EGX30 Falls 2.95 % In Week As OCI Tax Dispute Weighs

The Port Said court ruling proceeded by bloody riots, massive blaze and police strike alongside the pending tax disputes between Orascom Construction Industries and the Egyptian Tax Authority have driven the Egyptian Exchange to incur losses of EGP 5.8 billion in a week.

The capital market has hit EGP 361.392 billion at the end of last week, compared to EGP 367.216 billion at the end of a week earlier.

Benchmark EGX 30 index sank by 2.94%, , representing a decline of 158.41 pts, ending Thursday’s transactions at 5207.21 pts, compared to EGP 5365.62 pts at the end of a week earlier.

Regarding current week trading, the index hit its highest point on Tuesday closing at 5404.91 points, where its lowest point recorded on Thursday at 5207.21 points.

Meanwhile, the mid- and small-cap index, the EGX70 fell by 0.16% closing at 456.15 pts during Thursday’s session, compared to 456.9 pts at the end of a week earlier.  Price index EGX100 also pushed down by 1.68% concluding Thursday’s session at 758 pts, compared to 771.29 pts during a week earlier.

Also in a week, the EGX has recorded a volume of trades hit  436.6 million securities, compared to 595.2 million a week earlier; while the traded value reached EGP 1.516 billion, compared to EGP 1.747 billion a week earlier.

Companies’ Weekly Performance Highlights:

Orascom Construction Industries (OCIC.CA) closed last week at EGP 249.58, while closed on Thursday at EGP 229.34 (lowest close), dipping by EGP 20.24 (8 %).

Stock highest close during the week came on Sunday at EGP 248.87.

Last Thursday, Prosecutor-General Talaat Ibrahim has ordered the formation of a technical committee tasked with looking into a recent finance ministry report in which Egypt’s OCI is accused of tax evasion, Al-Ahram’s Arabic-language news website reported.

The technical committee, which will function under the auspices of the government’s anti-tax evasion unit, will send its assessment of the dispute – which has already impacted OCI’s share prices – to the prosecutor-general, who will then take the appropriate legal steps, according to Al-Ahram.

On Sunday, OCI N.V.’s subsidiary, OCI, in response to statement from the Egyptian Tax Authority (ETA), reiterated its strong position on the alleged tax claim further undermining any allegations of tax evasion.

The company clarified the following key points:

• In accordance with paragraph 8 of article no. 50 of law no. 91 of 2005, all capital gains resulting from the sale of shares listed on the Egyptian Stock Exchange (EGX) are tax exempt; consequently the sale of Orascom Building Materials Holding (OBMH) to Lafarge SA in 2007 is exempt of any capital gains tax. This law has been the cornerstone of the Egyptian Tax Code and has not been challenged or objected since its ratification. It is important to note that the ETA has not communicated any claims to any listed company on the EGX during the past 7 years.

• The current dispute between the company and the ETA is matter of differences over interpretation of the applicable tax laws and not a matter of tax evasion. The company has been accused of tax evasion even though article no. 133 of law no. 91 of 2005 is not applicable on the transaction. It is important to note that a tax audit on a given company cannot take place unless certain evidence is presented that provides reason to warrant a tax audit.

• The ETA performed a tax audit on the transaction to study the company’s rights for tax exemption and concluded that EGP 22.6 billion of the total transaction value of EGP 68.6 billion is subject to tax. The ETA claims that a portion of the transaction occurred in the form of a direct “share swap” despite the fact that the company presented supporting evidence (trade confirmations from various brokers involved in the transaction as well as Lafarge SA’s share register immediately after conclusion of the transaction) proving that the sale of OBMH occurred on the EGX in its entirety and that no share swap took place. Today, OCI does not have any ownership in Lafarge SA and never did in the past.

• OCI and its affiliates present their annual tax returns and pay their dues on the legally set dates; the company has consistently filed its tax returns in a timely manner and has provided supporting evidence to the ETA for the period 2007 – 2010. In light of that fact, the company fails to understand how the ETA never brought to its attention an alleged tax claim on the transaction. Furthermore, the company fails to understand how the ETA can simply blame the delay in submitting the tax claim on “errors in examination” by former tax officials.

• The ETA claims that the sale of OBMH to Lafarge SA occurred prior to the listing date of OBMH on the EGX. These claims are false as the actual sale never occurred prior to the listing date but occurred 2 months after the company was listed on the EGX.

• The Egyptian Tax code stipulates that a positive revaluation of a company’s assets and liabilities is subject to tax. The ETA claims that profits generated from the sale of OBMH should be considered as profits from a revaluation of the company’s assets and liabilities. OCI emphasizes that this is void and erroneous. It is clear that the ETA is trying to create a context for tax that does not exist and/or is not applicable. OBMH’s shares were sold to Lafarge SA on the EGX through a registered sale and all available evidence of such a sale has been presented.

• The ETA claims that the fees related to the sale of OBMH to Lafarge SA were EGP 3 billion and constituted fees for an investment bank to revaluate the company’s assets and liabilities. The company fails to understand how the ETA can misconstrue such information when all disclosures related to the transaction have consistently quoted EGP 250 million in fees and the settlement of EGP 2.3 billion in debt to various counterparties. Moreover, the EGP 250 million figure covers conventional transaction fees for bankers, lawyers, advisors and consultants and was not for a revaluation of the company’s assets and liabilities as suggested by the ETA. It is again clear that the ETA is attempting to create a context for a tax liability when an incidence does not exist and/or is not applicable.

• Under any normal tax claim, a given company has the right to submit a direct appeal to the ETA’s Appeals Committees to request a study of the ETA’s objections before a specialized appeals committee, consisting of a justice from the Egyptian Ministry of Justice, two legal auditors and two representatives from the ETA. The role of this committee is to provide an unbiased and independent assessment of the tax claim and help resolve outstanding tax-related matters between the ETA and a given company. The ETA Appeals Committee has requested information pertaining to the claim from the ETA but the request has not been fulfilled to date. It is again indicative that the ETA intends to deprive the company of its legal rights as guaranteed by the law.

On Wednesday, Hundreds of workers from Orascom Construction Industries protested against the Egyptian government’s accusation that the company owes 14 billion pounds ($2.1 billion) in back taxes, a charge they say threatens their livelihoods, Bloomberg reported.

The workers rallied outside the company’s Cairo headquarters, blocking traffic from a section of the corniche that leads from the banks of the Nile to Tahrir Square.

Dressed in florescent yellow and orange jackets, they held banners that read: “Oh Finance Minister, where is social justice?”, “Bread, Freedom, Sawiris is not a tax evader,” and “100,000 families will lose their income.”

Late Wednesday, the firm announced that there will be another meeting with ETA next Sunday March 17, seeking to reach a reasonable compromise and end the existing disputes over tax evasion claims amid the sale of Oracom Building Materials to French Lafarge in 2007.

During the last two meetings with the ETA, OCI has offered pay EGP 6 billion.

Senior source from ETA told Amwal Al Ghad During the last two meetings of March 10 and 12, OCI has offered to pay EGP 6 billion to the authority to reach reconciliation for the EGP 14 billion tax evasion issue.

The source further explained that OCI has requested to transfer its tax file from ETA’s Anti-Tax Evasion Department to the Appeals Committee so as to look into the rest of the tax dues of EGP 8 billion. The source attributed OCI’s request to the fact that the Anti-Tax Evasion Department is likely to double the tax dues from EGP 8 billion to EGP 28 billion.

On the other hand, first-hand sources from OCI negated that the firm has offered to pay EGP 6 billion to reach reconciliation for the EGP 14 billion tax evasion issue.

The sources reiterated that the company continues talks with the Tax Authority and that another meeting will be held next Sunday in this regard, Mubasher reported.

“Any talks about figures for settlement are incorrect currently,” the sources noted.

National Societe Generale Bank (NSGB) – (NSGB.CA) closed last week at EGP 38.07, while closed on Thursday at EGP 38.13 (highest close), upping by EGP 0.06.

Stock lowest close during the week came on Sunday at EGP 38.05.

On Wednesday, HC Securities, the independent financial advisor evaluating National Societe Generale Bank (NSGB) share price, has performed a study to evaluate Qatar National Bank’s mandatory tender offer to buy NSGB entire shares.

HC stated that, it evaluated NSGB share price at EGP 35.25 which is lower than the price offered by QNB amounting to EGP 38.65 per share.

It added that, the price offered is good for bank’s investors.

Accordingly, NSGB BOD approved the tender offer and financial advisor’s report as the price offered in the tender offer is higher than the evaluation price by 9.6 % and 31 % higher than the average price of bank’s share in the market in the last 6 months. 
Also on Wednesday, NSGB reported consolidated financial results posting a net profit of EGP 1,537,903,726 in 2012, compared to net profits of EGP 1,489,612,069 in 2011.

NSGB BOD suggested cash dividends of EGP 1.25 per share.

Moreover, it approved issued capital increase by EGP 433.535.900 via stock dividends (one free stock for every existing ten held).

On Thursday, Audi Saradar upgraded NSGB rating to Hold from Reduce with target price of EGP 38.7 per share.

Audi stated that, NSGB net income for Q4-12 ended at EGP 361 million, below our estimate by 10%.

It added, higher than expected provisions and opex were the key reason behind this miss. Q4-12 net income is down 10% Y-o-Y and 7% Q-o-Q.

Telecom Egypt – (ETEL.CA) closed last week at EGP 13.55, while closed on Thursday at EGP 13.23 (lowest close), dipping by EGP 0.32 (2 %).

Stock highest close during the week came on Monday at EGP 13.69.

On Monday, Telecom Egypt reported a 12.8 percent fall in full-year net profit, hit by economic turmoil in the north African country and a further decline in its fixed-line business as customers switch to mobile phones, Reuters reported.

The company, which is hoping growth in data services will offset lower fixed-line income, said on Monday it made a net profit of 2.61 billion Egyptian pounds ($386 million) last year, compared with 2.99 billion in 2011.

Egypt’s economy has been battered by political turmoil since Hosni Mubarak was ousted from office in February 2011, with violence and rows between political groups hurting the economy.

Telecom Egypt Chief Executive Mohamed El Nawawy said he was optimistic about the long-term business and political conditions in the country.

“All that I can say is that we are very optimistic as the fundamentals are the same,” El Nawawy, who is also chairman, told a conference call.

However Samir Azmi, head of the technical analysis desk at Blom Egypt Securities, remained cautious.

“Nothing keeps going down forever, but I can’t see any other practical reasons behind such optimism as long the status of the country remains unchanged,” he said.

Egypt Telecom said fourth-quarter net profit was 452 million pounds. It did not give a comparative figure, but a financial statement on its website showed 443 million pounds net profit in the fourth-quarter of 2011.

For the full year, it reported a 37.1 percent margin on its earnings before interest, taxes, depreciation and amortization (EBITDA), compared with 46.7 percent in 2011. Annual revenue rose 1.6 percent to 10.03 billion pounds.

Also on Monday, Telecom Egypt announced that company’s BOD suggested cash dividends of EGP 1.30 per share, which was submitted to AGM for getting approval.

On Tuesday, Audi Saradar re-iterated Telecom Egypt Accumulate rating with fair value of EGP 16.10 per share after reporting Q4/2012 results.

Audi stated that, Telecom Egypt net income came in at EGP 453 million vs. our estimated EGP 687 million and Bloomberg consensus of EGP 650 million.

It added that, higher costs relating to salaries and back-dating of interconnection costs due to Mobinil agreement weighed heavily on TE’s EBITDA, over-shadowing the revenue diversification power of the company.

The Board recommended a dividend distribution of EGP 1.3/share, vs. our estimated EGP 1.4/share, translating into a 2012 dividend yield of 9.5%.

However, we believe that the company’s catalyst is acquiring an integrated license, allowing it to offer mobile services (whether MVNO or MNO), which will tackle top-line weakness.

On the other hand, EFG-Hermes stated that Telecom Egypt 4Q2012 results were mixed, with total revenue exceeding our estimates by 1.5%, but margins and earnings missing significantly.

Hermes added that, what is positive is that wholesale revenue grew 9% Q-o-Q, exceeding our estimates by 7%, while negative point is that EBITDA margin missed significantly, coming in at 21% versus our estimate of 45% mostly on higher-than-expected interconnection and employee costs.

Hermes pointed out that TE’s board of directors proposed a cash dividend of EGP1.30 per share (subject to shareholders’ approval on 27 March 2013), lower than our expected EGP1.45 per share and lower than last year’s dividend distribution of EGP1.40.

Regarding Investors’ Activity:

Local investors led the market activity all through the week, followed by Foreign and Arab investors respectively.

Local investors were the most active buyers this week earning the value of EGP 188,307,357.

Arab investors chose also to buy by value of EGP 841,113.

Foreign investors were most active sellers this week by the value of EGP 189,148,468.

Retail & Institutions’ Activity:

Retail activity led the market all through the week as it ranged between 10.04 – 65.24 %.

While Institutions activity ranged during this week between 43.75 – 89.95 %.