We recommend a LONG TERM BUY on Equity Group Holdings with a one-year target price of KES 54.11 – representing an upside potential of 35.4% from the current market price of KES 39.95 (as at 25th January 2019). Currently, Equity is trading at a P/B of 1.62x compared to the average banking sector P/B of 0.94x as at 25th January 2019.
We attribute the high P/B ratio to high growth expectations by investors. Equity has a high ROaE of 21.6% (the highest in the banking sector) which is well above the industry average of 13.4%.
The current business model, hinged on technology, innovation and business diversification affirms the group’s competitive advantage in an industry adapting to the digitization strategy amidst the current regulatory challenges. Thus, we believe this business model will support growth in the long-term.
Equity has a new dynamic business model tailored to address the emerging challenges in the banking sector. The model is hinged on the following focus areas:
- Non funded income growth – to support net interest income
- Regional diversification – to mitigate against regulatory risk
- Strengthening liquidity and balance sheet agility
- Treasury operations – to enhance treasury income
- Asset quality (especially with tougher regulations in the horizon)
- Innovation and digitization
- Efficiencies and cost optimization
