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Vetiva Research - Update on Coverage Companies

Update on Coverage Companies                             

Consolidating on mostly better-than-expected performances from 9M’17, we are optimistic of more positive earnings for the FY’17 period, supported by stable macroeconomic conditions in the final quarter of the year and the usual festive demand boost. Given the improvement in Nigeria’s risk environment and downward trajectory of FGN treasury rates spurred by a modest economic improvement and possible rate cut in the near term, we have revised our coverage valuations to reflect the new realities. Specifically, we revise our risk-free rate downward to 14.65% and our market risk premium is cut by 50bps to 5.50%.                   

We remain optimistic about FY’17 earnings performance, supported by seasonal boost and a stable macroeconomic environment. In the banking sector, we note that despite a shrunk loan book (9M’17 average loan growth: -3%) across our coverage banks, the top tier banks benefitted from the elevated interest rate environment. For the Consumer and Industrial Goods sectors, we expect that year-on-year comparables will remain strong across our coverage companies, driven by stronger prices, volume boost due to the festive season, and stable costs. Finally, upstream energy players should turn in impressive results – supported by a rebound in crude production volumes and higher average crude prices in FY’17 (and Q4 especially). We believe downstream earnings will remain dismal, constrained by pricing regulations and intermittent product shortages. We revise our Risk-Free Rate (RFR) assumption to capture our expectation of near-term yield moderation in the Nigerian Fixed Income market.                            

We have revised our valuations across our coverage names. We are most optimistic about the banks and expect the sector to remain the toast of investors. Given the sector’s strong correlation with the macroeconomy, the anticipated macro improvement bodes well for earnings. Overall, despite the recent rally in the Nigerian equity market (NSE ASI up 14.5% ytd), we hold the view that the market still has legs – supported by the NSE ASI P/E ratio of 14.18x versus MSCI Frontier Market Index of 15.83x and MSCI Emerging Market Index of 17.40x.