Author: ARM

5 Investment Principles to Use During an Election Period

Okoro was busy talking to himself, murmuring in his room after looking at his investment portfolio and reviewing the current situation in the country. What do I do now? Election is coming up in 3 months – will the incumbent be retained, or will a new president be voted into power? There is so much uncertainty. Where do I keep the funds I intend to invest, and where do I transfer my existing investment portfolio to maximize returns? Okoro was disturbed.

Just before the last election, he withdrew his investments from the stock market only to hear that there was a growth of 12.5% over a 3-day period immediately after the announcement that a new president was voted into power as well as the peaceful transition that followed.

Okoro wants to know how he can manage the situation this time to get the best value from his investment portfolio and ensure he never gets broke?

Hmmm…. Let’s try to provide some solution to Okoro’s dilemma……

Election comes every 4 years but we have financial goals to achieve regardless of who wins- incumbent continues with the existing policies or a new winner emerges and promotes new policies to better the achievement of the previous government. These actions are not expected to influence your investment goals if you always apply the five investment principles highlighted below;

1. Be clear on your financial goals- Why are you keeping the funds away? How long are you looking at? Apply the SMART acronym to your goals- ensure that your goal is Specific, Measurable, Achievable, Realistic and Time Bound.
2. Know your financial status- What is your Net worth? Deduct your liabilities (what takes money away from you) from your assets (what makes money for you). Measure your cash flow and expenses with the help of a Budget. All of these would help you create a convenient savings plan towards achieving your financial goals.
3. There are so many goals running through your mind. Therefore, it is required that we split our goals into 3 different categories namely: Short term (those you want to achieve in 2 years), medium term (those you want to achieve between 2 to 10 years) and long term (those you want to achieve above 10 years).
4. Implement your strategies- You need to understand that the different financial instrument available are suitable for specific category of goals identified above. For instance, short term instruments are Treasury bills, Money Market Fund. Medium Term are Balanced mutual fund while long term are Stocks and real estate. You might need a Financial Advisor to help out.
5. Review your investment- Align your investment plan with new policies to ensure you are making the most value for yourself. Always review your short-term investment every 3 months, medium term goals every 6 months, Long term goals annually.

These are tested and trusted principles that will provide the hedge required on your investment portfolio at all times regardless of what changes in the economy.

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4 reasons to get life insurance policy this 2019

The topic of getting life insurance is one you may not want to talk about. But because it is important that you ensure the financial security of people that depend on you, it is worth dealing with.

First, let us break down why you need one.

If you’re a breadwinner, you need a life insurance

Let’s be real, if you are the main financial backbone in your family and anything happens to you, your partner, children and anybody else that depends on you, will probably suffer financially. This is one of the major reasons people get life cover; to ensure a safety net for their loved ones in the face of unforeseen circumstances. With the rising cost of education, you can ensure that your kids will still be able to get the education they deserve should the worst happen.

It is not anticipating bad omen. It is simply facing reality and planning for it.

Got loans?

This is one that you might not have thought about. What becomes of your family if you have taken a loan or got a mortgage and something happens to you and there is no one to pay it off? Proceeds from your life insurance policy can be used to settle these loans ensuring that if the worst happens, your family doesn’t have an additional debt to deal with.

Single but responsible

Now, being single doesn’t mean you don’t have anyone that depends on you financially. It could be an elderly parent, sibling or relative. Having a life cover will make sure that these people you care about will be taken care of regardless of your presence, giving you and them peace of mind.

If you need to take care of future medical expenses

If you can’t predict the future, then you never know what may happen. A life protection plan comes in handy in the event of injuries, accidents or terminal illnesses which may prevent you from working. It saves you and your loved ones from unplanned and expensive medical bills.

While life insurance protects your family in the event of uncertainty, there are also lots of other benefits to getting one. Haven’t already taken out a life insurance? It’s not late.

Get in touch with us today via [email protected] to discuss your options.

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Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or Damp Squib?

Nigerian Banks

A Lofty Deal or a Damp Squib?
• A switch to National Banking License… In our recently published equity commentary on Diamond Bank (See report: Overblown fright or Justified concerns), we had stated three options the bank’s management will adopt to keep the bank operational and meet its obligation to lenders. While we had considered the possible acquisition by a bigger bank, the management of both banks in separate press releases refuted the claim. Consequently, as with one of our options, Diamond Bank got approval from the CBN to operate as a national bank following the sale of its UK business, a development that was perceived to have saved the bank from capitalization needs and continue operations on a better footing.

• …and then a Scheme of Merger. To our surprise, news broke over the weekend of a possible merger between both banks, with the management of Access Bank Plc and Diamond Bank Plc yesterday separately issued releases on the Nigerian Stock Exchange (NSE) stating the planned acquisition of Diamond by Access with a consideration price of N3.13/share. This is on the consideration of N1.00 in cash for one share of Diamond bank held and 2 new shares of Access for every 7 shares of Diamond. Accordingly, we estimate total cash consideration of N23 billion and new allotted shares of 6.6 billion units in Access Bank. We note that the consideration price is 213% above the closing market price of N1.0 per share of Diamond yesterday.

• Estimating the transaction multiples. As at 9M 2018, Diamond bank’s book value stood at N217.1 billion with a book value per share (BVPS) of N9.37, we estimate a transaction price to book multiple (P/B) of 0.3x compared with the market valuation of 0.1x P/B. Given our thought that the transaction is strictly equity based, we assume a situation wherein the un-provisioned part of the non-performing loan is adjusted for through equity to leave the books with performing assets. As such, based on current NPL of N99 billion and total credit charge loss of N54 billion, we estimate an equity charge of N45 billion by Diamond bank over Q4 18 to leave the book value at N172.1 billion and BVPS of N7.4 with implied transaction price to book multiple of 0.4x.

• How they Stack up Post Consolidation. The notice by Access indicated that the bank will issue additional shares of 6.6 billion shares to accommodate the shareholders of Diamond bank. Assessing the impact on current outstanding shares of Access bank of 28.9 billion, we estimate increase in total shares post consolidation to 35.5 billion. Accordingly, we estimate that the potential dilution from the merger of 19%. Furthermore, post-merger, Carlyle Group, Kunoch Holdings and Diamond Partners will own 3.3%, 1.7% and 1.1% of the enlarge Access bank respectively.

• Expected Moderation in Cost of Funds. During our engagement with the management of Access Bank in November, they guided to the bank’s plan to gradually close out on expensive borrowings. Specifically, the CFO stated that the bank could refinance its expensive Eurobonds if presented with the opportunity and any other available opportunity that could result in a significant moderation in its funding costs. Notably, as at 9M 18, Access cost of funds stood at 5.6% compared to Tier 1 average of 4.0%, following contraction in cheaper deposit (current and savings account) mix by 195bps to 45% which resulted in 18.5% YoY jumps in interest on customers deposits, 1.0x YoY growth in interbank placements, and 73.8% YoY increase in borrowing cost. However, Diamond cost of funds remains the lowest among peers at 4% (coverage Tier 2 average of 5.4%) despite a 260bps YoY contraction in CASA composition to 78.3% over 9M 18. Accordingly, we see some benefit to Access in terms of moderation in funding cost from the acquisition of Diamond and estimate that Access’s cost of funds could moderate to ~5.1% with a CASA mix of ~55.3% post consolidation.

• However, given the reaction to the bank in recent months, we are cautious on the level of cheaper deposits composition being inherited by Access bank. For context, over the last five quarters, Diamond bank has lost CASA deposits of N247.6 billion, reflecting a 22.8% decline YoY to N836.7 billion in Q3 18 from N1.1 trillion in Q3 17. Also, given the lower credit rating of Diamond bank, in terms of corporate deposits, we do not rule out the possibility of erosion in Access bank’s credit rating.

• What’s the immediate Impact? In summary, while this acquisition appears positive for shareholders of Diamond Bank, we are of the view that the transaction will be undesirable for Access Bank in the near term, giving bottlenecks in terms of collapsing of structures as well as dilution impact on profitability metrics. That said, we await meeting with Management of Access Bank tomorrow (Click here for conference detail) for further details and discussion on this acquisition and would communicate our views in due course.

• Any benefit for the core investors in Diamond? Following the exit of Actis in August 2014 and the need for recapitalization of the bank in November 2014 via a rights issue, Carlyle Group, became the largest single shareholder in Diamond with transaction valued at $147 million (N7.38 per share). Accordingly, we estimate that on current price of N1.07, the Group is taking a bad hit on the investment to the tune of N20 billion. Accordingly, we believe that the consideration price of N3.13 could reduce Carlyle loss in the venture to ~ N11.4 billion in the short term. However, post consolidation and integration of the shareholders into the enlarged Access bank, we believe the change in the fortune of Carlyle in the venture will be determined by the gains from the integration.

Download full report below

Access Bank Plc and Diamond Bank Plc Merger – A Lofty Deal or Damp Squib

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ARM Research – Stock Recommendation for the Week , December 17

Activities in the Nigeria equities market was bearish in the past week, with the NSE ASI declining by 0.60% WoW to 30,681.50 points and market capitalization shedding about N61.8 billion over the week. The loss was driven by declines in bellwether stocks in the banking (FBNH: -1.97%, STANBIC: -2.34% and ZENITH: -2.34%), Breweries (NB: -0.63%) and Food (NESTLE: -6.39%) sectors. Top decliners during the week were MOBIL (-10.41%), CONOIL (-10.00%) and CUTIZ (-9.64%).

 Fidelity Bank Plc – BUY (FVE: N2.92). We are more optimistic on our earnings expectation over 2018 largely on the back of lower loan-loss provisioning. We have revised our FY 18E EPS higher to N0.82 (previously N0.76) which is 25% higher YoY. Our FVE of N2.92 (previously N2.82) translates to a BUY rating on the stock. Based on Friday’s closing price, our dividend expectation translates to a dividend yield of 8%.

 Nigerian Breweries Plc – SELL (FVE: N76.58): Reflecting the industry competition and further declines in volumes into Q4 18, we forecast FY 18E revenue to decline by 6.8% YoY to N321 billion. However, we envisage cost pressures due to rising barley prices. Thus, we forecast FY 18E gross margin at 40.8% (FY 17: 41.7%) and EBIT margin of 12.6% (FY 17: 17%). Having rolled forward our model, we cut our FVE on NB to N76.58, translating to a SELL.

 Unilever Nigeria Plc – STRONG BUY (FVE: N47.58). Unilever is our top pick in the consumer space with FY 18E EPS expectation of N2.11 (+18.2% YoY), based on revenue growth (+9.7% YoY) and significant moderation in interest expense (-90.1% YoY) – following the sizeable deleveraging of its balance sheet.

 Dangote Cement Plc – STRONG BUY (FVE: N253.03): We have lowered our FVE on DANGCEM to N253.03 largely due to a downward revision of 2018 and 2019 volume growths. The revision reflects the impact of the prolonged rainy season and electioneering concerns which has now slowed ongoing infrastructure projects. However, we believe DANGCEM presents an attractive entry point in the cement sector in Nigeria given its strong and diversified margins and balanced funding structure.

 Lafarge Africa Plc – SPECULATIVE BUY (FVE: N18.07). We have lowered our FVE on Lafarge to N18.07 as we now expect a more significant dilution from the N89 billion Rights Issue and a downward revision to our 2019 volumes growth. Based on current price, our FVE translates to a BUY. However, we are highly cautious on Lafarge and thus rate the stock a SPECULATIVE BUY.

Kindly, visit ARM Research Portal for full stock reports.

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Fixed Income Report: Is STAB the new normal?

• CBN moves the needle. Last week Thursday, for the first time this year, CBN conducted a special OMO auction where it sold Stabilization securities (STAB) worth N287.7 billion. This came after subscription levels (N403 billion) at Thursday’s auction were 42% and 41% shy of planned offer (N700 billion) and OMO maturity on the same day (N684 billion) respectively. In addition to OMO issuances earlier in the week, CBN net issued N248.7 billion in the first week of December alone.

• The Elephant in the room. It all started in November, where CBN grappled with pent up liquidity in the system following higher OMO maturities (N1.89 trillion) and higher FAAC distribution (+13% MoM to N788.1 billion) and its reverberating effect at the Investors and Exporters Window.  As earlier posited, the repatriation of funds by offshore investors continued into November with a total outflow of $2.8 billion (vs. $2.0 billion in Oct). According to our analysis, of the $2.1 billion staged to mature in the month, a total of $1.6 billion was repatriated. This alongside demand from foreign Non-bank financial institutions and importers cascaded into widening of the demand-supply gap at the IEW to 49.3% MoM to $1.2 billion. Consequently, we saw depreciation of the NGN at the parallel market (N367.5/1$) and NAFEX (N364.1/1$) market which informed CBN’s decision to move the needle on naira liquidity (Total OMO sale last week: N932.7 billion).

• Scope for another STAB exist? Coming into December, with OMO maturities for the month at N2.3 trillion (vs N1.8 trillion in November), the Elephant in the room is pretty much around. In fact, we estimate FPI outflows to the tune of $1.6 billion (akin to November we assume that 83% of estimated offshore holdings for the month would be repatriated) which should leave the CBN with net outflow of $1.3 billion in December (vs $1.2 billion in November). In tackling this menace, we think CBN will remain fixated on keeping the currency stable at least pending when political uncertainties wane and crude oil inflow show signs of stamina. Consequently, we see scope for incessant liquidity mop up to wade off further attacks on the naira. However, in the event that CBN is unable to fill its coffers at subsequent OMO auctions—particularly on days where we have OMO maturities—we see room for further use of Stabilization securities to drive the apex bank’s quest of keeping the market illiquid.

• Room for higher Fixed income yields exist. Having laid the foundation for a tighter monetary policy in a bid to limit the outflow of offshore funds, we see room for higher fixed income yields in December. For us we think monetary influences will continue to trump downward pressure on yields emanating from expectation of thinner FG paper supply (ARM est. N28.2 billion in December vs N87.2 billion in November) after factoring the $2.8 billion and N100 billion Sukuk bond expected to come in Next week.

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