UBCAP: Strong Half Year Performance; Analyst Places a BUY Rating

Proshare

Tuesday, August 11 2015 07:14pm / FSDH

HY1 Performance Analysis:
As at HY 2015, Gross Earnings (GE) increased by 21.80% to N2.75bn, compared with N2.26bn recorded in the corresponding period of 2014. The company has a relatively diversified income stream. Net interest income, which is the interest on managed funds less the interest expenses on managed funds accounted for 51.18% of the company’s GE.


Fees and Commission income which represents financial advisory fees and other fees changes accounts for 29.72% of GE. The investment income which is income on fixed deposits accounted for 10.38% of GE. Net trading income which includes gains and losses arising from trades and purchases of quoted equity accounted for 1.29% of GE.


The other income which covers dividend on equity instruments and others accounted for 8.27% of GE. Net loss on Financial Assets Held for Trading stood at N23mn. The rising yield and interest rate in the fixed income market helped to improve the income of the company. It also grew its fees and income due to its involvement in some corporate finance transactions in the market.


The impairment in trade receivables as a result of the growth in the trade and other receivables and foreign currency related loans of the company, are the major downside risks in the short-term. Any borrower of dollar denominated loan is currently faced with challenges because of the devaluation of the Nigerian Naira due to the fall in oil prices. Investment income increased significantly by 218.31% to N285.48mn in 2014, while fees and commission income increased by 90.14% to N817.40mn in 2014.


The operating expenses increased significantly by 232.68% to N1.13bn in HY1 2015. The PBT increased to N1.79bn, an increase of 19.54% from N1.50bn recorded in the corresponding period of 2014. The tax provision increased by 51.12% to N384.11mn from N254.18mn, leading to a PAT of N1.41bn in HY1 2015 from N1.25bn in the corresponding period of 2014, representing an increase of 13.10%. The increase in the tax provision may be linked to the increase in income derived from sources not qualified for income tax exemption.





The PBT Margin decreased marginally over the HY1 2014, but higher than the Financial Year ended December (FY) 2014 figure. The PBT margin decreased to 65.18% in HY1 2015 from 66.41% as at HY1 2014, but higher than the 49.40% recorded at the end of FY 2014.


Also, the PAT margin stands at 51.22% in HY1 2015, down from 55.16% in the corresponding period of 2014, but up from 46.26% as at FY 2014. The result also indicates that the percentage of T/O, PBT, and PAT in the HY1 2015 to the Audited T/O, PBT and PAT for the period ended December 2014 are: 58.82%, 77.61% and 65.13%, respectively.


Given the run rate, the company is likely to meet and surpass its previous year’s performance provided the current high yields on fixed income securities persists and the company is able to secure additional corporate finance mandates where it can earn fees.





Drivers of Performance:
United Capital’s earnings were impacted by the following:


Positive Factors:

  •          High yields on fixed income securities as a result of the tight monetary policy.
  •          The growth in its corporate finance business.
  •          Growth in its funds under management from various managed funds.
  •          Aggressive marketing drive of its products.


Negative Factors:

  •          The decline in the equity market.
  •          Difficult operating environment due to fall in oil prices.
  •          Growth in trade receivables and impairment charges.
  •          Low activities in the primary market for debt and equity issuance.
  •          The weakness in the value of the Naira in relation to the dollar.


The company managed to increase its Turnover and PBT in the three months ended June 2015 over the three months ended March 2015, but its PAT dropped marginally because of the increase in tax provision.



Valuation

In arriving at a fair value for the ordinary share of the company, we used the Discounted Free Cash Flow (DCF) model. We applied a terminal growth rate of 6.44%. We used a beta value of 0.84x based on the 5-year daily historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE ASI).


We used the yield of 14.61% as our risk free rate, and market premium of 11.15%. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 23.94%. Using 6bn shares in issue, the DCF model generates N1.58 per share, which is our fair value.


The current market price of United Capital shares is N1.35. The highest and the lowest closing price in the last 52 weeks are N2.20 and N1.27 respectively. The 2015 forward earnings yield and dividend yield based on our fair value are: 22.21% and 16.66% respectively.


The expected capital appreciation from the current price to our fair value is 17.04%. This is higher than our risk free rate of 14.61% which is the current yield on the FGN Bond.


We therefore place a BUY on the shares of United Capital Plc at the current price of N1.35 as of August 11, 2015. We note that the cost of equity is high.


This reflects the current investors’ expectations on equity investment in the Nigerian market and particularly for financial related companies. This is compensated for by the high earnings and dividend yields in United Capital.


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