Poli­cies leave big­gest coys cheap

Business a.m. - - FRONT PAGE - Sto­ries by Ades­ola Afo­labi

SUB­STAN­TIAL AMOUNT OF EF­FORT put to­wards en­sur­ing the sur­vival and sus­tain­abil­ity of cor­po­rates around the world re­sults in value ac­cre­tion and gen­er­ally builds fi­nan­cial progress. How­ever un­der­ly­ing poli­cies in the op­er­a­tional en­vi­ron­ment of such firms

SUB­STAN­TIAL AMOUNT OF EF FORT put to­wards en­sur­ing the sur­vival and sus­tain­abil­ity of cor­po­rates around the world re­sults in value ac­cre­tion and gen­er­ally builds fi­nan­cial progress. How­ever un­der­ly­ing poli­cies in the op­er­a­tional en­vi­ron­ment of such firms play a cru­cial role in de­ter­min­ing the worth of these cor­po­rates. Some­times these poli­cies are deemed favourable, other times not quite.

In the case of Nige­ria’s big­gest cor­po­rates, the bat­tle for a stable ex­change rate may not have au­gured well to aid a re­silient fi­nan­cial per­for­mance, thus leav­ing the value of their stocks con­sis­tently cheap­ened to the ad­van­tage of for­eign port­fo­lio in­vestors al­beit against the in­ter­est of lo­cals.

Con­trol­ling a third of Nige­ria’s en­tire eq­uity mar­ket is Dan­gote Ce­ment. It is Nige­ria’s largest quoted com­pany, a sub­sidiary of the Dan­gote Group pri­mar­ily known for ce­ment pro­duc­tion with op­er­a­tions in over 10 African coun­tries and rev­enues in ex­cess of $1.9bn as at Septem­ber 2018. A trend of Dan­gote ce­ment’s share price shows the stock has ap­pre­ci­ated sig­nif­i­cantly over the last three years. In fact, the shares which closed at N187.70 per share as at Thurs­day 27th De­cem­ber 2018 was 10 per­cent greater than a share price of N170- the value of the stock as at the be­gin­ning of 2016, just be­fore the naira was de­val­ued.

Nige­ria’s naira of­fi­cially val­ued at N197 to one US dol­lar at the be­gin­ning of the 2016 fi­nan­cial year, was de­val­ued to an of­fi­cial price of N305 to $1 as at May 2016, a move unan­i­mously taken by the Cen­tral Bank of Nige­ria’s Mon­e­tary Pol­icy Com­mit­tee to “re­store the au­to­matic ad­just­ment prop­er­ties of the ex­change rate.” The de­ci­sion was backed with the cre­ation of a win­dow to fund crit­i­cal trans­ac­tions, which turned out well for the cap­i­tal mar­ket as for­eign in­vestors could source for­eign ex­change upon exit of the mar­ket.

The worry ex­pressed by an­a­lysts at the time of de­val­u­a­tion among which were height­ened in­fla­tion­ary bur­den and con­tin­ued pres­sure on the naira in the ab­sence of tight­en­ing or other sus­tain­able sta­bil­is­ing mea­sures, is seen to play out when con­sid­er­ing the real value (in dol­lar terms) of stocks to­day.

While the share price of Dan­gote Ce­ment has ap­pre­ci­ated in naira terms within this three year pe­riod, the real worth of the stock has crashed 28 per­cent within the same pe­riod when taken the de­val­u­a­tion into con­sid­er­a­tion. The stock worth $0.86 to a for­eign in­vestor as at 2016, is to­day val­ued at $0.62.

The story is not so dif­fer­ent for Nige­ria’s third largest quoted com­pany, Nige­rian Brew­eries. With $1.8 bil­lion in mar­ket cap­i­tal­i­sa­tion, the real value of the pi­o­neer and largest brew­ing com­pany in Nige­ria as at 2015 year end was $0.69. With the share price clos­ing at N82.50 on the 27th De­cem­ber 2018, the value in dol­lar terms stands at $0.27, mak­ing the stock 61 per­cent cheaper in terms of value within the re­view pe­riod.

Other big cap­i­talised stocks so an­a­lysed in­cluded fi­nan­cial sec­tor giants such as Guar­anty Trust Bank and Zenith Bank worth $0.11 and $0.08 re­spec­tively as at clos­ing prices of De­cem­ber 27th.

These val­ues were marginally in con­trast with their 2016 val­ues of $0.09 and $0.07 re­spec­tively.

The com­po­si­tion of in­vestors in Nige­ria’s cap­i­tal mar­ket largely skewed to the for­eign port­fo­lio in­vestors leaves the mar­ket sus­cep­ti­ble to exit de­ci­sions they make, this has fu­eled the ad­vo­cacy of indige­nous economists and var­i­ous mar­ket stake­hold­ers for a more re­silient mar­ket built by lo­cal in­vestors.

Al­though the 2018 year has been par­tic­u­larly chal­leng­ing for busi­ness op­er­a­tions in light of it be­ing a pre-elec­tion year, in­vestors in­ter­est to­wards fron­tier and emerg­ing mar­kets have not also been par­tic­u­larly favourable, con­sid­er­ing higher rates ob­tain­able in Amer­ica and Euro­pean coun­tries.

The de­pen­dence on for­eign port­fo­lio in­vestors (FPIs) to drive stock mar­ket per­for­mance and eco­nomic growth is detri­men­tal, con­sid­er­ing the fact that they have started pulling out of the mar­ket mas­sively since March 2018, Ro­timi Fakayejo chief ex­ec­u­tive at En­treprise Stock­bro­kers told busi­ness a.m in a tele­phone in­ter­view.

Ac­cord­ing to Fakayejo, the vol­ume of blue chip stocks dumped by the FPIs in the last month is a con­trib­u­tory fac­tor to the down­turn of the mar­ket. The sav­ing grace for some of the stocks is the buf­fer cre­ated by ma­jor share­hold­ers, Fakayejo ex­plained, cit­ing the ex­am­ple of 102.4 mil­lion units of Zenith Bank shares worth N2.3bn were sold off midDe­cem­ber by FPIs. The share price was how­ever sal­vaged as chair­man of the com­pany, Jim Ovia, bought them off, thereby pre­vent­ing a share price free fall.

Other poli­cies seen as un­favourable to sus­tain­able share price ap­pre­ci­a­tion of quoted com­pa­nies in the 2018 fi­nan­cial year, in­clude the in­tro­duc­tion of a new mar­ket struc­ture by the Nige­rian Stock Ex­change (NSE) at the be­gin­ning of July

The mi­crostruc­ture was de­vel­oped pri­mar­ily to drive eq­ui­ties mar­ket trans­parency with its 10 per­cent up­per and lower limit on share prices trad­ing. The struc­ture fol­low­ing five months of its ex­is­tence is how­ever be­ing ad­judged as a cat­a­lyst for drag­ging the en­tire stock mar­ket down in a bear­ish ses­sion where in­vestors are will­ing to dump stock(s) at all cost, thereby in­creas­ing the risks of mar­ket vul­ner­a­bil­ity to vo­latil­ity

“Imag­ine a 10 per­cent loss by Dan­gote Ce­ment, that will mean that even if the en­tire high cap stocks in the mar­ket gains by same mar­gin, that gain is lost,” Fakayejo ex­plained, point­ing out that the pre­vi­ous struc­ture which had up­per limit and the lower limit for price move­ment at 5 per­cent would have been bet­ter for the mar­ket, as he be­lieves there is still need for con­trol and more reg­u­la­tions in the mar­ket.

The Nige­rian Stock Ex­change in Jan­uary 2018 also an­nounced an amend­ment to the pric­ing method­ol­ogy and par value rules for stocks traded on its floor. The rules sought to cre­ate a form of liq­uid­ity and price move­ment in a num­ber of stocks long stuck at 50 kobo par value. The rules fur­ther sought to en­gen­der an easy takeover for some of the com­pa­nies fol­low­ing price move­ment, but ma­jor­ity of the stocks in this cat­e­gory has seen a fur­ther crash in the share price, some to as low as 20 kobo as seen in Re­gency and Al­lied In­surance which was erst­while bought at a value fairly above N3.

The struc­ture, ac­cord­ing to the NSE is in line with its 2018 to 2021 cor­po­rate strat­egy aimed at boost­ing re­tail in­vestor par­tic­i­pa­tion and pro­vid­ing the po­ten­tial for cheaper cost of cap­i­tal to is­suers in the mar­ket.

But Fakayejo ar­gued that the abil­ity of a stock to go be­low 50 kobo has not been a plus to the mar­ket, “there is hardly any stock that went be­low 50 kobo and was able to rise above that price later,” he added.

An­other set­back for the mar­ket in 2018, was the is­sue of Skye Bank be­ing con­verted to a bridge bank- Po­laris, a move that blew off N10.7 bil­lion eq­uity putting re­tail in­vestors at a huge loss and great dis­ad­van­tage.

While the Nige­rian stock mar­ket emerged the third best per­form­ing mar­ket in 2017 after per­form­ing poorly for three straight years be­fore then, the 2018 per­for­mance with a year to date loss of 17.1 per­cent as at re­port­ing date shows that the pe­cu­liar­ity of the Nige­rian mar­ket cre­ates room for in­vest­ment op­por­tu­ni­ties to thrive with the right set of poli­cies con­sis­tently en­forced with a sense of pro­mot­ing in­vest­ment and eco­nomic growth.

With the 2019 elec­tion draw­ing nearer, the af­ter­math re­mains a ma­jor con­trib­u­tory fac­tor to a re­bound of Nige­ria’s stock mar­ket space, an­a­lysts have said in their out­look of Nige­ria’s 2019 fi­nan­cial mar­ket per­for­mance.

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