Earnings Report /
Egypt

HRHO: Strong FY 19 results driven by Tanmeyah and IB platform; maintain Overweight

  • Q4 19 Group profit at EGP344mn (-4% qoq, +16% yoy), mainly from microfinance Tanmeyah and IB platform

  • Group revenues supported by capital markets and treasury operations, despite faster sequential growth in expenses

  • Maintain Overweight on FV of EGP23.47

Al Ahly Pharos Securities Brokerage
18 March 2020

4Q19 profits supported by capital markets and treasury operations, despite faster sequential growth of expenses

Group attributable profit for 4Q19 recorded EGP344mn (-4% q/q, +16% y/y), bringing FY 19 bottom line to EGP1.4bn, 36% higher than FY 18 of EGP1.0bn, mainly on Tanmeyah’s robust revenue growth and that of IB platform, and despite the decline in investment banking and asset management revenues. 

4Q 19 highlights:

  • Group operating revenues (+13% q/q, +5% y/y) were mainly supported by capital markets and treasury operations (+83% q/q, +3% y/y), which now represent 42% of 4Q19 group operating revenues up from an average of 25% over the past 3 quarters. 
  • Operating expenses (+17% q/q, 0% y/y) were mainly driven by other operating expenses related to Tanmeyah’s expansion.
  • Net operating profit of EGP480 million (+6% q/q, +15% y/y) filtered into a bottom line figure of EGP344 million declining by 4% sequentially and expanding by 16% annually.  

FY 19 highlights: 

  • Group operating revenues (+20% y/y) were mainly driven by the third heaviest business line Tanmeyah (+66% y/y) followed by private equity (+133% y/y) on performance fees realized from the Wind portfolio exits (Vortex I & II) which closed in 1Q19. Then Brokerage, capital markets and treasury operations came in third place where they expanded by 16% y/y and 14% y/y, respectively. compensating for the annual decline witnessed in Investment banking, asset management, and leasing revenues. 
  • Operating expenses (+17% y/y) were mainly driven by employee expenses attributed to higher salaries as Tanmeyah’s headcount increased.
  • Net operating profit expanded by a strong 26% y/y on faster growth of operating income than expenses, filtering into a net profit after tax of EGP1.4 billion recording a strong annual growth of 36%.

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, which currently represents 23% of FY 19 of bottom line, while management sees it at 50% of bottom line within the next 3-4 years. 

We extrapolate our fair value for EFG Hermes, which stands at EGP23.47/share, using Relative Valuation and SoTP model due to the high uncertainty that lies in projecting the earnings of the volatile investment banking business, currently a dominant in the company’s operations, representing 77% of FY 19 bottom line. 

Based on our valuation, the IB platform represents 35% of our FV, NBFI platform represents 30% with microfinance Tanmeyah dominating at 19% contribution to the FV. Cash is 27%, while other investments represent 7%. Find our updated valuation breakdown for the group in the full report. At the current market price, HRHO is trading a P/B20 of 0.5x and P/E20 of 4.9x on an ROAE 2020 of 10%.