Earnings season upon us

Market activities in the week were in stark contrast to those recorded thus far in the year, as the market returned positive on all trading days. Consequently, the NSEASI returned +5.05% WoW to peg the YtD return of the index at -13.80%.

There were twenty seven (27) gainers and thirty (30) decliners to peg the market’s breadth at 0.90x, with the volume and value of transactions paring by 72.35% and 6.54% accordingly. DANGCEM led the gainers, after appreciating by 17.86% to close at NGN146.50. The ticker was closely followed by FO (+14.00%), NEWGOLD (+8.77%), MOBIL (+8.11%), and AIRSERVICE (+4.78%). On the flip side, CONOIL (-17.95%), MAYBAKER (-13.04%), GLAXOSMITH (-9.80%), NEIMETH (-9.30%), and UACN (-6.65%) populated the top decliners’ list.

NB released its FY2015 result during the week which showed a Year-on-Year growth of 10.30% in Revenue to NGN293.91bn, while Profit-After-Taxes declined by 10.50% YoY to NGN38.06bn. Also, the Company proposed a final dividend of NGN3.60 per share, implying a yield of 3.70% based on the stock’s closing price for the week (NGN97.40). Closure and payment dates are scheduled for the 3rd – 9th of March, and the 12th May 2016 accordingly.

Naira fell to a new low at the parallel market this week, trading at NGN321.50/USD during the week, representing a spread of 61.96% between the interbank and parallel markets. We expect this trend might persist over the short-term as supply remains strained. Nonetheless, we maintain our position that we do not expect a ‘devaluation’ in the near-term given the implications of same, over the potential benefits.

While we anticipate that this may be a generally weak earnings season with regards to financial performances, we opine that expectations of dividend disbursements, and proposed corporate actions made attractive by the current level of market prices might spur demand regardless. Hence, we envisage that market activities might be relatively positive over the coming month as the earnings season gets into full flow.

In this report, we review events in the economy, laying emphasis on the performances of different segments of the financial market, while presenting our expectations for the coming week.

Fixed Income Brief:  Naira falls to NGN321.50/USD at parallel market

The dearth of Open Market Operation (OMO) auctions in the week, coupled with the repayment of maturities worth c.NGN234bn on Thursday helped maintain a robust liquidity level in the financial system. Consequently, the average yield on FGN bonds trimmed by 0.13% WoW to 11.13%, while average yield on Treasury Bills pegged at 5.91% (-0.43% WoW).

Also, the Debt Management Office (DMO) auctioned two FGN bonds (12.5% FGN 2026 and 15.54% FGN 2020) in the week, worth NGN50bn and NGN40bn accordingly. There were lower stop rates recorded on the respective instruments compared to the prior auction (12.39% and 12.19% vs. 12.50% and 12.24%) which allowed for profit taking on the part of the auction winners in subsequent days, as yields declined amidst bullish market sentiments buoyed by the system liquidity.

The activities in the Treasury Bills and Bonds market were reflected in the NIBOR and Money markets as well, as the average NIBOR and money market rates settled at 7.34% (-0.28% WtD) and 0.71% (-0.08% WtD) correspondingly.

The local currency depreciated marginally against the US dollar by 18bps WoW at the interbank to close at a mid-price at NGN199.30/USD, while the currency remained significantly pressured at the parallel market.

Agric. Sector: Records No WoW Change

The sector’s weekly performance, as measured by our MERI-AGRI Index, was flat, with no week-on-week change despite the bullish run recorded in the general equities market. The sector, however, holds the second best YtD return (-0.35%) compared to other sectors tracked by our MERI indices.

The analysis of price movements across sector counters revealed that only LIVESTOCK (+0.77%) recorded a WoW change, as ELLAHLAKES, FTNCOCOA, OKOMUOIL, and PRESCO sustained prior week’s closing prices.

We maintain our view that the sector remains critical to the current administration’s economic diversification drive, and so we advise positioning in the fundamentally viable companies in the sector for long term gains.

Banking Sector: Returns 0.47% for the week

The banking sector ended the week on a negative note, paring by 0.47% to bring the YtD return to -12.97%. There were six (6) gainers and seven (7) decliners to peg the sector breadth at 0.86x. All other tickers traded flat.

FCMB led the gainers, after advancing by 4.55%, followed by GUARANTY, UBA, UNITYBNK, and UBN which recorded respective gains of 3.50%, 3.19%, 3.03%, and 1.53%. On the flip side, the decliners were led by ETI, ZENITH BANK, DIAMONDBNK, FIDELITYBK, and STERLNBNK which recorded respective losses of 6.05%, 4.91%, 3.45%, 2.38%, and 2.23%.

As we head towards the earnings season for Nigerian DMBs in March, we reiterate our expectations that price returns will continue to advance up until then as market participants’ position for dividend disbursements.

Consumer Goods: NB declares NGN3.60/share

The Consumer Goods sector returned -0.15% WoW, pushing the Year-to-Date return of the sector to -19.57%, as measured by the NSEFBT10. The sector breadth for the week pegged at 0.67x, as six (6) counters advanced against nine (9) decliners.

PZ led the advancers with a WoW gain of 4.78%. FLOURMILL, HONYFLOUR, NB NASCON and CADBURY were the other tickers on the gainers’ chart, after recording respective gains of 2.58%, 2.05%, 1.41%, 0.71% and 0.17%. The decliners’ chart featured UACN, CHAMPION, TIGERBRANDS, UNILEVER, and GUINNESS with price declines of 6.65%, 4.76%, 4.00%, 2.67%, and 2.48% in that order.

During the week, Nigerian Breweries released its audited FY2015 scorecard, which showed a 10.3% growth in revenue. This revenue growth was however, pressured by greater increments in cost of sales (+15.8%), Opex (+14.6%), and interest expenses (+34.8%). Consequently, PBT and PAT fell by 11.3% and 10.5% YoY respectively. As earlier stated, the Company proposed a final dividend payment of NGN3.60 per share, implying a dividend yield of 3.70% based on today’s closing price.

We anticipate increased position taking in fundamentally justified counters with consistent dividend pay-out histories. We however, stress the importance of positioning cautiously considering our outlook for the general market and pending scorecards.

Health Care:  MAYBAKER sheds 13.04% WoW

Investors’ activities within the sector during the just concluded week were solemn, as our Meri-Healthcare Index returned -9.47% WoW to push the sector’s Year-to-Date return to -37.94%. Four (4) counters recorded value declines, while all other counters traded flat.

MAYBAKER was the week’s highest decliner, paring in value by 13.04%. GLAXOSMITH, NEIMETH and PHARMADEKO followed with returns of -9.80%, -9.30% and -4.89% accordingly. FIDSON, MORISON and EVANSMED held positions at their respective market prices of NGN2.79, NGN1.73 and NGN0.50.

We anticipate some position taking in the coming week given the relatively low market prices of the sector’s component counters, although we are not enthusiastic about the possibility of a sustained resurgence in the short term.

Industrial Goods: Bulls arrive in style

For the first time this year, the industrial goods sector returned a positive weekly performance, as our Meri-Industrial index recorded a massive appreciation of 15.32% for the sector. Consequently, the Year-to-Date loss for the sector was reduced to -13.75%.

DANGCEM was the week’s top advancer, after appreciating by 17.86% to close at NGN146.50. Also, CUTIX and PORTPAINT gained 4.35% and 3.60% respectively at the end of the week to make up the list of advancers. On the reverse end, CAP shed 3.82% to close at NGN35.78, and finish the week as the sole decliner.

During the week, Dangote Cement Plc. announced a meeting of its board of directors on Monday, February 29, 2016 to consider its audited financial statements for the period ended December 31, 2015.

The industrial goods sector was driven by DANGCEM this week, which was primarily responsible for the positive returns recorded on four (4) of the five (5) trading days. However, we are not overly confident of the sustenance of this rally, and thus advise investors to configure their investments with a long term view in mind.

Insurance Sector: CUSTODYINS falls below long-term support level

The sector’s performance during the week was downtrodden, in contrast to the general equities market. The performance, as measured by the NSEINS10 Index, was recorded at -1.28% WoW, which further pressured the sector’s Year to Date return to -7.34%.

NEM emerged the top gainer for the week, having appreciated by 1.41% WoW to peg the market price at NGN0.71. Conversely, MANSARD, AIICO and CUSTODYINS emerged as the sector’s top underperformers, after the respective counters waned in value by 4.87%, 2.35% and 0.99%.

In the coming week, we expect market activities on the sector nobles (CUSTODYINS, AIICO and MANSARD) to dictate performance. Also, we anticipate a positive rally on the equity of Custodian & Allied Insurance Plc (CUSTODYINS), as investors’ position for the Company’s anticipated dividend declaration.

Oil & Gas Sector: Sector Breadth settles at 2.0x

Positive sentiments were sustained on most sector counters in the week, as indicated by the 8.24% WoW hike in the NSEOILG5 index. Four (4) stocks appreciated in value compared to two (2) decliners, pegging the sector breadth at 2.0x.

FO, MOBIL, ETERNA, and SEPLAT all gained in the week, advancing by 14.00%, 8.11%, 3.98%, and 3.75% WoW accordingly. Conversely, CONOIL continued its losing streak in the week, plummeting by 17.95% WoW to close at NGN18.33, while OANDO dipped by 0.26% WoW. Other counters traded flat.

The upward movement of global crude oil prices in recent times was cut short in the week, as Brent crude declined by 7.72% WoW to settle at USD31.43pb. Pressures such as the resilient inventory levels in the US and the “unsuccessful” meeting between the Saudi oil minister and his Venezuelan counterpart earlier in the week were responsible for the drop in prices.

We note that stock fundamentals should remain key in the current volatile market as investors continue to take position.

Services Sector: Bulls emerge

Despite the market breath of 3.00x achieved during the week, as three (3) stocks gained against one (1) decliner, the MERISER U index fell by 1.25% WoW, fixing the year to date return at -2.88%.

AIRSERVICE led the gainers’ chart, after appreciating by 4.78% to close the week at NGN 2.19. The counter was followed closely by CAVERTON and IKEJAHOTEL which advanced by 4.52% and 0.35% respectively. On the other side, NAHCO lost 4.59% of its value to the peg its market price at NGN3.53.

With a notable reduction in pessimism of market participants, we opine that investors should take positions in stocks trading significantly below their fundamentally justified prices.