The current bearish trend on the Nigerian Stock Exchange offers an opportunity for investors to rebalance their portfolios — sell stocks that have over-performed and buy stocks trading at a discount.
Buy/Sell/Hold is a weekly column which samples opinions on a variety of stocks that are picked from gainers and losers of the previous week, as well as analyst reports by several investment houses.
Ikeja Hotel Plc: SELL
Latest results: Results for the first quarter ended March 2018 show that revenue increased from N2.7 billion in 2017 to N3 billion in 2018. Profit before tax increased from N80 million in 2017 to N328 million in 2018. Profit after tax increased from N40 million to N220 million.
Current Share price: N2.70
PE ratio: 5.34X
Price to Book: 1.33
Year to date: 51.69%
One year: 51.69%
A technical suspension placed on the company’s shares was lifted last week.
Ikeja Hotels is a SELL in Nairametrics’ opinion.While the stock is trading at a lower PE ratio compared to its peer, Transcorp Hotel, with a PE ratio of 19.52 times earnings, the rise in the price has been largely due to the lifting of a technical suspension last week. The stock is also trading at an all time high currently. Investors would be better off waiting for a dip before entering.
AIICO Insurance Plc: BUY
Latest results: Results for the first quarter ended March 2018 show that gross premium written increased from N7 billion in 2017 to N10.7 billion in 2018. Profit before tax increased from N673 million in 2017 to N973 million in 2018. Profit after tax rose from N547 million in 2017 to N805 million in 2018.
Current Share Price: N0.57
PE Ratio: 2.86x
Price to Book: 0.46
One year: 20.78%
Analysts at Afrinvest have a reduce rating on AIICO. The firm has a new target price of N0.52 per share, which is lower than its current share price of N0.57. They expect a downside of 8.8%.
AIICO is a BUY in Nairametrics’ view. The stock is currently trading 35% below its year high of N0.88. AIICO is also trading at a discount compared to peers like AXA Mansard which is trading at 12 times earnings and Continental Reinsurance with a PE ratio of 4.72 times earnings.
Flour Mills of Nigeria Plc: HOLD
Latest Results: Results for the 9 months ended December 2017 show that revenue increased from N389 billion in 2016 to N427 billion in 2017. Profit before tax also rose from N10.2 billion in 2016 to N19.5 billion in 2017. Profit after tax increased from N7.4 billion in 2016 to N13.2 billion.
Current Share Price: N30.10
PE Ratio: 6.29x
Price to Book: 0.73
One year: 67.73%
The company last month signed a partnership agreement with Corteva Agriscience for the development of maize seedlings.
Analysts at Afrinvest have a HOLD recommendation on the stock. They have a target price of N31.57, which is 7% above the current price of N29.50 as at the date of the report.
Analysts at Morgan Capital have also placed a HOLD recommendation on the stock. They have a target price of N32.39, which translates to a 9.81% upside from its share price of N29.50 as at when the report was prepared. Their view is based on a 12 month target price.
Flour Mills is a HOLD in Nairametrics’ view. While the company’s results have shown superb improvement from the prior period, the stock is trading at 20.7% from its year high of N38. Current bearish sentiments in the market mean that it could drop even further.
FCMB Plc: BUY
Latest results: Results for the 12 months ended December 2017 show that gross earnings dropped from N176 billion in 2016 to N169 billion in 2017. Profit before tax fell from N17 billion in 2016 to N9.4 billion in 2017. Profit after tax also dropped sharply from N14.3 billion in 2016 to N9.4 billion in 2017.
Current Share Price: N2.00
Pe Ratio: 3.82x
Price to Book: 0.22
One year: 75.16%
Analysts at Afrinvest have placed a SELL rating on FCMB. They have a target price of N1.66 which indicates a downside of 24.5% from its current price of N2.20 as at when the report was prepared.
Analysts at Morgan Capital have a BUY rating on the stock. They have a 12-month target price of N3, which indicates a likely upside of 36.54% from the price of N2.20 as at when the report was prepared.
FCMB is a BUY in Nairametrics’ view. The stock is currently trading 44% below its year high of N3.61, and also trading at PE ratio within the range of its peers such as Fidelity Bank.
This is not a buy sell or hold recommendation. Remember to consult a competent financial analyst or stockbroker if you need help with your investment decisions.
Exchange rate falls across the forex markets as CBN devalues the naira
Naira depreciated against the dollar at the Investors and Exporters (I&E) window.
Nigeria’s exchange rate at the NAFEX window depreciated to N386 during last intraday trading on Friday, August 7, 2020. In another development, the exchange rate at the parallel market dropped marginally on Friday as it closed at N475/$1 after exchanging as high as N486/$1.
Parallel Market: At the black market where forex is traded unofficially, the Naira depreciated against the dollar to close at N475/$1 on Friday, according to information from Abokifx, a prominent FX tracking website. This represents a N1 drop when compared to the N474 to a dollar that it exchanged on Thursday, August 6. However, in a deeper drop, Nairametrics forex tracker obtained a price as high as N486/$1 from some traders suggesting market volatility still persists.
NAFEX: The Naira depreciated against the dollar at the Investors and Exporters (I&E) window on Friday, closing at N386/$1.
- This represents a 50 kobo drop when compared to the N385.50 rate close that was reported on the last trading day, Thursday, August 6.
- The opening indicative rate was N385.55 to a dollar on Friday. This represents a N1.33 gain when compared to the N386.88 to a dollar that was recorded on Thursday.
- The Naira fell to as high as N390 during intraday trading before strengthening to the closed rate of N386. It also sold for as low as N359/$1 during intraday trading.
Forex is sold at several prices and at different times during the day.
Forex Turnover: Meanwhile, forex turnover at the Investor and Exporters (I&E) window recorded a massive increase on Thursday, August 6, 2020, as it rose by 916.77% day on day.
- According to the data tracked by Nairametrics from FMDQ, forex turnover increased from $10.49 million on Wednesday, August 5, 2020, to $106.66 million on Thursday, August 6, 2020.
- The forex turnover for the day is the highest daily volume recorded in about 3 weeks. The dollar supply which had remained weak improved significantly during the day’s trading.
- The average forex sale for last week was a low volume of about $32 million which is a slight improvement on the $27 million that was recorded the previous week. FX turnover which topped the $100 million mark after weeks of very low volume, still falls short of the over $200 million turnover that was recorded in January.
- Total forex trading at the NAFEX window in the month of July was $937 million compared to $875 million in June.
- The exchange rate disparity between the official NAFEX rate and the black-market rate widened further on Thursday staying as wide as N88.5. Nigeria maintains multiple exchange rates comprising the CBN official rate, the BDC rates, SMIS, and the NAFEX (I&E window).
Exchange rate unification remains on the cards and yet to be implemented weeks after the central bank governor confirmed it will be executed.
Nigeria’s airspace remains closed to commercial international flight operations and won’t be open till October 2020. Foreign travel has often been a source of demand for the greenback.
- The recent demand for dollars at the parallel market is thought to be fueled by speculators.
- The parallel market also caters to forex trades through wire transfers especially for buyers who cannot fulfil their dollar demands at the I&E window or the SMIS window.
- The exchange rate for wired transfer is often at a premium to the black market rate.
Forex Challenges: Last few weeks have been most challenging for the foreign exchange market as it witnessed very low liquidity. Although there was some improvement in dollar supply this week, the downward slide of the naira against the greenback and some other major currencies still persists due to tightened liquidity in the system.
- According to a report from FSDH research, forex inflows into the I&E window had dropped significantly in the second quarter of 2020 on the back of lower foreign portfolio inflows.
- Although there was a slight improvement in the month of July, the turnover of $937 million is a far cry from the $3.19 billion, $5.02 billion and $3.7 billion turnover that was recorded in the months of January, February and March respectively before the lockdown which was triggered by the coronavirus pandemic.
- The low oil prices have constrained the CBN’s capacity to intervene further in the foreign exchange market as dollar inflow still remains very low.
The exchange rate has faced significant pressure in both the NAFEX window and the black market. The pressure stemmed from declining external reserves and low oil price.
Nairametrics had reported that in a move seen as a step towards the unification of the exchange rate, the Central Bank of Nigeria (CBN), devalued the official exchange rate to N380/$1 from N360/$1. The adjustment which was formally done on CBN’s website suggests the CBN may have moved to unify the exchange rate in line with the promise earlier made by the apex bank’s Governor, Godwin Emefiele.
This is the second devaluation of the official rate since the crash of oil prices and the outbreak of coronavirus pandemic. The first one occurred in March when the official rate was adjusted from N307/$1 to N361/$1.
FX utilization fell to its worst on record in April
Forex Utilization in Nigeria fell by a whopping 80% in April as the economic shuttered in reaction to the covid-19 pandemic.
Forex Utilization in Nigeria fell by a whopping 80% in April as the economic shuttered in reaction to the COVID-19 pandemic. According to data from the central bank, Nigeria’s forex utilization fell to just $1 billion in April, the month where Lagos State and the Federal Capital Territory, FCT, shut down economic activities and movement.
The CBN reports forex utilization in terms of the amount of forex utilized for invisible and visible imports. In April 2020, only $713 million dollars was used for visible imports from major sectors such as Industrials, Mineral, Manufacturing, Agricultural, Oil sector and transport. This compares to about $1 billion in March. The Industrial, Food and Manufacturing sector alone gobbled up $548 million compared to $791 million in March.
Worst hit was the invisible sector, which includes financial services, business services, health and the general services sector in general. it is termed the invisible sector because the forex is utilized for payment of services unlike the visible sectors where forex is utilized for importation of equipment, assets and other physical products.
The invisible sector reported a forex utilization of $361 mullion in April compared to $4.3 billion in March and $3.6 billion in February. This is the worst drop since 2008 the earliest date we have for this dataset. Whilst the drop was recorded across all sectors, the worst hit was the financial services sector. Forex utilization fell from $4.2 billion to just $331 million. The sector constitutes a bulk of forex utilized monthly.
What this means: Forex utilization is a function of how much forex is available for businesses to use for their transactions with counterparties across the world. The economic shutdown in April affected currency markets as forex sales fell across all forex windows.
The impact in April is severe and is probably remained worse throughout May, June and July. The CBN is one of the largest forex suppliers in the country but has staved off any pressure to sell citing limited economic activity in the country and around the world. Pent up demand for forex is thought to be between $1.5 -$5 billion.
Whilst there is a recorded drop in forex utilization as officially recorded, it is likely that some of the demand may have passed through the black market. It is also no surprise that forex utilization also fell between April 2016 and January 2017 as Nigeria faced a currency crisis before it devalued to N307/$1 and launched the NAFEX window.
Brewery sector: A quarter to forget
Beer makers saw their revenues plummet in the second quarter of 2020 as the economic shut down extinguished sales.
The quarter ending June 2020 will be one to forget for Nigeria’s struggling brewery sector. Whilst the negative effect of COVID-19 is still being reported across every sphere of the economy, the brewery sector was always one of those that were expected to suffer the most.
The latest results from two of the industry giants, Nigeria Breweries and International Breweries confirm our worst fears. Combined revenues for both companies was N93.9 billion, representing a 22% drop year on year. Both companies reported revenues of N120, 4billion in the corresponding quarter of 2019.
Disaggregated, Nigeria Breweries reported a 21% drop to N68.6 billion and International Breweries 24% drop in revenues to N25.2 billion. Guinness is yet to release its quarter ending June 2020 results which happens to be its year-end. Ahead of its release, the company issued a profit warning as it anticipated the worst. The drop in revenues recorded in the Brewery sector is not a surprise. With most parts of the country in complete economic lockdown, beer sales are expected to drop significantly.
As expected, the fall in revenues crashed margins significantly. While Nigeria Breweries was able to eke out a tiny N70 million in pre-tax profits, International Breweries lost N4.2 billion. Nigeria’s Breweries actually fared worse when you consider that they reported a N7.9 billion in 2019 and N12.3 billion in 2018. Could it get any worse?
Beer companies have always posted some of their best revenues in the second quarter of the year and struggle in the third. With results this bad already in the second, things could only get worse in the third quarter. Though, economic activities are gradually picking up, entertainment life which it heavily relies on remains in comatose.
The industry has been struggling with dwindling sales and thin margins for years as younger Nigerians ditch beer for spirits, which are often cheaper, do not bloat the stomach and are quicker to intoxicate. Increase in beer sales are also seemingly positively correlated with an uptick in social events such as weddings, parties and birthday ceremonies. Hotels, bars, clubs and most entertainment centres remain shut since March. Some are expected to reopen in the coming weeks as the government eases lockdown. But till then, beer making companies are clutching on straws.
COVID-19 could be blamed for the industry’s woes, but a changing demographic still poses an existential threat to the sector. In fact, COVID-19 only showed how urgently they need to pivot away from relying on outdoor events to drive sales. Beer drinking is purely consumer product and needs to be pitched as such.
Rather, than advertise beer as a drink for bars during live events, it should be sold as a “must-have” beverage in the evening during family time. It should also be pitched as a must-have staple for house parties and close family gatherings or even casual remote working settings. The packaging should also gear off for a makeover. Beer dispensers anyone?