Investment advisory firms assess FDH Bank IPO

Five investment advisory firms have generally agreed that FDH Bank, whose Initial Public Offer (IPO) closes Friday, is a long-term buy that offers good value for investors.

FDH Bank, which is expected to list 1.38 billion shares or 20 percent stake on Malawi Stock Exchange (MSE) on August 3, plans to raise K13.1 billion through the IPO.

In their analyses, all the five firms—Nico Asset Managers Limited, Cedar Capital Limited, Continental Asset Management and Alliance Stockbrokers Limited—have highlighted, among other factors, that FDH Bank has one of the best dividend policies on the market that seek to pay up to 80 percent of its profit as dividends.

In it analysis, Nico Asset Managers Limited said the K10 share price offers medium to long-term gains and steady dividend yields.

“The dividend policy is to pay 80 percent of the banks’ profit after-tax. This could translate to a dividend yield of 8.2 percent based on the forecasted profit for 2020,” reads the analysis in part. 

The firm said FDH Bank has shown signs of earnings growth, with figures showing that in the year ended December 31 2019, the bank registered a seven percent increase in net interest income largely stemming from the 31 percent jump in interest from money market investment and a 32 percent increase in profit after-tax.

“For the past two consecutive years, FDH Bank’s return on equity and return on assets have both been significantly higher than the local averages of the banking industry and other listed banks.”

In its analysis, Continental Asset Management said FDH Bank continues to consolidate and improve on the convenient delivery channels through its digital products and providing innovative first-class financial solutions.

“Our view is that the bank is well positioned to mitigate risks. We thus encourage investors to consider this opportunity after understanding of all the risks, but our considered view is that FDH is a viable counter for long-term investment,” said the firm.

It said based on its dividend policy, it means that with a profit after-tax of K7.85 billion in 2019, dividends payable to shareholders should be K6.28 billion, translating to a dividend yield of 7.63 percent, which is the highest dividend yield on MSE, followed by Airtel at 6.25 percent.

On its part, Cedar Capital Limited, which is one of the underwriters of the transaction alongside First Discount House and Reunion Insurance, said FDH Bank has a strong entrepreneurial culture and stringent credit control.

Reads the analysis in part: “FDH Bank, tracing its roots to just before the global financial crisis of 2008, has since grown strongly, anchored mainly on its entrepreneurial culture.

“It has grown to surpass other entities established much earlier and has achieved this while generating strong returns for shareholders as evidenced by the strong return on equity of over 40 percent in financial year 2019.”

The firm said unlike most domestic and founder-led banks in Africa which are known for bad lending practices, FDH Bank has lowest non-performing loans (NPL) ratio of 0.80 percent compared with 6.3 percent for the rest of the banking sector.

“This is really impressive, especially when compared with the other two listed peers, which have double digit NPL ratios.”

Cedar Capital said by earning more than 75 percent of its total income from fees and commissions, the bank can meet its operating expenses, which means that net interest income is a bonus and it does not have to embark on aggressive lending to drive revenues.

Said the firm: “We have also applied the relative valuation method using listed peers—National Bank of Malawi plc, Standard Bank plc and NBS Bank plc—which gives us a fair value for FDH Bank of K12.98.

“This gives a potential upside of 30 percent on the IPO price. We would recommend investors to participate in the offer.”

Weighing in, Alliance Stockbrokers Limited said FDH Bank has a comparative advantage because of its wide network and is the third largest bank in terms of customer deposits as at December 2019.

It said “FDH Bank has sound key performance indicators and a solid forecast with much leverage on digital banking”.

“Profit history shows commitment to growth as evidenced by the sound balance sheet. FDH Bank is a growth company with so much potential for growth, especially due to the extension of service to the unbanked through financial inclusion programme.”

On its part, Old Mutual Investment Group (OMIG) said FDH Bank’s growth strategy looks at growing the market share through deposits mobilisation and growing the revenue line by growing the loan book.

FDH Bank managing director Elias Ngalande said the listing presents a rare investment opportunity in the banking sector.

FDH Bank wants to list on MSE to raise capital to support future growth estimated at K4.01 billion before listing expenses, fulfill contractual obligation with the Government of Malawi as part of Malawi Savings Bank (MSB) acquisition in 2015 to list on the bourse and allow government to dispose of its 5.04 percent stake estimated at K3.28 billion.

The listing will also enable existing shareholders to dispose part of their shareholding in FDH valued at K6.52 billion before listing expenses.

Currently, FDH Financial Holdings Limited, the parent company of the bank, has 93.68 percent stake, Malawi Government 5.04 percent and MSB Esop 1.28 percent.

But post-IPO, the shareholding of the bank will be as follows; FDH Financial Holdings Limited 78.79 percent, MSB Esop 1.21 percent and the public 20 percent.