Nigerian Financial Journalism

[SpecNomics]

Fidelity Bank Records 137% Rise in Profit
By Ogbuotobo Chuks

Fidelity Bank Plc over the weekend announced an increased profit after tax of N1.9 billion for the half year ended December 31, 2006, representing an increase of 137 per cent from N800.9 million of the previous year.


The bank’s gross earnings also grew by 24 per cent increase from N8.3 billion in 2005 to N10.4 billion in 2006.


Profit before tax went up also by 137 percent from N1.01 billion to N2.4 billion in the period under review. The board of directors of the bank expressed confidence that bearing any unforeseen circumstances, the bank would exceed its financial projections for the current financial year.

The bank is likely to come out with an IPO anytime from now, so get your money ready.

[SpecNomics]

In general, I find Nigerian Financial Journalism inadequate. I mean take this article above for example. I do not in anyway attempt to discredit the author, I just want to point out what we as investors want from their pieces.

Should we be carried away by the fact that Fidelity Banks' Profit After Tax just rose 137 per cent?

Our initial reaction is surely WHAO, THATS IMPRESSIVE!!! But when we consider that the average Nigerian Bank had to raise its Capital by more than 1000%, then we might question whether an increase of ONLY 100% in Profit After Tax is really that impressive!

To illustrate my Point

Pre-Consolidation, Bank X had N2.5bln Capital, invested it all in FGN Bonds 2008 yielding 18.25% per annum, assuming they had no expenses and their Income Statement simply showed a revenue of N456.25mln (N2.5bln*18.25%)

Post Consolidation, Bank X has now raised its capital to N25bln and pursued the same investment strategy i.e. buying the FGN 2008 Bond, all things as above, they'll report a revenue of N4.56 bln.

Their revenue has increased by 1000% (same amount as Capital, as expected), but the Bank is no better off has its Revenue Margin (revenue/capital) is still 18.25%.

This is a simple take on what is happening in most Nigerian banks. So they are not really more attractive, simple maths means that their Profit from yr to yr would increase, but in relative terms, it should still be thesame, and in some cases probably worse.

NB I am strictly speaking about Fundamentals here i.e. Financial Statement Performance, I know Stock Market Returns are impressive; But it worries me to think they are being fuelled by this

And the gentleman also advised us to GET OUR MONEY READY FOR THEIR UPCOMING IPO!!!

I mean does anyone really think the company is more attractive simply because revenue increased when operations were not like for like. If like for like (meaning Capital base was still thesame) profit after tax increased then kudos we should consider buying into their IPO.

In conclusion, my critic of Nigerian Financial Journalism is its failure to give reasons for observed events so that the investor can better understand the issue being written about. Otherwise they could be conspiring with Corporations, unknowingly, to take away from us our hard earned cash.

We as investors must ask for better journalism, and its their duty to give us their opinion on why events took place.

All we get are big numbers, why are we not being told the FACTS BEHIND THE FIGURE, to use a cliche.

[cmi]

Mr. SpecNomics - the points you raised are quite valid, however we need to remember that some of these banks raised funds from the capital market for particular projects - as stated when coming out with their IPO's. Perhaps the funds raised will take time before these start generating profit for investors. Consider a bank that raised funds to expand it's branch network or improve it's IT facilities. Some of these are long term investments, which will obviously take sometime before they start yielding good fruits for hungry investors like us.

[SpecNomics]

@ cmi - I do undertsand that the Capital raised is for long term programmes that'll not be hitting the bottom line in the short-term. And the example used was simply the most suitable illustration for the article sighted.

NSE reviews in most daily newspapers just state "the bulls are ahead in the market as the market as risen XX%" they rarely do explain the causes. This is the main issue at hand, and yes all bank results should ideally be accompanied by Profitability Ratios, not year on year figures, which really give no relative or comparative insight.

And do not let us get into the debate of how well the Capital raised has been or would be utilized. Giving the current valuation of Nigerian Banks, our Bank CEOs are the best in world, and are, without a doubt, going to utilise the capital raised more effeciently than most other Banks CEOs in the world. Do you disagree that that is what current valuations are inferring!

Really, how different do you think the Return on Equity pre-consolidation is to the same variable post-consolidation! Theoretically and holding that capital raised would not hit bottom line till mid-long term, they should be lower, so finanical journalists should highlight such.

[Stockbear]

@ SpecNomics - I'm in awe of your knowledge, which obiviously is quite deep.

How can I learn to discern all these figure thrown us us? Can you point me and anyone else willing to learn in the right direction, possibly guide me/us?

[bwalaman]

SpecNomics, I think you are harsh on the “Financial folks” – the journalists. I do agree with you that the public should get more information, but I believe you will agree that information is not free.

I think we should be careful also when it comes to talking about Fundamentals not to compare to much “textbook” data related fundamentals to the NSE. Of course other variables such as value, corporate management/governance and market potential holds true across the board.

The type of info you described is typically found in business/economics/stock market specific journal or dailies, not ordinary news dailies. Naturally as the Nigeria investor becomes more sophisticated, the news dailies will reflect/adjust to that need. But for now, it requires think tanks, University Depts, investment banks, dedicated Firms etc actively researching / analyzing and churning out the info/data. Now tell me, is there a market strictly for such a publication- profitable, to the "middle class and below"? I think not…

The rich do have this service- the typical Brokerage House / service (FSDH, IBTC, Express Discount and a lot others) actually have the type of info you are talking about, but guess what – (1) one has to seek the info (2) check out the typical minimum to maintain a brokerage account- it is somewhere around 5 million naira (that some cash man)- but if you can maintain that I believe you will get tons of info, advise and advice! In fairness to the banks/companies- a lot of the info is public- read their annual report and prospectus (in case of IPOs), analysis is not free.

On your maths, I think you kept it too simple. Do not forget that most of the monies raised in the consolidation will be used in consolidation/harmonization of operations, improve IT/new IT systems, opening new branches / regional centers to extend their coverage. Re-branding, changing software, changing passbook/cheque books harmonizing all other operations, rationalization of staff, organizational culture / management issues…Add Nigerian factor this means more over head in transport, energy (generators / fuel) and other logistics. All not to be taken for granted… So it should not be taken for granted that their yield will be proportional to the cash they just picked up.

So these banks have done well in my opinion. The question is can they sustain such growth and for how long?

Ending, this is why ideas floated in this forum to have investments clubs is great- it could be used to gather, consolidate, analyze information /trends etc… This is why this forum itself is great, because we are exchanging info and making analysis as well- but guess what, this is also not free…

Info cost money analyzing the info cost even more...

What do you think???

[Stockbear]

Is this appropriate ? This is the first weekly stock pick I have received from Cashcraft. I am not pleased with it. More so, now that I've read SpecNomics post. What do you think



Week’s Stock Choice

Company Recommendation Remark

C & I leasing - Buy - Negotiations are under way to buy at least 48% of
the equity of leasAfric Ghana Limited. The acquisition will make C& I Leasing a regional player in West African Leasing industry



UBN - Buy - 2nd Quarter result for turnover and PAT grew by 32.78% and 42.86% respectively



PZ - Buy - Fundamentally strong franchise-medium to long term Investor

Fidelity Bank - Buy - Fair price, 1st Quarter Result: turnover and PAT grew by 171.18% and 119.96% respectively.

UACN - Buy - Good results expected based on posted quarterly results. Bonus probable

UAC-Prop - Buy - Fundamentally strong franchise-medium to long term investor

First Bank - Buy - Most Capitalized Stock, the turnover and PAT of 2nd
Quarter result grew by 35.1% and 11.1% respectively. Fair price range

[paragon]

@SPECNOMICS

well, if you are up to date with nigerian banks, you will see that it's not just talking about the figures. Fidelity bank is one bank that we have continually publicised thier fundamentals since last year. So when i say buy, i know what i am talking about.

Well, investment is a matter of choice, so if you feel that the information you are getting is not enough, let us know and we'll look for avenues to serve you better. Afterall, that's why there's a section on the blog for comments.

THANKYOU

[Stockbear]

Can we all work together? I think yes! As much as I am new to the stock market, I am willing and able to learn if anyone is willing to teach/guide. This goes for most of us.

I am aware that they are various methods used to evaluate stock, and as much as I like following guidance, I also would like to have/learn the basic skills/methods used to analyse stock.

I see this forum as an avenue whereby, through the contribution from various sources we can all benefit greatly. The richer our contributions the richer our gain from this forum. I personally will endeavour to share any relevant info that will promote the value of this forum's membership and would like to believe others will do same.

Paragon you input is valued. It takes someone dedicated to start something an follow it through. This forum is a new baby and as new baby's go: requires a lot of attention. Many of us are hungry for info to better our lives and when we ask questions somehow we want our answers almost immediately, so somehow this need, needs to be met. My suggestion is to create an avenue on the site where all those in the know contribute info about how to choose/analyse stock/companies. This would be the first port of call for most people before they start to ask questions.

There should be an avenue whereby you ask for various contributions of info from the forum that would further help you help us provide in depth analysis of companies and stock. This is something an organisation called Proshare does. You have various tools at your disposal (the talent of various contributors/members on this site), you need to somehow tap into this to further enchance the value of this forum and our experience as a whole.

I hope I am making sense.

@ Bwalaman - you are obviously knowledgable about the stock market so please don't be a stranger, your contributions are valued. We need to hear/know from different perspectives. Variety as they say is the spice of life.

[SKO]

All,

I'll advise you check out this site: http://pages.stern.nyu.edu/~adamodar/

I have found the materials - particularly the spreadsheets - very helpful in evaluating stocks in the Nigerian market.

Let me know what you think.

[Stockbear]

@ SKO - This way out of my league and as far as I can tell, that of the average joe. The spreadsheets are for advanced users.

Is there anything for beginners like me?

[c kenneths]

I really agree with SpecNomics on the low level of Nigerian financial analysis and reports. Most of these guys feed us with half baked information. There are times I look at some reports and feel strongly that it's all paid advert!
Somebody was telling me that the situation is an offshoot of the situation that arose when every Tom, Dick and Harry that can write, simply started writing financial stories because the Nigerian Stock Exchange is in the news.
Most of these guys doesnt even own one share in any company.
However, Bwalaman was right when he said there are places where we can get advanced information for a fee.
But my take on this is that investment in shares just like every other investment vehicle has to come with a certain amount of risk, some people has real info while others dont. Investment without good info increases your risk exposure. So, if you are willing to reduce your risk level, invest more in information. At the other hand, Istill think most of our banks and other companies are performing splendidly. The returns are showing.
HAVE A LOVELY WEEKEND ALL YA!

[SpecNomics]

@Bwalaman – What do I think? I think information required for what I expect is not expensive, such info is readily available in quarterly results produced. And no, the type of info I described is typically found in any financial piece, specialist journals or daily.

You say the example is too simple! I agree with all the potential costs you’ve included and their likely effect on bringing down short-term profit, not that such costs would be accounted for all in 1 yr, but they should drag short term earning growth down. But closer examination would show that this not the case in this article.

But you fail to appreciate that all I was attempting to show is that the article could have been fleshed out more i.e. Fidelity did not attain this strong growth solely because of better operational performance but that the yield earned on capital raised must have accounted for a significant amount of this growth.

@ Paragon – If you are the author or not, I owe you an apology. You have given me a chance to share my views with people I might otherwise not have had the chance to, and I would hate to think I have misused that opportunity to make irresponsible claims.

You have now said that past articles on Fidelity Bank would have enabled the reader of the most recent piece to understand the bigger picture, one that I hope you agree is not immediately evident from the most recent piece.

On this note, I can only say that you continually refer to those variables that make an investment a good one in every article you write about it, so that the first time reader can understand the background environment leading to the performance and company specific issues leading to the performance. Continuous reference to these two important facets of performance would satisfy my thirst any day and I can confidently say that I represent the avg. reader in my wants and needs.

PS. The article points at a Gross Earnings Growth of 24% and a Profit After Tax increase greater than 100%! Do we not think this should be salted. In fact I will go down the line to state that the most probable reason for why this was the case, if the figures are to be believed, is because unlike other revenues those earned on the newly raised Capital would not incur the same cost as old Capital, and thus feed directly to the Profit Figure thus the substantial increase in Profit in comparison Revenue.

Also note that if Fidelity have undertaking all those projects they’ve raised the capital for, surely they could not have started yielding results yet! I mean 100% increase in PAT on an increase 24% in Gross Earnings, they must have gone through a serious cost savings exercise, essentially the figures are saying they’ve doubled Profit Margin (Profit After Tax/Gross Earnings).

Now I prefer to think that the doubling was due more to the yield on Capital raised than the Cost savings.

[bwalaman]

@SpecNomic – Go back and read what I wrote… if you still don’t follow, please know I have no qualms with your views. We can agree to have different perspectives, I hope.

[c kenneths]

Paragon, SpecNomics and Bwalaman, are we not veering off from the issue at stake ? Lets tackle issues on investment strategies please.

[SpecNomics]

Come on, its a given that we can agree to have different perspectives, but as John Stuart Mills said there is nothing like allowing your thoughts to collide with those of others, to consolidate your arguments if right and when wrong, to allow you see the errors of your ways. This why I am a member of this forum.

Perhaps it would be in both out interest that I spell out my understanding of what you wrote.

Your first point was that the sort of information I was talking about was not free, and I stated in my response that I am of contrary opinion, the information is free, its on the webpage of Fidelity re company specific performance, and the general economy’s performance can be observed from different sources. And clearly, your other sub-points, under information etc, were not applicable has I in no measure mistook Market Performance for Financial Statement Performance. It would be school boy error for any Journalist, which I am not, to mistaken them. They Report and should report all the dynamics surrounding the event.


The second point you made was re the simplicity of my maths. Which I agreed with, esp. the costs you mentioned and the effect this would have on Earning growth i.e. dragging it downwards. But the simplicity was chosen to make the point of the effect a change in capital has on earnings, this applies to any industry. Growth of any kind is good, but a reporter must report the cause of this growth, and I feel strongly that omitting an item such as the effect of Capital Raised is telling half the story.

I am aware that towards the end of your postings you made fwd looking statements re Growth sustainability, investment clubs, etc, if you anticipated our discussion continuing from that point onwards, then fair enough, but you can appreciate that it’s a bit off topic and forgive me for not following up.

I can not avoid the punt, but perhaps, if I had the reasons for the current growth, I could analyse its sustainability. Which goes back to my point, these were not articulated in the article and this inadequacy pervades most articles on Nigeria’s Capital Markets.

I hope I understood your article and conveyed coherently and concisely my own opinion in my response. I am open to debate, therefore open to correction, let us abstain from using language such as the one used in your response, “Go back and read what I wrote… if you still don’t follow, please know I have no qualms with your views. We can agree to have different perspectives, I hope.” I want to understand and I went back and read, and attempted to show you my understanding of what you wrote, if I misunderstood anything you said, then correct me in your response as I will surely do in my postings.

BUT AS YOU POINTED OUT CK WE ARE VEERING OFF!!!