Ahead of the second-quarter earnings season, investors are looking beyond the profit growth of listed companies, choosing rather to wait on President Muhammadu Buhari-and his cabinet- for reasons to stake resources in the Nigerian equities market.
Data from companies’ Q1 scorecard and the Nigeria Stock Exchange (NSE) show that despite growth in the profit of 13 NSE-listed companies in the quarter, the said-companies, save one, have a negative year-to-date price change, as investors fail to reward their performance with better valuation.
Investors have overlooked an average profit growth of 26.7 percent year-on-year in Q1 2019, while the shares of the highly capitalised and liquid companies – with highest bottom-line among peers – have fallen by an average of 14.88 percent year-long. The price of shares reflects investors’ perception of a company.
“It is not just about the company itself, it is a bandwagon effect of the risk apathy towards Nigeria itself,” Fola Abimbola, equity analyst at FBNQuest, told BusinessDay. The analyst explained that prices currently do not reflect the strong fundamentals of many stocks in the market.
The trend among the NSE 30 contrasts with the expectations that price movement of shares ought to reflect changes in the performance of companies; it is assumed, other things being equal, that a profit-making company would return better value for its owners.
As a result, financial analysts and investors are always keen on companies’ earnings performances and expected future earnings as a guide to positioning in well-performing stocks.
The variance in NSE 30 profit growth and their share movement, however, indicates “the need for more urgent policy reforms” in restoring investors’ confidence in Nigerian businesses, Paul Uzum, a broker on the floor of the NSE, told BusinessDay over the phone.
“Foreign Portfolio Investors are trying to play safe given Nigeria’s weak economic growth and the lack of catalysts to encourage private sector growth,” Uzum said.
Nigeria’s economy has been projected by the World Bank to grow at 2.1 percent in 2019 while sub-Saharan Africa grows at 2.9 percent. The disparity is expected to widen in 2020 and 2021.
Investors would closely watch President Buhari and the cabinet he picks to guide their expectations on the performance of the economy, as the need for policy reforms across sectors of the economy remains on the front burner.
“If people start seeing a change in the government in terms of the calibre of people Buhari appoints, and macroeconomic shift towards a catalyst-driven economy, then things might change,” Uzum said.
Abimbola, however, maintains that it remains unclear what might be, given that “Buhari has said his second term would be status-quo”.
The analyst quips that failure of a market rally following the successful conclusion of the 2019 general elections, MTN to revive the market and favourable external factors to support equity market justifies scepticism about long-term trends.
“A Fed’s rate cut would only favour the fixed-income market should the prevailing conditions remain,” Abimbola explained, adding that an upbeat performance of companies in Q2 might not be enough to change market sentiment.
The equities market closed in the red for the seventh straight trading session on Thursday, dragging year-to-date return to -4.47 percent.
In Q1, recently merged Access Bank grew its profit by 87.67 percent to N41.1 billion. The tier-one lender had the highest profit growth in the period but its year’s return is -7.35 based on Thursday’s closing price of N6.3 per share.
Seplat also grew its bottom-line in the quarter by 61.29 percent but failed to trigger positive sentiments of investors who have refused to be lured by the oil and gas company’s N10 billion profit in Q1. Seplat has shed 19.78 percent year-to-date.
Similarly, consumer goods firm, Nestle Nigeria, made 49.3 percent profit more than it did in Q1 2018 when it posted N8.6 billion. The share of the manufacturer is down 2.36 percent on year-to-date, regardless.
The other 10 NSE 30 companies with positive profit growth in Q1 include Dangote Sugar, Fidelity Bank, Guinness, United Bank for Africa, Guaranty Trust Bank, Oando, EcoBank, First Bank of Nigeria Holdings, Zenith Bank, and Sterling Bank.
Among the 13 companies, Sterling Bank stands out with a positive year-to-date of 24.21 percent, surpassed by just Union Bank and Dangote Flour Mills. Only shares of these three companies have a positive return year-long.
Union Bank of Nigeria maintained its Q1 2018 of N5.3 billion profit in Q1 2019.
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