Asset & Resource Management Company (ARM), a leading investment services company, has said the ongoing rights issue of Sterling Bank Plc provides investors with a highly attractive opportunity given the intrinsic potential of the stock.
In an extensive review of the bank?s fundamentals, ARM said the right issue?s price was an ?attractive entry point? and thus placed a ?buy? on the stock at the rights issues price. According to ARM rating explanatory note, ?buy? rating means that investors should ?accumulate security to a substantial extent constrained only by portfolio diversification considerations.?
Sterling Bank is raising N12.5 billion through a rights issue of about 5.889 billion ordinary shares of 50 kobo each at N2.12 per share. Application list, which opened on June 24, 2013, will run till July 31, 2013.
According to the investment company, the overall outlook for the bank has been bolstered by improvements in operational metrics, which underscored the breadth of the ongoing recovery.
ARM pointed out that the latest interim earnings report of the bank for the first half ended June 30, 2013 showed that profits before and after tax surpassed analysts? estimates, which made the bank?s shares to be more attractive.
?Clearly however, the right issue price at N2.12 offers a more compelling entry point at a 52 per cent discount to fair value, current price-to-book value is at a slight premium to Tier II peer average at 0.8 times whilst price-earnings ratio at 6.2 times compares with peer average of 8.6 times,? ARM stated.
The report noted that key extracts of Sterling Bank?s first-half results significantly exceeded analysts? forecasts.
According to the report, gross earnings rose 28 per cent to N41.8 billion, tracking five per cent ahead of analysts? forecast while profit before tax and profit after tax rose a much faster 93 per cent and 97 per cent to N6.3 billion and N5.9 billion, which were well ahead of analysts? forecasts of N5.2 billion and N4.7 billion respectively.
It attributed the strong bottom-line performance to the improvements in the bank?s cost efficiency, noting the improvement in the cost-to-income ratio and increasing success of the bank?s deposit mobilization strategy.
?Since expanding programme for using direct sales agents, which has seen its sales force quadruple to over 1,600, funding costs have declined steadily from a three years high of 6.5 per cent, indicating that it has brought net benefits from more efficient deposit mobilisation,? ARM stated.
The report commended what it described as general improvement in the asset quality of the mid-tier banks and particularly the continuing improvement in assets quality of Sterling Bank.
?While the results are unaudited, overall improvements suggest that industry-wide asset quality improvements are taken firmer hold across the mid-tier banking in general and Sterling Bank in particular,? ARM pointed out.
While underscoring the fact that Sterling Bank?s capital adequacy ratio is slightly ahead of the 10 per cent minimum regulatory standard, it noted the well-laid out plan by the bank to raise additional capital totaling $400 million in Tier 1 and II capital over the next 12 months, beginning with the ongoing $80 million right issue.
The net proceeds of the rights issue, estimated at N12.13 billion, would be used to finance branch expansion, infrastructure upgrade in support of automated and cashless payment, enhance information technology and additional working capital.
Interim report and accounts of Sterling Bank for the six-month period ended June 30, 2013 showed that earnings per share doubled to 38 kobo in 2013 as against 19 kobo in comparable period of 2012, underlining the increasing attraction of the bank as a high-yield stock. On the basis of the six-month report and current price, earnings yield stands at a double-digit rate of 14.2 per cent.
The first-half report came on the heels of initial filings showing extensive shareholders? interests in the bank?s ongoing N12.5 billion rights issue.
The report showed that profit before tax rose by 93.5 per cent to N6.27 billion as against N3.24 billion recorded in corresponding period of 2012. Profit after tax nearly doubled from N3.01 billion to N5.92 billion, representing an increase of 96.7 per cent.
The bottom-line performance was driven by the bank?s growing brand acceptability and customers? deposit as well as efficient cost and risks management. Gross earnings rose by 28 per cent from N32.68 billion to N41.86 billion. While interest income grew by 18 per cent from N26.34 billion to N31.08 billion, net interest income grew faster by 27 per cent to N15.17 billion in 2013 as against N11.96 billion in comparable period of 2012.