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Outlook for the Nigerian investment space given recent positive developments

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Monday, May 02, 2017/11:38 AM/ Investment One Research  

Please find our Macro and Markets update below:

Macro and markets update

  • We update our outlook for the Nigerian investment space given recent positive developments.
  • We believe the macro situation is on a positive trajectory; and the recently released PMI readings lay credence to this.
  • We see support from improved government spending capacity as well as the introduction of the Investment and Export FX regime (OTC market).
  • While corporate earnings remain below the pre-crisis level; we expect some level of recoveries as economic situations improve further.
  • In addition, Nigerian shares should see some level of support from the new revised PFA investment guideline despite threat of sell down as FPIs seek exit via the new Investment and Export window (OTC market).
  • While the CBN may maintain its stance in keeping system liquidity tight via OMO auctions in continued defence of the local currency; the likelihood that PFAs may rotate out of some fixed income instruments to meet the minimum 10-15% equities holding may put upward pressure on yields.
  • Our preference remains quality equity names: GTB; Zenith; UBA; Access; NB; Dangcem; and NESTLE. 

Macro

  • We believe the current relative peace in Niger Delta and the continued engagement by the Federal Government is a positive for the oil sector of the economy.
  • Also, the current average price level of Brent oil prices in addition to the Eurobond proceeds should be supportive of government spending. This should see traction in both the construction and real estate activities in the economy.
  • While the manufacturing sector, the most hard hit during recession remains fragile, we believe the appreciation in Naira and the new OTC FX market will provide some level of support for output in the medium to longer term.
  • We add that recent readings from PMI indexes have seen sentiments move from negative through neutral to slightly positive.
  • Overall, with continued positive trajectory in Agriculture, Telecom and Wholesale & Retail trade, the growth in the Gross Domestic Product should return to the positive territory as hinted by the nation’s statistical body.

Equities

  • We change our outlook on Nigeria equities from neutral to cautiously positive.
  • While the recent opening of the Investment and Export window (OTC market) portends a potential sell down for shares as FPIs seek to exit, we nonetheless believe the long run upside potential outlook of the economy would moderate the overall effect of this sell down.
  • We also believe the recently approved new PFA investment guideline, which stipulates minimum of 10-15% for equities investment should serve to boost both turnover and price momentum. We estimate this could see potential inflows of c.N600bn in PFAs investment into the equities space as part of portfolio rebalancing exercise.
  • We also believe the threat of MSCI index exit of Nigerian equities is now moderate given the new Investment & Export window.
  • Current PMI readings suggest potential for improvement in real sector operating climate as such we may see recovery in earnings performance.
  • We however reiterate our preference for quality names given their dominant position in their respective sector.

Fixed Income

 

  • The recent two consecutive monthly declines in headline inflation to 17.26% in March have raised expectation for a potential rate cut by the monetary authority.
  • However, we highlight the uptrend in m/m inflation, which has surged to 1.72% in March (1.01% in January), may limit the expected moderation in headline inflation
  • Despite this, we are likely to see the Apex bank maintain its stance in keeping system liquidity tight via OMO auctions in continued defence of the local currency
  • This combined with the likelihood that PFAs may rotate out of some fixed income instruments to meet the minimum 10-15% equities holding may put upward pressure on yields.  

Our Top Picks 

  • Nigerian BreweriesNB’s strong market positioning in the accessible/ value brand segment, coupled with increased local sourcing of input material (estimated at 48% by the Group CEO) are potential driver of earnings in both the near and medium term.
  • Dangcem:  Dangcem’s attractiveness is supported by Potential improvement in margin due to improved energy mix (switch to use of coal) and benefit from cement price hike, market leading position in the home market of Nigeria, increased market share in its ex-Nigerian operations; Strong pricing power relative to competitors and economies of scale advantage.
  • Nestle: Diversified portfolio of products offering which are less susceptible to economic downturn has seen Nestle maintain decent earnings scorecards in the last few quarters. As such, we have it as a core holding over the medium to longer term.
  • GUARANTY: GTB remains one our top picks given its superior ROE, impressive cost to Income ratio, strong management team, net long dollar position estimated at $800m, and stringent risk management framework. In the near term, we expect PBT and ROE to be supported by the high yield in the fixed income market given its c.N500bn fixed income portfolio; potential for write back of a significant portion of the N47bn collective impairments taken in 2016
  • ZENITHBANK: Similar to other Tier 1 names, Zenith Bank’s results should continue to be reflective of the higher yield and interest rate environment. This combined with increased efforts at improving cost to income ratio, down to 53% from 58% in 2014 should be supportive of PBT and ROE. Although, NPL ratio spiked to 3% as at Q4 2016, coverage remains adequate at 100% while capital adequacy is the highest amongst its peers at 23%. 
  • ACCESS: While we believe the bank’s earnings should continue to see support from the high yield and interest rate environment, we remain concerned on the volatility of non-interest income performance going forward. This is premised on the unpredictability seen in the performance of foreign exchange income and derivative instruments over the last five quarters. With this said, asset quality remains stable with NPL ratio at 2.2% and NPL coverage at 164% while capital adequacy stood at 21% as at Q1 2017.
  • UBA: Given UBA’s relatively liquid balance sheet, c. 20% of total assets held as cash or cash and cash equivalent, we believe the bank is well positioned to take advantage of the high yields in the current environment. Capital adequacy remains significantly above regulatory threshold at c.20%, although NPLs increased to 3.9% of loan book as at Q4 2016. Despite the bank’s exposure to the troubled power sector (10% of loan book), management highlighted there has been no impairments.  

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