RECOMMENDATION ON DIAMOND BANK PLC RIGHTS ISSUE

Transcription

1 RECOMMENDATION ON DIAMOND BANK PLC RIGHTS ISSUE JUNE 214

2 Background Information Diamond Bank is among the large financial services providers in West Africa with total assets in excess of NGN1.7trn, which represents the 7th largest of the banks on the Nigerian Stock Exchange (NSE) with only the 6 tier-1 banks ranking above it. Diamond Bank Plc submitted an application to the NSE to raise approximately N5.37bn (USD39mn) via a Rights Issue as part of the bank s capital raising exercise to shore up its capital adequacy ahead of Basel 3 implementation. This capital raising exercise has also included a Eurobond (newly issued in May, 214) from which the bank raised USD2mn at a rate of 8.75% over 5 years. This Rights Issue (if 1% subscribed) will add 8,685,145,863 ordinary shares of 5 kobo each to the bank s current shareholding structure to bring the total shares outstanding to 23,16,388,968 ordinary shares (8th largest of the 15 banks on the Exchange). Peer Comparison It is our opinion that Diamond Bank, with its re-branding, growth ambitions and planned extensive branch establishment over is on the vanguard of crossing over to join the top players in the Tier 1 league. These banks are usually the favourite of institutional investors, both foreign and local, and their stronger market visibility, higher trading float and liquidity are some of the factors driving this patronage. Chart 1: DIAMONDBK Total assets vs. sector s constituent banks Chart 2: DIAMONDBK Market cap vs. sector s constituent banks Millions 4,5 Billions 1, 4, 9 3,5 3, 2,5 2, 1,5 1, 5 DIAMONDBK ranks 7th, with only Tier-1 banks above DIAMONDBNK will rank 9th before and after the Rights Issue at its current price Source: NSE, Company Financials, Meristem Research 1 P a g e

3 There is empirical data that lends credence to the assertion that there has been a benchmarking of the performance of banks in each tier structure against one another, and then against industry averages. This has instigated a high level of competition in the sector to maintain and then bridge the gap in their key metrics such as balance sheet size, margins, price multiples and even share price. When Diamond bank s metrics are compared with other tier 2 banks, the disparity begins to lend credence to our position that the bank trades well below its fair value. The bank s current P/E of 2.96x is the lowest in the sector, which means that this stock represents the best value for money based on current price and earnings of NGN8.45bn (214Q1 numbers). Chart 3: Metrics comparisons with tier structures and industry Banks Price EPS P/E P/BV BVPS Asset Turnover Net Margin Leverage ROE CIR LTD ACCESS x.89x % 5.54x 12.13% 64.6% 65.5% DIAMONDBNK x.7x % 1.85x 21.5% 6.3% 57.8% ETI x.71x % 9.34x 7.27% 66.% 72.2% FBNH x 1.8x % 8.3x 13.86% 66.% 62.9% FCMB x.53x % 6.84x 11.8% 69.4% 71.8% FIDELITYBK x.36x % 5.96x 4.15% 77.% 56.7% GUARANTY x 2.47x % 6.1x 24.3% 46.% 68.4% SKYEBANK x.38x % 8.98x 12.8% 83.5% 77.3% STANBIC x 2.43x % 7.79x 24.52% 75.% 67.8% STERLNBANK x.76x % 11.64x 14.86% 71.7% 62.4% UBA x 1.8x % 1.92x 17.66% 69.1% 48.6% UBN x.85x % 4.88x 1.61% 73.7% 51.8% UNITYBNK x.62x % 1.26x % 66.3% 65.5% WEMABANK x.94x % 13.58x 13.77% 83.5% 46.2% ZENITHBANK x 1.5x % 5.92x 18.93% 55.% 57.3% Tier x 1.18x % 7.38x 14.66% 6.5% 62.% Tier x.72x % 8.55x 12.98% 73.9% 6.7% All banks 7.88x.89x % 8.6x 11.78% 67.7% 62.% 18 June, 214 Prices are used in the computations. Also tier-2 for P/E, Net margin and ROE avg. discounts UNITYBANK. Key EPS P/E P/BV BVPS ROE CIR LTD Earnings per Share Price-to-Earnings ratio Price-to-Book Value Book Value per Share Return on Equity Cost Income Ratio Loan-To-Deposit Source: Company Financials, Meristem Research 2 P a g e

4 The bank s high financial leverage of 1.85x relative to the tier- 1(7.38x), tier-2 (8.55x) and industry average (8.6x) and is the attendant effect of the bank financing its exponential growth with debt, and other liabilities. We do not envisage this being an issue in the near term as long as the bank can grow risk assets sufficiently to offset declining yields on assets. This we believe is achievable given their current LTD ratio of only 58% (which is well below the statutory limit of 8%). Also, the bank s relatively high ROE of 22%, which is well above that of most tier-1 banks save for GUARANTY is not unconnected with this huge balance sheet leverage which is the second highest in the sector. Share price performance DIAMONDBK currently trades at NGN6.5, which represents an 18% discount to its 52-week high of NGN7.95, and an 18% premium to its 52-week low of NGN5.5. The stock is fairly liquid and trades at a beta of The counter has declined by approximately 9% to date, compared to the NSEASI s return of -.47%. We surmise that the headwinds at the start of the year were largely responsible for this stock s underperformance so far in 214. The first 4 months of the year saw the ticker pare by -19%. However, after the release of impressive FY213 results the ticker garnered investor attention and the share price rallied, gaining 11% in May alone. Chart 4: 52 week price volume chart Chart 5: Price movement vs. NSEASI (rebased) Volume (RHS) Price DIAMONDBNK NSEASI Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: NSE, Bloomberg, Meristem Research 3 P a g e

5 The latest data from the CBN shows that the level of foreign participation in the equities has steadily risen to 32% from lows of 22% recorded in March. We opine that as the level of participation increases, the sound fundamentals of the stock will gain it the recognition that will drive the share price towards our estimated fair value. Valuation We valued DIAMONDBK using a blend of absolute (5%) and relative (5%) valuation techniques. Our adoption of Price Multiples methodology in the valuation metrics is to better reflect the impact of market trend on the stock s movements over time. For the DCF valuation, we used a 5-year forecast model, 6.33% market risk premium through till 216 and 6.18% for 217 and 218. We obtained our terminal values using a cost of equity of 22% and 7% sustainable growth rate. Return on Equity (RoE) is estimated at 15.9% for 214FY which is below our 22% derived Cost of Equity. The issue will imply a lower full year 214 estimate EPS of N1.52 (based on the weighted average shares for the year) versus of our previous forecast of N2.5 which will imply a forward P/E of 5.69x by FY214. Our valuation methodologies put DIAMONDBK at a target price of NGN7.79, a premium of 24% to the current market price of NGN6.27 and a 34% premium to the Rights Issue list price of NGN5.8. And so thus, we recommend that investors take up this Rights Issue. Financial Performance Interest Income & Non-Interest Income Diamond bank grew interest income by 13% Y-o-Y by 214Q1 (27% as at FY213) which supported strong gross earnings growth of 22% (27%; FY213). The bank s strong performance is largely due to the increase in risk assets majorly composed of loans largely skewed towards MSME s which has significant risk, but also significant risk pricing match (as is apparent), 4 P a g e

6 The bank will continue to drive its retail segment competence to attract low cost deposits, and make high margin loans. This leads us to forecast that their FY214 performance might closely mirror that of FY212 (though slightly tempered), and so we forecast interest income growth of 18%. This we expect will be supported by robust risk asset creation by the bank on the precipice of prominence. Chart 6: Trend in gross earnings, interest and non-interest income Billions 25 2 Gross Earnings Interest Income Non-Interest income 2 per. Mov. Avg. (Gross Earnings) F 215F Source: Company Financials, Meristem Research The bank s growth in non-interest income of 65% (24% Y-o-Y; FY213) was equally impressive, supported by an 8% contribution from fees and commission income in 214Q1 (78%; FY213)). This impressive growth in the first quarter of 214 was supported by a gargantuan 68% growth in trading income which we do not expect will reoccur in such magnitude. We forecast a much slower growth in non-interest income growth of 14% to NGN42bn by FY214, primarily due to the impact of reduced COT. OPEX The bank managed a cost to income ratio of 6.3% as at FY213, and 62% as at 214Q1. The cost trended upwards as at 214Q1 primarily due to the new banker s tariff (which includes the AMCON levy and depositor (NDIC) premium). It is likely that the bank s costs might further trend upwards this year due to expansion plans and staff costs. 5 P a g e

7 This bank unlike the most of the rest of the industry plans to undergo major expansion plans (with a target of 3 branches set or 214) for which they have already raised debt of USD2mn. Due to this massive undertaking we expect that the bank s cost to income might trend upwards by FY214, and so we expect a FY214 cost to income ratio of around 7% (8% over 214Q1, and 1% over FY213). Chart 7: Operating Expenses and Cost-to-income ratio from 28 to date 9 Billions Operating Expenses CIR 84 72% % 68% % % 62% 6% 2 58% 1 56% Source: Company Financials, Meristem Research 54% Earnings The bank generated earnings of NGN29bn from gross earnings of NGN181bn by FY213 (representing a net margin of 16%), and NGN8bn from NGN49bn as at 214Q1 (representing an improved net margin of 17%). This performance translates to ROE of 22% which is well above the tier-2 bank average, and would not be illassumed as a tier-1 bank performance. Our expectations for the bank s FY214 performance are tempered by rising OPEX associated with the massive branch expansion being undertaken. We forecast earnings growth of approximately 2% to NGN34bn. 6 P a g e

8 Financial Highlights (NGN billion) DIAMOND BANK PLC Q1:214 Result Profit & Loss Account Q1:214 Q1:213 y/y Growth Gross Earnings % Interest Income % Interest Expense % Impairment Charge % Net Interest income after impairment charge % Non Interest Income % Net operating income % OPEX % PBT % PAT % Balance Sheet Cash and bank % Loans to banks % Loans to customers % Investment Securities % Fixed Assets % Other Assets % Total Assets 1, , % Deposit from Banks % Deposit from Customers 1, , % Borrowings % Total Liablilites 1, , % Other Liabilities % Shareholders' fund % Per share data DIAMONDBNK Current Price 6.27 EPS 2.12 BVPS 1.16 Price multiples/ratios P/E 2.96x P/BV.62x RoAE 21.48% RoAA 1.98% Cost of Funds 3.1% Net Margin 17.24% 7 P a g e

9 Analyst s Certification and Disclaimer This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the cover of this report. Each research analyst hereby certifies, with respect to each security or issuer covers in this research that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers (the Issuer); and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Research analysts compensation is determined based upon activities and services intended to benefit the investor clients of Meristem Securities Limited (the Firm). Like all of the Firm s employees, research analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the Firm. (3) each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting non-material non-public or material public market information. As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a judgment, and are not connected to research analysts compensations. In the case of non-currency of the date of this report, the views and contents may not reflect the research analysts current thinking. This document has been produced independently of the Issuer. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the ratings, forecasts, estimates, opinions and views contained herein are fair and reasonable, neither the research analysts, the Issuer, nor any of its directors, officers or employees, shall be in any way responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking. Investment Ratings Fair Value Estimate We estimate stock s fair value by computing a weighted average of projected prices derived from discounted cash flow and relative valuation methodologies. The choice of relative valuation methodology (ies) usually depends on the firm s peculiar business model and what in the opinion of our analyst is considered as a key driver of the stock s value from a firm specific as well as an industry perspective. However, we attach the most weight to discounted cash flow valuation methodology. Ratings Specification BUY: HOLD: market price. SELL: Fair value of the stock is above the current market price by at least 2 percent Fair value of the stock ranges between -1 percent and 2 percent from the current Fair value of the stock is more than 1 percent below the current market price. Definitions Price Targets: Price targets reflect in part the analyst s estimates for the company s earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or market, and may not occur if the company s earnings fall short of estimates. 8 P a g e

10 Date Asset allocation: The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable. Movements in Price Target Company Name: Diamond Bank Plc Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 17/6/ BUY BUY New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company Diamond Bank Plc Disclosure a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. 9 P a g e

11 Conflict of Interest It is the policy of Meristem Securities Limited and its subsidiaries and affiliates (Individually and collectively referred to as Meristem ) that research analysts may not be involved in activities that suggest that they are representing the interests of Meristem in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in Meristem s Investment Banking or Sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analysts published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests. Important Disclosure For U.S. persons only: This research report is a product of Meristem Securities, which is the employer of the research analysts who has prepared the research report. The research analysts preparing the research report are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analysts are not subject to supervision by a U.S. broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Mersitem Securities only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Meristem Securities has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. Legal entity disclosures Meristem Securities Limited is a member of The Nigerian Stock Exchange and is authorized and regulated by the Securities and Exchange Commission to conduct investment banking and financial advisory business in Nigeria. However, the company through its subsidiaries carries out stock broking, wealth management, trustees and registrars businesses which are regulated by the SEC and ICMR. 1 P a g e

12 Contact Information Brokerage Services ( ) Investment Banking/Corporate Finance ( ) ( ) Wealth Management ( ) ( ) Tel: Registrars muboolasoko@meristemregistrars.com ( ) Tel: Trustees yinkaadegbola@meristemng.com ( ) Tel: Client Services tounomonaiye@meristemng.com ( ) Investment Research Saheedbashir@mersitemng.com ( ) kemiakinde@meristemng.com ( ) research@meristemng.com Tel: Corporate websites: Meristem Research can also be accessed on the following platforms: Meristem Research portal: meristem.com.ng/rhub Bloomberg: MERI <GO> Capital IQ: ISI Emerging Markets: Reuters: FactSet: 11 P a g e

13 12 P a g e Diamond Bank Plc