UBA Plc Begins 2019 Full-Year Strong After Flat 2018 Outing

United Bank for Africa Plc (UBA) recently presented its unaudited account for the three month- ended March 31, 2019 as and when due, keeping to its post-listing requirement and best practice to allow investors forecast and plan their investment. The result was released on the same date as the previous year.

The increasing Pan-African business offices and spread of its retail outlets supported its profitability ratios, despite the high loan loss provision and operating expenses level within the period under consideration. The group has remained committed to the vision of staying true to its name, by continuing to strengthen its presence and operational capacity, while sustaining growth and profitability across its all operational bases.

The bank reported N124.2bn top line, up by 8.63%from N114.33bn in 2018, while profit climbed 20.76% up to N28.66bn, as against N23.74bn in the previous year. Impairment loss on financial assets for the period increased to N1.71bn from N1.45bn in 2018, slowing down the bank’s bottom line, with provisions up by 17.88%.
These notwithstanding, UBA Plc has shown resilience, remaining in the green despite the weak economy and risk exposure, with all sectors of the system struggling as a result of economic policies n need of a total overhaul.

Coupled with over-regulation of its industry, despite the recent easing of the monetary policy with the 50 points rate cut by the Central Bank of Nigeria (CBN), which left it at 13.5%.
The marginal growth in the gross earning of UBA Plc in the period under review is a reflection of the instability in many Africa economies The bank’s dexterity in navigating its balance sheet towards areas of opportunities was also revealed within the review period.
Q1 Earnings Per Share (EPS) was up by 20.76% to N0.84 from N0.69 in 2018.
If this up-trend is sustained in the subsequent quarters of the year, it would support the share price and hope for higher dividend payout as expressed by shareholders during the last Annual General Meeting. The shares are currently trading at N6.70each, which is over 137% below its Book Value of N15.88 per share. This has revealed the undervalued state of the bank’s share, as well it’s upside potential.
The bank’s Earnings ratio is 2.04x, while investors’ waiting period has dropped significantly from 4.03x as a result of growth in its earnings power and general down market condition.

UBA reported a mixed year-on-year margin movement with Net Interest Income Margin dropping to 4.92% from 5.46%, while pre-tax profit margin declined slightly to 41.82%, from 43.48% in 2018. Meanwhile, Net Income Margin improved to 23.68% from 20.76% in 2018: Return on equity stood at 5.28%, just another profitability ratio for the period closed green as a testimony to the group’s real improvement in its earnings power over the period. As shown in the table above

Technical View

The bank’s price action has been on a downward trend for more than a year same as the general market trend but recently rebounded in April to form a symmetrical triangle, a chart pattern that indicates continuation or reversal of the trend. The strong support level of the bank in its pullback movement is N5.60 per share. The attempt to breakdown the triangle last week failed due to mixed sentiments.
Traders and Investors should look the way of UBA for the breakout of the first resistance at N7.00 and the second resistant at N8.10 or reversal to first support level at N6.40 and second support price of N6.15. The momentum of the trend is strong at 40.82 points above 20 ADX.

Forecasts
Our FY 2019 gross earnings forecast for UBA is N496.79bn representing a 6.63% improvement relative to FY 2018, while our net income estimate for FY 2019 is N92.40bn, which translates to a 17.6% improvement on FY 2018. This yields an EPS of N2.70 and a forward P/E of 2.28X.
The banking sector still remains attractive to foreign and local investors due to the nature of its service, marketability and relatively high volume for traders. We expect less loan loss provisions if the key sectors of the experience recovery in the second half of the year as expected. This is with the belief that the government will hit the ground running after May 29 inauguration.

Analysts Opinion/Recommendations
The shares of UBA is undervalued, bearing in mind our FY 2019 estimates. The stock is currently trading at a 150% discount to our Fair Value estimate of N17.00.
We are mildly optimistic due to the tight operating environment in Nigeria, especially with the rate cut and insecurity across the entire northern Nigerian stretch, coupled with the delay in budget implementation.

The seeming high oil price should boost loan recovery in the oil and gas sector and enhance asset quality for most Nigerian banks. This resulted from their exposure to the sector and the tight regulatory policies of the CBN which has weakened the earnings capacity of banks in the country, but UBA Plc has the capacity to grow as its operating network outside the nation wax stronger.
We are also impressed with the steady rise in the bank’s Book Value position over the last few years. However, the group’s management must be proactive with its Return on Equity (ROE) growth. We have a BUY recommendation on the shares of UBA Plc.

Enhancing Balance Sheet, Growing Profitability
The bank’s ability to reposition its retail and investment banking business segments will further enhance earnings, profit and enable the board to reward investors handsomely in the nearest future. The ongoing deposit drive and proactive balance sheet deployment will deliver positive results, going into the future. The group’s management was very effective, with the cost of risk at 0.40%, ensuring that the backlash of some regulatory policy changes was moderated. The relative stability in local currency is an incentive for UBA Plc to sustain offshore earnings through its operating network and in the process support bottom-line growth.
Four-Years Performance (2015-2018)

The bank has been resilient as mentioned earlier, despite the tight economic conditions, especially since the crash in oil prices and the resultant pressure on disposable income. This may have been the major restraining factor against the creation of risk assets during the review period.
Gross earnings over the four-year period grew by 47.98% to N456.9bn from N314.83bn in 2015. The profitability level for this period was stable, despite different regulatory rules and huge provisions. The bottom line for the same period was up by 31.76% from N59.65bn in 2015 to N78.6bn as shown in the table below.

Efficiency for the period declined before the recent reversal, as shown by Return on Equity (ROE) of 17.98%, 16.13%, 14.68% and 15.64% for 2015, 2016, 2017 and 2018respectively. Profit margin (PM) experienced downward swing during the same period to 16.87%, from 18.95% year-on-year remaining above the 15% international standard. It also grew shareholders fund for the period by 51.11% to N502.6bn, from N332.62bn in 2015.

VALUATION ANALYSIS
Based on our analysis, the stock is currently trading at a 150% discount to our estimated fair value of N17, with a 12-month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our projection for full-year 2019. Our Fair Value for UBA shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model. This comprises our expected dividend estimate for the bank, adjusted for the risk of investing in the Nigerian Financial Services sector. We have placed a positive rating on the stock of UBA Plc.

https://investdata.com.ng/2019/05/uba-plc-begins-2019-full-year-strong-after-flat-2018-outing/