Nigeria’s N33 trillion stock market undervalued, trading at discount

Despite its total equity market capitalisation of over N33 trillion and N5 trillion gain recorded in the first half of the year, analysts said the market is undervalued and currently trading at a discount.

Although the market rallied recently, analysts at Codros Securities, in its 2023 Review and Outlook of the Financial Market believed that NGX ASI, which trades at a P/E multiple of 11x currently, represents a 7.4 per cent discount to its 10-year average of 11.8x, and a 17.6 per cent discount to frontier market peers – MSCI FM (13.3x).

As at Sept. 2016 the equities market PE ratio data reached an all-time high of 30.87 per cent. The price-to-earnings (P/E) ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The MSCI Frontier Markets Index captures large and mid-cap representation across 28 frontier markets (FM) countries.

The analysts described the current market valuation as unjustified, given that the market in recent times has continued to deliver strong earnings growth, indicating that it should be trading at a premium to its historical average.

According to the analysts, a breakdown of the components of the bourse also indicated that most, if not all, regularly traded stocks are trading at levels below their fair value.

“Though we acknowledge that current market valuations are now closer to analysts’ expectations, given the recent rally in the equities market. Therefore, we retain our conviction that there still exists scope for an expansion of valuation multiples as long as corporate earnings remain resilient.”

They urged investors to continue to seek relative safety in value stocks, with market volatility considered as a key worry.

Also reacting to the low valuation of the market, Vice President of Highcap Securities, Imafidon Adonri, linked the low market valuation to the imbalance state of the market where market activities are concentrated solely on fewer companies, as 15 stocks constitute 80 per cent of the market capitalisation out of over 200 quoted companies on the nation’s bourse

The 15 companies include: Dangote Cement Plc, MTN Nigeria Communications Plc, Airtel Africa Plc, BUA Cement Plc, BUA Foods, Nestle Nigeria Plc, Guaranty Trust Bank Plc and Zenith Bank Plc.

Others are Nigerian Breweries Plc, Stanbic IBTC Plc, Lafarge Africa Plc, Access Bank Plc, UBA Plc, First Bank Nigeria Holdings Plc, Dangote Sugar Plc and Seplat Petroleum Company Plc.

Adonri pointed out that prolonged uncertainty and other macroeconomic challenges in the country have continued to dampen price valuation of equities.

According to him, an ideal market structure and composition should be strived for at this time to boost market liquidity and depth.
He bemoaned the liquidity threat that low valuation poses to the nation’s stock market performance while stressing the need for Federal Government (FG) to expedite actions, aimed at prioritising the listing of privatised companies and other multinationals in the telecoms, and oil and gas sectors within a specified period.

He warned that with the current imbalance that exists in the equities market, price depreciation in one of the dominating stocks could trigger a persistent bear run in the market because of the large composition of the stock to total market capitalisation.
Aside from liquidity constraint, he said the current undiluted market structure where price movement is dependent on the performance of fewer stocks would continue to depress the All-share index (ASI).

According to him, an efficient capital market is devoid of monopolies, many sellers and buyers, with active information symmetry.

He said in an efficient capital market, there are no price givers and takers, noting that the mechanism alone determines the allocation of merchandise or securities.

“Several factors can affect the efficiency of a capital market. This includes the presence of oligopolies as evidenced in the Nigerian capital market where 15 companies out of over 200 companies listed constitute 80 per cent of market capitalisation.

“Another factor is information asymmetry where price-sensitive information is not openly and equally available to the investing public. Again, the low number of buyers and sellers in the Nigerian capital market also fuel imperfection of the market, leading to inefficiency.”

An independent investor, Amaechi Egbo, said the primary market segment must become more active to achieve liquidity and avoid fewer stocks dictating the direction of the market and boosting the performance of more companies on the exchange.

He pointed out that experiences from successful privatisation exercises in other countries provided their citizens’ opportunities to benefit from the transformation of the commonwealth of the enterprises.