Annual and sequential expansion witnessed across most lines of business despite higher opex
4Q21 group attributable net profit came in strong recording EGP402 million (+13% q/q, -14% y/y, and +8% higher than our estimates) bringing FY21 bottom line to EGP1,456 million (+12% y/y) where the IB represented 74% of the bottom line, NBFI represented 24% and aiBank represented 3%.
4Q21 strong sequential performance came, despite a surge in OPEX, on the back of strong sequential growth across all business lines, with the exception of ‘ValU’ whose revenues declined 14% q/q, however the decline was offset by the growth of the other NBFIs lines of business.
4Q21 annual decline came on the back of: 1) lower holding & treasury revenues (-54% y/y) despite higher Investment bank, NBFIs, and aiBank consolidation which added EGP 306 million to group revenues, 2) Higher opex expansion (+31% y/y) mainly driven by employee expenses as other operating expenses came in flat, met by softer growth on the revenue side (+19% y/y). This has completely wiped growth trickling down from topline causing net operating profit to end flat y/y, and 3) Taxes and minority interest further weighed down on profits to end 14% lower y/y.
FY21 strong annual performance came on the back of: 1) strong NBFIs revenues (+41%) coupled with aiBank revenue contribution, while the investment bank platform revenues were dragged down as the comparable year included exceptional incentive fees coming from PE exits and hefty unrealized gains on the holding level, and 2) moderate increase in group OPEX driven by lower investment bank platform OPEX while NBFI and aiBank boosted OPEX.
Business lines in focus
IB, Capital Markets and Treasury Operations' (62% of FY21 Group operating revenue) quarterly revenues expanded on sequential basis driven by improved performance across the board, however, it contracted on annual basis dragged down by holding and treasury operations that included unrealized gains, despite improved performance of brokerage, AM, investment banking and PE. IB NPM reached 20% in 4Q21 (-14 pps q/q, -12 pps y/y).
NBFI (33% of FY21 Group operating revenue) revenues strengthened annually and sequentially as expansion was witnessed across all NBFI platform business lines with the exception of ValU that saw 14% contraction q/q.
Tanmeyah (23% of FY21 Group operating revenue) represented 69% of the NBFI revenue in 4Q21 (flat q/q). Total outstanding portfolio expanded to EGP3.7 billion as of Dec-end 2021 (+5% q/q, +22% y/y), with portfolio coverage of 7.7% (-0.4% q/q) as Tanmeyah didn’t book any provisions during 4Q21. By the end of 4Q21, operational branches increased by 2, reaching 300, during the quarter.
ValU (5% of FY21 Group operating revenue) represented 16% of NBFI’s revenue in 4Q21 (-3 pps q/q), where growth slowed down sequentially (-14% q/q, +89% y/y) with an outstanding portfolio of EGP2.0 million (+44% q/q, +139% y/y) (including securitized portfolio of EGP 179 billion). ValU ended 4Q21 with provisions coverage ratio of 4.4% (flat q/q).
Leasing (4% of FY21 Group operating revenue) represented 12% of NBFI’s revenue in 4Q21 (+3 q/q). New bookings in 4Q21 recorded a strong EGP1,286 million (+35% q/q, +13% y/y), taking the total outstanding portfolio to EGP5.8 billion (-6% q/q, +14% y/y) excluding securitized portfolio of EGP748 million. The leasing total provision balance stood at EGP64 million where the company released/reversed EGP18.5 million in 4Q21, reflecting a total portfolio coverage of 1.35% (-0.25% q/q).
Factoring (1% of FY21 Group operating revenue) represented 5% of NBFI’s revenue in 4Q21 (+3% q/q). Revenues more than doubled annually and sequentially. Outstanding portfolio expanded to stand at EGP1,904 million (+134% q/q, +132% y/y). The total provision balance stood at EGP25.6 million (+33% q/q), reflecting a total portfolio coverage of 1.3% (-1.1% q/q)) for the factoring business.
aiBank (5% of FY21 Group operating revenue) two months of revenues were consolidated on HRHO’s books recording EGP 306 million which filtered into net attributable profit of EGP38 million (51% is HRHO's stake).
Operating Expenses expanded annually and sequentially in 4Q21 (+75% q/q, +31% y/y) on the back of aiBank OPEX consolidation, coupled with variable expenses related to higher revenues generated across all core operations and reflecting the scaling up of the NBFI platform. The employee expenses to revenues spiked reaching 47% up from 44% in 3Q21.
Maintain Overweight at FV of EGP 19.17/share
Lending businesses (NBFIs) which management sees at 50% of bottom line in 2 years (up from c.37% in 9M21) should improve group margins with its higher NPM (c.27%) vs IB platform NPM (25%). Margins should improve further with improved economic conditions and lower booked provisions. Microfinance and consumer finance services compromise 40% of FV, while leasing and factoring are 6% of FV.
We expect that ValU stake sale would reprice and unlock the unrealized value of the NBFIs platform and the upside potential of HRHO in general.
AIB (12% of FV) acquisition is expected, within two years, to improve group profitability, and RoE by complimenting other lending businesses and creating new cross selling opportunities across the group. On the long term, commercial banking activities are expected to yield high RoEs, around the mid-teens ("AIB” 51% share valued at EGP2.6 bn).
The investment banking arm (22% of FV) is expected to be a key beneficiary of the revival in trading volumes in 2022 and healthy pipeline of IPOs, through its solid brokerage market share (north of 20%) and its strong IB/advisory business.
New Ventures: Factoring, Online Payment Platform “PayTabs”, Insurance, and Mortgage Finance, altogether will not have a meaningful contribution in FY22 but should have positive contribution on the longer-term.
HRHO is highly rich in cash with excess cash valued at EGP4.72/share (which is almost 26% of market price and 21% of FV), post the bank acquisition.
BoD proposed distributing 1:5 bonus shares from 2021 net profit up to the GAM approval.
The company is currently trading at P/E22 11.0x and P/B22 1.1x.