Equity Analysis /
Egypt

HRHO: Q1 19 – private equity and Tanmeyah drive solid earnings; maintain Overweight

    NBFI performance outshines investment bank 

    Group attributable profit for Q1 19 was EGP374mn (+26% qoq, +51% yoy), mainly supported by private equity and Tanmeyah, along with lower non-employee expenses. NBFIs revenue expanded by 18% qoq and 65% yoy outpacing investment bank (IB) revenue growth of 35%yoy and sequential drop of 5%.

    • IB, capital markets and Treasury operations revenues (72% of Q1 Group operating revenue) came in at EGP97 mn in 1Q (-5% qoq, +35% yoy), mainly driven by private equity performance fees realised from the Wind portfolio exits (Vortex I & II), which closed in Q1, and treasury operations which together contributed 58% of the IB platform revenue. Healthy growth of brokerage revenue is also notable. However, IB operations continued its weak revenue growth, which had started in the previous quarter, and asset management showed the lowest single quarter revenue over the past four quarters. IB NPM improved to 30% in Q1 versus 26% in Q4 18.  
    • NBFI revenue (28% of Q1 Group operating revenue) demonstrated strong growth of 18% qoq and 65% yoy, filtering to bottom-line of EGP82mn (157% qoq, 65% yoy) representing 22% of the Group's bottom-line. Microfinance Tanmeyah which represents 67% of NBFIs revenue provided the main support amid the sequential decline in revenues from leasing and Valu. NBFIs NPM for the quarter improved to 22% versus 10% in Q4 18.  
    1. Tanmeyah revenue (19% of Q1 19 Group operating revenue) grew by 36% qoq and almost doubled annually reaching EGP253mn (+125% yoy). Total outstanding portfolio reached EGP3.0bn as of Mar-19, growing by 8% qoq, driven by an increase in the number of employees reaching 4.3k (+12%, 69% yoy).
    2. Leasing revenue (9% of Q1 Group operating revenue) declined by 5% qoq in Q1 reaching EGP118mn (+23% yoy), representing 31% of NBFI’s revenue in Q1 19. New booking in Q1 19 recorded EGP310mn taking the outstanding portfolio to EGP3.2bn. EFG Leasing to SMEs contribution remained unchanged at 15%.
    3. ValU (0.2% of Q1 19 Group operating revenue) saw revenues declining by 55% qoq in Q1 19 to stand at EGP2mn, representing 0.5% of NBFI’s revenue in Q1 19, and an outstanding portfolio of EGP174mn (+27% qoq).
    4. Factoring (0.1% of Q1 19 Group operating revenue) revenues were sequentially stable recording EGP2mn, and representing 0.5% of NBFI’s revenue in Q1 19. 

    The contributions from ValU (started operation early-2018) and Factoring (started in Q4 18) to the top-line were minimal. In terms of profitability, their contribution was negative as both start-up businesses still incur losses.

    • Operating expenses declined in Q1 19 by 4% qoq, improving net operating profit margin by 400bps to 35%, up from 31% in Q4 18. Expenses declined on lower non-employee expenses, which declined by 27% qoq after surging in the previous quarter driven by geographical expansion and start-up costs. Employee expense continued expanding (+11% qoq, 53% yoy) on higher NBFI employee expenses related to salaries and monthly bonuses, but staying below the 50% mark, and representing  45% of operating revenues.

    Maintain Overweight

    We view the real potential for EFG Hermes to lie within the increased exposure to the NBFI sector, which currently represents 28% of revenues and 22% of bottom-line, while management sees it at 50% of bottom-line within the next 3-4 years. At the current market price, HRHO is trading at PB 19 of 0.8x and PE 19 of 10.5x.