Category Archives: MARKET INTELLIGENCE

The equities market shrugged off early gloom as an uptick in domestic bargain hunting especially in non-financials helped lift the bourse by +0.86%.

The equities market shrugged off early gloom as an uptick in domestic bargain hunting especially in non-financials helped lift the bourse by +0.86%. Cement majors gave the bourse its biggest boost for the second consecutive day – a mix of illiquidity and domestic buying pushed prices in Dangcem(+1.96%) and Wapco(+2.95%).

Sentiment in cement stocks were mixed – Intbrew(+4.85%) and Unilever(+1.51%) surged on late buying while profit taking weighed on PZ(-1.92%) and Dangsugar(-0.45%). Despite increased demand in the banks, most closed lower amid a glut a supply. Zenith(-0.38%), UBA(-0.90%) and tier II banks dropped on large offers; Guaranty traded flat.

 

Turnover improved to N5.3bn ($14.7m) buoyed largely by increased bargain hunting in Zenith($7.3m). Ytd gain rose to +6.81%, we expect the market to tick higher in coming sessions on sustained bargain hunting

 

Presco Q4 2017 results: first reaction

Event: Presco reports Q4 2017 results

Implications: Mixed reaction by market expected

Positives: Sales grew 44% y/y

Negatives: Opex grew 133% y/y

Earlier this morning, Presco reported its Q4 2017 results, showing sales growth of 44% y/y to N5.4bn. However, PBT declined by -86% y/y to N3.0bn. Despite a 2,038bp y/y gross margin expansion to 81.8% and the strong sales growth, these were not strong enough to offset a 133% y/y rise in opex, a 29% y/y increase in net finance charges and an -85% y/y reduction in biological asset revaluation gains to N3.1bn. Owing to a tax credit of N17.0bn, PAT (before other comprehensive income) grew by 34% y/y to N20.0bn. If we strip out the biological asset revaluation gain, the underlying results reveal that the company made a pre-tax loss of –N62m for the quarter.

On a sequential basis, sales and PBT grew by 33% q/q and 756% q/q respectively. Despite an opex growth of over 1000% q/q, the stronger bottom line was due to a 2,594bp q/q expansion in gross margin and the N3.1bn biological asset revaluation gain versus a loss of –N1.4bn in the prior quarter. PAT grew to N20.0bn versus a post-tax loss of –N196m in Q3 2017 owing to the N17.0bn tax credit. Compared with our estimates, Q4 sales were  ahead by 44% while PBT and PAT were significantly ahead, due to the biological asset revaluation gain. We had forecast zero for this line.

On a full-year basis, sales advanced by 42% y/y to N22.4bn. We believe that the growth supports our opinion that local palm oil producers are in an advantageous position relative to importers (competitors) due to CBN policies which have encouraged local production and also translated to favorable pricing locally. Despite a 146bp y/y gross margin expansion, PBT declined by -65% y/y to N11.0bn due to increases of 71% y/y and 42% y/y in operating expenses and net finance charges. An 89% y/y decline in biological assets revaluation gain to N2.8bn also contributed. PAT grew by 17% y/y due to a tax credit of N14.5bn. FY 2017 sales were in line with consensus’ estimates. PBT was ahead by 20%.The company proposed a dividend of N2.00 per share, implying a yield of 3% and payout ratio of 8%. The DPS is higher than consensus’ DPS estimate of N1.37 and 33% higher than the dividend declared in 2016.

Year-to-date, Presco shares have gained 5.1%, slightly underperforming the NSEASI which has gained 7.0%. We expect the market’s reaction to these numbers to be mixed because we expect the better-than-expected dividend will slightly offset negatives coming in from weak underlying results.

We rate the stock Neutral. Our estimates are under review.

Presco Q4 2017 results: actual vs. FBNQuest Capital Research estimates (N millions)

FGN bond yields have narrowed in recent months due to the strategy of increased externalisation of sovereign debt obligations and the resulting strong bid from offshore investors.

Wait, wait and see

. Patience for the medicine to do its work: Nine members of the monetary policy committee (MPC) met this week, having reached quorum, and decided unanimously to hold the policy rate of 14.00%. The other policy parameters are also unchanged. Our call was a rate cut of 50bps on the grounds of slowing inflation in the months ahead and of providing a boost to economic activity. The committee concluded that a cut would have given a push to inflation and put pressure on the exchange rate, as well on the current account through higher imports. Its position is that its current policy stance has started to work and requires time to make its desired full impact.

. No change in fx policy: The committee noted the stability of fx rates and the healthy rise in reserves, while calling for expansion of the buffer. There was no indication of a change in its thinking on fx, and indeed there is little pressure to unify its rates.

. Toward sustainable growth: The committee opined in this particularly thin communique that the economy is returning to sustainable growth, citing as partial evidence the robust readings from its PMIs over the past year. We have doubts about the hoped-for quick passage of the 2018 budget, and about the response of the banks to the latest call to step up lending to employment generating industries.

. Warning of sticky food price inflation: There was no mention of the positive base effects for inflation and no sharing of the CBN’s in-house inflation forecasts so we cannot test its comments about the stickiness of food prices.

. Scope for additional yield compression: FGN bond yields have narrowed in recent months due to the strategy of increased externalisation of sovereign debt obligations and the resulting strong bid from offshore investors. We see a further leg to this compression, with yields in the mid-curve at around 13.00% by the next MPC meeting.