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Intercontinental Bank PLC CSL Stockbrokers LTD NIGERIA Equity Research NSE ASI: 47,093.27 41.89% YTD April 23, 2007 Intercontinental Bank PLC Price: NGN25.95 Fair Value: NGN25.81 Financial Summary 2006 2007E 2008E Revenue: N38.79B, $303.05M Rating: Outperform 5-year EPS CAGR: 35% EPS 1.10 1.69 1.38 Recommendation: BUY ROE: 13.88% P/E 11.78 15.37 18.83 Market Data Current BVPS: N5.08 Credit Rating: AA, Agusto; A, Fitch Debt to Capital (%): 35% Bloomberg: INTB NL Fiscal Year-End: February FYE: February EBITDA: N10.55B, $83.73M Outstanding Shares: 10.72B Sustainable growth rate: 6.40% Free Float: 76% Dividend Yield: 1.73% Net Profit: N8.23B, 52 week high/low: NGN27.95/NGN9.85 INVESTMENT SUMMARY & HIGHLIGHTS Lifetime High: NGN27.95 Investment Grade: C+ Q3 06 result: Exceeds expectations Daily avg. Volume/Value: INTERCONTINENTAL Bank Plc has released its third quarter (nine months) result which 13,506,125 shares/ showed a quantum leap in profits and gross earnings. The bank's profit before tax grew by 179 per cent to N12.8 billion by end of the third quarter ending November 30, 2006 NGN301,856,956; $2.395M compared to N7.18 billion recorded in the same period of 2005. Gross revenues almost (90-day moving average) doubled at 194 per cent to N59.11 billion from N30.48 billion, while profit after tax soared by 172 per cent to N10.13 billion from N5.88 billion during the period under review. The Mkt Cap:NGN278.7B; US$2.2B bank has in the past nine months experienced unprecedented growth in its deposits portfolio indicating robust customer confidence. N/share Intercontinental Bank price mov't 30.0 27.5 25.0 Full-year revenue projections expected to double preceding year 22.5 20.0 Revenue for February 2006 - February 2007 fiscal year is expected to double to 17.5 15.0 NGN77.5B when the 2006-2007 full-year results are announced. This estimate is based 12.5 10.0 on our extrapolation from previous quarters and our belief that the trend will continue 19-Apr-06 19-Jul-06 19-Oct-06 19-Jan-07 19-Apr-07 coupled with the increase in consumer confidence about the bank’s future financial Daily price mov't 30-day mov'g av. 60-day mov'g av. prospects and service delivery. Jude Fejokwu [email protected] +234 1 271 3925 CSL RESEARCH Intercontinental Bank Social risks highly diminished due to Corporate Social Responsibility acts The bank has been at the forefront of corporate social responsibility acts especially within the educational and health sectors. Fifteen universities have so far benefited from the bank’s infrastructure development projects within the educational sector. The bank has also awarded scholarships to indigent and deserving college students across the country. The bank is definitely in tune with its host communities. Investor goodwill is at a high which in the African cultural context translates into increased business patronage and more positive interest in buying the stock. Valuation promising and should improve further once new information arrives Our five-year DCF based valuation of Intercontinental Bank’s fair value today based on future projections is NGN24.90. Once certain systematic issues like inflation within the economy and cost of debt can be reviewed downwards, the WACC of 19.88% will adjust downward thereby creating more value for the firm even at current projections. INVESTMENT THESIS The stock has gained almost 50% within the first quarter of this year and definitely has value over the mid – long term. The stock price is currently holding steady within the N25.00 – N26.00 range. We suggest investors latch on to the stock now as the stock will soon embark on a steep upward movement. The stock definitely has good value going forward. • Great Value & Growth Stock • Exponential Growth in earnings between FY 2005/2006 and FY 2006/2007 • Foreign investors (Vectis Capital, EMP Africa Fund II, RICO, AIG Global Emerging Markets Fund II and Rand Merchant Bank of South Africa) stake $161 million (N20.25B) in form of convertible preferred equity into the bank • Great Investor Goodwill & confidence in the stock. • The first bank in Nigeria to raise its shareholder funds to $1 billion which highlights the strength of the bank’s brand equity. • Steep increase in deposit base and steadily increasing further buoyed by the Happy Savers Promo currently ongoing nationwide. Happy Savers Promo has attracted 115,000 new accounts so far. 2 CSL Stockbrokers CSL RESEARCH Intercontinental Bank • Attractive market and rapidly evolving industry: only about 10% of the Nigerian populace currently have bank accounts. Lots of room to gain market share which Intercontinental Bank is poised to capture a sizeable chunk of the non-banking populace. BUSINESS STRATEGY Management expects growth in revenue and market share to come from seven different activities: • The bank is in the process of building about eighty new branches this year which will increase their number of branches to 280 evenly spread across the country and located in places where the bank is either unrepresented or underrepresented. This will enhance the bank’s reach to potential customers. The bank will take advantage of value-adding opportunities outside Nigeria to enable it become a global player. • The bank aims to be aggressive in attracting new customers by approaching customers without being approached. The bank is rolling out new products and putting them at the door-step of consumers through cross-selling and adverts and promos. Nigerians like promos and this is a great way of increasing market share and revenue thereof. The ultimate goal of the ongoing Happy Savers promo is to raise the bank’s balance sheet size to N1.0 trillion before the end of the year. • The bank is constantly upgrading its processes and services to meet customers’ needs thereby cementing strong customer loyalty and support. Management believes this will generate customer loyalty and affection which is an integral part of increasing market share in the mid – long term. • The bank is aiming to be one of the strong players in global banking which culminated in its technical partnership with BNP Paribas last year to enable the bank qualify to manage the country’s foreign reserves valued at $41 billion. This will be an added brand new revenue stream for the firm though there are about eleven other banks also primed to benefit from this new revenue stream, management believes there is enough to go round. • The bank is at the forefront of business development and product innovation; this is evidenced by its wide array of highly successful subsidiaries and highest number of exceptionally powerful product brands. 3 CSL Stockbrokers CSL RESEARCH Intercontinental Bank • Management believes its innovative products coupled with effective marketing will generate patronage of its products, increase its market share and improve its bottom-line. • Management sees ecommerce as a viable route to revenue generation and a platform to cross-sell products with minimal expenses incurred which benefits profits. Most of its current array of products is ecommerce focused. The average Nigerian consumer is still not very comfortable with the World Wide Web to engage in business transactions through the internet. Massive sensitization of its customer base will need to be embarked on by the firm to enable it benefit financially from the roll-out of these products. • The bank will not pursue every project available; the bank will concentrate on niche projects to enable it lower its marginal costs thereby improving its bottom- line. Other banks are also rolling out similar products but with a customized touch to them. Differentiation is the key driver in banks’ product marketing drives. We expect banks with strong customer loyalty and affinity to be most successful in selling their products. The competition is not necessarily trying to compete but to be different. Products are becoming so customized that patronage is low. We believe consumer financing schemes are the way to go to attract mass patronage. Intercontinental Bank needs to reach out further to the populace in this regard. INDUSTRY OVERVIEW The banking industry has undergone major reforms in recent times; the most heralded being the recapitalization exercise completed December 2005 which raised the minimum capital base of commercial banks in Nigeria to N25 billion. As a consequence of this reform, there are now twenty-five banks in Nigeria from eighty-one before the reform came into being. The government recently enacted a money laundering law which requires banks to report funds transfers in excess of stipulated amounts to curb fraud and corrupt activities. The banks had to upgrade their systems to enable them comply with the directive. All banks are grappling with non-performing loans to varying degrees which has led to a committee being set up to form a credit bureau to enable banks better ascertain the risk of every loan applicant which should thereof reduce their bad debt and thereof the provision for it. The CBN has given all three tiers of government till March 31st to dilute their stakes in banks to a maximum of 5%. This will free up shares and give bigger banks a chance to prey on smaller ones. Stay tuned for the musical chairs. 4 CSL Stockbrokers CSL RESEARCH Intercontinental Bank Most of the twenty-five banks in the country are currently aggressively rolling out customized retail products to meet the needs of their teeming customers. Most banks believe that there are a good number of unmet consumers’ needs which if correctly identified are the best way of greatly increasing revenue. A lot of banks in a bid to increase their demand deposits are doing promotions to attract new customers and bring in more deposits from new and existing customers.
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