Vetiva! Some of your ‘High Conviction Stocks’ have underperformed year-to-date

Vetiva equity research analysts in their November performance review listed their ‘conviction stocks for 2022’.

“Our ‘high conviction stocks’ are those that we believe have sound fundamentals and provide superior risk-adjusted returns over the next 12 months. Our high conviction stocks are reviewed quarterly,” the analysts said in their December 1 note to investors.

A look at these high convincing stocks and their returns in eleven months to November shows a mixed bag of performance. While some have outperformed the market, others have either underperformed or outrightly in a negative return.

For instance, as of November 30, while the equities market’s positive return was 11.57 percent, Access Corporation, one of Vetiva’s high-convincing stocks decreased by 9 percent year-to-date (YtD).

Access Corporation

Access Corporation in its financial statement for the nine months ended September 30 recorded 31percent year-on-year (y/y) growth in Gross Earnings to N907 billion as against N692.796billion in 9M’21. Profit After Tax (PAT) was also up by 12percent to N137.008billion from N122.030billion in 9M’21.

In their November 1 note, Vetiva asked investors to BUY Access Corporation shares, saying their target price for the stocks is N13. As at Monday November 5, the stock price was N8.7.

“Despite our revised earnings projections, our PBT projection remains flat at N205 billion, while PAT is also raised to N180 billion, giving us an EPS figure of N5.08 (Previous: N4.89). Overall, we slightly adjust our 12-month target price to N13 (Previous: N12.97) and maintain our BUY rating on the stock. The bank’s share price has fallen 14.52percent YtD, and it is currently trading at a P/B of 0.3x below Tier-I peer average of 0.5x,” Joshua Odebisi, analysts at Vetiva noted in the November 1 note.

Others are: Dangote Cement (2 percent), Julius Berger (-19percent), Fidelity Bank (63percent), Guinness (62percent), MTN N (11percent), Seplat (62percent), TotalEnergies Marketing (-13percent), Lafarge Africa (-8percent), and Unilever (-28percent).

Dangote Cement

Dangote Cement released its third-quarter (Q3) 2022 unaudited results after trading hours on Friday, October 28. In the nine months 9M’22 under review, Dangote Cement earnings grew by 15percent to N1.18 trillion, from N1.02trillion in 9M’22. Its Profit After Tax (PAT) came lower by 23percent to N213.10billion from N278.25billion in 9M’2021.

“Following the commencement of the dry season, we expect cement volumes to improve in the next quarter, supported by a ramp-up in capital projects across the country. However, if the gas supply disruptions maintain course, further contraction in sales volume is likely in Q4’22.

“Nonetheless, we expect Dangote Cement to take advantage of elevated cement prices to drive top-line growth while also tilting toward the use of alternative fuels to mitigate FX concerns. Overall, we forecast revenue and PAT increases of 6percent and 2.3percent to N1.4 trillion and N372.7 billion respectively for FY’22,” according to Abigail Alabi, equity research analysts at Vetiva in a November 3 note.

The share price of the largest cement maker stood at N262.3 as at Monday December 5. Vetiva’s target price for Dangote Cement shares is N324.46 per share. At that target price, the analyst placed a BUY rating on the stock.

Read also: High input cost drags Neimeth to N109m loss

Julius Berger

This stock closed at N21.2 as at Monday December 5. Vetiva’s target price (TP) for Julius Berger is N34.79 per share. The analysts want investors to BUY. A look at the construction giant’s 9M’22 financials show Julius Berger recorded 17percent y/y growth in after tax profit (PAT) to N6.9 billion as against N5.932billion in 9M’21. The company grew its 9M’22 revenue to N309.807billion, up by 22percent from N253.910billion in 9M’21.

“We expect improvement in the fourth-quarter (Q4) period, on the back of lower levels of rainfall and an uptick in construction activities. For cost, we expect further weakening of the currency and an upward inflationary trend for the rest of the year, to elevate costs. “However, we expect Julius Berger to lessen the effect of the FX crisis through FX inflows from its other business divisions like the Agro processing business,” said Abigail Alabi, Vetiva analyst in October 31 note.

Fidelity Bank

Fidelity Bank traded at a 52-week high of N4.15 per share on December 5. Vetiva target price for the stock is N5 with a BUY rating.

Fidelity Bank Plc in line with its upward growth trajectory posted an impressive 34.7percent growth in profit from N28.1billion at the end of third-quarter (Q3) 2021 to N37.8billion for the 9M 2022. This was made known in the Bank’s unaudited 9M’22 financial statements released on the issuer portal of the Nigerian Exchange (NGX) on Friday October 28, 2022. Fidelity Bank recorded Gross Earnings growth of 42percent to N241 billion as against N169,334billion in 9M’21. In same period, its PAT rose by 32percent to N34.958billion, from N26.514billion in 9M’21.

In an October 31 note following Fidelity Bank’s 9M’22 scorecard, Joshua Odebisi, equity research analysts at Vetiva said, “Our new profit projection of N45 billion (Previous: N43 billion) yields an earnings per share (EPS) of N1.56. However, we maintain our N0.50 dividend forecast and maintain our 12-month target price of N5. The stock is trading at a current P/B ratio of 0.4x, below our coverage average of 0.5x. We reiterate our BUY rating on the stock”.

TotalEnergies Marketing Nigeria Plc

This is another stock Vetiva asked investor to BUY. But at N193 per share, TotalEnergies has underperformed and nears its 52-week low of N197 per share. Vetiva’s target price for TotalEnergies is N303.15. TotalEnergies is one of the largest marketers and distributors of petroleum products in Nigeria. In the 9-month period to September 30, TotalEnergies reported a 39percent y/y increase in revenue to N337.1billion from N242.224billion in 9M’21. Its profit after tax was N12.506billion, down by 7percent as against N13.386billion in 9M’21.

“Riding on higher diesel and jet fuel prices, we project fuel turnover for FY’22 to come in 39percent higher y/y at N355.7 billion (FY’21: N255 billion). Similarly, given higher pricing in the lubricants segment, we expect revenue to come in 42percent higher y/y at N122.4 billion (FY’21: N86.1 billion). That brings total revenue for FY’22 to N478 billion, up 40percent y/y. “Meanwhile, we expect the pressure on margins to persist, and forecast gross margin to come in at 13percent for the full year (FY’21:16percent).

“Finance costs, on the other hand, are expected to come in 2x higher y/y at N5.1 billion (FY’21: N1.7 billion), given Total’s strained cash position. All in, net income is projected to come in at N15.69 billion, 6percent lower y/y, as the pressure on margins is expected to limit bottom-line growth. Finally, we value TotalEnergies at N303.15 and since the stock is currently trading below our target price, we rate it a BUY,” Vetiva’s Victoria Ejugwu said in October 31 commentary on TotalEnergies Marketing Nigeria Plc 9M’22 financials.

The November to remember

In November, the market increased by 8.72 percent or N2.08trillion. Some analysts had expected the impact of 100 basis points (bps) hike in Monetary Policy Rate (MPR) to surface in the local bourse, as investors look to higher yields in fixed income space.

“In a surprising turnaround from the previous month, the All Share Index (ASI) recorded its best monthly performance since May, as the market rose by 8.72percent month-on-month (m/m). This was the first month in 2022 when the broad market outperformed our conviction stocks, as our portfolio fell 3.06percent m/m,” the analysts noted.

“However, our portfolio is still up against the market YtD, having returned 17.7percent, against the ASI’s 11.6percent performance,” Vetiva added.

How the High Conviction Stocks performed in November, the drivers

The analysts noted that Dangote Cement was the best performer across “our Industrial Goods picks, as the counter surged circa 19percent m/m, thanks to renewed investor interest, contributing a 0.95percent return to the portfolio. However, Julius Berger and Lafarge closed lower m/m by 20percent and 1percent respectively, translating to an aggregate loss of 0.1percent for our conviction stocks.

“Across our Consumer Goods picks, Unilever rose 3percent m/m, as investors snapped up the stock which had sunk to new all-time lows. Meanwhile, Guinness continued to experience profit-taking action following its half-year (H1) 2022 rally. The stock sank 24percent m/m, translating to a 2.7percent loss for the portfolio,” Vetiva analysts added.

“Meanwhile, our Oil and Gas picks once again performed poorly due to weaker crude prices. Overall, this contributed a 2.2percent loss to the portfolio. Seplat lost 12.50percent m/m, as profit-taking action dragged the counter in October. Additionally, Total’s price depreciated 2percent m/m.

“It was a mixed bag for our Banking picks, as they contributed a 0.6percent gain to the portfolio. Fidelity Bank dipped by 1percent m/m, while Access Corporation rose 9percent m/m. Finally, MTNN gained 11percent m/m, contributing a 1.3percent gain to the portfolio on the back of some bargain hunting by local investors,” the analysts further explained.