May 7, 2019/ FBNQuest Research
8% increase to our 2019E EPS forecast and price target
We maintain our Outperform rating on UBA and increase our price target by 8% 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 8% increase to our 2019E EPS forecast.
On the back of the upgrades to our forecasts, we now expect the bank to deliver a 2019E ROAE of 19%, c.100bps higher than management’s 18% guidance for the year. We believe that the bank’s current valuation level (2019 P/B multiple of 0.4x or a 41% 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 17.3% in 2020E vs the 18.9% for the sector. Following the declassification of its 9mobile exposure totaling N22.5bn (from stage 3 to stage 2 loans), UBA’s NPL ratio improved by c.116bp q/q to 5.3%. 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 24%, 48% and 50% respectively as at the end of Q1 2019 are amongst the best in the sector. At current levels, we see an upside potential 107% in the shares.
Q1 PBT up 14% y/y, driven by an 8% y/y growth in pre-provision profits
UBA’s Q1 PBT grew by 14% y/y to N30.2bn. The key earnings driver was an 8% 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 18% y/y rise in loan loss provisions and a 5% y/y increase in opex. Below the tax line, PAT grew by 15% y/y.
Sequentially, PBT was up by 9% q/q, mainly due to a 20% q/q growth in pre-provision profits. Thanks to a positive result of N11.9bn in other comprehensive income (OCI) vs. –N21.9bn in Q4 2018, PAT grew to N38.0bn compared with –N3.7bn in Q4 2018. Relative to our estimate, PBT was broadly in line with our N29.2bn forecast. However, PAT beat by 49%, thanks mainly to the positive surprise in OCI.