Reports of board wrangling at ETI Inc prompts reassessment


Wednesday, July 17, 2013 12:30 PM / ARM Research

FT reports board squabbles in ETI
The FT, yesterday, reported Ecobank Transnational Incorporated (ETI) was in the “throes of a bitter boardroom battle over outstanding debts owed by businesses associated with its chairman, Kolapo Lawson”. 

This had apparently been initiated by CBN notifying Ecobank of Mr. Lawson’s failure to make payments on “huge outstanding non-performing facilities” owed to AMCON estimated at N1.2bn, with an additional N1.6bn exposure to the Ecobank Nigeria subsidiary.

The situation apparently resulted in one of the major shareholders, South Africa’s Public Investment Corporation (PIC), calling for an urgent board meeting. Among other issues, this would aim to address CBN questioning the chairman’s fitness to head the holding company as well as reports of imminent top-level management shake-up even as the chairman asserts the loans are performing and he has furnished the CBN with further information.

More smoke than fire: Qualitative effects more pertinent, in our view
In our view, the loan exposures pose little operational risk. The combined value of N2.8bn is only 0.2% of current loan book and a moderate 3% addition to current NPL portfolio, if not already classified.


To our mind, the corporate governance issues raised by the developments appear more pertinent especially in light of recent crisis, and the still fragile recovery, within the banking industry. With this in view, we believe the eventual response of the regulators with whatever explanation has been provided will be key to shaping investors’ reaction.


Thus, pending further information and the details of possible effects on strategy, we do not believe rumored management restructuring will have a significant fundamental impact especially as its reasons are clear and rational. As ETI points out, this is a normal part of any top level transition.


Our contact with ETI in the aftermath of the news has done little to change our initial views. The sense is that the matter is being constructively discussed with major shareholders and relations remain cordial.


Nonetheless, we await confirmation of how the exposure stacks up against insider obligor limits, which remain well within regulatory prescriptions, to get a sense of any potential breaches.

Q2 expectations continue to reflect recent improvements

In line with our views, our expectations for imminent Q2 2013 results are broadly unchanged. We continue to expect broader footprint and geographic diversity to help moderate some of the negative revenue impact of recent regulatory changes in Nigeria. We forecast revenues to rise 4% QoQ to N97bn in Q2 13.


However, higher interest and operating costs will likely still drive PBT 8% lower QoQ to N14.4bn, from the recent peak recorded in Q1 13.


Nevertheless, our forecasts reflect expectations for sustained performance improvements from 2012 and expected earnings growth of 12% is ahead of peer average of 7%.


BUY rating still intact

Having just recovered from recent weakness, which was possibly related to the above developments, potential upside for ETI relative to our unchanged fair value estimate of N22.6 remains significant at 51%. ETI trades at a current PE multiple of 6.3x and 5.9x FY13EPS compared to Tier 1 average of 6.5x and 6.2x respectively. Price to book of 0.8x is also much lower than 1.5x average for peers. Therefore, we maintain a BUY rating on the stock.

Summary of Forecasts

ARM ratings and recommendations
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