After three consecutive years of losses, the All Share Index (ASI) rebounded strongly in 2017 to close up 42% at 38,243.19 points. Similar to the preceding years, fx was the single greatest driver for the market in 2017. However, unlike in previous years during which the naira saw marked devaluation and a worsening of fx liquidity, through 2017 fx liquidity improved substantially and the naira was stabilised by a series of measures by
The recovery was broad-based. The sectoral (based on names we track) chart below shows arithmetic averages (not weighted), hence most sector average performances being higher than that of the ASI. The banks led the way with a 76% gain, followed by respectable performances in most non-financial sectors. On average, our coverage universe of 8 banks doubled. The cement sector turned in a 46% gain, but this was largely due to the smallest producer, CCNN, rising 90%. Dangote Cement and Lafarge Africa managed gains of 32% and 16% respectively, the latter having been held back by capital raising concerns. Similar to the cement names, the smallest of the three brewers we cover, International Breweries, flattered the sector average, thanks to a 195% gain.
Both Nigerian Breweries (-9%) and Guinness Nigeria (+20%) underperformed due to lingering fx and capital raising issues respectively. The loss by the oil & gas sector reflects a correction after a strong 2016. Seplat’s +65% gain deserves a mention however, helped by improvements in its operating environment.
We are slightly positive on the equities market, largely because of the extent of the gains recorded since 2017 and ytd 2018. We have increased price targets across the board on the back of cuts to the risk free rate and equity risk premium assumptions in our valuation models of 150bps and 50bps respectively to 14% and 6% respectively. These
adjustments reflect current economic realities. Notwithstanding, the run-up in the shares implies that yields on final dividends are unlikely to be better than mid-single digits.
Although fundamentals are stable to improving, supported by the improvements on the macro front, we do not expect earnings to surprise (positively) in a significant manner.
Caution as the electoral cycle kicks off this year is also likely to limit risk appetite from late Q2 onwards. For these reasons, we are projecting up to 25% rise in the ASI for 2018, implying a close of c. 47,800 by year-end.
After a stellar 2017, we expect most of the banks we cover to post earnings growth in 2018 (12% on average, excluding outlier Diamond), given that fx-related base effects should be less problematic. We expect the banks to offset reinvestment risk from lower yields on fixed income securities with a pick-up in risk asset growth. That said, much of this outlook is already reflected in valuations. In addition to the reductions to our risk free rate and equity risk premium assumptions, we have also adjusted our dividend discount models to reflect peak cycle multiples / ROE assumptions (previously average cycle). Despite this, only Zenith Bank offers any meaningful upside potential, hence our Outperform rating. Concerns around the bank’s asset quality are overblown in our view.
We are also of the view that our forecasts incorporate sufficient conservatism. From current levels, we see upside potential of 17%. Moving on to the non-financials, we expect the uptick in economic activities to drive a pick-up in unit volume growth for the cement sector in 2018E. We expect that the FG’s release of the of N750bn – the second tranche of the capital budget – and on-going construction work being carried out with the N100bn Sukuk bond which was raised in September 2017 to support volume growth of high single-digits in 2018E (thanks to
base effects). We forecast average sales growth of around 11% y/y for our two cement names. Although we see DangCem delivering similar PBT growth to sales of c.10% y/y in 2018E, we forecast PBT growth of 277% y/y on the back of base effects (2017 PBT was weighed down by fx losses and one-off items in Q3). At current levels, on our
published estimates, Dangote Cement is trading at a 13% premium to our fair value estimate. Although our price target for Lafarge Africa implies a potential upside of 39% from current levels, post a rights issue of N131.65bn, much of this upside disappears.