Last checked at 17 May 2010 08:30
1Q2009 Earnings Release - 17 May 2010
Performance at a Glance
Table 1: Operational Indicators
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: EFG Hermes audited financial statements and management accounts
Table 2: Financial Performance
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf *includes EGP 21.9 million of Investment Banking fees being the advisory fee on the sale of Bank Audi
** includes EGP716.6 million of capital gains on the sale of the stake in Bank Audi in 1Q2010 and EGP85 million being share of profit of associate in 1Q2009
Sources: EFG Hermes audited financial statements and management accounts
Note
The fiscal year 2010 to achieve more clarity the earnings release will distinguish between the revenues and costs relating to the fee and commission income and those relating to the capital market transactions and treasury operations. Accordingly, the minor differences in total operating revenue and total operating expense is mainly due to the reclassification of finance cost, FX differences and also EGP 5 million from general and administrative expenses. Analysis below relating to audited financial statements reflects similar distinctions.
1Q2010 in Review
n Global market recovery began to slowly trickle into markets in the MENA region;
n Total net consolidated revenue more than tripled over 1Q09 to EGP 1.07 billion up from EGP 328 million a year earlier. If adjusted for the one-off capital gain and the revenue of Bank Audi in 1Q09 total net consolidated revenue is EGP 349.6 million, a 43.5% increase over 1Q09;
n Total fee and commission income was the main component of the Group's revenues increasing 56.7% over 1Q09 levels to EGP 267 million as market activity began to improve and investor sentiment slowly recovered allowing for the closure of several investment banking deals and increased brokerage activity;
n Total revenue from capital markets and treasury operations increased 410.9% to EGP 800 million in 1Q2010 (including the one-off capital gain of EFG 716.6 million on the sale of Bank Audi) up from EGP 157 million a year earlier;
n Excluding the one-off capital gain booked on the sale of the stake in Bank Audi in 1Q2010 and the revenue from the investment in 1Q09, Capital Market and Treasury operations increased 13.8% over 1Q09 booking a total of EGP 83 million and responsible for c.24% of the total adjusted net consolidated revenue;
n Fully loaded total operating expenses (general and administrative expenses) increased 39.3% over 1Q09 to EGP 205 million as the full effect of the management incentive scheme filtered through, salary cuts were reversed and the staff body increased 6.8% to cater to the increased business and locations;
n Net operating profit for the Group as a whole increased 377% over 1Q09 level to EGP 861 million. Adjusted for the effect of the Bank Audi stake, net operating profit in 1Q2010 increased 43.7% over 1Q09 to EGP 145 million corresponding to a net profit margin of 41.4%;
n In spite of the full effect of the new expanded Management Incentive Scheme being reflected in 1Q2010 as well as the increase in number of employees, net operating profit from the fee and commission income increased 146.1% over 1Q09 levels to EGP 86 million resulting in an improved operating margin for the business up to 32.2% from 20.5% during 1Q09;
n Adjusting for the effect of Bank Audi, whether the capital gain from the sale or the revenue portion during 1Q09, net operating profit of the Capital Markets and Treasury operations declined slightly to EGP 59 million down from EGP 62 million in 1Q09;
n Net profit after tax and minority interest increased 3.5 fold over 1Q09 level to EGP 483.6 million. Of the bottom line, EGP 51 million relates to the on-going fee and commission business (up from EGP 10.8 million a year earlier) and EGP 432.6 million relates to the Capital Markets and Treasury operation (up from EGP 129.3 million in 1Q09);
n Regional operations (non-Egypt related operations) accounted for 40.4% of the total fee and commission income in 1Q2010 up from 37.9% a year earlier;
n EFG Hermes maintained its position as the MENA region's largest brokerage house with the following market shares in the main markets it trades during 1Q2010: Egypt (24%), DFM (9%), ADX (19.3%), Kuwait (35.4%), Oman (21.5%), Saudi Arabia (1%), Qatar (14.5%) and Bahrain (13.6%);
n The driving force of the overall growth in the Brokerage operations during 1Q2010 remained the developing retail facet of the business. During 1Q2010 retail operations accounted for 52% the total brokerage revenue up from 38% in 1Q09 and 43% for the full year 2009 and with 5 new branches opened between January and May 2010;
n The Research Department continued to increase the stocks and economies under coverage and support the Investment Bank's operations as a whole with the stocks covered increasing to 100 stocks up from a coverage of 96 stocks at the end of 2009;
n Total assets under management within the Group increased to USD 5.47 billion, of which USD 4.54 billion are in listed equities and money market funds and the remainder in private equity;
n EFG Hermes Private Equity has scheduled two roadshows for the latter part of 2Q2010, namely, the Egypt portion of the InfraMed Fund and the Syrian Private Equity Fund;
n Investment Banking closed three deals during 1Q2010. Two of the deals were underwritten: the USD 100 million rights issue for SODIC and the EGP 1.5 billion bond for Mobinil; both of which were oversubscribed and EFG Hermes did not have to carry any of the paper on to its books;
n EFG Hermes' shareholding structure remains dominated by institutional shareholders. The top 50 shareholders own c.71% and include 30 western institutions and fund managers, 7 of who own between 1 and 3%.
n The Board of Directors is recommending, pending shareholders' general assembly approval, the distribution of an EGP 2/share special dividend. This is in line with the announcement in the previous earnings release dated March 4, 2010 and the shareholders' general assembly meeting on April 11, 2010.
Important Events Subsequent to the End of 1Q2010
During April 2010, the Syrian Commission on Financial Markets and Securities has granted EFG Hermes Syria L.L.C. (under establishment) full advisory and corporate finance (excluding underwriting), research, securities brokerage and asset management licenses.
Performance
Total Revenue
Table 3: Breakdown of Total Revenue
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sums and percentages may not add up exactly due to rounding
*includes EGP 21.9 million of Investment Banking fees being the advisory fee on the sale of Bank Audi in 1Q2010
**net of bank interest paid, bank charges and FX differences and includes EGP7.7 million of realised and unrealised capital gain/loss on fixed income in 1Q2010 (EGP23.2 million in 1Q2009)
*** includes EGP716.6 million of capital gain of Bank Audi in 1Q2010
Sources: EFG Hermes audited financial statements and management accounts
In general, improved investor sentiment and general rebound, albeit limited, across regional markets has supported EFG Hermes' growth in earnings. Total net consolidated revenue more than tripled over 1Q09 supported by the one-off capital gain of EGP 716.6 million booked as a result of the sale of the Group's stake in Bank Audi during January 2010. Setting aside the capital gains resulting from the sale of the Bank Audi, the growth in total revenue over 1Q09 is 6.6% (43.3% growth if the revenue from the investment in Bank Audi in 1Q09 is removed) echoing the general positive trends witnessed in the regional markets over 1Q2010.
Setting aside the one-off capital gain, fee and commission revenue remained the key contributor to net consolidated revenue, accounting 76.2% of the total net consolidated revenues, up from 52% a year earlier. Fee and commission revenue increased 56.7% over 1Q09 to EGP 267 million as the Investment Banking Division closed 3 deals during 1Q2010 while none were completed during 1Q09, combined with the stellar performance of both the Private Equity and Brokerage Divisions.
Capital markets and treasury operations continued to be a core contributor to revenues, reigning in around 24% of the total adjusted net revenues (setting aside the one-off capital gains). Capital Market transactions and Treasury's cash management coupled with selective investing in fixed income products to counter the declining interest rate environment managed to book EGP 83.1 million, increasing 13.8% over 1Q09. With the divestment of the stake in bank Audi in January 2010, EFG Hermes will no longer book a portion of the Bank's revenues. Having said that, revenue generated by the Treasury Department from the resultant cash balances (which are yet to be fully deployed) will support the Group's revenue during this interim period.
Fee and Commission Revenue
Market Performance
Table 4: Performance of Markets in the Arab Region during 1Q2010
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: Regional markets and EFG Hermes
Activity on capital markets where EFG Hermes operates has been disparate over the first quarter of the year, but there has been a consistent upward trend in both volumes traded and valuations, stating in the latter part of 1Q2010 that has continued into 2Q2010. Overall, market valuations are on average 35.2% and 8.5% higher than 1Q09 and 4Q09 respectively. On the other hand, as a regional average, volumes traded are around 19% lower than both 1Q09 and 4Q09. Although some of the regional markets experienced increased trading volumes compared to 1Q09 (Egypt +53.1%, Dubai +5%, Kuwait +32.2%) but the regional average is kept down by the decline in volumes traded on the Saudi exchange, the largest of the regional capital markets. Volumes across most regional markets have declined over 4Q09 levels, with the exception of Kuwait. Total volumes executed by EFG Hermes increased 32.2% over 1Q09 levels to USD 12.5 billion whilst decreasing over 4Q09. This, coupled with improved investor sentiment in general has seen the Group's fee and commission income rebound, increasing 57% over 1Q09 levels to EGP 267 million.
EFG Hermes continued its dominance of the capital markets across the region. Expansion of the retails brokerage business has ensured that its positioning as the #1 broker is maintained.
Table 5: Contribution of the Different Divisions to Operating Revenue on a Quarterly Basis
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sums and percentages may not add up exactly due to rounding
Sources: EFG Hermes audited financial statements and management accounts
Although Brokerage operations' contribution declined to 44.6% of the total fee and commission income down from 58.5% in 1Q09 it remained the core contributor to the business so far in 2010 as revenue from the other business lines, especially Investment Banking, began to pick up. Closing 3 deals during 1Q2010 Investment Banking is the second contributor to fee and commission income accounting for 27% of the total. In absolute terms, Asset Management fee and commission revenue was nearly flat and its contribution to the total declined to 14% down from 20.7% as the rebound of the other business lines was quicker. Private Equity revenues increased 40% over 1Q09 levels to EGP37 million, yet its contribution to revenues declined to 14.4% down from 16.1% the previous year as Brokerage and Investment Banking revenue increased 20% and over 9 fold respectively.
In line with the Group's regionalisation and geographic expansion strategy the Investment Bank's revenues emanating from outside Egypt totaled 40.4% in 1Q2010 up from 37.9% a year earlier. It is worth noting that that the decline in regional revenues was a direct result of increased Investment Banking deals sealed out of Egypt rather than any absolute decline in revenues booked from the region.
Hereunder is an analysis of the company's main operational divisions:
Brokerage
Market activity across the market where EFG Hermes has physical presence was disparate. With the exception of Kuwait, all these markets witnessed declines in volumes traded over 4Q09 levels ranging from around 22% in Saudi Arabia and nearly 40% in the case of Dubai. Volumes traded across most regional markets were above their levels during 1Q09 with the exception of Saudi Arabia (the largest of the regional markets) and Jordan. Conversely, market valuations were up around 31% over 1Q09 and around 8% over 4Q09 reflecting the creeping in of positive investor sentiment and the better than expected results in several of the largest traded stocks across the region. Given this back drop coupled with EFG Hermes maintaining its market positioning as the #1 broker across the region total value of trades executed by the Group increased 33.2% over 1Q09 to USD 12.5 billion. Consolidated Brokerage fees and commissions increased 20% to EGP 119 million reigning in 44.6% of total fee and commission revenue down from nearly 60% in 1Q09.
The lucrative retail business increased to constitute around 52% of the total fee and commission revenue booked by the Brokerage business as institutional business remains lower than the pre-Lehman era, although picking up. EFG Hermes remains committed to building its retail platform both through expanding its branch network, which reached 10 by April 2010, as well as expanding and improving its online trading platform. Furthermore, clients' use of the Access Products is increasing, especially for entry into the Saudi market. As at March 31, 2010 the total outstanding on both access products was USD 330 million.
Figure 6: Breakdown of Brokerage Commissions Booked by Various Business Categories during 1Q2010
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: EFG Hermes audited financial statements and management accounts
During March 2010, EFG Hermes hosted its eighth annual One-on-One conference. This year's event set a new record in terms of issuing companies presenting (60 issuing companies) and investors (265 investors) attending the five-day event.
Egypt
Although volumes executed on the EGX declined around 25% compared to 4Q09, market valuations improved over both 4Q09 and 1Q09 (+9.9% and +53% respectively), EFG Hermes' total values executed remained very close to the 1Q09 levels at EGP 20 billion. It must be noted however, that EFG Hermes executed several special transactions during 1Q09 the largest of which was worth USD 1.266 billion. Accordingly, the Group's market share of total secondary market executions was 30.5% in 1Q09 compared to 24% during 1Q2010. The main reason for the decline remains the fact that the bulk of the trading on the exchange was on speculative stock which the Group neither recommends to its clients nor does margin lending against. Nevertheless, EFG Hermes managed to retain its leading position as the #1 broker on the EGX. It must be noted however, that the gap in market share between EFG Hermes and its main competitors on the EGX has widened as a result of the trading on speculative stock being usually conducted by the smaller fragmented brokers rather than by EFG Hermes and its main competitors.
Figure 7: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: EGX and EFG Hermes
Online Brokerage operations have continued to pick up. The volumes executed though the Group's online platform remains on the increase and during 1Q2010 increased by 32.1% with the Online Desk within the Egyptian Brokerage operations booking around 10% of the total fees and commissions booked by Brokerage in Egypt. Five new branches have come online in Egypt during since the beginning of 2010 to date.
Revenue from brokerage activity in Egypt increased 4% over 1Q09 levels to EGP 82 millionconstituting 30.6% of the Group's consolidated fee and commission income for the year down from 46.3% in 1Q09 as the other business lines and geographies began to slowly recover.
UAE
Figure 8: Progression of Values Executed and Share of Total Market Executions*
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
*calculated as total values executed by EFG Hermes/ total values executed on the market
Sources: DFM, ADX and EFG Hermes
Volumes traded on both ADX and the DFM decreased c.40% over 4Q09 levels and remained flat over the low levels of 1Q09. Values executed by EFG Hermes in the UAE mirrored the declines in the markets.
Although not as large as the operations in Cairo, online trading in the UAE has continued to pick up. During 1Q2010, executions through the online trading platform in the UAE increased to 10.4% of the total values executed by EFG Hermes.
Revenues from Brokerage operations out of the UAE have increased to the equivalent of EGP 11 million in 1Q2010 up from EGP 9 million a year earlier constituting 4.1% of the Group's total consolidated fee and commission revenue.
Saudi Arabia
Figure 9: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: TADAWUL and EFG Hermes
EFG Hermes share of total market executions in the Kingdom remained in the vicinity of 1% during 1Q2010. With the trading restrictions continuing on several investor groups there has been no major change in the Group's market positioning. Access Products, although provide an entry point to the Saudi market; remain at a low level relative to the overall market capitalisation.
EFG Hermes' strategy for the Saudi operations aims at expanding all the business lines rather than focus on brokerage as the launch pad for the other activities. On the Asset Management front EFG Hermes is beginning to see a trickle in of business that is expected to pick up as the year progresses. It is worth noting that within EFG Hermes' business lines including Asset Management, Brokerage (albeit not in trading the Saudi market) and Private Equity there is a sizeable Saudi client base generating revenue that is not booked (on the accounting front) in Saudi Arabia.
In absolute terms, revenues from the Saudi brokerage activities remained nearly flat at 1Q09 level and booked EGP 3 million in agency fees corresponding to 1.1% of the Group's consolidated fee and commission revenue.
Oman
Figure 10: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: Oman Stock Exchange and EFG Hermes
EFG Hermes executions on the Omani Stock Exchange declined 17.5% over 4Q09 levels to OMR 81 million as the market volumes contracted 27.6% over the same period resulting in an increased share of market executions to 21.5% and an improvement in its market ranking to oscillate between second and third position.
Revenues consolidated from Vision Securities' activities recorded the equivalent of EGP 3 million in agency fees corresponding to 1.1% of the Group's consolidated operating revenues during 1Q2010.
Kuwait
Figure 11: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: Kuwait Stock Exchange and EFG Hermes
The acquisition and integration of IFA has proved quite beneficial to EFG Hermes. With the integration now in its final stages and EFG Hermes' tighter control system being implemented the focus has now turned to improving client service. Today as a broker EFG Hermes is the #1 broker on the KSE and command c.35% of total market executions. The main driver for the growth in market share is driven though the online front, that is being promoted by the few branches IFA already had in Kuwait as well as various promotional functions.
An important regulatory development were introduced onto the market during 1Q2010 that will no doubt further enhance EFG Hermes IFA's market leadership on the brokerage front. The first of these was the passing of the new capital markets law at the end of March 2010. The introduction of new regulations with respect to IPO procedures, trading practices and overall calculations is likely to initially drop volumes traded as stricter regulations are implemented that would curb most of the speculative trading on the market. Given that corporate governance has always been a priority to the Group as a whole, EFG Hermes IFA is fully compliant with the new regulations; so far a stumbling block for most of the other brokers most of whom do not even have a compliance function. In the long run the new regulation will most definitely deepen the market and attract increased foreign institutional investors as transparency increases. It is worth noting that today only around 5% of the market activity is channeled by foreign institutional investors with around 60% of that being executed through EFG Hermes IFA.
The Kuwaiti subsidiary booked the equivalent of EGP 21 million in revenue during 1Q2010 corresponding to 7.7% of the Group's total fees and commissions up from EGP 6 million in 1Q09.
Other Regional Markets
Total executions by the Group on markets where EFG Hermes has no physical presence increased by 17.7% to USD 1,127.5 million up from USD 958.1 million a year earlier. As at the end of 1Q2010 EFG Hermes' share of total market executions in the main markets that it trades but has no physical presence include Qatar (market share 14.5%), Bahrain (market share 13.6%), Jordan (market share 1.7%) and Morocco (market share 0.22%).
Online Trading
During 1Q2010, the IT Division launched a new interface to the online trading platform. The new interface called "Market Beat" is basically a light weight application that allows the user to view activity all the regional markets where EFG Hermes operates in real time, without delay. The new system allows the user to select what they want to view, place normal trading as well as conditional orders.
Research
Figure 12: Development of Active Research Coverage
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Source: EFG Hermes
The Research Department continued to support the Group's operations and expanded active research coverage to over 100 stocks in the region representing over 55% of the region's market capitalization.
In March 2010 EFG Hermes was named the #14 research house covering global emerging markets by the Institutional Investor Magazine. Coming a close second to HSBC and ahead of global houses for the MENA region segment, the polling puts EFG Hermes at a disadvantage as the Group does not cover a lot of the countries within the poll's scope. Nevertheless, this ranking attests to the quality of the research product.
Asset Management
Figure 13: Development of Listed Assets under Management (totals in EGP billion)
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Source: EFG Hermes
Assets under management increased at the end of 1Q2010 to USD 4.54 billion, a 5% increase over the year-end level and up 24% from 1Q09. Egyptian AuMs have generated approximately 41.1% of the total booked revenues due to the prevalence of money market funds within the Egyptian operations with the remainder coming from the Group's regional non-Egyptian asset base.
The Group's flagship fund, the EFG Hermes MEDA ended the quarter with an NAV of USD 322 million up from USD 306 million at the end of 1Q09. On the performance side, the Fund ended 1Q2010 with a performance of 8.4% and on the back of increasing interest in the Fund, the Team is looking to expand the existing distribution channels both regionally and internationally.
The MENA Opportunities Fund, the hedge fund launched in partnership with Harvard Management Company, faired extremely well and ended the quarter with an NAV of USD 466 million. As MENA markets lagged during 2009, the Fund had increased its equity exposure and reshuffled to a relatively concentrated investment strategy to take advantage of potential convergence with other emerging market valuations. The MENA markets outperformed the broader EM at the beginning of 2010, and the Dubai World debt bailout helped rally markets in February and March with the fund achieving +11.2% YTD.
Over the quarter, the Team launched several new products that included the first dedicated fixed income mutual fund in Egypt (as opposed to money market funds), the Bank of Alexandria Fixed Income Fund, in March 2010 with the initial subscription level of USD 32 million. On the discretionary portfolio side, the Team added several new portfolios to be managed on behalf of family offices and pension funds mainly from Saudi Arabia and Egypt totaling around USD 30 million.
Asset Management revenues increased by 6% over 1Q09 levels to EGP 37 million and constituting 14% of the total consolidated fee and commission revenue. It is worth mentioning that EGP 3.9 million of incentive fees were booked during 1Q2010 compared to none booked during 1Q09 and that unrealised incentive fees as at the end of 1Q2010 were EGP 32.4 million compared to none in 1Q2009.
Investment Banking
EFG Hermes Investment Banking enjoyed solid performance during 1Q2010. Although market conditions remained relatively difficult, investor sentiment has significantly improved over the previous year. The Team began to build a solid and varied pipeline of mandates whether on the debt or equity raising or advisory side. This compares to the near non-existence of deal flow during the first part of 2009.
During the 1Q2010, the Investment Banking Division saw the closing of two important transactions; the EGP 550 million rights issue for the Sixth of October Development and Investment Company ("SODIC"), which was the first ever equity transaction in Egypt to be fully underwritten. The transaction was successful and almost fully covered during the first round of subscription thereby eliminating the need for any call on the EFG Hermes underwriting.
With the new direction of conservatively and selectively utilising EFG Hermes' balance sheet to enhance fee generation on the Investment Banking side, the Team also underwrote the EGP 1.5 billion bond issuance for the Egyptian Company for Mobile Services (Mobinil), becoming in the process the first Investment Bank to underwrite a fixed income product in Egypt. As was the case with SODIC, the Mobinil transaction was very well received by the market resulting in no underwriting exposure being booked on Firm's balance sheet.
The SODIC and Mobinil transactions, in addition to advising on the sale of Bank Audi, the Team was able to end the quarter with solid ranking on both the local and regional league tables.
Although the Team enters the second quarter with a strong and varied pipeline both by type of transactions and geographic origin, the Team remains cautiously optimistic and the pipeline is continuously expanding both in types of transaction and industry.
Revenues booked by the Investment Banking Division in 1Q2010 recorded EGP 72 million well above the EGP 43 million booked during the full year 2009. Investment Banking revenues constitutes 27% of the Group's consolidated total fee and commission revenue. It must be noted that if markets continue to experience positive sentiment, the Investment Banking Division could end the year as a major contributor to the fee and commission revenue.
Private Equity
As March 31, 2010 total funds under management with Private Equity decreased to USD 931 million down from USD 961 million the yearend 2009 as Horus I was totally wound down and a few small exits from the CIIC portfolio was completed leaving its current size at EGP 791 million.
The InfraMed initiative (as previously mentioned) is reaching its final closing stages with the "mother" fund expected to finally close in May 2010 with an initial size of around Euro 400 million with a target final size of Euro 1 billion. The Egypt pocket, which EFG Hermes is to manage, is expected to receive at least 20% of the total mother fund and the Team will locally in Egypt raise a further USD 100-150 million. The local fund raising is expected to start by early June.
Concurrently with EFG Hermes' entry into Syria, Private Equity announced the launch of a dedicated Syrian fund with a target size of USD 300 million. Initial market testing has revealed strong appetite for investing in this nascent market and the roadshow is to begin during June 2010.
With the management contract for the CIIC portfolio drawing to a close, the Team was able to renew the contract including an increased management fee, a fee on any investment sold and an increased success fee. This should bode well for Private Equity revenues for the rest of the year as several exits are slated for 2Q and 3Q2010.
On the investment side, the Team is working on several prospects. It is broadly pursuing the same investment strategy with primary focus on defensive sectors and Egypt, Saudi Arabia and the UAE in terms of target countries.
Total revenue booked by Private Equity increased 40% over 1Q09 and reached EGP 37 million in 1Q2010 representing the management fees of existing funds under management and include EGP 11.9 million of success fees booked on the few exits during the year.
Capital Markets and Treasury Operations
Capital Markets and Treasury Operations is the other main component of the Group's revenues. It includes revenues from cash management resulting from the Treasury operations; whether in terms of interest or realised or unrealised capital gains (or losses) on the selective opportunistic investment mainly in fixed income products and any FX gains or losses.
Total revenue from the Capital Markets and Treasury Operations increased to EGP 800 million in 1Q2010 up from EGP 157 million in 1Q09. During January 2010, EFG Hermes sold its entire stake in Bank Audi at a USD 91/share at a premium of 10%-15% to the then ongoing share price with a total deal size of approximately USD 913 million resulting in a one-off EGP 716.6 million capital gain on the sale of the Group's stake in Bank Audi that is recorded in the revenue from Capital Markets and Treasury operations. If removed, total revenues from Capital Market and Treasury transactions booked EGP 82 million, up 13.8% over the similar period the previous year and constituting 23.5% of the Group's net adjusted total revenues.
Net Treasury income as a result from both cash and balance sheet management continued to be a strong source of revenue throughout the quarter and has supported the Group's overall revenue. It must be noted that the overall decrease in revenue from Treasury operations resulted mainly from the decline in the net revenues from investing opportunistically within the fixed income realm declined over 1Q09 (EGP 23.2 million in 1Q09 compared to EGP 7.7 million in 1Q2010) due to the narrowing margins on fixed income products across the region. Furthermore, during 1Q2009, there was a one-off gain of EGP 25 million.
Operating Expenses
Please note that in order for the comparison to depict the Group's true performance the one-off capital gain on the sale of Bank Audi for EGP 716.6 million is removed from the total revenues for 1Q2010 in the write up following the table.
Table 14: Breakdown of Operating Expenses
Please refer to the attached pdf
http://www.rns-pdf.londonstockexchange.com/rns/0150M_1-2010-5-17.pdf
Sources: EFG Hermes audited financial statements and management accounts
Management continued to administer tight control over the operating expenses but nevertheless, expenses increased 39.3% over 1Q 2009 to EGP 205 million up from EGP 147 million; 88% which relate to the fee and commission generating business. The increase is predominantly a result of increases in employee expenses and promotional expenses as the full effect of the renewed management deal came into play, the salary cuts were reversed coupled with an increased staff body and the largest ever One-on-One conference EFG Hermes has hosted took place in March 2010. Having said that, total operating expenses declined substantially when compared to total revenue, especially at the level of the fee and commission generating activities where fully loaded operating expenses although increasing by 35.6% have actually dropped to 67.8% of net consolidated fee and commission revenue compared to c.80% a year earlier.
As markets rebounded and EFG Hermes expanded into retail brokerage and began hiring for the regional expansion and for the newly introduced facets within the business lines, the number of employees increased to 1,025 as at the end of 1Q2010 up from 960 as at the end of 1Q09. Employee costs remained the major portion of operating expenses given the nature of the business that relies on hiring and retaining the best talent available to power the business. Fully loaded employee expenses increased 68.2% over 1Q09 to EGP 137 million and constituted 66.9% of total operating expenses (55.3% in 1Q09). The fixed employee costs have increased 22.1% over 1Q09 levels compared to the 7% increase in the number of employees over the similar period. It must be noted that there were several senior hires that were added, mainly at the managing director level, to the Team during the latter part of 2009 whose respective packages were not within the 1Q09 employee expenses. Furthermore, the positive effects of the salary cuts were apparent in the 1Q09 employee expenses, a feat that was reversed in November 2009. However, the main reason for the increase in employee expenses is the increase in the Management Incentive Scheme component as a result of the renewal of the Management Deal in 2009 and as previously mentioned, the full effect of which will begin in 2010 (both as a result of the increased number of participants on the scheme and the average cost per share at which it is financed). As a result, fully loaded employee expenses relating to the fee and commission business increased to 66.5% of the total expenses relating to fee and commission income up from 57.2% the previous year but remained at around 45% of the total operating revenue emanating from the fee and commission income. For the Firm as a whole employee expenses constitute 39.2% of the Group's total revenues (excluding the one-off capital gain from the Bank Audi sale) and 66.9% of total operating expenses.
On an absolute basis the other operating expenses (that include occupancy expenses, office expenses, communication expenses (data and telecommunication), travel and marketing expenses, promotion and advertising expenses and consultant and service fees) have only slightly increased to EGP 68 million in 1Q2010 up from EGP 66 million in 1Q 2009 as a result that of several expense categories declining as the stringent expense policy remained intact while others grew as a result of the increased business levels over the quarter.
The two components of operating expenses that witnessed substantial increases over 1Q09 were promotional expenses and third party fees. Promotional and advertising expenses increased nearly three-fold over 1Q09 to EGP 9.1 million. The major increase came from the cost of the annual One-on-One conference as the level of attendance on both the investor and issuing company side set the record of the highest ever. In addition, EFG Hermes began to resort to newspaper advertising to support the retail side of the business. Promotional expenses constituted 2.6% and 4.4% of total adjusted revenues and total operating expenses respectively in 1Q2010 up from 1.03% and 2.3% respectively in 1Q09. Third party fees increase by 49.3% over 1Q09 (3% of adjusted revenues and 5.1% of operating expenses) as a result of increased business within all divisions as they begin to prepare for the launch of new products compared to a time in 1Q09 when the capital markets were virtually shut down. In addition, during 1Q2010, some of the third party fees related to the divestment of the stake in Bank Audi. Having said that, consultants and service fees as a whole decreased 16.5% over 1Q09 to EGP 14.9 million as a result of savings on legal fees.
As the Group's footprint continued to increase both regionally and within Egypt two constituents of the other operating expenses increased over 1Q09, namely occupancy and communication expenses. Occupancy expenses increased 19.7% over 1Q09 to EGP 10.1 million mainly as a result of the branch network in Egypt coming online. Telecommunication expenses increased 9.6% over 1Q09 levels as the Firm continued to ensure smooth connectivity between its increasing physical locations and the start of the operations of the disaster recovery sites.
All other major expense items witnessed declines. Travel expenses declined as the full effect of the travel policy introduced in 2009 became more entrenched in the modus operandi across the Group in spite of the increase in absolute travel due to business picking up. Travel expenses declined 10.9% over 1Q09 to EGP 5.3 million. Data communication also declined by nearly 12% over 1Q09 to EGP 7.2 million.
With the rebound of capital markets in general and the cautious improvement of market sentiment, coupled with the relative control of operating expenses, EFG Hermes net operating profits increase over 4 fold to EGP 861 million in 1Q2010 up from EGP 180 million in 1Q09. The increase is 50.2% (EGP 144.6 million up from 96 million in 1Q09) if adjusted revenues from Bank Audi, whether the one-off capital gain or the consolidated portion of revenues in 1Q09 are neutralised. 59.4% of the adjusted net operating profit emanates from the fee and commission revenue generating activities while the remainder is a result of the capital markets and treasury operations. Net operating profits from the fee and commission revenue business increasing over 4 fold to EGP 86 million and improving the net operating margin to 32.2%. Overall, adjusted net operating margins increased to 41.3% in 1Q2010 up from 39.6% in 1Q09. More importantly, as the fee and commission business began to pick up and despite the increase in employee costs mentioned above, the net operating margins on the fee business has improved over 1Q09 recording 32.5% in 1Q2010 up from 20.5% the previous year. Although not as high as the margins on the fee generating business in 2007 and the first half of 2008 (c.55%) the healthier margin is a step toward improving margins for the fee generating business.
Other Expenses
Other expenses for 1Q2010 include the usual depreciation for EGP 9.8 million.
In light of the tremulous market conditions that are currently prevailing in Europe and that Management believes may adversely affect the real estate market in the Middle East. A careful and diligent study of the EFG Hermes' real estate portfolio was conducted and a total of EGP 93.5 million of related asset markdowns and provisions were expensed during 1Q2010.
Balance Sheet
EFG Hermes' balance sheet remains strong and more liquid; an asset in volatile markets especially in terms of counter-party risk as well as having the firepower to expand its business whether organically or through acquisitions at anytime. The already high levels of cash have been augmented by the sales proceeds of Audi and cash, cash equivalents and other investments (namely T/Bills, bank deposits and investment in money market funds) increased to EGP 6.96 billion up from EGP 2.37 billion at the end of 2009. Around 60% of the cash balances emanating from the sale of Bank Audi is held in USD.
Total receivables and payables resulting from operations resulted in a net payable to clients of EGP 96.5 million incurred mainly due to the normal course of business concentrated within the Brokerage and Asset Management divisions. This is down slightly from EGP 148 million as at the end 2009.
The increase in projects under construction from EGP 311.9 million as at the end of 2009 to EGP 350.5 million as at the end of 1Q2010includes the continued work on the Group's new headquarters at the Smart Village in Egypt, the disaster recovery sites in both Egypt and the UAE, the increased branch network and the new premises in the UAE. It is worth noting that most of the Cairo-based staff has moved from the dispersed locations to the state-of-the-art facilities at the Smart Village starting mid-April 2010 with the remaining teams due to move by end of May at the latest.
In total, the available for sale investments increased by EGP 137.4 million over the year-end 2009 to EGP 915.4 million, being mainly existing positions (such as the stake in SODIC) and seed capital into EFG Hermes' Private Equity and Asset Management funds. EFG Hermes continues to have no Principal and Proprietary Trading accounts. A large part of the increase is the due to the increase in the market valuations that have caused the value of the Group's stake in SODIC and the NAV of the seed capital of the listed EFG funds to increase.
The decrease of the total, current and non-current, amounts relating to the EFG Hermes Employee Trust from EGP 412.2 million as at the end of 2009 to EGP 380.1 million as at the end of 1Q2010 reflects the portions due to the members that have already completed a vesting period.
On the asset side, the major change over the year-end balance sheet is the decline of the investment in subsidiaries and associates from EGP 4.7 billion to EGP 11.8 million as a result of the Group's divestment of the sale of the Bank Audi stake that resulted in the increase in cash and cash equivalents as discussed above.
On the liability side, the Group continues to carry very little bank debt. The only debt outstanding as at the end of 1Q2010 is a total of EGP 88.3 million of long term loans from DEG and IFC, this is down from EGP 88.3 million as at the end of December 2009.
As at the end of 1Q09 shareholders' equity increased to EGP 8.89 billion up from EGP 8.74 billion as at the end of 2009.
Taxes
In absolute terms EFG Hermes' tax bill increased substantially over 1Q09 levels to EGP 261.6 million up from EGP 19.1 million. It must be noted however, that EGP 234.7 million of the total provision for income tax related to capital gains tax on the sale of the stake in Bank Audi. Accordingly, the provision for income tax that relates to the on-going taxable business is EGP 26.9 million.
Profitability
Net profit after tax and minority interest increased 3.5 times over 1Q09 level to EGP 483.6 million. Of the bottom line, EGP 51.04 million relate to the on-going fee and commission business up from EGP 10.8 million a year earlier. With the improved conditions across regional markets, after tax margins on the fee and commission income tripled to 19.1% up from 6.3% in 1Q09 in spite of the increase in associated operating costs that have increased as a result of increased hiring and build up of new products that have not yet booked any meaningful revenues.
Recommended Dividend Payout
The Board of Directors is recommending the distribution of EGP2/share as a special dividend, subject to approval by EFG Hermes Holding Company's general assembly, in light of the recent divestment of the Group's stake in Bank Audi. This is in line with the announcement in the previous earnings release dated March 4, 2010.
The proposed dividend of EGP2/share corresponds to a total dividend bill of EGP765.428 million.
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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. Such forward looking statements by their nature may involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by these statements. Examples may include 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. Furthermore, forward looking statements contained in this document that reference past trends or activities should not be taken as a representation that such trends or activities will continue. EFG Hermes does not undertake any obligation to update or revise any forward looking statements.
Accordingly, readers are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made.
This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities or interests described within it in any jurisdiction. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.
EFG Hermes Holding SAE has its address at 58 El Tahrir Street, Dokki, Giza and has an issued capital of EGP 1,939,320,000.
المجموعة المالية هيرميس القابضة شركة مساهمة 58 شارع التحرير- الدقى- الجيزة رأس المال المصدر: 1,939,320,000 جم
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Stock Exchange & Symbol:
Cairo: HRHO.CA London: HRHOq.L Bloomberg: EFGH Reuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM
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EFG Hermes (Holding Main Office)
58 Tahrir Street Dokki Egypt 12311 Tel +20 2 333 83 626 Fax +202 333 78 038
Building B129, Smart Village, Km 28 Cairo Alexandria Desert Road, 6 October, Egypt 12577
Tel +20 2 353 56 499
Fax +20 2 353 70 942
efg-hermes.com
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