Diamond bank: Set to soar
Diamond bank took a loan of $100m from AFREXIM in Q2 2012 at 7%. The loan is a subordinate issue and thus falls under Tier 2 capital and it is non-convertible. It also went ahead to take another loan of $70m, which is convertible, from IFC in Q3 2012 at 6%. The capital raised is expected to raise the capital adequacy ratio from 12% in Q2 2012 to 16% at the end of the year.
At the time the convertible loan was issued, Diamond bank was selling at N2.10 - N2.20 in the market. The loan cannot be converted until 2015 and it is estimated to have a conversion price of N2.81, going by the same kind of deal that GTB got from IFC in 2010.
A few points to note:
The estimated conversion price was at a premium to the prevalent market price.
Diamond bank was upfront with shareholders about the deal though they tried really hard to keep the conversion price a closely guarded secret.
Those that bought Diamond bank below N2.80 got a sweet deal. But the value add from the loans sure makes it a plus and the future dilution may well be worth it even if the stock rises up to N8.00
In 2011, Nigeria raised Eurobond at 6.75% and GTB also raised a Eurobond at 7.50%, which means IFC has effectively paid shareholders an option price by providing capital at below market rates
Greece, Spain and Italy are not likely to get the kind of deal that Diamond bank got from investors.
In addition, Diamond bank has told shareholders that they are going to reduce dividend payout to the barest minimum.
The conversion price translates to an additional shares of 3.9b. Assuming that the shares are converted today, the price to earnings of Diamond bank will rise from 2.5x to 3.2x, which is still far lower than the current industry average of 5.3x and market average of 17.1x. The only stocks that beat the valuation, in terms of PE, are UBA with a PE of 3.1x and Skye bank with a PE of 2.9x. However Diamond bank has a return on equity of 23.4% while UBA has return on equity of 27.1% and Skye bank has 15.4%. While UBA looks better than Diamond bank, concerns persist about their perennial exceptional items that they habitually slam on shareholders at the end of the year. Skye bank also has its own share of loans and debts that was not captured in the valuation.
Using a combination of valuation factors Diamond bank has a fair value of N7.28, indicating an upside of 71% from current price of N4.25.