Efg-hold.gdr S Regulatory News (EFGD)

14 Aug 2007 17:30

EFG-Hermes Holdings SAE14 August 2007 2Q2007 Earnings Release - 14 August 2007 Summary 2Q2007 proved very eventful for EFG-Hermes with several new business initiativescoming into play and launched. Signature of the joint venture agreement to setup EFG-Hermes Qatar Financial Centre, the launch of a fund in conjuction withHarvard Endowment Fund and the Horus III Private Equity Fund being the mainhighlights. At the business line levels, all the divisions maintained theirleadership positions while on the corporate level, EFG-Hermes was invited andattended several one-on-one conferences across the US and Europe reflectingincreased interest in both the Group and the stock as a reflection of the regionand the potential of its emerging capital markets. Furthermore, importantregional financial channels including CNBC Arabia, Al Jazira and Bloomberg aswell as several regional journals now regularly feature EFG-Hermes ResearchAnalysts, Senior Brokers and Technical Analysts commenting on regional economiesmarkets and stocks. 2Q2007 saw market performance picking up across the region. With the exceptionof Saudi Arabia and Lebanon, both volumes and indices are back at and above2Q2006 levels. The Egyptian market has rebound both in terms of volumes andmarket capitalization, the DFM has rebound but on the back of weaker volumes.The Saudi market continued its correction; making investment decisions based onfundamental analysis as opposed to speculation a necessity rather than a luxury. Table 1: Arab Markets Performance during 2Q2007 Sources: Regional markets and EFG-Hermes 1H2007 IN REVIEW • Total consolidated revenue booked during 2Q2007 reached EGP529.2 million; more than doubling over the similar period during 2006 bringing the total revenues for 1H2007 up to EGP978.0 million in comparison to EGP1.2 billion for the full year 2006 ; • Total consolidated operating revenue for the 2Q2007 reached EGP320 million, a 72.9% increase over 2Q2006 and making 2Q2007 the best ever quarter in EFG-Hermes' history in terms of operating revenues; • Net operating profit for 2Q2007 recorded EGP182.4 million, a 62.7% increase over 2Q2006 and corresponding to a net operating margin of 57%; • Net profit after tax and minority increased 103.3% over 2Q2006 to EGP313.9 million, recording a net return of 59.3% calculated on total consolidated revenues; • As the Group expands in the region a growing portion of the operating revenue stream is booked regionally. In 1H2007 operating revenues originating in the region contributed 24.7% to the consolidated Group revenues up from 15.5% in 1H2006; • Total unrealized incentive fees for 1H2007 reached EGP68.7 million up from EGP37.6 million in 1Q2007 and EGP8.7 in 1H2006; • The Brokerage arms in both Egypt and the UAE (on the DFM) have maintained their number one positions, with positioning on the ADSM improving to be one of the top 5 player; • More recently, the EFG-Hermes Research Team has topped nine key categories out of a total of fourteen in Euromoney's Middle East Equity Survey; • Total assets under management with the Group reached the equivalent of USD4.23 billion, USD3.8 billion of which are in listed equities and money market funds and the remainder in private equity; a 41.8% increase over 1Q2007 and a 52% increase over the year-end 2006. Of the increase in 2Q2007, EGP5.9 billion are new cash inflows; • During 2Q2007, Investment Banking sealed seven transactions, 6 for a total of USD2.9 billion and the seventh for an undisclosed amount; • During 2Q2007, Private Equity began marketing for the Horus III general purpose Egypt and North Africa Fund, that is due to close by the end of August. Concurrently, the Regional Asset Management Team began the roadshow for a fund in conjunction with Harvard Endowment Fund that is also due to close during the first week of September. With these new initiatives, funds under management is expected to increase by in excess of USD1 billion. PERFORMANCE Operating Revenues On a consolidated basis, 1H2007 locked in EGP541.6 million of operatingrevenues, EGP320 of which emanated during 2Q2007, a 72.9% growth over 2Q2006.Furthermore, operating revenues booked during 2Q2007 represents 36% of totalconsolidates operating revenues booked in the full year 2006. Table 2: Contribution of the Different Divisions to Operating Revenues onQuarterly Basis * includes EGP7 million of custody & margin fees held at the Holding Company level in 2Q2007 ** excludes a total of EGP68.7 million of unrealised incentive fees for the regional and Egypt operations in 1H2007 *** includes one-off EGP91.68 million in 2006 relating to EFG-Hermes private placement Table 3: Contribution of the Different Divisions to Operating Revenues on HalfYear Basis * includes EGP7 million of custody & margin fees held at the Holding Company level in 2Q2007 ** excludes a total of EGP68.7 million of unrealised incentive fees for the regional and Egypt operations in 1H2007 & EGP7.1 million in 1H2006 *** includes EGP91.68 million relating to EFG-Hermes private placement in 1H2007 During 2Q2007 Brokerage operations and Investment Banking remained the corecontributors to operating revenue. Brokerage activity in Egypt contributed 31.7%to the total consolidated revenues followed by Investment Banking out of Egyptcontributing 25.9%. Overall, brokerage activity constituted 40.3% of the Group'sconsolidated operating revenues in 2Q2007. The growth in assets under managementsince the end of 1Q2007 has been reflected in the increased contribution byRegional Asset Management to total operating revenue to 11.1%, mainly as aresult of the growth of assets under management. Operating revenues emanatingfrom Private Equity recorded EGP9 million, a 10% decrease over 2Q2006. Figure 4: Breakdown of Revenue by Business Line on a Quarterly Basis * Including Asset Management incentive fees as follows: 2Q2005 EGP15 million, 3Q2005 EGP12 million, 4Q2005 EGP155 million, 1Q2006 EGP1 million, 2Q2006 EGP3 million, 4Q2006 EGP4.9 million, EGP37.6 million in 1Q2007, EGP31.1 million in 2Q2007 (a total of EGP68.7 million for 1H2007) ** Includes EGP91.68 million of IB fees relating to EFG-Hermes capital increase in 1Q2006 Sources: EFG-Hermes and Management Reports Hereunder is an analysis of the company's main operational divisions: Brokerage Division The new structure introduced within the Brokerage Division during 1Q2007 (andexplained in our 1Q2007 earning release) has proved beneficial. In general, itensures that EFG-Hermes maintains its leadership position in the major marketson which it operates. Furthermore, this setup has enhanced EFG-Hermes executionsfor clients onto capital markets where the Group does not yet have physicalpresence including Qatar, Oman and Kuwait both enhancing profitability from themajor accounts as well as helping the Firm gauge our clients' priorities withrespect to the next markets in our expansion plans. Early during 3Q2007, EFG-Hermes announced the set up of the derivatives deskwithin Brokerage, the activities of which are expected to have majorcontributions to the business line's performance going forward as it opens upinvestment opportunities across the region for non-GCC nationals. The twoprofessionals responsible to set up the desk that have been hired from aninternational investment bank out of London and have started work at thebeginning of July. Egypt Excluding special transactions, volumes executed on CASE increased 19.7% over2Q2006 levels. 2Q2007 witnessed EFG-Hermes' market share rebounding to 18%.Volumes executed by EFG-Hermes slightly declined over the similar period lastyear as less special transactions were executed both on the market andaccordingly through EFG-Hermes' brokerage arms. Figure 5: EFG-Hermes Executions and Market Shares Sources: CASE and EFG-Hermes The use of the Group's Call Centre and Online operations in Egypt continued toexpand and together total executions through both services increased 27% in2Q2007 to EGP813 million and locking in a total commission of EGP4 million. During 2Q2007 revenue from the brokerage activity in Egypt increased 2.6 timesover 2Q2006 to EGP1011 million , constituting 31.7% of the Group's consolidatedrevenue. UAE Figure 6: Progression of Volumes Executed and Market Shares Sources: DFM, ADSM and EFG-Hermes Brokerage operations in the UAE continued to be the overall number one brokerwith total executions of AED14.6 billion in 2Q2007 and a 5.9% market share ofthe total UAE market. On the DFM, EFG-Hermes executions doubled over 2Q2006 inspite of the 28.7% decline in the total volumes executed on the marketmaintaining the number 1 position into 2Q2007 and averaging a 6.6% market share.On the ADSM, EFG-Hermes reached the number 5 position during April 2007 and hasbeen in the top 5 brokers ever since. The market share on the ADSM has increasedto 4.5% in 2Q2007 up from 2.5% and 1.9% in 1Q2007 and 2Q2006 respectively. Consequently, total revenues from the core operations in 2Q2007 increased 84%over the similar period last year to the equivalent to EGP27 millionconstituting 8.6% of the Group's consolidated revenues. Saudi Arabia Brokerage activity in Saudi Arabia is picking up slowly with the majoradvertising campaign set for September. Since executions on Tadawul began duringMarch 2007, EFG-Hermes' executions has more than doubled to reach SAR69 million,a 0.04% market share, by July 2007 up from SAR28 million during March 2007. Research The Research Division continued to expand its coverage of both Egyptian andregional stocks and economies. The most important initiations during 2Q2007included seven Saudi banks and the two telecom operators. An initiation note onMorocco was also published in early April 2007 followed by the initiation ofcoverage on three Lebanese banks and Air Arabia in the UAE. As with Egyptian andthe UAE markets, the Team now also publishes a Saudi daily and is workingtowards publishing a Saudi yearbook by the end of 2007. What is even moreimportant about the initiation of coverage on the Saudi stock is how well it wasreceived by the investor community and that now EFG-Hermes researchrecommendations are widely quoted in several Saudi and regional journals andprograms. 1 Including EGP7 million of fees for custody and margin trading held at the Holding Company level More recently, the EFG-Hermes Research Team beat its regional and internationalcounterparts covering the region in Euromoney's first Middle East Equity Survey.With competition including HSBC, Citi Group, Credit Suisse, Deutsche Bank,Global and Shuaa Capital, EFG-Hermes ranked first in nine out of the total fourteencategories (banking & finance, cement, industrial, economic, strategy, telecom,pharmaceutical, real-estate, agriculture & food), came second in four categoriesand third in another. Asset Management Figure 7: Development of Listed Assets under Management (totals in EGP billions) Source: EFG-Hermes During 2Q2007 listed assets under management increased to EGP21.6 billion, a33.4% increase over 1Q2007. The bulk of the increase, 82.3%, was a result of netnew fund inflows and not market related despite regional market indicesincreasing by on average 10% during 2Q2007. The major growth areas remained tobe the both money market funds as well as in the off-shore equity funds. Havingsaid that, discretionary portfolios also grew by an impressive 20% over 1Q2007to reach EGP7.1 billion. Egypt The major growth in assets under management within Egypt was in the money marketfunds that grew 52.5% over 1Q2007 to reach EGP9.3 billion. With the majority ofincentive fees on the existing funds and portfolios being calculated at the yearend, unrealised incentive fees as at the end of 1H2007 for the Egypt AssetManagement recorded EGP49.7 million up from EGP26.1 million at the end of 1Q2007with realised incentive fees for 2Q2007 being only EGP3.5 million. Total revenuebooked in 2Q2007 was EGP17 million constituting 5.3% of the total consolidatedoperating revenues for the Group. Regional Asset Management During 2Q2007, the Regional Asset Management Team out of Dubai emerged as amajor contributor to the Group's consolidated revenues. Booking the equivalentof EGP36 million in revenues, EGP23.3 million of which were realized incentivefees, the division contributed 11.1% to the Group's consolidated operatingrevenues. Of the total assets under management with the Group the offshore fundsmanaged by the Team in Dubai grew by over 30% during 2Q2007 to EGP3.2 billion.MEDA Fund increased to USD374 million adding USD210 million worth of new moneyover the quarter, while the newly launched Al Wassila Fund ended the quarter atUSD35.7 million. Of the existing funds, Al Dannah Fund, managed for Al Bank AlSaudi Al Faransi was ranked the best performing fund in Saudi Arabia for 1H2007. During the quarter the Team went on a roadshow to market a MENA specialopportunities fund in conjunction with the Harvard Endowment Fund. The Fund isdue to close by the first week of September 2007. Investment Banking During the quarter EFG-Hermes' investment banking arms sealed seven transactionsin total, four capital increases and private placements raising USD1.28 billionand three M&A transactions, two for a total of USD1.6 billion and the third foran undisclosed amount. The pipeline remains strong with a few mandates on handout of Saudi Arabia. The four equity raising deals were in the real estate and building materialsector; and represent deals for both regional and Egyptian Groups who are repeatclients, namely the capital increases for Solidere International (USD700million) and the Talaat Mustafa Group (USD230 million) and private placementsfor El Ezz Steel Rebars (USD200 million) and Suez Cement (USD150 million). Onthe M&A front, the Team advised on the sale of the Egyptian Fertiliser Companyfor USD1.4 billion as well as on two regional M&A transactions in the financialservices sector. Investment Banking remained a core contributor to the Group's operating revenuesbooking 40.6% of the Group's consolidated net revenue in 2Q2007. Revenues bookedin 2Q2007 increased 31.1% over 2Q2006 levels to reach EGP130 million. Private Equity Funds under management with Private Equity fell in 2Q2007 to USD428 million as 4investments from the CIIC Fund were exited realizing substantial capital gains.Based on market valuations both the CIIC and Horus II funds have close to USD120million of unrealized gains on their portfolios. During 2Q2007, the launch ofthe Horus III general purpose Egypt and North Africa Fund was launch and is dueto close by the end of August 2007. Private Equity's total revenue for 2Q2007 recorded EGP9 million contributing2.7% to the Group's consolidated revenues. Saudi Arabia Operations in Saudi Arabia are picking up slowly with major launch campaignsplanned starting September 2007 due to the slow down of the summer months.Investment Banking is working on a couple of deals which are due to close by theyear end. On the Asset Management front, several portfolios for high networthindividuals and family groups have been secured. The rollout of research notesis on track, and to date initiation reports on seven banks and the two telecomoperators companies have been published. A daily note on the Saudi market ispublished as is done for the Egyptian and UAE markets. Operating Expenses General and administrative expenses recorded EGP137.6 million in 2Q2007representing 43% of operating revenues and fee income. Employee costs remain the largest single component of operating expenses. Fullyloaded employee expenses constituted 56.2% of total operating expenses in 2Q2007despite the fact that over 100 new hires were recruited since then, many ofwhich are senior positions. Although in absolute terms the employee expensesincreased between 2Q2007 and 2Q2006, these expenses have declined to 24.2% ofconsolidated operating revenues compared to 43.11% in 2Q2006. More importantly,as the Firm has developed and has recruited more senior hires, the variableportion of the employee expenses has increased relative to the fixed portion.Furthermore, increased hiring in Saudi Arabia, which has only barely began tobook any revenue has added to this increase. A continuing feature of EFG-Hermes'staff profile relates to the fact that across all the lines of business there isa hidden employee cost that are associated with the Group's regional expansionplan where extra staff is hired and trained in order to be placed within thevarious regional units. Promotional and advertising expenses continue to be a major constituent ofoperating expenses. During 2Q2007 promotional and advertising expenses wereEGP6.8 million constituting 5% and 2.1% of operating expenses and operatingrevenues for the quarter down from 7.4% and 2.2% in 1H2006 respectively. Theexpense mainly relates to the promotion of EFG-Hermes' image across the regionas well as advertising for the various products. The new logo has been launchedand the re-branding process is well under way and expected to be completed bythe year-end. Telecommunication expenses remained at 1Q2007 levels of around 4% of totaloperating expenses slightly up from 3.7% 1H2006 figures as the operations in theUAE increased, and the fact that Saudi Arabia is picking up entails increasedcommunication costs due to the use of the multi currency multi market brokeragesystem as well as having remote offices across the region. Travel and marketing expenses dropped to 4.6% of total operating cost in 2Q2007down from 5.1% in 2006 as a result of both opening up the Riyadh office andseveral employees working from there rather than flying in from either the UAEor Egypt. In absolute terms consultant and services fees dropped 44% over 1H2006 levelsand constituted 2.8% of total operating costs in 2Q2007. Still a large amount inabsolute terms, it must be noted that the consultancy services used in bothperiods were different. The bulk of these expenses in 2006 related to legal feesin conjuction with the Saudi license application, EFG-Hermes' capital increases,the acquisition of the Banque Audi stake, the set up within the DIFC and variousinvestment banking and private equity transactions. During 2007, the expensesare largely related to PR and media consultants. As a result, net operating profit in 2Q2007 increased 63.2% over 2Q2006 toEGP182.4 million with an operating margin of 57%. Comparing the full 1H2007 tothe similar period during 2006 and adjusting for the expenses unrelated to1Q2007 (EGP23.5 million of bonuses paid in 1Q2007 relating to 2006) and theunusual investment banking fee in 1Q2006 relating to EFG-Hermes' privateplacement, net operating profit has increased in 1H2007 to EGP309.4 million, a25% increase on the EGP248 level in 1H2006, with a net operating margin of 57.1%up from 50.9% in spite of the inclusion of the costs of the operation in Saudithat has not yet borne fruit. Net operating profit does not include EGP68.7million of unrealised incentive fees, which if booked would improve the netoperating profit margin to 70%. Other Revenues and Expenses The bulk of the EGP209.2 million of other revenues not relating to investmentbanking operations fall into three main categories; the income the Banque Audiinvestment, the gains from the sale of part of the remaining proprietarypositions and interest income on both the cash balances generated from thebusiness and the last capital increase. EFG-Hermes' 28.6% ownership stake in Banque Audi Saradar remains a major revenuecontributor. During 2Q2007, the consolidated portion was equivalent to EGP65.1million. No major additions were done to EFG-Hermes' stake during 2Q2007. The other major contributor to other revenues is the gain on selling investmentsfor EGP59 million. This amount corresponds to the capital gain on the continuedsale of SODIC shares during 2Q2007 in line with the plan to slowly exit theinvestment on a quarterly basis over a 2 to 3 year period. The actual capitalgains remain held at the OPD level. As EFG-Hermes began to repay part of the DEG and IFC long term loans during the2Q2007, the bank interest and expenses recorded only EGP8.4 million. Treasury operations have continued as a major contributor to the Group's bottomline profitability as the interest earned and income from the money marketoperations using funds from both the operations and the free float as well onthe unutilized portion of the capital increase have contributed a net of EGP78.7million to the Group's other revenues. EGP8 million of FX losses incurred in 2Q2007 was mainly as a result of theappreciation of the EGP against the USD and relate to the unhedged portion ofthe FX balances held by the Firm. Consequently, net profit before taxes and minority interest for 2Q2007 more thandoubled over 2Q2006 levels to reach EGP367.1 million. This level of net profitsbefore tax and minority interest is 87.4% of total 1H2006 net profit beforetaxes. However, adjusting the net profit before taxes and minority interest forincome consolidated from Banque Audi and the interest income earned on theproceeds of the second capital increase, net profit before taxes and minorityinterest drops to EGP254 million in 2Q2007 compared to EGP138.2 million in1Q20072 and EGP107 million in 2Q2006. Furthermore, and to get to the actualprofitability of the investment bank's activities, EGP59 million are capitalgains not related to the core investment bank's business operations need to bededucted. Given the above, the adjusted net profit before tax and minorityinterest recorded EGP195.6 million with a margin of 61.1%. Balance Sheet With two capital increases during 2006, the second of which has not yet beenfully utilized, the Group's balance sheet further strengthened, withshareholder's equity and minority interest reaching EGP8.13 billion compared toa current market capitalisation in the vicinity of EGP17.5 billion. During3Q2007, at least USD50 million of the capital increase will be utilized to seedthe Group's newly launched funds. Cash, cash equivalents and other investments (namely T/Bills, Central Bankdeposits and investment in money market funds3) have increased to EGP7.9billion, EGP 4 billion of which related to the escrow account held on behalf ofone of the Investment Banking capital raising transactions against which aliability for the same amount is found within the balance of creditors and othercredit balances. EFG-Hermes' strategic ownership in Banque Audi Saradar remains at the 1Q2007level of 28.6%. Net payables resulting from operations recorded EGP345 million incurred mainlydue to the normal course of business as brokerage activities increase bothlocally and in the UAE as the result of settlement of normal execution businessand client deposits at the cut off date that were duly fully settled thereafter. On the liability side, the Group remains in a positive net debt position, withthe only outstanding bank debt at a total of the equivalent of EGP207.9 millionbeing the loans from IFC and DEG drawn down towards the end of 2005 withrepayment commencing during 2007. 2 Also adjusted for EGP23.5 million of bonuses relating to 2006 3 EGP1.2 billion of investment in money market funds is reported in the EGP1.3 billion trading investment figure Taxes EFG-Hermes' Finance Department continued to work on the effective asset andliability management, optimizing balance sheet management and revenue generationwhile effectively minimizing FX fluctuations. As a result, the effective taxrate for 2Q2007 was 13.6% down from 15.1% in 1Q2007. Profitability As a result, net income after tax and minority interest increased 57.4% over1H2006 level to EGP564.2 million and recording a return of 57.7%. Net profitafter tax and minority interest for 2Q2007 on a standalone basis reachedEGP313.9 million, an increase of 103.3% over 2Q2006. It is worth noting that the1H2007 net profits after tax and minority interest represent 80.5% of the fullyear 2006 net profits after tax and minority interest. Of the bottom line profitability, the majority relates to our core business; asthe bottom line 1H2007 if adjusted for the revenue consolidated from BanqueAudi, the interest income relating to the latest capital increase and the andthe extra bonuses paid in 1Q2007 relating to 2006 the adjusted net profit aftertax and minority interest recorded EGP354 million (up 32.5% over adjusted1H2006). Attesting to the firm's dynamic growth and continued enhancement of thebusiness lines' performance 2Q2007 (on a standalone basis) profitability fromthe core investment banking operations recorded EGP201.4 million equivalent to1.3 times the fully loaded 2Q2006 net profit after tax and minority interest.In this earnings release EFG-Hermes may make forward looking statements,including, for example, statements about management's expectations, strategicobjectives, growth opportunities and business prospects. These forward-lookingstatements are not historical facts but instead represent only EFG-Hermes'belief regarding future events, many of which, by their nature are inherentlyuncertain and are beyond management's control and include among others,financial market volatility; actions and initiatives taken by current andpotential competitors; general economic conditions and the effect of current,pending and future legislation, regulations and regulatory actions. Accordingly,the readers are cautioned not to place undue reliance on forward-lookingstatements, which speak only as of the date on which they are made. EFG-Hermes (Main Office), 58 Tahrir Street, Dokki, Egypt 12311Tel.: +20 2 333 836 26 | Fax: +202 333 780 38 | Website: www.efg-hermes.comStock Exchange & Symbol: Cairo-HRHO.CA | London-HRHOq.LBloomberg: EFGH | Reuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM Please attach the pdf copy of the audited financial statements here http://www.rns-pdf.londonstockexchange.com/rns/0882c_-2007-8-14.pdf http://www.rns-pdf.londonstockexchange.com/rns/0882c_2-2007-8-14.pdf This information is provided by RNS The company news service from the London Stock Exchange