Welcome to Results Sheet, a newsletter focussed on the interim and audited results released by companies quoted on the Nigerian Stock Exchange.
Despite being an advocate of fundamental analysis, it is often an onerous task sifting through over 100 pages of financial statements published by companies. To understand the contents, one must be really patient and have the expertise to analyse financial statements and relate the numbers with some of the disclosures contained in them. So, it is quite easy to appreciate why a lot of people prefer to just grab the headline numbers and do not bother with flipping through the pages of financial statements.
This newsletter is for retail investors who are looking for the key details in a financial statement but do not have the time or expertise to read all that wonky stuff. It is also for you, if you are a discerning investor looking for any information that can help bridge the asymmetric hole that is typically the bane of smart investing.
After today, you may not be able to get this Newsletter on Nairametrics except via subscriptions.
1. MAIN STORY
Nestle and the Water Factory
Nestle released its first quarter results and as expected, they did not disappoint. Earnings per share was up 2.9% to ₦10.85 compared to ₦10.55. More importantly, revenue rose 10.3% year on year and I am glad for that.
Perhaps you are thinking, “this compares to a 69% rise in revenues in March 2017, so why is 10% so great?” In 2017, Nestle’s revenues were largely driven by price increases and not necessarily volumes. To counter a difficult inflation laden 2016, they had to raise prices. It is also important to note that 2016 was a very low base for Nestle.
So long as Nestle grows its revenue enough to maintain a gross profit margin above 35%, then I believe that they are doing just fine. The company also recently launched a slew of products such as Nestle Milo (ready to drink) RTD, Maggi Naija Pot, and Golden Morn Puffs. We will be tracking these products to see how they are faring in key markets across Lagos.
Nestle also dropped a bombshell in its Q1 results. The company disclosed that it had taken a ₦3.8 billion loss provision on its new Water Factory in Abaji Abuja. This was a rude shock to me as I had all the while thought that the factory was producing already and that the company was starting to make some money from it. According to Nestle, “the expected business growth and gain of market share for the factory has not been realised and outlook for future expansion is below estimates.” The company tested the factory’s facility for impairment and recorded an impairment loss of ₦3.4 billion in respect of related property plant and equipment.
Nestle may have reported a profit of just over ₦13 billion if it had not taken on that provision. Nevertheless, it is a good thing that they have acknowledged the failure recorded in this water plant. Consumer business is very challenging and competitive even if you are a Nestle.
In terms of share price appreciation, Nestle is currently trading at ₦1,596 with a price earnings multiple of 32x and price to book at 27x. This is as expensive as it gets for this stock and I don’t see any more upside, at least until they release their next results. Something inside me suggests that Nestle might raise equity in the nearest future. Most of its loans are related party loans and a conversion into equity may trigger a price rally. Just saying.
2. Cement Co Northern Nigeria (CCNN)
Officially the best performing stock on the exchange, the stock is up 385% in the last one year and still trading at 10x earnings per share. The dilemma here now is whether to still buy this stock or just admit that I lost a massive opportunity to make money. Their latest results provide a guidance so let’s look at the talking points.
The company reported a revenue of ₦5.39 billion up 25%, year on year. Earnings per share also doubled to 86 kobo per share. This is basically in line with the earnings growth recorded in the full year ended December 2017. It is interesting to also note that volumes have been in line with production.
CCNN also has little debt and has ₦2.44 billion in cash in the bank. So is this why the share price has been on the rise? I have seen far cheaper stocks with perhaps better potentials without this sort of capital appreciation.
My gut feeling is that the beneficial owners of the company, BUA Group may be working on a merger deal and investors are taking positions ahead of this announcement. BUA owns about 50.7% of CCNN via its subsidiary, Damnaz Ltd. To forge a merger, they might need to raise the stakes to over 60%. I might be widely wrong but I like to follow my instincts.
3. Diamond Bank postpone the evil day
The tier 2 bank issued a press release last week informing investors about yet another delay in the release of its full-year results. There is a bit of apprehension about what is going on in this bank but from what I gather, the company is likely going to be taking more provisions on its bad loans thus, the back and forth with regulators.
It’s been a tough ride for the bank and indeed investors in this bank. I first bought Diamond Bank shares at ₦7 at a time when we thought they had the SME banking model on lock.
How time has changed. Uzoma Dozie has been cleaning up some of the mess created in the Alex Otti era while still creating his own mess too. I still have a bit of hope about this stock but not at the current price earnings ratio. I should have this stock on my radar if it drops below 4x price earnings (provided it reports a profit in 2017, which is unlikely).
4. London and Presco’s Biological Issues
The Oil Palm company reported a surprising 25% drop in earnings per share. Earnings dropped to ₦3 per share compared to ₦4 a year earlier. Rummaging through the results, I observed that the problem was with the revenues from CPO (Crude Palm Oil).
The company’s CPO sales to UK dipped by 76% to ₦468 million and affected bottom line. Nigerian CPO sales did rise 13% to close at ₦6.1 billion but it could not make up for the decline in overseas sales. Gains from biological assets also declined to just ₦96k. Presco has over the years relied on this accounting entry to declare profits. Sometimes it works and other times it doesn’t. The latter is what investors are experiencing.
5. Fidelity Bank scouting for more capital
They finally released their earnings during the week and as expected, earnings per share was up 86% to 65 kobo per share. The stock is also up 184% in the last one year and is one of the better performers this year. At a price earnings ratio of 2x, buying this stock is a no brainer. There would be a little more analysis about the results in our subsequent newsletter, so watch-out for that.
The company also announced that it was going to raise capital from the debt market. The bank said that they were looking to raise funds via commercial papers. Last year, they raised $400 million in Eurobonds which they deployed into trade finance and used part to refinance existing loans.
That’s all for the week. Have a profitable week ahead.
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How does a bank make N19 billion a month?
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers.
How does a Financial Services Group make N19b a month, post a Profit After Tax figure of N230b in an environment where global commerce virtually ground to a halt in 2020?
The Zenith Bank Plc (Zenith) Year-end 2020 final results are a blockbuster, not just in the quantitative, but the qualitative as well. In all major headline numbers, Zenith posted growth on a Year-on-Year basis, specifically, Gross Earnings are up 5.2%, Net Interest Income up 12%, Customer deposits up 15.3%.
Somehow Zenith grew her loan book by 18% in a recession and reduced the volume of Non-Performing Loans in the same period. Zenith was also able to post a higher revenue number from non-interest income even as yields on fixed-income fell across Nigeria. I must stress, Zenith has posted these results by servicing her target segment of the high-end corporates in Nigeria.
So how did Zenith achieve this? I want to do a deep dive into how to make profits in a recession. However, it is important to start with a background on how banks make money which is basically in two ways;
- Interest income: which is income generated from the bank gathering deposits from customers and investors and “renting” out these funds to individuals and corporates for a fee called interest. Interest Income is seen as the main business of banks. It is a measure of how well the bank has fine-tuned its people, process, and systems to generate returns from a commodity called cash.
- Non-Interest Income: This is the income the bank generates from deploying its brands and people to juice revenues from activities that do not necessitate a transfer of cash. For Example, a bank asset management business leverages the bank’s skillsets to earn fees by providing investment advice to clients. Does a business want to expand? The bank can advise on the process to make that happen.
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers. This allows the bank generate a spread between cost and revenue. The bank’s interest spread can be magnified by the number of quality loans it creates as Interest Income rests also on the quality of the loan book. Positive spread drives the funding of other banking services and is supported by the banks internal competencies to manage risk
So a bank makes profits by
- Attracting cheap deposits
- Earning positive spread
- Providing value addition for a fee
- Effective Risk Management
All these have to happen simultaneously. A bank that sources expensive deposits by paying higher rates generates a lower spread. Lower spread exposes the bank to cost overruns and will prove fatal to long-term growth.
With this in mind, let’s review Zenith FY 2020 Performance
- Attracting Cheap Deposits: In 2019, Zenith’s total interest expense, which represents how much it paid to get deposits was N148b, that figure dropped in 2020 to N121b. this means the bank was able to grow deposits by 25% but at a lower cost. How? Zenith changed her deposit mix, reducing borrowed funds/leases and time deposits by 41% and 38% respectfully and increasing the share of current accounts by 155%. By swapping the deposit mix, the bank’s cost of funds ratio fell by 18mn%.
- Earning Higher Spread: Zenith grew Net Interest Income by 12.2% in 2020. This figure represents income earned from the deposits and investments of the banking group. Again, this was achieved by asset mix reorganization. In the face of falling rates especially on shorter-dated FGN instruments, Zenith shifted allocation from Treasury bills to longer-dated FGN bonds which paid a higher yield. Zenith’s Non-interest Income also grew to N275b a 5% jump from 2019. This is driven largely by extraordinary items including foreign currency revaluation gain, which is the gain realized from the revaluation of foreign currency-denominated assets. I must highlight this. Zenith was able to post a gain of about N43b which is a 256% gain from FY 2019 based on the Naira being devalued to the US Dollar.
- Providing Value Addition: Value addition will include all non-core banking services Zenith Group provides to the public including subsidiaries like the Zenith Penson Custodians which has N4t in assets under custody. Commission on agency and collection was a big contributor to Zenith’s non-core banking revenue.
- Risk Management: Zenith was efficient in deploying its internal competencies to minimize and avoid risk and impairments from the ordinary and extraordinary course of business. Zenith like other financial institutions saw a pullback in commercial activities from her clients. Take the Commerce subsector, the Non-Performing Loan share in that sector grew from 9% to 24%. Zenith, booked an increase in the number of NPLs by volume to N125m in FY 2020 but the bank was able to keep the NPL ratio down to 4.29%. An extraordinary feat.
Overall, the bank was able to navigate a difficult year and post a good return and a handsome dividend of N3 to investors. Zenith was able to achieve all this while increasing the staff strength by 4.6% to 7555 employees.
However, there are red flags as well:
- Net Interest Margin was down in FY 2020 as yields declined. If yield continues to stay muted, can Zenith keep finding profitable avenues to invest that N5.34 deposit base?
- Interest income positive in FY 2020 at 420b but when compared to 2017, interest income is falling.
- If you ignore the revaluation gain, then Non-Interest income will be considerably muted, possibly negative in FY 2020
- Fees on electronic products fell 36% in an environment where online banking has been not just sound business practice, but life-saving as well.
Overall, in an environment with months of local and international shutdowns, Zenith has posted good numbers and demonstrated it is possible to eke out gains from a hard environment. When one looks at the dividend yield, P.E. Ratio of the bank, for me, this is a Buy.
Why there is a massive sell-off of US stocks
The United States 10-year Treasury yields rose to a new one-year high of 1.5% on Thursday sending the equities market on a bearish run. The US Dow Jones Industrial Average was down 1.5% as of 7.30 pm on Thursday falling by a whopping 500 points. The S&P 500 and NASDAQ were both down 2% and 2.75% respectively ad the sell-offs intensified.
Global bond prices also fell lower on Thursday and investors around the world sold off massively as they feared higher inflation could erode bond yields.
What is going on?
Investors are worried that massive injection of stimulus in the US and in most European countries could trigger higher inflation which will erode profits on bond yields assuming their fears materializes.
US inflation rate for the month of January 2021 was 1.4% the same as the month of December 2020. US inflation was as high as 2.3% a year ago yet investors remain worried. In response to this fear, bond yields have hit multiple one-year highs. This fear is has now spread to the US equities market.
US President Joe Biden is seeking a $1.9 trillion stimulus package which many had hoped will please the market. However, it appears investors are rather afraid that it could trigger a “reflation” eroding whatever positive jolt it could have had on the wider economy.
What this means for your stocks
A rise in interest rates is triggering a massive sell-off in US stocks ad investors fear a return to higher inflation could signal the market could be entering a bearish era. Stocks have hit multi-year highs since January as investors poured in billions of dollars into stocks. If this sell-off persists then investors in US stocks could see the value of their portfolio plummet.
Tech Stocks are particularly affected by the sell-offs with investors dumping heavyweights like Netflix, Tesla, Amazon, Microsoft, Facebook, Google all falling. Meme stocks, an acronym for stocks popular with Reddit and Twitter retail investors have also suffered losses.
Nairametrics SSN subscribers are advised to track their portfolios accordingly.
Nairametrics | Company Earnings
- Custodian Investment Plc posts N12.69 billion profit in FY 2020.
- 2020 FY Results: Nestle posts N39.2 billion, as earnings per share prints N49.47
Nestle Nigeria Plc released its audited […]
- 2020 FY: WEMA Bank posts N5.06 billion profit after tax as earnings per share prints at N13.1.
Wema Bank Plc released […]
- 2020 FY: Zenith Bank post N230.6 billion profit after tax
Zenith Bank Plc released its […]
- Mutual Benefits Assurance Plc boosts post tax profits by 25.9%
Mutual Benefits Assurance Plc released […]