Illiquid

Our stock market has become illiquid. There are no buyers. Value of transactions has dried up. The daily average Naira value of trades in October has been less than two billion Naira. The All Share Index has continued its downward slide unabated.

If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.

The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.

In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.

For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.

Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.

Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.