Brokerage companies are pinning hopes on the Egyptian Exchange (EGX) continuing to benefit from the decision to float the Egyptian pound, which is supported by the implementation of the government offerings programme, until the situation of these companies’ main shareholders improves to enable them to exit from them.
Amid the increased trade volume ranging between EGP 1.5bn and EGP 2bn since early November, coinciding with the flotation decision, there are now two main questions regarding the future of companies that may witness a change in ownership.
The first question is how much are brokerage companies benefiting from the noticeable increase in trading values? Can shareholders who are more inclined towards exiting withdraw from the decision with the improved performance of companies and the improvement of the EGX, as well as its record of exceeding the level of 12,000 points?
The acquisition operations experienced by the market during the last quarter of 2016 were characterised by a price nearing the minimum of a nominal value of EGP 5m, such as Global Brokerage of which 85% was acquired after assessing the company’s shares at EGP 6.5m.
On the other hand, selling El Tawfik Brokerage to Al Naeem Holding for Investments for EGP 16.3m was carried out based on the book value after the capital erosion.
Fixed expenses, indebtedness of customers are continuous pressures
Mohamed Fathallah, the managing director of El Tawfik, said that the securities market has reached a difficult phase in terms of attracting businesses due to the accumulated losses for five years, which forced brokerage companies to freeze their activities, liquidate their businesses, or sell them.
Fathallah explained that the lowest amount of monthly fixed expenses for small brokerage companies ranges between EGP 200,000 and EGP 300,000. This includes wages, the rent of the headquarters, expenses of connecting with the EGX’s screen or the system of settlement, deposit and preservation of Misr for Central Clearing, Depository, and Registry (MCDR), in addition to the expenses of facilities and equipment necessary for operation.
Fathallah added that there are also the expenses of the risks of customers’ debts who trade through borrowing from the brokerage companies through what is known as the “buying through margin” system. This puts the companies’ financial situation under pressure.
Selling is better than liquidation
He noted that these pressures cause shareholders in brokerage companies to make the decision to exit and not prefer the liquidation of companies due to the rigidity of the liquidation procedures, which includes paying late wages, settling the situation of insurance, taxes, rent, stock fees, and MCDR control, as well as public relations with customers.
Based on that, Fathallah believes that shareholders who decided to exit their companies during the past period will not withdraw even with the improvement of trading values, because now companies lack the foundations of operation efficiency, whether long-term or short-term.
Under the pressure of the financial position of brokerage firms, the board of directors of the investor protection fund approved supporting brokerage firms with EGP 5m in November, and the amount to be allocated to companies according to the percentage of their contribution to the fund during 2016.
The managing director of Al Tawfeek company for trading securities added that brokerage firms lack the space to negotiate a better assessment. They resort to implementing the exit deal at a rate close to the minimum value of the brokerage licences set at EGP 5m, or selling the company based on the book value—which is what happened when Al Tawfeek company was sold to Al Naeem.
He predicted that acquisitions in the brokerage sector will continue because there are companies that still want to enter the market or expand their activities.
Several companies have shown interest in acquiring local brokerage firms, including Mega Holdings, Solid Capital, and Misr Asset Management.
Awaited transformation in brokering acquisitions activity
On the other hand, chairperson of Egyptian Arabian Themar Securities Brokerage Adel Abdel Fatah believes that the brokerage sector has been witnessing a major shift in terms of acquisitions, and its attributes are represented in the improvement in companies’ financial evaluation as a result of higher trading volumes. This will be reflected in improved revenues, profits, and price earnings ratio, which is currently under evaluation.
The price earnings ratio is measured by dividing profits by the number of shares to conclude the ration of each profit share, and then measuring the earnings per share to the proposed value of the acquisition of all shares, which is one of the indicators used to infer how attractive companies are and the price on the basis of acquisition implementation.
He added that the second feature in this transformation is the lack of supply from companies for acquisition by time, due to revenues improvement at rates that might cover operating costs.
Prerequisites for the completion of this transformation
Abdel Fatah said that this transformation is attributed to two main factors. The first is to speed up the implementation of the offers by the state-owned enterprises programme in the oil and banking sectors, because these offers will play a pivotal role in maintaining trading value hikes between EGP 1.5bn and EGP 2bn, compared to EGP 300m before the pound’s flotation.
The second factor is that companies would still be able to sustain themselves financially and operationally in order to take advantage of the improved trading values over the next year as well, and then companies can reach the break-even point between expenses and revenues.
He pointed out that as long as there are companies which believe that the EGX still offers good opportunities, acquisition requests will continue to entice business owners, rather than directing these requests to establishing new companies in order to save time and benefit from the existing corporate customer base.