Economy
Is Nigerian Equities Market Overvalued?
By Afrinvest Research
Given the challenges faced between H2:2014 and Q1:2017, investors constantly punished Nigerian equities, with sell-offs recorded across various sectors of the market.
Consequently, Nigerian equities were undervalued, in comparison to peers, presenting ample opportunities for investors to take advantage of some of the companies, which turned out impressive results despite the economic challenges.
Following the reforms in the FX market which resulted in increased FX liquidity and a restoration of investor confidence, massive gains were recorded in the market in 2017 and this has been sustained into 2018, up 12.2% (12/01/2018).
With the market now at an all-time high in terms of market capitalisation and the NSE All Share Index at a 9-year high, there are justifiable fears of overvaluation of the market which raises concerns with regards to a near term correction.
Our approach is to diagnose and probe into the fundamentals as well as technical merit of the overvaluation hypothesis.
From our analysis, average Trailing P/E and P/BV for the Nigerian equities market in the last one month as at 17/01/2018 stood at 13.1x and 1.7x, which are lower than 15.1x and 2.0x respectively for the MSCI Frontier markets index.
Looking back to the last 2-year bull market run Nigeria experienced between 2012 and 2013, the Nigerian equities market was priced at a premium to frontier markets peers in the late cycle of the run, as shown in the average P/E and P/BV multiples of the MSCI Frontier Markets index of 12.5x and 1.6x in 2013 relative to 13.5x and 2.2x of the Nigerian market in the same period.
This implies that despite the rally in the market in 2017 and early trading in 2018, current undervaluation of the Nigerian market by valuation multiples and the proven historical valuation premium Nigerian market enjoys in period of boom suggest there are more miles to clock in the market rally.
Hence, against the backdrop of improving macroeconomic conditions as well as positive outlook for corporate earnings, we believe there is a compelling case for investors to sustain interest in the Nigerian equities market as already noticed in the YTD return of 17.4% (17/01/2018).
Our Scenario Analysis in 2018
A review of our market forecast for 2017, shows that actual performance outperformed our bull case scenario, in which we projected that a contraction in the spread between the official and parallel market rates, an increase in oil production to about 2.2mb/d, oil prices between $55/b to $60/b and MPR at 14.0% will result in a 15.6% appreciation in the benchmark index.
Actual performance for 2017 (+42.3%) surpassed our forecast as investor confidence was reinvigorated following the reforms in the FX market and resilient earnings. In 2018, we envisage that market performance will be largely determined by the following factors:
- Earnings fundamental of Corporates;
- Stability in the FX market and other macro indicators; and
- Funds flow dynamics to emerging and frontier markets.
Our analysis of market trend over the past 10 years, makes a case for a possible repetition of history.
As noticed in 2012 and 2013, the periods following the global economic crisis, sentiment in the local bourse strengthened which drove the ASI 35.4% and 47.2% northwards in the respective years.
In a similar situation, as the economy rebounded from the slump – 2014 to 2016 – in 2017, we expect market sentiment to wax stronger in 2018.
In our scenario analysis for the market performance in 2018, we employed a blend of relative valuation in which we benchmarked our market valuation against multiples for peers in the MSCI Frontier market index and absolute valuation based on price forecasts for our coverage universe which is about 86.0% of the entire market.
From our analysis, the Nigerian market has outperformed the MSCI index on the basis of EPS, growing at a CAGR of 12.2% between 2010 and 2017 vs. a 2.1% decline for the MSCI index in the same period.
Similarly, on a P/E basis, the Nigerian market has commanded higher pricing over the MSCI index in 6 of the 8 years under review.
Against this backdrop, we carried out scenario analysis for the performance of the All Share Index in 2018.
Our forecast for the performance of the benchmark index in 2018 is largely positive as our scenarios (bear, base, bull) all signal appreciation in the benchmark index.
On a relative valuation basis, we noted earlier that our expectations for corporate earnings in 2018 is largely optimistic on the back of improving conditions in the operating environment; hence, we assumed an EPS of N3,377.4 as our base case scenario which implies a 13.0% increase from a trailing EPS of N2,988.8 in the prior year.
Our EPS projection was based on the 7-year EPS CAGR for the All Share Index to arrive at the forecast.
For our P/E projection, we compared current pricing in the Nigerian markets against peers for which the MSCI Frontier Markets index was employed.
In order to arrive at our p/e forecast of 14.1x in the base case scenario, we analysed historical P/E multiple of the ASI relative to the MSCI Frontier Index P/E and assumed a 1.0x premium in line with historical valuation spread.
This methodology yielded an All Share Index projection of 47,620.71 points in our base case scenario, which suggests a 24.5% appreciation in the year.
On an absolute valuation basis, we have a more conservative forecast for market performance, albeit still positive.
Based on our 12-month target prices from our coverage universe of stocks – about 86.0% of market cap – relative to 2017 yearend prices, we forecast a 5.6% jump in market capitalisation, implying ASI projection of 40,384.81 points.
Finally, to make a call on market performance for 2018, we adopted a blend of both valuation methodologies. Based on the foregoing, we arrived at an ASI projection of 45,811.73 points for 2018 which is a 19.8% appreciation from 38,243.19 points in 2017.
Our bear case (+7.7% to 41,189.9 points) and bull case (+32.7% to 50,749.10 points) also follow the same trend and further buttress the consensus view of positive market performance in 2018.
Whilst we note that developments in the macro space will also determine overall market performance, we opine that barring any major shocks in the FX market, corporate fundamentals will be a key determinant of overall performance.
By Adedapo Adesanya
Food Concepts Plc neutralized the gains recorded by three securities, returning the NASD Over-the-Counter (OTC) Securities Exchange into the negative territory with a 0.27 per cent loss on Thursday, December 4.
Yesterday, the share price of the parent company of Chicken Republic and PieXpress declined by 34 Kobo to sell at N3.15 per unit compared with the previous day’s N3.49 per unit.
This shrank the market capitalisation of the OTC bourse by N5.72 billion to N2.136 billion from N2.142 trillion and weakened the NASD Unlisted Security Index (NSI) by 9.57 points to 3,571.53 points from 3,581.10 points.
Business Post reports that Central Securities Clearing System (CSCS) Plc went down by 50 Kobo to N38.50 per share from N38.00 per share, FrieslandCampina Wamco Nigeria Plc gained 29 Kobo to sell at N55.79 per unit versus N55.50 per unit, and Geo-Fluids Plc added 5 Kobo to close at N4.60 per share compared with Wednesday’s closing price of N4.55 per share.
Trading data indicated that the volume of securities recorded at the session surged by 6,885.3 per cent to 4.3 million units from the 61,570 units posted a day earlier, the value of securities increased by 10,301.7 per cent to N947.2 million from N3.3 million, and the number of deals went up by 146.7 per cent to 37 deals from the 15 deals achieved in the previous trading session.
At the close of business, Infrastructure Credit Guarantee Company (InfraCredit) Plc was the most traded stock by value on a year-to-date basis with the sale of 5.8 billion units for N16.4 billion, trailed by Okitipupa Plc with 170.4 million units worth N8.0 billion, and Air Liquide Plc with 507.5 million units valued at N4.2 billion.
InfraCredit Plc also finished the session as the most traded stock by volume on a year-to-date basis with 5.8 billion units transacted for N16.4 billion, followed by Industrial and General Insurance (IGI) Plc with 1.2 billion units sold for N420.2 million, and Impresit Bakolori Plc with 536.9 million units traded for N524.9 million.
By Dipo Olowookere
The upward trend witnessed at the Nigerian Exchange (NGX) Limited in recent sessions continued on Thursday as it further improved by 0.10 per cent.
This was despite investor sentiment turning bearish after the local equity market ended with 23 price gainers and 28 price gainers, indicating a negative market breadth index.
UAC Nigeria gained 10.00 per cent to finish at N88.00, Morison Industries appreciated by 9.94 per cent to N3.54, Ecobank rose by 8.53 per cent to N36.90, and Coronation Insurance grew by 8.47 per cent to N2.56.
On the flip side, Ellah Lakes depreciated by 10.00 per cent to N13.14, Eunisell Nigeria also shed 10.00 per cent to finish at N72.90, Transcorp Hotels slipped by 9.95 per cent to N157.50, Omatek shrank by 9.23 per cent to N1.18, and Guinea Insurance dipped by 8.46 per cent to N1.19.
Yesterday, the All-Share Index (ASI) went up by 152.28 points to 145,476.15 points from 145,323.87 points and the market capitalisation chalked up N97 billion to finish at N92.726 trillion compared with the previous day’s N92.629 trillion.
Customs Street was bubbling with activities on Thursday, though the trading volume and value slightly went down, according to data.
A total of 1.9 billion stocks worth N19.2 billion exchanged hands in 23,369 deals during the session versus the N2.3 billion valued at N21.0 billion traded in 21,513 deals a day earlier.
This showed that the number of deals increased by 8.63 per cent, the volume of transactions depleted by 17.39 per cent, and the value of trades decreased by 8.57 per cent.
For another trading day, eTranzact led the activity chart with 1.6 billion units sold for N6.4 billion, Fidelity Bank traded 31.0 million units worth N589.3 million, GTCO exchanged 28.3 million units valued at N2.5 billion, Zenith Bank transacted 27.1 million units for N1.6 billion, and Ecobank traded 21.9 million units worth N744.3 million.
By Adedapo Adesanya
The Naira marginally depreciated against the United States Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEM) on Thursday, December 4 amid renewed forex pressure associated with December.
At the official market yesterday, the Nigerian currency lost 0.01 per cent or 18 Kobo against the Dollar to close at N1,447.83/$1 compared with the previous day’s N1,447.65/$1.
It was not a different scenario with the local currency in the same market segment against the Pound Sterling as it further shed N15.43 to sell for N1,930.97/£1 versus Wednesday’s closing price of N1,925.08/£1 and declined against the Euro by 20 Kobo to finish at N1,688.74/€1 compared with the preceding session’s N1,688.54/€1.
Similarly, the Nigerian Naira lost N5 against the greenback in the black market to quote at N1,465/$1 compared with the previous day’s value of N1,460/$1 but closed flat against the Dollar at the GTBank FX counter at N1,453/$1.
Fluctuations in trading range is expected to continue during the festive season as traders expect the Nigerian currency to be stable, supported by intervention s by to the Central Bank of Nigeria (CBN)in the face of steady dollar demand.
Support is also expected in coming weeks as seasonal activities, particularly the stylised “Detty December” festivities, will see inflows that will give the Naira a boost after it depreciated mildly last month, according to a new report.
“As the festive Detty December season intensifies, inbound travel, tourism spending, and diaspora inflows are expected to provide moderate support for FX liquidity,” analysts at the research unit of FMDA said in its latest monthly report for November.
Traders cited by Reuters expect that the Naira will trade within a band of N1,443-N1,450 next week, buoyed by improved FX interventions by the apex bank.
Meanwhile, the crypto market was down as the US Federal Reserve’s preferred inflation gauge, core PCE, likely rose in September—moving in the wrong direction. However, volatility indices show no signs of major turbulence.
If the actual figure matches estimates, it would mark 55 straight months of inflation above the US central bank’s 2 per cent target. The sticky inflation would strengthen the hawkish policymakers, who are in favour of slower rate cuts.
Ripple (XRP) depreciated by 4.5 per cent to $2.08, Solana (SOL) went down by 3.8 per cent to $138.11, Litecoin (LTC) shrank by 3.1 per cent to $83.23, Dogecoin (DOGE) slid by 2.5 per cent to $0.1463, Cardano (ADA) declined by 2.1 per cent to $0.4368, Bitcoin (BTC) fell by 0.9 per cent to $91,975.45, Binance Coin (BNB) crumbled by 0.9 per cent to $899.41, and Ethereum (ETH) dropped by 0.7 per cent to $3,156.44, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) closed flat at $1.00 apiece.
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