Meristem Investment Guide: Bearish mood fails to abate

The equities market continued on a negative path this week, despite a successful end to the general elections. The Nigeria bourse, which started the week on a high note, traded South in three out of five trading days.

Consequently, the equities All Share Index (NSE ASI) closed (-2.02%) down, pegging YtD return at +1.00 percent. Volume and value of transactions dipped by 80.56 percent and 56.51 percent, respectively, week-on-week (WoW). 47 stocks advanced in the week ended, while 28 stocks declined in value, skewing market breadth (1.68x) for the week, in favour of advancers.

GUINNESS emerged as the top gainer for the week with a 21.43 percent increase in share price. VONO (18.82%), LIVESTOCK (14.54%), HONEYFLOUR (14.05%), and UACN (13.43%) also featured on the performers list. On the contrary, NESTLE led the laggards shedding 9.97 percent WoW. Other underperformers were ROYALEX (-5.45%), ABCTRANS (-5.26%), CCNN (-5.11%) and DANGFLOUR (-5.10%).

We expect the negative sentiment that has permeated the equities market in the last two weeks to recoil in the coming week, if the flurry of corporate releases in the offing throw up impressive showings. Be that as it may, we expect discerning investors to engage in bargain hunting for attractively priced and fundamentally justified stocks.

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

Economic update: Inflation rate hits 8.5%, while oil prices reach 2015 highs

With the successful conclusion of the country’s general elections, economic and corporate activities are expected to gradually pick up across the country. We, however, anticipate that the transition period may drag government activities, as developmental actions and policies by the current administration may be stalled as ministries and governments prepare to hand over on May 29, 2015.

Although the incoming government is yet to clearly define its economic stance, objectives and preferred strategies for achieving such, we do not envisage a significant deviation from current fiscal and monetary policies given the fragile state of the economy.

Global oil prices rose to new highs this week, with Bent crude selling at c. $63, following the drop in US shale oil production levels and the subsequent reduction in oil supply and demand gap. OPEC basket price also reached its 2015 high at $58.88pb. We believe the gradual upswing in oil prices portends benefits for the Nigerian economy, which is highly dependent on oil proceeds to fund its expenditures. Given a possible oil benchmark price of $53 for the 2015 budget, the unanticipated excess will certainly go a long way in reducing the country’s fiscal deficit.

The National Bureau of Statistics (NBS) released the March 2015 inflation report, which showed an 8.5 percent year-on-year rise in inflation, up 0.1 percent from 8.4 percent recorded in February. Core inflation (all items less farm produce) grew to 7.5 percent from 7.0 percent in prior month, while food inflation rate remained at 9.4 percent. The surge in headline inflation index in March, may not be unrelated to increased political spending in the period, as well as the tacit devaluation of the naira following the closure of the RDAS FX window in February. These, we believe, influenced the further hike in general prices, especially on imported items.

We anticipate a slow-down in inflation rate in the coming months, following the halt in political spending now that elections are over. We, however, note that the unfavourable FX rate may continue to trigger imported items inflation.

Agric Sector: Witnesses a resurgence as WtD increases by 1.43%

Despite the lacklustre performance of the equities market in the week, the MERI-AGRI index increased by 1.43 percent WtD to drive the YtD return to 7.33 percent. Market breadth (2.00x) favoured advancers, as 2 stocks gained against a sole decliner.

LIVESTOCK seemed to be on a cyclical run, rising by 14.54 percent to close at N2.60 after an unimpressive showing last week. OKOMUOIL also grew by 4.73 percent. Conversely, PRESCO continued its bearish run, as it pared by 1.69 percent to close at N26.25.

We expect a level of positivity in the agric sector next week, given its resilient stance even as the equities market remained morose. We opine that as more impressive corporate releases begin to trickle in, optimism will set in and further drive the sector.

Banking Sector: Stocks fully priced after post-elections market surge

Activities in the sector were tempered during the week, as eight stocks advanced, five decliners, while two stocks traded flat to peg the YtD return of our MERI-BNK index at 15.84 percent. The gainers were led by FIDELITYBK (5.045%), ETI (5.34%), and UBA (3.96%), while the loser’s list included FCMB (-4.43%), SKYEBANK (-3.41%), and STANBIC (3.33%).

There were several results released in the week, as Q1:2015 results started trickling in, while UBN released its FY2014 numbers.

UBN finished 2014 on high note, recording gross earnings and earnings-before-taxes growth of 11.94 percent and 406.12 percent, respectively. The performance was a divergence from those reported all through 2014, as the divestment of its non-banking subsidiaries acted to boost FY2014 performance.

DIAMONDBNK, GUARANTY,STANBICand UBA reported Q1:2015 numbers during the week. GUARANTY and UBA recorded respective gross earnings growths of 3.49 percent and 22.06 percent, and earnings-before-taxes growths of 16.59 percent and 34.71 percent, respectively; while DIAMONDBNK and STANBIC recorded recording respective YoY gross earnings growths of 16.93 percent and 11.63 percent, while profit-before-taxes growth came in at -15.14 percent and -38.90 percent YoY accordingly.

Many stocks are currently trading near their fundamentally justified prices after the rally that partnered the conclusion of the general elections. Consequently, the release of results seemed to have minimal impacts on the direction of trading on the specific stocks. This, in our opinion will persist in the near-term, although we expect a surge in market activities may partner the transition of government.

Consumer Goods: GUINNESS returns 21.43% WoW

Consumer goods counters recorded a negative week-on-week performance as major heavyweights pressured sector performance. The NSEFBT10 index consequently declined by -1.27 percent during the week, although sector breadth settled at 2.00x.

At the top of the gainers’ chart, GUINNESS returned 21.43 percent WoW, followed by VONO, HONYFLOUR, UACN, 7UP, INTBREW and UNILEVER with gains of 18.82 percent, 14.05 percent, 13.43 percent, 6.26 percent, 5.39 percent and 4.10 percent, accordingly. NNFM and PREMBREW maintained their prices at N18.05 and N3.61.

The decliners’ chart had NESTLE, DANGFLOUR, NB, DANGSUGAR, CADBURY, PZ and UNILEVER with respective losses of 9.97 percent, 5.10 percent, 1.51 percent, 1.10 percent, 1.23 percent, 0.74 percent.

During the week, GUINNESS announced a change in company leadership, as John O’Keeffe was promoted to the position of President of Diageo Africa, while Soren Lauridsen replaces him as MD/CEO of Guinness Nigeria plc effective from June 2015.

The recently released March 2015 inflation report by the NBS, showed Food and Non-alcoholic beverage recorded the highest MoM inflation growth, advancing by 1.06 percent (vs. 0.71% in prior month), while Alcoholic beverages advanced by 0.82 percent. This could imply an increase in demand for consumer goods relative to supply, or more likely, an indication of a transfer of increased production costs to the final consumers.

Healthcare Sector: Meri-Health continues to outpace NSE ASI

The sector index continued to outperform the market, advancing by a marginal 0.02 percent WoW to settle the YtD return at 12.24 percent. Sector breadth pegged at 3x in favour of advancers, as three stocks appreciated in priceagainst a lone decliner. All other counters closed flat.

MAYBAKER emerged as the top gainer for the week, advancing by 9.77 percent WoW, to settle price at N1.91. NEIMETH consolidated on the previous week’s gain, appreciating by 9.20 percent to close at N0.95. Also, FIDSON appreciated slightly by 1.52 percent in the week. On the flip side, only EVANSMED witnessed a price decline of 4.78 percent to N1.99.

The sector has sustained the positive momentum for the third consecutive week; however, we expect some pockets of profit-taking on some counters that have appreciated significantly in the past weeks. Thus, we advise investors to tread cautiously.

Insurance Sector: HMARKINS releases impressive FY2014 result

In spite of the profit-taking activities during the week, the NSEINS10 Index appreciated by 0.40 percent WtD to peg YtD return at -2.41 percent. Market breadth (0.60x) tilted in favour of decliners, as three stocks advanced against five decliners.

AIICO returned +9.00 percent WtD, to close at N1.09 (vs. N1.00 in the previous week), emerging as the top gainer for the week. CONTINSURE and NEM trailed with respective gains of 1.49 percent and 1.16 percent WtD. On the flip side, ROYALEX led the underperformers after shedding 5.45 percent, to close at N0.52. Other decliners for the week included; WAPIC (-3.77%), CUSTODYINS (-2.41%), INTENEGINS (-1.96%) and MANSARD (-0.33%), while all other counters traded flat during the week.

Consolidated Hallmark Insurance (HMARKINS) released its FY2014 financial result during the week, which showed that the company grew both its top and bottom-lines by 12.70 percent and 196.27 percent, respectively. We expect an inflow of earnings results going forward, due to information sourced from NAICOM’s website, which revealed that 46 companies have submitted their 2014FY financial results, while others are under regulatory intervention or yet to submit.

We anticipate that the outlook of the earnings declared would make or mar the sector performance in the coming week.

Industrial goods: Sector mood remains pressured

Activities in the industrial goods sector stayed tempered during the week as most sector stocks traded flat, 3 stocks appreciated and declined in value apiece.

CUTIX emerged as the highest gainer, with a 9.49 percent WoW increase in share price to N1.73. ASHAKACEM and BERGER made up the list with respective gains of 3.62 percent, and 0.11 percent.

WAPCO closed the week 0.01 percent down to N90.0, having shed the marginal gains made during the week, on the last trading day. CCNN and PORTPAINT also declined by 5.11 percent and 4.86 percent accordingly, in the review period.

We expect companies in the sector to commence release of Q1: 2015 score sheets in the coming weeks. We are, however, not overtly optimistic that this will translate into improved sentiments on the stocks, as we do not envisage significant earnings surprises given the harsh operating environment.

Oil & Gas Sector: FO records Q1:2015 declines

Activities within the sector were quite lull, with four stocks floating above waters for the week. OANDO advanced the most with a 6.82 percent gain, followed by SEPLAT, ETERNA, and MOBIL, which returned gains of 2.66 percent, 2.62 percent, and 1.27 percent in that order. Conversely, decliners for the week were FO and CONOIL, dipping 1.57 percent and 3.80 percent, respectively.

In the week, Seplat Petroleum Development Company plc (SEPLAT) proposed a dividend of N18.00/share, which translates to a dividend yield of 4.51 percent at the current market price. Closure date for the declaration is May 22, 2015. Forte Oil plc (FO), in the week, released its Q1:2015 results, showing a 4.94 percent loss in revenue (N33.062bn vs. N34.781bn). Cost-to-sales and OPEX ratios inched up slightly by 1.05% and 0.33% YoY. Consequently, PAT for the quarter declined by 28.98 percent (N0.783bn vs N1.103bn), reflecting a 0.80 percent dip in Net Margin YoY.

Going into the coming week, we believe that investors’ expectations from companies’ FY2014 and Q1:2015 results would be factored into stock pricing, and would determine market direction.

Services Sector: AIRSERVICE gains 12.82%

The services sector recovered from its weak standing, as the MERI-SERV index advanced by 4.49 percent, pushing YtD return to 3.33 percent. Five stocks increased in value during the period, while two stocks declined.

AIRSERVICE (12.82%), NAHCO (11.91%), TRANSEXPR (9.76%), CAVERTON (8.28%), and RTBRSICOE (3.70%) all appreciated in that order. ABCTRANS (-5.26%) and LEARNAFRICA (-3.97%) depreciated in value, while other counters traded flat.

We expect the positivity in the services sector to continue, and we anticipate that impressive corporate releases in the sector will help to drive activity and renew confidence among investors.