Corporate Earnings Outlook 2013

NSEFiscal 2013 looks quite promising to run on the platform of operating stability from start to finish. At the absence of regulatory ‘disturbances’ for the second year has provided an environment for banks and other operators to sustain their recovery processes for yet another year. Some of them can be expected to step up earnings growth but generally this isn’t a year of exceptional growth.

Other than the apparent operating peace, the environment seems to lack any reasonable growth stimulants for companies and industries. While leading companies might be able to maintain growth in revenue and profit, the growth rate is likely to slow down. The explanation for this is the inability to actualise so far the key promise of improved electricity supply upon which the hopes for accelerated growth in the business sector rested for this year.

It had been expected that considerable cost saving from cheaper energy would induce growth in industrial output and sales volume through lower price inducements and appeals. Apart from the low energy cost expectation, improved corporate earnings outlook for this year was also based on the highly anticipated reduction in interest rates by the Central Bank.

It had been expected that moderation of inflation rate, which has happened, will lead to a significant reduction in interest rates. This has not happened and isn’t likely to happen going by the disposition of the monetary policy making team of the Central Bank. Consequently, many companies are likely to apply significantly increased proportions of their sales revenues to pay interest charges this year to the detriment of profit growth.

The only positive development this year that may favour corporate earnings performance is the improved fortunes of investors in the stock market. Improved market stability with gains in share prices and improvement in dividend payment is virtually the only source of improvement in consumer spending capacity. This is however insufficient to spur an all round recovery in consumer spending.

Purchasing power of consumers therefore remains weak and only high priority consumer facing companies may be able to get the likely moderate increase in consumer spending. Only those with superior selling strategies as well will be able to achieve accelerated growth in sales volume.

Most companies appear to understand that the market this year is quite tough to push sales volume significantly up. So, the main strategy is focused on how to improve profit from the slowly growing sales revenue by cutting back costs. It is more likely that the few companies that may be able to achieve high growth in profit this year will most likely do so by reducing cost and improving margin than by growing sales revenue. This rules out the many highly indebted companies that are presently carrying unrelieved burden of high interest charged.

The hopes for any growth in profit and for sustaining or improving dividend payment remain on the industry leaders and major players with dominant products that constitute household names. The operating climate remains essentially hostile to the host of small players and penny stock groups that remain trodden down under the competitive hostility. Expect however that a few of them could find some oasis of survival and recovery despite the competitive choke.

Agric stocks

The agricultural sector is dominated by the two leading companies  Okomu Oil Palm and Presco. Both have experienced rapid profit growth over the past three years running but this year for them looks like one of consolidation. The earnings prospects for the companies usually change with changes in product yields – which is a weather dependent factor. This tends to create an unstable pattern of growth in revenue and profit.

In reflection of the changing product yields and the unstable growth in sales revenue, profit performance appears to follow a random walk. This year could be the period for a downward step for the oil palm producers. For both companies, sales revenue and profit performances aren’t expected to be as good as they were in 2012 and earnings per share is headed for a drop.

Okomu Oil recorded a drop 20.8% to N4.83 billion in sales revenue in the second quarter and a drop of 28.1% is expected at full year. Its after tax profit also fell by 51.6% to N1.43 billion in the second quarter and the full year outlook indicates a drop of 75.4% from the net profit figure of N8.95 billion posted in 2012. Net profit margin has fallen from 48.3% in the second quarter of 2012 to 29.6% in the current year and earnings per share is down from N6.0 to N1.0 over the same period.

At N3.92 billion at the end of the second quarter, Presco’s sales revenue went down by 15.7% and after tax profit dropped by 63.6% to N592 million. Based on the current growth rates, full year projections indicate that turnover will go down by 27.1% and after tax profit could drop by about 69%. Profit margin is down from 31.6% in the 2012 full year to 15.1% in the second quarter.

Airline services

Airline service companies, NAHCO and Airline Services & Logistics, are experiencing growth constraints in reflection of the cost cutting measures being applied by most companies. This is a sector in which the impacts of economic prosperity and decline tend to be prolonged. Weak growth in corporate earnings this year therefore mean lean earnings prospects also for this service industry.

Airline Services achieved a strong growth in profit last year by cost cutting but this year a decline looks likely based on the first quarter growth rate. Revenue growth has been quite slow, as the company pushes for recovery after a decline in turnover in 2010. Another decline in revenue looks likely in the current year. Profit margin has declined from 12.8% in the 2012 full year to 11.1% in the first quarter and net profit may fall by more than 18% if the current growth rate is maintained to full year.

NAHCO has been struggling with slow growth in revenue over the past three years and has embarked upon measures to achieve revenue diversification. The new measures aren’t yielding much fruits yet but a moderate growth in turnover is expected from the company this year. The company reported a turnover of N3.2 billion in the second quarter and full year prospects indicate a likely improvement of about 11%. With a slight gain in profit margin, after tax profit is expected to improve by 15% to N680 million.

Banking stocks

The banking sector is generally promising this year but earnings growth is likely to slow down from the performance achieved in the preceding year. Revenue and profit numbers can be expected to approach new highs this year for most banks while recovery process will be sustained by others left behind. The sector still retains the engine of growth, which is the high interest rate on low risk government securities.

Caution is however needed on bank by bank considerations because they are operating at various levels of risk exposure. Those that have achieved reasonable stability on earnings growth and stable improvement in dividends are the low risk operators with the strength of defend and improve share price performance. Banks that are still shaky on the path of profitability and dividend payment carry high risk of share price volatility.

Interim results so far show that industry leaders are ahead in terms of improving earnings and dividend capacity as was the case last year. Others still on the recovery process will have to first rebuild their depleted retained earnings before resuming dividend payment. The picture is that despite the impression of industry-wide growth for the banking sector, the performance outlook is quite uneven.

The stock market will likely remain cautious with banking stocks not forgetting the huge losses sustained in the last market crash. Unlike many other companies, banks are yet to reclaim their pre-crisis share price peaks. Investors are expected to continue the hit and run approach on banking shares, which will keep prices largely subdued. In the short-term, banking stocks will appear under valued, which will take the longer term to correct.

All the banking stocks remain below their historical average p/e ratios. Even those that have attained new peaks in earnings are still trading well below their previous share price highs. Earnings are expected to keep growing ahead of share price improvements for banks in the short-term.

GTB’ second quarter result was still awaited at press time but the bank earned N63.57 billion in gross income in the first quarter, an increase of 20.8% over the corresponding figure in 2012. After tax profit also grew by 16% to N22.56 billion during the first quarter. Based on the first quarter growth rate, gross income is projected at N254 billion in 2013 and net profit is expected to come to about N90 billion at the end of the year. The bank earned 80 kobo per share in the first quarter and the outlook for the full year is N3.20 per share.

The bank has consistently improved dividend payment over the past few years from N1.0 in 2010 to N1.10 in 2011 and further to N1.55 in 2012. An interim dividend is expected from the second quarter earnings report.

Zenith Bank reported over N171 billion in gross earnings at the end of the second quarter, an increase of 13% over the corresponding quarter in 2012. After tax profit grew by 7% to N45.42 billion over the second quarter figure in the preceding year. Net profit margin declined slightly from 28.1% in 2012 to 26.5% in 2013.

Based on the growth rate at the end of the second quarter, the bank is projected to realise gross earnings of about N346 billion at full year and profit after tax is expected to be in excess of N92 billion for the year. Earnings per share is projected at N2.94 for the bank in 2013, down from N3.19 in 2012.

Zenith Bank improved its dividend to shareholders from 85 kobo in 2010 to 95 kobo in 2011 and further to N1.60 in 2012. The bank may maintain the N1.60 dividend per share for the current year.

FBNH is yet to post its second quarter report at press time but its first quarter result shows gross earnings of N99.47 billion and after tax profit of 24.44 billion. The company grew profit ahead of revenue during the period and thus stretched out net profit margin.  It is expected to achieve a gross income of about N400 billion in the current year and after tax profit is forecast to close for the year at about N100 billion. That will raise earnings per share to about N3.10 compared to N2.33 earned in 2012.

Its dividend record has improved from 60 kobo in 2010 to 85 kobo in 2011 and further to N1.0 in 2012. Further improvement is expected in the current financial year.

UBA improved gross earnings by 16.7% to N125.98 billion in the second quarter over the corresponding figure in 2012 and net profit improved by 9.9% to N28.41 billion over the same period. If the second quarter growth rate is maintained to full year, the bank is expected to report gross income in the region of N254 billion in 2013. After tax profit is also projected to stand at more than N64 billion at the end of the year based on the current growth rate. It is expected to earn N1.96 per share at full year.

UBA has been able to maintain regular dividend payment in the past few years [cash/scrip]. It resumed cash dividend payment at 50 kobo per share in 2012 after a break in 2011 when only a bonus of 1 for 50 was given. The bank is expected to improve its 50 kobo per share dividend for 2012 operations.

Access Bank was yet to report on its second quarter operations at press time. Its first quarter report shows a slip of 1.0% in gross earnings at N52.71 billion over the corresponding quarter in 2012. After tax profit dropped by 19% to N9.59 billion over the same period. The bank lost net profit margin, which went down from 22.2% in the first quarter of 2012 to 18.2% in the current year. Based on the current growth rate, the bank is expected to close the year with gross earnings of about N215 billion and after tax profit of close to N40 billion. Earnings per share is also projected at N1.73 for the current year. These would be moderate improvements over the 2012 full year figures.

The bank paid a total dividend of 85 kobo per share to shareholders in 2012, an improvement from 50 kobo per share it paid in both 2011 and 2010. The bank may propose an interim dividend from the second quarter earnings, as it did in the previous year.

Diamond Bank closed its second quarter operations with gross earnings of N86.16 billion and after tax profit of N12.64 billion. Profit margin is slightly down from 15.6% in the first quarter to 14.7% in the second. Based on the second quarter earnings growth rate, the bank is expected to earn gross income of over N173 billion and after tax profit of about N26 billion at the end of 2013. That will mean earnings per share of N1.78 for the bank in 2013.

The bank paid no dividend to shareholders for the second year in 2012 in spite of earnings per share of N1.51 for the year. It has been rebuilding its retained earnings that have been in huge negative numbers after a payment of a 15 kobo dividend mainly from reserve in 2010. It is however expected to return to positive reserve position in the course of the current year and resume dividend payment at the end of the year.

ETI recorded gross earnings of N195.29 billion at the end of the second quarter, an increase of 19.4% from the corresponding figure in 2012. After tax profit rose by over 94% to N26.91 billion over the same period. Profit margin improved from 8.5% in the second quarter of 2012 to 13.8% in the current year. Based on the current growth rate, the bank is expected to gross over N390 billion in 2013 and after tax profit is likely to come to about N55 billion for the same period. Earnings per share of N3.07 is expected from the bank at full year.

ETI is quite conservative with dividend payment and that culture is not expected to change in 2013. Out of its earnings per share of N322 in 2012, it gave out an equivalent of 62 kobo in cash dividend, which is unchanged from the 62 kobo it paid out of earnings per share of N2.50 in 2011. Only a moderate increase may be expected from the bank in dividend pay-out in 2013.

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