2018 Q2 ‘Bleak’ Earnings Realities

• Might be too weak to revive prices
• Facts and Strategies to Survive

The loss of 0.76% Friday brought the Nigerian equities’ market to sixth straight sessions of losing streak as the All share Index of the Nigerian Stock Exchange closed at 37,682.53 from the previous week’ close of 38,928.02. There are not clear signs of immediate and sustainable reversal. That is however not to assume a crash. In whatever market session, knowledge investing requires understanding and strategic move in the right direction to achieving a measure of positive returns and if the coast remains unclear, it might just be right to hold cash and wait. Let’s take a deeper look at the way the market behaved last week.

KEY INDICATORS

FACTS FROM INDICATORS:

• Increasing number of losers in the week in comparison with the previous week.
• Lower number of gainers when compared with performance of the previous week
• Total amount invested last week was lower than records of the preceding week.
• Volume of trades was also lower than the record of previous week.
• There were more deals last week in comparison with the preceding week.
• Index and market capitalisation were down for the week.

We are not drawing the conclusions yet until we go through the list of major gainers and losers as contained in the tables below.

GAINERS FOR THE WEEK

• Of the twenty five gainers, only about four are such that could be categorised as high profile stocks. These include Nigerian Breweries, Guinness, Okomu and perhaps, International Breweries. All the rest are low and mid-cap stocks.
• Major gainers are not such equities that command volumes, deals and values. Their weights also on the indexes are low.
• A few of the major gainers also had their annual general meetings within last week.
• A number of the major gainers also got far below their par value and are struggling to catch up. Improvement in such prices are mere speculative in nature as sustainability is not guaranteed.

LOSERS FOR THE WEEK

• Significantly, there are more high-cap stocks among losers last week. These include Seplat, FO, Unilever, Dangote Cement, Flour Mills and UACN. Others are UBA, Zenith, Guaranty, Pz, Access, FBNH and Oando though percentage losses were low.
• The weight of these equities on the indexes are more hence, the decline recorded by major indexes.
• In these classes of equities are records volumes and values

Combination of figures from market sessions last week point to the fact that:

• Sellers are higher among high-cap stocks. Buyers are currently being cautious.
• Takers of such stocks that are being offered for sale are low
• Lower sessions might be witnessed until equilibrium is reached.

KNOWLEDGE INVESTING

• Budget 2018 eventually has been passed. Though the Buhari government is thrifty but then at whatever level, government spending should increase. Liquidity naturally helps the market.
• APC is the ruling party. The convention where new set of leaders were elected took place over the weekend. The expected chaos did not happen. This is a pointer to the fact that elections 2019 will come and go. The fears currently being nursed might not be justified after all.
• The American market is shaky, President Trump’s policies on trades is causing panic across board. Portfolio investors are bound to review their stake in countries across the globe. Such influence on the Nigerian market might not be positive.
• Q2 reports should trickle in within the next two weeks or thereabout.
• Buy and sell of stocks at this juncture should be premised on expectations of Q2 earnings.

Q2 EARNINGS AND IMPACTS ON STOCKS

• Of course, figures emanating for the Statistician office are not looking bad but the realities sure point to different directions. Company results are bound to reflect realities on ground. Liquidity in the system is an issue; prices are high while purchasing power is low. In other words, cost of production is high while sales are not increasing significantly. Q2 earnings should therefore not be expected to come in significantly sharper than previous year’ level. In most cases, organisations will struggle to report earnings within same figures. Decline in earnings are not unexpected.
• Impacts of Q2 earnings, premised on current trend might not necessarily be felt on the market in general but rather on individual stocks hence, attentions should not be market based but on specific equity’ based.
• Impacts of Q2 earnings no matter how positive on high-cap stocks will most likely not generate sustainable price rise as sellers will more or less bank on improved demands to bail out and consequently depress prices of such. In other words, relying on Q2 earnings to buy for meaningful returns on high-cap stocks might not be plausible.
• Impacts of Q2 earnings on low cap stocks will be most likely sustainable if the earnings are positive. In other words, purchases could be made in low and mid-cap stocks will possible good Q2 outlook.
• Premised on YtD performances and why, equities of companies with low number of shares outstanding will remain upbeat if the Q2 earnings of such comes in positive
• In same vein, equities with few float in the market based on favourable concentrated distribution will retain relatively sustainable prices if Q2 earnings come in positive.
• Performances at release of Q2 earnings will not be industry based but on individual equities.
• Between 2014 and 2017, the month of July, which is often when Q2 earnings are released had only grown once as the market in July 2014 lost 0.9%, -9.8% in 2015, -5.4% in 2016 and 8.2% growth in 2017. July 2018 might trend in same direction all things being equal.
• Watch out for equities that often declare interim dividend with Q2 reports. These are more among banks- Access, Guaranty, UBA and Zenith. Others are Nestle and Nigerian Breweries. Please note, if Q2 earnings must come with interim dividend, the account must be audited, at that, delay in release of such reports should be expected.

THE MARKET THIS WEEK

• The index might close weak Monday and struggle throughout the week, a number of equities are however looking positive, going by closing bid and offer sizes Friday.
• If the market should drop Monday, it would have eroded its entire gains YtD. It will probably touch around 36,975 before a rebound.
• Apparently, low profile- low and mid-cap stocks will still dominate gainers’ list. This is a major signal of a weak market.
• High profile stocks are not in any way expected to record significant losses though.
• No matter the decline, at least one day of gain will be recorded. It might extend to two.

STOCKS TO WATCH THIS WEEK

• ACCESS BANK PLC: The stock looks flat at the open but might record one or two sessions of gains in the week. it recorded about 1.89% decline last week to close at N10.40 which its support. A reversal is expected after one day of decline below the current price level. Access is one of the equities that do pay interim dividend with Q2. The expected Q2 earnings might not be significantly different from previous performances both ways. No matter the storm, Access suitable for mid to long term holds.

• AFRICA PRUDENTIAL PLC: With a loss of 1.72% last week, start of this week looks flat or even with decline, going by the closing performance Friday, the stock stands the chance to fight further consistent decline into the week. With such possibility, it remains one of the stocks to watch for the week. Seeing Afriprud at any price below N3.95 makes it a good buy on the strength of current earnings and Q2 possibilities.

• CEMENT COMPANY OF NORTHERN NIGERIA: Closing performances Friday give lots of hope for this week. Though it lost 10% WoW, it grew 3.1% Friday. At that, the stock looks likely to open the week strong. Being one of the higher performers YtD, outstanding shares and distribution still remain intact to pull fallen price back up. Its products’ elasticity and earnings possibility make CCNN suitable for medium and long term.

• DANGOTE FLOUR: The loss of 0.47 WoW significantly states that sellers and buyers are not agreeing so well. Performance on Friday to close the week was flat. These are indicators that the stock has got what it takes to resist sharp decline. Such is what investors should look for in a down market. Either sharp or slightly strong open is expected this week but definitely not a sharp drop at open. Though it will struggle to remain upbeat for the rest of the week. Its product line and earnings possibilities make the stock suitable to watch.

• DANGOTE SUGAR: Of the four trading sessions last week, three were flat with one session recording a loss. Refusal of consistent decline makes a stock good in a down market. There possibilities of improving demand this week, consequently, its price might inch up for one or more days within the week.

• FBNH: Of the four trading sessions last week, FBNH was down in three. Friday was however better though with a marginal price growth. The week looks either flat or with decline at the start. Demand is expected to improve into the week to record one or two sessions of growth all things being equal. The burden of loan loss provision remains the major obstacle but in the medium to long term, FBNH remains good.

• FIDSON: Currently at an oversold level, its price has refused to decline further. After this session, an upward move is expected. Based on capabilities, Fidson is good for medium and long term hold. At current price, risk becomes low.

• GUARANTY: Though the amount is more or less fixed but it is sure. GTB is one of those equities where interim dividend always comes with Q2 earnings. For last week, Tuesday through to Thursday ended in red but Friday brought about a reversal which is hoped to stretch till start of this week. On the whole, the week might still be rough sort of but Guaranty sure has what it takes to hold forth. Q2 earnings will largely remain within same range.

• JAIZ: The stock recorded two days of red and another two of green last week. Closing bid size suggests likelihood of positive open but doubtful if this can be sustained into the week as indicators are showing possible price shed. It however remains a stock to watch.

• ZENITH: Sellers keep doing the offering but Zenith is not such that the market could look away from. The start of this week looks slightly friendly with profit takers still around to cash in. Its Q2 often comes with fixed interim dividend payout. Stock suitable for mid and long term hold.