Monday, March 26, 2018 /4:45 PM /Cordros Capital
Cadbury Nigeria Plc (CADBURY) – Sell
The shares of CADBURY depreciated by 14.91% last week to N14.55. CADBURY trades at a significant forward PE above its 5-year historical average of 24.9x.
Despite having a challenging 2017FY, contrary to the rest of our consumer goods universe, the company reported a net profit of NGN300 million, from a loss in 2016FY. We forecast net profit to grow by 38% in 2018E, equating to DPS of NGN0.22/share. On our revised estimates, CADBURY is trading at 2018F P/E multiple that is at a significant premium to its five-year historical average.
We forecast revenue growth to moderate to 8% in 2018E, from 10.3% in 2017FY. As with the industry, we expect revenue growth this year to be largely volume-driven. And specifically, for CADBURY, we look for management backing sales with a lot of promotional activities, including price discounting, given intense competition, especially in the Food Beverage segment.
For us, CADBURY’s gross margin outturn – excluding the one-off spring to 30% in Q3-17 – was impressive in 2017FY. We think this is down to prices, which management needed to keep competitive in order to support revenue. On the other hand, we forecast EBIT margin to increase to a 2-year high of 3.4%, but still below the 5-year historical average of 7%. Opex has been well-contained in the last two years, including the ratio to revenue which fell to record-low 20.6% last year.
Although we project finance costs will be higher relative to 2017FY (we estimate average interest rate on ST debt to be 22%), borrowings will be lower by end-2018E, as the sizeable settlement of trade payables in Q4-17 frees new cash for debt repayment.
We update on CADBURY with a TP of NGN10.96 (29% downside) and maintain SELL recommendation.
Dangote Sugar Refinery Plc (DANGSUGAR) – Hold
The shares of DANGSUGAR rose by 0.48% to N21.00. DANGSUGAR trades at forward PE of 6.8x, lower than its 5-year historical average of 7.5x.
DANGSUGAR recently released Q3-17 result, showing revenue declined 1% y/y while EBITDA (226% y/y) and PAT (244% y/y) grew strongly. Continued stronger gross margin and tamed opex, primarily, in addition to higher investment income, was the lever for earnings growth. The decline in revenue, was driven by lower sales volume, which more than offset the relatively higher price. Compared to 2016, sales volume has closed lower in all three quarters this year in response to the sharp increase in price (+75% in 9M-17 vs. 9M-16).
The management reduced the per bag price of sugar by N1,000, effective in April, to help support sales.
Despite cuts to sales estimates, we raise DANGSUGAR's 2017F EBITDA and net profit by 50% each, and for 2018-2019F by 55% and 56% respectively. The upward revision follows better margin outlook on declining per tonne production cost, which we expect will offset price cuts. Our revised estimates translate to EBITDA and net profit growth of 158% (+131% in 9M-17) and 155% (+162% in 9M-17) respectively in 2017F, and 3% and 5% average growth in 2018-2019F.
We cut revenue estimates for 2017-2019F by 10% average, on downwardly revised volume (for 2017F only) and selling price estimates Sales volume (-17% in 9M-17) has been hit by weakened demand, and more recently, by both the influx of smuggled sugar and the terrible condition of the road to the Apapa factory. While retaining average growth of 10% in freight income, net impact is for 2% growth in gross revenue over our forecast period.
We raise gross margin estimate for 2017F by 983 bps to 27%, following the significant formation over 9M-17 (+895 bps vs. 9M-16), particularly the last two quarters (33% average) and also raise estimates for 2018-2019F by about 1,000 bps average, on the assumption that the expected cut in selling price will trail decline in per tonne production cost. Upside risks to our per tonne production estimate (down consistently q/q to -34% between Q3-17 and Q4-16) include (1) better energy efficiency and stronger exchange rate, (2) stable outlook of global raw sugar prices, and (3) positive mix from growing contribution of higher margin Savannah.
Downside risks to our margin estimate include (1) deeper-than-expected cut in selling price and (2) an upturn in global prices of raw sugar (sugar prices for 2019 delivery are higher by 4% for November contracts).
On net, we raise TP for the stock by 39% to NGN19.03/share, representing 89.38% downside from current level.
Flour Mills Of Nigeria Plc – Hold
The shares of FLOURMILL was flat at N38.00 . FLOURMILL trades at 2018 PE of 7.4x, below its 5-year average of 19x.
Following the conclusion of the NGN38 billion Rights Issue (RI) and our recent discussions with management, we revise our TP and earnings estimates for FLOURMILL. Feedback is that the RI was successful (oversubscribed). On net, we (1) increase the post-rights shares outstanding by 56% to 4.1 billion and WACC by 158 bps to 15.2% and consequently, (2) lower our TP for the stock by 21% to NGN30.56.
Although we revised our net earnings estimates slightly higher, however, overlaid on the post-rights shares, we now look for 2019E and 2020E EPS of NGN4.8 (NGN7.5 ex new shares) and NGN6.4 (NGN10 ex new shares) respectively. FLOURMILL’s share price has accumulated 31% YtD and we maintain a HOLD rating on our new TP. On our estimates, FLOURMILL is trading on forward (FY18E) P/E and EV/EBITDA multiples of 6.1x and 3.7x respectively, at material discounts to the (1) peer average forward P/E of 11.5x and EV/EBITDA of 7.8x and (2) its five-year historical average of 14x and 8.1x respectively.
Notwithstanding the impact of the RI on valuation and EPS, we have a fairly strong view of FLOURMILL over the medium term. From 1% average between 2014-2016 (2017 was an outlier, in our view) and 5% in 2018E, we forecast sales revenue growth to increase to 9% average over 2019-2020E. Management has continued to reiterate that its emphasis going forward is on driving returns from the investments of the recent years. And it is our view that the group’s focus on food-based and agro-allied products, whilst favoured by Nigeria’s demographic potential and spending patterns, also provides a good hedge against cyclicality effects in the FMCG industry.
We also forecast EBITDA to grow steadily to NGN81 billion by 2020E, from NGN57 billion in 2017FY, and the margin to stabilize at 12% average, 300 bps above the rate achieved in the last five years. With a robust top-line, we view the sustenance of the opex margins of 4.5% achieved in 2017FY and 4% as at 9M-18, compared to 8% historical average, as positive for EBITDA formation going forward. Management said it does not expect opex-to-revenue ratio to change materially to the upside going forward, given its emphasis of growing revenue, while focusing strongly on containing costs.
Guinness Nigeria Plc – Sell
The shares of GUINNESS closed higher by 4.79% to N105.00. GUINNESS trades at 2018 PE of 58.7x, above its 5-year average of 27.7x.
Sales revenue grew 19% in H1, representing 25% pricing and 75% volume. We estimate that volume grew 17% during the period. The 23% sales growth achieved in 2017FY was 33% and 67% price and volume related, respectively. We expect revenue growth to moderate to 11% in H2, as the contribution of pricing tapers.
Although H1 gross margin of 34% was higher relative to the last financial year, we are unimpressed by the declining trend we have been seeing since Q3-16/17. Management is Of the view that achieving gross margin of 40% (which is below the group’s 44% historical average) will be challenging going forward, and pointed to inflationary uncertainty and pricing difficulty. Management expects “competitive margins” (with no specific guidance) will return in the next three to five years period.
Gross debt has reduced to NGN12.5 billion from end-2017FY NGN42 billion, following the completion of the rights issue (RI). Trade payables also reduced visibly, using proceeds from the RI, and supported by significantly improved domestic FX liquidity condition. But about USD22 million of Diageo loan is retained and somewhat exposes the P&L to FX volatility risks.
Broadly, we see the repayment of debt (1) impact on earnings through sizeable reduction of interest expenses (we estimate will contribute up to 36% and 59% to 2018F and 2019F earnings respectively and (2) free up cash for the group to pursue innovation.
At our revised TP of NGN68.59 (34.68% downside), we find the shares of GUINNESS expensive. Though at H1 run rate, the 2018 results show significant performance improvement compared with the last three years, they have thus far lagged broad expectations.
Nigerian Breweries Plc – Sell
The shares of NB fell by 4.89% last week to N126.50. NB trades at forward PE of 23.6x, below its 5-year average of 31.5x.
NB published its results for the period and year ended 31 December 2017. For the year end, net sales and earnings grew 9.8% and 16.3% respectively. Q4-17 net sales declined 1% y/y while net earnings grew by 9% (but 24% behind our estimate for the period).
Despite the miss in Q4 (6% below our estimate), we raise sales revenue growth estimate for 2018F by 200 bps to 7%, taking into consideration potential price hike in the wake of the recently proposed excise tariff increase. Whilst the economy (new mainstream) segment is expected to continue to underpin group volume, management however did acknowledge signs of moderating consumer down-trading, specifically confirmed by Heineken’s (an international premium brand) return to growth.
Management does not anticipate FX-related losses in 2018F (-33% in 2017FY to NGN5 billion), given the sizeable clearance of USD-denominated trade payables in 2017, and the expectation of continued healthy FX liquidity.
NB has issued NGN57 billion out of its NGN100 billion commercial paper program. Gross debt was NGN8.5 billion as at December 31, and while we expect new CP issuances in the year, we have modeled interest expenses to halve in 2018F, on expected reduced working capital pressure and lower interest rates.
Following the result, we cut 2018-2019F EBITDA and net profit forecasts by 3% each, reflecting mainly the downward revision of gross margin estimates. We also cut TP to NGN109.75 (previously NGN123.16) and maintain SELL rating.
Nestle Nigeria Plc – Sell
The shares of NESTLE was lower by 4.57% to N1,317.00. NESTLE trades at 12-M PE of 31.0, below its 5-year average of 43x.
NESTLE’s reported revenue of NGN244.2 billion in 2017FY was 34% higher vs. 2016FY, but slightly below consensus NGN245.9 billion. Also during the period, EBITDA and net profit grew by 41% and 326% respectively compared to 2016Y.
We revise our 2018E net profit estimate 5% higher to NGN49.3 billion, equating to NGN62 dividend per share. We note the stimulus to 2018E earnings coming majorly from significantly lower finance charges and lower opex-to-sales ratio.
NESTLE reported q/q sales revenue contraction in the seasonally-supportive Q4-17, which in our view, suggests that volume came under pressure during the period. Consequently, whilst we retain our 10% growth estimate for 2018E, we now forecast revenue of NGN268.6 billion (vs.NGN279 billion previously) for the year.
We retain our gross margin estimate of 42% (vs. 41% in 2017FY) for 2018E. While noting the weakness experienced in Q4-17 as dampening margin growth outlook, we have based our benign growth estimate on moderating commodities price inflation and stable naira exchange rate outlook.
We estimate finance charge to reduce by more than 14x in 2018E on less geared balance sheet and stable naira outlook.NGN42.7 billion worth of loans was repaid in 2017FY, thus reducing gross debt to NGN24.2 billion (from NGN50.7 billion in 2016FY), split into 74% dollar and 26% naira(vs. 92%:8% in 2016FY).
At our revised TP of NGN851.92 (previously NGN843.54), we maintain SELL rating on NESTLE’s stock .
Pz Cussons Nigeria Plc – Sell
The shares of PZ closed lower by 4.13% to N22.05. PZ trades at 2018 PE of 32.0x, below its 5-year average of 37.3x.
We update on PZ following recent meeting with management. Feedback is that the operating environment has been more challenging than expected since December, and could impact the group’s performance in the traditionally strong second half, and indeed, 2018F.
In management’s view, sales are pressured by local competition – through imports – which has been strengthened by the improved dollar liquidity levels. And cross border trade, with Sudanese customers specifically, has been affected by some sort of currency devaluation in that market.
Sales growth in H1 was strong (23%), and despite revising forecasts for
H2 lower, we have a 2018F growth estimate of 14.7%. Part of measures management
is implementing to support sales in the immediate include sizeable discounting,
improved (but on very selective basis) credit conditions, and better
distribution. New product launches are planned in the Electrical division.
Gross and EBIT margins in Q2 were consistent with our expectations; hence, we make no changes to our H2 estimates. Both stable FX outlook and moderating inflation should be supportive of margins. Management mentioned the merger of sales force across the group and the implementation of SAP as recently supportive of efficiency gains. That said, management is of the view that margin growth is constrained by the dominance of low margin products in the sales portfolio. We also note the risk to margin from possible price cut in 2019F, as competitive pressure intensifies. What is optimal for the group, in our view, is to rationalize its sizeable low margin and slow moving SKUs, and focus its resources to promoting and marketing the relatively better margin SKUs.
Interest expense in H1 (NGN544.8 million vs. NGN290.5 million in 2017FY) significantly tracked ahead of our estimate on expensively sourced working capital. However, management has guided to reduced pressure going forward, on raw materials destocking (Talo) and improved FX funding arrangements.
We cut 2018F net profit estimate by 3% to NGN3.43 billion and maintain SELL rating at NGN15.19TP.
Unilever Nigeria Plc – Sell
The shares of UNILEVER closed higher by 3.86% to N55.20. UNILEVER trades at forward PE of 32.5x, below its 5-year average of 61.8x.
UNILEVER released Q3-17 result, showing revenue and net profit grew by 36.6% y/y and 142.7% y/y respectively. Finance costs increased by 48% y/y and 25% q/q, on the repayment of short term USD intercompany loans, and compared to Q3-16, gross margin (31%) was higher by 661 bps and beat our 30% estimate.
Following UNILEVER’s 9M-17 results, we raise 2017F sales estimate by 1.4%, but cut EBITDA and net profit estimates by 1.2% and 9% respectively, on the back of lower other income and higher opex and finance costs. While also lowering our 2018-2019F EBITDA estimate by 0.6% average, we raise net profit estimates by 17% and 15% respectively in 2018F and 2019F, reflecting majorly, our expectation of significant moderation of finance costs over the periods.
We reiterate that volume will be crucial to sales growth going forward, and look for better efficiency in promotional activities/RTM initiatives as well as new products launches, especially amidst stronger outlook for competition. In the H1 earnings call, the management hinted on ongoing innovations in the HPC product segment, some of which will be launched in 2018.
The slight reduction of our EBITDA estimates is on the back of (1) increase in operating expenses forecasts – +39% y/y and +20% q/q was recording in Q3-17 following 8% contraction in H1 – reflecting pressure on marketing and distribution spend, on expected resurgence of competition and (2) the reduction of other income estimate, also evident in 9M-17’s -100%.
Our revised EBITDA forecasts imply that UNILEVER will achieve an EBITDA margin of 15.8% in 2017F (previously 16.2%), and modest increase to 16% average in 2018-2019F (previously 16.3%) amidst possible pricing pressure.
We raise estimate for finance costs by 40% in 2017F, evident in the sharp spike experienced in Q2 and Q3-17 following the drawdown of expensive short term loans. Our cut to the 2018F and 2019F estimates however reflects the sizeable reduction of short term borrowings (63% YtD by end-September 2017) following the completion of the Rights Issue (programme of NGN58.9 billion). Management said it is targeting a debt-free balance sheet by the end of the RI, suggesting finance costs could be lower than we estimated.
Net impact of the above changes is for EBITDA and net profit growth of 79% (previously 81%) and 122% (previously 144%) in 2017F, and 8% and 36% growth in 2018F, respectively.
That said, we cut our TP for the stock by 40% to NGN21.70. The drivers of our TP are increases in (1) shares outstanding by 52%, following the recent listing of additional 1.96 billion shares and (2) cost of capital (WACC) by 158 bps, on the significant deleveraging of the balance sheet.
Dangote Cement Plc – Sell
The shares of DANGCEM was lower by 3.41% at N255.00. DANGCEM trades at forward PE of 16.8x, higher than its 5-year average of 15.8x.
DANGCEM released 2017FY results last week. Group revenue of NGN805.6 billion (+31% vs. 2016FY) and PAT of NGN204.3 billion (+43% vs. 2016FY) are behind Bloomberg consensus’ NGN810.4 billion and NGN249.9 billion, respectively. Sales volume, at 21.9 million tonnes, was lower by 7% vs. 2016FY, and behind the 22.3 million tonnes we estimated.
EBITDA came in at NGN388.2 billion, +51% vs. 2016FY, and ahead of consensus’ NGN380.3 billion. Nigerian revenue and EBITDA grew by 30% and 52% respectively, while net profit contracted by 17%. Sales volume was down by 16% while effective tax rate (ETR) was higher by 1200 bps. On other hand, Non-Nigerian revenue and EBITDA grew by 34% and 45% respectively, while loss after tax (LAT) reduced from NGN163 billion in 2016FY to NGN50.4 billion. Volume grew by 9%, gross and EBITDA margins improved, while ETR was lower by 200 bps.
For Q4-17, Group revenue and EBITDA grew by 16.8% y/y and 20% y/y respectively, while net profit contracted by 79% y/y. PBT grew by 116% y/y, so the significantly higher effective tax rate of 84% (vs. credit in Q4-16) was responsible for the earnings contraction.
In Nigeria, revenue and EBITDA grew by 15% y/y and 16% y/y respectively, while PAT fell by 84% y/y, also as a result of significantly higher effective tax rate of 84% (vs. a credit in Q4-16). Non-Nigeria revenue and EBITDA on the other hand grew by 20% y/y and 180% y/y respectively, while loss after tax stood at NGN570 million, vs. NGN20.9 billion in Q4-16.
Overall, DANGCEM’s performance in 2017FY was positive. That said, we note the risk to earnings from losing tax benefit claims in Nigeria. On net, our TP for the stock is NGN215.56/share. Our estimates are under review.
Lafarge Africa Plc – Sell
The shares of LAFARGE was lower by 5.66% to N50.00. LAFARGE trades at forward PE of 69.4x above its 5-year average of 11.8x.
LAFARGE released Q3-17 result, showing revenue growth of 28.2% y/y, and a loss after tax of N18.8 billion which almost erased the N19.73 billion profit reported as at H1. Given the largely stable cement prices across markets, we attribute the higher-than-expected revenue to both higher (than expected) sales volume in Nigeria and the stronger performance of the aggregate and concrete business. Further impacting earnings was other operating loss of N9.3 billion, attributed to the net forex loss of N9.9 billion reported during the period. In addition, finance charge increased 85.7% y/y and 24.7% q/q, driven by interest on borrowings which increased 27% q/q and 185% y/y. Compared to Q2 closing balance, borrowings increased by 12.5% when it stood at N245 billion (from N147 billion in Q1).
We revise forecasts for LAFARGE following 9M-2017 results, and adjust our TP for the stock for the Rights Issue (RI). We cut net profit forecasts by 85% for 2017F and by 3% average for 2018-2019F, increase shares outstanding (NOSH) by 57% to 8.6 billion, and roll-forward valuation to 2018F. The broad industry challenge aside, LAFARGE's sales volume, among our universe, lags expectation the most. Margin recovery outlook is relatively less assuring. And there is an underlying FX risk on the outstanding sizeable quasi-equity USD borrowings (USD286 million). On the positive, proceeds of the RI will partly address the Group's debt overhang condition and allow management focus on profitable operations.
Following Q3-17 result, we raise 2017F volume forecast slightly to 6.2Mts (previously 6.1Mts), representing 18.6% contraction (previously 19.3%), on better-than-expected Nigerian volume (precisely Mfamosing). For 2018 and 2019 however, we revise volume forecast lower to 6.7Mts (previously 7.2Mts) and 6.9Mts (previously 7.6Mts), after cutting expected utilization rates for the West (2,000bps) and North (500 bps) of Nigerian operations. Volume forecast for the South African operation, struggling with high competition and weak infrastructure spending, is unchanged. We retained estimated end-2017 selling price of NGN32,340/bag for the Group (Nigeria: NGN44,800/bag) for 2018F.
LAFARGE's unsteady gross margin between Q4-16 and 9M-17 (compared to DANGCEM's) does not make for strong reliance on management's claims of strong contribution from coal, pet-coke, and alternative fuels in cement production. Overall, we cut 2017F EBITDA forecast by 25% and 2018-2019F by 7% on higher OPEX and lower gross margin than previous estimates. Our revised EBITDA forecasts imply EBITDA margin of 18% in 2017F and 23% in 2018F and 2019F.
The slight cut to 2018-2019 net profit forecast, notwithstanding the above revisions, reflects the potential gain from the part refinancing of debts using RI proceeds. From 9M-17's NGN267.4 billion, we estimate gross debt will reduce to NGN135.7 billion in 2018F, and consequently reduce finance costs to NGN16.1 billion, from our previous estimate of NGN 23.1 billion, and NGN24.4 billion potentially in 2017F.
On net, we reduce TP for the stock by 55% to NGN38.98/share (NGN80.04/share on the old NOSH).
Cement Company Of Northern Nigeria Plc – Sell
The shares of CCNN closed 2.74% higher by 4.95% o N18.75. CCNN trades at forward PE of 10.5x, above its 5-year average of 7.1x.
In Q3-17 result, revenue (86.1% y/y), EBITDA (553% y/y), and PAT (1,500% y/y) all grew strongly. Compared to Q2-17, strong double-digit growth was also recorded across all line items – revenue (23%), EBITDA (90%), and PAT (95%). We assume that price increase during the quarter entirely accounted for the surprised strong q/q growth in revenue. At 43% (+2,100 bps y/y and +900 bps q/q), the gross margin reported over the three months period was a positive surprise.
We revise forecasts for CCNN following impressive 9M-17 results, and roll forward estimates and valuation to 2018. The revision to our estimates was driven by improved EBITDA and EBITDA margin (+113% and +774 bps respectively in 9M-17) on (1) higher realized sales volume and stronger selling price and (2) improved energy cost (-10% YtD and -35% q/q cost/tonne in Q3). On net, we raise our EBITDA and net profit forecasts by 33% and 38% respectively for 2017F, and by 14% and 16% average respectively for 2018-2019F.
We increase sales volume and price forecasts for 2017 by 6% and 9% respectively, equating to -16% (previously -20%) and +58% (previously 44%) from 2016. Following the contraction in 2017, we forecast sales volume will grow by 2% in 2018 and flattish in 2019 on estimated 85% plant utilization rate.
Compared to Q2-17, we estimate that CCNN achieved 35% decline in per tonne energy cost in Q3-17. Outlook for the price of CCNN's type of energy is positive, on significantly reduced demand from the bigger consumers in the cement industry and positive feed-through from stronger one-year naira outlook. Downside risk, however, is the potential increase in the unregulated LPFO price, on rising crude oil price; hence, our EBITDA margin estimates of 23% average for 2018-2019F (albeit above 5-year average of 17%), vs. 27% for 2017F (on the backdrop of the 33% margin achieved in Q3).
Media reports have recently quoted top management member of CCNN reiterating progress on expansion work (additional 1.5Mts/year to increase capacity to 2Mts/year) in Sokoto and guiding to delivery in 2018. While noting the significance of the delivery of additional volume on EBITDA formation going forward, we are still reluctant to factor the expansion into our model, given that the company's recent financials (balance sheet and cash flow statements) are yet to capture the movement of capital to support management's claim. On net, we raise our TP for the stock by 28% to NGN9.52/share.
Access Bank Plc – Hold
The shares of ACCESS fell by 3.00% last week to N11.30. ACCESS trades at forward PE of 4.3x, above its 5-year average of 2.9x.
Access Bank Nigeria Plc (ACCESS) released its FY-2017 results, showing growth in Gross earnings in the year by 20.39% to NGN459.08 billion – short of our estimates by 5.71%. PBT (-11.36%) and PAT (-13.23%) declined to NGN80.07 billion and NGN61.99 billion – missing our estimates by 17.16% and 19.28% respectively, and were below Bloomberg’s polled estimates by 12.41% and 16.26%.
Interest income (+29.35% to NGN319.85 billion) increased at a slower pace than Interest expense (+44.63% to NGN156.40 billion), resulting in a 17.47% increase in net interest income, lower than the 32.04% rise recorded in the previous year. As a result, net interest margin dipped 40 bps to 5.80%, from 6.20% in the previous year. Asset yield was 11.30% from 11.10% in 2016, while cost of fund increased to 5.10% from 4.30% in the previous year.
NIR inched higher by 4.26% to NGN139.14 billion, supported by the surge in forex income to NGN107.93 billion, from NGN3.60 billion in the previous year, as well as marginal improvement in net fee and commission income (+3.16%). Both muted the significant declines in net trading (-160.68%) and other incomes (-59.80%).
The decline in net trading income follows a 178.38% downturn in return on derivative instruments, which dropped to a loss of NGN39.27 billion, from a gain of NGN50.11 billion in the previous year.
Provision for credit losses was higher by 57.0% at NGN34.47 billion – 63.29% higher than we expected. Accordingly, cost of risk increased to 1.70%, from 1.30% in the previous year. CAR dropped 140 bps to 21.10%, but remained well above the regulatory requirement. The increased loan loss provision matched the 270 bps increase in the NPL ratio to 4.80%, against 2.1% recorded in the previous year.
Opex growth increased to 17.31%, from a 10.13% increase in the previous year, driven by a 23.02% and 20.82% increases in other operating expenses and depreciation and amortization respectively. Although tax expense was 4.33% lower in absolute terms, the effective tax rate increased by 271 bps to 29.17%.
Over Q4-17, the top and bottom line performances were poor, with Gross Earnings (-20.25% q/q, -11.49% y/y), PBT (-65.67% q/q, -60.94% y/y), and PAT (-66.97% q/q, -60.99% y/y) posting declines. All three line items came short of our estimates by 22.75%, 69.84%, and 72.57% respectively.
Our current 12-month TP of NGN11.58 implies upside potential of 2.48% from current level. Our estimates are under review.
FBN Holdings Plc – Sell
The shares of FBNH appreciated by 4.70% last week to N12.25. FBNH trades at forward PE of 8.2x, above its 5-year historical average of 6.3x.
FBNH released unaudited Q3-17 last week, wherein gross earnings grew marginally by 1.85% q/q and 0.40% y/y, while PBT and PAT rose 28.01% q/q (71.19% y/y) and 24.44% q/q (145.47% y/y), respectively. The growth in earnings is broadly supported by (1) growth in funding income (by 7.73% q/q and 17.43% y/y), which more than subdued the 6.57% and 37.91% y/y contraction in NIR and (2) decline in opex by 3.51% q/q (+2.27% y/y).
Specifically, over 9M-17, gross earnings grew by 5.17% while PBT declined 3.52%, PAT grew by 7.81%. The marginal growth in gross earnings over the period broadly reflects the impressive yield on interest earning assets (+210 bps to 12.28%) and consequently, robust interest income, which more than offset the significant decline in NIR (47.08%).
While the performance over 9M-17 is broadly in line with our estimate, we have now revised estimate for Q4 and FY-2017 upward to reflect the relative consistency over the first three quarters of 2017, compared with same periods in 2016. We revise gross earnings growth forecast slightly higher to 0.81% (previously -4.63%) in 2017F to N586.54 billion, on expected higher growth in interest income and a lower contraction in NIR. While we maintained our 2017F costs or risk estimate, we have lowered net loan growth estimate by 8.76%. As a result, we now forecast PBT and PAT growth of 107.87% and 214.18% (previously 51.78% and 51.74%) to N65.92 billion and N53.85 billion respectively. As a result, our 2017F EPS of N1.50 is now 107.06% higher than the previous estimate of N0.72.
We revise asset yield estimate for 2017F higher to 12.45% (previously 11.65%), on expected continued elevated yields on interest earning assets over Q4 (expanded 210 bps y/y to 12.28% in 9M-17). Overall, we look for interest income growth of 17.88% (previously 12.38%) to N477.76 billion. On NIR, we believe the growth in net insurance revenue, dividend income, and other operating income will persist for the rest of the year. However, we expect a significant contraction in foreign exchange – reflecting the limited legroom for revaluation gains in 2017 with the relative stability of the NGN –, as such, we have lowered the expected contraction in NIR to 45.41% (previously 51.63%).
We have revised our 2017F cost of funds estimate higher by 16 bps to 3.85% (+62 bps y/y), translating to 31.54% growth in interest expense to N132.64 billion. However, with the upward review of the high yields on interest earning assets, we believe the impact of the expansion in cost of funds will be muted, thus, we estimate net interest margin to decline 13 bps to 8.72% (previously 8.49%).
Over 9M-17, asset quality deterioration persisted, albeit with some respite as NPL ratio moderated 190 bps to 20.10% compared to H1-17. Following the moderation in NPL and the 90.08% y/y growth in net recoveries from loans previously written off (with an additional recovery of N1.32 billion over Q3), we have revised our forecast NPL to 19.55% (previously 21.65%), but maintain our 6.65% estimate - translating to additional provisioning of N45.85 billion for Q4 and total credit loss provision of N143.47 billion for 2017F.
Our current 12-month TP implies downside potential of 39.76% from current level.
Guaranty Trust Bank Plc – Hold
The shares of GUARANTY closed higher by 4.45% to N46.90. GUARANTY trades at forward PE of 8.72x, above its 5-year average of 6.2x.
Guaranty Trust Bank Plc (GUARANTY) released the FY-2017 result showing Gross earnings was 1.11% higher than in the previous year (2.21% lower than our forecast). Growth in both interest income (24.7%) and net gains on financial instruments (117.30%) respectively, muted declines in fee and commission (-16.29% y/y) and other income (-60.65%) incomes. Net interest income rose by 26.23% during the year to NGN246.66 billion – 3.29% lower than our forecast. The net interest margin also improved 67 bps to 10.34%, as the high interest rate environment buoyed growth in interest income.
Loan impairment charges was 81.36% lower than the previous year, with cost of risk dropping significantly to 0.80%, from 4.41% in the previous year, as quality of assets improved during the year. Opex was 8.47% higher in the year, following increase in operating lease (+16.10%) and personnel (+11.47%) expenses. Cost-to-income ratio also increased by 369 bps to 36.72%.
PBT (+21.26%) and PAT (+28.89%) grew to NGN200.24 billion and NGN170.47 billion – 2.46% and 1.17% lower than our forecast, but 3.83% and 4.54% higher than Bloomberg’s polled estimates by 3.83% and 4.54% respectively.
Over Q4-2017, Gross earnings grew by 15.01% q/q and 28.99% y/y to NGN110.07 billion during the quarter. However, this was 7.92% lower than our forecast. The surge in other income to NGN25.60 billion – from a negative position of -NGN2.49 billion in the previous quarter, and NGN1.68 billion in the corresponding quarter of the previous year – muted the declines in interest income (-4.03% q/q, -1.89% y/y) and fee and commission income (-72.15% q/q, +275.56% y/y).
PBT (+2.61% q/q and +106.63% y/y) and PAT (+7.15% and +263.38%) grew to NGN50.21 billion and NGN44.89 billion in the quarter, but came below our forecast by 9.12% and 4.30% respectively. A dividend of NGN2.70 (2016:NGN2.00) was declared for the period, equating to a yield of 5.71% as at release date price of NGN47.30.
Our target price stands at N42.81 (previous: N42.45) with a downside potential of 8.72% from current level. Our estimates are under review.
United Bank For Africa Plc – Sell
The shares of UBA rose by 3.14% to N11.50. UBA trades at forward PE of 4.8x, above its 5-year average of 3.2x.
United Bank for Africa Plc (UBA) released its FY-2017 results, showing growth in top and bottom line items – Gross earnings (+20.31% to NGN461.56 billion) and PAT (+8.75% to NGN78.59 billion) – but missing our estimates by 2.24% and 3.64% respectively. Against Bloomberg’s polled estimates, pre-tax profit was 5.47% higher, while post-tax profit was 1.22% short.
Net interest income was 25.69% higher than the previous year’s at NGN207.63 billion, as interest income (+23.37% to NGN325.66 billion) grew at a faster pace than interest expense (+19.49% to NGN118.03 billion). Accordingly, NIM improved by 51 bps to 7.61% (higher than our 7.10% forecast). This was supported by 59 bps improvement in asset yield to 11.94%; whereas, cost of funds declined by 3 bps to 3.70%.
NIR also increased during the year by 12.53% to NGN118.93 billion, owing to growths in Net fee and commission income (+11.42% to NGN65.97 billion), Net trading income (+11.96% to NGN49.06 billion), and other income (+46.79% to NGN3.90 billion). Loan impairment charges rose by 18.83% during the year to NGN32.90 billion. As a result, the cost of risk increased by 16 bps to 2.01% - coming 46 bps higher than our estimates.
Opex was also higher by 23.68% at NGN188.61 billion (4.53% lower than we estimated), with a cost-to-income ratio of 57.76%, coming 146 bps higher than last year, but 266 bps lower than our forecast. While pre-tax profit increased by 16.13% to NGN105.26 billion, higher effective tax rate (+506 bps) of 25.34%, drove a slower growth in the post-tax profit (+8.75%) of NGN78.59 billion.
In the last quarter of the year (Q4-17), improvements in key income lines – interest income (+5.32% q/ and +8.13%y/y), fee and commission income (+16.96% q/q ad +47.50%y/y), net trading income (+136.01%q/q and -24.89%) – supported growth in Gross earnings (+14.81%q/q and +8.07%y/y).
Net interest income (+8.67%q/q and +4.16%y/y) grew to NGN55.34 billion, with interest income (+5.32%q/q and +8.13%y/y) and interest expense (+0.03% q/q and +15.71% y/y)
increasing to NGN325.66 billion and NGN118.03 billion respectively.
Our current 12-month TP of NGN10.14 implies downside potential of 11.83% from current level. Our estimates are under review.
Zenith Bank Plc – Hold
The shares of ZENITH appreciated by 9.42% to N30.20. ZENITH trades at forward PE of 5.3x, above its 5-year average of 5.0x.
Zenith Bank Plc (ZENITH) released its FY 2017 results which showed that Gross earnings was higher by 46.69% during the year at NGN745.19 billion – 55.14% higher than Bloomberg’s polled estimates, and 8.49% higher than our forecast. Interest income (+23.42%) increased to NGN474.63 billion – lagging our estimates marginally by 1.59%. NIR surged by 119.18% to NGN270.56 billion, owing to significant rise in trading income by 456.29%.
As a result, total operating income in the year was 45.36% higher at NGN528.55 billion – 178.00% higher than polled expectation. Loan impairment provision surged by 203.64% to NGN98.23 billion – 83.40% higher than our forecast. Operating expenses was 29.99% higher than the previous year at NGN226.86 billion, and 3.50% than our estimate of NGN219.20 billion.
PBT and PAT stood at NGN203.46 billion and NGN177.93 billion, 29.80% and 37.24% higher than their respective figures in the previous year, and Bloomberg’s polled forecasts of NGN193.59 billion and NGN159.52 billion.
Over Q4-2017, Gross earnings (+41.83% q/q and +67.59% y/y) increased to NGN212.92 billion – its second highest during the year, after Q2-2017’s NGN232.70 billion. This came in higher than our forecast by 27.26%. Interest income also improved by 13.37% q/q and 14.11% y/y to NGN112.84 billion. The significant upticks in trading income (+361.86% q/q and +535.34% y/y) and other income (+277.65% q/q, +207.59% y/y) during the quarter, muted the decline in fee and commission income (-42.52% q/q and -13.72% y/y), to drive growth in the NIR by +97.07% q/q and +251.45% y/y. Dividend of NGN2.45 (2016: NGN2.02; 2017F:2.15) was proposed, equating to 7.90% yield on the release date price of NGN31.00.
Our target price on the stock stands N30.15 (Previous: N27.18), translating to 0.17% downside from current level. Our estimates are under review.