The recent equity market selloff has left the benchmark NSE 30 index trading at the lowest price to earnings (P/E) multiple in a decade.
Investors use earnings multiples to judge whether a stock looks overvalued or undervalued.
The P/E ratio for the NSE 30 which captures 96 percent of equity market capitalisation was at an all-time high of 21.68x in 2009, according to data from the Bloomberg terminal.
The full year (FY) ratio was 13.94x in 2010; 18.18x in 2011; 11.58x in 2012; 14.51x in 2013; 11.84x in 2014; 11.46x in 2015; 12.47x in 2016, and 10.67x times in 2017.
It currently trades at a low of 9.01x, according to Bloomberg data. Analysts say the mispricing could be a great bargain and will prompt investors to buy before the market corrects it.
Share prices are falling so the ratio will fall and this is due to massive sell off we have seen since December, according to Bunmi Asaolu head of equity research at FBN Quest Capital.
Some firms have seen earnings growth as share prices fall further compressing valuations.
The introduction of the Importers and Exporters (I and E) policy last year combined with relative peace in the Niger Delta region and a rebound in crude oil price resulted in corporate earnings growth in 2017.
The NSE – 30 index has shed -6.47 percent year to date (YTD), compared to a -5.08 return for the broader all share index.
A breakdown of the NSE 30 index shows the banking 10 index price to earnings ratio is currently trading at 5.36, this compares with 7.15 in 2017. Bloomberg’s estimate for price to earnings is 4.37 times in 2019. Lenders recorded earnings growth through 2015 and 2017, fuelled by the devaluation of the currency and high interest rate environment.
For the year ended December 2017, after tax profits for the 10 lenders that have reported results spiked by 44.28 percent to N693.92 billion from N478.19 billion the previous year (2016).
However, analysts are of the view that precipitous drop in yields on short term securities will squeeze future margins.
Margin deterioration has the potential to terrify bulls.
The low P/E ratio may mean it is time to buy. Earnings for banks are under pressure because of the low interest rate environment, according to Dolapo Ashiru, an investment analyst.
“Consumer good stocks have been affected because earnings are slowing down due to pressure on consumer wallets,” said Ashiru.
The Consumer Goods 15 Index’s- the names of largest firms in the sector- price to earnings ratio is currently at 19.80, this compares with 27.87 in 2017. Bloomberg estimated industry price to earnings ratio to fall further to 15.98 in 2019.
Analysts say most consumer goods firms are unable to hike prices of key products this year even as sales are growing at a slow pace which will undermine future margins.
The Oil and Gas index price to earnings ratio currently trades at 4.17 times, this compares with 12.18 times in 2017.
BALA AUGIE & Abdullateef Eniola-Giwa
