Policies leave biggest coys cheap
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.