May 28, 2018/InvestmentOne Report
Core holdings status remains despite likely decline in ROE
We resume our coverage of Zenith Bank following the release of its Q1 2018 results with a BUY recommendation on the stock given the 26.9% upside our new target price of N33.8 represents against current price levels. We point out the upside on the stock has been supported by the recent sell-off in the Nigeria Stock Exchange.
Zenith Bank remains one of our core holdings given the relatively solid capital adequacy ratio, strong asset yields and above average ROE. We believe these factors justify the bank’s fair value (FV) P/B at 1.36x against peer average of 1.08x.
However, we point out the 1) possible classification of the Bank’s 9Mobile exposure; 2) smaller than expected contraction in cost of funds; and 3) lacklustre loan book growth on the back of weak economic activities, pose a downside risk to our outlook.
Valuation
While we forecast ROE could fall to 20.9% in FY 2018, from 23.3% in FY 2017, due to weak non-interest income, ROE could improve to 22% levels in FY 2019, which we see as the bank’s sustainable level.
The new target price of N33.8 is arrived at by applying a 1.37x FV P/B estimate to our FV 2018 Book Value Per Share (BVPS) forecast of N24.7. We derive our FV P/B estimate using a sustainable ROE of 22%, which was weighed down slightly by the forecasted FY 2018E performance. Other key assumptions include a beta of 1.2, risk free rate of 13.0% and equity risk premium of 5.0% (previously 5.5%).
