Efg-hold.gdr S Regulatory News (EFGD)

15 May 2007 17:55

EFG-Hermes Holdings SAE15 May 2007 Summary 1Q2007 has seen the market volumes in all the regional markets decline. Thethree markets in which EFG-Hermes operates have been the top decliners: Egypt36.6%, Dubai 58.14% and Abu Dhabi 40.18%, all affecting EFG-Hermes' top line.Taking into consideration the prevalent market conditions, the group'sperformance has shown both growth and resilience. Table 1: Arab Markets Performance during 1Q2007 Sources: Regional markets and EFG-Hermes Table is available in the PDf copy linked http://www.rns-pdf.londonstockexchange.com/rns/6641w_1-2007-5-15.pdf 1Q2007 IN REVIEW • Total revenues booked during 1Q2007 reached EGP449.6 million; a 23.2% growthon 1Q2006; • Total operating revenues recorded EGP221.6 million; a 26.8% decline from theeuphoric 1Q2006. However, if the EGP91.68 million Investment Banking fees linkedto EFG-Hermes' capital increase are removed from 1Q2006 operating revenuesdepicting the true revenue levels related to operations, 1Q2007 operatingrevenues would increase 5% in spite of the decline in volumes in the markets weare operating by 46.7% over 1Q2006 levels, asset management unrealizedincentive fees as at end of March 2007 stood at EGP37.3 million; • Net profit after tax and minority increased 20.3% to EGP251 million in 1Q2007compared to EGP209 million in 1Q2006 ; • EFG-Hermes received its margin trading license in Egypt and will probablyremain the only non-commercial bank related firm to receive it; • The first trades on Tadawul (Saudi Arabia) were executed towards the latterpart of the quarter; • The Brokerage arm in the UAE has maintained the number one position on the DFMsince December 2006; • Assets under management increased 60% over the similar period the previousyear to the equivalent of USD2.52 billion; a 25.5% increase over year-end 2006; • Aggregate assets under management increased by 45% to the equivalent of USD3billion, out of which USD2.5 billion is in securities; • Relative to the full year 2006, 1Q2007 witnessed relative stabilization of theshare price. The differences between the high and low in any one month hasdecreased and the share now represent around 10% of daily trading volumes onCASE down from an average of 30% of daily trading values in 2006. Today,EFG-Hermes shareholders have declined to around 33,000 shareholders from around65,000 in 1Q2006. More importantly, the top 30 shareholders include 12 foreignfunds and hedge funds and 10 renowned Egyptian and regional financialinstitutions; • In addition to the coverage by HSBC and Prime Securities, Shuaa Capital hasinitiated coverage on the stock. During the quarter, EFG-Hermes has beenapproached by several research houses to cover the stock and Management expectsinitiation of coverage by several firms by year-end; • Commencing 1Q 07, audited financial statements are reported under the Egyptianaccounting standard that have been adjusted to comply with the IFRS; • The success of the fifth annual One-on-One Conference at Sharm El Sheikh. Thisyear the conference was attended by 42 listed companies from across 9 countriesthe region and 104(1) investors predominantly from the region, Europe and theUS. PERFORMANCE Operating Revenues On a consolidated basis, total operating revenues have decreased to EGP221.6million, excluding EGP37.3 million of unrealized asset management incentivefees. In absolute terms, this is below 1Q2006 revenues but it is above 2Q, 3Q,4Q2006 and is higher than 3Q2005 (the period just before the bubble on allregional markets started). On the surface it would seen that operating revenueshave declined by 26.8% with a backdrop of a shake down in the 3 markets in whichwe operate, where volumes declined by nearly 46.7% and the indices eitherplummeted or barely moved relative to the same period last year. Consequently,this put a damper on the brokerage market as well as delay of several investmentbanking deals. However, if adjusted for the one-off non-recurring EGP91.68million of Investment Banking fees relating to the EFG-Hermes's Capitalincrease, we find that the total operating revenues has increased 5.1%. Table 2: Contribution of the Different Divisions to Operating Revenues * excludes EGP37.2 million of unrealized Incentive Fees for the regional andEgypt operations in 1Q2007 ** includes EGP91.68 million in 1Q2006 relating to the EFG-Hermes capitalincrease Sources: EFG-Hermes management accounts and audited financial statements Table is available in the PDf copy linked http://www.rns-pdf.londonstockexchange.com/rns/6641w_1-2007-5-15.pdf On a consolidated basis, Brokerage operations continued to be the main revenuegenerator to operating revenue, contributing around 46.3% to total consolidatedrevenue. Investment Banking followed contributing 29.9% to consolidatedoperating revenues. Private Equity operating revenues increased by 4.8% over1Q2006 levels to reach EGP29 million contributing 13.2% to the total operatingrevenues, mainly due to the increase of success fees emanating from severalexits including SODIC and Suez Cement. Asset Management activities' contributionto total consolidated revenue increased to 10.7% up from 5.3% in 1Q2006, on theback of the growth of assets under management by EGP2.9 billion. Figure 3: Breakdown of Revenue by Business Line on a Quarterly Basis * Including Asset Management incentive fees as follows: 2Q2005 EGP 15 million,3Q2005 EGP 12 million, 4Q2005 EGP 155 million, 1Q2006 EGP 1 million, 2Q2006 EGP 3 million, 4Q2006 EGP 4.9 million, EGP6.5 million in 1Q2007 ** Includes EGP 91.68 million of IB fees relating to EFG-Hermes capital increasein 1Q2006 Sources: EFG-Hermes audited financial statements and Management Reports Chart is available in the PDf copy linked http://www.rns-pdf.londonstockexchange.com/rns/6641w_1-2007-5-15.pdf Hereunder is an analysis of the company's main operational divisions: Brokerage Division 1Q2007 saw the Brokerage activities across the Group implementing a newstructure whereby the various sub-teams are divided by the type of client theyservice rather than by geographic location. Today there are three main lines ofbusiness; institutional and foreign clients, high networth individuals andretail teams into which both the online and call centre teams report. The newstructure aims to improve the client services and actually putting to the testour in-house developed multi-market multi-currency trading platform. Our online trading and Call centre operation are continuing to grow & havebecome an increasingly important portion of the business. Combined executionsfor both online trading and call centre operations were around 6.5% of thenon-institutional executions, and contributing 9% to the non-institutionalcommission revenues in March 2007. Egypt 1Q2007 was mainly devoted to implementing the new structure and supporting theSaudi launch, both technically and in terms of human resources. EFG-Hermes'sBrokerage arm in Egypt booked EGP86 million contributing 38.7% to the group'stotal operating revenues. Figure 4: EFG-Hermes Executions and Market Shares Sources: Case and EFG-Hermes Chart is available in the PDf copy linked http://www.rns-pdf.londonstockexchange.com/rns/6641w_1-2007-5-15.pdf Total market executions on CASE dropped 37.8% compared to the all time high of1Q2006 which coincided with the bubble on the market. EFG-Hermes volumesdeclined 51.9% over the similar period the previous years. The main reason forthis being is that the average volumes on the market during 1Q2007 contracted20% compared to 4Q2006 and trading was dominated by several speculative stockwhich EFG-Hermes neither covers in research nor recommends to its clients. UAE Figure 5: Progression of Volumes Executed and Market Shares Sources: DFM, ADSM, and EFG-Hermes Chart is available in the PDf copy linked http://www.rns-pdf.londonstockexchange.com/rns/6641w_1-2007-5-15.pdf Brokerage operations in the UAE have been the first to benefit from the businessline's restructure. The introduction of foreign fund managers to the UAE marketsthrough the Egypt contacts was key for the operation to climb the number oneposition on the DFM in December 2006 and maintain the position until today.Market share on the DFM has been increasing steadily since 2Q2006 to 9.1% in1Q2007. On the ADSM, the more competitive market, EFG-Hermes reached the number5 position during April 2007 and ended the quarter with a 2.5% market share. Our executions in the UAE have continued to grow, during 1Q2007 increased 55% toAED8.5 billion despite the fact that total market executions declined 54% over1Q2006 levels. Consequently, total revenues from the core operations increased39.2% to reach EGP17 million up from EGP12 million in 1Q2006. As at the end of 1Q2007, the UAE brokerage operations had a 7.6% market share ofthe total UAE local markets. In anticipation of the introduction of new moresophisticated products, two new hires from international firms with emergingmarkets background have joined the team. Research EFG-Hermes' independent Research Division continued its increased coverage ofregional stocks and economies. During 1Q2007 the Team initiated coverage on Du,Union Properties and Tamweel in the UAE and the Arafa Group in Egypt. Inaddition to the initiation of a macro and strategy notes on Morocco waspublished in early April 2007. Expanding coverage remains at the focus of the Team's strategy with the firstin-depth coverage on Saudi stocks due to be published during the third week ofMay 2007 and will include a macro and strategy country notes and coverage of 10listed stocks, Concurrently, publication of the Saudi daily market notes willcommence. Asset Management (listed) Figure 6: Development of Assets Under Management Source: EFG-Hermes Chart is available in the PDf copy linked http://www.rns-pdf.londonstockexchange.com/rns/6641w_1-2007-5-15.pdf 1Q2007 saw the Group's assets under management increase to EGP14.3 billion, withassets under management with the Regional Team growing by 40.4% during thequarter relative to a 22.4% growth in the assets under management with the EgyptTeam. Of the increase, 76% are new cash inflows not related to the market. Themajor growth areas during the quarter were in the both money market funds aswell as in the off-shore equity funds. Egypt Assets under management within Egypt are predominantly discretionary portfolios(42%) and money market funds (38.4%) and the growth in AUM within 1Q2007 wasmainly in the money market funds. Total revenue booked in 1Q2007 was EGP18 million, a growth of 11.3% over 1Q2006and constitutes 8.0% of the total consolidated operating revenues for the Group.Unrealized incentive fees as at end of 1Q2007 for the Egypt Asset Managementrecorded EGP19.35 million. UAE The Regional Asset Management Team out of Dubai continued to add on new fundsand portfolios to manage as well as increasing the buyside research coverage toinclude companies all over the Arab world. Today, the Team follows over 100companies. During 1Q2007 the Team launched Al Waseela Fund for the CommercialBank of Qatar and is expected to bear fruit during 2Q2007. Contributing 2.7% to the Group's total revenues regional asset management bookedthe equivalent of EGP6 million in 1Q2007. Unrealized incentive fees as at end of1Q2007 for the Regional Asset Management recorded EGP17.85 million. Investment Banking EFG-Hermes' investment banking arm raised around USD550 million worth of equityfor clients, predominantly through M&A and private placement transactions.Currently the Teams have several active transactions that are due to closewithin 2Q2007 and 3Q2007, with the pipeline remaining strong for the rest of theyear with over USD10 billion worth of transactions. Egypt 1Q2007 saw Investment Banking in Egypt remaining as the core contributor to theGroup's operating revenues booking 27.5% of the Group's consolidated netrevenue. On the surface revenues booked have decreased 47.9% over 1Q2006 levelsto reach EGP61 million; the increase is 141% once adjusted for the one-offEGP91.68 million collected as fees for the EFG-Hermes capital increase areremoved. It is worth noting that the majority of the active transactions aredeals for repeat clients. UAE The Investment Banking Team out of the UAE closed a USD200 million M&Atransaction in the UAE, namely Matex. Booking approximately USD1 million infees, Investment Banking out of the UAE has contributed 2.4% to the Group'sconsolidated revenues. Private Equity On an operational level, 1Q2007 proved to be a good quarter for EHPE, as HorusII is now 85% invested with a total of USD131 million in 5 investments and anNAV substantially in excess of that. Of the investments, Al Watany Bank of Egyptis currently being exited. The other four investments are large and attractiveenough to be prospective Investment Banking deals. Following the success ofHorus II, Horus III, a general purpose Egypt and North Africa fund, is due to belaunched by the year end. The concept of incubation of investments within the Technology and DevelopmentFund (TDF) has proved to be very successful and with the fund fully invested.TDF II is to be launched by the year-end with a prospective size of USD50million. Horus Agri has already invested USD14 million of the USD 46 million, intwo companies. Another initiative with a roadshow set for June 2007 is an oil &gas fund. EHPE hopes to end the year with 60-80% increase in its funds undermanagement. Private Equity's total revenue recorded EGP29 million, an increase of 4.8% overlast year and contributing 13.2% to the Group's consolidated revenues. Saudi Arabia Operations in Saudi Arabia are not yet in full throttle, first trades wereexecuted on Tadawul during the first week of March and to date are mainly tradesfor our Saudi clients channeled through the Egypt office. Operating Expenses In absolute terms general and administrative expenses, including employee costs,have increased by 55.7% compared to 1Q2006. However, this includes EGP 23.5million(2) of extra bonuses that were paid during 1Q2007 and relate to thefiscal 2006. The extra bonuses were paid as a result of pressure to retain keyjunior and middle management staff both in Egypt and the UAE. If adjusted, theincrease in operating expenses would drop to 24.4% with an absolute value ofEGP93.4 million. Employee costs remain the largest single component of operating expenses. Fullyloaded employee expenses grossed EGP74.8 million compared to EGP44.4 for thesame period last year. However, if adjusted for the extra bonus, the 1Q2007figure would drop to EGP51.3 million; only a 15.6% increase over 1Q2006. Employee expenses have increased with respect to operating revenues to 33.7% upfrom 14.7% in 1Q2006 reflecting the increased hiring of senior staff into thesupport functions including the Head of HR, the Head of Compensation, the Headof Recruitment & Talent Development and the Group Legal Counsel. Furthermore,increased hiring in Saudi Arabia, which has not yet began to book any revenuehas added to this increase. A continuing feature of EFG-Hermes' staff profilerelates to the fact that across all the lines of business there is a hiddenemployee cost that are associated with the Group's regional expansion plan whereextra staff is hired and trained in order to be placed within the variousregional units. Promotional and advertising expenses increased to EGP14.2 million, 12.2% oftotal operating expenses compared to 8.2% in 1Q2006. The increase reflects thechange in the modus operandi of the function, whereby, promotion and advertisingis directed at entrenching and nurturing our brand across the region rather thanat products during the launch and marketing phase. This has come in handy,especially for in the Saudi market where we capitalized on our existing Saudiclients' recognition of the brand from Egypt and the UAE. Telecommunication expenses increased to 4.0% of total operating expenses up from3.1% 1Q2006 figures as the operations in the UAE increased, entailing increasedcommunication costs due to the introduction of the multi currency multi marketbrokerage system as well as the new offices at the DIFC Gate, the FIX lines andas the of operations in Riyadh commence. Travel and marketing expenses remains within the 3% range of total operatingcost. The consultant and services fees dropped to 3.3% of operating expensesdown from 5.5% in 1Q2006. However, it must be noted that the consultancyservices used in both quarters were different. The bulk of these expenses in1Q2006 related to legal fees related to the Saudi license application,EFG-Hermes' capital increase and the acquisition of the Banque Audi stake, theset up within the DIFC and various investment banking and private equitytransactions. During 1Q2007, the expenses are largely related to PR and mediaconsultants and engineers and architects for the design of the new premises. On the surface, net operating profit has decreased to EGP104.8 million comparedto EGP227.5 million during the elated 1Q2006 and the operating margin dropped to47.3% down from 75.2% in 1Q2006. However, in reality adjusting for the expensesunrelated to 1Q2007, net operating profit has slightly increased in 1Q2007 toEGP128.3 million with a net operating margin of 57.9%. This slight decrease innet operating margin is due to the costs associated with the set up of Saudiwhich has not yet began to bear fruit, including the employee costs, thedecreased levels of fee and commission revenue across the brokerage operationsdue to the decrease in turnover on the markets in which we operate and the fixedcosts associated with institutionalising the firm. Other Revenue The major portion of the EGP145 million of other revenues is the gain on sellinginvestments for EGP71 million. This amount corresponds to the capital gain onthe sale of 500,000 SODIC shares during January 2007. The actual capital gainsare still held at the OPD level. However, as the amount is substantial, and willcontinue to be so as EFG-Hermes divests its prop position over the coming coupleof years, it has been agreed with the Auditors to equity consolidate the portionof OPD that EFG-Hermes owns. The other major contributor to non-investment banking operations is the EGP74million(3) related to income from Banque Audi. EGP65.7 million of the amountrelates to EFG-Hermes' share in Banque Audi. The 57.06% in the consolidatedportion over the 1Q2006 level is due to both the increase in Banque Audi'sbottom line for the quarter to the equivelant as well as the increase in theconsolidated portion from 20% in 1Q2006 to 28% in 1Q2007. Other revenues alsoinclude EGP83 million, which is the net interest income at the end of thisquarter. Other Expenses Traditionally other expenses included the financing cost as EFG-Hermes was a netborrow. As business grew financing costs turned positive as the free cash flowfrom operations increased and the debt was paid down and more recently interestincome and quasi interest income earned on both the group's free cash flow andthe USD500 million capital increase have filtered in. Please note that thecapital increase is earning well above average money market rates during thequarter. As a result net profit before taxes and minority interest increased 22% over1Q2006 to EGP308.5 million exceeding total revenue. However, adjusting the netprofit before taxes and minority interest for consolidated income from BanqueAudi, the interest income earned on the proceeds of the second capital increaseand the one time revenue in 1Q2006 and the bonuses related to 2006 paid in1Q2007, net profit before taxes and minority interest is EGP210.2 million andEGP119.4 million in 1Q2007 and 1Q2006 respectively. Profitability relating tothe pure investment banking activities, EGP72 million relating to the capitalgains from the sale of a portion of the SODIC position needs to be deducted.Given the above, the adjusted net profit before tax and minority interestrelating to the investment bank for 1Q2007 is actually EGP138.2 million, a 15.8%growth over 1Q2006 (EGP119.4 million). Balance Sheet If the effect of the EGP6.4 billion capital increases are stripped out, thebalance sheet has grown to 1.24 times over its size in 1Q2006. Cash, cashequivalents and other investments (namely T/Bills and Central Bank deposits)have increased by a net amount of EGP724 million as a result of both operationsand interest generated on the capital increases. With the formal set up of EFG-Hermes KSA all related expenses, fixed assets andpayables done by the Holding Company on behalf of KSA have been removed as anopening balance sheet and income statement have been produced and the Companynow reported as a consolidation into the Group financial statements.Accordingly, EGP68.588 million found in the other current assets account as atyear-end 2006 relating to the headquarters and premises in Riyadh, have beentransferred to the consolidated fixed assets. The EGP183.6 million found in theassociated and subsidiaries account at year-end 2006 relating to the paid-incapital of the Saudi subsidiary, has been washed out during the totalconsolidation of the KSA as at 31st March 2007. On the liability side, the Group remains to have a positive net debt position,with the only outstanding bank debt at a total of the equivalent of EGP228million being the loans from IFC and DEG drawn down earlier during 2006. Net debt resulting from operations recorded EGP107.6 million incurred mainly dueto the normal course of business as brokerage activities increase both locallyand in the UAE. Within the current liabilities are EGP292 million relating tothe proposed dividend payable for the fiscal year 2006 that was approved by theCompany's general assembly on 25th March 2007. During the first week of January2007, the firm transferred the balance of 1,121,787 shares (being theoutstanding treasury shares as at year-end 2006) to the EFG-Hermes EmployeeTrust Fund in line with the general assembly approval dated 23rd November 2005. Taxes Under the existing tax law, income from EFG-Hermes subsidiaries domiciled in theUAE and the Banque Audi are investment tax free. However, dividend distributionfrom subsidiaries is taxable. With interest income from time deposits alsotaxable, EFG-Hermes Treasury Division worked on the effective management ofassets and liabilities optimizing balance sheet management and revenuegeneration. Accordingly, a large portion of the proceeds of the second capitalincrease were directed towards the tax free treasury bills and central bankdeposits while the rest being effectively hedged for FX fluctuations. The consolidated tax bill for the quarter is EGP46.6 million from EGP36.3million in 1Q2006; and an effective tax rate of 15.1% compared to 14.3% over thesame period the previous year. Profitability As a result, net income after tax and minority interest increased 20.3% over1Q2006 level and recorded EGP251 million up from EGP209 million; andrepresenting 35.8% of the full year 2006 net profits after tax. Adjusted for theactual costs and revenues related to 1Q2007 and 1Q2006; net profit after tax for1Q2007 recorded EGP274.5 million; a 134.8% increase over 1Q2006 level. Of the bottom line profitability, the majority relates to our core business; asthe bottom line 1Q2007 if adjusted for the EGP73.8 million of revenueconsolidated from Banque Audi, the interest income relating to the latestcapital increase, investment banking fees on EFG-Hermes capital increase, andthe distributed bonuses in 1Q2007 that relate to the fiscal year 2006, theadjusted net profit after tax and minority interest recorded EGP152 million (up103.4% over adjusted 1Q2006). Share Price Share Price Volatility drastically decline during 1Q2007 compared to 1Q2006.Share movements during the quarter were between 5-7.5% up and down. Furthermore,the share represented an average of 10% of daily trading during 1Q2007 asopposed to 25-40% during 2006. This decline has consolidated our shareholdingstructure by increasing our institutional investor base. (1) Over half of these were institutional investors who had more than one seniorrepresentative at the conference (2) Approved by the compensation committee (3) EGP 6.6 million relate to Private Equity fees that for IFRS accountingpurposes need to be reported within the pool from income from associates ratherthan as fee revenue at the business line level. This information is provided by RNS The company news service from the London Stock Exchange