Meristem Investment Guide Equities market sentiments

The stock market has maintained a positive mood in the last few weeks. This is largely attributed to relative attractive pricing, reasonably impressive 2013FY results across broad spectrum, and modest first quarter 2014 performances of a few banks that have released results so far. Despite Central Bank of Nigeria’s tight regulations on the banks, the banking sector stocks’ performance has partly sustained the All-Share Index from April till date, with 0.39 percent returns.

Other events that helped cushion the year-to-date loss from 6.25 percent in March to 5.88 percent as of April 25, include the listing of Seplat Petroleum Development Company (oil and gas exploration and production company) as well as the calm atmosphere in the money market. This report reviews the sentiment and performance of key stocks based on recent corporate earnings releases.

Banking Sector

Banks grow their loan books despite tighter regulations

Over half of the quoted banks (i.e. 9 out 15) have released Q1:2014 results so far. The performances thus far follow common theme – “resilience”; in the face of tightening deposit expansion as a result of additional 3 percent and 25 percent hikes in cash reserve requirements (CRR) on private and public deposits, respectively, and reduced income generation as a result of the CBN’s directed reduction of COT (Commission on Turnover) from N3/mille in 2013 to N2.00/mille in 2014, effective January 1. However, in order to offset the effects of declining income from COT, most of the banks have been able to manage this and other non-interest income by growing other revenue sources, including trading income and fees on services such as internet and mobile banking.

However, some banks are yet to devise alternative strategies to cushion these regulatory headwinds towards non-interest income.

Although the recent policy reforms in the industry have reduced industry margins significantly, banks with cost efficient models and wide networks to reach the greater mass of customers will hold industry-leading margins. Guaranty Trust Bank and FBNH are the top picks of the 1st tier banks, while Sterling Bank and Skye Bank represent picks of the 2nd tier list. These companies have stood out from the pack with regards to their financial results and in our opinion portend the highest upside for 2014.

Consumer Goods Sector

Fair performance expectation

The consumer goods sector remains one of the toasts of local and foreign investors owing to the fundamental drivers of the sector as well as the affiliations of some of the companies in the sector to certain international brands. The sector has however suffered a major setback in 2014, as a result of funds repatriation by foreign investors and general negative market sentiments leading to a 2014 return of -9.55 percent vs. -5.88 percent for the market.

Flour Mill is a major counter that has suffered from negative investor sentiments in the year. Despite the attractive fundamentals (given recent investment and revenue plus earnings projection) and valuation which portend a potential upside for the stock, investors seem to be treading on the cautious path. The stock has shed 22.59 percent YtD on the back of current market mood. As the market awaits the release of the company’s 2014FY result, which will be due by July based on historical (Year-end: March), we expect a rebound of sentiment on the stock.

Expectation of companies’ Q1:2014 results are mixed, in our view. As much as we believe in the major drivers for the sector, we expect first quarter numbers to be modest without any major earnings surprise.

For the stocks in the breweries sub-sector, discretionary spending drags, pressured growth to a decline of c.10 percent in 2013. The performance of Guinness Nigeria plc during the same period was the weakest (13.34% turnover decline) in contrast to the results of Nigerian Breweries plc (NB) and International Breweries plc (INTBREW), which both recorded impressive performances (6.31% and 30.40% turnover growth).

Our review of sentiment on the major players in the sector shows that NB and INTBREW enjoy a relatively positive sentiment compared with Guinness, primarily due to 12-month performance of these beer makers. We expect growth in the sector to recover this year given the high levels of election spending expected, however, our short- to medium-term performance expectation favours NB and INTBEW. Furthermore, we anticipate that Guinness may not record impressive performances in the short term, although we expect that to revert in the medium to long term.

Oil and Gas Sector

Delay in petroleum import licence drags revenue

The delayed issuance of petroleum import licence for Q1:2014 that has resulted to fuel scarcity in recent period is expected to drag the turnover of most players in the sector and thus informs our modest expectation on Q1:2014 financial performance. This is further buttressed by the fact that the industry witnessed a similar experience in the same period of 2013.

However, with continued diversification of business activities by several industry players, we foresee growth in other business segments to make up for the sluggish growth in the oil marketing operations.

Impressive results by Mobil, Total and FO make the counters the most favoured in the industry. While Eterna’s 9.66 percent revenue growth in 2013FY indicates that the company is gradually putting the subsidy allegation behind it, the 24.59 percent earnings decline shows that a lot still needs to be done to lower the debt exposure and consequently reduce finance charges and boost earnings. MRS on the other hand grew its 2013FY turnover by 10.11 percent but recorded operational loss, which was over compensated by a 322 percent growth in non-operating income to bring about a positive bottom line. Expectation is high on the sector as the market awaits the 2013 full year and first quarter results of the industry leader Oando, which is expected to reflect the operations of the newly acquired ConocoPhillips.

The new industry entrant and indigenous oil firm, SEPLAT, is the first upstream operator to be listed on the floor of the NSE. We maintain a positive outlook for the stock as a net margin higher that what is obtainable in the petroleum marketing industry coupled with a favourable investor sentiment begin to add value to investors. However, good fundamentals and positive expectations on Mobil and Total place the stocks as our top picks.

Industrial Goods Sector

Strong construction growth supports positive expectations

Market sentiments towards the cement companies have been calm though slightly in the negative region as the stocks have traded in tight bands (save for WAPCO, which sustained a positive trend in the week). The recent buy interests witnessed on Lafarge WAPCO stock, which has resulted in gains of 6.13 percent (from N106 to N112.50 currently) has been driven by positive expectations on the stock and reassurance of continued good performance following news of expansion plans, introduction of new products as well as the LafargeHolcim merger.

In the chemical and paints sub-segment, however, the industry leader Chemical and Allied Products plc (CAP) has recovered from the sustained share price decline experienced since the start of the year (-13.31% YtD) despite its attractive 2013FY results. In our view, the reversal of the trend was driven by positive expectations, and the subsequent release of impressive first quarter results.

CAP grew its Q1:2014 turnover and after-tax profits by 19.67 percent and 30.41 percent Y-o-Y, respectively, as the company’s quality premium products continued to enable it to take advantage of the fast growing building sector. We still see attractive upside potential in the counter at the current market price. Other major players in the paints segment have traded relatively flat in recent times as investor patronage and liquidity on the counters remain minimal.

Our expectations for Q1 results for the industrial goods companies are upbeat given the strong level of building and construction activity in the first quarter of the year in spite of construction unfriendly weather conditions. Cement demand is estimated to have grown by >10 percent in the quarter further indicating sustenance of the strong trend from 2013FY. In our view, as more Q1 numbers filter into the market, investors’ sentiments will gradually switch towards position taking given the currently attractive price levels.

Insurance Sector

The future looks bright

The insurance sector has been characterised by negative investor sentiments, largely owing to ‘less-than-adequate’ transparency in financial reporting and disclosure, poor dividends relative market prices and weak performance among others. Only Custodian and Allied plc and Mansard Insurance have released 2013FY results thus far.

Given the various reforms and initiatives introduced by NAICOM and investments by foreign players, which we believe, would have impacted strongly on growth, our outlook for 2013FY results for top insurance companies yet to release results is positive.

On the back of good fundamentals and anticipated positive investors’ sentiments, top stocks to watch out for in the insurance sector are Custody Insurance, NEM and Mansard. However, CONTINSURE also portends good fundamentals but investors’ appetite has been weak in recent times.

Outlook… Monetary policy events and profit-taking: The test of sustainability of recent mood.

Given our positive outlook on the 1st quarter earnings of large cap companies on the exchange from sectors such as Banking, Consumer goods and Industrial goods, we expect positive investors’ sentiments to feature on stock trades. Nonetheless, the events in the monetary policy atmosphere as well as profit-taking activities by investors will be a major test of the sustainability of a positive market mood.