As earlier envisaged, more 2012FY results and corporate actions, especially some of the banking stocks hit the market during the week. Although most of these results were largely in line with expectations, there were few corporate action surprises such as OKOMUOIL which declared NGN7.00 dividend and scrip issue of 1 for 1. While we have always reiterated the likely impact of corporate actions on price movement, events of the past few weeks suggested that corporate actions leave little or no impact on the prices except for one-off spikes. This is perhaps an indication that most actions have been priced in expectations. In this report, we review the performance of the market during the week and highlight the feat of few of the companies that released their results during the week.
Market Review and Preview
The Equities market resumed the week overly bullish driven by the influx of corporate earnings releases. The Agricultural stocks were largely the toast of the market with OKOMUOIL gaining 31.03% WtD following its proposed dividend of NGN7/share at 8.78% yield at the time of declaration and bonus of 1 for 1. LIVESTOCK also significantly enjoyed from this rally gaining 14.23% respectively WtD.
Similarly, better-than-expected performances from companies with though less attractive dividend yields enjoyed investors sentiments with companies such as ZENITH, despite recording c.107% earnings growth , its dividend yield was 7.39%. While some investors seemed to have keyed in to other stocks in expectation of attractive dividend declarations; some others have taken advantage of market liquidity to make capital gains from previous rally and exited their positions amid unattractive dividend yields (43 stocks gained in the week vs. 36 losers).
Looking ahead, we expect more corporate actions and full year audited financials of other companies especially the banks and the insurance companies.
Following the mild reaction of investors to the results and corporate actions released within the week (which were within forecasts), we are of the opinion that dividend expectations seem to have been largely factored into the current prices. Little wonder why prices have remained less responsive to results. However, we still expect the market to react to interesting earnings and corporate actions in the coming week.
BERGER PAINTS PLC| 2012FY
The company’s revenue decelerated by 2.33% y-o-y in 2012 though at a much slower pace than the 6.6% decline as at 2011FY. BERGER appears to be struggling with keeping top-line growth positive which we attribute to more aggressive sales efforts by peers. We expect the company to institute more aggressive means of driving revenue possibly via production of innovative paints products.
Cost level in line with our forecast; cost to sales settled at 61.14% in 2012FY compared with 62% in 2011. While we expect a 1.2% decline in costs y-o-y, the company achieved 4.24% indicating positive results of efforts at curtailing costs. We anticipate improved cost management in the year but only slightly; thus we expect cost-to-sales to slow to 60% in 2013.
Earnings slid 15.8% though an improvement over the previous year’s 43.5% decline. Despite the earnings decline, the company maintained its DPS of 70k/share for a third consecutive year. We expect the company to revert to positive earnings growth in the year which we believe will be driven by increased revenue and higher cost savings in its production and operations; our forward EPS is NGN0.93k vs. NGN0.88k as at 2012 FY.
MOBIL OIL NIGERIA PLC | 2012FY
Despite a trying year for all industry operators, MOBIL Oil grew turnover by 30% y-o-y, the highest in the last 8-year and higher than its 5-year CAGR of 8.2%. However, cost to sales ratio increased due to the Government delay in issuing import licences and paying fuel subsidies. Increased cost impaired earnings as gross profit and PBT dropped by 19% and 32% respectively while PAT growth was supported by other comprehensive income.
Turnover Growth hit Historical High: MOBIL turnover increased to NGN80.80bn vs. NGN62.10bn in 2011, growing by 30.1% y-o-y; its 8-year historical high. The company’s turnover increase was driven by higher prices of refined petroleum products. The partial removal of fuel subsidy increased per litre of fuel from NGN65 to NGN97, an increase of 49.2%. We expect a conservative 10% turnover growth in 2013.
Government’s bureaucracy impacts cost: MOBIL cost of sales increased 39.7% yoy. This is higher than turnover growth of 30.1% over same period. Cost to sales ratio increased to 89.8% vs. 83.7% in 2011. The allegation over fuel subsidy overpayment necessitated government actions to delay subsidy payment and issuing fuel import licences. MOBIL, like others, incurred additional cost to meet obligations.
Net Margin Decline though earnings supported by other comprehensive income: Given the industry’s increasing cost, MOBIL’s net margin declined to 4.45% vs 5.61%. However, earnings grew 3.2% courtesy of other comprehensive income. We expect 5.7% margin in 2013.
PRESCO PLC| 2012FY
Much in line with our forecast, turnover tows historical 5-yr CAGR of 32.32%. PRESCO operational efficiency marginally improved as OPEX margin slowed from 19.18% to 19.12%. However, cost to sale margin leapt to 53.5% vs. 52.5% in 2011FY. We expect cost to temper as the company completes the energy cost saving project.
Turnover Growth is Consistent with Historical Trend: Turnover grew by 31.82% much in line with company historical; we attribute growth to capacity expansion and increasing demand due to supply gap. We expect 2013 turnover of NGN 14.8bn to be driven by continued demand given the inelastic nature of its products.
Improved Efficiency Expected in Second Half: PRESCO cost to sales ratio slightly increased to 53.47% in 2012 vs. 52.54% in 2011. We attributed high cost of maintenance of existing production plant as the factor for the slight increase. We expect that completion of the cost efficient power generators by Q2:2013 will see reduction in the processing costs; capacity expansion should also lower unit cost.
Improved Net Margin Surpasses Historical Average: The exceptional growth in earnings (c.97.6%) was attributed to the increased sales due to capacity expansion and slight reduction OPEX margin.
UNILEVER NIGERIA PLC| 2012FY
The company recorded a marginal growth rate of 1.50% despite the seemingly high prospect that Nigeria’s growing population offers the personal care product industry. Modest growth is linked to increasing competition from fringe players in the industry. Cost to sales ratio however moderated as it declined by 2.42%. Net margin remained impressive at 10.08% reflecting an improvement over historical average of 5.93%.
Growth Decline Signals a Saturated Market: The moderate growth witnessed by UNILEVER suggests that the competition in the industry is huge especially given the presence of so many fringe players. We are of the opinion that the nature of products in the industry – length of product usage- also contributed to the modest growth. Nigeria’s demographics as well as product affordability (through smaller product packaging strategy) are noticeable growth drivers we foresee for 2013 financial year.
Company’s Efficiency Objective Yields Results: Moderation in cost to sales ratio to 61.03% from 63.45% is an indication of the results of management’s cost strategy. We believe this effort can be sustained over time given that the company can also leverage on economies of scale to further reduce cost.
Net Margin Improves despite Modest Growth: Net margin at 10.08% improved considerably relative to 7-year historical average of 5.93% suggesting that net margin is assuming an upward trend; cost over the years has assumed a downward trend. We expect sustained efficiency to positively impact on future profit margin.
ZENITH BANK PLC| 2012FY
ZENITHBANK expanded gross earnings by 25.88% to hit NGN307.08bn in 2012FY, implying a 10% upside surprise on our forecast for the year. With total asset increasing by 11.94% y-o-y supported by high asset allocation [c.94%] to interest earnings assets in a high interest environment, the bank ultimately laid the foundation for an impressive performance. Earnings after tax grew by 102% y-o-y to N98.46b which in our opinion is a reflection of cost curtailment and margin expansion. A dividend of NGN1.60 was declared implying 7.39% dividend yield.
The bank recorded interest income of NGN221.32bn in 2012 implying yield on earning asset of 10.4%. Given customer’s penchant for higher interest on deposit, interest expense grew by 85% y-o-y and drove up cost of funding to 3.5% in FY:2012 from 2.3% the previous year. Cost of funding is ahead of our 2.59% forecast for the year. Hence there is a considerable increase in Net Interest Margin to 8.0% which outstripped that of previous year by 260bps. Given the lower yield outlook for 2013, we expect slight margin improvement and hence forecast NIM of 8.10%. Though loan grew by 10%, asset allocation was largely tilted to money market investments accounting for 56% of asset mix. We expect higher loan growth of 16% in 2013 as anticipated lower yield on money market instruments should drive risk asset growth.
All cost measures tempered; total operating expenses stayed intact at cNGN119bn between 2011FY and 2012FY. On the other hand operating income increased by 21.1% from NGN180.3bn in FY: 2011 to NGN218.2bn in FY: 2012. Hence cost income ratio tempers to 50.10%, 900bps below FY: 2011 and 140bps below our forecast. Given lower inflationary expectation and the assumption of retaining AMCON charge at current level, we forecast 2013 CIR of 49.1%. Lower NPL ratio ensured cost of risk was largely benign at 1% compared to 2.8% in FY:2011, we expect further moderation to 0.5% in FY2013.
