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Earnings Review H1: Zenith Bank Earnings Don’t Add Up But Still Beat Estimates

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Zenith Bank released H1 earnings report at the end of last week and didn’t fall behind in earnings and revenue expectations. However, we didn’t see the same exponential earnings growth that First Bank churned in their H1 results.

Revenue

Zenith Bank increased gross earnings by 22.6% to N151b for the first half of the year with interest income making up a huge chunk of the contribution. Interest Income increased 39% from N79b in the first of 2011 to N110b in the first six months of 2012. However, interest income did come at a huge cost shedding off 28% in interest expenses for the period (First Bank was 21%). Nevertheless Net Interest Income grew by 26.6%. The Bank declined in earnings from commissions and fees dropping 7% to N24.5b in the first half of this year pointing to reduction in loan making and income from non interest business.

Expenses

The Bank managed to keep operating expenses low, a stat that was partly to blame for their poor margins in the full financial year of 2011. Operating profits thus grew37% to N48b, a figure that arithmetically differed from the N50b posted in their earnings report. At almost 44% operational profit as a percentage of operating income was higher than the 38% posted by First Bank.

Profit After Tax

Zenith Bank at the end of the first half of this year made a profit of N40.64b, 33% higher than the N30.4b it made in the same period last year. The increase however did not reflect in its profit margins as it marginally grew from 24% to 27% in the first half of 2012. However, this is still in line with its competitors showing the banks ability to post acceptable returns despite cost pressures. At 10% though, the returns on total equity was higher than the 7.7% obtained in the prior year but still short of the magical 15% I expect from blue chips.

Bottom Line

Zenith Bank has been consistent for years and utilizes an aggressive model that mostly keeps them within or ahead of competition. Like most banks it has relied on fixed income securities from the government in growing earnings. For example its reliance on treasury bills and government bonds grew over 137% and 96% respectively  from the same period last year taking up a combined 47% of its total interest income. However, I believe their reliance is on average lower than most banks in their competitive set. The bank will have to increase its loans by more than the 14% it did this half of the year if earnings of its core segment, interest, are to keep up with growth expectations. The high yields we see on TB’s and Bonds surely won’t last forever especially as the government identify the need to reduce local borrowing.

 

 

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Zenith Bank is currently priced at N14.50, slightly higher than its average of N14.5 per share. Its P.E ratio of 8x is also on the “affordable” end leaving potential investors with a good upside for growth in the medium term. It also looks like a N20 share by year end with or without any astronomic growth by year end. As one of the big five, the “herd mentality” will surely propel its share price should that of First Bank and Gtb see remarkable growth (provided it doesn’t carry any huge provisioning). For me though, it is one of those shares I like to keep in a portfolio as its stability and reliability over the years help mitigate downside in a turbulent market. The bank gets a black ink

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Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market.Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

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    Nigerian Breweries leveraging, but stacking cash through rising input costs

    The marathon continues for Nigerian Breweries with its 2020 financials.

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    Humanity might need more booze to survive the increasingly daunting intricacies of life, but Nigerian Breweries 2020 financial statement is proof that even the best can get caught up in the reality of changing business lifecycles.

    Nigerian Breweries Plc had floored the market providing both alcoholic and non-alcoholic premium quality beverages across the nation. But with brands like Star lager beer launched as far back as 1949, Gulder lager beer launched in 1970, and even the family-friendly Maltina introduced as far back as 1976, it is only natural that both the old and new generation competition gives them a run for their market share.

    Much like other old money companies, Nigerian Breweries has done its bit to remain relevant in the industry from creating new variants of existing favoured brands to paying dividends consistently annually for the past few years. Yet within the same period, the company’s financial statements have been a testament to its streamlined market share and reducing profits. The marathon continues with its 2020 financials. The industry giant may as well be setting itself up for a debt quagmire peradventure its projections do not match the true reality of events.

    READ: How COVID-19 has changed Nigeria’s consumer goods & industrial markets –KPMG

    2020 financials: A tale of higher costs & larger debts

    2020’s unfavourable financial/ business environment led to the increase in the prices of raw materials and disruptions in logistics for many Nigerian-domiciled businesses including Nigerian Breweries. Raw materials and consumables witnessed a 17% increase despite the marginal growth in revenue.

    While the group’s 2020 results revealed a 4.35% increase in revenue from N323 billion in the prior year to around N337 billion, these gains were curtailed by a higher-than-par increase in cost of sales which had risen by 13.9%, from the N191.8 billion expended in 2019 to N218.4 billion as its 2020 financials reveal and interest rates going way up.

    READ: Flour Mills and its diverse challenges

    The company’s lower operating expenses were not enough to salvage the disruption caused by the raging interest expense following increased charges paid on bank loans and overdraft facilities as well as the significant increase in overall debt. Between 2019 and 2020 alone, long term loans and borrowings increased by 974% from N4.8 billion to as much as N51.8 billion. Even trade and other long term payables increased by 35%.

    In its financials, the company noted that it has revolving credit facilities with five Nigerian banks to finance its working capital. The approved limit of the loan with each of the banks range from ₦6 billion to ₦15 billion (total of ₦66 billion) and each of the agreements had been signed in 2016 with a tenor of five years. The Company had also obtained Capital and Working capital finance from the BoI in 2019.

    READ: Manufacturing sector in Nigeria and the reality of a “new normal”

    It is no news that the company is involved in diversified lease arrangements. Following reclassifications made in 2019 to some of its lease assets, the 2020 asset base also witnessed significant increase in Right of Use Assets which increased by 288%% from N11.1 billion to N42.9 billion. Yet, the fact that in one year, interest expense on Lease Liabilities rose from N19.7 million in 2019 and to a whopping N4.171 billion shows that the company is taking way more debt than its books require.

    But what’s it using all the cash for?

    Beyond rising material costs, borrowing costs have been huge and the annual interest payment by virtue of these loans make the possibility of higher profits for the company a mirage. That said, the overall increase in total liabilities might not have been such a bad idea if the funds were being used to increase revenue and profits. But having a huge chunk of all that money in cash creates a different kind of challenge. Cash and bank values in its statement of financial position significantly increased by 377% from N6.4 billion in 2019 to N30.4 billion in 2020.

    Is the cash being held to mitigate possible challenges of the volatile economy or are they being used to pay dividends? Even at a share price of N52 per share, the company’s price-to-book value sits at 2.5816, testament of its dire overvaluation. Consequently, there is an ardent need for the company to come up with newer ways to attract the wider market and keep its book in the green with a little less external funding.

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    Secret behind MTN’s blistering performance

    Despite COVID-19 disruptions, MTN Nigeria’s 2020 financials showed marked improvements compared to its 2019-year-end.

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    NCC, MTN’s parent company faults regulator’s recommendation for data price reduction, MTN Nigeria reacts to poor internet as network issues go beyond Nigeria 

    MTN Nigeria Communications Plc (MTN Nigeria) released its audited financial results for the financial year ended December 31, 2020.

    Despite a challenging 2020 to individuals and businesses caused by COVID-19 disruptions, MTN Nigeria’s financial and non-financial information showed marked improvements compared to its 2019-year-end as well as prior quarters of 2020 results that were impacted by the COVID-19 pandemic.

    Indeed, the evolving pandemic which intensified lockdown, remote working, and work-from-home procedures, appeared to have led to increased adoption of MTN Nigeria data and digital services.

    Specifically, year-on-year on non-financial information, mobile subscribers increased by 12.2 million to 76.5 million; active data users increased by 7.4 million to 32,6 million while the company’s mobile money business continued to accelerate with a 269.2 % increase in the number of registered agents to over 395,000 and 4.7 million active subscribers from approximately 553,000 in 2019.

    Year-on-year on financial information, service revenue increased by 14.7 % to NGN1.3 trillion driven principally by voice (with revenue growth of 5.9 %) and data revenues (rising by 52.2 % led by increased data use and traffic); profit before tax (PBT) grew by 2.6 % to N298.9 billion; profit after tax (PAT) increased by 0.9 % to N205.21 billion; while Earnings per share (EPS) rose by 0.9 % to N10.1 (N9.93, 2019).

    Nonetheless, significant increases were noted in its operating expenditure as well as capital expenditure. First, there was a 2.3 % increase in operating expenses arising from the rollout of new sites and the impact of naira currency depreciation affecting the costs of MTN Nigeria lease contracts. Secondly, EBITDA margin declined by 2.5 %age points to 50.9 % (from 53.4 % in 2019) There were also other significant cost rises including a 25.4 % increase in net finance cost, and 19.4 % increase in capital expenditure which had a 11.7 % knock-on increase in depreciation and amortization costs.

    On the back of the year-end result, MTN Nigeria has proposed a final dividend per share (DPS) of N5.90 kobo per share to be paid out of distributable income and brings the total dividend for the year to N9.40 kobo per share, representing an increase of 18.7 %. MTN Nigeria paid N4.97 as final dividend for the year ended December 31, 2019. This was in addition to an interim dividend of N2.95, which brought its total 2019 dividend to N7.92 per share.

    The proposed dividend implies a yield of 3.4%. Having paid an interim dividend of NGN3.50 in 2020, the proposed dividend, if approved, will bring the total dividend per share to NGN9.40 or c.19% higher compared with 2019.  We expect a positive reaction from the market due to the marked improvement in earnings. However, the market’s reaction may be dampened by negative investor sentiments on equities arising from the uptick in yields on fixed-income securities.

    We expect that the introduction of additional customer registration requirements requiring subscriber records are updated with respective National Identity Numbers (NIN), and the continued suspension of the sale and activation of new SIM cards will affect subscriber growth.

    MTNN share price remains unchanged at the end of trading yesterday at N174 per share.


     

    Tade Fadare PhD, is an economist, and a professionally qualified accountant, banker and stockbroker. He has significant experience working or consulting for financial institutions in Europe, North America, and Africa.

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