Despite expensive valuation, uncertainty, Aval's share offer likely to meet strong demand

Bnamericas Published: Monday, April 11, 2011
While reports say the share issue by Colombian financial holding Grupo Aval of at least US$500mn will be three times oversubscribed, almost every analyst is describing the company as expensive on a trailing basis and saying there is a lot of uncertainty regarding the group's future plans. On March 18, the group announced it would issue 800mn-1.6bn preferred shares at 1,300 pesos each, and the offering closes on Monday. The price represents a sharp discount compared with the 1,520-peso average daily trading price in March, before the issue was announced, local brokerage Correval said in a report. The offering is not open to US investors and purchase orders will be received in packages of at least 7.5mn pesos (US$4,000). Brokerage firm Corredores Asociados in a note to investors strongly recommended buying the shares, as "the new issue is an attractive opportunity to invest in a leading company in the sectors with the highest growth potential over the next few years." Grupo Aval's issue will be carried out locally, and its proceeds will mainly be used to finance the purchase of Central American banking group BAC Credomatic for US$1.9bn. The holding commands roughly a third of the Colombian system's loans through its chain of four banks. It also owns the country's largest private pension fund manager, AFP Porvenir. The group's net profit rose 17.7% last year to 927bn pesos, as all of its subsidiaries posted good results. This implies that Grupo Aval is trading at 21.8x price/last 12 months earnings (P/E) and 3.5x price-to-book value (P/BV). "However, considering that BAC Credomatic's earnings have not yet been consolidated, we expect lower multiples in the future," Corredores Asociados' report reads. The brokerage is expecting Grupo Aval's 2011 estimated P/E to fall to 13.2x. According to Correval, the shares of Grupo Aval's chain of banks are trading at an average 3.27x P/BV, trailing only its Chilean and Peruvian peers in the region. ON THE OTHER SIDE Others, such as brokerage Bolsa y Renta analyst David Peláez, do not rely on the holding's 2010 results to make projections, as these saw a boost from investment gains and the impact of Grupo Aval's investing arm Corficolombiana on the earnings of Banco de Bogotá, the holding's largest asset and the second biggest bank in Colombia. According to the analyst, Grupo Aval's chain of banks reported a 9% increase in profits last year compared with 2009 and represented 37% of the Colombian banking system's earnings. "The important thing is that I believe that the group's earnings growth in 2011 will be around 65% given the acquisition of BAC and the additional 63.1% stake they bought in subsidiary Banco Popular," Peláez said. "The group is saying their future plans will help valuations, but the market needs to hear more about those plans before making assumptions," another broker said. Grupo Aval has carried out a very aggressive marketing campaign and has been offering the lowest interest rates on the street to buyers of the shares, financial services company Celfin wrote in a note to investors. "Those shares can then be dumped, and the loan is still yours for up to three years. This is a no-brainer for some, but what happens if everyone does the same? On top of all this, there is word of generous fees being paid to bank employees who gain orders," the note reads. "The placement is for up to US$1.1bn so there will be room for most, but we would still plump for [the country's number three and one players] Davivienda or Bancolombia (NYSE: CIB) on valuation and transparency arguments," the note reads. Analysts also agree that the share issue will bring Grupo Aval one step forward in providing more information to investors. Last month, the group registered the preferred, non-voting shares before the SEC in the US, in what analysts see as another step toward its planned IPO abroad. Grupo Aval's shares are expected to begin trading on the Bogotá stock exchange on May 12.

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