Meristem Investment Guide: Equities on a bull run

The equities market in the week hovered within the positive territory on account of perceived foreign fund managers’ entry into the Nigerian equities market. This swung the equities benchmark index within the positive realm (0.35% YtD returns).

The market closed the week and month with WtD and MtD gains of 4.12 percent and 7.77 percent, the highest thus far in 2014. Total volume and value traded also increased by 1.86 percent and 46.38 percent, pegging at 1.901units and N34.643 billion, respectively.

Banking Sector resurgent

It was a bullish week of trading in the banking sector as 13 out of 15 banking stocks gained, with only Wema Bank shedding points (-6.06%). The top gainer was ETI (11.04%), which was closely followed by FBNH (10.07%), and FCMB (8.59%). ETI gained significantly during the week, appreciating by 11.04 percent as the ticker still appears to be riding high on its inclusion in the MSCI Index.

Also, FBNH completed its acquisition of ICB Senegal and consequently, ICB West Africa comprising operations in Gambia, Ghana, Guinea, Sierra Leone and Senegal. This move is expected to consolidate the banks position as one of the largest corporate and retail banking financial institutions in sub-Saharan Africa (ex-South Africa).

The sector P/E and P/BV currently stand at 8.03x and 0.87x, respectively, relative to market ratios of 13.89x and 2.01x in that order.

This recent resurgence in the banking sector is much in line with our earlier stated expectations that with the steady recovery of the equities market (now in positive territory; 0.35%), there would be strong gains by banking tickers. We maintain our stance that as headwinds subside and interest of foreign investors return, the banking sector will continue to post positive gains.

Insurance Sector: CUSTODYINS leads the pack

Insurance sector continued its positive momentum returning 2.97 percent WoW. Custodian Insurance has been hugely favoured by investors’ sentiments due to the company’s sound fundamentals as it gained c.16 percent in the week. The counter might however experience some sell pressure by profit-takers in the following week due to its massive 56.25 percent gains this year.

Other stocks that recorded positive WoW returns are: AIICO, NEM and Oasis, each returning 1.23 percent, 6.17 percent and 1.96 percent, respectively, while Continental Insurance, Mansard, Prestige, Royal Exchange, and WAPIC closed negative, shedding 1.87 percent, 1.24 percent, 7.02 percent, 3.64 percent, and 2.47 percent in that order.

We expect the sector’s performance for the coming week to be largely driven by Custodian Insurance as it currently dictates the direction of the sector’s weekly performance.

Consumer Goods Sector: Riding the wave of positivity

In line with positive market mood, the consumer goods stocks across various sub-sectors are beginning to gyrate within the positive territory returning impressive numbers during the week. The sector returned +0.29 percent and +3.46percent WtD and MtD, respectively.

Food and beverage counters gyrated majorly within the positive territory in the week. The heavyweights within the sub-sectors such as Flourmill, Cadbury, Honeyflour, Nascon, PZ, Unilever and Vitafoam returned respective positive gains of 8.72 percent, 1.99 percent, 3.90 percent, 1.80 percent, 3.36 percent, 0.93 percent and 2.68 percent.

Nestle however was within the red zone after trading 0.65 percent down. We think the current market state will continue to favour positive sector swings in the near term. Investors should watch out for Flourmill, Dangote Sugar, Nestle and Vitafoam, among other stocks.

In the Brewery sector, the rally on Nigerian Breweries (NB) began to moderate. The price of the stock has declined 0.02 percent vs. 8.02 percent and 18.02 percent in the last two weeks. Compared with NB, activities on Guinness and International Brewery were calm for most part of the week as both stocks traded marginally flat for the week.

Overall, the Conglomerates sector appreciated 11.9 percent WtD. UACN saw renewed investors’ interest as the company returned +12.07 percent, rising from N58 previous week to N65 this week. We noticed an unusual volume of trades on Wednesday (17.9m), which according to data, is the highest since 2013.

We suspect that offshore interest may be responsible for this volume spike. AGLEVENT on the other hand was rather flat for the week; the stock recorded some sell pressures mid-week but rallied back to N1.45 as at close of trade. Other counters in the sector were flat for most of the week.

Industrial Goods Sector: Another week of positive trades

It was a positive week for the industrial goods sector as all major stocks appreciated as reflected by our MERI industrial index, which gained 4.72 percent in the week. Dangote Cement recovered all it shed at the start of the week to gain 5.09 percent week-on-week.

This is attributed to investors’ attraction to its current price level which is still at a discount to its fundamentally justified value. AshakaCem was investor’s toast in the cement sector with the stock maintaining a gaining streak through the week to record 12.91 percent WtD return. CCNN further consolidated on the previous week’s gain while others traded flat week-on-week.

Julius Berger, which announced its intention to raise N7.5 billion for financing its operations, advanced 4.85 percent in the week. The company noted that the financing would be by public offering, private placement, rights issue or other appropriate means. However, we see equity financing as preferable given the company’s debt to equity ratio which stands at 1.22x as of 2013FY and Q1:2014. Deleveraging will reduce the burden of finance costs on Julius Berger’s earnings.

Agric Sector: Sector rebounds on general positive mood

The positive momentum experienced in the market in the past three weeks finally rubbed on the sector as Livestock, Okomu Oil and Presco returned 5.33 percent, 2.48 percent and 1.98 percent, respectively, for the week. ELLAHLAKES and FTNCOCOA however traded quietly during the week, leaving their prices unchanged.

Even though Presco gained 3.40 percent (on weaker volume- 0.19m) on Monday, it quickly shed 1.37 percent the following day (on a much higher volume- 0.44m) before settling at N36.00 for the remainder of the week, suggesting investors’ perception that it is fairly valued at around N36. FTNCOCOA and Okomu Oil saw weaker than usual volumes throughout the week except on Friday when Okomu Oil traded significant volumes.

Technical indicators show that Okomu Oil remains in the oversold region, while Presco has broken out of the region to enter the fairly bought region. Livestock remains fairly bought according to technical indicators. We do not envisage any major price movements on agricultural sector stocks in the coming week as we believe Okomu Oil and Presco are currently priced fundamentally. Livestock may continue to gyrate around N3.00 mark.

Oil and Gas Sector: Oando unable to sustain rally, FO’s bullishness continues

Positive sentiments which started upon the inclusion of Forte Oil in the MSCI frontier basket were sustained during the week as the counter crossed the N200 mark. Following an impressive three-week rally, the counter closed at N213.88, a 14.66 percent gain over the previous week amid strong investor confidence.

Oando was unable to sustain last week’s rally which made the counter return 25 percent and the stock shed 8.95 percent, closing at N18.21. With just one month to the expiration of the deadline of concluding the acquisition of ConocoPhillips assets, we anticipate favourable investor confidence in the coming weeks.

After three weeks of calmness, Etrena’s share price took a hit during the week but because of the last day rally, it closed at N3.51, a 2.77 percent loss from the previous week. Total consolidated on last week marginal gain as the counter gained 6.44 percent to close at N166.05.

Services Sector: Positive stance persists

Relative to last week, the mood in the market though positive was mild. Ikeja Hotel halted its upward trend as the stock traded flat this week while TRANSEXPR and RTBriscoe recorded price declines.

Investors’ negative posture towards Air Service persisted as the stock shed 7.1 percent in the week to peg its closing price at N2.09, having shed 34.69 percent YtD. Caverton’s downward slide became more pronounced this week as its price further depreciated by 22.93 percent to close the week at N5.41, a staggering 43.05 percent decline from its listing price last week.

Learn Africa, Red Star Express, Transcorp and UPL maintained a positive stance as prices further appreciated by 2.34 percent, 1.11 percent, 0.26 percent and 0.25 percent in that order. NAHCO returned to the positive zone this week following a 0.20 percent gain in price.

We expect price decline on Caverton to moderate next week on the back of the company’s planned interaction with stakeholders, which may help assuage fears and reduce negative investor sentiments. On the whole, we expect the sector to maintain its current disposition barring external market moving news.