Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or Damp Squib?

Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or Damp Squib?

Nigerian Banks

A Lofty Deal or a Damp Squib?
• A switch to National Banking License… In our recently published equity commentary on Diamond Bank (See report: Overblown fright or Justified concerns), we had stated three options the bank’s management will adopt to keep the bank operational and meet its obligation to lenders. While we had considered the possible acquisition by a bigger bank, the management of both banks in separate press releases refuted the claim. Consequently, as with one of our options, Diamond Bank got approval from the CBN to operate as a national bank following the sale of its UK business, a development that was perceived to have saved the bank from capitalization needs and continue operations on a better footing.

• …and then a Scheme of Merger. To our surprise, news broke over the weekend of a possible merger between both banks, with the management of Access Bank Plc and Diamond Bank Plc yesterday separately issued releases on the Nigerian Stock Exchange (NSE) stating the planned acquisition of Diamond by Access with a consideration price of N3.13/share. This is on the consideration of N1.00 in cash for one share of Diamond bank held and 2 new shares of Access for every 7 shares of Diamond. Accordingly, we estimate total cash consideration of N23 billion and new allotted shares of 6.6 billion units in Access Bank. We note that the consideration price is 213% above the closing market price of N1.0 per share of Diamond yesterday.

• Estimating the transaction multiples. As at 9M 2018, Diamond bank’s book value stood at N217.1 billion with a book value per share (BVPS) of N9.37, we estimate a transaction price to book multiple (P/B) of 0.3x compared with the market valuation of 0.1x P/B. Given our thought that the transaction is strictly equity based, we assume a situation wherein the un-provisioned part of the non-performing loan is adjusted for through equity to leave the books with performing assets. As such, based on current NPL of N99 billion and total credit charge loss of N54 billion, we estimate an equity charge of N45 billion by Diamond bank over Q4 18 to leave the book value at N172.1 billion and BVPS of N7.4 with implied transaction price to book multiple of 0.4x.

• How they Stack up Post Consolidation. The notice by Access indicated that the bank will issue additional shares of 6.6 billion shares to accommodate the shareholders of Diamond bank. Assessing the impact on current outstanding shares of Access bank of 28.9 billion, we estimate increase in total shares post consolidation to 35.5 billion. Accordingly, we estimate that the potential dilution from the merger of 19%. Furthermore, post-merger, Carlyle Group, Kunoch Holdings and Diamond Partners will own 3.3%, 1.7% and 1.1% of the enlarge Access bank respectively.

• Expected Moderation in Cost of Funds. During our engagement with the management of Access Bank in November, they guided to the bank’s plan to gradually close out on expensive borrowings. Specifically, the CFO stated that the bank could refinance its expensive Eurobonds if presented with the opportunity and any other available opportunity that could result in a significant moderation in its funding costs. Notably, as at 9M 18, Access cost of funds stood at 5.6% compared to Tier 1 average of 4.0%, following contraction in cheaper deposit (current and savings account) mix by 195bps to 45% which resulted in 18.5% YoY jumps in interest on customers deposits, 1.0x YoY growth in interbank placements, and 73.8% YoY increase in borrowing cost. However, Diamond cost of funds remains the lowest among peers at 4% (coverage Tier 2 average of 5.4%) despite a 260bps YoY contraction in CASA composition to 78.3% over 9M 18. Accordingly, we see some benefit to Access in terms of moderation in funding cost from the acquisition of Diamond and estimate that Access’s cost of funds could moderate to ~5.1% with a CASA mix of ~55.3% post consolidation.

• However, given the reaction to the bank in recent months, we are cautious on the level of cheaper deposits composition being inherited by Access bank. For context, over the last five quarters, Diamond bank has lost CASA deposits of N247.6 billion, reflecting a 22.8% decline YoY to N836.7 billion in Q3 18 from N1.1 trillion in Q3 17. Also, given the lower credit rating of Diamond bank, in terms of corporate deposits, we do not rule out the possibility of erosion in Access bank’s credit rating.

• What’s the immediate Impact? In summary, while this acquisition appears positive for shareholders of Diamond Bank, we are of the view that the transaction will be undesirable for Access Bank in the near term, giving bottlenecks in terms of collapsing of structures as well as dilution impact on profitability metrics. That said, we await meeting with Management of Access Bank tomorrow (Click here for conference detail) for further details and discussion on this acquisition and would communicate our views in due course.

• Any benefit for the core investors in Diamond? Following the exit of Actis in August 2014 and the need for recapitalization of the bank in November 2014 via a rights issue, Carlyle Group, became the largest single shareholder in Diamond with transaction valued at $147 million (N7.38 per share). Accordingly, we estimate that on current price of N1.07, the Group is taking a bad hit on the investment to the tune of N20 billion. Accordingly, we believe that the consideration price of N3.13 could reduce Carlyle loss in the venture to ~ N11.4 billion in the short term. However, post consolidation and integration of the shareholders into the enlarged Access bank, we believe the change in the fortune of Carlyle in the venture will be determined by the gains from the integration.

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Access Bank Plc and Diamond Bank Plc Merger – A Lofty Deal or Damp Squib

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My uncle’s children

My uncle’s children

My cousin Gerald has visited again. This time, he is staying for one month to buy all the necessities for his first year at the University. Dad would be funding it as usual. I and my five siblings have gotten used to seeing my dad fund his nephews’ education while my uncle did his best to keep populating the world.

My mum wasn’t against dad helping his nephews, but she kept prodding dad to save some money for his own children’s education as well since we were all still quite young. Dad didn’t understand her. He believed that if he gives the best to his brother’s children, his brother or maybe someone else would do the same for him. In truth, I think he never really envisaged that his business would go under before his own kids were grown – he was so sure of this that he asked mum to resign from her government job as a teacher. Unfortunately, the business stopped doing well and thank God mum didn’t resign.

Growing up, I and my siblings lived a life of managing. Dad became a sad version of himself especially when we asked for money for the basic needs as students. It was almost as though we shouldn’t ‘need’ anything. Back in the University, we weren’t the kids that carried the latest phones, or wore the best clothes or even had the required textbooks. We were the kids that made do and never complained.

Mum soon took over the financial reigns as dad’s business completely crumbled. Seeing her struggles fostered some form of discipline in us all to succeed and make her and dad proud. Did my uncle finally help out financially? I wish. He never even looked our way again.

Somehow, we all scraped and managed till today. Today, I own a multimillion naira apparel business alongside my lucrative consulting role in an Oil and Gas firm while my other siblings are doing good in their careers and businesses.

Every day I remember how we all got here. How mum put in her sweat and blood – and how dad miscalculated with his finances and when we were little.

Yes, we all turned out well, but would we have if mum didn’t make all the sacrifice? What if dad had saved for our education like mum persuaded him to? I know a lot of people will say that the struggle made us better people. That is true only because of the upbringing mum gave us and her kind of woman. I’ve seen families that went through what we did, and it shattered their future.

I’ll be a fool to allow the thunder strike twice in the same place. That is why the moment our twins were born four years ago, I got an education plan for them as well as a trust fund. Life has taught me enough lessons, so I know better than to leave anything to chance.

I still take care of needs from extended family but at least I’m at peace knowing my wife and children will never have to struggle through life like I did.

 

 

 

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ARM Research – Stock Recommendation for the Week , December 17

ARM Research – Stock Recommendation for the Week , December 17

Activities in the Nigeria equities market was bearish in the past week, with the NSE ASI declining by 0.60% WoW to 30,681.50 points and market capitalization shedding about N61.8 billion over the week. The loss was driven by declines in bellwether stocks in the banking (FBNH: -1.97%, STANBIC: -2.34% and ZENITH: -2.34%), Breweries (NB: -0.63%) and Food (NESTLE: -6.39%) sectors. Top decliners during the week were MOBIL (-10.41%), CONOIL (-10.00%) and CUTIZ (-9.64%).

 Fidelity Bank Plc – BUY (FVE: N2.92). We are more optimistic on our earnings expectation over 2018 largely on the back of lower loan-loss provisioning. We have revised our FY 18E EPS higher to N0.82 (previously N0.76) which is 25% higher YoY. Our FVE of N2.92 (previously N2.82) translates to a BUY rating on the stock. Based on Friday’s closing price, our dividend expectation translates to a dividend yield of 8%.

 Nigerian Breweries Plc – SELL (FVE: N76.58): Reflecting the industry competition and further declines in volumes into Q4 18, we forecast FY 18E revenue to decline by 6.8% YoY to N321 billion. However, we envisage cost pressures due to rising barley prices. Thus, we forecast FY 18E gross margin at 40.8% (FY 17: 41.7%) and EBIT margin of 12.6% (FY 17: 17%). Having rolled forward our model, we cut our FVE on NB to N76.58, translating to a SELL.

 Unilever Nigeria Plc – STRONG BUY (FVE: N47.58). Unilever is our top pick in the consumer space with FY 18E EPS expectation of N2.11 (+18.2% YoY), based on revenue growth (+9.7% YoY) and significant moderation in interest expense (-90.1% YoY) – following the sizeable deleveraging of its balance sheet.

 Dangote Cement Plc – STRONG BUY (FVE: N253.03): We have lowered our FVE on DANGCEM to N253.03 largely due to a downward revision of 2018 and 2019 volume growths. The revision reflects the impact of the prolonged rainy season and electioneering concerns which has now slowed ongoing infrastructure projects. However, we believe DANGCEM presents an attractive entry point in the cement sector in Nigeria given its strong and diversified margins and balanced funding structure.

 Lafarge Africa Plc – SPECULATIVE BUY (FVE: N18.07). We have lowered our FVE on Lafarge to N18.07 as we now expect a more significant dilution from the N89 billion Rights Issue and a downward revision to our 2019 volumes growth. Based on current price, our FVE translates to a BUY. However, we are highly cautious on Lafarge and thus rate the stock a SPECULATIVE BUY.

Kindly, visit ARM Research Portal for full stock reports.

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Don’t be like Uncle Jimoh

Don’t be like Uncle Jimoh

The moment I crossed that finish line and felt the coldness of the medal as it was hung around my neck, I felt truly victorious.

When 2018 began, I had pledged to be a healthier version of myself, get serious with investing, get married and begin planning my retirement. The latter was informed by my uncle’s heart-attack on his 65th birthday which the doctor relayed was partly due to his hard work and little or no rest. You see, Uncle Jimoh had retired but had to keep working at a Primary School to make ends meet.

His children could have taken care of him, but even those two are still trying to find their feet financially. After his burial, I wondered how different things would have turned out had Uncle Jimoh had some millions in his retirement account and didn’t have to work so hard to earn a living. Perhaps, he might still be alive today.

Well, as a sharp guy with common sense, I did the mathematics and research. If I wanted to live long, I might as well do it healthier. If I wanted to live wealthy, I might as well start investing. If I didn’t want to be paying school fees in my 50’s, I might as well marry early and most of all, if I wanted a retirement free of hassles, I might as well start growing my retirement savings account.

A crucial step

So you see, crossing that finish line at the ARM Pension’s Run For The Future run/walk event on November 24, 2018, was a very crucial step in forging ahead with redeeming my pledge to myself this year. That makes it three things I have succeeded in checking off my list this year.

The first one about investment was super easy. I simply found a great investment vehicle that suited me and went with it. The second was even easier – topping up my RSA. Since my Pension Managers were so reliable, all I had to do was put a call across to indicate interest in making Additional Voluntary Contributions to boost what my employer deposits into my RSA and like Aladdin making a wish, my wish was granted. Now I rest easy knowing my investment is growing, retirement fund is bulking up and my fitness is on track – it has to be because I completed the 8K race…yippee!

Now I have only one thing left on that list. Marriage! This thing called marriage isn’t as easy as I thought. I had meant to propose to Amaka in October before the run. When 2Baba released that song about Amaka disappointing him, I rebuked that fate. But apparently, the die had already been cast. My Amaka relocated to the UK for good on October 5th while making it clear she isn’t ready for marriage.

It’s all good though since I still got three out of my four pledges down. Who knows if love will still find me before 2018 gets over and done with? Hey don’t call it wishful thinking, I am an optimist to the bone and believe anything is possible. You just watch…

Meanwhile, don’t let my Uncle Jimoh’s fate be yours. Join me in planning your retirement by making Additional Voluntary Contributions to your RSA. Start at www.armpension.com/avc

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Fixed Income Report: Is STAB the new normal?

Fixed Income Report: Is STAB the new normal?

  • CBN moves the needle. Last week Thursday, for the first time this year, CBN conducted a special OMO auction where it sold Stabilization securities (STAB) worth N287.7 billion. This came after subscription levels (N403 billion) at Thursday’s auction were 42% and 41% shy of planned offer (N700 billion) and OMO maturity on the same day (N684 billion) respectively. In addition to OMO issuances earlier in the week, CBN net issued N248.7 billion in the first week of December alone.
  • The Elephant in the room. It all started in November, where CBN grappled with pent up liquidity in the system following higher OMO maturities (N1.89 trillion) and higher FAAC distribution (+13% MoM to N788.1 billion) and its reverberating effect at the Investors and Exporters Window.  As earlier posited, the repatriation of funds by offshore investors continued into November with a total outflow of $2.8 billion (vs. $2.0 billion in Oct). According to our analysis, of the $2.1 billion staged to mature in the month, a total of $1.6 billion was repatriated. This alongside demand from foreign Non-bank financial institutions and importers cascaded into widening of the demand-supply gap at the IEW to 49.3% MoM to $1.2 billion. Consequently, we saw depreciation of the NGN at the parallel market (N367.5/1$) and NAFEX (N364.1/1$) market which informed CBN’s decision to move the needle on naira liquidity (Total OMO sale last week: N932.7 billion).
  • Scope for another STAB exist? Coming into December, with OMO maturities for the month at N2.3 trillion (vs N1.8 trillion in November), the Elephant in the room is pretty much around. In fact, we estimate FPI outflows to the tune of $1.6 billion (akin to November we assume that 83% of estimated offshore holdings for the month would be repatriated) which should leave the CBN with net outflow of $1.3 billion in December (vs $1.2 billion in November). In tackling this menace, we think CBN will remain fixated on keeping the currency stable at least pending when political uncertainties wane and crude oil inflow show signs of stamina. Consequently, we see scope for incessant liquidity mop up to wade off further attacks on the naira. However, in the event that CBN is unable to fill its coffers at subsequent OMO auctions—particularly on days where we have OMO maturities—we see room for further use of Stabilization securities to drive the apex bank’s quest of keeping the market illiquid.
  • Room for higher Fixed income yields exist. Having laid the foundation for a tighter monetary policy in a bid to limit the outflow of offshore funds, we see room for higher fixed income yields in December. For us we think monetary influences will continue to trump downward pressure on yields emanating from expectation of thinner FG paper supply (ARM est. N28.2 billion in December vs N87.2 billion in November) after factoring the $2.8 billion and N100 billion Sukuk bond expected to come in Next week.

 

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A cheat guide to staying fit this Christmas

A cheat guide to staying fit this Christmas

What is Christmas without food and drinks? No wonder some of us come back in January with a resolution to shed those mysterious pounds that somehow snuck in unnoticed.

We have all been there. Oh, the torture! But hey, there’s good news.

Here are ways to curtail any unnecessary weight gain this Christmas without hitting the gym – because honestly, who wants to be at the gym at Christmas?

Eat before going out

Don’t skip meals. Try to eat something before heading out. Doing this helps you avoid the temptation to overindulge yourself or eat a lot.

Drink moderately (and responsibly)

It’s okay to be merry and enjoy a few glasses. But it is best to watch your drinking since alcohol, soft drinks or other juices will only add more calories to the ones you’ve already eaten.

Stay active

It is very hard, almost impossible to find time amidst the activities of the season to exercise. But try to do as much as you can. Little things like simply walking some more, chasing the kids around or using the stairs can burn some calories too. If dancing is your thing, dance like no one is watching. You’ll be having fun and burning some calories too, win-win.

Drink plenty of water

Water can satiate your appetite and keep you hydrated all the time. Plus, it will also help prevent a possible hangover if you go aboveboard with the alcohol.

Order your meals with caution

If you’ll be going to restaurants or ordering your meals, think more of protein and veggies, less of carbohydrates. And don’t forget that salad dressings often pack lots of calories, so order them on the side that you can control how much you’ll be using.

Enjoy yourself

It’s a festive season. So, enjoy the foods and drinks you love but in small/moderate portions and move as much as you can in the ways that you actually enjoy.

This cheat guide can help set you on the right track weight-wise, health-wise and ready for the New year.

But if all else fails, wear black. We hear it’s slimming 😉

 

Have a Merry Fit Christmas!

 

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ARM Research| Nigeria equity market booked another week of loss

ARM Research| Nigeria equity market booked another week of loss

The Nigeria equity market booked another week of loss, with the NSE ASI declining by 2.54% WoW to 30,874.17 pts and the market capitalization shedding N293.7 billion over the week. The loss was driven by declines in bellwether stocks in the banking (FBNH: -6.58%, GUARANTY: -5.63%, STANBIC: -2.04%, UBA: -3.85% and ZENITH: -3.33%), cement (DANGCEM: -4.15%, LAFARGE: -7.14%) and Oil & gas (SEPLAT: -9.68%) sectors. Top decliners during the week were DIAMONDBNK (-31.58%), PRESTIGE (-30.38%) and UNITYBNK (-18.82%).

  • Fidelity Bank Plc – BUY (FVE: N92). We are now more optimistic on our earnings expectation over 2018 largely on the back of lower loan-loss provisioning. We have revised our FY 18E EPS higher to N0.82 (previously N0.76) which is 25% higher YoY. Our FVE of N2.92 (previously N2.82) translates to a BUY rating on the stock. Based on Friday’s closing price, our dividend expectation translates to a dividend yield of 8%.

 

  • Nigerian Breweries Plc – SELL (FVE: N58): Reflecting the heated competition and further declines in volumes into Q4 18, we forecast FY 18E revenue to decline by 6.8% YoY to N321 billion. However,  we envisage cost pressures due to rising barley prices. Thus, we forecast FY 18E gross margin at 40.8% (FY 17: 41.7%) and EBIT margin of 12.6% (FY 17: 17%). Having rolled forward our model, we cut our FVE on NB to N76.58 (previous: N121.30), translating to a SELL.

 

  • Guinness Nigeria Plc – UNDERWEIGHT (FVE: N96): As with NB, due to heated competition in the brewery sector, we foresee higher cost of sale over FY 19F due to rise in barley price and higher cost per unit due to loss of diseconomies of scale following weaker volumes. Having rolled forward our model, we cut our FVE on Guinness Nigeria to N73.96 (previous: N88.21), translating to an UNDERWEIGHT

 

  • Okomu Oil Palm Plc – STRONG BUY (FVE: N75): Over our forecast period, we anticipate volumes growth emanating from the harvest of fresh fruit bunches from its extension 2 plantation. Based on our expectation for volumes growth, accompanied by margin expansion, we raise our FVE to N97.75.

 

  • Seplat Petroleum Development Company Plc – STRONG BUY (FVE: N27). The case for Seplat remains higher crude oil prices and volumes, unrecognized capital allowance, reserve accretion, higher receipt from crude oil lifted in OML 55 as well as the company’s extended debt maturity profile which feeds into an improved cash position

 

Kindly, visit ARM Research Portal for full stock reports

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‘Poof’ went the money

‘Poof’ went the money

Jane couldn’t believe what she was seeing. She was in shock.

All her plans for the Christmas just disappeared before her eyes and she couldn’t fathom what had happened.

For the past seven months, Jane had been saving towards Christmas. She was finally travelling home with her family after an 8-year break, and she wanted to storm her hometown in style. When she brought home the local piggy-bank she bought along the road to start her saving rendezvous, Edet her husband tried to dissuade her.

Edet tried to convince Jane to invest her money instead so that it could bring returns. Jane failed to listen because she always believed she had more control when she could feel and touch where her money was.

Today, as she stared unbelievably at the broken piggy-bank, she saw all her convictions shattered to pieces. Jane had consistently dropped one thousand naira everyday into the piggy-bank for seven months. Some days, she dropped more than that depending on the loose change she found herself with. She knew it was full because she had been forcing the currency notes into the small hole for the past month and planned to break it open in November ahead of December.

Her Christmas shopping list was ready. She had packed up her children’s old clothes to give away to relatives at her maternal home. She had given away her own old clothes to Iya Fatima who sold Moi Moi just down the street. Jane was ready for her and the children to slay in new clothes this Christmas. But when she broke open her local piggy-bank, all she saw were five and ten naira notes. She was weak, confused and angry.

She had been standing there staring for so long she didn’t hear her husband Edet walk in. When Edet saw her countenance and asked what the problem was, Jane told him a tale that sounded like it was enacted from a Nollywood movie. After recounting the ordeal to Edet, he burst out laughing.

Jane was infuriated “How can you laugh at something as mysterious and serious as this honey? Don’t you think someone has been stealing my money?”

Edet calmed himself down before responding “Dear, no one has been stealing your money. You just got ‘juju-duped’! Many people are falling victim to this now, that’s what I tried to tell you earlier. I know this is not the right time to say this, but I told you so. If only you had invested this money in a reliable investment vehicle, ‘juju’ wouldn’t have reached there and you’ll still have your money plus interest.”

Jane fell back into her chair and sighed bitterly “But why didn’t you tell me the part about juju” she quizzed but Edet had left the room leaving her alone. Alone with her thoughts, Jane vowed to be wiser next time. Never again will she make this kind of mistake.

 

Don’t take chances when it comes to your money. Explore investment options before the new year comes at www.arminvestmentcenter.com

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