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Samar Abuwarda  Abdelwahab Msc

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Life is a puzzle so make sure to gather the right pieces and analyze it with passion… Master in Finance and Investment - Nottingham University Business School.. My specialties include project finance & syndicated loans , private equity, investments, structured finance -mergers and acquisitions, telecommunication and energy finance and options, large corporate and SME’s financial advisory.. Contributor at Linkedin Profile: Samar Abuwarda

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Islamic syndications pre and post COVID-19 era

Article about Islamic syndications pre and post COVID-19 era

Islamic finance, with its wide range structured products, is commonly used in the GCC and other Islamic countries such as Malaysia, Pakistan, Turkey and Iran. Also, the UK is an important Islamic syndication deals originator. To some investors, Islamic finance matches their aspiration to conduct transactions complying with Shariah. To others, they don’t rely on Islamic finance due to religious beliefs. Rather, some of the Islamic products suit their business circumstances more than conventional.

Islamic syndication transactions could include any type of Islamic finance products. By definition, a syndicated facility requires a huge amount of investment cost for project finance or tremendous amount of required debt raised that no single bank could underwrite alone. Hence, the most commonly used Islamic products in syndications are Istisnah, Ijarah, Murabahah and Sukuk where the first two products are widely used in project finance syndications. So how did Islamic syndications performed in 2019? What is the contemplated outlook especially in light of the COVID-19 outbreak?    

2019 a review

From a global perspective, Islamic finance market size ranged between US$1.8 trillion and US$2.2 trillion during the period 2017-2019. According to Bloomberg global syndications report for FYE 2019, Islamic syndications volume for mandated lead arrangers role aggregated to around US$29 billion with a total count of deals of 68 transactions. Global syndications volume for the same role aggregated to US$ 4.2 trillion with a total deal count of 7,700.

Hence, Islamic syndications in volume and deal count represented around 0.7% and 0.88% respectively of the global syndication market. This is considered modest figures where global syndication market alone surpassed the total market size of Islamic finance of US$2.2 trillion. Such Islamic syndication performance during 2019 could be attributed to several challenges facing the industry. The complexity of legal documentation in Islamic syndication is considered a vital challenge. This situation is quite obvious when the syndication structure entails more than one product. One example is combining Istisnah with Ijarah and sometimes Murabahah or Mudarabah or Musharakah products under the same syndication umbrella. Another complex structure is also found in some Sukuk syndications by combining Murabahah or Mudarabah with Wakalah or Ijarah. 

Such structure necessitates an extra legal and administrative effort to be exerted if compared to a similar conventional transaction. Consequently, discouraging investors from using Islamic syndication products as a result of the higher transaction cost especially advisory and legal documentation fees. Lacking of hedging mechanism in Islamic finance is another market dynamics challenge since Islamic Shariah prohibits the use of speculative derivatives especially futures and options. Such prohibition might not suit the hedging needs for oil and gas companies if they wish to raise funds through an Islamic syndication. Even if possible, this might require exceptional Shariah Board approvals besides additional documentation to link the hedging ISDA with the syndication structure.

On the other hand, some challenges were stemmed from geopolitical and market dynamic factors that occurred in 2019. This could include but not limited to oil markets volatility, geopolitical tensions in the Gulf region, ambiguity surrounding the Brexit strategy, investors’ appetite to raise funds through IPO’s rather than syndicated loans, currency decline in emerging markets specifically Turkish Lira and syndication banks favoring to finance projects that complies with ESG standards.  

2020 a preview

That being said, so what is Islamic syndications outlook in 2020 especially after adding the COVID outbreak as a new challenge? According to most global economic reports, global recession is expected in 2020 if not stagflation for some countries. In addition, combining COVID impact with an oil price war sharply decreasing Brent prices depict a gloomy picture for all markets and investors both conventional and Islamic.

Nevertheless and in my humble opinion, there are two windows of opportunities embedded in Islamic finance especially syndications. First, Murabahah syndications could be an appealing product to finance mega transactions and projects in countries with high inflation. To curb COVID recession, most countries are pouring stimulus packages to keep the boat floating. Some of these packages if associated with excessive consumer spending on basic products, might lead to inflationary impacts. Hence, central banks regulators will have to curb the situation by increasing lending interest rates.


By virtue, Murabahah as a fixed installment product could act as hedging tool under such circumstances. Islamic banks could use fintech and blockchain technologies to enhance its deposit liabilities cost of fund. Such technologies if properly applied will compensate for the increased use of Murabahah product. Secondly, Green Sukuk will be on the rise due to the declining Brent prices and the global trend of applying ESG standards.

Finally and in my humble opinion, Islamic syndications have a golden opportunity to flourish by embedding in its transactions the values of solidarity and compassion during this difficult time. Such values are truly the essence of Islamic Shariah.        


This article was first published in Islamic Finance News (IFN) Annual Guide 2020 on May 6th, 2020

Fallen Angels in Debt Markets: A Come Back Opportunity to Bonds Heaven?

Article about Fallen Angels in Debt Markets: A Come Back Opportunity to Bonds Heaven?

“If Plan A did not work, stay cool.. The alphabet has 25 more letters”- Anonymous

As a result of the COVID19 outbreak, the world is currently witnessing the Fallen Angels phenomena.  By definition, such phenomena occur when credit ratings of sovereign and corporate bonds are downgraded from investment category to junk.  Attributed to the pandemic, revenues are declining and debt covenants are breached on the spot and not gradually. Simply, there were no warning signals to raise any flags regarding such imminent black swan situation. Consequently, this created an inevitable environment of rating downgrades limiting capabilities of raising new funds from both financial institutions and fixed income fund managers. The former will require imposing higher rates and tighter covenants to disburse debt. On the other hand, the latter will refrain from disbursing any dry powder funds in order to meet their mandates regarding investing in certain investment graded bonds. From the legal and technical perspectives, some analysts argue that covid outbreak is a force majeure case. Hence, this is not a genuine breach of covenant resulting from a specific operational or business model malfunction. Generally speaking, the whole world is passing through an economic phase where the worst case scenario is currently considered the base case model. This is evidenced by a U shaped recovery rather than a V shaped. In addition, downgrading could occur in the future for larger spectrum of countries and companies. Such economic circumstances and market dynamics raises a thoughtful question. How to stimulate demand creating a comeback opportunity to bonds?

To answer this question, we will tackle scenarios for issued and potential bonds. Also, it is assumed we are talking about LIBOR rated bonds. Hence, it is appropriate to recall that LIBOR is expected to be cancelled by 2021 and replaced by another reference rate. Most reports are recommending the SOFR rate to replace LIBOR. It is worthy to mention that SOFR is quoted at a lower rate than LIBOR. In addition, most central banks around the globe are currently interested in stimulating economies by engaging in bonds purchasing programs especially corporate bonds. Now, let’s alter some of the issued bonds parameters under downgrading circumstances. Downgrading necessitates implying a higher yield and hence a lower bond price. This impact is multiplied especially if accompanied by a massive sale wave from pension and fixed income funds that are prohibited from holding fallen angel bonds in their portfolio as per their investment mandate.

So how could we counter such situation? Frankly speaking, black swan crisis requires similar black swan counter measures. Simply, strip the selling yield from the LIBOR coupon rate.  In other words, the issued bond selling rate today should be calculated based on the lower SOFR rate and not the LIBOR coupon rates. This will increase the bond price countering the downgrade and sales impact. Taking the argument a step further, central banks through their stimulus programs will purchase the corporate bonds in the open market at the implied SOFR yield rather than the previously issued higher LIBOR rate. Hence, providing the required liquidity for investors whom already purchased issued bonds. Actually investors might end up achieving a capital gain compensating their coupon stream. Another adjustment is including a transitional period of around 6 months where the coupon payment is referenced at SOFR rate. Consequently and post the pandemic, the bond coupons pays an altered reference rate of SOFR plus a markup equating it with the prevailing LIBOR rate at that future timing.

As for potential bonds, same could be applicable more or less for new issuance. Stripping the bond into principal or face value quoted at SOFR and coupons with increasing balloon payments referenced at SOFR and an equating markup to the LIBOR. Such thoughts could be applicable to some potential sovereign bonds especially for countries operating in a declining oil prices such GCC sovereign bonds. By the end of the day, LIBOR will be cancelled by 2021. The whole idea lies in the concept of speeding up the reference replacement process.

Finally, this article theme is an attempt to come up with a plan B. But as the opening quote states, there is still a possibility of coming up with another 24 backup plans. Just unleash your imagination and the road back to bonds heaven will guide the fallen angels..     

Private Equity Valuation In The COVID-19 Era: Potential Opportunity Or Myth?

Article about Private Equity Valuation In The COVID-19 Era: Potential Opportunity Or Myth?

“During the COVID lock down, the only active button in my body is my imagination”- Garfield the Cat

Stipulating on the WACC approach, ROE is considered a key and popular determinant in PE valuation whether utilized in mergers and acquisitions or IPO’s or even direct investments transactions. Theoretically, think of ROE as a triangle with its three main heads: stock market return/ premium, sector beta and RFR.  As a result of the pandemic outbreak globally, most of the stock markets witnessed massive selling trends leaving most of stocks prices and indices in the red area. In the US, the 1 year return for S&P 500 and DIJA recorded -13% and -8.7% respectively. As for the Asian markets, Nikkei and STI recorded -10.3% and -21.9% respectively. The British FTSE recorded a declining impact of -22.5% as well. Some of the emerging and frontier markets witnessed a hard impact such as EGX30 recording -32% for the same period. Hence, plugging in any of these market premiums will yield negative ROE making it difficult to conclude an accurate valuation.


On top and above, most world economies will experience a diminishing economic growth if not negative as a result of the pandemic procedures of partial and full lockdown.  Thus, calculating terminal values based on negative growth rates will not also be applicable. Most investors are reverting to their hard powder reserves to complete their open commitments and positions in some PE transactions.  All of these market circumstances combined raise an essential question: is it possible to conduct an accurate PE valuation? If yes, what are the parameters to do so? 


Actually to answer this question, let’s unleash our imagination like Garfield the cat. In my humble opinion, an accurate PE valuation is doable. What are the parameters? Two main pillars, country risk premium and foreign currency direction. For the sake of argument and for illustrative purposes, I will use the US equity market especially S&P 500 returns and correlate it to the Egyptian equities spectrum and currency to calculate the Egyptian ROE. Nevertheless, this illustrative methodology could be applicable to any other emerging or frontier market subject to two conditions.


First, its economy will be witnessing a positive growth. Like the rest of the world, Egyptian market is subject to partial lock down. As an impact of the pandemic outbreak, Egyptian economy is expected to grow at a rate of 2% according to conservative estimates.  Secondly, its local currency is currently selling at a discount to its equilibrium value and expected to appreciate. Now, how to evaluate an Egyptian equity when EGX30 return is -32%? Simply calculate the ROE in the US market and add Egypt’s country risk premium to the equation as tackled by many researches. Under such methodology, Egypt’s country risk premium to be added as independent factor and not mixed or multiplied with US Sector Beta. Hence, assuming all Egyptian equities is subject to the same country risk as per the following equation:



ROE US= US RFR+ US Sector Beta *(S&P500 1 year return – US RFR) + Egypt’s country risk premium




US RFR= 3 months T/B of 0.14%


S&P500 1 year return = -13%


US Sector Beta = the beta of the US sector similar to the sector of the Egyptian equity


Egypt Country Risk Premium= 10%


Subject to,


0<US Sector Beta<1



Incorporating the numerical data in the calculations, leads to two important conclusions.


First, such approach is only applicable to Egyptian defensive equities where its equivalent US sector records a beta of less than 1 such as power, utility, food processing and telecommunications. Thus, such method could be partially utilized in evaluating Vodafone and STC contemplated acquisition deal. Also, such defensive equities in the Egyptian market will be easier to promote for international investors in the upcoming period.


Secondly and, depending on the Egyptian Target sector beta, the global stock market return will be chosen. For example, defensive equities betas below 0.5 could tolerate up to 32 % declines in stock market returns. On the other hand, defensive equities betas above 0.5 but below 1 could tolerate less market declines by a range of 5%-10%. Nevertheless and under all scenarios, the country’s risk premium will compensate positively for the declining stock markets return.  Subsequently, we have to convert the US ROE into the local currency denominated ROE. This could be done by utilizing the international interest rate parity, yet allowing for some minor adjustments to cater for foreign currency discounts / premiums as per the following:



(1+Egypt ROE)/ (1+US ROE)= (1+FC premium)




Egypt ROE=((1+US ROE)*(1+FC premium))-1



Noting that the current USD/EGP spot rate is EGP 15.75, the Egyptian Pound is expected to appreciate vis-à-vis the USD by a premium of 13%. This is based on a USD forward price of approximately EGP 14. Now, this approach will yield positive trailing EV/ EBITDA multiples by plugging in the positive Egyptian ROE into our PE valuations beside the positive growth rate of 2%. Even under unlevered and no growth scenarios except for terminal value, this approach might still generate lucrative valuations depending on the Egyptian equity sector and its equivalent beta in the US. 


Finally, an adjusted ROE approach catering for country’s risk premium might be appealing to some investors stemmed from some factors. First, it suits economies that will rely more on its local industries to face the partial halt in the global trading movement as a result of COVID-19 lock down. Secondly and despite the sharp declines in EGX30, its standard deviation is still considered low partially due to illiquidity reasons. Hence, some of Egyptian equities beta could be distorted and relying on its US equivalent will be more appropriate.


The successful marketing of Egyptian equities will rely to great extent on preserving Egypt’s foreign currency reserves to strengthen its local currency and ultimately achieve a positive ROE. This could be done by mimicking the Russian and Chinese hedging mechanism applied few weeks ago in bilateral trading. Both countries opted to conduct trading transactions in Ruble and Yuan, hence, preserving their FC balances. Anyways and in all cases, time will tell if such approach is a real opportunity or an imaginary myth.


This article was first published on on 18/04/2020

REITS and Dividends Futures vis-à-vis COVID: Safe Havens protecting Investors from coughs and sneezes?

Article about REITS and Dividends Futures vis-à-vis COVID: Safe Havens protecting Investors from coughs and sneezes?

“In the midst of every crisis, lies great opportunity”-

Albert Einstein


From an optimistic perspective, every crisis is a disguised opportunity if managed properly. From a global realistic perspective, markets investors and analysts did not view COVID pandemic as an opportunity at all. No wonder in that. Panic combined with uncertainty prevailed in global markets since COVID outbreak depicting a roller coaster performance. Despite world leaders restless efforts to comfort citizens and markets, most global indices plunged drastically to the red area.  During Q1 2020, global markets depicted a declining range of around 20%-40%. Attributable to the virus widespread beside lockdown to contain the pandemic repercussions, investors were partially deprived from international diversification privileges. In essence and due to global ambiguity, some investors no longer view stocks and bonds as safe havens. If that’s the case, so what could be? During crisis periods, investors whether retail or institutional relinquish their risk appetite and seek an investment income with a steady cash flow stream besides hedging such income. In other words and under the current circumstances, could Real Estate Investment Trusts (REITS) be considered safe havens? If so, which REITS type or classes are suitable investment vehicles? Could REITS combined with dividends futures act as an effective hedging strategy? If some capital markets lack such instruments, what else can be done?

Actually, there is no concrete answer because simply no one knows what will happen next day or how this will end. At such circumstances, analyzing current facts and correlating it with what used to be a successful strategy might pave the way for potential solutions even if temporary. By definition, REITS are investment vehicles providing steady dividend income stream partially derived from the underlying rental payments. REITS could be classified into equity and mortgages. During the captioned period, REITS especially retail declined way below its intrinsic or equilibrium value in a manner similar to other stocks in the markets. What other facts we know? REITS types include but not limited to grocery retail, shopping malls, offices, apartments/mortgages, tourism specifically hotels and hospitals or medical offices and clinics. Defensive sectors include grocery and health care. By late March, the United States approved its COVID stimulus bill of around $2 Trillion announcing that more economic procedures might follow in the upcoming weeks. Hence, it could be lucrative to long some REITS stocks stemmed from the golden rule of thumb “buy low and sell high”.

Which ones? On top of the list come health care REITS and its subsectors including hospitals and medical offices. Some reports predict the continuity of around 6.8% dividend yield for health care REITS especially hospitals since revenue stream is now government guaranteed. Next on the list, grocery retail REITS especially big chains located outside shopping malls as the stimulus bill enhanced citizens purchasing power. In the upcoming few weeks, if US will deploy further COVID precautions such as partial or full lockdown, grocery retails revenue will increase even more. In the same manner, one could analyze the current importance of industrial REITS especially food and beverage producers. Shopping malls and hotels REITS come last. Some predict that these sectors could be compensated for force majeure closure and activity suspension. This resulted in Q1 dividends cancellation as announced earlier by some hotels REITS. Generally speaking, some reports speculate that less levered REITS will have better chance in outperforming its peers. Thinking about it, it is not necessary the case. It depends on the debt purpose, the REITS historical track record with its lenders and capability to negotiate or adjust its financial covenants. Some REITS survived the 2008 subprime despite their highly leveraged positions by adjusting its leverage parameters.

That being said, assuming that some REITS will continue distributing its dividends stream. How to hedge it? To partially answer the question, let’s assume derivative markets will remain capable of pricing the instrument and its underlying asset. Investors could be indifferent between dividends options or futures based on market direction assumptions. It will only make a difference depending on how confident they are regarding such assumptions to engage in an obligation or a right. Based on instrument costs especially options during uncertain periods, investors will prefer dividends futures as no upfront fees only periodical settlements. Consequently, investor will commit to a future position opposite to his REITS stock position. Choosing to be the future’s seller or buyer, this will greatly depend on the REITS sector outlook. For example, one could assume a lucrative strategy by longing hospital REITS stock and shortening its dividend future. Thus, investors ensure steady income stream besides potential capital gain from stock sale in the future. Many strategies could be deployed depending on the available instruments in the derivative markets.

Ok great, but what if some capital markets lack a broad spectrum of REITS stocks especially hospitals and local derivative instruments. Stimulus actions directed towards stock markets could be one of the solutions. For example, Central Bank of Egypt (CBE) announced a 20 Billion stock purchase program besides eliminating capital gain taxes to attract investors fund and protect retail investors’ interests. Egyptian stock exchange is more of a value market rather than growth as most stocks distribute dividends. Some reports analyzed the stimulus plan in the context of generating capital gains as an alternative for dividends in case some stocks decided to halt or postpone distribution this year. Bearing into mind, banks and financial institutions sector constitute around one third of the Egyptian equities spectrum. CBE decision to decline interest rates by 300 bps will represent a true challenge to bank’s net interest margin during 2020. Hence, bottom line will have to increase from other sources. This could be from non-recurring income like unnecessary asset stripping and sale to achieve capital gain. Others could include exploiting international diversification synergies. Hospital REITS and dividends futures arbitrage could be lucrative synergies subject to choosing an international market depicting favorable foreign currency international parity.  


Finally and in my humble opinion, effective crisis management include well-timed decisions accompanied by safe landing concept. Some predicts new market dynamics and structure will emerge after the COVID crisis. Hopefully it will end well for the whole world with the least coughing and sneezing damages by preserving calmness, rationality and cooperation.

Quantum Algorithms: The New Black Box In Portfolio Optimization. What Connect The Dots?

Article about Quantum Algorithms: The New Black Box In Portfolio Optimization. What Connect The Dots?

“Creativity is intelligence having FUN” – Albert Einstein

The quantum algorithm is a new fun field emerging in the finance town. Such a field is capitalizing on developing Artificial Intelligence “AI” software to spot arbitrage opportunities in portfolio optimization.  Hence, it is gaining wide popularity nowadays among asset managers especially hedge funds. Currently, many firms utilize quantum algorithms in stock and bonds trading. They consider their applied algorithms, the firm’s most valued black box. Even more, they treat the algorithm success recipe as ultimate confidential. But why are algorithms in portfolio optimization that important? What connect the dots?

A quick and simple answer, it saves transaction costs and time. Ok, wait just a second, does it? Actually, this depends on the statistical and mathematical framework applied in the trading algorithm. In other words, it depends on the data sample size and formula embedded in the algorithm to calculate the optimum return/risk bundle in the investor’s portfolio. Theoretically, Mean-Variance (MV) is the most popular framework used to calculate the optimum return/risk trade-off. MV theory assumes the stock returns and variance are normally distributed; preferences are quadratic functions estimates and investors risk-averse homogeneous rationale. Generally speaking, theory losses its importance if assumptions are violated in real life scenarios. Statistically, in today’s fast-paced world, most of the stock returns and variance depict non- normality distribution and investors' preferences are heterogeneous. Investors could be categorized into risk-averse, neutral and risk seekers. It is true that AI software could process data sample size of millions and even billions of stocks returns and variance to overcome the violation of non-normality distribution. This AI pro could be considered con from the statistical perspective. It is not always the bigger the better, as sometimes big data samples may cause statistical biases especially p-values problems. Hence, accepting or rejecting null hypothesis while it is genuinely true or false. Consequently, processing big size of data in stock prediction could be time-consuming and expensive instead of reducing costs and time.


So what is the alternative algorithm formula that could be deployed efficiently? Extended Mean Gini (EMG) is another framework used in portfolio optimization that has its merits in overcoming returns and variance non –normality distribution by applying stochastic dominance techniques. Fortunately, such a framework does not necessitate using large samples upon calculating the portfolio minimum variance. The EMG formula is easy to embed in portfolio trading algorithms as per the following:


Min (R)= -v *COV [E(r),(1-Rank)^(v-1)]


Where R is the Gini Coefficient, v is the investor risk-seeking- preference degree, Cov is the covariance coefficient, E(r) is the expected return of the risky portfolio and Rank is the portfolio’s individual return ranked in descending order. Despite its simplicity in application, EMG framework assumes investors' preferences to be risk-averse only. Consequently, I attempted to cater for different types of investors by adjusting the EMG formula to include the coefficient as per the following:


Min (R)= 0.5 *v *COV [E(r),(1-Rank)^(Lnv)]

Subject to

0≤v ≤1 and 0≤R ≤1.


Where Lnv is the natural logarithm of the risk-seeking coefficient. The justification for using the natural logarithm of v is pursuing a measurement coefficient that caters for the risk seekers negative correlation perception between return and risk. Since risk seekers v is constrained to lie between 0 and 1, so Lnv will always depict a negative number. In addition, Lnv could be viewed as a substitution for the deleted negative sign in the original EMG equation. Consequently, adjusting the EMG equation by constant factor 0.5 could be rationalized from the Gini economic index. Such a concept necessitates that log normal distribution has to be divided by 2 to cater for the area below the Lorenz curve. Subsequently, this variance adjusted technique if applied in AI algorithms could save time and cost. This could be achieved by making small sample data reliable and catering for different investors’ types.


Finally, theories should connect real life dots. Real life applications should save money and also have solid theoretical grounds. Spotting the right arbitrage opportunity in trading stocks, bonds, options or any other financial instrument, depends on how accurately asset managers incorporate return and variance variables in their algorithms. No one has the crystal ball, but definitely part of the answer is in visualizing what connect the dots. Unleash your fun imagination and the puzzle pieces will form together the big forest picture.

This Article was published via TalkMarkets on 20/01/2020

The Valuation Feasibility of Military Companies IPO in Egypt: Analysis of the Strategy and Tactics.

Article about The Valuation Feasibility of Military Companies IPO in Egypt: Analysis of the Strategy and Tactics.

“Strategy without tactics is the slowest route to victory and tactics without strategy is the noise before defeat”- Sun Tzu

Couple of days ago, London School of Economics “LSE” hosted an event to discuss Yezid Sayigh latest book “Owners of the Republic”. Released in mid-December 2019, the book is considered a comprehensive research anatomizing the Egyptian military economic activity. The research based its analytical methodology on numerical figures mentioned by official statements regarding companies’ performance. According to the book, the military economy constitutes around 1%-2% of the Egyptian GDP. Upon the book release, the Egyptian political leadership announced its intentions to launch an IPO program for some of the military companies. The statements beside the book’s findings and conclusion raised a heated debate among local and international reports. Some doubted the feasibility of undergoing an IPO program while others contemplated its success yet subject to some conditions. The conditions coincided with one of the book’s main findings. It specifically includes cost efficiency, transparency and financial engineering to halt losses utilizing comprehensive economies of scale structure.  Hence and post monitoring the latest official statements, is it feasible to launch an IPO program and properly evaluate the military companies? What could be the tactics for a financial restructuring strategy?

To answer the feasibility question, we have to tackle the transparency and the companies’ valuation worthiness if compared to Egypt EV/EBITDA expected figure. Earlier this month, the Egyptian Ministry of Military Production “MOMP” announced the military companies’ financial performance. During 2019 fiscal year ending on June 30, MOMP companies’ revenue aggregated to EGP 13.2 Billion recording a growth of around 12% and 215% if compared to 2018 and 2015 fiscal years respectively.  In addition, the companies’ profits recorded an amount of EGP 235 Million during 2019. Since the companies’ financials are not published, a detailed analysis of the financial components and breakdowns is not applicable. Nevertheless and by default, undergoing an IPO process necessitates publishing the financial statements. Hence, the valuation verification and analysis could be conducted easily fulfilling the transparency requirement. The IPO program announcement did not reveal a solid time frame for implementation, so 2019 financial figures might not be the base year for evaluation. However, the author opted to utilize these figures for the sake of the valuation argument. As a result of lacking a detailed income statement, the bottom line of EGP 235 Million is assumed to be the companies EBITDA. Also, it is assumed a projected horizon of 5 years with a no growth scenario for unlevered company. Upon discounting the EBITDA cash flows using the Egyptian 3month T/Bills, industrial manufacturing goods beta of 0.9 and EGX30 return for 1 year, the calculations yielded EV/EBITDA of 7.73 indicating an enterprise value of around EGP 1.82 Billion. If compared to Egypt expected EV/ EBITDA of 5.68, the companies valuation appears lucrative and feasible. However, each military company EV/ EBITDA might vary due to changes in industry beta calculations according to its activity classification in the Egyptian stock market.

To answer the strategy and tactics question, we have to correlate it with Sun Tzu quotation mentioned above. In military literature, a successful strategy is the one that utilize sound tactics optimally in the right timing. Yezid research criticized the military financial performance especially cost efficiency in some main aspects. Administrative cost, technological advancement, know how transfer and increasing the local component. The MOMP announced the reduction of administrative cost ratio from 56% in 2015 to 20% in 2019. Hence, the strategy was reducing administrative costs by implementing tactics on two phases. First, increasing revenue volume followed by organizational restructuring. On the other hand, an effective production cost strategy requires endorsing some tactics. One could think of a simple tactic by stripping idle assets to generate cash. This could be done either through direct sale to record capital gain or leasing to secure a steady cash flow stream. In January 2020, Yezid Sayigh tweeted a suggestion for the military companies to embark partnership with some other companies rather than conducting business with Chinese. The suggestion if juxtaposed vis-à-vis some tactics could explain the reasons behind choosing China. Post local currency devaluation in 2016, the Yuan exchange rate is considered favorable where Yuan is quoted at EGP 2. Hence, it is cheaper to import Chinese machinery achieving the required know-how transfer mentioned in Yezid research and allowing 100% local component production. Secondly, China trading mechanism might be to some extent flexible regarding payment currency. Conducting transactions utilizing the local currency of both countries could preserve the foreign reserve denominated in US dollars. In addition, launching the commodity market is another tactic to achieve production cost efficiency. Stipulating free market dynamics based on clear pricing mechanism will curb unjustified inflation, hence, elevating unnecessary cost burden from some military companies’ financials.

Finally, some reports contemplates that IPO program could be oversubscribed if more shares are allocated to retail investors and common people counting on the military popularity among Egyptians. On the other hand, some reports contemplate more shares allocated to institutional investors to boost partnership with private sector under the Public Private Partnership “PPP” umbrella. Which scenario will prevail, time will tell…

Thoughts on Saudi Aramco Evaluation

Why is the Egyptian capital markets a lucrative arbitrage opportunity for investors since it is underpriced ?

The $1.7 Trillion Jackpot: Curious Drilling In Saudi Aramco IPO Evaluation

Article about The $1.7 Trillion Jackpot: Curious Drilling In Saudi Aramco IPO Evaluation

“Curiosity is the lust of the mind”- Thomas Hobbes

In December 2019, Aramco IPO was announced the biggest ever with an Enterprise Value (EV) of $1.7 Trillion. The offering value of $25.6 Billion surpassed Alibaba's $25 Billion IPO subscribed in 2014. Some reports also mentioned Aramco’s intentions to finalize Saudi Arabia Basic Integrated Chemicals (SABIC) acquisition by Q1-2020.  Reading all of this news raised curious questions: which of the financial evaluation scenarios prevailed? Did the base case scenario prove its viability? What were the financial model's main assumptions and variable inputs? How did they account for the qualitative risks using quantitative frameworks? Was SABIC cash flows incorporated in the projected outlook noting that Aramco is acquiring a 70% stake? Is it possible to conduct a dual listing in the future? Was there a sensitized or no-growth case scenario? The EV of $1.7 Trillion, is it considered a fair equilibrium value? If not, what is the possibility of an arbitrage? 

Before answering these questions, we have to conduct some drilling in the IPO prospectus. The prospectus entailed useful information about the company’s industry outlook, future cost plan, waivers, and financial statements.  During the offering period, the prospectus lacked information regarding the share price or equity stake offered. However, the prospectus included Aramco consolidated financials for FYE 2017, 2018, Q2 and Q3 of 2019. As mentioned in the waiver section, Aramco waived presenting FYE 2016 in its documentation. Nevertheless, FYE 2017 statements included FYE 2016 comparison figures. Hence, some reports speculated the offering share price to range between SAR 20 and SAR 50 / Share. The prospectus also included SABIC financials for the same period. The official announcement declared the final offering price to be SAR 32/ Share or $8.5/ Share if quoted at an exchange rate of $/SAR= 3.75. In addition, the offering represented a 1.5% stake of the 200 Billion outstanding common shares. Consequently, Aramco's total shares aggregated to a value of $1.7 Trillion.

In order to answer these questions, let’s first unleash our imagination. But first, we have to plug in the financial. By plugging in the data in Aramco financial statements, evaluation of exactly SAR 32/ Share and ultimately an EV of $1.7 Trillion is doable subject to hypothetical sensitized assumptions. Aramco is assumed to follow a no-growth scenario in its revenue for a projected outlook period from 2019-2024. Hence, the projected revenues are pegged to mimic FYE 2018 revenues and operating costs value. Consequently, the projected EBITDA will be more or less similar to FYE 2018 EBITDA mentioned in the prospectus Table (8). The slight EBITDA discrepancy could be attributed to the projected depreciation and amortization resulting from the declining assets and intangibles. So it is appropriate to assume that SABIC projected cash-flows were not accounted for. Subsequently, Aramco evaluation cash-flows will entail no terminal value and will be discounted only for the captioned period. Stipulating on same methodology, Aramco could be considered unlevered company where borrowings are neutralized by cash using the free cash flow to equity method especially that cash balances surpassed borrowings evidenced by historical performance. Hence, it will be appropriate to discount the projected excess cash and the EBITDA during the outlook period.

The ROE and WACC discounting parameters might clarify the offering price range between SAR 30-SAR 32/ Share. After being listed on the Saudi Stock Exchange (Tadawul), it is still early to quantify Aramco levered / unlevered beta. So energy exploration and refineries 1-year unlevered beta of 0.72 could be an alternative. This moves us to the Tadawul return pattern necessary to calculate the market risk premium. The interesting part is the volatility of the cumulative monthly return during 2019 and till the offering period from 17/11/2019 till 4/12/2019.  During most of November 2019, the cumulative monthly return declined by a range of 7% to 9% where the latter prevailed during the last week of November and the early week of December. By plugging in this return range, it will produce a share price range of SAR 30-SAR 32/ Share. MSCI-Tadawul 30 is another index that supports the return hypothesis as it declined by almost 10.25% for the same period. 

Finally, I don’t think the above mentioned hypothetical scenario is realistic. Stressing cash-flows to that extent may not reflect the stock equilibrium value and the firm’s true potential. But what if true, what pieces of the puzzle justify a share price of SAR 32. The general explanation could be conducting Aramco IPO on several phases and what we have witnessed was just the soft launch. Some might think the mega second phase will occur post officially finalizing SABIC acquisition. It might be the case and a piece of the puzzle if analyzed in accordance with the acquisition synergies mentioned in the prospectus. Starting from January 2020, Aramco will be eligible to claim a 20% taxes instead of 50% on its downstream portfolio including SABIC subject to applying certain consolidation conditions prior to 2024. Another piece might be preparing for a dual listing where full acquisition has to materialize prior to doing so. Bearing into mind, integrated oil and gas levered and unlevered beta (classified as Aramco industry) is not less than 1.3 and 1.1 respectively in some global stock markets. Consequently, this might increase the stock value to SAR 38 and SAR 43 respectively eliminating any discrepancy between the foreign and local share price. In addition, some global markets could not incorporate SABIC financials in its consolidated evaluation based only on share purchase agreement. Starting from January 2020, the concession royalty rate will be adjusted to record 15% instead of the current 20% for Brent prices below $ 70/barrel but increasing the rate for Brent thresholds above $70. Thus, it might be prudent to further monitor the Brent direction prior to launching another offering. I have some other curious questions about SABIC acquisition but this is another story.

This article was published in TalkMarkets on 3/2/2020

Buy, Neutral, Or Sell... Investing In The Egyptian Stock Market

Article about Buy, Neutral, Or Sell... Investing In The Egyptian Stock Market

“Investing is laying out money now to get more money back in the future”- Warren Buffett

The opening quote, if combined with the image, truly defines the essence of investing: a growing tree. So why invest in Egyptian equities? Is it worth it? Will it cause our money to grow? I will try to make the answer as simple as possible, but to answer the question it is necessary to understand some fundamental questions first. What entices investors to buy equity stocks in any market, whether advanced or emerging? Which investors is the Egyptian market more suitable for? Those who are risk averse or risk seekers?

Investing is all about the optimal risk/return ration. By applying the golden investment rule of thumb "buy low and sell high", investors are attracted to arbitrage and mispriced stocks from its equilibrium, especially stocks that are undervalued. Egyptian equities belong to the undervalued stocks spectrum, evidenced by MSCI-Egypt index performance in 2019. According to the index prospectus, it is designed to measure the performance of the large and mid cap segments of the Egyptian stock market, constituting approximately 85% of Egyptian equity universe traded at EGX30.

In 2019, the MSCI-Egypt index traded at a valuation of 10.18 times earnings which is considered a 33% discount to MSCI-EM. According to the prospectus estimates for 2020, MSCI-Egypt is expected to trade at a valuation of 9.52 times earnings, considered a 25% discount to MSCI-EM. Consequently, Egyptian equities in 2020 represent an arbitrage opportunity for investors with lucrative returns evidenced by MSCI-Egypt index performance of 42.07% if compared to MSCI-EM index performance of 18.88% in 2019. In addition, the devaluation of Egyptian currency that occurred in late 2016 by almost 50%, makes Egyptian equities cheaper in USD$ than compared to other emerging markets.

That being said about Egyptian return and arbitrage, let's move on to the Egyptian equities risk profile and its suitability to investors’ appetite. Standard deviation is the most common statistical measure for any market volatility and risk profile. According to MSCI-Egypt prospectus, MSCI-Egypt is considered riskier than MSCI- EM evidenced by a 10 year annualized standard deviation of 28.83 if compared to MSCI-EM standard deviation of 17.15 for the same period. Hence, Egyptian equities are more suitable to risk seekers than risk averse investors. Nevertheless, this risk appetite might change in the upcoming years to entice risk averse stemmed from some changes occurring in the Egyptian stock market. In December 2019, Egyptian stock market introduced a short selling mechanism for the first time in its history. Short selling, as an investment tool, has its virtues in minimizing any stock exchange volatility. In early January 2020, the Egyptian stock exchange announced its plan to inaugurate its first local derivative market. Such market will incorporate futures and options trading in local currency. This is considered an advantage from a risk averse appetite, since derivatives will provide the required hedging to cater to a risk averse strategy. Hence, it is expected that Egyptian equities will entice both types of investors: risk averse and seekers. This seems the most optimal scenario, but what if the local derivatives market launch did not occur? As the famous saying goes: if you don't have a plan B, you don't have a plan at all.

In my humble opinion, another alternative to entice risk averse investors and to provide the necessary hedging is by applying cross hedging using index futures. Research conducted by the author of this article concluded that Egyptian equities could be hedged indirectly by longing the Singaporean index futures. This investment strategy will provide investors with some advantages. First, international diversification as Egyptian and Singaporean markets are not perfectly correlated, evidenced by a correlation coefficient less than 0.5. Second, adjusting the portfolio beta without having to long or short the stocks itself, hence no re-positioning is required. In addition, there are minimal transaction costs as the futures initial margins will be cheaper, stemming from the Egyptian currency devaluation. Another advantage, the Singaporean index futures tracks a composite of stock index characterized by sector weights similar to the Egyptian stocks index, hence, minimizing the impact of the tracking error. Consequently, the Singaporean futures recorded a hedging effectiveness with Egyptian equities of 24%. Bearing in mind that MSCI-Egypt futures tracking MSCI-Egypt index recorded a hedging effectiveness of 30% and was terminated in 2016.

Finally, I think the Egyptian stock market under current and future circumstances will make investors' funds grow more, as defined by the Warren Buffet quote above. It will take some time for stock prices to revert back to its equilibrium as compared to EM peers. But how long will the arbitrage window exist? Perhaps Artificial Intelligence algorithms could help answer such a question, but that is a thoughtful story for another day...

This article was first published in TalkMarkets on 15/1/2020

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