BFST - Business First Bancshares: Hidden Small-Cap Story Ready To Reverse

2023-07-28 11:52:22 ET

Summary

• Business First Bancshares, Inc. is a $413-million market cap bank holding company for b1BANK, offering various banking products and services.
• The bank's results for Q2, released on July 27, far exceeded market expectations [EPS and revenue beat].
• I believe BFST's recent quarterly report showed the bank's resilience and contradicts the overly pessimistic EPS forecasts for the next two years.
• BFST's price-to-book ratio stands at 0.81x, which is -27.75% below the sector's median value of 1.12x.
• I think the move in after-hours trading that we are seeing now is too small, in my opinion, to fully reflect what BFST deserves to get for its quarterly results.

Thesis

I happened to come across Business First Bancshares, Inc ( BFST ) while looking at the latest news about how various companies have reported in recent days. Many of my subscribers who are interested in the Financials sector prefer large caps, which have a premium over regional banks, but are inherently much more stable - the beginning of this year has clearly demonstrated that:

But not all regional banks are the same. Somewhere the region in which a particular bank is located has an impact, somewhere management can deal more effectively with potential risk. In general, there are many factors that may create idiosyncratic opportunities for investors, especially in the small-cap space. I believe BFST's recent quarterly report showed the bank's resilience and contradicts the overly pessimistic EPS forecasts for the next two years, which analysts managed to revise down significantly in recent months. But first things first.

The Company And The Opportunity

Business First Bancshares, Inc. is a $413-million market cap bank holding company for b1BANK, offering various banking products and services, including deposits, loans, wealth management, and online banking. Headquartered in Baton Rouge, Louisiana, and having ~ $6.5 billion in assets and ~$6.4 billion in assets under management, BFST operates in Louisiana, Dallas, and Houston markets since 2006.

The bank reported Q2 FY2023 results on July 27, 2023 , showing a net interest income of $53.3 million, which is a slight improvement from the previous quarter's $52.7 million. This increase was primarily attributed to higher loan and interest-earning asset yields, which rose by 20 and 19 basis points, respectively, QoQ. The company experienced gains from loan repricing and higher yields on new originations. However, the net interest margin and net interest spread decreased to 3.63% and 2.75%, respectively, down from the previous quarter's 3.75% and 2.96%.

The overall cost of funds climbed from 1.97% to 2.31%, a 34 b.p. increase [QoQ], mainly due to higher-cost deposits. Excluding loan discount accretion of $2.1 million, non-GAAP net interest income for the quarter was $51.3 million, compared to $49.8 million in Q4. The provision for credit losses also saw a notable decline influenced by loan growth in portfolios with lower estimated loss rates and reduced reserves for unfunded commitments stemming from lower unfunded balances, according to the press release.

As a result, the bank's results for Q2 far exceeded market expectations:

I believe there may be an opportunity here.

From what I gather, Wall Street is not optimistic about BFST's potential for EPS growth shortly. This is evident from the fact that EPS estimates have been reduced by approximately 15-22% since the start of the year:

As you can see above, analysts expect an EPS of $2.1 for FY2023, but the most recent results already point out to TTM EPS of $2.55, which is now 5% more than last quarter .

That is, the panic of the first half of this year, which weighed on the shoulders of regional banks, didn't hurt BFST much, but analysts are in no hurry to react to it. I suppose that's because of the relatively small size of the pot. But isn't that a reason for a buying opportunity?

BFST stock is trading below its book value [$17.01 vs. $20.87 in the chart above], having lost over 22% of its market capitalization YTD. So the price-to-book ratio stands at 0.81x, which is -27.75% below the sector's median value of 1.12x (according to Seeking Alpha data ):

Despite shrinking net interest spread (and NII margin), the company has seen rising ROA and ROE in recent quarters, as well as consistent equity growth, so I think the analysts' fears were overblown.

My guess is that even the highest current estimates of BFST's EPS are too low to be close to reality, based on how the bank coped with the challenges of the last six months.

We know from a press release that management announced a quarterly common dividend of $0.12 "based upon financial performance for the second quarter" - that's 2.82% annualized, if my calculations are correct. We don't have a 10-Q report, and we haven't heard any comments from management yet, but I assume they are confident in BFST's "financial performance" beyond just Q2.

The Bottom Line

Right now, the stock is responding on the post-hours trading with a gain of more than 3.5%, which means investors have taken positively to the bank's EPS and revenue estimates beats for Q2.

But of course, this story has its risks. First, BFST is a very small bank with relatively low liquidity and the associated negative implications for investors. Second, the negative hype surrounding regional banks is still in the air. Perhaps the next bank failure will force BFST to sink even lower. Third, we have not yet heard management's comments for the second quarter, nor have we had a chance to look at a full 10-Q - perhaps something will turn up in one of these sources of information (e.g., management's guidance) that could affect the stock's potential recovery move.

Despite the risks, however, I think the strength BFST is showing against the backdrop of Wall Street's very negative estimates presents an attractive opportunity to initiate new long positions for the medium term. The move in after-hours trading that we are seeing now is too small, in my opinion, to fully reflect what BFST deserves to get for its quarterly results. That is why I recommend readers taking a closer look at this bank.

Thanks for reading!

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