dfcu Group FY2017 Audited Accounts Snapshot

April 27, 2018

BUY dfcu Group (USE: DFCU) FY2017: Earnings boost from Crane Market Price 27/04/2018 Ugx778 acquisition 12-Month Price Target* Ugx832 Analyst opinion: BUY with 12-month target price of Ugx831.94 ($0.21): Upside to TP 7.07% At the start of 2017, dfcu took a game changing decision to acquire Crane Figure 1: DFCU Year-to-date Share Price Trend. Bank (CBL), a move which has given the group a boost in ’s highly competitive banking sector. In its August 2017 Rights Issue Information memorandum, dfcu reported the acquisition included assets with a value of Ugx1.17Bn ($318.17Mn) and liabilities of Ugx986.92Bn ($244.40Mn) with a fair value of net identifiable assets of Ugx270.76Bn ($73.77Mn). Over the years, dfcu appears to have perfected the acquisition game, with successful takeovers of Gold Trust Bank (2000) and Global Trust Bank (2014). The transaction immediately grew the company’s assets by 75.15%, customer deposits by 75.12%, and loans and advances by 59.87%, Customer numbers increased to more than 900,000 higher than Stanbic with

more than 665,000 customers (2016) but lower than ’s 1.48Mn Source: Bloomberg (2016). dfcu also expanded its countrywide coverage to a branch network of Share Details 67 and over 100 ATMs (2016: 43 branches, 42 ATMs). Symbol (Bloomberg) DFCU UG The 2017 results show improvement in key performance metrics; return on Market USE average assets (ROaA) increased 66.80% to 4.45% from 2.67% in 2016, return Last Price Ugx778 on average equity (ROaE) rose by 40.17% to 27.34% compared to 19.50% last Beta 0.03 52 Week Range Ugx680-778 year. This is competitive compared to local listed peers with Stanbic’s (SBU) Year to Date Vol Traded 3.18Mn ROaE of 25.26% and ROaA of 4.01% and Bank of Baroda’s (BOBU) ROaE Year to Date Turnover Ugx2.25Bn ($0.61Mn) of 16.25% and ROaA of 3.28%. dfcu’s cost to income also improved to Year to date Return 14.41% 49.10% from 55.98% in 2016. However, we expect these to normalize in 2018 Shares Outstanding (Post Rights) 748,143,893 taking out the impact of exceptional items during the Crane Bank acquisition. Market Capitalization Ugx581.31Bn ($157.54Mn) Corporate action update: dfcu group undertook a rights issue in September 2017 Financial Details (Ugx Mn) FY2016 FY2017 % Change to pay off a bridge loan facility acquired from its majority shareholder ARISE Total Income 257,007 517,538 101.37% B.V. of Ugx184.50Bn ($50Mn). dfcu successfully raised Ugx190.67Bn Net Interest Income 133,241 215,451 61.70% ($51.95Mn) with a 95.21% subscription rate increasing the total number of Impairment for credit losses 17,830 48,652 172.87% issued and fully paid shares by 50.47% to 748.14Mn shares. Net Profit 45,325 106,892 135.83% Loans and advances 834,827 1,334,611 59.87% We give dfcu a BUY recommendation with a 12-month target price of Customer deposits 1,134,731 1,987,118 75.12% Ugx831.94 ($0.21) and a 7.07% return on current market price, adjusted for Total Assets 1,745,640 3,057,476 75.15% the dividend yield of 8.77% results in a projected total shareholder return Total Liabilities 1,495,988 2,525,138 68.79% (TSR) of 15.84%. The counter trades at the lowest price to earnings multiple Shareholders’ equity 249,652 532,338 113.23% among local listed with 5.45x compared to BOBU at 7.39x and SBU Source: dfcu Group FY2017 Audited Accounts with 7.92x. Our estimates assume a growth of 10.49% derived from a retention Ratios FY2016 FY2017 % Change rate of 52.24% from the company’s FY2017 earnings. ROaA 2.67% 4.45% 66.80% Key to note, the group’s expenses are likely to remain high impacted by the ROaE 19.50% 27.34% 40.17 % Ugx200Bn ($54.20Mn) purchase cost of Crane Bank to be paid quarterly to Cost to income 55.98% 49.10% (12.29)% Credit Loss 2.14% 3.65% 70.68% the central bank starting in the fourth quarter of 2017, which includes Loan to deposit 73.57% 67.16% (8.71)% Ugx20Bn ($5.42Mn) payments each quarter through to the first quarter of Earnings Per Share 91.16 142.88 56.73% 2020. In addition to growth through acquisition, dfcu also obtained licenses Dividend Per Share (Ugx) 25.19 68.24 170.90% to transact Bancassurance and Agent banking from which it may earn Dividend Payout 27.63% 47.76% 72.84% additional revenue. It however remains to be seen how dfcu will unlock and Dividend yield 3.27% 8.77% 168.12% take advantage of the vast opportunities presented by the larger asset base now Price to earnings 8.45x 5.45x (35.53)% at Ugx3.06Tn ($833.10Mn) (2016: Ugx1.75Tn ($475.65Mn) and translate these Price to book value 1.53x 1.09x (28.70)% into increased shareholder value. Source: dfcu Group FY2017 Audited Account

CRESTEDCAPITAL st Impala House 1 Floor, Plot 13/15 Kimathi Avenue Research Team P.O. Box 31736, , Uganda Tel: +256 312 230900, Hotline: +256 758 230900 Zacheus Mushaija [email protected] @:[email protected], Emasu Oscar Paul [email protected] W: www.crestedcapital.com

dfcu Group FY2017 Audited Accounts Snapshot

April 27, 2018

Figure 2: dfcu Group Earnings per share trends FY2017 Audited Financial Results: Profitability: dfcu group made a significant leap in PAT rising 135.83% to 160 142.88 25.0x Ugx106.89Bn ($28.97Mn) from Ugx45.32Bn ($12.28Mn) in FY2016. dfcu 140 20.0x bank, the group’s single largest operating entity also made a 175.85% increase 120 in PAT to Ugx127.64Bn ($34.60Mn). 91.16 100 15.0x Total Incomes: dfcu’s FY2017 result indicate a 59.79% improvement in interest 80 70.97 70.98 63.32 incomes to Ugx347Bn ($94.04Mn) driven by a larger interest earning asset 60 10.0x base. The group’s income composition was little changed from 2016 with 40 5.0x 68.81% of the interest incomes derived from loans and advances, 28.48% from 20 government securities and 2.71% on deposits and placements. - 0.0x Net interest incomes were Ugx215.45Bn ($58.38Mn) up from Ugx133.24Bn 2013 2014 2015 2016 2017 ($36.11Mn) in 2016 while total incomes for the year were Ugx517.54Bn Earnings Per Share Dividend Payout Price to Earning ($140.25Mn) compared to last year’s Ugx257.01Bn ($69.65Mn), 29.82% of Source: dfcu Group Audited Accounts 2013-2017, Crested database which is linked to the purchase of CBL. Figure 3: dfcu Group net asset value and share price trends Total expenses: dfcu reported total expenses of Ugx369.72Bn ($100.20Mn) 1,400 3.5x compared to Ugx198.64Bn ($53.83Mn) in FY2016. Particularly, the group’s management indicated the 95.58% rise in operating costs to Ugx189.52Bn 1,200 3.0x ($56.36Mn) were largely attributed to onetime costs incurred during 1,000 2.5x acquisition of Crane bank. Interest expenses were up 56.32%, interest on 800 711.54 2.0x borrowings increased by 57.68% while the portion of loans impaired sharply rose by 172.87% to Ugx48.65Bn ($13.18Mn). 600 502.11 1.5x 432.68 385.24 Total Assets: increased 75.15% to Ugx3.06Tn ($828.58Mn) from Ugx1.75Tn in 400 324.13 1.0x 2016 before the CBL acquisition. Loans and advances for the 12 months rose 200 0.5x to Ugx1.33Tn ($361.68Mn) from Ugx834.83Bn ($226.24Mn) in 2016, cash - 0.0x positions with the central bank increased to Ugx591.71Bn ($98.17Mn), 2013 2014 2015 2016 2017 property and equipment to Ugx145.64Bn ($38.65Mn) and assets classified as Net Asset Value Share Price Price to Book other assets increased to Ugx239.54Bn ($64.92Mn)

Source: dfcu Group Audited Accounts 2013-2017, Crested database Liabilities: dfcu group’s obligations at the end of FY2017 rose 68.79% to Ugx2.52Tn ($684.32Mn) driven by a 75.12% addition to customer deposits to Ugx1.98Tn ($538.51Mn) and a 60.29% growth in borrowed funds which rose to Ugx410Bn ($111.30Mn). The loan to deposit ratio for the period was 67.16% compared to 73.57% in 2016. Methodology: Shareholders’ Equity: Following the rights issue in September 2017, shareholders’ Our 12-month target price is derived from three models; Using the Capital equity improved 113.23% to Ugx532.34Bn ($144.26Mn) with a 6,351.8% Asset Pricing Model (CAPM) with a risk-free rate of 14.030% and a return on increase in share premium, 22.11% in retained earnings, 58.10% in share equity of 14.38%, we get a 12-months target price of Ugx889.84 ($0.24). Using capital and 172.85% in reserves. These improved Net asset value (NAV) per the Enterprise value Multiples method, we get an implied share value of share by 41.71% to Ugx711.54 ($0.19) from Ugx502.11 ($0.14) in 2016. Ugx824.55 ($0.23) while for the Discounted Cash Flow, we get an implied equity value of Ugx781.44 ($0.21). An average of the methods gives us a 12- Earnings Per Share: dfcu group returned Ugx142.88 ($0.04) in earnings per share month target price of Ugx831.94 ($0.21). compared to Ugx91.16 ($0.02) in 2016. The company is expected to payout 47.76% of earnings in dividend per share of Ugx68.24 ($0.02), a 170.90% Recommendation Guide: increase from Ugx25.19 ($0.01) in FY2016. This represents the highest BUY – Strong Fundamentals; BUY/HOLD - Fundamentals are good, in line with sector dividend yield among listed banks in Uganda of 8.77% (SBU 5.67% and performance and guidance; HOLD - Future Outlook remains positive; SELL/HOLD - Substantial Risk to fundamentals, Negative outlook and guidance; SELL - Strong Risk on BOBU 5.36%). If approved at this year’s annual general meeting, the dividend fundamentals will be paid on or about 31 July 2018. (Book closure: 28th June, USE effective date: 1$ = Ugx3,690 25th June 2018)

DISCLAIMER: The information contained herein is obtained from sources, which to the best of our knowledge are reliable. As such, we are not responsible or liable for any factual errors arising thereof. The opinions expressed herein are ours and are subject to change anytime without notice. ss CRESTEDCAPITAL st Impala House 1 Floor, Plot 13/15 Kimathi Avenue Research Team P.O. Box 31736, Kampala, Uganda Tel: +256 312 230900, Hotline: +256 758 230900 Zacheus Mushaija [email protected] @:[email protected], Emasu Oscar Paul [email protected] W: www.crestedcapital.com