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ARM Research - Weekly Stock Recommendation

Proshare

Monday, April 30, 2018 /05:18 PM /ARM Research 

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Improved Outlook, but at a Hefty premium
 
In this note, we update our views on PZ Cussons Nigeria Plc, factoring the nine-months  2018 numbers and revise our FVE lower to N16.56 (Previous: N20.97). EPS in nine months 2018 declined 16.5% YoY to N0.34 (9M 17: N0.40) as higher input cost (+18.7% YoY to N45 billion) and operating expenses (+13.1% YoY to N12.5 billion) led to a 522bps contraction in operating margin to 9.1% (Gross margin: -481bps YoY to 28.8%). Further down, finance cost expanded 5.3x YoY to N1.1 billion, which is a surprise for us considering the low leverage - we perceive its due to overdraft facility taken and paid during the third quarter. Notwithstanding the moderation FX losses which was a major pressure point in 2017, earnings moderated by 46.3% to N3.3 billion. 

Given nine-month numbers, we revise our FY 18E earnings lower to
N2.1 billion (previous: N4.1 billion). Farther out in 2019, we expect weak recovery in volumes to drive modest top line growth of 2.3% YoY. That said, we expect faster rise in input cost (+4% YoY) – on the back of higher petrochemical inputs – to stoke pressure on gross margin (-150bps YoY to 26.5%). The foregoing, alongside higher operating cost should drive EBIT lower (-14.7% YoY). Irrespective, projected stability of the Naira guides to materially lower FX losses (-55% YoY) translating to PBT and PAT of N5.4 billion (+78% YoY) and N3.7 billion (+78.4% YoY) respectively. 

On our 2019 numbers, PZ trades at a P/E of 27.8x relative to Bloomberg Middle-East and Africa (MENA) peers of 24.9x. We retain our
SELL rating on the stock with our revised FVE estimate of N16.56 (previous: N20.97). 

Proshare Nigeria Pvt. Ltd.

Across our Tier 1 space, FBNH offers a more sizeable return underpinned by improving asset quality and above par core banking metrics. Precisely, we see further potential upside from lower provisioning, resilience in Net Interest 
Margin (NIM), operational efficiency and possible streamlining of branches. 

Having booked ~
N442 billion on loan loss provision, we expect to see sizable improvement from its upstream Oil and Gas (O&G) exposure which currently constitutes 43% of NPL as at 9M 17. Given the recovery in crude oil production and higher crude oil prices, we expect upstream O&G NPL to moderate to ~30% in FY 18. We forecast NPL and Cost of Risk in FY 18F to print at 18% (FY 17E: 20%) and 3.5% (FY 17E: 6.5%) respectively. 

Across our Tier 1 space, FBNH offers a more sizeable return underpinned by improving asset quality and above par core banking metrics. Precisely, we see further potential upside from lower provisioning, resilience in Net Interest 
Margin (NIM), operational efficiency and possible streamlining of branches. 

Having booked ~
N442 billion on loan loss provision, we expect to see sizable improvement from its upstream Oil and Gas (O&G) exposure which currently constitutes 43% of NPL as at 9M 17. Given the recovery in crude oil production and higher crude oil prices, we expect upstream O&G NPL to moderate to ~30% in FY 18. We forecast NPL and Cost of Risk in FY 18F to print at 18% (FY 17E: 20%) and 3.5% (FY 17E: 6.5%) respectively.

On asset yields, despite our expectation of a 200bps decline in yields on investment securities, the largely sticky nature of interest rate on loan books should moderate the impact of a lower yield environment. Accordingly, we forecast 
asset yields of 15% for 2017E and 2018F, and an average of 14.8% for the period 2019F-2021F. Overall, we forecast NIMs of 10.7% for 2017E and 2018F. Consequently, we estimate FY 17E EPS of N1.72 (9M 17: N1.28) and N3.18 for FY 18F – implying a 260% and 85% growth in EPS in FY 17E and FY 18F accordingly, given the materially low base in 2016.

In summary, with a focus on leveraging lower funding cost, operational efficiency, adequate capital buffer, no plans to grow risky assets, and lower loan-loss provisioning — the downside risk to 2018 earnings now seems moderated 
than was earlier expected. 

Overall, we forecast 2018F EPS of
N3.18 (+85% YoY) and DPS of N0.50. FBNH trades at a P/B of 0.7x compared to peer average of 1.4x. Furthermore, at current pricing, its 2017E dividend translates to dividend yield of 3.9%. Our FVE of N16.69 translates to a 30% upside from current pricing. Consequently, we rate the stock a STRONG BUY, reflecting attractive valuation and a view that fundamentals will improve going forward.
 

Proshare Nigeria Pvt. Ltd.

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