INTRODUCTION
It is another wonderful Saturday afternoon. Welcome to yet another edition of the Equity Traders & Investors’ Town Hall with Ambrose Omordion. As usual, we begin our review of equity market activities for the week ended August 20, 2021, using our daily timeframe. But before that, I want to quickly summarize what happened in the week under review… what I call a pop panda movement, as the benchmark index created a see-saw movement closing on Friday almost 0.5% in the red. But, on the whole, our market is still very strong, despite uncertainties we are seeing coming from the Covid-19 impact on oil price, just that every player should fix their gaze on the market, to ensure that you are abreast with what is happening on daily basis. This is not a time to invest and run. At the risk of sounding like a broken gong, let me repeat it again that the low priced or penny stocks are the ones that will give the most significant returns, and you can see the way this category of stocks have given investors return in the first eight months of this year- between January and August, you would have observed that the market is changing. Last year, we saw how the high cap stocks moved the market such that in the last quarter, the market gained almost 20 percent, but I’m telling you that the way we are going now, we are seeing a lot of changes in terms of variables which will likely play a very major role in the last quarter of the
Year.
It means that you as an investor or a trader… remember I have said it repeatedly that both institutional and retail investors are still studying the half-year results, moving from one stock to another and from one sector to the other, selling down where necessary because they need to make money. They are looking out for where there is a high potential for an upside move… people want to position in such a sector. That is why, as an investor you do not have to depend on company fundamentals alone, you need to combine it with technical to know exactly where you to go, because although fundamentally, a company may be good, but then there are other factors to consider, including whether it is the right time to buy into a company, and whether the price is right. You may need to ask yourself: Why are you buying it? A combination of fundamental and technical tools will help you in terms of the proper timing of any investment…
Don’t forget that the third-quarter earnings season is key in any equity market across the world, because it gives you a lot of information about what you’re going to see but those who know how to trade using their analysis know the importance because it gives a hint of what to expect going forward. The fourth quarter has always been the most active, it is only on rare occasions that you see that the last quarter was down.
Despite the fact that the inflation rate has dropped for the fourth consecutive month so far, it is still high, that is why most of the fixed income market instruments are still give a negative return, which is why if you really want to hedge against inflation the only place you should be is the equity market and ought to target penny stocks- both medium and low cap stocks with the potential to rally, rather than the high caps that should only be in your portfolio as some form of defence, should the market move against you, to balance your portfolio and preserve value. You need to know what is going to drive them, look at sectors they operate in, their numbers, products portfolio… and their technical position… This is very important, market sentiment is simply a function of demand and supply. When there is demand for a stock, the price will go up. You need to apply commonsense to your analysis… which means you need to look at your technical analysis… Is there volume… is the money flow index positive or negative? Is it going up… which means funds are entering or is showing that people are selling down? If you look at all these indicators or technical analyses, it will help you to know what to do per time. As an investor, when you see the market pulling back you can take advantage and sell when it’s going up. There are some breakers that show when you can jump in. When a stock touches a circuit breaker and starts pulling back, you as a trader should know at that point you are supposed to sell part of your position, take some profit, and then when it breaks out you start again. That is why we say “trend is your friend” in technical analysis.
Last week, I remember you really dwelt much on Honeywell and we saw what played out especially on Friday (August 20), when it touched N3.27 before closing finally at N3.00 each. Are the factors behind the stock still intact? We hear rumour of a likely acquisition…
I believe it is still intact because we have not heard anything contrary. I often tell investors, whatsoever you hear, look at the fundamentals of the company… at the candlestick… to guide you. Don’t be carried away by rumours of a possibility that you could make 20m%. Once you are satisfied that you have made it at any level, you are good to go. I can tell you something that I see there, if the potentials that attracted you into a stock are still there, you don’t need to panic out. What I saw on Friday was kind of a shake-out for those that are fearful and others that have made money. When you have made like 100% or 80% in one or two weeks… you have to sell off, but those that know what is going on may hold on. For me, if you are in Honeywell Flour, it depends on your investment objective. If you met your target, you can sell-off, but if you want to hold you can go ahead and hold because I see that that stock is still going higher.
Don’t forget that September is also the AGM date, I don’t know what the outcome is going to be. Same for Oando, the end of August is the AGM, we need to see what the outcome will be. That means, if you are looking at this kind of stocks, it is not only the rumour you are hearing or what you are expecting, the candlestick performance will also tell you. Candles will not lie, it will tell you what has happened in a stock, it will guide you… Even the rumour you are hearing must reflect on your candle, that is why you should always look at your candle at any time. When I saw people selling off, I was not surprised. When you see a stock move up in such a manner, don’t be surprised, people are bound to take profit. A pull back is good and it is also an opportunity to buy back is good and an opportunity for you to buy at N3.00 each… not at N3.37 each. You can still enter and see how far it will go. The man that bought at N1.36 is good to go now, he is smiling already and the man who buys at N3 is also going to achieve something, there is no cause for alarm.
Still, on Honeywell Flour, remember we saw this huge quantity of about 372m units, is there a way we can tie this acquisition to, was it purchased by an individual? We’ve not seen any company or insider dealing being declared…
The good thing is that for you as a trader, we have emphasized the importance of volume in equity investment. When I notice that volume. It was a ‘buy’ volume, whether it was a crossed deal or insider dealing, it was a ‘buy’ volume, which means somebody is seeing something you and I are not seeing and jumping in immediately and that volume changed the story of that company. Since then, it went dry and started coming back yesterday. You saw the volume that came out yesterday, compared it to the volume of 371m, which means that people are still holding on to the stock. Why is this so, because they are watching the developments… they are still seeing something there. This means that the stock has the potential to go up if you are still there.
Participant I: I just want to advise investors to look at the trend of yesterday for Honeywell Flour and notice that three times, it hit N3.27 per share and the moment it started coming down, people will mop it up and take it back to that level… It was only towards the end of the trading session that it came down to N3.00 and even at that, it showed you the strength of the stock because three times in a day a stock will go up and come down, go up and come down. It shows you that there is a belief that there is something inherent in that stock. And look at it what volume was traded before it reached N3.27 each. The whole volume traded is nothing to write home about now, plus the fact that the majority of yesterday’s trading if you look at the average trading price… it was the in the neighbourhood of about N3.27 per share. So, it shows you that some people have taken position already and it gives you a very, very strong signal. For the first time, you see a stock that hit its highest price three times in a day. It is something worth noting.
Ambrose: Also, in the chart of Honeywell Flour Mill and you can see the movement in this Candlestick in the past two weeks… it’s a strong candlestick showing that this talk is going somewhere. Even the little pullback after touching N3.37 is still showing strength. The volume that supported in the first week that it went up was high that was when we
saw that 371m units. The volume also came down a little but the price still moved up to show you that there are some forces within the stock. I want to quickly go to other indicators so that you can see what we combine when looking at all stocks to know if funds are still entering the stock or not. This is because when funds are entering into a stock it gives you a lot of insights as to insights of what is happening in that stock. Fund is very important that is why we call it a money flow index. It’s very, very important… you need to know whether that fund is entering a stock or not.
Let’s also look at the dimension of the CBN deadline that First Bank to perfect the lien or something like that, and then the issue of whether the shares of First Bank should be divested, and then also whether the loan was actually secured by the chairman’s First Bank shares or the shares of the company… That dimension is being overlooked in analyzing the stock. It may have something to do with that high volume we saw recently.
Like I said earlier, that volume under reference, was a ‘buy’ volume, which tells you that people were taking interest in that company at that particular time, but when it comes to the issue of the loan agreement between Honeywell and First Bank, I know it was purely a business transaction. Don’t forget that before that First Bank also has 5% holding in that company, which makes the bank a stakeholder in the company, so if they gave a loan, it is because they also have a business they are doing with Honeywell… I believe that the company has all it takes to sort its problems out with First Bank and then concentrate on its plans for the future.
Participant I: I think we need to throw some light on this issue of Honeywell Flour… A lot of people are getting a lot of things confused about Honeywell and the situation with First Bank. The money that First Bank is talking about is the loan taken by the Honeywell Group, which is a private limited liability company, completely different from Honeywell Flour Mills, which is a publicly quoted company. But because the name is Honeywell, no serious distinction is made, especially in the public domain to distinguish between the loan that was taken by the chairman under the group umbrella and the loan that was taken by Honeywell Flour Mills as a standalone public entity. There is a difference between the two and for the benefit of investors, there are two basic loans that Honeywell has with First Bank and these are already in the public domain. They are in the annual reports and accounts. There is a term loan which is about N10 billion, and like you have just said, the loan is performing. The second one is an import finance facility which is a dollar-denominated loan that they import with, and which is also performing… So, if First Bank calls it in today another bank will take it up tomorrow. So, these are the only exposure of Honeywell Flour Mills to First Bank. The issue of shares or no shares… First Bank is completely at liberty to approach the capital market to sell off its five percent shares in Honeywell Flour. And if they are willing to sell today, from these sentiments that we have seen, I’m sure the market can absorb it. But that is completely different from whether there are certain other facilities that the chairman of the group guaranteed. You know, Honeywell is a group with about 13 or 14 subsidiaries and added to a lot of investment all over the place. So, there is a need for investors in Honeywell Flour Mills to know that some of these facilities having to do with the former chairman are not facilities affecting or concerning Honeywell Flour Mills. I just thought I should make that point.
Participant II: Let me just add this. One other factor is, besides First Bank that owns five percent of Honeywell Flour shares, the chairman Oba Otudeko and his son jointly own 73 percent of that company. If you go to the latest financial report, you will see it. So for each time, you see a major investor having up to 73 percent, they can use it to swing the market. That’s not a small shareholding in any organization. First Bank also, is an institutional investor so if you take those two it’s already 78 percent. You don’t even know of other institutional investors that might have relative volume. So, I would say there is a bit of scarcity of that form because if Oba Otudeko and his son decide to hold those shares and not sell, you do not have enough volume to circulate. And that in itself can create a scarcity that will make the price go up. If you check your financial report and check their finance cost, I don’t know whether everyone here has time to check each quarter’s financial report… You will see a huge finance cost, even though we say the loan is performing, but it needs to be seen on a quarterly basis whether that finance cost is reducing. If the finance cost is not reducing, it is an indication that the company is not doing well, because once you have a cost, what you need to be paying is the principal and the interest and once you’re servicing that loan it’s supposed to be coming down quarter by quarter. So people need to check that line item, and as it is reducing it will reduce to a level where the whole of that would have been paid off and once it is paid off it means it now becomes a net profit issue straight away because finance cost comes after your gross margin. So that sense of looking into the financials that they release on a quarterly basis is also key. The fact that the chairman and his son control 73 percent is just like BUA Cement where the chairman (Abdul Samad Rabiu), owns close to 90 percent of the shares in issue. That’s why the price can go up so astronomically because you have
very little quantity… A stock like that, that is so highly valued in terms of market cap, you know… if the quantity is in the hands of one person they can swing price and that price will continue to go up. So as we take our position, let us be clear on some of the other factors that are driving it, you know so that we know when to enter and to exit. Thank you.
Participant III: I want to shed more light on this five percent you are talking about, I want to assume that by the time they traded that 371 million that has taken care of that five percent, because definitely where do you get 371 million units of a company traded in a day? It must have been that. The moment I saw it, I assumed that it was the five percent. But when you are taking a loan, you must place something as collateral and now, the major question is: what did the Honeywell Group place as collateral for the First Bank loan?
if you place bank shares it is not acceptable by the CBN guidelines. So the only shares you can place are those of other companies except banks. So, assuming the loan that the Honeywell Group has taken has Honeywell shares as collateral, that is where the damaging effect is. As long as the loan is performing, fine… but if there is any default in that loan your collateral can go… But even in that case, if the loan is performing fine and good but be aware any day you default you can lose your control.
Ambrose: Going by what we have discussed about the loan if you look at the company’s net asset or shareholders fund… that is if you look at it for the short-term, or what we call Quick Ratio, it has about N80 billion, while on the long run it is about N25 billion, while the net value is about N65 billion. That means only the short-term loan might give them little stress. That is an indication that Honeywell is still very healthy where it is now, once they release more numbers you can confirm what’s happening. But the Q1 number I’ve seen is an indication that the company is going somewhere. Let’s watch the momentum and don’t forget that I said it before at this meeting that when you are investing, look at what the momentum, look at the earnings, and look at the sentiment, and sentiment comes from trading- ‘buying’ and ‘selling.’ Remember also that volume in your trading is very key, as well as the company’s earnings, and if it is a positive sentiment that alone can give you money that you will not believe. But when you are using sentiments, follow the market’s speed because when sentiment starts going you also have to leave the stock, know when is very key. Now, we are seeing positive sentiments in the stock, we are seeing improving earnings, also we seeing that also numbers from the company are getting better. Let us keep our fingers crossed and watch, don’t invest now, and go to sleep.
EQUITY TRADERS & INVESTORS’ TOWNHALL with AMBROSE OMORDION cfm is the transcript of the weekly question and answer session by Mr. Ambrose Omordion, Chief Research Officer of Investdata Consulting Ltd, with select equity investors and traders on Zoom (Saturday, August 21, 2021 edition) and was first published in the Sunday Independent of August 29, 2021. For questions and clarifications, reach him on +23408028164085, +2348179547605. email: info@investdataonline.com, info@investdata.com.ng, ambrose.o@investdataonline.com, ambroseconsultants@yahoo.com
