Quote:
Originally Posted by riskreturn
We are all seem to have agreed that the fundamentals available in the public domain do not justify the existing technical suspension price OF 7.28 Naira (with a trailing P/E of 37.66 times). The only added information I have gathered are the probable favourable sentiments in support of even a higher price, as well as corporate decision to manipulate the price to still a higher level in preparation for a PO. To bring its forward end-June 2008 P/E to about 10 times and below we anticipate at today's closing prices for a number of stocks like Skye Bank, FCMB, Access Bank, Bank PHB and even First Inland Bank and a few others (before reckoning with dilution of their shares with public offers), it has to record about 300% profit growth in its financial year ending 30 June 2008, over the earlier corresponding year - which may be an unlikely feat. Also, to raise funds from the capital market, its forward end-Deccember 2008 P/E ratio should be around 10 times or, at most, around 12 times (i.e., after including new shares to be issued!), given the current market situation or even moderately improved market conditions that are likely to prevail while going to the market later in the year. Its projected profit would then have to grow several multiples (not less than 5 times) of end-June 2007 one to justify an offer price of about 7.28 Naira. This means the scope for manipulation of price to a higher level would be limited than thought - hardly feasible to justify manipulation to 12 Naira, as the technical suspension price. Anyway, going to the market to raise funds would not be advisable now, given what can be described as the prevailing market crash, particularly as regard banking stocks. the waiting period also seems to be uncertain, as no ones knows the duration of this market crash situation.
In summary, anyone who risks buying the stock now in anticipation of price gain after lifting of technical suspension should be ready to take exit after 2 or 3 days rally following lifting of technical suspension. Thereafter, investors are likely to start dumping the stock, driving the price to much lower than the technical suspension price of 7.28 Naira. But one can even suggest that the safest thing is not to speculate by buying the stock and those that are already holding it should try to take exit before the technical suspension is lifted.
However, the conclusion above has to be moderated by the fact that the bank can release very surprising quarterly results before the technical suspension is lifted, which may boost the price of the stock. This has happened in the case of Afribank earlier in the week when its Facts Behind Figures briefing reveal very robust pending audited annual result that greatly contradicted and surpassed the guidance or projection contained in its offer prospectus in late 2007.
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Sterling bank is a growth stock and if anyone wants to invest, then they should invest heavily in it despite the high PE multiple. This is based on the fact that growth stocks have the potentials of slashing their PEs by half by just releasing a singular result. Sterling bank has been able to do something close to that. Their last results slashed their PE from 39 to 23. Only a company that has potentials can possibly do something like that. A big bank like UBA will find it difficult to perform such a feat as confirmed by the results they released yesterday. Sterling bank is small and they have the potentials to generate a lot of wealth for investors but only people with long term horizon can benefit from it. Short term players cannot enjoy the ride. I am basically a fundamental investor and believe in the figures, but there are times some qualitative analysis should drive decisions.
This bank is aggressively investing in the maritime sector. They have procured $20m to purchase some vessels and they also invested in a dedicated maritime servicing company. These are just investments that are yet to have any definitive effect on their financials. My take is that even at an outrageous PE Sterling bank is still a very good buy because they have a lot of room for expansion and their results have shown that they still have a very high marginal revenue, hence the need for them to raise more funds from the market to develop their competitive edge, which I believe is very sharp.
5th May 2008, 04:13 PM
