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8/2/2019 Industry Insights - Issue 01
1/13
Major Economic Indicators:
Quarterly Outlook
Inflation:StableInterestRates:StableExchangeRates:StableGDP Growth:StableEquityMarkets:StableBondMarkets:Stable
Economy into Neutral as Elections take Pole
Global Perspective
The global economy performed better than
expectedinthefirsthalfoftheyearprompting
the International Monetary Fund (IMF) to
revisegrowthprojectionsfor2010upwardsby
0.5%to
4.5%
at
the
start
of
quarter
three.
A
robust Asian recovery as well as wider im
provement in industrial activity and private
demand was held to be responsible for an
annualised growth of above 5% recorded in
the first quarter. The strength of the growth
data also thrust the International Energy
Agencytoreviseoildemandforecastsupby80
thousandbarrelsperday(kbpd)to86.6million
barrels per day (mbpd), translating to a 2.2%
growth for 2010 following the 1.1% decline
recorded in2009.Theupwardrevisionswere,
however,not
without
caveat;
with
both
bodies
warningofincreaseddownsiderisksasaresult
of thehighly fragilenatureof the globaleco
nomicrecovery.
Oil GDP
Crudeoilpriceshaveaveragedaround$75per
barrel inthe firstninemonthsof2010 incon
trasttoanannualaverageof$61 in2009.We
expectthepricetoremainatcurrentlevelsfor
the remainderof theyeargiven International
Energy Agencys forecast revision and ex
pected reaffirmation of cutbacks at the next
OPEC ministersmeeting inOctober.Nigerias
crude oil production is thought to be at its
highestlevelsinrecentyears,withthecurrent
climate of relative peace in the Niger Delta.
Thecountrysproductionisexpectedtoremain
strongfortherestoftheyearwithmoreprevi
ously lockedin onshore and shallow offshore
fieldsproducingclosertocapacity.Theradical
Petroleum IndustryBill (PIB) is stillawaitinga
third(andfinal)reading intheSenate.Thebill
is looking increasingly unlikely to be passed
beforetheendoftheyearasthegeneralelec
tionsslatedforearly2011approach.
NonOil GDP (Public Sector)
The government generated revenue of 2
trillioninthefirstfourmonthsof2010,afigure
which on a time apportioned basis is 25%
downonthe8trillionprojectedinthebudget
for2010.Thetotalfederallycollectedrevenue
is expected to be closer to6 trillion for the
year, with economic conditions unlikely to
Contents
The Macro Economy P.1
Electricity P.4
Oil& Gas P.6
Food & Beverage P.8
Real Estate P.10
Pharmaceuticals P.12
QUARTERLY REVIEW OF NIGERIAN INDUSTRIES
Industry Insights
Agusto & Co.RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT
ISSUE 01, OCTOBER 2010
1
8/2/2019 Industry Insights - Issue 01
2/13
corded for the same quarter in 2009. The
Sectorisexpectedtoagainshowsolidgrowth
inthe
latter
part
of
the
year,
with
the
coming
harvest inthenorthernpartofNigeria.There
is, however, some concern that lower than
expected food inflation of 12.9% in the sec
ondquartercomparedto14.7% in2009may
deter farmers from significant expansionary
activities.
Money Markets
There is stillno signof thecredit squeeze in
theeconomyabatingat theendof the third
quarterof2010. Inspiteof theCBNsefforts
toreduce treasurybilland interbankrates
whichwentas lowas1.2%and1.3% respec
tivelyinAprilbanksremaincautiousregard
ing lending. The evidence suggests that the
economy,whichrecordedayearonyearrate
of inflation of 13.7% in August according to
the NBS, is in a liquidity trap; with the CBN
unabletostimulatelendingbyloweringinter
estrates.TheCBNcontinuestodrivethrough
what could be termed a quantitative easing
programme intheestablishmentof interven
tion funds to refinance existing bank loans.
TheMonetary
Policy
Committee
at
ameeting
attheendofSeptembertookthepreemptive
step of increasing the monetary policy rate
(MPR)by0.25% tocurbwhatcould turnout
tobeexcessiveinflationinlightofthecoming
electionsandexpectedincreaseinliquidityof
banks. The countrys external reserves have
been on a decline, hovering around $37 bil
lioninSeptemberfrom$42billionatthestart
of the year. The fears over the reserves rot
spread to the exchange rate in September
with the price of $1 rising above149after
settling
at
the
higher
end
of
148
formost
of
theyear.Ouroutlookforthemoneymarkets
for the remainderof theyear ismoreof the
same with the inflation rate, interest rates
and exchange rates all expected to remain
stable.
TheNigerianbondmarketcontinuesitscrawltogreaterdepthswiththeissu
anceoftwomoreStategovernmentbonds
change significantly in the latter months of
2010. The country generated lower than
expected oil revenues, with the PIB still not
yetpassed;receiptsfrompetroleumprofittax
androyaltieswereconsiderablydownonthe
2010
budget
estimates.
The
governments
nonoil revenues were also considerably
lower as there was a larger than expected
decline in customs and exercise duties and
companiesincometaxaswellasothertaxes.
The decline in these duties and taxes were
largely a reflection of the economic adversi
tiesthatwerefaced insomesegmentsofthe
countrys private sector in 2009 and early
2010.
NonOil GDP (Private Sector)Theprivatesectorhasshownimprovementin
2010with an8.41% realgrowth recorded in
thesecondquartercomparedto8.18%inthe
corresponding period of 2009 according to
the National Bureauof Statistics (NBS) quar
terlyestablishmentsurvey.Theslowlychang
ingfortunes
of
strategically
important
sectors
such as Banking and Telecommunications,
whichhadearlierledtherationalizationdrive,
positively impacted on other sectors of the
economy. The growth witnessed in the sec
ondquarterwaslargelydrivenbysignificantly
improvedactivities intheRetailSectorwhich
recordedarealgrowthof11.4%comparedto
11.18%recordedforthesameperiodin2009
accordingtotheNBSsurvey.TheAgricultural
Sector, as usual, showed solid growth of
5.84% in the second quarter following har
vestsin
the
southern
part
of
the
country,
although this was lower than the 5.94% re
2
8/2/2019 Industry Insights - Issue 01
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Capital Markets
TheNigerianbondmarketcontinues itscrawltogreaterdepthswiththe issuanceoftwomore
StategovernmentbondsKadunaandEbonyi inthethirdquarter.Themanner inwhichthe
municipalbondmarketcontinues to thrive is incontrast to thecorporatebondmarkets leth
argy;withonlyahandfulofissuescomingtomarketinthelastfewyears.Theequitymarkethas
remainedlargelybearishinthethirdquarter,withthe1.84%gainoftheNSEASIinJulyreversed
bya6.23%dropinAugust.TheAgusto40Index,whichisdesignedtorepresenttheperformanceofNigerianquotedequityandtheeconomy ingeneral,mirroredthedirectionoftheNSEASI in
thesetwomonths.TheAgusto40,however,as isexpected inabearmarket;outperformedthe
NSEASI,gaining3.92% inJulyanddroppingonly4.67% inAugust.The lowlystateoftheequity
markethascontinuedtodeterissuerswithUnionHomesRealEstateInvestmentTrustPlcsIPO
andSkye
Bank
Plcs
special
placement
the
only
cash
issues
in
the
third
quarter.
However,
our
outlook for the remainderof theyear for theequitymarket is stable.TheAssetManagement
CompanyofNigeria(AMCON) isexpectedtocommenceoperationsbeforetheendoftheyear,
mitigatingthebearishtrendcausedbybanksreducingtheirholdingsofmarginloans.Weexpect
thebondmarket tobestable,with thepossibilityofacoupleofmunicipalorcorporatebonds
beingissuedbeforetheendoftheyear.
Outlook
PoliticsissettodominateNigeriansocialandeconomicproceedingsoverthenexttwoquarters
with the impending general elections. The Independent National Electoral Commission (INEC)
receivedanapprovalinprinciplefromthelawmakerstorescheduletheelectionsforalaterdate
thanstipulated
by
the
countrys
constitution
to
allow
for
sufficient
time
to
make
the
prepara
tions.The traditionalhandoverdateof29Maydubbeddemocracyday is,however,ex
pected to remainunchangedunder thenewschedule tobeput forwardby INEC.Thegovern
mentsparticipation ineconomicactivities isexpectedtobe limitedoverthenexttwoquarters
asthepolitickingforcandidatureandcampaignforelectedofficesissettotakecentrestage.We
expectthistohaveanadverseknockoneffectonboththeOilandtheNonOilPrivateSectorfor
thenexttwoquartersmakingourotherwisepositiveoutlookonGDPstable.
3
Lagos,Nigeria
3
8/2/2019 Industry Insights - Issue 01
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The Nigerian Power Industry Letsturnthelightson
Are the reforms enough?
Nigeriahassufficientenergyresourcestomeetthenationsdemand.Nonetheless,todoso,the
industryneeds investmentsofanestimatedUS$3.5 billionperannum inpower infrastructure
over
the
next
ten
years,
which
in
our
opinion,
cannot
be
achieved
without
sufficient
private
sec
tor investments.Overtheyears, thedearthof longtermfundinghasbeenoneofthekeycon
straintstotheperformanceofprivateplayersinthepower industry.WithCBNsrecentfunding
initiatives,weexpectsome improvements in thisarea in themedium termas these fundsare
deployed.
Tofurthersupportexternalfunding,electricitypurchasedfromthegenerationcompaniesbythe
bulk tradercompanywillbecoveredbyacreditguarantee from theFederalGovernment. It is
however important to note that this guaranteedoes not cover the full extentof the liability,
whichsomewhatnegates theattemptatmaking thepowerpurchaseagreementsbankable. In
ourview,forthereformstowork,theFederalgovernmentwillneedtofullycovertheseexpo
suresuntilefficiencyconstraintsareremovedtomake investorsmorecomfortable. Inaddition,
The Power Holding Company of Nigeria
(PHCN) supplies most of the electricity con
sumedin
Nigeria,
supplemented
with
power
generatedfromprivatelyownedplants.Nige
riacurrentlyhas8,300MWof installedgener
ating capacitybut is only able to generate a
maximum of 3,700MW. Most businesses in
Nigeria have been rendered globally uncom
petitive as a result of the high costs of self
generation.
Thepowerindustryhasundergoneaseriesof
reforms in the last tenyearsbutwithdismal
results.Privatesectorparticipationisstillvery
lowand
most
of
the
new
power
plants
are
yet
to be completed. In addition, most of the
operationalpowerplantsarefunctioningsub
optimally due to lack of maintenance, while
thetransmissionanddistributionsectorhave
been plagued by technical and financial
losses.
Upon resumption of office, President Good
luck Jonathanannounced thathewouldper
sonally oversee the industry to ensure the
effectiveimplementationofthenewreforms.
A committee was constituted to urgently
review the challenges faced by the power
industry and proffer solutions. In August
2010, thePresidentpresented theblueprint
forachieving
aminimum
target
of
40,000MW
by2020.Thekeypointsofthisstrategicinitia
tiveare:
Theprivatizationofthegeneration and
distributioncompaniesbyQ22011.
The transmissioncompanywillbeman
aged by a private company and trans
missionserviceswillberegionalized.
Abulktradercompanywillbeinstituted
to handle the purchase of electricity
from the generation companies for
onward sale to the distribution compa
niesbyyearend2010.
Electricity tariffs are to be increased
from 8.50 to 22//kWh effective Q1
2011.
TheCentralBankofNigeriahaspledged
thesumof200billionfortheresuscita
tion of the Power Industry. In addition
to this, the CBN Governorhasalsodis
closedthat400billionwillbedeployed
frompensionfundstowardscompleting
powerprojects.
44
Privatesectorparticipationisstillverylowandmostofthenewpowerplantsare
yettobecompleted.
8/2/2019 Industry Insights - Issue 01
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powerpurchaseagreementsshouldbe fullymatched (i.e. in termsof tenors, fixedpricingetc)
with fuel supply agreements to minimize the risks inherent in the trading agreements. These
critical issuesneedtobeaddressedurgentlytomakethe industrymoreattractiveto investors.
Banksarealsowaryaboutlendingtothecompaniesduetothevaguepaymentterms.
Another major hurdle faced by intending entrants is the commercial viability of the industry,
whichthe
tariff
hike
aims
to
address.
Nonetheless,
analysts
have
questioned
the
affordability
of
thenewtariffsparticularlytolowincomeearnerswithoutthesupportofgovernmentsubsidies.
Inourview,consumersshouldbewillingtopaymoreas longaselectricitysupply issomewhat
guaranteed.It isestimatedthatNigeriansspend80/KWHoncandlesandkerosene lampsand
70/KWHondieselandpetrol.Furthermore,evenwiththehikeintariffs,Nigeriastillhasoneof
thelowesttariffsintheAfrica(seefigure1below).
Figure1:ElectricityTariffs
Source:PresidentialTaskForceonPower
Webelievethatthehugegapbetweenthedemandandsupplyforelectricity,coupledwithgov
ernmentsrenewedfocuspresentsa lotofopportunitiesforgrowth.Considerable investments
areexpectedtoflowintotheindustry,spurredbytherecentreforms.Sixforeignandlocalcom
panieshavealreadytenderedbidsforthemanagementofthetransmissioncompany.Whenfully
operational, the new transmission structure should reduce transmission losses. Privately run
distributioncompaniesshould improverevenuecollection,ultimatelymakingthe industrymore
profitable and thus more attractive. In Nigeria, transmission losses in the Power Industry are
currentlyestimatedat40%comparedtocountrieslikeGhanaandKenyaat10%.
Wehowevernote thatthepaceatwhich thereformsare implementedmaybeslowedbybu
reaucraticdelays and distractions caused by the impendingelections.Onekey point thatwas
omitted from the roadmap is the issueofcorruption.Over the lasteighteenyears,vast sums
havebeenspentwithoutcommensurateresults.Whileweexpectthatefficiencygainsshouldbe
derived in the medium to long term from the privatization of the unbundled companies, we
believethatthesuccessofthereformsarelargelydependentonGovernmentsabilitytoensure
accountabilityandstewardshipforallcontractsawarded.
0
5
10
15
20
25
30
35
40
45
50
BurkinaFaso
GuineaBissau
Liberia SierraLeone
Gambia Ghana Nigeria
55
8/2/2019 Industry Insights - Issue 01
6/13
InMay2010, theFederalGovernmentbegan
issuingSovereign
Debt
Notes
(SDNs)
to
im
porters of petroleum products (Premium
MotorSpirits(PMS)andHousehold Kerosene
(HKK), as guarantee for their subsidy pay
ments.ThenotesareissuedbytheDebtMan
agementOffice(DMO)tothelicensedimport
ers through thePetroleumProductPricing&
Regulatory Agency (PPPRA). The notes are
discountableshorttermbills,liketheGovern
ments treasurybills (Tbills),butunlikeTbills,
theyhaveashortertenorof45days.Toqual
ify for the SDNs, an importer must deliver a
cargoof
PMS
or
HHK
that
meets
regulatory
specifications. Once this is confirmed, the
note,whichcanbediscountedbycommercial
banks,isissuedtothepetroleumimporterby
thePPPRA.TheSDNsarebackedbytheGov
ernments treasury and cover the difference
betweenthelandingcostofPMSandHKKand
theofficialpumppricesof 65and50 re
spectively.
The Federal Government must be com
mended for the introductionof theSDNs. In
additionto
forestalling
the
buildup
of
unpaid
subsidies and ensuring some stability in the
supply of these petroleum products, it also
provides petroleum importers an alternative
sourceoffundingi.e.theycaneitherdiscount
thebillsiftheyareunableorunwillingtohold
themtomaturityorusethemtosecuretheir
short term bank borrowings. The initiative
buttresses Governments resolve to address
the issues of the downstream segment and
represents a step towards the full deregula
tion of the sector. Most of the petroleum
marketers/importers
have
received
their
outstandingpaymentsandarenowrecording
improved cash flows from operations. The
initiative has also reignited the interest of
certain marketers who had previously
stopped importation of petroleum products;
and as a result, have submitted applications
toobtainpetroleumimportlicenses.
However,afewissueshavedoggedtheintro
duction of the notes. Firstly, the notes are
only receivable after upfront payment of
administrative
and
Petroleum
Equalization
Fund claims.Previously these feeswereonly
deducted at source when the subsidy pay
ments were effected; somewhat like a with
holding tax. Some marketers have com
plained about this new method and are re
questing that the Federal Government re
versethispolicy.Secondly,theintroductionof
the notes was also accompanied by some
inconsistency in the allocation of the import
permits i.e. the withdrawal of petroleum
import licensesthathadbeen issuedandthe
reissuanceto
favor
some
marketers
that
had
earlierdiscontinued the importationofprod
ucts.ThePPPRAhasbeenchallengedtomake
the allocation process more transparent and
review the process of allocation of import
licenses. These marketers have also accused
thePPPRAof favoritism towards five import
erswhoreceivedmore thanhalfof the total
importquotaforeachofthesequarters.
Notwithstanding the furor over the granting
ofpetroleumimportlicenses,themostimpor
tantconcern
for
industry
stakeholders
is
the
sustainabilityoftheinitiative.Thisisbasedon
two factors. The first is the rising domestic
debtprofileofthecountry;GiventheFederal
Governments'planstoraisedebtintheinter
nationalcapitalmarketsaswellastoincrease
domestic debt issuances to fund a yawning
budgetdeficit, thereare fears that theSDNs
may add to this debt burden and may be
sacrificed for other seemingly more impor
tantcauses.Theupcomingelections in2011
alsoprovideanothercauseforconcerndueto
the
tendency
of
new
regimes
to
abandon
programsinitiatedby previousregimes.
These two factors could easily overturn the
progress recorded by the industry since the
introductionofthenotes.Thesecondquarter
performance (2010 Q2) of most operators
reveals significant improvement over both
2010 Q1 and the corresponding quarter in
2009. According to unaudited accounts for
thehalfyearended30June2010,fourofthe
66
Oil & Gas Sovereign Debt Notes: A Step In The
Right Direction
Marketers
havealsoac
cusedthe
PPPRAoffa
voritismto
wardsfiveim
porterswho
receivedmore
thanhalfof
thetotal
im
portquota.
8/2/2019 Industry Insights - Issue 01
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majormarketers(OandoPlc,MRSOilNigeriaPlc,TotalNigeriaPlcandConoilPlc)recordedacom
binedturnoverof340.5billion,representinga50% increaseoverthecomparableperiod inthe
previous year. Profit after Tax (PAT) for these companies in this interim period is estimated at
12.9billion,representing a160%growthoverthecorrespondingperiodin2009andtranslating
to4%ofsales(2009:2%).Ifthistrendissustained,weexpectturnoverof681billionandPATof
25billion
at
31
December
2010.
In
addition
to
the
issuance
of
the
SDNs,
we
note
that
the
im
provement in sales is also attributable the absence of industrial actions, product scarcity and
greaterefficiencybyoperatorsamongotherfactors.
Inabid to sustain this trend, thePPPRAhas revised theguidelines for issuing import licenses/
allocationsforQ42010.Amongtherevisionstotheguidelinesistherequirementthattheimport
ersprovide proofof financialbackingora letterofundertaking fromabank to finance the im
ports.ThePPPRAhasalsosuspendedtheadmissionofnewfuelmarketersintotheimportalloca
tionprogramandpetroleum importers/marketerswillalsobeprohibited from transferring their
importquotastothirdparties.Thismoveisexpectedtocurtailtheactivityofportfoliomarketers
whoonlybidfortheimportpermitsinordertoselltheallocations toothermarketers.
OverallAgusto
&
Co
is
of
the
opinion
that
for
the
SDNs
to
continue
to
work
effectively,
the
process
ofawarding import licensestooperatorsmustbetransparentandefficientlymanaged.Thenew
guidelinesadoptedbytheregulatoryauthoritiesforthefourthquarterof2010 isamove inthis
direction and if sustained should reflect in improved performance of industry operators in the
nearterm.
77
8/2/2019 Industry Insights - Issue 01
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WithanestimatedNigerianpopulationof150
milliongrowing
at
approximately
4%
per
an
num; thecountrysFoodandBeverage Indus
try(theF&BIndustryortheIndustry)wasestimated at 530 billion in 2009. Despite
prevailing market conditions, the Nigerian
marketremainsthedelightofindustryplayers
duetothelargenumberofconsumers.
Between 2005 and 2008, the F&B Industry
witnessed an influx of new entrants, who
alongside established companies increased
capacity and expanded their scope of opera
tionsdue
to
buoyant
economic
conditions
ultimatelyresultinginaveragerevenuegrowth
rates in the region of 22% within this period
(outpacingtheaveragenominalGDPgrowthof
20%). The growing sophistication and emer
genceofthemiddleclass,increasingdesirefor
convenience in the form of packaged foods
andgreatermarketpenetrationcontributedto
increased salesvolumes. Another factor that
impactedpositivelyontheIndustrysperform
ance was improvements in food quality as a
resultofincreasedcompetitionandregulatory
enforcementby
the
Standards
Organization
of
Nigeria (SON) and the National Agency for
Food & Drug Administration Commission
(NAFDAC).
In 2009, the Nigerian economy recorded
slower growth, with recessionary pressures
settinginandremainingin2010.Inadditionto
thedecline inpurchasingpowerof thepopu
lace and inflationary pressures, industry op
erators currently have to contend with in
creasesinoperatingcost,increaseinthecosts
of
raw
materials
and
for
some,
reduced
access
tofundingforbothworkingcapitalneedsand
business expansion. While the impact of the
depreciationoftheNairawasmostobvious in
2009, the costs of power generation in the
formofdiesel;rosesignificantlybyanaverage
of 21% between 2009 and August 2010. For
eign exchange rates have been relatively sta
ble in 2010, with US Dollar exchanging for
149.29/$ in August 2010 from150.91/$ a
yearearlier.TheNairaalsoappreciatedagainst
the Euro and Sterling, dropping to 191.90
and 232.94 respectively in August 2010.
Continuedstability
in
the
Naira
exchange
rate
could bode well for the Industry in the next
quarter,thoughitisunclearifpressuresonthe
externalfrontcouldresult infurtherdeprecia
tionin2011.
While overall industry growth remains sub
dued compared to previous years, 2010 con
tinuestoseeanimprovementonanumberof
fronts. Interim results for the 2nd
quarter,
show continued growth in sales, with some
improvement in margins over corresponding
periods
in
2009
for
some
operators.
But
as
is
expected, resultsappear tobemixedby seg
ment.Webelieve this isdue to thenatureof
products in each segment and the ability to
passoncost increasestoconsumers. Inaddi
tion, companies that have integrated back
wards and have a more diversified product
baseappeartohavefaredbetter.
Overall, competition remains keen and some
segmentscontinuetofarebetterthanothers,
withcontinuedgrowthridingonthebackofan
increaseinproductofferingsandthemodifica
tionofexistingones. Amongstsuchoperators
areNestle
Nigeria
Plc
(with
new
products
like
Milo chocolate bar and Milo readytodrink
canbeverage)andDangoteFlourMillPlc(new
pasta variants: Alphabet and Actilease). Cad
bury Nigeria Plc on the other hand has re
viewed product offerings and discontinued
less profitable products including Eclairs,
RichocoandBubbabubblegum,whiledirecting
effortsatbetterperformingproducts suchas
Bournvita,Buttermint,andTomTom.
88
What Is Happening In The Nigerian Food
And Beverage Industry?
ProfitafterTaxtoTurnoverRatio(HalfYearEndedJune2010)
Companies
thathavein
tegrated
backwards
andhavea
morediversi
fiedproduct
baseappear
tohavefared
better.
8/2/2019 Industry Insights - Issue 01
9/13
Repackagingof products into individual serving size is also a continuing trend,with the likesof
UnileverPlc,andFrieslandFoodsWamcorepackingestablishedproducts;Bluebandmargarineand
evaporatedPeakmilkintosinglesizeservings. Individualsizeservings,allowscompaniestocreate
markets
for
their
products
across
different
income
segments.
The
noodles
sub
segment
is
also
recording increased competition as the likes of Honeywell, DangoteFlourMillsPlc and May&
Baker PlctrytocapturemarketsharefromthedominantplayerDufilPrimaFoods;themanufac
turerofIndomieNoodles.
Weexpectbusinessvolumesofthefoodandbeverageindustrytopickupinthelastquarterofthe
year,with theapproachingholiday season.Theeffectof inflationarypressures,which increased
from11%in2009to13%in2010andledtochangesinthemonetarypolicyrateasofSeptember
2010to6.25%,isonlyexpectedtobemorepronouncedpostholidayseasonassalesnormalize.On
theforeignexchangefront,providedtheNairaremainsstableagainstmajorcurrenciesandother
operatingcostsremainrelativelyunchanged,thereshouldbesome improvementinperformance
formostindustryoperators.
Despitetheindustryssensitivitytoitsoperatingenvironment:poorinfrastructureandhighoperat
ingcosts;webelievethatasinpreviousperiodsofdownturn,theNigerianFood&Beverageindus
trywillprove tobemore resilient thanother industriesand thus remainamongst thebestper
forming in the short term.This isbasedon ouranalysisofcontinuedopportunities for market
penetration,theintroductionofnewproductsandthenecessarynatureoftheindustrysproducts.
9
8/2/2019 Industry Insights - Issue 01
10/13
Real Estate Industry Review What determines
where you live?
In 2010, the aftershocks of the financial crisis
and the shortage in commercial lending stalled
renovations,
building
conversions
and
new
office space developments around large cities,
particularly in Lagos State. Furthermore, the
economic downturn affected the emergence of
newresidencesandbusinesses,especiallysmall
andmediumscaleenterprises(SMEs),company
subsidiaries, branches and retail outlets. How
ever,theaveragerentalpriceforofficespace in
largecitieshavenotchangedsignificantly.
In the residential market however, population
growth, urban and intercity migration ensured
some
measure
of
volatility.
Nigeria
has
a
housing
deficit of well over 16 million units. In Lagos
State, 65% of the population lives in rented
accommodation,sometimesspendingashighas
40 percent of their monthly income on house
rent. Residential rent is the largest recurring
expenditure made by the average Nigerian be
tweentheagesof30and40.Thereasoncannot
bemoreobvious;housing isabasicneed, its in
shortsupplyandhouseownersdemandupto2
yearsadvancepayment.
In 2010, an analysis of the housing market re
veals
that
when
household
income
or
size
changed (as has happened to many Nigerians),
asides from affordability, the four prominent
nonostentatious determinants of choice of
residence are congestion, perceived environ
mentalsecurity,relativedistance(centrality)and
infrastructure provision. For instance, prior to
2010, the relative closeness of Ajah in Lagos
State to the commercial district sparked land
acquisition,constructionandinturn,anincrease
inrentalratesinthearea.However,subsequent
congestion in 2010 andan increase injourney
timeowing
to
road
work
have
adversely
affected
rentalrates.
Security
Ouranalysisrevealsthatsecurityisthestrongest
considerationinresidentialselection.Ofthefour
mainconsiderationsinrentalselection,asample
ofprospectivetenantsfeltthatsecurityconcerns
motivatedthemby43%torentaproperty.This
has given rise to the prevalence of residential
estates with heightened security facilities and
personnel.However,despitetheoptionofresid
ingwithinanestate,thegeneral senseofsecu
rityof
an
entire
area
is
still
held
by
many
as
the
greatest concern when making a residential
propertyselection.
As at September 2010, respondents surveyed
ranked Ikoyias the safestplace to live inLagos
state. Surulere and Yaba were perceived to be
less secure than Ikorodu, Ketu and Iyana Ipaja.
SurulereandYabassecurityrankingisattributed
totheirgrowingpopulationdensityduetointer
citymigration,which inrecenttimeshas largely
come fromAjahand the Lekkiaxis. Thismigra
tionofislandersappearstohaveraisedsecurity
concerns in the area, sparking fears that crimi
nalsmightbeattractedtothepresenceof new
comers.
In Port Harcourt, Rumibekwe ranked as the
safestresidentialareatrailedcloselybyGRA.As
aconsequenceofrecentRiverstateGovernment
efforts in reclaiming waterfronts, the Borokiri
areahasexperiencedan increase in security. In
contrast,incidencesofkidnappinginAdaGeorge
has led toadecline inperceivedsecurity in the
neighborhood.
Distance from thecentralbusiness
districts
The central business districts (CBD) in Lagos
StateareVictoriaIsland,MarinaandIkeja.How
ever,forthepurposeofthisresearch,Marina is
considered as the CBD of Lagos State. In Port
Harcourt, Township is regarded as the CBD
while Centralarea isreferred toas theCBD in
Abuja. We observed that residents in Lagos
considered distance to the central business
district injourney timeas the second most im
portantfactor
in
selecting
rental
property
and
felt itoffered29%motivationwhen choosinga
residence.
InLagosState,Yabaremainedthefirstchoicefor
proximitytothecenter,followedsequentiallyby
Ikoyi, Surulere, and Apapa. As a result of the
road construction on the LekkiEpe expressway
whichresults inheavytrafficcongestionatrush
hour, Ajah ranked further from the CBD than
Ogba/Agegeinjourneytime.
1010
Decision drivers in property
selection
8/2/2019 Industry Insights - Issue 01
11/13
Infrastructure
Social amenities such as roads, water and
electricityaffectthecostoflivingofresidents
inanareaandsomeareasaremoreprivileged
than
others
in
this
regard.
In
Lagos
State,
highbrow areas are popular for good road net
worksbutnotsomuch forelectricity supply.
Low income areas connote the thought of
poor infrastructure;however,middle income
neighborhoodsareacombinationofsorts.
Our research showed that tenants believed
infrastructure was the third strongest influ
ence on their rental decision and felt it of
fered 19% motivation when selecting rental
property. Most tenants were accustomed to
supplementing poor electricity supply with
personalgenerators,
poor
water
supply
with
bore holes and bad road networks with a
goodmechanicora fourwheeldrivevehicle
(whentheycanaffordone).Hence,infrastruc
ture is deemed less important to distance
from the CBD and security. For Lagos State,
Ikeja ranked as the second best location for
infrastructurebehindIkoyi.TheLekkiaxistied
at third with Surulere and Yaba. Apapa led
Festac Town in fourth place while Ketu and
Iyana Ipaja were seen as having the poorest
infrastructure among the areas sampled in
LagosState.
Congestion
Thelevelofcongestioninanareacontributes
tootherfactorsthataffectthechoiceofresi
dence in the large commercial cities suchas
noise pollution, waste disposal and traffic
congestion. Many of the respondents sam
pled believed this factor had the least influ
ence on their rental decision and felt it of
fered only 9% motivation when choosing
rentalproperty.
In Lagos State, Ikoyi and the Lekki axis were
rankedas
the
least
densely
populated
areas
of the state. Apapa ranked as the least
densely populated residential area on Lagos
mainland. The survey showed that Surulere,
Yabaand Iyana Ipajawereperceived tohave
equalpopulationdensitiesandwereonly less
densethanKetuarea.
1111
Infrastructure
isdeemed
less
importantto
distancefrom
thecentral
businessdis
trictsandse
curity.
Outlook
Inthe
third
quarter
of
2010,
the
economic
slow
down
affected
rental
yields;
firstly
by
restricting
growth inpropertypricesandsecondlyby limitingthe increase inrent.Morespecifically,rising
insecurity insomeareasofPortHarcourtcontributed tovolatility intheresidentialmarketand
affectedgrowth in rentalyieldsadversely. In LagosState, increasedjourney timewasamajor
influenceon rentalyieldsandareas along the LekkiEpeexpressway were mostaffected.Asa
resultofthesefactors,therentalyieldsintheresidentialmarketreducedslightlyfromtheprevi
ousyear.
OtherinhibitorstotheRealEstateIndustryin2010aretherestrictionincommerciallendingand
higherinflation. Asideslimitingthesupplyoffundsusedinbuildingconstruction,lowbanklend
inghasalsoaffectedtheprovisionof infrastructuretoanumberofnewhousingestates. Infra
structuraldevelopment intheseestates isnowcontingentonreceiptsfromthesubsequentsale
of properties, which has also dwindled under current economic conditions. As a result, many
earlybuyersanddevelopersintheestatesmaycontendwithpoorinfrastructureforlongerthan
anticipatedandthiswouldrestrictrentalpricegrowthintheseareas.
Domestic inflationandexchangerateshavealsoaffected theRealEstate Industryespeciallyby
increasingthecostofsomebuildingmaterialssuchaswood,steelandcertainchemicalsusedin
paintproduction.Theconsequentialhighercostofbuildingconstructionhasaffectedthesupply
ofnewhouses in theRealEstate Industry,particularly in Lagos state,during theperiodunder
review.
Inspiteof these factors,ouropinion is thatrental rateswouldremainstable in lesspopulated
areasofthemaincommercialcitiesovertheshortterm. InLagosstate,webelieverentalrates
wouldincreasearoundthemoredevelopedareasonthemainland.
8/2/2019 Industry Insights - Issue 01
12/13
Drugcounterfeiting
is
aglobal
problem,
ema
nating from a poorly regulated distribution
system. InNigeria,themainsourcesofcoun
terfeitdrugsarethemultitudeofunregulated
drug markets in its major towns and cities.
According to the drug regulatory authority
National Agency for Food, Drug Administra
tion&Control(NAFDAC),illegaldrugmarkets
haveexistedsincethe1960sandhavegrown
innumberovertheyears.
In dismantling these markets, a holistic ap
proachhas
been
proposed
by
some
interna
tionalhealth institutions WorldHealthOr
ganisation (WHO), the United States Food &
DrugAgency (USFDA)and theUnitedStates
National Association of Boards of Pharmacy
(NABP) which entails among other meas
ures, the effective regulation of wholesale
drug distribution. In most developed and
emerging pharmaceutical (pharma) mar
kets,drugcounterfeitinghasbeenmoderately
stemmed by establishing a well structured
drugdistributionsystem.
Inlinewiththisglobalpractice,in2001,NAF
DACproposed theestablishmentofawhole
sale Zonal Drug distribution system, as a
major tool for restructuring thecurrentdrug
distribution system in the country. This
wholesale distribution system involves the
establishment of drug marts in the six geo
political zones in the country for localdistri
butionandexport.Thesedrugmartsaretobe
regulatedbyNAFDAC,theStandardOrganiza
tion of Nigeria (SON), the Pharmaceutical
CouncilofNigeria (PCN)andNationalExport
ProcessingZones
Authority
(NEPZA).
How
ever, thisproposeddistributionsystem isyet
tobeimplementedduetowhatwegatherto
be the huge setup costs associated with it
(amongstotherfactors).
Agusto & Co. believes the crux of an ideal
drugdistributionsystem isgovernment legis
lationon
the
registration
of
key
distributors.
It
is our belief that if the Federal Government
adopts the proposed Zonal Drug distribution
system, as well as enacts legislation on the
compulsory registration of major drug dis
tributors, it would lead to a decline in the
presence of counterfeit drugs. Upon review,
Agusto&Co.findstheproposed distribution
system well structured, though it would re
quire a significant amount of will, resources
andmanpowertoregulate. This inouropin
ion, shouldnotbeadeterrent,ashealthcare
touchesevery
citizen
and
is
one
of
the
most
important determinants of a countrys stan
dardofliving;
Our interpretation of NAFDACs proposed
zonal drug distribution system is that regis
teredwholesaledealerswouldhave the sole
righttotrade inpharmaceuticalproductsand
tooperatewithinthesixgeopoliticalzonesin
the country.We expect that thesewholesal
ers would be compelled to register the
downlinks pharmacies and drug stores in
theirsupply
chain,
thereby,
creating
adata
base of the entire drug distribution chain in
thecountry.Ontheotherhand,drug import
ers and manufacturers in the country would
also be compelled to directly supply the six
ZonalDrugMarts,NonGovernmentalOrgani
sations(NGOs),public&privatehospitalsand
owned pharmacies, thus reducing the prob
ability of adulterated drugs infiltrating the
supplychain.Furthermore,theissueofsupply
shortfallscreatingpossibilitiesofcounterfeit
ingwouldbe avoidedunder this zonaldrug
distribution
system,
given
the
wholesale
deal
erstightmonitoringoftheirdownlinks.
Inconclusion,shouldtheFederalGovernment
adopt the Drug Mart distribution system in
the short tomedium term,weexpecta cut
down insupplies to the illegaldrugsmarkets
and a sharp decline in the penetration of
adulterated drugs in the country. These
1212
Laying The Foundation For An Ideal Drug
Distribution System In Nigeria Agusto &
Cos Perspectives
8/2/2019 Industry Insights - Issue 01
13/13
shouldbeachieved through theunrelentingenforcementactivitiesofNAFDAC and theStates
TaskForcesonFakeDrugs.Consequently,theseshould increasethefortunesofbothmanufac
turingandimportingpharmaceuticalcompanies.It isourbeliefthatwithamoreefficientdistri
bution system and the recentWorldHealth Organization Good Manufacturing Practice (GMP)
certificationofmostpharmamanufacturingcompanies inNigeria,theIndustrywillbepoisedto
exceedthe
16%
average
sales
growth
recorded
between
2004
and
2008.
However,
industry
players stillhave tocontendwith theharshbusinessenvironment inNigeria,which remainsa
majoroffsettingfactortoperformance.Currently, thecostsofimportation(ofbothrawmateri
als& finisheddrugs),conversion (production)anddistribution remain relativelyhigher than in
otheremergingpharmamarkets inAfrica ultimatelymakingpharmacompanies inNigeria less
competitivethansomeoftheirregionalpeers.
1313
Agusto & Co. Limited
Agusto & Co. is the foremost credit
rating agency in Nigeria, specializing
in financial institutions, corporate
and
bond
ratings.
We
are
also
a
research organization providing
business information forour various
clients.
As business information service
providers, we publish industry re
ports containing unbiased expert
analysis of various industries in the
Nigerian Economy. We gather infor
mation about the market size and
potentialofan industry, itskeyplay
ers,competitors,
products
and
finan
cial condition amongst others. In
providing a broad overview of the
industry and its key players, our
analysts interpretdatacollectedand
assign each industry a risk rating,
taking into cognisance Nigerias risk
profile.
We also conduct client specific de
tailedresearch.
ThecopyrightofthisdocumentisreservedbyAgusto&Co.Limited.Nomattercontainedhereinmaybe
reproduced,duplicatedorcopiedbyanymeanswhatsoeverwithoutthepriorwrittenconsentofAgusto
&Co.
Limited.
Action
will
be
taken
against
companies
or
individuals
who
ignore
this
warning.
The
infor
mationcontained inthisdocumenthasbeenobtainedfrom sourceswhichweconsidertobereliable
butdonotguaranteeassuch. Theopinionsexpressedinthisdocumentdonotrepresentinvestmentor
otheradviceandshouldthereforenotbeconstruedassuch.
Thecirculationofthisdocumentisrestrictedtowhomithasbeenaddressed.Anyunauthorizeddisclo
sureoruseoftheinformationcontainedhereinisprohibited.
Disclaimer
Agusto & Co. Limited
UBAHouse(5thFloor),57Marina
Lagos
P.O. Box56136,Ikoyi
Tel:(234)126435715
Fax:(234)12643576
E-mail:[email protected]
Website:www.agusto.com