$70 oil price required to sustain budget – FG

What shaped the past week?

Global: - Markets in North America traded higher last week, as global investors continued to monitor developments concerning the COVID-19 vaccine, as well as the on-going negotiations within the U.S. Congress, on another round of economic stimulus from the U.S. government. The negotiations between U.S. Senators, remained the focus of investors throughout the week, as Democrats and Republicans a far on a deal that would get bipartisan support. As at 1600GMT, the Dow Jones had gained 183bps w/w, while the SP500 and NASDAQ advanced 69bps and 24bps respectively. Meanwhile, across the Atlantic, European markets traded slightly higher as well, despite negative economic data from the United Kingdom. According to data released by the country’s Office for National Statistics, gross domestic product (GDP), for the second quarter of 2020, plunged 20.4%, triggering an economic recession. Investor confidence in the recovery in European region took a hit on Friday, following the release of weak GDP data by Eurostat. Eurostat’s saw the euro area’s economy contracting 12.1% in the second quarter. Meanwhile, the Eurozone’s employment slid by 2.8% while it weakened by 2.6% in the whole European Union on a quarterly basis in the second quarter. At close of business, the FTSE 100 gained 51bps w/w, with the German DAX gaining 182bps w/w. Finally, in Asia, markets closed higher as well, despite growing tensions in the U.S – China relationship. Beijing sanctioned United States Senators Marco Rubio and Ted Cruz in response to the sanctions Washington had imposed against the leaders of Hong Kong two weeks week ago. In Japan, the benchmark index the Nikkei 225 recorded the largest advance for the week, amongst the major markets, gaining 430bps w/w, while the Shanghai Composite gained 18bps w/w.

Domestic Economy:

On Friday, the National Bureau of Statistics (NBS) released Nigeria’s unemployment data report for Q2’20, in which it stated that out of the nation’s 80 million labour force, 27.1% were unemployed, up 4.0% from Q3’18. The report also revealed that youth unemployment (15 – 34 years), recorded the highest rise to 34.9%, from 29.7% in Q3’18. As the economy contin182DTM, ues to deal with the fallout of the pandemic, young people appear to be bearing the brunt of the impact, evidenced by the highest rise in unemployment amongst all age groups. The rise in unemployment will put further pressure on the nation’s revenue, due to a decline in tax receipts. Furthermore, high unemployment can negatively impact the economic health of the country and resulting in a more unflattering misery index ranking. Factors such as investor and consumer confidence are key to sparking an economic recovery, however, if workers are dejected about their future in country, the economic growth needed to raise the standard of living in the country will be hard to come by, as businesses will be faced with hiring under-skilled workers while workers could find it difficult to build their savings due to the strain on their income. Equities: The local bourse traded higher last week, gaining 63bps w/w, as local investors sought after stocks in the Consumer Goods and Oil and Gas sectors. Gains recorded in the Oil and Gas sector, saw the index gain 592bps w/w to lead the way; in particular, capital appreciations in SEPLAT (+10.00% w/w) and ARDOVA (+494bps w/w) helped propel the index higher. Meanwhile, a surge in CADBURY (+12.88% w/w), as well as gains observed in NB (+12.50% w/w), UNILEVER (+417bps w/w) and GUINNESS (+267bps w/w_, saw the Consumer Goods space advance 225bps w/w. On the other hand, the Industrial Goods sector closed lower, shedding 271bps w/w, as investors booked profits on DANCGEM (-409bps w/w), following gains it had recorded in the previous week. Finally, interest in the Banking Space was relatively subdued this week, evidenced by the marginal 3bps w/w moderation in the sector. For the week, value and value traded increased 34.62% and 34.77%, from the previous week.

Fixed Income: The Central Bank of Nigeria conducted a primary market auction (PMA), where they offered and sold 56.78 billion across the 91DTM, 364DTM tenors at stop rates of 1.2%, 1.38%, and 3.19% (Effective Yield: 1.20%, 1.38% and 3.2%) respectively. The fixed income space traded in a relatively mixed manner this week, as we observed limited interest and selloffs at the start of the week, as investors sought to position themselves for the PMA. In the Treasury bonds space, yields on benchmark bonds advanced 14bps w/w, driven by sell-offs at the short-long end of the market. Meanwhile, in the Treasury bills space, yields eased on OMO and NTB papers, eased 4bps and 13bps respectively, as investors expressed interest across a broad range of tenors in the market.

Currency: The Naira remained unchanged at I&E FX Window at 386.00 and unchanged at 472.50 against the dollar in the parallel market. What will shape markets in the coming week? Equity market: The Nigerian equities market saw a mixed trading pattern during the week, as investors took profit on some of the gains made last week while the Bulls took control at mid-week, thereby neutralizing previous losses. Despite the attractiveness of a number of fundamentally sound stocks, we expect the market to remain volatile in the short term amid the persistent uncertainties in the global and macroeconomic environment, hence, a cautious trading strategy is advised.

Fixed Income market:

We expect to see increased participation in the market in the coming week, owing to the level of liquidity as well as in-coming OMO maturities. As such, we expect the participants to remain active in the Bond space, as fund managers are faced with limited investment options amid a low-yield environment 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 PRESCO PLC - Anticipating a strong end to FY’20

Land border closures continue to drive topline performance

Presco released its H1’20 results recently, reporting an impressive 71% y/y jump in PAT to N4.4 billion in H1’20, significantly ahead of our N2.5 billion expectation. The earnings beat was driven by strong topline and effective cost containment in the recently concluded quarter. Revenue surged 63% y/y to N8.1 billion in Q2’20, taking H1’20 Revenue 29% higher y/y to N13.5 billion (Vetiva: N12.1 billion). As expected, Q2 topline benefitted from a surge in domestic CPO prices, brought on by the FG’s drastic decision to shut down land borders in Q3’19, limiting the supply of illegally smuggled CPO in the Nigerian market. We also believe that Presco’s CPO sales increased over the period, with demand for food and hygiene products (largely oil palm based) rising during the lockdown and demand shifting towards domestic producers and imported volumes declined. Boosted by significant investments in production and processing capacity, Presco was in a decent position to take advantage of the stronger demand in the period. Notably, the CPO producer had completed construction of a new 350 tons/ day palm kernel crushing plant as well as a 30 tons/ day shell boiler in 2019. Furthermore, the palm oil mill was expanded to a capacity of 90 fresh fruit bunches (FFB)/hour from 60 FFB/hour in January while a new 500 tons/day vegetable oil refinery was slated to be completed in Q2’20. Amid a strong focus on hygiene and with macroeconomic woes unlikely to slow down demand for food and other CPO based products, we forecast an 41% y/y Revenue growth in FY’20 Revenue to N27.8 billion.

Earnings surge on account of topline, cost containment

Spurred by a higher topline and weak base, Gross profit rose 80% y/y to 5.2 billion, taking H1’20 Gross profit 32% higher y/y to N9.0 billion. Gross margin in Q2 (65%) however moderated by 13.6ppts from the Q1 figure (78%), likely reflecting pandemicinduced inflationary pressures. With Operating expenses largely contained and falling 11% y/y to N1.2 billion in Q2’20 (H1’20: N2.1 billion), EBIT surged 126% y/y to N3.8 billion in the second quarter, taking H1’20 EBIT 52% higher y/y to N6.6 billion (Vetiva: N5.0 billion). With Net interest expense falling 23% y/y to N0.3 billion, PBT rose 177% y/y to N3.5 billion in Q2’20. After adjusting for tax, PAT rose 221% y/y to N2.7 billion in the second quarter.

Valuation revised higher to reflect stronger fundamentals

Following Presco’s impressive first half performance, we have adjusted a number of our cost estimates to match the second quarter run rate. Thus, we arrive at a 71% y/y growth in FY’20 EBIT to N13.9 billion. After accounting for interest expense and tax, we arrive at a 230% y/y jump in FY’20 PAT to N8.8 billion, a record bottom line for the CPO producer. Adjusting for the expected improvement in performance over the forecast period, lower interest rate environment as well as Presco’s reduced Net debt balance, we now value the stock at 59.94 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.