Last week the potential threat posed to Nigeria’s public sector finances from a little-known law case, launched by a little-known natural gas company called Process and Industrial Developments, became apparent after it was a revealed that a London-based hedge fund manager has purchased a stake in the claim. See page 2.
Last week, the NIFEX rate remained stable at NGN358.79/US$1. The NAFEX rate appreciated by 0.09% to NGN360.15/US$1. The US dollar in the NAFEX (inter-bank) market trades at a 0.38% premium to the NIFEX rate.
This month the Central Bank of Nigeria (CBN) has injected US$357.9m into the NAFEX market which is low compared with the trend late last year. The CBN’s FX reserves currently stand at US$42.9bn. We reiterate our view in Coronation Research: Year Ahead 2019, A tale of two halves, 15 January, that FX reserves are sufficient to ensure Naira exchange rate stability in 2019.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 7bps to 14.24%, and at 3 years rose by 6bps to 14.61%. The yield on a 364-day T-bill fell by 69bps to 14.34%. The yield on a T-bill with 3 months to maturity decreased by 58bps to 11.84%.
Last week Friday, the National Bureau of Statistics (NBS) released the inflation print for February with the rate dropping by 6bps m/m to 11.31% y/y. The fact that inflation more-or less held steady in February contrasted with earlier fears that election spending would force it up.
The price of Brent rose by 2.16% last week to US$67.16/bbl. The average price, year-to-date, is US$63.09/bbl, 11.99% lower than the average of US$71.69/bbl in 2018, but 15.23% higher than the US$54.75/bbl average seen in 2017.
According to Reuters, the Organisation of the Petroleum Exporting Countries (OPEC) is set to scrap its planned meeting in April and decide on whether to prolong oil supply cuts through to June, when the market would be able to evaluate the full impact of U.S sanctions on Iran and Venezuela.
The Nigerian Stock Exchange (NSE) All-Share Index recorded a loss of 2.45% last week, taking the year-to-date return to negative 0.92%. Last week Cadbury Nigeria (+9.09%), Sterling Bank (+6.38%) and Diamond Bank (+2.89%) closed positive while Zenith Bank (-11.02%) and International Breweries (-10.93%) fell. Last Monday Zenith Bank shares became ineligible for a N2.50 final dividend so the adjusted week-on-week decline was just 2.00%.
The equity market rallied 4.06% between the beginning of the year and February’s elections and has fallen 4.86% since. We maintain that there is value among selected stocks, particularly bank stocks.
P&ID’s risk to Nigeria
The ongoing court case between Nigeria and an oil and gas firm, Process and Industrial Developments (P&ID), dates back to 2010. P&ID is reported to have entered into a contract with the Ministry of Petroleum Resources of the Federal Government of Nigeria (FGN) in 2010 and, according to reports, the agreement obliged P&ID to build a natural gas processing plant while the FGN would build pipelines to bring untreated gas to the plant (gas which is otherwise flared in the course of oil production). P&ID alleges that: it invested US$40m in the project (though it did not actually build a plant); the FGN did not build the pipelines specified in the agreement; it (P&ID) is entitled to compensation for lost earnings as a result; the governing law is English.
The original arbitration in an English court in favour of P&ID was upheld in 2017 with a final award of just under US$6.6bn (Naira 2.4 trillion at today’s exchange rate), though with interest accruing so that the award is currently referred to as close to US$9.0bn (N3.2tn). The English court award is being applied in the US courts. Lawyers for the FGN have argued that the FGN is protected under the Foreign Sovereign Immunity Act (FSIA) and the FGN has been given leave to appeal to the US Court of Appeals for the District of Columbia Circuit.
It is not clear to us, at this stage, how the FGN’s appeal citing the FSIA has progressed. However, it was about the time of the FGN’s decision to use this defense that VR Capital Group was reported to have involved itself in the case by buying, according to Bloomberg (Friday, 8 March), a 25% stake in P&ID. The fact that VR Capital Group, a hedge fund specialising in distressed sovereign debt, has taken a stake in the claim underlines its seriousness, in our view.
The FGN has several options open to it, in our view: it could either negotiate or borrow from the international market to pay the alleged liability. A potential award of this size could have serious implications for Nigeria’s fiscal position, borrowing costs and even its foreign exchange position, in our view, and represents a significant new risk. For comparison, the FGN’s 2019 budget (as currently proposed) is N8.8tn (US$24.4bn) and the foreign exchange reserves of the Central Bank of Nigeria (CBN) are US$42.9bn.
If successful – and we emphasise that the FGN has appealed – then the FGN could be on the hook for a lot of money. The question, therefore, is to what extent a government feeling the pinch would be able to turn to the private sector for help. See Coronation Research: P&ID’s risk to Nigeria: Hedge fund purchase underscores fiscal, monetary risk, 14 March.
This report was contributed by Coronation Merchant Bank.
Why Shoprite is “exiting” Nigeria
Shoprite’s intention to divest from its Nigerian operations appears to be anchored on these factors.
Africa’s largest retail chain, Shoprite, announced on Monday that it is considering divesting from its Nigerian retail entity, Retail Supermarkets Nigeria, the owners of Shoprite Supermarket Nigeria.
Shoprite Nigeria operates about 26 outlets across the country and employs about 2000 employees who are 99% Nigerians. A divestment means it will sell its holdings to another investor who will continue to run the business.
According to the company, it has taken a decision to leave “following approaches from various potential investors” looking to invest in the Nigerian entity. The group also said the decision is in line with its “re-evaluation of the Group’s operating model in Nigeria” one of the 15 countries where it currently operates.
Shoprite also confirmed it has initiated a formal process to sell its entire stake in the Nigerian entity or a majority stake.
Why the exit?
Shoprite’s explanation of its intention to divest from its Nigerian operations appears to be anchored on its investment expectation and operating environment. However, there could be more to it.
Firstly, Nigeria is a highly competitive space, where retail is the survival of the fittest. Following Shoprite’s foray into Nigeria in 2002, the retail chain disrupted Nigeria’s retail space giving ordinary Nigerians a taste of what it feels to shop with family and friends. But the fairy tale was not going to last forever. Previous retail outlets like Park n Shop rebranded and injected significant funds in their operations and business expansion. Park n Shop rebranded to Spar and has 14 outlets across the country. It only makes sense for them to divest having held on to the Nigerian operations for almost two decades.
Shoprite also competes with homegrown retail outlets especially in Nigeria’s commercial city, Lagos State. Retail outlets like Ebeano, Citydia, and Adiba are now household names that are expanding rapidly across the state. There are also several neighbourhood supermarkets in the nooks and cranny of Nigeria’s commercial capital piling pressure on Shoprite’s market share. Shoprite does not disclose revenues from its Nigerian operations.
Shopping is also going online as evidenced by the growth in online shopping since COVID-19 hit Nigeria. Jumia, one of Nigeria’s largest online retail outlets, revealed lower earnings in the first quarter of 2020. However, the company is optimistic of higher revenue growth in Q2, on the back of the COVID-19 lockdowns. Jumia had earlier noted that “we are seeing unprecedented demand to join the Jumia platform, especially for named brands. We believe those dynamics will help accelerate the shift toward online.”
Local competitors like Spar and Ebeano already offer online shopping experiences and deliver goods to your doorstep. Shoprite’s business model relies heavily on physical store visits.
As internet services become faster and cheaper, more Nigerians will rely on e-commerce to meet their shopping needs. Jumia has often struggled in this space and remains unprofitable. However, gravitation towards online shopping is inevitable and only those who have the capital and know-how will come out winners.
Jumia’s competitor in this space, Konga, was also recently acquired by Zinnox. Konga was then merged with another Nigerian retail giant Yudula. Interestingly, Konga’s model includes a combination of online and brick and mortar. The company has since been acquiring warehouses across the country as delivery points for its retail expansion drive.
Nigeria’s harsh operating environment is also another major challenge Shoprite faces. The Muhammadu Buhari-led administration, through the CBN, has focused on supporting locally made goods by banning forex availability for the importation of local substitutes. This has negatively impacted the number of products Shoprite can sell and how many new shelves it can create per floor space. It also creates supply chain challenges, especially with locally produced goods.
Note that supermarkets sell on very thin margins. Therefore, the more products they can sell the higher the operating profits. Taxes are also higher and Nigeria’s susceptibility to exchange rate devaluation is also a major challenge. The company makes money in Naira and must convert to dollars before converting back to Rands.
In 2017, when Nigeria last faced a currency crisis, Shoprite explained that it has about Rand 2.3 billion in cash locked up in Angola and Nigeria due to currency restrictions (inability to repatriate their money on time). Information reaching Nairametrics from traders suggest most foreign-owned investments in Nigeria are also facing “restrictions” due to limited liquidity in the NAFEX window.
Shoprite’s less talked challenge is its Legal Issues. In 2011, Nigerian company A.I.C Limited (the Claimant), which is owned by Chief Henry Akande, issued a summons against Shoprite South Africa and its Nigerian subsidiary for an alleged breach of a joint venture agreement (the JV Agreement) allegedly concluded in 1998. The company took Shoprite to court claiming it breached on an agreement to set up the Nigerian arm of the business.
The Federal High Court then ruled in favour of AIC and awarded damages of $10 million against Shoprite in 2017. Shoprite appealed the judgment in the appeal court and lost again earlier in 2020. It is unclear if Shoprite has any plans to take the matter up to the Supreme Court. Could this be another reason why the owners are deciding to divest?
Whatever the reason is, officially, it perhaps makes sense for the company to exit its Nigerian operations in the light of the points mentioned above. Its Nigerian entity is worth 1.1 billion Rands (N24 billion) per its financial statements and could be worth more when the sale is eventually consummated.
Okomu Oil: Home is where the heart is
Okomu Oil has its tires on the track and is not slowing down.
Despite the teeming opportunities in the Nigerian agriculture industry, very few companies in the agro-space have been able to put in place the right processes and systems to create huge corporations out of farm produce. But there is one that is doing just okay. With a market capitalization of N71.5 billion, Okomu Oil Plc sits at the top of the industry.
While many companies, big and small, are losing their grip to the volatile global economic landscape of 2020 birthed largely by the COVID-19 pandemic, Okomu Oil has its tires on the track and is not slowing down. More so, it is not only proving COVID-19 wrong. Just a little over a year ago, Nairametrics had downgraded the company to a “Sell” owing to its faltering revenues. Today, with huge increases in revenue in 2 out of 2 completed quarters, Okomu Oil plc is laughing last.
READ ALSO: Okomu Oil half year profit drops by 57%
Winning by the Numbers
The company’s Q1 financials had revealed a 65.2% growth in revenue as the company recorded a turnover of ₦6.9 billion in comparison to the ₦4.2 billion it made in Q1 2019. It had also recorded a profit after tax of over ₦2 billion in comparison to the ₦1 billion recorded in Q1 2019 resulting to a 101.4% jump in profits. In the second quarter of the year, its unaudited results reveal that the company has also increased its revenue. Turnover jumped by 50.6% from N4.3 billion in Q2 2019 to N6.5 billion in Q2 2020. This jump was not totally reflected in its profits after tax, however, owing to a significant increase in income tax from nothing in Q2 2019 to N462 million in Q2 2020. PAT was still able to increase by 30% to 1.9 billion in 2020. While there could be a myriad of reasons for the tax burden, the company’s foreign operations are starting to rain on its parade.
Why it has to watch its foreign operations
Okomu Oil’s wins can be directly attributable to its domestic activities, bolstered by devaluation impact and a larger market share as a result of border closures. A closer look at both its Q1 and Q2 financials reveal that a majority of its earnings have been from improved domestic operations. In Q1, the company witnessed a decline of ₦89.8 million in Q1 2020 from its 2019 figures, representing a drop of 12.5% in the comparative quarter. In Q2, its export revenue took an even greater plunge. Export sales experienced a 35.3% drop from N730.6 million in Q2 2019 to N473 million in Q2 2020. Domestic sales had increased by 67.9%.
While this is reflective of the current economic activities, there are rising fears that it will keep relapsing. Failure to contain its activities will, sooner than later, have it in the same position as some of the equally large companies that had to eventually spin off ailing foreign activities. Reduced turnover is not the only diaspora-induced challenge being faced by the company. Its Q2 financials also reveal exchange losses of over N17 million for the quarter. Compared to the exchange losses incurred in Q2 2019 which stood at 1.2 million, it recorded a 1284% increase in foreign exchange losses.
In today’s world, it is becoming increasingly tough for businesses to ward off the allure of foreign opportunities in trade as well as in the area of raising finance. While these, no doubt, have immense benefits to businesses, there’s a long list of reasons why staying home and penetrating local markets has been underrated. Being able to source inputs locally, produce locally, and even finance locally is becoming even more of a luxury to Nigerian companies especially given the challenges around the relatively weak currency to stronger currencies.
Okomu Oil plc is creating a sustainable market in Nigeria and its efforts are paying off. Until order is restored, an increasing focus on its domestic market will do the company more good. That said, the company is a great stock to have in your investment portfolio to serve as a hedge against companies that have been negatively impacted by the pandemic. Its current share price is N74.95. While its price to book ratio is high at 2.2857 hinting that it could be overvalued, its EPS is stable at 7.33.
Why you should avoid investing long term in Nigeria’s stock market
The stock market is only as resilient as the economy.
Thirteen years ago today, I was getting set to oversee a meeting with a group of partners in a newly formed investment club. About a dozen of us, young and just at the cusp of family hood thought it was important to come together and put money aside for the future.
We had several options such as real estate or treasury bills, but we settled for the Nigerian Stock market. The decision wasn’t difficult to make especially when you look at the performance. Stocks were up 37.8% in 2006 and will close the first half of 2007 55% up.
Demand was high as everyone wanted a piece of what was then the fad. Private placements, right issues, IPOs were fast and coming and it was as if any offer placed in the table was sure to sell. The early signs that this was a bubble was when spare part traders abandoned their trade to get in on the gold rush.
The All Share index showed its first signs that the bears were around the corner when it fell by 5.15% in August 2007. As investors who were made to understand that investing in stocks for the long term was wise, we ignored the temptation to sell believing that stocks will rise again.
It’s 13 years now and the Nigerian All Share Index is down 52% between June 2007 and June 2020. In hindsight, we should have sold everything we had and simply bought dollars and kept it under our pillows. The stocks, we had hoped will deliver compounding returns over the years have delivered nothing but losses.
The Nigerian Stock Exchange is not a long-term market. We learned this 13 years ago but believed that experience was just a massive correction and that things will change. It did not and is unlikely to change so long as we remain a highly import-dependent economy. The stock market is only as resilient as the economy. If you have an economy like Nigeria that is good at growing its population and not its economics, investments in capital and money markets is a risky activity.
READ MORE: Where to Invest N5 Million right now
The more we remain reliant on crude oil and high imports, the worse it gets and you lose more money. Thus, it is my firm belief that investing in Nigerian stocks for the long term is folly. There are much better investments out there that will deliver you better returns and reduce capital erosion, two of the major symptoms of the Nigerian Stock market. But why is this market not a long term investment?
Firstly, stocks rely heavily on foreign portfolio investors to drive demand up. Since former CBN Governor, Sanusi Lamido Sanusi allowed foreign investors to repatriate any portfolio investment into the country without restrictions, stocks have become heavily reliant on hot money to keep valuations high. Thus, when foreign investors exit, stocks suffer. They create a bubble when they enter our markets and leave bears to dominate when they exit, until they are ready to get back in again.
READ MORE: A New Wave: Where to Invest in H2 2020
Secondly, Nigeria’s susceptibility to frequent currency devaluations keeps market valuations in perpetual risk of capital erosion. For example, if your portfolio was worth N165, 000 in 2013 it was the equivalent of $1,000. Today, that portfolio is worth just $412 assuming N400/1. So, even if you are lucky to have a portfolio that has performed well over the years, it will struggle to outperform dollar investments on the medium term.
Also, Nigerian companies are hardly accountable with the way their businesses are run. Insider trading persists without control and suspicions are immediately swept away. There are no consequences for reckless corporate behaviour. Most of the corporate fraud and unscrupulous activities perpetrated in the great stock market crash of 2008/2009 did not lead to a single jail term for anyone.
Billions lost in stocks over the years have not been recovered. Whilst some companies have continued to grow their revenues and profits most remain unprofitable and lack the basics of corporate governance.
Investor protection is weak in this market as there are no reliable remedies for fraud induced market losses. The stock market is also very limited in the number of products available to buy. Apart from buying and owning stocks, there are little options to short-sell. We understand this is in the pipeline but it has remained there for years.
These are examples that explain why investing for the long term cannot work in Nigeria for now. Buy and hold forever is a myth at least in today’s Nigeria. You will get burned and likely lose the value of your investments.