[ANALYSIS] Are Investors Too Harsh On FCMB?

One thing that most analysts are probably sure of in this earnings season is that FCMB will post a full year loss for its 2015 audited results. The beleaguered bank already issued a profit warning and confirmed investors fears after it reported a loss before tax of N6.4 billion for the three months ending September 2015. The bank reportedly took an N11.5 billion impairment charge that quarter alone taking the total to N14.4 billion for the year. To put that into context, FCMB’s retained earnings (profit from which it can declare dividends) was about N26 billion at the end of 2014 thus it has wiped out over half of that amount due to bad loans it gave to the likes of Capital Oil and MRS.

The implication of the above of course is that the company cannot pay dividends this year and will probably not pay next year either. It may also need to raise more equity even though the CEO claims they do not need to. In Nigeria, stocks that don’t pay dividends get punished as investors are yet to trust managements and board of companies with their money. Rather than have the management invest that money to grow the company organically they rather have it returned to them via dividends.

FCMB shares has now dropped a massive 57% this year alone and over 75% since it hit its highs of N4 last year. The stock now trades at just 89 kobo leading one to wonder if the punishment is a little high handed. At 89 kobo FCMB is trading at a massive 43% to its book value. This means it is trading at a discount of 43% of its net-worth. This by all valuation metrics is extremely cheap making the drop in share price seem quite punitive. Surely, profits are going to nose dive and will likely turn to a loss in 2015 but does its current travails warrant an 89 kobo share price. The last time FCMB paid dividends it paid 25 kobo per share. Dividend won’t be paid this year but one can expect a turn around by 2017 if not 2016. Nigerian banks do this a lot and its something you can’t discount.

Should I invest? On the basis of technical analysis indications are that this stock is a strong sell meaning the share price is more likely to drop than rise. The chances of the stock staging a rally in the next few days if not weeks is rare especially as investors are still waiting to see just how bad its 2015 results will be. Anything else can happen after the results are out and as we have come to learn, the market has a mind of its own. If you are however one to look for bargains even if it means waiting for another year or maybe two then this could turn out to be a huge opportunity.