The decision by the Central Bank of Nigeria (CBN) to ban many investors from the OMO auctions has had a huge effect on local bond yields, with short term rates almost halved since October.
Inflation is sticky at 11-12% and not expected to come down anytime soon.
Equity market in 2019 has been anything but exciting at -10% including dividend, and are trading at or close to 10y PEx and PBx lows.
Average daily turnover is muted around USD 9m (Back in 2013-2014 USD at 25-30M was the norm).
GDP growth expectations are bleak; IMF expects 2.5-2.7% annual growth (2019-2024).
We saw a pick up interest in November (after the new OMO guidelines) when both turnover and stock market spiked, especially the financial sector which continues to deliver profit growth. But all banks (except Access) are still down 15-25% YTD.
The banks are now on average trading at PE 3.2X FY20e, PB 0.7X FY20e and an estimated dividend yield of 10.2% and almost 10% EPS growth.
Local pension funds have halved their equity exposure to 5% in September 2019 from 10% in beginning of 2018, investing pension inflows outside the stock market (graph from @efghermes).
In the Nov 27 Nigerian Bond auction, Total subscribed interest was USD 1465M for USD 415m offered, 3.5x.
There is a lot of money looking for returns and willing to accept negative real returns investing in bonds, rather than investing in the stock market at bottom, valuations where dividend return is expected in some cases are at, or higher than inflation.
Hint: Doubling equity portion of pension fund holdings to 10% (still low for a long term investment portfolio in my opinion) =165 days of average daily trading. And subscribed interest in the Nov 27 bond auction also equals 165days average daily trading.
ABOUT THE FUND MANAGER
Mathias Althoff is a portfolio Manager at Tundra Fonder, he has over 15 years of emerging/frontier markets experience following equity markets, company strategies and company valuations as well as cultural history.
His other specialities include portfolio management, equity valuations, investment advice, macro research and strategy. Prior to working as a portfolio manager in Tundra, he worked as a Manager, Asian Equities in the Carnegie Investment Bank and HQ Bank respectively.
Tundra Fonder (Tundra), with AUM of over $400mn (Mar 2018), is a Swedish asset manager specialising in frontier markets. They manage funds with local research offices in Asia and have one of the largest investment teams dedicated to frontier markets in the world. Tundra has been approved by the Swedish FSA to manage mutual funds and alternative investment funds as well as discretionary mandates. Tundra is a member of The Swedish Investment Fund Association and SWESIF.
Dangote Sugar, sweet in more ways than one
Significant growth in gross revenue was driven largely by sale to Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited.
By refining capacity, Dangote Sugar Refinery Plc (DSR Plc) is acknowledged as the largest Sugar Refinery in sub-Saharan Africa and one of the largest in the world. With up to 60 percent market share, it is also clearly, the most dominant player in the Nigerian sugar market.
DSR Plc recently released its audited Financial Statements for the year ended December 31, 2020 and overall and year-on-year group performance results were very good.
Despite the impact of the Covid-19 induced lockdown which curtailed distribution across the country and resulted in decreased revenues from income generated from freights, gross revenues increased by over 33 percent year-on-year to ₦ 214.3 billion. The significant growth in gross revenue was driven largely by a rise in revenue from the sale of its 50kg sugar, with the two main customers being the Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited who operate principally from Lagos.
Year-on-year, gross profit increased by over 40 per cent to ₦ 53.75 billion, Profit before tax increased by almost 53 per cent to ₦ 45.62 billion, and Profit after tax increased by 33 per cent to ₦ 29.78 billion.
Notwithstanding the good result, the group operating results showed some issues and headwinds. First, during the year, DSR Plc wound up Dangote Niger Sugar Limited (one of four companies that had been set up to acquire large expanse of land and locally grow sugarcane as part of its concerted backward integration project). The winding-up was sequel to continued community dispute over land acquired in Niger State for this purpose. This winding-up event cost DSR Plc approximately ₦ 100 million.
Second, there continues to be a heavy reliance on Lagos for its gross revenues as revenues generated from Lagos State increased significantly from circa 33 per cent at the end of 2019 to over 50 per cent by the end of 2020. The share of the Lagos segment in gross revenue thus continued to grow and currently represents a significant market concentration risk for DSR Plc.
Third, provision for impairment on financial assets or in simple terms, receivables that are unlikely to be collectable, also trended upwards from ₦ 1.3 billion in 2019 to ₦ 1.45 billion by end of 2020 with net financing expenses also rising significantly from ₦ 516.2 billion in 2019 to ₦ 1.92 billion by the end of 2020. This rise in expenses was largely driven by a significant rise in exchange losses incurred in the ordinary course of business, rising from about ₦ 7 million in 2019 to over ₦ 1.57 billion at the end of 2020.
Finally, administrative expenses represented mainly by employee salaries grew year-on-year by over ₦ 1.2 billion.
With the recent reopening of land borders, we expect that revenues and margins will become squeezed as sales and production volumes become constrained by the influx of largely smuggled, lower quality, and much cheaper sugar and its substitutes. DSR Plc’s sugar refinery is also strategically located very close to the Apapa port and its logistics operations, distribution of raw materials and delivery of finished goods will continue to be impacted by the infamous Apapa Traffic Gridlock and road diversions/closures around the axis. Although the effort of Lagos state and the recent introduction of the electronic call up of truck by the NPA has eased the issue, still, it needs to be watched closely.
Earnings per share at the end of 2020 was ₦ 2.45 (2019: ₦ 1.87; 2018: ₦ 1.85)
Subject to approval at its forthcoming Annual General Meeting, DSR Plc board of directors have proposed a dividend of N1.50k per ordinary share (2019: ₦ 1.10k, 2018: ₦ 1.10k).
This performance is sweet in more ways than one.
CBN “Naira 4 Dollar Scheme” Explained
What the CBN’s Naira 4 Dollar scheme means for your money.
In what appears to be an attempt to incentivize dollar remittances by all means possible, the Central Bank of Nigeria (CBN) released a circular to Deposit Money Banks (DMBs), International Money Transfer Operators (IMTO), and the General Public, advising that remittances paid into a bank account will attract an additional credit alert for every USD$1 received!
Yes, you read that correctly. The CBN will facilitate a special additional credit alert of N5 for every USD$1 received. In other words,
- if someone sends you $10,000, you get an additional special credit alert for N50,000.
- If someone sends you $100,000, you get an additional special credit alert for N500,000.
Who is eligible?
To be eligible, the diaspora remittances need to be processed and received from one of the registered IMTOs and funds received into a Bank account operated by the DMBs. (So, if you are receiving funds via Crypto sorry you are not eligible).
Additionally, the circular says this “incentive runs from Monday 8th March 2021 to Saturday 8th May 2021″. So, if you have plans to receive dollars, you can plan accordingly.
The circular is not clear how exactly the commercial banks will know which account to pay the extra special credits into. Although, that may be a question diaspora funds recipients will need to ask their DMB accounts officers to clarify for them.
How will this be funded?
The circular notes that the “CBN shall through commercial banks, pay to recipients the N5 incentive for every USD$1”. In other words, it is the CBN funding the cost of this special extra credit.
- One would argue that given the costs of alternative incentives to attract dollars such as the special OMO window for FPI, this may be a cheaper alternative for the CBN.
- But we will need to see the volume of expected remittance to be certain of that. Nigeria attracts about $5billion per quarter in remittances and only trails oil in terms of foreign earnings.
Why this matter to Nigerians?
Following the collapse of US Dollar inflows into the country, the CBN initially tried to balance its current account deficits and avoid an official devaluation by tackling FOREX demand (Think ban of 41 items, etc).
- However, in recent times, CBN is now trying to address the challenge of FOREX supply. In 2019, CBN restricted OMO bills for FPIs, and this year, CBN directed all IMTOs to discontinue the practice of not remitting dollars into the country but keeping it overseas and sending Naira.
- Also, the IEFX rate has been allowed to continually diverge from the official rate. As at close of business on Friday 5th March 2021, the IEFX rate of N412.50 is 8.8% premium to the official rate of N379.
- Some may point out that, if the CBN is looking to have ordinary Nigerians enjoy some benefits from its ongoing FX subsidy largesse then maybe that is “arguably” more palatable than the prior focus on FPIs.
Finally, this short-term Naira-4-Dollar scheme will not be called an official Naira Devaluation. But a question is what do we call the new short-term price of N412.50 + N5.00? Maybe we can call it Naira Modulation.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- Seplat falls into a loss in FY 2020
- 2020 FY Results: Cornerstone Insurance Plc reports a 61.1% decline in profit
- Ellah Lakes increases operating expenses by 33.36% in HY 2020
- 2020 FY Results: Nigerian Breweries reports a 54.3% decline in profits in 2020
- Abbey Mortgage Bank projects N51.08 million profit in Q2 2020.