Profits fall annually and sequentially despite controlled OPEX
Group attributable net profit for 3Q21 recorded EGP383 million (-34% q/q, -24% y/y), coming 13% below our estimates for the quarter and bringing 9M21 profits to EGP1,053 million (+25% y/y). Decline in earnings was exacerbated by the lack of significant catalysts this quarter versus strong comparable quarters annually and sequentially. 3Q20 was driven by private equity incentive fees related to Vortex III exit (c.EGP349 million), and the previous quarter was driven by unrealized gains on the revaluation of seed capital.
The sequential decline came on the back of lower earnings across all lines of business except for the consumer finance arm “ValU”, leasing, and private equity. The annual decline was mainly caused by private equity coupled with capital markets and treasury operations despite the remaining segments performing well.
9M21 profits reached EGP1,366 million, driven by an outstanding performance of all lines of business except for private equity and capital markets/treasury operations, coupled with muted opex growth on lower loan loss provisions and other expenses.
Business lines in focus
IB, Capital Markets and Treasury Operations' (65% of 9M21 Group operating revenue) revenues contracted to record EGP677 million (-40% q/q, -38% y/y) on weaker sequential performance across the platform business lines coupled with strong unrealized losses on seed capital booked during the quarter. Annual drop came on the back of high comparable quarter boosted by private equity gains, despite improved performance of brokerage, AM and investment banking. IB NPM reached 28% in 3Q21 (+2 pps q/q, -5 pps y/y). Excluding the one-off from last year, platform revenues would then decline by (-8% q/q, -6% y/y) instead of (-40% q/q, -38% q/q) because this quarter was pressured by unrealized losses from the revaluation of seed capital.
NBFI (35% of 9M21 Group operating revenue) sequential revenues strengthened to stand at EGP507 million (+52% q/q, +12% y/y), despite sequentially weaker microfinance and factoring revenues. This filtered through into a net profit of EGP168 million, with higher NPM of 33% in 3Q21 (+10 pps q/q, +16 pps y/y), representing a high contribution to the Group bottom line of 47% in 3Q21.
Tanmeyah (26% of 9M21 Group operating revenue) represented 70% of the NBFI revenue in 3Q21 (-6 pps q/q). Total outstanding portfolio expanded record EGP3.5 billion as of Sep-end 2021 (+4% q/q, +19% y/y), with portfolio coverage of 8.1% (-0.4% q/q) by the end of 3Q21. Operational branches increased by 12, reaching 298, during the quarter.
ValU (5% of 9M21 Group operating revenue) represented 19% of NBFI’s revenue in 3Q21 (+6 pps q/q), continuing its significant growth streak with an outstanding portfolio of EGP1.4 million (+21% q/q, +106% y/y). ValU ended 3Q21 with a total provision balance of EGP39.3 million representing a coverage ratio of 4.4% (+0.9% q/q).
Leasing (3% of 9M21 Group operating revenue) represented 9% of NBFI’s revenue in 3Q21 (flat q/q). New bookings in 3Q21 recorded a strong EGP955 million (+19% q/q, +101% y/y), taking the total outstanding portfolio to EGP6.2 billion(+6% q/q, +43% y/y). The leasing total provision balance stood at EGP82.5 million, reflecting a total provision coverage of 1.6% (flat q/q) for the Leasing business.
Factoring (1% of 9M21 Group operating revenue) represented 2% of NBFI’s revenue in 3Q21 (flat q/q), Revenues lost 11% sequentially and gained 28% annually. Outstanding portfolio contracted to stand at EGP814 million (-37% q/q, +56% y/y). The total provision balance stood at EGP19.3 million, reflecting a total provision coverage of 2.4% for the factoring business.
Operating Expenses contracted annually and sequentially in 3Q21 (-22% q/q, -14% y/y) on the back of lower employee expenses related to the variable portion, (-29% q/q, -20% y/y) and lower loan loss provisions (-48% q/q, -44% y/y). The employee expenses to revenues reaching the 44% mark from 45% in 2Q21.
Upgrade FV to EGP19.61; Maintain Overweight
We view the real potential for EFG Hermes to lie within the increased exposure to the non-banking financial services sector and which currently represents 37% of 9M21 bottom line, while management sees it at 50% of bottom line within the next 3 years.
We update our fair value of EFG Hermes to EGP 19.61/share, using Relative Valuation SoTP model due to the high uncertainty that lies in projecting the earnings of the volatile investment banking business, which dominate the company’s operations, representing 63% of 9M21 bottom line, then we applied a 15% conglomerate discount to the FV.
Based on our valuation, IB platform represents 23% of our FV, NBFI platform represents 43% with Microfinance Tanmeyah dominating by 32% of the FV. Net cash is 34%. Find below our updated valuation breakdown for the group. Our valuation doesn’t take into account the upside potential that would come from the acquisition of Arab Investment Bank.
At the current market price, HRHO is trading at 0.7x P/B22 and 8.0x P/E22 on an ROAE 2021 of 9%.