Broadstreet Watch: So Do We Still Buy Stocks?

For stock investors this cannot be happy times. The Nigerian All Share Index (ASI) has dipped 5 per cent from January to date and skidded by a disappointing 17.9 per cent from its 31,071.25 in June 2016. So should investors pile into the market or should they simply give a defiant shrug and move on?

On the face of it when things get scary the rational thing to do is to duck or dash. But in a depressed stock market the issues are not that easy. A poorly performing stock market could actually throw up rare gems at bargain prices. Think of buying a Samsung S8 edge android phone for N50, 000? Well some stocks are currently priced at such huge discounts to their intrinsic value that they are like buying top range androids at huge knock down prices. Take Guaranty Trust Bank (GT) for example.

The banks audited annual accounts for 2016 shows that the bank pushed the earnings cart forward as operating income rose 36 per cent from N121 billion in 2015 to N165 billion in 2016. Net interest income as a proportion of gross earnings (a measure of the bank’s underlying profitability in its core business) rose from … in 2015 to… in 2016, a jump of …per cent or …per cent higher than that of UBA which rose ..per cent from …in 2015 to…in 2016.

A large slice of GT Banks earnings came from a 77.3 per cent rise in its fee-based corporate finance business and a staggering 1,580 per cent rise in gains from foreign exchange revaluation which put on additional icing from fees on transfer-related businesses which rose 111.4 per cent.

Beyond the earnings bulge

The cheery earnings outlook for banks masks knottier industry challenges. In fighting recession many borrowers have seen their corporate books run red lights as profits disappear, operating costs soar, and sales volumes take nasty tumble. This has increasingly meant that the quality of bank credits granted to customers has gradually nosedived over the last few quarters with borrowers finding it difficult to find the money to pay off debts. Not surprisingly GT bank’s impairment charges in 2016 rose from a relatively modest N12.4 billion in 2015 to a towering N65.3 billion in 2016, a leap of 427 per cent or 12 times the growth in its gross earnings for the year. But investors need not panic, not yet anyway. The bank’s loan loss provision of 3.66 per cent is still within the central banks 5 per cent limit and the banks reserve coverage of 223 per cent (taking regulatory reserves into account) stands it in good stead to meet sudden shocks to its liquidity. GT’s closest rival Zenith Bank equally pulled off an impressive 2016 year end performance but with sooty specks on its balance sheet. Gross earnings went up 45.9 per cent between 2015 and 2016, from N34.8billion in 2015 to N50.8 billion in 2016, operating profit on the other hand climbed by a milder 24.8 per cent from N125.6 billion in 2015 to N156.7 billion in 2016. Also similar to the GT Bank story, loan impairments in the year soared by 106 per cent rising from N15.7 billion in 2015 to N32.4 billion in 2016. Not yet done chasing its banking competitor Zenith Bank also made a tidy bundle from foreign exchange translation gains which rose from a puny N637million in 2015 to a tectonic N30.3billion in 2016, an incredible leap of 4,663 per cent year on year. Indeed foreign exchange gains constituted a handsome 19 per cent of Zenith Banks pre-tax operating profit for the year 2016. So, are banks still good to go as preferred investment assets in 2017? The answer is still a bit ropy. Not all banks tell the same story.

Fidelity Bank for example has released its audited results for 2016 and its N9.7 billion naira after tax profit though sizeable, represents a worrisome 30 per cent fall from the N13.9billion it recorded a year earlier. The bank had been struggling for most of last year as its chief executive officer maneuvered around one controversy or the other. Thankfully the pulp drama seems to be over but the bank still has to reestablish public trust and confidence as it builds up its core business. Another bank investors would for now give a wide berth is Ecobank.

Dusty destinies

But banks are not the only game in town; other businesses ply their wares in Nigeria’s recession-troubled market place. Take Dangote Cement, for instance. For the building materials behemoth 2016 was a rather tricky year as the economic meltdown took a severe toll on the construction industry with contractors owed billions in unpaid federal debt and banks howling at the gates. Interestingly despite these difficulties the cement maker was still able to roll sales forward a notch resulting in a 25 per cent growth in sales volume on average. Volume growth in Nigeria, its largest market, came in at around 13.8 per cent in contrast to its African growth which sprinted ahead at a racy 54 per cent. The company’s regional revenues, on the other hand, grew by a sluggish 9.5 per cent in Nigeria and 88.5 per cent on the continent, bringing weighted average growth to about 25 per cent. This was fairly impressive when compared to its local nemesis Lafarge-Wapco which saw corporate revenues tank by 17.8 per cent dipping from N267.2 billion in 2015 to N219.7 billion. To make matters worse Lafarge also got bloodied from a profit punch which saw earnings after tax fall 37.8 per cent from N27.2 billion in 2015 to N16.9 billion in 2016. ‘Lower economies of scale and higher break even margins seem to have done the company in. Its narrow market concentration has hurt both sales momentum and operating profit’ argues Segun Atere, former head of research stock trading house, Apel Assets and Trust.

So is this time to bail out on the building materials sector? Well no. Lafarge’s weaker performance, admittedly, is worrying, but the company seems to be wriggling out of the operational problems that plagued its business over the first nine months of 2015. The company’s debt restructuring challenges have worked themselves off by the year end and the company has made full provision on its books for its deferred Unicem (a subsidiary) tax assets of N40 billion. Both Dangote and Lafarge are likely to see faster paced sales growth in the domestic market in 2017 as the federal government continues to stimulate the economy by hefty injection of fresh funds for the rehabilitation of public infrastructure and the building of road and rail assets across the country. With about N1trillion in new capital spending already been made by the end of March the outlook for cement sales growth in the course of the year is pretty bright. The implication is that companies like Lafarge, Dangote, Unicem and Ashaka Cement should see sales volumes rise strongly over the next three quarters.

The major issues for these companies in the course of the year would be for them to hold down operating costs, cut back domestic debt and perhaps hedge foreign exchange fluctuations. Dangote has the best handle on the forex problem as its different African subsidiaries could gradually begin to dilute the adverse effect of exchange rate uncertainty in the Nigerian market on the group’s overall performance for the year. The other companies may have to find other ways of sterilizing the impact of forex on their books. However, generally speaking, the outlook for makers of cement seems decent if not entirely stunning.

A nod to the market

The stock market with an All Shares Index (ASI) dropping 5.9 per cent year to date has not been a lover’s fest. Nevertheless, low prices, in the minds of some analysts, suggest hidden value opportunities that could energize investor’s portfolios in months ahead. With inflation hugging 17.8 per cent and GDP growing at a limp 1.67 per cent (projected), the search for superior returns is a dog fight between brains and brawn.  So which stocks are likely to pull investor yields above 30 per cent per annum?  Aside reading tea leaves, gazing at stars, and sweating over reams and reams of tear-inducing trend charts, strategic figure-crunching and clever reading of BH could prove quite savvy over the next few weeks (next week read about two equities that you must have in your 2017 portmanteau).