Focus for the week: July 2024 Inflation review – Inflation moderates for the first time in 19 months

H1 revenue dips on lower volumes lifted in Q1

Seplat’s H1 results largely mirrored our expectations. Revenue declined 23% y/y to $421 million (Vetiva estimate: $442 million). This performance was largely a reflection of the lower volumes lifted in Q1, and slightly lower liquid production in Q2. That said, oil revenue declined 25% y/y to $360 million. Similarly, gas revenue fell by 4% y/y to $61.2 million. Also, reeling off the impact of the dip in revenue, gross profit dipped 34% y/y to $181 million.

Operating results get a boost from other income

On the operating front, amid a lower OPEX, operating results got a boost from strong growth in other income. The growth in other income was driven by the recognition of earnings accrued from the underlifts, after being successfully evacuated in Q2, and a recognition of $30 million in FX gains. Additionally, OPEX fell 14% y/y to $57 million, owing to reductions in professional and handling fees, and declines in employee benefits during the period. On this basis, operating profit soared 77% y/y to $209 million. Meanwhile, net finance costs increased by 4% y/y, owing to the higher interest rate environment which increased the interest rate on bank loans; however, given higher operating margins, PBT climbed 110% y/y to $179 million. Meanwhile, given a higher effective tax rate (H1’24: 72%, H1’23: 3%), PAT declined 40% y/y to $50 million.

Outlook

Looking ahead, we maintain our forecasts for production output at 51,000boepd, as the company’s drilling programme has remained largely on plan. Thus, amidst expectation for strong oil prices (forecast: $80/bbl), we estimate oil revenue to print at $919 million. Additionally, gas revenue is projected to print at $131 million. This will take full year revenue to $1.1billion, a flattish performance y/y. For operational results, we have revised upwards our expectation for EBIT, to reflect the growth in other income; that said, our expectation for EBIT prints at $397 million +13% y/y (Previous estimate: $344 million). After accounting for a higher effective tax rate, our projection for PAT sits at $117 million (previous estimate: $130 million).

What shaped the past week? 

Equities: This week, the local market traded in a mixed manner, but the bears came out on top as sentiments in the equities space remain subdued. The ASI lost 1.53% w/w to settle at 97100.31 ppts. This downturn was driven by losses in the Banking (-2.28% w/w) and Industrial Goods (-5.16% w/w) sectors. Losses in FBNH (-6.89% w/w), ETI (-6.18% w/w) and FIDELITYBK (-4.27% w/w) contributed to the decline in the banking space, while losses in CUTIX (-17.50% w/w) and BUACEMENT (-13.48% w/w), dragged lower the Industrial Goods sector.  On the flip side, positive sentiments persisted in the Oil and Gas space (+5.25% w/w) as TOTAL gained 33.86% during the week. Finally, the Consumer Goods sector (+0.37% w/w) and Insurance sector (+0.79% w/w) closed in the green following gains in NASCON (+11.59% w/w) and GUINEAINS (+17.65% w/w).

Fixed Income: This week, trading patterns in the secondary market were dictated by system liquidity. Given low liquidity on most days of the week, the market traded largely with a bearish tilt.  At the of the week, yield movements were seen on the 91-Day bill (-45bps), 182-Day bill (-4bps), 364-Day bill (-7bps), 5-year note (-6bps), and 10-year note (-1bp). Also, owing to constrained liquidity, the OPR stayed above 30%, albeit lower by 109bps w/w to settle at 32.30%. 

Currency: At the close of market trading on Friday, the Naira declined by ₦5.69 w/w to close at ₦1579.89 per dollar.

Domestic Economy: Nigeria’s July 2024 CPI reading showed that prices rose at a slower pace for the first time since December 2022. Annual headline inflation moderated to 33.40% y/y in July (Jun’24: 34.19% y/y).  The descent in inflation can be attributed to the decline in food and core inflation. Food price gains moderated in July, as the prices of some staple food items fell and stabilized after Sallah festivities in June.  Despite the supply chain disruption induced by the nationwide hunger protests during the first ten days of August, we still see inflation moderating further to 32.33% y/y, as base effects could remain strong. We expect the harvest season to override the disruptive impact of protests on food prices.

Global: U.S. stocks ended higher on Friday, extending their biggest weekly percentage gains of the year, as worries of an economic downturn eased. The S&P 500 and the Nasdaq notched their seventh straight session of gains, as stocks recouped losses from a tailspin two weeks ago. A barrage of high-profile economic data this week, including the Labor Department’s consumer price index, and a retail sales report from the Commerce Department, provided assurances that inflation continues meandering down toward the Federal Reserve’s 2% target, and that consumer spending remained healthy. The Dow Jones Industrial Average (DJI) rose 96.7 points, or 0.24%, to 40,659.76. the S&P 500 (SPX) gained 11.03 points, or 0.20%, at 5,554.25, while the Nasdaq Composite (IXIC), added 37.22 points, or 0.21%, at 17,631.72. Meanwhile, in Europe, U.K. inflation rose to 2.2% in July, coming in slightly below expectations as such, the FTSE 100 gained 1.8% during the week to close at 8311.41 points. Also, the pan-European Stoxx 600 index closed up 0.31%, to record a weekly gain of 2.4%, supporting the global stocks recovery. Over in Asia, Japan stocks led gains on Friday to notch their best week in four years, after Wall Street rallied overnight as fresh economic data eased recessionary fears. The Nikkei 225 jumped 3.64% to cross 38,000 for the first time since Aug. 1. On a weekly basis, the index was up 8.67%, its highest gain since April 2020. Also, Australia’s S&P/ASX 200 rose 1.34%, closing at 7,971.1, while Hong Kong’s Hang Seng index was up 1.81% and mainland China’s CSI 300 rose 0.11% to close at 3,345.63.

What will shape markets in the coming week?

Equity market: The market will remain in a wait-and-see stance, as capital market environment remains unfavorable for equites; that said, we expect to see cherry picking action in the market as investors pursue fundamentally sound names at attractive levels.

Fixed Income: The DMO has scheduled a Bonds auction for Monday so, we expect that the results from the auction would influence trading patterns in the market.