EFG Hermes Holding [HRHO]: Blueprinting Its Eminence
Diversification to target higher returns
EFG Hermes Holding [HRHO]
Egypt / Non-Banking Financials / Core Coverage Report
12M PT EGP17.7 (+28%)
set on 22 Dec 2020
Investment Rating: Overweight | Risk Rating: Medium
Key Insights
A three-pronged strategy
EFG Hermes Holding [HRHO], a leading MENA-based investment bank, has been shifting and expanding into non-banking financial services (NBFS) and now commercial banking. This means a faster pace towards generating double-digit ROAE with better utilization of its equity base.
Growing its regional presence
Another pillar of HRHO’s strengths is its regional presence which gives HRHO an edge against its local peers whose businesses are concentrated within Egypt’s borders only. Today, HRHO’s investment banking (IB) platform has operations across several emerging and frontier markets, breaking free from its reliance on Egypt.
Further diversifying revenue streams
HRHO is building its own NBFS platform from the ground up in Egypt. Moving into this high-growth NBFS segment, HRHO’s array of services includes microfinance, leasing, factoring, and consumer finance. Successful implementation of its NBFS strategy would see HRHO replicate this model in other markets where it has footprints.
Complementing the bouquet
HRHO’s second attempt to penetrate the commercial banking segment, albeit in Egypt this time, should help boost its earnings visibility. Also, the conclusion of the Arab Investment Bank (aiBank) acquisition could further support its NBFS platform.
Valuation, Investment Thesis, & Risks
Overweight, 12M PT EGP17.7/share (+28%)
We valued HRHO using a residual income model which pointed to a fair value of EGP15.4/share and led us our 12-month price target of EGP17.7/share. Hence, our Overweight rating. Over the year, HRHO has underperformed, falling 18% ytd on pressure from a market that is racked with COVID-19 pain. Having dropped to its lowest point in three years on 18 March 2020 (57% off its highest point in 2020), HRHO’s stock is yet to revert back up to its pre-pandemic levels. We expect HRHO’s bottom line to grow at a 4-year CAGR of 9% to EGP1.9bn by end of 2023.
Investment rationale
Market recovery during Q4 2020 and H1 2021 and beyond. Partial reversals of credit provisions. A recovery in transactions and AUMs in 2021 as well as value accretion from the potential acquisition of aiBank.
Risks
HRHO could see the impact of COVID-19 on its two platforms as follows:
•IB Platform: Weaker capital markets, lower AUMs, and delayed IB transactions.
•NBFS Platform: HRHO has already taken early precautionary steps by building up its provisions, but any hit to customers’ credit quality would harm almost all companies within the NBFS platform, and slower-than-expected growth would de-rate the stock valuation.
For the full report, please click here.
Sherif El Etr
Equity Analyst
T +20 3300 5720