Economy | Reviews & Outlooks

2023 Outlook - A Tipping Point

Jan 20, 2023   •   by CSL Research   •   Source: CSL   •   eye-icon 269 views


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  • The Nigerian equities market closed positive (+19.98%) in 2022, for the third consecutive year, despite the external shocks that greeted the global investment terrain for most part of the year.  Sustained revenue growth and corporate actions by some tickers were key drivers of market growth. Expectations of similar corporate actions/positive news around the heavily weighted stocks and elimination of political risk post the February elections are factors that may drive a positive 2023 close we believe. However, we expect the lingering impacts of the Russia – Ukraine war and electoral activities to keep activity level low in the first half of 2023 
  • The past few years have been particularly difficult for the country, characterised by systemic failures in governance, widespread insecurity and  slow economic growth punctuated by two recessions. In our view, 2023 is a critical year for Nigeria. Two events that we believe will be game changers are the choice of leadership and the commencement of the Dangote refinery. Nigerians will again head for the polls in February. While our core view is that the 2023 election will be held without extensive violence, we do not eliminate the possibility of pockets of violence post the elections. Major decisions around subsidies, fiscal responsibility and FX liberalisation must be taken to avert an economic collapse. Judging by the antecedents and campaign promises of the three frontliners, there is a fair chance  of knowing their stance on such decisions and we discuss these in the report. 
  • Nigeria’s hope of attaining self-sufficiency in the local domestic oil refining space might just rest largely on the operations of the Dangote refinery. The refinery, which has one of the largest production capacities in the world, operating at full capacity would more than meet Nigeria’s domestic fuel requirements with excess capacity for export and we expect a positive impact on foreign exchange supply. While we note that achieving self-sufficiency in local refining capacity might not reduce the cost of petrol significantly, it would at least boost the availability of the product and bring a lasting end to the persistent issue of fuel scarcity in the country.
  • We forecast GDP growth of 3.1% driven by both the oil and non-oil sector as we expect a reversal in the fortunes of the oil sector. We forecast production will reach 1.6mbpd in 2023 and oil price will average US$85/bbl. Headwinds to the Naira will likely persist as foreign inflows remain uninspiring, and demand pressure remains heightened. We expect the exchange rate at the I&E window to depreciate to N510.00/US$ and the wide parallel market premium to persist. The CBN joined the hawkish parade in 2022, hiking the policy rate by 500bps to 16.5%. In 2023, we believe the CBN will maintain its rate hike stance in H1, though at a slower pace and will likely keep rate constant in the second half of the year. In 2023, we project inflation to moderate by 71bps to 18.20%, aided largely by base effect, especially in H2-2023. Nevertheless, we still expect some price triggers from electricity tariff hikes, PMS price adjustment, persistent currency pressure and climate-related shocks
  • Foreign investors have in the past few years shown apathy towards Nigerian equities and we do not expect any significant comeback this year, at least until FX concerns are addressed directly, or indirectly through positive news like commencement of operations at the Dangote refinery. Activities at the Nigerian equities market remain dominated by institutional investors with 72% (56% local institutions and 16% foreign) share of transaction value as at November 2022. While transaction volumes from local institutional investors are expected to remain resolute, we expect a sizeable portion of investments to go to the fixed income market. Though still real negative, fixed income rates are expected to rise and will not be ignored by investors.
  • We are, however, optimistic about the performance of some of the sectors we cover. We model an increase in Pre-tax profits for all Tier 1 banks in 2023e. We foresee headwinds such as slightly higher cost of risk and higher operational and refinancing costs impacting earnings, however, rising interest rates should support margins, cushioning the decline in earnings and permitting improvements in profitability. Moreover, current P/BV valuations of the banks remain at historic lows and present an entry opportunity for investors
  • The Nigerian consumer remained under severe pressure in 2022 as purchasing power weakened progressively amidst high inflation. In response, the average consumer continued to trade down on the value chain, switching to cheaper alternatives as living costs rise in the face of generally low-income levels. However, most of the food processing and FMCG sub segments recorded revenue increases in 2022, albeit, driven mainly by upward price reviews. We expect Revenue to remain upbeat due to the essential nature of goods produced and the reduced level of imported substitutes despite the border re-opening in 2021. On the other hand, operating cost pressures will likely persist in 2023 due to FX pressures
  • The cement sector remained moderately upbeat in 2022. With housing needs deficit estimated at 28million units and the gradual shift to cement paved roads, we believe that the sector will remain resilient. In addition, the establishment of the PPP Infra-Co to bridge the infrastructural gap in the country will benefit the players in the cement sector. We also expect private sector investments in real estate to remain strong. 
  • The telecoms sector retained its growth trajectory in 2022. Teledensity rose to 112.47% as at October 2022 from 102.40% as at December 2021. Similarly, broadband penetration rose to 45.55% as at October 2022 from 40.88% as at December 2021. The sector is also in the process of deploying the 5G broadband network with MTN Nigeria Limited already taking the lead. The operators’ foray into payment service is another booster to the industry growth. We expect growth in the sector to remain strong as the virtual business space continue to gain traction.
  • Barring any political catastrophe during the electoral process, the drivers of the Nigerian capital markets performance remain the oil price, the smooth running of the banking system, and the health of the economy. Oil price risk stands out as the one extraneous factor that could go badly wrong, and a sharp fall in the oil price would have directly negative effects, in our view. That said, we believe the valuations of many stocks remain very attractive. Within our coverage universe, we have Buy ratings on FBNH, UBA, Access, Zenith, Guaranty Trust Bank, Dangote Cement, MTNN, Cadbury and Okomu. Essentially, we believe current valuations present medium to long-term investors with attractive entry opportunities as we anticipate that a rebound in market performance will lead to a re-rate of these aforementioned stocks.

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