Research Notes
MDM Bank not to pay out dividends
| 12.05.10 |
On May 7, MDM Bank’s BoD has recommended AGM not to pay 2009 dividends, including the dividend on type 3 preferred shares, fixed at USD 0.08 per share according to the company’s charter. MDM board chairman, Oleg Vyugin said in a brief official commentary that the decision was due to the bank’s weak financial performance in 2009.
In our opinion, MDM Bank has enough cash on the book to pay dividends on preferred shares. The decision, therefore, demonstrates the bank’s weak loyalty towards minority holders. We downgrade our rating for MDM Bank preferred shares to SELL with a fair price of USD 0.48 per share.
Bank attributes the decision not to pay dividends to financial crisis. MDM board chairman, Oleg Vyugin said in a brief official commentary that the decision to leave the dividends unpaid was related to the bank’s weak FY2009 financials. The bank’s IR department has refused to give any additional comments.
We believe MDM was able to pay dividends on preferred shares. To pay out dividends on type 3 preferred shares, MDM Bank would have spent USD 23 mn. For a bank whose assets top USD 13 bn, this is not a significant amount. Last year, MDM reported a RAS net income of USD 27 mn, while the company’s cash and equivalents as of year-end exceeded USD 2 bn. Therefore, MDM had both grounds and ability to pay out dividends, at least on the prefs.
Bank’s decision demonstrates poor loyalty towards minority shareholders. The issue prospectus for type 3 preferred shares of URSA Bank, merged with MDM Bank on 2009, provides for the fixed dividend size of USD 0.08 per share, and the bank’s charter contains an identical provision. MDM was previously a flawless dividend payer: its shareholders were awarded dividends even in 2009, at the height of the crisis. In our opinion, the decision made by the BoD demonstrates the bank’s poor loyalty to minority shareholders.
MDM prefs look overvalued according to peer-group analysis. On average, Russian traded banks are valued at a 2009 P/BV of 1.6. The fair price of MDM Bank preferred shares, estimated by peer-group analysis with use of the same P/BV ratio and adjusted to a 54% discount between preferred and common shares, equals USD 0.33, which implies above 30% downside to the current market price.
Dividend stability under question. If assumed that MDM Bank makes stable dividend payments on type 3 prefs in future, the fair price for the shares valued by DDM is USD 0.55, which even implies a slight upside to the market price. After the May 7 BoD’s decision, uncertainty over the bank’s future dividend flow has considerably increased. However, judging from the current market price, investors still expect the bank to resume stable dividend payments.
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Sector: Financial sectorCompany: MDM Bank, OJSC