Friday, September 22, 2017/1:32PM/ ARM Research
Union Bank of Nigeria (UBN) is looking to raise N49.7 billion via rights issue of 12.1 billion ordinary shares. Investors who had shares in the bank as at Monday, 21st August 2017 will be entitled to buy 5 additional shares for every 7 held at N4.10 per share. This implies discounts of 19% and 29% to the theoretical ex-rights price of N5.08 and current market price of N5.79 respectively.
Eventual proceeds from the rights have been earmarked for the enhancement of the bank’s capital adequacy position to ensure compliance with regulatory capital requirements.
Of the estimated net proceeds of N48.99 billion, 80% will be used to improve working capital via focus on balance sheet optimization that would enhance capital adequacy. In addition, 12% of the proceeds will be invested in technology with the remaining 8% billed for service delivery improvement.
Shareholders have three options: take up the rights, sell the rights, or "tail swallowing".
Rights issue to enhance capital base
In our view, we expect the rights issue to improve both the capital adequacy and liquidity ratios of the bank. Specifically, CAR as at FY 16 was 13.3% - below the 15% minimum requirement for banks with international license. Having factored in the N39.14billion, we see scope for an expansion in CAR to 15.1% and 17% for FY 17 and FY 18 respectively (assuming declines in loan subsist).
Also, the bank’s liquidity ratio (~37% as at H1 17) is well ahead of the regulatory minimum of 30% but 3pps lower than that of peers. For us, the rights issue should see UBA’s liquidity ratio bridge this discount to peers in coming periods. On current pricing, UBN trades at a P/E and P/B of 7.1x and 0.4x compared to peer averages of 7.4x and 0.6x.
In terms of investment recommendations, there are a few options. First, based on the bank’s earnings resilience, taking up the rights is a good play for a growth and long-term investment strategy. On this basis, a cash-less take up option can be explored. This involves selling a portion of the investor’s eligible rights to cover the cost of buying the remainder (tail-swallowing).
Another way is to go tactical, purchasing the rights and subsequently selling at the market for an implied return of 29% or 19% from current market price and ex-rights price respectively. In addition to this upside, investors would have also mitigated against unforeseen negative movements in UBN’s share price by adopting the tactical play.
3. UBN declares N4.52 billion PAT in Q1 2017 Results,(SP:N5.00k)