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Juhayna Food Industries (JUFO) of Egypt and Political Risk facing Investors in EMs

Synopsis: In 1983, a young man after working for many years in Saudi Arabia comes home to Egypt. He starts a dairy farm and names it after his mother’s hometown, Arab Juhayna and turns it into a leading dairy manufacturer while transforming the juice and dairy industry in Egypt. That man was Safwan Thabet and the farm he created was Juhayna Food Industries. While Juhayna weathered several storms, including the energy price hike in 2014 and the devaluation of Egyptian pound in 2016, Safwan Thabet wasn’t as fortunate. He was arrested in December 2020 on charges of funding a terrorist group, Muslim Brotherhood. But there were reports that the charges were a mere façade to hide the real intention: government’s wrath. The stock price has been on a downward spiral ever since and EMAlpha takes a deeper look at some of the challenges facing investors looking at Egypt and how the local news analysis can help. Qualitatively, the political risk is very different from other business risks and it may even have a long lasting impact on the stock price. While some of these developments may happen rapidly, investors need to be on top of these events and should exit at the first sign of serious trouble.

Egypt: An intriguing Emerging Market

Among the Emerging Markets (EMs) included in the MSCI Emerging Markets Index, there are Twenty-Seven markets: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Of these EMs, Egypt is among the countries that have seen maximum changes and transition over the last two decades. After a tumultuous period the politics and society went through which had serious negative impact on Egypt’s economy, the last few years have been characterised with a more sensible, confident and open approach from the policymakers.

The fiscal and monetary measures, macroeconomic and structural reforms especially in major sectors like Energy have helped in stabilizing the economy. In 2019, the growth in GDP was 5.6%, a rate that had not been achieved in more than a decade. From languishing at around 2% GDP expansion during 2011-13, the economy came back firmly to 4-6% GDP growth range during 2015 onwards phase. In hindsight, this has helped the country in dealing with the Coronavirus crisis in a much better way. Just like other parts of the world, Egypt too has been affected deeply but on a relative basis, the situation is still better than many other countries and overall, it is satisfactory. How did these positive changes come about?

The role of politics and governance structure

Since January 2011, with the popular uprising that forced the resignation of former President Hosni Mubarak, the political changes have been rapid. The latest constitution was approved by Egyptian voters in January 2014 and a series of amendments were approved in a referendum in 2019. In March 2014, the former Field Marshal Abdel Fattah el-Sisi who was also the Egyptian Defence Minister and Commander-in-Chief of Egyptian Armed Forces, retired from the military and contested the presidential election. The poll held in May 2014, resulted in a landslide victory for el-Sisi and he became the President in June 2014. Since then, he has gained in strength and he has consolidated his position as the solo power centre, with little room for dissent.

While the period since President Abdel Fattah el-Sisi has been at the helm has coincided with the phase that brought political stability and pickup in economic growth, there is also a flip side. Egypt has started to get more involved in local geo-political conflicts such as its military intervention in the Libyan civil war and the dispute with Ethiopia. There are also several media reports which highlight that the Egypt government is also engaged in domestic repression which includes quelling any opposition brutally and not allowing free and fair reporting by journalists, including local and foreign media. Often this may not directly matter for markets and investors but what happens when a company gets caught in this cross-fire?

Juhayna Food Industries

Over the course of three decades since its inception, Juhayna Food Industries has been among the leaders in the production of dairy and juice products in Egypt. With four fully operational facilities, a vast network of distribution centers serving more than 136,000 retail outlets nationwide, and a 5000-feddan, fully-owned dairy farm that has the capacity to house 7,000 milking cows, Juhayna has grown rapidly. It has a market cap of 4.2 billion Egyptian pounds (US $ 267million) and has reported good operating and financial performance.

Figure 1: Previous four quarters earnings (value in millions Egyptian pound)

Source: www.investing.com

Yet, Juhayna’s stock price has struggled over the past year.

Figure 2: Stock price of Juhayna over the past year

Source: www.juhayna.com

The Thabet family and ties to the Muslim Brotherhood

Although the stock was on a downslide since July 2020, the fall was prominent during December 2020 and later from February 2021 onwards. EMAlpha analysed the news flow and found out the primary reason behind the fall.

On 5th December 2020, Egypt’s public prosecution ordered a 15 days arrest of Safwan Thabet, the chairman of Juhayna, on charges of “funding a terrorist group”, the outlawed Muslim Brotherhood: a charge which he denied. Earlier in August 2015, a judiciary committee formed by the government had confiscated Thabet’s funds on similar charges of links with the Muslim Brotherhood. Following news of his arrest, Juhayna’s shares tanked 6.1% and the Egyptian Exchange suspended the company’s shares.

Following Safwan Thabet’s detention, Juhayna appointed his son, Seifeldin Thabet as the acting chairman. But bad fortunes followed him as well. On February 07 2021, Seifeldin Thabet was detained as part of investigations into alleged financing of terrorist groups by his father. The share price tumbled further and it has been on a downhill ever since.

Figure 3: Juhayna’s stock price between Dec 2020 and March 2021

Source: www.juhayna.com

Juhayna’s stock price has underperformed the broader market index (EGX 30) by more than 50% over last one year as the stock remains under sustained pressure.

Figure 4: Stock price of Juhayna over the past year vs. EGX 30

Note: At the top, EGX 30 performance and below, Juhayna Stock Price

Source: https://www.egx.com.eg/en/StocksData.aspx?ISIN=EGS30901C010

Is there more than what meets the eye?

Terrorism accusations are very serious accusations and it is even more damning when the person happens to be one of the leading industrialists of a country. In the three decades that Juhayna and Thabet have been prominent figures, there has been no talk of a potential link between the businessman and the Islamist organization. When President Abdel Fattah al-Sisi ascended to power, Thabet was invited to attend one of the first meetings with businessmen that the new president held in 2014. Thabet announced then that he would donate 50 million Egyptian pounds (roughly US $6.9 million at the time) to Tahya Masr Fund (Long Live Egypt), a black-box reserve that is managed directly by the president without parliamentary oversight and is tax exempt. All seemed to be well between the state and Thabet who was also hailed as a ‘patriotic businessman’. So when did things go south?

The fallout began on August 20, 2015, when the committee tasked with surveying and managing the assets of the Muslim Brotherhood decided to freeze Thabet’s assets under the pretext that he was a “member” of the Brotherhood, rather than being a mere “sympathizer”. In February 2016, the committee also froze 7.2% of Juhayna’s shares that Thabet owned indirectly. In January 2017, he was listed on the state’s terrorism list for a period of three years. Despite being named on the terrorism list, Thabet was not arrested until December, 2020.

The Role of The State in Business

That the Egypt government favours the military-owned firms over the private sector is very clear now considering the tax and other advantages that are granted to them. In the World Bank Group’s 2020 ease of doing business report, Egypt ranked 114 out of 190 countries. The International Monetary Fund warned in Sept 2017 that private sector development and job creation “might be hindered by involvement of entities under the Ministry of Defence”.

It was reported in Nov 2015 that “Even though President Abdel Fattah Al-Sisi’s government is relying on investors to stimulate the economy, offering them unprecedented incentives through the New Investment Law, some economists forecast a “hidden war” between the state and businessmen, due to the recent targeting of famous tycoons”. One of the famous tycoons was Safwan Thabet. Link

In the past years, the Egyptian army monopolised many economic areas in the country. It quickly removed all competitors and controlled many areas of the economy with an eye on expanding its economic empire to other regions as well. President Sisi, from mid-May 2020 onwards had repeatedly stated his desire to establish an integrated system of dairy collection centres nationwide. Safwan Thabet, over the course of decades, had become a formidable competitor in the Egyptian and African dairy market.

According to a report, Thabet rejected a proposal submitted by a minister to buy the struggling state-owned food manufacturing companies Qaha and Edfina, which were suffering from major economic pitfalls. The report further stated that “Safwan’s lack of interest in the idea was due to the large and exaggerated financial compensation that he would have to offer in exchange for the two companies”.

It has been further alleged that after Thabet was arrested, he and his sons were asked to give up the assets of Pharon Investments Limited owned by the family. Interestingly, Pharon Investments has a 51% holding in Juhayna Food Industries. It is evident that it is the assets that are needed and not the cash.

From the above discourse, what emerges is a picture not of a company harbouring Brotherhood assets, as some rumours would suggest, but more of one increasingly wary of demands for ever larger donations and cooperation in state-led projects.

The other side of the Story

There are always two sides to a story and a discourse isn’t complete until both sides’ statements have been laid on the table.

Although there have been no reports of Safwan Thabet’s linkages to the Muslim Brotherhood, nonetheless his mother is Khalida Hassan al-Houdaiby, the daughter of the second supreme guide of the Muslim Brotherhood, and the sibling of Maamoun al-Houdaiby, the sixth supreme guide of the group. In 2018, Seifeldin Thabet signed an agreement for Juhayna to donate 15 million Egyptian pounds to the Tahya Masr Fund as contribution to the national campaign to end Hepatitis C in Egypt. In appreciation for the contribution, the Armed Forces Finance Authority and the Tahya Masr Fund secretary, General Mohamed Amin Ibrahim, awarded the company an honorary shield, according to a press release by the company in June 2018. In addition, Thabet participated in initiatives and events in cooperation with several ministries, including contributing to a Health Ministry-led initiative to provide protective equipment to medical staff during the beginning of the coronavirus pandemic. Prior to the arrest of Thabet and his son, the family had participated every year in fairs organized and sponsored by the Supply Ministry to sell household goods at discounted prices.

According to a report, “It does not make any sense that the state was honouring people who are financing terrorism. Safwan and his son received honorary awards. It is also against common sense that the state did not know who was investing his money and where, especially if we are talking about the Muslim Brotherhood. Furthermore, it is not in the state’s best interest to have talks of asset freezes of businessmen under various pretexts, which gives a negative impression about its intervention in the economy”.

What do we understand from this episode?

While one can argue that Safwan Thabet was made a scapegoat by a government whose military’s ambitions are far-reaching, another can argue that Safwan Thabet’s arrest was the government’s way of trying to save face. But the end result is not pleasant for investors. The investors in Juhayna have suffered heavily and for them, the explanations and discussion on what the reality is and who is right or wrong offers no consolation.

However, what can’t be denied is the Government and the military’s increasing influence in civilian and private sector activities. President Sisi, who is a former Director of Military Intelligence, is known for his staunch support of the military. He has been quoted in the past as saying that “the military can deliver large, complicated projects faster than the private sector”. These kinds of statements certainly don’t bode well for investors looking at Egypt.

There are situations when these statements are merely political but this doesn’t seem to the be the case here. The main market index EGX 30 Index, which is a free-float capitalization weighted index of the 30 most highly capitalized and liquid stocks traded on the Egyptian Exchange is reflecting that the investors are concerned. As we highlighted earlier, the 2014-2019 phase has been good for the economy but after the initial euphoria, the markets have been struggling since 2018. Also, another important noticeable fact is that after the pandemic induced impact in March-April 2020, most global markets recovered sharply. This didn’t happen with Egypt.

Figure 5: EGX 30 performance over last five years

Source: https://in.tradingview.com/symbols/EGX-EGX30/

How EMAlpha can help Investors in such cases?

The impact of political risk is significant for investors in Emerging Markets. While some of these developments may happen very rapidly, investors need to be on top of these events and should exit at the first sign of serious trouble. Qualitatively, the political risk is very different from other business risks and adverse events and it may even have a long lasting impact on the stock price. In such cases, EMAlpha can help investors in the following ways;

  • Go beyond the official reported version – Local domain expertise matters and there is a need to look beyond what the companies are reporting and what the official version is. The EMAlpha algorithms scan through unstructured data to pick the relevant news as unofficial leaks appear first.
  • Importance of local news – The local news flow collection picks up grapevine first and for stocks, it is important. The local language along with English news analysis can be tracked for such issues. The extent and seriousness of such incidents and the potential fallout is usually better predicted using local news analysis.

References

  1. The MSCI Emerging Markets: 27 EM countries https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111#:~:text=*%20EM%20countries%20include%3A%20Argentina%2C,Turkey%20and%20United%20Arab%20Emirates. (Accessed on 29th May 2021)
  2. Egypt Economic Monitor and World bank on Egypt https://www.worldbank.org/en/country/egypt/overview (Accessed on 27th May 2021), https://www.worldbank.org/en/country/egypt/publication/egypt-economic-monitor (Accessed on 29th May 2021), https://documents.worldbank.org/en/publication/documents-reports/documentdetail/256581604587810889/egypt-economic-monitor-from-crisis-to-economic-transformation-unlocking-egypt-s-productivity-and-job-creation-potential (Accessed on 27th May 2021), https://documents1.worldbank.org/curated/en/256581604587810889/pdf/Egypt-Economic-Monitor-From-Crisis-to-Economic-Transformation-Unlocking-Egypt-s-Productivity-and-Job-Creation-Potential.pdf (Accessed on 29th May 2021)
  3. GDP growth (annual %) – Egypt, Arab Rep. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=EG (Accessed on 29th May 2021)
  4. Egypt: Government and society https://www.britannica.com/place/Egypt/Government-and-society (Accessed on 29th May 2021)
  5. Egypt: Trends, politics, and human rights https://www.brookings.edu/testimonies/egypt-trends-politics-and-human-rights/ (Accessed on 29th May 2021)
  6. http://www.juhayna.com/en/ (Accessed on 27th May 2021)
  7. Milking Juhayna for all its worth https://www.madamasr.com/en/2021/05/05/feature/politics/milking-juhayna-for-all-its-worth/?__cf_chl_jschl_tk__=d468f8bf83e11a61c2631d9ec07fe72c57480b22-1622198047-0-AVJ2b-EP5Y78z3yktIghos2yn9Of3XpfakswVTQpPJroQnVu6P5KlVP0bnmZ91mmokQTbRhj95BFfICroyIWj10NxW0bBLw-xzNOx8ZKU1YaDJCjWQpB0sSJGL3vz5kSAbrR_shV71iVwvztxCRiICvqvSSduMkKucC6CwyXKGG0rM5OWFc5aCg4ADkeDmOFrDEaqgqiybo-SPB7rhZTcU1xOShN1_ZvMElFG9Nte6g1WkzSDbiR1U87e-qE2ruCWbds99ugE2SGt4wDb9m5SR25SB0K9o9WwE60TyGJRdCn8LezxN8WoKuRThebDBbfh_6IBBTBhS62xTPMZ5jFfOqIcbJOcB9nayRmVZ4BVXMW7lLhGQJl4RQ4XPv1PmhF-n_GXcKvi1R5sODmxqljbc1dFF67-vd2qYl5q8XsXx32H-6_MCeMmgwcz2mxTz4a8or4ATyMkFwzv04HAwUpyF9sDSQ23jSBOLyPrPZUHbTMO_wUGeFldfd85ldMUF2yhmKdlAAQ2PWTktMfgBP9Bpqtmi01UnikmcLQGSxsQ2C5 (Accessed on 27th May 2021)
  8. Businessmen and the state: A confusing relationship https://dailynewsegypt.com/2015/11/21/businessmen-and-the-state-a-confusing-relationship/ (Accessed on 27th May 2021)
  9. CEO of Egypt’s Juhayna detained, share price tumbles https://www.marketscreener.com/quote/stock/JUHAYNA-FOOD-INDUSTRIES-S-6605923/news/CEO-of-Egypt-s-Juhayna-detained-share-price-tumbles-32380456/ (Accessed on 27th May 2021)
  10. Egypt arrests Juhayna company chairman for funding terrorist groups https://egyptindependent.com/egypt-arrests-juhayna-company-chairman-for-funding-terrorist-group/ (Accessed on 27th May 2021)
  11. The Army Dairy Company: The secret behind the arrest of Safwan Thabet and his son https://egyptwatch.net/2021/05/04/the-army-dairy-company-the-secret-behind-the-arrest-of-safwat-thabet-and-his-son/ (Accessed on 27th May 2021)
  12. From war room to boardroom. Military firms flourish in Sisi’s Egypt https://www.reuters.com/investigates/special-report/egypt-economy-military/ (Accessed on 27th May 2021)
  13. Egypt rises six spots to 114th in World Bank’s ease of doing business report https://enterprise.press/stories/2019/10/27/egypt-rises-six-spots-to-114th-in-world-banks-ease-of-doing-business-report/ (Accessed on 27th May 2021)

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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