November 18, 2024/Cordros Report
In this report, we update our views on FBN Holdings Plc (FBNH). FBNH reported a 125.1% y/y surge in EPS in their recently released 9M-24 financials, driven by substantial increases across the group’s core (+164.6% y/y) and non-core (+82.4% y/y) income lines. The significant growth in the group’s performance was primarily driven by the elevated yields in the debt market. The preceding led to a +450bps y/y increase in earnings yield to 14.8%. Notably, we retain our “HOLD” rating on the stock but raise our year-end target price by 9.0% to NGN25.47/s. The upward review of our target price is driven by our expectation of sustained growth from the funded and non-funded income lines. On our analysis, we estimate a gross DPS of NGN0.75 in 2024E, which translates to a dividend yield of 2.7%. Our model suggests the stock is currently trading at a 2024E P/E and P/B estimates of 1.3x and 0.3x, respectively.
Funded and Non-Funded Income to Drive Earnings: Following the remarkable outturn in 9M-24, we expect FBNH’s 2024E gross earnings expansion to remain sturdy (+96.0% y/y | 2023FY: +98.1% y/y) with a 2024E – 2028E CAGR of 10.0%. Our forecast is based on our expectations of a higher interest (+149.8% y/y) and non-interest (+16.5% y/y) income. On interest income, we believe growth will be supported by the (1) elevated interest rates in the fixed income market and (2) boost in earning assets underpinned by the inflation of FCY-assets. However, we note the divestment of the group’s merchant business could impact the ability to sterilise surplus capital. Elsewhere, fixed income and foreign exchange gains (+4.7% y/y to NGN400.72 billion) in 2024E will be the main driver of non-core income as net fees and commission income (+25.4% y/y) also trends higher. We expect the tax on FX gains to have limited impact in 2024E, as we believe the group will opt to begin payments in 2025E. Accordingly, our model points to a +123.2% y/y growth in EPS to NGN19.18 in 2024E.
Regulatory Capital Injection to Bolster CAR position: We expect the capital raise to boost the HoldCo’s capital buffers in the near term. Notably, the HoldCo’s capital position has been sturdy against adverse currency movements underpinned by disciplined capital management and impressive bottom-line growth. For context, the group’s CAR improved to 17.9% in 2023FY (2022FY: 16.6%), driven by the management’s decision to reduce dividend payments to the group. In a bid to bolster the HoldCo’s capital base in line with the CBN’s directives, FBNH intends to boost the group’s paid-up capital by at least NGN500.00 billion via rights issue, public offers and private placements. We believe this step, in addition to collateralisation of loans (to lessen risk weighted assets) will buoy the Holdco’s financial stability in the near-term and give room for growth and increased shareholder value in the long term.
Valuation: Our year end target price is NGN25.47/s, derived from a blend of the Dividend Discount Model (60.0%), GGM (30.0%), relative P/E (5.0%) and relative P/B (5.0%) valuation methods. Assuming a 33.7% CoE and a forecast payout ratio of 3.9%, our DDM FV amounted to NGN22.11/s. For GGM, we maintained CoE at 33.7% and utilised an average RoE of 16.2% and derived a FV of NGN31.83/s. On relative P/E, we utilised tier 1 peer average P/E (1.2x) and applied it to our 2024E EPS estimate of NGN19.18/s to derive a FV of NGN23.49/s. Lastly, for relative P/BV, we estimated forward book value per share of NGN79.88/s – tier 1 peer average P/B of 0.4x – and derived a fair value estimate of NGN29.59/s.
