The unprecedented economic uncertainties caused by the coronavirus pandemic (Covid-19) will leave valuators scratching their heads as they will be forced to readjust their future earnings forecast and discount rate used in valuing firms.
This is because during an economic downturn sales ebb and profit slumps, leading to a reduction in cash flow; and a reduction in cash flow undermines the value of a firm.
Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximise long-term free cash flow (FCF).
Wale Olusi, head of research at United Capital Limited, says COVID-19 is a risk to the economy, and the cost of equity will rise and valuation will fall.
This crisis is coming with yields rising, and that it is an anomaly that will force valuators to use inflation rate instead of the conventional risk free rate of returns in the calculation of cost of equity, Olusi notes.
Abiola Gbemisola, analyst at Chapel Hill Denham Limited, agrees with Olusi as he is of the view that the current crisis will impact on banks’ valuation, because their loan assets will deteriorate on the back of regulator pressures that are eating up yields.
The impact of the COVID-19 pandemic and the control measures put in place does not favour loan disbursement, therefore, loan growth is expected to be muted.
The spread in coronavirus pandemic across the world has triggered unanticipated global financial market volatility, and Nigeria is not spared the pang of the crisis.
The International Monetary Fund (IMF), Washington-based institution, estimated Nigeria’s GDP would contract by 5.4 percent and not the 3.4 percent it projected in April 2020; a double whammy for a country that exited its first recession in 25 years in 2017.
According to the Q1-2020 GDP report published by the National Bureau of Statistics (NBS) on May 24, 2020, Nigeria’s economic growth slowed to a nine-quarter low of 1.87 percent year-on-year (yoy) from 2.55 percent (yoy) in Q4-2019 and 2.12 percent yoy in Q2-2019.
The COVID-19 induced crisis also stoked sell-off, albeit investors had already dumped shares over poor corporate earnings and weak and lack of policy direction of the part of government.
The market is continuing on the volatile path. In all, the All Share Index closed (July 14) at 24,954.3pts, with YTD loss pegged at -10 percent.
However, there are attractive dividend valuation and cheap market valuation.
The All Share Index has a dividend yield of 7.7 percent and it has a price to earnings ratio of 8.10 times.
Wale Okunrinboye, equity analyst at Sigma Pensions Limited, warns that businesses that people feel are not important will see their valuation go down, and that the demand for real estate will slump post COVID-19.
“Every crisis changes the life of people and some business may not recover from the crisis,” Okunrinboye says.
The European Central Bank (ECB) has spent €1.35 trillion (pandemic emergency purchase programme) on fixing the balance sheet of member countries reeling from the devastating impact of the virus.
The executive board of the IMF has approved Nigeria’s request for emergency financial assistance of $3.4 billion under the Rapid Financing Instrument (RFI) to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic.
“The impact of COVID-19 on business valuation will defer from industry to industry. The Information and Technology sector is getting a boost to their earnings,” notes Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited.
