By FBNQuest Research,
Slight cut to 2019-21E EPS forecasts
Following UACN’s earnings conference call, we have made slight downward adjustments to our 2019-21E forecasts, despite the new management’s assurance that things are turning around for the better. Although large impairments taken on real estate investments in 2018 – which drove the pre-tax loss of -N5.5bn – are expected to be non-recurring over the forecast period, we see the biggest challenge coming from the animal nutrition and other edible businesses (Grand Cereal and Livestock Feeds; c.54% of group sales). Indeed, group sales which declined by -12% y/y were weighed down by weaker sales in Grand Cereal (-28% y/y) and Livestock Feeds (-23% y/y).
Looking ahead, these businesses are unlikely to show a healthy pick-up in the near term, given sustained competition from global food company Olam International. Our forecasts already reflect a tough competitive environment, though we have made a slight cut of -60bps on average to our 2019-21E EPS estimates.
However, on the back of lower sum-of-the-parts valuation assumptions, our new price target of N10.2 is around -19% lower than previous. Year-to-date, UACN’s shares have shed -28.7%, underperforming the broad index by 24.3%. Although our new price target implies a potential upside of 45% from current levels, we retain our Neutral rating on the shares, considering the overall bearish picture in the near-to-medium term.
-N6bn in pretax loss made in Q4
Q4 sales for the group plummeted -48% y/y to N23.0bn, while pre-tax and after-tax losses of –N6.0bn and –N9.8bn were incurred for the quarter. A gross margin contraction of -39bps y/y to 16.9% and other operating net losses of –N8.9bn (Q4 2017: -N955.9m) also contributed to the squeeze in profitability during the quarter. These negatives completely offset the gain from lower net finance costs of N347m (down -86% y/y).
Sequentially, sales increased by 22% q/q whereas Q4 pre-tax loss compares with -N1.6bn for Q3. Compared with our forecasts, sales beat by 10%, but PBT and PAT were significantly lower than our forecasts of N260m and N176m respectively.
By ARM Research,
Solid outing to the year
After a very weak Q4 performance which dragged overall full year earnings, UBA Plc posted strong recovery in Q1 2019, showing improvement across income lines. Particularly, the bank recorded material growth in non-interest revenue (+72% QoQ), following sturdy growth in net fee income (+16.4% QoQ), three-fold gain in the other income line and trading gain of N6.1 billion compared to a loss in the prior quarter. The strong gain in NIR coupled with net interest income growth of 5.7% QoQ, moderation in cost to income ratio (-700bps QoQ to 62.1%) and lower effective tax rate of 4.9% (Q4 18: 38.9%) necessitated expansion in EPS by 69% YoY. Excluding the materially lower effective tax rate, the reported profit before tax of N30.2 billion (+9% QoQ) represent c.26% of our FY19 estimates.
On net interest income, the gains stemmed from a faster expansion in interest income (+4.9% QoQ) relative interest expense (+3.7% QoQ), both coming in line with our estimate. On the former, the increase emanated largely from interest on interbank placements of N4.5 billion compared to a reversal of N687 million in the prior quarter. Also, the bank booked modest increase on interest on loans (+1.7% QoQ), which combined with the net positive interest on interbank neutered decline in interest on investment securities (-3% QoQ), to support a slower moderation in assets yield by 15bps QoQ. Elsewhere, funding cost moderated at a much slower pace of 10bps QoQ to 3.8% following higher interest on interbank takings (+141% QoQ), which outweighed slower growth on debt services (+1.7% QoQ) and decline on interest on customers deposit (-1% QoQ) – reflecting expansion in CASA share of deposits by 218bps QoQ to 79.1%. Accordingly, NIM dropped 5bps QoQ.
Perusing the balance sheet, net loan book declined 1.5% YtD (gross loan book: -1.5% YtD) to N1.7 trillion, with a complementary decline in investment securities by 2.2% YtD. Deposit book remained strong, expanding 5.4%, largely 10.2% increase in current account (+10.2% YtD) and term deposits (+3.6% YtD). On regulatory position, the bank’s liquidity ratio stayed strong at 50% (50% in FY 18), NPL moderated to 5.29% (FY 18: 6.5%) with capital adequacy ratio of 24% (FY 18: 24%).
Rest of Africa to remain the harbinger of growth in near term.
In our stock update published earlier in the month (See report: Rest of Africa to drive earnings growth in near term), we guided that while the bank recorded sluggish performance over 2018, UBA growth story across Africa remain compelling. Particularly, we guided to a meaningful growth in earnings over 2019 on the back of strong retail deposit growth, increase in loan book, expansion in trading book and net fee income, and healthier asset quality. Consequently, we modeled FY 19E earnings growth of 10.8% YoY to N87.1 billion, with FY 20F and FY 21F growth forecasts of 6% and 5% respectively. With the performance across income lines (net interest income and NIR), opex and credit loss provisioning coming largely in line with our estimate, even PBT, we have left our model unchanged and maintain our FVE of N13.04/share with a STRONG BUY rating. UBA trades at FY 19E P/B of 0.43x, a discount to Tier 1 average of 1.0x.
By FDC Research,
Africa’s historic trade deal has garnered enough votes to go into force. On April 2nd, The Gambia became the 22nd country to approve the African Continental Free Trade Area (AfCFTA), helping the deal bypass the minimum threshold to go into implementation. The agreement would establish the world’s largest free trade area since the formation of the World Trade Organization. This is happening at a time when an ideological struggle between protectionism and globalization is disrupting international trade. Global trade volume growth is forecast to fall to 2.6% in 2019 from 3% in 2018.
Africa’s awe is not limited to its various tourist attractions but includes its talented citizens who continue to draw attention towards the continent. The youngest DJ in the world, DJ Arch Jnr who thrilled the crowd and judges in America’s Got Talent 2019 edition hails from South Africa.
On the environmental front, Tanzania will join countries such as Rwanda and Kenya who have taken steps towards environmental sustainability. Tanzania plans to ban the use of plastic bags by its citizens in 2019. It is however disheartening to witness countries such as Zimbabwe, Mozambique and Malawi at the peril of continuous underdevelopment further aggravated by Cyclone Idai.
Malaria is the scourge of the African continent. There were 219 million reported cases of malaria in 2017 globally, with Africa accounting for 92% (200 million), according to the World Health Organization (WHO). The world’s first malaria vaccine, which was created by GlaxoSmithKline in 1987, has faced considerable pushback from both the pharmaceutical industry and cultural interests. On April 23, the WHO launched a pilot project that will administer the vaccine to over 360,000 children across 3 African countries. If the project is successful, it would help raise life expectancy, labour productivity and human capital development (a key to sustainable GDP growth).
This edition of the FDC Afriscope promises to be an eye opener on developments in Africa…..The FDC Afriscope Edition 3
By FBNQuest Research,
10% avg. increase to our 2019-20E EPS forecasts
Access Bank’s (Access) Q1 2019 results beat ours and consensus forecasts on every criterion. In particular, funding income was exceptionally strong, with a growth of 27% y/y and a positive variance of 23% relative to our forecast. The stellar growth in funding income was driven by a 159% y/y increase in income from investment securities on the back of a 54% volume growth on the investment securities line during the quarter.
In contrast to the growth trends on the P&L, there was visible deterioration in balance sheet metrics because unlike the P&L which showed only Access Bank’s numbers, the balance sheet numbers reflected consolidated numbers for the post-merger entity (including Diamond). On its Q1 2019 earnings call, management disclosed that total NPLs and impairments taken by Diamond were c.N269bn and N219bn respectively as at December 2018. Further write-offs of N61bn, loan recoveries of N4.5bn and loan repayments of N63bn in Q1 2019 resulted in a reduction of impairments and NPLs to c.N156bn and over N200bn for Diamond.
As such, NPL and coverage ratios for the combined entity deteriorated to 10.0% and 88.2% (compared with 2.5% and 160% respectively for Access as at Q4 2018). Following the results, we have increased our 2019-20E EPS forecasts by an average of 10% and our price target by c.8% to N14.7. The upgrades to our forecasts translate to 2019E PBT and PAT of N140bn and N117bn respectively and an implied ROAE of c.19.6%, just shy of management’s 20% guidance. Our new price target implies a potential upside of c.114% from current levels. As such, we retain our Outperform rating on the shares.
Q1 PBT up 64% y/y, driven by pre-provision profits & impairments
Access Bank’s Q1 results showed strong growth across the P&L. PBT grew by 64% y/y to N45.1bn. Although a -32% y/y decrease in loan loss provisions contributed to the strong earnings growth, pre-provision profits which was up by 22% y/y was the major driver.
From a revenue perspective, funding income was the main driver, with a growth of 27% y/y. However, non-interest income also grew strongly by 17% y/y. Below the tax line, PAT grew by 192% y/y, thanks to a positive result of N5.9bn in other comprehensive income. (OCI). Sequentially, PBT and PAT grew by 37% q/q and 95% q/q respectively.
Similar to the y/y trends, double digit q/q growth in pre-provision profits, a significant reduction in loan impairments and a positive result in OCI were the key drivers behind the strong earnings growth.