Citi says Kenyan lenders ideal takeover targets by PE Atlas Mara

Kenyan banks are ideal takeover targets as they match the financial measures being sought by London Stock Exchange-listed private equity fund Atlas Mara in its African acquisitions, investment bankers at Citi say.

According to Citi, the Kenyan lenders have the ideal return on assets (ROA), cost of capital and price to earnings (P/E) ratios at a time Atlas Mara is eyeing East African acquisitions to grow its African banking asset base from about Sh245 billion ($2.4 billion) to Sh1.8 trillion ($17.5 billion).

Atlas Mara is targeting an ROA of two per cent, while Kenyan banks have on average an ROA of 4.5 per cent as per third quarter 2015 numbers.

The metric shows the extent to which assets contribute to net profits. Their cost of capital of about 17 per cent and P/E — showing how earnings are reflected in the stock price — of 7.3 also matches the ideal numbers for Atlas Mara, the research shows.

This means that the lenders are more than attractive for acquisition by the PE firm, which has already set up shop in the region after acquiring two Rwandan banks in the past two years.

“When we look across our coverage universe, we are using a cost of capital of about 17 per cent for our Kenyan banks and 22 per cent for our Nigerian banks. Given its arguably superior corporate governance and ability to diversify across different economies, Atlas Mara should have a cost of capital towards the lower end of the sub Saharan Africa bank spectrum,” said Citi analyst Josh Levin in the report.

“On the other hand, Atlas Mara has an unproved business model, and its financial resources may not be as robust as those of a major bank.

Based on discussions with the company, our best estimate is that Atlas thinks of its cost of capital, on average, in the 16 to 17 per cent range.”

Citi says that although African equity markets have not got a long or rich enough history to confidently identify a normalised P/E multiple and compare it with Atlas Mara’s, a base case of 7.5 times can be made which is similar to listed Kenyan banks’ ratio.

“Our logic is that earlier in 2015, when investors were enthused about Kenya’s growth prospects, Kenyan banks traded on average at 7.5 times (versus Nigerian banks at 3.9 times).

If Atlas Mara’s business model proves successful, we would argue that investors would place a similar sort of multiple on it,” said Mr Levin.

The high rate of growth for Kenyan banks in assets and earnings, however, means that any acquisition will have to be at a premium, with sellers unlikely to part with an outperforming asset easily.