AKD Quotidian about — MCB: TP upgraded but still a Reduce

Karachi, May 17, 2013 (PPI-OT): Following a better than expected IQCY13 result, clear improvement in asset quality dynamics and prospects for strong capital gains, AKD Securities raise AKD Securities target price for MCB to PkR230/share from PkR182/share previously.

According to AKD Securities, in this regard, AKD Securities believes MCB will continue to trade at a premium to peers given its superior asset quality, excellent cost efficiency and management efficacy. That said, considering that MCB has already rallied by 45%CYTD and that its valuation set (CY13F P/B: 2.4x, P/E: 12.0x) now appears stretched viz. the listed banking sector (P/B: 1.2x, P/E: 8.3x) AKD Securities believes investors should look to book profits in the scrip.

As such, AKD Securities believes that the market has already priced in MCB’s positives while ignoring nascent risks such as a prolonged subdued interest rate environment where the recent T-bill auction saw a marked shift into the 12m tenor. AKD Securities revised target price of PkR23O/share implies 15% downside. Reduce!

Estimates revision: On a consolidated basis, MCB posted NPAT of PKR5.89bn (EPS: PkR5.82) in 1QCY13, up by 2%YoY, with provisioning reversals, capital gains and high PF write backs countering the impact of lower NIL. An interim dividend of PkR35/share (payout ratio: 60%) was announced. Results tagged in better than expected where asset quality improvement and prospects for robust capital gains compel us to raise AKD Securities EPS estimates across AKD Securities forecast horizon by an average of 7%. Together with higher dividend forecasts and a slightly trimmed discounting factor of 16%, this raises AKD Securities target price for MOB to PkR235/share, which still implies 15% downside.

Premium valuations are justified…
AKD Securities believes MCB will continue to trade at a premium to the listed banking sector where the bank displays superior asset quality (NPL stock down by 6%YoY/3% QoQ in 1 QCY13 with coverage a shade short of 90%) and excellent cost efficiency (CY13F cost/income: 35% ex-PF write backs: 37%) In addition, MCB will likely be able to post modest growth in CY13F (in contrast to earnings declines expected for peers) on the back of high capital gains on disposal of ULEVER shares (direct EPS impact of PKR 0.71 on 79k ULEVER shares held at ~PkR4,900/share in addition to ULEVER shares sold by AICL).

…but not to this extent: MCB, owned by the Nishat Group, has depicted a post-elections rally of 10.5% to trade at a CY13F P/B of 2.4x, P/E of 1 2.0x, D/Y of 5.1% and market cap/deposits ratio of 49.3%. This valuation set is at a significant premium to the listed banking sector which trades at a P/B of 1 .2x, P/E of 8.3x and market cap/deposits ratio of 13.4%. While we are cognizant of MCB’s superior dynamics, AKD Securities fail to find value for money in the scrip at current levels and flag UBL and BAFL as more attractively priced propositions.

Investment perspective: Buoyed by a better than expected 1QCY13 result, a post-election rally and anticipated strong capital gains in 2QCY13, MOB has rallied strongly to return 45%CYTD. That said, AKD Securities believes valuations are now unduly stretched particularly as this week’s T-bill auction (-70% of bids in 12m tenor) suggests the money market expects no near-term reversal in the monetary policy cycle. AKD Securities revised target price of PkR23O/share implies 15% downside. Reduce!

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