Stock market enthusiasts who were waiting on a positive effect of the H1 earnings season might need to wait a while longer as market selloff continues to push the Nigerian Stock Exchange into bear territory.
As these selloffs persists, there have been sightings of market inefficiencies as fundamentally stronger companies are currently selling at lower valuation multiples compared to weaker peers.
An inefficient market, according to efficient market theory, is one in which an asset’s market prices do not always accurately reflect its true value.
Efficient market theory, or more accurately, the efficient market hypothesis (EMH) holds that in an efficient market, asset prices accurately reflect the asset’s true value. In an efficient stock market, for example, all publicly available information about the stock is fully reflected in its price.
AIICO recently published its half year result for 2019, and posted an annualized earnings per share of 82kobo. On the stock market, AIICO trades at N0.64 which puts the earnings yield at 128.13 percent and PE below 1x. This shows that if the entirety of AIICO was acquired by an investor today at N4.43billion, he could easily recoup his capital with 2019 profits.
Tochukwu Okafor, Lecturer in Banking and Finance department at Covenant University explained that “this is what happens when sentiment deviates from fundamental performance. Arbitrage profits can be made on mispricing and the AIICO situation is a prime example. If an investor borrows money from the bank at a reasonable interest rate, he could acquire the company and pay back with the full year profit and interest. This will require no commitment of capital from the investor with only a risk of overstatement of earnings by the company.”
A critical example of market inefficiency also lies in the Banking sector where Tier-2 banks have been selling at greater multiples than the Tier-1 banks.
Union bank, Wema Bank and Sterling Bank are currently priced at 10.18x, 6.96x and 7.31x. These valuation multiples are currently the highest in the Nigerian banking sector.
“While four of the five tier one banks are selling below a PE ratio of 4x. Savvy investors should look to pick the best banks in the market at maybe the cheapest price the market will see in the next few years,” Okafor added.
The Nigerian Stock Exchange (NSE) ended Friday’s trading session in negative territory. The All Share Index closed at 27,630.46 basis points, down 0.43 percent. Year to date, the index is down by 12.09 percent.
Ifeanyi John
