Zenith Bank Q1 2019 Results Review: Shares Undervalued

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by FBNQuest Research / Header Image Credit: Zenith Bank

Modest revisions to our 2019-20E earnings forecasts2% avg

Although Zenith Bank’s (Zenith) Q1 2019 PBT came in well ahead of our estimates, PAT was broadly in line, due to a negative result of –N6.6bn in other comprehensive income. Consequently, we have made modest upward revisions to our 2019-20E EPS forecasts.

As such, our price target of N36.4 is unchanged. On the back of the revisions to our forecasts, we now expect the bank to deliver a 2019E PBT of N246bn or around 3% higher than the 2019E guidance of N240bn. We find the shares cheap on a relative valuation basis. Zenith Bank shares trade on a 2019 P/B multiple of 0.7x, a -50% discount to the 1.7x that rival GT Bank is trading on.

We find this multiple unjustified because it is not fully reflected in their returns profile (2020E ROAE of 21.9% vs. 28.8% for GT Bank). At current levels, our forecast 2019 dividend of N2.90 per share implies a yield of c.13.6%, much higher than that the 8.7% yield that we forecast for GT Bank. We see a potential upside of 71% from current levels. Consequently, we retain our Outperform recommendation on the shares.

Q1 PBT up 6% y/y, thanks to a 54% y/y decline in loan loss provisions

Zenith’s Q1 2019 PBT was up by 6% y/y to N57.3bn. The single-digit earnings growth was mainly driven by a -54% y/y reduction in loan loss provisions to N-N2.1bn. Further up the P&L, although funding income advanced by 23% y/y, a -35% y/y decline in non-interest income completely offset the y/y growth in funding income. As such, pre-provision profits came in flat y/y.

Despite the single- digit growth in PBT, PAT fell by -16% y/y because of a negative result of -N6.6bn in other comprehensive income (OCI) compared with a gain of N4.8bn in the prior year quarter.

Sequentially, PBT and PAT declined by between 10% q/q and 11% q/q mainly because of a 38% q/q spike in opex and the negative result on the OCI line. Relative to our estimates, PBT beat by 22% as a result of positive surprises in funding income, loan loss provisions and opex.

However, following the negative surprise in OCI, PAT growth decelerated to 6% y/y.