BY CHARLES ABUEDE
With MTN Nigeria, Nestle Nigeria and Dangote Cement leading the way of companies giving investors best returns for their investments based on their high and promising returns on equity in the last 12 months, Seplat Energy (8.5 percent), Nigerian Breweries (7.4 percent) and FBN Holdings (7.1 percent) have showed a much lower return on equity investments over the last 12 months, according to a recent report by African Financials on the top 30 companies in sub-Saharan Africa.
Basically, the return on equity, as one of the many fundamental ratios, gauge a company’s ability to generate earnings from its investments and thus, shows if management is growing the company’s value at an acceptable rate. For most professional investors in the equities market, they may have developed a reasonable benchmark to value floated companies on an exchange, with an average return on equity (ROE) above 10 or 15 percent indicating how the management of these listed companies can easily squeeze profits from shareholders’ money invested in the said company.
In the last 12 months, according to the data accessed by Business A.M. Intelligence, Nigerian firms have dominated the sub-Saharan equities market by giving the highest return on equity investments to their investors with the likes of MTN Nigeria (112.7 percent), Nestle Nigeria (187 percent), Dangote Cement (37.4 percent), and newly listed BUA Foods (30.3 percent) leading the order, forming an average of 57.8 percent of the total earnings from equity investments into these floated firms over the last 12 months in the region.
According to the report, a peep into the banking and finance sector highlights that equity investors reward high ROE’s handsomely with a strong correlation of ROE and Price/Book value. Analysts observed during the review period that Nigerian banks outperformed their peers across the region, excluding South African banks which trade at higher valuations. However, it would be recalled that investors in December 2020 began rerating Nigerian banks and Guaranty Trust Bank, which is a subsidiary of the Guaranty Trust Holding Company (GTCO) traded at valuations comparable to non-Nigerian banks.
It is, however, expedient to note that Guaranty Trust Bank, which is simultaneously quoted on the London Stock Exchange, in 2021 traded at a seven percent discount in comparison to the Nigerian Exchange (NGX) market share price. In a similar occurrence, other Nigerian banks were at a big discount against the region’s banks. For example, First Bank Nigeria had a 45 percent discount to book value, while it had ROE at 7.1 percent.
As with the banks, where investors reward high ROE, so with the industrial and commercial firms, which were not left out of the report as analysts observed that the likes of Nestlé Nigeria and MTN Nigeria, both have high Price/Book to ROE ratios, as a result of leverage of eight and 11 times respectively. And as the analysts noted, they could be vulnerable should earnings disappoint.
On the flip side, BUA Cement seems to look overvalued relative to its ROE. A stock or company is said to be overvalued when its price to earnings ratio is high with a longer payback period for every investment into the firm and also possesses a high growth prospect. However, it should be noted that not all firms with high growth prospects are overvalued. This is because most equity investors are not growth investors.
Meanwhile, equity investors are also to note the discounts on dual listed Nigerian stocks in London, such as Airtel Africa, with a 37 percent discount as well as Seplat Petroleum trading at a 30 percent discount.
As equity analysts further observed, analysis of the data shows that historic Price/Earnings ratios have risen as investors anticipate higher earnings and P/E’s are now above their March 2021 highs. Also, Price/Book ratios have fallen as some companies have increased their equity through retained earnings while dividend yields have fallen back sharply from multi-year highs as markets have risen and some companies have reduced/passed their dividends (Covid-19).
In another development from the foregoing, the sub-Saharan African stock market (excluding South Africa) returns in United States dollar terms have been held back by Nigeria and are at support levels going back to year 2004. The performance of the market compared to the Shanghai Composite and MSCI Far East has disappeared, but the region’s market has outperformed MSCI Eastern Europe.
Also, African Financials in the report showed that the market cap of the Top-30 companies for February 2022 was $117 billion, up 0.7 percent on January, while the stock markets across the SSA region excluding South Africa rose 3.1 percent in February, 2022, up 4.7 percent year to date with the internationally listed stocks accounting for 43 percent of the top 30 companies within the region and telecoms and technology firms accounting for 55 percent.
However, during February, the Nigerian stock market rose 1.7 percent, while the Cote D’Ivoire stock exchange was up 7.7 percent, Tanzania was at 4 percent and Zimbabwe reported 15.6 percent rise. On the other hand, Kenya, Ghana and Ugandan exchanges were down 2.1 percent, 10.1 percent and 2.5 percent, respectively.
Further analysis of the data shows that nine of the 14 SSA (excluding South Africa) stock markets have positive dollar returns year to date. The report shows that 10 firms reported a ROE above 25 percent, 10 companies’ dividend yield were above five percent, 12 of the companies’ current or trailing price-to-earnings ratio were below 10 times and this shows that some equity investors were not ready to put in extra dollar into the company owing to the low or negative return from the investment and growth expectation in the future.
In addition, 11 quoted firms have a price to book value below 1.50 times, which shows that the market value of these companies’ shares are far lower than the mere value of the company’s assets.
A look at the average return earned in excess of the risk-free rate per unit of volatility (standard deviation) or total risks or returns from each market, using the Sharpe ratio, shows that Nigeria, South Africa, Côte d’Ivoire, Zimbabwe and Tanzania were major markets with high Sharpe ratios, indicating a high return on investment (ROI) for investors in the market, compared to the risks involved.
Meanwhile, the high Sharpe ratios and low standard deviation of returns featured the likes of Botswana, Tanzania and Malawi, during the review period.