UBA: Buy Rating, Despite Profit Taking Induced Price Decline

Picture: Kennedy Uzoka, GMD, UBA Plc

COY: United Bank of Africa
Rating: BUY
Current Market Price: N11.50
Fair Value: N17.63
By Jeariogbe Segun (Equity Analyst)

Key Financial Tickers
• Our analysis is based on the full year financial performance for the year ended 31st December, 2017
• The management of UBA announced 65k final cash dividend for the 2017 financial year, this plus the interim dividend of 20k paid in the half year brings total cash dividend for the year to 85k
• The bank’s register of members will be closed on 10th April, 2018. In other words, the qualification date for the dividend is 9th April, 2018
• The payment date is April 23, 2018, the same day as the Annual General Meeting (READ).

Corporate Summary
United Bank for Africa Plc is engaged in corporate, commercial and retail banking, trade services, cash management, treasury and custodial services. The Company’s business segments are Corporate Banking; Retail/Commercial banking, and Treasury and Financial Markets. This segment is responsible for formulation and implementation of financial market products for its customers. The Board of the financial institution is currently chaired by Mr Tony Elumelu, a Nigerian Businessman, entrepreneur, investor, billionaire, economist, philanthropist and proponent of the Africapitalism vision; while the group managing director is Mr Uzoka Kenedy.
Company’s Figures
• Gross Earnings improved by 20.31% against comparable year of 2016. The figure increased to N461.55 bill from N760.93 billion.
• Both Profit before Interest and Profit for the period stood above comparable year’s value by 16.13% and 8.75% respectively.
• Total Comprehensive Income on the other hand reduced against the 2016 figure by 23.01%. The current Total Comprehensive Income is N106.35 billion compare to N138.15 billion posted in 2016.
• In summary, we are of the opinion that the management of UBA appreciably grew its income elements in 2017, which in our opinion is an impressive performance. Nevertheless, we believe that investors already factored in this performance into its price, following which there may not be need for a revaluation.

The share price of UBA is volatile just as its industry peers, but very liquid. Nevertheless, it runs a very high Total Debt to Equity Ratio of 99.55% far above the 54.05% by its industry peers.

Profitability Ratios
Interest Expense to Gross Earnings reduced marginally by 25.57%, this is appreciable. Both Profit before and after Tax margin dropped by 3.47% and 9.60% respectively, please note that this is a reduction in the financial institution’s rate of profitability over a given period.

Efficiency Ratios
Gross Earnings to Total Assets stood at 11.34% as against the 10.95% in 2016. Gross Earnings is 87.18% of the shareholders’ equity. The bank’s Total Assets can replicate the Shareholders’ Equity 7.69 times, this is quite impressive. Within the period under review, 58.29% of the customers’ deposit was given out as loan, this could be the bank’s conservative approach to guard against an unhealthy rise in none performing loans. We believe this ratio will improve as the nation’s economy booms further.

Investment Ratios/Dividend
The amount earned per unit of UBA (EPS) is estimated at N2.30, a 4.88% increase above the N2.19 earned in the 2016 financial year. Due to the drop in Total Comprehensive Income (TCI), TCI/Share dropped below previous year’s figure by 25.75%. Impressive also is the 19.98% yield over the current market price. Price Earnings Ratio (PE/Ratio) increased to 5.00x from 2.46x of last year.

While valuing the share price of UBA, efforts were made to avoid the problem of abrupt decline in growth rates hence we adopted the Dividend Discount Valuation H-Model. A five-year spread was considered with long growth rate (gl) at 5% and short growth rate (gs) at 10% half-life of growth period (H) was therefore set at 2.5% with the required investment return of 10%. We arrived at fair value of N17.63 for UBA, the model equally confirmed that the equity is currently undervalued. Please note that both the Normal and the High value estimates are respectively N15.75 and N1.88.

QoQ Comparison
Although we could not feature the full comparison of UBA’s quarterly results, we tested all four quarters of 2016 and 2017 and discovered very similar patterns. More importantly, it was discovered that the bank’s income statements grew outstandingly between the first and the second quarters while growth rate recorded in Q2-Q3 was fairly maintained between Q3-Q4 financials.

Technical View