The Nigerian stock market did well in 2017; it was reported to be one of the best performing ones in the world as the Nigerian Stock Exchange returned 42% in 2017.
Though this trend is likely to continue in 2018, it is advised that we invest wisely by picking the winners while shedding those that look risky, from the beginning of the year.
3 stocks to buy
FCMB
Tier two banks in the banking sector have witnessed limited upsides (with the exception of Stanbic IBTC which appreciated by over 100%) when compared to their bigger counterparts in the country. Tier one banks are the 5 biggest banks by shareholders funds and include FirstBank Nigeria, United Bank for Africa, Guaranty Trust Bank, Access Bank and Zenith Bank. Other banks are collectively known as tier two banks. Investors will most likely take positions in anticipation of dividend payments within the first quarter of the year.
While in 2017, profit before tax dropped from N14.1 billion to N6.8 billion, this was largely due to the absence of N33 billion in extraordinary gains from foreign exchange. Impairments also dropped from N34.4 billion in 2016 to N12.6 billion in 2017.
FCMB is currently trading at 5.5 times earnings and has a price to book ratio of 0.1. Price to book ratio is gotten by dividing the latest stock market price of a stock by its book value per share. Book value per share is calculated by subtracting a company’s assets from its liabilities. A low price to book ratio means that a stock is undervalued.
Eterna Oil
The stock is currently trading at a price earnings ratio of 3.96, which suggests that there may still be room for significant upside. Results for the third quarter ended September, 2017 show that the company has exceeded its full year (FY) 2016revenue and earnings per share targets. Revenue as at September, 2017 was N125 million compared to N106 million earned in December, 2016. Profit after tax as at September,2017 was N2 billion, compared to the N1.4 billion made in December, 2016.
Earnings per share as at the third quarter ended September, 2017 was N1.55, compared to FY 2016 figures of N1.13. This suggests that the company could very likely exceed its 2016 dividend payment. Eterna paid a dividend of 30 kobo per share for the financial year ended December, 2016.
The Federal government, in a bid to maintain petrol prices at current level, is considering a special foreign exchange window for petroleum marketers, as well as tax incentives. These measures could lead to a rebound in profits for the various companies operating in this sector.
Caverton
Caverton had a fantastic 2017 which saw it recovering from its 2016 losses. Its 2017 results show that turnover increased from N14.4 billion in 2016 to N14.8 billion in 2017. Profit before tax also increased from a loss of N955 million in 2016 to N1.8 billion in 2017. The company last year signed a 5 year contract with Chevron Nigeria Limited to provide medical evacuation services.
Caverton is currently trading at a price to earnings ratio of 1.67 and a price to book ratio of 0.3. A price to earnings ratio is the current share price of a company divided by its earnings per share. A low price to earnings ratio often serves as an indicator that a stock is undervalued.
SELL
Cadbury Plc
2017 was a bad year for Cadbury judging by its results. While the company made a profit before tax of N701 million in the quarter ended September, 2017, it made a loss of N64 million,year to date.
A schedule of directors’ meetings for the year reveals that the board will approve Q4 2017 results and results for the 12 months ended December, 2017 on the 24th of January, 2018, and Q1 2018 on the 14th of March, 2018.
While the company could turn out a profit for 2017, its fundamentals remain weak and several analysts have stopped coverage of the company, due to this. Cadbury badly needs a change in strategy which the company has not signalled intentions to implement. It has few products in the market, which are facing intense competition.
Cadbury is currently trading at 48 times earnings, and has a price to book ratio of 2.81 which suggests that it is overpriced. If FY 2017 results are negative, the stock price may take a nose dive.
Oando Plc
Oando Plc has had the spectre of the Securities and Exchange Commission (SEC) hanging over its operations. The technical suspension slammed on the stock means that investors will be unable to benefit from the recent rally in the stock market, and positive developments in the downstream sector.
Though the company has returned to profitability, it remains highly leveraged – the company has a total debt of N735 billion and equity of N197 billion. Simply put, for every N1 of equity, Oando has N7 of debt.
Newrest ASL Limited
Newrest ASL’s principal service is the provision of catering services to international airlines operating in the country.The company also operates VIP lounges at the Muritala Mohammed International Airport (MMIA), Lagos and the NnamdiAzikwe International Airport, Abuja. In addition, its subsidiary, Newrest ASL Oil and Gas Logistics Ltd, provides oil and gas catering and logistics services to companies operating in the oil and gas sector in the country.
The company had a stellar 2016 return on the back of foreign exchange gains from its Rwandan subsidiary. Those were however absent in 2017; also, the company sold its 70% stake in the Rwandan subsidiary. For the 9 months ended September, 2017, profit before tax fell from N1 billion in 2016 to N189 million in 2017. Earnings per share also fell sharply from N1.62 in 2016 to N0.44 in 2017.
A price to book ratio of 1.32 suggests that the stock is overpriced.
