Just imagine that someone tells you to buy a company that made N1 million in 2015 for N2 million today even though it has a net-worth that is 14x that price? This means, if you bought that company and it continues to make a profit of N1 million, you will basically recover your original investment in two years. You’d probably pause for a while and wonder if there is something else to this offer?
This is the sort of situation Access Bank Plc finds itself in as the target. The Bank is currently trading at N6.11 per share and is trading at just 1.9x its last (2015) full year earnings. The bank has traded at a P.E ratio of between 1.5x to 1.9x for the most of 2016 and continues to do so in the first three trading days of 2017.
Access Bank’s 9 months 2016 results shows the bank reported a profit after tax of about N56.6 billion a 19% increase from the N47.5 billion posted same period in 2015. For the nine months ended 30 September 2016, net interest income after loan loss provisions increased 43% to N94.98 billion. Unlike most of its Tier 1 peers, the bank has not relied on foreign exchange gains to grow profits. On the back of its profitability growth, it is projected that the company may grow earnings per share to about N2.8 per share. The bank announced on Thursday that it was holding a board meeting on Thursday January 26th to approve the end of year audited results.
In this period of uncertainty and distrust for corporate management, betting on the long term prospects of most commercial banks may be foolhardy. However, ignoring the fact that a stock trading at less than 2X its trailing twelve months earnings, when its peers is trading at 5x, may even sound more rueful.
Last October, ARM research projected a valuation of N8 for Access Bank citing a positive view and ending with a “Strong Buy” recommendation. The stock failed to gather any traction after the valuation as investors still fret about diving in relying only on favourable projections over recent fundamentals. The last time Access Bank touched N8 per share was in November 2014, just about when the stock market rode its first market crash following the oil price crash and the subsequent devaluation of the naira.
As the announcement of the results draws closer, one eye will be on dividend announcement. It paid a combined 45 kobo in 2016. Final dividend announced in March was 30 kobo per share at a time when its share price was N4.33 implying a dividend yield of 7%.
It is unlikely that Access Bank will match this yield this year as doing so will mean paying a final dividend of 56 kobo, which we think is not likely. Access Bank paid a final dividend per share of 35 kobo in 2013 and 2014 respectively.
We however do believe strongly that Access Bank could increase its dividend this year but do not see that exceeding 40 kobo per share. A dividend of 40 kobo per share at a 5% dividend yield will imply a valuation of N8, same as ARM. That also indicates a price multiple of 2.8x assuming it earnings per share meets our target of N2.8 (still below industry peer average of 5x PE ratio).
We believe an entry price of not more than N7 is enticing assuming capital gains is the target. Anything higher is risky as it may not contain any significant upside except for a paltry dividend per share of 35 kobo.