While investors and shareholders eagerly anticipate Jaiz Bank’s Q3 results, which are expected later this month, the bank’s capacity to either beat or miss its earnings forecasts has emerged as a critical determinant in influencing shareholders’ value, particularly considering the planned Rights Issue.
If the bank exceeds its earnings forecast, consistent with its historical trend of strong performance, the growth in earnings could counteract the anticipated dilution effect of the Rights Issue, ultimately enhancing the bank’s valuation.
Jaiz Bank Plc has set an ambitious target of achieving N24.787 billion in gross earnings for the second half of 2023. This projection was detailed in its Statements of Earnings Forecast for the third and fourth quarters of 2023, as sourced from the Nigerian Exchange Limited (NGX).
In addition to gross earnings, the bank also projected a pre-tax profit of N5.131 billion and a profit after tax of N4.618 billion for the specified period.
Considering the bank’s Q3 and Q4 forecasts alongside its Q1 and Q2 results, profit after tax is expected to grow by 22% year-on-year to N8.386 billion in 2023.
Last week, the bank submitted an application to the Nigerian Exchange Limited, seeking approval and listing for a Rights Issue comprising 5.4 billion ordinary shares, each with a nominal value of N0.50, to be offered at a price of N1.00 per share.
The rights issue will be pre-allotted based on 87 new ordinary shares for every 250 ordinary shares held as of October 6, 2023.
If the shareholders opt to exercise their rights and acquire the entire 5.4 billion shares at the specified N1 per share, which represents about a 39.39% discount on the bank’s last closing market price of N1.65, it will undoubtedly lead to a 16% increase in the number of shares outstanding to about 39.95 billion.
This might apply downward pressure on the share price
Conversely, should shareholders decide not to exercise their rights, Jaiz Bank may find itself in the position of needing to sell the remaining shares on the open market. This move could generate upward pressure on the stock price.
Nevertheless, it is vital to highlight that the effects of this Rights Issue extend beyond its immediate impact on share prices. It has the potential to significantly influence earnings per share (EPS) and, consequently, the bank’s overall valuation.
The dilution effect means that the earnings per share (EPS), which is calculated as earnings divided by the number of outstanding shares, may decrease because the earnings are spread thinner across a greater number of shares if the increase in outstanding shares due to the Rights Issue is not offset by a proportional increase in earnings.
A lower EPS may affect the bank’s valuation, as investors often consider EPS when determining the attractiveness of a stock.
In this context, Jaiz Bank’s projected 22% PAT growth for 2023 exceeds the expected 16% increase in outstanding shares resulting from the Rights Issue, assuming full subscription.
Consequently, the bank’s earnings per share (EPS) is likely to experience an upward trend, positively impacting the overall value of the bank.
However, the realization of this scenario hinges on the bank outperforming its forecast for H2, making it a defining factor.
Looking back, over the past five years, the bank has consistently demonstrated earnings growth. The compound annual growth rate of earnings per share stands at an impressive 48%, indicating consistent annual growth of EPS by 48% on average
In the recent Q2 earnings report, the bank recorded a 54% year-on-year growth in profit after tax, reaching N2.175 billion. Consequently, EPS grew by 54% YoY to 6.30 kobo, taking the H1 EPS to 10.92 kobo and EPS (TTM – Trailing Twelve Months) to an impressive 23.87 Kobo.
At the current EPS (TTM) level, Jaiz Bank’s stock is presently trading at a price-to-earnings (P/E) ratio of 6.7x.
This P/E ratio is higher than the NGX banking sector’s average P/E ratio of 4.16x, positioning the bank at the 12th rank in the NGX banking sector in terms of banks with the highest earnings multiples, just below Stanbic IBTC and Unity Bank.
This indicates that Jaiz Bank’s stock is currently trading at a premium valuation compared to the average valuation of stocks within the entire NGX banking sector. For every Naira earned by the bank per share over the past year (TTM), the market values the stock at N6.7
Furthermore, these higher valuation metrics suggest that investors have high expectations for Jaiz Bank’s future earnings growth, and they may be willing to pay more for the bank’s stock compared to other banks in the sector.
This disposition is also reflected in the bank’s price-to-book (P/B) ratio of 1.07x and price-to-sales (P/S) ratio of 0.95x, both of which surpass the sector’s average P/B ratio of 0.58 and P/S ratio of 0.72.
Meeting or exceeding the earnings forecast growth would be a crucial factor in sustaining the positive market sentiment toward Jaiz Bank’s stock, especially considering the Rights Issue.
By outperforming its earnings forecast, the bank can potentially mitigate the dilution effect caused by the increase in outstanding shares resulting from the Rights Issue.
If the bank’s earnings grow at a rate that outpaces the increase in the share base, it could help maintain or even increase earnings per share (EPS), which is a key metric that investors often consider.
This could justify the premium valuation that investors are currently assigning to the stock. Strong earnings growth can attract more investors and keep existing shareholders optimistic about the bank’s prospects.
Ultimately, the decision to participate or not in the Rights Issue should be based on your careful assessment of financial circumstances and investment objectives.
It is also essential to keep informed about the bank’s financial performance and market conditions as you make your decision.
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