UBA: Analysts See Higher Valuation Ahead, Raise Share Target Price
United Bank for Africa (UBA) could be worth more than the current market value if analysts target price expectation is anything close to the lender’s fair value. The Pan-African lender share price printed at N7.60 after the market close on Thursday as equity analysts see the possibility of re-pricing having noted the lender is undervalued.
In its equity report on the ticker, WSTC Securities sets N14.72 as the target price as analysts express confidence that the Group will sustain its geographical advantage by growing its business in other Pan African markets with relatively better economic fundamentals.
The bank’s performance remains impressive given the challenging core business environment. We envisage this strong earnings growth would remain till full-year, given our expectations of sustained momentum in the acceleration of loans and higher yields obtainable to reinvest maturing assets, Cordros Capital analysts said in a note.
Valued at less than N258 billion on 34.199 billion shares outstanding, of which the UBA group Chairman, Anthony Elumelu, fondly call Tony owns 2.185 billion direct and 195 million indirect stakes.
The breakdown shows that Heirs Holdings own 5.03% of UBA group as of the first half of 2021 which is 1.814 billion shares from the indirect interest in the Pan Africa lender. Other influential shareholders include the Stanbic IBTC nominees that own 5.81%. Kennedy Uzoka, the group managing director owns 37.173 million shares.
UBA said in its first half result that a total of 1.8 billion units of UBA shares were traded on the Nigerian Stock Exchange in the first half of 2021, representing 5.3% of the shares outstanding.
Management noted that the share price waned 15.6% in the period, closing at N7.30 from N8.65 as of 31 December 2020, reflecting the bearish performance of the Nigerian equity market. This was signified by the 5.9% and 7.1% loss in the Nigerian Stock Exchange All Share Index (NSE ASI) and the Banking Sector Index (NSE Bank 10) during the period ended June 30, 2021.
First Half 2021 Scorecard:
United Bank for Africa raised the bar on its earnings performance in the second quarter of the financial year 2021 performance with double digits growth in after tax profit, up 36.3% to N60.58 billion from N44.42 billion in the comparable period in 2020.
Amidst economic recovery in the first half, UBA gross earnings jumped albeit moderately by 4% year on year to N159.88 billion, on the back of interest income growth amidst a slowdown in the banking sector due to a low-interest rate environment.
The Pan African lender recorded 18% jump in interest income year on year to N114.04 billion in the second quarter2021, while non-interest income declined by 19% year on year to N45.84 billion.
WSTC Securities analysts said in an equity report that the relatively strong interest income growth resulted from a 39% year on year growth in interest-earning assets from an average of N4.63 trillion in the first half of 2020 to an average of N6.45 trillion in the first half of 2021.
Most of the increase came from 52% increased investments in fixed income securities according to analysts, attributed to the trend of rising yields in the fixed income market during the period.
In addition, the Group’s loan book expanded by 22% to an average of N2.59 trillion following the Central Bank 65% loan to deposit ratio target. Analysts spotted that lender’s loan book expanded strongly at 18% year on year to N1.83 trillion in the Nigerian market, while it grew by 35% in the Pan African space.
WSTC Securities noted that as a reflection of the Group’s sustained drive of its retail banking, specifically, interest income from retail loans jumped by 94% year, partly driven by early successes recorded in its recently launched ‘Click Credit’ product.
However, lower trading gains drag non-interest income in the period, according to the detail from the financial statement.
Fee and commission income grew by 42% to N39.13 billion in Q2-2021 year on year, driven by e-banking income and other transaction-related income. Notably, analysts said the bank e-banking income grew by 78% year on year to N17.12 billion in the second quarter of 2021.
In terms of contribution to total fee and commission income, e-business income accounted for 44%. The Group incurred a net trading and FX loss of N1.37 billion in Q2-2021 from N26.06 billion gain in the comparable period in 2020.
Meanwhile, other operating income rose by 177% to N8.08 billion. Analysts think the impact of the net trading and FX loss incurred in the period outweighed the gain recorded on other non-interest income lines.
Therefore, total non-interest income dipped by 19% year on year, WSTC Securities analysts report explained while noting that cost efficiency drives the Pan African lender’s bottom line expansion in the period.
“We expect the bank’s continued improvements in operational efficiency to propel earnings further”, analysts at Cordros said.
On the strength of the 47% growth in net interest income to N71.58 billion – supported by a 5% year on year decline in interest expense and a 59% decline in an impairment charge, the Group’s operating income increased by 6% to N103.69 billion.
This occurred at the time when UBA operating expense declined by 7% to N68.68 billion in Q2-2021, leading to a 900 basis points reduction in cost-to-income ratio to 66%, according to analysts.
As a result, profit before tax spiked by 46% year on year to N35.61 billion in Q2-2021. WSTC Securities raised the 2021 EPS projection to N4.03 from N3.68.
“We expect the Group to sustain its current growth trajectory in the second half of 2021. We expect to see a higher loan growth and marked growth in the Group’s digital business”.
Analysts also expressed the view that the Group will sustain its geographical advantage by growing its business in other Pan African markets with relatively better economic fundamentals.
“We estimated N14.52 fair value for the stock”, WSTC said in its equity report adding that at the reference market price of N7.60, the firm believes that the stock is trading at a steep discount.
The stock’s earnings yield at the current market price stands at 53% – which effectively implies that the investor gets to recoup its (undistributed) invested capital in approximately two years. Also, with a dividend yield of 13% – industry best, we posit that there is room for significant upside in the stock, recommend the stock to clients.
Expressing an opinion on why the UBA share is significantly undervalued, WSTC Securities analyst remarked that the broad weak investors’ sentiment in the equities market is the catalyst – and the major driver of the weak sentiment is the uncertainty in the foreign exchange market.
“We maintain that external factors are the source of the undervalued state of the stock. We have a positive outlook for the Nigerian foreign exchange market, expected to be supported by incoming Eurobond proceeds and a stable global crude oil market.
“With stability in the foreign exchange market, we believe that the stock would reprice to reflect its earnings and fundamentals”, WSTC analysts explained.
UBA: Analysts See Higher Valuation Ahead, Raise Share Target Price