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HRHO: 1Q21 – Strong annually and weak sequentially; NBFI continues to expand

  • Earnings surge annually on exceptionally weak comparable quarter
  • Earnings decline sequentially on lower IB platform revenues coupled with robust previous quarter and despite lower opex
  • NBFI continues to expand, recording its highest contribution to the Group bottom line in a single quarter, at 38%

Earnings surge annually on exceptionally weak comparable quarter and decline sequentially on lower IB platform revenues coupled with robust previous quarter and despite lower opex

Group attributable net profit for 1Q21 recorded EGP292 million (-37% q/q, +223% y/y), higher than our estimate of EGP215 million by 36%. 

Sequential decline came after the strongest quarter of 2020; despite 1) lower OPEX and 2) higher NBFIs revenues, net profit continued to decline on 1) the high base effect and 2) lower revenues on the IB platform business lines with the exception of private equity.

However, the robust annual expansion came on the back of strong IB and NBFI performance coupled with an exceptionally weak comparable quarter caused by the first time adoption of IFRS 9 which resulted in sizable unrealized losses, and higher provisions in anticipation of NBFIs expected credit loss amid the outbreak of the pandemic in 1Q20.

Business lines in focus

IB, Capital Markets and Treasury operations' (65% of 1Q21 Group operating revenue) revenues contracted sequentially to record EGP814 million (-38% q/q, +35% y/y) on lower revenues across all lines of business with the exception of PE which doubled sequentially. AM, Investment banking, Brokerage, and Capital markets and treasury operations revenues contracted on high comparable base, but remained to be strong compared to previous quarters. The Investment Bank saw an increase in deferred taxes of EGP30 million on the seed capital revaluation (gains) booked during the quarter which weighed down on profitably, filtering into net profit of EGP180 million (-52% q/q , +60 y/y), with NPM of 22% in 1Q21 (-6 pps q/q, +4 pps y/y).

NBFI (35% of 1Q21 Group operating revenue) revenues strengthened recording EGP441 million (+10% q/q, +22% y/y), as annual and sequential growth rates were witnessed across all NBFIs lines of business, with the exception of factoring which contracted sequentially, filtering into a net profit of EGP111 million, with improved NPM of 25% in 1Q21 (+3 pps q/q, +31 pps y/y), recording its highest contribution to the Group bottom line in a single quarter, at 38%.

  • Tanmeyah (26% of 1Q21 Group operating revenue) represented 73% of the NBFI revenue in 1Q21 (almost stable). Total outstanding portfolio grew marginally to record EGP3.2 billion as of March-end 2021 (+6% q/q, -2% y/y), with provision coverage at 9.5% by the end of 1Q21 with no additional booked provisions in 1Q21.

  • Leasing (4% of 1Q21 Group operating revenue) represented 13% of NBFI’s revenue in 1Q21 (+1pps q/q). New bookings in 1Q21 recorded a strong EGP856 million (+10% q/q, +65% y/y), taking total outstanding portfolio to EGP5.2 billion (+10% q/q, +39% y/y), with provision coverage of 1.5% of total portfolio.

  • ValU (4% of 1Q21 Group operating revenue) represented 13% of NBFI’s revenue in 1Q21 (+2pps q/q), continuing its significant growth streak with an outstanding portfolio of EGP992 million (+19% q/q, +101% y/y).

  • Factoring (0.6% of 1Q21 Group operating revenue) represented 2% of NBFI’s revenue in 1Q21 (-1pps q/q), where revenues lost 22% sequentially but doubled annually. Outstanding portfolio came flat at EGP816 million as of March-end 2021.

Operating Expenses contracted annually and sequentially in 1Q21 (-22% q/q, -3% y/y) driven by lower non-employee expenses and provisions and despite an annual increase in employee expenses (-6% q/q, +31 y/y). However, employee expenses to revenues ratio remained much lower than the 50% mark, at 46% in 1Q21.

At the current market price, HRHO is trading at 0.7x P/B21 and 9.5x P/E21 on an ROAE 2021 of 8%.


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