Earnings Growth Key For Market Sentiments

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Thus far the H1-2021 season for larger blue-chip stocks has been positive, as we delve deeper into the earning season, we retain our broadly positive outlook for listed Nigerian companies, particularly in the real sector of the economy.

The elevated inflationary environment has given consumer and industrial goods companies room to raise prices on their products.

Our positive stance is predicated on the economic rebound following the recession in 2020, we expect to see a resurgence in consumer demand although the average consumer continues to remain pressured.

That said, we expect to see a significant rise in cost for these companies considering the global rebound in commodity prices, devaluation of the naira and the high inflationary environment.

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All in, we expect the impact of revenue growth on bottom line to outweigh the drag from increased costs. Thus, we project decent growth in profitability for FMCGs, Brewers, Food Processors and Cement companies.

In addition, we have a similar sentiment for Telecoms companies as accelerating broadband penetration would continue to drive data revenue growth, while the resumption of SIM registration would further support the subscriber base.

However, on the downside, we have a less optimistic outlook for banking earnings in H1-2021 and we maintain a lukewarm position for their earnings outlook. First, for interest income, we expect a decent improvement considering the fast-paced reversal in the fixed income environment. The tighter system liquidity is expected to weigh on their Cost of Funds, given the spike in Fixed deposit rates.

Thus, we expect to see pressure on the Net Interest Margin (NIMs) of banks stocks. As a result, growth in Net Interest Income can only be supported by loan book expansion. On Non-interest income, we expect it to be supported by trading income and continued growth in Fee & Commission income Lastly, cost management in this high inflationary environment will be critical for profitability for banking stocks.

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