Tuesday, May 28, 2019 /02:27PM /
The equity market came alive last week with five days’ trading of MTN Nigeria (for our view of MTN Nigeria see Coronation Research, MTN Nigeria, Listing on the Nigerian Stock Exchange, 16 May 2019). It was interesting to see some major bank stocks sell off against the market’s trend, with the effect of giving them cheaper valuations than before. We think the forward-looking gross dividend yield of the top-five banks is 11.6% (2018: 10.6%), which is beginning to look interesting. We look forward to another week of strong equity turnover.
Last week we wrote that, with the Central Bank of Nigeria’s FX reserves now over US$45.00bn, it is highly likely that a Naira/US dollar rate of close to N360.00/US$1 can be held for the rest of this year. There is one fly in the ointment, however, the ongoing case against of Process and Industrial Developments (P&ID) versus the Federal Government of Nigeria. See page 2.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity increased by 1bp to 14.25%, and at 3 years dropped by 7bps to 14.43% last week. The yield on a 364-day T-bill declined by 22bps to 13.45%. The yield on a T-bill with 3 months to maturity increased by 150bps to 11.68%.
Our oft-stated view that one-year risk-free Naira-denominated rates need to trade 250-300bps above inflation is now challenged by the 364-day T-bill trading at a yield 208bps above April’s inflation print of 11.37% y/y. As we do not see inflation coming down soon we think that 13.45% is unusually low. When we receive data for the volume of foreign buying of Naira-denominated securities we will recalibrate our view, if necessary, but until then we expect a richer yield than this.
The price of Brent decreased by 4.87% last week to US$68.69/bbl. The average price, year-to-date, is US$66.73/bbl, 6.92% lower than the average of US$71.69/bbl in 2018, but 21.88% higher than the US$54.75/bbl average seen in 2017.
Oil prices fell last week as the Energy Information Administration (EIA) released data indicating that crude oil and gasoline inventories had surged upwards. In addition, shale oil production in the United States has been rising, even during a period of pipeline bottlenecks. The overall expectation is of rising supplies and inventories. We think Brent will settle at a price north of US$0.0/bbl over the coming months.
The Nigerian Stock Exchange (NSE) All-Share Index recorded a gain of 6.96% last week, taking the year-to-date return to negative 1.75%. Last week MTN Nigeria (+28.6%), Dangote Cement (+13.6%) and Fidelity Bank (+5.2%) closed positive while Sterling Bank (-17.2%), Flour Mills of Nigeria (-12.1%) and Access Bank (-10.1%) fell.
P&ID versus Federal Government of Nigeria
Back in March we wrote about the extraordinary legal case launched by the British Virgin Islands company Process and Industrial Developments (P&ID) against the Federal Government of Nigeria (see Coronation Research, P&ID’s risk to Nigeria, 14 March). Here we report on recent developments in this case.
P&ID’s case alleges that: in January 2010 it entered into a contract with the Federal Government of Nigeria (FGN) which obliged it to build a natural gas processing plant while the FGN would build pipelines to bring untreated gas to the plant; it (P&ID) invested US$40m in the project (though it did not actually build a plant); the FGN did not build the pipelines specified in the agreement; it (P&ID) is entitled to compensation for lost earnings as a result; that the governing law is English. An arbitral court in the UK awarded P&ID just under US$6.6bn in 2017 with interest accruing so that the sum referred to today is around US$9.0bn.
Earlier this year it was reported that a hedge fund, VR Capital Group, which is a specialist investor in sovereign debt disputes, had taken a stake in P&ID. P&ID has been applying the arbitral award in US courts for over year.
Last week the attention reverted to London. The Times newspaper of the UK reported that a tribunal would rule on whether P&ID could seize assets belonging to the FGN in the UK.
Meanwhile last week, in the United States District Court for the District of Columbia, the FGN continued to argue that it is protected by the Foreign Sovereign Immunities Act (FSIA) and that the application of the FSIA should have been resolved before the court considered other merits of the case.
As with all cases of this type, the route to final resolution is probably some way off. But last week’s activity showed that the case is not going away.