Partnership Investment Company Limited: Offer by Private Placement

Transcription

1 Equity Research Other Financial Services Nigeria Partnership Investment Company Limited: Offer by Private Placement Idowu Ogedengbe Tola Odukoya Michael Nkadi February 20, 2008 Offer Price: N2.00 Fair Value: N4.14 Offer Summary Sector Other Financial Services Units on offer, m 1,500 Offer Price (N) 2.0 Offer Size (N m) 3,000 Minimum Subscription (units) 50,000 Subsequent multiples (units) 20,000 Pre-Offer Market Cap. (N m) Post-Offer Market Cap. (N m) 3, Opening Date 04 Feb, 2008 Closing Date 12 Mar, 2008 Underwriting Status None Issuing Houses: UBAGM, Ecobank and FBN Capital Source: Offer Document and UBAGM Research Financial Data, Dec. FY Dec M Sept Revenue, N , ,909 PBT, N , ,438 PAT, N ,777 79,546 Net assets, N , ,383 Market cap., N , ,800 Issued shares, HIGHLIGHTS Raising capital to meet up with regulatory requirement Partnership Investment Company Limited (PICo.) is seeking to raise N3bn via a private placement of 1.5 million ordinary shares of 50kobo par value at an offer price of N2 per share with a view to shoring up its capital base from N378mn to well over N3bn. In April 2007, the Securities and Exchange Commission (SEC) had directed all operators rendering issuing house and advisory services to recapitalize to a minimum of N2bn by December and diversify operations. The proposed application of funds confirms the company s vision of becoming a well diversified financial services group. PICo would be spending over 45% of its offer proceeds on strategic acquisitions, enhancing subsidiaries capacity, project and real estate financing. Strong regional presence and growing retail franchise. PICo operates in four key regions (Lagos, Abuja, Benin and Port Harcourt). The company runs a business model that revolves around providing brokerage and asset management services to about 10,000 retail clients it has currently. We believe the recent regional expansion embarked upon by the Nigerian Stock Exchange should bode well for PICo, particularly within the oil-rich middle belt and Niger Delta regions of Nigeria, given its understanding of the culture and peculiarities of the locals. Increasing market share. The company recorded a 3-year CAGR of 74.6% and 38.7% in gross earnings and net profit to N510.3mn and N14.8mn respectively in However, profit margins have been volatile over the years, due to high cost of financing its operations. We expect the fresh equity to be injected into the company on the successful completion of its offer to moderate this trend. Q3 07 results show an impressive run in profitability. PICo recorded a PBT of N121.4mn on gross earnings of N545.9mn. Applying historical tax rates of 34.5%, we estimate a net profit of N121.8mn and a net margin of 16.8% for FY 07 (FY 06: 2.9%). Valuation yields significant upside potential. Our valuation of PICo yields a fair price of N4.14 per share which indicates a 107% upside potential when compared with the offer price of N2.00. Fig. 1: Ratios and Margins Company P/E P/B RoAE RoAA Net Profit (x) (x) (%) (%) Margin (%) 2008e e Source: Offer Document and UBAGM Research Kindly read the Important Disclosures on page 9 of this report.

2 Strategy and Investment Case Diversifying into Leasing. The company plans to commit about N100mn on establishing a leasing division. The company, to be named Partnership Leasing Ltd, will be a wholly owned subsidiary of the group. We believe investment in a leasing business will add value to the group given the positive outlook for consumer finance in Nigeria. Whilst we expect PICo to face stiff competition from banks, we believe the company could carve a niche for itself particularly at the lower end of the market, a segment with significant value yet to be unlocked. Deepening participation in Real Estate and Property Market. PICo s strategy includes the modernization of its property in Benin City. On completion of the project, the asset will be securitized as a subsidiary. In addition to the rental income accruable from its property, PICo plans to enhance its cash flow by aggressively participating in the real estate and property market, which has significant upside growth potentials. Both urban and rural communities in Nigeria suffer monumental housing deficiencies. Current housing (office and residential) deficits in Nigeria is estimated at between million units. Launching Equity and Money market funds. To enable it benefit from potential growth in its market, PICo intends to set up an asset management subsidiary. The launch of these funds should provide the company an opportunity to capture a sizeable portion of the rapidly growing retail investor base in the economy. The recent clampdown of the SEC and CBN on unregistered money managers and the planned release of funds invested in these companies to the public should enable PICo to achieve huge success when it launches its funds. Margin lending, another source of growth. PICo also intends to take advantage of the bull run in the Nigerian equity markets by setting up a margin lending desk. Of recent, many aggressive investment banks and brokerage firms have enhanced bottom line growth by assisting clients fund their investment plans for a fee. This strategy has also led to higher brokerage commissions and increased patronage to brokerage houses. Management believes margin lending will generate between 40-50% return per annum. Further Branch expansion will be pursued. In order to further extend its market presence and positioning, the company will be adding a few more branches to further spread awareness and help target clients channel resources into more productive uses. We believe that there is still a significant gap in the number of stockbrokerage firms required to provide investment services to the rising population of investors, particularly within the regional markets. Enhancing underwriting capacity. About 35% of PICo s offer proceeds would be used to improve its investment Banking and underwriting capabilities. We believe this strategy should position the company for emerging opportunities as more corporates approach the market to raise fresh capital. SEC had recently issued a directive that all public offering of securities be 80% firmly underwritten. 2

3 Fig. 2: Utilization of Offer proceeds, N m Inv. Banking/Underwriting 1,000 Investment in Subsidiaries 500 Acquisitions 500 Project & Real Estate Financing Working Capital Infrastructure upgrades 130 Branch Expansion Leasing Operation ,000 1,200 Source: UBAGM Research Raising more funds through an IPO. Management has indicated plans to raise more equity capital through an Initial Public Offering. This is expected after an introductory listing of PICo s shares on the daily official list. We believe buying now could be a viable option as we expect the IPO to be offered at a premium to the Private Placement offer price. Company Profile Partnership Investment Company Limited (PICo) was incorporated and licensed as a finance company in August It became a member of the Nigerian Stock Exchange in 1995 to enable it provide core investment banking and brokerage services embracing financial advisory, asset and portfolio management. Besides its Head Office in Lagos, PICo operates out of its other regional offices in Benin, Port Harcourt and Abuja. PICo s business lines include: stock broking securities trading corporate finance treasury and asset management Fig. 3: Proposed Group Structure Partnership Capital Plc Partnership Securities Ltd Partnership Properties Ltd SBDC Microfinance Ltd Partnership Asset Management Ltd Partnership Leasing Ltd Source: Offer Document and UBAGM Research 3

4 The Company proposes to have five (5) subsidiaries as shown above. A number of the subsidiaries are already incorporated with the Corporate Affairs Commission. Meanwhile, the microfinance bank SBDC Microfinance - has been granted an Approval-in-Principle by the Central Bank of Nigeria. Valuation and Key Risks. We valued PICo using a combination of a 2-stage Discounted Dividend Model (DDM), Discounted Cash Flow (DCF) and multiple-based analyses. Our DCF analysis produced a fair value of N3.6 for a share in PICo. The valuation suggests the shares are offered around a discount of 78% to our fair value estimate. Valuation Assumptions Risk free rate 9.5% Beta Factor 1.00 Equity risk premium 8.5% Illiquidity Premium 3.0% Cost of equity 21.0% WACC 16.69% Fig. 4: DCF Valuation FCF Calculation 2008E 2009E 2010E 2011E 2012E Res. Period N'000 EBIT 370, ,481 1,403,989 2,023,981 3,035,972 3,035,972 Tax Rate 34% EBIT (1-t) 244, , ,633 1,335,827 2,003,741 2,003,741 Add Depreciation 24, , , , ,798.5 Change in Wkg Cap. 1,799, ,958-1,163,572-1,266,240-1,899,359 CAPEX 94, , , , ,297.4 FCF 2,163,309 93, , , ,478 2,003,741 TV in year ,009,163 PV of Cash Flows No of Years Discount Factor 16.69% PV of Cash Flows 1,853,972 68, , ,511 6,008,796 Total PV of Cash Flows 8,400,676 less short term debt 1,108,483 less long term debt 197,253 Implied Equity Value 7,094,940 Post Offer Shares Outs. 1,996,575 Fair Value Per Share 3.55 Offer Price (N) 2.0 Discount to Fair Value 77.7% Source: UBAGM Research 4

5 Multiple-based valuation. We also valued PICo by comparing its price multiples to with those of Deap Capital. Deap trades on P/B and P/E multiples of 6x and 32x respectively, while the broader market P/E multiple hovers around 25x. At offer price, PICo s P/B multiple is 2.3x, while it s P/E multiple approximates 11x. Even though we expect Deap to trade at a premium due to its liquidity, we believe that PICo s valuation is fair considering management s plans to apply for listing on completion of the placement. Discounting the outcome from both the P/B and P/E relative valuations, due to the stock s illiquidity, we arrived at implied fair values of N4.7 and N4.1 respectively. Therefore, its shares could trade around these implied fair values if the proposed listing comes through. 5

6 DDM Analysis. Our DDM valuation employed a 2-stage analysis. The result of the valuation, which is displayed below suggests that PICo s shares are worth N4.21 each. The assumptions of the valuation are summarized as follows: Valuation Assumptions Current EPS 0.28 CAGR in EPS (ERPeriod) 39.3% Avg. Payout in ERPeriod 25.0% Length of ERPeriod 5yrs Terminal Growth 11.5% Payout in Terminal Period 60% Cost of equity 21.0% Source: UBAGM Research Fig. 5: Discounted Dividend Valuation Current Inputs Current Earnings per share 0.27 Excess Return Period Length of excess return period 5 (Number of periods/years) Growth rate during excess return period 39.33% Payout ratio during excess return period 25% Cost of Equity during excess return period 21% Stable Growth Period Terminal growth rate 11.50% Payout ratio in steady state 60% Cost of Equity in steady state 21% Discounted Value of Future Dividends 2008E 2009E 2010E 2011E 2012E Periods EPS DPS Cost of Equity Discount Factor Discounted Dividends Output PV of Dividends 0.73 PV of Terminal Price 3.47 Value per share 4.21 Source: UBAGM Research Fig. 6: Summary of Valuation DCF Value 3.55 P/B Value 4.70 P/E Value 4.10 DDM Value 4.21 Average Value

7 Risks to our valuation Economic risks exist as forecast terminal growth (Nominal GDP growth rate) depends on macroeconomic performance Political and environmental risks that could emanate from changes in government and crises in areas of operations Regulatory risks that could arise from a change in SEC and/or NSE rules. Operational risks that could arise from negligence or breach of work ethics on the part of management or an employee Risks relating to an under-subscription of the offer. Although SEC had directed all public offerings in the market to be 80% underwritten, the rule does not apply in this case given the private nature of the offer. Similarly, at the instance of the Issuer, the offer is not underwritten. The downside of this option is that it would not be approved by SEC should the subscription level be lower than 25%, which could lead to a re issuance of the offer or an outright cancellation. Liquidity risks emanating from a likely delay or cancellation of the proposed listing of the shares on the Exchange. 7

8 Financial Data and Forecasts Income Statement 9mths(Sept) N' e 2008e Gross Earnings 103,024 95, , , , , ,059 1,343,209 % Change -7.0% 148.1% 11.7% 92.1% 42.3% 85.0% Operating Expenses 22,462 13,261 55,802 42, , , , ,074 % Change -41.0% 320.8% -23.6% 206.7% 33.2% 61.9% Gross Profit 80,561 82, , , , , ,805 1,061,135 % Change 2.5% 120.4% 22.5% 70.1% 45.4% 92.3% Overhead expenses 38,020 49,581 71,318 93, , , , ,654 % Change 30.4% 43.8% 30.5% 71.5% 73.9% Earnings Before Interest & Tax 42,541 33, , , , , , ,481 % Change -22.4% 235.5% 17.4% 69.2% 101.3% Finance cost 38,512 24, , , , , , ,050 % Change -35.8% 330.9% 17.0% 58.4% -37.5% Profit before taxation 4,029 8,279 4,192 5,342 22, , , ,431 % Change 105.5% -49.4% 27.4% 319.5% 723.9% 241.0% Taxation ,742-1,460-2,012-7,629-41,289-62, ,007 Profit after taxation 3,175 5,538 2,731 3,330 14,778 80, , ,425 % Change 74.4% -50.7% 21.9% 343.8% 724.5% 241.0% Transfer to Reserves 3,175 5,538 2,731 3,330 14,778 80, ,843 Dividends ,856 Retained profit 6,350 11,075 5,463 6,660 29, , , , % -50.7% 21.9% 343.8% 724.5% 27.9% Notes Depreciation 1,494 4,270 7,318 10,523 18,944 18,021 24,777 45,837 EBITDA 44,035 37, , , , , , ,319 Working capital 88,847-87, , ,134-1,128,902-2,539, ,950-1,368,908 Change in Working Capital -176, , , ,768-1,410,744 1,799, ,958 Purchase of fixed assets 2,351 10,304 19,228 17,282 62,293 70,744 94, ,811 Ratios and Margins Opex/Gross Earnings ratio % 21.8% 13.8% 23.5% 16.1% 25.6% 29.9% 24.0% 21.0% Overhead Exp/Turnover % 36.9% 51.7% 30.0% 35.0% 31.3% 22.2% 25.0% 23.5% Gross Margin % 78.2% 86.2% 76.5% 83.9% 74.4% 70.1% 76.0% 79.0% Operating Margin % 41.3% 34.4% 46.6% 48.9% 43.1% 47.8% 46.6% 45.8% (Pre-tax) Profit Margin % 3.9% 8.6% 1.8% 2.0% 4.4% 22.2% 25.4% 46.9% Tax Rate % -21.2% -33.1% -34.8% -37.7% -34.0% -34.0% 34.0% 34.0% Net Profit Margin % 3.1% 5.8% 1.1% 1.3% 2.9% 14.7% 16.8% 30.9% Finance Cost/LT Debt % 19.4% 8.5% 18.3% 10.1% 12.7% 4.7% 12.7% 12.7% Payout Ratio % 0% 0% 80.0% 25.0% RoAE % 1.2% 0.5% 0.4% 1.4% 6% 16.1% 17.2% Share Data Shares outstanding 80, ,000 20, , , , ,400 1,996,575 Earnings Per Share EPS Growth -30.2% 393.3% -94.5% 343.8% 724.5% -24.6% Book Value Per Share P/B x P/E x Common sized Analysis (% of Revenue Depreciation Rate 1.5% 4.5% 3.1% 4.0% 3.7% 3.3% 3.4% 3.4% Investment Rate 2.3% 10.8% 8.1% 6.5% 12.2% 13.0% 13.0% 13.8% Working Capital Rate 86.2% % % % -54.6% % % % Source: Offer Document and UBAGM Research 8

9 IMPORTANT DISCLOSURES This research report has been prepared by the research analyst(s), whose name(s) appear on the front page of this document, to provide background information about the companies (or the company) and securities which are the subject matter of this report. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned herein. Each analyst hereby certifies that with respect to each of such companies and the securities, all the views expressed in this document are his or her own and reflect his or her personal views about any and all of such securities or Companies. These views are not necessarily held or shared by UBA Global Markets or any of its affiliate companies ( UBA GM ). The analyst(s) views herein are expressed in good faith and every effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or completeness. The opinions and information contained in this report are subject to change and neither the analysts nor UBA GM is under any obligation to notify you or make public any announcement with respect to such change. This report is produced independently of UBA GM and the recommendations (if any), forecasts, opinions, estimates, expectations and views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable, none of the analysts UBA GM nor any of its directors, officers or employees has verified the contents hereof and accordingly, none of the analysts, UBA GM nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. With the exception of information regarding UBA GM, reports prepared by UBA GM analysts are based on public information. Facts and views presented in this report have not been reviewed and may not reflect information known to professionals on other UBA GM business areas including investment banking. This report does not provide individually tailored investment advice. Reports are prepared without regard to individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. It is recommended that investors independently evaluate particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances or objectives. Neither the analyst(s), UBA GM, any of its respective directors, officers nor employees accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each analyst and/or any person connected with any analyst may have acted upon or used the information herein contained, or the research or analysis on which it is based prior to its publication date. This document may not be relied upon by any of its recipients or any other person in making investment decisions with respect to the company s securities. This report does not constitute a valuation of the companies business, assets or securities for the purposes of the Nigerian Securities and Exchange Commission s guidelines on valuation activities. Each research analyst certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific recommendations (if any), opinions, forecasts, estimates or views in this report. Analysts compensation is based upon activities and services intended to benefit clients of UBA GM. As with other employees of UBA GM, analysts compensation is impacted by the overall profitability of UBA GM, which includes revenues from all business areas of UBA GM. UBA GM does and seeks to do business with companies covered in its research reports including market making, trading, risk arbitrage and investment banking. As result, investors should be aware that UBA GM may have a conflict of interest that could affect the objectivity of this report. In accordance with S.76 of the Investments and Securities Act 1999, it is expressly disclosed that UBA GM acted and will receive fees as the co-issuing house/arranger in respect of the Private Placement scheduled to close on 12th March,

10 Contacts: Research ID Telephone Idowu Ogedengbe Tola Odukoya Michael Nkadi Sales - Institutional Ikedichi Nwoke ikedichi.nwoke@ubagroup.com Sara Duncan sara.duncan@ubagroup.com Olabosipo Daniel olabosipo.daniel@ubagroup.com