UBA: WHEN STRONG ASSET QUALITY DRIVES EARNINGS GROWTH
The management of United Bank of Africa Plc recently
released its full-year 2016 earnings report a bit later than the date of the
2015 numbers, which was however still within the regulatory time frame, in line
with its post-listing requirement, realizing that corporate governance and
performance cannot be overemphasized, being key ingredients that sustain value
creation at any time.
The bank’s solid network of Pan-African business offices continues
to support its profitability ratios, regardless of its huge provision and high
income tax expenses in the period under consideration, coupled with the
management’s commitment and vision of strengthening its presence and
operational capacity to sustain growth and profitability.
Gross earnings for the year rose by 22% to N383.65bn from
N314.83bn in 2015, as bottom line grew 21% rise to N72.26bn from N59.65bn in
2015, as impairment loss on financial assets for the period soared by 448.19% to N27.68bn
from N5.05bn in 2015, a reflection of the weak macroeconomic environment that adversely
affected manufacturers, in addition to the huge exposure to the highly capital
intensive oil and gas, as well as power sectors. It is clear that without the
huge provisioning, the bank’s profit level would have been in the neighbourhood
of N110bn, making it one of the most profitable in the industry.
The bank grew deposits from banks and customers by 79% and 20% respectively
to N109.68bn and N2.49tr, just as loans and advances portfolio to banks and
customers were up by 45% and 56% respectively.
These notwithstanding however, UBA Plc has shown resilience by remaining in profit, despite the obvious over regulation in its industry and continuous tightening of monetary policy by the apex bank.
These notwithstanding however, UBA Plc has shown resilience by remaining in profit, despite the obvious over regulation in its industry and continuous tightening of monetary policy by the apex bank.
Improvement in the bank’s core performance ratios and asset
quality as revealed by its balance sheet, are indications of its strength and
growing financial institution.
Full-year Earnings Per
Share (EPS) was up 21%, beating market estimate at N1.99, from N1.64 in 2015.
The up-trend in the bank’s earnings on quarterly basis supported the share
price, as it grew by 54% in one year from N3.50 as at release date for the 2015
accounts, to N5.39 as at the released date of its 2016 numbers.
The market price of the
stock is 121% below its N12.35 per share Book Value, an indication that the
stock is grossly undervalued and worthy of attention from discerning investors.
The bank’s Price to Earnings Ratio is 2.71x, meaning that investors' waiting
period has slightly increased, as a result of growth in the bank share price.
United Bank of Africa (UBA)
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2016 Full Year Result
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COY
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2015
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2016
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% Chg
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(N)
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(N)
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Date Released
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March
14, 2016
|
March 24, 2017
|
|
Price as at Release Date
|
3.50
|
5.39
|
54.00
|
Gross Earnings
|
314,830,000,000
|
383,647,000,000
|
21.86
|
Profit After Tax
|
59,654,000,000
|
72,264,000,000
|
21.14
|
Shareholders' Fund
|
332,621,000,000
|
448,069,000,000
|
34.71
|
Dividend Payout
|
0.60
|
0.75
|
25.00
|
ESTIMATED RATIOS
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Earnings Per Share
|
1.64
|
1.99
|
21.34
|
PE Ratio
|
2.13
|
2.71
|
27.23
|
Earnings Yield
|
46.98
|
36.95
|
-21.35
|
Book Value
|
9.12
|
12.35
|
35.42
|
Price to Book
|
0.38
|
0.44
|
15.97
|
ROE
|
17.93
|
16.13
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-19.87
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Profit Margin
|
18.95
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18.84
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0.25
|
|
|
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SOURCES: COMPANY DATA & INVESTDATA
RESEARCH
UBA recorded a slight decline year-on-year
in margin movements with Net Income Margin
down to 18.84% from 18.95%, while profit
before tax margin increased similarly to 23.63% from 21.74% in 2015. Return on equity stood at 16.13% as other profitability
ratios for the year were in the green, testifying to real improvement in the
bank earnings power.
Technical View
UBA's price action has been in uptrend
for more than a year to form a symmetrical triangle chart pattern and has
broken out of the triangle to support continuation of trend. Pullback is
imminent as the stock price will be adjusted for dividend soon. The support and
resistance level of the bank are N4.09 and N5.59 respectively. The attempt to
break out the resistance level has failed on the strength of market forces.
Traders should watch out for a pullback
to first support level at N4.09 and second support at N2.89 or reversal to
first resistance level at N5.64 and second resistance price of N6.00. The trend
ability and momentum is strong above ADX
20 at .21.56.
Analysts Opinion/Recommendations
The 2016 numbers have revealed that UBA
is seriously undervalued as it is currently trading at a 145% discount to its Book
Values, while our Fair Value estimate of N9.28.
We are optimistic that despite the huge
provision and present economic situation, the bank will continue to wax strong
as the new management moves to reposition its operations and further drive
earnings.
Although we expect headwinds to continue
till the third quarters in 2017, it is our opinion that the bank’s impairment
loss for 2107 will drop and push earnings to the north
We are also impressed with the steady
rise in the bank’s core profitability ratio where the Book Value position is
over N12.35. However the bank must be
proactive in risk management with its Return on Equity (ROE) growth.
We have a BUY recommendation on the
shares of UBA
Forecasts/Valuation
We remain bullish and confident in the
ability of UBA’s management team to meet and even outperform its 2016 figures,
going forward. Hence, we have retained
our target price of N9.28 on UBA; this represents 65% upside to current
price of N5.60. United Bank of Africa currently trades at P/B of 0.44x
which is attractive with high margin of safety.
UNITED BANK FOR AFRICA
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Share Holding
Structure
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Stanbic Nominees
Nig. Ltd.
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11%
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UBA Staff
Investment Trust Scheme
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7.6%
|
Consolidated Trust
Funds Ltd.
|
4.7%
|
The Bank of
New York Mellon
|
4.4%
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Heirs Holding Ltd
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3.4%
|
STH Limited
|
2.6%
|
Bank of America
Merril Lynch
|
2.3%
|
International
Finance Corporation
|
1.8%
|
Poshville
Investment Ltd.
|
1.7%
|
BGL Securities
Ltd/MM
|
1.1%
|
Other Statistics
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|
Shares
Outstanding (MN)
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36,279,526,322
|
Opening Price
(2016)
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N3.35
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Closing Price 2016
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N4.25
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Closing Price as at March 29
|
N4.50
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Date Listed
|
1970
|
Year End
|
31ST
DECEMBER
|
Management to drive balance sheet
The new management of the bank is demonstrating
commitment to repositioning it for enhanced profitability, following which the
board hopes to reward investors handsomely in the neatest future.
Moreso, UBA was very proactive with its
balance sheet deployment in the review period. The bank’s defensive strategy
was very effective and ensured that the backlash of some regulatory policy
changes were mitigated. The pressured local currency is a major disincentive
for UBA to sustain this venture but its earnings offshore through its operating
network has supported bottom line.
Performance in
Four Years (2013-2016)
Looking at the bank’s numbers for the
period under consideration, it has remained resilient despite the tight
economic conditions especially since the crash in oil prices and the resultant
pressure on disposable income, which may have been the major restraining factor
for creation of risk assets during the review period.
Gross earnings for the period grew by 45%
to N383.65 billion from N264.69 billion in 2013. Profitability for this period
was stable, despite the over regulation with banks having to make different
provisions. Bottom line for same period was up by 55% to N72.26 billion from
N46.6 billion in 2013.
Return on Capital Employed and Assets
for the four-year period were 19.8%, 1.8%, 18.1%, 1.7%, 17.9%, 2.2%, 16.13% and
2.06% in the four years respectively from 2013 2014 2015 2016. Return on Equity was 16.13% in FY-2016 down from 18.84% in
FY-2015 while return on assets experienced a marginal decline for the same period to 2.06% from
2.17% year on year. It also grew net assets
for the period by 90.64% from N235.04bn in 2013 to N448.09bn.
UBA FOUR YEARS FINANCIAL PERFORMANCE
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2013
|
2014
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2015
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2016
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Date Released
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March 27, 2014
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March 26, 2015
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March 14, 2016
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March 24, 2016
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Price @ Released Date
|
9.45
|
4.03
|
3.50
|
5.39
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Gross Earnings
|
264,687,000,000
|
290,019,000,000
|
314,830,000,000
|
383,647,000,000
|
Profit After Tax
|
46,601,000,000
|
47,907,000,000
|
59,654,000,000
|
72,264,000,000
|
Shareholders' Fund
|
235,036,000,000
|
265,406,000,000
|
332,621,000,000
|
448,069,000,000
|
Dividend
|
0.50
|
0.10
|
0.60
|
0.75
|
SOURCES: COMPANY DATA & INVESTDATA RESEARCH
Ratio Analysis
The bank has sustained upward earnings
trend that supported price performance as the EPS moved from N1.41 in 2013 to
N1.99 in 2016, just as Price to Earnings Ratio remained unstable due to up and
down movement of equity price. In arriving at our fair value for the stock, we
focused on the historical financial performance of the stock and our
expectations for full year 2017.
Our Fair Value for UBA shares was
calculated using the Price to Book Value method of valuation as well as the
Dividend Discount Model comprising our expected dividend estimate for the bank
and to adjust for the risk of investing in the Nigerian Financial Services
sector. We have placed a POSITIVE rating
on the stock of UBA
UBA- ESTIMATED RATIOS
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2013
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2014
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2015
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2016
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Earnings Per Share
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1.41
|
1.45
|
1.64
|
1.99
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PE Ratio
|
4.95
|
2.77
|
2.13
|
2.71
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Earnings Yield (%)
|
20.18
|
36.04
|
46.98
|
36.95
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Book Value
|
7.13
|
8.05
|
9.17
|
12.35
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Price to Book
|
0.98
|
0.50
|
0.38
|
0.44
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ROE (%)
|
19.83
|
18.05
|
17.93
|
16.13
|
Profit Margin (%)
|
17.61
|
16.71
|
18.95
|
18.84
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Year End
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Dec
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Dec
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Dec
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Dec
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SOURCES: COMPANY DATA & INVESTDATA RESEARCH
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