Equity Analysis /

MCB Group (Mauritius): Solid FY19 result, raise TP to MUR405, Buy

    Rahul Shah
    Rahul Shah

    Head of Financials Equity Research

    Tellimer Research
    29 September 2019
    Published by

    Robust FY19 leads us to raise our mid-cycle ROTE estimate to 17.3% (16.7% previously) and to increase our target price to MUR405 from MUR385. MCBG combines a cautious risk management culture with solid growth potential through international hard-currency trade finance and project finance lending. 

    FY19 net attributable profit of MUR9,482mn, up 31% yoy. This was 4% above our estimate of MUR9,122mn. Revenues were the key driver of the positive surprise, notably fee income and far value gains on equity and real estate investments. The full-year dividend was 30% higher yoy at MUR13.0.

    Strong core revenue delivery supplemented by investment gains. Net interest income rose 21%, as expected, although the margin was a little weaker than forecast, reflecting a sharp rise in the volume of investment assets. Fee income grew 10%, above the trend of the past couple of years (better capital markets, trade finance and payments income). The top line was also boosted by fair value gains in the equity and real estate portfolios.

    Operating costs continue to rise (up 10% yoy). Staff costs increased 13% yoy, reflecting higher headcount and bonus payments. IT and marketing-related costs have also increased. The cost/ income ratio was broadly in line with our expectations, at 37.1%.

    Loan quality maintained its positive trajectory, with the NPLs/ loans ratio improving to 4.1% from 4.5% last year, though slightly up on the 4.0% recorded in 9M 19 (based on management’s calculations).

    Capital ratios improved. The tier 1 ratio increased to 15.8% from 15.3% last year. CAR was 17.4%, up from 17.1% a year ago. However, shareholders’ equity/ assets is declining (11.9% from 13.3% last year), reflecting the strong growth in the balance sheet (notably financial investment assets). On a multi-year view, we think MCBG may look to raise hybrid Tier 1 or Tier 2 capital if it continues to experience solid asset growth.

    Loan growth moderated, but was still robust, rising 14% yoy. This is lower than the 20%+ yoy growth rates achieved earlier in the year, but is still highly respectable. Management noted that loan growth was still driven by foreign borrowers, notably in the Energy & Commodities and structured project finance areas. With MCBG’s foreign currency deposits continuing to rise, we see good long-term prospects for such lending.

    Segment B remains the key profit driver, generating 55% of group profits, up from 40% in FY18, reflecting strong growth in foreign currency lending to international businesses. Segment A’s profit contribution fell from 43% to 31% yoy, pointing to a relatively flat profit profile for the domestic operations. The sluggish domestic growth environment remains the key long-term negative factor to the MCBG investment case, in our view.

    We see MCBG delivering 9% profit growth in FY20 and 14% in FY21. ROTE should remain comfortably above 17% for the next few years. With the shares trading at 6.8x 2010f PE, 1.1x tangible PB and offering a dividend yield of 4.9%, we see good value in the shares.