Zenith Bank reported what is its best half year results in history, after reporting a pre-tax profit of N91 billion, representing a 71% rise from a year earlier. The company also reported earnings per share growth of 112% to N2.40 kobo (PAT of N75 billion).

Despite this blistering results, investors reaction was insipid as the share price closed lower at the close of business on Thursday and on Friday respectively. The message was loud and clear, “YOUR RESULT MEAN NOTHING”.

Why the drop-in share price?

Report suggest that the market is not happy with the dividends declared by the company, especially when you consider the level of profits declared. Zenith Bank proposed an interim dividend of 25 kobo per share, same figure it proposed in 2016 when profits were 53% lower (N35.4 billion).

A 25-kobo dividend per share reflects a dividend yield of 1%, in a market used to dividend yields of 5% and above. Last year, when Zenith Bank declared the same dividend, its share price was N15.3 representing a dividend yield of 1.63%, 63% higher than the yield on the day it announced the results.  Zenith Bank also reports it will close its register on the 21st of August and pay on the 25th.

Buy, sell or hold?

Unlike its competitor GTB, Zenith Bank shares have often attracted lesser valuation by investors. As an unwritten rule of thumb, the stock typically sells at a discounted price earnings ratio of GTB, regardless of whether it reported higher profits. It is currently trading at a price earnings ratio of 4.6x compared to GTB’s 7.6x.

If you sum up the last four quarters of Zenith Bank’s recently released results (Trailing twelve months, TTM) you get combined earnings per share of N5.4. We project that it could likely end the year at an EPS of N5.8 which could give it a valuation of N32 if you apply a multiple of 6x as against GTB’s current multiple of7.8x.

Zenith Bank is probably on track to report earnings per share of N5.8 by the end of the year which could imply a valuation of N32 per share assuming a multiple of 6x.

Is this plausible?

Yes for two reasons. Firstly, at a price earnings ratio of below 10x most Nigerian stocks are still relatively undervalued, assuming a long-term approach. Secondly, GTB is expected to report an equally improved result this year that could give it a TTM earnings per share of at least N6, sending its share price to N47. That momentum could reprice Zenith Bank shares dragging it past the N30 valuation which most investors had expected. Just to also add that Stanbic IBTC is currently trading at a price earnings ratio of 11x.

Zenith’s latest results has put it back on our radar as we consider it a buy fora potential exit period of 3-6 months.


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