November 18, 2024/Cordros Report
In this report, we highlight our estimates and update our views on United Bank for Africa Plc (UBA). In 9M-24, UBA reported a 14.3% growth in EPS to NGN14.78, underpinned by sturdy growth in the group’s core income (+170.0% y/y). We highlight that the preceding was sufficient to offset the lower non-core income (-24.1% y/y) recorded in the period, leading to a growth in earnings. We updated our estimates which led to an increase of our TP by 30.5% to NGN44.51/s (previously: NGN34.10/s), Based on this upside, we maintain our “BUY” rating. We believe funded income will be supported by the elevated interest rates and rising earning assets. We also argue that the persistent increase in net fees and commission will support non-core income. In our 2024E update, we factored in underlying risks for sector players, such as higher cost of funding, inflationary pressures, and regulatory risks. We estimate a final DPS of NGN4.00/s in 2024E, translating to a dividend yield of 12.0%. On our estimates, UBA is trading on a 2024E P/E of 2.0x and P/B of 0.4x
Solid Asset Base to Support 2024E Performance: In 2024E, we project a 52.0% y/y growth in the HoldCo’s gross earnings, primarily driven by an increase in funded income (+120.9% y/y), supported by the high interest rate environment and an expansion in earning assets (+94.9% y/y). Notably, our expectations of a higher interest rate also filtered into our forecasted interest expenses (+157.3% y/y), increasing the HoldCo’s funding costs. On impairment charges, we expect a decline (-11.7% y/y) due to UBA’s conservative lending approach and the risk management practices adopted in the review period. Accordingly, we expect cost of risk to settle at 2.3% (2023FY: 3.1%). Owing to the persistent inflationary pressures, we model a 54.2% y/y growth in operating expenses, primarily driven by higher personnel costs (+60.0% y/y) and the steep devaluation of the naira. All told, we expect cost to income ratio to print 49.3% in 2024E (2023FY: 37.2%). Consequently, we forecast that UBA will deliver an EPS of NGN21.93 (+20.3% y/y) and project an EPS CAGR of 4.7% over 2024-2027E.
Strong Capital Ratio to Bolster Growth: We like that UBA maintains robust capital buffers with a Capital Adequacy Ratio (CAR) of 28.3% as of H1-24 (Tier-1 average: 23.2% | Tier-2 average: 17.7%), as the bank continues to demonstrate the capability to absorb unforeseen losses. Also, this allows the group to comfortably boost risky asset creation without falling below the regulatory requirement. We also expect the capital injection to boost the HoldCo’s CAR further, even as a portion of the proceeds are deployed into interest-bearing assets. Also, UBA remains the bank with the highest dividend yield to investors (14.9% | Tier 1-average: 8.8%) as of November 15, 2024. We believe that the high dividend yield and remarkable capital buffers are good indicators of financial resilience and commitment.
Valuation: Our year end target price is NGN44.51/s, derived from a blend of the Dividend Discount Model (60.0%), Gordon Growth Model (30.0%), relative P/E (5.0%) and relative P/B (5.0%) valuation methods. Assuming a 32.2% CoE and a forecasted dividend payout ratio of 27.4%, our DDM FV amounted to NGN45.69/s. For GGM, we maintained CoE at 32.2% and utilised an average RoE of 15.3%, deriving an FV of NGN44.66/s. On relative P/E, we utilised the tier-1 forward average P/E of 1.3x and applied it to our 2024E EPS estimate of NGN21.93/s to derive a FV of NGN27.41/s. Lastly, for relative P/B, we estimated forward book value per share of NGN117.03/s – tier 1 peer average P/B of 0.4x – and derived a fair value estimate of NGN46.52/s.
