10 best undervalued stocks with ‘Buy’ rating in 2023

The beginning of a new year is expected to be an ideal opportunity time for investors to evaluate the stock markets in a new light.

The Nigerian All Share Index ended 2022 strongly with a gain of 19.98 percent representing a much better improvement from the 6 percent recorded in 2021.

The performance at the tail end of 2022 is against the backdrop of interest rate hikes, exchange rate challenges, drastic reduction in foreign portfolio inflows, the Ukraine-Russia war, and the impending 2023 elections.

Stocks have now recorded three years of back-to-back gains for the first time since 2000 when stocks gained for eight years straight.

Nigeria’s equities market has also risen by 0.16 percent or N44 billion in the trading week that ended Friday, January 2023.

To leverage on more opportunities, BusinessDay has shortlisted 10 stocks that present attractive opportunities for investors in form of capital appreciation and dividend return given the low yield environment in the fixed-income space.

After surveying NGX 30, findings showed Dangote Cement, MTN Nigeria, Nestle Nigeria, Zenith Bank, Seplat, GTCO, Nigerian Breweries, FBN Holdings, Stanbic IBTC Holdings, and Lafarge Africa made the top ten list of undervalued stocks in 2023.

According to Investopedia, undervalued is a financial term referring to a security or other type of investment that is selling in the market for a price presumed to be below the investment’s true intrinsic value.

“For the company, it could mean one of three things, either that their company is being undervalued by the market, or that they are not communicating enough with the investing public or market sentiments generally are negative and those companies are one of the companies affected by the negative market sentiment,” Tajudeen Ibrahim, head of research and strategy, ChapelHill Denham said.

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Olaolu Boboye, senior analyst at CardinalStone Partners believes undervalued stocks indicate an upside potential opportunity over the next 12 months, adding that “it provides some sort of guidance to the market.”

“The upside potential could be one of two things – dividend yields and capital appreciations (in terms of potential expansion),” he added.

What analysts are saying

According to Cordros Securities, GTCO and Zenith Bank made their top picks with target prices of N28.21 per share and N26.91 per share respectively, stating that GTCO maintains a leadership position in operational efficiency. Zenith Bank, Cordros stated that its dominance in the corporate and retail segments of the industry was the reason for the BUY rating.

Lafarge Africa is reportedly the only cement maker on the BUY list of Cordros Securities because they believe that “companies that can maintain operational efficiency and optimize plants to enhance fixed cost absorption will be better placed to deliver decent earnings in 2023.”

For Nigerian Breweries, Cordros Securities expect price increases and premiumization to remain supportive of earnings growth amid cost pressures arising from higher excise duties and the high inflationary environment, hence the BUY rating with a target price of N60.71 per share.

Similarly, on the back of topline and bottom-line growth, Vetiva Research issued Dangote Cement and Lafarge Africa a BUY rating with target prices of N330.12 per share and N31.09 per share respectively.

For Nigerian Breweries, Vetiva Research stated “Whilst we could see finance costs moderate from a paydown of maturing loans in the year, the company’s finance income is expected to come in even lower y/y from lower cash balance as NB focuses on deleveraging its books. This brings our PBT expectation to N14.6 billion (FY’20: N11.5 billion, FY’21E: N14.4 billion) and adjusting for tax, takes our PAT projection to N9.2 billion (FY’20: N7.4 billion, FY’21E: N9.1 billion),” thus, a HOLD rating.

CSL Securities Research recommends FBN Holdings, UBA, Access, Zenith, Guaranty Trust Bank, Dangote Cement, MTN, Cadbury, and Okomu. “Essentially, we believe current valuations present medium to long-term investors with attractive entry opportunities as we anticipate that a rebound in market performance will lead to a re-rate of these aforementioned stocks,” it noted.

Meristem Securities on the other hand noted, “the likelihood of a market rally in January, especially due to the optimism that usually comes with the new year, portfolio rebalancing activities, and possible corporate actions like DANGCEM’s buyback.”

“However, we expect this to be short-lived, as investors move to the less risky fixed-income investments, due to attractive rates and heightened political and economic risks. In our view, the mood in the market post-election will be largely dependent on the ease of transition of power, investors’ confidence in whoever emerges at the polls, and immediate policy decisions,” Meristem Securities stated.

Note: Watch out for ten stocks that are overvalued next week Monday