March 8, 2021/Cordros Report

Executive Summary

The Credit crisis of 1772; the Great Depression of 1929–39; the 1973 Oil crisis; the Asian Financial crisis of 1997; the Global Financial crisis of 2007–08. None has originated from a biological factor. 2020 brought a completely different twist. The year featured unprecedented shutdowns of economic activity due to a pandemic that overwhelmed the health care systems of many advanced economies. A fusion of massive monetary and fiscal stimulus packages, the historic OPEC+ oil production cuts, and a vote for new leadership in the US also characterised the year. As 2020 draws to a close, it is shaping up to be among the worst years for the global economy in more than 70 years.

In our 2020 Mid-Year outlook, we aligned with the view that without a vaccine, it was unlikely that economic activities would pick up pace anytime soon. Looking ahead now, we do see some silver linings. Breakthroughs on Covid-19 vaccines are being announced each week, and following encouraging early efficacy data, the hope is that most economies can return to a new normal following a widespread rollout of the vaccine in Q2-2021. Though challenges remain, we think the global recovery is sustainable, synchronous and supported by policy. The preceding, in our view, should culminate in the V-shaped recovery, which began in May, being sustained, and leading to 5.2% global GDP growth in 2021, according to IMF estimates.

On crude oil, our views on a rebound on global demand, as stated in our 2020 Mid-Year Outlook, played out in H2, with the resurgence of COVID-19 in Europe and the US leading to a slightly larger decline in global demand for the year. We expect the recovery in demand to continue, supported by the expansion in global growth. However, we still maintain the view that demand will likely not return to pre-COVID-19 levels before the end of 2021, especially as we expect a protracted vaccine rollout. On a balance of factors, we forecast Brent crude price will average between USD45.00 and USD50.00/bbl in 2021. This forecast is a slight increase from a projected USD42.00/bbl for 2020E but still significantly lower than the 2019 level of USD64.16/bbl.

The ravaging impact of the twin shocks (the pandemic and downturn in oil prices) may have dissipated following the re-opening of economies. Still, the cog in the wheels of economic activities will linger in 2021. Although we expect the economy to recover from the deep contraction in 2020, we believe policymakers will be faced with the more difficult task of lifting output growth above population growth. Consequently, the recovery will remain mostly insufficient in boosting per capita income, stimulating employment opportunities, and addressing the growing disparity in income levels. 

We are cautiously optimistic that the land borders, which were re-opened on 15th December, will ease pressures in food basket given weak domestic capacity. Nonetheless, we expect the gradual increase in electricity tariffs and higher distribution costs linked to higher PMS prices (especially if oil prices gain momentum) to offset the gains.

Despite the FX management strategies put in place by the CBN to reduce FX demand for importation, we expect the current account to be pressured by a faster increase in imports compared to exports. The pressure will be amplified by a wider deficit in the services account, based on our expectations on improvement in the scale of international airline operations and medical-related tourism. Taking into consideration the fragility of macroeconomic conditions coupled with the lingering liquidity constraints in the I & E window, we expect FPI inflows to remain tepid. This view, alongside our expectation of a marginal increase in export earnings, implies accretion to the FX reserves will be limited, thus, hindering the ability of the CBN to defend the local currency.

On monetary policy, we believe the MPC will be at a crossroads. They will be faced with the difficult choice of keeping interest rates low to support economic recovery while easing government financing pressures or tightening to attract FPIs to mitigate currency pressures and restore stability in the external sector. We expect the MPR to remain unchanged in Q1-21 but envisage tightening from Q2 onwards, due to our expectations on inflation and the need to stem currency pressures.

On fiscal policy, we expect budget performance to be characterised by the recurring themes of underperformance in revenue targets, sub-optimal CAPEX spending relative to recurrent expenditure, and weak revenue from State-Owned Enterprises (SOEs). Ultimately, we believe the government will be faced with the difficult task of balancing borrowings to support economic recovery and avoiding a further buildup of debt that will further weaken debt sustainability metrics.

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’ onNigerian 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).

InNigeria’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).

Click here to read full PDF copy of report