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Summary Nigeria’s GDP is extremely diversified, offsetting the risks of the current low price of oil, which has attributed to a sharp decline in the Global X MSCI Nigeria ETF. The main strengths of the ETF include the construction and banking industries, while the consumer products industry is characterized by high valuation and low growth. The sharp drop in the fund’s price since late November has created low valuation, and consequently a buy opportunity. I remain optimistic about Nigeria’s economic future, despite the fact that oil has plunged to a 6.5 year low. Citigroup even says that there is a 90% chance that oil will drop closer to $30/barrel soon . The impact of the declining price of oil has resulted in a significant decline of the Global X MSCI Nigeria ETF’s(NYSEARCA: NGE ) stock price, and this trend is certain to continue if the price of oil declines further. As 70% Nigeria’s government revenue and 90% of its export earnings come from oil exports , its struggle in a low price oil environment is inevitable. This can be seen historically in the decline of this ETFs price since late 2014, as well as examining Nigeria’s economic development since 1999 , when oil prices began to increase to an all time high by 2008. Moreover, Boko Haram can be seen as a threat to the fund’s performance, as it has previously also been responsible for a decline in the fund’s price. NGE data by YCharts However, I still take a bullish view on Nigeria on the basis of a newly emerging diversified GDP, that is not completely dependent on oil revenue; oil exports account for only 14% of the country’s GDP. The country’s Annual GDP growth is projected to increase from its current level of 2.57 to 3.61 by the 2nd quarter of 2016. The key strength of Nigeria is its banking industry, which is the second largest, only outsized by South Africa. Recent financial performance of the holdings in this industry, as well as their extremely low valuation, further edifies the value of this fund. The growth, financial performance, and current valuation of the construction industry can also be seen as a positive driver for this fund, as Nigeria is one of two countries that is projected to have higher construction growth than China. The consumer products industry is a hot topic in Nigeria, as consumption in Nigeria has been on the rise. I am, however, concerned with the future outlook of this industry, due to its relative high valuation and slowed growth in net income. Overall, a low oil price environment has created a buy opportunity for Nigeria, and the new diversified economy is strong enough to continue thriving. However, an increase in the price of oil in the future is necessary for full reconciliation of the fund’s price. Industry Specific Performance Each industry achieved the following level of growth in net income between 2012 and 2014 ; these calculations are based on the average growth of the fund’s top 10 holdings: Consumer Products Industry: 5.3% decline Construction Industry: 65.8% growth Banking Industry: 57% growth As of June this year, the average valuation for the industry was as follows: Consumer Products Industry: P/E=50.5 Construction Industry: P/E=14.9 Banking Industry: P/E=5.8 Therefore it is easy to make the following industry generalizations: The consumer products industry can be characterized as being in a bubble, and having disappointing financial growth. Its high valuation and low growth presents a minor threat to the fund’s performance. The construction industry can be characterized as having attractive valuation and substantial growth. It can be considered one of the positive drivers of the fund. The banking industry had substantial growth and has extremely low valuation. It can be considered the core competency of the fund. If there were Nigerian banking ADRs, then I would recommend solely investing in them rather than investing in this ETF. Consumer Products Industry 2015 Outlook: High Valuation with Moderate Growth Projected 1. During the 2nd quarter of 2015 , Nigerian Breweries PLC’s net revenue grew by 13% YoY and it also had 24% growth in EPS. Consequently, the company is now more attractively valued, as its P/E is now 21.7; its P/E in June was 26.3. 2. Nestle Nigeria’s net revenue declined by 17.6% YoY in March 2015, and the company’s profit decreased by 103% during this time as well. Its current P/E is 39.7 , which is slightly higher than its P/E of 35.9 in June. 3. Guinness Nigeria PLC’s net income declined by 12.2% YoY in March of 2015. Its current P/E is 61.2 , a drastic improvement from its P/E of 89.3 during June. Overall the consumer products industry can be considered a weakness of this fund, with an average P/E of 40.9, and disappointing growth during 2015. (click to enlarge) Source: Trading Economics The appeal of the consumer products industry in Nigeria is very obvious, given the substantial increase in consumer spending since 2012. The consumer products industry does have an overall favorable outlook between now and the 2nd quarter of 2016 : Consumer confidence most recently decreased by 12.4%, but is projected to decrease by 10% YoY during the 2nd quarter of 2016. Consumer spending is projected to increase at a modest rate of 2.3% during the next twelve months. Disposable personal income is projected to increase by 9.5% Overall the consumer products industry holdings are not ideal, but do not offset the appeal of the fund as a whole. Approximately 30% of the fund’s assets invest into this industry, providing the opportunity for the fund to benefit from the relative strengths of other industries. Despite disappointing growth and high valuation of these holdings, they do have a positive outlook throughout 2016. This fact, coupled with the positive industry outlook for the next 12 months, provides a somewhat favorable future outlook for these holdings. Reuters projects that Nestle Nigeria PLC’s EPS will increase by 7.6% between December 2015 and December 2016. Reuters projects that Guinness Nigeria PLC’s EPS will increase by 13.8% between December 2015 and December 2016. Reuters projects that Nigerian Breweries PLC’s EPS will increase by 8.9% between December 2015 and December 2016. Construction Industry 2015 Outlook 1. Lafarge Africa’s net income grew by 22% YoY during the 2nd quarter of 2015, reflecting a continued growth trend, although the growth has been slowed when compared to 2014. Consequently it is more undervalued at the moment, with a P/E of 11.42 ; the company’s P/E was 13.3 in June. 2. During June 2015, Dangote Cement’s net revenue rose by 15.94% YoY, and its operating profit grew by 9.3% YoY. Its current P/E is 15.33 , slightly lower than its P/E of 16.5 in June. Overall, the holdings in the construction industry have become cheaper, and were able to achieve substantial growth during 2015. The construction industry can now be viewed even more so as a positive driver for this fund, with a consistent demonstration of high growth and low valuation. However, these companies only account for around 11% of the fund’s total assets. Banking Industry: A Gem for Value Investors 42.16% of the fund’s assets are invested into the banking industry, which is the strongest segment of this fund, due to exceptional financial performance and incredibly low valuation. It is the strength of this industry in particularly that leads me to strongly justify investment into this ETF, amidst the risks associated with low oil prices and politics. Moreover, it is a strong complement to the relatively slower growth and higher valuation of the consumer products industry. 1. Guaranty Trust Bank PLC increased its net income by 34.1% YoY during the 2nd quarter of 2015, which is a substantial improvement from the growth experienced between 2012 and 2014. This has consequently created even lower valuation, as the company currently has a P/E of 5.45 . 2. Zenith Bank PLC increased its profit after tax by 12.1%, which is significant to note as its net income fell by -0.9% between 2012 and 2014. Its valuation is also substantially more attractive, as its P/E is currently 4.13 . 3. FBN Holding PLC had a 4.9% YoY increase in its profit after tax during the 1st quarter of 2015. Its P/E has now dropped even lower to 2.25 . 4. Stanbic IBTC Holdings PLC did not fare well during 2015, with a 52% YoY decline in Profit after tax during June 2015. Its net income previously grew by 230.3% between 2012 and 2014. This company is no longer listed in the top 10 fund holdings, indicating that less than 4% of the fund’s assets invest in this company. The company’s P/E is currently 7.98. 5. Ecobank Transnational Inc.: During the 1st quarter of 2015 , the company’s profit after tax rose by 65% YoY. The company’s P/E is currently 5.12 . Four out of five of the holdings in the banking industry were able to drastically increase their bottom line, and now consequently have substantially lower valuation; the average P/E for these five holdings is 5. This industry has demonstrated consistent financial performance, and is clearly being unfairly harmed by the low oil price environment. Therefore, it can be said that the low price of oil has created a substantial buy opportunity for the banking industry in Nigeria, and consequently the Global X MSCI Nigeria ETF, which invests 42.16% of its assets in the industry. What if Oil Prices Drops Further? The fund’s price has consistently declined from its 52 week of 15.56, due to the decline of oil prices beginning in late 2014. Consequently, the fund now currently has a P/E of 8.8, a far cry from the valuation of other ETFs. It is clear to see that the financial performance of the companies that the fund invests into has been exceptional, and that Nigeria has developed a new economy that is not entirely oil dependent. While it appears that oil may drop closer to $30/barrel in the future, this should not be viewed as a long term threat. Waiting for a further drop in the fund’s price, when the price of oil declines further, would be a wise endeavor. However, the takeaway is that this fund has massive upside potential once oil prices recover, and that most of the companies have fared well amidst low oil prices. The consequent irrational drop in the fund’s price has created a valuation paradise situation, for investors willing to risk investing in Nigeria. I first published an article stating my bull thesis for Nigeria when the fund was trading at 9.73; its price is lower now, but so is its valuation. Conclusion Nigeria is an excellent long term buy at the moment, with an inevitable rebound once oil prices recover. However, the country’s GDP is now diversified, and company’s in the construction and banking industry particularly have had exceptional financial performance amidst low oil prices. A further drop in the fund’s price due to declining oil prices would create even more attractive valuation. Regardless of the timing or price of the buy, a long term approach to Nigeria would be a wise endeavor for investors. My main concern is the high valuation and low growth of the consumer products industry, but this can not be avoided since the none of the fund’s holdings are listed on US exchanges. The Global X MSCI Nigeria ETF is holistically an excellent pick for investors who are willing to hold it long term, and profit from Nigeria’s economic growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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