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Published On: Sun, Aug 5th, 2018

Stocks: Investors scout for hidden value as market turns bearish


As Nigeria’s Stock Exchange’s All Shares Index (ASI) dips below a year-to-date yield of zero per cent (-4.58 per cent at the close of the previous week’s business on Friday), a growing number of investors have put gun sights on emerging hidden value opportunities in the market. So far the results have been mixed.

The Nigerian Stock Exchange

Analysts have noted that a pack of companies covering different segments of industry have seen their stock prices take a tumble as consensus market outlook grows increasingly dimmer. Recent figures by the National Bureau of Statistics (NBS), suggest that the Nigerian economy grew by an additional sleepy 0.05 per cent, rising from 1.9 per cent at the turn of the first quarter (Q1) of 2018 to a marginally livelier 1.95 per cent at the end of April, ‘’a bit of a cold  water in the face, if you ask me, especially when it is recalled that earlier growth expectations for 2018 was in the region of 3.2 per cent’’, says Chuks Nwajei, head of Investments, Core Capital and Finance. According to Nwajei, ‘’lazy growth figures have left little room for optimism about sales and earnings as the hard economic facts indicate that major profit growth will be as rare as a black swan’’.

Nwajei’s gloomy perspective is understandable. In a pre-election year analysts have projected that fiscal spending will likely ride a jetliner rather than a train as politicians attempt to outdo one another in bribing the electorate with colorful pre-election projects. ‘’How far that goes is anybody’s guess ‘’ says Segun Atere, chief equity analyst at Apel Assets and Trust, ‘’but what does appear clear is that public spending will rise in the third and final quarters of the year and lead to faster economic growth as multiplier effects kick in and businesses begin to receive reprieve from slow consumer spending’’.

Even so, gross domestic product (GDP) may not rise above 2.3 per cent for the year according to local economists. Central Bank of Nigeria (CBN) inflation worries, they argue, will lead to high domestic interest rates (prime lending rates currently average 17 per cent since 2017), reduced expansion of money supply, and tight cash reserve and liquidity ratios. Slimmer money supply and higher public expenditure may constitute a toxic combination that leaves the economy in middle of two terrible worlds of higher inflation and lower GDP. Analysts have argued that in this sort of situation several companies become boxed into a life of pain, tears and agony. ‘’Pulling back from lower growth with lower inflation is going to be a hard call because the CBN has fallen in love with declining inflation figures and the ministry of finance (MoF) lacks the political and technical strength to prevail against a single-minded currency regulator’’, argues economist and chief executive officer of mid-sized animal feeds producer Surka 719, Suraj Akinyemi.

While this appears to be true, Nigeria’s stock market still has a grocery list of businesses that could defy the doomsday prophesies. To be sure, a handful of stocks still look like rich pickings.

GT Bank: blowing back the clouds

GT Bank finances (and share price) may, contrary to pessimistic forecasts, blow past dark business clouds over the next two quarters as strong expected earnings show consistent profit after tax levels and sturdy current cash -to- debt ratios and total cash- to- debt ratio, indicating stability and capacity to meet short term liabilities in an orderly manner. GT’s underlying financial figures are likely to drag investor confidence up a couple of notches considering the banks relatively modest recent price earnings ratio (P/E) of 6.95 (as against the overall markets P/E of 10.6) and a one year forward future earnings projection of N6.22 per share, thereby opening up a hidden value opportunity (based on a P/E of 8) of 18.62 per cent leaving investors with a sliver of hope that the stock will close, what would otherwise have been a bleak year, on a happy note.

Segun Atere, chief market analysts at Apel Assets and Trust notes that, ‘’GT Bank has leveraged an incredible culture of hacking down on its costs with a  cost- to- income ratio that keeps shrinking, while impairment- to- loans ratio (an index of the bank’s loan quality) skips downwards on a year-to-year basis as its liquidity rises; in other words the bank has achieved a fitting concoction of corporate action and fiscal strategy that has consistently put the bank in the position of one of the top three most stable lenders in the financial market’’, he insists.

UBA: a time for rediscovery and fresh starts

After a decent pioneering run by its inaugural chief executive officer (CEO), Tony Elumelu, UBA has since taken on an Africa mandate with passion.   From the immediate past CEO, Phillips Oduoza (who currently Chairs, Investment Bank, Nova Merchant Bank) to the current boss, Kennedy Uzoka, UBA has worked on a feisty business model that combines continental expansion with aggressive cost reduction. So far, the approach seems to have worked.  For instance, in the first quarter (Q1) 2018 UBA remarkably squeezed larger incomes from foreign operations. This has helped the lender reduce exposure to country-specific risk (or what amounts to protection from the unintended consequences of local monetary and fiscal policies and a slowdown in economic growth). Analysts note that the gambit has, apparently, paid off nicely.

So far, Uzoka’s numbers look good. The banks 2017 results showed that gross earnings dusted that of 2016 by a buff 20.4 per cent from N383billion in 2016 to N461 billion in 2017, profit before tax skipped forward 16.13 per cent from N90.6 billion in 2016 to N105.3 billion in 2016 while impairments rose in absolute terms from N27.7 billion in 2016 to N32.9 billion in 2017. The rise in impairments appears to follow the banks deliberate efforts at clearing its backlog of toxic assets as quickly as possible by taking early charges on the bank’s profit and loss (P& L) account. This should stand the bank in good stead in 2018 and in years ahead as similar hefty charges are not likely to recur.  According to Capital Expresses operations head Oluwarinu Olawale, ‘’the faster corporations get poor quality assets off their books the better, eating big frog first is a sensible strategy for handling difficult times. On this point, business strategist Brian Tracy got it simply right’’, she observes.

Nevertheless, the banks impairment charges did rise as a proportion of loans to customers from 18 per cent in 2016 to 20 per cent in 2017, indicating that the management still needs to bring to heels its large loan portfolio and reduce the size of its delinquent credit. To be sure, First quarter (Q1) 2018 ratios look pleasing.

Net interest income as a proportion of loans and advances to customers rose from 4.2 per cent in 2016 to 4.3 per cent in 2017. Suggesting that margins from the bank’s core businesses has grown steadily over the last four quarters on a year-on-year basis. This is good news but needs to get better. Net profit margin on gross earnings, was equally strong but slipped marginally from 22.1 per cent in 2017 to 19.9 per cent in 2018, reflecting a still persistent pressure of a freezing economy on the banks bottom line. Nevertheless, the near 20 per cent net profit margin was very decent and well within the top-ranking business profit spreads for the quarter for all listed companies.

Kennedy Uzoka, MD UBA

Kennedy Uzoka may be self-effacing, but he is not shy of robust business profitability. UBA’s first quarter 2018 figures were admittedly modest, but they reflected the basis of stronger earnings on a prospective basis as cost-to-income ratios begin to scale down, while net earning margins rise and loan impairment problems get kicked to the kerb. In months ahead, analysts expect to see a bank in full flight.

“The bank is growing from strength to strength. Tony Elumelu laid a solid foundation. The Africa foray has strengthened their bottom line. That initiative has started yielding fruits. That is why the bank’s results are getting better and it has started to pay solid dividends (recent dividend yield was about 7.42 per cent).’’ notes David Adorin, Chief Executive Officer, HighCap Securities Limited.

Meanwhile PanAfrican Capitals Plc’s head of research Moses Ojo, believes that, “Tony Elumelu took UBA to the level of a tier 1 bank. However toxic assets took its toll on performance. Going forward, under Kennedy Uzoka’s magic touch, we expect to see full recovery from legacy asset strain. Within two to three years, UBA should be entrenched as one of the big boys in the market place, though it may not immediately match the likes of the Zenith’s and GTB’s of the world.” It is this kind of underestimation that Uzoka loves the most; he thrives easily when he has to break a sweat to burst the bubble of doubting Thomases.

Nevertheless, recent publicly available data suggests that the bank may see earnings per share for the year rise to N2.47 per share (N0.67 in Q1 2018) from N2.26 in 2017 (N0.63 in Q1 2017) and based on a forward p/e ratio of 6, the bank’s price could settle between a floor of N14.82 and a ceiling of N17.29 per share, creating hidden value opportunity of between 39.8 per cent and 63 per cent. Uzoka’s fresh strategic moves and his deliberate slashing of costs could see a price ‘bonus’ above the expected upper limit.

Access Bank: When perkiness pays

Access Bank, since corporate remodeling in 2004, has been in the lead for perkiness and clever financial footwork. Recent interim results show that the house Aig Aig-Imoukhuede and Wigwe built is fast becoming a retail powerhouse. The banks fresh approach to retail and corporate service provision emphasizes greater retail penetration and smarter mobile digital options.  Analysts agree that this cannot be said to be an industry disrupter as rival banks such as Diamond Bank, GT Bank and FBNH have equally pursued similar methods to punch up market share. However, Access Bank has managed squeezed ahead of its rivals with its nose slightly in front.

First quarter (Q1) 2018 results saw the commercial lender nudge profit after tax forward from 22.4 billion in 2017 to N22.1 billion in 2018. Earnings per share (eps) dipped from N0.79 in 2017 to N0.77 in the contemporary period of 2018. Six months ahead, analysts expect to see a full year eps of about N209, on a P/E of 5.1 (as against a more recent market P/E of 4.78) which indicates a potential future price of N10.66 and possible capital gain of at least N0.66 on paper (Access Bank’s recent stock price was N10.00 on Thursday last week).

The pluckiness of the bank’s management has given it sufficient competitive head room to marginally improve operating returns in what has become a rough business environment. Going forward stock analysts believe that investors will gladly hand clap as forward dividend and earning yields of the bank rise above achievable yields on short-dated treasury instruments, currently priced at coupon rates of between 12 and 13 per cent per annum. To be sure, with politicians warming up for the podiums in 2019, money managers appear to be searching feverishly for higher yields in a bearish market. The odds of success for bull and bear traders will depend more on experience than brilliance as a growing number of traders intensify daily buy and sell activities to keep their books in the blue.

Last note…

Away from the banking sector, a growing number of stocks are showing renewed promise as others groan in pain. For example, the Fast Moving Consumer Goods (FMCGs) sector still hurts from stumpy national aggregate disposable income (resulting in a slow moving GDP at 1.95 per cent) and a major shift in consumer spending patterns. Financial analysts have noted that net sales growth has remained stunted despite orchestrated projections centered on increased political spending by politicians in a run up to the 2019 general elections. Trader outlook suggest that demand for products of FMCGs such as Unilever Nigeria Plc, Nestle Nigeria Plc, and PZ Plc will increase in the next few months. If international oil prices hold up for the rest of the year at over $70 per barrel (Brent oil recently sold for $72.63 per barrel ) pundits see prices of equities like SEPLAT, OANDO and Mobil Oil gradually move up as the stocks wriggle ahead of previous difficulties and experience new leases of life.

According to Chukwuma Ogechi, a senior stock analyst at Capstone Capital, ”we should begin to see banks and oil companies bury their past animosities as higher new revenues from upstream activities enable oil companies cope more easily with their debt burdens”.  Says Ogechi, ”it has been a terrible time for oil companies as profits have gotten crushed by falling revenues and rising finance charges; the dangerous alchemy of sliding sales and rising costs has left many of them (and their bankers) gasping for air”.

Fears that oil prices could slip by as much as 30 per cent over the next two years, has resulted in some restraint in granting fresh credits and the expansion of new rig activities in the sector even though the temporary outlook for oil producers and marketers looks bright. Is this optimism outlandish? Maybe not but the cautionary approach adopted by stakeholders so far may prove inspired. The international oil market has gracefully obliged weaker oil producers with relatively high prices which have assisted in patching up various national budgets but the party may have a time bar. Oil prices could just as easily slide downwards over the next twelve months as the United States of America releases some of its reserves and panicky oil producers try to stabilize the market by increasing output.

As things stand banking stocks remain the bellwether of the Nigerian stock market, but opportunities do seem to be emerging in a few other sectors, how long this will last is anyone’s guess. But  smart local money appears to be on the prowl for exaggerated market price movements that could drag stock prices well below their intrinsic values, indeed a number of  analysts see the immediate future as, ‘’long, dark and ugly’’, according to Capstone’s Ogechi.


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