NBK Capital MENA initiated coverage of ADIB Egypt (ADIB) on 28 December with a “Buy” recommendation and a fair value of EGP 8.80 per share, implying 17 per cent upside potential. ADIB is the third-largest Islamic bank and the 12th largest bank in Egypt in terms of assets and has around 1.5 per cent market share in terms of loans as of September 2014. ADIB is 49 per cent owned by Abu Dhabi Islamic Bank (UAE) and enjoys ample support from it.
The stock price has decreased 9 per cent in 2014, significantly underperforming the Egyptian banking index, which has risen 46 per cent in the same period. ADIB trades at a steep discount of 1.3x 2015F book value and 6x 2015F earnings versus 2.4x and 9x, respectively, for CIB and 1.7x and 9x respectively, for Credit Agricole Egypt (CAE). NBK Capital MENA said, “We believe this excessive discount is unjustified given a strong net profit CAGR of 21 per cent between 2015 and 2017, which is the highest among peers. We expect a decreasing RoAE given ADIB’s relatively small equity base, but we still forecast the RoAE to average around 25 per cent in 2015-2017. Given ADIB’s low equity base, another valuation metric to look at is market capitalization to deposits, where ADIB’s ratio is at the lower end of peers, underscoring our view that ADIB’s valuation discount is excessive.
Downside risk stems from dilution of minorities
“In late 2013, ADIB’s board of directors proposed to increase the bank’s paid-in capital to EGP 4 billion from EGP 2 billion, through a rights issue. The rights issue will be priced at the par value of EGP 10 per share, which is above the current stock price of EGP 7.51. Therefore, minority shareholders will most probably not exercise their rights, leading to dilution. In fact, the rights issue may turn out to be a conversion of funds (EGP 1.9 billion provided by ADIB UAE) from reserves to paid-in capital. However, ADIB’s management has confirmed that the rights issue has been shelved for now. Accordingly, our base-case scenario does not assume this rights issue will take place, and therefore we are not assuming that conversion and dilution will take place. However, we incorporate this risk in our model by assigning ADIB an elevated risk level (5) and a high cost of equity (20.75 per cent) in our forecast horizon.
Improving fundamentals to propel valuation
“Post-restructuring, ADIB’s financing growth has been stronger than the sector, and we forecast ongoing market share gains. Furthermore, we think there is a lot of headroom for NIM accretion and cost efficiency improvement. We forecast financings will grow by 18 per cent annually in 2015-2017, translating into similar revenue growth, and even faster net profit growth. Strengthening the retail/SME/commercial businesses, optimizing branch efficiency, and increasing the NIM were few themes that emerged from our discussion with ADIB’s management.”
Originally published on www.cpifinancial.net
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