The 32 Stocks: Gold or Rust?

In its efforts to deepen the nation’s capital market, the Securities and Exchange Commission (SEC) on June 14, 2013, unveiled 32 securities as collateral for margin loans. This is to ensure that stakeholders, who wish to be involved in margin lending, are well guided. The reason given for this is to prevent a recurrence of the 2008 stock market downturn that shook the country.

It would be recalled that the unprecedented Nigerian stock market decline in 2008 was fuelled, among other factors, by excessive speculative activities and unsupervised use of margin loans to fund investments in listed equities, creating a crisis that put the entire economy at risk.

Margin lending has become one of the most contentious and infamous subjects in the Nigerian financial sector over the last two years. It became an unavoidable issue following the dramatic falls in market capitalisation experienced on the Nigerian Stock Exchange (NSE). When the risks associated with margin lending crystallised, regulatory authorities, most notably the Central Bank of Nigeria (CBN), took some drastic actions including injecting several billion dollars of public funds into the banks. The CBN dismissed the chairmen and chief executives (and their executive directors) of five banks (on August 14, 2009) and another five banks (in October, 2009) partly as a result of what it saw as the systemic risk posed by margin loans to the financial sector.

Banks’ Stocks Exclusion
It is important to note that the guidelines exclude bank stocks from being used as collateral for margin loan trading. While the regulatory authority failed to significantly explain the exclusion of bank stocks as collateral, despite FinIntell’s request to SEC, it could be presumed that it was a way of avoiding the recurrence of the banking crisis which margin loans played a major role.

The margin lending rules and guidelines provide for a Margin List. This Margin List is not an investment recommendation but rather a guide to those who wish to engage in margin activities. The SEC said the guidelines covers the type of securities that qualify as marginable securities as well as the profile of investors that may participate in margin trading.

Criteria for Determining Marginable Securities
According to SEC, the criteria for determining marginable securities include:

  • The average three month trading volume. This shall demonstrate active trading in the security in relation to float. A security not traded for two months straight out of the last three months shall not be approved as a marginable security, even if there is heavy trading in the third and last month.
  • The average last ten days trading volume, shall demonstrate an active demand for the security over the last ten days not determined by release of quarterly results.
  • Only companies that have been trading for at least 12 months shall be included in the margin list.
  • Market capitalisation as well as the share price of the securities shall be used by CBN and SEC in determining marginable securities.

Exclusion from the List of Marginable Securities
The following are excluded from the list of marginable securities:

  • Securities offered through private placements whether for a private company or by a public company prior to a listing by introduction.
  • All publicly traded banking securities.
  • Securities where the average trading volume of the company’s shares on a Securities Exchange over a 3 month period demonstrates low active demand for those securities.
  • Securities that have not traded actively for three months straight.
  • Securities of unlisted companies.
  • Securities of companies that have been listed on a securities exchange for less than 12 months.
  • Initial Public Offerings and shares of newly listed companies.
  • Bonds issued by Public companies that are not listed.
  • Securities of a company that have ceased to exist or filed for bankruptcy.
  • Securities of a company that no longer meets the criteria for determining marginable securities.

These criteria subsist provided that SEC in consultation with the CBN may add to, omit or remove from the margin list securities or companies if in its judgment such action is necessary or appropriate.

Are These 32 Securities Really Golden?
One would ordinarily expect that the companies selected by the SEC would be the companies whose stock performed best in the previous year, or at least be the companies with the highest growth rate, but this is not the case.

A close look at the performance of stocks that made up the margin list reveals that 23 out of the 32 stocks recorded positive returns in 2012 with International Breweries Plc taking the lead with 184.21% gains, closely followed by Cadbury and NASCON with 145.76% and 97.53% respectively. On the flip side, nine stocks posted negative returns with Oando Plc taking the lead with 45.35% losses.
A further look at the year-to-date (YTD) performance of the same set of stocks under review also revealed that 31 out of the 32 stocks have so far posted positive YTD returns with Livestock Plc taking the lead with 228.47% gains, closely followed by Presco and Cadbury Plc with 105.88% and 90% gains in that order; while Guinness Nigeria Plc represents the only stock which posted negative return with 3.64% YTD loss recorded.

The total market capitalisation of the 32 stocks amounted to ₦8.16 trillion, representing about 68.55% of the total market capitalisation. Out of all the 32 stocks, Dangote Cement Plc has the highest capitalisation contribution of 41.52%, followed by Nigerian Breweries Plc and Nestle Plc with 14.35% and 9.70% respectively; while Fidson Healthcare Plc has the least contribution of 0.04%.

Analysis of a Selected Few
International Breweries Plc: The company’s gross earnings in the Financial Year (FY) 2012 was ₦6.16 billion; a significant 29% jump from its ₦4.79 billion figure in FY2011. Its Profit Before Tax (PBT) was ₦1.09 billion in FY2012, a commendable 1,277% jump from its ₦92.63 million figure in FY2011.

In the first quarter of 2013, the company’s gross earning was ₦17.39 billion; signifying a 75% jump to its credit. International Breweries’ PBT for that quarter was ₦3.74 billion, signifying a 1,775% jump.
The company’s shareholders’ fund grew by 492.55%. Its fixed assets have grown by 60.38% and it declared dividend bonus of 1 for 85 in July 2013 (2013-07-19). Investors need to review the financial statements cautiously. The dramatic growth recorded by the company should be subjected to higher scrutiny.

Cadbury Plc: The next in line is Cadbury with 145.76% gains. The company had not declared dividend for 6 years but it seems to be recovering quite well from its 2006 accounting scandal and it has signalled this with the recommendation for distribution of about ₦1.6 billion to shareholders as cash dividends for the 2012 business year.

Cadbury recorded a drop in sales in FY2012 but its improvement of cost and financing management helped to raise its profit margin beyond its FY2011 figures. The company’s profitability ratio shows that it had a stronger performance in FY2012.

The company’s balance sheet revealed lower gearing ratio, improved liquidity, higher working capital and an increased proportionate contribution of equity funds to total assets. Its total assets increased from ₦33.66 billion in FY2011 to ₦40.16 billion in FY2012; a 19% jump. Its non-current assets increased marginally from ₦13.43 billion to ₦13.99 billion and its current assets increased from ₦20.23 billion to ₦26.17 billion; a 29% increase.

Nonetheless, the Cadbury’s liabilities rose from ₦17.07 billion to ₦20.12 billion; an 18% increase. Its long-term liabilities remained at about ₦3.2 billion, and its current liabilities increased from ₦13.88 billion to ₦16.91 billion; a  22% jump. Its paid-up share capital remained at about ₦1.57 billion; 3.13 billion ordinary shares of 50 kobo each.

Dangote Cement Plc: Amongst the 32 approved companies for margin loans, the highest contributor to the stock market capitalisation is Dangote Cement Plc which contributes 41.52%.
Dangote Group is still basking in accolades. For the FY2012, Dangote Cement, Dangote Sugar Refinery, and National Salt Company of Nigeria (NASCON) collectively paid ₦59 billion as dividends.

Dangote Cement Plc paid a total dividend payout of ₦51 billion. The company’s share fund growth was 12.63% in FY2012. This translated to a first time ever dividend of 300 kobo per share. In FY2012, the company recorded a turnover of ₦298.45 billion. This is a 23.63% increase over the ₦241.41 billion recorded in the corresponding period of 2011. Its PBT moved up to ₦135.65 billion from ₦113.78 billion in FY2011; a 19.22% increase. Its profit after tax moved up from ₦121.4 billion in FY2011 to ₦151.93 billion in FY2012: a 25% jump.

Its fixed asset growth was 5.32% and its revenue for FY2012 was ₦95.43 billion; needless to say that its share price still has quite a bit of upward potential.

Fidson Healthcare Plc: Of the 32 stocks, Fidson Healthcare Plc is having the least market capitalisation contribution of 0.04%. The company is one of the only five companies listed in the pharmaceutical subsector of quoted equities in the Nigerian Stock Exchange. This might explain its presence on the list of 32 stocks.
Fidson Healthcare has done quite a bit to put its subsector on the NSE map. It announced a 274% rise in its profit after tax for FY2012. Its profit after tax, which stood at ₦55m in the 18 months ended December 2011, rose to ₦206m in FY2012.

Its PBT rose from ₦214 million recorded in FY2011 to ₦540 million in FY2012; an increase of 152%.  The company’s turnover rose by 51% and it proposed a 12 kobo dividend pay-out to its investors which represents a 20% increase from the previous year.

Fidson Healthcare’s share price has also been moving up, recording a 4.7% rise in May 2013 to ₦1.78. Its shareholder fund growth is at 5.15%, fixed asset growth at 2.24%, while its revenue growth is at 54.72%. Its reports from 2010 till date show a steady growth in revenue as predicted.

Nestle Nigeria Plc: A look at the company’s financial statement reveals a reduction in growth of total assets. Total assets grew by 14% to ₦88.96 billion as opposed to a 28% growth to ₦76.94 billion the prior period.

A breakdown of total assets reveals a reduction in growth of fixed asset to 13% as against a 37% growth in FY2011, while cash and bank balance rose by 256% to ₦4 billion in FY2012. Total liabilities on the other hand declined by 1.33% to ₦54.78 billion. The reduction is buoyed on the decline in loans & borrowings and long-term borrowings alluded to above. Working capital improved by 145%, moving from a negative of ₦2.60 billion to a positive of ₦1.18 billion in FY2012 while net assets grew by 47% to ₦34 billion.

Nigerian Breweries Plc: Given the run rate, it appears that Nigerian Breweries may not meet its previous year’s bottom line, particularly as the company seems so busy, struggling to get its feet back. NB claims to be too busy, even a FinIntell’s company performance questionnaire sent to them could not be filled, as NB said, “Please be informed that we are unable to complete the questionnaire at this time.” However, we believe that NB should surpass its previous year’s performance given the historical trend of higher growth in second (Q2) and fourth (Q4) quarters. A cursory look at the balance sheet position as at first quarter (Q1) 2013 compared with the position as at FY2012, reveals an increase in the company’s fixed assets. Fixed assets rose by 1.61% to ₦144.64 billon from ₦142.35 billon in FY2012.

The company’s stock also increased to ₦25.51 billon from ₦24.65 billion in FY2012. Cash and bank balances grew drastically by 113.79% from ₦9.51 billon in FY2012 to ₦20.34 billion in Q1 2013.

Debtors and other receivables decreased slightly in Q1 2013 by 0.47% to ₦22.59 billion from ₦22.70 billon in FY2012 period. Creditors and other payables also fell by 2.79% to ₦59.97 billon from ₦61.69 billion as at FY2012. Net assets for the Q1 2013 increased by 6.71%, to stand at ₦177.99 billon from ₦166.80 billon in FY2012.

Presco Plc: Presco Plc reported a 56% year-on-year (YoY) rise in revenues to ₦4.4 billion for Q4 2012; 17% ahead of forecast, putting FY2012 revenues at ₦11.3 billion, 32% higher YoY.

The company’s FY2012 PBT and PAT rose by 42% and 94% respectively, to ₦3.9 billion and ₦3.5 billion (in contrast to the previous audited financial statement which indicated a 230% and 383% increment). Presco announced a dividend of ₦1.00, amounting to a 29% payout ratio in contrast to the 59% paid out on average over the last five years.

Building Castles in Air
In our opinion, the new value of these stocks is not a directly reflection of the company. If the criteria for selecting these companies turn out to be faulty, then perhaps SEC is building castles on air. More importantly, the indices used in selecting these companies should be carefully reviewed.  The insurance subsector is a case in point. Most of the insurance companies do not subscribe to global best practices. They have the weakest governance framework in the financial services industry in Nigeria.
It is no surprise therefore that only two made the list. Some other companies do not differ significantly from their peers that are not on the list. This is our opinion.

The question that comes to mind is: Is the value imputed by SEC solid enough to stand as true value in the market? Time will tell.

GSK Nigeria Deal: A Reflection of Weak Market Depth
Although, GlaxoSmithKline United Kingdom (GSK UK) has suspended its plan to increase its stake in GlaxoSmithKline Consumer Nigeria Plc (GSK Nigeria) from 46.4% to 75% following complaints from minority shareholders who consider the deal unfavourable, a review of the deal reflects the impact of weak market depth.

GSK is currently trading at about ₦67 which reflects a downside of about 28% to investors from the ₦48 that the parent company was offering. This implies that the parent company would have shored up its shares to the 75% target at a discount to current market valuation. This could partly be as a result of the time lag between the announcement and the execution of the deal. In November when the deal was announced, GSK Nigeria’s share price was ₦39.38 reflecting a 22% upside to the offer price. This led to a buying spree and the stock was eventually overbought.
In general, investor sentiments on the GSK deal seems to betray other underlying frustrations in the Nigerian market. The Nigerian equity market simply lacks depth. Outside the banking stocks, there are just a few choice names. The bulk of these names are foreign multinationals. The Dangote and the UAC family (parent and three subsidiaries) are still the biggest domestic non-banking names within the NSE.

Dangote Cement alone represents over a quarter of the entire value of the Nigerian equities market. The Dangote names on the NSE represent about 30% of the entire market value thus exposing investors to undue levels of concentration risk. It was this same concentration risk that exacerbated the market crash of 2008/09 when banks were over 55% of the entire market’s value.

If the Nigerian Stock Exchange wants to achieve the $1 trillion market capitalisation target by 2016, then the Nigerian market must adopt global best practices. Market activities must be guided by a strong regulatory framework which must converge with the global standards. This will also sustain the interest of foreign portfolio investors, especially those who seek to invest long term in the Nigerian market.

In due course, the market will require some form of structural correction and diversification to sustain investors’ confidence, provide capital to entrepreneurs and break the boom-bust cycles. There is a need to diversify the sectoral exposure on the NSE and bring in more non-cyclical stocks, particularly within the utilities region.