Few Months from Now, You’ll Probably Wish You Owned UBA shares
Few months from now, capital gain + dividend-seeking investors would see some stocks going vertical as current economic environment supports investing listed equities.
For UBA Plc shares, equity analysts at WSTC Securities forecasted a total return on the stock stands at 54%, comprises price return of 39%, dividend yield of 15%.
Buying listed companies stock isn’t many people forte, they don’t like the news on the street about the Nigerian Stock Exchange (NSE).
But here is the fact, that is where people are building fortunes – Ask the big boys in the trillion naira assets gang.
When monetary policy committee reduce money pricing rate, two things were communicated.
First, negative returns in the fixed income market would be under pressure. Long dated financial assets will be priced down.
Meanwhile, equities market would have more buying interest, which would automatically strengthen the local bourse.
Many analysts have started predicting bullish year end for NSE, and Banking stock segment is also expect to close positive.
It is easy to grasp as WSTC Securities Limited estimated fair value of ₦8.34 kobo for United Bank for Africa shares.
CSL Stockbrokers Limited rated UBA’s share buy having projected price target of ₦14.22 which translates to 135% upside.
Vetiva Capital also project a price target of ₦9.34, as against ₦12.45 initially forecasted though analysts maintained buy rating.
In its investors guide, FSDH Group rated UBA among its top stock picks.
All in, analysts told MarketForces Africa sentiment in the stock exchange would reverberate and stock prices will spike.
Amidst virus-damaged economic environment, United Bank for Africa Plc reported a 2% year– on-year gross earnings growth from ₦293.69 billion in H1:2019 to ₦300.26 billion in H1:2020.
Lender’s earnings lifted though there was pressure in the economy but banking activities sailed, albeit not rather smoothly in the first half of the year.
In its financial statement, the numbers showed that interest income came flat at ₦205.59 billion in H1:2020 compare to ₦204.89 billion in the comparable year in 2019.
Meanwhile, UBA’s non-interest income expanded 7% year on year from ₦72.52 billion in H1:2019 to ₦77.39 billion in H1:2020.
This reflects increased activities around non-interest related operations of the group.
This resulted to 5% increase in the group operating income to ₦188.91 billion when compare to ₦179.5 billion in H1:2019.
On the other hand, operating expense spiked by 21% YoY from ₦109.59billion in H1:2019 to ₦132.13billion in H1:2020.
Consequent to the high double-digit growth in operating expense, relative to the growth in operating income, profit before tax declined by 19%.
Specifically, due to pressure on earnings, lender’s pre-tax dragged lower from ₦70.27 billion in H1:2019 to ₦57.13 billion in H1:2020.
Similarly, there was a strong decline in profit after tax, having dropped 22% from ₦56.74 billion in H1:2019 to ₦44.3 billion in the period.
In the period, despite lower earnings per share, an interim dividend per share of 17 kobo was declared, 3 kobo lower when compare to 20 kobo enjoyed by shareholders in the comparable period in 2019.
WSTC Securities stated that lender’s reported flattish interest income on the back of a low-yield economic environment.
In H1:2020, the group’s interest-bearing assets advanced 34% on a year-on-year basis, from an average of ₦4.71 trillion in H1:2019 to ₦5.84 trillion.
The growth in interest-bearing assets was majorly driven by an expanded loan book, attributed to the regulatory loan-to-deposit ratio threshold mandated by the Central Bank of Nigeria.
Specifically, the Group’s loan book expanded by 25% YoY from an average of ₦1.70trn in H1:2019 to an average of ₦2.12trn in H1:2020.
However, resulting from increased competition in the industry which partially, alongside CBN‘s accommodative policies, informed a low-yield environment; yield on interestbearing assets declined from 9% in H1:2019 to 7% in H1:2020.
Therefore, analysts said despite the 34% growth in interest-bearing assets, the low-yield earned on the assets resulted in the flattish interest income position in H1:2020.
Excess Financial System Liquidity Drives Cost of Fund Lower
The accommodative monetary policy stance of the CBN resulted in depressed yields in the fixed income market.
The depressed yields in the market resulted in a significant level of liquidity in the financial system, due to a hunt for a more attractive investment.
WSTC Securities explained that the limited investment outlets in the economy catalysed a 25% growth in interest-bearing liabilities from an average of ₦4.32 trillion in H1:2019 to ₦5.41 trillion.
This was driven by a 26% growth in customer deposits from an average of ₦3.43 trillion in H1:2019 to ₦4.32 trillion, reflecting strong customers’ affinity.
The Group benefitted from the excess supply of funds in the financial system, in the form of a lower cost of fund.
WSTC said the Group’s cost of fund lowered by about 120 basis points from 4.39% in H1:2019 to 3.19%.
Meanwhile, analysts explained that impact of a lower cost of fund reflected in the 9% year on year decline in interest expense.
UBA’s interest expenses in the period dropped from ₦94.76 billion in H1:2019 to ₦86.26 billion in the period.
As a result, lender’s net interest margin jerked up 8% year on year from ₦110.12 billion in H1:2019 to ₦119.32 billion.
Analysts however reiterated that higher Covid-19 induced impairment loss moderates net interest income and margin.
Lender reported increase in impairment charge by 150%, from ₦3.12 billion in H1:2019 to ₦7.81 billion.
Analysts said this was due to the group’s provisioning of loan losses in sectors most vulnerable to the negative impact of the coronavirus pandemic.
Due to higher impairment charge, net interest income (net of impairment) growth moderated to 4% from ₦107 billion to ₦111.52 billion in H1:2020.
Due to specific industry’s advantage, UBA group trading and FX income support non-interest income growth.
So, UBA’s non-interest income rose by 7%, from ₦72.52 billion in H1:2019 to ₦77.39 billion in H1:2020.
The growth in noninterest income was driven by a combination of a 7% increase in net fee and commission income and an 8% growth in net trading and FX income from ₦32.75 billion in H1:2019 to ₦35.21 billion.
Lender reported an improvement in net fee and commission income growth from ₦36.06 billion to ₦38.58 billion.
Meanwhile, analysts said a 4% growth in interest income, and a 7% growth in non-interest income resulted in a 5% growth in operating income from ₦179.52 billion to ₦188.90 billion.
Meanwhile, operating expense grew significantly by 21% YoY from ₦109.59billion in H1:2019 to ₦132.13billion in H1:2020.
The spike in operating expense emanated from a 20% rise in personnel expense from ₦37.18billion in H1:2019 to ₦44.57billion in H1:2020.
In our view, we attribute the increase in staff-related costs to the recent promotions and remuneration review done by the Group. Other operating expenses grew by 23% YoY from ₦63.59billion in H1:2019 to ₦77.97billion in H1:2020.
During the period, the Group incurred significant expenses on contract services (+100% YoY from ₦4.57billion to ₦9.62billion).
Also, the Group incurred ₦4.71billion on donations in H1:2020 (H1:2019: ₦40.00mn). We attribute the increase in donations to COVID-related CSR activities.
Owing to the higher operating expenses incurred, profit before tax dipped by 19% YoY, from ₦70.27billion in H1:2019 to ₦57.13billion in H1:2020.
Profit after tax also declined by 22% YoY from ₦56.74billion in H1:2019 to ₦44.43billion in H1:2020.
In its valuation, WSTC Securities lower lender’s earnings per share estimate to ₦2.39 for 2020 as against previous estimate of ₦2.74.
Explaining the adjustment, WSTC said it expects the low-yield environment to be sustained in the near to medium term.
Therefore, the firm expects to see further depressed yields on asset portfolio, amid increased competition.
“Our model incorporated the higher operating expense incurred in H1:2019.
“Although, we discounted some expenses (such as donations) in second half forecast, as we do not expect them to be materially higher, we incorporated the impact of higher personnel costs“, the firm said.
WSTC Securities fair value estimate on the stock stands at ₦9.13. This means at current market prices, the stock trades at a price-to-earnings (P/E) and price-to-book (P/B) multiples of 2.51x and 0.28x, respectively.
“Based on our justified P/E and P/B multiples of 3.49x and 0.39x, we believe that the stock is currently undervalued“, analysts explained.
The total return on the stock stands at 54%, comprises price return of 39%, dividend yield of 15%.
Few Months from Now, You’ll Probably Wish You Owned UBA shares