27th Feb 2008 10:00
EFG-Hermes Holdings SAE27 February 2008 FY2007 Earnings Release - 27 February 2008 The fiscal year ending December 31, 2007 has been yet another remarkable yearfor the Group on all fronts. Record performance across all business lines, thelaunch of new products and the expansion into new markets whether physically orby tapping new classes of investors have all contributed to the superior resultsthe Firm is enjoying today. The fund management business has been at theforefront of EFG-Hermes' success and the increase in funds under management,whether in listed or private equities, has been spectacular although the sizestill remains relatively modest by international standards. Restructures withinthe business lines and the Group as a whole have also had positive impact onboth the Firm's bottom line as well as its modus operandi whose full impact willbe felt during 2008. Equally important is the fact that during 2007 great focuswas given to building a strong Team within the Group including an efficient andeffective second-line being the launching pad on to which EFG-Hermes's next waveof growth will hinge upon. Today EFG-Hermes has a strong Team with diversebackgrounds and experiences of the highest quality. In addition to all the expansion and hard work, the regional markets haveperformed well during the year and most have rebound in terms of volumes andvaluations after a very turbulent 2006. With the exception of Saudi Arabia wherevolumes continued to decline over 2006 levels increased trading across regionalcapital markets has set a positive backdrop for EFG-Hermes' business be itbrokerage activity, markets ripe for IPO or allowing the firm to lock insubstantial incentive fees at the year end. Table 1: Performance of Arab Markets during FY2007 Please refer to the attached pdf Sources: Regional markets and EFG-Hermes 2007 in Review1 • The Group's total consolidated revenue more than doubled over the year to reach EGP 2.6 billion remaining predominantly income from the operations of the investment bank; • Total operating revenue from the Investment Bank increased 132% over the year to EGP2.33 billion; • Net operating profit for the year increased over 2 folds to EGP1.53 billion corresponding to a net operating margin of 65.7%. Adjusting for 2006 bonuses paid and expensed during 2007, the adjusted net operating profit rises to EGP1.55 billion, with a 66.7% net operating profit margin; • Net profit after tax and minority increased 82.53% over 2006 levels to reach EGP1.28 billion; • Management is recommending the distribution of EGP1/share in dividend payout up from EGP0.75/share for the fiscal year 2006; • With the Saudi operation still being in the start up phase and not yet operating at full force the regional operations contributed 28.1%2 to the Group's consolidated operating revenue (37.5% in Q42007); • The Brokerage arms in both Egypt and the UAE (on the DFM) continued to maintain their number one positions, with the positioning on the ADSM improving to number 2. The Saudi Brokerage arm ended the year in the number 2 position among the 9 independent brokerage companies (after the 11 companies relating to commercial banks) despite having started trading actively only in 3Q2007; • The Research Team has been polled #1 in 9 out of 14 categories in a survey conducted by the Euromoney Magazine for the Middle East in addition to increasing the breadth of coverage across the region; • Total assets under management within the Group reached the equivalent of USD 7.5 billion, USD 6.5 billion of which are in listed equities and money market funds and the remainder in private equity; tripling over the year end 2006. Of the increase over the year, around USD 3.8 billion are new cash inflows; • Total realised incentive fees for 2007 reached EGP379.0million up from total incentive fees of 14.1 million in 2006. As at year end 2007 total unrealised fees amounted to EGP170.8 million; • 2007 saw Investment Banking close several deals with sizes at or above the USD 1 billion mark including the sale of the Egyptian Fertiliser Group to Abraaj Capital, the sale of Al Watany Bank of Egypt to the National Bank of Kuwait, the partial sale of Al Habtoor Engineering to Leighton Holdings as well both the private placement and the IPO for Talaat Mustafa Group; • Besides successfully closing the Horus III Fund, Private Equity successfully sealed several exits from the Horus II portfolio yielding substantial capital gains; • EFG-Hermes Qatar LLC has been granted a license to conduct investment banking and asset management activities on the Qatar Financial Centre; • The largest single shareholder in EFG-Hermes changed from Abraaj Capital to Dubai Financial Group during November 2007. The number of EFG-Hermes shareholders has continued to decline to around 16,000 shareholders from around 60,000 in 3Q2006. 1 please note that EFG-Hermes added principal investment activity and returnson capital allocation to the definition of the Investment Bank. Incomeconsolidated from Banque Audi becomes the only exception 2 including proprietary accounts within the region and brokerage commissionsearned in Egypt from regional markets Performance Total Revenue Table 2: Breakdown of Total Revenue Please refer to the attached pdf * including Prop. Account Sources: EFG-Hermes audited financial statements and management accounts The Group's total consolidated revenue has more than doubled over the year toreach EGP2.62 billion. The core revenue driver remains the fee income fromagency business that contributed 70.9% of total revenues. Although thecontribution of the equity consolidated portion of Banque Audi has increased32.9% over 2006, its contribution to total revenue has declined and that ofTreasury operations and efficient asset and liability management has grown inimportance. Revenues from Fees, Commissions and Management of Investments Performance across all the business lines during 2007 has been outstanding.Consolidated operating revenues have doubled over 2006 levels. Table 3: Contribution of the Different Divisions to Operating RevenuePlease refer to the attached pdf * includes EGP55.7 mn of custody & margin fees held at the Holding Company level in 2007 (EGP47.7 mn in 2006) ** includes EGP91.68 mn in FY2006 relating to EFG-Hermes capital increase in 2006 *** includes EGP43.7 mn 2007 relating to Solider International, a regional transaction executed by the Egypt Team Sources: EFG-Hermes audited financial statements and management accounts During the year, every quarter set a new record high in revenues from the coreinvestment banking activities. Continued leadership positions in the markets inwhich we operate, an expanded client base serviced through new products as well as favorable market conditions have all contributed to the growth. The reboundof the equity markets over 2007 up from their 2006 lows has positively impacted both brokerage revenues as well as incentive fees on the asset management sidewhile setting an accommodating backdrop for the investment banking transactions. The change in the investment bank's revenue breakdown relating to the agencybusiness in 2007 reflects the Group's strategy of growing the less volatileasset management side of the business as well as conservatively startproprietary activities. Although Brokerage operations remain the corecontributor to the consolidated operating revenue, it accounted for 30% of thebusiness as opposed to 44% in 2006. The larger asset management business ingeneral, including both listed and private equities, accounted for 37%, morethan doubling over 2006 levels. The major growth area was in the Regional AssetManagement business, accounting for 15% of the total business, as new clientswere introduced to EFG-Hermes and new products launched. Private Equity'sincreased contribution was as result both of an increase in management fees dueto the doubling of funds under management during the year as well as successfees from several sizeable exits from both the Horus II and CIIC funds.Investment Banking revenues have achieved an all time high which present achallenge to duplicate over the coming year. Its contribution to theconsolidated operating revenues has dropped to 25% of the total revenue, acontribution that is expected to continue in the future. With limited exposurein the equity proprietary account (around USD 70 million excluding SODIC)revenues from the account have began contributing to the Investment Bank'srevenues; 7.1% during 2007 mainly locked in during the last quarter of the year. In line with the Group's expansion strategyinvestment banking revenues emanating from Egypt have dropped from 88.9% in 2006to 71.9%3 in 2007 and expected to drop further as the full effect of the Saudientity comes into play during 2008 as well as Qatar and the other markets theFirm is expanding into. Figure 4: The Breakdown of Operating Revenue by Business Line on a QuarterlyBasis Please refer to the attached pdf * Includes Asset Management performance fees as follows: 2Q2005 EGP15 mn, 3Q2005 EGP12 mn, 4Q2005 EGP155 mn, 1Q2006 EGP1 mn, 2Q2006 EGP3 mn, 4Q2006 EGP4.9 mn, 1Q2007 EGP6.5 mn, 2Q2007 EGP26.9 mn, 3Q2007 EGP9.8 mn, 4Q2007 EGP335.8 mn ** Includes EGP91.68 mn 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 As of the beginning of the year Brokerage activities across the Group startedimplementing a new structure whereby a regional approach to the business hasbeen applied across all its segments. The new structure aimed at improvingclient services and has actually put our in-house developed multi-marketmulti-currency trading platform to the test. The new structure has provedbeneficial and has ensured that EFG-Hermes maintained its leadership position inthe major markets on which it operates. Furthermore, this setup has enhanced theGroup's executions for clients onto capital markets where the Group does not yethave physical both enhancing profitability from the major accounts as well asservicing our clients regionally rather than locally in each market. As a first step towards the establishment of the structured products groupEFG-Hermes announced early during 3Q2007 the set up of the structured productsdesk within Brokerage, the activities of which are expected to have significantcontribution to the business line's performance going forward as it opens upinvestment opportunities across the region. The two professionals responsible toset up the desk that were hired from a leading investment bank in the UK startedwork at the beginning of July. 3 including the breakdown of revenue from proprietary activity across theregion Egypt Over 2007 value traded on CASE has increased by around 19% and was reflected inthe increase in net 4 brokerage commissions in excess of 20%. Despite afluctuation in market shares throughout the year, EFG-Hermes ended the yearmaintaining its 20% market share by more than regaining its market share within4Q2007. With a total of EGP124 billion in executions over the year, EFG-Hermesremains by far the number one broker on CASE with executions 2.5 times more thanthat of its closest competitor. Figure 5: EFG-Hermes Equity Executions and Market Shares Please refer to the attached pdf Sources: CASE, EFG-Hermes 4 excluding commissions earned on executions on markets other than CASE by theEgypt Team Starting the last quarter of the year Brokerage and EFG-Hermes Management tookthe conscious decision to decrease commission rates charged to the institutionalinvestors and high networth individuals, being the bulk of the firm's clients.Since the implementation of the lower rates, EFG-Hermes has increased its shareof the existing clients' business across the region in addition to attracting awider client base. With the retail business becoming a more important component of brokerageactivity in Egypt, EFG-Hermes launched Online Brokerage and Call Centreactivities during the year. The pick up was initially slow but by the year endcommission income from both the Online and Call Centre services constitutedaround 5% of total brokerage commissions in Egypt. It must be noted that thegrowth in activity in both the Call Centre and Online has not taken away fromEFG-Hermes' retail brokerage arm as the subsidiary's executions remain on therise. Revenue from brokerage activity in Egypt increased 28% over 2006 levels to EGP434million5, constituting 23.4% of the Group's consolidated agency businessrevenue and 18.6% of the total consolidated revenues of the Investment Bank. 5 including EGP55.7 mn of fees for custody and margin trading held at theHolding Company level UAE Figure 6: Progression of Volumes Executed and Market Shares Please refer to the attached pdf Sources: DFM, ADSE and EFG-Hermes 2007 was a transformational year for Brokerage activities in the UAE. The numberone position on the Dubai market starting November 2006 has been furtherconsolidated as the gap between EFG-Hermes and the runner up increased andvolumes executed increased 35% over 2006 levels to reach AED 27.1 billion. TheGroup's executions on the Abu Dhabi Stock Market have increased over 4.5 timesto AED 14.9 billion and ending the year with a market share of 7.9% and insecond position in terms of brokerage companies. The major thrust in executionsin the UAE came as a result of exploiting EFG-Hermes' key strength ofinstitutional sales on the back of an extensive spectrum of research notespublished on the various stock by EFG. Although not as large as the operationsin Cairo, Online trading and the Call Centre in the UAE have picked up over theyear. Brokerage operations out of the UAE constituted 7.4% of the Group's totalconsolidated fee income and 5.9% of the total Investment Bank's revenues. Saudi Arabia Figure 7: Progression of Volumes Executed and Market Shares Please refer to the attached pdf Sources: TADAWUL and EFG-Hermes EFG-Hermes operations in Saudi Arabia in general were delayed due to variousregulatory issues and the time consuming processes of setting up. Brokerageactivities commenced at the end of March and have slowly picked up since then,ending the year with a 0.89% market share and a position as the number 2 brokerout of a total of nineteen brokerage companies that are not related to theeleven commercial banks involved in brokerage activities. Since startingoperations EFG-Hermes has not resorted to either giving rebates or discounts,which is common practice in the Kingdom, and to date commands the full 10bpsmandated by the regulators. Over the past nine months, EFG-Hermes has alsointroduced a call centre operations in the KSA. As EFG-Hermes' key strength inbrokerage is institutional rather than retail, the opening up of the Saudimarket, even on a limited basis, will have a major positive impact on bothvolumes executed going forward. Brokerage in Saudi Arabia has locked in the equivalent of EGP 9 million inagency fees corresponding to 0.5% of the Group's consolidated fee revenue. Other Regional Markets Due to the restructuring of the Brokerage division at the beginning of the yearEFG-Hermes began executing heavily on several regional markets. The business hasincreased tremendously to the extent that the volumes channelled by EFG-Hermesconstitute a calculable share on those markets. Research Figure 8: Development Research Coverage Please refer to the attached pdf Source: EFG-Hermes During 2007 Research has been a major contributor to the Group's overall growthand recognition. As at the end of 2007 the division covers 102 stocks (includingstocks under review) in eight countries across the region and publishedmacroeconomic and strategy notes on nine regional economies in addition to dailyreports on the Egyptian, UAE and Saudi markets, regional monthly reports andyear books. Over the year the average number of reports published per monthincreased from 12 in 2006 to 20 in 2007. During December 2007 alone, Researchpublished 31 reports including the initiation of coverage on 6 small cap banksin Egypt and the re-initiation of coverage on Dubai Investments Company. A keyattribute of EFG-Hermes research remains its quality; an attribute that hasenabled the Group to top the Euromoney Middle East Research poll released inAugust 2007. The Team was polled #1 in 9 of 14 categories including the mostimportant ones of Economics, Strategy, Banking, Real Estate, Industrials, Cementand Telecoms, came in second in four and third in one. Over 200 investinginstitutions participated in the survey and the competition included bothregional and global research houses. Asset Management Figure 9: Development of Listed Assets under Management (totals in EGP billions) Please refer to the attached pdf Source: EFG-Hermes The profile of the Asset Management business within the Group has changeddramatically during the year and its importance and contribution has increasedas it has become an effective shield in smoothing out the volatility ofinvestment banking revenues by providing a stable recurrent source of income. Assets under management more than tripled during the year to reach EGP35.9billion (USD6.53 billion) as at the year end with approximately 75% of theincrease coming from new inflows. Assets under management with the Egypt-basedTeam have grown 142% to reach EGP21.5 billion (USD3.9 billion) and nowconstitute 60% of the total listed assets under management within the Group,down from 77.8% in 2006. Growth in assets under management with the regionalUAE-based Team was even more spectacular as assets under management reachedEGP14.5 billion (USD2.63 billion) as at the year end, up from USD465 million atthe end of 2006. The composition of the assets under management has also changedthroughout the year; although money market funds have grown to over EGP13.3billion (USD2.4 billion), assets under management in the funds have increased to35.1% of total assets under management compared to 32.2% in 2006 and henceslowly increasing the longer term and more stable components of the moneymanaged. Asset Management: Egypt 2007 was a very successful year for the Asset Management Team in Egypt as assetsunder management more than doubled to EGP21.5 billion as a result of the launchof new funds as well as the introduction of a number of innovative products thatwere first in the Egyptian market. Asset Management (Egypt)'s performance has remained very strongly in 2007including some of the best performing Funds in the Egyptian market. The fivefunds managed for local commercial banks were ranked as the top five performersin Egypt for the second year in a row. The top performing local fund (CrediteAgricole's second fund) yielded a return exceeding 63% during the year,outperforming the index. Furthermore, EFG-Hermes's money market funds remain thetop performers in Egypt. Moreover, the EFG-Hermes Egypt Fund, which returned 62%in 2007, was named the best performing fund world wide over a three-year periodby the International Herald Tribune in April of 2007 and was also the only Egyptfocused fund to be granted an "AA" rating by Standard & Poor's. During 2007, total revenue booked by Asset Management in Egypt quadrupled over2006 levels to EGP225 million mainly on the back of EGP164 million worth ofrealised incentive fees, constituting 12.1% of the total consolidated feerevenues for the Group. Having said that, management fees have increased by over30% over 2006 levels attesting to both the increase in assets under managementas well as the ability to maintain the average management fee despite the largeincrease in money market funds that command lower fees. Regional Asset Management Growth in the Regional Asset Management business has been aggressive during theyear, with the building of an asset base in excess of USD2.6 billion compared toUSD465 million in 2006 due to the repositioning of the franchise and theplatform into the region, the penetration of new markets and the introduction ofa new class of clients to the firm. Over the year the Team launched several new funds, the most prominent being theMENA Opportunities Fund in conjunction with the Harvard Management Company whichclosed towards the end of 3Q2007 with an initial size of USD500 million. TheFund is the first of its kind in the region with the ability to invest both longand short as well as having an allocation to illiquid and unlisted opportunitieswithin the MENA region. Other funds launched during 2007 included Al WaseelaFund on behalf of the Commercial Bank of Qatar as well as the Al Tawfeek IslamicTelecom Fund. Existing funds have also seen tremendous growth with EFG-Hermes'flagship regional long-only fund the Middle East and Developing Africa (MEDA)Fund, which received AA rating from S&P in 3Q2007, increasing over seven foldto reach USD789 million by the year end over USD500 million of which were netcash inflows. Furthermore, the MEDA Fund's total returns for 2007 recorded areturn at 51% outperformed both the MSCI EM index as well as the MSCI Arabiaindex (ex KSA). Since inception in June 2002, the MEDA Fund has also performedwell above the MSCI EM index with a total return of 387% compared to 260% of theindex. Revenues of the Regional Asset Management team increased 17 fold to theequivalent to EGP286 million of which EGP215.5 million were realised incentivefees. Investment Banking Investment Banking has sealed thirteen deals during the year, raising USD2.1billion in equity for its clients and closing USD3.9 billion worth of M&Atransactions. On the Egyptian front EFG-Hermes remains the country's largestInvestment Bank and has captive, repeat clients that come to the Firm fortransactions within Egypt and the region. EFG-Hermes has also carved a nichemarket in the regional Investment Banking market especially with respect tocross border M&A deals and equity offerings where EFG-Hermes can capitalise onits regional client relationships and distribution muscle. It is worth notingthat our Group's strength in Investment Banking remains its ability tocapitalize on the growing intra-regional capital flows, its regional placingpower and contacts as well as its superior knowledge of the various sectors andindustries within the region. Several prominent transactions were concluded during 2007. On the equity raisingside, EFG-Hermes managed the largest IPO in Egyptian history raising over USD1billion in the initial public offering of the Talaat Mustafa Group. EFG-Hermeswas also the sole placement manager on the DIFC incorporation and USD700 millioncapitalisation through a private placement for regional real estate playerSolidere International. On the M&A front, three transactions were completed withan equity value that is in the USD1 billion range. EFG-Hermes acted as solesell-side advisor to the shareholders of Egyptian Fertiliser Company in the saleto Abraaj Capital in a transaction worth USD1.4 billion. We also acted as thesole sell-side advisor to the shareholders of Al Watany Bank of Egypt on thesale to the National Bank of Kuwait for USD1.02 billion, which ranks as thesecond largest M&A transaction in Egyptian financial sector's history and thelargest involving a private sector bank. The third major transaction for theyear was on the sale of 45% of Al Habtoor Engineering to Leighton Holdings ofAustralia for a total deal size of USD862 million where EFG-Hermes was also thesole advisor on the transaction. The latter deal was prominent both in the sensethat it was the largest M&A deal on the Dubai market as well as its being thefirst sizeable cross continental deal to be brokered by EFG-Hermes in the UAE. On the organizational level, four members of the Investment Banking Team inEgypt have relocated to Riyadh representing the initial core team there. Withthe Team on the ground, it is currently pitching for several major transactions.EFG-Hermes' commitment to Saudi is a function of our belief in the potentialthat this market has and our ability to capture part of the Investment Bankingbusiness that it generates on annual basis. Investment Banking revenue during 2007 has been the highest ever locking inEGP451 million, up 24% on the record high of 2006. The contribution ofInvestment Banking to the Group's consolidated fee income declined to 24.4% asthe other lines of business grew substantially over the year and 19.4% of thetotal consolidated revenues of the Investment Bank. Private Equity 2007 was a fruitful year for Private Equity between the successful closing ofHorus III and several exits; the division set the ground to launch several fundsin 2008 increasing its funds under management through several initiatives. As atthe end of 2007, total funds under management reached USD 885 million as aresult of Horus III closing at USD 585 million and despite sealing divestmentsfor a total book value of EGP326 million. During the latter part of 2007, two high profile divestments from the Horus IIFund (that had originally closed only in late December 2005) took place. Themajor one was the sale of the 10% stake in Al Watany Bank of Egypt realizing animplied IRR in excess of 140% since its acquisition in March 2006. Three exitsfrom the CIIC portfolio were concluded bringing in capital gains in excess ofEGP100 million. The Horus I Fund is winding down with 3 investments remaining tobe liquidated. On the back of Horus II's success, Horus III closed towards theend of 3Q2007 at USD585 million and currently has 3 investments. As with 2007, Private Equity will continue to be a deal source for the Group'sInvestment Banking arm. Private Equity grossed total revenues of EGP177 millionmore than double the previous year. The business line contributed 9.6% to theGroup's consolidated fee revenue in 2007. Saudi Arabia During 2007, revenue from Brokerage operations and EFG-Hermes' Principal accountin Saudi are the only revenue that is being booked directly to the Saudi entity.Asset Management fees on the portfolios for high networth individuals and familygroups are still being reported within the Regional Asset Management operationsuntil the Team is fully on the ground in the Kingdom. Research coverage hascontinued over the year and is currently running at 18 stocks and is beingexpanded into several sectors as well as further deepening coverage of banks andother industrials companies. During the latter part of the year, a majoradvertising campaign directed at retail investors including booths in majormeeting points was launched and has resulted in a marked increase in retailbrokerage accounts as well as raising the awareness of the Group's activities inthe Kingdom. More recently, the Team moved from the temporary offices to the newpremises. Over 2008, satellite offices across the Kingdom are beingcontemplated. On a consolidated basis the Brokerage operations in Saudi booked a total of EGP9million of revenue over the year. Operating Expenses Total operating expenses adjusted for the 2006 bonuses increased by 126.1% toEGP775.6 million. Due to the nature of the business employee expenses remain thesingle largest component of operating expenses. Fully loaded adjusted employeeexpenses (including bonuses) increased 2.5 times over 2006 to reach EGP553million. Total employee expenses account for 68.2% of total adjusted operatingexpenses and 22.75% of adjusted revenues of the Investment Bank up from 62.1% ofoperating expenses and down from 23.9% of adjusted operating revenues in 2006.Although employee expenses, even with a year of considerable bonuses, remainbelow international levels they indicate the slow increase in remunerationpackages, especially in the fixed portion, that EFG-Hermes has to pay in face ofincreasing competition for the Arabic speaking quality professionals as thebulge brackets began setting up within the region. Having said that, during 2007over 100 new hires joined EFG-Hermes many of whom are in senior positions. Travel and marketing expenses have doubled over 2007 to EGP33.4 million; 4.3%and 1.4% of total operating expenses and the Investment Bank's operatingrevenues respectively down from 4.6% and 1.6% in 2006 respectively. Although inabsolute terms travel and marketing expenses have increased due to the hike intravel by Senior Executives and at all levels of staff whether to support thenew offices across the region, investigate opening up new markets, servicingdeals and roadshowing the new funds across Europe, the US and the region theyhave actually declined relative to operating revenues attesting to the fact thatthe expense has been reflected in increased business levels. Promotional and advertising expenses have declined to 3.9% of total operatingexpenses and 1.3% of total operating revenues down from 5.7% and 2%respectively. The 53.8% increase to EGP 30.2 million was expensed across allbusiness lines with the bulk relating to the re-branding, new logo and thepromotion of the Group's image and new products across the region. A majoradvertising campaign was run in Saudi Arabia to both increase awareness ofEFG-Hermes' activities in the Kingdom as well as for the retail brokerageproducts. 2007 was also the first year ever when the Group resorted to newspaperand radio advertisements for its brokerage services as the Group launched boththe call centre and on line trading which are retail focused products. Telecommunication expenses nearly doubled over the year and reached EGP23.5million and 1% of the Investment Bank's operating revenues down from 1.2% during2006 as a result of the increasing communications between the Egypt, UAE andSaudi offices as well as the increased communications with the proliferatingclient base across the region and the world as a whole. Dedicated leased linesand other services ensuring the smooth running of the trading platform acrossmultiple markets has also contributed to the increased cost of communication. Adjusted net operating profit in 2007 increased 135.5% to EGP1.552 billion, arecord high for the Group. Adjusted net operating margins have improved to 66.7%up from 65.8%. Please note that if the net operating margin were calculatedbased on revenues from the agency business and disregarding the other revenuecomponents of the Investment bank, the net operating margin would be 58.1% in2007 down slightly from 61.8% in 2006 but still remaining well above the averageof the international investment banks. Other Revenue Revenues other than those emanating from the fee generating agency businessincludes revenues relating to the Investment Bank, namely Treasury operationsand balance sheet management and other income including dividend income and thegain on sale of investments as well as revenues not related to the InvestmentBank that is the revenue that is consolidated portion of EFG-Hermes' 28.45%ownership stake in Banque Audi Saradar. A) Banque Audi In terms of financial performance, Banque Audi ended the year approximately 20%above 2006 despite the year being difficult in Lebanon as well as the Banklaunching operations in six new markets during the latter part of 2006 whichhave not yet began to fully bear fruit while realising the full brunt of theadditional operating expenses. The Bank's performance reflected onto EFG-Hermes's financials through aconsolidation of the equivalent EGP 287 million up 32.9% from 2006 as a resultof the Bank's growth and the larger average stake owned throughout 2007; from23.05% in 1Q 06 up to 25.82% by the yearend 06 and 28.48% for most of 2007. Thisrevenue constitutes 11% of the Group's total consolidated revenue down from17.8% in 2006. B) Treasury Operations With EFG-Hermes having a positive net cash position, bank interest payable forthe DEG and IFC long term loans and other bank expenses and charges is more thancovered by interest and quasi interest earned on the cash balances, income frommoney market operations using funds from both the operations and clients' freefloat and the difference in payments on the NDF contracts hedging both theinvestment in Banque Audi and the cash balances in foreign currency. Treasuryoperations have continued as a major contributor to the Group's bottom lineprofitability and amounted to a total of EGP246 million; not accounting for theFX loss for EGP33.8 million for the year, up from EGP61.1 million in 2006. It must be noted that although the Group booked a consolidated FX loss ofEGP33.8 million due to FX cash balances and investments in foreign currency asat the end of the year (that were not hedged) as a result of the appreciation ofthe EGP against the USD to 5.5 (up from 5.7 at the beginning of the year); theTreasury Department has managed to avert an FX loss in excess of EGP 200 millionrelated to the Banque Audi investment and the USD 500 million of the capital asthey are FX related recorded on a balance sheet denoted in EGP had the USD beenmarked-to-market on the full amount, through various hedge contracts and sellingpartial sale of USD balances. C) Other Revenues The remaining major portion of other revenues is the gain on selling investmentsfor a total of EGP 210 million compared to EGP 28 million in 2006. The majorportion relates to the sale of SODIC shares in line with the strategy to divestthe stake over a two to three year period. During the year, around a millionshares were sold locking in a capital gain of EGP 118 million. Another gain onselling investments was EGP 17.1 million relating to the sale of 240,222 BanqueAudi shares that were in EFG-Hermes' trading portfolio that were sold duringOctober 2007. Other Expenses Depreciation and amortisation increased slightly over 2006 levels to reach 18.4million in 2007 as the premises in Saudi Arabia became operational. Provisionsacross all lines of business were also expensed in the normal course of businesspractices. Resulting from the above net profit before taxes and minority interest fornearly doubled in 2007 to 1.6 billion up from EGP 823.7 million a year earlier.However, adjusting the net profit before taxes and minority interest for theincome consolidated from Banque Audi to reach the profitability of theInvestment Bank, net profit before taxes and minority interest for 2007 amountsto EGP 1.32 billion and a margin of 56.6%. Balance Sheet A continuing feature of EFG-Hermes' balance sheet remains the high level oftotal cash, cash equivalents and other investments (namely T/Bills, Central Bankdeposits and investment in money market funds6) reaching EGP4.5 billion up fromEGP3.5 billion as at the end of December 2006. The balances include undeployedproceeds of the second capital increase as well as cash generated through theGroup's operations. Over the year the Treasury Division has been striving, andsucceeding, in maintaining a rate of return above that earned on money marketoperations. Using the year-end cash balances the average rate earned was 8%.However, it must be noted that in a declining interest rate environment lockingin high rates of returns as is happening today will remain challenging. Withseveral acquisition possibilities across the region in the investment bankingbusiness over the next 12 months or the opportunistic acquisitions that mayarise in either on the commercial or investment banking fronts the cash and theunleveraged balance sheet give the Firm immediate fire power. As at the year end the trading portfolio, excluding investments in money marketfunds, stood at EGP324 million and is marked-to-market with no major tradingpositions in the amount. During the year the trading portfolio included 240,222shares in Banque Audi which were sold in October locking in a capital gain ofEGP17 million. The major portion of the EGP1.4 billion available for sale investments remainsthe SODIC investment (through OPD) that is marked-to-market at EGP942 million.Please note that as SODIC is not within the trading portfolio, marking-to-marketis not recorded through the income statement. Although the Group has announcedthat it will divest the position over a quarterly basis over a two to three timeperiod, the Firm only sold around a million shares over 1Q2007 and 2Q2007. Themajority of the remaining balance relates to the seeding of EFG-Hermes assetmanagement and private equity funds (a total of USD257 million). Net payables resulting from operations recorded EGP324.3 million incurred mainlydue to the normal course of business as brokerage, private equity and investmentbanking activities. The growth in fixed assets over the year to EGP135.2 million and the projectsunder construction to EGP25.7 million relate to the new Saudi offices, theacquisition of premises in Lebanon as well as the costs to date of EFG-Hermes'new premises at the Smart Village. On the liability side, the Group remains to have a positive net debt position,with the only outstanding bank debt ending the year at a total of the equivalentof EGP189.9 million down from EGP227.3 million during 2006 being the loans fromIFC and DEG drawn down towards the end of 2005 with repayment commencing during2007. Over the year the Firm's networth grew by EGP1.3 billion to EGP9.32 billion; a16.8% increase over the previous year. Market capitalisation also increased overthe year to USD4.7 billion at the year end corresponding to a PBV of 2.8x upfrom a market cap of USD2.8 billion with the share trading at 2x book value in2006. 6 EGP1.06 billion of investment in money market funds is reported in the EGP1.3billion trading investment figure Taxes The effective tax rate for the 2007 has declined over the 2006 to 10.2% downfrom 14.5% in 2006 mainly as a result of the increasing portion of revenuesemanating outside Egypt. The Firm continues to administer tax management at thelevel of the Group as a whole as well as optimising balance sheet management andrevenues out of Egypt and other taxable subsidiaries. The effective tax rateremains well below the 20% flat tax rate. Profitability Net income after tax and minority interest increased 82.5% to EGP1.281 billionup from EGP701.9 million in 2006. Of the bottom line EGP380.4 million relate toincentive fees realised on the listed equity funds and portfolios and EGP134.3million in Private Equity. Attesting the Group's continued growth and enhanced performance across businesslines, the majority of the bottom line in 2007 relates to the core operations.If the bottom line is adjusted for a total of EGP287.5 million of revenueconsolidated from Banque and the 2006 bonuses paid in 1Q2007, the net profitafter tax and minority interest relating to the investment bank is EGP993.8million with a net bottom line margin of 42.7%. 2007 has been by far the bestyear for EFG-Hermes financial and operational success in the home markets haveset the stage for solid performance across the region, an expansion that ismaterializing rapidly. Recommended Dividend Payout Given the exceptional performance over the year Management is recommending thedisbursement of EGP 1/share in dividend. The total dividend bill proposed isEGP387.9 million, representing 16.7% of consolidates net profits after tax andminority interest and 30.3% of the consolidated revenues of the Investment Bank.The proposed dividend represents a 33.3% increase over the dividend paid lastyear. Share Price Over the year, the EFG-Hermes share reflected a lot less volatility than was thecase during 2006. Over the year the share represented an average of 10% of dailymarket trading on CASE down from 28.71% a year earlier. Moreover, the volatilityof the share declined tremendously with the average variation on any one monthdown to 14% from 41% in 2006. In terms of share price the year's low wasEGP32.17 in January and a high of EGP66.63 during December 2007. TodayEFG-Hermes has around 16,000 shareholders down from around 65,000 at thebeginning of 2006. _______________________________________________________________________________ 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 Paste the following links into your web browser to download the PDF documents relating to the Audited Financial Statements and Earnings Releases: http://www.rns-pdf.londonstockexchange.com/rns/8357o_1-2008-2-27.pdf http://www.rns-pdf.londonstockexchange.com/rns/8357o_2-2008-2-27.pdf This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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