January 09, 2008 505 VIEWS

Details of Offer: A hybrid offer for N129, 633,886,916:00 divided into 3.418bn Ord Shares of 50k each broken down into a Rights Issue of 1,654,557,911 Ord Shares at N36.90k each and an Offer for Subscription of 1,763,000,000 Ord Shares at N38.90k each. Duration of offer is Dec 06, 2007 to Jan 17, 2007.

Purpose of Offer: The Offer is to enable the bank meet the ever increasing call from its numerous clients for financing and to sustain its cutting-edge technology based services.

Fundamental Analysis

Management:  The bank operates under a group structure managed by a 14-man Board of Directors comprising of accomplished professionals and entrepreneurs who are committed to driving the achievement of the Bank’s objectives. A key hallmark of the bank is its stable board 

Revenue and Profitability:  Zenith’s group gross earnings for the fiscal year June 30, 2007 increased by N34.9bn (58.2%) relative to the prior like period. Comparatively the PBT increased by N10bn, or 64.5% compared to the PBT of N15.6bn for the prior year.  An analysis of the most recent six (6) years of gross earnings shows continued earnings growth.

Earnings per Share: Based on the financial statements for the most recent fiscal year ended June 30, 2007, Zenith Bank’s EPS was 202k which is above the industry average of 80k and 118k, the average EPS for the top thirteen (13) banks.

Return on Common Equity: The ROE for Zenith Bank Plc based on the most recent fiscal year’s financial statements is 15.97%, which is slightly above the industry average of 15%. The current year’s ROE represents an improvement of 30.4% compared to 12.25%, Zenith Bank’s ROE for the prior year.

Cash Flow: The calculation for the most recent four fiscal years reflects a bank with improving operating and free cash flow position. The operating cash flow (OCF) improved from N9.1bn in FY 2004 to N37.4bn in FY 2007, while the FCF improved from N2.7bn in FY 2004, to N15.4bn in FY 2006. 

Capital Adequacy Ratio: Zenith Bank’s CAR is 12% for the FY 2007 compared to 16% for FY 2006. The traditional rule of thumb is that financial institutions capital ratios should be in the range of 4% to 10%, depending on the size of the firm, its industry and the definition of capital being used.

Economic Value Added (EVA) Indicator: For the most recent four fiscal years (FY 2004, FY 2005, FY 2006, & FY 2007), the EVA for Zenith Bank was N7bn, N8.8bn, N13.2bn, and N25.6bn respectively, indicating an improving trend. The greatest virtues of EVA, is its direct link to stock prices. Zenith Bank has grown its EVA in the most recent 3 fiscal years by 27%, 49%, and 94% respectively.

Technical Analysis

Stock Performance: (Pre-Bonus) After the conclusion of the secondary offering and the resumption of trading on Jun 16, 2006, Zenith stock opened at N19.64, the price at which the stock was halted for the offering. During the next 67 days (Jun 16, 2006 through Aug 22, 2006) the stock gained N7.24k, or 36.9% before losing N3.08K or 11.5%  in a tight trading range during the next 4 months (Aug 23, 2006 through  Dec 20, 2006). However, beginning Dec 21, 2006, the stock began a slow ascend that saw the stock gain N42.2k or 177.3% over an eight month period (Dec 21, 2006 through Aug 17, 2007) prior to the bonus adjustment. However, on a consolidated basis for the trailing 14 months ended Aug 17, 2007, Zenith stock gained N46.36k, or 236% based on N19.64 (the price the stock was halted for the 2006 secondary offering),  and  gained  N49.10k, or 290.5% based on the secondary offering price of N16.90k.

(Post-Bonus) As a result of the dividend implementation, the stock price was adjusted from N66.0k as of the close of trading on August 17, 2007, to N52.00k on Aug 20, 2007. Although Zenith stock experienced a brief downturn post the 1 for 4 bonus distribution, the stock subsequently recovered losing only N6.0k, or 11.5% post the bonus distribution.

Despite the brief downturn after the bonus distribution, if the most recent 14 months of Zenith daily stock closing prices is smoothed for the 1 for 4 bonus, the analysis shows that Zenith stock has gained 170% based on the most recent 12 months, and 198% (NSE ASI – 119%) for the most recent 14 months.

Analyst Opinion: Although the offer price of N38.90k (N7.19k, or 15.6% discount from its closing price of N46.09k) is below the stock’s two most recent price supports of N41.20k and N42.60k, it is slightly above the next major price support of N38.0k.

Technically, the price movement prior to the stock being halted for the secondary offering indicates a stock that is trading in a very tight range, but approaching two strong price resistances (the 20 and the 50 CSMAs’), but the stock is likely to experience some weakness since it will be trading below all its pertinent moving averages. Additionally, because the stock was discounted for the offering, several overhead resistances have been created. Therefore, the stock might experience some weakness at resumption of trading.

The offering increases the number of shares outstanding and float, which tends to slow the upward price movement as some previous shareholders might try to sell into the early price rally. In spite of these noted issues, the stock has significant support at N38, a price that represents a double top formation break-out created on March 28, 2007.

Although the offer price is only N6.97k removed from the projected stock value of N45.87k; our analysis indicates that the stock is a medium to long-term BUY.

Download the Full Analyst Report for more detailed analysis. http://www.proshareng.com/assets/user/pdf/analystreport_zenithbank_2007.pdf  E-mail: analyst@proshareng.com  Text Only Tel: 0708 399 9377


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