Sunday, October 17, 2021 / 08:17 AM /By
Proshare Research / Header Image Credit: Ecographics
October 2021 has become a talisman for FBN Holding Company (FBNH) as the financial Holdco's share price on the Nigerian Stock Exchange (NGX) rose by 34.78% between the beginning and second week of October 2021. The second week saw the company's share price rise by 8.5%, from N10.00 on October 8th, 2021 to N10.85 on October 14th, 2021. Instructively, since Proshare broke its "100 days after the Central Bank of Nigeria (CBN) appointed new boards for the Holdco and bank" report, the share price of the Holdco has risen by 44.67%, from N7.50 on September 17th, 2021 to N10.85% on October 14th, 2021. So, what can be responsible for the steep price rise in one month?
Investors Reshuffle their Deck of Cards
Proshare, in mid-September 2021, published a report on the corporate governance realities around both FBNH and FBN; and pointed to the need for the Holdco and its bank to clean up its insider-related loan book, strengthen its credit oversight process, refocus its business priority areas, and make technology adoption more of a culture than an appendage to existing operations. Fact is, these submissions aligned with the thinking of the CBN-assembled management of both institutions.
For the report's writers, FBNH was an excellent case of a local Nigerian financial service brand with an underwhelming performance over the last twenty years, except between 2002 and 2008; and the recent rebound between 2016 and 2021. With the CBN and its forbearance support, the bank's new management initiated a turnaround programme that has seen some shakiness. The problem areas were well-documented in the "100 Days After CBN's Board Removals: FBNH's Shaky House of Cards" report. The share price movement of FBNH suggests a post-report response by discerning investors who looked beyond the noise and saw value (see chart 1 below).
Chart 1: FBNH's Share Price Movement Year-to-Date (YTD); of Reports and Consequences
Source: Proshare Research, NGX data
Since the serialization of the report, shareholders appear to have taken the happier position of seizing 'hidden value' opportunities inherent in the Holdco's business, given specific internal steps adopted to improve future earnings and return on investor equity (RoE).
However, the rise in trade volumes of the financial Holdco and the upward rise in trade values seem to hide another unfolding story guarded against the public display. The momentum of the Holdco's price movement may indicate investors reordering their deck of equity assets and reshuffling their investment portfolio to take advantage of anticipated earnings growth at FBN by the year ended December 31st, 2021. The forward forecast is not misplaced as Proshare's earlier report suggested that there would be a mild growth in the Holdco's shares based on an expected stronger earnings outlook. However, what we did not envisage was the pace and depth of the recent share price movement.
The Bank Escalator: Understanding the New Numbers
The Proshare 100 Days After Board Removal report put a tentative underlying value of FBNH at between N8.00 and N9.00. The assumption, based on Q1 and Q2 earnings and free cash flow indicated that if non-performing loans (NPLs) provision continued to improve and its cost-to-income ratio (CIR) declined, the Holdco could see a markedly higher market price between Q4 2021 and Q1 2022. The recent rise in the Holdco's equity price could be related to this explanation, yet; it does not explain the activity level before the release of Q3 2021 numbers.
FBN may have commenced writing down its insider-related NPLs and strategically cutting operating costs to within its Tier 1 counterparts; but analysts will have to wait for the Holdco's Q3 2021 result before confirmation. That said, while the potential future rise in earnings might have spurred a bid for the company's shares and set alight investor interest; it does not tell the full story and the Proshare Research & Intelligence unit's take indicates that this may be driven by consequential reactions to turnaround moves.
The impact of the renewed investor interest becomes clear when the NGX ASI performance YTD is compared with the FBN Holding Company's YTD share price movement. The Holdco's share price movement has underperformed the ASI throughout Q1, Q2, and Q3 and only spiked to match the ASI performance in October 2021, two weeks after the report (see chart 2 below).
Chart 2: NGX ASI Vs FBNH Price Movement YTD 2021
Source: Proshare Research, NGX data
Whatever doubts we had about the Research & Intelligence unit's take around a 'peg' to explain the movements was removed after the hefty upward hike in FBNH's share price within a single week.
A Second Look at FBNH Valuation
Warren Buffett, the United States of America's investment sage from Omaha and arguably the most successful stock market investor of the century once observed that "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." Does this explain what Nigerian investors are doing with FBNH shares? Are the Holdco's shares presently undervalued? The two questions appear tricky, without context.
The large movements in traded value and volume of FBN shares between September 30th, 2021, and October 11th, 2021 appear to be more of an investor's equity power-move than the spontaneous enthusiasm of thrilled dividend-seeking 'retail' investors. Most of the heavy trades within the last two weeks were cross deals and not open market transactions that usually take place between small and medium-sized investors thereby, highlighting the potential move of a strategic bidder.
The move by the large investor could push FBNH's price up a few more notches if the undisclosed investor aims to increase the relative size of his or her shareholding in the financial Holdco. Indeed, Proshare enquiries indicate that even current directors of the Holdco are anxious about the size of trade on the Holdco's shares and the sharp rise in its market price. According to an insider who declined to have his name mentioned for this report, "there is a high stake share acquisition manoeuvre, and we may have some idea of who the buyer is, but we have no idea where the direction is headed - a share gain investment move or a build-up of equity; it is still a mystery". Well, mystery or not, FBNH may see another twist in its story since the well received Proshare report on the financial Holdco in September this year.
So far, the sustained buy pressure has forced up the average price of the bank between 2016 and 2021, going beyond the average price of the bank under Adesola Adeduntan, its Managing Director at N6.40 as of the end of Q3 2021. With the recent rise in share price to N12.70 as of close of trading last week, the average would rise a few ticks. The consequence of rising value could be beneficial to the Holdco and investors but it could equally be fraught with not-so-hidden consequences. If these moves were made by a new outside investor, the large move on the Holdco's shares could mean an added fly in the Holdco's governance ointment as the investor would want to assert influence on how the century-old financial enterprise runs. The strategy would involve acquiring sufficient shares to have a seat on the board and then exert pressure for specific changes. Suppose the existing board members are sufficiently irritated by the newcomer. In that case, they could buy them out at a hefty premium or live with the reality of another big player at the table. Impossible? Not really.
FBNH does not seem to have a 'poison pill' clause in its memorandum of agreement and articles of association (MEMART) that would make it difficult for an investment hawk to swoop in on the Holdco's shares. If the scenario of a hawk proves true, then the Holdco could enter into a new and interesting phase in the two months to year end. As things stand, FBNH's share price may rise further. While existing shareholders may grin at their 'good fortune', the outcome may be a big future payday for the new strategic investor.
Such corporate manoeuvres are not common in Nigeria but are fairly well-known in more mature financial markets like Europe and America. Globally, corporate raiders have had reputations for such manoeuvres with varying degrees of success for decades. In the 1970s and 1980s, corporate raiders were similar to today's private equity companies, the main difference being the enlarged ego and media razzmatazz of the raiders of old. The public suicide of Eli Black highlighted the drama of the traders of old.
Other prominent raiders, particularly in the 1980s, were Carl Icahn, Victor Posner, Kirk Kerkorian, Meshulam Riklis, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Harold Clark Simmons, Sir James Goldsmith, Paul Bilzerian, Saul Steinberg and Asher Edelman. The raiders used strikingly similar tactics and moved against roughly the same kinds of companies using traditional leveraged buyout strategies to muscle in on seats at the board table, making them forerunners to modern-day private equity firms. One of the raiders of old Victor Posner was considered the first to have coined the term "leveraged buyout" or "LBO."
The issue of LBOs becomes important as directors of FBNH try to figure out who has been buying up the Holdco's shares and where the stash of cash for the acquisition came from. In-house calculation of the traded volume of the Holdco's stock bought within the last two months would put the purchase cost at a ballpark figure of between N30bn and N35bn. The new acquirer seems to have averaged down the acquisition cost by buying gradually over low price ranges and picking up declining volumes at higher prices. This is high-level trade management at its best practical expression.
The current move on the Holdco's shares appears to be pushing its price closer to its perceived underlying hidden value after backing out its reduced delinquent loan asset portfolio. Analysts believe that even at the recent market price of N12.70 at the end of last week's trading session, FBNH's valuation could still be between 26% and 42% below its detoxified loan asset estimate.
FBNH's New Game of Thrones
FBNH's maverick history is about to turn a new corner with the likely emergence of a new power player on the Holdco's board. Proshare's coverage since the board removal move and its September 2021 report on the shaky but improving financial and corporate governance position of the bank appears to have encouraged or suited either a 'white' or 'black' knight to the boardroom table. The sharp rise in the Holdco's share price and traded volume suggests that someone or a group of entities has made a calculated move; signalling a compelling new narrative to the financial institution's governance structure and strategic repositioning.
One scenario that would interest minority investors (it is noteworthy that FBNH has the highest 'free float' or freely traded shares of all tier 1 banks on the NGX) is the impact of the Holdco's shares used as collateral for loans taken by large insider interests or related parties. If this is confirmed as true, then the value of toxic loans on the bank's books would drop. The implication for the bank would be:
The combination of these factors would put a shine on the Adeduntan/Odukale era as the FBN leadership and the Remi Babalola-led new board for FBNH. So far, FBNH's share price average and, therefore, investor capital appreciation which has been the lowest under Adeduntan, for factors beyond his immediate control; will see an improvement. The average share price of the institution had slid since 2008 under Moyo Ajekigbe (see chart below).
Chart 3: FBNH: A Tale of the Price Tape
Stakeholders will remember the Adedutan 'tour of duty' for its reset of a venerable financial institution. The defining wins would be a lower CIR, a reduced NPL, a healthier CAR and a stronger liquidity position. If a new major investor emerges from the sweet season of rapid upward share price adjustment, then some events may be increasingly probable over the next few weeks/months such as :
Previous insider alignments/interests would change as the new big-ticket investor may insist on greater efficiency and effectiveness; removed from disruptive insider politics that plagued the institution.
Conclusion: A Tale of Moving Parts
The new power moves at FBNH are likely to benefit shareholders and the bank. If Proshare's active research and market intelligence is anything to go by; the huge FBNH share purchases in recent weeks represent a strategic move by an experienced power broker. The new investor would likely be compelled by regulatory requirements to officially report his acquired interest in FBNH to the NGX and other regulators, who would be obliged to inform the market perhaps later this week.
If this scenario plays out, the move by the new investor would be one of the most audacious, clever, and value-creating manoeuvres attempted at the Nigerian stock market in recent times. Audacity in itself is not a virtue, but when it translates into creating value, it becomes a priceless pearl. The spike in the price of FBNH (see chart 4 below) sits on the shoulders of several moving parts, and Proshare will continue to monitor the changing shapes of investor and corporate actions in the interest of shareholders and the broader market.
Chart 4: FBNH's Month of Sharp Spikes
Source: Proshare Research, NGX data
James McNerney, a former Boeing Airline executive, once remarked that "The key to making acquisitions is being ready because you really never know when the right big one is going to come along". The McNerney maxim is probably a lesson from the far outreaches of corporate chess moves. The recent share acquisition play by an FBNH outsider speaks to the brilliance of a savvy entrepreneur and investor bending his business sails to the wind of financial opportunity, taking a leaf from McNerneys acquisition playbook.
PDF - 100 Days After CBN's Board Removal: First Bank's Shaky House of Cards Report (PDF)
1. Executive Summary: 100 Days After CBN's Board Removal: First Bank's Shaky House of Cards - September 19, 2021
2. Full Report: 100 Days After CBN's Board Removal: First Bank's Shaky House of Cards - September 19, 2021
1. Sept. 19, 2021
2. Of First Bank and Bad Debtors; A System's Throbbing Headache - Apr 30, 2021 - Proshare Editorial
3. CBN Removes Boards of First Bank of Nigeria, FBN Holdings; Appoints New Chairmen - Apr 29, 2021 - Proshare News
4. Analyzing the H1 2017 Performance of FBNHoldings Plc - A Comprehensive Report - Oct 23, 2017, Proshare Research
5. FBNHoldings Plc Q1' 2017 Performance Assessment Report Updated - Sep 25, 2017, Proshare Research
6. Bank NPLs (23) - The Case for a New Approach - Jun 07, 2020 - Debtors Africa
7. W. Chan Kim and Renee Mauborgne (2004) "Blue Ocean Strategy"
8. Board Governance: A Thin Line Between Oversight and Operations - Sep 28, 2020 - IoD Centre for Corporate Governance
10. CEO Remuneration 2021 Report: From COVID to Collaboration - Aug 01, 2021, Proshare Research
11. Memo to the Market - The NSE, Oscar Onyema Foundation and Corporate Governance - Aug 20, 2018, Olufemi Awoyemi, Proshare
12. FBN Holdings Plc - IR Page on Proshare MarketsProshare Research
13. Annual Accounts - IR Page in ProshareProshare Research
14. Bernard Longe wins suit against First Bank Plc, Supreme Court decides today - Mar 05, 2010, Proshare
Related News from the Report
2. ARMA: Forecasting FBNH's Year-End Share Price - Oct 01, 2021
3. 100 Days After CBN's Board Removal: The Analyst Buggy Train - Sep 30, 2021
4. FBN Holdings Valuation: Turning the Analyst's Lenses on FBNH's Value - Sep 29, 2021
5. FBNH 100 Days After CBN's Board Removal: The FUGAZE - Sep 28, 2021
6. Of FBNH Numbers and Tables: A Look at the FBNH Ratios - Sep 27, 2021
7. Of FBNH Numbers and Tables: The Statement of Financial Position - Sep 26, 2021
8. Of FBNH Numbers and Tables: The Trend of Cost and Profitability - Sep 25, 2021
9. Of FBNH Numbers and Tables: Understanding Performance Patterns - Sep 24, 2021
10. Adeduntan's Need for New Glasses: Confronting the Legacy Question -Sep 23, 2021
11. First Bank Board Removal: When Boards Blur Vision - Sep 22, 2021
12. First Bank and Institutional Learning - A Sense of History - Sep 21, 2021
13. 100 Days After CBN's Board Removal: First Bank's Shaky House of Cards - Sep 19, 2021