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Opinions of Thursday, 24 November 2022

Columnist: Kofi B. Kyei

ADB 3Q 2022 earnings not impressive, current market price above intrinsic value

ADB Bank logo ADB Bank logo

ADB is a universal bank offering a full range of banking products and services in retail, commercial, corporate, and investment banking. The company was set up in 1965 by Act 286.

The Bank successfully listed on the Ghana Stock Exchange (GSE) on December 20, 2016. The new ownership structure of the Bank is shown in the chart.

MISSION: Growing a strong customer-centric bank, providing profitable and diversified financial services for a sustained contribution to agricultural development and wealth creation.

VISION: To be the People’s bank, harnessing the transformational power of agribusiness for wealth creation.

PRODUCTS & SERVICES: Retail & Corporate Banking, AgricFinance, SME Banking, Treasury Management

INDUSTRY METRICS

Commercial Banks: 23

Market Cap:1,763.58[GHCBn.] Regulator: Bank of Ghana

VALUATION

VALUATION ASSUMPTIONS

My target price of ADB is GHS1.71 per share for, which represents a NEGATIVE 66.0% upside from the current share price. I arrive at my target price through the following assumptions:

• I use a target multiple of 7.29x P/E, which is in line with the current peers average.

• I assume a 2022 E.P.S. of GHS 0.24/share.

Valuation analysis: ADB is currently overvalued by 51%. This is why I recommend a SELL because prices are likely to drop in the next few months trading at a slight premium. On a yield basis, the stock looks do not look attractive as the dividend has not been declared before

Market Cap > Shareholders Fund

P/E Ratio > Peers Average

• INVESTMENT CASE

ADB is Overvalued by 66%. And this means that the stock has a current price that is not justified by its earnings outlook, known as profit projections, or its price-earnings (P/E) ratio.

COST TO INCOME

It depicts the efficiency at which the bank is being run. The lower ratio, the better, and it indicates more profitability of banks. There is an indirect relationship between the cost-to-income ratio and the bank’s profitability.

ADB`s Cost to income is extremely high [ the worst among all banks listed on the exchange] and this is not recommended for a banking trading publicly on the organized market.



EARNINGS PER SHARE

ADB with a market of 5.06ghc producing an Earnings Per Share of 12Gp is considered as not ideal enough. It is clear that the company is not doing enough in terms of revenue generation. Its CURRENT Earnings Per Share is the LOWEST among all the listed Banks

NET INTEREST INCOME MARGIN

It is clear from the charts demonstrated above that ADB bank has weak interest income margins as it records the lowest for all banking stocks in 3Q 2022

ASSETS AND LIABILITIES

• From 2018 to date, ADB`s LIABILITIES have grown year on year more than that of the growth in their assets. What this mean is that, with time, the company`s assets may exceed its assets and this indicator the company may default on its obligations and be headed for bankruptcy



INVESTMENT CASES [FINANCIALS]

LIQUIDITY ANALYSIS (STOCK & ACCOUNTING LIQUIDITY)

STOCK: Here, we are concerned about how ‘‘quickly and efficiently’’ one can buy or sell an asset (stocks) of ADB listed. The benchmark/principle is that "the easier it is to buy and sell the more liquid it is."[Volume & Value Traded Over Time]

Benchmark: 2353443 [sector average] [Vale: Ghc3327041.07

ACCOUNTING: For Accounting Liquidity, we are looking at how well ADB`s current assets cover its current liabilities. Basically, a measurement of the company`s ability to meet short-term financial obligation`s when the need arises

RELEVANCE OF LIQUIDITY

Liquidity is an indicator of the financial health of a business. Every entity that is profitable will find itself in a bankruptcy position if it fails to meet its financial obligation to short-term creditors.



To investors, it is basically about being able to have access to the wealth you build when necessary, so that you don`t miss out on other better investment opportunities. It is therefore advisable that an investor maintain a certain level of liquidity at every point in the term.

From 2018 -Date, ADB`s Volume & Value traded has BEEN significantly below the FINANCE SECTORS average which is my benchmark for this analysis.
In 2021 for instance, ADB recorded JUST a single trade of which 28 shares only were traded valuing Ghc141.68

INVESTMENT CASE/THESIS[LIQUIDITY]

ADB has a weak level of liquidity and this will cause ADB investors to be Cash Poor

CURRENT RATIO: 0.9x CASH RATIO: 0.28x

REGULATION-ECONOMY- GENERAL INVESTMENT ATMOSPHERE

BoG CONDITION No.2: Compliance with the Capital Adequacy Ratio of 13%, Cash Reserve Ratio of 10%, and Non- Performing Loans (NPL) ratio of below the industry average at all times.

ADB Currently has a Cap Adequacy Ratio of 14.87 % [Lowest among peers] and an NPL Of 21.59% [Worst Among Peers & Above the Industry Average of 12.0%
ADB does not qualify to declare dividends in the coming year



POLICY RATE:

The Bank of Ghana raised its benchmark monetary policy rate by a further 250 bps to 24.5% during its October 2022 meeting, above market forecasts of 23%, bringing borrowing costs to the highest since 2017. This obviously has had effects on banking activities.

FINAL RECOMMENDATION: SELL

Current Price: Ghc 5.06 Fair Value: Ghc1.71

 CASE 1: Non-Payment of Dividends, ADB since 2016 that it got listed has not declared dividends to its shareholders and it does not look like it is going to declare dividends in the next year to come due to the fact that it is not meeting BoG`s condition for dividend payment

 CASE 2: Low Liquidity, ADB`s trading summary over the past years ranks below industry averages and what this means is that, investors of
ADB will be cash poor.

 CASE 3: Major business efficiency indicators like Profit margins, EPS, gross margins, and total assets are all not at their best and have not been at its best over time.

 CASE 4: ADB is on the redline and needs more time to bounce to level ground. It`s among the banks recapitalized by the Government in 2018 with funds from the Ghana Amalgamated Trust Fund.

 CASE 5: ADB is significantly overvalued (by 66% ) and all other things being equal, if the market adjusts to normal, the Price is going to fall.

• GoG /IMF ENGAGEMENT & POSSIBLE DEBT RESTRUCTURING

As of the year-end of 2021, Ghana’s banking sector cumulatively held 50% of the total domestic debt stock comprising commercial banks (30%) and the Bank of Ghana (20%). The non-bank sector comprised firms and institutions (22.6%), individual investors (9.2%), rural banks (1.1%), insurance companies (0.6%), and the Social Security and National Insurance Trust (0.3%).

Foreign investors held 16% of the remaining domestic debt. Now, whichever way the restructuring goes, commercial banks including ADB will have some level of impact, and therefore, for a bank already on the redline, the impact, I expect will be immense.

COMPANY STATISTICS

Share Price… Gh5.06
All Time Price Range [Ghc]……………………….2.87 – 5.95
Shares Outstanding……………………………347Million
Market Capitalization [Ghc]………………1.76Billion
YTD Traded Volume [Shares]………………….… 622
Earnings Per Share… 0.12

source of data: GSE, BOG, https://afx.kwayisi.org/gse/