Healthy revenues across subsidiaries
EFIH reported 1Q22 revenues of EGP560 million, compared to EGP463 million in 1Q21 and EGP664 million in 4Q21 (+20.7% YoY, -15.7% QoQ). Annual revenue is driven by healthy revenue growth across subsidiaries (e-finance digital operations +25.6% YoY, e-cards 47.5% YoY, e-Nable +25.7% YoY, and eAswaaq +40% YoY), where the quarterly decline came on the back of a strong base effect in 4Q21, witnessing the recognition of EGP130 million related to the railway project. Both annual and quarterly performance were capped by an accounting treatment that requires the redistribution of tax declaration revenues (usually reported under fixed transaction revenues under e-finance digital operations) over the full year instead of only being recognized in the first quarter.
During 1Q22, e-finance Digital operations continued to lead revenue contribution (83.3% of total revenues, -0.5pps YoY, +21.4pps QoQ), followed by e-cards (10.2% of total revenues, +1.5pps YoY, -22.5pps QoQ), Khales (1.6% of total revenues, -1.1pps YoY, flat QoQ), e-Nable (3.0% of total revenues, flat YoY, +1.0pps QoQ), and eAswaaq Misr (1.8% of total revenues, +0.2pps YoY, +0.2pps QoQ).
e-finance Digital Operations
e-finance Digital Operations recorded revenues of EGP512 million in 1Q22 (+25.7% YoY). Transaction revenues contributed 41.7% of total revenues (-11.3% YoY, -17.4pps YoY), while B&O and Cloud Hosting revenue contribution stood at 54.5% (+84.6% YoY, +17.4pps YoY). The change in revenue mix came on the back of the accounting treatment that requires the redistribution of tax declaration (transaction-based fixed fee revenues) over the year, instead of being recognized in full in 1Q22, where 1Q21 wasn’t restated to account for this adjustment.
Accordingly, transaction-based revenues declined by 11.3% YoY to stand at EGP214 million, attributed to a decline of 47% YoY in fixed fee revenues, counterbalanced by an increase of 144.2% YoY in variable fee revenues. Variable fees revenues growth came on the back of a 51.2% increase in variable transactions throughput, where the decline in fixed fee revenues is attributed to a decline of 18.4% in the number of transactions processed, attributed to the tax declarations accounting adjustment in addition to the gradual shift of pension-related transactions from e-finance Digital Operations to e-cards on favorable pricing.
Cloud Hosting Services revenues came in at EGP82.6 million in 1Q22, an increase of 25.7% YoY, driven by the growth of business under some of the segment’s main contracts, including for the Egyptian Tax Authority’s Core Taxation and e-Invoice programs, in addition to data hosting contracts for the Government Financial Management Information System (GFMIS) and the state’s disaster recovery project.
e-cards recorded revenues of EGP62.8 million in 1Q22 (+47.4% YoY). e-cards continues to show a stellar performance in 1Q22, on the back an increase in card management revenues (+82.3% YoY) and card production revenues (+39.5% YoY). Healthy card management revenue is expected to drive the subsidiary’s gradual margin expansion going forward; although being capped in 2021 by the Railway one-off revenue recognition (low margin). eCards has also secured a card production and management mandate for the Tahweesha project, a micro-saving, and micro-lending signed with the National Council for Women.
e-cards has previously signed a contract with TGI (healthcare services provider in Zimbabwe, with a presence in SADC African countries) in February to issue and manage smart cards for 10 years. Management believes that the move would be the company’s first step towards regional expansion and plans to target other SADC African countries with similar services, in cooperation with TGI, going forward. Over the length of the contract (10 years), e-cards will issue and manage around 2 million cards (out of which 300k cards will be issued in phase 1 in 2022) and deploy around 7,000 PoS machines. Revenue recognition is expected to start in 2022, coming from card issuance, card management, and transaction flow post PoS deployment.
Khales, the Group’s retail arm, performance during 1Q22 was hindered by a strong base effect in 1Q21 on the recognition of around EGP7 mn of PoS sales. Revenues for the quarter came in at EGP10.1 million (-24.1% YoY). Normalizing for the PoS one-off sale in 1Q21, revenue growth should have stood at 78.4% YoY, reflecting growth in the subsidiary’s core aggregation business.
Despite being negatively impacted by global pressures on the tourism sector in Egypt, Aswaaq Misr is moving forward with digitizing touristic attractions (a total of 31 tourist attraction) and is working on other revenue generating streams that would gradually yield positive cashflows going forward. e-Aswaaq Misr revenues stood at EGP53.8 million in 1Q22 (+69% YoY).
e-Nable recorded revenues of EGP18.6 million in 1Q22 (+25.7% YoY). Revenue growth is mainly stemming from operational capacity growth (number of seats +41% YoY, Number of customers served +30% YoY).
Margins expand on a favorable revenue mix
Gross profit came in at EGP272 million in 1Q22, showing a healthy increase of 29.4% YoY, but declining by 12.3% QoQ; implying a GPM of 48.7% in 1Q22 (+3.3pps YoY, +1.9pps QoQ). Annual gross profit performance came on the back of a favorable revenue mix with growing variable transactions and cloud hosting revenues, where the quarterly decline came on the back of lower sequential revenues on a strong base effect of recognizing EGP130 million of railway project revenues. However, the quarterly GPM expansion is attributed to the fact that the EGP130 mn of railway revenues had a relatively lower than average margin. Going forward, given the shift towards a higher margin revenue mix and excluding any one-offs, GPM is expected to expand further.
EBITDA came in at EGP218.8 million in 1Q22, growing by 17.4% and implying a margin of 39.1% (-1.1pps YoY). EBITDA performance came on the back of an increase in SG&A of 79.9% YoY to stand at EGP73 million (13% of sales, +4.3pps YoY), driven by the expansion of headcount.
Solid bottom line on income from investments and finance income; despite a surge in the effective tax rate
During 1Q22, net profit came in at EGP200.3 million in 1Q22 (+40.0% YoY, +43.7% QoQ), implying a margin of 35.8% (+4.9pps YoY, +14.8pps QoQ). Bottom-line performance is attributed to:
solid revenue growth and healthy operational performance,
a spike in net finance income of 501% YoY and 120% QoQ, recording EGP75 million, compared to EGP12 million in 1Q21, and EGP34 million in 4Q21,
income from investments of EGP38 million in 1Q22, compared to EGP2.9 million in 1Q21, and EGP0.9 million in 4Q21,
a surge in the effective tax rate to stand at 34.2% in 1Q22 (compared to 22.3% in 1Q21 and 39.4% in 4Q21), on the back of taxes paid on dividends distributed by EFIH subsidiaries and taxes paid on intercompany transactions.
Sustainable flow of digital projects fuels a positive outlook
e-finance has successfully managed to provide leading digital payment solutions across the nation by establishing and developing a digital financial network that forms the backbone of the Egyptian government’s digital transformation strategy. The company provides a wide range of digital transformation solutions, including e-payment infrastructure, cards center services, cloud services, contact center services, and operational support services. Moreover, we believe that e-finance is a key beneficiary of government support for digital transformation along with other digital transformation projects in the transportation, healthcare, and tourism sectors that will drive growth going forward. The company enjoys a very solid pipeline going forward and the company is still in phase 1 in many projects, which would be reflected in next year’s business plan.
EFIH has previously announced that the company is close to signing a contract within the transportation sector, through digitizing the payments of another transportation method (other than the railway). The company announced before digitizing the biggest 4 railway stations in 2021. The company had expedited plans for the rollout of the tourism project, by digitizing the remaining 31 touristic attractions that they’ve previously contracted. So far, EFIH digitized around 10-11 sites.
On the regional expansion front, EFIH plans to further expand in neighborhood countries in Africa, after the agreement signed with TGI to deploy PoS machines, and issue and manage cards for 10 years.
BoD has previously proposed distributing a DPS of EGP0.10/share (EGP177.7 million, DY of 0.6%, payout of 34.2%).
EFIH is currently trading at 2022f P/E of 37.5x and 26.8x