Nigeria tops Rencap Frontier picks on demographics, growth

Nigeria is Renaissance Capital’s top pick in a universe of 35 Frontier Markets (FM) as the country’s bourgeoning population and steady high single digit growth rate, make an attractive investment theme.

“Nigeria tops our multi-factor model, with both valuation and growth looking supportive, although the election cycle provides short-term risks,” said Rencap in a 200 page report released April 28th, entitled ‘the final frontier and beyond’.

“Demographics, low debt/GDP ratios and high growth, are positive for Africa (31 percent of MSCI Frontier after May), with Nigeria the best ranked in Frontier,” the report said.

Frontier Markets are those countries whose stock markets do not meet the criteria (liquidity, accessibility and size) required for Emerging Market (EM) or Developed Market (DM) inclusion.

Rencaps multi-factor model for evaluating the attractiveness of each FM it screened included: market size, macro score, GDP growth cycle, Return on Equity (ROE), dividend yields, and 2015 estimated EPS growth.

Nigeria’s demographic dividend and market size can be seen in its being the country with Africa’s largest population and consumer market.

It also recently emerged as the largest economy in Africa, with nominal GDP of $510 billion, and growth rates forecast to average over 7 percent per annum over the medium term.

Nigerian equities made up 17 percent of the MSCI FM index as at May 2014.

Investors have tended to value countries running twin surpluses (current account/ budget), since the Fed warned of tapering in May 2013, leading to withdrawal of capital flows from countries deemed risky.

Nigeria is seen as attractive because it runs a post rebasing C/A surplus estimated at 5 percent of GDP, while the budget deficit to GDP and public debt to GDP is estimated at to 1 percent and 11 percent respectively.

This means the government has more room to borrow, which is positive for infrastructure development and companies active in that space.

Guaranty Trust Bank, Lafarge WAPCO, and Nestlé Nigeria are identified by Rencap as top FM equity names for investors.

“We believe GTB is head-and-shoulders above the rest of the banks we cover in SSA and view it as the best-in-class SSA bank. It has consistently led the pack in generating value-creating returns in Nigeria,” the report said.

“What really differentiates GTB from peers is its focus on cost efficiency (with the lowest cost/income ratio in Nigeria) and value-creation for shareholders (with the highest RoA and RoE, at c. 30 percent for 2013).”

Rencap has a target price (TP) of N33.5 on GTB, implying c. 20 percent potential upside from current levels.

Lafarge WAPCO’s buy rating is centered on improving margins, lower tax rates, a declining debt balance and renewed opportunities for top-line growth, according to Rencap, which has a TP of N130 on the stock.

Nestlé Nigeria is also recommended as a top pick for investors seeking exposure to the Nigerian consumer.

Rencap uses a forward exit P/E of 30 xs to derive a TP for Nestlé Nigeria of N1, 200 (current price NGN1, 100).

There are 15 Nigerian companies from the financials, consumer staples and materials sectors in the MSCI FM index, with MSCI full market capitalisation of $60 billion and free float market cap of $24 billion.

This compares with the NSE-ASI with market cap of $78 billion.

On EPFR data, frontier funds have seen inflows of $4.4bn or 33 percent of asset under Management (AuM) since the beginning of 2013, while over the same period, EM equity funds have seen net outflows of 5 percent of AuM.

The MSCI Frontier Index has advanced 34 percent in dollar terms, since end-2012, while MSCI EM has declined 5 percent over the same period. However, MSCI Frontier is still 40 percent below its 2008 dollar peak.

Frontier markets which are much less correlated with global equities than EMs are supported by a relatively high dividend yield, compared with both EM and DM. MSCI Frontier’s trailing dividend yield is 3.4 percent, compared with 2.7 percent for EM.

PATRICK ATUANYA