Diamond Bank Plc closed trading last week at a price of N3.62 just a few kobo off its lowest year low of N3.45. The share price has suffered in the last few months and we blame the following reasons
Regulatory Head winds – Diamond Bank belongs to the Tier 2 class of Banks according to the CBN. This pits them among banks that are at risk of not paying significant dividends in line with the CBN’s new capital adequacy ratio restriction on dividend paying banks. Though the bank raised significant amount of equity last year when it concluded its rights issue, many still feels some of the recent CBN policies will have a negative impact on its results
Lack of corporate action – Diamond Bank is yet to release any major news regarding its results or dividend payments. Our sources suggest an announcement could be made early next week. Without any major guidance as to what they will be reporting, it is likely that investors will keep pumping and dumping the stock in line with profit taking.
Market sentiments – Market sentiments is also weighing down on Diamond Bank just as it is on banking stocks and the all share index. The bank has already posted a negative return of 35% in the last one year making it one of the worst performers in the sector. With the elections closing in and oil price fall still a factor, things will continue to swing up and down until at least after the election
Buy sell or hold? The current share price of N3.62 is way below our valuation of about N10 for the bank. Just imagine that the stock is trading at a P.E ratio of just 2.2x!!! Even if 2014 EPS remains flat (which we expect) P/E ratio will still be unbelievably attractive. In fact, Diamond Bank is a buy at any price below N6. It is important to note that the market is irrational at the moment with most stocks being priced disproportionately. It could remain undervalued for as long as the market remains dislocated. For us, this price is a huge bargain!!
Decision
Buy
Projected Upside – 66% within 6 months, 170% within two years.
Disclosure – The author(s) of this article own shares in Diamond Bank for long term purposes. The author of this article wrote it themselves, and did not write this article on behalf of Diamond Bank, its associates or representatives. The article is purely their opinion.
