Last checked at 4 Mar 2009 07:30
FY2008 Earnings Release - 4 March 2009
2008 in Review
EFG-Hermes today reported consolidated net revenue of EGP2.21 billion and net profit after tax and minority interest of EGP933.5 million for the fiscal year ending December 31, 2008. Total revenue declined 15.3% (FY2007 revenues EGP2. 6 billion) while decline in net profit was 27.7% (FY2007 net profits EGP1.292billion).
Please find below a few key performance indicators:
Fee and commission income declined 5.8% to EGP1.62 million in 2008 down for EGP1.72 billion in 2007;
Prop. and principal trading contributed a positive EGP352 million in 2007 and a negative EGP84 million in 2008;
Financial impairment, booked in 4Q08, of EGP105.2 million;
Substantial decline in margin trading facilities to clients from a peak of USD250 million during the year to approximately USD30 million without meaningful losses resulting in the decline of gross receivables from EGP2.6 billion in 2007 to EGP958 million in 2008;
As of December 2008, interest earning cash stood at USD500 million, excluding investments in Banque Audi, SODIC, Nile City, seed capital in EFG-Hermes managed funds and shares purchased under the new Management Incentive Scheme or for cancellation.
In the end of 2008, EFG-Hermes has taken measures to reduce total operating expenses going forward. These measures included redundancies, salary reductions for the top 200 employees, the implementation of a new expense policy and the relocation of certain functions to Egypt, all of which should lead to a meaningful decline in operating expense.
1 Please refer to table 2 for breakdowns
2 Net profit after tax and minority interest has been restated up to EGP1.29 billion in 2007 up from EGP1.28 million due to a change in accounting policy relating to fair value of property investments; please refer to note 27 in the audited financial statements
Market Commentary
2008 was a tough year. The foundations of capitalism were shaken to the point of collapse, prompting many governments around the world to reassert their role. The world witnessed some of largest ever one year declines in asset prices, and witnessed investor optimism shrink, with Emerging Markets being among the hardest hit.
While relatively resilient in the early parts of the year, the myth of "decoupling" from the global economies was shattered as the regional economies and markets became painfully aware of how vulnerable our region is to a combination of unprecedented turmoil in the global credit markets, global economic slowdown, and declining oil prices.
The continuation of the global credit and liquidity crunch through the fourth quarter 2008 and early 2009 increased volatility across all the regional markets but to varying degrees. Equity valuations across all regional markets have dropped on average 52% versus 2007 levels with the hardest hit being the most active and liquid markets in the region including Dubai (down 72.4%), Saudi Arabia (down 56.5%) and Egypt (down 53.9%), with real estate and financial services stocks being hardest hit. Trading volumes also declined in key markets such as Saudi Arabia (down 22.7%) and Dubai (down 19.5%). However, other markets witnessed continued growth over the full year with Egypt and Abu Dhabi up 34.9% and 32.3% respectively and Kuwait ending the year with slightly higher volumes than 2007. These full year figures largely reflect the extraordinary strength of the markets in the first half of 2008 as the second half of the year witnessed accelerating declines across the board. Valuations and volumes traded in 4Q08 declined by an average 52% and 50% versus 4Q07 across all regional markets.
Arguably in 2008, the financial markets witnessed the most severe crisis in decades, however, for EFG-Hermes the game plan has not changed. Amidst this unprecedented market turmoil EFG-Hermes continued to deliver profitability, albeit at lower levels as volumes declined, redemptions increased and investor sentiment became less conducive to either launching new funds or closing Investment Banking deals. Management believes that the Group has the right business model, the right country focus and is looking to solidify the Group's positioning in anticipation of eventual market improvements. In recent months, the Firm has moved aggressively to further improve its structure in the rapidly changing market environment by engaging in initiatives including:
- A deliberate and focused reduction of balance sheet-intensive businesses including a resizing of the margin lending business and the limits on the DVP transactions, the exit of proprietary trading strategies and the closure of the principal trading account;
- Several measures aimed to reduce the overall cost base tackling both operating and non-operating expenses.
Nevertheless, it would be unrealistic to assume that the Firm has not and will not be affected during the coming months as volumes have declined and sentiment has made it difficult to bring any ECM transactions to the market. Having said that, such market conditions allow EFG-Hermes to focus on increasing the efficiency of the Investment Banking operation, upgrading its infrastructure and solidifying its market positioning as it reaps the benefits of strict self regulation and adherence to best practices in corporate governance, a strong and liquid balance sheet and an unparalleled regional footprint.
Table 1: Performance of Markets in the Arab Region
Please refer to the attached pdf
Sources: Regional markets and EFG-Hermes
Business Highlights
Total revenues declined during 2008 to EGP2.2 billion down from EGP2. 6 billion during 2007 predominantly booked through the operations of the Investment Bank; a 15.3% decline compared to declines in equity values in the markets where EFG-Hermes operates in excess of 50%;
Total revenues booked from the Investment Bank declined 26.6% to EGP1.65 billion in 2008 down from EGP2.25 billion in 2007. Fee and commission income declined only 5.8% reflecting EFG-Hermes' stronger positioning vis-à-vis its regional competitors. Prop trading results moved from a positive EGP352 million in 2007 to a negative EGP84 million in 2008;
Net operating profit reflecting the Group's core agency based business, declined 20.4% from 2007 to EGP732.2 million and an operating margin of 45.2% declining from 53.5% a year earlier;
Net profit after tax and minority interest decreased to EGP933.5 million down from EGP1.29 billion in 2007; a 27.7% decrease resulting in a margin of 42.6% compared to 50.6% in 2007 after taking an impairment and write down charge of EGP105.2 million in the fourth quarter;
After locking in profit over the first half of the year, as markets declined the Principal account booked a net loss of EGP84 million for the full year 2008 compared to a net gain of EGP352 million in 2007 (including EGP121 million gain on the sale of SODIC shares). Between inception during 2H07 and liquidation in October 2008 the Principal account booked a net gain of EGP147 million;
Regional operations during 2008 accounted for 42.1% of the total fee and commission income up from 34.8% in 2007;
The Brokerage arms in Egypt and the UAE (on the DFM and ADSM) continued to maintain their number one positions and the Saudi subsidiary continuing to be the #1 independent brokerage company. Furthermore, EFG-Hermes is continuing to integrate the newly acquired Vision Securities (#2 position starting September) and Gulf Brokerage House (renamed EFG-Hermes IFA, #2 position starting September) operations into the platform;
The Research Department finished the year with a total of 76 companies under coverage versus 60 at the end of 2007. Extensive company, economic and strategy coverage of Egypt, the UAE, Saudi Arabia, Qatar, Kuwait, Oman, Lebanon and Morocco continue to position EFG-Hermes Research as the leading franchise in the region;
Total assets under management within the Group decreased to USD5.35 billion, USD4.2 billion of which are in listed equities and money market funds and the remainder in private equity. AuMs in listed equities declined since the end of 2007 with 84.5% of the decline as a result of market conditions;
Total realised incentive fees within Asset Management were non-existent during 4Q08 that was traditionally one of the periods where a sizeable portion of the incentive fees are booked. Total incentive fees booked during 2008 were EGP218.1 million down from EGP379.1 million in 2007;
During 2008 the Investment Banking Team closed 8 transactions raising USD862 million in equity for its clients and M&A deals for USD720 million compared to 13 transaction in 2007 totaling USD6 billion;
During 2008, Private Equity launched its first transaction based initiatives, namely Sahara North Baharia, closed Technology Development Fund II and the initial closing of the Horus Tourism Investment Company;
As at the end of the year, EFG-Hermes' shareholding structure remained dominated by institutional shareholders. The top 50 shareholders own 78.5% and include 33 western institutions.
Performance
Total Revenue
Table 2: Breakdown of Total Revenue
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* net of FX losses and interest expense
** no Principal Account in 9M07, major amount is gain on sale of SODIC for EGP121 million; includes unrealised loss on trading investments
of EGP37.4 million in FY2008 (EGP7.9 million in FY2007)
Sources: EFG-Hermes audited financial statements and management accounts
Total consolidated revenue booked during 2008 reflected the financial market crisis enveloping all global and regional markets. After booking total consolidated revenues of EGP1.4 billion during 1H08, 2H08 proved more challenging as markets deteriorated. Total net consolidated revenues for the full year reached EGP2.16 billion down 15.3% from 2007 levels. Fee and commission income remained the core contributor to total revenue accounting for 75.2% of total consolidated revenues. The decline in revenues generated from Treasury operations mainly reflects the use of a large portion of the cash balance in the Principal account (until October 2008), and the increased level of margin lending and DVP transactions which peaked during August 2008 and have since been brought down significantly.
Operating Revenues
Highlighting the weakness of the end of 2008, the 4Q08 total operating revenue is similar to revenue levels witnessed during the low quarters of 2005 and 2006. The sharp decrease in values traded as well as a noticeable decline in interest from both regional and international clients led directly to a lack of incentive fees and a decline in volumes executed on all regional markets. Fee and commission revenue booked by the Investment Bank (excluding treasury operations and Prop. Account) reached EGP158 million in 4Q08 down from EGP422 million in 3Q08, EGP1.18 billion in 1H08 and EGP768 million during 4Q07 (of which EGP330.2 million were incentive fees). The sharp decline echoes the year-on-year declines in regional market values and volumes in 4Q08 of around 38% and 26% respectively which led to overall lower volumes executed in spite of EFG-Hermes' increased market shares. In addition, the lack of incentive fees that are usually booked during 4Q08 and the loss incurred as a result of the closure of the Principal trading account totaling EGP123 million (excluding impairment and write downs) materially impacted the 4Q08 figures.
On an annual basis, the total operating revenues for 2008 reflect the stellar market conditions that prevailed during the first part of the year as well as the Firm's ability to grow its core business. Operating revenues for the full year decreased 25.8% to EGP1.54 billion in spite of booking a net loss of EGP84 million on the Principal account during the year. Excluding the Principal account for 2007 and 2008 and the restatement resulting from the change in accounting policy mentioned above, operating revenues for 2008 declined 5.8% to EGP1.62 billion.
Table 3: Contribution of the Different Divisions to Operating Revenue on an Annual Basis
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* excluding Treasury Operations; no major Principal Account until 3Q07, EGP121 million relates to sale of SODIC in 2007
Sources: EFG-Hermes audited financial statements and management accounts
Table 4: Contribution of the Different Divisions to Operating Revenue on Quarterly Basis
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* excluding Treasury Operations; no major Principal Account until 3Q07, EGP121 million relates to sale of SODIC in 2007
Sources: EFG-Hermes audited financial statements and management accounts
In general revenue booked by Brokerage increased over 2007 levels. Expansion to new regional markets, either through physical presence or remotely, as well as continued expansion of retail client business has helped maintain volumes executed and market shares during the latter part of the year. As executions by institutional clients and HNWI fell to all time lows, this expansion of the business was crucial in limiting the decline in operating revenues during 2H08.
Continuing the Group's regionalisation and geographic expansion operations during 2008, regional operations accounted for 42.1% of the total fee and commission income, up from 34.8% a year earlier.
Hereunder is an analysis of the company's main operational divisions:
Brokerage
Despite increasing signs of the global financial difficulties, the regional markets witnessed continued rallies during the first part of the year as the theory of de-coupling of emerging markets from developed markets took hold. Unfortunately, the theory proved wrong and global emerging markets, including the MENA markets, succumbed to the downturn, giving up all of the recent gains in just a few months during the later part of the year. The selling frenzy that ensued combined with the collapse or near collapse of many of the largest global financial institutions severely dampened sentiment across all regional markets with values traded dropping to levels not witnessed over the past 4 to 5 years. Having said that, although values traded have dropped on average of around 50% during 2008 (4Q08 versus 4Q07) across the MENA markets, the bulk of the decline was valuation related rather than a decline in volumes traded which have, in a number of regional markets, actually increased over 2007 levels.
During these softening market conditions EFG-Hermes managed to retain its leadership positions across all the markets in which it operates due to its widespread distribution platform, its varied client base and most importantly its strict internal policies, procedures and compliance that have helped minimise losses due to client bankruptcies or delayed settlement. Furthermore, the Group's positioning across several markets has ensured that the risk of operating in a mono-market is mitigated and has paid-off.
The Brokerage Division ended the year in the #1 position in all the markets in which it operates, excluding the two recent additions of Oman and Kuwait where the firm has climbed to the #2 position in just a few months in spite of introducing more stringent policies and processes to integrate the subsidiaries into the platform. It is worth noting that EFG-Hermes IFA (Kuwait) climbed to the #1 position during February 2009. Trading continued through the year on markets where the Firm has no physical presence with the process becoming more instilled and the revenues booked growing.
Egypt
Despite a 54% decline in the index on the Egyptian Stock Exchange and a 34.9% increase in volumes traded during 2008, the value traded by EFG-Hermes' Brokerage arms increased 71.4% over 2007 levels to reach EGP213 billion over the year. This was reflected in the increase in net brokerage commissions by around 120%. Capitalising on its domination of the market during the early part of the year and the prevalent market conditions during 4Q08 that allowed it to solidify its position in the market, EFG-Hermes brokerage arms executed around 43% of the total market in 2008 remaining by far the #1 broker on the EGX. The success of the Group's strategy in adding retail brokerage, whether through call centres, branches or online, to the business model since 2007 carried it through the period when institution sales retreated. This has paid off with the firm being able to maintain its leadership of the market despite trading being dominated by retail activity during the latter part of the year.
On the operational level, Brokerage in Egypt continued to increase its client base, including among other issues opening branches. During 2008, EFG-Hermes opened 3 retail branches around Cairo that provide customer service activity to the retail clients.
Figure 5: EFG-Hermes Executions and Share of Total Market Executions
Please refer to the attached pdf
Sources: EGX and EFG-Hermes
Revenue from brokerage activity in Egypt increased 25.4% over 2007 levels to EGP545 million constituting 33.6% of the Group's consolidated fee and commission revenue.
UAE
Figure 6: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: DFM, ADX and EFG-Hermes
Brokerage in the UAE continued its position as the #1 broker in the country as value executed by EFG-Hermes increased 40.5% over 2007 levels to USD22.1 billion compared to traded values decreasing 72.4% and 47.5% on the DFM and the ADX respectively over the same period. Over the year, EFG-Hermes' market shares on both the DFM and ADX peaked during 3Q08 to around 24% on each market. Overall, the market share for the full year 2008 was 19.1% of the executions on the DFM and 17.6% on the ADX. EFG-Hermes was able to increase its market share lead over its closest competitors over the year as the general global financial crisis impacted the Group's key competitors to varying degrees. EFG-Hermes is increasingly executing on the DIFX as volumes and liquidity on the exchange slowly picks up. Total executions for 2008 on the exchange reached USD317.1 million. Although not a significant contributor to revenues in the UAE, trading on the DIFX completes the spectrum of services offered by EFG-Hermes by covering all the exchanges in the country.
Brokerage in the UAE has become the regional hub into which brokerage operations in the lower GCC reports. Accordingly, since the acquisition of the Omani brokerage operations the team in the UAE has been responsible for the integration of the new firm, instilling the procedures and processes that will bring the operations up to the EFG-Hermes standard.
Brokerage operations out of the UAE have increased 9.1% over 2007 to reach the equivalent of EGP150 million and constituted 9.2% of the Group's total consolidated fee and commission income.
Saudi Arabia
Figure 7: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: TADAWUL and EFG-Hermes
The Saudi market was one of the worst affected regional markets during 2008 with both the trading values and volumes declining drastically. The main index dropped 56.5% over the year coupled with a 22.7% drop in volumes traded. Market cap/GDP fell to 52.7% as at the end of the year down from 133% a year earlier.
Over 2008 EFG-Hermes executed SAR27.2 billion worth of trades on Tadawul with an average market share of 1.6% over the year. Business in the Kingdom picked up, albeit during challenging market conditions, with the Group's market share solidifying it as the #1 non-bank broker on the Exchange. It must be noted that the drop in EFG-Hermes' market share during 4Q08 reflects the increased activity on the part of the pure retail clients, a segment which the Group is not yet firmly entrenched.
During 3Q08 the Capital Market Authority began allowing foreign participation in the market through swaps and participation notes. EFG-Hermes KSA received approval to conduct this business during August 2008 and began offering the product, named Abwab, to clients starting October 2008. General market turmoil and uncertainty across the globe has dampened the volumes that were expected. However, EFG-Hermes with its institutional client base and an established presence in the KSA is well positioned to capture the increased business once meaningful foreign inflows resume.
Brokerage in Saudi Arabia has locked in the equivalent of EGP35 million in agency fees, corresponding to 2.2% of the Group's consolidated fee income. The Saudi operation has also begun to book Asset Management revenue (EGP5.4 million in 2008) after the launch of the Saudi Fund in the latter part of June 2008.
Oman
Figure 8: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: Oman Stock Exchange and EFG-Hermes
During 2Q08 EFG-Hermes acquired a majority managing stake in a brokerage firm in Oman, Vision Securities, for a total consideration of USD15.3 million. At the time of acquisition the Company averaged 9.2% market share (18.4% of total market executions), excluding EFG-Hermes business that was channeled through other brokers until the acquisition was completed. Since then, Vision Securities has climbed to the number two position on the Muscat Stock Exchange.
Since the acquisition EFG-Hermes continues to integrate Vision Securities' operations, incorporating the company into the Group's platform and introducing Compliance procedures and workflow. As EFG-Hermes began channeling its client business in Oman through Vision Securities, the Company's share of total market executions increased to 29.9% in 3Q08 and 24.3% in 4Q08 despite EFG-Hermes Compliance Department limiting trading on all accounts that did not have proper EFG-Hermes level of documentation.
The portion consolidated from Vision Securities' activities recorded the equivalent of EGP21 million in agency fees, corresponding to 1.3% of the Group's consolidated operating revenues during 2008.
Kuwait
Figure 9: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: Kuwait Stock Exchange and EFG-Hermes
During August 2008 EFG-Hermes acquired a controlling management stake in Gulf Brokerage Company in Kuwait in the middle of August 2008 for a total consideration of USD125 million. Since the acquisition, the Company has been renamed EFG-Hermes IFA and the integration process is well under way. Over 2008, EFG-Hermes IFA averaged 25.4% of the markets total executions ending the year in second position overall and has since climbed to the #1 position in February 2009.
The portion consolidated from the Kuwaiti subsidiary in 2008 is the equivalent of EGP40 million corresponding to 2.5% of the Group's total operating revenues for the year.
Other Regional Markets
Trading on markets where EFG-Hermes has no physical presence began in 2007 with the introduction of the "trading a region" concept into Brokerage rather than trading separate markets. The main markets where EFG-Hermes executed significant business without being on the ground were Oman, Kuwait and Qatar. With the acquisition of local operations in Oman in April 2008 and another in Kuwait in August 2008, the markets which the Team focused on shifted to Qatar, Jordan, Morocco and Bahrain. The bulk of the activity and hence the commissions is due to executions on the Qatari stock exchange.
Online Brokerage
EFG-Hermes' online brokerage portal, introduced towards the end of 1H07, has been steadily growing, especially in Egypt. Values trades through the portal increased by 167.3% over the year to reach USD2.3 billion; 76% of which is Egypt based and which has more than tripled over the year. Today around 7,000 customers actively use EFG-Hermes' online portal up from around 3,000 as at the end of 2007. Online services have been introduced into Saudi Arabia during the latter part of 2008 but executions through the portal there so far remain minimal
Research
Figure 10: Development Active Research Coverage
Please refer to the attached pdf
* active coverage defined as at least one note published in the past 6 months
Source: EFG-Hermes
The Research Division increased its stock under coverage to 76 stocks at the end of 2008 up from 60 at the end of 2007. Overall, the number and frequency of reports have increased markedly through the second half of the year.
Expanding coverage of stocks to maintain EFG-Hermes' regional leadership remains at the heart of the Division's strategy. Extensive company, economic and strategy coverage of Egypt, the UAE, Saudi Arabia, Qatar, Kuwait, Lebanon,Morocco and Oman continue to position EFG-Hermes Research as the leading franchise in the region.It is worth noting that due to market requirements in the Kingdom, all research published in Saudi Arabia is distributed simultaneously in both English and Arabic, a key differentiating factor for the firm.
Over the year the Team introduced the Saudi Yearbook along the lines of the annually published Egypt and UAE Yearbooks. The Strategy Team in cooperation with EFG-Hermes' Sales Team introduced a Focus List in 3Q08 which is regularly reviewed and which contains the Firm's top stock picks for the given period.
Confirming EFG-Hermes' continuous publication of high quality dependable research, the firm was ranked the overall #1 research house for a second year running in the MENA region in a poll conducted by Euromoney Magazine and published in its August 2008 issue. Over 2009 the role of the Research Division will be key to maintaining the Group's reputation and client base during challenging market conditions.
Asset Management
Figure 11: Development of Listed Assets under Management (totals in EGP billions)
Please refer to the attached pdf
Source: EFG-Hermes
2008 was a particularly difficult year for the MENA markets. The MSCI Arabia and the MSCI Egypt indices declined by 55% and 54% respectively. Assets under management peaked during 2Q08 at USD7.73 billion (of which 29% were in money market and fixed income funds). However, the year ended with the assets under management falling sharply to USD4.2 billion down from USD6.5 billion at the end of 2007, a 35.8% decline. Of the year-on-year decline 84.5% is due to market effect. The net cash outflows totaled USD361.8 million with the bulk coming from the money market funds run out of Egypt which had a net cash outflow of USD806.5 million. On a geographic basis the change in assets under management over the year is considerably different. Assets under management run on a regional level have declined by a total of USD700 million as a result of the acute market related decline (USD1.4 billion) which marginalised the net cash inflows over the year. Within the Egypt only mandates, the bulk of the 39.5% decline (USD1 billion) to USD2.5 billion over the year was predominantly as a result of net cash outflows from money market funds.
Over the year the breakdown of assets under management became more skewed to those with a regional focus rather than the mandates that are Egypt centric. As at the end of the year 40% of the assets under management were in funds and portfolios with a regional focus up from 36.6% a year earlier. The major growth in the regional business came from the managed funds including the EFG-Hermes MEDA Fund and the MENA Opportunities Fund which now represent roughly 29% of AUMs up from 26% a year earlier.
On the Business Development side, the Team launched several differentiated products that expanded the spectrum of funds offered by EFG-Hermes.
On the performance side, the funds managed by EFG-Hermes continue to outperform their peers, whether in Egypt or regionally. The MENA Opportunities Fund received the "Best Newcomer" award from Terrapin's Hedge Funds World during 2Q08. Over the year, the EFG-Hermes MEDA Fund's overall size dropped due to the pronounced decline in the NAV, it ended the year -42.1% outperforming all regional peers by at least 500 basis points and outperforming the MSCI Arabian Markets Index by 12.9%. The MENA Opportunities Fund had increased to USD1 billion in the early part of the year but ended at USD644 million with the bulk of the decline emanating from the market. As market conditions continued to deteriorate into the fourth quarter, the Team adjusted the investment strategy in both Funds accordingly.
The EFG-Hermes Saudi Arabia Equity Fund launched on 17th June 2008 ended the year beating all other Saudi-specific funds in the region and outperforming the MSCI Saudi Arabia Domestic Index by 80 bps.
The outperformance of the relevant MSCI indices was also echoed in the performance of the EFG-Hermes Egypt Fund which ended the year outperforming the MSCI Egypt Index by 10%.
Revenues of the Asset Management business decreased 3.2% to the equivalent of EGP494 million in 2008 from EGP511 million the previous year. Total realised incentive fees during 2008 were EGP218.1 million compared to EGP379.1 million in 2007. Asset Management revenues contributed 30.5% to the Group's consolidated fee and commission income.
Investment Banking
Coming off a spectacular year in 2007, the Investment Banking Team encountered a tougher market during 2008. The execution of deals became increasingly difficult as the year progressed with the Egyptian market being impacted in May after the Government's May 5th decisions relating to energy subsidies and free zones. The slowdown then spread to the rest of the region during the summer, with the markets essentially closing as the global financial crisis set in over the late summer months. Nevertheless, Investment Banking sealed eight deals during the year, raising USD862 million in equity for its clients and closing USD720 million worth of M&A transactions, down from thirteen transactions during 2007 worth a total of USD6 billion.
Despite the difficult market conditions, the Team fared well on a relative basis, booking EGP217 million of total revenue. The revenue booked was a result of a number of high profile transactions. The simultaneous and unprecedented closing of two significantly large initial public offerings during May 2008 on the Cairo & Alexandria Stock Exchange attested to the Group's distribution and placement capabilities not only in the region but also its penetration of a large base of investors and fund managers in the West with investment portfolios earmarked for the region. The first of the IPOs was the USD273 million IPO of Maridive Oil Services. The second equity offering, comprising of both a local equity offering on EGX and a GDR offering on LSE, was a USD343 million IPO of Palm Hills Development. 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 Group's strong performance continued into 3Q08 with a large private placement in the UAE (Gulf Housing Solutions - USD141 million), a private placement (Maridive & Oil Services - USD156 million) and an M&A transaction in Egypt (Tarek Nour Holding - USD70 million) in Egypt. The latter transaction was the first transaction to be listed on NILEX, the nascent Egyptian equivalent of AIM. As market conditions began to deteriorate towards the end of 3Q08 and into the fourth quarter, activity within the Investment Banking division began to markedly slow down. However, the Team managed to advise on the acquisition of Forall Confezioni S.p.A (an Italian retail network and brand owner) by Arafa Holding. The significance of this deal was not its size (Euro25 million) but that it was a cross border acquisition for a repeat client and hence attests to the Group's ability to maintain its client base as well as ensure a continued deal flow.
Revenues booked by the Investment Banking Division during 2008 represent a 48.6% decline over 2007 levels to EGP232 million contributing 14.3% to the Group's consolidated revenues.
Private Equity
The target for 2008 was to transform the Private Equity business into a regional play rather than an Egypt focused operation, scale the business and substantially increase the funds under management through 2009 and 2010, a task that was deemed achievable during the first half of 2008.
On the organisational level, new leadership for the Division was brought in during the year and physical presence established in the UAE to cater to the expected growth in the regional business.
On the operational level, although the funds under management increased marginally from around USD890 million as at yearend 2007 to USD1.15 billion as at the yearend 2008, the Division was transformed preparing a solid foundation for increased business if and when market conditions improve.
With the regionalisation of the business, Horus III completed its first GCC investment during 3Q08 and the increased regional presence and network is evident in the Division's current pipeline. 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") into a new SPV and has seeded the transaction for USD20 million. 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.
Although the aim was to launch several funds during the latter part of the year, the Team closed only two funds; namely the Technology Development Fund II at EGP215 million and the initial closing of the Horus Tourism Investment Company for around USD200 million.
The turmoil in the financial markets across the world and the pursuant credit crunch has created dislocation in the market and an associated volatility during 4Q08 which rendered deal-making difficult. Investors became short-term focused and strong preferences towards liquidity in turn harming appetite for long-term locked-up asset classes like private equity. Given such market conditions, EHPE adopted a much more conservative stance on the Fund deployment under existing funds as valuation parameters are shifting down to Funds' advantage and working with the pipeline of opportunities.
Due to the lack of any sizable exits locking in success fees as was the case in 2007, Private Equity revenues declined 40.7% to EGP105 million in 2008 corresponding to 6.5% of the Group's total consolidated operating revenues. It is worth noting that the annuity-type income that Private Equity provides on a quarterly basis is very important to the Group as a whole, especially in the prevailing market conditions.
Principal & Proprietary Trading
The separate Principal and Prop. trading accounts were started during the latter part of 2007. With USD200 million earmarked for the activity Management continually tracked the accounts on a weekly basis. With the downturn of the market in Egypt in May/June 2008, Management began the gradual liquidation of the accounts that ended in October 2008.
During the first half of the year, the Principal and Prop. trading accounts booked3 a total of EGP233.9 million in revenues. This was more than offset by the loss of EGP194.3 million in 3Q08 and a further EGP139 million in 4Q08 as the positions were wound down. As a result, over 2008 the accounts lost a total of EGP84 million compared to total revenue of EGP231 million (excluding the SODIC investment) in 2007. Accordingly, between its inception and liquidation the Principal Account has booked a net gain of EGP147 million.
3 Amounts includes unrealised gain of EGP11.2 million in 1H08, unrealised loss of EGP138.9 million in 3Q08 and unrealised loss of EGP37.4 million in FY2008
Operating Expenses
Table 12: Comparative Operating Expenses and Margins
Please refer to the attached pdf
Sources: EFG-Hermes audited financial statements and management accounts
Operating expenses have increased 11.1% over 2007 levels to EGP887.5 million, which due to softening market conditions has not been matched by an equivalent increase in operating revenues. The major expense components that increased over the year relate to employee expense, marketing and events planning, third party fees and utilities and office expenses.
In addition to the growth of business in its core markets over the early part of 2008, EFG-Hermes's geographic expansion warranted an increase in the number of employees within the Group peaking at 942 people (178 of which are blue collars) in November 2008 up from 720 in January 2008. Additions came across all lines of business and geographic locations. Despite that the fully loaded employee expenses, including bonuses, remained at the same level of 2007 at EGP552 million. A total of EGP202.2 million were paid in bonuses reflecting a 35.5% decline over what was paid in 2007 and only 96.7% of what was accrued over the 9M08. As the Management Deal expired for several key players at the end of 2007, the employee costs reflect the remainder of the previous deal and a portion of the renewed contracts. Fully loaded employee expenses account for 62.2% of total operating expenses down from 69.21% in 2007 mainly as a result of growth of other expense items and accordingly remained in the vicinity of 31 to 34% of operating revenues.
Although the Group's core business hinges on human capital and the ability to hire and retain the very best, Management has been prudent in the current downturn in reviewing staffing needs in order to maintain an efficient workforce. In addition, some cost savings have been achieved through relocation of select staff back to Cairo from the higher cost locations in the Gulf region.
The largest expense item after employee expenses during 2008 relates to third party expenses that recorded EGP52.4 million, the bulk of which were expensed during 3Q and 4Q08 at the Holding Company level and relate mostly to the universal bank project and legal fees related to the acquisitions in Kuwait and Oman. The expense grew over threefold since 2007 and constituted 6.4% of total operating expenses and 3.5% of total operating revenues in 2008 up from 1.98% and 0.9% the previous year.
Marketing and events expense in 2008 increased 1.7 times over 2007 to reach EGP51.5 million increasing to 5.8% of total operating expenses and 3.2% of total consolidated operating revenues up from 3.8% and 1.8% respectively in 2007. The major cost component of this expense remains EFG-Hermes' annual One-on-One Conference. Additional conferences targeting the various client categories and counterparts were also sponsored during the year. Other major items within this category were journal and TV advertising. Given the current market conditions, Management has reigned in all conference sponsoring with the exception of EFG-Hermes' own One-on-One Conference and during 2009, all journal advertising is to be limited to those for regulatory disclosure and on a very limited basis, if required, for the launch of retail based products.
Utilities and office expenses increase 82.2% over 2007 levels to reach EGP50 million as the Group opened offices in new markets including Kuwait, Oman and Lebanon and branches across Cairo and Saudi Arabia. This expense increased to 5.6% of total operating expenses and 3.1% of total operating revenues during 2008.
Travel expenses increased 37.6% over 2007 levels to reach EGP45.6 million in 2008, only slightly higher relative to total operating expenses and revenues versus the previous year. Major cost saving is expected in this area during 2009.
By virtue of the nature of the business and operating across several countries telecommunication expenses remain a large portion of total operating expenses. Total communication expenses, reached EGP35.3 million in 2008 up from EGP23.3 million in 2007 representing 4% of operating expenses and 2.2 % of operating revenues.
During 2008 EFG-Hermes spent a total of EGP15 million on charitable causes through the EFG-Hermes Foundation as approved by the Group's general assembly meeting during April 2008.
On the surface net operating profit4 in 2008 decreased 20.4% over 2007 levels to EGP732.7 million resulting in a net operating margin of 45.2% down from 53.5% in 2007. However, only EGP218.1 million relate to incentive fees in 2008 compared to EGP379.1 million a year earlier. We note that excluding incentive fees (in order to understand the underlying efficiency of the business without market impact), net operating profits generated during 2008 have decreased to EGP514.5 million down from EGP541.4 million the previous year reflecting net operating margins of 31.8% and 31.5% respectively.
4 based on fee and commission income only
Other Revenue
The major components of Other Revenues are the consolidated portion of EFG-Hermes' 27.87% ownership stake in Banque Audi Saradar and the net income from treasury operations. However, during 3Q08 revenues resulting from fair value adjustments also contributed to the total non-agency business revenues.
Despite the cancellation of the transaction combining EFG-Hermes and Banque Audi during 3Q08, total consolidated revenues from the stake remains sizeable and has returned to constitute 15.2% of the total revenue. During 2008 revenue consolidated from Banque Audi reached EGP327.6 million, a 14% increase over 2007.
EFG-Hermes continues to have a positive net cash position despite a continuing trend of decreasing free funds that are left to Treasury to manage due to the use in both acquisitions and in running the business. Interest expense and bank charges remain covered by the interest income and quasi interest income earned on cash balances and money market operations and the difference in payments on the NDF contracts hedging both the investment in Banque Audi and the cash balances in foreign currency. Nevertheless, Treasury operations continued to support the Group's bottom line profitability, whether directly through revenue generation or aversion of genuine FX losses that could have occurred if the EGP had continued to depreciate against the USD as it did during the first half of the year.
The positive financing cost in 2008 of EGP122.7 million is a result of netting out all the interest income, interest expenses and bank charges and is down from EGP208.2 million in 2007. It must be noted that as the Principal Account has been liquidated since October 2008 and volumes have shrunk due to the downturn of financial markets, funds available to the Treasury Department have increased.
The EGP: USD exchange rate began the year at EGP5.52: 1USD. However, the EGP began to appreciate until the rate hit EGP5.29: 1USD. Due the unavailability of NDF contracts at the beginning of the year, EFG-Hermes realised FX losses on the USD based assets. By the third quarter of 2008, EFG-Hermes was able to fully hedge its USD positions after which the financial crisis hit and the USD began another wave of appreciation against all major currencies including the Euro and GBP. Given such movements EFG-Hermes managed to lock in a total FX gain of EGP22.1 million during 4Q08 by correctly positioning the firm. For the full year EFG-Hermes booked a net FX loss of EGP9.9 million in 2008 compared to EGP33.8 million loss in 2007.
Netting out the FX loss from the revenue of Treasury operations results in a total of EGP112.8 million in 2008 constituting 5.2% of total revenue, down from EGP174.4 million during 2007.
During 3Q08 EFG-Hermes revalued its real estate investment in Nile City. The 5,209 sqr. metres owned were revalued at EGP34,200/metre and resulted in net revaluation gains of EGP90 million.
Other Expenses
In addition to the annual depreciation and amortisation charge of approximately EGP25 million, other expenses include a provision expense for EGP42.3 million covering potential deferred liabilities. Another major expense during 2008 was EGP105.2 million of financial asset impairment predominantly covering declines in seed capital in EFG-Hermes managed funds.
Including the above expenses, net profit before taxes and minority interest in 2008 decreased 32.2% versus the previous year to EGP1.09 billion resulting in a margin of 49.3% down from 62.5% in 2007.
Balance Sheet
EFG-Hermes's balance sheet remains strong, liquid and unleveraged in spite of of the use of approximately USD200 million during 2008 for acquisitions (including Gulf Brokerage House in Kuwait and Vision Securities in Oman), seeding EFG-Hermes funds (Horus Tourism Investment Co. and SNB among others) as well as beginning the construction of the Group's new headquarters.
The balance sheet still carries high levels of cash and cash equivalents for a total of EGP3 billion5 as at the end of December 2008 even after major acquisitions during the year of both operations and permises. EFG-Hermes' Treasury Department continued to maintain a rate of return above that earned on money market operations.
The available for sale investments declined to EGP704.2 million at the end of 2008 down from EGP1.4 billion the previous year, mainly as a result of the decline in the market valuation of the Group's stake in SODIC to EGP175.7 million as at the end of 2008 down from EGP 942 million as at the end of 2007. As EFG-Hermes seeded several of its new funds during the year, EGP196.2 million of the available for sale investments in 2008 represent the increase in EFG-Hermes' core business generators.
Total receivables and payables resulting from operations resulted in a net payable to clients of EGP481.7 million incurred mainly due to the normal course of business concentrated within the Brokerage Division. It should be noted that gross receivalbles declined from EGP2.6 billion in 2007 to EGP958 million in 2008 not only as a result of contraction in market volumes but also as EFG-Hermes reduced its margin trading facilities to clients from a peak of USD250 million to approximately USD30 million.
The growth in property, plant and equipment over the year to EGP3761.1 million up from EGP160.9 million at the beginning of the year relates mainly to the continued work on EFG-Hermes' new Egypt premises, the new premises in the UAE and the disaster recovery site.
The increase over the year of the total, current and non-current, amounts relating to the EFG-Hermes Employee Trust from EGP79.9 million at the end of 2007 to EGP305.8 million at the end of 2008 reflects the renewal of the Management Deal for the people whose contracts expired at the end of 2007 and vested until the end of 2008. On a related note, EFG-Hermes purchased a total of 25 million treasury shares over the period from 29th September 2008 to the end of the year. Before the yearend, EFG-Hermes transferred a total of 14,392,772 shares to the Employee Trust Fund at the cost plus carry. At the end of December 2008 the treasury shares reported on the balance sheet for a total of EGP239.4 million correspond to a total of 10,607,228 shares.
Goodwill on the balance sheet increased to EGP699.5 million at the end of 2008, up from EGP63.5 million at the yearend 2007. This increase was mainly due to the consolidation of the Omani subsidiary, Vision Securities (EGP66 million), in 2Q08 and the Kuwaiti subsidiary, Gulf Brokerage (EGP568 million), during 3Q08.
On the liability side, the Group continues to carry very little bank debt. The only debt outstanding at the yearend 2008 is a total of EGP128.8 million, being the soft loans from IFC and DEG, which are down from EGP189.9 million a year earlier.
5 Includes a total of EGP593 million of money market funds (EGP159 million), treasury bonds (EGP213 million) and Weather Capital bonds (EGP221 million) reported within trading investments
Taxes
The effective tax rate for the year 2008 decreased substantially to 10%, down from 13.1% in 2007 as revenues emanating from outside Egypt and from non-taxable entities 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 profit after tax and minority interest decreased 27.7% to EGP933.5 million in 2008 down from EGP1.29 billion in 2007. The decline in net profit after tax and minority interest is greater than the decline in total consolidated revenues as a result of the surge in several operating expense items including employee expenses, events planning and travel during the first half of the year, all of which are budgeted to decline in 2009. Net profit margin also declined over the year falling to 43.3% in 2008 down from 50.7% in 2007. Having said that, the most important issue on the financial side is that despite the initial hike in operating costs and the dwindling business levels during the latter part of the year the operations of the Investment Bank remained profitable with net operating margins in the vicinity of 50%. On the operational side, the Group has so far successfully navigated the difficult financial markets, relying on its internal policies relating to corporate governance, client documentation and operating procedures (including margin calls) to emerge with no calculable losses whether to clients or the Firm. Such a performance highlights the Group's leadership position within the regional investment banks.
Recommended Dividend Payout
The Board of Directors is recommending the distribution of EGP 0.5/share in dividend. The total dividend bill proposed is EGP188.6 million, representing 20.2% of the consolidated net profit after tax and minority interest. EFG-Hermes will look at buybacks and cancellation of shares as an alternative form of dividend.
Corporate Social Responsibility
Since its inception during 2007, the EFG-Hermes Foundation has been at the helm of implementing the Group's corporate social responsibility projects, with all projects sponsored or funded mostly being channeled through it. The Foundation, set up and operating as an independent organization, spent most of 2007 testing the water by sponsoring and funding several projects until a clear important mission was identified and followed. The mission chosen is to assist people in overcoming the financial, educational and health-related challenges facing our society as well as supporting innovative and sustainable programs that increase the opportunities for those most in need to make a positive change in their local communities. Over 2008, EFG-Hermes has directed a total of EGP15 million to the Foundation as was approved by the Board of Directors and the Company's general assembly earlier in the year.
The Foundation's main project is an integrated development project for poverty alleviation in Ezbet Yacoub - Beni Sweif named Ro'ya. The project represents a new holistic approach towards poverty alleviation. Instead of just looking to meet the immediate needs of the villagers, it goes further and tries to tackle the root of their challenges by providing them with a steady source of income and basic education on how to manage their affairs. The project, which began in May 2008, is the first of its kind in the area of comprehensive rural development, includes the construction of 370 safe and environmentally-friendly homes, a community service center that is run by the villagers and which will include a bakery, a clinic, a dairy production facility, a computer training facility for youth, and a center for children with special needs. So far 34 newly built homes were handed over to the residents, and work has began on the introduction of a sewerage system within the village as a whole. The project has created hundreds of jobs and trained over 50 youths of different vocations.
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 ("Investments") 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 مساهمة58 شارع التحرير- الدقى- الجيزة رأس المال المصدر: 1,939,320,000 جم
Stock Exchange & Symbol: Cairo: HRHO.CALondon: HRHOq.LBloomberg: EFGHReuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM
EFG-Hermes (Holding Main Office)58 Tahrir Street Dokki Egypt 12311Tel +20 2 333 83 626 Fax +202 333 78 038 efg-hermes.com
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