The stocks of Dangote Cement Plc, Zenith Bank Plc, Nestle Plc, Nigerian Breweries Plc, and Seplat Plc have made the list of shares of fortune, a report from ARM Securities disclosed.
Though the tides in the Nigerian equities turned as the All-share index lost its four-week rally when it dropped to 26,855.52 points, with market capitalization shedding N70.8 billion, the stockbroking firm is optimistic that the stocks would give their investors expected returns on investment (ROI).
Where they stand
Dangote Cement Plc (DANGCEM) is a leading cement manufacturer in Nigeria and it made ARM’s ‘STRONG BUY’ list. The firm’s earning per share (EPS) is expected to drop to N14 from the N22 billion that was recorded in 2018. This is due to lower volumes in Nigerian business (caused by increased competition from BUA Cement) and some of its Pan African business, as well as the high base of tax credits the company recorded last year.
Nonetheless, experts in ARM argued that DANGCEM, which currently trades at FY 19E P/E of 11x on its estimates, is cheap compared to its competitors, WAPCO and CCNN at 17.7x and 16.8x, respectively. The stockbroking firm also believes that the cement manufacturer’s current valuation is unjustified given the superior return on equity (ROE) of 24%.
The Zenith Bank Plc stock also made the STRONG BUY list at N31.50. The performance of the stock shocked ARM’s experts so much that they had to adjust their projections for FY 2019, following some surprises observed in the bank’s second-quarter figures (Q2).
As stated in the report, “We revised net interest income lower due to compressed yields on its loans and treasury asset (H1’18 -10.6% against H1’19 – 9.1%) amidst contraction in funding cost. We adjusted NIR higher due to upward review of electronic fee income and trading book. We now forecast profit before tax (PBT) of N218 billion, while we cut our Fair Value Estimate (FVE) to N31.57/share from N33.71/share.”
Nestle Plc is another stock that made the STRONG BUY list as its FVE was pegged at N1447.39. According to ARM, the conglomerate managed to stay afloat, reporting modest growth in earnings amidst incessant competition. As at the end of last September, it’s Earning Per Share (EPS) expanded by 11.2% year-on-year (YoY) to N46.48. The growth of the EPS was driven largely by the absence of impairment charges, which created a high base for input costs over the same period in 2018. Asides the improved earnings, “its strong cash balance, ROE and 100% dividend payout further supports the case for a STRONG BUY rating.”
Nigerian Breweries Plc’s stock FVE was pegged at N75.82. Defeating obstacles like intense competition from International Breweries (IB) and graduated excise duty (+17% YoY) that kicked off on January 19, NB’s revenue growth is expected to be slow as ARM expects higher finance cost (+38% YoY) to be another pressure point to earnings in 2019.
“Given our case for a slight improvement in volumes and decline in cost of sales (-1.1% YoY), which translates to gross (+120bps YoY) and Earnings before interest and taxes (EBIT) (+101bps YoY) margin expansion, the misery seems moderated. Overall, the net impact of all our adjustments translates to PBT of N29.9 billion and EPS of N2.58 (+6.3% YoY) over 2019.”
Despite the drop in Seplat Plc’s total production in third-quarter 19 (Q3) due to the decline witnessed in gas production that offset improvement in the oil segment, experts are optimistic that the stock remains a STRONG BUY. They attribute their projection to the fact that the stock remains positive on growth in production going into the final quarter of the year (especially in oil) and into 2020, as Seplat increases capital expenditure.
As stated, “Cashflows remain healthy. Upsides reside in the ANOH Gas project and acquisition of Eland Oil & Gas Limited.”
Experts say …
Stockbrokers, who spoke with our analyst in separate interviews, agreed with the ARM report as they believe that the stocks listed above are investors’ delight.
A stockbroker, Abimbola Olaniyi, gave a thumbs-up for Dangote Cement, which operates across 16 African nations and controls about 60% market share in Nigeria.
According to him, the earning profile of over the last few quarters from Q1 2018 to 2019 revealed that its revenue grew by at least 12%. He said, “Though its revenue declined by 0.80% in Q1 2019 as the company recorded N240.16b revenue, its performance has been very commendable as revenue increased impressively in each of the quarters of 2018.”
Experts in EFH Hermes Research also confirmed that despite the food inflation that has slightly accelerated over the past two months, which is affecting the purchasing power of Nigerians, Nestle remains a major stock to watch in the consumer segment of the Stock Exchange.
With the further competition that would impact margins and significantly increase capex, “Nestle’s returns are expected to remain strong and well above its Weighted Average Cost of Capital (WACC), and Returns on Equity as it would continue generating value over the coming years.”