Zenith Bank and Unity Bank released their Q1:2013 results Monday, posting net income of 21.75 percent and 8.33 percent, respectively. The results motivated the market as the banking stocks dominated the day’s activities. Market breadth tilted away from bears camp as 30 advancers against 24 losers resulted in the breadth of 1.25x.
Mid/small cap stocks featured mostly on the top gainers and losers list for the day with John Holt and Learn Africa leading the gainers by 10 percent and 9.87 percent while MRS lost the most by 10 percent, closely followed by Deap Cap and Royalex, which lost 9.89 percent and 9.86 percent in that order. The All-Share-Index gained 29bps to stay at 33,090.04pts, market capitalisation closed the day at NGN10.578trn while YtD return settles at 17.85 percent.
In the face of no apparent market catalyst (we believe that the gains of the first trading day is not sustainable as investors temporarily reacted to the Zenith Bank results) and given that expectations have long been priced in by investors, we envisage that market will shed 100bps by week end. However, current stock prices remain attractive entry points even as we expect slightly impressive Q1 results to steer mild positive sentiment.
Dangote Sugar: Earnings buoyed by other income as turnover decline
Dangote Sugar posted a rather disappointing turnover numbers in FY:2012, recording a decline of 0.33 percent. This we attribute to both rather stagnating volume growth y-o-y as well as emerging competition in the country’s sugar market. Cost to sales ratio declined y-o-y from 87.32 percent to 80.25 percent, while the OPEX margin increased to 6.44 percent from 2.93 percent. The net margin also increased to 10.10 percent from the previous 6.91 percent. Our valuation model places a hold on Dangote Sugar at a target price of N8.81.
Growing industry competition slows top-line growth: Contrary to expectation, Dangote Sugar recorded a turnover decline, its first in the last four years. We attribute this to the growing competition for market share especially from new entrants, particularly Golden Sugar – a subsidiary of Flourmills Nigeria.
In addition, drop in volume (ton) is responsible for this decline because turnover growth recorded in recent years was price driven rather than volume-driven. The company needs to braze up to confront the emerging competition in the industry as well as tap into other markets. In our view, the company’s creation of export link within the West African sub-region is a near term revenue source. We expect a modest turnover growth of 7.50 percent in the 2013FY result.
Reduced cost to sales ratio linked to reducing price of raw sugar: Company recorded a reduction in cost to sales ratio of 7.07 percent, dropping from 87.32 percent to 80.25 percent. This in our opinion is largely due to the 38.88 percent 2012 y-o-y decline in the raw sugar price. As a result, gross margin improved to 19.75 percent from 12.68 percent.
Full-year earnings remains moderate: Notwithstanding the marginal decline in turnover, Dangote Sugar recorded an impressive 45.83 percent growth in PAT. This was driven by the 347 percent y-o-y increase in other income to N2.10 billion. We will analyse the sustainability of the other income as we get more colour on its composition.
We review upwards our target price: on a blended valuation basis, we value Dangote Sugar at N8.81 from our previous valuation of N8.70 using a cost of equity of 18.02 percent and terminal growth of 8.50 percent.
Fidelity Bank: Accelerated earnings growth
Fidelity Bank released its FY:2012 result Monday recording N0.63 EPS, which is 19 percent above our N0.53 forecast. This positive performance derives from the growth recorded in both interest and non-interest income which grew by 60% and 66% respectively. The result was also supported by the benign cost components which were largely in line with expectation aside the interest expense, which was 7 percent ahead of our N39.5 billion forecast. The bank paid N0.21 dividend implying 33 percent payout ratio, which is lower than 74 percent payout in FY:2011. We find this reasonable given the expectation of higher loan growth in 2013 and a need to keep a close watch on capital adequacy ratio.
The bank recorded RoAE of 12.2 percent, which was ahead of our 10.6 percent forecast, though below the industry average of 22.5 percent based on FY: 2012 results released so far. We see the current RoAE as an improvement when compared with its most recent three-year average of 3.2 percent, though unattractive when compared with its 17 percent cost of equity. The higher return on equity was as a result of improvement in the income line. Interest income increased y-o-y by about 60 percent and non-interest income increased by 66 percent.
This was driven by higher than industry average growth in loan of 24 percent as well as favourable yield on treasury investments.
We believe the bank will not suffer any inertia in booking loan in 2013 since that is the veritable source for driving income by the industry this year. Loan provisioning of N4.15 billion was in line with our expectation which makes its cost of risk tally with our 1.5 percent forecast. Loan to deposit ratio of 48 percent leave ample room for loan growth though efforts need to be directed at lowering NPL ratio given the higher loan growth outlook in 2013.
Operating expense and operating income ratio grew by 42 percent and 172 percent, respectively. Its 70.9 percent cost to income ratio and 6.6 percent cost of funding are one of the industry’s highest. This was responsible for its relatively lower net interest margin of 4.7 percent compared with our 5.9 percent forecast. We expect slight improvement in margin to 6 percent in 2013 if the bank can get better pricing on its deposit.
