Monday, August 07 2017/6:16 PM/ Afrinvest Research
Market Last Week (Our Observations)
Following a 16-day bullish run, the Nigerian bourse witnessed some profit taking in the early trading sessions of the previous week but sentiment turned bullish on Tuesday and this persisted till the end of the week. Consequently, the ASI gained 1.5% W-o-W to settle at 37,425.56 points while YTD gain expanded to 39.3%.
The Consumer Goods index led sector gainers, up 4.9% W-o-W followed by the Insurance index which trended 2.8% upwards W-o-W while the Industrial Goods index gained 0.1%. On the flip side, the Oil & Gas and Banking indices declined 3.0% and 1.6% W-o-W.
The top gainers were CILEASING (+44.9%), DANGSUGAR (+37.3%) and LINKASSURE (+27.1%) while MORISON (-16.9%), REDSTAREX (-12.4%) and CUTIX (-9.9%) were the worst performers for the week.
Market This Week (Our Expectations)
The Afrinvest weekly sentiment indicator strengthened to 3.9 points from 3.7 points last week due to improved market turnover.
Although valuation multiples have increased since the macro-themed rally started in April, we do not believe that the market is overvalued and we remain convinced that there are opportunities for investors to key into.
We expect market performance to remain driven by H1:2017 corporate earnings releases in the week. Notably, ZENITH is scheduled to release its H1:2017 result during the week; we believe this will be largely positive and could potentially boost investor sentiment.
Our top pick for the week is UBA.
Top Pick for the Week: United Bank for Africa Plc
United Bank for Africa Plc is one of the largest banks in Nigeria offering a broad range of financial services. With a Pan-African footprint all over Nigeria and 18 Sub-Saharan African countries, the group also services the need of its 8m customers across the globe through its offices in the UK, USA and France.
UBA’s FY:2016 Gross Earnings expanded 21.9% Y-o-Y to N383.6bn (higher than our FY:2016 estimate of N351.0bn), the fastest topline growth since 2010 (when compared with 5-year average annual growth of 12.3%) notwithstanding extreme operating environment. PBT and PAT numbers climbed higher by 32.4% and 21.1% Y-o-Y to N90.6bn and N72.3bn respectively in FY:2016 despite a sharp rise in impairment charges (up 447.9% Y-o-Y to N27.7bn) for the period.
The bank continued to strengthen its cost management framework as FY:2016 Cost to Income (CIR) Ratio witnessed significant improvement, moderating to 56.3% from 65.0% in prior year. In Q1:2017 the bank reported a 37.5% and 31.6% Y-o-Y growth in Gross Earnings and PAT which increased to N101.2bn and N22.4bn respectively.
Amid sound risk management framework and improved operating network across Africa (ex-Nigeria now accounts for 32.0% of Gross earnings), outlook for UBA remains positive.
Though the stock has an RSI of 59.8 which is closer to the overbought region, relative valuation analysis of the stock suggests the it is trading at a relative discount to peers with a P/BV multiple of 0.7x compared to average tier-1of 0.9x.
This implies a relative undervaluation of the stock with more upside for capital gain. Furthermore, UBA is yet to release its H1:2017 report which is largely expected to positive.