• Friday, March 29, 2024
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Nigerian companies deserve better valuation despite sluggish economy

Nigerian companies deserve better valuation despite sluggish economy

Nigerian companies deserve better valuation even amid prevalent slow recovery in growth and lack of transformation policy.

This is because Nigerian equities have the cheapest trailing price to earnings ratio (P/E) across Emerging Market (EM) and Frontier Markets (FM).

The benchmark stock market index had a PE ratio of 8 times (x) compared to MSCI EM and MSCI FM of 15.4x and 10.6x respectively. African peers like South Africa, Egypt and Morocco trade at trailing PE ratios of 15.7x, 11.8x, and 21.1x respectively.

The EM and FM currently trade close to their 5-year average PE, while the Nigerian market trades at a steep discount to its 5-year average PE of 12.2x.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future.

Since the start of the year, the Nigerian Stock Exchange (NSE) All Share Index (ASI) has gained 8.17 percent, but the bourse ended 2019 with a negative return of -14.12 percent.

The emerging markets and frontier markets ended last year with positive returns +15.40 percent and +14.30 respectively.

Nigeria’s economy is beset by absence of structural reforms, rising vulnerability to external shocks, and poor corporate earnings especially for consumer goods firms.

The above challenges are responsible for foreign investor lethargy towards the country’s equities.

For instance, the dual exchange rate system adopted by the central bank discourages investors and encourages corruption.

Analysts say continued foreign-exchange restrictions dampen long-term foreign and domestic investments and keep the economy reliant on volatile oil prices.

They however said that a unified, market-based exchange rate would support inflation targeting.

Data from the Nigerian Stock Exchange (NSE) showed that foreign inflows from January to November 2019 declined 28 percent to N397.44 billion from N553.47 billion in the same period in 2018.

The data further revealed that net outflows from January to November increased 62 percent to N84.53 billion from N52.07 billion in the same period in 2018.

Nigeria’s external reserve has fallen to $39 billion from $70 billion in 2013.

The International Monetary Fund (IMF) reiterated its forecast that the country’s economy, as measured by the Gross Domestic Product (GDP), will grow by 2.5 percent in 2020.

The IMF however downgraded its growth forecast for the global economy to 3.3 percent in 2020, representing a one percentage point decline from 3.4 percent forecast made in October last year.

The global economy has been hard hit by the trade war between China and the United States (US), but an agreement between the two world super powers could restore calm to global financial market.

Analysts do not expect a notable recovery in Germany’s economy as the Euro-area largest economy continues to grapple with lethargic industrial output.

Last week Thursday the Bank of England voted to keep interest rates on hold at 0.75 percent as the Monetary Policy Committee decided the improvement of the business sentiment since the general election made a cut necessary.

On the home front (Nigeria), this year may bring more challenges for companies as a torrent of stringent regulations by the central bank could hurt banks’ future earnings while a hike in VAT is inimical to consumer wallets which could have a negative impact on companies.

To increase lending to the real sector, the CBN in July last year came out with guidelines to mandate commercial banks to direct credit to the real sectors of the economy particularly small and medium scale enterprises (SMEs).

It increased the minimum loans to deposit ratio (LDR) to 65 percent but analysts say forcing lenders to extend credit to the high risk sectors could result in spiralling Non Performing Loans (NPLs).

The apex bank earlier this year reduced fees for a number of transactions including e-transactions like Automated Teller Charges (ATMs), and what this means is that banks’ non-interest income (a major driver of gross earnings) would come under pressure.

A few weeks ago the Monetary Policy Committee (MPC) of the CBN hiked the Cash Reserve Ratio (CRR) by 500 basis point to 22.75 percent, to address the high liquidity in the banking system.

Analysts however expect the the revised CRR to have the following impact of banks: (i) Reduced downward pressure on asset yields as fixed income yields will likely reprice higher. (ii) Increased downward pressure on Net interest Margin (NIM). (iii) Slower credit growth on tighter liquidity available for lending amid swift macro conditions. (iv) Lower-than-expected earnings on the likely drop in net interest income.

Despite all these headwinds, Nigerian stocks remain cheap and could payoff for investors that take positions today.