From Wuhan, one of China’s most populous cities, the 2019 novel Coronavirus (2019-nCoV) has now spread to 74 more countries, apart from China with over 92,000 confirmed cases, 3,130 deaths and 48,451 recovered cases (as at 03 March 2020). Expectedly, the Coronavirus outbreak seems to be on everyone’s mind, alarming public health authorities, spooking the global equity markets and sinking stock markets into the red.
China’s importance in a globalized economy has dramatically increased since the 2002-2003 Severe Acute Respiratory Syndrome (SARS) outbreak, the most obvious precedent for today’s crisis that originated in the Guangdong province of China and spread to more than two dozen countries. Then, China comprised less than 4% global GDP; today, China is the world’s second-largest economy, currently accounting for 16% of the world’s GDP and contributing 24% of the global imports.
Therefore, putting brakes on Chinese factories’ output and disrupting global supply chains running through China will unavoidably have a ripple effect on international businesses, world economy and global growth. There are also concerns over consequences of the United States, the world’s largest economy, being forced to implement a lockdown similar to the one imposed by Chinese authorities.
As the novel COVID-19 strain of the coronavirus moves far beyond China’s borders, it is difficult to fully evaluate the scope and severity of the risks on investments. As the Coronavirus spreads, so do fears of a financial collapse. That fear is causing a lot of selling and a lot of losing. Notably, world stock markets have tumbled since the first death was announced on January 11.
While the only confirmed case of coronavirus in Nigeria remains the index case of the Italian citizen confirmed on the 27th February, the country can’t stay unscathed with the happenings in China—a chief trade partner to Nigeria. The Nigerian Stock Exchange (NSE) lost a whopping N308 billion (USD845 million) less than 24 hours after reporting the index case.
Investors lost N209 billion (USD573 million) on Monday 2nd March as the stock market dipped further. The price of oil, Nigeria’s major source of public revenue, has already taken hit as a result of the ongoing outbreak; there could be nothing worse for an already struggling economy, than having her source of revenue negatively impacted.
Markets do not like uncertainty, thus investors are understandably nervous with the spread of the coronavirus disease. We do not know, with certainty, how far the virus has spread and how long it might last; how much fear inhibits travel, consumer spending, manufacturing, and trade; and the capability of public health institutions to stop the spread of the virus. These uncertainties have led to increased volatility in the stock market as investors scramble to adjust their portfolios to factor in the virus’ potential for damage to the global economy and assess its further impact on asset prices.
One major question every investor should strive to answer is: Is my investment short or long term? Another is: Is there evidence linking global epidemics with long-term investment fundamentals?
No cause for alarm
Past experiences show that, in general, epidemic outbreaks tend to have temporary impacts on markets and economies. In fact, markets have short memories regarding epidemics. Markets may initially react to the uncertainty, but global equities tend to rebound after temporary decline. Besides, this isn’t the first new virus we’ve seen, and this won’t be the last. SARS, Zika, Influenza H1N1 and others have all come and gone.
This is not the time for a knee-jerk reaction as global efforts continue to combat the coronavirus epidemic. Temporary phenomenons and markets go through cycles like this. Viruses will get contained and investors will return to corporate and economic fundamentals. One of the most important things an investor can do in the face of market uncertainty is to make sure that investment portfolios are at the right risk levels. Market volatility helps build wealth over a period of time. For investments whose timelines are on the shorter side, such investments are already at a low level of risk. This insulates you from market volatility—whether it’s related to disease outbreaks or otherwise.
The lauded investor Warren Buffett advised investors not to allow coronavirus to infect their investment strategy. “It is scary stuff. I don’t think it should affect what you do with stocks,” he told CNBC’s Becky Quick in an interview that aired February 24 on “Squawk Box.”
No need for any fear-based changes. Investors are encouraged to continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocations. Panicking to sell out as markets slide would only lead to further losses. Staying the course can help handle the downturn, and potentially stay the course.
In tuning out the noise and sticking to the long-term plan, you should identify opportunities to immunize your portfolio against coronavirus and other possible similar outbreaks. Diversification premium is an investment cure for coronavirus. Having a mix of assets across sectors and geographies is the best way to ensure that one spell of volatility does not take your portfolio down.
Despite the perceived and actual threats from the coronavirus, high-quality bonds, gold and safe-haven currencies like the U.S. dollar have rallied while more production-intensive commodities like oil have suffered, as have the stocks of companies domiciled in or exposed to the affected areas. Funds focused on sheltering capital, strategic bond funds, and multi-asset funds with a cautious approach are good additions if you are looking to add diversification to an equity portfolio. The current situation should also be seen as an opportunity to invest for long-term in quality companies.
Investors are admonished to be on alert for fraudsters attempting to play into our natural emotions of fear and greed during this period of uncertainty. There have been spikes in investment opportunities with unbelievable return-on-investment and get-rich-quick schemes. At the risk of sounding like a broken record on this topic, there are no sure things or get-rich-quick strategies when it comes to investing.
While it’s unclear how many people will ultimately be affected by COVID-19, or how many weeks or months it will take to run its course, if it holds true to similar epidemics, however, it will run its course. Investors are enjoined to stay alive even as they seek to safeguard their investments from the outbreak. Standard recommendations to prevent infection spreading include regular hand washing, covering mouths and noses when coughing and sneezing, thoroughly cooking meat and eggs, etc. Also, avoid close contact with anyone showing symptoms of respiratory illness such as coughing and sneezing.
Written by Oluwaseun Oguntuase
Merger, Tax incentive boosts BUA Cement FY 2019 result
BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
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BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.
Analysis: Nestlé strong but exposed.
Being a market leader is great, but in times of economic despair, it can quickly turn you into prey.
With about six decades of being the choice companion for families within Nigeria and the diaspora, Nestlé Nigeria Plc has positioned itself as one of the largest food and beverage companies on the continent. Owing to the expansive growth of Nigeria’s population – one projected to reach 300 million by the year 2030, as well as the growing middle class, the FMCG sector has a very positive outlook.
Consequently, Nestle’s leadership in the industry and its huge market size expectedly gives it a huge advantage. However, with the global economy barely racing against the impact of the Covid-19 pandemic, even the brimming FMCG sector will experience its own level of disruption.
Nestle’s recently released Q1 2020 financials reveal a revenue decline of 0.9%, as it dropped to a marginal ₦70.33 billion from the ₦70.97 billion turnover it garnered in Q1 2019. The profit before tax also experienced an 8.7% drop while the profit after tax had a 12.84% drop, both yielding ₦17.5 billion and ₦11.2 billion respectively, for the first quarter of this year. This is predominantly owing to its increased losses from its overseas activities.
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The company procures all of its raw materials on a commercial basis from overseas and local suppliers; consequently, the percentage of its supplies dependent on international suppliers had a negative impact on its Q1 2020 financials. Its profits were plagued by a foreign exchange loss of ₦154.7 million from ₦18.9 million, an even higher loss of 720.6%. While the company did not disclose the value of its export revenue, we believe it too might have suffered from reduced exportation in the latter part of the quarter.
The group has since been taking on expansionary projects, such as its launch of a second beverage production plant in Ogun State in February of 2018. The company, on a continuous basis, explores the use of local raw materials in its production processes, contributing its own quota to the Nigerian economy.
Just last week, Nestlé’s stocks went up 2.56% to close at ₦1000, a price it still currently holds today after markets closed. Its price to earnings ratio is 18 and its earnings per share (EPS) of 55.54, signal an investor sentiment of confidence. However, its high price to book ratio of 13.9865 reveals that the company is slightly overvalued and its price of ₦1000 makes it attractive primarily to institutional investors that can afford to purchase large volumes of the stock enough to benefit from its steady growth in value. The company had proposed a dividend payout of ₦45 per share. This also comes after paying ₦25 per share interim dividends earlier. Its dividend yield at the time of writing this is 7%, further heightening the possibilities for the income investor.
While the company has strong fundamentals governed predominantly by its position as a market leader, its years of experience, and its existence in the FMCG sector, it too might not have a smooth sail in the coming quarter. Its overseas business from both the supply and the demand sides are expected to experience a further decline, ultimately resulting in an even lower relative turnover and lower earnings.
We also expect the decline in average disposable income of Nigerians from loss of jobs and an overall wariness of the economic impact of the pandemic, to further drive down turnover; however, sound operational efficiencies and cost control/ profit strategies by the group could ease the burden. The company fundamentals remain strong but its exposure to consumer disposable income remains a major concern. There is always a cheaper alternative and when your pocket empties your choice for cheaper substitutes swells.