Unilever, Nestle raise bubble concern on Nigerian stocks valuation

Investors are valuing shares of Nestle SA and Unilever’s Nigerian units at about twice the level of their European parents, as faster growth in Africa’s most populous nation lifts consumer stocks to record highs, reports Bloomberg.

The 53 percent surge in Nestle Nigeria Plc this year, pushed shares to 33 times estimated profit, almost double the ratio for Zurich-listed Nestle and up from a discount last year. Guinness Nigeria Plc is trading at a 53 percent premium, relative to its parent, Diageo Plc. Unilever Nigeria Plc has a price-to-earnings multiple of 38, compared with 18 for

Unilever which is based in London and Rotterdam.

While bulls say the gains in Nigeria are justified by the economic expansion in the country, Hermes Fund Managers Ltd. and Renaissance Asset Management see the valuation gaps as a signal shares are too expensive. All three units reported profit declines in the period ended March, as accelerating inflation and an Islamist insurgency in the north curbed spending by the nation’s 170 million citizens.

“There may be a correction,” Lanre Buluro, the head of research at Lagos-based Primera Africa Securities Ltd., said by phone on May 23. “People will start looking to re-evaluate and move this money somewhere else.”

The Nigerian Stock Exchange All-Share Index is valued at 13 times estimated earnings, the highest level since December 2010, after rallying 42 percent this year. The MSCI Frontier Markets Index, the benchmark gauge for nations with an average market capitalisation of $34 billion, has a multiple of 11 after gaining 14 percent in 2013.

Local investors have piled into Nigeria’s stock market, accounting for 57 percent of trades in March, compared with 39 percent in all of 2012. Growth in the $269 billion economy, Africa’s largest outside South Africa, will quicken to 7.2 percent this year from 6.3 percent in 2012, International Monetary Fund projections show. That compares with an estimated 5.6 percent growth rate for Sub-Saharan Africa.

The euro area’s economy will probably contract 0.6 percent this year, according to the European Central Bank.

“Many asset managers around the world, who are not experts on Africa or on frontier markets, want to get into these markets at any cost and they’re just choosing a name which is familiar and which they perceive to be safe,” Sven Richter, who oversees about $260 million as managing director of frontier markets at Renaissance Asset Management, said by phone from Johannesburg May 13.

Net foreign inflows into Nigerian equities amounted to N29.3 billion ($184 million) in March, compared with N93.8 billion in 2012, according to the Nigerian Stock Exchange.

Richter, whose Renaissance African Sub-Saharan Fund has outperformed 95 percent of peers tracked by Bloomberg during the past 12 months, said he doesn’t own shares of Guinness Nigeria, Unilever Nigeria or Nestle Nigeria. Most multinational companies listed on the Nigerian bourse are majority-owned by their parents, according to data compiled by Bloomberg.

“We can’t figure out how they should be valued so highly,” said Gary Greenberg, who has invested in developing nations since 1989 and runs the $320 million Hermes Global Emerging Markets Fund, which has outperformed 91 percent of peers so far this year.

Greenberg favours Nigerian lenders such as Zenith Bank Plc , which trades at eight times estimated 2013 earnings. That compares with a multiple of 29 for Guinness Nigeria, according to data compiled by Bloomberg. The first Guinness brewery outside of Ireland and Britain was started in Lagos in 1963 and listed its stock on the bourse in 1965, according to the company’s website.

Adeola Adejokun, a spokesman for Guinness Nigeria, declined to comment on valuations. The increase in Unilever Nigeria’s shares reflects the return investors expect they can get, Yemi Adeboye, a spokesman for

the company, said in a May 22 e-mailed response to questions. Unilever’s roots in the country date back to 1923, when it started as a soap manufacturing company, according to its website.