News Column

EFG Hermes reports net profit of EGP 119 million for Q1 2014

May 15, 2014

EFG Hermes reported a nearly three-fold year-on-year rise in Group net profit to EGP 119 million on total Group operating revenues of EGP 563 million.

The investment bank made a strong contribution to both bottom-line profitability and to a 14 per cent rise in Group operating revenues. In the quarter just ended, the investment bank contributed EGP 60 million to Group net profit after tax and minority against a loss of EGP 31 million in 1Q13.

The significant pickup in the profitability of the investment bank owes to both the impact of cost optimisation measures and higher revenue generated from core business activities. The investment bank's operating revenue increased 27 per cent year-on-year to EGP 246 million. Excluding the capital market activities, the core businesses of advisory, securities brokerage, asset management and private equity generated 46 per cent of their revenues from regional operations, with the remaining coming from operations in Egypt.

Core lines of business continue to enjoy market-leading positions in Egypt and a growing share of market activity in the GCC.  

Cost optimisation effort, meanwhile, saw the ratio of employee costs to revenues decline to 49.8 per cent in 1Q2014, a range that management will continue to try to target going forward. By comparison, the ratio of employee costs to income stood at 72 per cent in 4Q2013 and 69 per cent in the same quarter of last year.

As a result of cost optimisation and the pickup in revenues, net operating profit at the investment bank has risen c. 17x from 1Q2013 to EGP 87 million.

The commercial bank, meanwhile, contributed EGP 59 million to Group net profit after tax and minority as better net interest income and fee and commission income largely offset the impact of lower trading income.

In line with a strategy to control costs and maximise shareholder value announced in May 2013, EFG Hermes returned EGP 425 million to shareholders in the first quarter through a share buyback and continued to dispose non-core assets, including the recent divestment of most of its stake in leading Egyptian real estate developer Sixth of October Development and Investment Company (SODIC).

Key Operational Highlights

Securities Brokerage was the number-one ranked broker by market share of executions on the Egyptian Exchange (EGX) and assumed the top position on the Kuwaiti Stock Exchange while maintaining a leading position in other regional markets. The division saw total executions rise 71 per cent quarter-on-quarter and 122 per cent year-on-year to $12 billion in the first quarter. Regional operations accounted for 44 per cent of total securities brokerage revenues in 1Q2014.

Investment banking is in the process of concluding its first transaction in Sub-Saharan Africa, advising Al-Futtaim Group on the acquisition via public tender offer of CMC Holding, the largest automotive distributor in Kenya. The tender offer closed during the first quarter with a large acceptance rate of 91 per cent with transaction execution and completion expected to take place in the second quarter of 2014. Meanwhile, in another regional transaction, the team advised a group of prominent regional investors on the acquisition of the third largest offshore accommodation vessels operator. The team continues to be focused on growing its regional footprint during the coming period while continuing to maintain its leading share of the Egyptian market. More importantly, it has built a very strong pipeline of transactions, some of which are expected to close during 2Q2014.

AUM grew five per cent quarter-on-quarter at asset management as a seven per cent appreciation in Egyptian and regional markets offset a two per cent net outflow of AUM, most of which came in the form of redemptions on local equity funds and outflows from Egyptian money market funds. Asset management's client base remains diversified.

Meanwhile, AUM at Private Equity stood at $0.6 billion. Following up on the division's new strategy, the team is reviewing new investment opportunities as well as negotiating a number of exits at different stages from the existing portfolio. Most recently, private equity exited its 19 per cent stake in leading regional jeweller Damas via sale to majority shareholder Mannai Corporation in an all-cash transaction valued at $150 million. The exit generated a c. $65.4 cash gain, implying a cash-on-cash multiple of 1.8x and an IRR of 37.8 per cent.

The research house covers 132 equities representing c. 59 per cent of the aggregate regional market capitalisation, with further coverage of 11 economies from a macro perspective and eight in terms of regular strategy notes.

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Source: CPI Financial

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