Stock market closes at -0.06% for the week

After a brief transition into the bearish mood, the Nigerian stock market partly swung back into a positive season during the week ended with most sectors partaking in the reverse trend, to close the market flat ex-Dangote Cement. This has been driven largely by attractive pricing following the previous weeks’ of downtrend occasioned by the profit-takers activities.

A section of the market participants opined that the 24^th World Economic Forum (WEF) for Africa being held in Nigeria for the first time also contributed to the positive sentiment in the market this week, signalling some economic strength despite the insurgency worries. Out of the 16 African companies selected to join the WEF global growth companies community, six are Nigerian companies (Seplat, CWG, UAC, Interswitch, Notore Chemicals and Nagode Group), which draws attention to the great potentials of the Nigerian market.

Banking Sector: Tempered expectations may bring revival

Skye Bank gained the most during the week, appreciating by 6.40 percent to end the week at N3.66. Though there was no major news in the market to drive the appreciation. However, our expectations for Skye Bank this year is high and we believe it represents a good buy at its current price.

Also, Unity Bank concluded arrangements to raise a total of N39 billion through both rights issue and private placement. The bank plans to utilise proceeds for shoring up its capital adequacy in compliance with the Central Bank of Nigeria’s directives. The capital raising is comprised of N19billion from rights issue of 38 billion shares of 50k each and N20 billion through a private placement, which will be fully taken up by Asset Management Company of Nigeria (AMCON).

However, the news has had no effect on the price of the stock as there is no incentive to cause any upward price movement as the only possible direction in this current circumstance.

Post rights issue and private placement, Unity Bank will emerge as the bank and company with the largest outstanding shares on the Exchange with 116.89 billion shares. We strongly believe the bank is not anywhere positioned to generate earnings to support this huge shareholding. Hence, it will have to undertake share reconstruction post capital raising for meaningful performance metrics.

Consumer Goods Sector: Quiet market mood persists

Flour Mill share price has remained flat in the last few trading days post release of Q3:2013/14 results. In a similar trend, 7UP, Cadbury, Dangote Flour, NNFM and PZ have been trading relatively flat in the past weeks. Honeywell Flour, Nestle and Vitafoam on the other hand have been marginally swinging in opposite directions without major news flow to trigger significant up-trend in price performance. On the other hand, Unilever sustained marginal gains throughout the week.

Interestingly, National Salt Company of Nigeria (NASCON) was on the front burner in the week, posting positive returns for major part of the trading days. The stock returned 8.25 percent on back of expectation of its 2013FY results. We suspect mixed reaction in the coming week on NASCON shares owing to sentiments on possible drop in 2013FY revenue, while a modest dividend yield will likely play out.

Industrial Goods Sector: Production and cost efficiencies dictate profit performance

Dangote Cement posted Q1 results, which was largely below expectations with the company recording a modest 8.5 percent revenue growth largely owing to production hitches at its Obajana and Ibese plants caused by gas supply constraints and LPFO shortages. The lower gas utilisation contributed to 26.2 percent growth in cost of sales while operating expenses rose by 24.4 percent due to expenses incurred on direct-to-customer distribution and depreciation on additional trucks.

Similarly, the expiration of tax holiday and commencement of tax payments on some of its new plants led to the 11.3 percent drop in PAT. However, with its coal milling plant projects expected to be completed this year, coal should then act as a substitute for LPFO to augment gas usage, which should support smooth production process and reduce the pressure on its costs. While the stock has lost 1.11 percent since the release of its Q1 results, Dangote Cement remains a top pick for medium- to long-term value investors.

Ashaka cement gained 10.51 percent in the week as investors priced-in its impressive performance numbers. The company grew its Q1:2014 profit by 69.5 percent compared with the decline recorded in 2013. Increased cement production volumes following maintenance works on its kilns last year drove revenue growth of 7.7 percent. Earnings expanded on the back of increased coal usage as opposed to Low Pour Fuel Oil (LPFO; a more expensive energy source), and other cost cutting strategies. We expect the company to maintain its current cost levels as coal utilisation persists. The ground-breaking for its new plant capacity expansion was done in April with project completion expected in the next 2-3 years which should support Ashaka Cement’s medium-term growth prospects.

Insurance Sector: Impressive week for the insurance sector

The insurance sector was on investors’ radar throughout the week as the sector recorded 4.06 percent WtD gain as measured by the MERI-INS Index. The upward swing in the price of Custodian and Allied (second most capitalised stock in the sector, which gained 21.07% WtD) contributed to this feat. Following the release of its impressive Q1 results, the company grew earnings by 78 percent and investors’ sentiments have swung largely in favour of the stock to push its price upward by a massive 33.18 percent in 10 trading days. While market participants expect audited 2013FY results from Continental Reinsurance, its share price appreciated by 2.97 percent compared to previous week’s close.

Some market participants express bias that this trend may continue as more investors discover some inherent values in the Nigerian insurance space. Our top picks based on company’s fundamentals and investors’ sentiments remain Custodian, Continental and NEM Insurance.

Oil and Gas Sector: WEF recognises Seplat’s growth potential

The World Economic Forum (WEF) Africa on Tuesday named the newly listed Seplat a global growth company; a recognition that further reinforces the company’s focus on being a champion among indigenous oil exploration companies. The stock gained 8.31 percent in the week to close at N682.33, owing to boosted investors’ sentiments. We anticipate this to linger for a while.

On the back of impressive Q1 results, Mobil’s price trended during the week, returning 18.15 percent. We see this positive trend being sustained in the coming week although profit taking may temper expected gains. Meanwhile, the uncertainty trailing Oando’s completion of its ConocoPhillips acquisition was further fuelled when the company announced extension of the deadline for completion of the deal to June 30 from May 23.

Agriculture Sector: Sentiments may continue to favour PRESCO

Negative earnings growth in 2013FY results plus “lower-than-expected” dividend declarations for Okomuoil and PRESCO made the 2 stocks shed some Naira bringing them closer to their “fundamental” prices, according to our valuations.

Okomuoil Q1:2014 results reveal revenue declined only marginally (0.47%). However, this may be rated impressive especially in the light of about 30 percent decline in the price of rubber (which accounts for one-third of the company’s revenue) and about 4 percent increase in Crude Palm Oil (CPO) prices. We advise cautious trading on the stock in the meantime.

However, we envisage some positive sentiments to favour PRESCO, especially as we expect Q1:2014 revenue and PAT growth to be positive. In spite of this, we still re-iterate our position that the stock is fairly valued at N35.18. As for Livestock, in the absence of any significant news flow, we see the stock’s price gyrating around current level.

Services Sector: A glimmer of hope?

The services sector has witnessed sustained negative trading sessions with returns to date at -11.54 percent as measured by our MERI-Services Index. The downbeat mood in the sector could initially be linked with the general negative mood in the market in the first quarter. However, this depressing trend was further worsened by largely unimpressive 2013FY and Q1:2014 results as most of the companies recorded huge declines in earnings. AIRSERVICE, LEARNAFRICA, TRANSEXPR, CAPHOTEL, AFROMEDIA and TOURIST all posted earnings decline of 82 percent, 43 percent, 23 percent, 53 percent, 86 percent and 76 percent in that order.

As an exception, Transnational Corporation of Nigeria (TRANSCORP) grew its top and bottom lines in Q1:2014 by whopping 196.86 percent and 278 percent, respectively; driven largely by continued its oil and gas and energy business divisions.

However, TRANSCORP and the Nigerian National Petroleum Corporation (NNPC) signed a production sharing contract last week for the exploration and production of OPL 281.

Under the terms of the contract, the company has a working program to prove and develop an approximate 104 million barrels of oil reserves, an additional 335 million barrels of probable reserves, and about 4 trillion cubic feet of natural gas reserves. Investors possibly reacted positively to this with news flow during the week ended as the stock closed at N3.67 to post +7.31 percent capital appreciation. We expect the stock to witness positive trading in the short-to-medium term as investors take position ahead of impressive performance numbers in 2014FY.