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Monday,
January 29, 2018 / 06:30PM / Vetiva Research
Consolidating on mostly better-than-expected
performances from 9M’17, we are optimistic of more positive earnings for the
FY’17 period, supported by stable macroeconomic conditions in the final quarter
of the year and the usual festive demand boost. Given the improvement in
Nigeria’s risk environment and downward trajectory of FGN treasury rates
spurred by a modest economic improvement and possible rate cut in the near
term, we have revised our coverage valuations to reflect the new realities.
Specifically, we revise our risk-free rate downward to 14.65% and our market risk
premium is cut by 50bps to 5.50%.
Earnings Preview – Expect
consolidation on 9M outperformance
We remain optimistic about FY’17 earnings
performance, supported by seasonal boost and a stable macroeconomic
environment. In the banking sector, we note that despite a shrunk loan book
(9M’17 average loan growth: -3%) across our coverage banks, the top tier banks
benefitted from the elevated interest rate environment.
Despite lower yields in Q4’17, we foresee stable
earnings for the quarter, lifted by strong non-interest income and improving
asset quality. For the Consumer and Industrial Goods sectors, we expect that
year-on-year comparables will remain strong across our coverage companies,
driven by stronger prices, volume boost due to the festive season, and stable
costs.
Furthermore, we highlight sustained stability in
gas supply and currency liquidity as a boon for margins. Finally, upstream
energy players should turn in impressive results – supported by a rebound in
crude production volumes and higher average crude prices in FY’17 (and Q4
especially). We believe downstream earnings will remain dismal, constrained by
pricing regulations and intermittent product shortages.
Yield moderation and reduced risk
support revision to valuation
We revise our Risk-Free Rate (RFR) assumption to
capture our expectation of near-term yield moderation in the Nigerian Fixed
Income market. Using a three-month exponential moving average (EMA) of the
10-year benchmark bond yield, we revise our RFR assumption from 15.67% to
14.65%. Further reflecting the improved macroeconomic outlook following
stronger global crude prices as well as stable FX, we revise our equity risk
premium lower by 50bps to 5.50%.
Valuations raised amidst revisions
to factors
We have revised our valuations across our coverage
names. We are most optimistic about the banks and expect the sector to remain
the toast of investors. Given the sector’s strong correlation with the
macroeconomy, the anticipated macro improvement bodes well for earnings.
Overall, despite the recent rally in the Nigerian
equity market (NSE ASI up 14.5% ytd), we hold the view that the market still
has legs – supported by the NSE ASI P/E ratio of 14.18x versus MSCI Frontier
Market Index of 15.83x and MSCI Emerging Market Index of 17.40x. 
Kindly
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