United Bank for Africa Plc, on Friday, February 28, 2020, after trading hours on Friday released its full-year audited scorecard for the period ended December 31, 2019, becoming the second deposit money bank to have provided its financials to the investing public. The numbers came earlier when compared to that of the previous year.
A close look at the numbers shows it is an impressive performance across its top and bottom lines, with the diversified banking network and operations that have reflected on its numbers due to the effective synergy between the Nigerian operation and offshore business offices. There are also the effects of UBA’s innovation in its retail banking and customer service delivery.
The group’s bottom line for the period under review closed at N89.09bn, a growth of 13.35% from N 78.6bn in 2018, this momentum was sustained throughout the quarterly result of the full-year under consideration. There is also the high possibility of higher profit in the future, because the bank grew its interest income, despite the prevailing low yield environment.
The group has grown its earnings steadily over the past three years, due to the increasing contribution of offshore operations to its earnings and profit, just as its improved retail banking supported its profitability and investment ratios to make the bank’s shares price attractive.
The accelerated revenue growth led by interest and non-interest income, despite the high provision for bad loans; and improved cost management as shown in the group’s profit margin.
Loan-to-Deposit Ratio (LDR) improved from 49.12% at the end of 2018 to 52.91% but remains below the Central Bank of Nigeria’s 65% benchmark as of December 31, 2019. This is was despite the increase in the bank’s loans and advances to N2.06tr, from N1.72tr in 2018.
UBA increased earnings capacity and profit line is expected to support its price and dividend payout in the months and years ahead, which are factors expected to trigger a reversal in price movement.
We note that the management of UBA Plc has kept its promise of impressive performance expected to create better value for investors, with the offer of N1.00 dividend per share, considering that the final dividend of 80 kobo and 20 kobo interim dividend paid earlier.
The bank’s gross earnings for the period stood at N560.22bn, compared to N494.46bn in a similar period of 2018, representing a 13.3% rise, while profit hit N89.09 billion, from N78.6bn in 2018.
Impairment charges on financial assets for the period jumped to N18.25bn, from N4.53bn in 2018, resulting in a 302.87% growth in loan loss provision, which has slowed down the bank’s profit for the year.
Earnings Yield stood at 38.88%, compared to the 30.85% recorded in 2018, while the 12-month Earnings Per Share (EPS) increased by 13.04% to N2.60, from N2.30 in 2018, following which the up-trend in UBA’s financials is yet to impact the share price, due to the general market downturn as it currently trades at N6.70per share as of Friday- the released date.
Considering the Book Value of N17.49 per share, UBA Plc’s share price is currently trading at 161.04% below its book value, an indication that it is grossly undervalued, as a result of which it should command the attention of, and be attractive to discerning investors and traders. Also, Price-Earnings ratio is 2.57x, following which investors’ waiting period in the stock has reduced, due to the low price and stronger earnings that signaled brighter prospects capable of supporting a price rally and payout in the future.
SOURCES: COMPANY DATA & INVESTDATA RESEARCH
Despite the challenging business environment here in Nigeria and other emerging economies which are under less pressure, given that the inflow of funds has remained very low, irrespective of the oscillating oil price and trade wars that have slowed down global growth momentum. This situation is already reflecting on the region, with a return on equity slowing down to 14.90% from 15.64%.
UBA’s Return on Assets (RoA) stood at 1.59% from 1.61%; just as other profitability ratios for the year closed green as evidence of real improvements in the bank’s earnings power. The improved customer service delivery, new banking products/services that are innovative and technology-driven will further enhance performance by increasing deposits and profit, given that operating expense to gross earnings dropping to 38.76% from 2018 position of 39.90%.
Technical View
Price action for UBA has been on a decline for almost two years, forming a bearish channel before breaking out of the downtrend line in September 2019 to form a bullish channel that prevailed between the last quarter of 2019 to early 2020. This was before the current pullback that had created a ‘buy’ opportunity amid mixed sentiments on strong financials likely to support upward reversal which is imminent. The recent strong support level of the bank is N6.30 on a weekly chart.
Investors should watch out for a breakout of N7.00 for a reversal as accumulation in the stock continued with the money flow index looking down at 46.12. The momentum of the trend is STRONG above ADX of 20 at 29.25.
Forecasts
The bank’s Q1 2020 gross earnings is forecast at N131.58bn, representing an 8.1% improvement, relative to the comparable period of 2019, while our net income estimate for the first quarter is N31.43bn, which translates to a 12% growth over the corresponding period profit level. This yields an EPS of N0.91 and a forward P/E of 3.86X
Analysts Opinion/Recommendations
The share price of UBA Plc is undervalued, judging by 2019 actual numbers. The stock is currently trading at a 169% discount to our Fair Value estimate of N18. The bank has a book value above the current market price which shows a high margin of safety and a higher upside potential for future growth.
After using various valuation models to arrive at the above fair value, we are also impressed by the steady rise in the bank’s Book Value position and earning power over the past years to record the highest earnings yield of 38.88% in the industry. However, UBA Plc must be proactive with its profit margin (PM) growth which was flat at 15.90% in the review period.
However, we recommended a BUY on the shares of UBA Plc.
Expanding the operational network to boost earnings and push prices higher in the long run
The bank is expected to double its efforts and strategic risk/cost management to maintain this tempo of profit growth, given that gross earnings and net assets have crossed the N500bn mark, to set a record of higher performance. More so, UBA Plc has been very proactive with its balance sheet deployment in the review period, while remaining diversified with 46% of its profit coming from its operations outside of Nigeria. The relative stability in the local currency also remains a plus for the bank, while its offshore earnings power from its operating network has supported bottom-line.
Four-Year Performance (2016-2019)
The bank’s numbers for the years under consideration show a healthy dose of resilience, despite the weak and unstable economic conditions, coupled with the industry overregulation, just as credit and assets quality has remained high.
Gross earnings over the four-year period grew by 44.24% to N560.22bn, from N388.65bn in 2016, even as the profit line for the period was stable, irrespective of the challenging business environment and changing policy regime of its primary regulator. The bottom line for the same period was up by 23.3% to N89.09bn from N72.26bn in 2016.
The profitability and investment ratios for the years under review had fluctuated, beginning with the Return on Equity which declined from 16.13% in 2016 to 14.68% in 2017, and then inched up in 2018 to 15.64%, but slipped down in 2019 to 14.90%. The net profit margin for the same period declined all through from 18.84%, 17.42%, 15.90% and 15.90%% respectively. It also grew Net Assets for the period by 33.46% from N448.07bn in 2016 to N597.98bn.
Investment Ratio Analysis
UBA has sustained an upward earnings trend that supports price performance as the EPS moved from N1.99 in 2016 to N2.27 in 2017, and then N2.30 by 2018; after which it posted N2.60 in 2019. Price to Earnings Ratio for the period was unstable, due to the up and down movement in the bank’s share price.
In arriving at our fair value price for the stock, we focused on its historical financial performance for the past four years, which was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model, comprising the recent dividend of the group, which was adjusted for the risk of investing in the Nigerian Financial Services Sector. We have placed a POSITIVE rating on the shares of UBA.
