World Bank approves $114 million for Nigeria’s COVID-19 response

What shaped the past week? Global: -

Major markets in the U.S. strengthened over the course of the week as investors expressed confidence in the nation’s ability to recover from the COVID pandemic, which was fueled by positive data reports. One such news was IHS Markit stating that manufacturing activity in the world’s largest economy was at its highest level, since January, while they also observed an improvement in non-manufacturing activity and services for the month of July. Investor sentiment was further improved by statements from U.S. Congress officials, who stated that both parties were “moving in the right direction” on a fourth COVID stimulus package. Meanwhile, in a bid to support the labor market, U.S. President Donald Trump issued an executive order, barring domestic IT firms, from outsourcing its business outside the United States. Major European markets finished the week in a mixed manner, as the reveal of an improvement in manufacturing activity in the region, was dampened by statements from the Bank of England officials; the BoE projected that unemployment in the U.K could double once the government’s COVID assistance program runs out. The BoE decided to keep rates steady at 0.1%, which expresses their belief that economic output may need until the end of 2021, to return to 2019 levels. Sentiment remained mixed over the course of the week, following the release of data which showed an expansion in manufacturing PMI in Germany, and other parts of the Eurozone as well. However, on Tuesday, Eurostat reported that producer prices had increased a meagre 7bps in June, which weighed on investor sentiment in the region. Finally, on the Asian front, markets traded in a mixed manner as well, as further escalation in U.S.-China tensions weighed on sentiment in the region. On Thursday, U.S. President Donald Trump, signed an executive order, requiring the Chinese-parent companies of TikTok (ByteDance Ltd.) and WeChat (Tencent Holdings), to sell their U.S. based assets to an American firm within the next forty-five days. Markets in the region responded with selloffs on Friday, as the TikTok business is expected to question the legality of the executive order.

Domestic Economy: On Thursday, the International Monetary Fund (IMF) in its latest external report on the COVID-19 crisis., stated that it expects the COVID-19 pandemic to drag global oil demand lower, by c.8%. According to the fund, the impact of lower prices on oil trade balances will vary across economies, highlighting the dependence of oil exports and imports. The forecasted drop in demand by the fund is in line with other agencies such as the IEA and OPEC, whom expect global demand to ease by 8.9mbpd in 2020 and remain pressured throughout 2021. The latest report, by both OPEC and the IMF, could spell troubling times for many oil-dependent nations, notably in the Middle East and Africa. Nigeria is no exception to this, as the nation’s economy remains driven by oil exports. The fall-out from the drop in crude oil receipts, could weigh on the nation’s foreign reserves and constrain the nation’s liquidity, if prices do not recover to pre-COVID levels. The country has seen its reserves fall from $45 billion in June 2019 to $35 billion in August 2020. In addition, the country is facing other challenges such as high import costs, capital flight and an inability to attract FDI. Furthermore, with a ratings downgrade, being one of the major fallouts of the slowdown in crude earnings, the nation could struggle to sell its debt to foreign investors.

Equities: The local bourse started off the month on a positive note, advancing 96bps w/w, as buy-side activity in the Oil and Gas and Banking sectors, propelled the NSEASI higher. However, the Oil and Gas sector remains the worst performing sector year-todate (-32.00%), although SEPLAT saw its shares gain 12.83% w/w, following the release of its H1’20 results. In the banking space, GUARANTY (+656bps w/w) and UBA (+349bps w/w) led all gainers in the sector to close the week 141bps higher. Meanwhile, in the Consumer Goods sector, interest across a broad range of counters in the space, saw the sector gain 70bps w/w; notably FLOURMILL advanced 293bps, After it released impressive results at the start of the week, while NB also closed higher, gaining 323bps w/w. Finally, in the industrial Goods space, limited interest in mid-cap stocks saw the sector gain 10bps w/w, the sector remains the best performing sector year-to-date (+6.72%), being the only sector in the positive region.

Fixed Income:

Trading activity in the fixed income space was mixed last week, as system liquidity constrained buy-side activity over the course of the week. In the Treasury bonds space, the yields on benchmark bonds advanced 56bps w/w driven by sell-offs at the short end of the bond curve; notably, the yield on the 16.39% FGN-JAN-2022, 12.50% FGN-JAN-2026, and 12.40% FGN-MAR-2036, all advanced by 150bps on average respectively. Meanwhile, we witnessed a flurry of buying and selling activities in the OMO market, where the yields on OMO securities eased 26bps w/w. Finally, we saw yields in the NTB space close relatively flat on the week easing 5bps w/w, as investors seek alternative investments.

Currency:

The Naira appreciate N3.25 w/w at the I&E FX Window to settle at N386.00 and depreciated N0.50 w/w to settle at N472.50 against the dollar in the parallel market.

What will shape markets in the coming week? Equity market: Trading

sessions for the week were characterized by bargain hunting as investors reacted positively to a number of earnings results released by bellwether stocks. However, despite the capital appreciation recorded this week, we still believe that current price levels remain good for long term investors, as a number of fundamentally sound stocks continue to trade below their fair values. We however advice cautious trading by investors in the short term in the face of market volatility.

Fixed Income market: We expect the secondary fixed income space to start off the week on a tepid note, owing to the constrained level of liquidity amid a lack of suitable options for investors.

Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week FLOUR MILLS OF NIGERIA PLC - Revenue performance boosts Profits

Impressive Revenue growth sustained by improved volumes

Flourmill Nigeria recently released its FY’20 results, reporting a 7% y/y Revenue growth to N573.8 billion in the year, a step-up from the 2.8% y/y decline it had reported in the previous financial year. We believe that increased demand from consumers who could no longer access land border imports supported topline growth in three of their four business lines. Sugar Revenue grew 18.1%, spurred by higher prices and volumes, due to the unavailability of cheaper smuggled sugar. The closure also impacted the food business, especially pasta volumes which improved c.20% y/y. Food Revenue was also supported by improved B2C marketing as Flourmill introduced five new value brands across its staple segment, with food Revenue growing 6.8% y/y to N358.4 billion (FY’19:2.9%). The best performer by segment was the Agro-allied business which expanded by 19.7% y/y to 105.5 billion. We believe that the increased focus on local agricultural livestock and crops increased demand for its feed and fertilizer products, especially in the last two quarters of the year. The company showed improved cost efficiency as gross profit jumped 23.3% y/y to 65.8 billion, lifting gross margins to 11.5% (+1.5ppts y/y). That said, OPEX jumped 18.2% y/y to N32.6 billion, reflecting inflationary pressures as well as costs of pushing its newly introduced products. However, due to improved revenue, operating margin remained stable at 6.1%, with EBIT coming in at N35.1 billion. We recall that in January, the company issued a N20 billion fixed rate bond (as part of its N70 billion bond issuance programme) to refinance existing higher interest debts, taking advantage of favourable interest rate levels. As a result, Flourmill’s interest expense declined 12.7% y/y to 19.9 billion. Consequently, PBT jumped 69.6% y/y to 17.3 billion. Despite the significant improvement in pre-tax profit, the company paid much lower taxes this year with an effective tax rate of 34.1% (FY’19: 60.7%). This led to a 1.8x y/y increase in PAT to N11.4 billion, showing impressive EPS growth from N0.97 in 2019 to 2.77 in FY’20. Management has proposed a FY’20 dividend of N1.40/share.

Expect stable Revenue growth momentum

We believe that Flourmill’s new value brands will prove pivotal at this time, given our expectation of continuously pressured consumer wallets. Maintaining positive expectations for all segments, we estimate a 6.5% y/y growth forecast for topline in FY’21 to N611.2 billion. However, given the company’s dollar exposure due to wheat importation, we foresee a 1ppt y/y tightening in gross margin to 10.5% due to the currency adjustment in March. Overall, we estimate that Gross profit would decline by 2.4% y/y to N64.18 billion in FY’20. Furthermore, we expect operating expenses to increase by 7.7% to N35.1 billion amid inflationary pressures, taking FY’21 EBIT 3.1% lower y/y to N33.9 billion. We expect interest expense to decline further by a marginal 0.2% y/y to N19.9 billion and project a PBT of N15.8 billion. Adjusting for taxes, we expect Flourmill to deliver an FY’21 PAT of 10.4 billion. We value the Flourmill at N25.43 and place a BUY recommendation on the stock.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.