, petrochemical and technology companies to launch operations in the country.
“One of our clients is a major food production company and they were looking to launch an importation and trading subsidiary in Egypt,” added Hashish. “After the investment law, it has decided to relocate their regional production line entirely to Egypt.”