Cairo – Mubasher: At the time when CIB’s GDR window was open, high investor demand on the local shares to transfer into the GDR as a profit repatriation mechanism has lifted local share price and pressured GDR price, said Pharos Research.
As long as the GDR window was open, the GDR failed to mirror the solid performance witnessed by the local share. Once the GDR window closed, and as the transfer pressure on the GDR was lifted, the stock re-rated massively, noted Pharos.
Pharos believes that the same scenario will happen with EFG Hermes GDR, after the conversion window closes, which should take a month or less, depending on when devaluation would happen and/or restrictions on repatriation of profits ease, or the GDR conversion limit is reached.
By looking at EFG Hermes GDR closing price on 2 November 2016 of EGP15.67 and using the same exchange rate implied by CIB conversion EGP11.62, the EFG Hermes GDR should re-rate to USD2.69, offering a 47% potential return on the USD. This is not happening currently or on the short term, as long as the GDR conversion is still open.
In respect to potential risks, the only risk to this trade is that the EFG-Hermes local share price drops anywhere below EGP15.67 before the GDR window closes, which reduces the potential return from 40% (scenario analysis provided in the note). Another risk is that EFSA prohibits GDR conversion for foreign investors, but we see low chances for such risk
