Zenith bank Plc

Zenith Bank Plc Full Year (15 months) Results for the Period Ended 30 September 2008 Adjusted for 12 months
2008 2008 (adjusted) 2007 Growth
Turnover (N’b) 208.293 166.634 94.880 75.63%
PBT (N’b) 56.118 44.894 25.676 74.85%
PAT (N’b) 51.992 41.594 18.779 121%\


Balance Sheet Summary
2008 2007
Assets (N’b) 1,176.303 1,108.828
Liabilities (N’b) 1,441.214 856.488
Shareholders’ Equity (N’b) 346.618 116.455


Selected Indices
Sector: Banking Adjusted EPS: 248K
Current Price: N27.14 PE: 10.94x
Shares Outstanding: 16.74 billion Proposed dividend: 170K
Market Capitalization: N569.16 billion Closure of Register: 24 Nov 08
PAT (FY 2008): N51.992 billion Payment date: 05 Dec 08
Adjusted PAT (FY): N41.594 billion Fair value: N51.96


Financial analysis
Zenith bank Plc is one of the first tier banks in Nigeria. They recently released their results for the full year ended September 2008 on the floor of the NSE. They changed their financial year end to September from June and hence released a 15 month results instead of 12 months. I have adjusted the results to 12 months in order to objectively assess their performance over the past fiscal year. It should also be noted that the bank floated their third public offer over the past four years early this year. This means that they have had ample time to deploy the funds raised.

The results show that the bank was able to increase turnover over the 12 months performance adjusted period by 75.63%. Profit before tax grew by 74.85% while profit after tax rose by 121%. The results also indicate that the bank lost control of expenses by 78 basis points. There should be an explanation for this. I had earlier forecasted a 12 month PAT of N51 billion, which they fell short by N10 billion. This can be explained by most banks exposure to the stock market and to the global financial crises that had been nightmare come true. However, the bank’s ability to weather the storm and come up with results like this is remarkable, but this may also have been helped by the money they raised. The increase in expenses may have also been due to the fact that they may have written off some bad debts.

Comparing these results with the third quarter analysis I did a few months ago, the turnover rate of increase rose by 563 basis points from 70% to 75.63% meaning that the bank is still on an upward trajectory motion and is yet to get to the peak of their marginal revenue.

The balance sheet shows that the current income tax liabilities grew by N2.141 billion, which could partly explain the reduction in taxes paid and the non-linear increase in PBT and PAT. Statutory reserve is stable at N16.878 billion in both financial years but is likely to drop soon due to the CBN policy drop of reserve requirements from 4% to 2%. SMEEIS reserve is also stable at N3.729 billion, which raises the question why Zenith bank has not taken any interest in small and medium scale enterprises in Nigeria.
The cash ratio is presently 0.99 but there is no doubt about the bank’s solvency even though the debt to equity ratio (excluding deposit liabilities) worsened from 0.54 to 0.74. The return on asset remained stable at 0.02, while the return on equity dropped from 0.16 to 0.12. This drop can be explained by the money raised from the capital market and the storm the financial sector has faced, which has reduced profitability across board.

Valuation
Based on the results and selected indices, the bank’s earning per share comes to 311K out of which they have proposed a dividend of 170K per share. The adjusted EPS comes to 248K with a retention rate of 45%. At the current price of N27.14, the price earning multiple is 10.94x. The book value is also noted to be 20.21 with a price to book value of 1.31x.

The calculated sustainable growth rate of dividends of the bank comes to 5.4% per annum, while the cost of equity using the dividend discount model is 10.68%

The fair value of the bank using the price earning model comes to N49.60, the dividend yield model gives N54.40 while the price to book value model generates a price of N51.79. An average of the three values gives an intrinsic value of about N51.96.

The stock should hit N57.51 within the next 12 months for it to be worth its salt. Although this bank is set to generate wealth for its shareholders there are better buys out there even in the banking industry. This will be a very good asset for wealth preservation with little volatility and for risk-averse investors going by the relative resilience of the stock price to the recent near market crash.

It does not fit into my personal investment risk-return profile.