Bottom line fell sequentially on lower operating income; cost inefficiencies from launch of new insurance businesses
SRWA Q2 19 net profit post-minority interest came in at EGP63mn, falling by 47% sequentially and 34% annually, bringing H1 19 bottom line to EGP183mn, increasing by 24% annually, with an annualised ROAE of 21%.
- Financing Business Line (auto credit, consumer finance, mortgage finance, factoring, and leasing) revenues plunged sequentially by 51% to stand at EGP125mn in Q2 19, mainly due to the high weight of auto credit, which declined heavily in H1 19 (-24% yoy), as a result of the weak automotive market in Egypt. The weakness resulted in lower portfolio contribution to stand at 80% as of June 2019, down from 85% in June 2018. The other segments within the financing business line witnessed a rise in terms of revenue growth and portfolio contribution. Leasing, that contributed 9% of the financing portfolio increased in H1 19 by 38% yoy, on the back of both the transportation segment, which grew by 136%, and the medical segment which grew by 76%. The total financing portfolio grew by 11% y/y to stand at EGP6.3bn at the end of June 2019.
- Insurance Business Line came in strong with net insurance income of EGP27mn in H1 19, versus EGP17mn in H1 18, increasing by 53%, mainly due to the commencement of Sarwa Life and Sarwa Insurance companies that started operations in April 2019.
- Total operating costs, including operating expenses and SG&A, jumped in Q2 19 by 12% qoq, resulting in a higher cost/income ratio (CIR) sequentially, recording 46% in Q2 19, up from 22% in Q1 19. The jump in CIR was also a factor of weak operating revenues.
- Lower effective tax rate, falling by 18ppts to stand at 6% in Q2 19, down from 24% in Q1 19.
Maintain Overweight on FV of EGP8.50
Sarwa Capital has a distinctive combination of complementary business lines, capitalising 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. Retail services include auto credit, consumer finance, residential mortgages and insurance. Corporates services are debt capital market advisory (securitization), leasing, insurance brokerage, and factoring.
Auto credit has always been leading the company’s portfolio, since it was Sarwa’s first founded company in 2001, representing 82% of the total portfolio in 2018. Due to turbulent auto market conditions resulting from currency devaluation and lower purchasing power coupled with the lower custom duties on European models, we expect a decline in auto credits growth. Mortgages is a rapidly growing business, with a surge of 239% in 2018. The growth is mainly driven by the launch of the low and middle-income products in line with to the CBE initiatives. We estimate that mortgages financing will continue growing, taking advantage of lower cost of funding offered by the CBE initiatives. Leasing’s main focus is on SME in the transportation and medical sectors, operating in an underserved market that is not tapped by conventional leasing companies. Sarwa Capital ends its long chain of financing options with insurance on either car loans, or mortgages, capitalizing on cross selling opportunities.
We reiterate our Overweight recommendation on SRWA on FV of EGP8.50/share. The stock is trading at P/E19 of 10.3x, and P/B19 of 1.9x, on ROAE of 18%. The stock is awaiting 3:5 bonus shares, that might improve stock price performance.