Stock Watch: Equity Group Holdings Ltd

Equity Group Holdings Ltd (NSE: EQTY) announced their audited results for the period ended 31st December 2014 on 10th March 2015.

Recommendation: HOLD – Target Price – KES 47.71 (Downside – 9%)

 
16.8% Rise in Pre-Tax; 27.8% Growth in After-Tax Earnings: EQTY announced 16.8% rise in pretax profits to KES 22.4 billion underpinned by 20.2% growth in non-funded income to KES 18.5 billion as PAT shored up 27.8% to KES 17.15 billion. Interest income spanned 10.9% to KES 35.4 billion despite NIMs easing by 60bps to 11.4% on account of 2014’s lower interest rate regime. 14.7% growth in interest expense to KES 6.2 billion was owed to 17.5% uptick in cost of customer deposits to KES 4.7 billion (customer deposits up 26.1% to KES 245.3). With KBRR lowering to 8.54% in January 2015, NIMs are expected to compress even further from 11.4% necessitating diversification in non-funded income. As at 31st December 2014, non-funded income contribution to total income grew to 39% Vs 37% on the back of a 26% jump in transaction income to Kes 14.1 billion.

Impairment in Cost-to-Income Ratio to 52.0%; DPS Up 20% to KES 1.80: Operating expenses spanned 16% to KES 26.3 billion as cost-to-income ratio deteriorated to 52.0% from 49.3% borne from 19% and 28% rise in employee costs and other operating expenses to KES 10.8 billion and KES 26.3 billion respectively. Despite trimming dividend pay-out ratio from 41.8% to 38.9% to solder up on capital buffers following implementation of the Basel II regulation, the lender raised its first and final DPS to Kes 1.80 from Kes 1.50 (FY13). Friday 20th March 2015 was provided as the book closure date for qualification in payment of the final DPS.

Gross NPL Ratio Declines to 4.2%; 34% Attrition in Loan Loss Provisions: EQTY’s loan book expanded by 24.7% to KES 214.2 billion while customer deposits surged by 26.1% to KES 245.3 billion. 11.9% rise was observed in borrowed funds to stand at KES 29.9 billion to placate the lenders burgeoning loan-to-deposit ratio at 87.3% with cost of funds easing to 2.5% from 2.6% (FY13). Gross NPL ratio declined from 5.2% last year to 4.2% as loan loss provisions retreated by 33.8% to KES 1.59 billion. Meanwhile, NPLs appear well-provisioned with Equity Bank’s coverage ratio improving to 64.5% (FY14) up from 53.4% in 2013.

Outlook: Sufficiently Buffered; Subsidiaries Accelerate in Growth Phase: EQTY remains sufficiently buffered against liquidity freeze with core capital ratio and total capital ratios at 14.8% and 17.3% vis-à-vis CBK regulation of 10.5% and 14.5% respectively. Its vast regional expansion paid dividend as earnings from subsidiaries rose by 328% to account for 5.0% of group PBT and is expected to boost future earnings with subsidiaries accelerating further in their growth phase.

The share has reported a gain of 4%YTD (31/12/2014- Kes 50.0) and currently trades at P/E and P/B multiples of 11.23x and 3.02x in comparison to industry’s average of 11.80x and 2.46 times – indicative of marginal headroom in returns.