Author: Linet Muriungi

Dyer & Blair investment bank
DBIB; JUST A THOUGHT
Founder Member of the Nairobi Securities Exchange
14th NOVEMBER 2019

Unrealized FAIR VALUE ADJUSTMENTs impact on BRITAM
We analyze the potential outcome of Britam’s financial performance given the group’s investment in financial assets specifically on equity investment and its strategic investment in Equity Group. This is given the recent rally of banking stocks in the bourse with the banking sector recording an average growth of 11.4% YTD, NASI recording a 14.6% growth YTD to 160.99 and NSE 20 declining by 4.1% YTD to 2,717.86.
Our analysis of Britam’s financial performance implies that the group is substantially impacted by total fair value adjustments reported by the group. This is substantiated by a 0.665 correlation between unrealized FV adjustments and the group’s profit after tax performance. In addition, net unrealized fair value gains/losses on equities show a correlation to net earnings of 0.549.
The impact of unrealized fair value gains or loss from equity investment contributed (54.2% (5 year average of 81.4%) of the group’s fair value adjustments as at FY18, despite a 24.8% (5 year average of 42.3%) contribution to financial assets held at fair value through profit or loss. We attribute this to the group’s financial presentation with approximately 65.3% of the group’s financial assets as at FY18 held at fair value through profit or loss and the relatively stable interest rate environment in Kenya over the period. This substantial impact of equities to Britam’s performance poses a market risk which has seen the group historically record volatile performance. Management considers a 15.0% change/movement in the NSE to be its market risk threshold. In addition, holding other variables constant, they estimate that a 15.0% change in the NSE in FY18 would have resulted in a KES 1.4 BN increase or decrease in after tax earnings and shareholders’ equity. In further, a 15.0% change in equities held at fair value through other comprehensive income would have affected the Group’s reserves and other shareholder funds by KES 706.6 MN (higher/lower).

NET UNREALIZED FV VS PAT VS EQUITIES FV
(Source: Company Filings and DBIB Research)
PRICE ABSOLUTE EXCESS
RETURN RETURN RETURN
3 months 1.09 (2.98)
6 months (15.91) (13.90)
12 months (28.85) (22.20)
KEY METRICS
Current Price (KES) 7.40
52 week Range (KES) 6.80-10.60
YTD Return (%) (26.00)
Issued Shares (Mn) 2,523.49
Market Cap (USD Mn) 182.90
Trailing EPS (KES) (0.60)
NAV (KES) 10.23
P/E (x) (12.30)

RESEARCH DEPARTMENT
Faith Muthoni
Fmwisywa@dyerandblair.com
0709 930 130

low R-Squared value indicate weak correlation between two variables and vice versa.
BRITAM: 52 WEEK PRICE PERFORMANCE
(Source: NSE and DBIB Research)
BRITAM VS EQUITY GROUP
(Source: NSE and DBIB Research)

Our analysis of NSE 20’s and Equity Group price impact on Britam’s price performance resulted in the below findings;
Between 2013 and 2018, there was a decent correlation of 0.63 between Equity Group and Britam stock prices. In addition, the linear R squared (R2) was at 0.42 meaning that 42.2% of Britam’s price is explained by Equity stock price.
Between 2013 and 2018, there was a correlation of 0.93 between NSE 20 and Britam stock price with an R2 of 0.71 meaning that 71.5% of Britam’s price is explained by movement in the NSE 20.
The group holds a majority of its strategic investment in Equity Group at fair value through other comprehensive income (NCA). We estimate a KES 3.8 BN (using KES 47.50 per share) fair value gain courtesy of Equity Group’s recent rally. We believe that approximately 51.7% of this will directly impact shareholders equity.
Kindly find below graphical representation of the regression analysis
(Source: Company Filings and DBIB Research)
Summary and call to action
Britam has considerable exposure to market forces courtesy of its presentation of financial assets with majority held at fair value through profit or loss. In 1H19, Britam recorded a 70.5% jump in profit after tax (PAT) to KES 1.7 BN which we primarily attributed to the drop of government yields with the 5 and 10 year bonds recording a 155 bps and an 86 bps y-o-y drops to 10.44% and 11.75% as at June 30th 2019 respectively. This attribution was further affirmed by the decline in NSE with NASI and NSE 20 recording a 14.2% and 19.9% y-o-y by June 2019. Although we expect the yield curve to come under pressure given the repeal of the interest rate cap, we expect total fair value gains to increase if current trends in the equities market hold courtesy of the group’s sensitivity to the equities market. In addition, we don't expect the group to further impair its investment in HF Group given the lender’s improved performance and the repeal of the interest rate caps. We thus issue a BUY recommendation on the stock.

APPENDIX
COMPANY INVESTMENT RATINGS
Buy: Share price may generate more than 15.0% upside over the next 12 months
Overweight: Share price may generate between 10.0% and 15.0% upside over the next 12 months
Hold: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels. Company fundamentals however remain strong
Underweight: Share price may generate between 10.0% and 15.0% downside over the next 12 months
Sell: Share price may generate more than 15.0% downside over the next 12 months, significant business and/or financial risks present, industry concerns
Not Rated: Counter is not within regular research coverage
SECTOR INVESTMENT RATINGS
Overweight：Industry performance better than that of the whole market
Equal weight： Industry performance about the same as that of the whole market
Underweight：Industry performance worse than that of the whole market
DISCLAIMER
While every care has been taken in preparing this report and it has been prepared from sources believed to be reliable, no representation, warranty, or undertaking (express or implied) is given and no responsibility is accepted by Dyer and Blair Investment Bank Limited, its related companies, subsidiaries, affiliates, its employees and agents, as to the accuracy and completeness of the information contained herein or in respect of any reliance on or use thereof. This report is solely intended for distribution to clients of Dyer and Blair Investment Bank Limited. Any information may be changed after distribution at any time without any notice.

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