December 11, 2017 / 12:40PM /Cordros Capital
Market Last Week (Our Observations)
The equities market was largely bullish last week as the All Share Index (ASI) appreciated 3.5% WTD to close at 39,257.53 points while YTD gain advanced to 46.1% respectively.
Performance across sectors was mixed as 3 of 5 indices under our coverage advanced WTD. The Consumer Goods Index led gainers, rising 6.1% WTD. Similarly, the Banking and Insurance indices rose 5.3% and 0.2% respectively. On the contrary, the Industrial and Oil & Gas indices closed in the red, depreciating 1.4% and 0.5% respectively.
The best performing stocks last week were FBNH (+26.3%), CADBURY (+22.9%) and FIDELITY (+20.9%) while TOTAL (-5.4%), INTBREW (-5.4%) and CHELLARAM (-4.9%) were the worst performers.
Market This Week (Our Expectations)
The Afrinvest weekly sentiment indicator weakened to 3.7 points from 4.3 points recorded last week despite the improvement in market breadth.
This week, we expect profit taking by investors in early trading sessions. However, we maintain our positive outlook for the market in the near term as the year-end rally continues.
In the medium term, our outlook remains bullish against the backdrop of improving macroeconomic fundamentals and consensus expectation of positive earnings outlook.
Our top pick for the week is Guaranty Trust Bank Plc.
Top Pick for the Week: Guaranty Trust Bank Plc
Guaranty Trust Bank Plc (“Guaranty” or “the Bank”) has established itself as one of the leading Nigerian banks, with business operations across west and east African countries as well as the United Kingdom.
Guaranty ranks as a Tier-1 Bank, based on total assets of N3.2tn as at 9M:2017 by Afrinvest classification, and also a Systemically Important Bank (SIBs) by CBN’s Taxonomy
In 9M:2017, Gross earnings fell by 5.9% Y-o-Y to N309.9bn as the impact of the 36.5% jump in Interest income (from N181.9bn in 9M:2016 toN248.3bn) was countered by a 58.2% drag in Non-Interest income (from N147.4bn in9M:2016 to N61.6bn in 9M:2017).
Interest Income was supported by the higher interest rate environment while Noninterest income suffered from a high base impact on FX gains as well as a decline in e-business income.
PAT came in higher at N125.6bn, up 7.3% Y-o-Y. Despite the improvement recorded in profitability, ROAE and ROAA weakened to 25.9% and 4.4% in 9M:2017 from 31.8% and 5.1% in 9M:2016 respectively.
Our outlook on the Guaranty is broadly positive as the bank has demonstrated its resilience amidst tougher operating conditions in the past year. We forecast gross earnings and PAT to expand by 1.8% and 24.4% to N422.0bn and N164.5bn respectively in FY:2017.
We expect the positive performance to be driven by sustained growth in interest income while the bank continues to leverage on technological advancement to boost efficiency and keep cost pressures minimal.
Guaranty currently has an RSI of 47.3 and trades at N42.00 (8/12/2017) implying a 9.5% upside potential relative to our target Price of N46.01. Hence we recommend a BUY for the stock.