Meristem Investment Guide: Naira gains 71bps…as losses in equities market persist

The bears dominated in four of five trading days, resulting in a 1.08% decline in the NSE ASI. This bearish mood was also confirmed by the market breadth, which pegged at 0.61x, as 28 stocks appreciated while 46 declined in value.  Activity during the week was comparatively lower, as volume traded declined by 18.46% relative to the previous week. Value of transactions, however, increased by 103.51%, indicating that a significant portion of trades were on large-cap stocks.

Top gainers during the week were CCNN, RTBRISCOE, CHAMPION, NEIMETH and NASCON, with respective gains of 10.71%, 10.53%, 9.03%, 7.56% and 6.38%. Top losers, on the flip side, were CILEASING, MAYBAKER, UNHOMES, OKOMUOIL and PZ, with respective losses of 15.15%, 14.29%, 9.69%, 9.60% and 9.23%.

During the week, treasury bills and bonds worth NGN223.86bnwere issued, while treasury bills worth NGN170.18bn matured. The CBN also conducted Open Market Operations in the week, which resulted inlower liquidity in the system. Consequently, we saw rises in money market rates, especially the NIBOR CALL rate and the OBB and OVN rates. The Naira held steady against the dollar during the week, appreciating by 0.71%.

As we move towards the end of H1:2015, we believe that expectations from Q2:2015 corporate performances will determine market direction. Whilst these results are expected to be affected by the overall drag in economic activities during the period, we opine that earnings releases would be mixed.

In this report, we review events in the economy, laying emphasis on performance of different segments of the financial market, while presenting our expectations for the week ahead.

Economic Round up: Foreign Reserves Drop to $29.004b

Tension continues to mount in the Greek economy, as the country has less than two weeks to strike a deal with its creditors or default on the EUR1.6bn loan repayment due to IMF by 30th of June 2015. Although Greece has already rolled in a part payment of EUR300mn, it risks having to leave the Eurozone and possibly the European Union (EU), if the obligation is not met. Alternatively, the IMF and ECB board have offered to grant Greece bailout funds of EUR7.2bn, if it agrees to their proposed reforms concerning pensions, VAT and budget surplus.

Few weeks after the inauguration of President Muhammadu Buhari’s administration, the absence of positive news inflows or clear policy direction in the face of pressured monetary and fiscal systems, remain major causes for anxiety in the polity.  The most recent data available on Central Bank of Nigeria (CBN) website, showed that the FX reserves settled at USD29.00bn, which represents a 2.00% decline Month to Date (MtD), from USD29.59bnas at the end of May, 2015.

In the face of dire financial crisis affecting most states of the country, the Nigerian Governors Forum (NGF) has challenged the federal government to reimburse them for executed federal government projects in their respective states, rather than move for bailout from the federal government.

We opine that the inability of about 18 state governments to pay accrued salaries coupled with the existing economic challenges faced by the country continues to cast aspersion on the credit worthiness of Nigeria, and will affect investors’ sentiments.

Fixed Income Brief: Naira appreciates 71bps WoW

Sales at the Primary Market Auctions in the week to the tune of NGN223.86bn resulted inan upward trend of money market rates for the week, despite a net CRR credit of about NGN27.7bn, and net Treasury Bills maturities of NGN26.54bn hitting the system. Open Market Operation (OMO) auction worth NGN79.71bn was conducted on Monday, while banks also funded NNPC debits in the week. Consequently, average change on OBB and OVN rates was +5.27% WtD, as they settled at 14.83% and 15.13% in that order. Average NIBOR pegged at 21.19% (+6.27% WtD).

Average yield on Treasury Bills instruments closed higher in the week (+0.60%) to stay at 13.23%, as respective yields on the instruments settled at 12.06% (1M), 12.75% (2M), 12.81% (3M), 13.57% (6M), 13.89% (9M), and 14.31% (12M).

Sentiments continue to trail the pronouncement of JP Morgan’s ejection of Nigeria’s bond from its Government Bond Index by December 2015 if the government does not restore liquidity to its currency market, amongst other requirements. This, they noted, will allow foreign investors tracking the index to have seamless transactions. Should this crystalise, it will trigger significant outflow of funds from the country and as such, pressure the nation’s bond and currency markets. Our Meri-Bond index level pegged at 787.57, representing a WtD change of +0.45%.

The Naira had an impressive run against the dollar in the week, appreciating by71bpsWoW to peg mid-price at NGN197.37/USD. YtD depreciation stands at -6.50%.

Agric Sector: Sector records loss after a 4-week bullish run

The equities market lackluster performance was also seen in the agric sector as the MERIAGR index witnessed a WtD decline of –8.37% to trim YtD to 27.42%. No stock appreciated during the week, three stocks declined while the other two stocks traded flat.

Following a sterling performance last week, OKOMUOIL recorded the highest decline in the sector, to peg its market price at NGN31.55.PRESCOalso pared by 7.25% to drag its share price to NGN32.00 just as LIVESTOCK trimmed by 5.83%.ELLAHLAKES and FTNCOCOA both traded flat.

The agric sector, until lately, stayed resilient despite the poor performance of the equities market. We envisage a continuance of the recent negative sentiment as investors take profit in coming weeks.

Banking Sector: Sector breadth at 1.60x despite WoW loss

The banking sector ended on a negative note, with the MERI-BANK Index closing with a WtD loss of 1.01%. However, a sector breadth of 1.60x showed a positive mood, as eight stocks appreciated in the week, while five stocks declined in value. This can be attributed to the large market capitalization of stocks which recorded the losses, as well as the size of the losses.

Leading the gainers for the week were STANBIC, FIDELITYBK, GUARANTY, UNITYBNK and ACCESS, with respective gains of 2.22%, 1.70%, 0.41%, 0.40%, and 0.33%; while the losers were WEMABANK, FBNH, UBN, ZENITHBANK, and UBA, with losses of 7.69%, 6.03%, 3.50%, 2.55%, and 0.19% in that order.

Heading towards the end of the second quarter, we expect investors to trade in line with their Q2:2015 performance expectations, as well as ahead of possible interim dividend payments. However, given that Q2:2015 results are expected to be negatively affected by reasons such as; the limit on growth in non-interest income, harmonized CRR and its effect on banks with high exposure to private sector funds, further pressures on interest expenses as a result of rising cost of funds, and loan impairment charges which have been affected by the challenging operating environment and non-performing loans, amongst others, we do not anticipate significant buy pressures on the sector stocks for the week.

We opine that long-term investors may take advantage of cheaply priced stocks, which might result in positive returns for the week.

Consumer Goods: UNILEVER extends tender offer to June 25th.

In line with market performance, some counters retained their market price, while there were pockets of gains and losses in the week. The Conglomerates and Consumer goods sector recorded WtD returns of -1.33% and 0.99% respectively, as measured by our sector indices.

CHAMPION led the gainers’ chart with a 9.03% WoW gain. Also on the chart were NASCON, DANGSUGAR and UACN with WoW respective gains of 6.38%, 4.66% and 1.20%. On the flip side was PZ with the highest WoW drop of 9.23%. The counter was trailed by DANGFLOUR, INTBREW,CADBURY, HONYFLOUR, GUINNESS, NB,FLOURMILL, VITAFOAM ,and NESTLE with respective declines of 7.86%, 7.45%, 5.84%, 4.52%, 1.79%, 1.48%, 0.69%, 0.37%, and 0.01%.

Unilever Overseas Holdings B.V (“Unilever Overseas”), the parent company of Unilever Nigeria Plc (“UNILEVER”) extended the tender offer to acquire additional 942,215,930 ordinary shares of 50 kobo each at NGN45.50 per share which was supposed to close on 15th June, 2015 to 25th June, 2015. The company stated that the extension was to ensure full participation of shareholders, following the disruption of postal and transportation services during the period of fuel scarcity.

We expect the dampened mood to persist in the coming week. However, we imagine discerning investors to take position in stocks trading below their fundamentally justified prices.

Healthcare Sector: Counters maintain oscillating trend

The sector towed the direction of the market as the MERI-HLTH index pared by 0.60% Week to Date to settle the Year to Date return at 9.67%. Sector breadth pegged at 0.67x, as two stocks advanced, against three stocks that shed points while other counters traded flat.

MAYBAKER emerged as the top slacker for the week, as the counter continued in its oscillating trend in the week. The stock reversed the previous week’s gain to decline by 14.29%, thereby pegging its share price at NGN 1.50. The stock was trailed by EVANSMED which depreciated by 9.14% to settle at NGN1.59. GLAXOSMITH, with a loss of 0.59%, also featured on this chart.  NEIMETH and FIDSON however, reversed their previous week’s lacklustre performance, appreciating in price by 7.56% and 1.49% to close at NGN1.28 and NGN3.40 respectively.

The performance in the sector has been largely dominated by activities of speculators who take position on stocks trading below their fundamental prices and take profit when they have accumulated some gains. We expect this current trend to persist in the coming week. However, we advise investors to trade cautiously.

Insurance Sector: Losses halt, Sector gains 0.77% WoW

In spite of profit-taking activities on insurance stocks during the week, the sector was able to halt the negative run suffered in the last two weeks. As measured by the NSEINS10 index, the sector recorded a 0.77% gain WoW to trim the year to date return to -2.47%. Market breadth (0.25x) skewed in favour of decliners, as only one stock advanced against 4 decliners.

NEM logged the highest loss during the week, having shed 7.32% to close at NGN0.76 (vs. NGN0.82 in previous week). Joining the counter on the losers’ chart were CONTINSURE, AIICO and WAPIC with respective losses of 2.91%, 2.13% and 1.96%. Conversely, MANSARD emerged the lone gainer, as the counter appreciated by 5.65% to close at NGN2.99 (vs. NGN2.83 in the previous week).

STACO Insurance Plc. released both 2014FY and Q1:2015 financial results during the week. Gross Premium Written (GWP) in both periods respectively grew by 5.82% and 10.08%. However, Earnings after Tax in 2014FY declined by 60.19% to NGN185mn (vs. NGN464mn in 2013FY), and a significant YoY gain of 75.55% was recorded in Q1:2015.

Similarly, Regency Alliance Insurance Plc. released both 2014FY and Q1:2015 financial scorecards. The 2014 YoYGross Premium Earned (GPE) grew by 17.02%, but declined by 23.12% in the Q1:2015 YoY. Earnings after Tax however pared in both periods by 7.23% and 42.21% respectively.

Industrial goods: More stocks close negative

The industrial goods sector reversed the marginal gains from the previous week, as the Meri- Industrial index closed the week 0.96% lower, dragging YtD return to -9.77%. Only two stocks recorded WoW gains while 5 stocks declined in value.

CCNN topped the gainers’ chart with a 10.71% growth in share value during the week. PORTPAINT trailed, gaining 1.67% WoW. After over 2 months of trading flat at NGN0.83, DNMEYER emerged as the largest sector loser, shedding 8.43% WoW. CUTIX, DANGCEM, BERGER and WAPCO also declined by 1.14%, 1.12%, 1.06% and 0.10% accordingly.

Although the market continues to bleed due to uncertainties in the nation’s economic and political space, we urge stakeholders with long investment horizons to continue to hold and take positions in fundamentally justified and attractively priced stocks.

Oil & Gas Sector: Fuel subsidy hits NGN49.35/Litre

More stocks recorded gains at the close of the week, as four counters advanced while three stocks recorded price decline.The NSEOILG5 index settled at 1.88% lower in the week.

CONOIL gained 5.00% WoW to close at NGN42.00. FO, ETERNA, and MOBIL also featured on the gainers’ chart, with 4.03%, 2.77%, and 0.68% respective gains. On the flip side, SEPLAT shed 6.57% to close at NGN315.80, OANDO and TOTAL followed suit, with 6.19% and 0.56% declines respectively. Other counters traded flat.

The landing cost of Premium Motor Spirit (PMS) according to data from the Petroleum Products Pricing Regulatory Agency (PPPRA) have reduced to NGN120.86/litre from NGN123.12/litre. We however note that with subsidy on PMS at NGN49.35/litre, this still poses a threat to the country’s revenue.

As investors continue to factor in current events in the sector into their pricing of the sector counters, we advise investors to take long term position in fundamentally justified stocks.

Services Sector: RT BRISCOE springs back

Three stocks appreciated against the five stocks that declined to tilt sectoral breadth (0.60x) in favour of decliners. The MERI-SER index declined by -1.16% during the week to further drag the YtD to -5.56%.

RTBRISCOE bounced back from five weeks of decline to lead the gainers’ chart with gain of 10.53%, thereby pegging share price at NGN0.84. Other performers include LEARNAFRICA (5.22%), and IKEJA HOTEL which also upturned2-weeks of lacklustre performance to appreciate by 3.33%.

On the flip side, AIRSERVICE led the underperformers with a 6.73% decline in share value. ABCTRANS (-5.36%), ACADEMY (-4.21%),NAHCO (4.19%) and REDSTAREX (-1.77%) also made the list.

We do not expect sufficient activities to stimulate a bullish mood in the coming week, unless there is an influx of positive news into the sector in the coming week.