Dangote Cement mulls Eurobond issue: Dangote Cement is considering issuing a Eurobond or a local debt issue and will make a decision towards the end of the year, its chief financial officer, Brian Egan said yesterday. Egan said 70% of the company’s N389bn (US$1.1bn) debt was short-term and from its parent firm, Dangote Industries Limited, adding that the company wanted to change the loan mix. (Source: Thisday)
This afternoon GT Bank (GTB) published its Q3 2017 results. Although the bank’s results showed that PBT and PAT declined y/y, relative to our estimates, PBT and PAT beat by 7% and 15% respectively, thanks to positive surprises in opex and loan loss provisions. On a y/y basis, PBT and PAT declined by -6% y/y and -10% y/y to N48.9bn and N43.8bn respectively. The y/y decline in earnings was driven by a 73% y/y reduction in non-interest income due to negative base effects in the prior year (GT Bank’s 9M 2016 earnings were boosted by fx revaluation gains of N93.6bn vs. N11.7bn 9M 2017). Funding income grew by 12% y/y. However, the reduction in non-interest income proved significant and was the major driver behind the 27% y/y decline in pre-provision profits. Although opex and loan loss provisions declined by 20% y/y and 94% y/y respectively, partially offsetting the reduction in non-interest income, PBT still fell by -6% y/y. Further down the P&L, PAT declined even more, by -10% y/y, because of a 66% y/y decline in other comprehensive income (OCI). Sequentially, PBT and PAT showed single digit percentage changes relative to Q2. Again non-interest income which was down by 53% q/q underpinned the sequential decline in earnings.
Despite the y/y decline in earnings, we expect the market to focus on the broad positives, particularly the y/y decreases in opex and loan loss provisions. Notwithstanding, theweakness in non-interest income and the q/q decline in funding income will concern investors.
When annualised, GT Bank’s 9M 2017 PAT implies a respectable ROAE of around 32%; this is among the highest in our universe of bank stocks.
Although the bank’s shares have gained 65% ytd (vs. a 36% ytd return on the NSE ASI), we expect a slight positive reaction from the market.
Our estimates are under review. We rate GT Bank shares Neutral.
GT Bank Q3 2017 results: actual vs. FBNQuest Research estimates (N millions)
Investment flows in need of a major lift
On Monday we commented on the current account in the balance of payments (BoP) for Q2 2017. Today it is the turn of the capital/financial account, and the investment flows in particular. These are gross flows (ie those in the reporting economy before investment by Nigerian residents offshore). Direct, portfolio and other investment were again positive on this basis in Q2. The chart shows portfolio flows peaking above US$4bn in Q2 2013, when Nigeria was still basking in the glow of its inclusion in the JP Morgan indices for local currency, emerging sovereign debt.
- Direct investment in 2016 amounted to US$4.5bn, equivalent to 1.1% of GDP. This is pitifully low. The numerous structural flaws in the economy and the investment climate are barriers for the direct investor although they are not always the preoccupation of the offshore portfolio community.
- The short-term prospects are better for the two other components. The Eurobond issuance, we assume, explains the improvement in other investment in Q1 2017, and is set to be repeated this quarter. We should shortly see the impact of the NAFEX experiment on portfolio investment.
- When we adjust for the assets on the capital account (Nigerian investment offshore) in Q2, all three components remain positive on a net basis: direct investment of US$580m, portfolio investment of US$1.48bn and other investment of US$2.58bn.
- · We focus on the investment components because they provide a narrative. For the record, the broader picture in Q2 2017 shows a current-account surplus of US$1.41bn, a capital/financial-account surplus including the movement in reserves of US$4.34bn, and net errors and omissions (negative) of –US$5.75bn. The last item, which is effectively the balancing item, is often revised: an outflow of -US$1.63bn in Q1 is now shown as -US$4.09bn.
Event: Dangote Cement reports Q3 2017 results
Implications: Slight downward revisions to consensus 2017 earnings forecast likely
Positives: Sales and PBT up by 27% y/y and 171% y/y respectively
Negatives: Negative surprises in gross margin and opex
This morning the NSE published Dangote Cement’s (DangCem) Q3 2017 results which showed that PBT grew strongly by 171% y/y to N64.6bn. The stellar growth in PBT was driven by sales growth of 27% y/y and a 1,859bp expansion in gross margin to 56.9%. These completely offset a 10.1x increase in net interest expense to -N5.0bn. We note that net interest expense was boosted by fx gains of N54bn in 9M 2016. Despite the triple-digit y/y growth in PBT, PAT declined by -37% y/y due to negative base effects stemming from other comprehensive income (OCI) (arising from fx translation gains of N106bn in 9M 2016). Sequentially, sales, PBT and PAT fell by -7% q/q, -18%q/q and -54% q/q respectively. Relative to our forecast, sales were in in line. While PBT missed by 28%, PAT missed by a wider margin of 46%, mainly because of a higher effective tax rate of 24% vs. the 6% that we had in our model. The 24% tax rate is the highest rate paid by the company in recent times. To put the tax rate into proper perspective, it is far higher than the average taxation run rate of 7.4% over H1 2017 and the 13.6% tax rate for 2014 – one of the highest tax rates ever paid by the company.
Despite the stellar sales growth, what is clear is that the unit volumes in Nigeria continue to be under pressure, due to the effect of weak private demand and elevated prices. Based on management’s statement, unit volumes for Nigeria declined by 16% to 2.8 million metric tonnes (mmt) in Q3 2017. On a 9M basis the decline was even more at around 19% y/y to 9.6mmt. In contrast, unit volume growth for the pan-African operation was up by around 5% y/y in Q3 to around 2.3mmt. DangCem’s group EBITDA margin expanded by 1,686bps to 47.5% in Q3 2017, mainly driven by a 2,324bp y/y expansion in EBITDA margin for Nigeria to 64.4%. Similar to Q2, we believe that the marked expansion in gross margin in Nigeria was driven by the combination of higher pricing and a favourable fuel mix in favour of coal and gas as compared with low-pour fuel oil (LPFO). DangCem’s fuel mix shows that LPFO accounts for just about 2% and 1% of the total fuel mix in Obajana and Ibese compared with around 37% and 21% in 2016.
DangCem’s 9M 2017 PBT of N220.2bn tracks behind consensus 2017 PBT forecast of N286bn. As such, we expect to see downward revisions to consensus 2017E earnings forecast and a broadly neutral reaction from the market. DangCem shares have underperformed the index this year. They have gained 26.4% ytd compared with the 36.3% return delivered by the ASI. At current levels, on our published estimates, DangCem shares are trading on a 2017E P/E multiple of 13.6x for 14% EPS growth in 2018E.
Mixed Q3 results; retaining Neutral rating
- 6% cut to our earnings estimates and price target: UBA’s Q3 2017 PBT came in weaker than expected, mainly because of a negative surprise in opex (c. 11% higher than our forecast). To a lesser extent, subdued funding income (c. 5% lower than our estimate) also contributed. Although management did not disclose the specific line(s) responsible for the spike in opex, we believe inflationary pressures and the lagged impact of the naira devaluation were major drivers. Going forward, we expect opex to remain elevated. Consequently, we have raised our opex forecasts by 5% on average and cut our funding income forecasts by 4% over the 2017-18E period. A positive surprise in loan loss provisions has led us to reduce our cost-of-risk assumption by 100bps to 1.5%. These changes underpin the -6% reduction to both our 2017-18E earnings forecasts and price target. Our valuation reflects the cancellation of the staff share investment scheme (a 6% reduction to the share count). Our new forecasts imply a 2017E ROAE of 18.8%, lower than management’s guidance of 20%. Beyond Q3, UBA will have to grow its funding income – which has barely grown in the last three quarters – more aggressively to achieve meaningful earnings growth. Having gained 104% ytd (vs. ASI: 36%), our new price target implies an upside potential of 4% from current levels. As such, we retain our Neutral rating.
- Q3 PBT down 14% y/y, driven mainly by a 25% y/y spike in opex: UBA’s Q3 PBT declined by -14% y/y to N20.8bn. The key drivers behind the y/y decline in earnings were a 25% y/y rise in opex and 52% y/y increase in provisions for loan losses. Although pre-provision profits grew by 12% y/y, the negatives on those two lines proved significant. In terms of the revenue split, non-interest income was the major driver of the expansion in pre-provision profits. However, funding income was also up by 6% y/y. Moving down the P&L, the decline on the PAT line was greater at 26% y/y, because of a 35% y/y increase in income taxes and base effects on the OCI line. Sequentially, PBT fell by 35% q/q. In contrast to the y/y trends, the non-interest income line declined by -39% q/q (because of base effects) and drove the marked decline in PBT. The weakness on the non-interest income line also led to a 16% q/q drop in pre-provision profits. Compared with our forecasts, PBT missed by 15%. This was primarily due to a negative surprise in opex.
A further decline in m/m inflation
The latest inflation report from the NBS shows headline inflation y/y at 16.0% in September: this was the eighth successive slowdown, albeit by just 3bps on this occasion. Our expectation, shared with wire service polls of analysts, was an uptick to 16.3% y/y. Core inflation slowed from 12.3% in August to 12.1% y/y while food price inflation was 7bps higher at 20.3% y/y.
- Policymakers will note that the m/m rate for all three measures declined in September for the third month in succession: by 19bps for the headline measure, by 13bps for core inflation and by 27bps for food prices. They can therefore conclude that there is a movement towards general price stability.
- The CBN’s reference range for the headline rate, for what it is worth, is a y/y target of between 6.0% and 9.0%. We do not see the attainment of this range before 2019.
- For imported food prices September brought both m/m and y/y increases. Given the stability of the fx rate in the various windows in recent months, the first probably reflected rises in the dollar price of individual food commodities.
· As for the stance of the monetary policy committee (MPC), the communique after its meeting in late September noted several reasons for stubbornly high food price inflation including a weak harvest. The MPC also indicated that it did not anticipate significant gains on GDP growth (higher) and inflation (lower) much before Q1 2018.
· We see the headline rate at 15.9% in October.
Sources: National Bureau of Statistics (NBS); FBNQuest Research
Event: United Bank for Africa (UBA) reports Q3 2017 results
Implications: Limited revisions to consensus PBT forecasts; Neutral reaction from the market
Positives: Loan loss provisions were well below our expectations
Negatives: Opex grew 25% y/y
This morning UBA published its Q3 2017 results which showed that PBT declined by -14% y/y to N20.8bn. The key drivers behind the y/y decline in earnings were a 25% y/y rise in opex and 52% y/y increase in provisions for loan losses. Although pre-provision profits grew by 12% y/y, the negatives on those two lines proved significant. In terms of the revenue split, non-interest income was the major driver of the expansion in pre-provision profits. However, funding income was also up by 6% y/y. Moving down the P&L, the decline on the PAT line was greater at 26% y/y, because of a 35% y/y increase in income taxes and base effects on the OCI line. Sequentially, PBT fell by 35% q/q. In contrast to the y/y trends, the non-interest income line declined by -39% q/q (because of base effects) and drove the marked decline in PBT. The weakness on the non-interest income line also led to a 16% q/q drop in pre-provision profits. Compared with our forecasts, PBT missed by 15%. This was primarily due to a negative surprise in opex (+11% more than what we were modelling).
We note that UBA’s opex was also up, by around 20% y/y, in Q2 2017. Given the persistent rise in opex, we expect this line to come under scrutiny by investors. In terms of balance sheet trends, UBA’s loan book and deposits grew by 2% q/q and 3% q/q respectively, better than the 1% and -6% respectively in Q2.
UBA’s 9M PBT of N78bn tracks broadly in line with consensus PBT forecast of N103bn for 2017. As such, we expect to see limited revisions to consensus earnings estimates and a broadly neutral reaction from the market.
We rate UBA Neutral. Our estimates are under review.
UBA Q3 2017 results: actual vs. FBNQuest Research estimates (N millions)
Lower current-account surplus due to MCP
The balance of payments for Q2 2017 shows that the current-account surplus narrowed from the equivalent of 3.2% of GDP to 1.6%. The explanation lies in a decline in the trade surplus from 2.7% to 2.4% of GDP, along with a larger widening of the services outflow from 2.4% to 3.8%. Fx availability has been enhanced by the CBN’s multiple currency practices (MCP). Importers have benefited, which is evident from manufacturing PMIs, and retail has also been able to meet its requirements. In a forthcoming daily note we will examine trends on the capital account.
- The share of oil and gas exports in GDP crashed from 25.0% in Q1 2012 to just 9.6% in Q4 2016. A modest recovery to 10.9% in both Q1 and Q2 is attributable to a pick-up in oil production and the contraction in GDP.
- Merchandise imports increased by US$1.0bn q/q in Q2: if we strip out oil and gas, the increase rises to US$1.3bn. This underpins our point about fx availability and masks any benefits from the FGN’s import substitution policies.
- The same is self-evident when we drill down into the outflow on services in Q2 2017. The debits on travel and other business services rose by US$900m and US$400m q/q respectively. Fx ix available at the CBN’s various windows if the user is comfortable with the price.
- Net current transfers, which are overwhelmingly workers’ remittances, have held up better than expected, at more than 5% of GDP for four successive quarters.
· We are comfortable with the smaller surplus on the current-account because offshore investors have returned to local equity and debt markets, and because the FGN is to revisit the Eurobond market this quarter.
FBNQuest FI-FX Daily Watch 13 October 2017
Opening market liquidity on Thursday was N244bn (negative). OMO bills of N127bn matured. Meanwhile, at an OMO auction, the CBN raised N64bn from the sale of the 196-day paper at a stop rate of 17.85%. (The rate was 17.93% at the auction of 28 September.) A downward trend was observed on selected tenors.
The FGN bond market was relatively active, and yields contracted at the mid to long end of the curve. Fidelity Bank raised US$400m in the Eurobond market in a refinancing exercise.
The CBN’s daily fx intervention was again US$0.5m, at N305.05. Turnover on NAFEX rose from US$253m on Wednesday to US$341m. Indicative rates ranged from N310 to N362. Oil prices slipped on Thursday as US fuel inventories rose. OPEC is widely expected to extend its accord on supply cuts beyond the current expiry date of March 2018.
Credit allocation to favour the few
Although Nigeria’s economy has emerged from its technical recession, its macro challenges have not dissipated. As such, a cautiously optimistic approach has been adopted by banks on lending. The CBN’s Quarterly Statistical Bulletin for Q2 2017 shows total private sector credit by banks’ contracting by –0.5% q/q and expanding by just 1.1% y/y. The slowdown in loan growth is partly due to banks’ preference for the elevated yields well in excess of 20% for longer tenors that were recently available on the NTB market. However, those yields have started to dip in response to the CBN’s signal of lowering the stop rates at its auctions.
· There was a marginal decline in the banks’ favoured sector, oil and gas. Lending to the sector contracted by -4.8% q/q but increased by 2.6% y/y. The q/q contraction is not surprising when we consider that, given the slide in oil prices since mid-2014, many operators have had to restructure existing loans.
· Agriculture, which has been identified as a growth engine for the economy by the FGN and the consensus of development economists, received just 3.3% of DMB’s credit allocations at end-Q2.
· Meanwhile the Quarterly Statistical Bulletin shows a marginal pickup of 3.7% q/q in total credit allocated to the manufacturing sector in Q2. The credit status of manufacturers has been enhanced by the CBN’s multiple currency practices since their access to imported inputs has been transformed.
· A recent analysis of Nigeria’s credit allocations, based upon official data, showed that 83% of total lending was allocated to credit lines above N1bn. This is scenario of limited financial inclusion, in which the obvious losers are start-ups and SMEs.
· We doubt that loan growth will pick up significantly in the near-term as most banks continue to tread cautiously regarding non-performing loans.