The events and aftermath of the January 25 revolution in Egypt have left the shares of companies listed on the Egyptian stock exchange severely undervalued.
Egypt's shares rose to the highest levels in more than a month after the US and Saudi Arabia pledged $6 billion in aid to the country. But despite the market rally based on this good news, analysts say stocks are still sufficiently undervalued to attract investors who are looking beyond these few weeks.
"More generally, I would say that the market has done well over the past week on good news flow --pledges of aid and signs that investor disputes may be resolved. However, we don't yet see an improvement in the fundamentals that would support a sustained rally in the market," said Simon Kitchen, a strategist with EFG-Hermes.
With the shares of solid companies selling cheaply, Gulf News asked analysts for their pick of the top performing stocks for the next six months that make the best buys now.
The companies that repeatedly made the list among analysts were Orascom Telecom (OT), Commercial International Bank (CIB), Tele-com Egypt, Maridive and Oil Services, Sidi Kerir Petrochemicals and Ezz Steel.
OT is expected to trade at 5 Egyptian pounds by the middle of the year, compared to the current 4.10 pounds, said Ebrahim Al Nemr, Head of Technical Analysis at Naeem Brokerage in Egypt, last week.
Potential
"Their stock has been suffering for a long time mainly because of what is happening in Algeria, even before the revolution in Egypt. Where OT is trading now does not reflect the full potential in Algeria. Any progress on the Djezzy deal will reflect strongly on trading," said Chahir Hosni, Sales Manager at EFG-Hermes.
Djezzy, Orascom's Algerian unit and its single biggest source of revenue, has been locked in a dispute with Algeria over back taxes since 2009 and has come under increasing regulatory pressure. Algeria has said it wanted to buy the unit.
CIB, a heavyweight in Egyptian banking, is expected to trade at 31.50 pounds by mid-2011 compared to the current 27 pounds, said Al Nemr.
"It has outstanding performance, strong management and is one of the major bluechips in the Egyptian market," said Hosni. However, the first quarter results were weak because of provisions and the bank could not collect its dividends from investors in other companies because of delays in re-opening the market after the revolution but it will do so in the second quarter, he added.
"We see good long-term potential in the banking sector," said Simon Kitchen, a strategist with EFG-Hermes.
Also popular is Telecom Egypt as it prepares to pay high dividends at the end of this month, said Hosni.
"It is a dominant player in the Egyptian market. Given the uncertainty in the market, it is a defensive story," said Tudor Allin-Khan, Chief Economist at AlembicHC. The Egyptian government, which is currently strapped for cash and owns 80 per cent of the company, is likely to increase the dividend that is paid out from Telecom Egypt, he added.
Both Maridive and Oil Services and Sidi Kerir were also favourites because their operations are outside Egypt, said Allin-Khan.
In the case of Maritime and Oil Services; 90 per cent of their revenues are in dollars and their stock is denominated in the dollar, said Hosni. "If the Egyptian pound weakens against the dollar, the company would benefit from that angle."
Ezz Steel also made it to their lists as its Chairman Ahmad Ezz, who was previously charged with corruption, resigned and was replaced by Paul Chekaiban.
Legal charges and draft law
A series of court cases and charges of corruption against prominent businessmen following the collapse of the old regime has made foreign investors jittery about some listed companies.
"This has adversely affected investor sentiment towards these companies. However, we now see a good potential upside in some of these companies," said Kitchen, referring to Ezz Steel.
Real estate companies, previously rising stars on the Egyptian bourse, are feeling the heat from a string of legal challenges to their land acquisitions that began before former president Hosni Mubarak was ousted but which are since gathering pace.
The cases are about the way the land was brought from the state, through direct sales rather than auctions, which enabled them to obtain plots below market value.
To address these legal issues, the military council is considering a draft law aimed at "reconciliation with businessmen" to encourage foreign and domestic investment into Egypt. "It is a step in the right direction to enhance the confidence of investors," said Hosni.
Foreign direct investment in Egypt has reached zero levels, the military council warned last week.
With the shares of top-performing companies trading at incredibly low prices, this is a good opportunity for short and medium-term investors, most analysts agreed.
"Investors are worried and afraid, they don't know what will happen tomorrow. But despite this, mid and short term investors will see some good profits in this time range," said Al Nemr.
Other investors are taking a wait-and-see approach. "We believe investors will remain on the sidelines until after the election in September, as the quiet summer months, corporate earnings and Ramadan delay any rush to enter the market," said Allin-Khan.
Beyond the short-term turbulence in Egypt, investors are awaiting the September elections for clearer insight into the new government's economic policies and how it will tackle unemployment, inflation and a rising budget deficit.
Economic policy that takes a balanced approach to tackle social issues while dealing with rising subsidy costs and altering the tax system, rising inflation and a budget deficit could will bring back foreign investors, said Alli-Khan.
"If a new government adopts socialist policies, that simply raise wages, subsidies and use fiscal stimulus to generate jobs, foreign investors may be dissuaded from returning to the domestic market, as a rise in the fiscal deficit and domestic inflation, will see an erosion of the Egyptian balance sheet. Consequently, the election outcome and economic policy set by a new government is key," he added.
Analysts agreed that the prospects in the next 18 months look bright for long-term investors as the new government seeks to encourage foreign investors to boost the economy.
