e-finance, Egypt’s largest IPO since 2005, sets the bar high at EGX

By Sherif Tarek
Posted on Tuesday, 26 October 2021 14:10, updated on Monday, 8 November 2021 08:29

The Egyptian Exchange bell is seen at the stock exchange in Cairo
The Egyptian Exchange bell is seen at the stock exchange in Cairo, Egypt February 13, 2018. REUTERS/Amr Abdallah Dalsh

One of the largest IPOs in the history of the Egyptian Stock Exchange, the state-controlled firm e-finance could pave the way for more offerings of state firms and tech companies

Ahmed Nabil lost around 40% of the capital he had invested in the Egyptian Exchange (EGX) when the market was hit hard by the pandemic last year.

For a year and a half, the Egyptian banker refrained from trading, out of fear of further deepening his woes amid longstanding repercussions of Covid-19 on the economy and ensuing market volatility.

He only had a change of heart when the anticipated initial public offering (IPO) of fintech company e-finance was launched, raising hopes that he could make up for some of his losses.

First state company listed in two years

e-finance, the company exclusively managing and developing the government’s financial network, was the first state company to be listed on the EGX in over two years.

Founded in 2005, e-finance floated a 26.1% stake in a LE5.84bn ($372m) offering as Egypt’s largest two banks – National Bank of Egypt and Banque Misr – were selling shares.

It has become EGX’s largest IPO of all time in terms of value, exceeding Telecom Egypt’s 2005 offering that was valued at LE5.1bn ($325m).

Government-owned firms are usually more appealing to investors than private ones, but for Nabil, the ownership of e-finance was not what coaxed him to return to trading.

Encouraging factors

“What made the difference for me is that the market began to come back to life a bit … and I realised that there was a high demand for this IPO,” the 37-year-old tells The Africa Report.

“The thing that encouraged me the most was [that] there were funds from the US and Europe subscribing to it,” he says, after the number of foreign investors hit a record-low in 2020, which took a heavy toll on liquidity.

I expect it [e-finance share] to do better in the coming months, provided that financial results impress and beat estimates and the company continues to come up with positive news of growth…

Simon Aird, head of international equity capital markets at Renaissance Capital, a bookrunner alongside CI Capital Investment and Pharos Holding, says in a note that total foreign investor allocations were around 72%, branding it a “great outcome.” Global leading investment bank, Goldman Sachs, was among the prominent investors.

Nabil placed a bid to buy 143,000 shares, but was only allocated nearly 7% of this amount as the offering was more than 60 times oversubscribed.

‘Outstanding performance’

Still having cold feet after losing heavily in 2020, Nabil wanted to play it safe by selling his shares once they had increased by 10% to avoid any possible fluctuations. He easily surpassed his target.

Half an hour into the session, when e-finance made its debut on Wednesday 20 October, the shares went up from an initial pricing of LE13.98 to LE19.50, around a 40% jump that prompted Nabil to sell.

The stock hit new highs later in the session and closed with a hefty 50.21% ramp-up as the IPO valued the company at LE22.4bn.

“Obviously, the first day of trading for e-finance has been an outstanding performance with the stock rising as high as LE25 intraday or 79% intraday,” Amr Elalfy, head of research at Prime Securities, an investment bank headquartered in Cairo, tells The Africa Report.

“I expect it [e-finance share] to do better in the coming months, provided that financial results impress and beat estimates and the company continues to come up with positive news of growth, like the recent e-health venture announced in partnership with the Universal Health Insurance Authority” this month, Elalfy says.

On Monday 25 October, e-finance revealed that it is “open to considering opportunities to acquire companies” in case such deals would add value to its shareholders and boost its stocks. The firm added that “currently, investment opportunities in one firm or more in different sectors are being studied.”

New trends in post-Covid world

Sherif Shebl of Pharos Holding, a Cairo-based investment bank, says the IPO has sent “very positive” signals for the recovery of the market, which need to keep up with the new trends.

“This [e-finance IPO] proves that when the product is good, attractive and new, it will draw people’s attention,” he tells The Africa Report.

“Maybe we’re starting to get out of the phase where all kinds of [large listed] companies are from the real estate [sector] or banks,” for which investors no longer have the same appetite as 10 years ago, he says.

The success of Fawry IPO may have contributed 20% to that of e-finance.

Other sectors such as healthcare and, in particular, technology have thrived since the outbreak of the coronavirus, says Shebl, who is the vice president of Gulf Cooperation Council sales at Pharos.

This has reflected on the stock markets around the world: bourses on which booming tech companies are listed were the most appealing – such as in the US, Germany and Spain.

In Egypt, there are only a handful of listed IT companies.

Keyword: fintech

To leave the door wide open for the tech sector, IT companies and start-ups that are not making profits should be allowed to be listed on EGX, which will require legal amendments, says Shebl, citing similar facilitations in Dubai.

In August 2019, the IPO of Fawry was subscribed by over 30 times. The e-payment platform was valued at $1bn a year later, becoming the fastest-growing firm in EGX history.

Shebl believes even though there is a drastic difference between e-finance and Fawry, with the latter on the commercial side and offering diversified e-payment solutions, they are widely seen as similar.

“The success of Fawry IPO may have contributed 20% to that of e-finance,” he says, adding that more offerings of tech companies would revitalise the market.

Elalfy from Prime Securities echoes similar sentiments, with an emphasis on financial technology.

Fintech in Egypt, like the rest of the world, has been at an inflection point since the pandemic, with incessant government initiatives over the past five years to turn the most populous Arab state into a cashless society.

A growing startup scene and an increasingly welcoming entrepreneurial environment have also lured the private sector into Egypt’s fintech drive.

“I think the most prominent factor that helped make e-finance that much [more] attractive is the sector it operates in, fintech, given its high growth potential with the state support in view of its high ownership stake,” Elalfy says.

Resumption of privatisation

e-finance’s EGX debut heralds the resumption of a privatisation programme that Egypt kicked off in 2019, with the aim to float over 20 stakes of state firms from various sectors.

The ambitious government IPO initiative was launched following a $12bn funding agreement with the IMF, signed in 2016. Proceeding with the programme was reiterated by the stand-by agreement that Egypt signed with the IMF in 2020, as a step to “deepen structural reforms.”

Egypt’s tobacco monopoly, Eastern Company, led the way by listing a 4.5% stake in March 2019. The IPO programme witnessed a hiatus until the e-finance listing.

On Wednesday 20 October, Finance Minister Mohamed Maait said five or six IPOs from Egyptian state companies would be launched in the current financial year that ends 30 June 2022, without naming any or providing further details.

We will see more IPOs within the same fintech space, like Ebtikar…

Shebl believes it’s unlikely that EGX would see more state IPOs for the remainder of 2021, shrugging off the attractiveness of government-controlled companies on the bourse should they not meet the new requirements of the post-Covid-19 reality.

For his part, Elalfy expects e-finance IPO to encourage the government to list more state companies, for which he believes the appetite would be bigger. Nevertheless, he thinks the coming offering will likely be from the private sector.

“We will see more IPOs within the same fintech space, like Ebtikar,” a financial services firm that operates e-payments platforms Bee and Masary, and is planned to be listed in the current last quarter of 2021, Elalfy says.

Domestic conditions

Elalfy believes that some domestic conditions have been “overshadowing the performance of EGX, especially small caps as measured by [the broader] EGX 70 EWI” index, including:

  • Anticipation over the implementation of the capital gains tax (which was repeatedly put off over the past years) starting in 2022, and the impact it would have.
  • The crackdown by the regulator on speculative behaviour that saw some stocks reach unprecedented levels.

“The capital gains tax issue has to be put to bed once and for all, whether to implement it as planned or to cancel it altogether,” Elalfy says. “I believe having a high level of visibility is of an essence.”

“Also, addressing stock manipulation by levying high fines would be more effective as opposed to cancelling trades, which adds to the uncertainty in the market and punishes other investors on the other side of the cancelled trade who may very much have nothing to do with the stock manipulation.”

Nabil, the banker, did not offset his previous losses by selling his e-finance shares, yet he revels in quadrupling the funds he invested in the historic IPO.

“Maybe the gains I’ve made would encourage me to go back to trading” at some point in the future, he says, adding that what would mostly be heartening for him is “to see the [EGX main] index going up.”

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