Bank Alfalah BAFL PA
June 28, 2007 - 8:18pm EST by
cross310
2007 2008
Price: 62.15 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 668 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Description

  • Bank Alfalah (BAFL) is the 4th largest private sector bank in Pakistan in terms of deposits and one of the leading players in the consumer finance segment.
    • BAFL has a nationwide network of 195 branches, and it is the 18th largest company in Pakistan in terms of market cap.
    • BAFL’s total loan book size is approximately PKR$149B, 24% comprised of consumer loans and 76% comprised of corporate loans.
    • BAFL maintains 16% market share in the consumer lending segment and controls an 8% share in deposits. BAFL is also the leader in the credit cards segment.
  • BAFL employs a relatively high average cost of funds (6.2% vs. industry level of 3.1%) and one of the highest cost-to-income ratios of 65.7% primarily due to staffing costs. The high cost of funds derives from the bank’s aggressive branch opening plans (the bulk of deposits were raised in 2005 when monetary tightening was instituted by the central bank).
  • Over the past three years, BAFL’s deposit growth has outstripped loan growth by 10% (30% loan growth, 10% deposit growth) compared to the industry average of loan growth outstripping deposit growth by 10%. Bank Alfalah is therefore sitting on excess cash with a loan-to-deposit ratio of 0.85x (industry average 1.05x).
  • BAFL is 44% owned by the Abu Dhabi group of the UAE (which also owns United Bank and Warid Telecom)
  • BAFL owns a 16.4% stake in Warid Telecom the 4th largest mobile operator in Pakistan.

Thesis

  • Rumors have been floating around for the past several weeks month that Warid Telecom would be selling a stake to a foreign operator after China Mobile (CHL) bought a stake in Paktel (CHL tends to increase the competitive nature of markets it operates in).
    • Recently, the chairman of Warid Telecom suggested it was engaged in talks about the possibility of selling a minority stake to the foreign operator.
    • The Financial Times has reported the EV/subscriber (BAFL has 10mm subscribers) would be around US$100/sub (a significant discount to the roughly $270/sub CHL paid for Paktel).
  • Dow Jones Newswire reported that a deal has been formalized and will be announced tomorrow at 12PM Singapore time valuing the company at roughly USD$250/sub.
    • At a $250/sub valuation, BAFL’s stake in Warid Tel is valued at roughly USD$400mm vs. total market cap of BAFL of ~US$667mm
    • Book value of BAFL’s stake in Warid is ~USD$33mn, so at $250/subscriber an incremental US$360mn flows to the balance sheet.
    • If Warid Tel is valued at US$250mm/sub, BAFL is trading at ~1x 2007 P/B and 0.97x 2008 P/B, with a 20% ROE.
  • Separately, press reports indicate Orascom increased its stake in Mobilink by 11.3% with a proposed US$230mm investment – according to the latest numbers released by Pakistan Telecommunication Authority (PTA), Warid is ranked 3rd, behind Mobilink and Ufone
Downside Case:
Even if the stake sale in Warid does not materialize in the immediate future, BAFL is a fairly valued company
  • BAFL is the largest consumer lender in the country.
  • BAFL has the capital base to grow loans aggressively and improve its net interest margins and room to improve the cost to service ratio to industry benchmarks.
  • Liquidity: BAFL is relatively liquid trading US$11mm/day.

Catalysts

  • Formal agreement of stake sale which we are hearing is supposed to be scheduled for 12PM tomorrow.
Risks
  • Lack of monetization of stake sale (the Abu Dhabi group may sell their stake in Warid Telecom from their portfolio and not through Bank Alfalah)
  • Reinvestment of sale proceeds in unprofitable ventures vs. compensating investors through dividend payments
  • Unexpected increase in loan loss allowances in the consumer portfolio
  • A decline in net interest margins and slowing loan growth
Upside/Downside

Stock price:       PKR$62.15

Target price:     PKR$82.6    (1.3x '08 Adj. BV)      Reward:       PKR$23.4 (33% upside)

Loss limit:            PKR$53                                             Risk:               PKR$6.2

 

Risk/Reward ratio = 3.7:1

 
 
 
 
 
 
                   BPS
 
 
                   P/B
 
 
                 ROE
 
Ticker
Name
 
Price
 
2007
2008
 
2007
2008
 
2007
2008
NBP PA
National Bank of Pakistan
 
257.2
 
113.017
132.482
 
2.3x
1.9x
 
21.8%
20.2%
MCB PA
MCB Bank
 
364.5
 
72.01
82.025
 
5.1x
4.4x
 
32.3%
28.7%
BOP PA
Bank of Punjab
 
113.4
 
55.22
69.12
 
2.1x
1.6x
 
23.4%
24.7%
ACBL PA
Askari Bank
 
101.5
 
34.05
 
 
3.0x
 
 
21.0%
 
FABL PA
Faysal Bank
 
69.4
 
 
 
 
2.0x
 
 
19.9%
19.5%
PICIC PA
Pakistan Industrial Bank
 
76.75
 
 
 
 
2.6x
 
 
33.3%
 
UBL PA
United Bank
 
218.45
 
50.025
61.26
 
4.4x
3.6x
 
32.0%
28.6%
ABL PA
Allied Bank
 
131.5
 
39.233
49.67
 
3.4x
2.6x
 
27.7%
27.3%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mean
 
3.1x
2.8x
 
26.4%
24.8%
 
 
 
 
 
 
Median
 
2.8x
2.6x
 
25.5%
26.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
BAFL PA
Bank Alfalah
 
59
 
25.975
31.915
 
2.3x
1.8x
 
19.2%
19.7%
 
 
Valuation
Price:               PKR$62.15                                                      2007E   2008E                          
Shares:            650mm                                     EPS                  4.656    5.442   
Mkt cap:           PKR$40.4B                               P/E                   13x       11x      
Mkt cap:           US$667.7mm
                                                                        BPS                 25.975  31.915 
                                                                        P/B                   2.3x      1.8x     
                                                                        ROE                 19.2%   19.7%
 
 

Catalyst

Formal agreement of stake sale which we are hearing is supposed to be scheduled for 12PM tomorrow in Singapore.
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    Description

    Description

    Thesis

    Downside Case:
    Even if the stake sale in Warid does not materialize in the immediate future, BAFL is a fairly valued company

    Catalysts

    Risks
    Upside/Downside

    Stock price:       PKR$62.15

    Target price:     PKR$82.6    (1.3x '08 Adj. BV)      Reward:       PKR$23.4 (33% upside)

    Loss limit:            PKR$53                                             Risk:               PKR$6.2

     

    Risk/Reward ratio = 3.7:1

     
     
     
     
     
     
                       BPS
     
     
                       P/B
     
     
                     ROE
     
    Ticker
    Name
     
    Price
     
    2007
    2008
     
    2007
    2008
     
    2007
    2008
    NBP PA
    National Bank of Pakistan
     
    257.2
     
    113.017
    132.482
     
    2.3x
    1.9x
     
    21.8%
    20.2%
    MCB PA
    MCB Bank
     
    364.5
     
    72.01
    82.025
     
    5.1x
    4.4x
     
    32.3%
    28.7%
    BOP PA
    Bank of Punjab
     
    113.4
     
    55.22
    69.12
     
    2.1x
    1.6x
     
    23.4%
    24.7%
    ACBL PA
    Askari Bank
     
    101.5
     
    34.05
     
     
    3.0x
     
     
    21.0%
     
    FABL PA
    Faysal Bank
     
    69.4
     
     
     
     
    2.0x
     
     
    19.9%
    19.5%
    PICIC PA
    Pakistan Industrial Bank
     
    76.75
     
     
     
     
    2.6x
     
     
    33.3%
     
    UBL PA
    United Bank
     
    218.45
     
    50.025
    61.26
     
    4.4x
    3.6x
     
    32.0%
    28.6%
    ABL PA
    Allied Bank
     
    131.5
     
    39.233
    49.67
     
    3.4x
    2.6x
     
    27.7%
    27.3%
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    Mean
     
    3.1x
    2.8x
     
    26.4%
    24.8%
     
     
     
     
     
     
    Median
     
    2.8x
    2.6x
     
    25.5%
    26.0%
     
     
     
     
     
     
     
     
     
     
     
     
     
    BAFL PA
    Bank Alfalah
     
    59
     
    25.975
    31.915
     
    2.3x
    1.8x
     
    19.2%
    19.7%
     
     
    Valuation
    Price:               PKR$62.15                                                      2007E   2008E                          
    Shares:            650mm                                     EPS                  4.656    5.442   
    Mkt cap:           PKR$40.4B                               P/E                   13x       11x      
    Mkt cap:           US$667.7mm
                                                                            BPS                 25.975  31.915 
                                                                            P/B                   2.3x      1.8x     
                                                                            ROE                 19.2%   19.7%
     
     

    Catalyst

    Formal agreement of stake sale which we are hearing is supposed to be scheduled for 12PM tomorrow in Singapore.

    Messages


    Subjectsale announced
    Entry06/29/2007 12:01 PM
    Memberraf96
    don't they have to pay taxes on the gain?

    Subjectpartial sale only
    Entry07/02/2007 04:23 PM
    Memberraf96
    it looks like only a small portion of their interest is going to be sold at this point. Looks like the catalyst has evaporated.
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