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Fri 6 Mar 2015 10:12 AM

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EFG Hermes: How patience turns to profit

Operating through four years of political and economic turmoil in Egypt took its toll on EFG-Hermes, but the investment banking firm - one of the region’s largest, with operations in eight Arab countries - has risen from the instability and a period of consolidation to return to profit.

EFG Hermes: How patience turns to profit
After taking up the helm as CEO 18 months ago, Karim Awad says he expects to announce a return to profit after writedowns caused a $48m loss in 2013.

The past 12 months have been busy for EFG Hermes. After a period of consolidation and retrenchment in 2013, the latest figures due to be announced next week will confirm that the company has emerged from the most testing period of its 30-year history to profitability once more.

The Egypt-based institution, which specialises in investment banking, asset management, securities brokerage, research and private equity, is said to be the region’s largest, with a client base of over 102,400, served by its operations in Egypt, the UAE, Saudi Arabia, Kuwait, Oman, Qatar, Jordan and Lebanon.

Struggling against the backdrop of Egypt’s political turmoil, EFG-Hermes underwent a series of cutbacks and job cuts in 2013, and went on to record a net loss of $48m (335 million Egyptian pounds) when the figures were announced last year.

“We went through a phase where we wanted to restructure our P&L and balance sheet, and we did most of that during the second half of 2013,” says EFG-Hermes’ CEO Karim Awad, who after 16 years as an investment banker with the firm, assumed control in 2013.

Just like Egypt’s ongoing economic revival, EFG-Hermes has emerged even stronger following its various cost optimisation initiatives. Almost 18 months on, Awad’s leadership has guided the company into some extremely positive and exciting times across all sectors of the business.

In its latest announcement to the London Stock Exchange (it’s also listed on the Egyptian Exchange), at the end of January, the company indicated that it would make net profit of more than $65m for 2014 (formal figures are due to be announced on March 18).

“We kept a very close eye on our expense fees in 2014. We had a good year in terms of profitability and we will continue to grow the business on a number of fronts in 2015,” Awad says.

The strong performance in 2014 was boosted by better revenue growth across all business lines.

Initial public offering (IPO) activity was particularly strong in the Middle East and North Africa region during 2014. Independent data suggests $11.5bn was raised across 27 IPOs, compared to $3bn in 2013 from 25 IPOs.

EFG-Hermes advised on a number of landmark IPOs, including the $689m listing of Dubai Parks and Resorts, the $140m rights issue for SODIC, the $1.579bn IPO of Emaar Malls Group and the acquisition of SeaFox by Millennium Offshore Services.

“We’ve had a really good 2014. We were bookrunners on the IPOs of Emaar Malls, as well as Dubai Parks and Resorts in UAE. We also did an IPO in Egypt for a company called Arabian Cement; this was the first IPO that Egypt saw since 2010,” Awad says.

“We also had a number of rights issues that took place in Egypt and M&As [mergers and acquisitions], including an advisory to Al Futtaim Group from the UAE on an acquisition of a company in Kenya. So it was actually quite a busy year.”

Tightening global liquidity and falling oil prices are likely to lead to a slower first half of 2015 in the GCC, according to EFG-Hermes’ research. Awad says despite the expected drop, they anticipate a busy year ahead with Orascom Construction and Emaar Misr, the Egyptian arm of Dubai developer Emaar Properties, among its current clients.

“We’re optimistic on 2015. We just launched our first IPO for the year for Orascom Construction, which is an IPO that will list between Nasdaq Dubai and the Egyptian stock exchange. We have a number of other offerings that are coming to the Egyptian market hopefully within the next few months,” Awad says.

“We will probably see, relative to last year, a slowdown in IPOs in the region during the first half. But I think you might see a good fourth quarter in terms of IPOs in the region.  However, we should see much stronger activity in Egypt on the IPO front during the first half of the year,” he says.

Egypt’s ongoing economic recovery, as well as the recent remarks from the new head of the Capital Market Authority in Saudi Arabia encouraging more state-owned companies to list, will see Egypt and Saudi Arabia lead activity in the MENA IPO market in the first half of this year.

As Egypt’s largest broker, he describes the securities brokerage as “a very important business” for the company, with a strong presence also in the UAE, Kuwait, Jordan and Oman.

The planned opening of the Saudi market to direct foreign investors, a development likely to take place later this year, will be of particular interest, Awad says.

“This year, what we’re focusing on is the expected opening of the Saudi market to foreign investors. We’ve been present in Saudi Arabia since 2007 with a fully-fledged licence to conduct brokerage, investment banking and asset management activities. Given the size and the depth of the market, this is something that we view as important step for the business,” Awad says.

While EFG does not expect significant passive inflows until Saudi is upgraded to MSCI Emerging Market status – likely in 2017 – the kingdom is viewed as a “very compelling market that will be of interest to pathfinding investors who have long had an appetite for KSA equities”, according to the bank.

EFG-Hermes will also focus on building its assets under management (AUM) in the coming year, according to Awad.

“We have around $3.1bn of assets under management to date, between Egypt-dedicated funds, Saudi-dedicated funds and discretionary portfolios, as well as regional funds,” Awad says. “The performance of all of our funds, whether on absolute or relative basis, has been quite good for the past three years. What we’re focusing on this year is to try to grow the AUMs for all our funds.”

EFG-Hermes’s private equity business will refocus on certain lines this year, including renewable energy.

“We did a couple of things in private equity in 2014. We exited our investment in that company that we had made through one of our vintage funds. This was a great investment for our fund holders, with a return of around 1.8 times cash in a very short investment period,” he says.

“We want to refocus the business on three main lines: infrastructure-specific, yielding assets, as well as consumer-related businesses. We added around $200m of assets under management to our private equity business in 2014, through buying, in conjunction with co-investors, a stake in a collection of wind farms in France. This falls into both the infrastructure and the yielding part of the business focus that we have for private equity,” he adds.

EFG-Hermes bought 49 percent of wind power firm EDPR France for $208m in October, last year. It dovetailed nicely with the Egyptian government’s announcement in January that it plans to build solar and wind plants in the next three years, with a combined capacity of 4,300MW.

Fundamental to the bank's operation is its research unit, Awad says, providing research analysis on regional equities, macroeconomic analysis of 11 MENA economies and analysis on key equity themes and markets performance.

“We have the highest coverage among any research house in the region today and we continue to rank among the top houses covering the region,” he says. “We cover over 133 listed stocks in the region and our coverage is quite consistent.

“The idea is that we don’t do one research piece a year on stocks, we actually cover the results and developments that are happening. Research is another important part of our business because it helps the institutional side of the brokerage business by providing quality coverage of companies that are listed in the region today.”

The research provided an important backdrop for last week’s 11th edition of the EFG-Hermes’ annual One-on-One Conference, the MENA-focused investment gathering that brought together government officials and over 450 investors from 200 institutions (with AUM of over $10 trillion), along with senior managers from 107 companies from 14 countries across the Middle East and Africa.

“The aim of [the conference] is to bring companies on different exchanges in the Middle East and Africa, with investors from the region, as well as from the Western world, to discuss the latest developments in each company and hopefully attract institutional investors into the stock exchanges on which those companies are based,” Awad says.

Participating companies were drawn from a broad list of sectors, including financial services, energy, consumer discretionary, consumer staples, telecommunications services, healthcare, industrials, utilities, materials, and real estate and hospitality.

Among the key talking points at this year’s gathering was the increase in IPO activities in Egypt, and anticipated rise in private market transactions in the GCC, such as mergers and acquisitions.

The conference outlined an economic outlook for the year ahead, which Awad says looks positive, particularly towards the end of the year.

“In the MENA, we’re still quite bullish on the region as a whole. There is definitely caution associated with the drop in the oil prices, however from our in-house view it seems that spending is continuing from all the GCC economies. The budgets are still expansionary in nature and the large projects continue to be announced across the GCC region,” he says.

The bank's research says Dubai is a trade and finance hub of growing importance for the UAE, with the Expo 2020 to remain a driver of public sector spending growth.

In Egypt, where 2014 has been a hugely positive year for its economy, Awad says the year to come will be even better again.

“In terms of Egypt, we feel the country is at a good inflection point and it is definitely one of the beneficiaries of the drop in oil prices. We feel that the upcoming Economic Development summit should be a good launch pad for the economy, which we expect to do better in the near term,” he says.

“We will continue to focus on trying to extend our presence in the GCC region, in addition to maintaining our leading position in the Egyptian market. We are looking at a number of businesses that we believe will complement our operations going forward. Those include, starting hopefully within the first half of 2015, a leasing business in Egypt and a number of prospects that we’re looking at and will announce to the market as soon as they materialise.”

Next week’s figures should provide further evidence that EFG Hermes can match Egypt’s impressive emergence from testing economic circumstances into a thriving business once more.

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