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Equity Market Strategy - Beyond the obvious, opportunities abound

• Since the listing of MTN shares on the NSE, the market has been on a rollercoaster with positive daily reading in its last six trading sessions (+10.1%). So far, a whopping 310 million unit of MTN shares have been exchanged at a value traded of N40.4 billion. No doubts, the ‘new kid in town’ appears to be pulling its weight. To reflect its remarkable solo efforts, when you exclude MTNN’s 10% daily gain since listing, market would have only gained a tamer +2.5% reflecting a slight improvement in investors’ sentiment. On a lighter note, if one could read the minds of other heavy weighted stocks on the bourse (DANGCEM, ZENITH, GUARANTY etc.) I am so sure echoes of ‘am I this bad?’ would resonate with acute bitterness…lol.
• To be fair on MTNN, the rally appears justified. First off, after crossing N1 trillion revenue mark in FY 18, MTNN also recorded an impressive start to 2019, with Q1 19 revenue increasing 13% YoY to N282 billion. At listing, the company’s valuation appeared attractive with P/E and EV/EBITDA ratios of 12.6x and 4.5x at significant discount to the respective multiples of Safaricom (16.7x, 8.2x), the MTN Group (30.5x, 4.9x) and Bloomberg MENA peers (19.5x, 5.2x). In addition, the company also boasts of a high ROE (FY 18: 66.4%) and dividend payout of ~80%.
• Having gained ~50% since its listing there seem to be little to boast of as valuations starts to appear stretched with P/E and EV/EBITDA of 20.2x and 7.1x, using yesterday’s closing price of N144.85/s. Consequently, compared to the peers’ multiples we highlighted earlier, MTNN at current pricing appears quite pricey. Hence, as against playing a catch-up on MTNN shares, we recommend cherry picking from our array of fundamentally sound stocks whose valuation appears attractive and has greater upside than MTNN at current price. The next table clearly shows what the depressed equity market has done to our investment rating.

• Despite facing mammoth pressures ranging from a lower interest environment, limited FX gains to implementation of IFRS 9, Nigerian banks withstood the year 2018, with our coverage names posting solid Return on Equity (ROE) and PAT margins. Our estimate over 2019 suggests sustained earnings growth for the banks largely driven by improved asset quality and resilience in Non-Interest Revenue (NIR).
• We continue to favor the heavyweights in the banking sector with GUARANTY, ZENITH and UBA catching our eye. Similar with other sectors, Nigerian banks’ stocks have been overly punished with most stocks trading at historical lows. Current pricing therefore presents an opportunity to position for a pick up in the near term.
• Dangote Cement Plc: While DANGCEM is yet to hit the N1 trillion revenue mark (2018: N901 billion) like MTN Nigeria (MTNN), it is a contender in terms of profitability. MTNN’s annualized Q1 19 EPS of N9.52 and ROA of 13% is no match to our DANGCEM’s 2019 forecast EPS and ROA of N15.55/s and 16.3%, respectively. However, it is fair to state that MTNN’s annualized ROIC and ROE of 43% and 99% dwarfs DANGCEM’s 2019E of 20% and 26.4%, respectively.
• In addition, the stock currently trades at a 12-month trailing P/E of 9.1x (adjusted: 15.8x) which is a far discount to its 5-year average P/E of 15.29x (adjusted: 17.4x) and Bloomberg MENA peers of 22.4x.  Dangote Cement remains an uncontestable economic moat despite the recent challenges it has faced with the new production capacities from the BUA group. Our FVE on the stock currently prints at N248.14 which implies a 22% upside from current market price, while our forecasted 2019 EPS prints at N15.55 and translates to a forward P/E of 13.1x. We resound our STRONG BUY rating on DANGCEM – “a wonderful stock at a wonderful price”.