Investor's Diary - Demerara Bank Limited 31 March 2007 Interims
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This column provides informative commentary on business and financial matters and is written by Patrick van Beek, Managing Proprietor of Caribbean Actuarial & Financial Services.
Stabroek News
April 22, 2007
Introduction
The interim earnings reporting season for those publicly traded companies with September 30th financial year ends is upon us and first out of the gate is Demerara Bank Limited (DBL), with results published just a little over two weeks after the close of half-year, a commendable achievement by the directors, management and staff. Once again the information provided is in excess of that required by the Securities Industry (Disclosure by reporting Issuers) Regulations 2002. However, the basis of taxation does not appear to have been reported. Of all the information required by the Regulations this appears to be the item that is most frequently missed in the interim disclosures. I am somewhat unsure why the Regulations require the basis of taxation to be reported in the first place, and if its absence is not cause for a public response from the regulator or the investing public, then would it not be better to amend the Regulations to remove reference to it all together?
Share Price
When I reviewed DBL's year end financials the shares were trading at G$5 and I recommended buying the stock if it was available at that price. However no stock came up for sale on the local stock market until 20 November 2006 at a price of G$9. Given this would mean the stock would be trading at a price earnings (PE) ratio of 14.3 I did not expect this order to be filled quickly, however over the next two weeks the entire lot was sold, once more leaving no stock available until 05 February 2007. Since that time the stock has traded between G$8.9 and G$10, most weeks trading at G$9. Some 835,500 shares remain on offer (just 0.186% of the total number of shares in issue), and outstanding bids (orders to buy) go up to G$8. .
Company Performance
In his review, the Chairman, Mr Yesu Persaud, himself a sizeable shareholder, comes across as very positive "Net Profit after Taxation for the rest of the year is expected to exceed that of last year". It is worthy of note that those who invested in the bank at the outset at one dollar per share will have seen a nine-fold capital return on their investment.
In keeping with the formula which has led to success across the banking sector, DBL's profits are driven by a healthy spread between the rate paid to depositors and the rate earned on its assets. The bank has continued to attract deposits which have grown by 16% over the comparative period one year ago. Remarkably, non-interest expenses have remained virtually unchanged. This has allowed the increase in the net interest income to flow directly to the bottom line - for the six month period profit before tax now stands at G$374.4M, an increase of 63%.
On first inspection the allowance for taxation looks low - it stands just G$1M over the equivalent figure in the period to 2006. However, it should be noted that the estimate in the 2006 Interims turned out to be about 5/6 of the tax bill for the entire year! The fall in the effective tax rate has allowed trailing twelve month profit to break through $G350M for the first time - a threefold increase since the low point of September 2001.
Internet Banking
One exciting area which the company is developing is internet banking. The service was recently launched and will allow customers to view the accounts balances, recent transactions, order statements and pay bills all from the convenience of an internet connected computer. It may turn out to be a draw for new deposits too - I am strongly considering opening an account to take advantage of this service if my own bank does not follow suit.
Justified PE and Investor's Diary recommendation
The dividend in respect of the financial period has increased dramatically from 0.7 to 0.12 resulting in an increase in the dividend in the 12 months to date from 0.15 to 0.23, an increase of over 50%. Despite this, the payout ratio remains low - representing just 27.1% of the trailing twelve months earnings per share of 0.85. DBL has experienced a dramatic increase in the capital value of its shares and as such it is now trading at some ten times earnings. Using my standard assumptions (required return of 15% and 10% dividend growth) the current payout ratio justifies a much lower PE ratio of 6.0. As I stated in my review of the 2006 full year figures both these assumptions are subject to considerable uncertainty - and indeed the share price appreciation of nearly 100% and growth in trailing twelve month earnings of 35% has shown just how much variety there can be. Using a higher rate of dividend growth would justify a more aggressive valuation - however given the variability in the recent figures I will wait to see the full year results before updating the assumptions I used six months ago: a growth rate of 14.5% pa and a required return of 18%. These justify a PE ratio of 8.85 or a share price of G$7.5. Being not much less than the best bid I recommend those with the shares hold onto them and those without hold-off from buying. If you believe the recent increases in dividends are likely to be maintained for some time to come then this stock is an interesting prospect at $9.