Equity Analysis /
Egypt

Egypt Non-Banking Financials: Underpenetrated and ready to take off

    Al Ahly Pharos Securities Brokerage
    18 June 2019

    In our 55-page assessment of Egypt's Non-Banking Financials (NBFI) in 2019 we present:

    • Industry Outlook; Hopes and Fears; Top Picks; Stocks Awaiting Catalysts
    • Sub-Sectors Overview
    • Individual Company Review
    • Intercompany Comparison

     Top picks

    • HRHO (FV: EGP20.21) is a play on non-bank financial services, in its widest definition, whether it is traditional investment banking (EGP8.21/share), microfinance (EGP4.42/share) through controlling one of the largest microfinance branch networks, consumer finance services (EGP1.27/share) or leasing (EGP1.46/share) through strong corporate connections benefiting from cross-selling opportunities. With the expected improvement in the private investment climate in Egypt, especially in 2020, HRHO is a key beneficiary through its solid market share (north of 20%). HRHO is also highly rich in cash (EGP3.13/share), representing 19% of market cap. HRHO trades at 11.0 P/E19 and 0.8x P/B19.
    • CICH (FV:11.16 EGP, OW) 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 its high exposure to Leasing and Microfinance operations. CICH is looking at expansion opportunities within the NBFS space with the IPO remaining proceeds of EGP750mn (of which EGP500 are used in equity margin trading portfolio). Mortgage, factoring, and insurance are amongst the industries under consideration, while targeting Education by acquiring a 9%-12% of Al Taaleem Management Services In 3Q19, which is expected to be covered by the EGP 240mn excess cash the company has.

    Stocks lacking catalysts

    • ATLC (FV: EGP7.19, OW) is a very well-managed leasing company that is amongst the top five by size in the market. ATLC started retaining part of profits in 2019, with an expected cut in payout ratio from 80% to 50% of bottom line to support expansions and new regulatory capital requirements. ATLC Intends to add more financial services to its portfolio in 2019, including factoring and the high margin SME leasing, un-tapping a new market potential. The stock is currently trading at a P/B19 4.x and P/E19 0.9x. At an ROAE of 24% for 2019.
    • SRWA (FV: EGP8.50, OW ) has a distinctive combination of complementary business lines, capitalizing on cross-selling opportunities. The company’s portfolio is mainly focused on high margins businesses varying from asset-based lending to retail clients, to corporate services mostly to SMEs. However, Auto loans, which represents the highest contribution from SARWA’s portfolio, is expected to come under pressure due to turbulent auto market conditions resulting from currency devaluation and lower purchasing power. Coupled with a weak price performance resulted from the low stock liquidity. The stock is currently trading at a P/B19 2.01x and P/E19 11.0x. At an ROAE of 18% for 2019.
    • AIND (FV: EGP0.97, OW) made strong progress in the turnaround plan that started in 2017 with the entry of new main shareholder and management team, followed by recorded profits in 2018 after three years of consecutive losses, mainly due to the cleaning up of legacy issues. The stock is currently trading at a P/B19 1.1x and P/E19 3.2x.

    Hopes

    • Improved investor sentiment towards emerging markets should support foreign investment in emerging equity markets.
    • CBE policy rate cuts should support alternative financing businesses like leasing.
    • Rate cuts should also drive a spike in microfinance companies’ profitability by widening their margins since microfinance clients are price uneducated and thus insensitive.
    • New Leasing and Factoring Law should limit competition by raising the standard requirements for starting-up a leasing and factoring institution.
    • Financial inclusion initiatives and encouragement of e-payment systems will increase the addressable market for microfinance institutions and create an environment where it is easier to extend and collect financing.

    Fears

    • Pressure on emerging markets reemerges, especially with the rise of global growth concerns.
    • Delayed policy rate cuts in Egypt, impacted by weaker global growth.
    • Intensified competition with the increased number of service providers, which would hinder growth rates or significantly pressure margins.
    • Lack of a strict-enough regulatory environment that would result in heightened competition in microfinance or leasing market, or push players to poor-quality growth that is of low asset quality.
    • Strict regulations from the FRA that would deter growth or profitability for non-bank financial services providers.