We are delighted to announce that we have now achieved critical mass in our Silk Road Income fund, our award winning fixed income strategy that offers a highly diversified allocation to the frontier bond markets in Africa, the Middle East and Central Asia. The fund’s assets are now just under the $30 million mark. This clearly indicates that European investors are increasingly ready to diversify away from the beleaguered Euro-zone and benefit from the higher yield offered by creditors who are arguably in much better shape than their peers in the developed world.
We also see an acceleration of inflows into our African equities strategy. Could this have to do with the increased media attention towards Africa, now that the world cup is in full swing? Probably so, but It is also fair to say that investors have now come to terms with the opportunities in this part of the world, which is not surprising given that there are more and more entities who are endorsing Africa and its promising future. It is also likely that this has much to do with the fact that investors can no longer ignore the economic strength of Morocco, Tunisia, Kenya, Nigeria and Ghana; with their strong recent performance, these markets seem oblivious to the difficulties the rest of the world is currently coping with.
There have also been new investments into our Arab Equities fund. Egypt, along with the markets in the Gulf region recently suffered from a ‘sentiment driven correlation’ to major markets. With regards to Egypt recent drops can be attributed to the fact that this market is a constituent of the main emerging market indices which brought its large cap names under pressure. However, there is not much rationality that can be applied in explaining the recent correlation of the GCC markets with the majors. As we have insisted on numerous occasions, the current valuations present an attractive entry point for investors. The same argument as always applies: the companies in the Gulf region operate in countries that are cash rich, where public investments present abundant opportunities, are ideally located between Asia, Europe and Africa. These dynamics are allowing the companies of the region to be increasingly assertive as regional and even as global players.
One of the core philosophies that support Silk Invest is to capture the benefits of investing in increased economic integration between Africa, the Middle East and Asia, a world we call today’s Silk Road. This week we focus on Orascom Construction Industries (OCI). This Egyptian company is a true example of how this new reality is folding out and why we think it represent yet another compelling investment story. The insight is provided by the members of our investment team based in Cairo: Hesham Saad and Mohammed Bahaa.
An Egyptian Falcon Soars
It is now known that China’s sovereign wealth fund, which manages around $300 billion in assets, is looking to Egyptian infrastructure and other possible investments in the Arab world’s most populous nation for part of its push foreign direct investment push of around $10 billion a year. One of the biggest beneficiaries of this initiative will be OCI, a company in which we are invested in both our Arab Falcons and African Lions fund.
Anywhere you go in Egypt, you will see the work of OCI. Based in Cairo, the company is the country’s leading construction contractor with a large presence abroad. OCI is also a major producer of fertilizers. The company was founded by the Sawiris Family, who still retain control of the group through a 55% equity stake.
The Company’s activities are focused on a series of activities related to construction, including contracting, manufacturing, engineering services, supply and installation of machinery, equipment, tools, materials and supplies required for construction activities. OCI also undertakes residential, industrial, commercial and infrastructure projects for public and private customers. The company’s high level of activity abroad makes it a very large contributor to Egypt’s import and export balance.
OCI’s fertilizer division produces different types of nitrogen-based fertilizers, including urea and ammonia. Recently, OCI has confirmed that the acquisition of the Dutch Royal DSM NV’s agro and melamine businesses has been finalized, which will further strengthen its fertilizer business. This additional capability will serve them well in Egypt and the region, where demand for food is virtually growing off the charts.
The OCI construction group ranks among the leading infrastructure contractors in the Middle East and North Africa. During 2009, 66% of new awards were infrastructure contracts. OCI’s book of business is worth around USD 6.65 billion, of which 78% was in the core geographic markets of Egypt, Algeria, Qatar and the United Arab Emirates. OCI’s client base is secure with regional sovereign clients representing 54% of its assignments. OCI’s core construction markets are Egypt, Abu Dhabi, Qatar and Algeria, where the project tendering momentum is as robust as ever.
Egypt in particular is witnessing an unprecedented spending on infrastructure, driven by the government’s PPP (Private Public Partnership law) initiatives. OCI expects to win up to around USD 4.1 billion worth of projects in 2010 (19% of this has already been achieved in Q1 2010). We expect OCI’s contract awards to accelerate progressively. Half of OCI’s assignments should come from Egypt alone with the remainder originating mainly out of Abu Dhabi, Algeria and Qatar.
OCI is also pushing for the majority of PPP driven transportation and utilities project tenders in Egypt, of which it has already secured USD 2 billion worth of work, most of these projects are due for Q2 2011.
There are more opportunities on the ‘Silk Road’ for OCI. The company is presently looking at projects in Kuwait and Afghanistan. We are aware of two very large and emblematic projects that OCI’s consortium has prequalified for in Saudi Arabia: the Jeddah Mile High Tower (USD 15 billion) and Mecca Medina railway (USD7 billion).
Further down the Silk Road, OCI has announced that it has signed a memorandum of understanding with Hindustan Construction Company (HCC) to form a partnership to pursue a series of government funded projects in India such as, for example, the National Highways Authority of India’s tender for 11,854 km worth of road projects over the next 12 months. Earlier this year, OCI had signed an agreement with Morgan Stanley Infrastructure to form a 50/50 joint venture to develop and invest in infrastructure-related assets across the Middle East and Africa regions.
OCI is clearly finds itself in the right place at the right time. It is a company that can clearly further build on its strength to continue to expand and compete on a more global basis. Another Arab falcon spreads its wings…
As always, if you would like to discuss this story in more detail, please don’t hesitate to get in touch with us.
We look forward to keeping you updated.
With kind regards from the Silk Invest team
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