8percent increase to our 2019E EPS forecast and price target
We maintain our Outperform rating on UBA and increase our price target by 8percent to N13.9 following UBA’s Q1 2019 results which surprised positively relative to our forecasts. The upward revision to our price target is driven by an 8percent increase to our 2019E earning per share (EPS) forecast.
On the back of the upgrades to our forecasts, we now expect the bank to deliver a 2019E return on average equity (ROAE) of 19percent, c.100bps higher than management’s 18percent guidance for the year. We believe that the bank’s current valuation level (2019 P/B multiple of 0.4x or a 41percent discount to the sector’s 0.7x multiple) look compelling when compared with peers and justifies a more positive view on the stock.
The discount is also unjustified when comparing our forecast ROAE of 17.3percent in 2020E versus the 18.9percent for the sector. Following the declassification of its 9mobile exposure totaling N22.5billion (from stage 3 to stage 2 loans), UBA’s non-performing loan (NPL) ratio improved by circa 116 basis point (bp) q/q to 5.3percent. Its loan book was flattish q/q.
However, following the conclusion of the general elections in Nigeria in Q1 2019 and the dissipation of associated political risks, management is more positive on the bank’s loan growth prospects for H2 2019. In addition, the bank’s financial soundness indicators, mainly capital adequacy, loan-to-deposits and liquidity ratios which stand at 24percent, 48percent and 50percent respectively as at the end of Q1 2019 are amongst the best in the sector. At current levels, we see an upside potential 107percent in the shares.
Q1 PBT up 14percent y/y, driven by an 8percent y/y growth in pre-provision profits
UBA’s first-quarter (Q1) profit before tax (PBT) grew by 14percent year-on-year (y/y) to N30.2billion. The key earnings driver was an 8percent y/y growth in pre-provision profits underpinned by high single digit y/y growth on both revenue lines. The y/y growth in revenues completely offset an 18percent y/y rise in loan loss provisions and a 5percent y/y increase in operating expense (opex). Below the tax line, PAT grew by 15percent y/y.
Sequentially, PBT was up by 9percent q/q, mainly due to a 20percent quarter-on-quarter (q/q) growth in pre-provision profits. Thanks to a positive result of N11.9bn in other comprehensive income (OCI) vs. –N21.9billion in Q4 2018, PAT grew to N38billion compared with –N3.7billion in Q4 2018. Relative to our estimate, PBT was broadly in line with our N29.2bn forecast. However, PAT beat by 49percent, thanks mainly to the positive surprise in OCI.
Iheanyi Nwachukwu
