FIDELITY BANK PLC. Equity Research Report

Transcription

1 Equity Research Report On FIDELITY BANK PLC October 27 This report is based upon information from various sources that we believe are reliable. However, no representation is made that is not accurate or complete. This report is not an offer to buy or sell, nor a solicitation to buy or sell the securities mentioned therein. This report is provided solely for the information of clients of LeadCapital Limited (LeadCapital) who are expected to make their own investment decisions without sole reliance on this report. LeadCapital accepts no liability for any direct or consequential loss arising from any use of this report or its contents. Investments can fluctuate in price and value and the investor may get back less than was originally invested. Past performance is not necessarily a guide to future performance. This information has been issued by LeadCapital, which is licensed by the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). Enquiries relating to any matters in this report should be directed to Bamidele Adewole ( ext 13) 1

2 Offer Highlights Issuer Authorised Share Capital Issued Share Capital Shares on Offer (inclusive of rights issue) Fidelity Bank Plc 25 billion ordinary shares 16.4 million ordinary shares 6 billion ordinary shares Offer Price N8. Total Offer Size (inclusive of rights issue) Market Capitalisation (pre offer) Market Capitalisation (post offer) Underwriting Purpose N48 billion N131.7 billion N179.7 billion 8% firm underwriting by joint underwriters The offer is being undertaken to expand the retail infrastructure and branch network, expand product distribution capabilities in the electronic banking space and deepen participation in power, oil & gas, real estate and telecoms sector Offer Opens September 27th, 27 Offer Closes November 9th, 27 The company is also offering by way of rights 498,899,579 ordinary shares at N8. per share to existing shareholders as at 2th August 27. 2

3 Key Statistics Offer Price (N) 8. Rights Price (N) 8. YTD Capital appreciation (%) 453 Current Market Price (N) Discount to Market Price (%) 5 Deposit Liabilities (N bn) Assets (N bn) Market Cap. (N bn) Trailing PE Valuation (x) Trailing Earnings Yield (%) 2.59 Trailing Dividend Yield (%) Forecast P/E Valuation (x) Forecast Earnings Yield (%) Forecast Dividend Yield (%) 2.8 Recommendation Short term CAUTIOUS BUY Long-term BUY Company Profile Fidelity Bank Plc ( Fidelity Bank or the bank ) was incorporated on 19 th November 1987 as Fidelity Union Merchant Bank Limited and commenced business on the 3 rd of June The bank was converted to a commercial bank on July 16, 1999 after which it sought quotation on the Nigerian Stock Exchange (NSE) and had its name changed to Fidelity Bank Plc in Following the Central Bank of Nigeria (CBN) ordered recapitalisation directive, the bank executed a merger with FSB International Bank Plc and Manny Bank Plc. The bank has 95 branches nationwide but has its head office situated at 2 Kofo Abayomi, Victoria Island, Lagos. Fidelity bank has acquired varied experience in commercial and merchant banking activities throughout its 19 years of existence. The bank is one of the settlement banks in the country and participates in the Wholesale Dutch Auction System (WDAS). Fidelity Bank is currently in partnership with Investec of South Africa for the management of Nigeria s foreign reserves. The bank s authorised share capital is 25 billion ordinary shares out of which 16.4 billion are issued and fully paid. The board of directors consists of a chairman, four executive directors and nine non-executive directors. Fidelity bank s products and services cut across a rather diversified range including Treasury, Investment Banking, Structured Finance and Credit products (such as Overdrafts, Term Loans and Commercial papers). The bank currently has three subsidiaries which are: Analyst Bamidele Adewole bamidele.adewole@leadcapitalng.com Fidelity Union Securities Limited Eastline Investments Limited Fidelity Pension Managers Limited 3

4 Key Selling Points Strong management team. The management team, led by its committed and highly experienced board of directors stand in good stead to lead the bank through the challenges of the Nigerian banking sector. Growth in shareholder value. The bank s shares have recorded a capital appreciation of over 379% since its Initial Public Offering (IPO) price of N2.5 in December 25. An investor who invested N5, in 25 is therefore worth approximately N2.4 million at its current price. The bank also rewarded its loyal investors with a dividend payment of 11k in 26 (dividend yield 3.41%), giving a cumulative to a return on investment of 384%. Highly diversified revenue base. Being a full fledged universal bank, the income streams of the bank are highly varied and diversified. The bank engages in virtually all areas of modern banking such as treasury, investment banking and structured finance. They also have interests in other key sectors of the economy including the downstream and upstream oil, gas and power sector, public sector servicing and a strong retail banking franchise through its participation in the Small and Medium Enterprises Scheme. We believe that this position will help improve the bank s risk profile and increase the confidence placed on it by its various stakeholders. Awards and Ratings. The bank has received several awards and nominations and is highly rated by agencies both local and international. Among such nominations are ThisDay awards for most improved bank in Nigeria, Fund manager of the year and stock offer of the year. The bank has also received an A rating from South Africa based Global Credit Rating Agency since 22. Strategic public sector involvement. The bank has strategically positioned itself to leverage on its opportunities that exist in the public sector by participating in many government initiatives. Some of these recent initiatives include: its appointment as a primary dealer in Treasury bills and Government securities, primary dealer/market maker in FGN bonds by the Debt Management Office (DMO) and its partnership with Investec of South Africa in the management of Nigeria s external reserves. Challenges & Risk Factors Operating Environment. Perhaps the biggest challenge facing the bank relates to its ability to remain competitive in the continuously evolving Nigerian Banking industry. The spate of M&A transactions, strategic alliances with foreign banks, continuous improvement in banking cultures, and increase in ICT platforms vis-à-vis the deployment of ATMs and upgrading of IT software makes the banking sector a highly competitive one. Fidelity banks is categorized among the second tier banks in Nigeria and as such may not have the financial muscle to compete with the bigger banks. Company Risk. The bank occupies an unenviable position in the industry as it is currently ranked 16th, 13th and 16th by assets, deposit base and market capitalisation respectively. The bank s risk asset portfolio is also one of the highest in the industry (NPL/Total loans 17.7%) and also relies heavily on public sector projects which are susceptible to crystallising in non-performing loans. 4

5 Chart 1. Shareholders Funds (N'bn) Chart 2. Total Assets (N'bn) Chart 3. Deposit Liabilities (N'bn) Financial Analysis The shareholders funds of the bank experienced unprecedented growth between FYE 24 and The company recorded a Compound Annual Growth Rate (CAGR) of 53% during the last four years of our review period from N3.48 billion to N29.1 billion. This astronomical rise in however attributable to the CBN enforced recapitalisation requirement which culminated in the execution of a merger between Fidelity Bank, Manny Bank and FSB International Bank. The bank also completed a successful Initial Public Offering (IPO) in December 25 which added to its total shares outstanding. Another key factor attributable to this increase is the growth in general reserve from N534 million to N2 billion (3% CAGR) during the same period. The asset base also grew by 55% during our review period (from N15.64 billion to N billion). This was as a result of the bank s organic and inorganic expansion and its diversification into other sectors such as oil and gas and public sector servicing. The quality of the bank s risk assets still leaves room for growth as its Non-Performing Loans/Total Loans ratio of 17% is above the industry average of 14.8%. The bank s participation in SMEs as well as its strong retail banking franchise seems to have paid-off as its deposit base has grown by 51% CAGR from N12.28 bn to N96.24 bn over the last 5 years. Competition from bigger banks within the industry may however restrict its ability to build on this trend in the years to come. 1 The analysis is based on the 3 rd quarter 27 financial results of Fidelity Bank Plc 5

6 Chart 4. Gross Margin (%) Chart 5. ROCE (%) Chart 6. RoE (%) A critical analysis of the company s income statement shows a rather sporadic movement in the company s margins from N67.37% to 72.87% during the period under review. Despite the bank s aggressive growth in gross income and after-tax profits of 41% and 44% respectively, the bank was only able to grow its gross margins 2 by a CAGR of 2% between FYE 22 and its nine months to March 27. This analysis however shows that the bank has been able to grow its non-interest and discount income (such as income from fees and commissions) at a much faster rate than its gross income thereby improving the quality of its earnings portfolio. Return on Capital Employed (ROCE) derived by dividing the bank s pre-tax earnings by its book value, has been on a steady decline in the last five years. Chart 5 indicates a fall from 43.98% to 12.57% representing a CADR of 22%. This trend is precipitated by the bank s increase by 53% CAGR in shareholders funds during the period without a corresponding growth in its earnings (CAGR 42%). We believe that Fidelity Bank would need to grow more aggressively its net earnings through reduced cost structures and interest servicing in order to improve its efficiency in income generation. RoE has also shown a similar trend as ROCE, recording a compound decline rate of 13% in the last 5 years from 45.62% to 22.15%. We expect this decline to continue as the shares to be raised from the offer will increase the equity base of the bank thereby putting more pressures on the bank. 2 Interest and Discount Income as a proportion of Gross Earnings 6

7 Chart 7. NPL/Total Loans (%) Diamond Bank 9.8 Access Bank 17.7 Chart 8. Fidelity Price History (N) May May-5 Sep-5 Sep-5 Jan-6 Jan-6 Technical Suspension May-6 May-6 Fidelity Fidelity Ecobank Bank PHB Sep-6 Sep-6 Jan-7 Jan-7 NSE Index May-7 Chart 9. Fidelity Bank Vs NSE Index (Rebased) May-7 Sep-7 Sep-7 Investment Strategy The major challenge for Fidelity bank is the ability to improve its efficiency and profitability indices in line with peer competition and industry trends. Its NPL/Total Loans ratio of 17.7% is above the second-tier industry average of The bank conservatively increased its provision for risk assets by 52% between FYE 25 and 26. Fidelity bank however recorded a capital appreciation of 274% in the last 2 years, from N3.23 to N The bank has also outperformed the NSE all-share index during the last 12 months, recording a 41% growth as compared with that of the index at 58%. Year to date, the bank s share price has appreciated by 453%. Based on its 9 months results to March 27, we extrapolate that the bank will achieve N4.5 billion at FY 27. Fidelity bank s offer price is valued at times its earnings and 4.54x times its book value. Assuming a 1% subscription for the offer, the shares outstanding will increase to 22.6 billion ordinary shares ( ). Assuming it achieves its profit forecasts of N11 billion, the 1 year forward PE valuation will stand at 16.34x while its price to book value will be 2.7x. These indices compare favourably with industry averages of 22.32x and 5.28x respectively. Its forecast dividend yield of 2.8% also compares favourably with that of the industry average of 2.4%. We however express our reservation on the bank s ability to achieve its projected forecasts of N11 billion in 28. Based on the above analysis and considering other market determined factors we place a cautious buy recommendation on Fidelity Bank for the short term and a buy for investors with long-term horizons. 3 Based on the latest available financials of comparable banks 7

8 Balance Sheet 9 Months N' N' N' N' N' N' Assets Cash and Short-term Funds 2,99,47 6,23,194 5,321,948 5,219,332 12,174,536 14,351,154 Due from Other Banks 2,18,993 4,26,825 4,822,582 8,281,394 34,834,546 16,14,323 Treasury Bills 3,696,831 3,41, 5,635,35 4,427,223 25,285,35 33,624,297 Investments 55,63 174, , ,315 1,376,748 3,659,75 Loans and Advances 4,934,514 7,175,55 9,735,682 13,892,29 38,661,271 56,493,737 Finance Lease 28,511 5, , ,814 1,298,635 Other Assets 598,97 394, ,986 1,22,9 2,587,24 8,958,461 Equipment on Lease 72,463 44,413 16,363-3,426 1 Tangible Fixed Assets 898, ,831 1,8,349 1,17,8 4,81,886 5,417,466 Total Assets 15,636,979 22,517,65 27,552,79 34,953, ,985, ,97,788 Liabilities Deposits and Other Clients' Accounts 12,28,593 16,888,124 2,556,176 2,572,61 78,647,638 96,239,43 Due to Other Banks ,5,283 2,681,841 - Other Liabilities 928,73 2,797,773 3,178,986 1,581,82 1,13,32 13,64,128 Deposits for Shares 418,798 14,57 14,179 1,589,38 263,28 175,252 Dividend Payable ,811,6 133,25 Taxation Payable 51,29 23,49 173, , ,11 711,38 Deferred Taxation 64, , , , Total Liabilities 13,743,226 2,49,682 24,76,236 25,229,83 94,388,88 11,899,323 Capital and Reserves Share capital 852,574 1,189,177 1,533,731 4,274,92 8,231,843 8,231,843 Share Premium 38, ,471-2,739,15 11,177,852 11,177,852 Statutory Reserve 592, ,266 1,116,625 1,5,796 2,449,5 3,472,942 General Reserve 89,329 86,363 51,63 756, ,658 2,462,561 Small Scale Industries Reserve 17, ,16 323, , ,149 1,19,296 Capital Reserve 213, ,553,971 2,553,971 Shareholder's Funds 1,893,753 2,467,383 3,475,843 9,723,548 25,596,973 29,8,465 Liabilities & Equity 15,636,979 22,517,65 27,552,79 34,953, ,985, ,97,788 8

9 Profit and Loss Accounts Historical 9 Months N' N' N' N' N' N' Gross Earnings 3,242,861 4,386,189 5,471,267 6,158,659 11,572,151 17,768,181 Interest and Discount income 2,184,613 3,33,473 3,821,72 4,547,95 7,67,471 12,946,872 Interest and Discount Expenses (1,332,264) (1,659,616) (2,153,187) (2,249,833) (3,169,886) (7,163,391) Net Interest and Discount Income 852,349 1,373,857 1,668,533 2,298,72 4,5,585 5,783,481 Provision for Risk Assets (75,81) (142,347) (384,94) (154,669) (235,364) (274,91) Net Interest Margin 776,548 1,231,51 1,283,593 2,143,43 4,265,221 5,59,39 Other Income 1,58,248 1,352,716 1,649,547 1,61,754 3,91,68 4,821,39 Net Income 1,834,796 2,584,226 2,933,14 3,754,157 8,166,91 1,33,669 Operating Expenses (1,21,) (1,499,154) (1,855,631) (2,189,767) (4,579,61) (6,684,765) Profit Before Taxation 633,796 1,85,72 1,77,59 1,564,39 3,587,3 3,645,934 Taxation (74,874) (254,769) (159,645) (283,819) (424,953) (234,461) Profit After Taxation 558,922 83,33 917,864 1,28,571 3,162,347 3,411,473 Appropriations Transfer to Statutory Reserve (167,677) (249,91) (275,359) (384,171) (948,74) (1,23,442) Transfer To Small Scale Industry Reserve (63,38) (18,57) (17,751) (128,57) (316,235) (341,147) Proposed Dividend - (475,672) - - (1,811,66) - Transfer to General Reserve 327,865 (2,967) 534, ,343 86,42 2,46,884 Forecast N' N' N' N' Gross Earnings 25,89,639 42,323,729 63,181,53 91,,66 Interest and Discount income 18,981,185 31,991,33 49,134,844 73,24,354 Interest and Discount Expenses (9,53,952) (13,385,467) (19,398,76) (27,92,425) Net Interest Margin 9,45,233 18,65,863 29,736,768 46,111,929 Loan Loss Expense (778,229) (3,377,214) (4,869,263) (6,831,586) Other Income 6,18,454 1,332,399 14,46,659 17,796,252 Operating Income 14,78,458 25,561,48 38,914,164 57,76,595 Operating Expenses (8,498,396) (11,86,51) (15,786,96) (22,36,276) Profit Before Taxation 6,282,62 13,754,997 23,127,24 35,4,319 Taxation (1,193,592) (2,75,999) (4,625,441) (7,8,64) Profit After Taxation 5,88,47 11,3,998 18,51,763 28,32,255 Transfer to Statutory Reserve (1,526,541) (3,31,199) (2,775,264) (4,24,838) Transfer To SME Reserve (58,847) (1,1,4) (1,85,176) (2,83,226) Dividend (2,634,19) (4,942,11) (7,637,653) (11,456,78) Transfer to General Reserve 418,892 1,66,388 6,238,67 9,567,411 9

10 Performance Indicators Months 27 Shares Outstanding () 2,378,354 3,67,462 8,549,84 16,463,686 16,463,686 Dividend (N') 475,672 N/A N/A 1,811,66 N/A Book Value (N') 2,467,383 3,475,843 9,723,548 25,596,973 29,8,465 Price Gross Margin, % Profit Margin, % Cost/Sales Ratio (%) ROCE ROA ROE EPS, N DPS, N.2 N/A N/A.11 N/A BV/Share, N Div Payout, % N/A N/A N/A Earnings Yield, % Div Yield, % 2.5 N/A N/A 1.38 N/A PE ratio, x (Based on Offer Price) Price to Book, x (Based on Offer Price) Div Cover, x 1.75 N/A N/A 1.75 N/A Cash Ratio, x Debtors Turnover, x Creditors Turnover, x N/A N/A N/A Fixed Asset Turnover, x