EFG Hermes bearish on Guinness NG, bullish on GTB, calls Nestle best non-bank name

Apparently unimpressed by its performance, EFG Hermes  revealed it has added Guinness Nigeria into sell lists for 2020.

However, the investment said GTBank makes it pick lists as it calls Nestle Nigeria best non-bank name.

EFG stated this in its outlook for 2020 with theme focus on growth in late-cycle markets.

In reaching its investing decision on the frontier emerging market, EFG said Nigeria’s macroeconomic environment is likely to remain challenging, with authorities showing no serious intention to press ahead with the much-needed structural reforms.

EFG said valuation says buy, but policy and growth keep the firm neutral.

“Poor growth and inconsistent policy choices have discouraged foreign buying, we believe, in spite of the dramatic fall in valuation multiples since President Buhari’s re-election in early 2019”, EFG stated.

Analysts’ consensus remains that Nigeria stocks are still trading close to post GFC-lows, with 11% premium for earnings yield over T-bills Change in OMO policy is forcing pension funds back into blue-chips… …but the macro backdrop is not promising – growth is slow and policies are contradictory.

“Strong 2020e non-banks’ earnings growth will be driven by the low base effect of loan to deposit ratio (LDR) targets could drive loan growth – and earnings – beats for banks, but beware of side effects”, said the analysts.

On Guinness Nigeria, a subsidiary of Diageo in Nigeria, producing beer, spirits and malt drinks, analysts said its presence in the lager beer segment is now residual, while stout, spirits and malt, have been growing in low single digits.

EFG noted that recent results show a strong deterioration in fundamentals, and we believe the company may book losses in financial year 2020 estimates.

However, analysts at the firm estimated that dividend yields are highest in Nigeria, Pakistan, the United Arab Emirates, Kenya and Kuwait.

The firm believes that shifting local liquidity will be a major driver in Kenya, Pakistan and maybe Nigeria.

EFG Hermes analysis suggests that pension funds have allocated very little new cash to local stocks in the past few years.

Analysts said however, stock exchange data shows a big spike in local institutional buying in October as the new OMO policy took effect.

Net local institutional buying totaled USD66 million in October compare to previous month average of just USD 14 million.

EFG said it stays underweight

According to the firm, it said: “GTB stays in our FEM picks list, Nestle is the best non-bank name Nigerian stocks rallied in fourth quarter of 2019 off a very low base as a ban on non-bank purchases of CBN Open Market Operations took effect”.

The ban pushed yields on Nigerian T-Bills much lower – by 490 bps to 8.4% in the 10 weeks until late November 2019 – forcing local institutions into higher-yielding equities.

Data on asset allocation for local pension funds, shows a steady reduction in equity allocations in the past five years in favour of rising exposure to sovereign assets.

EFG noted that the reduction in equity allocation accelerated in 2019 after the pension regulator removed minimums for exposure to variable return assets.

Local stocks accounted for less than 5% of pension funds assets under management (AUM) in August 2019, down from around 14% five years ago.

In its frontier emerging market stock pick, it revealed that Guinness has lost about 60% of its opening value as of early December 2019.

EFG recognises that January rally however pushed the stock up having yielded 10% ROI. This has reversed now as the stock has lost about 7% year to date.

EFG said it believes that decent returns can be made in key FEM and MENA markets, but think that this performance will be driven by shifting local liquidity – Kenya, Pakistan, Egypt, Sri Lanka, and Nigeria – as well as passive flows around Kuwait’s EM upgrade.

Discretionary foreign flows into FEM and MENA are unlikely to be sustained through the year, it stated.

On FEM performance expectation for 2020, it remains positive on dividend yields which the estimated to be highest in Nigeria.

“We look at expected drivers of FEM and MENA equity market returns in 2020 for each of the major FEM and MENA markets.

Multiple expansion and earnings growth are the most important for the short run, but dividends are a consistent positive contributor and are a useful source of ‘funding’ in markets that have de-rated (Nigeria, the UAE, and Pakistan stood out in 2019).

Finally, we look at the effect of FX moves on USD returns”.  EFG is however neutral on total return expectation in Nigeria.

“We see non-financials being the main driver of earnings growth in many of our markets in 2020 after disappointments in 2019, the report reads.

Elsewhere, such as in Bangladesh and Nigeria, favourable base effects will flatter non-financials’ earnings after earnings compression in 2018 and 2019.

Macro headwinds remain strong in a number of our markets, and the likelihood of a truly cyclical earnings recovery seems to be highest in Egypt and Saudi Arabia.

Local flows will be critical in Kenya, Pakistan, and maybe Nigeria and Egypt

Outside the GCC, local flows are likely to be as important as foreign flows in 2020.

Late-2019 saw a resurgence of local appetite in Kenya, Nigeria, and Pakistan, thanks to rate cap repeal, a collapse in local T-bill yields, and expectations of policy rate cuts, respectively.

EFG analysts said: “We question the sustainability of the move in Nigeria – clearly local funds are very underweight on equities, but the growth outlook is poor.

In Egypt, rate cuts have so far failed to catalyse lasting local interest – volumes remain low.

However, analysts think that policy settings appear more favourable in Kenya and Pakistan for a more lasting shift into stocks.

In Sri Lanka, a combination of political change, and new management at the CBSL is likely to drive a more expansionary fiscal and monetary stance that could benefit the market, at least in the short run.

EFG Hermes notes that valuation multiples are still well below LT averages in Kenya and Pakistan, and also Sri Lanka, and we expect multiple expansions in 2020.

Analysts said yields are high enough in some markets to be significant drivers of total returns.

“Valuations in Pakistan and Nigeria are particularly depressed, and the prospect of falling yields for risk-free assets is driving local investors into names offering high yields, such as Nigerian banks”, EFG stated.

EFG Hermes bearish on Guinness, bullish on GTB, calls Nestle best non-bank name – By Julius Alagbe