By Afrinvest Research,
Resilient Performance… A Clear Case of Undervaluation
Zenith Bank Plc (“Zenith” or “the Bank”) released its FY:2017 earnings result on the floor of the exchange on Monday (12/03/2018) and in line with expectation, Zenith’s performance was largely impressive. Gross earnings surged 46.7% Y-o-Y to N745.2bn. The Bank’s Interest income rose 23.4% Y-o-Y from N384.6bn in FY:2016 to N474.6bn in FY:2017 following increased yield on loans and advances (from 10.9% in FY:2016 to 11.8% in FY:2017) while Non-interest income surged 119.2% Y-o-Y to N270.6bn in FY:2017 from N123.4bn in the prior year, majorly due to the significant gains recorded from trading activities (especially Treasury Bills and Derivatives trading).
As noticed in 2017, more Banks seem to be focusing on trading activities to boost income given the attractive yield environment. This has been particularly true for Zenith which consistently recorded average quarterly trading income of N39.9bn between Q1:2017 to Q4:2017 from 2016 corresponding quarterly average of N7.1bn. We believe this is an income line that has come to stay as the Bank takes advantage of opportunities in the market. Zenith was also able to maintain its drive to optimize cost as Cost to Income Ratio (CIR) moderated to 42.9% from 48.0% in FY:2016 despite a 30.0% increase in OPEX (from N174.5bn to N226.9bn). Accordingly, PAT advanced 37.2% Y-o-Y to N177.9bn from N129.7bn in the prior year while RoAE improved to 23.4% from 20.0% in the prior year. A final dividend of N2.45 (N0.25 paid for H1:2017) was proposed for the period, translating to an implied dividend yield of 7.9%.
Our Compelling Investment Thesis for Zenith
The resilience of Zenith is clearly demonstrated in its FY:2017 performance and we have a positive outlook on future earnings in 2018 and beyond. In our view, the dividend yield (7.9%) on the stock is quite attractive given the current realities in the market and this presents a good opportunity for investors interested in dividend paying stocks.
Furthermore, on a valuation basis, considering the pre-earnings announcement P/BV of 1.5x and current P/BV multiple of 1.2x, we believe the stock is currently undervalued and presents an attractive entry opportunity. In a scenario in which the stock trades at the pre-earnings release P/BV, we envisage an implied price of N39.25 on ZENITH which presents an upside opportunity of 26.8% against a price of N31.00 (13/03/2018). Against the backdrop of our expectation of positive performance in 2018 as well as the current attractive pricing on the stock, we believe it is Open Season on ZENITH! and investors should be on the hunt for the Stock.