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Tuesday, June 18, 2024

These Companies Have the Strongest ROEs in Nigeria

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The Nigerian equity market shrugged off inflation fears and maintained bullish sentiment even as the central bank governor clings to the hawkish stance with a view to curb rising United States’ borrowing costs and a spike in commodity prices caused by the war in East Europe.

There are uncertainties surrounding the next year’s elections and a possible rise in bond yields combined with the impact of rising diesel prices are downside risk to corporate earnings outlook.

As investors adopt a wait-and-seat approach like a patient bird lurking in a corner, they can benefit from ‘cash cow’ stocks that garner higher returns.

But identifying a cash-rich stock alone does not make a nimble investment proposition without taking into consideration the underlying efficiency ratio such as the return on equity (ROE).

Key Metrics

ROE = Net Income/Shareholders’ Equity

ROE is a gauge of a corporation’s profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits.

Here are  companies who have used shareholders’ resources in generating higher profit, based on data gathered by Meristem Securities Limited in its latest report on the economy.

Nestle Nigeria Plc. The largest consumer goods firm in the country with a well-diversified product base that allures consumers has an ROE of 116 percent, a trailing earnings per share (EPS), and a price multiple of 24.93. Like its peers, Nestle benefited from a hike in key products, a strategy companies deploy to ward off impact of rising inflation on the bottom-line as they pass on rising input costs to consumers.

MTN Nigeria. The telecommunication giant that is making money from voice revenue has an ROE of 90 percent, trailing EPS of 15.81 percent and a price multiple of 14.49. It is expected that increasing smartphone penetration, rapid investment in network infrastructure, deployment of 5G, and granting of license to operate as PSB will add impetus makes MTN’s stock a sure BUY.

Presco Oil: The oil palm miller who is a beneficiary of government policies and benign global oil palm prices has a ROE of 60 percent and trailing 12 months price to earnings ratio of 7.41 earnings and earnings per share (EPS) N21.37.

TotalEnergies Plc: The downstream oil and gas giant has been recording consistent earnings growth since it reverted to the path of profitability 3 years ago and the earnings expansion has been impressive. It recorded an ROE of 4o percent, earnings per share of N53.78, and a trailing price to earnings multiples of 4.36.

It is important to note that the company has been able to reduce debt, improve on efficiency, and an attractive valuation means it is most likely to become a value stock.

Dangote Cement: Arguable the most successful firm in Nigeria, as it is the most capitalized and largest producer of the building material. It has well-diversified operations across the continent, which validates an ROE of 37 percent, EPS of N22.93 and price to earnings multiples of 11.56.

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