Equity Analysis /

HRHO: Q2 19 – Solid profits despite a decline in IB platform revenues

    Al Ahly Pharos Securities Brokerage
    8 August 2019

    Tanmeyah continues to shine, brokerage grows steadily and opex under control 

    Group attributable profit for Q2 19 recorded EGP304 mn (-19% qoq, +50% yoy). The sequential decline was mainly attributed to a high comparative base driven by private equity performance fees realised from the Wind portfolio exits (Vortex I & II) which closed in Q1 19, and treasury operations which together contributed 58% of the IB platform revenue in Q1 19. Earnings were mainly supported by Tanmeyah’s continued robust revenue growth -becoming the second largest contributor to the group earnings after brokerage-, healthy growth of brokerage and investment banking, along  with controlled employee expenses.  

    1. IB, Capital Markets and Treasury Operations (73% of 1H19 group operating revenue) delivered EGP729 mn in revenues in 2Q19 (-24% q/q, -2% y/y), declining mainly on high comparative base driven by private equity performance fees realized from the Wind portfolio exits (Vortex I & II), and the continued decline of asset management incentive fees recording the lowest single quarter revenue over the past six quarters. However, brokerage witnessed healthy sequential growth on stronger commissions generated in MENA markets particularly KSA, Kuwait, and the UAE despite the weakness witnessed in the Egyptian market. This reflects to a large degree the success of the company’s geographical diversification strategy. Investment banking operations also witnessed healthy sequential growth. IB platform NPM declined by 260 bps to 28% in 2Q19.
    2. NBFI (27% of 1H19 group operating revenue) demonstrated healthy growth in 2Q19 revenues of 6% q/q and 73% y/y, filtering to a bottom line of EGP102 mn (24% q/q, 137% y/y) representing 34% of 2Q19 group bottom line. Those results were mainly driven by the microfinance arm, Tanmeyah, which represents 85% of NBFIs 2Q19 revenue, along with consumer finance ValU, amid the sequential decline in leasing revenues by 15%, and flat factoring performance. NBFIs NPM for the quarter improved by 450 bps to 32%.
      • Tanmeyah (23% of 1H19 group operating revenue) revenues grew by 9% q/q and 83% y/y reaching EGP275 mn, representing 85% of NBFI’s revenue in 2Q19. Total outstanding portfolio reached EGP3.2 bn as of end of June 2019, growing by 8% q/q with 5 new branches opened in 2Q19.
      • Leasing (4% of 1H19 group operating revenue) revenue declined by 15% q/q in 2Q19 reaching EGP39 mn (+15%y/y), representing 12% of NBFI’s revenue in 2Q19. New booking in 2Q19 recorded EGP464 mn taking the outstanding portfolio to EGP3.3 bn. EFG Leasing to SMEs contribution remained unchanged at 15% with a target of EGP500 mn by the end of FY19.
      • ValU (0.4% of 1H19 group operating revenue) saw revenues surging by 191% q/q in 2Q19 to stand at EGP6 mn, representing 2% of NBFI’s revenue in 2Q19 up from 0.5% in the previous quarter, with an outstanding portfolio of EGP216 mn (+24% q/q, 525% y/y).
      • Factoring (0.2% of 1H19 group operating revenue) revenues were sequentially stable recording EGP2 mn, and representing 0.6% of NBFI’s revenue in 2Q19.
        ValU which started operation early FY 18 and Factoring which started in Q4 18 contributions to the top line were minimal. In terms of profitability, their contribution was negative as both startup businesses still incur losses. 
    3. Operating Expenses declined sequentially in Q2 19 compensating for the decline witnessed in operating revenues to result in an almost stable net operating profit margin of 36% versus 37% in the previous quarter. Expenses declined on lower employee expenses which declined by 22% qoq after surging in the previous quarter by 11% due to higher performance-related compensation and higher headcount within Tanmeyah. Non-employee expenses witnessed a single digit growth of 6% qoq on Tanmeyah’s branch network expansion, and higher provisions as portfolio expands. Cost/income ratio for the group inched up by 100bps to 64% in 2Q19 since the decline in operating expenses (-15% qoq) was met by a higher decline in operating revenues (-15% qoq).

    Maintain Overweight on FV of EGP23.47

    We view the real potential for EFG Hermes to lie within the increased exposure to the non-banking financial services sector and which currently represents 27% of H1 19 revenues and bottom line, while management sees it at 50% of bottom line within the next 3-4 years. 

    We  update our fair value of EFG Hermes to EGP 23.47/share, using Relative Valuation SoTP model due to the high uncertainty that lies in projecting the earnings of the volatile investment banking business, which dominate the company’s operations, representing 73% of H1 19 bottom line.

    Based on our valuation, IB platform represents 35% of our FV, NBFI platform represents 30% with Microfinance Tanmeyah dominating by 19% of the FV. Cash is 27%, while other investments represent 7%. Our adjustment was mainly related to the excess cash calculation where we excluded loans related to leasing business since they’re are asset backed in nature.