Contrary to general expectations about Q2 performance as covid-19 pandemic shutdown the economy for the better part of the second quarter of 2020, the market seems to have discounted this negative impact from low Q2 business activities as it has grown about 2.94% QtD. Q2 results released by listed companies also beat market expectation with impressive results. In a chat with Mallam Garba Kurfi, Managing Director of APT Securities and Fund Limited, the Capital Market expert gave an in-depth insight on market performance and stocks to watch going forward. Excerpts:
We have seen so far a number of Q2 results released to the market, how would you rate theses performances?
We had our expectation for the market. But contrary when the results starts coming we were surprised. The peak of covid-19 appeared in April and May, meaning that the Q2 result was expected to show the impact of covid-19. But looking at most of the Q2 result, some of them even did better than before. If with covid-19, they did well, what will happen in the third quarter and fourth quarter? Definitely they will do better than what they have declared in Q2.
The trend generally now is that, instead for most of the stocks to go further down, they are not. In the last two weeks, we see some element of recovery; and we are expecting this to continue because when results come better the next thing is to hold on to your stock or buy more. This is what is happening in most of this companies. Look at most of the breweries (GUINNESS, NB etc), you will see that there result performed better. Flour mills and Honeywell also did better in their Q2 results. If you look at some of the banks, there result is not disappointing. Of course we have some companies that performed poorly in their result, yet it is not that serious as regards heavy losses when one will begin to wonder what will happen to them; we have not experience such. So most of them will have mild decline, may be 5-6% or maximum 15% in either turnover or profit; and all these are marginal. Generally, the result of Q2 surprised the market, and that is why investors also surprised the market by taking more positions. So we see that instead of stock index going further down, rather it is coming up. Don’t forget that some of these companies are likely to declare interim dividend; except for MTN that has released their interim dividend for Q2 result, Zenith Bank has not released. We are still waiting for GT Bank, UBA and Access Bank.
Don’t forget that we were trading GT Bank between N18-N19 during Covid-19, as at now GT Bank is currently trading at N24.9. So if we look at it, we see that the market has already taken position.
Would you say you are satisfied or dissatisfied with the current status of the Nigerian Stock market especially in terms of the general administration and returns?
We are satisfied because we anticipated that worst result would come, and that did not happen. Secondly, we are satisfied in the sense that the investors realized this good result and started taking position. So instead of some stocks to further go down, rather they are recovering. Look at GT Bank, trading below N20 is now trading at N24. It has gained more than 20%. That is a good recovery. The response of investors to the market is satisfactory, results declared by some of this companies to the market is satisfactory. Altogether, we see that that the market is behaving well. Instead of going further down, it is going up. Don’t forget there is inflation. Already, dollar is now going around N470, that attracts more Nigerians in diaspora brought in there dollar so that they can get more Naira and take good position.
Primary market activities seems not to be as attractive as it used to be, would you agree or disagree with this? Can you further explain the current status of primary market activities within Nigerian capital market?
Primary market is a function of the secondary. Secondary market must be very vibrant before the primary market come. If you look at it, bonds and commercial papers are primary market activities and they have been coming to the market. Why they are coming is because they are taking advantage of the low interest rate. If you look at the Treasury bill today, it is about 3 to 4%, so these attracts more company to come through fixed income.
In term of equity we can say there has not been primary market activities, but in terms of fixed income, yes there have been several primary market activities. The primary market is active in the fixed income and not in the equity. What will trigger primary market equity is when the economy is doing very well and everybody is looking for expansion. Now is not the time because we are just recovering from covid-19. So you are just trying to work to see that you restore your position as it was before. Also remember that CBN brought about so many incentives; and most of the manufacturers are looking for those incentives to apply for. Look at the pharmaceuticals, where they make provision for N50 billion. According to CBN, as at today, they have applications of over N94 billion. So instead of coming to the primary market, people are looking at that CBN window to tap from it because it’s a cheap call. So for now I do not envisage much of primary market activities for equities, but rather, it will come in the form of fixed income.
The market year to date is down about 6%, do you see the market crossing to a negative zone anytime soon?
We have about four players in the market. Anytime they breathe in, the market shakes. These four players are Dangote Cement, MTN, BUA Cement and Airtel.
Dangote Cement is not currently trading at the best price. So tomorrow, if Dangote Cement gains 10%, the market will completely change. BUA Cement is trading around N38 as against when it was trading around N44. If BUA Cement bounces back, the market can change. MTN is already trading around N119, so any step in the right direction for MTN will change the direction of the market. All these stocks take about 50% of the entire market capitalization. When you say the market is negative, just look at the position of these stocks. If the entire market go up and these stocks we mentioned come down, the index will go down. If the entire market go down and these stocks go up, the index will go up because they constitute more than 50% of the market. So focus is not much on the equity generally, rather on these major four stocks. These stocks own more than 1.5 trillion market capitalization. If you add these four together, they control more than 50% of the entire market. As the All Share Index has lost 6.12% YtD, if each of these four stocks gain 10%, we will be out of the negative.
Which stocks would you recommend for close watch?
AXA Mansard has confirmed to us that they have sold their pension. It is currently trading at N1.59. By the time the sale of their pension arm reflects into to their financials, the price of this stock will go up.
FBHN is a stock to watch, they have injected N25 billion from the sale of their insurance subsidiary into their banking subsidiary.
We also learnt that AIICO Insurance wants to sell their pension fund, it is also a stock to watch.
We have to watch those stocks that have extra income because by the time the extra income flow into the company, their financials will change. So if you take position earlier, you are better off rather than waiting until the result is out. Already they have declared their intention, so why not take advantage of the market.
When you look at other stocks that we are expecting their interim dividend, with the exception of Guaranty Trust Bank, all the rest are still trading below their share value. Access Bank trading at N6.4, Zenith Bank at N16.7 and UBA at N6.5 for me is not matching for their results; and when the results come out, they are going to do better.