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Buy what? GTBank vs Zenith Bank

Despite being amongst the most capitalised banks in Nigeria, both still have a long way to go in catching up with the largest banks on the African continent.

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Two of Nigeria’s largest banks by capitalization, Guaranty Trust Bank (GT Bank) and Zenith Bank (Zenith) have declared their financial year 2020 returns. I decided to run through the numbers.

If you had to look over the results of a bank to invest in, what should you look for?

Capital & Gearing

The first is how capitalized is the bank? Nigeria currently has a minimum capital base of N25 billion, set in December 2005. The CBN Governor, Godwin Emefiele has indicated that as part of the new CBN monetary roadmap (2019 to 2024) the CBN will “pursue a program of recapitalizing the Nigerian banking industry to reposition Nigerian banks among the top 500 banks in the world.”

READ: How well are the investments in GTBank’s subsidiaries paying off?

Currently, GTBank is the most capitalized bank in Nigeria with N912b ($2.02b), Zenith Bank has N706b ($1.56b) in paid-up capital. On the Nigerian Stock Exchange, only five companies have posted more capital than GTBank and Zenith Bank. However globally, both banks have a long way to go in catching the largest banks on the African continent which are all South African, with the leader Stanbic Bank posting Tier-1 Capital of $10b.

Overall, both banks appear well-capitalized on a regulatory basis but digging deeper, Zenith’s Current Ratio is 0.79 as compared to the GTBank ratio of 0.51. The current ratio indicates liquidity. You can say Zenith has more liquidity relative to GTBank but you can also say GTBank is investing her excess cash more than Zenith.

In terms of financing, Zenith has a higher Debt to Equity Ratio of 1.20 as compared to GTBank 0.27. This indicates that Zenith utilizes more debt financing than equity (N1.34t) as compared to GTBank (N223b).

READ: Nigeria’s most valuable bank, GTBank posts a Profit After Tax of N201 billion

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Earnings

Next, we consider earnings. Now, remember we are investors in the equity of the bank, so we are looking at return on our invested capital, as compared to both banks.

A good way to determine earnings to the investor is the Earning Per Share (EPS), which is the monetary share value, i.e., what every share issued by the bank will receive from declared earnings. The higher the EPS, the more profitable the bank is. Full Year EPS for Zenith Bank comes to about 7.34 per share, as compared to 7.11 for GTBank. This means that investors holding shares of Zenith get 0.23k more. Keep in mind, EPS refers to corporate value, it does not indicate cash value to the investors, to determine that we have to look at dividend yield.

Divided Yield is important because it brings in the market price of the bank stock and the cash dividends paid by the bank, this is most useful because it indicates the actual cash that flows back to the investor. The dividend yield for Zenith Bank is at 13.33% while GT Bank is at 9.68%. This means that investors in Zenith Bank get a higher cash yield per invested share. On the Nigerian Stock Exchange, only three stock have a higher Dividend Yield than Zenith Bank.

READ: Analysis: GTB is minting profits but CBN is squeezing its cash

The dividend yield also allows investors to compare Zenith shares with other non-equity products like Treasury Bills and Commercial paper. If the yield on Fixed Income products is higher, then it is better you invest in Fixed Income because you get a higher yield at a lower price.

Stanbic 728 x 90

A final measure to consider is the Price to Earnings Ratio (P.E.) which is the Price of the stock divided by the earnings of the stock. P.E. is useful in determining how “cheap” or expensive a stock is. Based on market price, Zenith Bank is trading at N22.50 as of March 19th and GT Bank is trading at N31.00. It will be factually incorrect to simply say that Zenith is cheaper because the market price is cheaper, we have to look at the P.E. ratio.

Zenith Bank posts a lower P.E of 3, while GTBank posts a P.E. of 4.34. What this means is that with the current rates of earning in Zenith Bank, it will take just 3 years to match the market price of GTBank shares. In essence, Zenith Bank shares are cheaper.

In summary, assuming I had N100,000.00 to invest in January 2020. If I have bought Zenith and GTBank shares, I would have had more units of Zenith and earned more via a higher dividend yield. Zenith would also have posted a higher earnings value. Remember, I am just looking at both banks as an investor, there are other metrics that I cannot calculate from annual reports which are also essential in determining value and goodwill including brand power, workplace ethics, first mover, use of IT, Moat, and Vision.

Overall, both banks are among volume and dividend payout leaders, not just in their sector but in the NSE as a whole and remain firm in my “Hold” column.


 

This is not investment advice, please consult your advisor before making any decision.

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    Why SEC should support democratization of sale of foreign securities

    In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.

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    The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”

    These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.

    This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.

    READ: Crypto market surges above $2 trillion, as Bitcoin stages a huge comeback above $60,500

    In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.

    This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.

    READ: XRP posts a big bang, as legal tussle with SEC lingers

    The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
    palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.

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    After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.

    READ: Flour Mills shares surge by 6.9%, lifting the miller’s capitalization by N8.2 billion

    It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.

    At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.

    In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.

    Stanbic 728 x 90

    By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.

    The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.

    Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?

    The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.

     

    Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.

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    Blurb

    Buy what? Dangote vs BUA Cement

    Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?

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    I want to review the performance of the largest quoted companies in Nigeria.

    On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.

    Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.

    READ: Dangote Cement joins MTN in the trillion-naira club, as 2020 revenue surpassed N1 trillion

    Market Capitalization

    First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!

    Market Price

    With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.

    Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0

    READ: BUA Cement loses N162 billion in market value in a week

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    Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.

    So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.

    READ: Oba Otudeko’s stakes in Firstbank and Honeywell are worth over N10 billion

    What else?

    Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.

    Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.

    Stanbic 728 x 90

    So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.

    READ: Jumia: In search of the elusive break-even sales

    Let us go a bit deeper…

    When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.

    Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?

    READ: Three things Nigerians can learn from Warren Buffet’s latest letter

    Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.

    Let us score both company managers by how well they have managed the revenues and capital of the companies

     

     Return on Assets %Return on Equity %Return on Invested Capital %EBITA Margin %Net Margin %Debt to AssetsLong Term Debt to Assets
    Dangote Cement14.6231.2126.9244.0424.310.240.08
    BUA Cement11.1519.1215.3541.8732.030.360.23
    FY 2020

    Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.

    Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…

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    Do follow @FinPlanKaluAja1

    This is not investment advice, this is not a recommendation to buy or sell. Past performance is not a guarantee of future performance. Speak with your adviser before investing. Equity is risky.

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