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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
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RFHL Price & Volume (YTD)Volume Traded Closing Quote
Company Facts
Symbol: RFHL
Target Price: TT$130.59
Sector: Banking
Market Cap.: $19,810,861,207
Issued Capital: 162,637,396
Financial Year End:
30-Sep
Stock Performance
Banking YTD Price Change
Trailing Dividend Yield
RFHL 13.6% 3.6%
FCI 2.3% 4.2%
FIRST 18.9% 4.2%
NCBFG 21.9% 1.3%
SBTT -9.1% 5.1%
Sector Avg. 3.7%
Key Ratios
P/B ROE ROA Eff. Ratio
RFHL 2.08 13.8% 2.0% 50.5%
FCI 1.78 7.5% 0.9% 66.5%
SBTT 2.51 16.1% 2.7% 40.0%
FIRST 1.45 10.1% 1.7% 47.2%
NCBFG 2.89 22.7% 3.3% 51.4%
Valuation Report
September 2019 David Paul Investment Analyst [email protected]
Republic Financial Holdings Limited
(RFHL) PLEASE SEE IMPORTANT DISCLOSURES
Republic Bank Limited is incorporated and domiciled in
the Republic of Trinidad and Tobago. It is a member of the
Republic Bank Group, a financial services entity
comprising fourteen subsidiaries and four associated
companies. The Group is engaged in a wide range of
banking, financial and related activities in Trinidad and
Tobago, the Caribbean and Ghana.
Overvalued Fairly valued Undervalued
TT$134.51 TT$126.68
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Valuation Report
Company Overview
Republic Financial Holdings Limited (RFHL) is the
ultimate owner of the banks in the Republic Group,
which include: Republic Bank Limited, Republic
Bank (Guyana) Limited, Republic Bank (Barbados)
Limited, Republic Bank (Grenada) Limited,
Republic Bank (Suriname) N.V, Republic Bank
(Cayman) Limited, Republic Bank (Ghana),
Cayman National Corporation as well as Republic
Securities Limited and other subsidiaries.
Table of Content Company Snapshot…………………1 Company Overview…………………2 Business model……………………..4 Financial Analysis…………………..5 Recent Financial Performance……8 Expansion Activities………………10 Industry Overview…………………11 Valuing Financial Services Firms..12 Overcoming Valuation Issues……13 Quantitative Valuation……………14
DDM Insights……………..15 Simple P/E Insights………16 Simple P/B insights………16
RFHL Risk Factors……………….16 Limitations of Analysis……………17 Recommendation…………………17 Appendix…………………………..18
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Originally called Colonial Bank, they began operations in 1837 as the first commercial bank in
Trinidad and Tobago. The bank has a 182-year track record of operation in the region. Significant
expansion during this period, through the acquisition of several subsidiaries, resulted in Republic
Bank performing dual roles of a licensed commercial bank and a holding company for its
subsidiaries. In December 2015, a decision was taken to form Republic Financial Holdings Limited
by a Vesting Order, under the Financial Institutions Act, Chap 79:09, of the Laws of Trinidad and
Tobago; bringing the structure of the Republic Group in line with international best practices (i.e.
form a holding company).
The Group currently employs more than 5,570 staff members in 16 subsidiaries in Trinidad and
Tobago, Grenada, Guyana, the Cayman Islands, Barbados, Ghana, and Suriname. Across these
markets, RFHL offers an extensive range of banking services, including credit and debit card
issuance and processing, leasing, trustee services, mutual fund and investment management, and
merchant banking.
10 Largest Shareholders Shares %
NIF Company 42,475,362 26.13
Clico Trust Corporation Limited 40,072,299 24.66
National Insurance Board 29,944,942 18.42
Trintrust Limited 14,936,298 9.19
RBC Trust 5,779,927 3.56
First Citizens Asset Management 3,360,733 2.07
Guardian Life of the Caribbean 2,630,568 1.62
UTC 2,416,858 1.49
Central Bank of Trinidad and Tobago 782,039 0.48
T Geddes Grant Ltd Pension Fund Plan 575,000 0.35
Valuation Report
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
58%
11%
2%
20%
5%4%
Revenue MixAdvances
Investment Securities
Liquid Assets
Fees & Commissions
Exchange Earnings
Other Income
Business Model
RFHL main source of income is earned by providing loans and generating interest income from
those loans. The types of loans RFHL issues include mortgages, auto loans, business loans, and
personal loans. Customer deposits, such as checking accounts, savings accounts, money market
accounts, and CDs, provide the entity with funding to issue loans. Customers who deposit money
into these accounts effectively lend money to the bank and are paid interest. However, the interest
rate paid by the bank on money they borrow is less than the rate charged on money they lend (the
banks borrow short and lend long to benefit from changes in yields).
At the end of financial year (FY) 2018 interest from loans and advances accounted for 58% of the
Group’s revenue, fees and commissions accounted for 20%, interest from investment securities
contributed 11%, while exchange earnings, interest from liquid assets and other income comprised
the remaining 11%.
Mortgages contributed TTD 16.1 billion of total loans and advances, while corporate &
commercial lending and retail lending accounted for TTD 13.9 billion and TTD 6.6 billion
respectively.
6.6 B
13.9 B
16.1 B
Retail Lending
Corporate & Commercial Lending
Mortgages
LOANS AND ADVANCES (ASSET)
Valuation Report
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
67%
14%
6%
9% 4%Loans Geographical Mix
Trinidad &Tobago
Barbados
Guyana
Cayman, Suriname & EC
Ghana
59 M66 M 67 M 69 M 70 M
85 M
51 M57 M 57 M 59 M 60 M
75 M
SEP-14 SEP-15 SEP-16 SEP-17 SEP-18 LTM JUN-19
Assets Vs Liabilities
Total Assets Total Liabilities
Loans and advances in Trinidad and Tobago was responsible for 67% of total loans and advances
issued by the Group. This indicates that the Group is highly exposed to the Trinidad and Tobago
market. The second largest contributor to loans and advances was Barbados, which issued 14% of
the Group’s loans and advances.
Financial Analysis
Since 2014, total assets of RFHL has increased by 45% at an annualized rate of approximately
7.8%. RFHL has experienced its most significant increase in total assets in the current financial
year (21.3%). This increase was mainly due to the acquisition of Cayman National Corporation
(CNC).
Valuation Report
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
1.8%
9.4%
5.6%
2.8%
8.5%
22.5%
Trinidad &Tobago
Barbados
Guyana
Cayman & EC
Suriname
Ghana
NPL to Gross loans
Loans and advances which is RFHL’s main revenue driver also increased steadily over the last
five years. Since 2014, loans and advances increased by 63% at an annualized rate of
approximately 10.6%.
Total non-performing loans (NPL) in the Group stood at approximately TTD 1.6 billion as at the
end of FY 2018. The non-performing loans to gross loans ratio was 4.3%. Trinidad and Tobago
continues to maintain the lowest ratio in the Group at 1.8%. This bodes well for the Group given
their exposure to Trinidad and Tobago. RFHL maintained a provision coverage of 47.5% of its
non-performing facilities as at the end of FY 2018.
Valuation Report
7
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
3.5%3.7%
5.1%
4.4% 4.3%4.5%
3.4%
3.9%
2.7%
3.3%
2.2%
1.8%
2.1% 2.2%2.3%
2014 2015 2016 2017 2018
NPL to Gross Loans
RFHL FIRST SBTT
47.5%
50%
45%
RFHL SBTT FIRST
Provision Coverage as a % of NPLs
Of the locally domiciled banks RFHL has the highest NPL ratio. This is as a result of very high
NPL ratios in Ghana (22.5%), Barbados (9.4%) and Suriname (8.5%).
The Group’s provision coverage of 47.5% of its non-performing facilities as at the end of FY 2018,
seems to be in line with the industry as SBTT and FIRST have provision coverages of 50% and
45% respectively.
Valuation Report
8
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
In 2018 ROE increased to 13.8% from 13.3% in 2017. This was partly due to an increase in
financial leverage; caused by a TTD 2.7 billion increase in deposits and other funding instruments
over the prior year. Profit margin also increased to 24.4% from 23.8% in 2017. The uptick in the
profit margin was due to an improvement in RFHL’s efficiency ratio from 52.0% in 2017 to 50.5%
in 2018.
2014 2015 2016 2017 2018
ROE 14.3% 14.1% 10.5% 13.3% 13.8%
Financial Leverage 6.79 7.01 7.01 6.78 6.98
Asset Turnover 0.07 0.06 0.08 0.08 0.08
Profit Margin 29.8% 28.9% 18.8% 23.8% 24.4%
Net Profit TT$1.2B TT$1.2B TT$0.9B TT$1.3B TT$1.3B
Assets TT$59.4B TT$66.0B TT$66.9B TT$68.8B TT$70.5B
Equity TT$8.7B TT$9.4B TT$9.5B TT$10.1B TT$10.1B
Revenue TT$4.0B TT$4.2B TT$5.0B TT$5.3B TT5.4B
Recent Financial Performance
RFHL 9 Month Ended June 2019
9 Month Ended June 2018 Change Change %
$'000 $'000 $'000
Net Interest Income 2,813,053 2,527,519 285,534 11.3%
Operating Income 4,094,853 3,648,448 446,405 12.2%
Operating Expense 2,260,454 2,004,080 256,374 12.8%
Operating Profit 2,277,057 1,650,119 626,938 38.0%
Credit Loss Expense 154,418 144,716
9,702 6.7%
Net Profit After Tax 1,327,178 1,056,277 270,901 25.6%
Diluted EPS 7.59 6.13
1.46 23.8%
RFHL reported diluted Earnings Per Share (EPS) of TTD 7.59 for the nine-months (9M) ended
June 30th 2019, a 23.8% improvement from the TTD 6.13 recorded in the prior comparable
period. RFHL’s net interest income grew from TTD 2.53 billion in 9M 2018 to TTD 2.81
billion in 9M 2019, a TTD 285.5 million (11.3%) increase. Other income also increased
14.35% to TTD 1.28 billion. As a result, operating income for the period stood at TTD 4.09
billion, up 12.2% YOY. This improvement was, however, tempered by a 12.8% (TTD 256.4M)
increase in operating expenses which climbed to TTD 2.26 billion. The bank benefitted from
a one-off write-back of a Post-Retirement Medical Benefit (PRMB) Provision of TTD 438.4
million, which bolstered operating profits to TTD 2.28 billion for the period (up 38% YOY).
Valuation Report
9
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Adjusting for the one-off gain, operating profits would have been TTD 1.84 billion (up 11.4%
YOY). Credit loss expense increased by TTD 9.7 million or 6.7%, however RFHL recorded
profit before tax (PBT) of TTD 2.12 billion for the period, a 41.0% improvement over that of
9M 2018. Taxation expense edged slightly higher at TTD 450.2 million for 2019 as compared
to TTD 449.1 million in 2018 while the effective tax rate fell to 21.2% from 29.8% YOY.
Performance was also negatively impacted by one-off reversals of deferred tax assets (TTD
345.3M), resulting in net profit after tax for the period of TTD 1.33 billion, up 25.7% from the
TTD 1.06 billion recorded in 9M 2018. On an adjusted basis, net profits attributable to equity
holders would have been TTD 1.14 billion (up 14.7% YOY).
RFHL’s operating income has seen incremental improvements YOY over the past three
comparable periods. For the 9M 2019 period, RFHL’s operating income grew 12.2% YOY to
a total of TTD 4.09 billion as compared to TTD 3.65 billion reported in 2018. The strong
performance in 2019 was attributable to improvements in profitability across all geographic
segments but, most significantly, from their operations in Trinidad and Cayman Islands
through the recent acquisition of Cayman National Corporation. RFHL’s net interest income
has expanded by an annualized rate of 7.3% over the past 3 years, bolstered by a strong 2019
performance thus far. Likewise, other income has grown at an annualized rate of 6.3% per
year.
The Group’s PBT for 2019 jumped 41% to TTD 2.12 billion from TTD 1.51 billion. The most
significant contributors to this growth were RBL Trinidad and recently acquired Cayman
National Corporation. RBL Trinidad PBT surged 58.1% (TTD 1.16B) YOY, partly due to
adjustments to the terms of its PRMB plan, which resulted in a one-off write-back of TTD
438.4 million before taxes. On the back of the CNC acquisition, the Cayman Islands segment
saw PBT more than triple (up TTD 100.4M YoY), significantly adding to the Bank’s overall
profit from overseas operations. The Guyana segment also saw considerable improvements in
PBT, increasing 37% YOY. Suriname & EC and Ghana’s segments achieved moderate
improvements with PBT growth of 12% and 7% respectively, while the Barbados segment
remained relatively flat, growing just 1% YOY. Overall, PBT arising from overseas operations
grew 27.7%, now accounting for 19% of the Group’s overall PBT.
Valuation Report
10
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Expansion Activities
On March 13th, 2019, RFHL completed the purchase of Cayman National Corporation shares.
The transaction comprised the purchase of 74.99% of the issued shares in CNC at an offering
price of US$6.25 per share by RFHL’s Barbadian subsidiary, Republic Bank Trinidad and
Tobago (Barbados) Limited. The overall cost of the transaction was US$198,474,012.50. As a
result of this transaction, the asset base of the RFHL Group will increase to approx. US$12
billion. For its fiscal 2018 (October 2017 to September 2018), CNC recorded profit after tax
of US$26.5 million. RFHL would have estimated significant synergies from the transaction as
the total cost of the transaction represents a valuation of 1.88 times the book value of CNC.
Given the surge in the share price of the stock since the initial announcement, the market seems
satisfied with the price paid. Since RFHL announced the proposed transaction on August 6,
2019, the share price has surged by 18.4% as at the date of writing (26/09/2019).
On November 27, 2018, RFHL announced that it has entered into an agreement to acquire
Scotiabank’s banking operations in Guyana, St. Maarten and the Eastern Caribbean territories,
including Anguilla, Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia,
and St. Vincent and the Grenadines. The purchase price is US$123 million, which represents
US$25 million consideration for total shareholding of Scotiabank Anguilla Limited; and a
premium of US$98 million over net asset value for operations in the remaining eight (8)
countries. This price does not include any amounts required to capitalize the branches post-
closing.
On September 10, 2019, the Eastern Caribbean Central Bank (ECCB), in consultation with the
Eastern Caribbean Currency Union (ECCU) Monetary Council, formally approved the
application for the transfer of the assets and liabilities of the Bank of Nova Scotia (BNS) to
RFHL in six ECCU territories, namely Anguilla, the Commonwealth of Dominica, Grenada,
St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. Such approval does not
include the transfer of ‘BNS’ operations in Antigua and Barbuda.
One September 25, 2019, the Central Bank of Guyana denied RFHL plans to take over the
operations of Scotiabank in Guyana. Dr Ganga, the Central Bank Governor, stated that the
denial of the application for takeover by RFHL was due largely to the high level of
concentration of the banking system, noting that “it would lead to systemic issues” which
would have affected the health of the financial system in Guyana. This no doubt is a major
setback for RFHL as the Guyanese economy is expected to grow by 29.6% and 23.6% in 2020
and 2021 respectively. According to reports from Guyana’s Ministry of Finance, Republic
Bank currently holds 35.4% of the banking systems assets and 36.8% of deposits in Guyana
and the acquisition of Scotiabank would increase this to 51% of both assets and deposits. RFHL
should still expect significant growth out of its’ Guyana Subsidiary given the significant
growth in the economy which is expected due to the oil and gas boom.
Valuation Report
11
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
$20
$10
$13
$25
$10
$0 $10 $20 $30
RFHL
FIRST
FCI
NCBFG
SBTT
Billions
Market Cap
Industry Overview
The banking sector in Trinidad & Tobago is the largest sector trading on the local stock exchange
(58%) in terms of market capitalization. It comprises of 5 banks, namely, FirstCaribbean
International Limited (FCI), First Citizens Bank Limited (FIRST), NCB Financial Group Limited
(NCBFG), Republic Financial Holdings Limited (RFHL) and Scotiabank Trinidad & Tobago
Limited (SBTT). NCBFG is the largest bank in the sector (32% of market cap.), RFHL is the
largest locally domiciled bank on the exchange (25%). FCI, SBTT and FIRST make up 17%, 13%
and 13% of the market cap in the sector respectively.
The banking sector is currently trading at an average P/E multiple of 16.31 times, which is above
the T&T composite P/E multiple of 15.39 times. Average sector dividend yield stood at 3.84%,
well above the market average of 3.49%. RFHL has the lowest P/E ratio in the sector. Given the
pace at which RFHL is growing at in the region both organically and inorganically, the market
may be undervaluing RFHL when compared to its peers.
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
0.00
5.00
10.00
15.00
20.00
25.00
FCI FIRST NCBFG RFHL SBTT Sector Avg.
DIV
IDEN
D Y
IELD
P/E
RA
TIO
Banking Sector Metrics
Trailing P/E Trailing Div Yield
Valuation Report
12
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
2.1
0.2
3.42.4
0.9 1.12.0
-1.0
1.8
-6.5
-1.9
1.9
2013 2014 2015 2016 2017 2018
Financial and insurance activities GDP
According to data from the CBTT, financial and insurance services contributed approximately 8%
to the Trinidad and Tobago economy in 2018. The data also shows that over the past 6 years the
financial sector has outpaced economic expansion. The financial sector grew at an annualized rate
of 1.7%, while the Trinidad and Tobago economy contracted at an annualized rate of -0.6% over
that period. As shown by the graph below, even in years when the Trinidad and Tobago economy
declined, the financial sector showed resilience. In 2017, real GDP declined by -1.9%, while the
financial sector expanded by 0.9%. In 2016, growth in the economy was estimated at -6.5%,
however the financial sector expanded by 2.4%. The data shows that in recent times the financial
sector in Trinidad and Tobago has become very robust; as even in a recession the sector can realize
growth.
Valuing Financial Services Firms
Banks, and other financial service firms pose particular challenges for an analyst attempting to
value them for two reasons. The first is that the nature of their businesses makes it difficult to
define both debt and reinvestment, making the estimation of cash flows difficult. The other is that
they tend to be heavily regulated, and the effects of regulatory requirements on value have to be
considered.
Defining debt - With a financial service firm, debt takes on a different connotation. Rather than
view debt as a source of capital, most financial service firms view it as a raw material. In other
words, debt to a bank is akin to steel for an automobile company, something to be molded into
other financial products that can then be sold at a higher price and yield a profit. Consequently,
capital at financial service firms is more narrowly defined as including only equity capital. This
definition of capital is reinforced by the regulatory authorities who count only equity or equity-
like financing in regulatory capital.
Valuation Report
Source: CBTT, JMMB
13
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Regulation - Financial service firms are heavily regulated all over the world, though the extent of
the regulation varies from country to country. In general, these regulations take three forms. First,
banks are required to maintain capital ratios to ensure that they do not expand beyond their means
and put their depositors at risk. Second, financial service firms are often constrained in terms of
where they can invest their funds. Third, entry of new firms into the business is often restricted by
the regulatory authorities, as are mergers between existing firms. From a valuation perspective,
assumptions about growth are linked to assumptions about reinvestment. With financial service
firms, these assumptions have to be scrutinized to ensure that they pass regulatory constraints.
There might also be implications for how we measure risk at financial service firms. If regulatory
restrictions are changing or are expected to change, it adds a layer of uncertainty to the future,
which can have an effect on value.
Reinvestment – Measuring net capital expenditures and working capital at a financial service firm
can be problematic. Consider net capital expenditures first. Unlike manufacturing firms that invest
in plant, equipment, and other fixed assets, financial service firms invest in intangible assets such
as brand name and human capital. Consequently, their investments for future growth often are
categorized as operating expenses in accounting statements. Not surprisingly, the statement of cash
flows to a bank show little or no capital expenditures and correspondingly low depreciation. With
working capital, we run into a different problem. If we define working capital as the difference
between current assets and current liabilities, a large proportion of a bank's balance sheet would
fall into one or the other of these categories. Changes in this number can be both large and volatile
and may have no relationship to reinvestment for future growth.
As a result of this difficulty in measuring reinvestment, we run into two practical problems in
valuing these firms. The first is that we cannot estimate cash flows without estimating
reinvestment. In other words, if we cannot identify net capital expenditures and changes in working
capital, we cannot estimate cash flows, either. The second is that estimating expected future growth
becomes more difficult if the reinvestment rate cannot be measured.
Overcoming valuation Issues
Because of the uniqueness of financial services firms, it makes far more sense to value equity
directly at financial service firms, rather than the entire firm. Second, we either need a measure of
cash flow that does not require us to estimate reinvestment needs or need to redefine reinvestment
to make it more meaningful for a financial service firm. To overcome these issues, the Dividend
Discount Model (DDM), Simple Price to Book (P/B) and Simple Price to Earnings (P/E) valuation
methods were used. DDM implicitly assumes reinvestment through estimates of the retention ratio
rather than estimating CAPEX and working capital cash flows.
Valuation Report
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Quantitative Valuation
Dividend Discount Model
Growth Phase Transition Phase Stable Phase
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Exp. g 14.15% 14.15% 14.15% 14.15% 14.15% 12.24% 10.33% 8.41% 6.50% 4.59% 4.59%
EPS $11.00 $12.56 $14.34 $16.37 $18.68 $20.97 $23.14 $25.08 $26.71 $27.94 $29.22
PO Ratio 0.54 0.54 0.54 0.54 0.54 0.55 0.56 0.58 0.59 0.60 0.60
DPS $5.95 $6.79 $7.75 $8.85 $10.10 $11.59 $13.06 $14.45 $15.71 $16.76 $17.53
Ke 13.33% 13.33% 13.33% 13.33% 13.33% 12.94% 12.56% 12.17% 11.79% 11.40% 11.40%
PV 5.09 5.12 5.16 5.20 5.24 5.41 5.54 5.60 5.60 5.54
Fair V $131.03 Undervalued - $(9.18)
Simple P/E 2012 2013 2014 2015 2016 2017 2018 Forecast
Historical P/E 14.51 15.33 16.39 15.16 18.77 13.15 12.71
Price/ Implied 2019 134.56
Earnings per share 7.27 7.18 7.42 7.39 5.86 7.74 8.16 8.83
Current Market Price 121.68
Over (undervalued)
$(12.71)
Simple P/B 2012 2013 2014 2015 2016 2017 2018 Forecast
Historical P/B 2.00 2.08 2.25 1.93 1.87 1.63 1.67
Price/ Implied 2019 $ 125.75
BV per share 52.88 52.86 54.10 58.09 58.82 62.46 62.13 67.24
Current Market Price 121.85
Over (undervalued)
$(3.90)
Valuation Report
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
8.23%
6.34% 5.72%
2.67%
6.01% 6.12% 5.83% 6.43%
2019 -Trail.
2018 2017 2016 2015 2014 2013 2012
0
5
10
15
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
EPS VS. DPS
DPS EPS
Quantitative Valuation – DDM Insights
Our three stage DDM assumes RFHL will be able to maintain its 2019 payout ratio and grow its
EPS (and hence dividends) at the firm’s current fundamental growth rate for the next 5 years then
transition to the implied payout ratio given a stable growth assumption over the following 5 years.
Over the last 12 years RFHL has increased its DPS by 28%, from $3.15 in 2008 to $4.40 in 2019.
For that period EPS increased by 35%, from $7.15 in 2008 to $9.64 trailing EPS in 2019. In the
short-term, declines in EPS do not seem to have much effect on the level of DPS. In 2009 and
2016 EPS fell by 17.3% and 22.7% respectively, but in both years DPS increased. This indicates
that the DDM is a suitable method for valuing RFHL as stable dividends is the basis for using this
model. The smoothing of dividend payments over time usually indicates management is confident
concerning future earnings.
Our sustainable growth assumption for the high growth phase seems reasonable given the
trajectory of growth since 2016 and RFHL’s aggressive approach to expanding through
acquisitions. Growth will eventually slow when the firm concludes its’ aggressive expansion
throughout the Caribbean.
Valuation Report
Trailing 12M
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
This valuation is dependent on RFHL completing its planned acquisitions of Scotiabank in the
eastern Caribbean, economic expansion in Guyana and other expansions throughout the region in
the next five years.
Quantitative valuation – Simple P/E Insights
This model is a simple yet powerful measure of value that relies on historical market sentiment of
the growth prospects of the stock. It uses the market implied multiple for RFHL for the past 5 years
and forecasts the firm’s EPS to arrive at the firms ‘fair value’. The analysis shows that RFHL is
undervalued by $12.71.
Quantitative Valuation - Simple P/B Insights
Simple P/B multiple, has a similar methodology to the simple P/E. It uses the average P/B multiple
for the past 5 years then determines a fair value by projecting book value per share (BVPS). The
forecasted BVPS is simply beginning BVPS increased by the firms’ current fundamental growth
rate; so it implicitly assumes the same retention ratio. The analysis shows that the stock is
undervalued by $3.90.
RFHL Risk Factors
Macro-environmental factors - As with all firms RFHL is exposed to various risk factors
from the external environment. Although data shows that the financial sector in Trinidad is
more resilient during economic downturns than other sectors, investors must still be mindful
of the risk associated with increased delinquency caused by deteriorating economic conditions.
This could put a major strain of RFHL’s main income driver (interest from loans). Delinquency
could be caused by increased unemployment levels, decline in disposable income and increases
in cost of living of the citizens in the territories which RFHL operates. Interest rate risk is
always significant when discussing financial institutions as their revenue is heavily dependent
on where interest rates are.
Regulation – Regulation has already begun to affect RFHL negatively through the denial by
the Central Bank of Guyana of their proposed purchase of Scotiabank’s assets in Guyana. The
Government of Antigua and Barbuda is also attempting to block the proposed purchase of
Scotiabank’s assets in Antigua by RFHL. Both purchases have been met with claims of
concentration issues. As RFHL continues to expand throughout the region they may be met
with resistance as regulators are usually skeptical about Financial institutions becoming too
dominant in a market.
Peer to peer lending (P2P) – P2P is the practice of lending money to individuals or businesses
through online services that match lenders with borrowers. P2P companies often offer their
services online, and attempt to operate with lower overhead and provide their services for less
than traditional financial institutions. If this type of funding becomes popular in the region it
may eat into RFHL’s bottom line.
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Limitations of Analysis
Model Errors - DDM, P/B and P/E models are created in excel with most room for model
error in the DDM model.
Analyst expertise - The analyst has not been following the sector for an extended period of
time which limits insights in forecasting future growth in the absence of management
projections.
Recommendation
Our models give a range of values from $125.75 to $134.56, each with its own margin of error.
The DDM model is weighted at 50% while the Simple P/E valuation and the Simple P/B valuation
are weighted at 25% each. This is because we see the DDM as the most suitable model, given that
investors in Trinidad and Tobago tend to see more value in dividend stocks. A 3% margin of error
was applied to the weighted price to give a fair value range of $126.68 - $134.51. This is compared
to the current market price of $121.85. We recommend RFHL with an OVERWEIGHT rating.
This OVERWEIGHT rating is given on the following basis:
RFHL’s core revenue continues to grow on a consistent basis and we project that this pace
of growth will continue into the medium term.
RFHL continues to diversify its revenue streams with an aggressive acquisition strategy.
As earnings continue to grow RFHL will continue rewarding shareholders with healthy
dividend payments.
RFHL’s low cost of funds give it a significant advantage over its’ competitors. They will
be able to keep and grow their market share by offering superior priced products.
RFHL keeps investing in technology to become more efficient (implementation of a
common IT platform across all of its Caribbean subsidiaries) and providing innovative
products to their customers (card-less cash etc.).
RFHL is also expected to benefit from increased business in Guyana as that territory is
projected to experience significant economic growth due to oil and gas discoveries.
Fair Value Range Price Weight
DDM $ 131.03 50%
Simple PE Val $ 134.56 25%
Simple PB Val $ 125.75 25%
Weighted Price $ 130.59
3% Under $ 126.68
3% Over $ 134.51
Valuation Report
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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
APPENDIX
IMPORTANT DISCLOSURES
Abstract— as a part of our new portfolio strategy we are recommending strict adherence to the
following portfolio allocation definitions/recommendations.
PLEASE NOTE THAT NO INDIVIDUAL ASSET IN YOUR PORTFOLIO SHOULD HAVE
A WEIGHTING GREATER THAN 10% UNLESS OTHERWISE RECOMMENDED BY YOUR
PORTFOLIO MANAGER/ INVESTMENT ADVISOR OR A SPECIFIC JMMB RESEARCH
REPORT. CONSEQUENTLY, THE FOLLOWING DEFINITIONS ARE PROVIDED FOR
CLARITY.
HOLD/MARKETWEIGHT— This rating is based on a flat capital appreciation (0% to 3%) of
a stock relative to the current market price.
BUY/OVERWEIGHT— This rating is based on the capital appreciation of a stock above 3% of
the current market price.
UNDERWEIGHT— This rating is based on the negative price movement of a stock (less than
0%) relative to the current market price.
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property law and other proprietary rights. No part of this research report or the report in its entirety
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No part of this research report may be modified or changed or exploited or used in any way for
derivative works, or offered for sale, or used to construct any kind of database or mirrored at any
other location without the express written permission of JMMB.
Valuation Report
19
All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.
Thank you for respecting our intellectual property rights.”
The investments referred to in this report may not be suitable for you should consult your licensed
investment advisor. Nothing in this report constitutes investment, legal, accounting or tax advice
or a representation that any investment or strategy is suitable to your individual circumstances or
otherwise constitutes a personal recommendation to you.
Valuation Report