Wednesday 11, January 2017 by Sarah Spendiff

Renaissance Capital's valuation of EFG Hermes is both positive and cautious

EFG is up 75 per cent since the flotation of the Egyptian pound on the back of its dollar revenue exposure and dollar cash holdings, coupled with its expansion strategy and a better macro outlook for Egypt.

EFG is up 75 per cent since the flotation of the Egyptian pound on the back of its dollar revenue exposure and dollar cash holdings, coupled with its expansion strategy and a better macro outlook for Egypt.

Renaissance Capital expects EFG Hermes’s brokerage and investment banking (IB) to do well in the medium term, on higher trading volumes and renewed appetite for IPOs and M&A in Egypt, but it remains cautious on EFG’s expansion strategy.

EFG Hermes’s (EFG) strong industry positioning and franchise are offset by what is viewed as its full valuation, given recent share-price performance, and by execution risks on potential acquisitions in frontier markets, says report.

The report updated its earnings estimates to incorporate a better macro outlook for Egypt and apply FX of EGP16.0/$ for FY17/18E. On the new estimates, it increased TP to EGP26.8/share (from

EGP13.5/share), but maintain the MARKET PERFORM rating.

The brokerage business should, according to the report, do well on the back of an Egyptian recovery, a pick-up in earnings and increased risk appetite across its markets of operation. “We have already seen a sharp increase in trading volumes, with dollar ADV nearly doubling since the flotation of the Egyptian pound compared with July- November 2016. We expect brokerage revenue to reach EGP800mn/1bn in 2017/2018E. We expect primary activity to pick up in Egypt and in the wider region, adding to IB and brokerage income and providing the main driver for earnings. We expect IB revenue to increase to EGP180mn/200mn in 2017/2018E,” states the report released today.

Asset management and use of cash pose some risks it cautions, and adds that it is wary of EFG’s expansion strategy into new frontier markets, given their highly competitive and fragmented nature and the size of the opportunity. “While EFG has increased its AuM in private equity (PE) with the recently announced solar power deal to c. $1.3bn, we believe asset management and PE would both benefit from further increase in their AuM – these two lines of business have added substantially to earnings in good times, and offer somewhat less cyclicality than brokerage and IB,” said the report.

However the report added that the stock appear expensive at current price levels, trading at 31x/21x 2017/2018E P/E. “Once we exclude the proceeds from the sale of the Credit Libanais (CL) stake, cash and consumer finance businesses, its valuation comes down to 17x/11x P/E – in line with global peers. Our SoTP-based 12-month TP of EGP26.8 (EGP13.5 previously) is the sum of: 1) IB, valued at EGP14.5/share; 2) leasing (EGP0.5/share); 3) the CL stake (EGP4.0/share); 4) Tanmeyah (EGP1.0/share); and 4) investments and cash (EGP6.7/share). Our TP implies downside potential of 3 per cent and we reiterate our MARKET PERFORM rating. Our higher TP is driven by our higher estimates and FX rate. The key risks we see are stronger/weaker than expected Egyptian macro affecting market sentiment and a higher/lower-than-expected contribution from the consumer finance division,” it stated.

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