January 18, 2022/CSL Research

We begin 2022 following a positive performance in equities (+6.1%) in 2021. Unlike in 2020, when the market delivered a 50% return largely due to CBN policies which led to increased system liquidity, we describe 2021 as broadly lethargic, with the positive close induced mainly by corporate actions. The year was characterized by a flurry of corporate actions which caused a significant rise in the prices of some tickers.  Save for expectations of similar corporate actions and positive news around the heavily weighted stocks on the exchange, which could drive activities in the stock market, the narrative for 2022, to a great extent, tilts towards a bearish performance in our view.

Foreign investors have in the past few years shown apathy towards Nigerian equities and we do not expect any significant comeback in a pre-election year. If historical trends are anything to go by, stock market performance in the last 2 pre-election periods (2014& 2018) has been negative, making us more inclined to anticipate a weak market in 2022, especially as FX concerns which were not there in 2018, add another layer of concern.

The relatively unattractive carry trade in OMO bills, when compared with other African peers, may further elevate the risk of capital flight in 2022. Indicators of FX valuation suggest the Naira remains overvalued; hence, we expect naira at the I&E window to weaken to an average of NGN455.00/USD in 2022 from NGN415.00 in 2021. We also expect the parallel market premium to remain widened, as the CBN is yet to resume FX sale to the BDCs. In addition, corporates and individuals who import items restricted by the CBN will continue to source FX from the black market. Repatriation of funds has been difficult for FPIs in the last two years, and we believe favourable FX outlook and clarity on FX repatriation policy, both of which appear far-fetched in 2022 will be a major catalyst for FPIs to return to the market.

We are, however, optimistic about the performance of some of the sectors we cover. Aggressive CRR debits, sustained LDR policies, AMCON charges, are factors that would continue to undermine the earnings of stocks in the banking sector. However, current P/BV valuations of the banks remain at historic lows and in many cases, price in the loss of all profits and of a substantial portion of equity in 2022e. By contrast, we estimate that a COR of 1.7% (forecasted average for the tier 1 banks in 2022e) will not result in any significant dent to profit in 2022e.

Since 2012, the Nigerian consumer has come under severe pressure. From partial fuel subsidy removals to the free fall in Naira in recent years, to the imprints left by the border closure and insecurity in food processing regions, the Nigerian consumer has been left impoverished. In response, the average consumer has been trading down on the value chain, switching to cheaper alternatives as living costs rise in the face of generally low-income levels. We, however, expect a positive performance from players in the food processing and FMCG subsegments. Our positive expectation for the food processors is based on the essential nature of goods produced, and the reduced level of imported substitutes despite the border re-opening in 2021. For the FMCGs, we expect the improvement seen in the performance of the players in the sector since the relaxation of lockdown measures to continue into 2022.

We have also seen positive signals pointing towards robust earnings for the cement sector players, albeit growth may moderate in 2022. The Minister of Works and Housing, Babatunde Fashola, noted that the federal government may extend the implementation of capital projects components in the 2021 budget (such as the Lagos-Ibadan Expressway and 2nd Niger Bridge) into 2022. If done, we believe this bodes well for the cement sector amid the gradual shift to cement paved roads. In addition, the establishment of the PPP Infra-Co to bridge the infrastructural gap in the country will  benefit the players in the cement sector. We also expect private sector investments in real estate to remain strong.

The pandemic had adverse effects on many sectors, yet it was positive for the telecoms sector, which has remained the bright spot in the Nigerian economy. The news of the receipt of approval-in-principle (AIP) by the two telecom giants (MTNN and Airtel Africa) in November brought the year to a close with a reminder that the sector is still scratching the surface of its potentials given the opportunities in the payment business. Also, Airtel Africa received a super-agent approval in principle, all of which point to a good year for the sector.

Barring heightened security risks in the run-up to the elections, the key determinants of Nigerian capital markets remain oil price, the smooth running of the banking system, and ample liquidity. Though, we expect oil prices to remain relatively high, CBN policies continue to undermine banking sector profits and we do not expect ample liquidity in the stock market in 2022. That said, we believe the valuations of many stocks remain very attractive. Within our coverage universe, we have Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, Dangote Cement, Lafarge Africa, MTNN, Dangote Sugar and Flour Mills of Nigeria. Essentially, we believe current valuations present medium to long-term investors with attractive entry opportunities.

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