Africa Prudential Plc Stock Valuation

AFRICA PRUDENTIAL PLC

Ticker:                            AFRIPRUDNature of Business:      Other Financial InstitutionsLocation :                              Nigeria
Recent Price:           NGN6.30   52-Week High/Low: NGN7.35/4.00Estimated Fair Value:      NGN7.86-NGN9.90
Expected Return:      49.8%Consider Buy:                   Below NGN8.88Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               NoneCorporate Governance: Strong

Company Overview
Africa Prudential Plc (AFRIPRUD), formerly UBA Registrars Limited, started offering share registration services as a department of UBA Global Market Limited. It was spun off and incorporated in March 2006. AFRIPRUD became independent of UBA Plc following the directive of the Central Bank of Nigeria (CBN) requiring banks to divest from non-banking subsidiaries. The company’s shares were listed on the Nigerian Stock Exchange (NSE) in January 2013.

The acquisition of UAC Registrars Limited in 2013 was a plus to the management of AFRIPRUD. UAC Registrars Limited was founded in 1978 as a wholly-owned subsidiary of UAC Nigeria Plc. International Equity Capital controls 26% of the shareholding of AFRIPRUD.

 AFRIPRUD provides share registration and investor relation services to private and public companies. Its investment in technology enables clients to have access to the company's services online through its e-registrar, e-dividend, e-offer, and e-replacement solutions. The company has expanded its product portfolio to include digital technology solutions such as EasyCoop software for cooperative societies, Platform as a Service (PaaS) and Software as a Service (SaaS).

Obong Idiong is the managing director of the company while Chief (Mrs.) Eniola Fadayomi chairs the board of directors. Mrs. Fumbi Chima joined the board as an independent non-executive director in December 2020.

Investment Thesis
AFRIPRUD  is a financial institution that now offers digital solutions to its clients across Nigeria. The company’s investment in technology and human capital has had a positive impact on the company by increasing its product offerings beyond registrar and investor relation services. It has built capacity which helped it to diversify its sources of earnings; it developed EasyCoop, software that digitises the operations of co-operative societies. AFRIPRUD has also developed competencies in cloud computing, blockchain technology, and cybersecurity. The automation of its processes is expected to deliver some cost savings and efficiency going forward.

Fee income from corporate actions, register maintenance and retainership lost 55.8% in the year under review. The company is generating considerable interest income from investments and loans. Interest income has produced about 64% of gross earnings in the past eight years. AFRIPRUD  invests in less risky fixed-income instruments like treasury bills, bonds and term deposits.

AFRIPRUD has grown its gross earnings at a compound rate of 10.8% over the past seven years. Improved investment capability has enabled the company to grow interest income by 14.7% on a 7-Year Compound Annual Growth Rate (CAGR) basis. It is a profitable company with a track record of regular dividend payments to investors. In addition, profit margins are high. Profit Before Tax (PBT) margin and Profit After Tax (PAT) margin averaged out to 61.1% and 47.9% respectively over the past ten years.

We believe that if management does not relent, AFRIPRUD stands to benefit from the opportunities in emerging technologies like cloud computing.

Valuation
AFRIPRUD trades at 9.7 times earnings and 2.2 times book value. We have valued AFRIPRUD using our valuation models. Our estimate for a share of the company ranges from NGN7.86 to NGN9.9. And we anticipate a return of 49.8% on investment in the stock of AFRIPRUD.

Financial Overview
Despite losing 10.2% year-over-year as at 31st December 2020, gross earnings have grown at a CAGR of 1.9% over the past three years. The revenue decrease in the year was caused by a lack of retainership fees. The retainership fee was zero in 2020 compared to NGN922.5 million posted in the prior year.  Interest income, which produces the bulk of its gross earnings, gained 1.9% in 2020 as against a 21.7% decline in the previous year. Digital technology services produced revenue of NGN421.2 million up from NGN58 million recorded a year earlier. Interest on loans and advances rose by 12.5% to NGN2.2 billion over the prior year’s figure of NGN1.9 billion. Interest on loans was equivalent to 61.7% of gross earnings (2019: 49.2%).

PBT and PAT dipped by 17.1% and 14% respectively. PBT amounted to 56.4% of AFRIPRUD’s gross earnings of NGN3.5 billion compared to 61.2% of gross earnings of NGN3.9 billion achieved a year before.   PAT margin dropped 1.8% to close at 41.2%. Returns improved; Return on Equity ( RoE) was up from 8.3% to 17.8% while Return on Assets (RoA) added 4.7 percentage points.

Earnings Per Share (EPS) rose by 117.6% to NGN0.74 while Book Value Per Share (BVPS) was more or less flat at NGN4.20. Assets totalled NGN17.7 billion, down by 4.9% compared to the previous year’s figure. Shareholders’ fund grew marginally to NGN8.4 billion.  AFRIPRUD is not cash-strapped. It is a low-geared company and is adequately capitalised.

Business Risk
AFRIPRUD is exposed to interest rate risk because it realises interest from securities such as bonds. The investments could lose value if the interest rate rises. Moreover, there is a need for technological innovation in order to compete in the digital economy. This requires more spending on capital and Research and Development (R&D). Consequently, the company may have to take on more debts which will increase its debt obligations.

Recommendation: Buy

Earnings Chart of Africa Prudential Plc

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