Profit declines again for Orascom in Egypt



Quarterly profits at Orascom Construction Industries fell by almost one third as the cost of projects in Algeria and the United States weighed on earnings.

The Egyptian company, a star performer on the Cairo stock exchange this year, is often described as a contractor but makes most of its money from fertilizer sales.

But Orascom's latest quarterly numbers are disappointing. Quarterly revenues fell 8.5 per cent to US$1.3 billion compared with the same period last year.

The company's quarterly net income fell even faster, decreasing 27.7 per cent to $119.4 million during the same period, a third consecutive quarter of decline.

"During the quarter net income was impacted by a high effective tax rate due to higher contribution from our European operations," said Nassef Sawiris, Orascom's chairman and chief executive.

He added the company was yet to see any benefits from projects in Algeria and the United States on which Orascom is still booking start-up costs.

But earnings from continuing operations "were a bit on the light side", said Loic Pelichet, a financial analyst at NBK Capital. The construction company's backlog also disappointed, he added.

Orascom is betting heavily on the US with a $1.4bn greenfield fertilizer production plant in Iowa. The drought experienced in the Midwest this summer should also provide a catalyst for increased sales of fertilizers, the company hopes.

For investors, who have seen the company's shares rise 43.2 per cent this year to 288.05 Egyptian pounds per share, it may be time to take profits. Orascom's shares rose 1.3 per cent yesterday.

The company's meteoric rise represented much of the gains made year-to-date by the EGX30 benchmark, but had little further to run, Mr Pelichet added,

"[The stock is] starting to look fairly valued," he said.

"There's not a huge amount of upside left."

Orascom expects to split its fertilizer and construction arms, with the demerger expected during the fourth quarter.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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