Banks Performance for the 2017 full year results

      

As more banks release their financial results for 2017 full year, the disappointment is growing among investors. However there is also encouragement from at least banks from what we have seen in the results so far. We have been quietly observing and its now its time to break silence on banking sector.

First City Monument Bank Plc ( FCMB )  – FCMB released full year results that showed a significant spike in loan loss provisions. Non-interest income declined so sharply for FCMB that on a full year basis, PBT  of 11.46 billion declined by 30% y/y. The bank still proposed a dividend of 10 Kobo per unit, but given the current high stock price, that is not very exciting. Many would question the sharp increase in the stock price over the past 6 months given the disappointing result.
Diamond Bank Plc ( DIAMONDBNK ) – Another mid-tier bank, DIAMONDBNK delayed filing of their annual results. This again disappointed investors who wonder about the reason for such a delay.
On the other banks two banks that did excite this earnings season are UBA & ACCESS Bank Plc. We believe these two stocks are to be considered if one is thinking about investing in the Banking sector.
United Bank for Africa Plc ( UBA ). Gross earnings grew 20% to N 461 billion. Net interest income grew 26% to N 207 billion while non-interest income grew 13% to n 118 billion. Profit after tax grew 9% to N 78.59 billion in 2017. Loans and deposits grew 10% as well. The bank showed resilience in spite of increased loan loss provisions. The bank also showed a solid FX trading business in the fourth quarter particularly boosting NIM.
Access Bank Plc ( ACCESS ) – Nigeria’s 5th largest Bank, Access Bank Plc ( ACCESS ) posted Top line earnings growth of 20% to N 459 billion. Net interest income grew 17% to N 163 billion. Non-Interest income grew 4% to N 139 billion. Loans grew by 10% while deposits grew by 7% during the year. Profit after tax declined 13% to N 61.99 billion for full year 2017.
However ACCESS bank was very positive about 2018 on its conference call, management was confident that a reduction in funding cost via the re-pricing and gradual winding down of expensive structured funds would translate to a 70bp expansion in NIM, and that any ‘lost’ revenue on derivative income as its fx swaps mature could be replaced by funding income.
So Stock market can be irrational at times and disappointing Companies can have a better stock performance due to reasons one cannot explain. For example stock price of Unity Bank Plc ( UNITYBNK ) rose 3 times over the past 6 months just because of rumors of investment from a US based private equity firm. The stock market forgot the number of times these rumors have risen regarding this bank and foreign investment in the past. Hopefully this time the rumors are true for the same of shareholders of that bank.
But a rational investor must focus on financial performance as the most important yardstick to evaluate a Company before putting hard earned capital at risk.
The biggest banks of Nigeria are GUARANTY & ZENITHBANK and financial results from both those banks were below expectations and we have seen their stocks recede from recent highs. That does not mean we should not consider these stocks to bounce bank in 2018 after falling to more acceptable levels first. Overall these banks are still not performing banking actions and a big portion of their income is coming from risk free T-bills, FGN Bonds and from forex trading which is just not banking in international terms.

MTN Nigeria to list on the NSE – A promise fulfilled

After series of discussions, MTN is cementing plans to list its Nigerian Business ( MTNN ), which is estimated to be worth about $6 billion, on the Nigerian Stock Exchange by H2’18.

The company has obtained shareholder approval for the listing and is in the process of seeking regulatory approvals. We believe listing of the largest telecommunications company in Nigeria on the domestic bourse is a game changer for the equity market and as such, assess preliminary details surrounding the issue.

Largest Telco in West Africa
MTN Nigeria (MTNN) is a subsidiary of MTN Group South Africa (Africa’s biggest mobile phone operator) and the largest contributor to the group earnings accounting for about 33% of its revenue (5-year average). According to the Nigerian Communications Commission (NCC), the telecommunications giant has a customer base of over 52 million subscribers, accounting for c.36% market share in the country.
MTNN began operations in 2001 after securing one of four GSM licenses offered by the Nigerian Government in a deal worth $285 million. Since then, the Telco giant has so far made significant investment in its mobile infrastructure, with total assets worth over ?1 trillion as at FY’16, and has enjoyed a decent level of return over the years.
MTNN offers cellular network access to its subscribers within Nigeria, with airtime and subscription accounting for 64% of revenue as at FY’16 and roaming services (International roaming services, including data roaming, in-flight roaming, and WiFi roaming services) making up the second largest contributor to revenue at 12%.
Currently, MTNN is controlled by MTN International (Mauritius) Limited (MTNI) with 75.8% ownership. Also, 18.7% of its ordinary shares outstanding is held by Nigerian shareholders through special purpose vehicles.
In addition, 2.8% is owned by Mobile Telephone Networks NIC B.V and 1.8% owned by Public Investment Corporation SOC Limited. Upon completion of the planned IPO, MTNN will be the first subsidiary of the MTN Group to be publicly listed on a stock exchange, though we note that the Group has announced its intentions to also list 35% of its Ghanaian business on the Ghana Stock exchange by the end of 2018.
FY’17 Result shows stronger momentum as Data revenue leaps
MTN Group recently released financial results for the year ended 31 December 2017 which showed an 11.6% y/y revenue growth in its Nigerian business to N 885 billion (excluding the impact of currency volatility)  now contributing 27% of the Group’s Total revenue (FY’16: 32%). Voice revenue continues to account for majority of headline revenue , with the segment growing 17% y/y.
Performance of the Data segment was however much stronger with revenue up 87% y/y and the segment now contributing 12% to total revenue (FY’16: 7%). We note that the company’s total data user base grew 14% y/y, with its active data users reported at 14.1 million as at FY’17 (27% of MTNN’s total subscriber base).
Costs (operating expenses and cost of sales) over the year however rose at a faster pace than revenue – up 27% y/y – with the strongest rise recorded in network costs – up 65% y/y. Weighed by impact of the weaker Naira on foreign currency denominated expenses, MTNN’s EBITDA margin contracted from 46.4% in FY’16 to 38.9% in FY’17. Overall, FY’17 EBITDA declined 7% y/y to N 346 billion.
Though MTN Group did not report FY’17 bottom line figure for its Nigerian subsidiary, we estimate a single digit y/y PAT decline in the period; noting the weak run rate already recorded as at H1’17 (PAT down 28% y/y as at H1’17). While MTN Nigeria has not paid dividends since 2015, MTN Group declared a total dividend of R7.00/share ($0.54/share) for FY’17.
A promise fulfilled; MTNN to raise capital via IPO in 2018
In 2015, MTNN was levied an unprecedented fine of N 1.04 trillion (an equivalent $5.2 billion as at the date of fine) by the NCC for non-compliance with a deadline to disconnect all non-registered sim cards in the country – 5.2 million unregistered SIM cards billed at N 200,000 per subscriber.
Following series of negotiations between MTNN and the Federal Government of Nigeria, a final resolution was reached wherein the fine was reduced to N 330 billion (to be paid off over seven installments). Part of the settlement included a plan for MTNN to list its shares on the Nigerian Stock Exchange as soon as it became commercially and legally feasible.
However, given weak investor sentiment in the equity market since 2015, (NSE broad index down 17% and 6% in 2015 and 2016 respectively), MTNN stalled the listing agreement in hopes of more “suitable market conditions”.
Thus, given improving macroeconomic environment which has helped rejuvenate investor confidence in the Nigerian equity market, and spurred a 42% rise in the NSE All-Share Index in 2017, the Telco giant is in the market and ready to list its shares by H2’18.
IPO indicative details
MTNN currently has 402.6 million issued ordinary shares of N 1.00 each (nominal value), 402.6 million preference shares at $0.005c each (nominal value), and 4.5 million class “B” ordinary shares. As part of the listing process, we understand that the company plans to reclassify its Class B shares to ordinary shares – to have a single class of shares.
Also, in a bid to improve liquidity and achieve a more “market friendly” price, MTNN plans a share split of 1 for 50 (taking its nominal value per ordinary share to N 0.02 kobo from N 1.00). With this, total outstanding ordinary shares are expected to rise to 20.3 billion shares.
That said, MTNN plans to offer and issue at least 3.5 billion shares through an Initial Public Offer (IPO) on the NSE. We understand that the telecoms giant also plans to pay off its existing preference shareholders (402.6 million in issue) by offering and issuing ordinary shares in exchange.
With a nominal value of $0.992 for each preference share (share capital: $0.005c plus share premium: $0.987c), we estimate a value of N 144 billion for the total preference shares outstanding.
Using MTNN’s over-the-counter (OTC) market price of c.$13 (ytd average) for each linked unit of its ordinary and preference shares, a rough estimate puts the value of the ordinary shares at $12 (excluding the estimated $0.992 value per preference share) – this is equivalent to a post-split price of N 86.40/share (using N 360/$1 rate).
Analysts at Vetiva Capital Management Limited in Victoria Island highlight that given the impact of the fine earlier discussed, MTNN’s price in the OTC market has taken a dip – down from an average $26 as at Q4’15 to a year to date average of $13. We highlight that the eventual IPO price for the stock will be determined through book building.
Using our estimated OTC price, we expect an additional 1.7 billion ordinary shares to be issued in exchange for the preference shares. As such, we estimate a total of 5.2 billion new shares to be listed on NSE taking total shares outstanding to 25.5 billion. Consequently, we estimate a market capitalization of N 2.2 trillion for MTNN, with the company accounting for about 13% of the NSE’s Market Capitalization (post listing).
Listing portends benefits for NSE, MTN Nigeria
We believe the Group’s strong global brand recognition & reputation and strong financials present MTNN as a Blue Chip on the Nigerian Bourse and as such expect this to further support foreign interest in the Nigerian equity space.
In the short to medium term, we expect listing discussions on other telecoms operators to remain on the table amidst persistent pressure from national regulators across Africa; Vodacom in 2017 listed 25% of its Tanzanian business on the Dar es Salaam Stock Exchange (in line with government imposed regulation for telecoms companies to list at least 25% of their shares locally), MTN Ghana agreed to list 35% of its shares in order to obtain a 15-year 4G license.
Meanwhile, on the company side, additional equity capital will help improve the firm’s financial flexibility, capital structure and could potentially also support a better relationship with its regulator (NCC).
Analysts’ believe this could also improve general “national goodwill” for the brand as a larger pool of Nigerians attain ownership of the company. Overall, we are optimistic about MTNN listing before the end of Q3’18. Details on the listing remain sparse, however, media sources have stated that a spokesperson for the company said MTNN will prioritize Nigerian retail & institutional investors to access the issue.
MTN Nigeria remains a growth story in the Nigerian economy, given the room for improvement in mobile penetration (at 72% as at FY’17) and internet usage across the rapidly growing population (internet penetration at 55% as at December 2017).
New era for Telecommunications sector
In our view, the listing of MTNN on the NSE would help deepen the market, improve wider sector diversity, encourage further listings by other telecoms companies, and eventually make the equity market a better representation of the wider economy.
Currently, four major sectors (Banking, Consumer Goods, Industrials and Oil & Gas) account for 80% of the market capitalization of the NSE. Given the sheer size of MTNN, we expect the ICT sector to potentially displace the Oil & Gas (c.5% of NSE) as the fourth largest sector on the exchange  accounting for 12% of the NSE’s market cap (post listing) compared to a meagre 0.2% currently.
Source – analysts at Vetiva Capital Management Ltd in Victoria Island, Lagos. All opinions, targets, forecast expressed in above article are those of analysts at Vetiva Capital Management Ltd in Victoria Island.

Lafarge Africa Reports a Pretax Loss of N35.1bn in Q4’17 Results; Driven by a Negative Gross Margin

Monday, April 09, 2018/10:58 AM / FBNQuest Research

Event: Lafarge Africa reports Q4 2017 results
Implications: Downward revision to consensus 2018E PBT forecasts likely; shares expected to sell-off
Positives: Sales up 29% y/y
Negatives: Lafarge reported a pretax loss of –N35.1bn, driven by a negative gross margin of -9.5% and a spike in opex

Lafarge Africa’s (Lafarge) Q4 2017 results which were published over the weekend showed that the company reported a pre-tax loss of -N35.1bn compared with a PBT of N17.5bn in Q4 2016. Excluding the topline which grew by 29% y/y, the results were weak across the P&L. The weak earnings were mainly driven by a negative gross margin of -9.5% in Q4 (vs.38.4% Q4 2016) and a 63% y/y spike in opex. The notes to the accounts show that that company took an impairment loss of N19.2bn on fixed assets in 2017 (we suspect this explains the negative gross margin).

Further down the P&L, the after-tax loss narrowed to –N29.4bn (vs. +N43.2bn Q4 2016), thanks to a positive result of N6.1bn in other comprehensive income. Sequentially,  sales grew by 10% q/q. However, the pre-tax and after-tax losses compare with losses of -N17.1bn and –N21.2bn that the company reported in Q3 2017. Compared with our forecasts, sales were only slightly ahead of our N73.8bn forecast.

However, earnings missed our PBT and PAT forecasts of N5.2bn and N5.0bn respectively, because of negative surprises in gross margin, opex and net interest expense. The shortfall in earnings was greater compared with the N12.5bn Q4 PBT implied by consensus 2017 PBT forecast of N13.6bn.

On a full year basis, sales grew by 36% y/y. However, the pre-tax loss of -N34.0bn was worse than the loss of –N22.8bn reported in 2016. Lafarge also reported an after-tax loss of –N16.2bn in 2017 compared with a N18.3bn profit in 2016. Compared with our full year estimates, sales were in line. However, PBT and PAT missed our forecasts. The management of the company has proposed a dividend of N1.50 per share which is 29% higher than our N1.16 DPS forecast (N1.24 consensus). The DPS implies a dividend yield of N3.4%.

Given that Lafarge’s 2017 PBT came in well below consensus 2017 PBT forecast of N13.6bn, we expect to see marked downward revision to consensus 2018E earnings forecast and a significant sell-off in the shares over the next few days.

We rate Lafarge Neutral. Our estimates are under review.

Lafarge Africa Q4 2017 results: actual vs. FBNQuest Capital Research estimates (N millions) 

Source: NSE; FBNQuest Capital Estimates