Here is Afrinvest’s 2010 Outlook for the NSE and Nigerian economy as a whole. You can also download the report below.
Afrinvest 2010 Market Outlook Report (250)

Our Overall Expectations: 2010 Will be A Bag of Mixed Blessings

On the whole, we expect a tale of mixed fortunes for Nigeria in 2010. With commodity prices having somewhat stabilized driven largely by widespread signs of better than expected growth in global economic output, the current outlook for resource rich African countries is indeed much better than a year ago. This view is reinforced by global market conditions which seem to suggest that the United States and other major western economies are effectively out of recession, with leading emerging markets (Brazil, Russia, India, China) way ahead of the pack. Nigeria is therefore poised to derive significant benefits from the impending period of growth given its disproportionate reliance on crude oil receipts for government income and foreign exchange inflows (assuming prices hold steady above the $70.0 mark). However, one key risk to Nigeria’s revenue profile remains the amnesty deal brokered by the President with the militants in the troubled Niger Delta region. Should hostilities resume, production volume will plunge and drive a hole in the 2010 revenue forecast.

The Nigerian banking sector as the conduit for intermediating government spending should be positively impacted by increased government revenues. By Q2 2010, we would expect the reforms by the CBN to have reached an advanced stage: the Asset Management Company of Nigeria (AMCON) finally set-up, fully operational and in ownership and control of banks toxic assets; a number of M&A activities well beyond the exploratory talks and nearing completion; and the gradual return of new credit expansion as banks begin to lend once again. However, as current market conditions seem to suggest, credit availability in 2010 would be more constrained, and targeted only at borrowers with excellent credit ratings: governments, blue-chip corporates and ‘select’ high net worth individuals (given the name-and-shame strategy of the CBN). Retail consumers who have borne the brunt of a near total credit freeze will still remain largely frozen out for much of 2010 in our view. We also expect to see sparse volumes of credit-financed speculative inflows into real estate markets.

Given the current market preference for safety and fixed income, we expect money market instruments, government treasuries and sovereign bonds to continue to receive heavier weightings in investor portfolios. While we estimate the risk of further devaluation of the naira to be minimal, we however expect to see continued diversification into non-naira based assets as naira hedging continues to be fashionable in the near term. Within this scenario, we see scope for stable earnings performance for many large corporates, particularly in traditionally defensive sectors with limited dependence on financial market stability/liquidity for revenues and profitability.

2010 Equity Strategy: Wanted: High Cash Generative, Low Debt Businesses
Given the overall outlook on Nigeria’s macroeconomic scenario and financial market conditions in 2010, our focus remains on seeking strong companies with fundamentally sound competitive positions and revenue profiles, as well as a healthy degree of cash revenues, low debt dependence and strong management teams. Given the degree of uncertainty going into 2010, Afrinvest Research believes that market participants will pay a premium for competent corporate leadership, that is able to demonstrate a clear strategy for navigating the expected turbulence of 2010, and thriving over the longer term. Our focus is more heavily skewed towards companies with stable revenue sources.

On that note, we are most favorably inclined towards businesses with significant retail/consumer exposure, dominant market positions, high cash-based revenue components and with low links to sectors that are dependent on financial market liquidity. On the cost side, we expect the onset in 2010 of the planned de-regulation to the downstream sector of the petroleum industry to adversely impact energy and fuel costs. We also expect the continued , albeit modest, recovery of the global economy to exert an upward pressure on freight and commodities costs. This may result in slight increases in the import bill for Nigeria’s heavily import dependent businesses. While there is little to suggest any major devaluation risk to the naira, we highlight the potential downside risk to this scenario which the political uncertainty presents to fragile successes recorded by the amnesty. We seek businesses with low levels of recurring debt balances, relative to total financing structure as we expect a continuation of the constriction in bank credit to the private sector, with the sole exception of companies with the best credit profiles.

We believe that companies which fall within the fast-moving consumer goods segment would exhibit the characteristics we have outlined above. On a sectoral basis therefore, we are OVERWEIGHT consumer goods sector for 2010. Despite our outlook and thus UNDERWEIGHT stance on the financial services sector, a selection of banks and insurers continue to evince valuable propositions. Among banks, we see value in a few top-tier and in more mid-sized institutions with greater levels of disclosure on risk assets, diversified and well balanced funding sources and strong management teams that are able to provide a credible degree of visibility on near term business prospects. We remain OVERWEIGHT downstream construction sector as we see scope for upside given the continued emphasis on capital expenditure to bridge Nigeria’s infrastructure deficit by Governments across the federation.

Overall, we believe that a cautious increase in exposure levels to equities in 2010 is to be expected as current valuation levels would suggest a major buying opportunity across specific sectors. Afrinvest Research however expects that factors such as the banking sector overhang on the stock market will reduce the scope for near term price appreciation most equities. Further, with significant amounts of deficit financing anticipated by both Federal and State Governments in 2010 as well as the rush of corporate bond issuances still on the table, we anticipate lower levels of capital availability for private sector operators. We would look to buy into dips, skewed in favour of long term positions in traditionally defensive businesses, as against taking opportunistic positioning to benefit from short term appreciation driven largely by technical factors and favorable news flow.

They also provided a quick analysis of the following companies which they think have potentials, documenting their risks, rewards, etc.

ACCESS BANK PLC
BENUE CEMENT COMPANY PLC
CONTINENTAL REINSURANCE PLC
CUSTODIAN & ALLIED INSURANCE PLC
DANGOTE SUGAR PLC
DIAMOND BANK PLC
GLAXO SMITHKLINE PLC
GUARANTY TRUST ASSURANCE PLC
GUARANTY TRUST BANK PLC
GUINNESS NIGERIA PLC
LAFARGE WAPCO PLC
NIGERIAN BOTTLING COMPANY
NIGERIAN BREWERIES
OANDO
SKYE BANK
TOTAL
UAC of NIGERIA PLC
UBA
UNILEVER
Zenith Bank