Equities are dropping to their lowest share prices in recent history, but attractive valuation and strong fundamentals raise hope of a rebound, Capital Market Editor Taofik Salako reports
THE Nigerian stock market reopens today with most stocks at their lowest prices, as half-year earnings and comparatively attractive valuations failed to halt the decline in share prices. The stock market has posted negative returns in five out of the seven past months and it is heading to another negative close as investors remain ambivalent about the short-term outlook for quoted equities.
Checks yesterday indicated that most major stocks across most sectors have fallen to their lowest prices in a year, compounding the tenuous market situation at the equities market where more than a quarter of listed stocks are either at nominal value or are stagnant over a long period.
They include the highly capitalised industrial goods sector, the most liquid and influential banking sector, the populous but highly illiquid insurance sector, government-favoured agriculture sector, the popular oil and gas sector, the half-hearted services sector and the household consumer goods sector, among others.
The price depreciation at the Nigerian Stock Exchange (NSE) was headlined by the country’s largest quoted company, Dangote Cement, which opens today at one-year low of N165. Nigeria’s two largest financial institutions, Guaranty Trust Bank (GTB) and Zenith Bank International, open at low prices of N26.50 and N16.35 respectively. Newly listed telecoms giant third largest quoted company, Airtel Africa, is trading at a low price of N323.50 while downstream major, Total Nigeria, has fallen to a new low of N114.80.
Market-wide decline
In the agriculture sector, nearly all stocks are at their lowest prices. Industry leaders, Okomu Oil Palm and Presco, are trading at new low prices of N52 and N44.80 respectively. They had traded as high as N85 and N75 per share respectively. FTN Cocoa processors is stuck at 20 kobo while Livestock Feeds is at a low price of 41 kobo. Real estate’s flagship company, UACN Property Development Company is trading at one-year low of N1.12.
In the foreign-dominated breweries segment, industry leaders, Nigerian Breweries and Guinness Nigeria, open today at low prices of N50 and N41.40 respectively. International Breweries is trading at a low price of N12.
In the insurance sector, its negative outlook raises concerns about the prospects of recapitalisation. Most insurance stocks, including Cornerstone Insurance; Guinea Insurance; NEM Insurance; Niger Insurance; Sovereign Trust Insurance; Standard Alliance Insurance; Sunu Assurances; Unic Diversified Holdings; Universal Insurance; Veritas Kapital Assurance and Goldlink Insurance, among others, are trading below nominal values at 20 kobo per share. Law Union and Rock Insurance opens at one-year low of 39 kobo.
The National Insurance Commission (NAICOM) in May 2019 released new capital requirements for insurance businesses with a 13-month compliance period for operators to shore up their minimum capital base to the required level. The minimum paid-up share capital of life insurance company was increased from N2 billion to N8 billion, non-life insurance from N3billion to N10 billion, composite insurance from N5billion to N18 billion, while re-insurance companies were directed to raise their capital base from N10billion to N20 billion.
In the information and communications technology sector, most stocks are at their lowest prices, including Courteville Business Solutions, 20 kobo; Tripple Gee and Company, 70 kobo and E-Tranzact International, trading at a low N2.38. The steep decline in share price has been one of the major constraints against E-Tranzact’s new capital raising. E-Tranzact had, in December 2018, received shareholders’ approval to raise additional capital of up to N7billion.
In the oil and gas sector, hitherto stable stocks are dropping to new lows. Total Nigeria headlined the losses with a new low of share price of N114.80, 100 per cent decline from its high price of N223 during the period. MRS Oil and Gas is trading at N20.85. Eterna opens at a low N2.60. Japaul Oil and Maritime Services have remained stuck at 20 kobo, while impressive half-year earnings failed to lift Conoil, which opens today at a low of N17.65.
Most stocks in the services, healthcare and others are at their lows, including United Capital, which opens at N1.90; Morison Industries, 50 kobo; Afromedia, 41 kobo; RT Briscoe, 29 kobo; Tantalisers, 20 kobo; Transcorp Hotels, N5.40; DAAR Communications, 40 kobo and University Press, which is trading at a low N1.60 per share.
Drumbeats
Most analysts agreed that the stock market has been reflecting the tough macro-economic environment, especially the seeming lack of direction that had characterised the economy since the onset of political transition.
President, Association of Securities Dealing Houses of Nigeria (ASHON), Chief Patrick Ezeagu, said the Nigerian economy has been significantly impacted by the actions or inactions of the political class, which in the immediate, have not inspired investors’ confidence in the market.
“Till date, the government is yet to settle down after the election that took place in February to March this year with a plethora of court cases trailing it. In this kind of situation, most investors adopt a wait and see attitude. However, more enlightened and professionally guided investors continue to buy to reduce their cost profile in the hope that when the market rallies, they will be the first to recover and make handsome returns,” Ezeagu said.
He noted that the steep decline at the equities market has not fully reflected the encouraging earnings performance of several quoted companies.
Analysts at CardinalStone Limited said despite their attractive valuations, a reversal of fortunes for Nigeria equities is likely to depend on a decisive policy tweak to the current currency regime.
“Since 2017, investors have priced in a forward premium over spot rates in the naira forward market, currently one-year forward priced at N400.0/$, indicating expectations of imminent naira devaluation. Until this dark cloud is erased, we see little or no legroom for significant equity market correction in the near-term,” CardinalStone stated.
According to CardinalStone, Nigerian monetary policy direction remains largely unclear, with the monetary authorities leaving all its policy parameters unchanged in its late July meeting on the one hand, while implementing pro-growth administrative policies such as the increase in loan to deposit ratio requirement and reduction of the maximum amount banks can place on the Standing Deposit Facility (SDF) on the other.
According to FSDH Merchant Bank, investors and fund managers were facing tough time deciding on investment decisions at the stock market as returns on financial assets continue to depreciate.
FSDH said the assumption of immediate recovery at the equities market depends on availability of complementary fiscal policies that will de-risk the economy.
Chief Executive Officer, Sofunix Investment and Communications, Mr. Sola Oni, said the low purchasing power of the average Nigerian investors is also negatively impacting the market as investors contend with array of needs, including financial obligations for children’s school fees and other domestic exigencies.
When will bulls return?
But most analysts agreed that equities may soon bottom out and start a sustained recovery. Analysts almost shared a consensus that the steep decline has created attractive opportunities for investors with long-term funds.
“The equity market may recover from August. A number of companies have indicated that they will declare interim dividend for half-year results only waiting for regulatory approvals. In addition, we expect the various monetary policies the Central Bank of Nigeria (CBN) initiated to boost economic activity and lead to increased liquidity that can flow into the financial market,” FSDH stated in one of the most ambitious projections.
Ezeagu said the performance of quoted companies has been very encouraging despite the odds and the market may be on the path to early recovery, adding that the market will regain its vibrancy and the laggards will rather be playing catch up“ as soon as the ministers are sworn in.
FSDH urged investors, who have long-term funds, to take advantage of the imbalance in the share prices of some companies that have strong investment case in the equity market.
According to the wholesale investment banker, although nobody knows exactly when the equity market will take a turn, but it is clear that the market is close to the bottom, adding that the historic performance of the equity market with average growth of 24,590 per cent over the past three decades.
“Imagine that an investment of N100,000 in the equity market in 1985 recorded a return of 24,590 per cent as at December 2018. This means that the N100,000 increased to N24, 690,000 within 33 years without an additional capital. This was the performance of the NSE All Share Index (ASI) between 1985 and 2018. Not a bad growth at all. Meanwhile, there were some companies that recorded higher returns during this period than the NSE ASI,” FSDH stated.
Oni said the depreciation presents opportunities for real investors.
According to him, the steep decline should not be misinterpreted that the equity market is collapsing, as market fundamentals remain strong. The share prices will get to a rock bottom level that some institutional investors, who are busy with technical and fundamental analysis of the market, will begin to mop up. These investors will create a rally and there will be massive demand with associated effect of bullish trend.
The bearish period, he said, separates speculators from real investors, pointing out that while speculators buy for immediate gain and at times, end as a costly gamble, real investors buy on the strength of medium and long time capital gain and other returns.
Investors in Nigerian equities had lost N1.38 trillion over the past seven months. Nigerian equities suffered their worst depreciation so far this year in July, dropping by an average of 7.50 per cent, valued at about N990.45 billion.
The steep decline in July worsened the average year-to-date return, which had closed first half at -4.66 per cent, to -11.81 per cent, equivalent to net capital depreciation of N1.38 trillion for the seven-month period.
With a drop of 17.81 per cent in 2018, the decline at the equities market implied average decline of 29.62 per cent over the past 19 months. This implies that average investors who had invested over the period had lost almost a third of their portfolios, altogether implying a loss of about N4 trillion for the entire market.
The ASI closed July at 27,718.26 points as against its month’s opening index of 29,966.87 points, June’s closing index. The ASI had opened 2019 at 31,430.50 points, 17.81 per cent down from its 2018’s opening index of 38,243.19 points. It had however rallied a world-leading gain of 42.30 per cent in 2017.
The listing of Airtel Africa Plc during the month, however, boosted the total market capitalisation of all quoted equities. Aggregate market value of all quoted equities rose from its month’s opening value of N13.206 trillion to close July at N13.507 trillion. The NSE had listed a total of 3.8 billion shares of Airtel Africa at N363, adding N1.4 trillion to the equities market capitalisation.
The unabsorbed impact of the listing of Nigeria’s largest telecommunication company, MTN Nigeria Communications Plc in May 2019, also coloured the market capitalisation with a resemblance of gain. The NSE had listed 20.35billion ordinary shares of MTN Nigeria at N90 per share, representing initial listing value of N1.83trillion. The new listing and subsequent rally moved the market capitalisation to a gain of N2.726 trillion in May 2019, one of the two months that ended positive. The other positive month was February 2019.
With the MTN effect, aggregate market value of all quoted companies had closed first half at N13.206 trillion, implying a gain of N1.49 trillion during the first half. Market capitalisation of equities had opened 2019 at N11.721 trillion. It had opened 2018 at N13.609 trillion.
Based on market values, both the ASI and market capitalisation are correlated indices and without new listing or delisting, usually move simultaneously in the same direction. But the ASI is weighted, and as such adjusted for effect of new listing while the market capitalisation is a straight-line summation of share prices and issued shares. Thus, where the ASI and market capitalisation differ, the ASI is widely regarded as the true representation of the market condition.
Nigerian equities lost N326 billion in January 2019, with average decline of 1.82 per cent. The ASI and market value of equities had closed January 2019 at 30,557.20 and N11.395trillion respectively. In February 2019, investors in Nigerian equities netted N433billion in capital gains as the stock market staged a major recovery. Average return for the month stood at 3.80 per cent. The ASI and market value of quoted equities had closed February higher at 31,718.70 points and N11.828 trillion respectively. The market rounded off the first quarter with a net loss of N156 billion and average decline of 2.135 per cent in March 2019.
The market suffered a major contraction in April as the bearishness defied earnings reports and dividend recommendations. Quoted equities lost N714 billion in April. The ASI dropped from April’s opening index of 31,041.42 points to close the month at 29,159.74 points, representing average month-on-month decline of 6.06 per cent. Aggregate market value of all quoted equities also dropped from the month’s opening value of N11.672 trillion to close at N10.958 trillion.
