At Below 6x, NGSE P/E Ratio Becomes More Attractive, As More Stocks Now Undervalued

Market Update for August 21
The nation’s equity market remained mixed and volatile on Wednesday, even as it managed to close on a positive note, which was insufficient to entirely wipe off previous day’s loss on improved traded volume and buying pressure driven by the prevailing low price attraction.
This was in addition to the long-awaited inauguration of a new cabinet and assignment of portfolios to the ministers which took place also at the midweek, signaling the beginning of real governance, exactly six months after President Muhammadu Buhari was re-elected for his second and final term in February.

The prevailing high yield on the Nigerian Stock Exchange (NSE) as a result of the low prices could serve as an attraction for smart money at this point, considering the market’s Price to Earnings Ratio (PER) which is below 6x. This is considering the fact that yields in the fixed income market and other instruments are declining, due to interest rate cuts across the world that continued to confuse investors. One would expect that the high yielding stocks would be a primary beneficiary as investors search for alternative sources of yields or returns, without looking away from the safety of their capital, as many equities are currently undervalued and selling at a huge discount with yields above the inflation and Treasury bill rate.
Checks by Investdata Research show that stocks to watch (with dividend yields above 11%) on the NSE include: United Capital, 16.67%; Total Nigeria, 16.23%; Zenith Bank, 15.36%; UACN, 14.2%; Africa Prudential, 13.89%; Chams, 13.04%; UBA, 11.91%; CCNN, 11.72%; and Dangote Sugar, 11.33%.

At the midweek, trading opened on a slight downside in the early morning but retraced up in the mid-morning to gap higher in the afternoon session on a strong buying interest in consumer goods, interim dividend-paying stocks and telecommunication giants. This pushed the index to its intraday high of 27,352.94 basis points from a low of 27,043.28ps, before finishing the day at 27,352.28bps above the session opening figure.
Market technicals on Wednesday were positive and strong, with higher traded volume than the previous day’s in the midst of positive breadth and sentiment, as revealed by Investdata’s Daily Sentiment Report, showing ‘buy’ position at 100% and sell volume of 0% on total daily transaction volume index of 1.73.
The momentum behind the day’s performance remained seriously weak, despite moving up as Money Flow Index read 19.45 points up from the previous session’s 8.45bps, an indication that funds enter the market and some stocks in the face of persistent low liquidity.

Index and Market Cap
The NSE All-Share Index gained 294.32bps at the end of the day trading to close at 27,352.94bps, after opening at 27,058bps, representing a 1.09% growth, just as market capitalization inched N120.94bn higher to close at N13.31tr, from an opening value of N13.19tr, representing 0.92% value gain, as a result of the delisting of Fortis Microfinance Bank and Skye Bank from the official list of NSE (READ MORE).
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The day’s upturn was due to demand for stocks like MTN Nigeria, Nestle, Guaranty Trust Bank, Zenith Bank, Stanbic IBTC, Flour Mills, Dangote Sugar, PZ Cussons, ETI, Honeywell and C/I Leasing among others. This impacted positively on the NSE’s Year-to-Date loss, which reduced to 12.97%, just as YTD market capitalization gain climbed to N1.41tr or 13.31% from the year’s opening level of N11.72tr.

Mixed Sector Indices
The sectoral performance indices for the session closed largely bullish except for the NSE Oil/Gas and Industrial Goods that closed 0.74% and 0.08% lower respectively, while the NSE Consumer Goods led the advancers, after gaining 3.46%, followed by the Insurance index with 1.85% and Banking index that inched up by 0.39%.
Market breadth remained positive as advancers outnumbered decliners in the ratio of 23:16; just as the market traded volume and value increased by 73.63% and 39.54% respectively to 363.97m shares worth N4.52bn, from the previous day’s 209.62m units valued at N3.24bn. This volume was boosted by trades in financial services stocks such as UBA, Access Bank, Guaranty Trust Bank, FBNH and Zenith Bank.

Honeywell and Ecobank Transnational Incorporated were the best-performing stocks as they topped the advancers’ chart, after gaining 9.68% and 9.60% respectively, closing at N1.02 and N6.85 per share on low price attractions and market forces. On the flip side, Forte Oil and Okomu Oil which lost 10% and 9.18% respectively to close at N15.30 and N44.50 on selloff and bearish trend.

Market Outlook
We expect a mixed performance to continue as the reversal is imminent, looking at the high volume traded that is above the average on a strong buying pressure. Speculators taking advantage of the seeming improvement in economic indices released recently, as well as the corporate earnings that revealed the true position of listed companies. Also, long-term investors are reshuffling their portfolios in expectation of interim earnings reports of dividend-paying companies.
The rebound of the NSE is yet to be confirmed, despite the positive outing at midweek, with the swearing-in of the ministers expect more speculative move by market players that will be taking a new position, especially the stocks that are selling at a discount.

Discerning investors should target value stocks considering the current low valuation as they position for dividend income and capital gains, especially as the market’s Price to Earnings ratio remains attractive at 5.45x, which is well below the 8.24x average of its peers and its 9.56x five-year average. The current situation has revealed the existence of value and the high upside potentials for a rally. But then, wait to confirm reversal before jumping into a new position.
Investors should also take into consideration the expected economic reforms as President Buhari has assigned portfolio to the ministers. Central Bank of Nigeria (CBN) had earlier rolled out plans to boost productivity and investment by instructing the banks to lend more to the private sector. This is aimed at reducing banks’ participation in government securities and lending more to the private sector to drive economic growth.
There is also the likely impact of portfolio repositioning for the last quarter of the year ahead of Q3 financials in the midst of analyzing Q2 numbers and unfolding political events.

https://investdata.com.ng/2019/08/at-below-6x-ngse-p-e-ratio-becomes-more-attractive-as-more-stocks-now-undervalued/#morev