UBA: EARNINGS CAPACITY WAX STRONGER TO SUPPORT PRICE AND DIVIDEND

United Bank for Africa Plc, which prides itself as “Africa’s global bank” continues its re-engineering and just as its name goes, it has continued a strategic expansion across the continent, already seeing impressive results from previous efforts as revealed by the diversification in revenue base. This much has reflected on its earnings, profitability and investment ratios, judging by the recently released nine months scorecard to the investing community. The nine-month score-card, besides giving investors the current state UBA’s financial health and direction to help investors plan their investment, has shown that the bank remains consistent in making it numbers available as at when due.

UBA’s consolidating quarterly earnings performance so far in this current financial year has boosted share price and investor confidence, veritable ingredients that have sustained the uptrend performance in price which recently had become a trendy stock for all class of investors to play in. 

Growth in gross earnings and profit after tax for the period shows the healthy state of the bank which is poised to support price and dividend payout expected to ignite a share price rally as have been observed in its price movement from N4.10 between 2016 when the third quarter result was released, to N9.23 as at the released date of the 2017 numbers.

This represented 125.12% price appreciation, meaning that if you have invested in UBA Plc shares with N100,000.00, return on your investment would be N125,000.00, more than your invested capital.

Gross earnings for the 2017 nine-month was N333.91bn, compared to N265.53bn in 2016, representing 23.04% rise, while profit increased to N60.92bn, from N49.51bn in 2016.  The impairment charges on financial assets for the period increased to N12.91bn from N9.1bn in 2016, as provision rose by 41.89%, thereby slowing down the bank's profitability.

The improvement in interest and similar income boosted the gross earnings that supported bottom line, as interest expenses for the period dropped by 36% from 39% in the previous year to reflect the group’s cost management efficiency, despite the risk exposure in an economy recovering from recession.  Regardless of the over regulation of the industry and tightening of monetary policy by the Central Bank of Nigeria (CBN), banks in the country are enjoying the high interest rate regime which has supported the impressive numbers.

Third quarter Earnings Per Share (EPS) was up by 23.61% to N1.78 from N1.44 in 2016. The up-trend in UBA's financials as mentioned earlier has supported the share price which is currently trading at N9.00 per share as at Friday.

The stock’s price is 65% below the book value, which indicates that it is undervalued and should therefore be attractive to discerning investors, just as Book Value currently stands at N14.81 and Price/Earnings ratio is 1.73x. Investors' waiting period has slightly increased, as a result of growth in share price which is driven by stronger earnings and better future prospect.  

Africa’s economy is growing as oil price is bottoming out on global economy improvement and uncertainties that have impacted the continent positively, reflecting on UBA’s quarterly and yearly performance with return on equity growing to 12.00% from 11.00%. Loans/Deposit ratio also improved slightly to 64.42% from 61.75% in 2016. Return on Assets (RoA) stood at 1.62% from 1.50% as other profitability ratios for the period closed green as testimony to real improvement in the bank’s earnings power. The improving customer service delivery, new banking products/services that are innovative and technology driven will further enhance performance by increasing deposits and profitability at the end of the day.

Technical View

UBA's price action has rallied for more than two years to form a rising channel, but recently pulled back on profit taking to create a buying opportunity as positive sentiments on strong financials to support upward reversal which is imminent. The recent strong support level of the bank is N8.55 on a weekly basis.

Traders should watch out for breakout of N9.65 for continuation of the up-trend to first resistance at N10 and second resistant at N10.40 or reversal to first support level at N8.80 and second support price of N8.44. The momentum of the trend is STRONG above ADX of 20.

Forecasts

Our FY 2017 gross earnings forecast for UBA is N386.68bn, representing a 25% improvement, relative to FY 2016, while our net income estimate for FY 2017 is N72bn, which translates to an 18% improvement over the FY 2016 numbers. This yields an EPS of N2.10 and a forward P/E of 2.17X.

The Nigerian banking sector’s high interest rate regime will support the 2017 full year numbers and we expect more loan loss provisions, as inflation rate decline remains slow and as such not making much impact especially given that the cost of living remains high and reflects the current situation and where the economy is coming from.

Our Net Book Value estimate for Q4 is N538.78bn, which brings forward Price to Book Value to 0.96x. We also expect sluggish growth in both customer deposit and loan book for FY-2017, meaning that the lender’s success at the end of the 2017 full year will be determined by the efficiency of balance sheet deployment and the potency of its risk assessment framework.

Analysts Opinion/Recommendations

The share price of UBA Plc is undervalued, judging by our FY 2017 estimates. The stock is currently trading at a 100% discount to our Fair Value estimate of N18. The bank has a book value above current market price which shows a positive intrinsic value and points a better room for future growth.

We are also impressed by the steady rise in the bank’s Book Value position over the past quarters and years. However UBA must be proactive with its Return on Equity (ROE) growth. All considered, we have a BUY recommendation on the shares of UBA Plc.

Positive scorecards will push prices higher   

The bank’s management has so far demonstrated commitment to repositioning for enhanced profitability, following which the board has for the third consecutive year paid a 20 kobo interim dividend. Moreso, UBA Plc has been very proactive with its balance sheet deployment in the review period, while its defensive strategy has remained very effective, ensuring that the backlash of some regulatory policy changes is mitigated. The Naira, Nigeria’s pressured local currency is a major disincentive for UBA to sustain this venture, but offshore earnings power from its operating network has also supported bottom-line.

Four-Year Performance (2013-2016)

The bank’s numbers in the period under consideration has remained resilient, despite the tight economic conditions, especially since the crash in oil prices and the resultant pressure on disposable income of many households, which may have been the major restraining factor for creation of risk assets.

Gross earnings for the period grew by 45% to N383.65bn from N264.69bn in 2013, even as profit for the period was stable, despite the over regulation in the industry with banks having to make different set of provisions in line with Prudential Guidelines. Bottom line for same period was up by 55% to N72.26bn from N46.6bn 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%  respectively.  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.

Ratio Analysis

The bank has sustained upward earnings trend that supports price performance as the EPS moved from N1.41 in 2013 to N1.99 in 2016 and Price to Earnings Ratio remained unstable due to the up and down movement in equity prices.

In arriving at our fair value price for the stock, we focused on its historical financial performance and our expectations for full year 2017, which 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.  The current year’s financial performance is a pointer to what investors should expected as dividend.  With the projected 2017 full year EPS of N2.10, final dividend possibility in the range of 60 to 65 kobo is high.