UBA 2020Q1: Reaping Gains Of Strategic Pan-African Diversification, Needs To Watch OPEX
The management of the United Bank for Africa recently presented its unaudited financials for the three months ended March 31, 2020, to the Nigerian Stock Exchange (NSE), the same time it did that of the previous Q1, thereby allowing for projections and effective planning by the investment community.
The numbers show a commitment to value creation for stakeholders, especially the shareholders, even as the total 2019 dividend of N1.00 per share after many years speaks volumes about the capacity of its management. It equally signals strong value in the bank’s shares, as the brand continues to spread into more Africa countries, thereby broadening its earnings and profit, while repositioning and preparing for a long term global economic reset. The posting of double-digit growth across all major income lines is a plus and a boost for its balance sheet.
Gross earnings and profit cost of income dropped by a marginal 1.29%, just as the higher net interest income, fees, and trading gains during the quarter helped to boost bottom lines for the period under review. The increased operating expenses and loan loss provision charges on financial assets for the period, which jumped by 12.9% and 53.26% respectively to N58.66bn and N2.64bn.
Earnings yield for the period improved by 22.96% to 15.05%, compared to the 12.24% recorded in 2019, while the first-quarter earnings per share (EPS) increased by 4.76% to 0.88 kobo from 0.84 kobo.
This is translated to PE ratio of 1.66x as at the released date, while the Book Value stood at N17.91 per share from N15.88 in 2019, which reveals a high margin of safety associated with the shares of UBA, following which it currently sells at 188.87% below the Book Value at N6.20 per share. This indicated the undervalued state of the UBA Plc shares, even as the low Price-Earnings ratio of 1.66x has reduced investors’ waiting period, due to the low price and improved earnings that support an imminent price rally and future payout.
The global economic downturn and the business environment in Nigeria and other emerging economies have come under pressure due to the outbreak of the coronavirus pandemic, influencing the flow of funds in the face of the oscillating oil prices and continued lockdown that have slowed down the global growth momentum. This situation is expected to negatively impact activities in the region, with a return on equity slowing down to 4.42% from 5.28%.
UBA Plc’s cost of risk, during the period under review, dropped to 4%, from 8% in December 2019, irrespective of the 9.3% increase in gross loan and 11.5% rise in customer deposits, just as other investment ratios for the period look attractive to attract inflow into the bank shares.
Technical View
The global economic downturn and the business environment in Nigeria and other emerging economies have come under pressure due to the outbreak of the coronavirus pandemic, influencing the flow of funds in the face of the oscillating oil prices and continued lockdown that have slowed down the global growth momentum. This situation is expected to negatively impact activities in the region, with a return on equity slowing down to 4.42% from 5.28%.
UBA Plc’s cost of risk, during the period under review, dropped to 4%, from 8% in December 2019, irrespective of the 9.3% increase in gross loan and 11.5% rise in customer deposits, just as other investment ratios for the period look attractive to attract inflow into the bank shares.
Technical View
UBA’s price action over past three years has been on a bearish channel with different attempts to resist a decline before breaking out of the top line of the channel in December to rally up in January. It thereafter pulled back following the regulatory hike in the industry Cash Reserve Requirement (CRR) and selloffs on fear of the COVID-19 spread in March, which reversed in April on positive sentiments.
The price action is currently trying to break out another strong resistance level of N6.20 per share and the top line of the bearish channel signal a buy-opportunity. However, wait for a confirmation of breakout first before jumping into any position. The recent strong support level of the bank remains N4.40 on a weekly chart.
Traders should watch out for a breakout of N6.20, while investors should take advantage of reversal to accumulate the stock, as the money flow index is looking up at 20.44. The momentum of the trend is STRONG above ADX of 20 at 31.34.
Forecasts
The bank’s 2020 full-year gross earnings are forecast at N588.12bn, representing a 5.07% improvement, relative to the comparable period of 2019, while our net income estimate for the year is N95.1bn, which translates to a 6.75% growth over the corresponding period profit level. This yields an EPS of N2.71 and a forward P/E of 3.58X
Analysts Opinion/Recommendations
The high margin of safety in UBA Plc shares is as a result of its undervalued state, judging by its Price to Book and assets quality. The stock is currently trading at a 113.55% discount to our Fair Value estimate of N13.24. 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 quarter for which earnings yield stood at 15.05% in the period under review. However, the profit margin (PM) remained above the 15% international benchmark despite a slight decline to 20.45% from 21.77% in 2019. We, therefore, recommend a BUY on UBA.
Expanding the operational network to boost earnings, push prices higher in the long run
The bank is expected to double its efforts and strategic risk/cost management, thereby maintaining this tempo of profit growth, given the gross earnings and net profit, considering the ongoing pandemic and its impact on the global economy. Moreso, UBA Plc has been very proactive with its balance sheet deployment in the review period, just as it has remained a well-diversified financial powerhouse, garnering 46% of the profit from its operations outside of Nigeria, a ratio that is commendable.
Four-Year Performance (2016-2019)
The bank’s numbers for the years under consideration showed a healthy dose of resilience, despite the weak and unstable economic conditions, coupled with the overregulation in the industry, just as credit and assets quality remained high.
Gross earnings in the four-year period grew by 44.24% to N560.22bn, from N388.65bn in 2016, even as 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.
Profitability and investment ratios for the years under review 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%, before declining in 2019 to 14.90%. The net profit margin for the same period declined all through the period 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
Even in the face of the economic meltdown, UBA Plc is set to sustain an upward earnings trend that supports price-performance given that the EPS moved from N1.99 in 2016 to N2.27 in 2017, and then N2.30by 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.
Ambrose Omordion
CRO|Investdata Consulting Ltd
info@investdataonline.com
info@investdata.com.ng
ambrose.o@investdataonline.com
ambroseconsultants@yahoo.com
Tel: 08028164085, 08032055467
