BusinessDay... the voice of business: Banking, construction stocks will drive growth –Enyinnaya Banking, construction stocks will drive growth –Enyinnaya ================================================================================ GODFREY OBIOMA on 07 May, 2008 02:00:00 Opportunities in the market in 2008 We have carried out our research which shows that of all the companies registered with the Corporate Affairs Commission, only about 4 percent are quoted. And Nigerians have come to realize that it is better to get a company quoted so that it can diversities its risk. This is because the burden of running a successful company is less; You have the capacity to employ good hands to run the company. Having said that, I want to say that the capital market will become more vibrant. This is because foreign investors have come to realise that there are enormous opportunities in the Nigeria market. Now companies can access credit from banks to invest in an emerging market like Nigeria. In the last couple of years, some equities have returned between 35 to 700 percent through capital appreciation and dividends. Some people have argued that with increased capitalization, earnings would drop. But I don’t agree. Following the recapilisations , banks are syndicating long-term projects that will create employment. For example Oceanic Bank syndicated loans for the local terminal of the Murtala Mohammed Airport. And that airport can match any around the world. They are even planning to concession roads. Such project would improve infrastructure and create jobs. Because the banks are deploying the money, their earnings would grow. And a lot of these banks are deploying the funds even in the West Coast. So it would not take too long before returns start coming in. People have also argued that it would take some time before banks would fully deploy the large capital pooled during the recapitalization and grow earnings that would be commensurate with the increase in capital. But again I don’t agree with this because banks have been spreading out to the West Coast and Europe so it will not take that length of time before proportional returns start coming. Look at First Bank first quarter account. It reported about N25 billion. UBA and Oceanic Bank also reported impressive result. So earning per share would not decline. Sectors that would drive earning and returns in 2008 There is going to be a gradual movement relative to the exchange rate of the Naira to the dollar.In other words, share prices will be moving towards one dollar mark. This is because a lot of foreign investors are coming into the country. In addition, the federal government appears committed in rebuilding infrastructure. But the federal government alone cannot do this. The government is also committed in addressing the power and transportation problems. If the problems of transportation and power are solved, the cost of production of companies like Unilever, Nigerian Breweries and Cadbury would decline. With improvement in infrastructure, Cement companies like Ashaka and WAPCO will benefit from it because they are involved in heavy transportation. Rise in prices of penny stocks Venture capital does well in organized economies. What is happening in insurance companies is that they have larger capital to invest in oil and gas, stock market. They can now invest in business that were hitherto handled by foreign companies. But now they have the capacity to compete with them. There is also government local content policy whereby insurance business have to find a way of satisfying Nigerian companies. It is so designed that 80 percent of insurance business would be handled by Nigerian companies over time. So there are enormous opportunities for them. In developed countries, insurance companies own banks. But in Nigeria, it is the other way round . Now insurance companies are taking their rightful place in the economy aided by the local content policy of government. High PE ratio of insurance companies In finance, price earning ratio (PER) means price divided by earning per share. It tells you how long it would take you to recover your investment. But it is a qualitative factor. For a wise investor, the PE ratio may be high but, he is investing in the future. If you give a company with high PE ratio 2 to 3 years, the PE ratio would come down. The decision to buy a stock is not rigidly guided by the net present value. It is not just a matter of net present is more than one, therefore you buy. You also have to look at the qualitative factor like the quality of the directors of the company. You look at issues like happenings in the industry, the company and the individuals. You also need to look at the prospects, news or gossips. So what the company is doing is the most important thing and not the PE ratio. For the insurance companies, we need to wait and see their results. Investing hypothetical N300 million First of all, I will interview the person to know his risk tolerant. There are those who don’t like taking risk at all. Such people want to invest in First Bank, Union Bank, Nigerian Breweries, Zenith or in Treasury Bills. If I have N300 million, I will take all these into consideration. There are some private placement that could give him good returns I will go for them. For instance when Universal Insurance was looking for money to meet up their standard for escrow account, some of us invested in it. Ordinarily people wouldn’t like to invest in it. But I know the asset base of Universal Insurance. So I will look at the various sectors like the banking because a lot of stocks there will still go up. I told you there are some banks whose share price will reflect the relationship between the dollar and the naira. Some of these could go for 50 pence while some like UBA will aim for $1 . Niger Insurance, AIICO, Royal Exchange, LASACO are good. Then, I will look for companies like Japaul. I know what they are doing because I packaged their offer. I know that in the next two years, Japaul will hit N50.00.. Vita Foam is also good. I am surprise they did not give bonus. I will also consider Unilever, Dangote Sugar and Flour Mill. Flour Mills has diversified. I see Flour mill getting to N110 per share. I will also go for WAPCO. It was to pay bonus last year. They didn’t do it because when they wanted to pay bonus, the stock exchange asked them to pay some of their debts. So they decided to pay a lot of that debt. This year, by all standards, they should be able to pay bonus. So I am expecting WAPCO to get to N90 or 100 per share. Afribank is good too. It has one of the lowest capital bases. They can give bonus this year. Pre public offer share price rise I hear people say that some companies manipulated their share prices before they come to the market. I don’t think it is easy to manipulate share prices on the stock market because those that buy stock go through brokers.