SBU.ug_reiteration of BUY_potential Return 27%
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Transcript of SBU.ug_reiteration of BUY_potential Return 27%
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Stanbic Uganda: Recommendation
reiteration BUY, 27% potential return1. Theopportunity
We reiterate our BUY recommendation on Stanbic Uganda (SBU.UG) with a
target price of UGX194 by end of 1H10. The sources of opportunity include:
The stagnant share price: SBU share price has oscillated around
UGX155 before being stagnant at UGX160 for the whole month of
September 09. The share price rebounded soon after our initiating
report, but we see continued good value especially given our
expectations of ROE of greater than 40%. In our opinion SBU.UG is a
quality asset with a strong market share. The stable price provides an
entry point because we interpret it as a price weakness.
Potential upside risk on the UGX/US$ exchange rate: The local
currency has recovered against the US$ from the weakest exchange
rate of UGX2,295 per US$ in May 2009 to UGX1,882 per US$.
Exports of goods and services continue to increase, rising to
US$3.84bn from US$3.43bn last year. This improved the trade
balance, hence the recovery of the shilling. In the long-term, oil
extraction will augment US$ supply in the economy, supporting the
local currency.
Peter MushangweZandisile Mabuya
+27 11 551 3675
October 23, 2009
Fig 1: Price performance does not fully factor earnings growth expectations in our view.
100
110
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160
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200
October08
November08
December08
January09
February09
March09
April09
May09
June09
July09
August09
September09
Thesharepricehasnotfactoredintheupsideriskoftheeconomicrecovery
42.2% 9.8%3.2%
11.8%
56.2%
60%
40%
20%
0%
20%
40%
60%
80%
SinceJan2008
12Moths
YTD
3months
Sinceinitiation,May5
Despiteacolossal56.2%capitalgainsinceourinitiation,YTDreturnisnotexcessive,US$returns
Source: USE, Bloomberg, Legae Calculations
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Valuation: the bank trades at an implied P/E ratio of 8.3X (1H09) and
trailing P/E ratio of 10.5X (FY08). Our forecasts indicate a forward P/E
ratio of 6.3X by CY2012 yet we expect ROEs to be sustained at an
average of 43% over the same period. The implied P/E ratio does not
compare favourably against history, as well as against the justified P/E
ratio that come up to 15.7X and 11.9X respectively, using a CoE of
20.7%, average growth rate of 14% and dividend payout ratio of 70%.
Our 27% potential return comprise of an expected capital gain of
21.3% and a dividend return of 6%. The bank has a strong record of
dividend payment. The interim dividend is payable on 30 October
2009.
2. KeycatalystFY09resultsearlynextyearWe consider the banks fundamentals to be strong and the key catalyst for a
price appreciation will be the FY09 results to be released early next year.
The 1H09 set of results indicated strong profitability growth. Net interest,
fees and commission, and net profit went up by 30%, 10% and 40%
respectively. We expect Net Interest Income (NIM) to improve to 10.1% from
9.2% before declining to 8.4% in CY2012. ROE should be supported by the
leverage and should remain high (>35% upto CY2012). We expect the EPS
to go up by 24.8% to UGX19.1. We do not see material sector systematic
risks going forward. We do not perceive significant adverse regulatory risks.
SBUs performance could surprise and will be supported by:
Strong mortgage lending performance: We believe SBU is best
positioned to exploit the mortgage market, which to an extent is in its
infancy. The bank raised UGX30bn to support its Tier 2 capital, and
also to carry its mortgage lending business (long-term lending). The
bank still has biggest market shares on both asset (lending) and
liability (deposits) side of the balance sheet. The mortgage lending
book is only 6% of the total loan book, and in our view, the bank hasroom to grow this business segment.
Improvement in asset quality: We expect bad loans and write-offs to
increase beyond normal this year, but the formation of non-performing
assets will come down as the economy picks up. In our opinion, this
downward trend should start 4Q09. Consumer credit risks should
dissipate as well. Presenting 1H09 set of results, management
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indicated that the personal lending book took the biggest credit strain.
Personal and business lending make up 40% of the total loan book.
Despite our view that the personal loan book may take a longer period
to recover than the business segment, the bank stand to benefit from
reversal in the provisions in 2010.
Strong trading income: In spite of the economic recovery, volatility in
currency markets remains high relative to history. Currency trading
dominates the banks trading income. Trading income went up by 62%
to UGX16.7bn (1H09) from UGX10.2bn in 1H08. We expect trading
revenue to continue to show strong growth on the back of higher
volatility of the shilling (see fig 5).
Source: IMF WEO October 09, MoF Uganda, Legae Calculations
Fig 2: Economic recovery will prompt recovery in bad loans. Falling NPLs will spur profitability
YearGDP growth
rate,%
GDP per
Capita, US$
GDP,
US$bnInflation, %
CA balance,
US$ bn
CA balance, %
of GDP2000 5.4 254.88 16.82 5.8 -0.4 -6.5
2001 5.2 232.59 18.10 4.5 -0.2 -3.6
2002 8.7 239.35 19.99 -2.0 -0.3 -4.6
2003 6.5 245.86 21.75 5.7 -0.3 -4.7
2004 6.8 284.99 25.91 5.0 0.0 0.1
2005 6.3 320.07 25.86 8.0 -0.1 -1.4
2006 10.8 333.52 29.59 6.6 -0.3 -3.4
2007 8.4 385.28 32.99 6.8 -0.4 -3.1
2008 9.0 454.57 36.75 7.3 -0.5 -3.2
2009 6.0 471.70 39.92 14.2 -0.9 -5.5
2010 6.0 486.75 42.95 10.8 -1.0 -5.7
2011 6.8 505.89 46.51 5.8 -0.9 -5.1
2012 7.0 532.31 50.65 5.3 -0.9 -4.6
2013 7.0 560.96 55.26 5.9 -1.0 -4.6
2014 7.0 580.34 60.28 5.7 -1.0 -4.5
Expectedstrong
GDP growthand
lowerinflation
rateswillbode
wellforbanking
stocks
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Source: BoU, Legae Calculations
Fig 3: Interest rate spread is still strong but we expect it to shrink in the long-term
0%
5%
10%
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25%
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Au
g07
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t07
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c07
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b08
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r08
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g08
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c08
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b09
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r09
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Au
g09
Savingsdeposits
Timedeposits
Lending
The interestspread
remains strong,but we
expectittoshrinkinthe
longtermdue to
increasedcompetition and continuedmoralsuasionfromBoU for lowerlendingrates
Source: BoU, Legae Calculations
Fig 4: The more expensive fixed deposits are dominating the liability side. This will compressinterest spreads and NIM in the long-term.
750.0
950.0
1,150.0
1,350.0
1,550.0
1,750.0
1,950.0
2,150.0
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07
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Demanddeposits
Timedeposits
The "more
expensive"timedepositsare becomingmorepopular. Thiswill
negativelyaffect
interestspreads
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Source: Bloomberg, Legae Calculations
Source: Uganda Securities Exchange, Legae Calculations
Fig 5: This 100-day historical volatility of the UGX/US$ rate increased and remained fairly
high. This should sustain strong growth in trading income
7%
8%
8%
9%
9%
10%
Nov08
Dec08
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
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Oct09
Fig 6: SBU is the most traded stock on the Uganda Securities Exchange
9,873.17
BATU
BOBU
DFCU
EABL
EBL
JHL
KA
KCB
NVL
SBU
UCL
SBU's externalliquidityishighestonthe USE,withaturnoverofUGX9.8bn (aboutUS$5.3mn)YTD
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Legae Securities (Pty) Ltd
Member of the JSE Limited
6-10 Riviera Road, Houghton, Johannesburg, South Africa
P.O Box 87277, Houghton 2041, Johannesburg, South Africa
Tel +27 11 715 3700, Fax +27 11 715 3701
Web: www.legae.co.za email:
Analyst Certification and DisclaimerI/we the author (s) hereby certify that the views as expressed in this document are
an accurate refection of my/our personal views on the stock or sector as covered
and reported on by my self/each of us herein. I/we furthermore certify that no part
of my/our compensation was, is or will be related, directly or indirectly, to the
specific recommendations or views as expressed in this document
This report has been issued by Legae Securities (Pty) Limited. It may not be
reproduced or further distributed or published, in whole or in part, for any
purposes. Legae Securities (Pty) Ltd has based this document on information
obtained from sources it believes to be reliable but which it has not
independently verified; Legae Securities Pty Limited makes no guarantee,
representation or warranty and accepts no responsibility or liability as to its
accuracy or completeness. Expressions of opinion herein are those of the author
only and are subject to change without notice. This document is not and should
not be construed as an offer or the solicitation of an offer to purchase or
subscribe or sell any investment.
