December 18, 2017 / 12:40PM /Cordros Capital
Market Last Week (Our Observations)
The equities market was largely bearish last week as the All Share Index (ASI) depreciated 2.1% W-o-W to close at 38,436.08 points while YTD gain contracted to 43.0% respectively.
Performance across sectors was mixed as 3 of 5 indices declined W-o-W. The Banking index led laggards, down 5.3% W-o-W. Similarly, the Industrial Goods and Insurance indices shed 4.8% and 2.2% W-o-W respectively. On the other hand, the Oil & Gas and Consumer Goods indices rose 4.5% and 0.7% W-o-W respectively.
The top performing stocks last week were BERGER (+10.1%), DANGSUGAR (+8.3%) and NASCON (+8.1%) while LINKASSURE (-14.7%), LEARNAFRCA (-14.0%) and STERLING (-11.0%) were the worst performers.
Market This Week (Our Expectations)
The Afrinvest weekly sentiment indicator weakened to 1.4 points from 3.7 points recorded in the previous week following a decline in market breadth.
Following sell offs last week, we expect to see a rebound in market performance as investors take position in fundamentally sound stocks that have fallen to attractive entry prices.
We maintain our positive outlook for the market in the near term on the back of the expected year-end rally driven by portfolio rebalancing.
Our top pick for the week is GUARANTY.
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 32.7 and trades at N39.80
(15/12/2017) implying a 15.6% upside potential relative to our target Price of
N46.01. Hence, we recommend a BUY for the stock.