Bank, insurance and investment stocks at the Nairobi Securities Exchange (NSE) present the best bet for value appreciation this year given their price to earnings (P/E) ratios have fallen below the market average, analysts say.
According to data from Genghis Capital the sector P/E ratios of banking, insurance and investment segments stand at 7.65, 7.67 and 8.54 times respectively, compared to the market average of 12.82.
The P/E ratio is obtained by dividing a company’s share price with its earnings a share, and shows the amount of money investors are willing to invest in order to get a shilling return from the company. The higher the P/E ratio, the more expensive a share is considered to be.
“The main market price to earnings analysis shows that the banking, investments and insurance sectors provide a solace in good bargains…due to their lesser P/E in comparison with NSE’s normalised P/E of 12.82 times,” said Genghis Capital in a market report.
“We opine that the banking sector will outperform the market as soon as conditions begin improving in the equities market, based on the foreign activity being observed across the board.”
The main NSE index has lost over 23 per cent over the past year, with the bearish trend taking root from March 2015 across nearly all segments of the market.
Bank stocks have seen double-digit share price drops as the segment took the brunt of the foreign investor sell-offs in the market.
In the first full week of trading this year, there were signs foreigners may be looking to buy again into key stocks, especially with some prices nearing one-year lows.
The lenders’ financial results have continued improving even as share prices suffer, thus explaining the lower P/E ratios. The top banks, bar for Standard Chartered and CfC Stanbic, all reported earnings increases in the nine months to September 2015.
For the full-year earnings, the higher interest rates seen in October and part of November should boost the income for banks, given they earned more from their substantial holdings of government securities and also on the money lent to customers.
Insurance firms have been hit by lower earnings over the past year due to exposure to equities, but the low insurance penetration in Kenya means that they retain potential for growing their premiums.
According to ABC Capital analysts, the stocks of KCB, Equity Holdings, NIC Bank, Kenya Re and Centum have room for appreciation because they have low prices relative to their fundamental value, as well as good earnings potential.
“KCB also has a very high return on equity at 26 per cent according to the third quarter 2015 results. Only Equity Bank has a higher return on equity (among banks, at 29.24 per cent),” said ABC Capital in their report on stocks to watch in 2016. KCB and Equity stocks are trading at Sh41.50 and Sh39 respectively, which the analysts at ABC say offers upside potential of between 17.8 and 21 per cent respectively once the market regains its upward momentum.
Kenya Re’s P/E ratio of 4.6 is the lowest in the insurance segment. ABC adds that the firm’s future earnings are protected by the regulation that compels Kenyan insurance companies to cede 20 per cent of their reinsurance business to Kenya Re until 2020, hence guaranteeing its insurance premiums.
On Centum, the stockbroker pegs future performance of the share to the firm’s realisation of returns from its investments in real estate—primarily through the nearly completed Two Rivers development— energy and the education sector.
The stock is currently trading at Sh47, which is 34 per cent below its all-time high price achieved last year.