After some days of profit taking that left deep cuts in the basic indicators of the Nigerian Stock Exchange (NSE), and as investors punished some companies for poor outing in 2009, while rewarding others with robust price jumps, indications are that the market indices are set to soar on the wings of good quarterly earnings scores now trickling in.

Linked to this, particularly is the belief by analysts that another major driver of the growth could be the quarterly results submitted by most of the banks (not including those that were rescued by the Central Bank of Nigeria under its reforms programme). The result, it is noted, suggested that most of the banks have learnt their lessons, presenting numbers suggesting that they are already out of the woods and ready take their pride place among those with super returns on investment.

Stock market watchers have also noted the robust N98.725 billion and 408.16 basis points or 1.50 per cent growth in both equities capitalisation and the All-Share-Index on Friday, compared with the previous trading session. It is however not known whether weekend's growth, which contributed significantly to the 3.95 per cent rise in the index in the three-day week, had anything to do with the eventual passage on Wednesday, of the much touted Asset Management Corporation (AMC) Bill by the Senate, over a month after it scaled through the lower chamber.

Cheering also, observers say, is the hint by the CBN Governor, Sanusi Lamido Sanusi, that the AMC, which is expected to buy the toxic assets of Nigerian banks, at competitive rates, will take off with a minimum of N20 billion.

"The AMC (will) prepare those banks for the next stage of mergers and acquisitions, so whoever buys those banks eliminates downside risk. If we get the law through in May, we are very close to striking deals with four or five banks. They are in the process of making due diligence, at the end of that process all that's left is the numbers. If we can agree on the numbers in June and July, then in July we should be able to announce," specific actions, Sanusi told Bloomberg.com during an interview in Bahrain, reassuringly.

Analysts at First Securities Discount House Limited, in a report last week, listed factors expected to drive the performance of the Nigeria's equities market in the second quarter, include the ability of the listed companies to release good quarterly results; and the recovery in banks' after the huge provisioning last year. These factors, the report noted, would ensure that the NSE, with year-to-date return of 32.06 per cent, sustains the tempo as one of the world's best performing equities' market.

While also reviewing the first quarter and the outlook for the remaining part of the year, analysts at Afrinvest West Africa Limited, in a report last week noted that the strong link between the recent growth and the progress made in the AMC Bill by the legislature. The progress, the report noted remains a potent justification for the renewed interest in stocks from both international and select domestic institutional investors.

"In their quest for highly cash generative and lowly leveraged companies, investors began to take strategic positions in anticipation of favourable earnings announcements/corporate actions by companies, particularly for select banks as well as in the non-financial space (Fast Moving Consumer Goods and Infrastructure Plays) in the first quarter," the report said.

The growth, the reported continued, has also been helped by earnings announcements for most of these players pretty much that have "matched, or in some cases, exceeded analyst expectations. Coupled with the inflow of funds from the bond market, as bond yields became severely depressed and therefore unattractive, equities went on a bullish, albeit volatile, run."

"While we recognise the role of underlying company fundamentals in having triggered this market surge, we are constrained to think that the pace of growth may be a little too fast.

According to Afrinvest analysts, it remains to be seen, whether or not, the recent growth represents the fast build up of another asset bubble (with stock prices soaring as a result of market speculation) so soon after the experience of 2007/2008.

Their colleagues at FSDH expressed belief that the fear may, after all, be unfounded, despite the possibility of profit taking in the coming weeks and month. Their argument is hinged on the ruling low deposit interest rates and yields on government securities in the market continuing, resulting in the flow of funds to the volatile, but more rewarding equities segment of the financial market from the money and fixed income securities markets.

Manufacturers Drive Growth

"For FSDH analysts, primary determinants of what stocks investors should focus on for medium to long term positions in the market ahead of the recovery in companies in 2010, should be "companies with good management, good products that can generate and sustain good cash flow and can increase investors' wealth in the long run," the report added.

According to data obtained from cashcraft.com/performance (the official website of Cashcraft Asset Management Limited), attests to the fact that investor bias is now significantly skewed towards the fast moving consumer, based on year-to-date returns on investment. Ikeja Hotels continued to lead the top-25 returns table as best with YTD returns on investment of 163.22 per cent, despite not being in a position to propose any dividend yet.

The list, as of last weekend, comprised 12 manufacturing stocks, led by Cadbury Nigeria, with 160.44 per cent returns; seven service providers, three petroleum products marketers, two construction giants and one bank- Sterling Bank.

Cadbury, after the discovery of a gaping hole in its books post-2006, quietly started a rebuilding process, leading to a transformation of its board and top management, culminating in its very successful N21 billion rights issue principally to refinance its debt burden. All of this culminated in its recently released 2009 full year result to December, which hinted of its imminent return from the woods, with a significant 55.09 per cent drop in loss for the period, despite a slow turnover growth, and a strong cash/bank balance, according to available balance sheet position for the period.

Other manufacturing stocks, which cut across food/beverages, healthcare, building materials and brewery, sub-sectors that recorded significant returns YTD, according to the table included: Nigerian Bag Manufacturing Company, a subsidiary of Flour Mills of Nigeria, which recorded 140.69 per cent returns; Dangote Flour Mills, 135.71 per cent; International Breweries, 115.86 per cent; National Salt Company of Nigeria, another member of the Dangote Group, 101.75 per cent; Flour Mills, 99.72 per cent; Ashaka Cement, 88.76 per cent; Fidson Healthcare, 81.3 per cent; FTN Cocoa Processor, 79.63 per cent; and Cement Company of Northern Nigeria, 70.31 per cent.

The services providers beside Ikeja Hotels, include Nigerian Aviation Handling Company, 100.42 per cent; Red Star Express, 95.35 per cent; DAAR Communications, 87.93 per cent; Aiico Insurance, 87.65 per cent; UTC, 84.88 per cent; and AG Leventis Nigeria, 70.04 per cent.

Sterling Bank, the only operator in its sub-sector was number 18 on the ladder and returned 81.3 per cent; the petroleum products giants were Conoil, 80.96 per cent; Oando, 75.07 per cent; and Mobil, 67.85 per cent.

One company yet to submit its audited result, but whose price continues to soar is Bagco. This is however unexpected, going by the company's un-audited third quarter result to December 31, 2009, which indicated that shareholders could get more than the slim five kobo paid per share as dividend for its previous year end, despite 2.19 per cent turnover growth. Turnover rose by N162 million from N7.39 billion in the third quarter ended December 31, 2008 to N7.553 billion, while profit before tax jumped by N379.388 million or 227.87 per cent from N166.493 million in the previous third quarter to N545.881 million. Net profit climbed by N291.984 million or 398.59 per cent from N79.215 million in the preceding nine months, to N371.199 million, representing earnings per share of about 5.97 kobo within the period, as against the previous 1.27 kobo.

The market is also expecting the full year result of Dangote Flour Mills, but has continued to price the stock based on the third quarter outing that showed that while turnover increased by 34.77 per cent to N46.95 billion, compared with N34.84 billion in the corresponding period of 2008. PBT rose by a significant 227.31 per cent growth to N8.46 billion from N2.59 billion in the 2008 third quarter, while after tax profit stood at N7.62 billion, from the previous N1.76 billion in 2008, representing a growth of

333.16 per cent. In 2009, Dangote Flour commissioned the expansion of its noodles factories in Ikorodu, Kano and Calabar. The growth has been boosted by the huge expansion in production capacities in its Apapa (Lagos), Calabar, Cross River State, and Ilorin, Kwara State factories. The company planns to expand the current 4,800 metric tons of milling capacity per day to 7,300 metric tons.

Mobil Oil, at the weekend submitted its first quarter un-audited result to March 31, 2010, which indicates the company's capability to pay more than the 700 kobo paid as dividend for the just concluded year, if it continues at current tempo. The first quarter result showed that while turnover rose from N14.074 billion in the corresponding period of last year to N16.074 billion, out of which PBT jumped by 191.66 per cent to N1.554 billion, compared with the previous N537.815 million. Net profit rose to N1.104 billion from N360.016 million, representing 206.92 per cent growth within the period.

Banking Still Biggest

The banks have also not been left out of the spate of expectations, with the sub-sector still accounting for a disproportionate chunk of the NSE market capitalisation. Truth must, however, be told that the Sanusi reforms industry have significantly taken its toll on the industry, reducing the banking sub-sector share of the NSE equities' capitalisation from around 65 to 43.46 per cent at the end of last weekend's trading session. The audit embarked upon by the CBN to find out the true state of Nigerian banks showed huge toxic assets estimated by Renaissance Capital at about N1.5 trillion, especially in the oil and gas, stock market and mortgage sectors, that continued to be carried on as performing loans. At the end of the audit, the banks were forced to recognise the bad loans in their books and make provisions for them, forcing them to report losses.

So far, only about nine banks - Access Bank, Ecobank Nigeria, Finbank First Bank, Guaranty Trust Bank, Skye Bank, Stanbic IBTC Bank, United Bank for Africa and Zenith Bank, have submitted their results to the market. Of the lot, only GTBank, Stanbic IBTC, First Bank, Skye Bank and UBA submitted positive results. GTBank offered 75 kobo dividend; followed by Zenith Bank's 45 kobo; Stanbic IBTC paid 30 kobo; just as First Bank and UBA proposed 10 kobo apiece; and Skye Bank, five kobo.

The results were hampered by heavy provisions for loan loss within the period. For instance, directors of Finbank reported that in the 14 months to December 2009, earnings income rose by N41.607 billion or 135.17 per cent to N72.386 billion, from N30.779 billion in the 12 months ended October 31, 2008.

However, loss before tax and extraordinary item for the period increased by N30.696 billion or 38.11 per cent to N111.228 billion from N80.532 billion at the end of October 2009. The extraordinary item, which would possibly by provisions made for bad and doubtful risk assets, was valued at N38.597 billion. Net loss for the 14-month period jumped to N149.77 billion, compared with previous N96.726 billion, just as the bank's deposit base (a measure of customer confidence) within the period slumped by N16.54 per cent to N197.041 billion from N236.087 billion.

Balance sheet information provided by the Nigerian Stock Exchange (NSE) showed for example, that net assets, which according to one analyst also represent a company's shareholders funds, took a 559.19 per cent plunge from N27.407 billion to a negative N125.851 billion. The company's loans and advances portfolio also suffered 52.34 per cent shrink from 93.329 billion to N44.485 billion.

The first quarter result submitted to the exchange last weekend by the bank was however fairer, despite earnings and profit slide. Income fell by 27.93 per cent to N12.498 billion from N17.341 billion, out of which PBT was N1.165 billion, down by 55.82 per cent from N2.637 billion. PAT at N990 million represented a decline of 56.35 per cent from N2.268 billion earlier.

Conclusion

Indications are that majority of the quoted companies are gradually overcoming the pains of 2009, after learning bitter lessons, going by the first quarter results and forecasts submitted. A lot will however also depend on other actions taken by government, as well as how the budget 2010 is implemented and activities in the weeks leading to 2011 general elections plays out.