Financial Markets Review & Outlook
December 18, 2023/Cordros Report
This has been a surprising but truly exceptional year, especially for the financial markets. Having started the year at a snail’s pace, Nigerian equities ascended to a 15-year high, as new economic heralders came bearing gifts in the form of market-friendly reforms, which reinvigorated investors’ confidence in local tickers. Meanwhile, the fixed-income market was volatile, as we envisaged, with yields also reaching new highs, influenced by the combination of market dynamics and policy shifts.
Our overall theme for financial markets in 2024 is predicated on a consolidation of the reforms implemented by the new administration as we anticipate, albeit cautiously, follow-through policies that should enhance the already executed reforms.
We expect sustenance in the northward movement in fixed-income yields, highlighting another characteristically volatile fixed-income market. The confluence of key factors, including the (1) direction of global monetary policy administration, (2) monetary policy administration domestically, and (3) demand and supply dynamics, given the expected budget deficits, will influence our assertions. Assessing all the factors, we estimate that the yields on Treasury bills and bonds will increase in the year and settle at c.13.0% and c.16.0% by the end of the year.
We expect Nigerian equities to exhibit resilience in 2024, though at a modest pace. Our projection is that we do not expect any of our identified determining factors – an improvement in the FX space, prospects of improved macroeconomic conditions, and monetary policy direction and impact on fixed income yields – to have an outsized impact on eventual market performance. Nonetheless, we highlight the risk of a disconnect between improvement in company fundamentals and valuation multiples and intermittent profit-taking by investors. All in, we forecast a 11.6% positive return.
We present our views on the different sectors we cover in the following sections:
We are bullish on the Banking sector, as we expect a combination of (1) strong core-income growth driven by the elevated interest rates and (2) operational efficiency across our coverage. Our top picks for 2024FY are ZENITHBANK (BUY; TP: NGN44.66/s) and ACCESSCORP (BUY; TP: NGN22.18/s).
We are positive on the Cement sector, given that we anticipate cement manufacturers to capitalise on robust demand expected from both the public and private sectors, leading to decent revenue growth in 2024FY. Despite this positive outlook on volumes, we note that sticky cost pressures pose challenges to profit margins for DANGCEM (BUY; TP: NGN397.11/s) and BUACEMENT (SELL; TP: NGN59.24/s). However, WAPCO (BUY; TP: NGN44.48/s) stands out as an exception, demonstrating effective control over cost increases. Furthermore, the foreign exchange devaluation challenges from 2023FY are not foreseen to continue impacting earnings significantly, given the various government reforms. Thus, we project that our coverage companies will achieve impressive earnings growth in 2024FY.
For the Agriculture sector, even as global Crude Palm Oil (CPO) prices are expected to trend higher next year, we believe that factors such as the (1) potential reopening of the land borders and (2) lifting of the foreign exchange restrictions on the 43 banned goods, could lead to an increased influx of products through imports, resulting in higher competition and a dilution in demand for local players. As such we are on NEUTRAL on the sector – OKOMUOIL (HOLD, TP: NGN245.09/s) and PRESCO (BUY, TP: NGN242.26/s).
We are cautiously optimistic about the Consumer Goods sector as we expect continued robust revenue growth for corporates in 2024FY, driven by sub-inflationary price increases and volume expansion. Notably, food companies like FLOURMILL (BUY; TP: NGN47.64/s) and NESTLE (BUY; TP: NGN1304.68/s) are expected to outperform, benefiting from the essential nature of their products and their ability to implement price increases. Thus, we expect a positive financial performance, supported by a favourable price/volume mix. Likewise, in the HPC segment, our outlook on UNILEVER (BUY; TP: NGN16.97/s) is backed by pricing and product innovation, which we believe will sustain its profitability amid downtrading by consumers, given the lingering depressed consumer wallets. For brewers, including NB (“HOLD”, TP: NGN55.17/s), GUINNESS (“HOLD”, TP: NGN77.67/s), and INTBREW (‘‘HOLD’’, TP: NGN4.47/s), a gradual earnings recovery is anticipated in 2024FY, supported by sub-inflationary pricing, premiumisation, and improved volume growth. However, challenges such as inflation, local currency pressures, and excise duties may pose higher cost pressures.
In Telecoms, MTNN (BUY; TP: NGN202.21/s) remains our top pick in the sector. We expect the company to deliver double-digit topline growth of 17.6% y/y, and a 120.9% y/y recovery in its bottom line in 2024FY. Our view on continued subscriber growth particularly from the data value channel and continuous network expansion, underpins our expectation for the strong performance.
In the Oil & Gas sector, we anticipate that oil marketers will sustain their revenue growth in 2024FY, with our outlook primarily anchored on increased product prices. We foresee a gradual recovery in demand from the subdued consumption patterns observed in 2023, to be driven by improvements in economic activities. On the supply side, we expect the resumption of activities at the Dangote Refinery, Port Harcourt Refinery, and modular refineries to put an end to the importation of petroleum products into the country. Our pick for the sector is TOTAL (BUY, TP: NGN510.16/s). TOTAL maintains its position as the dominant player in the downstream subsector of the Oil and gas industry.
