Don't Miss

Nigerian stocks hit four consecutive days of gains

By on July 14, 2013

What shaped the past week

Global Markets

This week marked the start of earnings seasons and Global markets, specifically the U.S and European markets, opened the week positive on speculation Global companies will report better-than-forecasted earnings and an improvement in Euro economic data. However, by mid-week markets reversed gains on a report showing company earnings reported were the weakest in four years. Subsequently, equity markets gained after the U.S Federal Reserve Chairman, Ben Bernanke stated that the U.S will continue to need stimulus.

Domestic Economy: The Nigerian Stock Exchange is proposing some changes to trading rules. The proposal will see the NSE suspend trading activities in the event of extraordinary market volatility with the introduction of market-wide circuit. This circuit breaker will be triggered by a 5% decline in the market, and will last for 30 minutes. The reasoning behind implementing this strategy is to ensure that there are no sharp swings in the market. The NSE is calling for comments on the proposed new rule and is yet to finalize.

Equities: The Nigerian equity market recorded improved volumes, accruing an average daily turnover of NGN3.8 billion, a welcome 25% increase from the previous week, though this was driven by the cross trade in UBA shares – 492 million shares worth NGN4.1 billion. The market opened the week in the red, dipping 37bps Monday as sell pressure mounted on heavyweight Financials and Consumer Goods shares. The index subsequently booked four consecutive days of gains, thanks to sustained interest in large cap DANGCEM and NB (which further surged 2.0% WoW and 1.0% WoW accordingly).  The bulls nudged the NSE ASI to a 1.24% WoW gain, ramping the YTD return to 33%.

Fixed Income: The Central Bank remained active in the Treasury market this week, announcing three OMO auctions totaling NGN270 billion, though demand remained tepid considering stop rates were significantly below current market levels. The 226-Day and 224-Day bills were offered at a stop rate of 13.2% vs 14.2% which is the corresponding yield in the secondary market. Consequently, trading in the secondary T-bills and Bonds market picked pace, with yields up slightly by an average of 3bps in the T-bills market. Following the release of the July Bond auction calendar which shows bond supply by the Debt Management Office (DMO) will shrink c.47%, demand momentum improved with yields dipping a marginal 3bps.

Currency: In the FX market, the Central Bank offered and sold a total of $600 million was at the WDAS auction, with the stop rate still at NGN 155.76/US$. Whilst at the interbank market, the currency was weakened 50k WoW to close at NGN161.50/USD even as dollar supply narrows.

What will shape markets in the coming week?

We expect that global markets will find comfort in the sustenance of stimulus in the U.S. and to react to earnings in the coming week, which is broadly expected to show improvement. The Nigerian market strengthened this past week amid tepid volumes after a few sessions of sideways trading; leading our thoughts on some resistance to downward pricing. Nonetheless, we the market sentiment, albeit brighter, remains fragile, thus we think the sideways pattern may again kick-in in the coming week.

Demand in the Fixed Income market will continue to improve in the week ahead, supported by the weak appetite for the OMO bills, which will fuel secondary market demand for bills. The Bond market will likely remain active ahead of the July Bond auction as traders build positions considering lower supply on the instruments to be re-opened. All eyes on the June Inflation print (Vetiva est: 8.6% YoY), which will not materially change market sentiments in our view as it remains within single digits.

Focus for the week: UAC of Nigeria Company Update

We update our view on UAC of Nigeria (UACN) with a BUY rating upgrade at our revised Target Price of NGN71.48, which presents a 22% upside to current market valuation. Our outlook on UACN remains positive even as we remain confident in the ability of management to see the conglomerate through its current restructuring program.

Emerging stronger through restructuring

We have been very positive on UACN’s recent restructuring efforts which officially began in 2011 with the 49% divestment in UAC Foods to Tiger Brands of South Africa. UACN’s restructuring efforts have since taken the Company from its previous bureaucratic centralized management to its current strategy as a holding company with controlling investments in strong, independent subsidiaries. The success of these efforts are evident in the company’s full year 2012 financial result which saw improvements in the company’s operating efficiency. OPEX, as a percentage of sales, decreased to 11.1% from 15.8% in 2011; whilst earnings quality improved with net profit margin of 15.4%, above 11.7% in 2011 and the three year average of 13.2%.

Local company with global access

UACN has been quite strategic in its restructuring, carefully aligning with choice global names in its financial and strategic partnerships. Management has sought not only financial investments but partners that can bolster the Company’s operating and technical capabilities whilst granting them entrance to the global platforms. Most recent strategic partnership comes by way of its 49% divestment in MDS Logistics to Imperial Logistics, a South African company with vast experience in the logistics business,  seeking to expand its African presence.

Consolidating market leadership

UACN is consolidating its market leadership and strengthening technical capabilities. UPDC remains the market leader in property development and management and its recent successful Real Estate Investment Trust Scheme (REITS) frees up ample capital for further expansion. UAC Foods continues to dominate its market segment whilst the Feeds business is on track to becoming a national leader following the acquisition of Livestock Feeds and the greenfield factory in Onitsha.

A local name that that stands out

Nigeria’s consumer space is largely dominated by global names like Unilever and Nestle that have operated in the country for almost a century and trade at significant premiums to local names. Even at that, UACN stands out amongst the best, trading at superior earnings growth whilst being priced at a discount to global names; 2013 forward PE of 22.5x relative to 38.7x for Unilever and 30.3x for Nestle. Our positive outlook on the Company and the potential performance of its shares is supported by our confidence in the present management to effectively conclude ongoing restructuring and drive new businesses going forward. We upgrade our view on the UACN with a Buy rating and a target price of NGN71.48, a 35% potential upside to market.