Strategy Note /
Egypt

e-finance: A key enabler of Egypt’s digital payments revolution

  • e-finance’s forthcoming IPO gives investors access to key top-down growth trends: digital payments & financial inclusion

  • The firm benefits from its exclusive government contracts. It is the largest card producer and bill aggregator in Egypt

  • Investors will need to assess whether future growth opportunities will be as profitable as current state contracts

e-finance: A key enabler of Egypt’s digital payments revolution
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Follow
Contributors
Rabail Adwani
Rohit Kumar
Tellimer Research
27 September 2021
Published byTellimer Research

e-finance, the Egyptian payments firm, has announced its intention to list its shares on the Egyptian exchange, via a primary issue of 178mn shares and a secondary issue of 80mn shares, together representing up to 14.5% of the company. The transaction is expected to take place before year-end. In this article we give a brief profile of the company, assess its financial performance and make an initial stab at the firm’s valuation. Readers can also access more detailed views on the broader Egyptian fintech system and Egypt’s high score in our fintech country rankings.

e-finance profile

e-finance was founded in 2005 to operate the Egyptian government’s financial network. The firm is the sole entity authorised to exclusively process and settle the Egyptian government’s payment and collection transactions, covering areas such as customs, taxes, healthcare, transportation, social insurance. It processed over 500mn transactions worth EGP2.1trn in 2020.

Since 2018 the group has provided end-to-end processing solutions for payroll-related payments to 4.8mn state employees and 5.7mn pensions beneficiaries. The firm has also settled EGP330bn transactions for government supplies over this period. e-finance is also responsible for operating the Treasury Single Account, which consolidates the bank accounts of more than 61,000 government accounting units into aggregated accounts at the Central Bank of Egypt.

Key shareholders include state-owned entities National Investment Bank, National Bank of Egypt and Banque Misr.

Company structure

e-finance’s Government Financial Network sits within its primary subsidiary, e-finance for Digital Operations. But the firm has several other meaningful subsidiaries that operate in the B2B and B2C arenas:

e-cards is the largest producer of payments cards in the country, helped by its leading data management and e-KYC capabilities. It has the manufacturing capacity to produce 200k smart cards per day.

e-aswaaq. This e-commerce platform hosts more than 300k merchants across agriculture, commerce, industry and tourism.

Khales. This platform acts as a central processing hub for 13 partners across a network of over 326k POS machines. In addition, Khales operates its own mobile app and retail digital payments portal. e-finance has the largest ecosystem of bill aggregators in Egypt.

e-Tax helps to improve revenue collection for the government.

e-nable. This business process outsourcing (BPO) arm offers a broad suite of solutions from HR to IT and hosts over 1.5mn calls per month for a range of local and international clients.

Other subsidiaries include:

ACIS, which offers consulting services.

Delta Misr Payments, a utilities payments processor.

e-serve, which promotes interaction between government departments.

e-health, which supports the Universal Health Insurance system.

Misr Technology Services, which assists the customs department.

The breadth and scale of e-finance’s activities give the firm a unique position in the Egyptian market and makes it well-positioned to benefit from Egypt’s ongoing transition from a cash-heavy to a cashless economy.

Top-down growth drivers

We summarise below some of the top-down growth drivers the company has highlighted when making its investment case:

Growing economy. The IMF projects Egypt’s GDP to grow by 2.8% in FY2020/21 and 5.2% in FY2021/22.

Young and growing population. 73% of Egypt’s 100mn population is aged 39 or less.

Underdeveloped digital economy. Only 2% of the population uses mobile money and only 3% engage in e-commerce. Online sales and digital wallet adoption both have the scope to grow rapidly.

Growth in non-cash transactions. These grew at 17% pa in the MEA region from 2017-19 and are expected to grow at 13% pa from 2020-22. 90% of Egyptians still receive their wages informally.

Rising internet usage. From 2016-20 this grew at 14% pa to 54mn.

Growing smartphone penetration. In Egypt, this increased from 25% in 2015 to 55% in 2020. This ratio is forecast to rise to 61% in 2021 and 66% in 2022.

Increasing card usage. Card issuance increased by 15% pa from 2016-20, reaching 45mn cards.

Growth strategy

e-finance is adopting a four-pronged growth strategy:

Solutions. e-finance will focus on tailored scalable solutions for essential services, with a focus on high-growth areas like smart transportation.

Platforms. The firm will generate value by allowing third parties to connect and transact on its platforms. Acquisitions may be made in some areas such as POS, ATM and payments platforms.

Services. There will be a focus on enhancing existing offerings with value-added services such as data analytics, cybersecurity and enhanced hosting.

Fintech. The group will develop products and services to address unmet needs and thereby grow transaction-based revenues.

 

Financial performance

e-finance has experienced 30% top line growth between 2018 and 2020. Margins have increased over this period, partly as a result of a shift from fixed contract-based fees to transaction-based fees. Cost efficiency has also improved.

e-finance's margins have been rising

In absolute terms, e-finance generated revenue of EGP904mn in H1 21 (US$58mn) and a net profit of EGP276mn (US$18mn).

e-finance: financial performance

 

We present some key performance metrics against the 10 emerging market peers we have used for valuation purposes. e-finance benefits from stronger margins and faster growth.

Key financial metrics for e-finance and EM peers

Valuation multiples of peer companies

We highlight below the interquartile range of the trading multiples at which a selection of 10 emerging markets payments companies are trading. Further details are presented in the appendix. Since we have not yet been provided with details of e-finance's balance sheet, we have focused on price (rather than EV)-based measures.

e-finance: listed EM peer company trading multiples

Implied valuation of e-finance based on peer multiples

Applying these multiples to e-finance's 2020 and 2021 performance (where 2021 is derived by annualising 2021 results) suggests an appropriate pre-money valuation for e-finance lies just above the US$1bn mark. This would be equivalent to around 7% of 2020 gross transaction value.

Clearly the choice of valuation metric will play a key role in where e-finance ultimately prices. If investors choose to focus on the top line, then this will depress the valuation. If EBITDA or earnings-based measures are deemed more appropriate, then e-finance would be able to command a higher valuation, reflecting its superior margins.

A key area for investors to evaluate is whether e-finance can move away from its core government-driven activities to effectively compete in the private economy; this is likely to be where the biggest growth opportunities will arise in the future. In addition, investors may wish to consider whether currently high margins are sustainable: for example, the government may prove more price-sensitive in its dealings with a privately-listed entity; and marketing/ promotional spending needs will likely be higher to entice private sector customers to the franchise. If management can provide sufficient comfort in these areas, then the firm’s superior historical growth and margins (versus EM peers) and Egypt’s attractive long-term growth characteristics can come into play via a premium valuation.

e-finance valuation range based on EM peer multiples

Fawry is e-finance's closest listed peer and supports a higher valuation

Rather than using a range of emerging market peers to guide valuation discussions, selling shareholders will likely try to steer investors towards Egyptian payments and lending firm, Fawry, being the most appropriate peer. We think the high multiples at which this name trades reflect a variety of factors:

  1. Scarcity value (there are few listed digital payments firms in the MEA region).

  2. Egypt's attractive top-down structural growth story.

  3. Fawry's strong market position and broad product profile.

  4. The firm's strong track record of growth and execution.

Based on Fawry's multiples, e-finance's valuation could fall within the following range. On this basis a US$2bn+ price tag seems achievable.

e-finance valuation range based on Fawry multiples

We have compared e-finance and Fawry along a few different metrics:

Size: Both firms had a similar top line in 2020 (EGP1.2bn ie US$58mn). But e-finance's profit was roughly twice as large.

Growth: From 2018-20 e-finance delivered 30% pa top line growth and 41% pa bottom line growth. Fawry has delivered stronger growth, at 42% pa and 70% pa respectively. Looking ahead, consensus expectations are for Fawry to deliver c40% top and bottom line growth in both 2021 and 2022.

Margins: Fawry generates a gross margin that is around 4-5 percentage points above e-finance's. But its EBITDA margin is much lower. We think this is because it is investing heavily to fuel growth, and because it must make more marketing efforts than e-finance, which has a large captive client in the form of the Egyptian government. Accordingly, e-finance's net margin is a hefty 15 percentage points above Fawry's.

The multiples investors are willing to attach to e-finance relative to Fawry are therefore likely to hinge on whether e-finance can:

  1. Close the growth differential to Fawry by successfully growing the private sector portion of its revenue pool.

  2. Retain its EBITDA margin advantage even as it seeks to break into more competitive areas of business.

In our view, e-finance should price above the median of EM peers, reflecting Egypt's attractive positioning for digital payments disruption, and the firm's recent track record of attractive growth and margins. But pricing above Fawry's multiples seems aggressive, since e-finance has a much less diversified revenue base (high dependence on public sector contracts that could be renegotiated once the firm becomes a private listed entity).

Appendix: Peer company trading multiples and performance ratios

We highlight below the trading multiples at which a selection of 10 emerging markets payments-focused companies are trading. We think investors may use some of these metrics to guide them as they assess e-finance’s valuation.

Valuation multiples: EM payments companies

We also present key margin and growth data for these names. 

Financial performance ratios: EM payments companies