Morningstar | Mediobanca Fiscal 2018: Decent Numbers but Puzzling Acquisition. See Updated Analyst Note from 10 Aug 2018
Mediobanca reported net profit of EUR 863 million for fiscal 2018 (year ended June), which is 15% higher than the profit it generated in fiscal 2017. Reported net profit also hit the consensus estimate of EUR 859 million on the nose. We believe it is important to look at the performance of Mediobanca's operating businesses excluding principal investments (mainly its 13% interest in Italian insurer Generali). On this basis, net profit increased by 47% year on year, driven by strong revenue growth due to the expansion in private banking/wealth management and lower loan-loss provisions. We cut our fair value estimate to EUR 10 from EUR 11 previously, mainly due to a lower valuation for Generali and a higher cost of equity as we improve the consistency of our approach across our coverage. We maintain our no-moat rating.In a separate announcement, Mediobanca announced that it will take a 20% stake in Indonesian consumer finance firm BFI Finance. We were very surprised by the announcement. We were under the impression that Mediobanca was looking to become a more focused business and reduce the conglomerate discount that the market traditionally applies to it. This seems to be a step backwards.
We estimate that the investment in BFI Financa amounts to EUR 270 million, which is very small compared with Mediobanca's nearly EUR 8 billion market value. It does seem to us that the longer-term goal would be to exercise full control over BFI Finance. BFI Finance seems to be a very profitable business with return on equity consistently north of 15%, very low gearing (return on assets is in the 6%-8% range), and excellent growth prospects, benefiting from the strong growth expected from the Indonesian consumer. However, our concern is that there is precious little overlap with Mediobanca's existing business and that it will only increase Mediobanca's diversity, while the lack of focus and synergy in the existing group is the main concern from investors.
Mediobanca Banca Di Credito Finanzario's core businesses are lending and investment banking. Co. helps its clients by providing them with advisory services in addition to medium-term bank credit. Co. is the parent company of the Mediobanca Banking Group, which has operations in consumer credit, retail banking, leasing, and private banking. Co.'s business divisions are comprised of: Corporate and Investment Banking, which comprises Wholesale Banking and Private Banking; Principal Investing, which brings together all equity investments in associates (IAS28) and available for sale assets; and Retail and Consumer Banking, which comprises consumer credit and retail banking activities.
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