Zenith Bank: In Need Of Lower Debt-Equity Ratio For Higher Valuation

COY: Zenith Bank Plc
Rating: Hold
Current Market Price: N28.75
Fair Value: N41.35
By: Jeariogbe Segun (Equity Analyst)

Key Financial Tickers
• The management of Zenith Bank Plc has reported a final cash dividend of N2.45k for the 2017 full year financial activities. This plus the previously paid interim cash dividend of N0.25k brings the total dividend paid for the year to N2.70.
• Since the total amount earned per share is N5.67k, it implies that the payout ratio is 47.62%
• Meanwhile, the said dividend is 8.71% of the current market price as at the released date.
• Please note that the N5.67k earnings per share is 18.29% of the current market price, that is, Earnings Yield is 18.29%.
• Qualification date for the dividend is Tuesday, April 3, 2018. This implies that shareholder register will be closed on April 4, 2018.
• Payment date is 13th April, 2018 while the Annual General Meeting will hold at Sheu Musa Yar’Adua Centre, 1 Memorial Drive (Opposite Sheraton Hotels & Towers), Abuja FCT on 13th April, 2018, take off time is 10 am.

Corporate Summary
Zenith Bank Plc is a Nigerian based company, which is engaged in the provision of banking and other financial services to corporate and individual customers. The Bank’s segments include Corporate, Retail Banking and Pension Custodial services, which provides a range of banking and pension custodial services to a range of corporations, financial institutions, investment funds, governments and individuals. Outside of Nigeria, it provides a range of banking services to a corporations, financial institutions, investment funds, governments and individuals.
The segments cover banking operations in other parts of Africa (Ghana, Sierra Leone and The Gambia) and Europe (the United Kingdom). The bank’s operations are primarily organized on the basis of geographic areas, which are Nigeria, the rest of Africa and Europe. Its subsidiaries include Zenith Bank (Ghana) Limited and Zenith Bank (Sierra Leone) Limited.

Company’s Figures
Comparing the released statistics for the year ended 31st December, 2017 with the corresponding year-2016, the followings can be established:
• Gross Earnings soared by 46.69% from N507.99 billion to N745.18 billion
• Interest Income grew by 23.42% to N474.62 billion from N384.55 billion, while Interest Expense stood above comparable year by 50.05%
• Profit before Tax and after Tax respectively increased by 29.80% and 37.24%, while Total Comprehensive income improved by a marginal 8.40%.

Though, Zenith Bank’s beta value is below the industrial average, at 1.05, it means that its share price is theoretically more volatile than the market. Increasing investment risk in the shares of Zenith Bank is the very high Total Debt to Equity ratio. At 92.89%, the implication is that the bank’s debt had almost swallowed the equity holder’s position. This accounts for the huge difference between Zenith’s fair value and the current market price.

Profitability Ratios
Compared to industry peers’ profitability ratios; one can safely conclude that the bank ran a profitable business through 2017. Although some of the ratios reduced when compared to previous year, when the harsh business environment within which it operates is put into consideration, the estimate should be commended.
Interest Expense to Gross Earnings inched above 2016’s by 2.29% from 28.42% to 29.07%. Both Profit before and after Tax Margin dropped against comparable year by 11.51% and 6.44% respectively. Return on Average Equity is acceptable at 21.66% from 18.40%.

Efficiency Ratios
To measure management’s efficiency, we have tested five ratios all of which confirmed that the management of Zenith Bank has what it takes to move the business to the next level.
Gross Earnings for the year ended December 31, 2017 is 13.32% of the Total Assets, an improvement over the 10.72% of last year, which also confirms a proper utilization of the equity. It was established that Gross Earnings is 90.69% of the Equity (although this was supported by debt). The financial leverage is 6.81x, implying that the Total Assets can replicate the Equity approximately seven times. And finally, confirming the proper utilization of the Assets, Loan and Advances was compared to Total Assets. We rated this fair enough at 37.54%.

Investment Ratios/Dividend
Earnings per share (EPS) improved by 37.24% over corresponding year level from N4.13 to N5.67. The said earnings yielded 18.28% of the current market price, while P/E ratio increased from 3.58x to 5.47. As we speak, the Book Value per unit of Zenith Bank is now N26.17. In summary, all investment ratios of the bank are attractive.

QoQ Comparison
Trying to establish the QoQ growth pattern of Zenith Bank performance, we have tested the growth in the released financials through 2017. From the comparison, we can reliably conclude that the second quarter is always a bullish period for the bank, Meanwhile, the growth rate looks fairly stable through the remaining quarter of the year. See the below table for details.

Our attempt to place a fair value on Zenith Bank took us through several valuation methods after which we settled for the constant perpetual dividend growth rate. We do not expect galloping growth in dividend since this has experienced appreciable growth in few years prior, so we make use of 3.258% as our growth rate. To arrive at this value, we estimated five years dividend growth rate at 16.29, and we make use of the average which is same as 3.258. We discounted with 10% considering the dwindling nature of the 91-days T-bills rate as impacted by the reducing inflation rate. On this strength, we have placed a fair value of N41.35.

Our findings have revealed that the share price of Zenith Bank is undervalued at the current market price, hence the risk of positioning in its shares is fairly low. Nevertheless, the managmenet of Zenith Bank will need to strictly work on its high debt to equity ratio to attract higher valuation of its share price. On the strenght of the above, we recommend that investors should hold on to Zenith Bank’s share.