United Capital PLC, one of the top investment banking and asset manager has released its 2017 stock recommendation for the year 2017.
United Capital disclosed the ratings in its 2017 outlook titled: “Green Shoots Amid Thorns”.
The report was concluded with buy, sell and hold ratings on top companies quoted on the Nigerian Stock Exchange.
Access Bank Plc: HOLD
The most recent results released by Access (Q3-2016) shows a 6.6% y/y increase in Gross Earnings (GE) to N274.5bn while pre and posttax earnings declined by 19.3% and 18.7% y/y to N72.0bn and N57.1bn respectively. On a standalone basis, relative to Q2-16, the results showed a decline in non-interest revenue (NIR), though a stronger interest income supported GE. However, increased cost pressure led to q/q slowdown of 19.9% and 12.3% in pre and post-tax earnings respectively. Although the run-rate of run-rate of provisioning declined by -72.8% over Q3-16, leaving Cost of Risk (COR) at 0.9%, the bank still maintains one of the lowest asset quality metrics in the industry. Management is guiding on a cost of risk of 1.0% -1.2% (vs 1.0% previously) . On valuation basis, we maintain a HOLD as the counter has rallied past our TP. Access currently trades at a 2016 P/BV of 0.3x (peer average: 1.6x and a 5-year average of 0.7x).
First Bank Plc: SELL
FBNH released its Q3-2016 results recently reporting a 6.3% y/y increase in Gross Earnings (GE) to N417.4bn while pre and post-tax earnings declined by 3.5% and 15.3% y/y to N57.4bn and N42.5bn respectively. On a standalone basis, relative to Q2-16, the results showed a weak Q3-16 performance across key income lines, leading to a 6.8% decline in GE while pre and post -tax earnings fell by 42.6% and 5.8% respectively. In line with our expectation, FBNH booked foreign exchange gains of N15.5bn in Q3-16 given its net long FCY positioning of 46.5% of net assets as at FY-15. At 24.9% (H1-16: 22.0%), FBNH’s Q3-16 NPL ratio remains well above industry average. The bank’s significant exposures to high-risk sectors continue to dent asset quality and earnings. Cost of Risk (COR) spiked to 6.9% from 2.1% in H1-15 and 6.5% in H1-16. Despite what looks like an ambitious recovery drive alluded to by management in recent times, fresh headwinds from naira weaknesses and broad macro-economic challenges continue to becloud the outlook for meaningful recovery.
FCMB Group Plc: BUY
Similar to peers in the tier-2 space, headwinds from exposure to high risk sectors have hit FCMB’s bottom, in the face of lower scale advantage to absorb the shocks. However, the bank’s earnings outlook appears to have been boosted by the recent full provisioning for its NPL leading to a Loss After Tax of N2.1bn in its Q3-16 results and a 27.0% decline in NPL and more than doubling of Cots of Risks to 2.4% and 13.8% respectively. On another positive note, OPEX declined 3.0% as the bank sustained its cost optimization strategies. Looking ahead, we expect revaluation gains to positive impact earnings albeit at a lower scale even as we look for further declines OPEX as another driver of earnings in 2017. We re-rate FCMB a BUY from HOLD, and raise our target price to N1.9 ( previously N1.8).
Guaranty Trust Bank Plc: BUY
Guaranty posted an above-consensus earnings performance in its Q3-16 results showing strong growth in Gross Earnings to N329.3bn, 43.6% growth y/y, while pre-tax and post-tax earnings rose 53.0% and 59.0% y/y N140.8bn and N119.9bn respectively. However, q/q GE, PBT and PAT all declined by 11.2%, 18.5% and 18.1% respectively. In line with our expectation, further FX revaluation gain (Q3: N32.6bn vs Q2: 60.8bn) drove top line for Guaranty over Q3 on the back of the bank’s significant long dollar positioning. However, we note that the results reflect some weakness in Guaranty’s underlying core earnings, a theme that we expect to dominate banks’ earnings scorecards for FY 2016. Despite signs of weak underlying earnings, given current macro challenges, Guaranty remains one of our favoured exposures in the tier-1 banking space. This is largely on account of its above-peer operating efficiency and high quality earnings.
Diamond Bank Plc: HOLD
DIAMOND continues to see pressure on earnings largely on account of deteriorating asset quality which has led to y/y spike in loan loss provisionings. With CAR almost breaching regulatory limits, (Q3-16: 15.6%), headroom for funding income continues to contract. In line with our expectation, rising cost of funds has constituted additional downsides to earnings in the face of tight interest rate environment. We believe there is need for additional capital given our expectation of a further weakening in the Naira in 2017. We believe any further devaluation in the Naira might have seen CAR materially lower than required threshold. Further, the possible build-up of NPL in the General commerce and consumer sector on account of macro challenges over 2016 is likely to pressure earnings and erode capital going forward. Overall, we expect earnings to continue to be challenged. Despite attractive valuations, we place a HOLD rating on the shares.
Zenith Bank Plc: HOLD
Zenith’s Q3-2016 results showed a 12.9% y/y increase in Gross Earnings (GE) to N380.5bn while pre and post-tax earnings increased by 16.6% and 20.4% y/y to N121.3bn and N100.1bn respectively. On a standalone basis, relative to Q2-16, the results showed a strong Q3 performance across key income lines, as GE increased by 43.5% while pre and post -tax earnings surged by 86.1% and 202.3% in that order. Similar to Guaranty, Zenith’s top line was buoyed by significant gains from FX revaluation (N28.2bn booked in Q3) as the c.40.0% devaluation of the naira within the period provided a succour. Although Zenith’s consistently superior asset quality relative to other banks came under scrutiny in 2016, NPL ratio and Cost of Risk (COR) remained fairly stable over Q3 at 2.3% and 1.3% respectively. The bank’s diversified loan book, especially its modest exposure to the upstream oil and gas sector (12.5% of Q3-16 loan book) remain the key drivers of resilience in its asset quality in the face of faltering macros. We place a HOLD rating on Zenith.
Flour Mills of Nigeria Plc: BUY
In the recently released earnings numbers for Q2-16, Flourmills revenue came in at N255.3b, a 43.8% rise from a year earlier. We noticed that the topline was buoyed by volume growth across its businesses as well as better price management and cost cutting, coupled with production efficiency required to cushion the increased cost of input resulting from foreign exchange revaluation. Looking at the q/q trend, revenue also surged by 114.1%. In line with YTD trend, and supported by lower interest rates (-100bps) in view of possible monetary easing cycle next year (as inflation decelerates on base effect) – we look for positive pass-through of continued moderation in finance charges to earnings. Flourmills is currently trading at forward P/E of 5.6x vs. EM peers at 81.2x, we have a BUY rating for the stock.
Nigerian Breweries Plc: HOLD
The industry headwind impacted NB’s 9M-16 results as its top line declined by 18% q/q to N65.3bn (although +3.6% y/y), with PAT coming in 23.0% lower y/y at N20.0bn. Although for Q3-16, the significant decline in profitability was mainly driven by a gross margin contraction of -639bps y/y to 35.8%, a 9% y/y rise in OPEX also contributed. The negatives on these lines more than offset the low-single-digit (+3% y/ y) growth recorded in sales. On a sequential basis, while sales declined by 18% q/q, PBT and PAT fell by much wider margins of 79% q/q and 88% q/q respectively. Although Q4 is the peak selling season for NB, we believe price increases will cap the usual volume growth recorded in this period – particularly in the premium segment as consumers continue to trade down. On valuation grounds, we have downgraded to a SELL rating from a previous HOLD. The counter is currently trading at P/E of 39.3x (vs. EM peers at 26.2x).
Guinness Nigeria Plc: SELL
In its latest results for H1-17, GUINNESS reported a Loss After Tax of -4.7bn despite a 19.5% increase in turnover to N59.5bn, extending its Q2 -17 loss position. A steep increase in COGS ratio from 57.0% to 74.0% saw a 54.6% decline in gross margin implying sustained pressure on input costs. Finance charges spiked 177.3%, as a N3.1bn loss on FX denominated loans weighed on earnings, effectively offsetting a 200.0% rise in interest income. While the strong q/q growth in GUINNESS’ top line (58.5% vs Q1-17) can be attributed to seasonality effect, the 19.4% y/y growth suggests that the company increased prices over Q4-16 despite the concentration of its product portfolio in pricesensitive value brands. Additional pressure from naira weakness continues to constrain earnings despite decent progress in cost optimization. With headwinds on input cost yet to subside, and FX outlook broadly negative, we believe the brewer’s earnings will remain challenged going forward. We maintain our SELL rating.
UAC Nigeria Plc: BUY
In its recently released unaudited results for the period ended 9M-2016, UAC of Nigeria Plc (UACN) recorded a 4.8% y/y rise in revenue to N57.7bn, while PAT came in at N4.3bn, N46.5% higher than the corresponding period of 2015. On a quarterly basis, Q3-16 revenue rose by 20.3% y/y to N20.9bn. A closer look shows that momentum came mostly from its food and logistics businesses alongside recovery at its real estate arm (UPDC) after six quarters of consecutive declines, offsetting the twin impact of higher commodity prices and FX. We expect that the impact of recent price hikes and rising livestock feed demand will continue to drive top-line momentum in the food division, with the real estate and logistics businesses also likely to continue to contribute positively. From a valuation perspective, we have a BUY rating on the stock. The counter is currently trading at P/E of 6.2x which is a steep discount to its EM peers at 18.7x.
Nestle Nigeria Plc: HOLD
Foreign exchange losses continued to adversely impact NESTLE’s earnings in Q3-16 as further currency weakness in the quarter ensured a second quarterly Loss After Tax of N51.1 million (Q2-16 LAT: N6.1billion). In Q2-16, NESTLE recorded a 376% y/y spike in net finance charges, majorly driven by N13.1b FX loss. This was exacerbated by further naira depreciation in the third quarter, as the figure rose further to N19.4b in 9M-16. We expect recent price hike to drive momentum in its top line. The fact that the bulk of its dollar denominated loans mature this year coupled with its drive to increase domestic sourcing by accelerating several backward integration, subsequently, moderated exposure to FX volatility further support optimism about its performance. On a valuation basis, we maintain our HOLD rating. The company is currently on a P/E of 26.4x vs 20.9x for its Emerging market peers.
Unilever Nigeria Plc: SELL
In its latest results for Q3-16, Unilever Nig. Plc (“Unilever”) sustained recent top-line momentum, with revenue coming in at N17.6bn, a 25.9% y/y rise (+13.5% q/q). A closer look at the result revealed that substantial tax credit and lower OPEX buoyed earnings, despite the resonating impact of lingering pressure on the naira which weighed heavily on performance for the quarter. On an aggregate basis, we note that the Food and Home Care division extended momentum, while the Personal care segment also recorded its first q/q revenue growth in 2016. It is also worthwhile noting that Unilever’s export revenue rose c.80.0% y/y, and now constitutes c.5% of gross revenue (c.3.0% at 9M-15). While we expect a tough year for players in the in the FMCG sector, we think recent product price increase across the board will remain positive for Unilever going into Q1-2017. The counter currently trade at PE 77.7x compared to EM peers at 98.0x, we maintain a SELL rating on the stock.
PZ Cussions Nigeria Plc: HOLD
In its recently released result for the period ended Q2-17, PZ Cussons Nigeria Plc. (PZ) recorded a 8.8% y/y rise in revenue to N33.3bn. Despite impressive operating numbers, it was the translation impact of short FX position (c.N4.9bn) from payables associated with raw material imports that weighed on earnings. This was further aggravated by a c.40% depreciation of the NGN/USD, following the adoption of a flexible FX regime over the reporting period. Overall, the company posted losses before and after tax of N425m and N289m respectively for the quarter. Over 2017, we hold the prognosis that PZ will be looking to raise product prices further in a bid to lessen the biting impact of higher cost of energy and imports on earnings. Overall, on model revisions we maintain a HOLD rating on the stock. The counter currently trades at a P/E of 40.1x compared to EM peers at 30.1x.
Total Nigeria Plc: BUY
Total reported 9M-2016 results wherein revenue rose by 38.2% y/y to N202b, we note that the positive momentum came from an uptick in sales across its product line. While petroleum product sales inched higher by 36.9% to N191b y/y, lubricants and others increased by 48.1% to N28b y/y. Even though COGS rose by 33.8%, topline increased at a faster pace of 38.2%, leading to 71.3% increase in gross profit. PBT saw a spike of 234.7% on the back of 59.2% contraction in finance cost, thus providing succor to 147% increase in income tax expense and buoyed the bottom line which came in at N11.6b, another surge of 319.9%. The result reflected on the one hand the ability of TOTAL to circumvent FX constraints which gripped other independent marketers and benefit from deregulation of the downstream sector on the other hand. TOTAL is currently trading at huge discount P/E of 8.9x vs. EM peers at 276.8x, we have a BUY rating for the counter.
Dangote Cement Plc: HOLD
DANGCEM ‘s 9M-2016 result showed that its revenue grew by 21.0%y/y to N442.1b. Although PBT fell by 10.9% y/y to N148.7bn, PAT inched higher by 15.5%y/y to N245.1b. For Q3-2016, while PBT fell by 38% y/y to 23.8b, PAT saw a spike 147% y/y to N68.3bn on the back of a strong positive result of N37.5b on the OCI line coupled with a tax credit of N6.3b. Stripping the OCI gains, the PAT growth would have come in at 12%. Dangote Cement took a bold step of switching to coal as its energy source, and abandoned the use of LPFO. In near term, we expect this to improve its fuel security and reduce the need for FX, by using own-mined coal, priced and paid for in Naira. DANGCEM is currently trading at forward P/E of 18.2x vs. EM peers at 19.2x, we have a HOLD rating for the counter.
LAFARGE AFRICA Plc: HOLD
Lafarge’s H1-16 results fell in line with earlier profit warning. The company reported an after-tax loss of N30.3bn for H1-16 (H1-15: after-tax profit of N27.3bn). Revenue declined y/y by 29.4% as weak volume growth cringed top line, while FX translation loss resulting from the c.42.0% devaluation of the naira drove the H1-16 loss position. The volatility in uptime arising from frequent shutdown in WAPCO and UNICEM on account gas supply disruption led to poor volume growth. While we are likely to see some recovery in top line over H2-16 as Dangote’s price increases work through the industry although the continued drag from the SA business is still likely to weigh on revenue. Furthermore, we expect higher cost of alternative energy (LPFO) typified by sharp increase in COGS-to Sales (H1-16: 85.0% vs H1-15: 64.4%) to continue to pressure bottom line. On FY 2016 expected loss of N31.5bn, we revise our target price to N59.2 (previously N122.5) and place a HOLD rating on the shares.