Last checked at 14 Aug 2008 08:30
1H2008 Earnings Release - 14 August 2008
1H2008 in Review
In spite of relatively volatile market conditions EFG-Hermes total consolidated revenue increased 55.98% over 1H2007 to reach EGP1.53 billion with the quarter on quarter growth being 64.7% over 2Q2007 to reach EGP871.3 million predominantly booked through investment banking operations;
Total revenues booked from the Investment Bank1 reflect a 94.7% growth over 2Q2007 to EGP741 million, with total revenue from the Investment Bank nearly doubling over 1H2007 to EGP1.26 billion, a level that it 68.1% of the full year 2007 level;
The breakdown of operating revenues during 1H2008 reflect Management's strategy to transform the asset management business in general to be a core driver going forward, the larger asset management business (both listed and private equity) accounted for 32.7% of the total operating revenues, Brokerage 38.9%, Investment Banking 10.7% and the trading book for around 18%;
Net profit after tax and minority increased to EGP757.7 million up from EGP564.5 million in 1H2007; a 34.2% increase resulting in a margin for the Investment Bank of 52.1% despite beginning to accrue a balance for bonuses (a total of EGP207.5 million in 1H2008) starting January 2008. Accordingly, the margin to be compared to 1H2007 is 61.7%;
Regional operations during 1H2008 accounted for 35.3% of the total fee and commission income (excluding capital gains from Principal account) up from 21.8% in 1H2007;
During 2Q2008 the Principal account diversified with investments in Egypt, UAE, Kuwait, Saudi Arabia and Qatar. Total realised capital gains booked from the Principal account during 2Q2008 recorded EGP124 million;
The Brokerage arms in Egypt and the UAE (on the DFM and ADSM) continued to maintain their number one positions with the positioning on the Saudi Exchange improving to the #1 independent broker. Furthermore, EFG-Hermes has slowly began to integrate the newly acquired Vision Securities' operations into the platform;
2Q2008 witnessed a surge in the Research Department's output due to increased coverage of Saudi stocks, the publication of the first Saudi Yearbook and the initiation of coverage of a few Qatari stocks;
Total assets under management within the Group slightly increased to USD8.8 billion, USD7.7 billion of which are in listed equities and money market funds and the remainder in private equity. Although AuMs in listed equities were at the same level as 1Q2008 the USD2.4 billion of AuMs redeemed from the money market funds were partly replaced by the longer term and more stable assets under management in regional funds (namely the MENA Special Opportunities and MEDA Funds) and discretionary portfolios (a total of USD1 billion) bringing down money market funds to 28.9% of total AuMs down from 35.4% the previous quarter;
Total realised incentive fees within Asset Management for the second quarter reached EGP179.3 million compared to EGP33.5 million for the full 1H2007. As at the end of 2Q2008 total unrealised fees amounted to EGP97.4 million compared to EGP67 million as at the end of June 2007;
During 2Q2008 Investment Banking Team simultaneously closed two IPOs as well as continued to build the pipeline on both equity raising and M&A side;
The Team from a renowned intenational investment bank hired into Private Equity joined towards the end of the quarter. On the business side, several new investments were undertaken within the Horus III Fund as well as the launch of the Horus Tourism Company that is expected to closed during 3Q2008;
July saw the launch of several training and development programs across the Group including but not limited to the Executive Development Program and the annual three-month Investment Banking Program;
EFG-Hermes' shareholding structure remains dominated by institutional shareholders. The top 50 shareholders own 72.4% and include 34 western institutions.
Market conditions across the region were a challenge to EFG-Hermes during 2Q2008. Increased market volatility and reduced interest from both foreign and retail investors across the region have set a backdrop of softening markets in volumes traded and valuation levels, if not both.
On the Egyptian market sustained buying during the latter part of 2007 lead to strong positive performance in all market indices, a trend that was carried through by retail investors, albeit at a slower rate of growth, until May 2008 when market corrections began. Average daily value traded has fallen sharply in June and July (an average of USD253 million) from levels seen earlier in the year (an average of USD359 million), not related to seasonal effects but are more volatile than previously witness by the market. Going in to 3Q2008 investor sentiment is excepted to be subdued due to the poor performance of retail driven stocks, rising interest rates and the summer and Ramadan lull. Although foreign investor buying into large caps based on fundamental analysis and those with regional diversification is expected to continue to the yearend but concerns over emerging market equities in general is expected to keep volumes low. The large and mid-cap liquid stocks continued to fall during June and July, in line with movements in emerging market equities, but to a much smaller extent than in 2H2007.
Looking at returns, the GCC can be split into three groups: the outperformers (Qatar, Oman and Kuwait with year-to-date returns of +21.3%, +21% and +18% respectively), the underperformers (Saudi Arabia (-22.9%) and DFM (-17.3%)) and the stagnant markets (Bahrain and Abu Dhabi). Having said that, it must be noted that the bulk of the positive performance was generated during 1Q2008 while during 2Q most markets were flat and in 3Q2008 to date almost all GCC markets have generated negative returns. Market movements have echoed foreign flows from and into these markets, especially for the UAE and Qatar over the past few months. As with Egypt, foreign investors are increasingly setting the direction for GCC markets but sentiment remains weak due to both global market turmoil as well as foreign investor limits and slower IPO launches. Theoretically, the Saudi market should be immune from concerns related to global market but in reality the highly speculative nature of the market has resulted in Tadawul closely tracking the DFM.
EFG-Hermes' performance during 2Q2008 attests to the Group's strength and market leadership across the region. In spite of softening and volatile market conditions as well as operating off lower volumes in the major markets where it has physical presence the Group's revenues and bottom line have increased to record levels. The addition of new markets, products and client profiles as well as the integrated business model has expanded the potential fee pot that EFG-Hermes could target and hence its ability to lock in increased revenues even in a period of softening market conditions and negative investor sentiment. The increasing retail facet of the business model has greatly contributed to the Group's activities growth over the quarter, especially within brokerage.
Table 1: Performance of Arab Markets during 1H2008
Please refer to the attached pdf
Sources: Regional markets and EFG-Hermes
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 1H2007, amount is gain on sale of SODIC
Sources: EFG-Hermes audited financial statements and management accounts
During 1H2008 total consolidated revenue grew by 50% to EGP1.43 billion mainly on the back fee and commission income booked during 2Q2008. 1H2008 total consolidated revenues represent 68.1% of the full year 2007 total consolidated revenues despite not yet realising incentive fees on some of the funds under management which are booked on 31st December. Banque Audi's regional expansion began to be reflected in its financial performance; 1H2008 consolidated portion grew by 26% to the equivalent of EGP175 million; EGP101 million of which were booked during 2Q2008. It must be noted however, that as the Firm's core business continues to grow the contribution from the investment in Banque Audi declines despite increasing in absolute terms.
Operating Revenues
Both the region's expanding fee pot and EFG-Hermes' premier positioning across the MENA region is reflected in the growth of its operating revenues; namely fee and commission income. Total consolidated operating revenues nearly doubled over 2Q2007 to reach EGP741 million (excluding EGP97.4 million in unrealised incentive until 30th June 2008). If annualised total consolidated operating revenue for 1H2008 corresponds to achieving 136.2% of the full year 2007 level.
Table 3: 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 Principal Account during 2Q2007 the amount is mainly gain on sale on SODIC shares
Sources: EFG-Hermes audited financial statements and management accounts
Table 4: Contribution of the Different Divisions to Operating Revenue on Half Year Basis
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* includes EGP10.6 million of custody & margin fees held at the Holding Company level in 1H2008
** excluding Treasury Operations; no Principal Account during 1H2007 the amount is mainly gain on sale on SODIC shares
Sources: EFG-Hermes audited financial statements and management accounts
Setting aside incentive fees usually booked during the last quarter of the fiscal year, 2Q2008 was the best quarter in terms of revenues the Firm has witnessed over the past few years. The continued growth in management fees and core business line income reflects the Group's strategy of growing the less volatile asset management side of the business. Asset Management in general, both on the listed and private side, continued to expand. On a quarterly basis Asset Management and Private Equity accounted for 38.5% of total consolidated operating revenues (32.7% in 1H2008). The performance of Brokerage manifests the maintenance of it dominant market share on the markets in which EFG-Hermes operates. Although on a quarterly basis Brokerage only contributes 31.6% to the total, on the half year basis it remains the dominant contributor to operating revenues with 38.9%. Starting 2Q2008 Vision Securities, EFG-Hermes' Omani affiliate operation, began to be consolidated. The delay in closing of a couple of M&A deals as well as the cancellation of the Banque du Caire sale by the Egyptian Government has decreased Investment Banking's contribution to 10.7% in 1H2008. The Principal Account generated 17.7% of the total operating revenues during the first six months of the year.
The above contributions in general reflect Management's strategy to grow the Asset Management business in general as well as the limited use of the balance sheet to generate earnings. Continuing the Group's geographic diversification regional operations during 1H2008 accounted for 35.3% of the total fee and commission income up from 21.8% in 1H2007.
The breakdown of fee and commission income by business line on a quarterly basis is as follows:
Figure 5: The Breakdown of Revenue by Business Line on a Quarterly Basis
Please refer to the attached pdf
* includes Asset Management performance fees as follows: 2Q2005 EGP15 million, 3Q2005 EGP12 million, 4Q2005 EGP155 million, 1Q2006 EGP1 million, 2Q2006 EGP3 million, 4Q2006 EGP4.9 million, 1Q2007 EGP6.5 million, 2Q2007 EGP26.9 million, 3Q2007 EGP9.8 million, 4Q2007 EGP330.2 million, 1Q2008 EGP34.6 million, 2Q2008 EGP176.3 million
** includes EGP91.68 million of IB fees relating to EFG-Hermes capital increase in 1Q2006
Sources: EFG-Hermes audited financial statements and management reports
Hereunder is an analysis of the company's main operational divisions:
Brokerage
The Brokerage Division continued its leadership on all markets in which it operates. Starting June 2008, EFG-Hermes climbed to the #1 position for non-bank brokers on the Saudi market. Trading continued on markets where the Firm has no physical presence with the process becoming more instilled and the revenues booked growing. The Division is continuously increasing the number, type and geographic origin of its client base. The fastest growing segments are the online and VIP desks. VIP clients are those with USD 1 to 2 million accounts but not large enough to be categorised as HNWI. The Team is currently working on integrating the Omani operations and instilling EFG-Hermes systems and procedures into the firm.
Egypt
The growth in value traded by EFG-Hermes in 2Q2008 over 2Q2007 (117.2%) was in line with the increase in market volumes (if special transactions executed by the Group are taken into consideration). Since 1Q2008 the value of trading on CASE has decreased by 17.5% to EGP343.9 billion (8.6% if special transactions are removed). Total special transactions on the exchange during the first quarter amounted to EGP172 billion compared EGP30 billion in 2Q2008. The drop in market share during 2Q2008 to 16.2% was mainly due to the fact trading on the exchange was dominated by pure retail activity, a segment although growing within EFG-Hermes remains not the Group's core competence area. Furthermore, the bulk of trading on CASE during 2Q2008 was skewed towards the smaller more speculative stock which EFG-Hermes neither covers in Research nor recommends to its clients. Nevertheless, EFG-Hermes retained its leadership of the market. It must also be noted that the Brokerage Team in Egypt sells other markets across the region and hence the reflection of the Team's success is no longer just the market share in Egypt but also the executions on markets where EFG-Hermes has no physical presence.
Figure 6: EFG-Hermes Equity Executions and Market Shares
Please refer to the attached pdf
Sources: CASE and EFG-Hermes
The use of the Group's Call Centre and Online operations in Egypt continued to expand and together total executions through both services increased 12.4% over 1Q2008.
Revenue from brokerage activity in Egypt increased 75.7% over 2Q2007 levels to EGP177 million constituting 24% of the Group's consolidated revenue.
UAE
Figure 7: Progression of Volumes Executed and Market Shares
Please refer to the attached pdf
Sources: DFM, ADSE and EFG-Hermes
Brokerage activities in the UAE continued its position as the #1 broker in the country as value executed by EFG-Hermes increased 33.1% over 1Q2008 levels to USD6.8 billion corresponding to 15% of total market executions on the UAE local markets. Again market shares dropped slightly to 7.4% and 8% on the DFM and ADSM down from 10% and 8.5% respectively due to the decline in foreign institutional activity on the market similar to the situation on CASE. EFG-Hermes' leadership of the UAE markets remains supported by cross selling the various regional markets to its clients. Western financial institutions that traditionally use EFG-Hermes in Egypt once introduced to the UAE were a major factor in increasing the Group's market shares there.
Brokerage operations out of the UAE have increased 33.2% over 2Q2007 to reach EGP36 million and constituted 4.9% of the Group's total consolidated revenues.
Saudi Arabia
Figure 8: Progression of Volumes Executed and Market Shares
Please refer to the attached pdf
Sources: TADAWUL and EFG-Hermes
The Brokerage operation in Saudi Arabia is finally picking up. Volumes executed by EFG-Hermes have nearly doubled over 1Q2008 to reach SAR9.3 billion. With a 1.6% market share, EFG-Hermes is currently the #1 non-bank broker on the Exchange. During July 2008, EFG-Hermes' market share has increased to around 2.1%. The market share is expected to further grow as the call centre and online operations penetrate more retail clients. It is worth noting that the Firm continues not to either give rebates or discounts, which are common practice in the Kingdom, and to date commands the full 10bps mandated by the regulators.
Brokerage in Saudi Arabia has locked in the equivalent of EGP11 million in agency fees, corresponding to 1.5% of the Group's consolidated operating revenues in 2Q2008.
Research
Please note that the number of stocks covered has been restated to include only those actively* covered
Figure 9: Development 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
Eiji Aono has taken over as Head of Research at the beginning of 3Q2008 following the departure of Philip Khoury. Eiji brings eight years of experience as a top ranked equity analyst from Credit Suisse, Goldman Sachs and JP Morgan in London.
During the quarter the Team expanded active coverage to 75 stocks up from 56 stocks during 1Q2008 and 45 stocks during the similar period in the previous year. Saudi Arabia was a key focus area during the quarter with stocks under coverage increasing to 16, including ten leading banks, SABIC, Savola and Zain, representing over 60% of the market capitalisation on the TADAWUL. Furthermore, the Team published EFG-Hermes' first Saudi Yearbook, a compilation of our views on the market from an economics and strategy standpoint as well as updated views on the individual stocks, similar to the Egypt and UAE Yearbooks published on an annual basis. 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.
EFG-Hermes recently received the results for the Euromoney Middle East research poll which were published in Euromoney Magazine's August issue. For the second year running, EFG-Hermes has come out as the clear leader in this poll, taking seven #1 positions, four #2 positions and two #3 positions out of fourteen categories. In addition, EFG-Hermes was acknowledged as having the "most convincing and coherent strategy".
Asset Management
Figure 10: Development of Listed Assets under Management (totals in EGP billions)
Please refer to the attached pdf
Source: EFG-Hermes
In spite of a turbulent quarter across all markets, both emerging and mature, Asset Management remained a core driver to the Investment Bank's revenue although the level of unrealised incentive fees as at the end of 2Q2008 decreased compared to the end of 1Q2008 due to market downturns but overall the division continued to provide increased stability to earnings through the increase in management fees. On the surface assets under management remained at the same level as 1Q2008 at EGP41.4 billion (USD7.73 billion). However, it must be noted that the total cash inflows over the quarter was USD2.91 billion which was mostly offset by redemptions on the money market funds for a total of USD2.41 billion over the same period. A large portion of the net cash inflows were within the regional fund segment, namely the MEDA and MENA Opportunities funds as well as into the discretionary portfolio segment. As at the end of 2Q2008 Money Market Funds constituted around 29% of total assets under management with the Group down from nearly 36% the previous quarter. In addition, although the markets in which EFG-Hermes Asset Management invests have generally declined over the quarter net effect of the market movements on the funds and portfolios that the Firm manages was marginally positive (USD6.3 million) as opposed to MSCI EM and MSCI Arabia falling 13% and 7% respectively since the beginning of the year.
The Team has continued to work on expanding the product range the inclusion of management of MENA portions of Asian Funds and products structured at around our existing funds and have attracted substantial assets to be managed by EFG-Hermes since the beginning of 2008. On the regional level, the EFG-Hermes Saudi Arabia Equity Fund was launched on 17th June and ended the quarter with an NAV of USD151 million with further inflows expected in 3Q and 4Q2008. During 2Q2008 the Team several discretionary portfolios both with regional and Egypt only focus. EFG-Hermes has also been awarded 2 new mandates for funds due to be launched during 3Q2008.
The Team is currently working towards including several of the offshore funds on various distribution platforms. The Division has also continued to diversify and grow its client base including more regional family offices, Scandinavian banks and regional sovereign wealth funds.
On the performance side, the funds managed by EFG-Hermes continue to outperform their peers, whether in Egypt or regionally. Over the course of 2008 the MEDA Fund gained 9% while the MSCI EM and MSCI Arabia lost 13% and 7% respectively. Since receiving the "Best Newcomer" award from Terrapin's Hedge Funds World, the MENA Special Opportunities Fund continued to outperform the market with an increase in it NAV around 6.5% over the course of the first 6 months of 2008. In terms of business development the Team is exploring the option of launching several specialized funds targeting its increasing MENA and Asia based clients.
Revenues of the Asset Management business increased over 6.5 fold to the equivalent to EGP236 million in 2Q2008 over the similar quarter the previous year; of which EGP179.3 million were realised incentive fees contributing 31.9% to the Group's consolidated net operating revenues. Unrealised incentive fees as at the end of 2Q2008 stood at EGP97.2 million compared to EGP144.8 million in 1Q2008. It must also be noted that the quality of assets in terms of profitability is reflected in the increase in management fees from EGP42.9 million in 1H2007 to EGP144.2 million in 1H2008 (3.4 fold increase) while the assets under management over the similar period have only increased by 90%.
Investment Banking
2Q2008 was yet another successful quarter Investment Banking despite softening market conditions across the region. The Team simultaneously closed two IPOs as well as continuing to build the pipeline on both equity raising and M&A side.
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, a renowned company in the oil and gas service sector. The second equity offering, comprising of both a local equity offering on CASE and a GDR offering on LSE, was USD343 million IPO of Palm Hills Development, a leading real estate developer in the Egyptian market. 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.
Since the end of the quarter the Team has closed two deals. On the regional front, EFG-Hermes just closed a USD150 million private placement for Gulf Housing, a real estate sector company that focuses on workers housing in the UAE. Another private placement that has also just closed for USD141 million was the Offshore Oil Services Co. Limited, an oil and gas services sector company. The Team is currently working on several transactions including M&As, private placements and debt issues that are due to close over 3Q and 4Q2008.
The Team in Saudi Arabia spent the better part of 2008 advising SAMBA on the acquisition of Banque du Caire. However, the process came to a halt after the sale of the bank did not go through. Currently, the Team is working on several cross-border transactions as well as pitching for several "pure" Saudi mandates. Although small and relatively new the Lebanon office is currently undergoing a surge in activity with respect to Investment Banking deals with several mandates about to be signed.
Investment Banking revenue booked during 2Q2008 relates to the Palm Hills and Maridive private placements and IPOs, bringing up the total revenue booked by Investment Banking to EGP136 million in 1H2008 a 30% decline over the similar period during 2007 with the Egypt Team is on track to surpass its budget for 2008. The contribution of Investment Banking to the Group's consolidated operating revenues declined to 10.7% as deals were delayed to 3Q2008 and the other lines of business, especially Asset Management, grew substantially over the quarter. As previously mentioned, going forward, this new lower level of contribution is expected as the sustainable revenues from Investment Banking within the framework of the expected future growth of Asset Management and Private Equity.
Private Equity
Expansion and restructuring of the Private Equity continued during the quarter as a team of professionals from a top-tier a intenational investemnt bank officially joined EHPE. In line with growing the division's geographic reach, Private Equity established a physical presence in the UAE.
On the operational level, the Horus III Fund received approval from its Advisory Board to expand the scope of its investments to the wider MENA region. In line with this, the Fund completed its first GCC investment. Horus III also completed another investment during 2Q2008 in the oil & gas services sector.
As at the end of 2Q2008 total funds under management with Private Equity are USD1.1 billion with no major divestment or exits taking place during the quarter.
Another initiative launched during 2Q2008 is the fundraising for Horus Tourism Investment Company ("HTIC") with an initial closing expected at the end of 3Q2008 in the vicinity of USD400 million. EHPE aims to increase the size of HTIC to USD500 million by the end of Q12009.
Private Equity revenues in 2Q2008 have increase both when compared to 2Q2007 and 1Q2008. Total revenue for 2Q2008 recorded EGP31 million; 4.2% of the Group's consolidated operating revenue (5% on a half-year basis). It is worth noting that Private Equity is in the "building" phase, funds under management are being accumulated and invested with the more lucrative cycle of divestment on which handsome success fees are earned is yet to come. Having said that, doubling the funds under management with the addition of Horus III during the latter part of 2007 has trickled into the Division's revenues as management fees tripled in 1H2008 to EGP45.2 million up from EGP14.7 million during 1H2007.
Principal & Proprietary Trading
The separate Principal and Prop. trading accounts are tracked by Management on a weekly basis to follow up on both strategy followed and the NAV. As at the end of 2Q2008 collectively, the accounts booked net gains of EGP171 million with minimum unrealised losses despite markets softening during the latter part of the quarter and included dividends collected. It must be noted that during 2Q2007 EFG-Hermes did not have a Principal account and the EGP61 million in the tabulation above relates to capital gains realised on the sale of SODIC shares during 2Q2007.
Saudi Arabia
The Saudi operation has begun to book Asset Management revenue after the launch of the Saudi Fund in the latter part of June 2008. With the Fund up and running and several foreign clients subscribing to it, Asset Management is expected to be a core revenue generator in Saudi and hence several products are in the pipeline. Research coverage has also been expanded in Saudi Arabia with more than 60% of the market cap currently being covered by the Team.
Oman
Early in 2Q2008, EFG-Hermes signed an agreement to acquire a 51% stake and management of Vision Securities Co. LLC, one of Oman's leading local brokers for a total of USD15.3 million. Since then several members from the Brokerage, Compliance and IT divisions have moved to Oman and the integration process is going to according to schedule. EFG-Hermes has began equity consolidating its stake in Vision Securities which has resulted in addition Brokerage revenues of EGP9 million (1.2% of total consolidated operating revenues for 1H2008).
Although Oman is not a large market, having a presence there adds a new product to EFG-Hermes's regional product offering on the Brokerage side.
Operating Expenses
Please note that starting 1Q2008 EFG-Hermes started to accrue a provisional amount each quarter to account for the annual bonuses; traditionally and until yearend 2007actaul amounts due for payout were deducted during the 4th quarter.
On the surface general and administrative expenses have increased by 110.7% over 1H2007 to EGP538.6 million in 1H2008. However, adjusted for the accrued bonuses (a total of EGP207.5 million in 1H2008) and the EGP23.5 million of bonuses paid in 1Q2007 relating to the fiscal year 2006, the actual increase is only 22.4% compared to a growth of over 85% in operating revenues and over 53% in revenues from the investment bank as discussed above.
The main expense items remains personnel related. Fully loaded employee expenses, including accrued bonuses, increased 188% over adjusted 1H2007 levels to reach EGP374.4 million. However, adjusting the accrued bonuses in 1H2008, employee expenses totaled EGP167 million, only a 28.6 % increase over adjusted 1H2007 levels. Total fully loaded employee expenses account for 69.5% of total operating expenses and 29.7% of operating revenues up from 60% of operating expenses and 22.8% of operating revenues in 1H2007. As discussed during previous earnings reports, employee expenses have to rise if not to but close to international levels to enable the Group retain the Arabic-speaking quality staff as the bulge brackets began setting up within the region as well as hiring new professionals of the highest calibre.
The largest expense item after employee expenses during 1H2008 was the marketing and events expense that increased 55.7% over 1H2007 to EGP28 million decreasing to 5.2% of total operating expenses and 2.2% of total consolidated operating revenues down from 7% and 2.7% respectively in 1H2007. The major cost component of this expense remains EFG-Hermes' annual One-on-One Conference. Furthermore, as EFG-Hermes began to introduce more retail driven products the need and importance of advertising and sponsoring more events to promote EFG-Hermes' image across the region became more important. These expenses will remain a major feature of operating expenses going forward, with the size during any one quarter depending on the products launched during the period under review
Another major component of operating expenses remains travel expenses. Having nearly tripled over 1H2007 to EGP26.6 million, travel expenses slightly increased to 4.9% of total operating expenses and 2.1% of total operating revenues in 1H2008 up from 3.8% and 1.5% in 1H2007 respectively. Travel expenses will, in absolute terms, remain on the rise over the next few years as EFG-Hermes increases its regional footprint as well as expand its target client base. The increase in this category of operating expenses has been reflected in the increased business level across all divisions, although there will always be a lag between the time the expense occurs and it being translated into revenue.
Utilities and office expenses remains a major portion of operating expenses as the Group opens offices and branches across various markets. As Asset Management in Egypt moved to Nile City, the Cairo head office expanded and offices in the UAE increased this expense doubled over 1H2007 level to EGP20.1 million but declined to 3.9% of total operating expenses and 1.7% of total operating revenues during 1H2008. Although this expense category may increase in absolute terms as the Group's physical locations increase but is on the decline relative to total expenses and total revenues.
Echoing the growth of locations, client and product base telecommunication expenses increased close to 100% over 1H2007 and reached EGP16.5 million and 1.4% of operating revenues down from 2.01% during 1H2007 as a result of the increasing communications between the Egypt, UAE, Saudi, Qatar, Oman and Lebanon offices as well as the increased communications with the proliferating client base across the region and the world as a whole. The dedicated lease lines that ensure smooth and seamless execution across several markets remains a key component of the telecommunication expenses.
Net operating profit during 1H2008 increased 73.7% over 1H2007 levels to EGP723.4million (a 2.2 fold if the accrual for the bonuses is removed). Unadjusted net operating margins have declined to 57.3% down from 61.96% in 1H2007. However, adjusting for the change in accounting policy described above and in order to be able to truly compare profitability margins in 1H2008 have actually improved to 73.8% up from 65.5% a year earlier.
Other Revenue and Expenses
The major components of Other Revenues are the consolidated portion of EFG-Hermes' ownership stake in Banque Audi Saradar and the net income from treasury operations.
The revenue consolidated from the stake in Banque Audi remains sizeable but is declining in importance as the Group's core business develops. As at the end of 1H2008 the revenue consolidated from Banque Audi, although had grown by 26% over 1H2007, contributes 12.3% to the Group's total consolidated revenue as opposed to 14.6% during 1H2007 and around 25% when the investment first began to be consolidated in 2006. In terms of performance the unaudited consolidated portion from Banque Audi during 1H2008 is the equivalent of EGP175 million, a 26% increase over 1H2007 mainly resulting from the Bank's regional subsidiaries in Egypt, Jordan, Syria among others that have began to bear fruit as operations in these countries pick up and the Bank increases its penetration of new markets. The improvement on the Lebanese political front has been translated into stellar growth and is reflected in the Bank's 2Q2008 performance where revenues increased 38% over 1Q2008.
EFG-Hermes continues to have a positive net cash position which is used both in day to day operations, especially in Brokerage to finance DVP clients as well as finance the Principal trading account. Interest expense and bank charges are fully covered by the interest income and quasi interest income earned on cash balances and money market operations as well as revenue earned from operations and clients' free float and the difference in payments on the NDF contracts hedging both the investment in Banque Audi and the current assets in foreign currency. The net interest differential during 1H2008 declined as compared to the previous year due to the use of cash in daily core operations and in the approved Principal trading accounts, both activities that have locked in substantial gains over the quarter. The Treasury Division locked in an average net yield of around 8% during 1H2008 on the cash balances. The Division has also managed to lock in a total of EGP31 million on the existing NDF contracts being both the interest differential used to hedge the Group's unutilized current assets in foreign currency and the renewing the NDF contract hedging the Banque Audi investment. These contracts were also important in averting an FX loss in the vicinity of EGP189 million due to the appreciation of the EGP against the USD since Jan 2008 (1USD: EGP5.55) to its current average level of 1USD: EGP5.34 as of today. It must be noted that these contracts also entail FX gains of LE48 million which is reflected within the equity account and will be put through the income statement when the contracts mature over the remainder of the year. Accordingly, the FX loss as at the end of 1H2008 is not EGP69.3 million but EGP21 million.
Depreciation and amortisation increased slightly over 1H2007 levels to reach EGP11.3 million as premises in Qatar and Oman became operational.
Resulting from the above net profit before taxes and minority interest in 1H2008 increased 27.4% over the comparable period the previous year to reach EGP861 million resulting in an adjusted2 margin of 73.4% in 1H2008 up from 72.1% in 1H2007. Further adjusting the net profit before taxes and minority interest for consolidated income from Banque Audi and the net interest income earned to get to the actual profitability of the investment bank; the net profit before taxes and minority interest for 1H2008 amounts to EGP686.1 million up from EGP536.7 million in 1H2007 with an adjusted net profit before tax and minority interest margin of 61.4% up from 57.8%.
Balance Sheet
EFG-Hermes' balance sheet remains strong and unleveraged.
The balance sheet contains high levels of cash, cash equivalents and other investments (namely T/Bills, Central Bank deposits and investment in money market funds3) reaching EGP3.1 billion as at the end of 1H2008 down from EGP4.7 billion as at December 2007 mainly as a result of the use of cash in Principal Trading, trading investments and seeding Asset Management and Private Equity initiatives launched Since the beginning of the year. Despite the decrease of the cash balances it had to deal with, EFG-Hermes' Treasury Department continued to maintain a rate of return above that earned on money market operations. Using the cash balances as at the end of the quarter the average rate earned was around 8%. With the use of cash in the business having an unleveraged balance sheet remains a key strength for the Group.
The major portion of the EGP1.15 billion available for sale investments remains the SODIC investment (through OPD) that is marked-to-market. SODIC remains a liquid investment that can be divested in face of a major business need or acquisition opportunity. The remainder of the balance mainly relates to the seeding of EFG-Hermes Asset Management and Private Equity funds (a total of EGP484.6 million).
Net receivables resulting from operations recorded EGP282.3 million incurred mainly due to the normal course of business mainly within the Brokerage Division.
The growth in fixed assets over the quarter to EGP159.4 million up from EGP135.2 million related to the new Saudi and Qatari offices. In terms of fixed assets as well major progress has been witnessed with respect to the new premises at the Smart Village as ground breaking began and major earth moving and foundation works have been completed. As at the end of 1H2008 the balance of projects under construction increased to EGP93.8 million to reflect the progress of the building.
The bulk of other debit balances (EGP406.8 million) is related to the hedge agreements. Other items within other debit balances include EGP70 million being payments under purchase of investments including amounts under acquisitions on behalf of Private Equity and the establishment of SPVs relating to funds that have recently been launched or are in the process of being set up.
Over the past years, goodwill that had been steadily declining as it was being amortised. The increase in the goodwill reported to EGP129.5 million up from EGP63.5 million as at the yearend 2007 is due to the consolidation of the Omani subsidiary, Vision Securities.
On the liability side, the Group remains to have a positive net debt position. Two sets of debt were outstanding as at the end of 1H2008: a total of the equivalent of EGP161.2 million being the loans from IFC and DEG and an overdraft for EGP129.8 million which has since been repaid.
Creditors and credit balances have declined from EGP633.5 million as at the yearend 2007 down to EGP493.2 million as at the end of 1H2008. The decline mainly arouse due to the actual payment of taxes and hence the decline of what was payable to the tax authority from EGP153.1 million as at the year end to EGP5.7 million as at the end of 1H2008. Other credit balances declined inline with normal business practices.
Shareholders' equity increased to EGP9.4 billion as at the end of 1H2008 up from EGP9.3 billion as at the end of 1H2007 and a market cap of EGP18.2 billion as at 30th June 2008 translating to a P/BV of 1.97 and a PE (on annualized earnings) of 12.85 down from 2.7 and 19.97 a year earlier.
Taxes
The effective tax rate for the 1H2008 has decrease to 8.3% down from 14.3% in 1H2007 as revenues emanating outside Egypt and from non-taxable entities have increased. Furthermore, the Firm continues to administer tax management at the level of the Group as a whole as well as optimising balance sheet management revenues.
Profitability
Net income after tax and minority interest increased 34.2% to EGP757.7 million in 1H2008 up from EGP564.5 million in 1H2007; a level that is higher than the net profitability for the full year 2006 with a margin of 52.1%. Of the bottom line EGP209.9 million relate to incentive fees realised on the listed equity funds and portfolios in 1H2008 compared to EGP33.5 million during 1H2007.
The majority of the bottom line in 1H2008 relates to the core operations. If the bottom line is adjusted for a total of EGP174.5 million of revenue consolidated from Banque Audi and approximately EGP9.8 million of net treasury operations, the net profit after tax and minority interest relating to the investment bank is EGP582.5 million. For a fair comparison with the previous year the bottom line need to be adjusted for the accrued bonuses yielding a margin of 61.7% in 1H2008 for the operations of the Investment Bank up from the adjusted 51.3% in 1H2007.
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.
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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