After a tumultuous year of extreme volatility, a relative calmness has been restored to the financial market. While the positive sentiments that pervaded the equities market in H2-20 extended into the early part of the year, it was short-lived as earlier-than-anticipated reversal in the yields on fixed income (FI) instruments dampened appetite for stocks. In the fixed income market, the combined impact of rising inflation, policy actions around the securitization of the Federal government’s ways and means balance with the CBN, and low system liquidity pushed yields significantly higher from the lows seen in 2020.
Despite the yield retracement in the fixed income (FI) market, we do not think investors should give up on the possibility of a market rally in the second half of the year as we still see scope for positive market performance. Our view is underpinned by (1) prospects of improved macroeconomic conditions which will enhance corporate earnings, (2) the possible return of FPIs, who have been net sellers of Nigerian equities thus far, (3) interim dividends that accompany the Q2 earnings season, and (4) stock-specific events such as GTB’s implementation of a holding company structure and the likelihood of a second tranche of share buy-back by Dangote Cement.
In the fixed income market, we believe that yields are at a resistance level, and thus, we expect an inflexion in the naira curve from the second half of the year. We believe that (1) reduced supply from the government, and (2) deliberate efforts by the government to bring down the overall cost of borrowing, will facilitate a drop in yields, albeit above 2020 levels, in the coming months. However, we highlight that the method of borrowing (yet to be disclosed) for the supplementary budget is an idiosyncratic event that will influence the direction of yields.
We present our views on the different sectors we cover in the following sections:
In the Banking sector, key players’ have demonstrated a commendable level of resilience despite the peculiar circumstances of the relatively weak and riskier environment as well as increasingly tight liquidity positions. We expect a combination of (1) improved fixed-income yields and (2) relatively stronger risk asset creation, (3) FX revaluation gains from the adoption of the I&E window rate, and (4) strong balance sheet management to support performance for the financial period. Accordingly, we remain ‘Overweight’ the sector and our picks are ACCESS (BUY; TP: NGN14.04/s), GTCO (BUY; TP: NGN39.46/s), UBA (BUY; TP: NGN11.57/s), and ZENITHBANK (BUY; TP: NGN32.21/s).
In Nigeria’s Cement sector, we expect volume growth will remain healthy due to continued growth in the construction sector, led by increased public spending on capital projects. We believe the price increments implemented in Q1-21 will protect margins from the impact of the local currency’s devaluation on energy costs. We expect DANGCEM (HOLD, TP: NGN255.54/s) to deliver decent EPS growth of 6.3% in 2021E. For WAPCO (BUY, TP: NGN29.53/s), we believe the company’s renewed focus on the Nigerian market and continued gains from its deleveraged balance sheet will support earnings. Thus, we estimate 2021E EPS growth of 13.4%. We have initiated coverage on BUACEMENT, Nigeria’s third-largest cement producer, with a ‘SELL’ rating and a target Price of NGN44.50.
For Consumer Staples, we expect the increased CPO price amid the reopening of the economy to support demand, and translate to revenue growth for Agriculture stocks – OKOMUOIL (BUY, TP: NGN148.20/s) and PRESCO (BUY, TP: NGN102.27/s). Brewery stocks are expected to record a strong recovery in volumes throughout 2021FY to pre-pandemic levels. However, we expect phased increases in prices to support top-line growth across the brewers. The Agro-Allied names remain the bright spot for Food & HPC stocks due to the (1) essential nature of the products, (2) reduced exposure to FX risks following substantial progress in backward integration programmes, and (3) ability to implement more significant price increases than peers. Accordingly, we see scope for significant earnings growth for FLOURMILL (BUY; TP: NGN38.87/s) and DANGSUGAR (BUY; TP: NGN24.88/s).
For Oil & Gas (Downstream), we expect the current price cap on PMS to remain in place, amid the weak macro conditions. On demand, we expect the resumption of full economic activities to continue supporting product demand. We expect individual product sourcing to remain challenging as structural issues persists. We expect both our covered companies – TOTAL (+26.2% y/y) and ARDOVA (+14.0% y/y) – to record revenue growth in FY-21. For TOTAL (HOLD, TP: 165.23/s), we believe the resumption of full economic activities will enable the marketer to push out substantial white product and lubricant volumes. For ARDOVA (BUY, TP: NGN26.31/s), we expect the marketer to consolidate on its increased market share (PMS: 27.3%; Lubes: 18.6%; ATK: 8.2%), with the acquisition of Enyo Retail and Supply Limited, the partnership deal with Shell, and existing deal with Texaco as the sole distributor of both companies’ lube products.
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