FWRY EY | OW, on robust LT profile; 3Q22e: EPS recovery
Resume at OW. We reach a 12M TP of EGP5.67/share, posing c38% upside. Fawry displays a strong medium to long-term growth investment profile. The two major short-term overhangs – the MSCI Standard Index exclusion and rights issue dilution – are now behind us. We see the stock as one of the main beneficiaries from the high interest rate environment. The stock trades on a 2022e EV/EBITDA multiple (excl. cash in transit) of 18.9x, and a P/E adjusted for ESOP of 43.3x, dropping to 12.7x and 28.1x in 2023e, respectively. Consistent sequential recovery in profitability – expected as of 3Q22 – should allow for a stock rerating.
Focus shifts to higher margin products. We expect Fawry’s total throughput and revenue to grow at a 2021-26e CAGR of 43.7%, and 33.8%, respectively. We look for more aggressive expansion in Fawry’s banking and microfinance operations, which are of higher margin segment, at the expense of Alternative Digital Payments (ADP). This expansion accommodates the structural shift in consumer preferences and is in line with the company’s mass PoS rollout plan.
Tides returning. High SG&A expenses and investment costs should continue to pressure 1H22. We estimate EPS to drop c41% y-o-y in 1H22 (-63% y-o-y in 1Q22). 3Q22 should see a step-up increase in earnings, in our view, after four quarters of consecutive drops, on a better sales mix, increased cost management efficiencies, improvement in return to scale, and higher interest income. We look for an EBITDA margin of 34.6% by 2026e, expanding from 29.8% in 2021.We see Fawry continuing to enjoy a negative working capital.
Key risks: Concentration and competition. The telecom industry represents the lion’s share in Fawry’s throughput. In addition, increased competition and the recent VFE and Ebitkar deal could pose a risk to it. This comes via possible channelling of Vodafone-related transactions through Fawry’s peers. However, we believe management’s active strategy and product pipeline should mitigate this. Key upside is the utilisation of the capital increase proceeds in accretive projects.
Fawry For Banking Technology And Electronic Payment S.A.E is an Egypt-based company, which provides an electronic payment network. The Company allows users to pay bills in multiple channels, such as online, using automated teller machine (ATMs), mobile wallets and retail points. The Company provides operations services specialized in systems and communications, management, operating and maintenance of equipment and computers networks services and internal systems of banks, networks, and centralized systems. The Company also establish operating systems for banking services through the Internet, phone and e-payment services. The Company's network of retailers includes small groceries, pharmacies, stationaries, and post-offices, among others.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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