Nigeria | NGX

At the start of the year, the global economy was projected to extend the strong post-pandemic recovery (2021: 6.1%) with a baseline growth rate of 3.6% in 2022. However, this bullish outlook was dented by the multifaceted negative spillovers from the ongoing war in Ukraine and aggressive monetary policy tightening by global systemic central banks targeted at curbing the runaway inflation. On the back of these developments, the IMF in its October 2022 World Economic Outlook (WEO) report downgraded its global growth projection for 2022 to 3.2% - its third downgrade since the war in Ukraine began in February.

Q4’22 commenced with heightened recessionary angst, as intensified geopolitical risks sustained energy-induced inflationary pressures and provided fodder for increased monetary hawkishness. Nonetheless, akin to July 2022, equity investors’ sentiments were lifted by expectations for a slowdown in the pace of monetary tightening and improvement in global supply chain (aided by progress in the execution of the Russia-Ukraine grain deal).

Over 15 states in Nigeria are battling excessive flooding, with National Emergency Management Agency (NEMA) estimating that more than 600,000 persons have been displaced while over 637,000 hectares of cropland are submerged. The crisis has been attributed to the release of excess water from the Lagdo Dam in Cameroon, which cascaded into Nigeria through River Benue and its tributaries, thereby inundating communities. In our view, the ongoing challenge Is a downside risk to agric GDP growth and upside risk to inflation.

On the heels of the increase in Nigeria's equity risk premium, the third consecutive upward adjustment to the monetary policy rate, and a revision to the cash reserve ratio requirement for banks, we move to isolate the first and second-order effects on coverage companies. This report assesses the impacts of the following broad model adjustments on listed companies within our purview:

This report adopts a relative valuation methodology to estimate a 12- month Target Price (TP) for GEREGU following its recent listing on the stock exchange. In arriving at our TP, we used comparable power-generating companies across select emerging market economies as our peer universe. The asset base of these companies ranges from $132.7 million to $1.6 billion. This peer universe has grown revenue and PAT by an average 3-year CAGR of 16.0% and 9.9%, respectively. These performance numbers pale compared to GEREGU's 26.5% and 23.0%, respectively. This disparity in earnings growth could be explained by the age and growth phase of GEREGU (16 years vs the mean of 34 years for peers).

With the flourish in H1’22 seemingly a distant memory, investors’ pessimistic disposition toward domestic equities accelerated throughout September. While the first half of the month was generally lulled, market entropy amplified thereafter following the stubbornly elevated inflation print and the market anticipation of a more hawkish outcome from the MPC meeting.