Summary
Cal Bank shares currently sell at GHS 0.69, which represents a Price to book ratio of 0.4x meaning the Bank is selling for less than half its book value or actual net worth. In theoretical sense buying Cal Bank at a price of GHS 432.34 million or GHS 0.69 per share is like buying the company at a significant discount of over 58% to its book value.
At the current price level, the expected dividend yield for Cal Bank is 12.90%.The expected dividend yield of 12.90% plus the forecasted share price increase of 44.93% positions holders of Cal Bank stock to gain a total return of 57.83% in 2021 if all go as expected and our management recommendations herein are implemented.
Even though the fundamentals of the Bank remain solid with a single digit non-performing loan ratio of 9.0% and a capital adequacy ratio of 20.8%. It is recommended for Management to consider a share buy-back Programme of between GHS 15 million to GHS 30 million to shore-up demand for its shares and further increases overall market capitalization by GHS 200 million (USD$ 38 million) in the first quarter of 2021. Cal Bank can also increase its dividend payment for fiscal year 2021 to improve its dividend yield and catalyze share price growth. In addition, it is expected that the bank will capitalize on the ongoing COVID pandemic and its associated low interest rate regime to refinance/reduce its cost of capital significantly whiles increasing overall leverage ratio to boost ROE.
Introduction
As the cliché goes “Opportunity comes but once”. This is by far the best phrase or proverb to describe the current happenings on the Ghana stock exchange. In some months past, I’ve observed with close astonishment the absurdly cheap valuations for some solid companies like Cal Bank, Societe Generale Ghana, Enterprise Group, GCB Bank, ETI and Fan Milk Ghana. In my upcoming equity valuation series, we will explore most of these great opportunities and how investors can take an advantage. In the latter section, I will include some management considerations required to catalyze shareholders value.
I will begin my thesis by exploring the value bargain for Cal Bank (CAL) shares on the GSE.
About the Company
CalBank formerly Continental Acceptances Ltd and Cal Merchant Bank commenced operations in July 1990, the Bank received its Universal Banking License in 2004 and began providing specialized retail banking services. The Bank currently has a network of 29 branches and over 100 ATMs spread throughout Ghana. It is currently the market leader in SME banking and plays a dominant role in corporate & wholesale banking.
Supporting Reasons for the Purchase Recommendation
The Bank is currently among the most undervalued stocks on the exchange that can offer investors the best bargain in 2021. Below are the reasons supporting the assertion.
1. Attractive Valuation or Cheap Stock Price: Cal Bank shares currently sell at GHS 0.69, which represents a Price to book ratio of 0.4x meaning the Bank is selling for less than half its book value or actual net worth. To explain in simple terms, the bank is currently selling at a price less than what investors can gain if the bank was to distribute its equity capital base (Asset less Liabilities) to investors today. The Bank’s current total market capitalization is GHS 432.34 million (GHS 0.69 per share), this refers to the market price at which an investor can purchase the entire company on the Ghana Stock Exchange. Surprisingly, the balance sheet equity capital, which refers to the actual amount the company possesses on its balance sheet for investors stands at GHS 1.04 billion. So, in theoretical sense buying Cal Bank at a price of GHS 432.34 million or GHS 0.69 per share is like buying the company at a significant discount of over 58%. You gain ownership of an equity capital base of GHS 1.04 billion using a capital of just GHS 432.34 million. This is a perfect arbitrage that can provide a potential yield of 44.93% when the arbitrage resolves to a P/B ratio of 1.
2. High Dividend Yield and Solid Dividend Payment History: Cal Bank has always paid dividends with exception of 2016, when the entire financial sector witnessed a downturn. At the current price level, the expected dividend yield for Cal Bank is 12.90%. This represents the amount of cash dividend payment that shareholders of Cal Bank may receive by April 2021 (Cal Bank’s dividends are normally paid in April) for the Bank’s performance in 2020. The expected dividend yield of 12.90% plus the forecasted share price increase of 44.93% positions holders of Cal Bank stock to gain a total return of 57.83% in 2021 if all go as expected and our management recommendations herein are implemented.
3. Strong company fundamentals and potential share price re-bounce: The fundamentals of Cal Bank’s balance sheet remain solid with a single digit non-performing loan ratio of 9.0% and a capital adequacy ratio of 20.8%. This compares favorably to the industry’s NPL ratio of 12% and the minimum required capital adequacy ratio of 10% by the Bank of Ghana. The profitability of the Bank remains intact despite the Covid-19 pandemic with the bank recording a total net profit amount of GHS 140.7 million in the third Quarter of 2020 and a per share earning amount of GHS 0.2996 for the same period. Cal Bank is a strategic player in the SME, corporate banking and wholesale banking space in Ghana with its dominant presence expected to continue unabatedly. Therefore, the current valuation afforded the company is not a true reflection of its strong earnings potential and value creation ability.
Management Consideration/strategy for Implementation.
The management consideration session provides advice on capital market tools/measures to deploy in order to shore-up the price of the shares on the exchange. Firstly, a depressed market capitalization of this nature pre-exposes the bank to potential takeovers and might also dampen existing shareholders trust in management’s ability to deliver shareholders value in the long run. Therefore, it is imperative that management considers the measures below to restore the value of the Bank’s shares.
1. Consider a share buy-back: Management can consider a share buy-back Programme of between GHS 15 million to GHS 30 million to shore-up demand for its shares and further increases overall shareholders equity or market capitalization of the bank. The proposed share repurchase amount of between GHS15 million to GHS 30 million is premised on a computed free float value of GHS 66.39 million, representing about 99.22 million tradable shares. Given that the tradable stocks (free float) of Cal Bank represent approximately 15% of the Bank’s total shares outstanding, a share buy-back of this magnitude will significantly catalyze share price correction. In addition, the recommended threshold of up to GHS 30 million represents about 6.94% of the bank’s current market capitalization and a little over 3.1% of the current shareholders’ fund. A buy-back of this magnitude will suffice for a dividend payment in 2021, in addition, the positive signal from the buy-back is likely to push the share price beyond our GHS 1.00 Benchmark price target, representing a 44.93% appreciation of the share price and about GHS 200 million increase in Market Capitalization. Such a buy back will further entice pension and retail investors to jump onto the momentum. Under such circumstances, less cash (GHS10m<) could be required to achieve the buyback objectives. The proposed threshold is equivalent to the monetary value of dividends paid in 2019 (GHS 30 million).
2. Increase dividend payment marginally: Cal Bank can increase its dividend payment for fiscal year 2021 to improve its dividend yield and catalyze share price growth. A dividend amount of GHS 0.11pesewas which is approximately 24% increase from the 0.089pesesewas paid in 2020 will be ideal. Given my forecasted end of year after tax profitability of GHS 187.68 million for 2020, the propose dividend amount of GHS 0.11p will represent a payout ratio of 27% for the period under review. Our recommended dividend payment represents a dividend yield of approximately 15.97% which presents adequate opportunity cost to forgo GoG treasury yields which pay about 14.65%. A combination of dividend yield and share repurchase can be executed concurrently to ensure the realization of fair value.
3. Increase non-funded income and invest more in treasury securities: The Covid-19 pandemic has resulted in significant quantitative easing or monetary stimulus measures from the Bank of Ghana, in its quest to revamp the ailing economy. In an emergency meeting on March 18, the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) slashed its key policy rate by 150 basis points to 14.50%. With pundits forecasting the policy rate to end 2020 at 14.43% and 2021 at 14.58%. The consequent impact of this action from the central bank has resulted in Bank’s holding record amount of cash and government securities due to arbitrage opportunities that exist on the yield curve. In view of the above, and with a dampened demand in credit, we expect the bank to increase its treasury operations/business in order to bolster operating income and reduce overall firm wide risk accordingly. The firm can also advance its business lines in the non-funded space where it can earn significant interest income from floats as witnessed from the business model of most Nigerian banks operating in Ghana.
4. Increase financial leverage & execute refinance of all existing high debt: The financial leverage of the firm ranks among the lowest in its peer group. The bank currently operates with a leverage ratio of 7.28 (asset/equity) compared to its local peers which operates with a leverage ratio of 10.18, given the decrease in overall interest rate on foreign debt due to COVID-19 and consequent stability in exchange rates, the bank can use the opportunity to increase its leverage ratio and refinance existing debts. Our recommended increase in the Bank’s leverage ratio can shore-up overall return on equity significantly and a moderate risk provided most of the borrowed funds are invested in high yielding GoG instruments.
Join the Webinar to Discuss Further
Emmanuel O. Boakye is set to host a webinar to discuss his analysis on why he thinks Cal Bank is undervalued. Please register to join the webinar to clarify questions you may have after reading this article or to challenge his ideas. Please see below the link to the webinar.
Webinar Link: https://doobia.com/investor-guide/webinars/webinar-bargain-hunting-a-compelling-case-for-purchase-of-cal-bank-shares-21
Disclaimer
This article was prepared by Emmanuel O. Boakye in his personal capacity. The opinion expressed in this article are the author’s own and do not reflect the view of his employer. Information and opinion herein has been compiled or arrived at based on information obtain from sources considered reliable. I therefore do not hold myself responsible for its completeness or accuracy. All statement of opinion, projections, forecast, or those relating to expectations regarding future events or performance of investments represents my own assessment and interpretation of information currently available, which are subject to change. Emmanuel holds about 15,000 shares in Cal Bank.
