Analysis of Zenith, GT, and Intercontinental Banks and Law Union and Rock Insurance as prepared by Meristem NG.

Zenith Bank
Zenith Bank was one of the stocks that became the toast of investors in the market during the week as a result of the release of its third quarter results for period ended March 31, 2008. The stock’s price appreciated in value by 9.56 percent to close the week at N 49.30k. Investors and market commentators were astonished by the Bank’s elegant performance indices. Gross earnings rose by 70 percent to N120.31bn from N70.77bn reported in similar quarter of prior year. Profit Before Tax and After Tax (PBT & PAT) rose by 111 percent and 136.6 percent to N40.64bn and N33.32bn respectively over similar period. The Bank’s net profit margin is 28 percent against 20 percent achieved in same quarter of 2007.
Zenith Bank’s trailing multiples have jerked up considerably above industry average for top tier banks. Trailing EPS now stands at N2.27k with a P/E of 21.59 xs compared with industry statistics of N1.63k and N27.23 xs respectively. Zenith Bank also listed a total sum of 5.1bn Ordinary Shares from its recent hybrid Offers and supplementary allotment. This has raised its outstanding shares to 16.74bn.

Analysts opine that the recent equity funds have impacted positively on the Zenith Bank’s third quarter and postulate that more impact of the fresh funds will be reflected in the full year results of the Bank by the end of June 30, 2008. As a way of feedback to investors and to repose investors’ confidence in Zenith Bank, the Bank’s management released its revised profit forecasts for the 2008, 2009 and 2010.

Gross earnings forecasts are N127.47bn, N181.01bn and N252.46bn while PBT & PAT projections are N39.02bn, N60.03bn& N82.65bn and N28.59bn, N44.10bn & N60.80bn respectively. Sequel to its supplementary allotment, the Bank had earlier projected N123.15bn, N168.64bn & N215.15bn as gross earnings for 2008, 2009 and 2010 in its Offer prospectus while PBT and PAT projections for same periods were N38.86bn, N57.11bn & N76.74bn and N28.76bn, N42.26bn & N56.79bn respectively.

There are sentiments that the stock is trading below its fair value and that early positioning for medium to long term investment decision will suggest significant returns both in capital appreciation and otherwise. However, there are fears that selling pressure may pull down the price as soon as investors who partook in the Bank’s last Public Offer collect and dematerialize their certificates for profit taking.

First Bank
First Bank is another blue chip banking stock that investors keep watch over. The stock has put investors in dilemma as per expectations both in terms of capital appreciation and corporate benefits in anticipation of the full year results for the year ended March 31, 2008. First Bank added 5.91 percent to close at N46.60k on Friday May 9, 2008. This represents a new high in the past 8 weeks. Market watchers are skeptical about sustaining the price trend prior t the release of the FYE results.

However, technical/trend analysis of the stock price movement reveals that First Bank has been hovering between the price band of N42 and N48 which provides opportunity for momentum traders with sound technical skills to make some marginal spread. We opine that the Bank will post very outstanding results for the FYE March 31, 2008 as a result of the huge funds raised from its mega Offer in 2007.

Analysts believe that the Bank’s balance sheet size should grow by over 270 percent and this subsequently should provide avalanche of opportunity for super growth in both top and bottom-lines for the FYE March 31, 2008. They argue that First Bank is better positioned to record unconventional growth in gross earnings, profit before tax and profit after tax (PBT and PAT) given the quantum of funds raised in the primary market in May/July 2007.

The Bank’s second and third quarter results post-Offer for the periods ended September 30 and December 31, 2007 bear credence to these speculations. First Bank consistently grew its gross earnings and PAT by average of 63.7 percent and 60 percent respectively against the Banks’ conventional growth rates of 35 percent and 17 percent in pre-Offer periods.

As at third quarter, gross earnings rose by 65.1 per cent to N105.21bn while PAT grew by 74.9 percent to N25.92bn. Net margin stood at 24.6 per cent compared with 23.3 percent posted in same quarter of prior year. Conservatively, annualized gross earnings and PAT are N140.29bn and N34.56bn respectively compared with the projected N118.92bn and N27.95bn as it is contained in the Bank’s Offer prospectus.

Trialing EPS is N1.58 based on the issued shares of 19.89bn. If the Bank sustains the recent quarterly growth trend, a moderate 50 percent and 65 percent projection for gross earnings and PAT implies N157.82 and N42.77bn for the FYE March 31, 2008. This will put First Bank’s forward EPS at N2.15k compared to its forecast N1.91k.Forecast dividend is N1.20k/Share.

There is a sentiment that a moderate bonus issue of 1 for 6 or 1 for 8 in addition to forecast dividend will push the stock to a new all-time high of N60 within the period of 18 months. Conversely, a class of dealers and market commentators rules out the possibility of bonus issue this year for the Bank due to its huge share overhang. They submit that this may be a disincentive for anticipated capital appreciation.

GTBank
Contrary to its convention, GTBank is yet to release its audited results for the financial year ended February 29, 2008. Hitherto, the Bank is renowned for publishing and distributing its abridged audited accounts and reports to all of its shareholders weeks post year end. This unusual delay has generated some curiosity amongst investors as to the Bank’s performance and corporate action for the FYE February 29, 2008.

However, information from market sources reveals that the delay must have been caused by the apex regulatory authority in the nation’s financial services sector, the CBN and that the results should be released in the next few days. GTBank’s third quarter results for the period ended November 30, 2007 show gross earnings growth of 58 percent to N53.27bn while PAT rose by 57 percent to N11.81bn.This puts the Bank’s trailing EPS at N1.27k and P/E at 26.77 xs as at date.

On annualized basis approach, GTBank’s gross earnings and PAT are N7.02bn and N15.74bn respectively which implies a forward EPS of N1.14k. It is hoped that the GTBank will sustain its culture of full year twin benefits of bonus and dividend. Market grapevine holds that the Bank will dole out a little above last year’s 50k final dividend in addition to a traditional bonus in the range of 1 for 4 and 1 for 5. In lieu of this, we anticipate the stock price to inch up to about N40 as traders take position for moderate capital appreciation. We recommend the stock for momentum traders as well as medium to long term investors.

Intercontinental Bank
Intercontinental Bank was amongst the few stocks that defied the recent free-fall in prices in the secondary segment of the market. Despite its relatively high volatility index of 0.70, the stock has maintained an average price/volume of N45/24 million units for the past 9 weeks from March till date. Market is rife with rumour that the Bank’s full year results will soon be released and that Intercontinental Bank’s full year benefit will considerably surpass its forecasted 40k final dividend. It will be recalled that the Bank had earlier paid a 35k/Share interim dividend compared to 30k/Share promised in its last Offer forecasts.

A segment of the market posits that though the Bank may significantly outperform its performance projections as well as forecasted final dividend, this may not be sufficient to push its price beyond N50 mark. This is premised on the attitude of investors in the Nigerian capital market as bonus issue remains a potent corporate strategy that drives share performance.

However, the Bank’s fundamentals are very strong for medium to long term investment horizon. Intercontinental Bank grew its gross earnings by 82.6 percent to N60.91bn while PAT soared by N72.6 percent to N11.32bn in the second quarter for the period ended August 31, 2007. Our conservative forecasts for gross earnings and PAT are N121.83bn and N32.82bn respectively compared with N84.35bn and N18.09bn projected in its last Offer prospectus. We recommend the stock for value investors who look beyond short term capital appreciation.

Law Union and Rock
Law Union and Rock is one of the foremost insurance companies that scaled the hurdle of recapitalization in the sector. It has key strength in corporate clients servicing with about 70 percent to 80 percent of its premium growth coming from that segment of the public. Sequel to the recent acquisition of 51 percent stake in the company by Skye Bank Plc, there are feelers that the company has crafted out aggressive strategies in its pursuit of the banc assurance model which will better position it for improved performance while enhancing its competitive strength in the sector.

A group of industry watchers maintains that while the company’s banc assurance stance is hinged on the operational efficiency of Skye Bank, a departure from its corporate clients’ focus may be expected owing to the retail banking drive of the Bank. However, this perceived possible change in business module is not expected to further impact negatively on the firm’s top lines as it currently makes forays into the West African market.

Law Union posted a strong earnings performance in its last third quarter-September 30, 2007. The company recorded an impressive 94.8 percent growth in gross premium from N1.03 bn recorded in the prior period to N2.01bn while PBT and PAT leapt by 209 percent and 204.1 percent respectively and net margin increased from 17 percent to 26.7 percent. Analysts maintain that given past performance records, this feat is likely to be carried to full year. Compared to its peers in the industry, Law Union trades at a below-industry multiple of 32 xs earnings and an earnings yield of 3.1 percent higher than the sector average of 2.3 percent. Modest forecasts put annualized gross premium at N2.67bn, PBT at N842.21m while PAT is N715m. This translates to a forward multiple of 9.7 xs earnings.