Not in any of Africa’s largest economies will you find cheaper company stocks yet investors want nothing to do with Nigeria at the moment and it could get worse as oil prices endure their longest losing streak since 2016.
Investors currently pay as low as 9.4 naira for each naira of profit made by companies listed on the Nigerian Stock Exchange (NSE), the lowest since 2008.
That’s despite the fact that the companies’ return on equity climbed to 15 percent as the end of September 2018, the highest since 2014, according to Bloomberg data.
Investors pay much higher to hold stocks in peer markets. In South Africa, the average price to earnings ratio is 15.2 times, while listed companies in Egypt are valued at an average of 12.5 times of earnings.
For publicly listed companies in Ghana, investors pay 22.4 times of earnings, while in Kenya they pay 11.2 times of earnings.
Investors had paid up to 12.42 times of earnings to hold Nigerian stocks at the start of 2018, after paying a peak of 14.5 times in 2017 and 17.40 times in 2016- which coincides with the period the economy was in recession and company profits tumbled.
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The decline in appetite for Nigerian stocks, which succumbed to a year to date loss of 19.27 percent Friday, is driven by an exit of foreign portfolio investors who are worried about the exchange rate leading up to the 2019 elections next February.
In dollar terms, the market is down about 16 percent.
Local investors are also showing less appetite for equities amid an uptick in bond yields that have proved a profitable distraction from stocks.
Wale Okunrinboye, head of research at pension fund manager, Sigma Pensions, told BusinessDay that local fund managers are on the side-lines partly as a result of attractive bond yields.
The effective yields on government bonds touched a two-year high of 17 percent, Friday.
Most companies are trading at their lowest levels in 52 weeks, including the most capitalised company, Dangote Cement, which fell to as low as N185 per share Friday from a peak of N278 in February and is down 18.7 percent year to date, according to data compiled by BusinessDay. Even the company’s planned IPO on the London Stock Exchange has done little to lift investor sentiments.
The country’s biggest lender by market value, Guaranty Trust bank, closed at N34.50 per share Friday in Lagos, just N2 shy of a 52-week low of N32.50. The stock is down 37 percent since a peak of N54.71.
Investment banks have written a raft of reports advising clients to take advantage of low valuations to buy fundamentally strong companies.
Dangote Cement and GTB have 80 percent BUY ratings with an upside potential anywhere between 40 to 70 percent.
Some fund managers and institutional investors interviewed by Business Day said they were waiting to see if valuations could go any lower before they swoop.
“Trying to pre-empt a floor in this market is like trying to catch a falling knife, but the decline in oil prices means there isn’t a shortage of negative events to push stocks lower,” a fund manager in South Africa told Business Day.
The stock market of Africa’s largest oil producer mirrors the dynamics of oil, which is the lifeblood of the economy; therefore it hasn’t surprised market observers that the renewed dip in oil prices has pushed stocks lower.
Even signs last week that the US Fed may begin to slowdown the pace of rate hikes haven’t helped Nigerian equities or even the naira to the extent at which it has benefitted other emerging and frontier markets.
The naira slipped to N364 per US dollar at the market-driven Investors and Exporters window Friday, the weakest rate since inception in April 2017, as lower oil prices threaten to test the resolve of the Central bank in defending the naira.
Brent crude, the international benchmark, fell to as low as $57 per barrel as at 1pm Friday, and is down 34.5 percent since a peak of $87 per barrel in September. All eyes have turned to an OPEC meeting Dec.8where expectations are for the cartel to announce fresh supply cuts to help prices stabilise.
Another Nigerian company to have collapsed to a 52-week low is Diamond bank, despite the tier-two lender’s announcement that it was in talks with a multilateral agency to raise medium-term funding over a 5-year period and will repay a $200 million Eurobond due in May on maturity from its own cash and other sources.
The bank said it has completed due diligence and agreed indicative terms with the agency, which it declined to name.
Diamond Bank stock, which has been in free-fall this month, dropped 3 percent on Friday to a new record low of 0.65 naira per share.
Nigerian banks have USD3.6 billion of outstanding Eurobonds, maturing mostly in 2021 and 2022, and some of them are redeeming the bonds.
In August 2018, First Bank of Nigeria called its USD300 million Eurobond before final maturity in 2020, while Guaranty Trust Bank has recently redeemed two bonds early.
Large Nigerian banks’ early redemption of Eurobonds highlights the improvement in their domestic foreign-currency (FC) liquidity, as well as a lower appetite for FC loans among borrowers, according to global ratings agency, Fitch.
With FC liquidity becoming less of a risk for banks, asset quality is again the main risk for Nigerian banks as it remains vulnerable to a fall in oil prices.
LOLADE AKINMURELE
