Week in Retrospect: Equities – DANGCEM Failed in Attempt to Buck the Trend

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November 2, 2018/Cordros Report

  • We guided in our Q4-18 note on Macro and Markets (published October 16), to Nigerian equities furthering losses in October and November, with rally expected in December. Our view had the backing of historical market trend, more so that this year has been broadly bearish. 
  • DANGCEM, accounting for 30% of the market, almost single-handedly caused a buck in the trend. Thanks to the stock’s 5% m/m rally, the NSEASI had posted 1.2% m/m gain on the eve of October ending (on Tuesday), despite negative market breadth. Stripping out DANGCEM, we estimate the rest of the market was down by about 0.5%. 
  • DANGCEM’s MtD gain was reduced to 2% on the final trading day of October, swinging the Index to 2.1% loss on the day’s session, and 0.9% loss for the month. Again, stripping out DANGCEM, we estimate that the rest of the market was down 2.1% by the end of the month. We did say we expected the loss in October would be smaller compared to the 5% average monthly loss experienced in Q3. 
  • November is typically more bearish for equities than October, so we suggest investors gear up. But amidst that, we have observed some “shenanigans” in past years where traders buy the dip of November and sell in the rally of December. 

(2)  Money market – NTB print at surprising stop rates

  • At the treasury bills auction held on Wednesday, the 182D and 364D bills printed at 13.5% and 14.4% stop rates respectively, effectively yielding 14.5% and 17% respectively. The last the bills printed at those stop rates in an auction was February and January this year respectively. OMO bills of similar maturities printed 13.9% (182D) and 16.8% (364D) effective yields yesterday. The 182D and 364D bills printed at 19.2% and 23% effective yields at the primary auctions in December 2016, and were then excused for the poor economic condition. But clearly – with the FX reserves down for the fourth month in a row – we might just be on a gradual journey to those levels, as the CBN tries to lure the FPIs to rollover maturing holdings. 

(3)  Jul-Sep Earnings – Consumer goods companies disappoint 

  • It was the last reporting days in respect of the July-Sep earnings (mostly unaudited), so we saw a deluge of results released between Mon-Wed. 
  • As the table below shows, the Jul-Sept results published by the consumer goods companies were largely disappointing. Common factors that pressured earnings were (1) lower revenue (due to weak demand, price cuts, and the Apapa traffic factor), (2) weaker gross margins, caused by the price cuts, higher input costs, and low utilization rates, and (3) increased OPEX. NESTLE and UNILEVER fared better.
DANGSUGAR

Q3-18

Q3-17

Change

                                      NB

Q3-18

Q3-17

Change

Revenue

32.68

44.35

-26.3%

                                      Revenue

65.41

73.69

-11.2%

Profit after tax

4.04

9.43

-57.2%

                                      Profit after tax

-3.65

0.26

-1502.6%

                                                     
FLOURMILL

Q2-19

Q2-18

Change

                                      NESTLE

Q3-18

Q3-17

Change

Revenue

32.99

21.33

54.7%

                                      Revenue

67.84

63.32

7.1%

Profit after tax

-0.02

-0.84

-97.9%

                                      Profit after tax

11.66

6.43

81.3%

                                                     
GUINNESS

Q1-19

Q1-18

Change

                                      UNILEVER

Q3-18

Q3-17

Change

Revenue

28.09

29.90

-6.1%

                                      Revenue

24.18

22.67

6.6%

Profit after tax

0.84

0.04

1918.6%

                                      Profit after tax

3.85

1.24

210.3%

  • The Oil & gas companies largely impressed, with (1) volume-led PMS and lubricants revenue growth, (2) higher gross margins and other incomes, and (3) stable OPEX, offsetting increases in net finance costs.
TOTAL

Q3-18

Q3-17

Change

Revenue

70.65

68.23

3.5%

Profit after tax

1.99

1.35

47.4%

       
FO

Q3-18

Q3-17

Change

Revenue

32.99

21.33

54.7%

Profit after tax

-0.02

-0.84

-97.6%

       
MOBIL

Q3-18

Q3-17

Change

Revenue

39.13

32.03

22.2%

Profit after tax

2.42

2.12

14.2%


(4) 
Conference Calls Highlights

FBN HOLDINGS PLC

  • The bank revised some of the projections made at the beginning of the year: cost to income ratio: 58% (previously: c.55%), net loan growth: c. < 1% (previously: 7-10%), and NPL ratio: 17-18% (previously: <15%). 
  • The increased NPL ratio projection is as a result of the expected FX impact translation on the outstanding loans.  Ex-FCY translation impact, the NPL ratio would have been 17%.   
  • With regard to the major name outstanding in the loan book – Atlantic Energy – the management stated that it was looking to ensure it will be resolved by 2019. However, in the absence of any major progress, it will have to be written off the books by end of that year. 35% provision has been made on the exposure so far. However, no additional provision is expected in excess of 5% (bringing total provision to 40%) if the need to do so arises. 
  • Loan book growth has been slower than expected so far this year. Hence the slower growth in interest income than expected. 
  • Decision to pay off the 2019 callable bond will be made after proper analysis, taking the liquidity position and need to be active in the global financial market, into consideration.
  • On the Insurance business, management stated that the Insurance arm of the business was adequately capitalized, amidst the recently halted recapitalization exercise by NAICOM. 
  • The major reasons for the decline in fee income was lower fees income generated from loan creation, and financial advisory income. E-business income growth remains strong. 
  • 51% loan book is denominated in FCY, with exposures majorly in the Oil & Gas and project finance. 
  • With 47.5% of its loan books having < 1-year tenors, the bank stated it was [part of the bank’s strategy to have its loan book exposures short-tenured. He also stated that new loans were in the pipeline to replace the exposures should they mature. 
  • The sectors of interests for loan growth in 2019 are manufacturing, consumer loans, and other non-oil sectors.

ACCESS BANK PLC

  • Management shared our concern over the high cost of funds, and the jump in interest expenses (+22% y/y) as shown in the 9M-18 result. Management stated that plans to wind down its structured debts will be taken on fully in Q4-18 – wherein USD567 million of structured debts would be wound down, while its commercial papers exposure will be reduced to NGN20 billion by the end of the year. 
  • The outstanding bond which is callable next year, will be paid off. 
  • Management also stated that it will look into repricing some of its expensive deposits, particularly the term deposits – in a bid to tame the rising cost of funds. 
  • On the 9-mobile exposure, the current coverage on the loan is 40%. The bank remained optimistic on the resolution of the loan, and that upon receipt of expected payments, coverage on the loan would rise to 80%. 
  • About c.USD1.3 billion was outstanding in swaps, with USD550 million maturing this year, and USD400 million maturing within 6 months. 
  • On NIR, decline in trading income (owing to derivatives which are fair valued through P&L) offset growth posted in fees & commission (following growth in E-banking income and credit related fees), as well as in other income (on the back of loan write-backs).   
  • The FX translation rate used in the 9M-18 account is NGN361/USD.

opan



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