Nigerian Bank Nigeria Access Bank Plc – Believing In The Upside

Source Business Day: January 18th 2010

Not ready to believe? Having shed 34% in 2009 (and 45% in 2008), the Nigerian Stock Exchange (NSE) has started encouragingly in 2010. By Tuesday (12 Jan) it was up 8% YtD, but has since corrected 2 ppts, ending the second trading week of 2010 up 6% YtD. So, what happened? After two years of numerous false starts, are investors ready to believe in a sustained rally?

The upside is real. At YE09, the NSE had a market capitalisation of $33bn, the same as in Dec 2006. However, over 2006-2009, Nigeria’s GDP increased 29%, to $188bn (from $146bn). This implies that the GDP penetration of the NSE fell from 23% in 2006 to 18% in 2009. To put this into context, the GDP penetration of the Kenyan and South African stock exchanges in 2009 was 36% and 145%, respectively. Furthermore, we estimate Nigeria’s 2010 GDP at $350bn, $35bn more than the IMF’s forecast for South Africa ($315bn).

Equities: The preferred investment vehicle. Unlike in 2008 and most of 2009, we think equities are clearly the most attractive investment vehicle in Nigeria, given that: 1) T-bills are yielding between 4% (91-days) and 5% (364 days); 2) government bonds are yielding between 6% (three-year) and 9% (20-year); 3) bank time deposit rates (annualised) have fallen from a high of about 20% in early 2009 to about 13% today; and 4) real estate is increasingly illiquid as prices come under pressure. With inflation at 13% this year, on our estimates, these alternative investments imply zero-to-negative real returns.

The South Africans are believers. This week FirstRand and Standard Bank publicly announced their interests in acquiring a Nigerian bank. Both cited the significant growth opportunities in Nigeria – a country with 153mn people and only 25mn active bank accounts (adjusted for multiple and dormant bank, we think the figure is closer to 15mn). This compares poorly with the 60mn mobile subscribers in Nigeria. We note also that Standard Bank, with a market cap of $22bn, could theoretically buy the entire quoted banking system of Nigeria, which has a combined market cap of $15bn.

With regard to this week’s biggest winners and losers, we highlight the following: Oceanic Bank (Not rated; Mkt. Cap. $396mn): Up 15% this week on the back of M&A speculation. Unilever (HOLD; TP NGN11.24; Mkt. Cap. $587mn): Up 12% on thin supply and strong dividend expectations. Julius Berger (Not rated; Mkt. Cap. $235mn): Up 8% on an expansionary budget for 2010 and strong cash dividend expectations.

Afribank (Not rated; Mkt. Cap. $233mn): Down 10% on limited perceived bank interest as an M&A target. First Bank (BUY; TP NGN28.00; Mkt. Cap. $2.74bn): Down 5% on large institutional selling. Pressure is likely to ease as blocks were sold.

 Access Bank (BUY; TP NGN16.00; Mkt. Cap. $409mn): Down 3% after a very strong first week of trading. Looking to next week, we strongly favour banks. While both the aforementioned South African banks have expressed interest in buying a distressed bank, FirstRand said it would prefer a “healthier” bank. We would recommend investors look at these banks before it does. We regard the following banks as potential M&A targets: Diamond Bank (BUY; TP NGN14.00, Mkt. Cap. $717mn): Trading at 2010 P/B & P/E of 0.74x and 4.1x; 85% price upside Skye Bank (BUY; TP NGN14.00; Mkt. Cap. $443mn): Trading at 2010 P/B & P/E of 0.59x and 2.3x; 142% price upside Sterling Bank (Not rated; Mkt. Cap. $108mn): Trading at 0.55x its reported book value (post audit). Conversely, we would take profits in the distressed banks, where potential capital raising will likely dilute existing shareholders:

Afribank (Not rated; Mkt. Cap. $233mn): Its last reported book value is -NGN107bn. Oceanic Bank (Not rated; Mkt. Cap. $396mn): Its last reported book value is -NGN69bn. Finbank (Not rated; Mkt. Cap. $69mn): Its last reported book value is -NGN85bn. Outside the banking space, we favour the following names, which we think offer strong earnings growth: Benue Cement Company (BUY; TP NGN59.45, Mkt. Cap. $1.14bn): Trading at 2010 P/E of 4.3x; 2010 EPS growth of 106% YoY, on our estimates.

Ashaka Cement (BUY; TP NGN18.00; Mkt. Cap. $140mn): Trading at 2010 P/E of 4.3x; 2010 EPS growth of 68% YoY, on our estimates. Nigerian Bottling Company (BUY; TP NGN28.75; Mkt. Cap. $214mn): Trading at 2010 P/E 6.9x; 2010 EPS growth of 32% YoY, on our estimates.

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