Earnings Report /
Egypt

CI Capital: 1Q2020 – Group earnings weaken as Corplease weathers the storm; Overweight

  • Group operating revenue sequential drop was solely driven by leasing revenues

  • Microfinance had started to come back strongly

  • The investment bank platform results came in mixed

Microfinance had started to come back strongly while leasing revenue wanes

Group attributable net profit for 1Q20 recorded EGP88.4 million (-57% q/q, -19% y/y). The strong sequential drop was mainly attributed to lower leasing revenues due to a strong comparable base that included EGP140 million irregular securitization gains, which usually take place in the last quarter of the year. OPEX contraction (as balance sheet deleveraging pays off) failed to filter through to profits due to a faster drop witnessed in earnings. 1Q20 financial highlights were:

  • Group operating revenue (-36% q/q, -9% y/y) sequential drop was solely driven by leasing revenues (-51% q/q, -15% y/y), due to the high base effect. Leasing revenues would have still declined by 36% q/q when normalized, explained by weaker revenue generation on a smaller lease portfolio coupled with the fact that lease originations were booked in March so corresponding revenues only reflected on a small period during the quarter. All other business lines showed healthy sequential growth. Annual weakness was noted in brokerage and advisory businesses. as a result of subdued stock market activity. 
  • Operating expenses (-21% q/q, -17 y/y) contracted, driven by lower direct financing costs (-27% q/q, -17% y/y) as a result of the securitization issuance of EGP2.2 billion last quarter that were used to deleverage the balance sheet and enhance the company’s equity base. 
  • Net profit was further dampened by the higher effective tax rate, recording EGP26% up from 18% in the previous quarter. 
  • Reefy had started to witness a healthy performance. Corplease weighed down on earnings, and the investment bank platform results came in mixed. Non-banking financial services contribution fell to 74% in 1Q20 of CICH attributable bottom line (49% leasing, and 32% microfinance) versus 84% in FY19 and 76% in FY18.

Business lines in focus

Leasing (49% of 1Q20 net profit attributed to CICH) 1Q20 bottom line recorded a weak EGP50 million (-77% q/q, -21 y/y) as top line declined -50% q/q which wiped out any positive effect coming from lower operating expenses (-27% q/q). Weak earnings were mainly attributed to securitization issuance which had a negative impact on 1Q20 revenue generation as well as spiking the comparable base by EGP140 billion. However, proceeds were used to deleverage the balance sheet and enhance the company’s equity base which reflected on financing costs along with policy rate cuts. New lease bookings for the quarter recorded a healthy EGP1.1 billion (-14% y/y) where lease portfolio reached EGP7.6 billion (+12% q/q, +7.7% y/y) as of March-end 2020, but with a contracting NIM of 4.4% versus 5.7% in FY19.
  
Micro finance (32% of 1Q20 net profit attributed to CICH) bottom line for the quarter recorded a strong EGP35 million (+22% q/q, +20% y/y). which came on the back of an increase in the number of branches and loan officers. OPEX increase (+6% q/q, +16% y/y) was mainly driven by salary increases which overshadowed the positive impact of lower financing expenses as a result of policy rate cuts. Loan portfolio stood at EGP824 million (+19%q/q, +30% y/y) despite the healthy expansion of individual group lending. Active branches increased by 10 in 1Q20 reaching a total of 70 branches.
 
Investment Bank (26% of 1Q20 net profit attributed to CICH) recorded a net profit of EGP23 million up from net loss in the previous quarter supported by asset management performance fees and advisory fees, while brokerage remained stable. However, the annual weakness in profit was driven by brokerage and advisory fees. Operating expenses declined as variable costs were controlled. AUM declined from EGP9.5 billion as of December-end 2019 to stand at EGP EGP8.6 billion due to the drop in equity funds but was partially offset by large inflows from money market and fixed income funds.

Maintain Overweight despite upcoming challenges; share price discounts headwinds

We are currently revising our valuation assumptions in light of the current challenges faced by the economy resulting from the virus outbreak.

At the current market price, CICH is trading at an annualized P/B2020 0.92x, P/E2020 6.4x with a ROAE2020 of 15% and EPS contraction of 19% in 2020 if 1Q20 is annualized. BoD proposed increasing the company’s capital by EGP200 million, from EGP800 million to EGP1.0 billion through the distribution of 1:4 bonus share. We believe that the stock has good potential for re-rating from the current market price.