The current low prices of most value stocks are ushering in another set of value investors who see the situation at Custom Street as a re-entry period capable of offering profitable return-on-investment in the medium-to-long term.
Activities of profit-takers had pounded the market by 5.85 percent and took-off about N800 billion from the market capitalisation of stocks at the Nigerian bourse, a trend market analysts saw as the worst weekly performance in the year, which weakened the market’s year-to-date (ytd) return to 32.66 percent.
Looking at the cyclical character of every stock market, many market watchers had expected this price correction considering the recent bull-run in the market that saw a lot of stocks make consistent weekly gains.
The optimism over market rebound is not in doubt because despite the dismal outing by equity dealers at the Nigerian Stock Exchange (NSE) last week, global stock market data have shown that African stock markets (Nigeria inclusive) have outperformed global equities. Most African markets have surpassed 2012 returns.
Taking a look at the stock market trend this week, research analysts at UBA Capital said they look forward to more attractive bargains in the equity market, “as we see further scope for price weakness; we are constructive on selective opportunities presented by last week’s sell-off on ‘Custom Street.’ While foreign portfolio inflow may still remain weak, local system liquidity will provide cushion.
“While we remain broadly conservative on the equity market, with expectation of another bearish week, new bargain opportunities in a few large-caps will provide technical stability for the NSE Index. The benchmark index should finish the week relatively weak, albeit our expectation is a marginal loss.”
In a related view, investment analysts at Cowry Asset Management said “we are overweight on the bears; however, we expect to see bargain hunting on undervalued smaller cap stocks.”
Advising investors based on the current market situation, analysts at Proshare said, “We seize this opportunity to remind investors that the need for investing in companies with strong fundamentals at good entry prices cannot be overemphasised, as this ensures that although prices may fluctuate in the short term, the long-term returns on their investments are guaranteed.”
They also added: “We must also state clearly that the capital market is a long-term market and as such, long-term investors who invest based on sound fundamental principles are almost certainly going to see their investment portfolio perform better than any other investment class.”
Looking at the stock market, research analysts at Consolidated Discount Limited (CDL) said they believe that the rich valuations of some of the big names in the Nigerian equity market might have pushed them into bubble territory.
They told INVESTOR that despite the recent rally in the equity space the market still seems fairly valued with a trailing price to earnings ratio (PE) of 14x and 12.15x 2013 forward PE.
“This clearly puts Nigeria at par with other emerging markets. However, there are fears with some of the big names that have driven the rally. Names like Unilever, PZ Cussons, Nestle and Guinness are rich in fundamentals and also sentiments (safe haven for dividend hunters), but may be up for some corrections as current valuations may not be sustainable,” the researchers added.
According to them, “Dividend yields within these names are around 0.9 – 3.2 percent, while Price to Earnings range from 26x to 74x trailing earnings. PZ Cussons hit a one-year high of N56 on June 11, at a PE of about 86x. Though the price has moderated to about N48.26, current valuations of about 74x still seem vulnerable to further price corrections especially on the backdrop that the forecast estimates for the Forward PE is 44.5x.
“Despite the respite in the correction of Nestle which has now closed positively for two days and hitting an intra-day high of N1,000 on Monday (June 17), we still see further correction in the price of the stock to a more saner level.”
CDL Research analysts noted, however, that the corrections might be moderated by the weak public floats of some of these names, saying “in prior price corrections in the Nigerian market, we have seen the illiquidity of these stocks leading to a preservation of value. However, the low dividend yields may ultimately force a rethink, especially when banks like First Bank and Zenith Bank seem to offer higher growth prospects for value investors.”
Week-on-Week (WoW), trend at the Nigeria bourse showed that a turnover of 3.725 billion shares worth of N75.874 billion in 39,060 deals were traded last week by investors on the floor of the Exchange, in contrast with a total of 1.917 billion shares valued at N25.133 billion that exchanged hands the preceding week in 32,368 deals. Trading in the top three equities – Transnational Corporation of Nigeria plc, IHS plc and Dangote Cement plc (measured by turnover volume) accounted for 1.348 billion shares worth N48.722 billion in 1,692 deals, contributing 36.19 percent, 64.22 percent and 4.33 percent to the total equity turnover volume, value and , respectively.
As usual, the Financial Services sector (measured by volume) led the activity chart with a turnover of 1.702 billion shares valued at N14.698 billion traded in 19,826 deals.
According to the weekly market report, the Financial Services sector represented 45.68 percent, 19.37 percent and 50.76 percent of the total traded volume, value and deals, respectively. The Conglomerates sector followed with a turnover volume of 597.153 million shares worth N1.052 billion in 1,410 deals, contributing 16.03 percent, 1.39 percent and 3.61 percent of the total equity turnover volume, value and deals, respectively. The ICT sector came third with a turnover volume of 516.087 million shares worth N1.007 billion in 264 deals.
Also looking into the equities market, analysts at Financial Derivatives Company Limited said, “With the growth recorded in 2013, the appeal of the market as a source of long-term capital may override any informational disadvantage currently felt.”
These analysts’ outlook tilts towards increased volatility “as competing forces intensify struggle for control in the market; increased market activity as second-quarter (Q2) ends; return to rationality in the market as correction occurs in equities prices; decline in equities prices as stocks are adjusted for corporate actions; profit-taking on consumer goods and industrial goods companies; slowdown in bull run as rally runs its course; and large cap stocks will continue to be market drivers.”