Despite Short-Term Earnings Pressure, Digital Overhaul And UGB Acquisition Will Strengthen Future Performance

Key Takeaways

• Acquisition of UGB in Bahrain and strategic pivot to Islamic finance could initially impact earnings and short-term revenue projections.
  
• Digital infrastructure investments and elevated operating costs strain current margins, while corporate tax uncertainty in Kuwait may affect future earnings projections.
  
• Burgan Bank’s focus on digitalization, strategic acquisitions, and strong asset quality bolsters operational efficiencies, revenue streams, and capital growth, enhancing potential earnings and shareholder returns.

Catalysts

Provides various banking products and services in Kuwait and internationally.

• The acquisition of UGB in Bahrain could initially impact earnings due to the integration process, and the initial impact on capital buffers is expected to be 60 to 70 basis points. However, the strategic pivot to Islamic finance and investment sectors might not deliver immediate revenue growth, potentially affecting short-term revenue projections.
  
• The ongoing investment in digital infrastructure and core banking system overhaul, while potentially boosting operational efficiency in the long run, could weigh on current margins due to increased expenses, compressing net margins in the near term.
  
• Elevated operating costs, especially staff expenses and IT and digital infrastructure investments, have pushed the cost-to-income ratio to 57%. This could limit operating profit growth and earnings expansion if not offset by significant revenue increases.
  
• Uncertainty regarding corporate tax legislation in Kuwait and its implementation may impact future net income. Burgan Bank has yet to fully quantify the corporate tax impact for 2025, which might affect earnings projections.
  
• Asset quality improvements in 2024, including a significant write-off of one large corporate customer, underscore potential risks. Future loan recoveries and continued asset quality improvements are uncertain, which could impact credit costs and earnings consistency moving forward.

Burgan Bank K.P.S.C Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Burgan Bank K.P.S.C's revenue will grow by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.4% today to 22.1% in 3 years time.
• Analysts expect earnings to reach KWD 71.2 million (and earnings per share of KWD 0.02) by about February 2028, up from KWD 37.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 22.0x today. This future PE is lower than the current PE for the KW Banks industry at 21.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.67%, as per the Simply Wall St company report.

Burgan Bank K.P.S.C Future Earnings Per Share Growth

Risks

• Burgan Bank's strong focus on digitalization and IT infrastructure, such as the overhaul of the core banking system with TCS, could lead to enhanced operational efficiencies and reduced costs, which may support profit margins.
  
• The acquisition of UGB and its strategic asset reallocation may boost Burgan's revenue streams and cross-selling opportunities, potentially leading to increased earnings.
  
• Improvement in the bank's asset quality, evidenced by a low NPL ratio of 1.8% and strong provision coverage, indicates a healthier loan portfolio and could positively impact net earnings.
  
• The bank's capital adequacy remains robust, with strong CET1 and CAR ratios, allowing for sustained asset growth and improved returns to shareholders, supporting bottom-line growth.
  
• Burgan Bank's liquidity position, highlighted by solid CASA levels and favorable regulatory ratios like LCR and NSFR, positions it well to manage operational risks, supporting revenue stability.

Valuation

• The analysts have a consensus price target of KWD0.191 for Burgan Bank K.P.S.C based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of KWD0.22, and the most bearish reporting a price target of just KWD0.15.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be KWD321.9 million, earnings will come to KWD71.2 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 22.7%.
  
• Given the current share price of KWD0.23, the analyst price target of KWD0.19 is 18.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.