Cardinalstone Maintains Buy Rating on Ecobank, Projects 44% Upside
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Cardinalstone Maintains Buy Rating on Ecobank, Projects 44% Upside

Equity analysts at Cardinalstone Partners have advised investors to buy Ecobank Transnational Incorporation (ETI) shares on account of 43.9% upside.

Analysts estimated ₦5.90 price target for the Pan-African lender at reference price of ₦4.10.

In the stock market, ETI share price maintained vertical trajectory in the last 7-trading sessions before it closed at ₦4.45 on Thursday.

The uptrend is the lender’s stock price is expected to be strong as Cardinalstone maintain buy rating while noting ETI trades at significant discount to peers in Middle East and Africa (MEA).Cardinalstone Maintains Buy Rating on Ecobank, Projects 44% Upside

According to the investment experts, ETI’s regional diversification remains a key strength which portends opportunities for stable earnings.

For instance, recent weakness in Nigeria have been largely offset by gains in the Central, Eastern and Southern Africa region (CESA).

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On its proposition for Nigeria, Cardinalstone said the lender hinted that it is likely to give more priority to deepening its payments business in the country.

In the first half of financial year 2020, Ecobank Nigeria’s payment business contributed 42% of revenues.

On the whole, analysts assessed that ETI will focus on revitalizing its Nigerian business in the short to mid-term.

Analysts believe that this could see the segment’s contributions to operating income and profit before tax improve to 20% and 13% in 2021”, Cardinalstone stated.

In the first half, contribution to the group operating income was 17%, which was below 5-year average of 25%.

Its pretax contribution was 9% compare with 5-year average of 11%.

All in, Cardinalstone raise its financial year 2020 earnings forecast by 11.9% to $225.9 million.

This translates to a jump in forecasted return on equity (ROE) to 14.5% from 13.0% previously.

“Our upward adjustment reflects better net interest income (+13.9%) on much lower cost of funds and a slowdown in operating expenses growth (-8.8%), which offset expectation of further decline in non-interest revenue (-8.2%)”, Cardinalstone noted.

The firm said it model cost of risk to increase to 2.15%, 10 bps higher than our previous forecast.

This was underpinned by much lower recoveries in 2020, in addition to COVID-19 induced weaknesses to exposed sectors.

“We raise our target price to N5.90 from N5.72, reflecting an exit price to book ratio of 0.23x”, equity analysts explained.

Cardinalstone said ETI currently trades at a forward price to book of 0.15x compare to 14.5% return on equity, which means a 74.6% discount to the bank’s 4-year average of 0.51x (ROE: 5.9%) and 85% discount to Middle East Africa peer average of 1.0x (ROE: 11.3%).

In its equity note, Chapel Hill Denham said lender’s lower funding costs and operating expenses are upsides to earnings.

Analysts explained that the 21.0% year on year decline in interest expense and 6.8% year on year decline in operating expenses are the positives in its earnings forecasts.

This is in line with the material improvement in H1-20 with cost of funds declining to 2.5% in H1-20 from 3.3% in H1-19.

Management attributed this to lower rates on funds and higher balances of cheap deposits, aided by customer switch to digital channels.

“We expect this to persist given that accommodative stance of central banks and sustained utilisation of digital channels amid gradual economic recovery going into 2021”, the firm stated.

Consequently, analysts said they expect ETI’s net interest margin to be higher by 30 basis points in 2020.

On operating expenses, the 4.1% year on year drop in H1-20 was attributed to cost savings on travel, rent & utilities, etc. following the switch to telecommuting amid COVID-19 concerns.

This supported the improvement in ETI’s cost-to-income ratio to 64.1% in H1-20 as against 66.4% in the comparable period.

Analysts said the Francophone region, which has the highest contribution to Group operating expenses posted 2% year on year decline.

The 4% decline in operating expenses for Nigeria was attributed to lower personnel costs and depreciation expenses.

“We believe further CIR improvement in Nigeria will be driven by stronger growth in operating income”, analysts at Chapel Hill Denham explained.

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Cardinalstone Maintains Buy Rating on Ecobank, Projects 44% Upside