EUR 124.67 For Business Accounts Only

FWRY EY | Egypt’s first unicorn; Initiate at Overweight

Strong proposition of growth and profitability; High conviction Overweight. We initiate coverage on Fawry, Egypt’s leading e-payment provider, with a TP of EGP37.3/share (30% upside). Fawry offers top exposure to the financial inclusion and digitalisation themes in Egypt, given its leading market share of 26%. Our valuation implies a 2022e PEG ratio of 0.9x, lower than peers’ average of 1.1x, and primarily reflects: i) favourable industry dynamics, supporting strong throughput potential, ii) Fawry’s solid profitability profile (2020-22e revenue and EPS CAGR of 44% and 63%, respectively, and RoE of c32%), and iii) scarcity of similar investment offerings in the region. The high-growth and innovative nature of the sector would trigger continuous rerating of the sector’s numbers, in our view.

Nascent, underpenetrated industry, with triggers ahead. We look for Egypt’s e-payment services to grow to 11% of GDP by 2025 vs. c4% in 2019, implying growth in total cashless payments by an average of 32% p.a. over 2020-25e. This comes below the growth rates for select EM peers over 2014-18a (35%), with penetration rates in 2014 similar to Egypt’s current level. Our growth assumptions for the sector are supported by the government’s aggressive push for financial inclusion (details on page 7), and Egypt’s low penetration of e-payment services, with: i) banking penetration at 32% in Egypt vs. 42% for peers, ii) PoS penetration in Egypt at 72/1k capita vs. 2.7k PoS for peers, and iii) cash circulated outside the banking system reported at EGP540bn (6.6x Fawry’s 2020e throughput).

Fawry’s comprehensive strategy to drive growth. We expect Fawry to grow its market share of digital payments to 33% by 2025e vs. 26% in 2020e, on: i) adding 36k PoS p.a., ii) enabling existing PoS with acceptance services, and iii) expanding its service offering and venturing into new solutions. ADP should grow by a 2020-25e CAGR of 23%, banking services by 63%%, supply chain by 39%, and microfinance should see the highest growth, at 72%. We look for margins to expand to 39.5% in 2025e (vs. 28.2% in 2020e), as new streams and solutions have higher margins, in addition to the high NIMs of the lending business. Fawry’s potential capital hike (EGP400mn, before end-2020) should help cement its leading position, mainly through raising capacity and adding new services.

Concentration and competition main risks. The telecom industry represents c40% of the top line, and the e-payments sector’s high growth is attracting new players, increasing competition. Fawry’s capacity to expand offering (i.e. new remittances service), potentially growing inorganically, should lower concentration risks and enhance cross selling efforts, strengthening the company’s market positioning.