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Summary of Broker’s Recommendation
| Stock Code | UBP |
| Company Name | Unionbank of the Philippines |
| Broker | AP Securities |
| Opinion Issued on | 25 April 2024 |
| Recommendation | Hold |
| 1-Year Target Price | PHP 52.46 |
For existing holders of UBP shares, there is pretty much no choice but to subscribe to the stock rights offering (SRO) in order to avoid dilution on their existing ownership positions. For those thinking of buying more UBP shares in order to snatch up more stock rights however, we would advise against such an action given the reason stated below.
Analysis and Opinion
UBP to conduct an SRO
The Aboitiz-led lender declared its intent to conduct a stock rights offering (SRO) wherein a total of 450.20-Million shares will be up for listing at a discounted price range of P33.73 to P38.23 per share. The entitlement ratio of the rights along with the final offer price will be set on May 02. Proceeds from the capital raising will be plowed into its digital banking subsidiary UnionDigital, alongside projected retail loan availments and/or for general corporate purposes.
Price adjustments alongside potential liquidity improvement
Given the corresponding increase in outstanding shares post-SRO as well as the discounted pricing of the rights shares, we expect UBP’s stock price to experience a downward adjustment on ex-date. Come listing date though, the stock could get a boost in its liquidity given the 450.20-Million shares that will be coming online, which represent 38.5x UBP’s 6-month average daily volume.
In our view however, this could also present a short to medium term overhang once the shares are listed, as subscribers to the SRO may take any sufficient rises in price as an opportunity to sell their discounted rights shares.
Wary on the impact to ROE
When assessing how the additional capital proceeds would affect UBP’s financials, we note that the impact to the bank’s return on equity (ROE) in 2024 may not be favorable. Assuming a price of P35.98 (midpoint of P33.73 and P38.23), the SRO on its own would grow UBP’s equity base by 9.2% from P175.6-Billion to P191.8-Billion.
While this would raise UBP’s CET-1 levels, we think that the opposite may be true for the bank’s ROE. Upon factoring in 2023 earnings ex-one offs of P15.7-Billion, we note that the subsequent increase in the equity base would result in UBP’s ROE ex-one offs dropping by 120bps from 9.7% to 8.5%.
In order to maintain the same ROE of 9.7% in 2024, earnings would likely have to grow by 13.5%. While this is a realistic target, a 9.7% ROE is still way below the industry’s typical range of 11 to 13%. An 11% ROE would likely require earnings growth of 28.7% relative to normalized 2023 profits while a 12.6% ROE (2023 industry average) would necessitate a mammoth-sized growth rate of 47.4% based on our calculations.
These numbers in our view are very difficult to achieve even amidst the brighter outlook for UBP this year. As such, while we do acknowledge that the added capital may provide a spring board for more aggressive growth in the long-term, we remain wary of how the SRO would affect UBP’s ROE and valuations over a 1-year horizon.
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