2016 Q1 Equity Market Review/ Q2 Outlook
MACRO-ECONOMIC OVERVIEW: LOW OIL PRICES PULL BACK GROWTH In 2015, the Nigerian economy slowed majorly on the back of low crude oil prices, weak foreign exchange earnings leading to imbalances in the domestic FX market, reduced government revenues, depreciation in foreign exchange and increased inflation. The situation was exacerbated by increased insurgency by Boko- Haram and policy uncertainty due to the delay in setting up the Federal Executive Council. Against this backdrop, the economy managed to grow by a meagre 2.1% in Q4-2015 similar to levels last seen in 1999. The GDP growth rate for 2015 moderated by 3.3% dipping to 2.2%, the lowest level in the last 15 years. According to data published by the Nigerian Bureau of Statistics (NBS), the deceleration was driven by a contraction in the Oil and Gas sector which plummeted by 8.3% in Q4-2015 year on year. The fall in crude oil prices coupled with lower than expected crude oil production led to the downturn in that sector. The ripple effect is that consumer confidence weakened as real wage declined and consumer purchasing power dropped. As the Naira weakened versus the US Dollar, imports quickly became more expensive, leading to strong inflationary pressures. Inflation has been on a steady rise since Q4-2014 and currently stands at 11.4%, its highest point in three years. IMPACT OF THE DECLINING OIL PRICE ON NIGERIA S GDP OIL PRICE OIL REVENUES EXPORTS RECURRENT AND CAPITAL EXPENDITURE GOVERNMENT BORROWING FOREIGN EXCHANGE RATE COST OF CAPITAL INFLATION GOVERNMENT SPENDING INVESTMENT CONSUMPTION NET EXPORT GDP GROWTH RATE Source: PWC, Greenwich Research 1
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EQUITY MARKET IN 2016: UNCERTAINTIES LINGER Crude oil contributes about 90% of total government revenues and the steep decline in crude oil prices in the last two years has weakened government revenues. Thus, crude oil price movement has had major bearing on Nigeria s economy over the last few decades. Performance of the equity market has mirrored the performance of the Nigerian economy. The equity market has recorded a sharp fall in market capitalization from 9.9 trillion to 8.7 trillion or -11.6% in 2016. NGSE-ASI FIRST QUARTER PERFORMANCE TREND (2010-2016) 24.67% 19.44% -0.60% -0.38% -6.25% -8.38% -10.09% Q1-2010 Q1-2011 Q1-2012 Q1-2013 Q1-2014 Q1-2015 Q1-2016 Source: Bloomberg, Greenwich Research With the decline in crude oil price, inflow of US Dollar earnings reduced and build-up of external reserves was threatened. Before long, our reserves dropped by nearly 40% in less than two years to close at US$28.7 billion in December 2015. The ripple effect of this was a deterioration in the value of the Naira vis-à-vis the US Dollar benchmark. This was one of the reasons why the Central Bank of Nigeria (CBN) took the steps to manage exchange rates in the face of dwindling US Dollar Reserves. Different analysts and economic pundits have their views on the efficacy of these exchange rate policies, but what is obvious is that the results are far from being positive. The CBN has held the official rate of the Naira stable against the US dollar since February 2015, despite the continued fall in Oil Price. The Bank has maintained its peg by progressively limiting access to the interbank Foreign Exchange (FX) market, which left Nigerians seeking Dollars to obtain them at the parallel black market rate offered by Bureau de Changes. Unfortunately, the CBN s FX strategy has not addressed the issue with growing demand as it has continued to reduce supply and availability, and both foreign and domestic investors have not been satisfied with the situation. 3
EQUITY MARKET Q1-2016 NGSE-ASI Q1-2016 TREND 28,000 26,000 25% FALL IN CRUDE OIL PRICES & LINGERING UNCERTAINTIES FROM 2015 CORPORATE EARNINGS & PROPOSED DIVIDEND PAYMENTS REACTION TO THE 2ND MPC MEETING CHERRY PICKING OVERSOLD POSITIONS RALLY IN GLOBAL CRUDE OIL PRICE 24,000 NEW SUPPORT LEVELS REACTION TO THE 1ST MPC MEETING VOLATILITY IN THE PARALLEL FX MARKET 22,000 31-Dec-15 31-Mar-16 Source: Bloomberg, Greenwich Research 4
NSE MONTHLY RETURNS The Nigerian equity market kicked-off the year 2016 on a negative note, reaching new support levels for the year at 22,456 points in January 2016. The total performance recorded for January 2016 was -16.5%, slightly better than the YTD loss of 17.4% in 2015. The massive loss in January was due to lingering policy uncertainty from 2015 in the domestic economy, continuous free fall in crude oil prices and low investors confidence in the domestic bourse. Foreign investors continued to show a lack of appetite in the domestic market as they persisted in pulling out their funds from the domestic market in January 2016. Also, in February foreign participation in the domestic bourse was lower at 36.5% even as foreign exchange translation risks remain undefined in our market. However, the equity market managed to gain some ground in February and March having positive monthly returns of 1.3% and 4.4% respectively. This was buoyed by select company earnings and corporate actions while oil prices recovered to US$40 levels. In light of this, the equity market performed better as buying momentum resurfaced. Though, the investors began taking profits from the market in the final week of March 2016 in reaction to monetary policy decisions of the CBN in March 2016. Overall, domestic investors have continued to dominate participation in the domestic equity market excluding January where they were marginally edged by their foreign counterparts. 70.00% DOMESTIC & FOREIGN PARTICIPATION ON THE NSE 60.00% 63.52% 50.00% 40.00% 53.55% 46.45% 48.43% 51.57% 30.00% 36.48% 20.00% 10.00% 0.00% Dec-15 Jan-16 Feb-16 DOMESTIC PARTICIPATION FOREIGN PARTICIPATION Source: Bloomberg, Greenwich Research Source: NSE, Greenwich Research 5
NGSE-ASI & BRENT Our time-series analysis over the last three equity market cycles revealed that strong positive correlation exists between the performance of NSE All-Share Index and movement in Brent crude oil prices. Our assertion is even more compelling because the NSE Index fell sharply in January 2016, shedding about 20% in two weeks as the price of crude oil dipped to a 12year low of US$27.88 per barrel. However, during the third month of the first quarter we observed a widening gap between the global crude oil prices and the performance of the Nigerian bourse indicating that the domestic market was driven by other factors apart from crude oil prices. 120 NSE-ASI & BRENT (REBASED TO 100) 100 80 60 12/31/2015 NGSE-INDX BRENT 3/31/2016 Source: Bloomberg, Greenwich Research 6
TOP MOVERS FOR THE FIRST QUARTER SECURITY NAME TICKER 31 DEC 2015 Q1-2016 TIGER BRANDED CONSUMER GOODS TIGERBRAND 1.13 2.21 95.58 SEPLAT PETROLEUM DEVELOPMENT COMPANY SEPLAT 203.00 300.00 47.78 INTERNATIONAL BREWERIES INTBREW 15.99 20.05 28.21 AG LEVENTIS AGLEVENT 0.62 0.74 19.35 LEARN AFRICA LEARNAFR 0.71 0.80 12.68 JULIUS BERGER JBERGER 42.00 47.04 12.00 NEM INSURANCE NEM 0.68 0.76 11.76 NPF MICROFINANCE BANK NPFMCRFB 1.10 1.20 9.09 VITAFOAM NIGERIA VITAFOAM 5.41 5.67 4.81 TOTAL NIGERIA TOTAL 147.01 153.82 4.63 YEAR- TO- DATE (%) LAGGARDS FOR THE FIRST QUARTER SECURITY NAME TICKER 31 DEC 2015 Q1-2016 YEAR-TO- DATE (%) FCMB HOLDINGS FCMB 1.69 0.87 (48.52) DIAMOND BANK DIAMONDBANK 2.30 1.20 (47.83) CAVERTON OFF. SUPPORT GROUP CAVERTON 2.47 1.33 (46.15) SKYE BANK SKYEBANK 1.58 0.91 (42.41) UNITY BANK UNITY BANK 1.12 0.72 (35.71) FBN HOLDINGS FBNH 5.13 3.30 (35.67) TRANSCORP HOTELS TRANSCORP 1.52 1.00 (34.21) UNILEVER NIGERIA UNILEVER 43.25 30.00 (30.64) MANSARD INSURANCE MANSARD 2.69 1.87 (30.48) HONEYWELL FLOUR MILLS HONYFLOUR 2.05 1.44 (29.76) 7
SELECTED AFRICAN BOURSES (Q1-2016) Exchange Name January YTD % February YTD % March YTD % Nigeria Nigerian stock exchange (16.50) 2.93 11.65 Kenya Nairobi securities exchange commission (6.10) (2.52) 1.19 Zambia Lusaka stock exchange (3.16) (2.78) (3.49) Tanzania Dar es salaam (1.83) 3.74 (6.89) South Africa Johannesburg stock exchange 0.46 0.56 (98.85) Ghana Ghana stock exchange 0.46 (1.59) (4.16) Mauritius Stock exchange of Mauritius 1.76 238.34 236.16 Tunisia Tunis stock exchange 7.41 (2.36) 7.51 8
OUTLOOK FOR Q2-2016 (OUR CRYSTAL BALL) OUR NGSE-ASI Q2-2016 PROJECTIONS 30,000 PRE MPC REACTION 29,000 POST MPC REACTION 28,000 27,000 IMPROVED Q1-2016 EARNINGS FROM NON- FINANCIALS 26,000 PROFIT TAKING/ POOR EARNINGS 25,000 24,000 23,000 CRUDE OIL PRICE SHOCK 22,000 31-Mar-16 30-Jun-16 9
KEY PROJECTIONS FOR Q2 2016 Higher Interest Rates: The Debt Management Office (DMO) has issued a provisional issuance calendar for Q2 2016, with plans to raise between N275bn (US$1.40bn) and N365bn (US$1.85bn) from the reissue of FGN bonds. As offshore buying interest wanes, we expect domestic investors (mostly PFAs) to seek improved yields in upcoming auctions. Similarly, our inflation outlook suggests that monetary policy will remain hawkish during the quarter. Foreign Exchange Rate Clarity: The Central Bank of Nigeria (CBN) has kept the tightly controlled official exchange rate near N199/US$ since February 2015, the parallel rate at which dollars are actually available, averaged N330/US$ in February. We expect that the CBN will attempt to address the liquidity issues on FX between market segments by introducing a new market segment to cater for certain goods and services. Deregulate Premium Motor Spirit (PMS): We expect that the Federal Government will deregulate the price of petrol during the quarter, as the crippling fuel shortage is causing economic activity in the country to grind to a halt, as individuals need queue for days to access scarce supplies of petrol. The government will quickly realize that subsidy payments are not sustainable, as Nigeria s current revenue profile and price fixing on petrol will require some sort of subsidy to achieve. It is also important to note the link between the Naira/US$ exchange rate and petrol subsidies. Recall that the 2015 appropriation bill only built-in N458bn for PMS subsidies, hence the request from the Presidency for N413bn as supplementary budget in November. These funds were used to plug the subsidy deficit in view of the resulting scarcity of the product during the period. The continuation of the policy regime will only reduce the CBN s ability to defend the currency and ultimately increase government borrowing. Equities: We expect a mild rally in the non-financial sector buoyed by positive Q1-2016 earnings from food and cement manufacturing counters. We envisage that the weakening investors confidence will likely persist but will pick up in May, just as government spending from the 2016 budget begins to kick-in. We recommend that investors should cherry pick quality counters during dips that could occur in May with a keen eye on management earnings guidance, dividend yield and sound corporate governance. 10
OUR STOCK PICKS SECURITY NAME TICKER PRICE PRICE TARGET POTENTIAL UP/ DOWNSIDE (%) P/B (x) 2016E P/E (x) 2016E MARKET CAP DIVIDEND YIELD (%) GUARANTY TRUST BANK GUARANTY 14.30 24.85 73.78 3.09 4.00 414,979.6 12.40 (21.34) ACCESS BANK ACCESS 3.79 7.60 100.53 0.32 1.50 115,711.9 12.40 (21.86) ZENITH BANK ZENITH 10.75 20.94 94.79 0.56 3.10 331,547.0 16.40 (23.49) NESTLE NIGERIA NESTLE 700.00 760.00 8.57 14.08 22.50 535,043.0 4.30 (18.60) LAFARGE AFRICA WAPCO 77.00 104.10 35.19 2.91 11.90 341,617.6 4.00 (20.45) GUINNESS NIGERIA GUINNESS 104.50 137.35 31.44 3.09 218.8 150,588.8 2.30 (13.21) NIGERIAN BREWERIES NB 107.00 125.89 17.65 5.04 22.90 871,408.2 4.40 (21.32) YEAR- TO-DATE (%) Research Team Usoro Essien Usoro.essien@gtlgroup.com Oluwaseun Dosunmu Seun.dosunmu@gtlgroup.com Tolulope Adepoju Tolulope.adepoju@gtlgroup.com 11
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