Impact of Bonus Shares on Zenith Bank Nigeria Plc Stock Price

Zenith Bank Nigeria Plc recently reported its financials for the 15 months fiscal year ended 12/31/09.

Zenith Bank Nigeria Plc recently reported its financials for the 15 months fiscal year ended 12/31/09. Some of the high lights of the reports are:

• Gross earnings of N277.3 billion, represents an increase of 31%, compared with the equivalent prior year period
• Net Interest Income increased 28% to N109.6 billion from prior year
• Operating Income of N188.2 billion, an increase of 22%
• Profit Before Tax of N35.1 billion, represents a decrease of 37%
• Profit After Tax of N20.6 billion, represents a decrease of 60%

The bank’s results were fairly good in light of the challenging Nigerian economic environment and the various issues that confronting the banking sector since the 3rd quarter of 2009. 

Technical Analysis

Zenith Bank share price is among the best performing bank stocks in the NSE in the last two years. In 2009 the company offered a 1 for 2 bonus shares to its shareholders with an effective date of June 4, 2009 and the stock price was adjusted to N17.46k from N26.20k to reflect the impact of the bonus offer. However, by August 21, 2009 the stock price had declined by N7.36k or 42% to N10.11k, its lowest price in 2009. Since, the low of August 21, 2009 and through April 1, 2010, the stock price has gained N9.19k or 90.9%. Majority of the gains (N5.80k, or 63.1%) were experienced in 2010 reflecting the turnaround in the Nigerian Capital Market. As of the close of trading on April 1, 2010, the stock price was trading above its 50 and 200 days cumulative moving averages, indicating a strong relative strength 

Technically, the stock price performed very well in March 2010, gaining N2.82k or 17.4% through March 29, 2010. I highlighted the current breakout in my March 12, 2010 article “Shares to watch as the NSE goes into full Throttle”. However, technically the stock price now appears to be moving higher on decreasing volume, which is usually the first sign of trouble because it indicates waning interest by investors. Usually price breakouts on low volume technically does not augur well for stock prices, especially for a stock that is currently richly price and does not have any room at the top.

Fundamental Analysis and the Bank’s Conference Call
Using constant growth model and earnings multiple valuation models, the fair value of Zenith bank share price is approximately N18.68k, based on the fiscal year results. This indicates that stock price is slightly over priced at N19.30k. Technically; it does not mean that the stock price will not trend higher, nevertheless it is important for potential investors to understand that the stock price is fully valued.
During the earning’s conference call last week, I asked the Mr. Jim Ovia, CEO and Managing Director of the bank, why the bank feels it is necessary to offer a 1 for 4 bonus to shareholders considering the potential dilutive impact on future EPS and stock price. . Mr. Ovia represented that he did not believe that the offering of bonus shares to shareholders have a significant dilutive impact on bank’s share price and that bonus shares is a way to reward the bank shareholders. He further noted that although large outstanding shares are viewed negatively in some developed market, the same cannot be said in the Nigerian context.
In 2009, Zenith offered a 1 for 2 bonus shares, and now in 2010 the bank is offering a 1 for 4 bonus shares. At the conclusion of the current offer, the number of outstanding shares will be approximately 31 billion shares.
I informed Mr. Jim Ovia about my different viewpoint regarding this issue by presenting the following scenarios:
Scenario 1
Lets assume that Zenith Bank doubles its net profit in 2010 to N41 Billion, the normal EPS based on 31 billion shares would be N1.34 If a dividend of N1 is paid for the fiscal year 2010. Based on the aforementioned parameters, the expected growth rate will be 3.06%, a plowback rate of 25.5%, a dividend payout ratio of 74.5% (i.e., assuming N1 projected dividend) with a computed earnings multiple of 14.9. The estimated value for Zenith Bank for 2011 will be N20.58k given projected earnings of 1.34k and a growth rate of 3.06%, with next year’s EPS estimated at 1.38k.
Scenario 2
If the bank did not offer any bonus shares and maintained it outstanding shares at 25 billion. Assuming the same earnings scenario as in scenario 1, the normal EPS will be N1.66K, the expected growth rate will be 4.7% , a plowback rate of 39.9% and dividend payout ratio of 60.1% (i.e., assuming N1 projected dividend) and a computed earnings multiple of 12.76 based on the aforementioned parameters, the estimated value for Zenith Bank for 2011 will be N22.18k.
 Conclusion
As noted in the two (2) optimistic scenarios (i.e., if Zenith Doubles its NPAT N41 Billion) highlighted above, it indicates that Zenith Bank’s shares will be negatively impacted by the new bonus shares, which adds about 6 billion shares to outstanding shares. Even though Nigerian shareholders expect bonus shares, management of listed companies should educate their shareholders about the negative impacts of having blotted shares. The large number of outstanding shares/float will eventually become the Achilles hill for the share price of Zenith Bank, because with a large float it will need significant demand volume to move the price of the stock in a positive direction. Finally, based on the reported earnings and NPAT, the stock price at N19.30 is trading above its fair value of N18.68k.
Although the stock is trading above its fair value, it does not mean that Zenith stock price will not move higher, since in most instances the movement of a stock price is impacted more by supply and demand (i.e., Greed or Fear), rather than fundamentals. Investors who significantly buy shares above fair value will regret the investment decision made out of greed. The recent NSE downturn should serve as a lesson to most investors as some insurance stocks which were purchased at prices that far exceeded their fair values have failed to recover.