Equity Analysis /
Egypt

CI Capital: Bottom line declines sequentially on weak operational revenues and one-off losses

    Al Ahly Pharos Securities Brokerage
    1 August 2019

    Leasing and Asset Management compensate for the decline in Brokerage and Investment Banking revenues; Microfinance slow growth continues

    CI Capital's group attributable net profit for 2Q19 recorded EGP99 mn (-10% q/q, +48% y/y). The sequential weakness was mainly fueled by: 

    1. One-off fx losses of EGP10-11 million in 1H19 as a result of the adaptation of the IFRS16 in the leasing business, as well as EGP3mn in 2Q19 fx losses on the holding level as a result of the appreciation of the EGP against the USD
    2. Decline in investment banking revenues annually and sequentially due to the delays of multiple deals that are expected to close in 3Q19
    3. Decline in brokerage revenues annually and sequentially in light of market wide low trading volumes. 

    However, management is confident that the company is on track towards bottom line surpassing EGP500 million in FY2019. Group annualised ROAE recorded 17% and management expects it to jump above the 20% threshold by year-end.

    Highlights 

    1. Non-banking financial services continued to deliver resilient returns representing 74% of 1H19 attributable bottom line (52% leasing, and 22% microfinance) while the investment bank contribution fell to constitute 26% of bottom line, down from 30% in 1H18.

    2. Unlike the previous quarter, Brokerage and IB Advisory declined annually and sequentially on unfavorable equity market conditions.

    3. Group cost-to-income ratio increased to 72% in 2Q19 up from 68% in the previous quarter despite lower admin expenses annually and sequentially. Expenses were mainly boosted by higher financing expenses that came on the back of a higher debt to equity ratio as a result of the postponement of securitization issuance. 

    4. Group net profit margin declined by 2% q/q to stand at 17% on faster growth of expenses, triggered by financing expenses, than growth in revenues. 

    Business lines in focus

    Leasing (52% of 1H19 net profit attributed to CICH) 2Q19 bottom line remained stable q/q recording EGP 62 million as operating expenses growth outpaced that of revenue. But profits on an annual basis almost doubled  growing by 96% y/y on the expansion of the leased portfolio that grew by 17% q/q and reaching EGP8.1 bn from EGP6.9 bn in 1Q19, successfully disbursing new contracts worth EGP800 mn in 2Q19 and EGP2.5 bn in 1H19, with NIM recording 5.1%. Leasing continued to represent the highest portion of group operating revenues standing at 69% in 1H19. 

    Micro finance (22% of 1H19 net profit attributed to CICH) bottom line for the quarter declined by 6% q/q due to faster growth in operating expenses (+11% q/q) than operating revenues (+3% q/q).The second quarter of the year continued to mark a slow quarter for Reefy for the third quarter in a row, due to the dead season during the month of Ramadan in May and the following holiday, coupled by the delay of branch opening approvals. Loan portfolio grew by growing 5% q/q in 2Q19 reaching EGP660 mn after growing in 1Q19 by 2% due to the halt in operations caused by the installation of new systems in branches. Active branches increased to 50 (adding 4 branches in 2Q19). Microfinance came in second surpassing brokerage, contributing by 15% to group operating revenues in 1H19. 

    Investment Bank (26% of 1H19 net profit attributed to CICH) revenues recorded EGP 93 mn (-23% q/q, and -30 y/y/) mainly dragged by investment banking advisory and brokerage. Asset management witnessed healthy growth of 5% q/q and 14% y/y. AUM reached EGP9.7bn as of June 2019. Controlled IB expenses, as a result of financing the margin trading portfolio through equity, limited the decline in bottom line to 26% q/q recording EGP 29 million. 

    CICH continues to provide best exposure to non-bank financial services in Egypt; Maintain Overweight on FV of EGP11.16

    We believe CI Capital is well positioned to benefit from the growth opportunities within Egypt's financial services sector by having the exposure to Egypt equity market while maintaining revenue stream stability from Leasing and Microfinance operations. 

    Based on our estimates, Corplease bottom line is expected to grow at a CAGR of 17% over 2019-2023 and continues to represent the majority of the company's attributable profits (average of 56%). Reefy net profit to grow at a CAGR of 26%, while net profits from the IB platform and holding company to grow at a CAGR of 16%. 

    We expect CICH attributable bottom line to grow at a CAGR of 19%. We set CICH FV using Residual Income-based SoTP model, where Corplease represents 42% of FV, IB platform 29% of FV and Reefy 23% of FV, and  Al Taaleem acquisition, which is expected to close in 3Q19, representing 6% based on a stake of 9%. We haven’t accounted for any upside potential coming from the mortgage finance business and the consumer finance business which would be a potential value driver on the long term.

    At the current market price, CICH is trading a P/B19 of 1.4x and P/E19 of 7.9x. We believe that the stock has good potential for re-rating from the current market price. CICH awaits a round of bonus share of 1.47:1 which is expected to kick off in Sept-19 or Oct-19 as per management guidance, which might help improve price performance.