“In spite of the effort to diversify the nation’s economy, there is still a huge dependence on the oil sector; marked declines in oil prices or revenue impacts other sectors negatively.” This was the opinion shared by Olubunmi Asaolu, Head of Equity Research of FBN Capital Limited at the firm’s 4th Annual Investor Conference themed ‘Lifting the Lid on Emerging Nigeria’ which was held on November 11, 2014 in Lagos. According to Mr Asaolu, “Intense naira pressure due to the recent fall in oil prices has killed off any hopes of a late year recovery in Nigeria’s equity market. This has further highlighted the consequences of the nation’s huge dependence on the oil sector”
The Nigerian Equity market has faced a lot of hurdles in 2014, and particular challenges facing non-financial companies included stretched valuations, a persistent decline in earnings, consumer spending squeeze which has led to downsizing, halving of PMS subsidies, power tariffs hike, insecurity in the North and the surprise “price war” in cement. The banks are also facing some headwinds, such as AMCON’s levy rising 30bps to 50bps of assets, Commission on Turnover (COT) going to zero in 2016, Cash Reserve Ratio (CRR) hike on public & private sector deposits, minimum savings rate increment, and numerous CBN circulars tightening rules around regulatory capital and Foreign Exchange (FX) exposure. Mr Asaolu stated that falling oil revenues do not bode well for reserves and increases the risk of currency devaluation, which simultaneously lead to the offshore investor community finding ways to exit. This then compounds foreign exchange pressure.
As for the challenges faced by FMCG companies he said that “there would be market share loss to value players and earnings are likely to frustrate the market”. Regarding the banks, he added that while their valuation at just over 0.6x book is tempting, the impact of the CBN circulars is still being felt and recent ones will limit loan growth. FX weakness adds an additional negative twist” he said, adding that the forecast for banks’ ROE in 2015 is ‘flat-to-down’.
In the medium to longer term however, for ‘non-financials’, he said there consumption should be strong and supportive, and that the reforms in the power sector will have dual impact – reducing cost and further boosting consumption. For banks’ medium to longer term outlook, Mr Asaolu said their underlying earnings are actually healthy. “We do not see a major/systemic NPL crisis unfolding”.