Zenith’s numbers in 9M 2019 showed a decline in yield on Loans to customers and on money market instruments. On the positive side, funding cost continues to improve, declining to 2.95% from 3.3% in 9M 2018.
Despite a steep decline in Non-Interest Income in Q3 relative to Q2 2019, Non-Interest Income growth continues to support the bank’s y/y growth in profit.
Zenith’s 9M annualised Return on Average Equity (ROAE) of 23.8% compares with our revised estimate of 22.6% for FY 2019 and with 23.7% for FY 2018. Capital Adequacy Ratio (CAR) of 23.8% (without the full impact of IFRS 9; we estimate 21.9% for FY 2019e post adjustment for IFRS transition) remains comfortably above current regulatory minimum of 15.0%.
Reported liquidity ratio of 63.8% is well above those of many of its peers. The bank also reports healthy asset quality ratios with annualised Cost of Risk (COR) of 1.1%.
The bank still rates well based on capital adequacy, sustainable long-term dividend yield, and stable asset quality. We retain our Buy recommendation on Zenith with a revised target price of N34.24/s from N33.41/s previously (current price: 17.35/s). Trading at 0.63x book value, valuations appear attractive. Based on our assumption of N2.80/s dividend for 2019e, dividend yield comes to 16.1% at current levels.
9M 2019 Interest Income was down 5.1% y/y but up 16.5% q/q (Q3 compared to Q2). The y/y decline was attributed to a decline in yields on both money market instruments and on Loans and Advances to customers. We attribute the Q/q growth in Interest Income to the strong loan growth in Q3. The bank’s Net Loans to customers were up 13.4% within the quarter, bringing 9M Net Loan growth to 12.1%.
Interest Expense was also down 2.9% y/y despite a 6.6% y/y growth in Interest Bearing Liabilities, resulting in an improvement in Cost of Funds to 2.95% in Q3 2019 compared with 3.3% in Q3 2018. The bank’s funding cost has been declining gradually since the spike in 2017-according to management, this has been supported largely by a re-balancing of the bank’s deposit mix in favour of cheaper retail deposits.
Overall, Net Interest Income was down 6.1% and NIMs declined to 8.69% in 9M 2019 compared to 9.6% in 9M 2018.
PBT grew 5.3% y/y and 18.6% q/q while Net profit was up 4.5% y/y. The bank’s annualised Return on Average Equity (ROAE) of 23.8% compares with 23.7% for FY 2018. We forecast FY 2019e RoAE of 22.6%.
Loans and advances
The bank’s Net Loans to customers were up 13.4% in Q3 quarter, bringing 9M loan growth to 12.1%. We model 2019e loan growth of 15.1% in line with management’s guidance. As at 9M 2019, we compute gross loan to total funding of 51.5% for the Nigerian bank without taking into consideration the effect of the 1.5% weighting on SMEs, Retail, Mortgage and Consumer loans and without adding investment securities such as corporate and state government bonds to gross loans.
Customer Deposits were up 21% y/y but are only up 7.1% year to date. We believe banks will not be so keen on increasing deposits given CBN’s minimum LDR of 65% by December 2019. Consequently, we assume 8.0% deposit growth for FY 2019e compared with Management’s 10% guidance.
Update on asset quality
The bank reported relatively healthy asset quality ratios. Impairment charge was up 27.3% y/y but declined in Q3 compared to Q2. We highlight that the bank’s Impairment charge was up significantly in Q2 compared to Q1. The bank’s 9M annualised Cost of Risk (COR) of 1.14% was significantly higher than our previous 0.8% assumption for FY 2019e. We have revised our COR assumption for FY 2019e to 1.2% considering the strong loan growth and expected increase in expected credit loss. Non-Performing Loan ratio of 4.95% and coverage ratio of 148% appears a strong buffer.
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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.
WARNING: 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.
Why Cadbury might be a long “Hold”
Top on the list of the company’s challenges is that it is over-due for a rebrand.
The consumer goods sector is almost always a win amongst others on the Nigerian Stock Exchange, mainly because of its stability with very little seasonal restrictions. In other words, consumer goods are important during Valentine’s as much as they are important at Christmas. Yet, the COVID-19 pandemic era has been an entirely different ball game for one of Nigeria’s leading consumer brands — Cadbury Nigeria Plc.
Having lost a lot of its grounds to competitors like Nestle years ago, the company had set off on a path to recovery trying to expand its market share and increase its revenue. Revenue had grown at a steady pace all through the years, moving from N27.8 billion in 2015 to N39.3 billion in 2019. The company’s 2019 financials had also continued the seemingly smooth sail to growth with a 26% increase in profit, following a fair 9% increase in revenue at N39.3 billion in the year.
Not hesitating to show its appreciation to its shareholders who had not received dividends for three years, before 2019, the company declared a dividend per share of 49 kobo this year, which was almost double the 25 kobo it had paid last year. It was also the first time the company had been paying two-consecutive dividends after a 3-year break. Needless to say, the dividends are still far from exciting.
However, 2020 has come with challenges that have had the company already dropping in revenue for 2 out of 2 quarters. Its Q1 2019 financials reveal that the company earned a total revenue of N8.5 billion, representing an 8% decline from the N9.2 billion it recorded in Q1 2019. It was able to still attain a profit after tax of 26% from N506.7 million to N638.9 million, owing to improved other income and a slight reduction in expenses. However, in its recently released Q2 results, its revenue took an even lower plunge of 27.6% to 7.4 million. In the same trajectory, the company recorded a loss for the quarter of N102 million, representing a whopping 162.7% drop in profits from the corresponding quarter in 2019 all from the reduced revenue. Expenses did not reduce as much.
The steady progression
Top on the list of the company’s challenges is that it is over-due for a rebrand. The company’s top brands, Bournvita, TomTom, Trebor/Peppermint, Eclairs and more have one thing in common and it is that they are almost nostalgic. We know and love them, but they’re not necessarily with us on a daily basis. Another way to look at it is that they have attained the same scarcity as luxury items, only at a low price point. Consequently, it is only natural that headwinds of the COVID-19 pandemic and all the other challenges 2020 has not been bereft of, got it on a downward spiral as they became less exciting given the limited financial resources of most Nigerians.
Another challenge that rests on its shoulders is the less than proportionate reduction in expenses despite the reduced revenue – and it didn’t start this quarter. Since the year 2015, analysis reveals that the company’s revenue has risen by 9% on an annualized basis. For some reason, cost of sales and operating expenses have also risen by 9% over the same period. What is more alarming is that these cost of sale makes up a huge amount of the total expenses. This could mean input prices have been rising without a similar increase in prices. It might also not have the required brand equity to survive a significant increase in price given the availability of close substitutes and alternatives that could even transcend the consumer goods industry.
For a company which was quoted on the Nigerian Stock Exchange (NSE) as far back as 1976, its current share price of N6.60 which is low on its 52-week average of N4.95 and 11.65 is underwhelming. An earnings per share of 0.51, show that its performance has not been stellar. With the overall economy further expected to plunge before only marginally recovering over the next few years, we cannot expect much of a difference in the state of its revenue. Its high price to earnings ratio of 13.07 could also mean many investors either have faith in the future of the company or are simply hanging on to its past victories.
Either way, what is clear is that investors in the company are going to need to be in a long hold position with very little gains in dividends. Whether the duration of the waiting period is longer or shorter rests on the back of its management to work out strategies to remain in the line of sight of the average consumer at low costs. Its growth is particularly important as it just does not have the option of being a value stock.