December 16, 2021/Cordros Report
As with most other years, 2021 brought fascinating developments in the financial markets, especially as the path from the pandemic was far from certain. However, the performance of the financial markets generally fell in line with expectation as fiscal and monetary stimulus packages resulted in a ‘pull to norm’.
In the fixed income market, yields advanced earlier-than-anticipated in the H1-21 before stabilizing in the second half. The bearish sentiments in the FI market were driven mainly by the twin effect of (1) upward repricing of OMO bills by the CBN to attract FPIs and, (2) frontloading of government borrowings which led to a substantial increase in the supply of domestic debt instruments. Consequently, the strong start to the year in the equities market was derailed by the upward retracement in FI yields before impressive corporate earnings lifted market performance in the Q3-21.
With 2022 being a pre-election year, we believe the sensitivity of market to events in the political landscape will be heightened. Historically, electioneering periods have brought a significant amount of volatility in the Nigerian financial market. The peculiarity of 2022 alongside our expectations surrounding the macroeconomic environment inform our view that periodic portfolio rebalancing will be pertinent in traversing the murky recovery.
In the fixed income market, we expect yields to inch higher due to a confluence of factors including (1) tighter global financing conditions as global central banks commence of normalization of monetary policy, (2) consternation regarding the pre-election period resulting in yield expectations that will likely be unpalatable for the fiscal authorities, (3) MPC switching to a hawkish stance to attract FPIs and mitigate currency pressures in the face of capital flow reversals, and (4) increased sub-national and corporate issuances as issuers frontload borrowings prior to increase in yields. In all, we expect the fixed income market to be far more volatile in 2022 than in the preceding year, with intermittent periods of upward pressure in Q1-22 and H2-22.
Given our expectation of yield elevation in the FI market and a heated political climate that characterizes a pre-election year, we expect risk-off sentiment for equities. That being said, we see corporate actions supporting market performance in H1-22, although buying activities may be constrained by expectations regarding monetary policy direction and developments in the political landscape. Consequently, we expect a disconnect between improvement in company fundamentals and valuation multiples.
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-22 financial period to support price performances. Our recommendations are ACCESS (BUY; TP: NGN13.80), GTCO (BUY; TP: NGN38.05), UBA (BUY; TP: NGN11.24), ZENITHBNK (BUY; TP: NGN34.46) and FBNH (SELL; TP: NGN9.08).
In Nigeria’s Cement Sector, we rate DANGCEM (HOLD; TP: NGN 272.55) highly given its market leadership position (market share of 64.2% as of 9M 2021), strong distribution network, efficient production techniques and ability to influence market prices in enhancing profitability. We see room for upside in Lafarge Africa, thus, we maintain our ‘BUY’ recommendation with a TP of NGN34.44. We maintain our ‘SELL’ rating on BUACEMENT with a Target Price of NGN44.50, given the sizeable discount to its current market price.
For Consumer Staples, it is a mixed bag. Notwithstanding an expected drop in CPO prices, we expect listed Agriculture companies (OKOMUOIL and PRESCO) to deliver revenue expansion, albeit mild, owing to higher volumes. We remain cautious about the performance of Brewery stocks over the short to medium term, due to frail macro conditions amid the stiff competition in the sector. Accordingly, we rate NB and GUINNESS a “HOLD” with the target prices of NGN48.50/s and NGN36.57/s, respectively. For Food & HPC stocks, we expect the agro-allied companies to deliver a strong performance than their peers in the consumer goods sector underpinned by substantial price increases. Overall, FLOURMILL is our top pick in the consumer goods space due to its (1) exceptional product portfolio diversification, (2) market leadership position and (3) substantial progress in its backward integration programme. We have a “BUY” rating on the stock, with a target price of NGN45.30/s (previously NGN38.87).
In Telecoms, MTNN (BUY; TP: NGN202.21) remains our top pick in the sector. We expect the company to deliver double-digit top-line and bottom-line growth of 14.1% and 28.8% in 2022E, respectively. Our view on (1) rebound in subscriber growth, growing 4G penetration rate amid increased network capacity, and (2) sustained recovery in voice revenue as economic activities continue to normalise in the informal sector underpins our forecasts.
For Oil & Gas (Downstream), we expect the price cap on PMS to remain in place, though we acknowledge the possibility of a hike in the product’s price. We expect the NNPC to remain the sole supplier of the market, pending the potential completion of the Dangote Refinery in Q4-22. We highlight that individual product sourcing will remain a big challenge for downstream players as FX liquidity issues persist. Our top pick for the sector is TOTAL (HOLD, TP: NGN227.88/s).
