Equity Analysis /
Egypt

ATLC: 2Q19 – An operationally weak quarter, but maintain Overweight

    Al Ahly Pharos Securities Brokerage
    7 August 2019

    Weak originations weigh down on earnings; Extras failed to support earnings 

    Al Tawfeek Lease (ATLC)'s 2Q19 bottom line recorded EGP15.3 million (-19% q/q, -14% y/y), bringing 1H19 bottom line to EGP34 million, flat year on year. Topline showed sequential weakness on the decline of new originations. Key takeaways this quarter were:

    • New lease originations recorded the weakest figure over the past five quarters,  of EGP205 million (-37% q/q, -58% y/y) bringing outstanding lease portfolio to EGP2.6 billion (+2% q/q, +10% y/y).
    • Margins contracted further by 20 bps to 3.6% in 2Q19 on sluggish portfolio expansion where both interest income and interest expense declined by 5%.
    • Net fees declined sequentially on low originations, where it stood at 19% of operating income versus 23% in 1Q19, which is still healthy compared to 2018 quarterly average of 15%.
    • Cost-to-income ratio increased by 100bps to 37%, despite an annual and sequential decline in operating expenses which was met by a higher decline in operating income.
    • Interest generated on cash management failed to support earnings as it declined by 46% q/q. 
    • Leverage ratio declined to 6.6x, and we see the company starting to take the path of profit retention to be able to sustain lease portfolio expansion in light of the new capital requirements by the new leasing law, which was reflected by paid-in capital increasing from EGP200 million to EGP234 million in 2Q19.

    Management is still running the model of the new leasing law and is expected to report financial statements complying with the new leasing law and IFRS16 in September 2019.

    Maintain Overweight on FV of EGP6.14 

    ATLC is amongst the top five leasing companies in Egypt in terms of market share. The company follows a tight risk management policy as it operated on a 0% delinquency rate over the past twelve years. The majority of ATLC’s leased asset portfolio is dominated by real estate with a contribution ratio of 73% which falls in line with the general market trend. Early in 2019, the company cut down its payout ratio to 30% of 2018 net profits after being a pure dividend play distributing 80% of annual profits to shareholders, a move that we saw inevitable in order to grow and compete especially in light of the capital requirements of the new leasing law. 

    The stock is currently trading at P/B19 of 0.9x and P/E19 of 3.9x versus its closest stock market peer CICH which is trading at 1.4x P/B19 and 7.7x P/E19, reflecting a discount that is much higher than the one deserved for liquidity.