Welcome to Follow The Money; a weekly review and preview of the Nigerian Investment space. We focus on the key issues in the Nigerian Economy and as it affects the Stock and Money Market in Nigeria.
ONE – Why are they selling?
What’s an earnings season without the FUGAZ? ICYDK, that stands for First Bank, UBA, GT Bank, Access Bank and Zenith Bank. Also known as Tier 1 banks, they dominate the banking sector in Nigeria. Despite impressive results from Zenith Bank and GT Bank, the market was having none of it. Zenith Bank, for example, lost 10.6% while GT Bank closed the week 5.87% lower. I got messages from some people struggling to understand what must have happened? Why are they selling they inquired? For those of us used to the Nigerian Stock Market and its irrationality, it is nothing new. This Market hardly reacts to fundamentals even if they are fantabulous.
For these banks, the impressive results have been priced in. Very few expected anything less! Some felt perhaps it was the dividends. Zenith’s N2.45 dividend gives it a dividend yield of 8% at the week’s opening price of 8%. GT Bank was even worse with its N2.4 dividend yielding just 5%. This is still within their historical averages. My take is to watch what happens as Access Bank and UBA results roll in. I’d stick to my GTB and Zenith if I owned them. Their PE ratios are still below 10x and even though there is a limited upside for another double-digit gain, it still helps balance portfolios.
TWO – of The Best
Stanbic and NASCON are one of the best performers this year thus far, but the market sent them messages. As NASCON topped its impressive results with a dividend announcement of N1.50., the market also reacted negatively as the share price tumbled 15.4% to N20.2. So what happened? The dividend of N1.5 suggests an indicative yield of 6.5%. Not bad for a company that has no debts and continues to post profits year on year. Perhaps at a Price Earnings of over 10x, NASCON was due a correction.
But Stanbic proved resilient and closed 3% higher. Reason? Look down South! The South Africans who own the majority of its shares are doubling down on their investments and are seemingly impressed with their 2017 performance. That paltry 50 kobo dividend is not going to deter them just yet. And yes, FRCN can shove up their…
THREE – A common problem
So guess who topped the losers chart last week? Yes, you guessed right, it was Japaul. After gaining over 100% this month, it lost 30.9% of its value to become the worst gainer this week. Another big loser this week was Unity Bank. The bank lost 21.5% of its value as investors sold off. The stock has now lost 9 out of 12 trading sessions this March and it’s taken just under 4 million units to shake things off.
Unity Bank and Japaul have two similarities in that investor appetite for the stock seem connected with to Milost Global, the US-based company that has been promised to invest billions of hundred’s of millions of dollars in these companies. But it appears a Businessday article last week must have panicked investors who now have reasons to doubt Milost.
FOUR – Price Joy, rate woe
Last week, the National Bureau of Statistics released Inflation Numbers and we were happy to see that inflation rate has dropped to 14.33%. Still far from single digit but a sign that the economy is perhaps getting better, at least for now. But there is an implication to lower inflation rates.
Rates on Treasury bills are only bound to fall further down and last week’s auction was another clear indication of where rates are headed. Last week 91 days went for 11.75%, 182 days 13% and 364 days 13.18%. As inflation rate drops, expect treasury bills rates to drop.
Implication? This could augur well for the stock market as investors will seek for the next best Alpha. But it’s important to note that Corporate Bonds is also a valid competitor to stocks. Most of the major corporates are looking in that direction.
FIVE – Baren Macros, More Earnings
We don’t expect to see much in terms of data on the Macro-economic front. Most of the major data has been released by the National Bureau of Statistics and we can only wait again until next quarter for anything major. But we are expecting more results this week and Access Bank and UBA should be released this week. Access Bank results could drop on the 22nd while UBA could drop the next day.
I don’t expect any major upsides for the two stocks but my money is on Access Bank for upsides in the next few months. Let’s hope they don’t disappoint with dividends. Oh yes, Dangote Cement and Dangote Sugar could also drop this week.
SIX – Oando is up to something
So I got a scoop that Oando has secured the services of Ensco Plc one of the largest Drilling firms in the world. The company is going to deploy a state of the art floating Rig in Nigeria and which cost a whopping $1 million per day to hire. Don’t worry, we understand Oando will not be paying for it.
From what I understand, Ensco and Oando Energy Services jointly own Ocean Deep Drilling ESV Nigeria Limited (“ODENL”) and will be using the vehicle for drilling services in Nigeria. As Oando’s partner, Ensco has access into some of the most productive oil wells in Africa and the world, while Oando leverages on their expertise and technology to improve their earnings. What does it mean for Oando share price? Not much!
SEVEN – What to buy
NEM was a good buy and it’s looking like I should have bought more. Another Insurance Stock on my watchlist is Custodian and Allied Insurance. Why them? They are the most diversified quoted insurance stock and have a shot at making me proud. Presco remains on the watchlist while Dangote Sugar is getting a look in. Access Bank is also on my buy list despite the lack of interest in recent weeks. The market reacts slowly sometimes.
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Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
|Return on Assets %||Return on Equity %||Return on Invested Capital %||EBITA Margin %||Net Margin %||Debt to Assets||Long Term Debt to Assets|
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
Do follow @FinPlanKaluAja1
This is not investment advice, this is not a recommendation to buy or sell. Past performance is not a guarantee of future performance. Speak with your adviser before investing. Equity is risky.
Is something fishy going on at Custodian Plc?
Custodian stock hit a year high just as it announced a Convertible Loan Instrument set to be approved at its AGM.
Custodian Plc, one of the largest insurance companies in Nigeria is currently trading at a new year high of N7.10 and is up 21% year to date. Nairametrics Blurb team has in recent days noticed an upsurge in its share price especially since the company announced its AGM.
As we pen this article, about 2.9 million units have exchanged hand at a share price of N7.
The stock is included in the Pension Index and by some measure quite illiquid. It is also one of the stocks recommended in our Premium Service Stock Select Newsletter thus the need for further introspection.
Custodian Investment AGM
Typically, when companies announce AGMs we are keenly curious as this is where decisions that can ultimately affect shareholders (especially smaller retail investors) are approved.
In its recent filings, the company stated as follows in item 10.
That the Board of Directors of the Company be and is hereby authorised to:
(a) raise the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars), as additional capital through a convertible loan instrument;
(b) convert the loan in the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars) into shares in the Company (the “Conversion Shares”) at a conversion price, being the higher of N6 per share or the 12-month historical average daily share price of the Company derived from the Daily Official List of The Nigerian Stock Exchange (for the period ending on March 23, 2021), subject to adjustment upon the occurrence of certain adjustment events;
(c) allot the Converted Shares to the Lender upon the exercise by the Lender of its right to convert the Loan into shares in the Company, subject to applicable law; and
(d) take steps necessary or reasonably desirable to give effect to the foregoing resolutions and for effecting any transactions pursuant thereto, including the appointment of professional advisers, and the obtention of relevant regulatory approvals.
What this means?
In simple English, the directors of Custodian are seeking the approval of its shareholders to borrow $15 million (N6.1 billion) in convertible loan instrument.
A convertible loan instrument is simply a loan that you can convert into shares if the lender so wishes. The share price for conversion are predetermined and in this case, they stated N6 per share or the 12-month historical average daily share price of the company’s stock.
If the lender does decide to convert the loans to shares at the current share price of N6 per share, it means about 1 billion shares will be offered to the lender, an equivalent of 17.4% of the total outstanding shares of the company. This loan is in effect, a potential dilution of existing shareholders of the company if it is approved at the AGM.
So why is the company seeking a convertible loan or even diluting its shareholders?
Fishing around for why
Typically when a company decides to raise money via a convertible loan instrument, they are looking for lower interest rates, debt that avoids the burden of periodic repayment, and/or looking to delay when the actual equity is issued. There are also tax considerations at play but not as significant as the ones mentioned above.
Except, Custodian is looking to purchase another asset, after it bought UPDC, we do not understand why it will be looking to raise capital huge enough to dilute existing shareholders. It also did not explain why it is seeking to raise the said capital in its AGM Notice, a slight departure from the norm in cases like this.
- Custodian is also highly capitalized with a Net Asset of about N46 billion and a balance sheet size of N176.1 billion (after the acquisition of UPDC) as of 2020.
- Suffice to add that the company recently paid shareholders about N2.6 billion in dividends, making us wonder why it is seeking to dilute shareholders when it could have just ploughed that amount to its capital raising needs.
- In fact, the dividends paid in 2020 was just 21% of profits, meaning it had retained about N10 billion in profits made during the year. Again, why does it need N6.1 billion in loans?
- Custodian also has a thriving insurance business which fetched it about N58 billion in gross premium income out of which N32 billion was from non-life. Again, why does it need N6.1 billion on convertible loans?
- The company currently carries a debt of about N5.5 billion which was inherited from its acquisition of UPDC. The debt is mostly a bond issued at an interest rate of 16% per annum and due for full liquidation in 2023.
- There is no rush to pay down this debt.
We are lost as to why the company is looking to raise this capital and can only now think of two reasons. Firstly, could it be the existing shareholders looking to tighten their stake in the company? Custodian’s majority shareholders are Gratitude Capital Limited and Mikeade Investments Limited with 22.48% and 15.72% respectively.
- The company CEO Oluwole Oshin represents Gratitude Capital while Business Mogul Micheal Ade (Elizade) owns Mikeade Investments Limited. Could it be either of these two investors looking to up their stakes?
- There could also be a reason for this back door approach. About 74.5% of the company is owned by just 20 shareholders so it is clear that increasing majority stake will be difficult to achieve.
- The other reason is perhaps an institutional investor looking to acquire a significant stake in the company through the backdoor. Is this plausible?
Well, these are speculations that only Cusdotian can confirm. We hope they do so as soon as possible.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- Cornerstone Insurance Plc notifies stakeholders of late submission of financial statements.
- NSE approves delisting of 11 Plc shares.
- Berger Paints Nigeria Plc reports a 67% decline in Profits in FY 2020.
- MTN Nigeria raises N73.5 billion from CP Issuance to finance operations.
- Jaiz Bank proposes dividend worth N884 million for shareholders.