Reuters Summit: Standard Bank Says Nigeria Cheap; Zimbabwe A Buy

Pearson, Standard Bank’s Head of Equity Product in Africa, told the Reuters Investment Outlook Summit that the bank had cut its forecast 2011 return for Nigeria’s key NSE 30 Index to just over 25 percent from 40 percent at the start of the year.

“Nigeria has had its own banking crisis, where almost 50 percent of local banks were put into effective liquidiation,” he said.

The flare-up of political instability across North Africa and Ivory Coast sub-Sahara also meant Africa has been unable to capitalise on the flood of liquidity unleashed by ultra-loose monetary policies in much of the developed world.

But consumption and infrastructure are still dominant investment themes for Nigeria and the rest of sub-Saharan Africa that would lure investors back to what are largely undervalued markets, Pearson said.

“(Nigeria) has significantly underperformed frontier market peers as well as emerging markets, but from a valuation point of view it is now very cheap,” he said, adding that Nigerian shares trade around 8 times forward price-to-earnings.

Stocks that will benefit from the growth in African consumer demand and infrastructure rollout are Nigerian cement producers Dangote and Lafarge Wapco as well as brewers such as Zimbabwe’s Delta Corp and UAC Nigeria and Nigerian conglomerate UAC.

Pearson said he was neutral on Kenyan stocks as he was increasingly concerned about inflationary pressures and the weakness of the Kenyan shilling.

he shilling has lost nearly 8 percent of its value against the dollar this year.

Pearson said he was an “ardent fan” of Zimbabwe, which despite political violence, remains infrastructurally superior to much of sub-Saharan Africa outside of South Africa.

“The managerial skill-set there is first rate…From an equity viewpoint, it offers great opportunity,” he said, adding that telco Econet Wireless was a top pick.

LIQUIDITY

Investors, however, still have to find their way to get around the lack of liquidity in these markets.

Ghana offers the most impressive economic growth prospects in sub-Sahara Africa but the best way for investors to tap into that story is through its Eurobond, Pearson observed.

Even the upcoming secondary listing of London’s Tullow Oil on the Ghana stock exchange is targeted mainly at local investors, he said.

Still, the public listing of more oil and energy firms would help alleviate liquidity constraints among these markets.

Average daily trading volumes in Nigeria, the third largest economy in Africa after South Africa and Egypt, has fallen to around $10 million compared to $30 million in January.

“I’m a firm believer that we will see a return to the liquidity levels of two to three years ago of an average of $80 million a day, peaking back then at a record $260 million a day. But it will take us a couple of years to get back there,” he said.

Until the listing of Dangote Cement last October, Nigerian banks represented nearly half of total market capitalisation.

Pearson was optimistic that the sector would stage a healthy return to loans growth in 2011 following a central bank-directed drive over the last two years to purge it of bad debt and insolvent banks.

Though there were hopes at the start of the sector overhaul that global banks would be more active participants in the process, foreign buyers have not materialised as the audits required before any acquisition could be daunting for investors.

“I still think there will be some M&A activity – whether or not it will be foreign led, I have my doubts. It’s been down to the fact that until recently, the due diligence required to digest the potential skeletons on the closet was just too difficult,” Pearson said.

Although many of the banks are now insolvent, there are still attractive bets in the sector.

“Of the the banks we like, there’s Zenith Bank. It’s very well capitalised, one of the strongest balance sheets in Nigeria. It doesn’t need to raise capital in near future to pursue a aggressive loan strategy,” he said.

First Bank also looks more attractive after it stepped away from talks to buy Oceanic Bank, Pearson said.

“Our preference this year is for banks that are not going to be part of the M&A process but more focused on lending growth,” he added. Reuters