NLB is one of the most interesting stories in current markets. IPO was placed 6 months ago, largely unknown to most investors. See my write up on the opportunity
Just published research by InterCapital the largest local broker. Quite bullish
NLB Group – More Than a Dividend Story”
Our initiation research for the NLB Group values the company at EUR 80.0 per share, giving it a STRONG BUY recommendation with potential upside of 38.4%. This translates into forward 2019 P/E of 8.35 and a P/B of 0.96. There are several key reasons behind our recommendation:
A strong dividend play: for the years 2019–2023, the company management is targeting a high payout ratio of 70%. Such an attractive dividend policy would translate into an estimated average dividend yield of 11.9% over the next five-year period (based on the current share price). Besides that, NLB Group is operating with a capital adequacy ratio (CAR) of 16.57% (Q1 2019) and is targeting a CAR of around 16.25%, indicating that the company has excess capital of EUR 160m (EUR 132m based on the target CAR). Any excess capital could be used for growth, potential M&A, or dividend payment.
Growth potential in the SEE region: The Group is expected to achieve solid growth in almost all their markets and especially in the SEE region (average growth of gross loans of 4.4% on the Group level until 2023E not assuming any acquisitions). We expect that the SEE region will over 5-year period account for a higher portion of the Groups total assets and gross loans (around 40% of total gross loans compared to current 38%). We expect that SEE markets will continue to be more profitable compared to Slovenia which should in turn help to support a solid development of the bottom line.
Undervalued compared to peers: At the current share price, the company is traded at P/E of 6.03 and a P/B of 0.67 while regional peers are traded at 8.49 and 0.98, respectively. Profitability wise, last year NLB recorded a ROE of 11.8% which is 20 bps above the peer group. We expect that the company will continue to achieve similar ROE over the next 5 years which will in turn allow it to continue with the aforementioned dividend payout. As a comparison, NLB’s last dividend yield of 11.5% is quite higher than the peer median of 7.6%.
Corporate governance and credit rating: NLB group is one of the only Slovenian stocks rated as investment grade by S&P and Moody’s. Since 2013, the company has been observing a steady growth and improvement of almost all major segments of the P&L, BS and corporate governance. NLB Group’s NPL ratio went from 28.2% in 2012 (NPLs of EUR 3.7bn) to 6.9% in 2018 (NPLs of EUR 622.3m). ROAE went from 4.8% in 2014, to 11.8% in 2018. Cost of risk went from 171bps in 2014 to -43bps in 2018. Consequently, NLB is rated as BBB- by S&P and Baa2 by Moody’s (investment grade). Lastly, we believe that being listed on LSEG and LJSE added to further improvement of corporate governance which provides us with a comfort that the company is on a right path to deliver the planned growth and dividend play story.