Nigeria | NGX

We expect TRANSCORP’s 9M’21 revenue traction to persist and project a revised growth of 55.1% (30.5% previously) for FY’21. Our growth expectation is premised on contained support from the energy and hospitality businesses, following weaknesses observed in the peak period of the pandemic. We also believe that the passthrough of the FY’21 performance will impact FY’22 and, hence, forecast a 7.1% top-line growth for the period. Continued expansion of the power business supported by improved gas supply and generating capacity.

Domestic Crude Palm Oil (CPO) producers have benefited from the sustained rally in CPO prices, which have jumped 53.8% in the last twelve months. The price increase resulted in an average revenue growth of 73.8% across our coverage names in 9M’21. In our view, global CPO prices are likely to remain elevated in the coming year, partly due to lingering supply disruptions in key producing countries like Indonesia and Malaysia and accelerating demand for biofuels. We forecast global CPO prices to remain elevated over the next twelve months, given our expectations of a sustained imbalance between global CPO demand and supply. We believe that labour constraints in Malaysia, as well as Indonesias’ export levies are likely to strain supply (both countries account for 84% of global CPO export). At the same time, rising demand for biofuels (particularly CPO biofuels) as a result of higher crude oil prices is projected to put further pressure on CPO demand and, consequently, prices.

Final consumption expenditure of households improved in the first half of 2021, after the COVID-induced plunge of the prior year. This recovery coincided with a 14.8% improvement in national disposable income, which we attribute to the impact of the increasing re-engagement of shut-out labour of the COVID restriction era. A few sector names also adjusted prices, attempting to compensate for the cost inflation induced by devaluation and surge in commodity prices. However, the competitive nature of the industry meant that margins still contracted across the board, with only a fraction of the cost burden transferred to customers.

Yield dynamics critical to banks’ performance in FY’22 We expect changes in yield dynamics to be a critical driver of banks’ earnings in 2022, given that net interest income accounts for c.60.0% of banks’ operating income. Our broad expectation is for yields to stay flat-to-falling in the first quarter of the year and rise gradually thereafter, with a base case shift of between +100bps and +200bps from current levels by year-end. In line with the stronger correlation between changes in interest income and asset yields (vs the less emphatic relationship between changes in interest income and interest-earning assets), we expect a 100 bps shift in asset yields to drive a 16.9% growth in interest income, all else equal.

We envisage another solid year for cement manufacturers, with private and public demand set to be major fulcrums. This prognosis on cement consumption is likely to reflect the knock-on effect of increased government spending and greater Public-Private Projects (PPPs) by institutions like RITC and INFRACO. Despite our broadly positive view on the sector, likely temperance in CAPEX implementation (as is often the case in most pre-election years), possible increase in market competition, and FX devaluation are likely to be of concern in the current financial year. Investors are, however, likely to remain excited about prospects for better near-term rewards from cement players, with DANGCEM set to lead the way with the second tranche of its buy-back program and WAPCO likely to further reward shareholders, after the well-received interim dividend payment.

Nigeria appears on course to surpass its pre-COVID 5-year peak growth of 2.21%. Precisely, we project growth rates of 2.65% and 2.70% for 2021 and 2022, respectively. However, these projected economic outturns still lag the long-run trend growth of 4.0% on the impact of inadequate structural and policy responses to the plunge in oil prices in 2015 and 2020.