Last checked at 19 May 2008 08:15
1Q2008 Earnings Release - 19 May 2008
Performance during 1Q08 reflected the success and strength of Group's business model. Despite the weakness of the markets within which it operates, with volumes rebounding in comparison to the same period the previous year but declining from the 4Q07 levels and valuations trading sideways; EFG-Hermes recorded impressive growth in both revenues and bottom line. Although markets have not been conducive to closing several IPOs, two of which have since been concluded during 2Q08, or locking in either success fees on Private Equity exits or any meaningful incentive fees on the Asset Management business, the Firm is on track to achieve its objective growth rates for 2008. Furthermore, the continuing subprime issues in the more advanced markets and the associated staggering write-offs as well as the global unease towards emerging markets because of both the recent political unrest and food shortages has reigned back the region's overall growth. Nevertheless, the Group's core business lines continue expanding in terms of product range, geographic reach and the client base expanding both further east and west. Being a people's business the main challenge remains the retention of human capital that is the force behind past as well as future success. Added to that competition from regional and global investment banks is mounting as the region becomes more and more attractive to investors.
The markets in which EFG-Hermes operates have not enticed stronger performance as has happened during 4Q07. Both volumes and valuations, although on the rebound over the similar period in 2007, have slightly declined and/or traded sideways across the region. Markets became dominated by retail which deprived these markets from the depth associated with the longer term institutional investors. Market conditions were tense during the quarter. Nonetheless, the Group's integrated business model with its increasing retail facet has been the pillar on which the doubling of revenues from investment banking activity was derived.
Table 1: Performance of Arab Markets during 1Q2008
Please refer to the attached pdf
Sources: Regional markets and EFG-Hermes
1Q2008 in Review
EFG-Hermes total consolidated revenue increased 47.8% over 1Q07 to reach EGP664.5 million increasingly emanating from the Investment Bank's operations;
Total Fee and commission revenue (operating revenue) in 1Q08 increased 112% to EGP469.9 million;
Net profit after tax and minority increased to EGP348.5 million up from EGP250.6 million in 1Q07; a 39% increase resulting in a margin of 52.4% in 1Q08 slightly down from 55.8% in the comparable quarter a year earlier, but up to 57% when adjusted for the accrued bonuses;
Regional operations have increased to 25.9% of the total fee and commission income up from 12.8% in 1Q07, a trend that is expected to continue as the Group expands into other regional markets including Qatar and Oman in addition to Investment Banking and Asset Management in Saudi Arabia picking up;
During the general assembly the Board of Directors was expanded to 13 and separation between the Chairmanship and executive management has now taken place;
Acquisition of 51% of Vision Securities in Oman during April 2008 at a PE ratio of 11.5 compared to EFG-Hermes' PE ratio of 16.6, taking into consideration that Vision's current earnings exclude the business EFG-Hermes has in Oman as it is routed through other brokers ;
The Brokerage arms in both Egypt and the UAE (on the DFM) continued to maintain their number one positions, with the positioning on the ADSM advancing to and maintain the number one position. The Saudi Brokerage arm ended the quarter in the #2 position among the 9 independent brokerage companies (after the 11 companies relating to commercial banks);
Total pages published by the Research Team in 1Q08 reached 697 pages compared to 2,480 pages for the full year 2007 as a result of increasing coverage the depth of the notes as well as the coverage of 2 IPOs which EFG-Hermes has recently launched;
Total assets under management within the Group reached the equivalent of USD8.6 billion, USD7.6 billion of which are in listed equities and money market funds and the remainder in private equity; a 15% increase over the yearend 2007. Of the increase over the quarter the majority (over USD1 billion) are new net cash inflows;
Total realised incentive fees within Asset Management for the first quarter reached EGP35.1 million, 85% of which relate to the funds and portfolios run out of Egypt, up from total incentive fees of 6.6 million in 1Q07. As at the end of 1Q08 total unrealised fees amounted to EGP140.2 million;
The Investment Banking Team was also able to close a USD 105 million private placement while market conditions had warranted the delay of 2 IPOs to 2Q08, which have since been successfully closed in May 2008;
The business model within Private Equity changed as the Team closed the first buyout deal in the oil & gas industry;
EFG-Hermes' shareholding structure remains dominated by institutional shareholders. The top 50 shareholders own 73.5% and include 38 foreign institutions.
1 Adjusted for EGP23.5 million of bonuses relating to 2006 and were paid during 1Q07
Performance
Net Revenue
Table 2: Breakdown of Net Revenue
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* net of all financing costs
** net of unrealised loss on Principal account in 1Q08 ;no Principal account in 1Q 07 the amount is gain on sale of SODIC shares
Sources: EFG-Hermes audited financial statements and management accounts
EFG-Hermes' net consolidated revenue has increased 45% to EGP643 million (total consolidated revenue increased 48% to EGP665 million) propagated by growth in revenues from the Investment Bank, namely the fee and commission income. 1Q08 net consolidated revenues represent 24.95% of the full year 2007 net consolidated revenues despite not yet realizing incentive fees on the bulk of funds and portfolios which are mostly booked on 31st December. With the consolidated portion from the Banque Audi investment which was flat compared to 1Q07, its contribution declined to 11.4% of the Group's total revenues down from 16.7% a year earlier. It is noteworthy to mention that Banque Audi's revenue contribution would have increased by over 15% if it were not for the appreciation of the EGP against the USD.
Operating Revenues
Please note that as of 4Q07 operating revenues include income from the principal trading account as the Firm moves towards the utilisation of the balance sheet. Accordingly operating revenues for 1Q07 have, for comparative reasons, been reclassified as below.
Attesting to the Group's outstanding positioning, consolidated fee and commission income has more than doubled over 1Q07 levels. It must be noted however, that as at 31st March 2008 total unrealised incentive fees recorded EGP140.2 million and the Principal trading account, although includes unrealised losses of EGP11 million, has ended the quarter with a net realised gain of EGP52 million despite markets being very volatile and indices on several of them declining substantially during the quarter.
Table 3: Contribution of the Different Divisions to Operating Revenue
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* includes EGP9.4 million of custody & margin fees held at the Holding Company level in 1Q08
** includes EGP4.1 million of custody & margin fees held at the Rep. Office level in 1Q08
*** excluding Treasury operations; no Principal account in 1Q07 the amount is gain on sale of SODIC shares
Sources: EFG-Hermes audited financial statements and management accounts
Setting aside the large incentive fees usually booked during the last quarter of the fiscal years, 1Q08 was one of the best quarters in terms of revenues with solid growth in management fees and core business line income reflecting the Group's strategy of growing the less volatile asset management side of the business. It must be noted that the surge in revenues expected from the Saudi operation remains delayed as the market remains closed to foreigners. However, the launch of the first Saudi fund is on track and set for June. Revenues from Oman and Qatar are not expected to filter in prior to 4Q08.
Brokerage operations remained the core contributor to the consolidated operating revenue accounting for over 49.1% of the business up from 35.1% in 1Q07. The larger asset management business in general, including both listed and private equities, accounted for 24.5%, increasing above 1Q07's contribution of 18.3%.
In line with the Group's expansion strategy investment banking revenues emanating from the region have increased to 25.9%2 in 1Q08 up from 12.8% in 1Q07 and expected to further increase as the full effect of the Saudi, Qatari and Omani business comes into play during 2008.
Figure 4: The Breakdown of Operating Revenue by Business Line on a Quarterly Basis
Please refer to the attached pdf
* Includes Asset Management performance fees as follows: 2Q05 EGP 15 million, 3Q05 EGP 12 million, 4Q05 EGP155 million,
1Q06 EGP 1 million, 2Q06 EGP3 million, 4Q06 EGP 4.9 million, 1Q07 EGP6.5 million, 2Q07 EGP 26.9 million, 3Q07 EGP9.8 million,
4Q07 EGP330.2 million, 1Q08 EGP34.6 million
** Includes EGP91.68 million of IB fees relating to EFG-Hermes capital increase in 1Q06
Sources: EFG-Hermes audited financial statements and management reports
Hereunder is an analysis of the company's main operational divisions:
Brokerage
The Brokerage Division continued its leadership positions on the markets in which it operates, despite the difference between EFG-Hermes and the #2 broker lessening on the Cairo & Alexandria Stock Exchange. As trading on markets where the Group has no physical presence increased so has the scope of clients the firm services. In addition to the growing diversity of our institutional clients, retail operations are becoming more rewarding.
2 including the breakdown of Prop. revenue across the regions
Egypt
During 1Q08 value traded on CASE has increased by 136.9% over 1Q07 levels while growth in EFG-Hermes executions on the market increased 6.7 fold over the same period (1.6 times if special transactions are removed) and was reflected in the increase in net brokerage commissions by around 114% reflecting the lower commission levels charged as compared to 1Q07 as well as the larger volume of special transactions. During 1Q08 EGP171.9 billion worth of special transactions were executed on the market, of which only EGP71.3 billion were executed through EFG-Hermes. As the bulk of the special transactions we executed outside the Group, the Brokerage arms ended the quarter not in the #1 and #2 positions on the exchange but in the #2 and #3 positions collectively and retaining the leadership of the market.
Figure 5: EFG-Hermes Equity Executions and Market Shares
Please refer to the attached pdf
Sources: CASE, EFG-Hermes
With the retail business becoming a more important component of brokerage activity in Egypt, both Online Brokerage and Call Centre activities operations have picked up during the quarter. Commissions booked by the Call Centre in Egypt increased both as a result of executions more than tripling over 1Q07 levels but also due continuing to charge an average commission rate in excess of that charged on the institutional business. By the end of 1Q08, online executions had more than doubled over 4Q07 levels. Together Call Centre and Online Brokerage represent nearly 10% of total Brokerage revenue in Egypt.
Revenue from brokerage activity in Egypt increased over 117% over 1Q07 levels to EGP185 million3 ; constituting 35.4% of the Group's consolidated net operating revenue.
3 Including EGP 9.4 million of fees for custody and margin trading held at the Holding Company level
UAE
Figure 6: Progression of Volumes Executed and Market Shares
Please refer to the attached pdf
Sources: DFM, ADSE and EFG-Hermes
Brokerage activities in the UAE solidified its position as the #1 broker in the country as EFG-Hermes rose to the #1 position on the ADSM echoing the Firm's success on the DFM. Executions by EFG-Hermes increased 2.2 times over 1Q07 to reach the equivalent of USD5.1 billion. Market shares also grew over the similar period to 10% on the DFM and a jump to 8.5% on the ADSM from only 2.5% during 1Q07. The increased activity on both the DFM and ADSM of the Group's foreign institutional clients, has propagated the increased volumes executed by EFG-Hermes despite the general decline in volumes executed on both markets over the quarter.
Brokerage operations out of the UAE have increased 3.7 times over 1Q07 to reach EGP63 million and constituted 12.1% of the Group's net consolidated revenues.
Saudi Arabia
Figure 7: Progression of Volumes Executed and Market Shares
Please refer to the attached pdf
Sources: TADAWUL and EFG-Hermes
Brokerage operations in Saudi Arabia have picked up with volumes executed by the firm there increasing 18.5% to SAR5.8 billion with the market share increasing to 1.4% up from 0.89% in 4Q07. EFG-Hermes ended the quarter as the #2 non-bank broker.
Brokerage in Saudi Arabia has locked in the equivalent of EGP8.5 million in agency fees, corresponding to 1.6% of the Group's consolidated net operating revenues.
Other Markets
Since the beginning of 2007 EFG-Hermes has been heavily trading, on behalf of its clients, markets where it has no local presence. The most heavily traded markets are Qatar, Oman, Kuwait and Jordan. Other countries traded include Bahrain, Morocco, and Lebanon. Executions on these markets have been growing steadily to the extent that orders channeled from EFG-Hermes through local brokers would represent a calculable market share on those markets. To put things in perspective, the volumes channeled through Qatar is equivalent to 8.5% market shares, around 3% in Oman and 1% in Kuwait. It must be noted that for the Omani market, the bulk of EFG-Hermes' executions were not channeled through Vision Securities, the entity the Group acquired. Accordingly, once EFG-Hermes assumes management of the firm, the market share in Oman will increase from Vision's average 9% to around 11%.
Research
Figure 8: Development Research Coverage
Please refer to the attached pdf
Source: EFG-Hermes
Research has continued to be the backbone supporting the Group's distribution and investment banking arms. The Division was very active during the quarter publishing 68 reports of 697 pages, and is on track to beat last year's record level of output. During the quarter the Team increased coverage of Egypt, by initiating coverage on Heliopolis Housing and TMG, reinitiating coverage on Orascom Hotel Development and Oriental Weavers while initiating coverage on a couple of stocks in the region including Qatar Water & Electricity Company. The team initiated research on three IPOs during the quarter, two of which were launched during April 2008 while the third has been delayed to 3Q08. Today the Team has 107 stocks under coverage across 8 countries as well as providing coverage of all countries with stock markets in the GCC, the Levant and North Africa from a macro standpoint and 3 countries from a strategy perspective. The focus for 2Q08 is towards significantly increasing coverage of Saudi and Qatari stocks, including the publication of the team's first Saudi Yearbook, followed by other GCC stocks in 3Q08.
Asset Management
Figure 9: Development of Listed Assets under Management (totals in EGP billions)
Please refer to the attached pdf
Source: EFG-Hermes
Asset Management remained a core driver to the Investment Bank's revenue while providing increased stability to earning through the management fees. Assets under management increased by 15.3% over the end of 4Q07 to reach the equivalent of USD7.6 billion with 97.8% of the increase being new net cash inflows with the bulk of the assets (63.2%) still being run out of Egypt. Having said that, of the USD4.81 billion of the assets under management with the Team in Egypt USD3.27 billion are in money market funds. The largest growth within the assets under management was in the offshore funds category increasing 23.4% over the end of the year reaching USD2.28 billion. The growth of funds and portfolios over money market funds further increases the longer term and more stable components of the money managed.
Confirming its commitment to providing global investment access to the MENA region, during 1Q 08 EFG-Hermes has launched the MENAsia Equity fund in partnership with Fullerton and the KB MENA Equity Fund in conjunction with KB Asset Management, South Korea. Both launches are indicative of the EFG-Hermes's commitment to expanding its client base across the world and that it has taken positive steps, well ahead of its competitors, to capture the growing appetite of Asian investors for the MENA markets. In the both funds EFG-Hermes acts as the manager of the MENA portion of the funds.
On the regional level, the EFG-Hermes Saudi Arabia Equity Fund has received full approval from the Saudi Capital Market Authority and the initial subscription period for the Fund will commence on June 1st 2008.
On the performance side, the funds managed by EFG-Hermes continue to outperform their peers, whether in Egypt or regionally. A case-in-point is the performance of the largest two funds managed by EFG-Hermes. Over 1Q08, the MEDA fund did not loose NAV despite the MSCI EM loosing 10% and MSCI Arabia loosing 9.3%. Over the six-month period since its inception MENA Opps Fund locked a return of 19.9% compared to 15.3% for the MSCI Arabia and 1.2% for the MSCI EM. In recognition for the success of its recently launched MENA Opps Fund EFG-Hermes received an award at the 2008 Hedge Funds World Middle East Awards.
Revenues of the Asset Management business increased over 4 fold to the equivalent to EGP100 million of which EGP35.1 million were realised incentive fees contributing 19.2% to the Group's consolidated net operating revenue. Unrealised incentive fees as at the end of 1Q08 stood at EGP140.2 million compared to EGP37.2 million in 1Q07.
Investment Banking
Across the board, 1Q 08 was spent mostly in preparing for the two IPOs that came to the market, several transactions as well as closing the USD 105 million private placement for SOG North Bahareya. Going forward the pipeline of deals remains strong.
Egypt
Two of the IPO that were slate for 1Q08 were successfully concluded during May 2008; Maridive (USD273 million) and Palm Hills (USD343 million). Backed by very strong Western and Gulf institutional demand as well as retail demand from Egypt, Maridive was nearly 30 times oversubscribed while Palm Hills was around 17 times oversubscribed. The closing of both deals is a testament to the strength of EFG-Hermes' equity franchise in the region as they were launched during turbulent market conditions. The Investment Banking Team was also able to close a USD105 million private placement for SOG North Bahareya.
UAE
In the UAE, the Investment Banking Team is about to launch a USD200 million private placement.
Saudi Arabia
The Team was able to sign the first mandate in Saudi Arabia.
Over the quarter, Investment Banking contributed 16.3% to the Group's consolidated net operating revenues. It must be noted that of the EGP85 million total revenues for the quarter around EGP68 million are the remaining fees collected from the TMG deal.
Private Equity
Over the past 12 months the Private Equity business has been gaining momentum but has remained a business with focus on Egypt and more recently on North Africa. The division has also changed direction to include transaction based funds and during 1Q08 Private Equity sealed a USD105 million transaction in the oil & gas field Sahara North Bahariya ("SNB") and has seeded the transaction. The SNB deal is important as it was the first time for EHPE to raise and manage equity on transactional basis parallel to the traditional structured fund management model. The scope of the original TDF Fund has also been expanded to include all areas of TMT and with the possibility of technical aid coming from the USA as TDF sets up permanent representation in there. Several sector specific funds and transactional deals are in the pipeline for 2008.
On the surface revenues from Private Equity in 1Q08 declined over 1Q07 levels. However, during 1Q08 a significant portion of the top line was a result of increased management fees due to income from Horus III Fund beginning to kick in. The business line contributed 5.3% to the Group's consolidated net operating revenues.
Principal & Proprietary Trading
As of the latter part of 2007, EFG-Hermes began to utilize its balance sheet conservatively in Principal and Proprietary trading. As these investments are marked-to-market the NAV of the accounts vary from one day to another. Management tracks the separate accounts on a weekly basis. As at the end of the quarter collectively, the accounts, including pre-IPO positions investing alongside our clients and excluding Treasury operations booked net gain of EGP52 million. It must be noted that during 1Q07 EFG-Hermes did not have a Principal account and the EGP70 million in the tabulation above relates to capital gains realised as a result of the sale of 500,000 shares of SODIC during 1Q07.
Saudi Arabia
Revenue from Brokerage operations and Principal Trading in Saudi remain the only revenue that is being booked directly to the Saudi entity. The Team is still waiting for the Capital Market Authority's written approval to launch the participation notes. The expansion of Research coverage of Saudi stocks has continued into the year and was the division's focus in 1Q08 and continuing into 2Q08.
Brokerage operations in the Kingdom booked the equivalent of EGP8.5 million, equal to the full year 2007 revenues from fee and commission income.
Operating Expenses
Total operating expenses doubled to EGP192 million4 in 1Q08 over the 1Q07 level (adjusted for the 2006 bonuses paid in 1Q07). Due to the nature of the business employee expenses remain the single largest component of operating expenses. Fully loaded adjusted employee expenses increased 53.3% over adjusted 1Q07 levels to reach EGP110.5 million. However, employee expenses account for 57.7% of total operating expenses up slightly from the adjusted 55.6% of operating expenses and decreased to 23.5% of operating revenues in 1Q08 down from 23.7% of operating revenues in 1Q07. As previously discussed, employee expenses have to rise if not to but close to international levels to enable the Firm to retain the Arabic-speaking quality staff as the bulge brackets began setting up within the region.
The consistently increasing travel and marketing expenses have nearly doubled over 1Q07 levels to EGP9.3 million; increasing to 4.9% of total operating expenses and 2% of total consolidated operating revenues up from 2% and 1.6% respectively in 1Q07. Travel and marketing expenses will remain a major component of operating expenses going forward as EFG-Hermes increases is regional footprint as well as expanding its target client base. The increase in this category of operating expenses has been reflected in the increased business level, although there will always be a lag between the time the expense occurs and it being reflected on the revenue.
Telecommunication expenses increased by 56.8% over 1Q07 and reached EGP7.3 million and 1.56% of operating revenues down from 2.11% during 1Q07 as a result of the increasing communications between the Egypt, UAE Saudi and Qatar offices as well as the increased communications with the proliferating client base across the region and the world as a whole. EFG-Hermes continues to upgrade and increase the dedicated leased lines and other services in order to ensure the smooth running of the trading platform across multiple markets, a factor that has and will continue to contribute to the increased cost of communication.
As EFG-Hermes began to introduce more retail driven products and the mindset changed within the Firm as to the importance of advertising and sponsoring more events to promote EFG-Hermes' image across the region, promotional and advertising expenses will also remain as a major feature of operating expenses going forward, with the size during any one quarter depending on the products launched during the period under review. These expenses doubled over 1Q07 levels to reach EGP21.9 million in 1Q08 constituting 11.4% of total operating expense and 4.7% of total operating revenues and are mostly the cost of the EFG-Hermes One-on-One Conference in Sharm El Sheikh held between 9 to 13th March 2008.
Net operating profit in 1Q08 increased 2.7 times over 1Q07 levels to EGP278 million (3 folds if the accrual for the bonuses is removed). Net operating margins have improved to 59.2% up from 46.8% (1Q08 adjusted net operating margin is 65.5% vs. 57.4% in 1Q07).
4 Starting 1Q08 EFG-Hermes started to accrue a provisional amount for the annual bonuses which until the yearend 2007 actual amount to be paid were deducted during the fourth quarter; amounts to EGP30 million in 1Q08
Other Revenue
The major components of Other Revenues are the consolidated portion of EFG-Hermes' 28.45% ownership stake in Banque Audi Saradar and the net income from treasury operations and balance sheet management.
The importance of Banque Audi to adding stability to the Group's revenues is decreasing as growth of Asset Management and Private Equity increases. In terms of performance the unaudited consolidated from the Banque Audi during 1Q08 is the equivalent of EGP73.6 million. On a USD basis the Bank's revenue grew by only 16.3% over 1Q07 but in absolute terms in EGP grew only 11.8%. However, it must be noted that as at the end of 1Q08 EFG-Hermes owned 28.45% of the Bank as opposed to 28.6% at the end of 1Q07. Furthermore, the devaluation of the USD against the EGP over the year has also affected the comparison; USD: EGP rate averaged 5.636 in 2007 and 5.45 as at the end of March 2008. The consolidated stake represents only 11.2% of the Group's consolidated revenue down from 15.2% in 1Q07.
EFG-Hermes continues to have a positive net cash position, bank interest payable for the DEG and IFC long term loans and other bank expenses and charges is more than covered by interest and quasi interest earned on the cash balances, income from money market operations using funds from both the operations and clients' free float and the difference in payments on the NDF contracts hedging both the investment in Banque Audi and the cash balances in foreign currency. However, over 1Q08 the contribution from Treasury operations declined as cash was channeled to daily core operations and the approved Principal trading accounts, the appreciation of the Egyptian Pound versus the USD making the differentials earned on the various hedging facilities decline as well as the decrease of interest rates on the USD. Nevertheless, Treasury operations have continued to provide major support to the Group's bottom line profitability and netted a total of EGP40.2 million in 1Q08 down from EGP75.8 million in 1Q07. The Treasury Division locked in an average net yield of around 7% during 1Q08 on the cash balances in spite of decline interest rates which and the devaluation of the USD against the EGP over the quarter. It must be noted that the NDF contracts hedging FX exposure resulting from the Banque Audi investment were also important in averting an FX loss in the vicinity of EGP100 million due to the appreciation of the EGP against the USD since Jan 2008 (1USD: EGP5.55) and a further EGP180 million since the acquisition of the Banque Audi stake when the exchange rate was 1USD:EGP5.7090.
The remaining major portion of other revenues is the gains on selling investments for a net total of EGP52.05 million compared to EGP70.0 million in 1Q07. In 1Q07 EFG-Hermes had sold around 500,000 shares in SODIC. In 1Q08 no SODIC shares have been sold. This income was a result of the shift from pure agency business to a business model that includes proprietary trading began to bear fruit as discussed above.
5 excluding gains locked in Treasury operations
Other Expenses
EFG-Hermes continues to book an FX loss (EGP 22.4 million) as the EGP appreciates against the USD. It is worth mentioning that the average USD: EGP exchange rate for 2007 was 5.636 and ended the first quarter of the year at 5.45. The NDF contracts amounting to USD150 million hedging our USD exposure in the region managed to avert an FX loss in excess of EGP30 million. This specific contract also has entails an FX gain of around EGP13 million reflected within the equity account and will be put through the income statement when the contract matures in 3Q08 bringing down the actual FX loss to EGP12 million.
Depreciation and amortisation increased slightly over 1Q07 levels to reach EGP5.4 million as the permanent premises in Saudi Arabia became operational towards the end of 2007. The other expense incurred was a provision expense for EGP6.7million that relate to normal business practices.
Resulting from the above net profit before taxes and minority interest in 1Q08 increased 35% over the comparable period the previous year to reach EGP416.4 million. However, adjusting the net profit before taxes and minority interest for consolidated income from Banque Audi and the interest income earned to get to the actual profitability of the investment bank; the net profit before taxes and minority interest for 1Q08 amounts to EGP326.2 million up from EGP163.7 million in 1Q07 (adjusted for income from the SODIC stake) with an adjusted net profit before tax and minority interest margin of 57.3%.
Balance Sheet
A continuing feature of EFG-Hermes' balance sheet remains the high level of total cash, cash equivalents and other investments (namely T/Bills, Central Bank deposits and investment in money market funds6) reaching EGP3.3 billion. This is down from EGP4.5 billion as at December 2007. Since the yearend EFG-Hermes has utilised part of the cash difference in the daily core business operations, prop trading and seeding its funds. Despite the decrease of the cash balances it had to deal with, EFG-Hermes' Treasury Department continued to maintain a rate of return above that earned on money market operations. Using the cash balances as at the end of the quarter the average rate earned was around 7% in a declining interest rate environment. Furthermore, with the increased executions across the region more and more balances are being used for clients operating on DVP basis and the regional growth strategy.
The major portion of the EGP1.9 billion available for sale investments remains the SODIC investment (through OPD) that is marked-to-market at EGP962 million. No divestment of any portion of the stake took place during 1Q08 although the possibility of total divestment during 2008 could occur through a strategic sale. The remainder of the balance mainly relates to a portion of the proprietary portfolios quoted at market prices and the seeding of EFG-Hermes asset management and private equity funds.
Net receivables resulting from operations recorded EGP538 million incurred mainly due to the normal course of business mainly within the Brokerage Division but also included receivables from clients within private equity, asset management and investment banking activities.
The growth in fixed assets over the quarter to EGP146.4 million up from EGP135.2 million related to the new Saudi and Qatari offices. In terms of fixed assets as well major progress has been witnessed with respect to the new premises at the Smart Village as ground breaking began and major earth moving and foundation works have been completed. As at the end of 1Q08 the balance of projects under construction increased to EGP92.9 million to reflect the progress of the building.
On the liability side, the Group remains to have a positive net debt position. Two sets of debt were outstanding as at the end of 1Q08: a total of the equivalent of EGP195 million being the loans from IFC and DEG and an overdraft for EGP306.1 million which has since been repaid.
6 EGP843.5 million of investment in money market funds is reported in the EGP1.4 billion trading investment figure
Taxes
The effective tax rate for the 2007 has decrease to 12.6% down from 15.1% in 1Q07 as revenues emanating outside Egypt and from non-taxable entities have increased. Furthermore, the Firm continues to administer tax management at the level of the Group as a whole as well as optimising balance sheet management revenues.
Profitability
Net income after tax and minority interest increased to EGP348.5million (excluding EGP140.2 million of unrealised incentive fees) in 1Q08 up from EGP250.6 million in 1Q07. Of the bottom line EGP40.0 million relate to incentive fees realised on the listed equity funds and portfolios and Private Equity in 1Q08 compared to EGP28.8 million in 1Q07.
The majority of the bottom line in 1Q08 relates to the core operations. If the bottom line is adjusted for a total of EGP73.6 million of revenue consolidated from Banque Audi and approximately EGP42.0 million of the interest and quasi interest income relating to net Treasury operations, the net profit after tax and minority interest relating to the investment bank is EGP234 million, a 54% increase over 1Q07 levels.
_______________________________________________________________________________
In this earnings release EFG-Hermes may make forward looking statements, including, for example, statements about management's expectations, strategic objectives, growth opportunities and business prospects. These forward-looking statements are not historical facts but instead represent only EFG-Hermes' belief regarding future events, many of which, by their nature are inherently uncertain and are beyond management's control and include among others, financial market volatility; actions and initiatives taken by current and potential competitors; general economic conditions and the effect of current, pending and future legislation, regulations and regulatory actions. Accordingly, the readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made.
EFG-Hermes (Main Office), 58 Tahrir Street, Dokki, Egypt 12311
Tel.: +20 2 333 836 26 | Fax: +202 333 780 38 | Website: www.efg-hermes.com
Stock Exchange & Symbol: Cairo-HRHO.CA | London-HRHOq.L
Bloomberg: EFGH | Reuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM
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