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Egypt’s First IPO Since 2010 a Success, but Uncertainty Looms

Egypt’s weak currency, unstable security situation, energy crisis and a government that’s almost bankrupt after three years of political uncertainty hardly make ideal conditions for a market rally. But even as periodic blackouts hit Cairo and Islamist militants carry out attacks on security forces, Egypt this week is welcoming its first initial public offering since a revolution toppled former president Hosni Mubarak in 2011.

Arabian Cement, a producer majority-owned by Spain’s Cementos La Union, sold a stake worth $110 million to investors through the offering, which is set to begin trading in the coming days. The company can produce 5 million tons of cement a year from its plant near the Red Sea entrance to the Suez Canal.

While the IPO was a success – it was 18.5 times oversubscribed – its popularity speaks to an apparent disconnect between Egypt’s myriad problems and the faith investors are placing in its future. The tourism sector lies in shambles, industries from cement to textiles have been hurt by the energy crisis, but the country’s main stock index has risen by more than 70% since a military coup removed former president Mohamed Morsi last July.

Analysts say this partly reflects expectations that Abdel Fattah Al Sisi, the former army chief who is favored to win a presidential election in a week’s time, will usher in a new era of stability and better economic performance. That could mean big profits in a country of almost 90 million people.

Corporate earnings have been on a healthy trend, too, although that’s largely because companies are making up ground lost in the tumult three years ago.

Egypt’s macroeconomic problems have already been priced into the market, according to Ahmed El Guindy, the head of investment banking at Cairo’s EFG-Hermes, which acted as a co-bookrunner on the IPO. Investors, he said, were now looking at companies that will manage well as the country rebounds.

Hesham Gohar of CI Capital, which also worked on the IPO, said the issue’s small size and pent-up demand after a four-year dry spell played another role. He pointed to interest from western institutional investors – they made up almost half of foreign bidders for the IPO shares – as a sign that Egypt was back on the radar globally.

“We think this signals the return of the Egyptian IPO market,” Mr. Gohar said. “Not only does it send the right message to issuers, getting more issuers to consider the IPO opportunity, it also signals there is genuine demand from foreign investors you’d like to see participate in these offerings.”

But as the bankers predict a new wave of IPOs, the future for Arabian Cement as a business could be challenging, much as it could be for all Egyptian firms exposed to the vagaries of local politics and markets.

Cement makers will benefit if Mr. Sisi is elected and invests in Egypt’s infrastructure. Arabian Cement also has an advantage over rivals because its plant can run near full capacity on coal, meaning it doesn’t have to rely on natural gas, a shortage of which lies at the heart of Egypt’s energy crisis.

Jose Magrina, the chief executive of Arabian Cement, said his company was doing well financially and had weathered the political change and labor strikes of the past few years well. It was possible that Mr. Sisi would invest in new infrastructure, he said, but the demand picture for the cement industry was still cloudy. Without ample energy, investing in new production capacity doesn’t make sense.

“In general I do not expect demand for cement and infrastructure for the next couple years will increase dramatically because of the shortage of supply of energy,” Mr. Magrina said. “Beyond that we’ll see – maybe.”

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(via WSJ Blogs)