Thursday, July 02, 2015 11:12 AM / FBN Capital Research
After what we would describe as a best-foot-forward quarter for a number of Nigerian banks in Q1 2015, we expect some degree of normalisation in the Q2 2015 results. Q1 2015 PBT growth for our universe averaged 13.9% y/y, slightly below the 16.0% y/y for full year 2014. One reason for the slightly lower growth in Q1 was that the positive impact of non-interest income (FX trading income to be precise) was less than we saw in Q4. We expect Q2 2015 PBT growth to be visibly slower – at 3.6% y/y, well below what we saw in Q1 2015.
Sequentially, our PBT estimates imply an average q/q decline of -1.4% q/q. If we exclude Stanbic IBTC, which we expect to show a rebound in profits from a depressed Q1, the q/q decline comes in at -12.1%. Although some of the larger banks showed healthy loan growth in Q1, others were constrained by regulatory capital concerns. While margins, on average, have held up relatively well in a challenging operating environment, we expect a combination of weak underlying macroeconomic environment and a marked reduction in FX-related income due to decisions by the central bank to weigh on Q2 earnings.
The banks will be relieved that the pace of newly introduced rules and regulations has slowed significantly since the end of 2014: although the harmonisation of public and private sector cash reserve ratios (CRR) to 31% at the last MPC meeting was a net tightening step, the c.N140bn outflow from the banking system is likely to have a modest negative impact on earnings. Notwithstanding, we do not expect any meaningful positive surprises from the banks, particularly as far as risk asset growth is concerned. In contrast, we think there is a growing risk that asset quality issues will become more meaningful as we move into H2 – a scenario we do not believe that banks have captured adequately in their guidance.
In the very near term, we continue to recommend that investors hold the quality tier 1 banks whose 2015 earnings guidance we find more realistic. In the medium term, we think banks traversing the tier 1 vs 2 divide are most attractive, namely Access and UBA. We would use any near term disappointments or market overreaction to build up positions in these.
In Q1 2015, the PBT for our universe of consumer stocks (ex-palm oil) declined by an average of -12% y/y. If we exclude Guinness Nigeria - the only stock that bucked the trend with PBT growth of 76% y/y, the average PBT decline for our FMCG names was much worse at -24% y/y. In addition to the well rehashed headwinds including increased competition and insecurity in northern Nigeria, most manufacturers now have to contend with a weaker macro environment precipitated by softer crude oil prices. These factors translated to weak consumer discretionary spend, down-trading to cheaper substitutes and stifled topline growth.
To further compound the woes of the sector, the -8.5% devaluation of the naira (vs. US dollars) between Q4 2014 and Q1 2015 resulted in a spike in raw material costs and severe gross margin contraction for a number of names under our coverage. Companies with a large proportion of fx-denominated loans such as Nestle Nigeria also saw a significant rise in interest expense.
The cement companies did not fare better: while Lafarge Africa and Ashaka Cement’s Q1 PBT fell by -70% y/y and -59% y/y respectively, Dangote Cement’s (DangCem) PBT, which grew by 32% y/y, was boosted by a net fx gain of N17.2bn. Excluding this gain, DangCem’s PBT would have been flat y/y. Moving into Q2, we do not expect to see a reversal of the trend. Given the weak fiscal position of the federal and state governments with about 18 of the 36 states still owing workers their salaries, the squeeze on household wallets is likely to translate into even weaker topline growth for most firms in the sector.
Although ytd prices of most key raw materials required by the manufacturers i.e wheat (-7%), sugar (-17%) and crude palm oil (-9%) have declined, we do not believe these declines are enough to offset the fx impact; the risks are higher should the naira devalue further. Given our modest earnings growth expectations, we do not believe that most non-financial names will deliver earnings growth that will justify the +30x P/E multiples that most of them are currently trading on.
Within the broad group, UAC of Nigeria is our only Outperform-rated name.
Download the FBN Capital Q2 2015 Results Preview