Blue chip firms undervalued, says Sterling Capital – Business Daily
Nairobi Securities Exchange trading floor. FILE PHOTO | NMG
Majority of large companies comprising the NSE 20 Share Index are undervalued as their earnings growth outpaces their share prices that have stagnated or declined, offering investors potential gains once the market undergoes a correction.
Analysts at Sterling Capital say that the projected earnings jump in the 2021 financial year will push down the average price to earnings (P/E) ratio of the 20 constituent firms to a historic low of 7.1 times, taking into account the depressed share prices at the bourse.
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 profitability race, having recovered strongly last year as the economy rebounded from the Covid-19 induced downturn of 2020.
With eight of the 11 local listed lenders on the index, the sector accounts for nearly 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 come in at Sh8.40 for 2021 financial year, which when compared to the suppressed share prices in 2021 would bring the indices P/E ratio to a historical low of 7.1 times,” said Sterling.
“The mismatch between company fundamentals and respective share prices points to relative undervaluation within the NSE-20 share index…the bourse is trading at historically low relative metrics, yet both cumulative and average earnings will be at record highs.”
The index is currently trading at 1,869 points, having fallen by 1.7 percent since the beginning of the year. Fourteen of its stocks have shed value this year, pointing to the continued negative sentiment towards equities due to the global uncertainty caused by Russia’s invasion of Ukraine.
Sterling Capital added that risk factors such as the Ukraine conflict and Kenya’s general elections in August are likely to continue weighing on share prices.