Analysts reveal Investment Opportunities in Selected Value Stocks for 2019

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Stock prices in Nigeria have continued to nosedive despite the relatively positive 9 months corporate results and the recovered crude oil prices which remained high for most of 2018. Nigeria’s sweet grade, bonny light crude, remained at USD73.44/barrel on average from January 2018 to November 2018, against average price of USD53.86/barrel it traded the same period in 2017.

Rising against the odds, some value investors have been taking advantage of the falling prices to either cut down their average prices (by accumulating their holdings of specific stocks) or add new stocks to their portfolios cheaply. Market turnover and volume of traded shares increased by 23.37% and 7.76% to N74.86 billion and 5.44 billion units respectively in November 2018, Indicative of stimulated investors’ interest amid lower prices.

Although fixed income investments seem to be attractive in the short term – as NITTY for 3-month, 6-months and 12-month maturities stood at 13.51%, 14.09% and 17.28% respectively as at November 30, 2018 – we believe that the increasing dividend yields amid lower market prices and expected capital gains would surpass the near-term benefits from treasury bills.

One of the leading factors that could whip up bullish sentiments in the Nigerian equities space would be the conduct of free and fair elections in an atmosphere of sportsmanship between public office contenders. This is nearly guaranteed to boost investor confidence, especially foreign portfolio investors who had grown cold feet in the lead up to the election season.

Reviewing how the local equities market fared in November 2016, we saw stock prices drop to very low levels and most companies became very cheap amid attractive valuations. Just thirteen months after, on January 19, 2018, the local bourse rebounded – the highest level so far in 2018 – and value investors were eventually rewarded for their patience.

For some selected stocks we reviewed (see table 03) based on 2016 FY financial results, we saw investors made capital gain of 199.77% and dividend yield of 17.44% on shares of United Bank for Africa in thirteen months. As at November 30, 2016, prices of the selected stocks were all trading below their respective Net Asset Values (NAV) with good returns on equity, thus, making the stocks attractive for pick-up by medium term investors.

LOCAL BOURSE FALL: BLESSING IN DISGUISE
Stock prices in Nigeria have continued to nosedive despite the relatively positive 9 months corporate results and the recovered crude oil prices which remained high for most of 2018. Nigeria’s sweet grade, bonny light crude, remained at USD73.44/barrel on average from January 2018 to November 2018, against average price of USD53.86/barrel it traded the same period in 2017.

The negative correlation between the bearish local bourse and the increased price of crude oil was at first due to the political uncertainty that engendered continuous outflows of foreign portfolio investments, and subsequently, the gap was widened by monetary policy tightening in the US (its benchmark rate now ranges between 2.00% – 2.25% from the previous 1.75% – 2.00%), thus, making fixed income instruments more attractive to foreign portfolio investors.

On January 19, 2018 market capitalization hit N16.15 trillion, the highest level so far this year, but had lost a whopping sum of N4.77 trillion, as it plunged to N11.38 trillion in November 25, 2018 and still threatening to decline further due to the recent potential threats.

Hence, on a year on year (y-o-y) basis, the NSE All Share Index (ASI) fell by 18.63% to 30,874.17 points on November 30, 2018. However, market turnover which rose y-o-y by 4.30% to N1.14 trillion in eleven months to November 30, 2018, showed that savvy long-term investors took advantage of the cheap prices to buy into some companies that have recorded increased profits in 2018 but which have been trading well below their book values (see figure 01).

1 Bearish Trend Might Linger in Near Term amid Downside Risks

The current bearish trend in local stock market prices might linger till Q1 2019 before possible recovery afterwards as downside risks, in addition to political uncertainty, include softening global crude oil prices in the short term (amid threat of increased supply by key producers such as U.S., Russia and Saudi Arabia in accordance with geopolitics) and the increasing yield environment both home and abroad on the back of sustained decline Nigeria’s external reserves amid high demand for FX and relatively attractive fixed income yields in the U.S. in 2019 (see figure 02).

External reserves declined to USD42.08 billion in November 29, 2018 from USD47.79 billion in July 2, 2018 on sustained interventions by the Central Bank of Nigeria (CBN) at most forex windows and has contributed to the rise in stop rates for 10-year bond maturity and 364-day treasury bills to 15.83% and 14.45% respectively in November 2018 from 14.80% and 13.70% respectively in January 2018.

The combined effects of the aforementioned risks, especially the political outcome of the 2019 Nigerian presidential elections, would determine how quickly local equities market would recover in 2019.

2 Savvy Long-term Investors Taking Advantage of Bearish Trend
Rising against the odds, some value investors have been taking advantage of the falling prices to either cut down their average prices (by accumulating their holdings of specific stocks) or add new stocks to their portfolios cheaply.

Market turnover and volume of traded shares increased by 23.37% and 7.76% to N74.86 billion and 5.44 billion units respectively in November 2018, Indicative of stimulated investors’ interest amid lower prices. This, was as NSE ASI and market capitalization for the same period plunged by 4.90% each to 30,874.17 index points and N11.27 trillion (see table 01).

Although fixed income investments seem to be attractive in the short term – as NITTY for 3-month, 6-months and 12-month maturities stood at 13.51%, 14.09% and 17.28% respectively as at November 30, 2018 – we believe that the increasing dividend yields amid lower market prices and expected capital gains would surpass the near-term benefits from treasury bills.

3 A Two-Way Traffic is Anticipated in 2019
The expected exit of foreign portfolio investors in fixed income securities, regardless, should constitute part of a two-way traffic in the sense that foreign portfolio investors in equities are likely to return into the country as part of efforts by global fund managers and investors to reallocate their funds to emerging markets’ variable income assets – given that the equities market in developed markets such as the U.S. are expected to suffer some volatility amid anticipated economic slowdown in that region.

A widening trade deficit in the U.S. (rose m-o-m by 1.65% to USD55.5 billion in October) at a time of relatively higher credit yields are expected to negatively impact on its economic output and weaken the labour market. These, in addition to the twin of a mounting fiscal deficit (due to tax cuts and increased spending), could weaken chances for further tightening in monetary policy so as to avoid a negative impact on real sector players and credit issuers even as debt levels in the US (both public and corporate) appears to be excessive.

In any case, an anticipated halt in U.S. Fed monetary tightening some time in H2 2019 or earlier could give emerging markets, including Nigeria, a breather and result in the return of fixed income investments.

4 Factors That Could Spur the Bulls…
One of the leading factors that could whip up bullish sentiments in the Nigerian equities space would be the conduct of free and fair elections in an atmosphere of sportsmanship between public office contenders. This is nearly guaranteed to boost investor confidence, especially foreign portfolio investors who had grown cold feet in the lead up to the election season.

In addition, higher global crude oil prices of between USD60 – USD70 per barrel would be a welcome development for the Nigerian economy as it will not only ease the jobs of the fiscal and monetary authorities, but also provide reasonable comfort to investors, lower premiums on fixed income yields and energize investments in equities.

Thirdly, the removal of PMS subsidy and outright deregulation of the downstream petroleum has been in the public discourse and could provide the much need spark of confidence in the Nigerian economy as an attractive investment destination.

PRESENT FUNDAMENTALS OF SELECTED VALUE STOCKS
As already mentioned, the pummeled bourse, we believe, has created buy opportunities for value investors amid cheap valuations. Against this backdrop, we reviewed the current fundamentals of selected company stocks in order to uncover their intrinsic values in addition to their relative financial performance vis a vis industry peers in their respective sectors.

We checked what their fundamentals were in 2016/2017, the last time equities market dipped and rebounded, and what their fundamentals are now that the local bourse is headed southwards again.

Benefit of Hindsight, 2016/2017
Reviewing how the local equities market fared in November 2016, we saw stock prices drop to very low levels and most companies became very cheap amid attractive valuations. Just thirteen months after, on January 19, 2018, the local bourse rebounded – the highest level so far in 2018 – and value investors were eventually rewarded for their patience.

NSE ASI rose by 78.64% to 45,092.83 points in January 19, 2018 from 25,241.63 points in November 30, 2016 even as market capitalization increased by N7.46 trillion to N16.15 trillion in the same period under review (see table 02).

For some selected stocks we reviewed (see table 03) based on 2016 FY financial results, we saw investors made capital gain of 199.77% and dividend yield of 17.44% on shares of United Bank for Africa in thirteen months. As at November 30, 2016, prices of the selected stocks were all trading below their respective Net Asset Values (NAV) with good returns on equity, thus, making the stocks attractive for pick-up by medium term investors.

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Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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