Is it time to buy some listed stocks in the NSE?

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1 Is it time to buy some listed stocks in the NSE? The downtrend in the NSE has been on for approximately five (5) months, and even with all the measures the federal government and the regulatory agencies have taken to stall the trend, the market continues to match to its own drum beat. Although the NSE implementation of the 1% maximum decline has slowed the deterioration, the NSE index is down,411 or.8% from its 52 week high of 66, Since September 1, 08, after the index had 4 days of gains, the index succumbed to selling pressure and has persistently declined losing 3,4 or 6.6% in the last twenty-three consecutive trading days as shown in the graph below NSE Index most recent 12 months movement Index (Index) Additionally, market internals continue to look very weak as declining stocks continue to outpace advancing stocks. In the most recent trading days, daily advancing stocks averaged stocks versus 65 declining stocks. Written by Chucks Biosah, InvestIQ for publication on Copyright reserved. 1

2 Advancers versus Decliners Stocks on NSE //08 7//08 8//08 9// Advancers Decliners The downtrend in the Nigerian capital market has negatively impacted the stock prices of majority of the listed companies in the Nigerian stock exchange. As a result most of the stocks are trading below their fair values, and it might be a good time to start accumulating the stocks of some these undervalued companies. Stock selection Process: Normally, I utilize technical and fundamental analysis in making my stock purchase decisions, but because the market has been in a severe downturn for over 5 months, utilizing technical analysis might be counterproductive, since most of the stocks in the NSE are trading below their relevant technical indicators (i.e., cumulative simple moving average, RSI, Fibonacci targets, ect). For examples, as shown below, the technical review of intercontinental, Zenith, and Oceanic Bank reveal that they are all trading below their relevant CSMAs. Therefore, an investor that bases their stock buying decision on only technical analysis might be dissuaded from buying any of the highlighted stocks. Written by Chucks Biosah, InvestIQ for publication on Copyright reserved. 2

3 Intercontinental Bank Continental Movement per. Mov. Avg. () () Oceanic Bank Movement Zenith Bank Movement 55 9/3/07 /3/07 11/3/07 12/3/07 1/3/08 2/3/08 3/3/08 4/3/08 5/3/08 6/3/08 7/3/08 8/3/08 9/3/08 /3/08 per. Mov. Avg. () () per. Mov. Avg. () () However using fundamental analysis and calculating the fair value of a few bank stocks based on the constant growth and earnings multiple models revealed that although these stocks are technically very weak, fundamentally some are very attractive at their current prices. Fundamental Analysis: Using the constant growth and earnings multiple models, we calculated the faire value of the following bank stocks: Access Bank, UBA, Zenith, Diamond Bank, Afribank, Intercontinental bank, First Bank Nigeria Plc, and Bank PHB. The analysis revealed that as of October 3, 08, with the exception of Zenith Bank, all of the analyzed stocks are trading below their fair values as shown in the schedule below. Written by Chucks Biosah, InvestIQ for publication on Copyright reserved. 3

4 by Constant growth model by Earnings multiple Variance b/ween fair value & stock price % variance from fair value BANKING Closing Combined average price ACCESS % AFRIBANK % DIAMONDBNK % FIRSTBANK % INTERCONT % PLATINUM % UBA % ZENITHBANK % As shown in the schedule, the most of the stocks in the sample have declined between 2.1% t o 17.6% below their fair values with a combined average decline of.3%. A cursory review of some of the sample stocks are highlighted below ACCESS Bank: Technically, Access Bank is has very low relative strength. At October 3, 08, the day and day cumulative simple moving averages were N12.52k, and N13.70k respectively. Based on the technical indicators an investor will not buy Access Bank. However, based on the most recent financial statements, we determined the earnings multiple at 13.59%, dividend growth rate at 3.03%, dividend payout ratio of 67.1%, and retention rate of 32.90%. Using the constant growth and price earning multiple models the fair values of the stock was computed at N11.52k and N13.57K respectively. The combined average fair value based on both models is N12.55k indicating that the stock is N1.03, or 8.2% below fair value. Although the stock is below fair value, I will not buy the stock at the current price because the risk/reward value is low. Access Bank Movement 5 per. Mov. Avg. () 0 1/4/07 3/4/07 5/4/07 7/4/07 9/4/07 11/4/07 1/4/08 3/4/08 5/4/08 7/4/08 9/4/08 Written by Chucks Biosah, InvestIQ for publication on Copyright reserved. 4

5 AFRIBANK Technically, Afribank Bank with a current share price of N21.56k is trading above its day and day bonus adjusted cumulative simple moving averages of N21.38K and N19.K respectively. Technically it appears that stock is trying to break down as It attempts to bounce of its day CSMA. Based on the technical indicators, an investor will wait to see if Afribank breaks below its day CSMA However, based on the most recent financial statements, we determined the earnings multiple at 26.01, next year s projected earnings at N1., dividend yield at 1.2%, dividend payout ratio of.2%, and retention rate of 68.8%. Using the constant growth and price earning multiple models the fair values of the stock was computed at N.83k and N.06kK respectively. The combined average fair value based on both models is N.k indicating that the stock is N3.89k, or.3% below fair value. Since the stock is below fair value by.3%, it has a good risk/reward ratio. I will begin accumulating the shares at the current price. The only negative indicator is the low dividend yield of 1.2%. As a rule, dividend paying stock with a yield below 2% are considered expensive AFRIBANK's Movement per. Mov. Avg. () 8//07 9//07 //07 11//07 12//07 1//08 2//08 3//08 4//08 5//08 6//08 7//08 8//08 9//08 Conclusion Although the Nigerian capital market is currently in a downtrend, my advice to long term investors is that start buying well managed companies that are undervalued. Although, all capital markets worldwide are experiencing severe bearishness, history has proven that these markets eventually turn around. Written by Chucks Biosah, InvestIQ for publication on Copyright reserved. 5