Reality Check: Why ADBL is one of the most undervalued stocks?

ShareSansar, April 22:

Those who are keeping a tab on the scrip of Agricultural Development Bank Limited are wondering as to why it remains undervalued.

It kind of defies logic that even after ensuring 31.58 percent cash dividend to the shareholders from the net profit it posted in the last fiscal year 2069/70, and having formally launched the process to seek a strategic partner to better manage its operation, the ADBL scrip has not been able to grow at all.

The price of ADBL scrip hovers around Rs 470 while the share of other government-backed bank, Nepal Bank Limited, has maintained strong support at 320 levels despite its negative reserve and not so sound financial report?

The comparison is pertinent in that both these banks are not only set up by the state, but are among the oldest and the largest commercial banks of the country.
The latest available information regarding these banks i.e. the second quarterly report

Nepal Bank Limited, the oldest bank in the country, has reported a massive profit rise of 572 percent in the second quarter of the current fiscal year 2070/71.

According to the unaudited financial statement for the second quarter published by the commercial bank, its net profit rose from Rs 3.90 crore in the corresponding quarter of the last fiscal year to Rs 26.22 crore by the end of the second quarter.

But the profit was largely propelled Rs 22.95 crore it was able to write back even as its core business has also improved a bit. Its net interest income has risen to Rs 1.1 arba in the second quarter from Rs 77.97 crore in the corresponding quarter. NBL mobilized Rs 64.32 arba in deposit and Rs 38.94 crore in loan as compared to Rs 57.01 arba in deposit and Rs 32.41 arba in loan in the corresponding quarter.

But again the bank’s profit and loss account is still worrisome in that it has provisioned Rs 24.21 crore for the possible losses, and that its non-performing loan has also risen to 5.83 percent up from 5.40 percent.

Now let us look at the second quarter report of ADBL.

ADBL’s net profit dipped to Rs 46 crore, down from Rs 54.63 crore in the corresponding quarter last fiscal year. But then the profit was mainly stemmed by more than Rs 79.52 crore provisioned for the possible losses by the end of the second quarter.

Its net interest income has risen to Rs 2.21 arba, up from Rs 1.96 arba in the second quarter of the last fiscal year.  The bank with one of the largest infrastructure and network mobilized Rs 64.96 arba in deposit and Rs 52.69 arba in loan as compared to Rs 44.97 arba in deposit and Rs 43.17 arba in loan in the corresponding quarter last year.

These figures show that ADBL’s core business is better than that of NBL as of now.

Another important thing is that ADBL’s non-performing loan has also decreased from 6.64 percent in the second quarter of the last fiscal year to 6.05 percent, while NBL’s NPL has increased—though marginally.

Now we come to the most important aspect of this comparison. ADBL’s EPS stands Rs 16.69 and its net worth per share is priced at 289.96. NBL’s EPS, on the other hand, stands at Rs 13.22 and its net worth per share is priced at just Rs 9.91.

Hence, if we are to talk in terms of core business and the general financial health, ADBL is in a far better position than NBL.

Now we come back to the million-dollar question: What is stemming ADBL’s growth?

‘Misreading’ the balance sheet

One of the major reasons, according to those who have been keenly following the price movement of ADBL scrip, is that there is no “player” for this share.

It is an open secret in the stock market of the country that you need some “players” or traders (not long-term investors) to shore up the price of any scrip.

“Players are yet to opt for ADBL scrip,” says Durga Upreti, the executive member of Nepal Investor’s Forum. “The big investors were reluctant to go after this scrip when its price was low. They clearly misread the balance sheet then. Now their ego is opposing them.”

To validate his argument, Upreti explains that many investors were repelled with ADBL’s balance sheet, which starts with its paid-up capital that stands at a staggering Rs 9.63 arba.

“But what they apparently missed is that Rs 6.43 arba of the paid-up is irredeemable, non cumulative preference shares, and that they will be converted to debenture from the next year (as required by the agreement with the Asian Development Bank),” he adds. “With this ADBL’s paid-up will stand at Rs 3.2 arba. Now think about its implication to EPS and the dividend.”

There is another important aspect of the balance sheet that many investors seem to have missed, adds Dilip Shrestha, one of the long-term investors in ADBL scrip. ADBL has kept aside 21 percent of its net profit in the reserve as retained earning.

“ADBL could have easily pledged up to 51 percent bonus for the last fiscal year alone,” says Shrestha.

Another big share investor Krishna Gopal Shrestha says that rather than being suspicious of the ADBL scrip just because it has major government holding, the investors should not forget that today ADBL remains the highest income generating bank in the country.

“ADBL has been posting much higher profit than Nabil Bank over the past few fiscal years, and is set to maintain that record in the current fiscal year, too,” he says.

“Yet another thing we need to understand is that, if we look at ADBL’s financial reports for the past few years, it usually recovers loan from the period between Baisakh and Ashad. Hence, the bank is poised to announce a massive profit rise by the fourth quarter,” Dilip Shrestha adds.

Echoing Shrestha’s statement, ADBL officials told ShareSansar that the bank is in a position to pledge more than 40 percent dividend, including bonus shares, to the shareholders from the net profit it posts in the current fiscal year.

“We make more income and profit in Jestha and Ashad (from mid-May to mid-July) than the rest of the months combined,” says Prakash Subedi, a senior official with ADBL. “And then we already have more than Rs 7 arba in the reserve set aside for the profit to be distributed to the shareholders.”

“And, most importantly, we are set to announce significantly higher net profit than we did in the last fiscal year. Now you can guess the kind of dividend we will pledge to the shareholders for the current fiscal year,” he adds.

The strategic partnership factor

Another important aspect of ADBL that is apparently being brushed aside is the issue of its strategic partnership aimed at making ADBL more effective and efficient.

The bank has already begun the formal process of forging the strategic partnership by September as directed by the privatization cell of the Ministry of Finance as part of the reform plan recommended by the Asian Development Bank.

A team comprising senior Finance Ministry and ADBL officials had gone to China a few days back to woo the largest Chinese bank — China  Construction Bank — to become ADBL’s strategic partner.

“The talks has been very fruitful, and we are looking forward to the strategic partnership with this Chinese bank and they are also quite interested in the deal,” Subedi said, adding that the deal, if it is landed, will be physically moving for ADBL.

China Construction Bank is one of the largest banks in the world.

He also rubbished some rumors in the market that the talks with China Construction Bank broke down after they sought 51 percent stake in ADBL.

“See the meeting was facilitated by the Asian Development Bank, and the deal is to divest only 30 percent of its stake in ADBL. If the Chinese bank is adamant about 51 percent stake then that would have been the dead end. But that is not the case,” Subedi explains.

He further informed that ADBL was currently conducting the Due Diligence Audit through an international audit firm so that the bank can invite a global tender for the strategic partnership.

The firm is Dev Associates Chartered Accountants. It has been appointed as an independent member firm of Baker Tilly International with effect from October 2011. As per the deal, Dev Associates and Baker Tilly Nepal are jointly representing as Baker Tilly International member firms in Nepal.

Sources privy of the development said that a bank each from Malaysia and New Zealand are also interested in the deal.