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(Special Report) Cordros Research Economic Report on Nigeria 2022

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The year 2022 was an auspicious year for investors in the financial market. As the global economy came under significant pressure, the domestic financial market’s performance mostly tracked well with original expectations, with the variance stemming from the lower-than-expected yield rise.
The fixed income market was quite volatile in the year, with yields trending northwards and touching levels last seen in 2019. A switch to a hawkish stance by the Monetary Policy Committee of the CBN and the demand and supply imbalance drove the upward tilt of the naira curve. However, we believe the rise in yields should have been steeper, considering the government’s inability to implement its external debt issuance program, which should ordinarily increase the FG’s reliance on the domestic market. However, this eventuality was circumvented by the FG’s continuous use of the CBN’s Ways and Means.
On the other hand, the equities market’s performance was mixed. A combination of significantly positive earnings with its associated dividend declarations, an accommodative monetary policy stance, and sustained FPI interest in fungible stocks underpinned the stellar H1-22 performance on the domestic bourse. However, the story turned sour in the year’s second half, as investors rebalanced portfolios following the uptick in fixed income yields and a shortfall in liquidity, given the deliberate actions by the monetary authorities to hike interest rates. It is pertinent to note that the impact of electioneering activities on the equities market was less pronounced than in previous pre-election years.
In 2023, all signs indicate a sustained northward movement in fixed income yields, with intermittent periods of upward pressure in Q1-23. The factors supporting our thesis include (1) a sustained tightening in the global financing conditions, though at a much slower pace, (2) a sustained imbalance in the demand and supply dynamics, (3) monetary policy administration, and (4) the electioneering process outcome and fiscal policy management after that. Assessing all the factors, we estimate that the yields on Treasury bills and bonds will increase in the year and settle at c.12.8% and c.15.5% by the end of 2023FY.
For the equities market, we posit three scenarios for market performance next year – base, bear, and bull cases. In the base case, which is the scenario that we believe is most likely to play out, we expect a combination of (1) positive corporate earnings, (2) a muted uptick in fixed-income yields, and (3) investors’ positive reactions to the election’s outcome, will support market performance and lead to a 3.5% return for 2023FY. In the bear case scenario, we assume a blend of (1) significantly weaker corporate earnings and dividend pay-outs, (2) a higher-than-anticipated uptick in fixed income yields, and (3) a sudden violent turn in 2023 election activities to drive apathy for stocks, to pressure the market performance. Finally, the bull case scenario expects the global economy to rebound within the year, and capital inflows strengthen as investors hunt for alpha. However, we still expect a disconnect between company fundamentals and valuation multiples.

Cordros Capital views on the different sectors we cover in the following sections:
Financial Services (Banking): For 2023FY, we believe Nigerian banks will maintain their growth trajectory supported by core income, owing to higher loans and investment securities yields. Although, we think banks will be cautious about growing loans domestically in 2023FY as the tight monetary conditions will likely limit risk asset creation. On the external front, Moody’s downgraded nine Nigerian bank’s long-term ratings based on the weakening in the Nigerian government’s fiscal capacity to support the country’s banks, and interlinkages between the sovereign’s weakened creditworthiness and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities. Although, we expect non-core income to support earnings in 2023FY, albeit marginal, as the price sharing and glitch on the e-banking platforms will continue to impact the performance. In addition, we believe this will negatively impact Nigerian banks looking to raise debt externally. Our top picks are (1) GTCO (BUY, TP: NGN28.21/s), as the company maintains a leadership position in operational efficiency, and (2) ZENITHBNK (BUY, TP: NGN26.91/s), given its dominance in the corporate and retail segments of the industry.
Industrial Goods (Cement): For 2023FY, we envisage solid growth in revenue for firms under our radar on the back of higher prices of cement and leverage of exportation strategy. On the flip side, we highlight that the higher inflationary environment will continue to pressure the operational activities of firms in the industry. Consequently, we believe companies that can maintain operational efficiency and optimise plants to enhance fixed cost absorption will be better placed to deliver decent earnings in 2023. Overall, our top pick for the industry is WAPCO (BUY, TP: NGN32.31/s).
Agriculture: Despite the challenging operating landscape, factors such as CPO import restrictions amid current FX liquidity challenges and long-term sector growth prospects remain favourable for sector players. Thus, we remain optimistic about OKOMUOIL (BUY, TP: NGN242.81/s) and PRESCO (BUY, TP: NGN213.37/s). For OKOMUOIL, though we do not expect a significant increase in its maturities, we believe the upgrade of the milling capacity at the Okomu II plantation will cause an improvement in its production efficiency and in turn, its volumes. For PRESCO, we expect the producer to deliver revenue expansion supported by improved volumes.
Consumer Staples: Across our coverage universe, we expect most HPC names to report single-digit volume growth over 2023 as we expect the high inflationary pressures to persist (Cordros estimate: 18.01% y/y), thus, keeping consumer spending in check. Nevertheless, we believe the agro-allied and the brewery subsectors will lead the next growth phase. Accordingly, we see scope for earnings growth for Agro-allied names — FLOURMILL (BUY, TP: NGN63.12/s), NASCON (BUY, TP: NGN27.84/s), and DANGSUGAR (BUY, TP: NGN26.31/s), given the inelastic demand facing their products and the ability to implement more significant price increases than peers. In contrast, the HPC’s growth will be more muted due to more exposure to foreign currency volatility and cost pressures. For Brewery stocks, NB (BUY, TP: NGN60.71/s) and GUINNESS (BUY, TP: NGN93.25/s), we expect price increases and premiumisation to remain supportive of earnings growth amid cost pressures arising from higher excise duties and the high inflationary environment. Oil & Gas (Downstream): We expect the price cap on PMS to remain in place, though we acknowledge the possibility of a hike in the product’s price. We expect the NNPC to remain the sole supplier of the market, pending the potential commissioning of the Dangote Refinery in 2023. As structural issues persist, we highlight that individual product sourcing will remain a big challenge for downstream players. Our top pick remains TOTAL (BUY, TP: NGN435.35/s) as we expect the company to maintain its resilience in 2023, leveraging its ample storage and distribution network to sustain its control of sector volumes.

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