Investors’ Bashing: Fidelity Bank Slips Further Below Book Value

Rating: BUY
Share Price at Earnings Release: N2.55
Intrinsic Value: N7.87
Latest Cash Div: N0.11
By Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers
• This report took account of both the full year financial performance indices of Fidelity Bank Plc for year-ended December 2017 and the first quarter 2018
• We established an underpriced position both in our valuation and difference between its Book Value and market price.
• A steady decrease in cash dividend was also noticed from 2014 when it paid N0.18 to the latest dividend of N0.11 each.
• The payment date for the latest cash dividend was May 25, 2018, same date as the Annual General Meeting. Please note that the closure date of the register was May 14, 2018. In other word, the qualification date was May 11, 2018.
• A major highlight of the score-card, was the rise in Impairment Charge from N8.671bn in 2016 to N11.315bn.
• Retained Earnings dropped marginally from N25.918bn in 2016, to N25.326bn.

Corporate Figures
• Gross Earnings for the year ended December, 2017 is N179.89 billion, same as 18.34% above the N152.02 billion posted in its 2016 full year performance.
• Interest Income grew by 22.40% from N123.15 billion to N150.74 billion. While Interest Expense is currently N79.278 billion, same as 29.49% above the N61.225 billion reported in 2016
• Profit before and after tax equally stood above comparable year. PBT is N20.302 billion as against the N11.061 billion posted in the previous year. Similarly, PAT appreciated by 93.72% over 2016 earning, having moved from N9.734 billion to N18.857 billion.
• Retained earnings dropped marginally by 2.28% from N25.918 billion in 2016 to N25.326 billion in the current year
• Total Assets valuation improved by 6.25% during the year. The figure currently stands at N1.379 trillion as against the N1.298 trillion in 2016. Meanwhile, Total Liabilities shot up by 59.60% to stand at N1.775 trillion from the previous N1.112 trillion.
• Total Customer Deposit dropped marginally against corresponding year by 2.23% from N792.971 billion to N775.276 billion.
• Loans and Advances on the other hand improved marginally above comparable year. Total loans through 2017 financial year was N768.737 billion, 7.01% above the N718.401 billion recorded in 2016.
• Net Assets equally improved slightly by 9.66% to N203.315 billion as against the N185.402 billion posted in 2016.

Liquidity/Risk Ratios
• The share price of Fidelity Bank is theoretically more volatile than the market. In fact, judging by the industry average of the sector’s beta value, it enjoyed more patronage compared to some others in the sector.
• Although, typical of financial institutions, it runs a high Debt to Equity of 112.75% far above industry average of 27.39%.

Profitability Ratios
• Interest Expense to Gross Earnings ratio grew by 9.42% over 2016 estimates. The ratio is currently estimated at 44.07% as against the previous 40.27%
• Profit before Tax (PBT) Margin soared against last year estimate by 55.11%. The current PBT Margin estimate is 11.29% compared to the previous estimate of 7.28%
• Similarly, Profit after Tax (PAT) Margin appreciated by 63.71%, moving from the previous 6.40% to 10.48%
• Return on Average Equity galloped by 76.66% over last year estimate. As shown in the table below, the current estimate of this ratio is 9.27% against 5.25%
• In the same trend, Return on Average Asset (though low) soared by 82.34%.
• Generally, we rate Fidelity Bank’s Profitability Ratio high, although we expect the management to take advantage of improvements in the economy to build more profit for stakeholders.

Efficiency Ratios
• Testing management efficiency, the Asset Turnover was gauged, the Ratio improved by 11.38% from 11.71% to 13.04%.
• Also tested was the Equity Turnover, which was confirmed to be outstandingly impacted by the high debt usage. The Ratio stood at 88.48%, as against the 82% estimated in 2016.
• The management of Fidelity Bank slightly adjusted its use of Debt to access more Assets, going by the estimated financial leverage within the two financial years considered in this analysis. As shown in the table below, the Financial Leverage reduced marginally to 6.78x compared to the previous 7.00x
• Loan to Deposit ratio remained high as the ratio improved by 9.45% over 2016 estimates. Estimated Loan to Deposit ratio for the current year is 99.16% against 90.60%
• See below for further efficiency ratios

Investment Ratios
• Following same trend as in the earnings, the amount earned per unit of Fidelity Bank (EPS) improved outstandingly by 93.72% from N0.34 to N0.65 an almost doubled position
• Total Comprehensive Income stood at N0.76 as against N0.23 in 2016 financial, this is an improvement of 236.92%
• Due to the large difference in market price between the two financial years compared in this analysis, the current Earnings Yield stood below estimated yield in the previous year. as shown in the table below, the current yield is 25.52% as against 39.99%
• Price Earnings ratio (PE/Ratio) confirmed a marginal investors’ preference for Fidelity Bank’s share from 2.50x to 3.92x
• Two ratios confirming the underpriced position of each unit of Fidelity Bank on the floor of the Exchange are the Price to Book Value (P/BV) and the Book Value (BV). Since P/BV stood below one (1) it implies that each share is underpriced. Confirming this further is the Estimate BV of N7.02 as against the market price of N2.55 (as at the released of the current full year result).

First Quarter 2018 Financial Indices
• All income statement improved over corresponding quarter of 2016
 Gross earnings: improved by 6.95% to N43.68bn against the ₦40.84bn posted in Q1 2017,
 Profit before Tax improved over 2016 by 2.74% from N4.849 billion to N4.982 billion
 Profit after Tax equally appreciated over 2016 by 7.21% to N4.627 billion, compared to N4.316 billion last year
• Total Assets grew by 12.88% from N1.31 trillion to N1.479 trillion.
• Total Liability grew by 15.90% to N1.300 trillion from N1.121 trillion.
• Net Assets posted for the period is now N179.662 billion, this is 5.05% below the previous N189.214 billion.
• On the strength of the above mentioned
 Profit per share for the reported three months is 16k compared to the 15k earned in Q1-2017
 The said earnings is a yield of 6.26% over the current market price as at the released date of the financials
 Book Value dropped to N6.20 per share, down from the N6.53 achieved at the end of Q1-2017.

• Our blend of valuation models agrees fully that Fidelity Bank’s share price are underpriced as established by the Book Value and the Price to Book Value estimate from the full year 2017 financial performance of the financial institution. We have valued each unit of Fidelity Bank’s share price for N7.87 each.