DFCU Group FY2015 Audited Financials Snapshot th 13 April 2016 Buy/Hold DFCU Group (USE: DFCU) Audited Accounts (2015): Rising expenses and Price 12/04/16 UGX 900 non-performing loans, profitability dips by 16.2% 12m Target Price* UGX 954 Analyst Opinion: BUY/HOLD with a 1-Year Target price of Ugx954 ($0.29): DFCU Group’s lower Upside to TP 6.00% performance was anticipated from the company’s half year unaudited accounts. That said, the company had a better second half of 2015 as observed from the 16% reduction in net profit compared to a 28% drop in the six months to June 2015. A higher cost to income ratio points to investments in Information Technology and effecting changes in business operations to improve efficiency. While the growing loan book reported to be Ugx807.6Bn ($241.4Mn) is quite impressive, we remain wary of the asset quality given its clientele focus. DFCU’s loan book is mainly comprised of the Trade and commerce (contributing 18% according to FY2014 Annual Report), which entails mainly small and Medium sized enterprises (SMEs). Second to trade and commerce, DFCU also provides loans to the agricultural sector and real estate each with 12% contribution to the loan book (Annual report 2014). The managing director of DFCU bank recently said that one of the reasons for the surge in non-performing loans last year was the restructuring of loans for one of their major clients involved in the agricultural sector. The risk of increasing non-performing loans still holds as the effects of the high lending rates witnessed last year continue to feed into the economy. Overall however, Uganda’s banking sector remains adequately capitalized with a capital adequacy level of 18.6% for 2015 according to statistics from Bank of Uganda. This is far above the statutory minimum of 8% adequacy requirement. DFCU’s core capital to risk weighted assets stood at 14.4% last year slightly lower than 16.5% in 2014. The bank’s insider loan exposure was recorded at Ugx2.1Bn ($0.6Mn) from Ugx1.7Bn ($0.5Mn) previously. Our opinion is that Uganda’s banking sector is more safeguarded from the turbulence currently observed in neighboring Kenya owing to stringent monitoring by the Central Bank which ensures the stability of the sector. We give DFCU a moderate Buy/Hold recommendation owing to the execution of its strategic plan left with 3 years, which is likely to position the bank for the future growth. Recent Figure 1: DFCU Group Ltd Share Price Trend (Year on Year) amendments to the Financial Institutions Act also offer an opportunity for more growth through agency banking. Agency banking is where commercial banks use agents to take deposits on their Source: Bloomberg, Uganda Securities Exchange (USE) behalf and also provide for withdrawals. Our opinion is that DFCU will continue to capitalize on its niche in the SME and agribusiness space to boost its growth levels. Share Details FY2015 Highlights: Symbol (Bloomberg) DFCU UG Net profit plunged by 16.2% to Ugx35.3Bn ($10.6Mn) from Ugx42.1Bn ($12.6Mn) in 2014. Market USE DFCU’s incomes grew marginally by 8.2% to Ugx222.9Bn ($66.3Mn) owing to a 15.9% rise in Last Price Ugx900 interest on loans and advances. Interest income was up 12.1% to Ugx183Bn ($54.7Mn). Expenses 52 Week Range Ugx850 – 982 soared to Ugx176Bn ($52.6Mn). Provisions for bad and doubtful loans increased by 11.4% from Year to Date Vol Traded 1,078,615 Ugx10.5Bn ($3.1Mn) to Ugx11.7Bn ($3.5Mn). The group’s cash and cash equivalents stood at Year to Date Turnover Ugx1.02Bn ($304,583) Ugx394.7Bn ($118Mn) at the end of 2015 from Ugx329.7Bn ($98.6Mn) at the beginning of the Year to date Return (8.16%) year. Shares Outstanding 497,201,822 Total Assets posted a 15.9% growth last year to Ugx1.65Tn ($493.8Mn) from Ugx1.42Tn Market Capitalization Ugx447.48Bn ($133.78Mn) ($425.9Mn) in 2014 with net loans and advances contributing 48.9% to these assets. Total liabilities were at Ugx1.4Tn ($429.4Mn) with customer deposits taking up 63.7% of these. Table 1 Source: Uganda Securities Exchange (USE), Crested Database Shareholders’ equity advanced to Ugx215.1Bn ($64.3Mn) from Ugx191.5Bn ($57.3Mn) with retained earnings and reserves rising by 7.5% and 111.7% to Ugx167.8Bn ($50.2Mn) and Financial Details (Ugx Mn) 2014 2015 % Change Ugx24.2Bn ($7.2Mn) respectively. Total Income 206,072 222,885 8.2% Provision for bad and doubtful Debts (10,490) (11,690) 11.4% The Group’s main subsidiary, DFCU bank registered an 11% dip in profit after tax to Ugx37Bn Total Expenditure (149,511) (175,963) 17.7% ($11.1Mn) from Ugx41.6Bn ($12.4Mn) in 2014. Interest incomes on loans and advances grew by 15.9% to Ugx139Bn ($41.5Mn) reflecting the loan book growth and effects of the high interest Net Profit 42,109 35,290 (16.2%) Total Assets 1,424,742 1,651,629 15.9% environment witnessed last year. Lending rates soared to 24.59% from 21.69% in January 2015 Total Liabilities 1,233,201 1,436,498 66.1% according to statistics from Bank of Uganda. Foreign exchange income appreciated to Shareholders’ equity 191,541 215,131 12.32% Ugx13.36Bn ($4Mn) owing to the volatility of the local currency in the past year. Total expenditure was up 17.3% to Ugx174.8Bn ($52.3Mn) due to an escalation in operating expenses Table 2 Source: DFCU Group Ltd Audited Accounts for FY2015 (Published on 24.03.2016), to Ugx89.5Bn ($26.8Mn) reflecting the company’s investment in information Technology. Crested Database Interest expenses on deposits were up 25.6% to Ugx46.7Bn ($14Mn). Notably, investment Ratios 2014 2015 % Change securities expanded by 22.8% to Ugx335.3Bn ($100.2Mn) compared to Ugx273.1Bn ($81.6Mn) ROA 2.96% 2.14% (0.8%) previously ). Customer deposits increased to Ugx915Bn ($273.5Mn) while borrowed funds were ROE 21.98% 16.40% (5.6%) up 20.6% to Ugx320.9Bn ($95.9Mn) in 2015. Non-performing loans surged 49.5% year on year Cost to income 54.37% 60.44% 6.1% to Ugx71.3Bn ($21.3Mn) last year from Ugx47.7Bn ($14.3Mn). Bad debts written off were largely Dividend Yield 2.90% 2.36% (0.5%) stable at Ugx12.3Bn ($3.7Mn). P/E 9.58 12.96 35.3 Earnings Per Share fell to Ugx70.98 ($0.02) in the year to 2015 from Ugx84.69 ($0.03) NAV (Ugx) 385.24 432.68 12.3% EPS (Ugx) 84.69 70.98 (16.2%) previously. DFCU group had a Return on Equity of 21.98% and Return on Assets of 2.14%. Cost to income ratio edged higher to 60.44% from 54.37% while net asset value rose to Table 3 Source: DFCU Group Ltd Audited Accounts for FY2015 (Published on 24.03.2016), Crested Ugx428.66 ($0.13). DFCU’s directors recommended a final dividend of Ugx21.73 ($0.006) per Database share representing a dividend yield of 2.36% from Ugx23.53 ($0.007) paid in FY2014 which yielded 1.95%. The proposed dividend represents a payout ratio of 30.6% up from 27.8% in 2014. If approved by shareholders at the Annual General Meeting scheduled for 22nd June 2016, the FY2015 dividend will be paid on or about 31st July 2016 to members on the company’s register on 30th May 2016 (USE Effective Date: 25th May 2016). * Methodology: We used three models for our valuation. The Capital Asset Pricing Model uses a market risk of 8.24%, a risk factor of 16.38% and expected return of 16.18%, we get a 1-year target price of Ugx1,068.85 ($0.32). PE multiples method; using a sectoral PE of 14.33 and a trailing PE of 11.9, we get a target price of Ugx936 ($0.28). For the three Stage Discounted Cash Flow; using a risk factor of 16%, a discount rate of 9% and a margin of safety of 25%, we get a target price of Ugx858.76 ($0.26). Taking an average of the target prices from the three models gives a 1-year target price of Ugx954 ($0.28) which has an upside of 6% from DFCU’s current price of Ugx900 ($0.27). Recommendation Guide: BUY – Strong Fundamentals; BUY/HOLD - Fundamentals are good, in line with sector performance and guidance; HOLD - Future Outlook remains positive; SELL/HOLD - Substantial Risk to fundamentals, negative outlook and guidance; SELL - Strong Risk on fundamentals 1$ = Ugx3,345 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. CRESTEDCAPITAL Research Team Impala House 1st Floor, Plot 13/15 Kimathi Avenue P.O. Box 31736, Kampala, Uganda Ruth Nabakka [email protected] +256 703 747 421 Tel: +256 312 230900, Hotline: +256 758 230900 José Domingo [email protected] +256 793 459 515 @: [email protected], W: www.crestedcapital.com Salima Nakiboneka [email protected] +256 774 560 681 Dreck Murozi [email protected] +256 775 425 060 .