Asset & Resource Management Company, an investment services company, has said the ongoing rights issue of Sterling Bank Plc provides investors with a highly attractive opportunity.

According to an ARM rating explanatory note, the right issue’s price places a “buy” on the stock at the given the intrinsic potential of the stock.

The “buy” rating means that investors should accumulate security to a substantial extent constrained only by portfolio diversification considerations.”

Sterling Bank is raising N12.5bn through a rights issue of about 5.889 billion ordinary shares of 50 kobo each at N2.12 per share. Application list is expected to run till July ending.

The investment company said the overall outlook for the bank had been bolstered by improvements in operational metrics, which underscored the breadth of the ongoing recovery.

“Clearly however, the right issue price at N2.12 offers a more compelling entry point at a 52 per cent discount to fair value, current price-to-book value is at a slight premium to Tier II peer average at 0.8 times whilst price-earnings ratio at 6.2 times compares with peer average of 8.6 times,” ARM stated.

The report noted that key extracts of the bank’s first-half results significantly exceeded analysts’ forecasts.

According to the report, gross earnings rose 28 per cent to N41.8bn, tracking five per cent ahead of analysts’ forecast while profit before tax and profit after tax rose a much faster 93 per cent and 97 per cent to N6.3bn and N5.9bn. Analysts had forecast N5.2bn and N4.7bn respectively.

It attributed the strong bottom line performance to the improvements in the bank’s cost efficiency, noting the improvement in the cost-to-income ratio.

“Since expanding programme for using direct sales agents, which has seen its sales force quadruple to over 1,600, funding costs have declined steadily from a three years high of 6.5 per cent, indicating that it has brought net benefits from more efficient deposit mobilisation,” ARM stated.

“While the results are unaudited, overall improvements suggest that industry-wide asset quality improvements are taken firmer hold across the mid-tier banking in general and Sterling Bank in particular,” ARM added.

While underscoring the fact that Sterling Bank’s capital adequacy ratio was slightly ahead of the 10 per cent minimum regulatory standard, it noted the well-laid out plan by the bank to raise additional capital totalling $400m in Tier 1 and II capital over the next 12 months, beginning with the ongoing $80m right issue.

The net proceeds of the rights issue, estimated at N12.13bn, would be used to finance branch expansion, infrastructure upgrade in support of automated and cashless payment, enhance information technology and additional working capital.

Interim report and accounts of Sterling Bank for the six-month period ended June 30, 2013 showed that earnings per share doubled to 38 kobo in 2013 as against 19 kobo in comparable period of 2012.

The report showed that profit before tax rose by 93.5 per cent to N6.27bn as against N3.24bn recorded in corresponding period of 2012. Profit after tax nearly doubled from N3.01bn to N5.92bn, representing an increase of 96.7 per cent.

 

Source: Punch