Deap Capital Revisited

Selected Indices
Sector: Other Financial Institutions
Current Price: N8.70
Shares Outstanding: 999,999,999
Market Capitalization: N8.7 billion
PAT (3Q 2008): N626 million
Projected PAT (FY): N835 million
EPS: 63K
Projected EPS (FY): 84K
PE: 13.81x
Forward PE: 10.36x
Industry average forward PE: 11.52x
Fair value: N17.64

Analyst’s opinion
I had analyzed this company and placed a buy recommendation on it based on the second quarter results, which they released earlier in the year. The company, which was hitherto the only one under the Other Financial Institutions sector before Crusader Nigeria relocated from the Insurance sector, released her third quarter results for the period ended June 2008 on the floor of the Nigerian Stock Exchange today.

The turnover increased by 185.65% from the previous corresponding period from N418 million to N1.194 billion, while the profit before tax increased from N202 million to N737 million indicating a 264.85% increase. The profit after tax increased by 266.08% from N171 million to N626 million.

The figures show that the company has reduced its overhead cost, which is consistent with the results they have released over the past three quarters. A triple digit growth rate in profit after tax shows that the company has a pretty high marginal revenue and will definitely benefit from raising more capital to exploit the opportunities that are available. The only challenge is that a low average total cost may be approached rapidly with the incursion of Crusader Nigeria into the sector and diminishing marginal returns may set in sooner than expected since Crusader Nigeria is also poised for a public offering, just like Deap Capital.

Based on 1 billion shares in issue, Deap Capital has a third quarter earning per share of 63K. The earning per share has grown from 42K to 63K within a quarter, which is in keeping with my projection from the second quarter results and may ultimately lead to a full year earning per share of 84K. The forward price earning multiple is 10.36x and using it alone as a benchmark, the fair value of Deap Capital is still N17.64. This value is a conservative figure because of the fact that this company can be considered a growth stock based on the triple digit percentage increase in profit after tax. This means that in the long run, as the market revives, the price will show the true reflection of the risk adjusted value, which will be much higher than the estimated fair value.

Considering the stock exchange at the moment, Deap Capital is likely to go on a free fall if it is released from the technical suspension today so buying this stock is at the discretion of the investor. However, I strongly recommend this stock for medium to long term, enteris paribus.