The Nigeria stock market has had a rough year, with the NSE Index, in particular, shedding nearly 14% so far. While most of the key sectoral indices are down by double-digits – NSE Banking Index (-10.53%), NSE Insurance (-5.79%), NSE Consumer Index (-26.42%), NSE Oil and Gas (-22.59%), and NSE Industrial Index (-13.63%) – some stocks have also delivered more value to shareholders that held on through the market uncertainties. For instance, Cornerstone insurance has appreciated by 215%, Chams’ stock is up by 85%, BOCGAS is up by 52.31%, AccessBank has done 36.03%, Jaiz Bank’s stock price increased by 32%, Caverton made shareholders 30.21% richer, Union Bank gained 25%, while Wema bank and AIICO did 11.11& and 17.46% respectively. When you match these performances with the latest rally, you would agree with me that there’s plenty for investors to be thankful for this holiday season.
We are just weeks away from the year-end, so it’s normal for everyone’s return to reset to zero as 2020 kicks off. As such, it’s common to see questions like, which Nigeria stock will deliver in 2020?.
While momentum sometimes continues for some of the stocks that performed in 2019, the market will definitely switch focus to sectors that may benefit from regulatory policies. With that in mind, I would like to summarize some of the key events that will drive the market in 2020.
- The increase in loan to deposit ratio to 65% is expected to drive private-sector lending and consumer credit.
- The complete restriction of local investors from the OMO market, which has switched interest to the Treasury bill hence pushed the 364-day, 180-day and 90-day yields to low levels last seen in 2016, might attract more customer deposit to bank’s coffer in form of term deposit.
- The border closure in August 2019 might add to inflationary pressure and at the same time increase demand for local products.
- The passage of Finance bill and accompanied 50% VAT increase to 7.5%
Best Stocks to Buy and Hold in 2020 – My Recommendations
Based on these economic events, here are my personal stock picks for next year and why I think they could add more value to shareholders that key into them right now:
Banks make their money from the interest they charge customers on lending, fees and commission and investments in financial instruments. While all are great, the money generated from loan and advances to customers is considered a core income and if anything goes wrong with this line of business, it could flash a red sign which is why they are mandated to provide for any impaired loan. Of all the Tier 1 banks, Access Bank has demonstrated its capacity to generate more returns in the retail lending space; going by its quarterly results, up to September 2019. While most of the banks delivered marginal and lower returns on their interest income amid lower yield, Access grew its net interest income the most by 34.6%, 92.8% and 74% in its first quarter, half-year and 9-months unaudited reports. Overall its 9-month profit is up by 44.1%. So, you shouldn’t be surprised that the bank was investors’ toast this year.
Will the trend continue in 2020, you ask? When you look at the bank’s aggressive drive to shore up its loan book (now N2.7 trillion, up by 42% from N1.9 trillion in 2019) coupled with the lower cost of funds on increased term deposit and CBN’s use of BVN to recover non-performing loan, I think the bank will continue its momentum.
As of this write-up, Access bank sells for N9.25.
With PE ratio at 3.98 and average year on year earnings growth of 15% – 20% in 2020, Access bank is still considered a cheap growth stock – PEG ratio prints 0.19 and I anticipate a further rise to N12 in 9 – 12months, that’s like 32% upside potential from today’s close.
A lot of investors don’t understand the business model of Jaiz bank – they think the bank operates like every other bank, No! Jaiz bank is a non-interest bank; they take a deposit from customers but don’t give loan to customers rather they invest the funds in revenue-generating activities or assets and share the proceeds of the investment with their customers. This is a departure from the normal model we are used to.
The bank, from its 9-month result, grew its Sukuk bond investment to N37.9b and if you compare this with N19.8b and N6.3b in 2018 and 2017 respectively, it implies a 500% increase. This rubbed off it proceeds from the investment – investment income between 2017 to 9-month, 2019 expanded from N684 million to N4.2 billion, that’s like 513%. On average the bank earns 10-11% return on its investment. The strategy the bank is adopting is to add more funds to Sukuk bond portfolio so it can generate more returns while cutting down impaired assets.
Also, its net share of profit after accounting for impairments has maintained steady growth, it increased from N5.3b in 2017 to N5.8b in 2018, the latest figure released in its 9-month report already covers 2018 full year – N6.7b which represents an average annual growth of 13%.
Profit after tax in the last 2 years has expanded by 61% on average – from N537 million, N946 million and N1.2 in its latest 9-month. Earnings attributed to the bank’s shareholder isn’t left out as it grew by more than 100% in the same period.
When you compare all these double-digit growths with a forward price-earnings ratio of 9.42, you will agree with me that Jaiz bank is still cheap at today’s market close of 66k. I had placed a call on the banking stock when it traded below 47k and the stock delivered, besides it reached 85k before reversal.
Dangote Sugar Refinery
The consumer stocks lost its momentum to smuggling and Apapa gridlock in 2019 but I think the story is about to change; thanks to the border closure, we might see a better financial result going forward.
Even though the stock is down by 1.6% on a yeat to date basis, 44.9% and 71.43% share price appreciation in the last 1 and 3-months respectively might be a strong sign that investors are gradually mopping up the consumer stocks ahead of a bumper harvest in 2020.
Besides, I think Dangote Sugar is one of the strongest non-banking stocks to watch as it could appreciate by 41%, from today’s close of N14.6 to N20 – the MACD indicator (monthly chart) shows a potential bullish run to that level, last seen in 2017. We await the stock’s Q4, 2019 result to validate this forecast.
At the time of this analysis, I own Jaiz bank, Access bank and have placed a buy order on Dangote Sugar Refinery, you are advised to do your due diligence.