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Rights Issue: Diamond Bank gets ‘attractive’ valuation

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Diamond Bank plc seeks to raise N50.375 billion ($300m) via Rights Issue of 8,685,145,863 ordinary shares of N0.50 kobo each at N5.80 per share. The Rights Issue is on the basis of three ordinary shares for every five ordinary shares held as of June 13, 2014.

The purpose of the Rights Issue is to enable the bank shore up its Capital Adequacy Ratio (CAR) to c.23 percent, and boost its capacity to lend to its focus sectors and segments – thereby growing its loan books – with FY14E of N758 billion (10% growth y/y), which will impact on its interest income (FY14E: N154bn)

The Rights Issue, if 100 percent subscribed will result in shares outstanding of 23,160,388,968 (the seventh highest in the industry) with market capitalisation of N145.910 billion at current share price of N6.30 kobo.

A team of analysts at UBA Capital recently undertook a valuation of Diamond Bank stock using price multiples based valuation models.

The analysts reinitiated coverage of the bank with a ‘Buy’ recommendation and a price of N9.50, representing a 51 percent upside potential.

Their recommendation is based on: the bank’s strong focus on the retail and SMEs segment will further drive deposit and funding base amid regulatory headwinds; capital raising programme by the bank will help support its dwindling Capital Adequacy Ratio, bulk up its liquidity position and support risk asset growth; and current P.E of 3.24x and book value per share at 0.6x remain attractive compared with sector coverage average of 6.07x and 1.58x.

“Our Target price of N9.50 (51% upside potential) has also been sensitised by other notable analysts’ estimates. Our valuation suggests that the stock portends potential returns to shareholders in the near term and thus we recommend that shareholders take up their Right,” said the UBA Capital analysts.

According to the analysts, “valuation remains attractive – the bank’s share price surged significantly in 2012, driven by its turnaround from a loss position in 2011. The share’s returned 157 percent and 49 percent in 2012 and 2013, respectively, compared to the NSE ASI gains of 36 percent in 2012 and 47 percent in 2013. Current P.E of 3.24x and book value per share at 0.6x make it attractive compared with sector coverage average of 6.07x and 1.58x. Using a blend of absolute and relative valuation, our model suggests a 2014 year-end TP of N9.50 with a return of 51 percent at current price level.”

Great start to the year with strong growth in Q1:2014 earnings. Gross earnings grew by 21.3 percent y/y to N48.9 billion in Q1:2014, driven by 13.0 percent growth in interest income to N38.2 billion and 64.4 percent growth in non-interest income to N10.7 billion. Loan book grew by 20.2 percent y/y to N712.2 billion, putting profit at N8.45 billion (34.3% y/y). The bank proved to be cost effective with a 15.3 percent growth in interest expense to N10.8 billion, despite its 24.7 percent y/y growth in deposit to N1.23 trillion. Operating income increased by 22.6 percent, though operating expenses surge by 25.1percent y/y to N23.2 billion in Q1:14, this can be attributed to its increase of 35.6 percent y/y in staff costs to N8 billion in Q1:2014 (from N5.9bn in Q1:2013).

Article Credit: Businessdayonline

Updated 4 Years ago

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