December 22, 2020/Cordros Report

This has been a truly exceptional year in, and outside of financial markets. The performance of the fixed income market outstripped that of all traditional asset classes, as a combination of market dynamics and policy actions resulted in yields paring to record low levels. Also, Nigerian equities sank to 8-year lows as investors ran to safety due to the pandemic but also saw a rapid recovery to 2-year highs as the hunt for yield intensified.

We believe that the performance in the fixed income market will be a tale of two halves. We expect yields to remain in the low single-digit territory through H1-21, with a moderate uptrend to account for reduced market participation as investors seek yields in other asset classes. However, in the latter part of the year, we believe that a combination of (1) weak market participation, (2) revision of monetary policy to a tightening cycle, (3) widening fiscal deficit, and (4) fragile macroeconomic environment will lead to an increase in yields over 2021.

Similar to the fixed income market, we also expect it to be a tale of two halves for Nigerian equities in 2021, with the market delivering further upside in the first half of 2021 before retracing slightly in the second half on an expected reversal in fixed income yields. The sources of risks remain plenty, the macro story remains uninspiring, and valuations are elevated. However, we think the mix of (1) elevated liquidity, (2) low interest rates, (3) attractive dividend yields, and (4) earnings recovery argues in favour of an extension of the equity bull market into 2021.

We present our views on the different sectors we cover in the following sections:

We are ‘Overweight’ on Nigerian Banks, as we expect a combination of (1) strong dividend yield expectations, and (2) resiliency of sector players into the FY-21 financial period to support price performances. Our picks are ACCESS (BUY; TP: NGN13.80), FBNH (BUY; TP: NGN8.50), GUARANTY (BUY; TP: NGN41.07), UBA (BUY; TP: NGN11.24), and ZENITHBNK (BUY; TP: NGN32.28).

In Nigeria’s Cement Sector, volume growth in 2021e will be modest due to the lingering impact of the pandemic on government finances and household income. Although the stiff competitive landscape coupled with soft industry conditions will deter industry players from raising prices substantially, we still see scope for marginal increases in prices. We expect Dangote Cement (BUY, TP: NGN252.68) to deliver decent EPS growth of 2.9% in 2021E. For Lafarge Africa, (BUY, TP: NGN29.53) we believe the company’s focus on the Nigerian market and continued gains from the deleveraging of its balance sheet, following the sale of the loss-making South African operation, will remain supportive of earnings. We estimate the company will deliver EPS growth of 3.7% in 2021E. 

For Consumer Staples, it’s a mixed bag. Agriculture stocks are likely to benefit from improved volumes from new maturities. However, the border reopening is a significant risk to pricing and by extension top-line growth. Brewery stocks are expected to record better volume growth in 2021FY, mostly due to the low base from 2020FY. However, the ability of brewers to increase prices above inflation remains constrained. Surging inflation and FX illiquidity will also put pressure on input costs and margins. We expect similar for Food & HPC stocks. However, we like the agro-allied names in salt [NASCON (BUY; TP: NGN20.49)] and sugar [DANGSUGAR (BUY; TP: NGN26.63) due to each business’ capability to fully price in movements in international prices and currency depreciation into the pricing of their products.

In Telecoms, there is a potential negative impact on Q1-21 revenues and earnings if the NCC does not extend the NIN registration deadline and lines are disconnected. However, we like that MTNN (BUY; TP: NGN202.21) is putting necessary measures in places to mitigate the disruptions. Consequently, we are conservative on subscriber growth in 2021E (+7.7% vs. 13.3% in 2020E). The start of the company’s PSB operations remains the key catalyst for the stock as mobile money in Nigeria presents a compelling growth/return opportunity for MTNN, in our view. However, over the medium to long term, the growth of Nigeria’s and MTNNs subscribers will continue to be underpinned by its attractive demographics as well as the structural upsides.

For Oil & Gas (Downstream), we forecast the price of PMS to average between NGN165.00/litre and NGN175.00/litre in 2021. Our view is hinged on our higher average oil price assumption (USD45.00 – USD50.00/bbl) in 2021. We expect demand for white products to return to pre-pandemic levels as the economy reopens. On supply, with current structural issues still existent, we expect the NNPC to remain the sole avenue for product sourcing. Our top pick for the sector is TOTAL (BUY, TP: NGN147.94).

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