1. PRIME INVESTMENT RESEARCH
AUTOMOTIVE |EGYPT
GB AUTO – INITIATION OF COVERAGE
JANUARY, 14TH
2016
PRIME INVESTMENT RESEARCH
FINANCIAL SERVICES |EGYPT
EFG HERMES – THOUGHTS ON CURRENT VALUATION STATUS
APRIL 24TH
, 2016
WE INITIATE COVERAGE ON … HRHO …
ASSIGNING A “BUY” RATING
EFG HERMES …
REMAINS EGYPT`S MARKET LEADER AND ON TOP OF MOST PLAYERS PARTICIPATING IN THE GCC
REGION.
CONTINUOUS SEARCH AND EFFORTS FOR VALUABLE GROWTH OPPORTUNITIES THROUGH
PENETRATING NEW BUSINESSES TO CONSISTENTLY ADD TO ITS SHAREHOLDERS` WEALTH.
IN 2015, WE SAW EFG HERMES ADDING THE LEASING BUSINESS TO ITS STRUCTURE, AND IN
2016 IT PENETRATED THE MICRO FINANCE BUSINESS THROUGH ONE OF THE WIDEST SPREAD
CHAINS IN EGYPT ACQUISITION. MARKING NON-CYCLICAL BUSINESSES ADDITION FOR RISK
DIVERSIFICATION … ANTICIPATE IMPRESSIVE FIGURES!
EFG HERMES SEEKS GROWTH IN ITS WELL ESTABLISHED SEGMENTS THROUGH ADDING MORE
MARKETS TO ITS FOOTPRINT ACROSS THE BOARD; SENDING POSITIVE VIBES.
HOWEVER, DURING CURRENT HIGH VOLATILITY TIMES WE REMAIN SKEPTICAL CONCERNING
SHORT TERM PATH FOR ORDINARY BUSINESS, BUT PE IS GOING ON TRACK.
WE INITIATE COVERAGE ON EFG HERMES, SETTING FAIR VALUE AT EGP
17.54/SHARE IMPLYING 73.8% UPSIDE POTENTIAL.
HENCE, WE ASSIGN HRHO A “BUY” RATING.
2. 2
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
We valued EFG Hermes at EGP 17.54/share driven from a sum of the parts valuation; comprised of
a P/BV multiple median of 0.84 estimated for the entity`s standalone book value. Added to the
company`s estimated sale value for commercial banking operations through Credit Libanais bank
and micro finance investment; which yielded a 73.8% upside over market price of EGP 10.09/share,
after adding net cash position and non-core assets market value.
EFG Hermes is Egypt`s and among the GCC leading investment banks, with operations executed
almost across the whole Arab world. The company continues to target creating shareholders` wealth
through enlarging its structure through new businesses penetration. Recently the company
penetrated the leasing business through a fully owned subsidiary that showed impressive
performance and ranking in a matter of half an operating year, being inaugurated in June 2015. EFG
continued its diversification through an acquisition for the widespread and successful microfinance
enterprise “Tanmeyah”. such additions mark a new less volatile revenue generating streams, in time
the region`s investment banking industry are suffering from the bearish outlook. Yet, EFG Hermes`
size and reputation continues to secure deals backlog, while competing in a downtrend to book
highest execution shares through its brokerages operations. The company is also known to possess an
active asset management division, and a tactical private equity team, with recent focus directed
towards the ever growing renewable energy investments.
In our case, EFG operates in what can purely be defined as a cyclical industry. However, in order to
apply a DCF valuation, we would then need to go through forecasting;
1) Brokerage revenues, through for instance setting our expectations for GDP in each market the
company operates within, in order to link their respective stock exchanges performance to GDP,
which is justified given empirical evidence that over long term aggregate equity market valuation
coincide to an extent with GDP changes. Going from such point, we would then be required to
set assumptions for EFG Hermes market share in each market, and hence, the company`s fees
levied over executions for the wide range of clients` types; which requires executions value
projections.
2) Asset management revenues, through setting projections for the company`s under management
assets performance relative to tracking indices, which requires setting assumptions for how
AuMs grow or shrink in size, incentive and performance revenues as a result of performance.
3) Private Equity revenues, through assuming new investments; requiring expectations for sectors,
deals values, returns and deals terms and conditions (seed financing, jurisdiction and
partnerships).
4) Investment banking revenues, through anticipating Equity, Debt and M&A new deals to be
acquired, their values and hence fees and coverage and markets of executions.
But is it reasonable to anticipate indices levels and hence total executions value during such highly
volatile times? To anticipate the IB division deals types, count and values beyond what the company
announce it has in its backlog? to forecast the PE`s active hunt for new investment opportunities? At
what planned exit IRR? In what sector? At what value? What about jurisdictions and partners? If yes,
how? we believe that in such times where volatility is low in comparison with the current ups and
downs we see, such forecasts can be fulfilled with only including absolute subjectivity based on
historical records. And since historical records are never good indicative in highly cyclical industries
not only correlating positive or negative events but also accounting for politics, that all together
narrow down to investors` sentiments, their risk tolerance, required returns and investment styles
and overlook over anticipated risk/reward matrix. We hence decided that a trailing multiple based
on fundamental is the best indicative of where EFG`s valuation might be standing from its current
market price.
EFG HERMES …
HEDGING VOLATILITY AHEAD THROUGH NEW NON-CYCLICAL BUSINESSES PENETRATION
Stock Data
Outstanding Shares [in mn] 614.8
Mkt. Cap [in mn] 6,204.3
Bloomberg – Reuters HRHO EY / HRHO.CA
52-WEEKS EGP 6.37 – EGP 14.14
YTD AV. DAILY TURNOVER EGP 37.1MN
Ownership
Bank of New York (GDRs) 10.5%
Dubai Financial Group 11.8%
Abdel Moneim Al Rashed 8.7%
Free Float 69.0%
Stock Performance
Source: Bloomberg
0
2
4
6
8
10
12
14
16
HRHO EGX 30 - rebased
“BUY”
MARKET PRICE EGP 10.09
FAIR VALUE EGP 17.54
POTENTIAL 73.8% UPSIDE
INVESTMENT GRADE
“VALUE”
Report Content
Valuation 4
Risks & Catalyst 5
Company Synopsis 6
1- Brokerage Operations 8
2- Asset management 10
3- Investment Banking 11
4- Private Equity 13
Two New Pillars
1- Leasing Business 14
2- Microfinance 15
Financial Summary 16
Disclaimer 18
3. 3
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
Although we strongly believe in FCF valuation methodologies` (FCFF or FCFE) abilities to unlock and breakdown
uncertainties to the most reasonable level. But only to the extent of cases where short term visibility over market
dynamics is assumed, in other words, in cases we believe that as deeper we dig we get closer to reality and away from
being pure subjective. We did not find the idea appealing to apply a DCF valuation for such industry, especially in
current times when even setting a base year for projection becomes unrealistic; as the MENA region, EFG Hermes`
core focus up till now, have been very volatile with too much politics and unexpected economic events currently
priced in within the region`s indices, but yet with no visibility where or when it ends. Instead of setting assumptions
setting risk adjustments through premiums and set reasonable growth projections that can be correlated with other
multifactor fundamental or macro-models; we see multiple based valuation as the most suitable in our case.
Our choice for multiple-valuation was based on our view as early stated for the highly volatile scene, whether for
estimating markets` executions, market shares, fees, deals prospectus, that are dependent variables at the end for
the same one independent variable “Investors Sentiment” with its coefficients being news on economic event and
political status.
And since we drove our multiple based valuation from comparables across the world, from markets to some degree
in imitating EFG Hermes client base, we then be indirectly accounted for the sentiment variable, through being priced
in already in comparables price-to-book multiple; the picked sample was also narrowed down by market
capitalization in respective currencies as much as reasonable to match EFG relevant size.
Validity of Price to Book value empirically can be extracted from:
1) According to the Bank of America Merrill Lynch Institutional Factor Survey, 53% of respondents
considered P/BV when making an investment decision, a matter strengthening the use of P/BV multiple
valuation concept as a viable one.
2) Intuitively, book value attempts to represent, on a per share basis, the investment that common
shareholders have made in the company. Book Value is a cumulative balance sheet amount, which is
generally positive even when EPS is approaching zero and being not indicative or turns negative, P/E for
such cases becomes meaningless in comparison within multiple choices. In same essence, book value per
share is more stable than EPS; P/B may be more meaningful than P/E when EPS is abnormally high or low or
is highly in periods of volatility.
3) In adjusting P/BV, the multiple also shows a derivation of a very important fundamental forecast
methodology, driven from the Gordon growth model, that it can directly be related to valuation based on
forecasted fundamentals:
Estimating a company`s adjusted P/BV based on forecasted fundamentals, for instance assuming the
Gordon growth model and using the growth, retention and ROE leads to a justified measure of the
most recent BV in terms of anticipated fundamentals as
B
R
Such equation without getting the hustle of derivation basis, states that simply such justification is
directly dependent on the relation between ROE to the required return.
Among the advantages of the BV multiple also is its ability to be linked to the present value of expected
future residual earnings; stating that if the expected earnings has a zero present value, only covering
its required return period by period, then we should see a justified multiple of 1. While if the
discounted residual earnings are positive in that case we should see a multiple of above 1 or vice versa.
B
V
B
4. 4
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
SOURCE: BLOOMBERG, PRIME
SOURCE: EFG HERMES, PRIME
Valuation
1- Investment Bank Valuation
We used EFG Hermes` standalone total equity as a reference for our multiple calculations, We chose to apply
a multiple based valuation for EFG Hermes to appropriately reflect the value it should have been trading at as
per 2015`s book value. We applied a P/BV multiple of 0.84 driven from the median value of the list of
comparables we chose. We used the standalone equity value as it is believed to reflect contribution to the IB,
Asset Management, Brokerage, Private Equity, and Leasing business which was established during 2015. It is
worth mentioning that, P/BV for the sector showed sharp drop across the world`s markets suffering from
higher volatility.
Sample Ticker Name P/BV - 2015 Market Cap - Respective CCYS
USA LM US Equity LEGG MASON INC 0.856 3,670
SF US Equity STIFEL FINANCIAL 0.828 2,140
KCG US Equity KCG HOLDINGS-A 0.774 1,035
Sweden CATB SS Equity CATELLA AB 1.196 1,514
ECEX SS Equity EAST CAPITAL EXP 0.743 1,744
England III LN Equity 3I GROUP PLC 1.192 4,669
France ROTH FP Equity ROTHSCHILD & CO 1.063 1,494
FFP FP Equity FFP 0.542 1,692
Italy EXO IM Equity EXOR 0.800 7,576
Spain ALB SM Equity ALBA 0.598 1,982
India NINV IN Equity NALWA SONS INVES 1.006 3,285
PGLT IN Equity PNB GILTS LTD 0.749 4,401
CGCL IN Equity CAPRI GLOBAL CAP 0.549 4,848
BENG IN Equity BENGAL & ASSAM C 0.330 4,268
OSCR IN Equity OSCAR INVESTMENT 0.213 3,802
Malaysia OSK MK Equity OSK HOLDINGS BHD 0.551 2,313
Pakistan OLPL PA Equity ORIX LEASING 1.427 3,893
Thailand KGI TB Equity KGI SECURITIES T 1.351 7,210
CNS TB Equity CAP NOMURA SECS 0.951 5,075
Philippines V PM Equity VANTAGE EQUITIES 0.753 6,677
Sri Lanka TAP SL Equity TAPROBANE HOLDIN 0.779 4,713
CFVF SL Equity FIRST CAPITAL HL 1.212 2,521
Botswana LETSHEGO BG Equity LETSHEGO HOLDING 1.5710 5,513
South Africa AEE SJ Equity African Equity E 1.863 4,250
ZED SJ Equity ZEDER INVESTMENT 0.988 9,518
Egypt BTFH EY Equity BELTONE FINANCIAL 1.187 3,377
PIOH EY Equity PIONEERS HOLDING 0.940 5,860
UAE DIC UH Equity DUBAI INVESTMENT 0.764 9,516
Median 0.842
Standalone Shareholders Equity Outstanding Shares BV/Share
EGP 6,756mn 614.8mn EGP 10.99/share
Comparables Median 0.84
Implied Standalone Value EGP 9.25/share
2- Commercial Bank Proceeds
In March 2016, EFG Hermes announced exiting its 63.7% stake; the sale of a 9.4mn shares representing 40%
in Credit Libanais at a price of USD 33/share to a consortium of Lebanese and Arab investors, subject to legal
procedures including the Central Bank of Lebanon approvals; with execution stated at no later than end of
June 2016. Beside, selling the remaining stake of 5.5mn shares indirectly owned with execution taking place
at same pricing terms, up to end of May 2017. The sale would generate proceeds of EGP 2.7bn in 2016 added
to proceeds of EGP 1.6bn in 2017 discounted for 1-period at a cost of equity of 23.2%, utilizing an equity risk
premium of 8%, risk free of 14.4% and a statistically adjusted beta of 1.11.
Total Sale Proceeds Discounted proceeds Outstanding Shares
EGP 4.33bn EGP 4.03bn 614.8mn
Implied Value EGP 6.55/share
5. 5
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
SOURCE: EFG HERMES
3- Microfinance Business – Investment Value at BV
Tanmeyah was acquired at a total investment cost of EGP 423mn, equivalent to EGP 0.69/share added to
total valuation.
4- Non-core assets
We valued the company`s 4.7% investment in SODIC at April 21st, 2016 closing price of EGP 11.1/share,
which yields a total value of EGP 176.8mn equivalent to EGP 0.29/share.
5- Finally we added the standalone net cash position of EGP 469.1mn equivalent to EGP 0.76/share.
Valuation Summary Sum of Parts Share Outstanding Per Share
Standalone Equity Valuation EGP 5.69bn 614.8mn EGP 9.25
Bank Proceeds EGP 4.03bn EGP 6.55
Non-core - SODIC Market Value EGP 0.176bn EGP 0.28
Micro-finance Investment Value EGP 0.423bn EGP 0.69
Net Cash (debt) EGP 0.469bn EGP 0.76
Total EGP 10.79bn EGP 17.54
Upside Risks
Stability in oil prices, before showing upward trends; hence enhancing investors` sentiments in markets
especially in GCC.
End to the current geopolitical tension in MENA region, incentivizing foreign investors` sentiments further
than current levels.
EFG Hermes replicating 2015 investment banking performance or book more deals during 2016.
Regaining Incentive fees over better performance for the asset management division.
More successful exits for current investments under the PE division management at high IRRs.
Successful and further brokerage operations expansions throughout Asia and Africa as early planned.
Further EGP devaluation, is additive to proceeds from regional operations and commercial bank stake sale.
Downside Risk
The CBE to continue limiting MMFs percentage to deposits in Egypt, impacting AuMs.
Continuity of adopting contracting monetary policy by the CBE in attempts to curb inflation through further
hikes in interest rates; seen adverse empirically on stock returns and valuation.
Any manufactured appreciation, would adversely hurt proceeds from regional operations and bank stake
sale.
Investment Catalyst
We are awaiting impressive performance from EFG Hermes lease and the micro finance business in 1Q2016.
Concluding Credit Libanais stake sale successfully, benefiting from the EGP devaluation, while opening up
for funding more growth opportunities.
Acquisition in non-cyclical businesses; likewise leasing and microfinance that support non-cyclical in nature
financing are anticipated utilizing the bank`s sale proceeds.
6. 6
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
EFG HERMES BOD
SOURCE: EFG HERMES
EFG HERMES OWNERSHIP STRUCTURE
SOURCE: EFG HERMES
FG H m … A t c
EFG Hermes S.A.E was established in 1984, as the Egyptian Financial Group that was later incorporated into EFG
Hermes. Since inception, the company has struggled to diversify its business through adding more investment arms
consistently and penetrating new areas of growth to become a fully fledged investment bank with a portfolio of
stakes in the most rapidly growing businesses.
One of the main positive attributes for EFG Hermes, is that it has always been characterized by a professional
management, that shall always be considered as a premium over valuation when looking for the company`s upcoming
horizon. As EFG Hermes with currently around 870 professionals, has been able to continuously expand operations
overseas and regional. A prestigious track record of regional markets` penetration and a global outlook, grabbing
global clients` attention to the GCC markets, led EFG Hermes to become among the globally recognized leading
investment banks, with current aggregate assumed GCC leadership.
EFG Hermes is a fully fledged investment bank, capitalizing on several divisions complementing each other to
preserve the company`s ongoing operations and market share in some of the MENA leading countries by turnover.
EFG execute in 10 of the MENA region`s most active markets, Egypt, UAE, KSA, Qatar, Oman, Jordan, Kuwait, Bahrain,
Lebanon and Morocco through its securities brokerage arms. EFG executes transactions for investors from over 11
different nationalities going from the GCC to Europe and USA. A leading investment banking division, has been able to
locally differentiate its offering, beside being strongly present in the regional scene through mega Equity, M&A and
Debt transactions; with the support of the brokerage arm through its wide reach and diversified client base exceeding
100k investors across the globe. EFG Hermes also has an active asset management arm through which it competes
over capital markets strongly supported by 50 professionals. The company`s private equity division has also been
successful in conducting valuable partnerships and getting involved in successful investments with proven profitable
exits with high multiples when the business matures.
EFG Hermes has also penetrated the commercial banking business through a 63.7% majority stake acquisition in
2010 in Credit Libanais (CL) Bank - Lebanon for USD 577.8mn. The bank is among the top 5 leading banks in Lebanon
with reach extending to 290k customers in Lebanon, Cyprus, Senegal, Bahrain and Iraq. CL specialized in commercial
banking, offering the wide spectrum of services including retail banking, checking and savings accounts, debit and
credit cards, personal loans and commercial retail loans, insurance, corporate banking, international banking services,
SME banking, private banking and asset management. The bank has 73 branches, 69 of which are located in Lebanon,
2 in Iraq, 1 in each of Cyprus and Bahrain beside a representative office in Canada and a subsidiary in Senegal. The
bank used to contribute impressively to EFG Hermes top line representing 59.9% in 2015 out of total EGP 2,616mn.
Diversifying its revenue streams; EFG concluded the leasing and microfinance businesses penetration successfully in
June 2015 and February 2016 respectively. Through establishing its leasing arm, EFG devoted EGP 100mn of capital as
the arm`s seed funding. The leasing business in Egypt is currently seen as one of the most promising areas to currently
be involved in. The company in continuance for its diversification away from traditional volatile revenue streams,
acquired a 76.7% stake in “Tanmeyah” a well established microfinance company in a EGP 345mn transaction, to open
up the road for the high revolving lower income financing business, and recently in April acquired EGB stake to raise
its holding to 94%.
Board Members
Mona Zulficar Chairman/ Non-Executive
Karim Awad CEO/ Executive
Yasser El-Mallawany
Y
Non-Executive
Takis Arapoglou Non-Executive
Robert Eichfekd Non-Executive
Thomas S. Volpe Non-Executive
Marwan Elaraby Non-Executive
Joseph Iskander Non-Executive
Jonathan Cimino Non-Executive
Charles Mcveigh III Non-Executive
10.5%
11.8%
8.7%
69.1%
Bank of New York (GDRs)
Dubai Financial Group
Abdel Moneim Al Rashed
Free Float
7. 7
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
Clean-up measures to optimize growth prospects
The company`s regional diversified model did not help prevent the adverse impact of to the 2011-2013 Arab Spring
period on investors` sentiments. By May 2013, EFG decided to take measures for the purpose of mitigating the
probability of likewise shocks hitting the markets in which it operates. EFG Hermes launched a 2-phase strategy
aiming for structural reforms. Phase 1 targeted a micro-restructuring plan, through cleaning up its balance sheet by
non-core assets divestiture and operational cost base optimization. To pave the road for phase 2 with core focus on
new businesses` and markets` penetration to augment revenue streams through looking for value additive
opportunities beyond and within Egypt`s borders.
Phase 1: May 2013/M ch 2 4 … the company`s management went through its 4-axis phase, targeting financial
strength, and appreciation.
As the company experienced a harsh year in 2013, leading to a net loss on the back of high operating expenses; the
implementation of the cost optimization aims at reducing the Investment Bank`s operational expenses to around EGP
500mn; and targets a 50% employees` expenses-to-revenues ratio as a benchmark to reach. The purpose behind
setting such goals is to maintain the IB`s profitability in times the markets turn unfavorable; mainly on the back of the
vacillating political and economical theme in the MENA region.
Phase 2: aimed to take phase 1 reforms to the next level of expanding
- During this phase, EFG targeted to maintain its leading position.
- Maintaining GCC penetrations and expansions.
- Incorporating new investments, negotiations were taking place for an alliance in the consumer finance
business; looking for synergies.
- Penetrating sub-sahara countries, and establishing a new eastern Africa hub servicing the region growth.
While Phase 2 is still in process, fruits are being collected. Through the successful inauguration for a microfinance
company added to the self-funding leasing business launch with purposes to consistently enhance both businesses
capital for enlarging capital available for financing through high leverage multiples.
I. Cost Optimization II. Non Core Assets III. Clean Balance Sheet V. Returns to Shareholders
- Restructuring Senior
Management Contracts.
- Layoff expensive &
unproductive staff.
- Combination &
Elimination of functions.
- Minimize non-employees
expenses.
- Sale of Old Headquarter
in Dokki.
- Sale of the majority of
HRHO ownership in
SODIC with only 4.7%
remaining currently.
- Renting and/or utilizing
other unsold assets; as
was the case with the Nile
City Towers office space
leased for 15 years.
- EFG cleaned its balance
sheet to fruit fair
representation starting
2014.
- To do so, EFG had to
impair all investments
that have deteriorated in
value whether in Syria,
Oman or Kuwait.
- An EGP 425mn share
buyback, retained at one
of the company`s
subsidiaries.
- Studying new lines of
businesses.
EFG Hermes – Office Presence – Egypt 1984
Investment
Banking
Brokerage
Asset
Management
Private
Equity Leasing Arm
Micro-
finance
Lebanon – 2010 - Commercial Banking – Credit Libanais (CL) … currently pending Lebanon Central Bank approval for Divestiture
UAE - 2002
KSA - 2006
Oman - 2008
Kuwait - 2008
Jordan - 2010
8. 8
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
SOURCE: EFG HERMES
I v tm t B k … 4-Operating Pillars
1- Securities brokerage
The Arab world leading brokerage firm by aggregate position, catering services to a wide spectrum of
investors; foreign, Arab and local institutions and high net worth clients with the region`s largest brokerage
team comprising around 120 sales and traders personnel specialized by client type and geography.
The securities brokerage division offers a wide range of services, including phone-execution orders, online
trading platform providing multimarket functionality in addition to margin trading for Egyptian retail
investors. Services are complemented by custody services, fundamental and technical research products
and insights and an ATM facility for Egyptian retail investors.
EFG Hermes is differentiated by its extensive client reach tool, offering face-to-face contact through
representative branches. Beside the virtual communication taking place through the company`s advanced
online trading platform accessing multiple markets simultaneously. A call center and an institutional and
high net worth desks are also available, for continuous support.
EFG Hermes knock regional doors, through its prestigious conferences held annually for valuable
networking opportunities and discussion panels. During March 2015, EFG held its 11
th
annual one-on-one
conference in Dubai, which grabbed the attention of 450 fund managers representing over 200 financial
institutions from 28 countries with assets under management exceeding USD 10tn. In September 2015,
London 5
th
annual conference held, where 250 fund managers attended representing 117 financial
institutions from 26 countries with aggregate assets under management exceeding USD 8tn. Both meetings
witnessed over 10k meetings as per EFG Hermes.
A growing track record and reputation has led to stability in Egypt`s leadership, while continuously
competing to trend upwards in ranking over all other operational markets, with the exception of KSA and
Jordan which both saw 1-rank drop in 2015 in comparison with 2014. In 2015, EFG Hermes leadership and
apparently investor sentiments towards the company were translated in capturing an average of 1-quartile
from aggregate executions in the wide span from Egypt to Oman.
We remain optimistic concerning the intention for acquiring a controlling stake of approximately 51% of
Invest & Finance Securities Ltd. for USD 1.9mn operating in Pakistan`s Karachi Stock Exchange, as it indicates
the company`s expansion path and its direction geographically rather than straight forward add in
prospectus to valuation, in other words, EFG Hermes active management maintains markets test.
Securities brokerage
Regional Presence, Market Share, Ranking 2013 2014 2015
Country Ranking Market Share ranking Market share ranking Market share
Egypt 1 29.1% 1 27.4% 1 32.7%
Dubai – DFM 6 10.8% 6 12.1% 5 14.7%
Abu Dhabi - ADX 6 10.9% 3 17.4% 2 27.4%
Nasdaq Dubai - - - - 1 52%
Kuwait 3 23.3% 2 25.6% 1 27.3%
Oman 7 14.0% 4 18.7% 3 21.7%
KSA 7 0.7% 5 1.0% 6 1.1%
Jordan 12 5.3% 3 8.8% 7 6.6%
Qatar NA 9.8% NA 10.0% NA 13.0%
Bahrain NA 3.5% NA 9.4% NA 3.6%
Lebanon NA 3.5% NA 3.9% NA 2.5%
Morocco NA 1.9% NA 2.3% NA 1.4%
9. 9
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
EFG HERMES CLIENTS` DIVERSIFICATION DAILY AVERAGE COMMISSION PER QUARTER – USD `000
SOURCE: EFG HERMES
SOURCE: EFG HERMES
SOURCE: EFG HERMES SOURCE: EFG HERMES
The daily average commissions reached USD 160k in 2015 registering a downfall of approximately 33% y-o-
y, driven from weaker markets and lower sentiments over the impact of oil prices drop in the region;
lending to some governmental tightening measures. While in 4Q2015 the average commissions over the
quarter reached USD 173k/day registering 29% over 3Q2015 due to relatively higher q-o-q aggregate
liquidity in markets, but were 16% down y-o-y. The drop in average commissions was driven by a drop in
executions, taking revenues down across the board of operating markets. Still EFG Hermes, managed to
account for total executions of USD 32.4bn, although the figure indicates the company`s well establishment
it was 31% lower y-o-y; but still managed to be translated into revenues of EGP 344mn which was 24%
lower y-o-y compared to EGP 451mn,. Although markets were in turmoil, institutions` executions favoring
EFG Hermes were the main drivers in accounting for the improvement in ranking across most markets; as
the company enjoys a well diversified client base from developed and developing nations.
Executions - USD mn 2012 2013 2014 2015
Egypt 5,672 4,710 9,425 6,839
DFM 1,636 4,658 12,547 6,075
ADX 837 2,511 6,799 4,514
Nasdaq Dubai - - 1,044 1,401
KSA 1,460 2,935 5,765 5,039
Kuwait 6,494 9,269 5,466 3,662
Oman 373 823 1,096 780
Jordan 167 228 280 317
Revenues - EGP mn 2012 2013 2014 2015
Egypt 179 159 252 209
Change 13.3% -11.2% 58.5% -17.1%
UAE 15 49 125 75
Change -11.8% 226.7% 155.1% -40.0%
KSA 7 12 23 17
Change -22.2% 71.4% 91.7% -26.1%
Kuwait 30 45 30 25
Change 20.0% 50.0% -33.3% -16.7%
Oman 5 12 14 11
Change -16.7% 140.0% 16.7% -21.4%
Jordan 4 6 7 8
Change -20.0% 50.0% 16.7% 14.3%
132
99
121
98
125
167
131
147
282285
184
206
156
176
134
173
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
0
50
100
150
200
250
300
1Q2012
2Q2012
3Q2012
4Q2012
1Q2013
2Q2013
3Q2013
4Q2013
1Q2014
2Q2014
3Q2014
4Q2014
1Q2015
2Q2015
3Q2015
4Q2015
Daily Average q-o-q change %
49.26
19.93
23.39
5.68
5.31
0.33 0.01 0.98
Egypt
UAE
Kuwait
Jordan
Oman
Saudi Arabia
Qatar
Others
10. 10
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
EFG HERMES CLIENTS` DIVERSIFICATION – USD BN
FUNDS CLIENTS CONTRIBUTION BY DESTINATION – 4Q2015
SOURCE: EFG HERMESSOURCE: EFG HERMES
2- Asset Management
EFG serves a well diversified client base including sovereign wealth funds, endowments, foundations, and
pension funds; with a team of 50 professionals across Egypt, UAE and KSA. The division currently manages
equity and fixed income funds, beside single country, sector and region specialized strategy funds, as well as
managing shariah compliant and absolute return and indexed funds.
EFG had USD 2.6bn of AuM by 2015 end, on a y-o-y basis AuM dropped by 16.1% in comparison with
4Q2014 USD 3.1bn. Looking at quarters average 2015 dropped only by 11.02% versus a year earlier. Same
adverse impact of lower sentiments and hence weaker markets headlined the decline, as 4Q2015 AuMs
represents the historical low level for the company`s under management assets. Historically, the ups and
downs were caused by gains versus losses in AuMs values; however, recently redemptions were of a major
factors enlarging declines, as out of 2015 average 11% decline, redemptions represented 3.8%.
The drop came across the different vehicles EFG Hermes manages, although there were new inflows from
the company`s capture of a new equity portfolio in Egypt beside flow injection in an existing KSA equity
fund, and 3 new equity funds in KSA in addition to new institutional equity portfolios, outflows surpassed
inflows. However, as the company noted that more than 50% of AuM is denominated in EGP while the
reported figures are in USD which shows the devaluation effect on AuM values, a matter enlarging
aggregate AuM declines in USD relative to each fund/portfolio respective currency.
One major reason for the drop in Money Market Funds (MMFs) was the recent CBE`s decision to lower
maximum amounts allowed by banks for investment in MMFs to 2.5% of banks total local currency deposits
from 5%, and/or 50x of 2% of banks tire 1 capita, whichever is lower. Similar to 2014 regulatory actions that
negatively impacted asset managers in Egypt, however, MMFs are already characterized by relatively lower
fees. Although 2015 was a tough year across GCC and Egypt, we believe EFG Hermes asset management
was active relative to others, as the division`s revenues came 21% lower in 2015 standing at EGP 215mn in
comparison with EGP 272mn in 2014, driven by the company`s diversified AuMs. A drop of only 12% in
regional AuM revenues standing at EGP 176mn in 2015, adjusted a 46% drop in Egypt`s AuM revenues that
came in at EGP 39mn.
3.3 3.4
3 3.1
2.6
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
0
0.5
1
1.5
2
2.5
3
3.5
4
2011 2012 2013 2014 2015
AUM % Change
0.1 0.2 0.2 0.2 0.1
0.6 0.6 0.7 0.7 0.7
2 1.8
1.2 1.1
0.9
0.6 0.8
0.9 1.1
0.9
0
2
4
2011 2012 2013 2014 2015
Egypt Equity Funds Regional Equity Funds
Money Market & Fixed Income Portfolios
41.00%
15.00%
30%
11.00%
2% 2%
Foundation/ Pension/
Insurance
Sovereign Wealth
Funds
Institutions
High Net
Worth/Families
Private Banks
Others
72.00%
28.00%
MENA
Europe
11. 11
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
SOURCE: EFG HERMES
AGGREGATE EQUITY OPERATIONS USD 20.5BN IMPRESSIVE ADVISORY OPERATIONS ON M&A – USD 53.5BN USD 4.3BN IN DEBT OPERATIONS
3- Investment Banking
EFG leverages its wide reach of serving around 102k investors in MENA, US and Europe already through its
brokerage operations, a winning card in capturing large sized deals, in anticipation from companies for high
coverage ratios for their high profile equity placements. EFG Hermes has a long track record showing
excellence in advising on over 200 different transactions, divided between Equity, Debt and Mergers &
Acquisitions totaling over USD 78bn; from which some of the largest regional deals was booked in favor of
EFG Hermes. Beside equity placements, debt raising and restructuring and M&A seeking clients pursue EFG
services, being known for negotiation skills and ability for securing needs, plus deal closures in timely
manner across the region.
Although brokerage and asset management divisions fell in revenues in 2015, the year closure was in good
shape with revenues increasing to EGP 163mn, to record 18% increase over 2014. On contrary to the asset
management stream, domestic operations showed almost 2 folds increase in revenues to end the year at
EGP 142mn over EGP 48mn in 2014. While regional revenues fell by 77% to EGP 21mn down from EGP
90mn in 2014.
The reason behind the overall solid performance can be attributed to the closure of 10 equity and M&A
transactions in 2015. EFG managed the sale of El Rashidi El Mizan in a USD 95mn cross border transaction,
also took charge for the USD 100mn sale of Egyptian electronic payment processor Fawry, as well as
advising on selling Schweppes Egypt to Coca Cola company. EFG Hermes as the lead or joint book runner for
4 major IPOs (Orascom Construction, EDITA, Integrated Diagnostic Holding, and Emaar Egypt), the 4 IPOs
were characterized by exceptionally high subscriptions and coverage, in addition to that IDH listing marked
EFG`s 1
st
operation in London stock exchange. During 2015, financial advisory was also provided for Palm
hills USD 216mn worth rights issue, GB Auto USD 126mn worth rights Issue, beside being in advisory joint
role and underwriter on Amer group`s backed security offering of USD 28mn. By all measures 2015 was
exceptional with a total worth of deals closure of USD 2.8bn. In 2016, EFG has YTD booked some major
transactions through Domty EGX listing, with backlog for Cleopatra hospital acting as financial advisor.
The year performance outperformed consensus view which strengthens our valuation methodology for EFG
Hermes. As although 2014 showed a regained momentum represented in 13 deals versus 5 deals in 2013
that was one of the lowest years in terms of deals closure and earned revenues; 2014 IB revenues were
lower than in 2015. Although markets across the board showed a strong rally in returns and sentiments
were high in 2014 before getting into the oil turmoil and geopolitical tension of 2015, in which EFG Hermes
booked an impressive year versus all expectations. In 2014, EFG was able to regain market activity strongly,
driven by the participation in 3 of UAE`s top IPOs during 2014; acting as a co-manager on the USD 201mn
IPO on Emirates REIT, Joint Book-runner on the USD 1.6bn IPO of Emaar Malls Group and USD 690mn Dubai
Parks & Resorts. Beside capturing GB Auto`s USD 70mn private placement, SODIC`s USD 140mn rights` issue
beside acting as a joint book-runner for Arabian Cement USD 110mn IPO.
51
13
20
2.3
28
5.2
0
10
20
30
40
50
60
Count Values - USD bn
IPO Private Placements Follow on/Rights Issue
42
8.3
46 45.2
0
10
20
30
40
50
Count Values - USD bn
Buy Side Advisor Sell Side Advisor
17
3.63
0.7
0
2
4
6
8
10
12
14
16
18
Count Values - USD bn
Arrangement Bond Underwriting
12. 12
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
SOURCE: EFG HERMES
EFG Hermes IB Track Record Shows Excellence
Country Company Advisory On Value Date EFG Role
Egypt Telecom Egypt IPO USD 891mn 2005 Joint Book runner
Talaat moustafa IPO USD 992mn 2007 Joint Book Runner
Juhayna IPO USD 176mn 2010 Coordinator & Book Runner
Paradise Capital Sale 52% in Olympic Group to Electrolux USD 452mn 2011 Fin. Advisor
Orascom Telecom Holding De-merger of OTMT SAE USD 2,592.4mn 2012 Fin. Advisor
Egyptian Refining Co. Private Placement USD 510mn 2012 Placement Managaer
Al Mokhtabr Labs Merger with Al Borg Group Undisclosed 2012 Fin. Advisor
Wadi Degla Private Placement USD 41.2mn 2013 Fin. Advisor
Japan Tobacco Int`l Acquisition of Al Nakhla Tobacco Undisclosed 2013 Fin. Advisor
Palm Hills Rights Issue USD 86mn 2013 Lead Arranger
Arabian Cement IPO USD 110mn 2014 Joint Book Runner
GB Auto
Placement of Secondary Stake followed by
Capital Increase
USD 70mn 2014 Placement Manager
The Abraaj Group Sale of 100% stake of leading private hospital Undisclosed 2014 Sell Side Advisor
Consortium of Investors Establishing a retail chain - kazyon USD 76.6mn 2014
Fin. Advisor & Placement
Manager
SODIC Rights Issue USD 139.8mn 2014 Book Runner & Joint Fin. Advisor
Amer Asset Backed Securities Bond USD 28mn 2015 Joint Fin. Advisor & Underwriter
Orascom Construction Ltd. Admission of Demerger Shares USD 185.4mn 2015 Joint Book Runner
Edita IPO USD 267.3mn 2015 Joint Coordinator & Book Runner
GB Auto Rights Issue USD 126.1mn 2015 Fin. Advisor
Palm Hills Rights issue Usd 216.4mn 2015 Fin. Advisor
Emaar Misr IPO USD 300mn 2015
Joint Global Coordinator & Book
Runner
Qalaa Sale of its 100% stake in El Rashidi El Mizan USD 95mn 2015 Sell Side Advisor
Domty IPO USD 127.2mn 2016 Coordinator & Book runner
Saudi Arabia
Saudi Communications and IT
Commission
Sales of 2nd GSM & Data License USD 3,457mn 2004 Joint Fin. Advisor
Bank Audi
Acquisition of majority stakei n (undisclosed)
Bank
Undisclosed 2007 Buy Side Advisor
UAE DU IPO USD 660.5mn 2006 Coordinator & Book Runner
Al Habtoor Sale of 45% stake to Leighton USD 862mn 2007 Sole sell Side Advisor
Mannai Corp/ EFG Hermes Advisory on Acquisition of 78% in Damas USD 445mn 2012 Buy Side Advisor
Dubai Group Advisory on Sale of 100% stake of Dunai First USD 164mn 2013 Sole Fin. Advisor
BLME Advisory on technical Listing on NASDAQ Dubai USD 500mn 2013
Corporate Broker & Listing
Manager
EFG Hermes Capital Partners Sale of 19% Stake in Damas USD 28.5mn 2014 Sell Side Advisor
Consortium of Investors Advisory on Acquisition of 78.3% stake in MOS USD 151mn 2014 Sell Side Advisor
Abu Dhabi based F&B Player Advisory on Private Placement undisclosed 2014 Fin. Advisor
Abu Dhabi based Real Estate Player Advisory on Private Placement undisclosed 2014 Placement Advisor
Emirates REIT IPO USD 201mn 2014 Lead Arranger
Exceed Industries
Sale of 15% stake in National Feed & Flour
Production
USD 41mn 2014 Sell Side Advisor
Emaar Group IPO USD 1,579.1mn 2014 Joint Book Runner
Dubai Parks IPO USD 689mn 2014 Joint Book Runner
Orascom Construction Ltd. Admission of Demerger Shares USD 1,400mn 2015 Sponsor & Coordinator
Oman Alliance Housing Bank Sale of 35% stake to Ahli United Bank USD 132mn 2009 Sell Side Advisor
Bahrain Etisalat Acquisition of 2nd Bahraini GSM License NA 2003 Fin. Advisor
Dubai Financial Acquisition of 100% Stake in TAIB USD 171mn 2007 Fin. Advisor
Sudan Japan Tobacco Int`l
Acquisition of 100% Stake in Haggar Cigarette &
Tobacco Factory
USD 450mn 2011 Fin. Advisor
Jordan Jordan Cement Factories Sale of 33% Stake to Lafarge USD 100.5mn 1998 Sell Side Advisor
Zain Acquisition of 92% Stake in Fastlink USD 423.9mn 2002 Fin. Advisor
Kenya Al Futtaim Acquisition of 100% Stake in CMC East Africa USD 88mn 2014 Buy Side Advisor
Slovenia El Sewedy Cables Acquisition of 98% Stake in Iskraemeco USD 56mn 2007 Buy Side Advisor
Italy Arafa Holding Acquisition of 35% Stake in Forall Confezioni USD 34mn 2009 Buy Side Advisor
Wind Telecom Merger with Vimpelcom USD 25,700mn 2011 Fin. Advisor
Pal Zileri Ownership Restructuring & Recapitalization USD 68mn 2014 Fin. Advisor
Tunisia Orascom Telecom Sale of OT`s 50% stake in Qtel USD 1,200mn 2011 Sole Fin. Advisor
Amsterdam MOS Acquisition of 100% stack in Seafox Contractions Undislosed 2014 Fin. Advisor
Fawry Egypt Sale of 100% stake to PSI Netherlands USD 100mn 2015 Sell Side Advisor
USA Schweppes Egypt Sale of 100% stake to Coca Cola Undisclosed 2015 Sell Side Advisor
London IDH IPO USD 334mn 2015 Joint Coordinator & Book Runner
13. 13
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
PE AUMS – USD MN AUM INVESTMENT CLASSIFICATION PRE-VORTEX EXPANSION - 2015
SOURCE: EFG HERMES SOURCE: EFG HERMES
4- Private Equity
The PE division is a well established with presence in Egypt and Dubai. The division provides investment
management and advisory services, beside fund raising activities. Up to 2015, EFG was able to invest USD
960mn in 38 different investments through Horus 1, EFG CP 2 & 3 and Horus Agri. Fund. The company was
able to successfully conduct 27 exits with proceeds totaling USD 507mn out of which, EFG realized gains
equivalent to EGP 176mn; setting aggregate exit IRR at 17%, and USD cash on cash exit multiple at 1.5x. One
of the remarkable exits that EFG was able to successfully conduct was Damas, in which EFG PE invested USD
85mn in March 2012 to account for a 19% acquisition alongside MANNAI corporations. Two years later,
March 2014, EFG exited its position at USD 150mn, recognizing an IRR of around 38%.
EFG PE`s AuM currently stand at USD 614mn, spread over several sectors, with risk diversification through
including cyclical and non-cyclical investments. EFG PE is also one of 5 main global and regional sponsors for
InfraMed fund, a EUR 385mn fund in investing in infrastructure with focus in the southern and eastern
Mediterranean. Up to date the fund has invested around 40% of commitments in investments in Egypt,
Turkey and Jordan. InfraMed investments in Egypt took place through ERC, in which a share of 15% was
acquired at USD 100mn. Turkey`s investment was a 20% stake in Iskenerun Port Facility, while Jordon
investment came represented in a 49% investment in Tafila Wind Farm which produces 114MW of
electricity.
In 2014, EFG was able to successfully close a 49% stake acquisition in a USD 208mn leveraged buyout along
with co-investors, in partnership with EDP Renovaveis (EDPR) for a portfolio of wind farms encompassing 33
wind farms with total capacity of 334MW in France. EFG PE representation came through Vortex to partner
with EDPR the 51% holder which takes responsibility for the operations and management of the assets,
while EFG manages the investment vehicle. The deal came in an arrangement with the French government
for a 15-year feed in tariff agreement.
Recently, April 2016, Vortex a renewable energy platform managed by EFG PE announced entering into an
agreement with a subsidiary of EDPR for the acquisition of EUR 550mn, 49% stake in an operational 664MW
European wind assets, distributed over 23 farms in 4 different jurisdictions; Spain (348MW), Portugal
(191MW), Belgium (71MW) and France (54MW). Vortex maintains plans for reaching 1GW of energy
generation within the upcoming two years, while through the acquisition EFG succeeded in almost doubling
its PE AuM to USD 1.16bn. EFG funded the transaction through a 40/60 equity/debt financing. The equity
investment encompassed a 5% EFG seed investment beside 95% GCC sovereign capital, while the 40%
remainder funding came from 5 European banks in a form of 13-years facility. The transaction takes Vortex
under management net capacity to 457MW, after 2014`s added 132MW. In 2015, EDPR France distributed
EUR 22mn to Vortex, a return on the 132MW investment, from which EUR 10.4mn were utilized in settling
debt payments while EUR 8mn were distributed to investors
1125
980
665 692 734
614
1164
0
200
400
600
800
1000
1200
1400
2010 2011 2012 2013 2014 2015 2016
YTD
17%
17%
11%
50%
2%
3%
Construction &
Real Estate
Oil & Gas
Food &
Agriculture
Infrastructure
Utilities
Textiles
14. 14
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
SOURCE: EFG HERMES
Tw w … Ensuring growth through non-cyclical operations
1- L B … FG L
In June 2015, EFG Hermes announced launching its leasing business after acquiring regulatory approvals
from EFSA, and ended 2015 with revenues of EGP 20mn. EFG Hermes Leasing became then a fully owned
subsidiary established through an allocation of EGP 100mn from the mother company. In a matter of less
than 6 months of operations through 2015 end, the leasing arm came in 8
th
place with a market share of c.
5% driven from leased value of EGP 708mn; however, in 4Q2015 the arm was 5
th
by lease value of EGP
450mn capturing 9% market share, headlining many well established competitors with vast track record of
operations. The business has acquired a leverage buffer over capital of 8x, to maximize funding financial
and/or operating lease to EGP 900mn, which supports growth in an underpenetrated segment. EFG Hermes
model targets a 3% leasing margin. The leasing arm has a turnaround of 20days mainly targeting SMEs that
still face difficulties in obtaining banking facilities. Although recent CBE regulations might bring the banking
system deeper to the SMEs financing scene, we believe leasing arms with SMEs focus enjoy priorities in
securing clients as a matter of being on the ground working hand in hand, plus enjoying a better tracking
mechanisms through complementary services provided and credit and financial checks done.
Contracts Booked - 2015 Lease Value (EGP mn) Market Share
1- Incolease 1,100 21%
2- Corplease 849 17%
3- Al Tawfik Lease 619 12%
4- Techno Lease 456 9%
5- EFG Hermes 450 9%
6- Al Ahly 433 8%
7- QNB 348 7%
8- GB Lease 135 3%
9- Orix 133 3%
10- Global Lease 131 3%
Contracts Booked - 4Q2015 Lease Value (EGP mn) Market Share
1- Incolease 2,067 14%
2- Corplease 2,025 14%
3- QNB 1,788 12%
4- Al Tawfik Lease 1,694 12%
5- Al Ahly 1,503 10%
6- GB Lease 1,130 8%
7- Techno Lease 979 7%
8- EFG Hermes 708 5%
9- Arab African 559 4%
10- Orix 493 3%
15. 15
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
2- M c c … T m y h
In February 2016, EFG Hermes concluded the purchase of a 76.7% stake of a leading microfinance player,
70% acquired from Qalaa Holding and 6.7% from the company`s management in a transaction worth EGP
345mn. In April 2016, EFG Hermes announced pursuing to enlarge its held stake at Tanmeyah through
acquiring the Egyptian Gulf Bank stake in the company of 17.3% at EGP 77.9mn; which brings total held
share to 94% for a total of EGP 422.9mn with the remainder held by the retained original dedicated
management.
The acquisition marks EFG Hermes accomplishment in targeting businesses with the highest potential return
over the upcoming horizon. Tanmeyah operates through lending to microenterprises operating in non-
cyclical businesses, loans ranging EGP 4-30k with tenor of 4-12 months for financing cash flows and assets;
hence guaranteeing low defaults and high turnovers. Besides, lending to very small enterprises operating in
non-cyclical businesses to isolate economic cycle risks. Loans range falls within EGP 30-100k with tenors of
6-24 months for cash flow financing only. Tanmeyah is geographically all over Egypt, with 114 branches in
total divided between, 53 in Delta, 7 in Greater Cairo and 54 in Upper Egypt; hence ensuring superiority in
targeted clients reach in all governorates far away from the banking system sophistication. Outstanding
repayments are also facilitated, whether through Fawry electronic platform in branches in case of micro-
enterprises or through ATM widespread through branches or through western union transfers in case of
very small enterprises.
Tanmeyah has impressively grown its revenues by 45.7% in 2015, to stand at EGP 134mn, while booking a
net profit margin of 31%. Since inception the micro finance chain has issued micro enterprise and very-small
enterprise loans worth EGP 3bn, with average loan size of EGP 8k indicating the targeted clients being the
most in need and the farthest from the banking arena which preserve high future potential. The company
currently has active borrowers of 110.3k served by 1.5k employees.
18. 18
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
PRIME SALES TEAM
Hassan Samir Managing Director +202 3300 5611 hsamir@egy.primegroup.org
Mohamed Ezzat Head of Sales & Branches +202 3300 5784 mezzat@egy.primegroup.org
Shawkat Raslan Heliopolis Branch Manager +202 3300 5110 sraslan@egy.primegroup.org
Amr Saber Team Head-Institutions Desk +202 3300 5659 asaber@egy.primegroup.org
Amr Alaa, CFTe Manager +202 3300 5609 aalaa@egy.primegroup.org
Mohamed Elmetwaly Manager +202 3300 5610 melmetwaly@egy.primegroup.org
Emad Elsafoury Manager +202 3300 5624 eelsafoury@egy.primegroup.org
RESEARCH TEAM
* research@egy.primegroup.org +202 3300 5728
HEAD OFFICE
PRIME SECURITIES S.A.E.
Regulated by CMA license no. 179
Members of the Cairo Stock Exchange
2 Wadi El Nil St., Liberty Tower,
7th-8th Floor, Mohandessin, Giza, Egypt
Tel: +202 33005700/770/650/649
Fax: +202 3760 7543
Disclaimer
Information included in this report has no regard to specific investment objectives, financial situation, advices or particular needs of
the report users.
The report is published for information purposes only and is not to be construed as a solicitation or an offer to buy or sell any
securities or related financial instruments. Unless specifically stated otherwise, all price information is only considered as indicator.
No express or implied representation or guarantee is provided with respect to completeness, accuracy or reliability of information
included in this report.
Past performance is not necessarily an indication of future results. Fluctuation of foreign currency rates of exchange may adversely
affect the value, price or income of any products mentioned in this report.
Information included in this report should not be regarded by report users as a substitute for the exercise of their own due diligence
and analysis based on own assessment and judgment criteria. Any opinions given are subject to change without notice and may
significantly differ or be contrary to opinions expressed by other Prime business areas as a result of using different assumptions and
criteria. Prime Group is under no obligation responsible to update or keep current the information contained herein.
Prime Group, its directors, officers, employees or clients may have or have had interests or long or short positions in the securities
and/or currencies referred to herein, and may at any time make purchases and/or sales in them as principal or agent.
Prime Group, its related entities, directors, employees and agents accepts no liability whatsoever for any loss or damage of any kind
arising from the use of all or part of these information included in this report. Certain laws and regulations impose liabilities which
cannot be disclaimed. This disclaimer shall, in no way, constitute a waiver or limitation of any rights a person may have under such
laws and/or regulations.
Furthermore, Prime Group or any of the group companies may have or have had a relationship with or may provide or have
provided other services, within its objectives to the relevant companies. Prime Group 2016 all rights reserved. You are hereby
notified that distribution and copying of this document is strictly prohibited without the prior approval of Prime Group.
![2
PRIME INVESTMENT RESEARCH
EFG HERMES – THOUGHTS ON VALUATION
APRIL, 2016
We valued EFG Hermes at EGP 17.54/share driven from a sum of the parts valuation; comprised of
a P/BV multiple median of 0.84 estimated for the entity`s standalone book value. Added to the
company`s estimated sale value for commercial banking operations through Credit Libanais bank
and micro finance investment; which yielded a 73.8% upside over market price of EGP 10.09/share,
after adding net cash position and non-core assets market value.
EFG Hermes is Egypt`s and among the GCC leading investment banks, with operations executed
almost across the whole Arab world. The company continues to target creating shareholders` wealth
through enlarging its structure through new businesses penetration. Recently the company
penetrated the leasing business through a fully owned subsidiary that showed impressive
performance and ranking in a matter of half an operating year, being inaugurated in June 2015. EFG
continued its diversification through an acquisition for the widespread and successful microfinance
enterprise “Tanmeyah”. such additions mark a new less volatile revenue generating streams, in time
the region`s investment banking industry are suffering from the bearish outlook. Yet, EFG Hermes`
size and reputation continues to secure deals backlog, while competing in a downtrend to book
highest execution shares through its brokerages operations. The company is also known to possess an
active asset management division, and a tactical private equity team, with recent focus directed
towards the ever growing renewable energy investments.
In our case, EFG operates in what can purely be defined as a cyclical industry. However, in order to
apply a DCF valuation, we would then need to go through forecasting;
1) Brokerage revenues, through for instance setting our expectations for GDP in each market the
company operates within, in order to link their respective stock exchanges performance to GDP,
which is justified given empirical evidence that over long term aggregate equity market valuation
coincide to an extent with GDP changes. Going from such point, we would then be required to
set assumptions for EFG Hermes market share in each market, and hence, the company`s fees
levied over executions for the wide range of clients` types; which requires executions value
projections.
2) Asset management revenues, through setting projections for the company`s under management
assets performance relative to tracking indices, which requires setting assumptions for how
AuMs grow or shrink in size, incentive and performance revenues as a result of performance.
3) Private Equity revenues, through assuming new investments; requiring expectations for sectors,
deals values, returns and deals terms and conditions (seed financing, jurisdiction and
partnerships).
4) Investment banking revenues, through anticipating Equity, Debt and M&A new deals to be
acquired, their values and hence fees and coverage and markets of executions.
But is it reasonable to anticipate indices levels and hence total executions value during such highly
volatile times? To anticipate the IB division deals types, count and values beyond what the company
announce it has in its backlog? to forecast the PE`s active hunt for new investment opportunities? At
what planned exit IRR? In what sector? At what value? What about jurisdictions and partners? If yes,
how? we believe that in such times where volatility is low in comparison with the current ups and
downs we see, such forecasts can be fulfilled with only including absolute subjectivity based on
historical records. And since historical records are never good indicative in highly cyclical industries
not only correlating positive or negative events but also accounting for politics, that all together
narrow down to investors` sentiments, their risk tolerance, required returns and investment styles
and overlook over anticipated risk/reward matrix. We hence decided that a trailing multiple based
on fundamental is the best indicative of where EFG`s valuation might be standing from its current
market price.
EFG HERMES …
HEDGING VOLATILITY AHEAD THROUGH NEW NON-CYCLICAL BUSINESSES PENETRATION
Stock Data
Outstanding Shares [in mn] 614.8
Mkt. Cap [in mn] 6,204.3
Bloomberg – Reuters HRHO EY / HRHO.CA
52-WEEKS EGP 6.37 – EGP 14.14
YTD AV. DAILY TURNOVER EGP 37.1MN
Ownership
Bank of New York (GDRs) 10.5%
Dubai Financial Group 11.8%
Abdel Moneim Al Rashed 8.7%
Free Float 69.0%
Stock Performance
Source: Bloomberg
0
2
4
6
8
10
12
14
16
HRHO EGX 30 - rebased
“BUY”
MARKET PRICE EGP 10.09
FAIR VALUE EGP 17.54
POTENTIAL 73.8% UPSIDE
INVESTMENT GRADE
“VALUE”
Report Content
Valuation 4
Risks & Catalyst 5
Company Synopsis 6
1- Brokerage Operations 8
2- Asset management 10
3- Investment Banking 11
4- Private Equity 13
Two New Pillars
1- Leasing Business 14
2- Microfinance 15
Financial Summary 16
Disclaimer 18](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)