Manufacturing PMI contracts in September, as COVID impact lingers

What shaped the past week?

Global: - Markets across the globe traded in a mixed fashion last week, as concerns over the pace of the recovery from the pandemic continues to be a key driver of investor interest. In the Asian region, major markets traded in a mixed manner w/w, as ongoing tensions between the U.S. and China left sentiment mixed in the region, while multiple holidays across the region limited trading activity in the region. The Nikkei 225 fell 75bps w/w, as it struggled with a power outage that saw the Tokyo Stock Exchange halt trading on Thursday. However, the south Korean KOSPI gained 215bps w/w, as rising optimism over a recovery in Asia filtered into its market. Meanwhile, major EU markets closed higher, as a result of a mix of data releases which showcased that the recovery in the EU, continues at an uneven pace. The German DAX gained 114bps w/w, while the French CAC climbed 140bps w/w. Finally, in the U.S., concerns over another round of economic stimulus from the U.S. government, remained at the forefront of investors’ minds. The techheavy NASDAQ composite had jumped 231bps w/w as at 1600GM, while the S&P 500 had advanced 171bps w/w driven by persistent interest in household names AMZN, TSLA and ZOOM. On Thursday, U.S. President Donald Trump announced that he had contracted the COVID-19 virus, which sent futures and crude prices lower as market participants express their concerns over the potential impact of this on the global market space.

Domestic Economy: Going by the Sep’20 Purchasing Managers Index (PMI) numbers released by the CBN, Nigeria recorded a faster pace of contraction in both the manufacturing and nonmanufacturing sectors compared to the previous month -Aug’20. Activities in both sectors have shrunk for five consecutive months, a butterfly effect of the COVID-19 pandemic. The PMI reading for the manufacturing sector stood at 46.9 points (Aug’20: 48.5) while that of the nonmanufacturing sector stood at 41.9 points (Aug’20: 44.7). The level of employment in both sectors declined at a faster pace (Manufacturing: -0.5; Non-manufacturing: -2.7), in response to a faster decline in new order levels (Manufacturing: -2.8; Non-manufacturing: -4.5). Although pessimism has trailed new order levels in both the manufacturing and non-manufacturing sectors for five consecutive months, new export orders for manufactured products appears to have picked up (+0.9), suggesting that the overall pessimism in order levels is due largely to weak local demand. This assertion is not implausible in the context of lower levels of employment and rising prices (Output prices: +0.4; Input prices: +3.0). While the GDP release for Q3’20 is a month away, the abrupt impact of COVID-19 on the value of the Naira, trade, and by extension, the purchasing power of Nigerians is already being felt. Recent energy reforms, coupled with the devaluation of the Naira, are new costs that purchasing managers must deal with. These costs may eventually be passed on to consumers, in form of higher prices, exacerbating an already unpleasant inflation situation.

Equities:

- With fund managers rebalancing their portfolios at the end of the month, the local bourse extended its rally, advancing 253bps w/w. Gains were broad based, with all sectors but the Consumer Goods closing in the green for the week. Sector wise, the Industrial Goods space advanced 325bps w/w, due to advancements in DANGCEM (+360bps w/w). Meanwhile, the Banking sector climbed 424bps w/w, leading all gainers as a result of advances in household names, GUARANTY (+741bps w/w) and ZENITHBANK (+434bps w/w) amongst others. Furthermore, the Oil and Gas sector grew 179bps w/w, as investors snapped up shares in TOTAL and OANDO, with both their shares surging 10.00% w/w and 2.69% w/w respectively. Telecoms giant, MTNN also surged 277bps w/w, as the month draws to a close. Finally, the Consumer Goods sector closed lower, shedding 75bps w/w, as profit-taking activity dictated actions in the space.

Fixed Income: -

The fixed income market remains of interest to investors, despite the weak outlook to the speed of the global recovery from the pandemic. Last week, the Central Bank of Nigeria conducted a PMA, where they offered N113.97 billion, and sold N133.97 billion across the 91DTM, 182DTM and 364DTM bills at stop rates of 1.080%, 1.490%, and 2.800% (Effective yield: 1.082%, 1.501%, and 2.880%). Meanwhile, yields on bonds continued to rally, easing 23bps w/w, driven by persistent interest in tenors at the short and long-end of the space. The 16.39% FGN-JAN-2022 bond continues to be of interest to fund managers, with its yield falling 128bps w/w. In addition, system liquidity continued to be a key driver of activity in the Treasury Bills space; with liquidity relatively tight throughout the week, yields on OMO notes climbed 5bps w/w, while they climbed 9bps w/w in the NTB space.

Currency:

The Naira closed the week unchanged at I&E FX Window to settle at N386.00 and while depreciating N1.00 to settle at N462.50 against the dollar in the parallel market.

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

With the Bulls dominating the four days trading week, the domestic market maintained its bullish run while the YTD performance returned positive. We expect some level of stability in the coming week as a number of fundamentally sound stocks find a new support level. However, with the gains recorded in the last few week, the possibility of profit taking on recent gains cannot be overruled.

Fixed Income market:

With the market ending the week on a tepid note, we expect sentiment in the market to remain mixed amid a lack of interest and limited liquidity, as global investors continue to remain risk averse due to rising COVID cases around the world.

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 ACCESS BANK PLC (ACCESS) - Costs slowly coming under control

The Monetary Policy Committee (MPC) continued its expansionary tone in rejigging the economy from a coronavirus-induced recession. The MPC reduced the Monetary Policy Rate (MPR) by 100bps to 11.5% and adjusted corridor rates to +100/-700bps around the MPR.

Opex remains the main barrier to higher profits

ACCESS recently released H1’20 results, reporting 22% y/y growth in Gross Earnings to N396.8 billion (Vetiva estimate: N378.4 billion). This came despite a 10% y/y decline in Interest Income and was mainly the result of a 191% y/y surge in NonInterest Income, which was driven by net gains on financial instruments, specifically derivatives of N103.2 billion. Meanwhile, provisions jumped 237% y/y to N16.5 billion (Vetiva estimate: N17.9 billion) while Opex worsened 44% y/y to N185.5 billion (Vetiva estimate: N172.7 billion). The significant increase was mainly due a 56% y/y increase I AMCON charges, which added N12.8 billion to the bank’s expense line. Furthermore, the bank reported a 16% y/y increase in personnel expenses to N36.3 billion. Overall, this led to a 2% y/y growth in PBT to N74.3 billion and PAT of N61.0 billion, a 1% y/y decline, in line with our expectations. The banks also declared interim dividend of N0.25/share (H1’19: N0.25).

Cost synergies materializing at a slower than optimal pace

Access Bank’s Q2 performance was weaker than Q1 across board. Gross Earnings declined 11% q/q to N186.9, with Interest Income falling 13% q/q to N114.9 billion and Non Interest Income declining 7% q/q to N72.1 billion. The decline in Interest Income was a result of lower income booked on investment securities, whilst Non-Interest Income was dragged by a further N11.0 billion loss on foreign exchange in Q2 along with a steep decline in gains on financial instruments held at FVOC (-37% q/q). Amid these declines in earnings, Operating expenses also declined albeit to a lesser extent. Staff costs declined 15% q/q to N16.6 billion while provisions fell 7% q/q to N7.9 billion. This led to a 40% q/q decline in PBT to N27.9 billion. Looking forward, we expect some improvements in quarterly performance in H2, with Non Interest Income likely to improve as foreign exchange losses normalize. Therefore, we raise our FY’20 Non-Interest Income estimate to N227 billion (Previous: N194.9 billion). Furthermore, we revise our provision expectation to N32.9 billion (Previous: N37.6 billion), while raising our Opex forecast to N306.2 billion (Previous: N276.6 billion).

TP revised to N11.95 (Previous: N11.35)

As a result of our revisions based on the bank’s H1 and Q2 performance, we have raised our FY’20 PAT estimate to N97.2 billion (Previous: N91.4 billion). This yields an EPS projection of N2.73 (Previous: N2.59) and a 12-month target price of N11.95 (Previous: N11.35). Thus, we maintain our BUY rating on the stock. The bank’s shares are currently trading at P/E and P/B of 2.4x and 0.4x vs a Tier-I average of 2.9x and 0.5x respectively.

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.