Divestment of ABL: Divestment of GoP shares, We recommend ‘Subscribe’ The Government of Pakistan (GoP) is selling its entire 11.5% or 131.3mn shares stake in Allied Bank Limited (ABL) at floor price of PKR 105/share, generating around PKR 13.78bn or USD 136.5mn for GoP. At a floor offering price of PKR 105/share ABL offers a good +37% to our target price of PKR 144/share. We recommend a ‘subscribe’. Target price of PKR 143/share, leaving fair upside of +27% Our Dec-15 price target for the Bank comes at PKR 144/share using justified price-to-book valuation, implying a 1.9x P/B multiple. Our valuation factor’s in cost of equity of +15.5%, sustainable ROE of 20% and growth rate of 10.8%. At last closing of PKR 113.7/share, ABL offers a healthy +27% upside potential to our target price. In addition, we expect the bank to pay a dividend of PKR of 6.0/share offering dividend yield of +5.3% bringing a total return of +32%. We recommend a ‘Buy” for the scrip. Investment Case • Expanding Earning Asset Yields...: Adequate capitalisation (CAR 18% in CY13), clean balance sheet (infection ratio 6.8% in CY13) and low advance-to-deposit (ADR 47% in CY13) ratio leaves enough headroom for the bank to expand its loan sheet. While hefty exposure in PIB’s will push earning asset yields >9.8% in CY14-CY17F from 9.1% in CY13, we estimate. • And Normalising Cost of Deposit...: Bank’s concentrated efforts to mobilise low cost deposits, despite above industry deposit growth rate, have all produce desired results, where ABL’s cost of deposits dropped to +4.8% in CY13, from +5.2% in CY11. • ...Should lead to higher NIMs with Earnings of +8.5% CAGR over CY14-17F: NIMs are estimated to normalise >4.3% during the period CY14-CY17F, supported by stable credit growth, hefty exposure in PIB and adequate cost of funding. Along with ABL’s robust non-interest income and cleaner balance sheet, we estimate earnings to exhibit +8.5% CAGR over the period of CY14-17F. • Lowest Infection Ratio amongst the ‘Big 5’ and High Coverage of +94%, Means Less Provisioning Surprises on Income Side: ABL’ infection ratio edged further lower in CY13 to +6.8%, which is the lowest amongst ‘Big 5’ (average of NBP, HBL, MCB, UBL ~12%). With bank’s a) prudent lending policy and b) industry lead factors would keep NPL accretion to minimal. While a high coverage ratio of +94% (CY13) the bank holds one of the cleanest asset profiles in the ‘Big 5’ banks, limited provisioning surprises on income side. • Trading at a Discount to Its Peer, Despite Equal Delivery: Moreover, ABL at current price is trading at discount of almost ~10% in our view to the ‘Big 5’ banks, despite equal delivery on ROE (>20%) and ROA (>1.9%).
Posted on: Wed, 10 Dec 2014 10:23:43 +0000
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