Over the past 10 years, Nestle Nigeria plc, Dangote Sugar Nigeria plc, and Guaranty Trust Bank have generated more profit from their shareholders investments than peers as evidenced in the consistent and superior return on equity, according to a recent report by Coronation Asset Management, titled ‘Navigating the Capital Market: the Investor’s Dilemma’.
The report studies the impact of the macroeconomic environment on earnings and valuations of Nigerian Stock Exchange (NSE) listed companies, and also beams its searchlight on investment returns, short-term government securities and inflations.
The return on equity (ROE) indicates how effective management is at using equity financing to fund operations and grow the company.
Over the past decade, companies have been operating in an unpredictable macroeconomic environment characterised by currency devaluation, deteriorating infrastructure, inflationary pressure, and volatility in oil price.
Some sectors have not recovered from the sharp drop in crude oil price of mid-2014 that stoked severe dollar scarcity and consequently tipped the country in its first recession in 25 years.
According to Coronation Research, GTBank, the largest lender by market value, had superior and consistent ROE in the last 10 years, which means it is a worthwhile investment.
The lender’s returns have been consistently higher in the benchmark Fair Value Equity Return (FVER), a parameter the investment house uses to gauge the efficient and profitability of an entity.
The analysis of the 2019 financial statement of top tier banks shows GTBank recorded ROE of 28.64 percent, which compares to Zenith Bank (24.80%); Access Bank (15.98%), and United Bank for Africa (14.90%).
Coronation Research, however, says the good news is that the trend (FVER) has been moving upwards.
For instance, Zenith Bank has joined GTBank as a strong performer (i.e. its RoE exceeds the FVER) over the past three years, while Access Bank joined this fortunate group last year.
The report observes that among the pure-play food manufacturing companies there is the remarkable exception of Nestle Nigeria, which has recorded an average RoE of 74 percent over the past 10 years.
Analysts at Coronation Research attribute the success of the consumer goods giant to its product portfolio that has won consistent loyalty from Nigerian consumers; its operating margins have been high and consistent, thanks to a high degree of local sourcing; it pays almost all its Net Profits as dividends, keeping its equity level low.
The analysts say majority of Nigerian listed companies do not return what they consider an adequate – 20.53 percetn – RoE; but they add that there are notable exceptions and several bank stocks deliver returns above this level, while other bank stocks are trending towards this level.
The report notes that many industrial companies have reported steeply declining returns over the past 10 years, disappointing a generation of investors in Nigerian industry.
Interestingly, the listed brewers are hardest hit from the economic downturn as ROEs of two out of the three dominant players in the industry have been declining in the last 10 years.
Aside macroeconomic uncertainties, the brewery industry was reeling from stiff competition; this happened when International Breweries launched top brands into the market in 2013. Peer rivals found it practically difficult to grow revenue.
The Fast Goods Consumer Goods Companies (FMCGs) have seen operating margins deteriorate due to hike in utilities and spiralling inflation that erodes the purchasing power of consumers. Because they had hiked the price of product in 2017 to compensate for rising production cost caused by dollar scarcity, it would be practically difficult for them to pass rising cost to beleaguered consumers in form of higher price.
The coronavirus pandemic that ravaged economies across the globe and disrupted the demand and supply side of the market, as government imposed lockdown policies, has dealt a great blow to the industry.
The earnings seasons have kicked off, showing play food companies that have released half-year results falling off the cliff.
Coronation Research notes that many companies with high shareholder returns have failed to deliver stock price returns of the same order.
“This is because the market has been de-rating these stocks, over time paying lower and lower multiples for their earnings. We cite several bank stocks as examples,” notes the report.
To shareholders who have invested in an entity with cash that would have been deployed in other investments, profit is the only thing to them.
Investors’ apathy towards the Nigerian equity market has heightened as they have been dumping shares due to lack of policy direction on the part of President Muhammadu Buhari-led government and poor macroeconomic indices.
The crash in oil price due to the coronavirus pandemic and rift between Saudi Arabia and Russia have elicited stock market rout as sentiments towards the equity market weakened to a record low.
In all, the All Share Index closed H1-2020 (July 24) at 24,474.62pts, with YTD loss pegged at 8.18 percent.
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