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Vetiva Reviews Stocks, Says Market Remains Undervalued

Vetiva Research has said the Nigerian stock market remained undervalued despite its growth of 16.3 per cent so far this year.
In a report released on Monday, Vetiva maintained its view that the market remains undervalued, supported by several factors including but not limited to the market price earning(P/E) ratio of 14.1x versus emerging market average of 17.4x.

The report noted that despite the recent rally in the Nigerian equities market Vetiva said that an important support to the revision of its valuations on coverage companies is the revision of its Risk-Free Rate (RFR) assumption to capture the Vetiva’s expectations of near-term yield moderation in the Nigerian fixed income market.

“Using a three-month exponential moving average (EMA) of the 10-year benchmark bond yield, we revise our RFR assumption from 15.67 per cent to 14.65 per cent,” Vetiva said.

Speaking on the report, the Head of Vetiva Research, Olalekan Olabode : “We have revised our coverage valuations to reflect the new realities. Specifically, we revise our RFR downward to 14.65 per cent and our market risk premium is cut by 50bps to 5.50 per cent”
Specifically, in respect of the Banking Sector, the report notes that, despite a shrunk loan book ( nine months 2017 coverage average loan growth of declined three per cent) across the coverage banks, the top tier banks benefitted from the elevated interest rate environment.

Also, the report stated that, despite lower yields in fourth quarter (Q4) of 2017, Vetiva analysts foresee stable earnings for the quarter, lifted by strong non-interest income and improving asset quality.
For the Consumer and Industrial Goods sectors, Vetiva expects that year-on-year comparables will remain strong across its coverage companies, driven by stronger prices, volume boost due to the festive season, and stable costs.

Furthermore, the report highlighted sustained stability in gas supply and currency liquidity as a boon for margins, also believing that upstream energy players should turn in impressive results – supported by a rebound in crude production volumes and higher average crude prices in 2017 full year (and Q4 especially). Despite the aforementioned, Vetiva believes downstream earnings will remain pressured, constrained by pricing regulations and intermittent product shortages.

In its revision of valuations across its coverage names, Vetiva is most optimistic about the banks and expect the sector to remain the toast of investors, given the sector’s strong correlation with the macroeconomy.

Some valuation revisions include, but are not limited to, GTBank Plc now valued at N53.48; Zenith Bank Plc at N37.09; Access Bank Plc at N13.91; Diamond Bank Plc at N5.15 and Flour Mills of Nigeria Plc at N54.94.


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