Blue-chip companies undervalued, according to Sterling Capital

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Capital markets

Blue-chip companies undervalued, according to Sterling Capital


Nairobi Stock Exchange trading room. FILE PHOTO | NMG

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Summary

  • Sterling Capital analysts say the expected rise in earnings in fiscal 2021 will drive the average price-to-earnings (P/E) ratio of the 20 constituent companies down to an all-time low of 7.1x.
  • Banks are expected to lead the race for profitability, having rebounded strongly last year as the economy rebounded from the Covid-19-induced slowdown in 2020.
  • The index is currently trading at 1,869 points, having fallen 1.7% since the start of the year.

The majority of large companies making up the NSE 20 stock index are undervalued as their earnings growth outpaces their stagnant or declining stock prices, offering investors potential gains once the market undergoes a correction .

Sterling Capital analysts say the expected rise in earnings in fiscal 2021 will drive the average price-to-earnings (P/E) ratio of the 20 constituent companies down to an all-time low of 7.1x, given the decline in stock prices on the stock exchange.

The ratio measures a company’s share price relative to earnings per share, with a lower ratio indicating a higher likelihood of undervaluation. Between 2016 and 2020, the NSE 20 averaged a P/E ratio of 10.6.

Banks are expected to lead the race for profitability, having rebounded strongly last year as the economy rebounded from the Covid-19-induced slowdown in 2020.

With eight of the 11 local lenders listed on the index, the sector makes up almost half of the price-weighted index, which incorporates blue chips with proven profitability and dividend records.

“Our forward estimates show that the average earnings per share for the NSE 20 constituents will reach Sh8.40 for the 2021 financial year, which, compared to the share prices suppressed in 2021, would bring the P / E ratio of the indices to a historic low of 7.1 times,” Sterling said.

“The mismatch between company fundamentals and respective stock prices indicates relative undervaluation within the NSE-20 stock index…the stock market is trading at historically low relative parameters, but cumulative earnings and averages will be at record highs.”

The index is currently trading at 1,869 points, having fallen 1.7% since the start of the year. Fourteen of its stocks have lost value this year, indicating the continued negative sentiment toward stocks due to global uncertainty caused by Russia’s invasion of Ukraine.

Sterling Capital added that risk factors such as the conflict in Ukraine and the general elections in Kenya in August should continue to weigh on share prices.

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