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EFIH EY | Piloting Egypt’s digitalisation; Initiate at OW

Positioned for critical mass. e-finance for Digital and Financial Investments (e-finance Group) is solely responsible for all central budget payment and collection transactions via a contractual agreement with the Ministry of Finance that safeguards exclusivity. We initiate coverage on e-finance Group with a 12M TP of EGP24.0/share, representing an upside potential of c22%. The stock trades on a 2022e EV/EBITDA of 27.4x and a P/E multiple of 43.6x, implying a PEG ratio of 0.94x, well below global peers. This is despite the company’s improving profitability profile and cash conversion cycle. The company guides for a 4Q21 bottom line of cEGP154mn (+c2x y-o-y). Key upside risks include e-health, property tax declaration, and the use of IPO proceeds in accretive expansion opportunities.

Rapidly evolving demand and regulatory framework. FY21/22 state payments and collections are budgeted at EGP2.4tn, rising at a FY21-25e CAGR of 15%, on our expectations. Egypt’s total cashless payments (ex-budget processing) are estimated at c4% of GDP vs. an EM average of 14%, highlighting the population’s cash dependency. We look for Egypt’s e-payment market to comprise 10.5% of GDP, implying growth in total cashless payments of 38% p.a. by 2025e. The government is prioritising financial inclusion, digitalisation, and formalisation of the grey economy. The May-19 Cabinet decree, mandating all government payments above EGP500 to be processed electronically, is a case in point. 

Focus on more value-accretive revenue stream. With a thriving backdrop and strategic positioning, the Group aims to increase top line contribution from the higher-margin transaction-based revenue (to 79% in 2025e vs. 47% in 2020), at the expense of B&O (build and operate) revenue, which is of lower-margin and weighs on the cash conversion cycle. Under the transaction-based revenue, the Group targets higher variable fee contribution (2020 money-weighted variable fee of EGP11.0/trx vs. EGP1.0/trx for fixed). We forecast 2020-25e CAGRs of 38%, 47%, and 45% in revenue, EBITDA, and net profit, respectively. 

Margin and cash flow expansion, on model shift and economies of scale. Driven by sector growth, regulatory tailwinds, strategic partnerships, initiatives to improve profitability, upward revisions to government fees, cross-selling, and operating leverage, we see EBITDA margins expanding to 51.9% in 2025 vs. c38% in 9M21. Our model implies robust returns and cash generation: i) 2022e RoE of 19.3%, ii) 2020-25e FCFF CAGR of 54%, and iii) 2022e FCFF margin of 14.7%.