dfcu Group Ltd FY2016 Audited Financial Statements Snapshot

16 May 2017

HMayOLD 201 7 dfcu Group (USE: DFCU) Audited Financial Statements 2016: A Tale of Two : dfcu faces a new dawn while Crane is no more. Mkt Price 16/05/17 Ugx759 12m Target Price* n/a We note two announcements by dfcu after the public release of the 31 December 2016 balance sheet; acquisition of Crane and an “in principle” shareholder loan of $50 million (Ugx180.5Bn). Upside/downside TP n/a These post balance sheet events are highly significant to the current and future valuation of the company.

Acquisition of : On 31 January 2017 dfcu announced it concluded arrangements to take over Crane Bank following “the purchase and assumption agreement with Bank of on 27 January 2017 in which dfcu Bank acquired some of the assets and assumed some of the liabilities of Crane Bank”.

Shareholder Loan: In a press release dated 3 February 2017 dfcu announced that “…Arise B.V has given its ‘in principle’ agreement to extend a USD 50 million bridging facility to the company to support the enhanced capital adequacy requirements of Bank”.

Analyst Opinion We have undertaken a review of dfcu Group using valuation models for a market-based CAPM, multiples approach, and discounted cash flow based on the FY2016 audited financial statements and the post balance sheet events. However, details relating to the value of assets and liabilities acquired from Crane, the drawdown amount and terms of the Arise B.V. bridge financing, and management’s plan for complying with requirements for capital adequacy, liquidity, and asset quality (among other information) were not publicly available. We are uncertain as to the impact such items may pose to dfcu’s future value, leaving an information gap in our valuation. Therefore, we give dfcu a HOLD recommendation at current market price of Ugx759 ($0.21).

We look forward to the company’s release of either 1Q2017 or 1H2017 unaudited financial statements which should avail sufficient information to populate our valuation models. Figure 1: dfcu Group Ltd Share Price Trend (Year on Year) Source: Crested Database, Market activity. dfcu has largely traded at Ugx758 ($0.20) by the close of the month of April, its Share Details lowest since the start of the year when it opened at Ugx770 ($0.21). The price is also 15.7% lower Symbol (Bloomberg) DFCU UG than April 2016 when it traded at Ugx900 ($0.25). So far in 2017, the counter has registered very Market USE low volume of 771,826 shares generating a year to date turnover of Ugx563.67Mn ($0.15Mn).. Last Price Ugx759 52 Week Range Ugx758 – 900 2016 Audited financial results; Year to Date Vol Traded 771,826 dfcu Group’s profit after tax increased 28.4% to Ugx45.32Bn ($12.55Mn) from Ugx35.3Bn Year to Date Turnover Ugx563.671Mn ($0.15Mn) ($9.77Mn) in 2015. dfcu’s Total incomes grew 15% from Ugx222.88Bn ($61.74Mn) to Ugx257Bn Year to date Return (1.30%) ($71.2Mn). Interest on loans and advances, government securities, interest on deposits and Shares Outstanding 497,201,822 placements by 1.7%, 65.7% and 1098% respectively. These contributed to the interest income’s Market Capitalization Ugx377.87Bn ($104.67Mn) 19.23% rise to Ugx217.15Bn ($60.13Mn) from Ugx183Bn ($50.7Mn) in 2015. Expenses also rose Table 1 Source: Uganda Securities Exchange (USE), Crested Database 13% to Ugx198Bn ($55.02Mn) from Ugx176Bn ($48.74Mn). The group’s provisions for bad and doubtful loans were up 52.5% to Ugx17.83Bn ($4.94Mn) from Ugx11.7Bn ($3.23Mn) in 2015. Financial Details (Ugx Mn) 2015 2016 % Change Balance Sheet: Assets in FY2016 grew 6% to Ugx1.75Tn ($487Mn) from Ugx1.65Tn ($457.45Mn) Total Income 222,885 257,007 15.30% in 2015. Loans and advances, investment securities contributed 70% to the total assets growing 4% Provision for bad and doubtful Debts (11,690) (17,830) 52.52% and 15% to Ugx842.36Bn ($233.34Mn) and Ugx387Bn ($107.2Mn) respectively. Marketable Total Expenditure (175,963) (198,644) 12.89% securities grew 41% in FY2016 to Ugx102.21Bn ($28.31Mn) from Ugx72.44Bn ($20.06Mn) in Net Profit 35,290 45,325 40.37% FY2015. Total Assets 1,651,629 1,757,725 6.42% Total Liabilities 1,436,498 1,508.073 4.98% Liabilities were at Ugx1.51Tn ($417.75Mn) growing 5% from Ugx1.43Tn ($398Mn) in FY2015. Shareholders’ equity 215,131 249,652 15.95% Customer deposits rose 24% in FY2016 to Ugx1.13Tn ($314.33Mn) from the previous year’s Table 2 Source: dfcu Group Ltd Audited Accounts for FY2016 (Published on 21.03.2017), Ugx915Bn ($253.45Mn). Shareholders’ equity in FY2016 also registered growth from Ugx249.65Bn Crested Database to Ugx249.65Bn ($69.15Mn) from Ugx215.13Bn ($59.6Mn) in 2015.

Ratios 2015 2016 % Change dfcu Bank, the group’s main subsidiary, in the statements slashed NPLs in 2016 by 18.10% from ROaA 2.29% 2.66% 16.15% Ugx71.3Bn ($19.74Mn) to Ugx58.4Bn ($16.17Mn) while its large loans exposure increased 19.2% to ROaE 17.36% 19.50% 12.33% Ugx217.4Bn ($60.21Mn) from Ugx182.32Bn ($50.5Mn) in 2015. The bank posted PAT of Cost to income 40.17% 37.7% 6.1% Ugx46.27Bn from Ugx37Bn ($10.25Mn) in 2015. This was on account of growth in incomes from Dividend Yield 2.2% 3.2% 45.45% loans and advances, government securities and fees and commission incomes as all contribute about P/E 13.8 8.44 (38.8%) NAV (Ugx) 215.1Bn 249.6Bn 16.04% 94.6%. The bank also recorded off-balance sheet exposures (Risk Weighted Assets) of Ugx1.06Tn EPS (Ugx) 70.98 91.16 28.43% ($293.4Mn) 4.7% from Ugx1.01Tn ($280.2Mn) in 2015 and a core capital to RWA 17.76%. Earnings per Share in FY2016 rose 28.4% to Ugx91.16 ($0.025) from Ugx70.98 ($0.019) in 2015. Table 3 Source: dfcu Group Ltd Audited Accounts for FY2016 (Published on 21.03.2017), Crested Database Return on Equity and Return on Assets were at 19.50% and 2.66% in FY2016, compared to an average of 21.33% and 2.76% over the last five years. The company’s Price-to-Earnings ratio of 8.44 in 2016 suggests it’s slightly undervalued compared to the peer group’s 8.82. dfcu’s directors recommended a final dividend of Ugx25.19 ($0.007) per share in FY2016 (FY2015: Ugx21.73 ($0.006). This represents a dividend payout ratio of 27.6% and a Dividend yield of 3.26%.

If approved at the AGM, the FY2016 dividend (subject to a deduction of withholding tax as applicable) will be paid by 31st July 2017 to members on the company’s register by 29th June 2017. The Annual General Meeting is scheduled for 8th June 2017. (USE Effective Date: 27 May 2017).

Recommendation Guide: BUY – Strong Fundamentals; BUY/HOLD - Fundamentals are good, in line with sector performance and guidance; HOLD - Future Outlook remains positive; SELL/HOLD - Substantial Risk to fundamentals, negative outlook and guidance; SELL - Strong Risk on fundamentals

1$ = Ugx3,610.

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