PLANET CAPITAL RESEARCH NIGERIA EQUITIES FINANCIAL SERVICES UNITED CAPITAL PLC 0 UNITED CAPITAL PLC Fair Value revised to N4.01; we recommend a HOLD Incorporated on March 14, 2002 as a Limited Liability Company Listed on the NSE January 2013 following UBA s successful Income Statement February, 2017 FY 16 FY 15 Change Gross E (N bn) 9,000 6,154 46.27% Net Oper.Inc (N bn) 6,675 5,496 21.45% Other inc. (N bn) 2,326 657 253.77% PAT (N bn) 6,913 2,570 168.95% EPS (Kobo) 1.15 0.43 268.95% Source: NSE, Planet Capital Research divestment First investment bank to go public Operates a holding company structure with 3 subsidiaries: i) United Capital Trustees Limited Balance Sheet FY 16 FY 15 Change Total Asset (N bn) 160,693 144,106 11.51% Total Liab. (N bn) 146,455 133,696 9.55% Equity (N bn) 14,238 10,421 36.63% ii) iii) United Capital Securities Limited United Capital Asset Management Limited Sharesout (mn) 6,000 6,000 0.00 Market Price 3.69 1.62 127.78% Source: NSE, Planet Capital Research West Coast Equity Limited and West coast Equity Nigeria currently the highest shareholders Latest FY 16 result shows a 46.27 percent YoY growth in Gross Earnings to N9billion PAT was up by 168.95 percent YoY to N6.91billion Profit margin rose to 76.81 percent; ROE 48.55 percent Stock Data Ticker Symbol UCAP Share Price 3.69 52-week high 4.06 52-week low 1.30 1-month average vol. (mn) 11.73 Current P/E 3.2x Market Cap (bn) 22,140 Source: Bloomberg, Planet Capital Research Based on numbers, EPS improved to N1.15 The company proposed a 50k dividend which is a payout of N3billion.
Improved asset yield bolsters top line growth The company s latest FY 16 earnings show a 46.27 percent YoY increase in gross earnings to N9billion, driven by investment income (mostly from fixed deposits) which accounted for 44.88 percent of top line at N4.03billion. Fee and commission income (mostly financial advisory services) was up 22.74 percent YoY to N1.97billion and contributed 21.99 percent to revenue. Other income (dividend and other interest income) came in higher by 253.77 percent YoY and accounted for 25.84 percent of gross earnings. Better cost efficiency supports margins Overall expense for the company was lower by 18.65 percent YoY to N2.63billion from N3.24billion recorded in the prior year. Cost-to-income ratio therefore improved to 29.27 percent, down from 52.62 percent in 2015. Gross Earnings by income segment 2016 2015 change Investment income (N mn) 4,049 3,073 31.48% Fee and commission income (N mn) 1,979 1,612 22.74% Net trading income (N mn) 15.31-100% Net interest margin (N mn) 640.31 810.86 (21.03%) Other income (N mn) 6,675 5,496 253.77% Source: Company financials, Planet Capital Research Strong PAT growth with 40.72% 4-year CAGR United Capital posted a 168.95 percent YoY increase in after tax profit to N6.91billion, with CAGR of over 40 percent in the last four years. Improvement in asset quality which was evidenced by the 94.97 percent decline in impairment charge to N33.51million also supported the company s bottom line in addition to a N909.69million income from divestment (50% stake in UBA metropoli tan life Limited. In terms of profitability, the company s profit margin rose to 76.81 percent from 41.77 percent for the same period in 2015 while ROE increased to 48.55 percent from 24.67 percent. Based on the current EPS of N1.15, United Capital proposed a 50k dividend (13.55% yield), higher by 42.9 percent from 2015.
Gross Earnings Vs. Profit trend 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Gross Earnings(N'mn) PAT (N'mn) Profit Margin 90.00% 76.81% 80.00% 70.00% 60.00% 50.00% 41.76% 39.52% 38.53% 40.00% 30.00% 20.00% 10.00% 0.00% 2016 2015 2014 2013 Source: Company financials, Planet Capital Research Balance sheet analysis Total assets grew by 11.51 percent to N160.67billion in 2016; loans and receivables (which represent investment in state government and corporate bonds, commercial paper and loan facility indexed to LIBOR for a two year period) was up 55.49 percent to N47.97billion. Investment in available for sale instruments (Tbills, bonds, equity, collective investment scheme) increased to N44.9billion, representing a 326.10 percent YoY growth. Total Liabilities recorded a 9.55 percent YoY growth to N146.45billion while equity of N14.24billion rose 36.63 percent YoY. The company s balance sheet is funded by 91.14 percent liability. Key ratios 2013 2014 2015 2016 2017E Profit margin 38.55% 39.48% 41.77% 76.81% 67.15% EPS 0.29 0.46 0.43 1.15 1.17 PE 4.9 5.2 3.8 3.2 3.43 ROE 19.42% 22.03% 24.67% 48.55% 45.18% ROA 2.22% 1.94% 1.78% 4.30% COST-TO-INCOME 45.99% 53.33% 52.62% 29.27% 24.93% BVPS 1.51 2.10 1.74 2.37 2.59 Source: Company financials, Planet Capital Research
Valuation We employed the Dividend Discount Model valuation in arriving at a fair value for the company; our terminal growth rate was adjusted to 2.50 percent taking into consideration the underlying macro-economic conditions. Risk free rate of 16.41 percent and beta of 0.85x were applied, with market premium at 6.40 percent which gives a cost of equity of 22.81 percent. Putting all the above parameters into the model, we arrived at a target price of N4.01, marginally higher than our previous estimate at N3.90. The company s share price is currently trading at N3.69 and we do not see a significant upside potential at this time as investors have priced in the earnings expectation seeing that the stock has rallied by over 100% in the last year. Earnings Outlook We think that the company will sustain its performance in 2017 and we forecast a PAT of N7.01billion. Normalizing 2016 profits by removing one-off items such as the proceeds from divestment means 2017 expected PAT will increase by 16.78 percent. We also noted that the company recorded a spike in other income but full details of the nature of this income were not stated so we think this is a slightly volatile income line and gave an appropriate hair-cut to our forecast. United Capital will continue to leverage on its relationship with the UBA group which will impact on the company s performance, in addition to having a well seasoned management team. We noticed a slowdown in the company s AUM growth YoY compared to a marked increase between 2015 and 2014; aggressive marketing should keep this line healthy to support margins. Positives: A well diversified income base. For instance, the lull in the equities market is unlikely to have a huge impact on the overall performance of the company since this is off-set by high yielding fixed income investments Decline in cost-to-income ratio means higher efficiency and this is a driver of profitability Robust assets under management (AUM) Support from relationship with UBA Plc Negatives We think that the higher inflation environment will pose a difficulty in achieving positive real rate of returns for investors Declining state government revenues will impact on the company s business Foreign exchange risks
Share price movement 3.00 UCAP Rebased Share Price ASI Rebased 2.50 2.00 1.50 1.00 0.50 0.00 2013 2014 2015 2016 2017E Gross Earnings 4,573,241 4,676,602 6,153,729 9,000,955 10,440,000 2.26% 31.59% 0.462683033 Investment income 1,559,367 1,670,843 3,072,587 4,039,726 4,424,423 Fee & comm income 2,093,730 1,846,581 1,612,806 1,979,622 3,222,427 Net trading income 108,517 25,979-15,310 52,200 Net interest margin 209,276 424,990 810,862 640,319 522,000 Net operating income 3,970,890 3,968,393 5,496,255 6,674,977 8,221,049 Other income 532,522 759,086 657,474 2,325,978 1,828,826 Net gains/(losses) from financial assets held for 69,829-50,877 - - - trading Dividend income from subsidiaries - - - - - Total revenue 4,573,241 4,676,602 6,153,729 9,000,955 10,049,875 Personel expenses - 1,130,209-1,188,826-1,197,807-1,274,449-1,212,222 Other operating expenses - 866,920-1,111,121-1,310,552-1,239,674-1,179,144 Depreciation and amortization - 35,141-69,633-63,993-86,587-82,359 Impairment charge - 71,148-124,647-665,664-33,511-31,875 Total expenses - 2,103,418-2,494,227-3,238,016-2,634,221-2,505,600.00 Share of profit of equity accounted investee 164,091 127,504 347,950 - - Profit before tax 2,633,914 2,309,879 3,263,663 6,366,734 7,544,275 Tax - 870,903-463,531-693,191-363,208-533,313 Profit from continuing operatoins Gains from sale of investment in associate 909,695 company Profit after tax 1,763,011 1,846,348 2,570,472 6,913,221 7,010,962
Analysts: Ibinabo Princewill iprincewill@planetcapitalltd.com +2348028465191 Planet Capital Research Wale Ojo oojo@planetcapitalltd.com +2348060558050 Planet Capital Research Office: Planet Capital Limited 3 rd floor, St. Peter s house 3, Ajele street, P.O. Box 360, Marina, Lagos-Nigeria. Tel: 01 2702296; 2120643 Email: info@planetcapitalltd.com Research: informationalservices@planetcapitalltd.com Website: www.planetcapitalltd.com Analyst Disclosure Investments discussed in this report may not be suitable for all investors and the reader(s) should independently determine their suitability and evaluate the investment risks associated with such investments. All investors are solely responsible for their investment decisions. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Planet Capital, through business units other than Planet Capital Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and Planet Capital is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report. To the extent that this report discusses any legal proceeding or issue, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Information relating to the tax status of companies whose securities are discussed in this report is not intended to provide tax advice or to be used by anyone to provide tax advice. By accepting this research report, you agree to be bound by the foregoing limitations. Planet Capital Limited is registered with the Securities & Exchange Commission as an issuing house, underwriter and financial adviser. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of Planet Capital Limited. Planet Capital research report is disseminated and available primarily electronically, and, in some cases, in printed form.