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FBN Capital: Q3 2014 results preview

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Banks

Q3/9M 2014 results will provide the last opportunity to assess how well banks are faring this year. H1 2014 results already showed that our coverage universe is on course for a rather lacklustre 2014, with the average H1 annualised ROAE more or less flat compared with the 18.5 percent that the banks delivered in 2013.

With no meaningful y/y expansion in ROAE expected, attention is likely to shift to the q/q changes, which we expect to provide some positives. We forecast Q3 PBT to grow by 7.5 percent q/q on average. Notwithstanding, the range across our coverage universe is quite wide. Banks we expect to deliver above average growth include FCMB (+13.2%), Diamond (+25.4%), GT Bank (+14.8%) and Skye (+13.9%).

However, given that most banks reiterated their guidance on most metrics for 2014 after their Q2 results were published, we believe these forecasts are baked into the market’s expectations.

We should add that the rebound in earnings implied by these forecasts is partly boosted by soft Q2 results. A lot of emphasis is likely to be placed on whether banks reaffirm their full year guidance for 2014, which we believe they will, particularly loan growth, and their outlook into 2015 given the uncertainties which are likely to stem from the February elections.

The reform programme of the government is the biggest casualty of the elections. Despite the potential negatives that may result from the potential slowing down of momentum as far as the reforms are concerned, banks’ loan growth through 2014 has been encouraging. We believe this will continue into 2015 and will ultimately reassure the markets. As such, we believe the market’s reaction will likely to be neutral to slightly positive.

Non-financials

We expect the broad group of non-financials that we cover to begin reporting their Q3 2014 results in the third week of October, although PZ Cussons Nigeria published Q1 2015 (end-Aug) numbers last week. PZ’s figures show that while sales were flattish y/y, both PBT and PAT declined markedly, by 31 percent y/y each. The insecurity in the north of the country and increased competition were primarily responsible for the weak results.

We do not expect a different trend from our core consumer names in the Q3 reporting season. In Q2, earnings growth for most of these companies came in weaker than expected, stifling any real hope of a recovery in the short term. From a macro standpoint, the naira has depreciated by –2.7 percent against the dollar ytd, increasing raw material costs for the mostly import-dependent manufacturers.

The continued slide of crude oil prices on the international markets could further challenge the Federal Government’s ability to hold the line on the exchange rate. On a brighter note, raw material prices in Q3 should provide support for core consumers’ earnings; crude palm oil (CPO), raw sugar, wheat, barley and sorghum prices declined by around -20 percent on average within the months of July and September.

Sorghum fell by -32 percent while wheat, barley, CPO and sugar declined by -23 percent, -21 percent, -13 percent and -10 percent, respectively. For the brewers, we expect Q3 sales to grow by 10 percent y/y on average due to the gradual inclusion of value brands into their product portfolios and the 2014 FIFA World Cup.

Similar to Q2, we anticipate subdued earnings growth for the big cement players due to relatively lower cement consumption during the rainy season. For the previous quarter, Dangote Cement and Lafarge Africa (pre-Ashaka merger) earnings declined by -15 percent y/y and -13 percent y/y due to gas supply challenges and a tax credit of N1.9 billion in Q2 2013, respectively.