Could Rencap’s buy ratings on these stocks mean they are undervalued?

by | February 12, 2018 12:51 am

Renaissance Capital (Rencap), an investment banking firm, forecast the highest upside potential in Access bank (BUY), Zenith bank (BUY), FBNH (BUY) and UBA (BUY), as they are seen to be trading lower than their intrinsic value.

These four tier one lenders’ stocks have the potential of surpassing their current market price of N11.95, N12.00, N30.90, and N12.00 for Access bank, UBA, Zenith and FBNH respectively, as at market close on February 9 2018.

An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its fundamental value.

Nigeria’s economic growth changed course and clawed its way back up to positive trajectory after a challenging period when was deep into recession for five consecutive quarters, which was as a result of decline in oil prices, a major revenue source for Africa’s largest economy.

The relative peace enjoyed in the Niger Delta coupled with the rise in oil prices saw the country’s exist from its worst contracting period.

More important, however, is how this translates to an improving asset quality outlook for the Nigerian banks.


Access bank stock yielded 14.35percent since the start of the year, outperforming the NSE all share Index of 12.77percent, as compiled from Meristem on the close of Friday 9 February 2018

According Rencap, the stock has an upside potential of 26 percent relative to its current market price giving its strong appreciation outlook.

The targeting profit is projected is up by 19 percent from N13.5 to FY 2018 value of N16.0.

The tier one bank was trading N12.45 at market opening February 9 2018 and closed at N 11.95 on the same day.


The investment bank firm increased it targeting profit for UBA by 20 percent from N12.1 to NGN15.3 with a reduction in it risk-free rate assumption to 13percent (previously 14percent).

One reason it forecasted the aforementioned for UBA is because it has a relatively more sustainable NIR income, compared to its tier one peers. Given the likely recovery in the Nigerian business, the contribution from the rest of Africa could come in lower than the c. 30perecent levels in 2017.

The potential upside of 20percent is set for the bank, UBA traded at N12.35 on the opening of Friday 9 February, 2018 and closed at N12.00 with a year-to-date return of 16.50 percent. Rencap says it continues to flag UBA’s power sector exposure as a key risk, despite the disbursement of NGN153bn of the CBN’s NGN701bn intervention fund to the power sector.


The investment bank firm was of the opinion that it prefer to see less volatility in Zenith’s numbers, as it was the same issue it flagged for most of FY17.

The bank’s $1.5bn derivative book matures over the next year, and this is believed to be the big wildcard to earnings.

The FY17 PBT forecast was increased by 9percent to NGN159billion, on stronger NIR expectations.

Although analysis shows there could be some potential upside risks to the numbers if the NIR line comes in much higher than expected, and also if CoR comes in lower than expected.

The potential upside of 10.4percent is expected for the bank.

A new targeting profit of NGN34.3 (from NGN27.4) was projected for the bank, largely driven by higher PBT forecast, lower risk-free rate assumptions, and the one-year rollover of valuation. The firm maintains its BUY rating on Zenith and also mentioned that the volatility in the NIR line could be a positive or negative surprise, which presents the biggest risk to its forecasts.

With an opening market price of N32.00, the bank stood at 20.51 percent in its year-to-date return, although it closed at N30.90, as at Friday 9 February 2018.


First bank of Nigeria, the sleeping giant, as referred to by Rencap is said to have increased in share price to about 58percent versus tier one banks’ average of 23percent since December 14 when the investment bank firm last released its report.

The upside potential of 8percent is expected for the bank. The new targeting profit is up 26 percent from N11.7 in 2017 to N14.7 in FY2018.

Looking beyond a 12-month investment horizon, FBNH is one of our top picks and we believe that an FY18E P/B multiple of 0.7x is still an attractive entry point, despite the rally in its share price.

We continue to monitor asset quality trends for FBNH and note that a $70/bl oil price should be positive for the bank’s NPL clean-up process, given the bulk of the bank’s NPLs are concentrated in the oil and gas sector. Execution in cleaning up the loan book presents both potential upside and downside risks to our forecasts.


Endurance Okafor