Company: Union Bank of Nigeria Plc
Rating: Long Term Buy
Current Market Price: N6.75
Intrinsic Value: N13.32
Latest Cash Div: NIL
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers
• This report takes into consideration both the full year financial performance indices of UBN ended December 31, 2017 and the first quarter ended March 31, 2018 statistics.
• Leading from the last oversubscribed right issue of UBN the new shares outstanding used in our analysis is 29.120 billion units.
• Between the December 2016 and 2017 financial year, the Non-performing loan (NPL) ratio soared from 6.9% to 19.8%, while the ratio moderated within the first three months of 2018 to 14.9%.
• In its full year statistics, the Retained Deficit dropped outstandingly from N244.183 billion to N14.384 billion. Surprisingly, it increased to N16.710 billion in its 2018 first quarter result. We are of the opinion that the management should pay keen attention to this figure to encourage investors, especially those who faithfully participated in its last capital raising exercise through the right issue.
• Due to the deficit state of the financial institution reserve, it has not been able to reward investors in a long while. We are of the opinion that if the management maintains cautious models through the current financial year, investors’ hope of being rewarded will increase.

Corporate Figures
• Gross Earnings for the 2017 full-year grew by 26.42% over the comparable period of last year, moving from the N129.60 billion of 2016 to the current N163.84 billion
• Similarly, Interest Income estimated at N124.54 billion from the N99.72 billion reported in 2016 financial.
• Net Impairment Charge was N25.609 billion, as against the N17.879 billion in the comparable period.
• Thus, both Profit before and after Tax stood below 2016’ by 1.39% and 5.09% respectively.
• As noted above, there was a retained Deficit of N14.384 billion, as against the N244.183 billion in 2016
• Enhanced by the just concluded right issue, Net Assets value improved by 27.27% to N345.741 billion, compared to the previous N271.670 billion.

Liquidity/Risk Ratios
• The share price of Union Bank is theoretically less volatile than the market. In our opinion, this could be linked to the no dividend status of the bank, traders are likely playing equities with stronger probability of paying dividend.
• Although a financial institution, it currently runs a fair Debt to Equity ratio of 28.69%, slightly above the industry average of 27.17%.

Profitability Ratios
• The amount reported as Interest Expense is same as 35.33% of the Gross Earnings figure, this is 32.01% over the 26.76% estimated in similar period of 2016.
• Profit before Tax (PBT) Margin decreased by 22.00% from similar period of 2016. As can be seen from the table below, PBT is 9.47% of the Gross Earnings as against the 12.14% margin in 2016
• Similarly, Profit after Tax stood below 2016’s by 24.92% as the margin between the profit for the year and the Gross Earnings is currently estimated at 8.92% as against the previous 11.88%
• In other words, 91.08% of the Gross Earnings were used to take care of various expenses through the year. In our opinion, this is evidently on the high side.

Efficiency Ratios
• Gross Earnings to Total Assets ratio was fairly stable through the years under comparison in this report. The Gross Earnings is currently estimated to be 11.26% of the Total Assets, as against the 10.35% estimated last year
• Gross Earnings to Equity was also fairly stable having reduced marginally to 47.39% from the 47.71% estimated in 2016 figures.
• Going by the Financial Leverage of 4.21x, it can be safely concluded that the financial institution has used more debt (as against the equity) to acquire additional assets. Please note that the index only dropped by 8.70% below the estimates in 2016
• Considering the inherent risk in the operating environment, the bank seems to have adopted a cautious approach towards creation of risk assets as the Loan to Deposit dropped by 15.42% from 67.74% to 57.30%

Investment Ratios
• The amount earned per share of Union Bank is currently estimated at N0.50 based on the current 29.120 billion units. The said earning is 44.80% below the N0.90 estimated in 2016 when the outstanding shares were 16.935 billion
• Similarly, Total Comprehensive Income for the period stood below 2016 income by 43.60%
• Since the difference in EPS was far higher than changes observed in the market price of UBN shares, the current earnings only yielded 7.43% of the current market price, this is lower than the 18.18% yield achieved in 2016
• Nevertheless, reasonable investor confidence was achieved within the period, based on the improvement in the PE/Ratio from 5.50x to 13.46x
• Going by the estimated 0.57x Price to Book Value, one could safely conclude that the shares of Union Bank are underpriced, a fact that is further established by the estimated N11.87 Book Value, as against the N6.75 market price as at released of this result.

First Quarter 2018 Financial Indices
• Outstandingly, all income statement improved over corresponding quarter of 2016
 Gross earnings: Up 15% to N39.5bn from the ₦34.3bn posted in Q1 2017,
 Profit before Tax improved over 2016 by 16.01% from N4.661 billion to N5.407 billion
 Profit after Tax equally appreciated over 2016 by 17.02%. Currently standing at N5.288 billion, compare to N4.519 billion last year
• Total Assets dropped by 5.11% from N1.455 trillion to N1.381 billion.
• In the same trend, Total Liability shifted down marginally by 1.28% to N1.095 trillion from N1.109 trillion.
• Net Assets posted for the period is now N285.652 billion, which is 17.38% below the previous N285.652 billion, despite the capital recently raised through the right issue.
• On the strength of the above mentioned
 Profit per share for the reported three months is 18k compared to the 27k earned in Q1-2017
 The said earnings is a marginal yield of 2.69% over the current market price as at the released of the financials
 Book Value dropped to N9.81 below the N20.41 achieved at the end of Q1-2017

Valuation
• Our valuation method considered the zero incentive status of Union Bank over the years
• Thus, we adopted the residual income valuation model with the assumption that the next full year earnings will drop and then remain stable (three-year income considered)
• We arrived at N13.32 per share intrinsic value for each unit of Union Bank.
• On the strength of this we recommend a very long term position in the share price of Union Bank Plc.