INTRODUTION...overwhelm domestic healthcare infrastructure, upend livelihoods, cripple social...

NIGERIA | 2020 MID YEAR OUTLOOK | INTO THE NIGHT 1

INTRODUCTION

Executive Summary

The twin evils of COVID-19 and oil price shock are

likely to cause a deterioration in the domestic

economy in 2020, with a potential spillover into the

first few quarters of 2021. The viral spread came at a

time when budgetary space to absorb shocks is

limited by weak oil prices. COVID-19 threatens to

overwhelm domestic healthcare infrastructure, upend

livelihoods, cripple social conditions, and distort

business activities. So far, Nigeria’s reaction has

mostly been in sync with IMF’s suggested response to

the viral spread and its fallout even though the scale

of the measures adopted appears insufficient to

prevent significant distortions to domestic macro

variables in the current year.

Monetary policy bias could remain largely dovish, with

administrative measures set to leave system liquidity

at elevated levels and yields mostly lower in Q3’20.

We expect yields to slowly reverse trajectory in Q4’20

due to a halt in OMO maturities that cannot be rolled-

over as a fallout of CBN’s OMO restrictions. Thus,

investors are likely to stay short in the fixed income

space. The government could also use some domestic

borrowings to augment any budgetary shortfall that

may arise after concessionary funding options have

been exhausted.

In the equities market, we expect investors to take

advantage of bargain hunting opportunities in

fundamentally strong names and hold for the long

term. Investors could gravitate towards stocks with

track records of high profitability, low financial

leverage, and less margin volatility amidst the current

macro vulnerabilities.

Kayode Eseyin

[email protected]

(234) 817 834 8569

Ngozi Chukwuneke

[email protected]

(234) 809 056 6324

Olufisayo Ademilua

[email protected]

(234) 809 056 6338

Khalil Woli

[email protected]

(234) 908 702 2238

Michael Nwakalor

[email protected]

(234) 809 022 1946

Jerry Nnebue

[email protected]

(234) 809 713 2016

Philip Anegbe (Team Lead)

[email protected]

(234) 809 041 5178

Investment Research

[email protected]

(234) 7100 433

Securities Trading

[email protected]

(234) 802 9755 644

Analysts

mailto:[email protected]







INTRODUCTION

Highlights

Sector Opportunities Ferreting out potential winners amidst uncertainties

19

5 H’s for Second Half Appropriate responses could be the bedrock for a winning

strategy

5

13 Investment Views

How do you invest in a low yield environment?


INTRODUCTION

Contents

Introduction

Executive Summary 1

Highlights 2

Contents 3

Summary of recommendations 4

5 H’s for Second Half 5

How badly has COVID-19 distorted growth expectations? 6

How far will counteractive policies go? 8

How will the currency quandary end in 2020? 11

How do you invest in a low yield environment? 13

Equities: The bold seeks Alpha even in a sinking ship 14

Fixed Income: Liquidity glut may pave way for market fundamentals by year end 16

How do you structure a winning portfolio? 18

Sector Opportunities 19

Nigerian Banks: A litmus test of resilience 20

Consumer goods: When will the sleeping giants rise? 33

Upstream Oil and Gas: Uncertainty encapsulated 42

Downstream Oil and Gas: PMS price modulation may fail to bolster margins 43

Oil Palm: Price trajectory makes U-turn on COVID global shocks 49

Telecoms: More defensive than most, but not problem-free 53

Cement: Seized by the pangs of the pandemic 56

Disclosures 60


INTRODUCTION

Summary of recommendations

Company Ticker Rating TP (N) Ref Price1

(N) Market Cap

(N’bn) 2020F P/E 2020F D/ Y

Upside/ Downside

Financial Services

ACCESS BUY 7.82 6.10 28.2% 216.80 2.3x 8.9%

ETI BUY 5.72 4.25 34.6% 104.50 1.9x 0.0%

FBNH BUY 7.47 4.95 50.9% 177.70 2.4x 4.3%

FCMB HOLD 1.87 1.90 -1.6% 37.60 3.0x 5.0%

FIDELITYBK HOLD 2.04 1.79 14.0% 51.90 2.3x 6.6%

GUARANTY BUY 31.37 21.50 45.9% 492.30 3.6x 11.3%

STANBIC BUY 39.61 29.00 36.6% 304.60 4.3x 7.0%

UBA BUY 7.70 6.15 25.2% 210.30 2.5x 14.1%

ZENITHBANK BUY 22.67 15.65 44.9% 491.40 2.7x 14.9%

Consumer Goods

DANGSUGAR SELL 11.28 12.00 -6.0% 144.00 6.9x 8.4%

FLOURMILL BUY 21.34 17.00 25.5% 69.71 6.1x 5.3%

GUINNESS HOLD 15.54 13.90 11.8% 30.45 0.0x 0.0%

NB HOLD 33.35 30.00 11.2% 239.90 33.7x 3.0%

NESTLE BUY 1455.22 1175.00 23.8% 931.40 20.4x 6.0%

UACN HOLD 8.26 7.30 13.2% 21.03 6.4x 1.4%

Industrial Goods

DANGCEM BUY 186.40 126.00 47.9% 2,147.10 13.2x 7.2%

WAPCO BUY 15.40 11.00 40.0% 177.18 13.5x 5.9%

Agriculture

OKOMU BUY 82.12 70.50 16.5% 67.20 12.0x 5.7%

PRESCO BUY 58.22 47.45 22.7% 49.45 12.9x 4.2%

Telecoms

MTNN BUY 149.36 118.00 26.6% 2,401.80 11.9x 5.9%

Oil & Gas

ARDOVA HOLD 14.42 13.45 7.2% 17.52 16.4x 3.7%

MOBIL HOLD 177.26 173.40 2.2% 62.53 10.0x 3.3%

SEPLAT BUY 494.47 386.00 28.1% 227.14 0.0x 0.0%

TOTAL SELL 95.00 97.50 -2.6% 33.10 0.0x 0.0%

1Close price as at July 20, 2020


5 H’S FOR SECOND HALF

Asking the right questions and proffering suitable answers

must now be considered the first play in today’s elusive

investment world. The world awakened to a shock

distortion that provoked unparalleled repricing of global

assets and commodities in Q1’20. Global equities tumbled

as did frontier and emerging markets fixed income

securities. Coronavirus swept away optimism as the

clamour for safe havens soared in the quarter.

Thankfully, a gradual re-opening of economies and an

OPEC+ truce dovetailed into a less pessimistic outlook for

oil exporters, like Nigeria, towards the close of Q2’20. Yet,

the savvy investor knows better than to rest on his or her

laurels with the threat of a second wave of coronavirus

outbreak and implosion of the OPEC+ agreement being

obvious downside risks to expectation.

Given this cloud of uncertainty, we believe responses to

the following five questions could be the bedrock of a

winning strategy for the rest of 2020. These questions

include:

1) How badly has COVID-19 distorted growth

expectations?

2) How far will the counteractive policies go?

3) How will the currency quandary end in 2020?

4) How do you invest in a low yield environment?

5) How do you structure a winning portfolio?

5 H’s for second half

Appropriate responses could be the bedrock for a winning strategy



How badly has COVID-19

distorted growth

expectations?

COVID-19 has already placed a strain on global economies in 2020. Its smoke of uncertainty is likely to severely test the

resilience of many economies in the coming months and, possibly, years. While there is consensus that the fallouts of the

pandemic would badly hurt economies, there are differing views on how long economic recovery would take across countries.

In our view, well-diversified economies that are able to deploy robust fiscal and monetary countermeasures are more likely to

recover faster. For others, the pathway could be long and hard.

Nigeria: Opening old wounds

In our view, the economic ramifications of COVID-19 in

Nigeria further accentuates the lingering vulnerabilities in

the economic landscape. More disconcerting is the

possibility that the chasm between Nigeria’s potential and

actual GDP is likely to widen as consumption and

investments come under pressure.

Beyond our domestic shores, the weaknesses in global

manufacturing and industrial activities suggest stifled

demand for commodities such as crude oil. This demand

weakness could sustain the pressure on oil prices and strain

government revenues amidst burgeoning debt service

needs. We, therefore, expect lower CAPEX implementation,

currency pressures, and higher fiscal deficit. The latter duo is

already manifest.

Global markets have reeled from COVID-19 impact

Currencies

Investors’ flight to safety led to

drastic weaknesses in most EM

currencies. The Barclay’s EM

Index fell 10.9%3 before

recovering to a contraction of

3.6%2. The Real (-32.0%), Rand

(-23.8%) and Lira (-15.2%) were

also among the worst hit2.

Commodities

The Bloomberg Commodity

Index fell 21.0%2 from

December 2019, and is hovering

at its lowest point in 5 years.

Agro and Energy commodities

have been the worst hit, as

economic activities slide due to

the virus.

Fixed Income

Most DM bond yields fell to pre-

2008 historical levels. In

contrast, EM bond yields soared

following downgrades to junk,

but began to slide as Central

Banks cut rates and investors

come to terms with the virus.

Equities

Most equity indices1 across US,

Europe, Asia and Emerging

Markets fell 8.3% lower YtD2 on

average, after dipping by

c.31.3% at the peak of the

crises. These early equity routs

hint at a likely recession due to

the virus.

Figure 1: Nigeria’s output gap is likely to widen further

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1

'15

Q3

'15

Q1

'16

Q3

'16

Q1

'17

Q3

'17

Q1

'18

Q3

'18

Q1

'19

Q3

'19

Q1

'20

Q3

'20

Real GDP Potential GDP

Source: Nigeria Bureau of Statistics; CardinalStone Research

1Indices considered: S&P 500; DJIA; FTSE; STOXX600; DAX; MSCI Asia ex-Japan

and MSCI EM. 2As as June 18, 2020 3As as March 23, 2020



2016 retold, with a health twist

While there are similarities between the 2016 economic

environment and current realities, we view the present

macroeconomic vicissitude as direr. In our view, the oil

and non-oil sectors are likely to reel from the first and

second-order effects of COVID-19. Notably, the COVID-19

crisis could negatively affect domestic consumption and

gross capital formation, both of which, per our analysis,

were the most critical growth drivers in the last 25

quarters.

Across sectors, we anticipate notable contractions in

Hospitality, Transport & Travels, Manufacturing,

Construction and Trade sectors. We also foresee growth

slowdowns in Agriculture, ICT, and Finance & Insurance

sectors.

Another recession could

be on the cards

How bad can it get?

Our bear case is a 5.0% YoY decline in GDP in 2020, but a

more likely outcome would be a 2.4% contraction in our

view.

Although the increase in COVID-19 cases has been

milder in Nigeria compared to other parts of the world,

there are concerns that an exponential rise in cases

remains likely. These fears hinge on the early easing of

lockdown measures across different economic sectors.

The government’s decision to ease the lockdown may

have been driven by the relatively low fatality rate in

Nigeria. Given this level of relative confidence, the

government may have opted for slightly higher risks to

hasten the economic recovery process. Notwithstanding,

an uncontrollable wave of cases could force the

authorities to reinstate some degree of restrictions

across sectors, which could worsen the current

economic realities.

30.0%

The amount by which oil

prices, in April 2020, fell

from 2016 lows. Though

prices have mildly

recovered, the inherent risks

are still somewhat

overbearing

41.1 pts

June 2020 PMI. The lowest in

at least 6 years. During the

recession, PMI fell to a low

of 41.9. A 32.4% decline

from December 2019 levels

also marks the steepest fall

over a short period.

Q3’17

The last time Business

Outlook Index was negative

just as Nigeria exited

recession. The index has

turned negative for the first

time since the recession

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Previous 2020F growth Revised 2020F growth

MTEF IMF

World Bank CardinalStone

Figure 2: Top contributors to GDP by sectors

Source: Nigeria Bureau of Statistics; CardinalStone Research

Figure 3: Nigeria is widely expected to plunge into recession in

2020

Source: Budget Office; IMF, World Bank; CardinalStone Research



How far will

counteractive policies go?

FG ponders $13.8 billion borrowing

With its proposed stimulus amounting to 3.0% of GDP,

Nigeria is looking to partly augment fiscal shortfalls, improve

healthcare infrastructure, provide welfare palliatives, and

ease the debt burden on the private sector. To bankroll this

stimulus, Nigeria has already obtained IMF’s $3.4 billion

(c.₦1.2 trillion at ₦360/$) financing under the RFI

programme with a further $2.1 billion expected from the

World Bank (71.4%), AFDB (23.8%), and Islamic Development

Bank (4.8%). In the context of closing the entire budgetary

gap (coronavirus-inspired or not), $6.1 billion domestic debt,

$1.1 billion project-tied loans, $700 million special-accounts

drawdowns, and $400 million from privatization, were

earmarked by the government.

We assess the impact of economic

countermeasures under three (3)

different scenarios. Our analysis,

which considers the potential extent

of COVID-19 damage to the

economy, developments across

global economies, and the adequacy

of the options deployed by the

authorities, suggests scenario 2 to be

the most plausible outcome.

COVID-19 provides a rare opportunity for enabling the necessary growth inducing conversations in Nigeria. The government’s

response to COVID-19 has culminated in a new Economic Sustainability Plan. This plan, as well as the fiscal and monetary

measures, reflects the intent to ensure unconstrained government spending and unrestricted access to funds (local currency

and FX) for businesses to provoke a quick recovery. As part of its first response, the government also engaged in the purchase

and distribution of essentials as well as direct cash disbursements to the poorest Nigerians to reduce negative passthrough to

consumption.

SCENARIO 2

COUNTERMEASURES PROVE

INADEQUATE, GROWTH SINKS

• COVID-19 cases rise rapidly, allowing only

a partial reopening of the economy

• Oil prices hover around $35/bbl on

skepticism over second wave of COVID-19

• Naira weakens to N400/$ on demand

pressures, weaker oil price & FPI exits

• GDP contracts 2.4% on weak activities as

bank lending, investments and

consumption slow down

SCENARIO 3

ECONOMY PLUNGES DEEP INTO

RECESSION TERRITORY

• COVID-19 cases rise exponentially, forcing

a reinstating of lockdown measures.

• A second wave of global cases causes oil

prices to plummet towards $25/bbl

• Currency weakens further to N440/$ due

to aggressive external flows

• GDP falls deep into recession at 5.0% on

slump in economic activities with fiscal &

monetary measures largely ineffective

This is a good place to briefly,

but effectively, describe your

product or services.

This is a good place to briefly,

but effectively, describe your

product or services.

SIDEBAR SUBTITLE TEXT

SCENARIO 1

• COVID-19 hospitalizations remain within

domestic healthcare capacity

• Oil prices improve towards $50/bbl on

improved global demand outlook

• Improved FX earnings ease currency

pressure. Naira consolidates around

N390/$

• Albeit, economy contracts slightly on

delayed recovery of investment and

consumption

SCENARIO 1

IMPROVING EXTERNAL CONDITIONS

SUPPORT DOMESTIC MEASURES



Figure 4: Timeline of government actions to mitigate COVID-19 impacts

Source: World Bank



Why we expect a 2.4% GDP contraction

despite Nigeria’s COVID-19 responses

-7.80%

The expected rate of

economic contraction across

Nigeria’s top 10 export

destinations in 2020.

Source: IMF, NBS

Weaker investments and net exports are likely to weigh

on growth in 2020, with the latter likely to be

exogenously driven by economic deterioration across

Nigeria’s most important trading partners. Weaker

private investments could expose government’s

inability to meet CAPEX targets due to weaker oil

earnings.

Proposed stimulus of 3.0% of GDP (mean of 5.0% for

SSA) may not be enough to jump-start economic

activities in the near-term. CBN’s targeted N50 billion

credit facility for households and MSME is even

materially insufficient to cover the funding gap in the

MSME space. In addition, overall disbursement of

intervention monies has been slow.

Private sector consumption and investment have not

been adequately targeted, given the devastating impact

of COVID on business operations and their contribution

to GDP. This inadequacy comes to the fore because

household consumption contribute up to c.76.0% of

GDP.

Inadequate data may frustrate efforts to reach the

informal sector. Containment measures are likely to

have more devastating impact on informal sector

workers because they have no employment-related

protection and no social safety nets.

N48 trillion

The funding gap in the

MSME space as at 2019.

Source: CBN

76.0%

The contribution of

household consumption to

Nigeria’s GDP

Source: NBS

41.0%

Informal sector proportion

of total economic output

Source: World Bank

Notwithstanding the above concerns, Nigeria’s response to

the current twin shocks can potentially yield a few

benefits. These benefits may include:

1. Accelerated healthcare investments could support

Nigeria’s Human Capital Index (ranked 152nd out of

156 countries)

2. The removal of PMS subsidy is likely to ease

budgetary burden by over N900 billion (including FX

differential)

3. Gravitation to concessionary foreign borrowing is

likely to slightly taper debt service concerns. FG

expects new concessionary borrowings to result in

only N200 billion of new debt service (vs. N300

billion if funding is sourced differently)

4. Improved fiscal responsibility as evinced by greater

care in the disbursement of FAAC and removal of

unsustainable “consumption padding mechanisms”

such as subsidies on PMS and, potentially, (via

preferential FX treatment) electricity.



How will the currency

quandary end in 2020?

The CBN devalued the official exchange rate to N360/$ in March 2020 (from N305/$ previously). Following conversations with

the IMF and the World Bank regarding unification of rates, there are indications that a further adjustment of the official

exchange rate could still be on the cards. We expect this repricing/unification of exchange rates to slightly offset the impact of

weaker oil price on government earnings. Currency repricing, recent oil price stability, and expected moderation in imports

are likely to cap scope for material currency devaluation over the remaining months of the year. Specifically, we expect only a

c.5.0% naira devaluation to N400/$ at the I&E window by year-end vs our fair value estimate (FVE) of N445/$. Our FVE

reflects Nigeria's external vulnerabilities and expected acceleration in the inflation rate.

Foreign borrowing to provide

temporary respite to FX reserves

The Nigerian FX reserves was in free fall earlier in the year

as risk-off sentiments, following the outbreak of the novel

coronavirus and the oil price crash, intensified foreign

capital reversals. However, a recent $3.4 billion loan

facility from the IMF provided timely respite and partly

offset the impacts of softer oil earnings and weaker

investment flows. To further consolidate its buffers,

Nigeria is seeking an additional $2.1 billion in

concessionary borrowing that will also improve its ability

to meet dollar and fiscal obligations in the current year.

While the prospects of concessionary dollar

borrowings and traditional adequacy measures (8x

import cover currently) suggest that reserves could

be adequate in the near-term, a look into its

composition and the FX demand backlog2 indicates

some latent weaknesses. That said, proposed FX

borrowings and the impact of global travel

restrictions on FX allocation for travel-associated

expenses (c.33.0% of FX outflows) could cap scope

for material currency repricing in the current year.

5.5% The amount by which the CBN

adjusted the currency to ease

the pressure on its reserves.

Similarly, parallel market rate

fell 20% on speculative activity

1Our currency forecasts are done with respect to the I&E window. 2There was a backlog of dollar demand because of recent capital controls and FX shortages

Figure 5: FX reserve composition ($’billions)

18.4

0

36.10

(6.00)

(5.30)

(6.40)

18.40

Gross FX

reserves

Swaps FPIs FGN & Fed

portion

Net FX reserves

Source: CBN; CardinalStone Research



Weak FPI appetite for OMO bills

worsens currency outlook

Foreign investors had been gravitating towards OMO

instruments due to the attractive yields offered since

2017. However, the money market instruments lost some

allure in recent months on weaker macros, tighter OMO

market restrictions, and stiffer capital controls. Demand

at OMO market auctions tailed off materially at the turn

of the year due to falling rates, macro uncertainties, and

credit rating concerns. Notably, the suspension of

domestic individuals and non-bank institutions from the

OMO market reduced liquidity, increased the

counterparty role of the central bank, and irked foreign

investors.

Foreign portfolio flows have been a crucial piece of naira

defense in recent years. Yet a weaker yield spread over

US treasury bill (relative to peers), frailer macro indices,

and firmer capital restrictions could weigh on foreign

investors' sentiments in the second half of the year. The

fallouts are likely to weaken the capacity for currency

interventions and increase reliance on dollar borrowings

on the fiscal side.

Modest FX repricing likely

The fundamental argument for the naira remains weak,

with twin deficits across current and fiscal balances as

well as elevated inflation expectations likely to pressure

rates. Even after accounting for expected foreign

borrowings, Nigeria’s external buffers (foreign reserves

of $36.2 billion and excess crude account of c.$71

million currently) are likely to remain vulnerable to

capital flight and import pressures amid one of the

worst oil crises since the Gulf war.

In line with our earlier expectations, speculative

activities have caused parallel market rates to diverge

from those of other windows, and trade beyond our fair

value. In our view, the direction in this market is likely

to be driven by developments in external buffers, the

body language of the apex bank, and supply/demand

dynamics. The CBN may eventually adopt a partial naira

repricing in 2020 given the potential knock-on effect on

the populace, who are also bracing up for electricity

tariff adjustments.

Due to the recent recovery in

oil price and scope for more

concessionary borrowing, we

now see scope for only a

moderate depreciation of the

naira to N400/$ at the I&E

window by year-end.

However, our fundamentally

obtained fair value remains

N445/$ even though the

reality of CBN’s currency

management makes a full tilt

to market-driven pricing highly

unlikely this year.

We are neutral in our currency expectations for the rest of the year following the earlier adjustment by the central

bank and elevated rates at the parallel market. Our investment view is therefore two-pronged:

1. Investors who require exposure to USD and are already long should hold . Those with significant exposures

without matching future obligations can take some profit, to mitigate against near term impact of a stronger

naira in the black market

2. Investors can seek or increase exposure to USD for diversification purposes only, given expensive black

market rates with muted upside potential in the near term. We favour a 75/25 NGN/USD portfolio

diversification

Investment View

Figure 6: FX utilization by sectors

24%34%

10% 5% 6% 3%

9%

9%

8%7% 9%

5%

21%

28%

26%

17%16%

10%

38%

18%

49%

65% 63%76%

Q4'15 Q4'16 Q4'17 Q4'18 Q4'19 Q1'20

Minerals & oil Agriculture Transport Manufacturing Food Industrial Invisibles



INVESTMENT VIEWS

Nigeria is close to an economic recession, and its fixed-

income yields are near multi-year lows. This combination

is driving unease amongst investors. Despite the anxiety,

we believe investment-related decisions should be

approached through the lens of an overall financial plan to

ensure that assets align to specific needs and investment

horizon. For the long-term equity investor, for instance,

current volatilities must not distract from the opportunity

to average down cost on fundamentally compelling

counters. In this recessionary phase, we recommend

tilting equity portfolios towards quality and yield, with a

keen eye on potential catalysts from corporate actions.

In fixed income, corporate Eurobonds may provide yields

comparable to those of domestic sovereign instruments

while allowing for a currency hedge. We, however, note

the need for investors to ensure adequate compensation

for credit risks and higher probability of defaults. Within

the domestic fixed income market, investors are likely to

stay short ahead of a possible low liquidity-induced yield

reversal in the final quarter of the year.

How do you invest in a low yield environment?


INVESTMENT VIEWS

Equities: The bold seeks

Alpha even in a sinking

ship

Global equities delivered broadly negative returns in H1’20 against a backdrop of weakening growth and declining trade

interactions. Locally, market performance was affected by the differing sentiments of domestic (institutional and retail)

investors and foreign portfolio managers in H1’20. On the former, CBN’s restriction of local non-bank financial institutions

and individuals from participating in OMO programs resulted in a significant increase in idle liquidity, some of which

eventually flowed to equities with the allure of fixed income market reduced by expansionary measures of the apex bank.

While the lack of viable options forced some domestic investors into stocks, foreign interest in Nigeria’s market waned on the

back of credit ratings worries, oil price weakness, currency concerns, and potential earnings tail off.

Nigerian equities could remain

underwater in 2020

Despite some recent resurgence, Nigeria’s stock market

could close the year in the red if deployed stimulatory

measures fail to compensate for macro setbacks. By our

estimates, the cumulative fiscal and monetary response to

tackling the ongoing coronavirus-induced economic

slowdown in Nigeria amounts to only 3.0% of GDP. This

stimulus pales in comparison to that of South Africa (10.0%)

and Brazil (6.5%) even though both countries were not as

exposed to the equally dire strait of falling commodity

prices. The grimmer outlook for Nigeria reflects the

additional strain that weaker oil economics can impose on

its mono-product economy. Besides, there are genuine

concerns that a full resumption of CBN dollar sales to

foreign portfolio investors could see renewed foreign sell-

offs overrun the bullish strides from domestic participants.

In a word, if you take away the few opportunities for

tactical positionings, the equities market may struggle to

attract significant buying interest for the rest of 2020.

In the end, the roar of foreign

bears may scare off a few

domestic bulls, but tactical risk

-takers could still outperform

even in a sinking ship

Figure 7: Domestic bulls harped on bargain hunting amid FPI exits in H1’20

7

-1 -8 -1

6 1

-33-20 -20 -23 -33

-65

-11-5

4

-93

4

-5 -3

29 20 20 22 3464

12

Ap

r-19

May

-19

Jun

-19

Jul-

19

Au

g-19

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan-

20

Feb

-20

Mar

-20

Ap

r-20

Net FPI to equities (N'bn) Net domestic flows to equities (N'bn)

Source: NSE; CardinalStone Research


INVESTMENT VIEWS

The search for quality and yield

could be justified

In our view, it is difficult to accurately predict the depth

or duration of the current economic downturn due to

the high volatility of macro variables. Yet investors

should brace for near-term declines in stock markets as

Q2’20 company scorecards are released. In this

environment, we expect investors to gravitate towards

stocks with track records of high profitability, low

financial leverage, and less margin volatility. Such

counters could provide critical buffers for portfolios in

the current year. Specifically, retained earnings from

prior successful years could support current dividend

payments, which could, in turn, augment portfolio

returns during market downturns. Within our coverage

universe, companies with high profitability, low

operating margin volatility, and consistent dividend

payout include GTB, ZENITH, UBA, DANGCEM, and

NESTLE. Some of these stocks also satisfy the need for

higher yield (relative to FIs) and have more stable risk

profiles than regular stocks.

Passivity may be heavily punished

in the current year

Proactive positioning in stocks that are targets of

restructurings, acquisitions, and other corporate actions

could also improve equity returns within portfolios. For

this to work, proper market timing with a keen eye on

oil market developments are likely to be sin qua non.

Passive investors who seek to replicate the NGSE may

experience negative returns in 2020, even though

valuation metrics (such as P/E) suggest that current

dynamics present attractive entry opportunities for

medium-to-long-term investors.

All in, while near term-risks of weaker oil price, macros,

and corporate earnings are somewhat obvious, the viral

spread could have a relatively longer-term impact on

consumer spending, dividend payments, share

buybacks, and other corporate actions. These hazier

potential impacts could be critical to equities

performance in the coming year.

Retained earnings from prior

successful years could support

current dividend payments,

which could, in turn, augment

portfolio returns during

market downturns.

74

30 29 29 24 22 2217

72 3 7 5 8 4 3 2

6

NESTLE GUARANTY OKOMU DANGCEM STANBIC PRESCO ZENITH UBA WAPCO

Mean ROE (%) Operating margin volatility (%) Mean operating margin volatiltiy across coverage (%)

Figure 8: Coverage names with highest profitability and low volatility (5-year average)

Source: Bloomberg; Company financials; CardinalStone Research

Market timing is key. For instance, expected sell-offs on

weak Q2 earnings could provide attractive entry

opportunities.


INVESTMENT VIEWS

Fixed Income: Liquidity glut may

pave way for market

fundamentals by year end

Bond and treasury bill yields sustained their downward trajectory from Q4 2019, mostly driven by the liquidity deluge

triggered by the CBN OMO ban on domestic investors. Although bond yields edged higher in March as foreign investors took

flight amid coronavirus fears and plummeting oil price, yields reverted to a downward trajectory shortly after as market

liquidity offset macroeconomic frailties. We expect fixed-income yields to continue its downtrend through Q3’20 on

sustained liquidity pressure, and slowly reverse trajectory in Q4’20. This yield reversal is likely to be driven by lower OMO

maturities and macroeconomic weakness.

Play short in the interim

Fixed income Investors should play in short tenor bills or

fixed deposits in the interim, given the heightened level

of macroeconomic uncertainty and the likelihood of a

reversal in yield trajectory before year-end. Notably, a

slowdown in OMO maturities1 from October onwards

could accentuate the impact of higher sovereign bond

issuances, slowdown in pension contributions2, double-

digit inflation, and expected current account weakness.

Consequently, we envisage a fourth-quarter rebound in

yields to between 11.5% and 12.5% on long-dated papers.

For the benchmark 5-year note, we expect yield to be

between 8.0% and 9.0% in the quarter. Our view

incorporates the likelihood that the FG could frontload

borrowing to opportune moments in Q3’20 when the

system would be awash with liquidity.

We expect a reversal in fixed-

income yield in the last

quarter due to lower OMO

maturities and

macroeconomic weakness.

1The reduction in OMO issuances after the suspension of domestic individuals and non-bank institutions from OMO market activities in October 2019 is expected to result in lower OMO maturities from October 2020 onwards 2Increase in worker lay off could reduce pension contributions. Nigeria also experienced a fall in pension contributions during the last recession

1.8

2.3

0.7

0.9

0.60.5

0.3

0.5

1.21.3

0.0

0.5

0.20.1

0.3

0.0 0.10.3

0.20.3 0.3

0.2

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-2 0

OMO maturities NTB maturities

Figure 10: OMO maturities will thin out in Q4’20 (N’trillions)


0

2

4

6

8

10

12

14

16

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

1Y 5Y 20Y

Source: FMDQ; CardinalStone Research

Figure 9: Bond yields (%) contracted in H1’20 despite macro

weaknesses


INVESTMENT VIEWS

Ramp-up in intervention spending

could improve liquidity

We are cognizant that our projected fixed income

trajectory may be subject to an usually high degree of

uncertainty as the interaction of coronavirus pandemic

and healthcare systems may be influential determinants

of market direction. While the number of coronavirus

cases has risen sharply, the death toll, which often lags

case numbers, remains inexplicably muted. If the death

and hospitalization outcomes are better than feared by

year-end, we may see improved appetite for FGN notes.

However, a surge in the death toll may hasten selloffs

and drive yields beyond our forecasted ceiling of 12.5%.

That said, a further ramp-up of intervention spending

could bloat system liquidity and cap the scope of yield

reversal.

Domestic over sovereign Eurobonds

Our prior prognosis for the currency was for investors to

go long on the greenback by taking advantage of

undervalued FGN sovereign Eurobond instruments

yielding over 14.0% at the time. With Eurobond yields

now between 6.0% and 9.0% across tenors, investors

would have realized gains on the capital appreciation and

currency fronts if they had adopted our strategy.

However, considering that Eurobond mispricing has

largely normalized, we believe the investment case for

dollar FIs is significantly weaker than before. In any case,

naira depreciation at the parallel markets has eroded the

likely upside given that investors are mostly able to

access dollars in this market at expensive rates because

of CBN's subsisting restrictions. We, however, do not

dispute that dollar FIs are still useful longer-term hedge

against inflation and currency shocks.

Corporate Eurobonds could buoy

portfolio returns

For investors who missed out on Nigerian sovereign

Eurobonds earlier in the year and desire foreign currency

exposures, diversifying into corporate Eurobonds may

provide yields comparable to domestic sovereign

instruments and allow for a currency hedge. Although

corporate Eurobond issuances are currently few and far

between, we believe that with yields above c.9%, select

Eurobonds could return favourable yield in the near-term

and provide a currency hedge beyond 2020. While local

investments denominated in USD will inevitably be

sensitive to macroeconomic developments and oil price

volatility, the current bank and non-bank issuers possess

sufficient dollar buffers to meet their outstanding dollar

obligations. We particularly like FIDELITY, ZENITH, UBA

and SEPLAT.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

May-19 Aug-19 Nov-19 Feb-20 May-20

Figure 12: FIDELITY Eurobond 2022 yield trend


Figure 11: Sovereign Eurobond 2023 yield trend



INVESTMENT VIEWS

How do you structure a winning

portfolio?

We recommend the spreading of investments across different asset classes to minimize risks and potentially increase

returns over the next 12-months. Our hypothetical portfolio, therefore, assigns weights to equities, fixed-income, and other

alternatives.

Equities

We construct a CardinalStone Hypothetical Power (CHP)

portfolio. The companies in the portfolio comprise

coverage names that meet our selected defensive criteria

of strong ROE, low earnings volatility, and relatively

moderate financial leverage. These stocks also have

attractive upside potential for 2020 based on our target

prices and are relatively consistent with dividend

payments. In line with these criteria, we selected nine

stocks from banking, agriculture, consumers, and cement

sectors. We expect these stocks to outperform their peers

over the next 12-months. As always, market timing is key.

For instance, expected sell-offs on weak Q2 earnings could

provide attractive entry opportunities.

Fixed Income

We suggest a cautious approach to fixed-income investing

in the near-term amid heightened levels of

macroeconomic uncertainty and the likelihood of a

reversal in yield trajectory in the final quarter. Notably, a

slowdown in OMO maturities from October onwards could

accentuate the impact of higher sovereign borrowing and

latent currency risks. We recommend a fixed income

portfolio consisting of a mix of domestic sovereign

instruments and select corporate Eurobonds to buoy

portfolio returns and provide a currency hedge.

Alternatives

We favour precious metals, such as gold over cyclical

commodities considering the current uncertainties.

Subdued economic growth prospects and relatively lower

interest rates reduce the opportunity cost of holding

precious metals. Investors, however, should be wary that

quicker than expected recovery may change the outlook

on precious metals and reverse that of cyclical. In private

markets, investors could uncover high-quality cyclical

assets at modest price multiples.

5-year mean

ROE (%)

Operating margin vola-

tility (%)

Debt/Equity (Last full year,

%)

12-month TP (N)

UPP (%) Expected

dividend yield (%)

Portfolio weight (%)

Weighted return (%)

ZENITH 21.7 3.4 80.1 22.67 44.9 14.9 13.0 7.8

GUARANTY 29.6 3.3 40.0 31.37 45.9 11.3 13.0 7.4

DANGCEM 28.8 4.9 42.0 186.40 47.9 7.2 10.0 5.5

STANBIC 24.5 8.0 230.9 39.61 36.6 7.0 12.0 5.2

WAPCO 7.4 6.1 18.6 15.40 40.0 5.9 9.0 4.1

NESTLE 73.9 1.7 29.2 1445.22 23.8 6.0 13.0 3.9

UBA 17.2 1.5 176.6 7.70 25.2 14.1 8.0 3.1

PRESCO 22.4 4.1 89.5 58.22 22.7 4.2 11.0 3.0

OKOMU 29.1 7.0 30.8 82.12 16.5 5.7 11.0 2.4

42.5 Expected return (%)

Figure 13: CHP portfolio and expected total return of 42.5% in 12-months



SECTOR OPPORTUNITIES

Across our equities coverage, we have a broadly positive

view on banking, cement, and agriculture stocks. Although

banking and cement are traditional cyclical sectors, the

evolution and peculiarity of Nigerian markets have

morphed them up with some defensive attributes. For

evidence, the banking coverage houses four of the ten top

stocks ranked in terms of profitability, earnings volatility,

and leverage ratios over the last five years. No doubt,

some lessons were learnt from the oil price plunge of 2014

-2016 that led to material increases in non-performing

loans and impairment charges across coverage names. A

recourse to improved risk management framework and a

scale down of exposures to volatile oil & gas sector has

provided some stability for Nigerian banks. At the other

end, the Nigerian cement sector is arguably the most

protected in Africa, with government regulation

completely stifling imported competition and ensuring

that prices are at a significant premium to those in

neighbouring markets. Similarly, the agriculture sector

currently boasts some of the most evident government

support frameworks in the country. Government's plans to

diversify the income base of the country and provide

employment are likely to leave the sector in the good

books of regulators in the foreseeable future.

Sector Opportunities

Ferreting out potential winners amidst uncertainties

*We converted our naira forecasts using an exchange rate of N386/$ for coverage names in the sector/company part of this report. This is to aid comparison across forecast years.



Nigerian Banks: A litmus

test of resilience

COVID-19 pandemic holds several ramifications for banks in 2020. Following strong Q1 earnings, we envisage a slowdown in

Q2 reflecting the impact of lockdown measures enacted during the quarter. We project a mild improvement in Q3 and Q4 as

the economy opens up in phases. Specifically, interest income could be impacted by lower asset yields and loan

restructurings. Organic loan growth could slowdown on less favourable macro conditions and asset quality fears. Deposit

growth could ease as households increase consumption at the expense of savings due to shrinking disposable incomes.

Prudential ratios (capital, liquidity and asset quality indicators) are likely to be severely tested.

Organic loan growth could

slowdown on frail macro conditions

While it is likely that FX impact could support the value of

banks’ credit assets through the year, it is our view that

organic credit extension may falter in subsequent

quarters. Our broad views regarding banks’ lending in

subsequent quarters reflect the following:

1. The recent fiscal and monetary initiatives in

support of both Healthcare and Agriculture sectors

may signify lending opportunities for banks.

Likewise, the COVID-19 induced acceleration in

adoption of digitalization by households,

businesses and government could support ICT

lending

2. Lending to strategic sectors such as Oil & Gas and

Manufacturing (41.0% of sector credit) is likely to

be soft, with increasing focus on managing already

existing relationships and assets. However, we

note that specific opportunities may exist for

quality obligors with working capital and CAPEX

needs

3. A sustained easing of lockdown measures across

other sectors including transportation,

entertainment and hospitality could present

opportunities for cautious lending

4. Consumer credit growth is likely to slow on higher

default fears. This potentially reflects weaker

disposable income and the increasing likelihood of

job losses

49.1%

-6.1%

10.7%

30.0%

15.4%21.2% 18.8%

22.1%

0.4%

10.2% 7.1%3.4%

7.8%15.1%

9.3% 11.3%

ACC

ESS

FB

NH

FC

MB

FID

ELI

TY

GT

B

ST

AN

BIC

UB

A

ZE

NIT

H

FY'19 Q1'20

Source: Company financials; CardinalStone Research

Figure 14: Banks are unlikely to replicate Q1’20 loan growth in

subsequent quarters

Figure 15: Weaker Oil & Gas and Manufacturing lending

(41.0% of total loans) could slowdown organic lending

Source: NBS; Company financials; CardinalStone Research



Asset quality to deteriorate, but a

2009 or 2017 repeat is unlikely

We acknowledge the threat posed by the COVID-19

induced macro weaknesses, as well as the fluctuations

in global market and financing conditions to Nigerian

banks, and expect these risks to reflect in banks’ NPL

ratios through FY’20. Nonetheless, we hold the view

that a reversion to 2009 (37.3%) or 2017 (14.8%) levels

could be far-fetched. Our stance is premised on the

CBN’s regulatory forbearance for banks to restructure

potentially affected loans. Over 32.9% of sector loans

have been identified for potential restructuring, which,

if granted by the CBN, would ease the NPL pressure.

Also, while Oil & Gas loans (26.6% of industry loans)

have elicited the most concern due to falling oil prices,

we argue that a considerable amount of banks’

exposures appear to be restructured facilities, a fallout

of the 2014—2016 crises, and thus expect the

repercussions to be less severe than initially feared. This

view is also buttressed by indications that of banks’

total requests for restructured facilities, Manufacturing

and General Commerce loans constitute the bulk,

according to the monetary authorities.

CBN’s persistent CRR debits

threaten sector liquidity

We view CBN’s discretionary CRR debits as diametrically

opposed to the LDR measure pushing for increased

credit creation. While we cognize the rationale for these

incessant debits—to stymie currency speculation and

ease FX pressure—we note its bi-faceted consequence:

rising interbank borrowings with its associated costs,

and plunging liquidity ratios. For context, FCMB grew its

interbank borrowings in FY’19 by nearly two-fold, with

STANBIC (+55.3%) and UBA (+52.8%) also heavy

borrowers. In Q1’20, FBNH (+37.9%), STANBIC (+78.8%)

and UBA (+50.3%) were among the heaviest reliers on

interbank borrowings to support liquidity levels.

Already, the CBN has hinted that it is aware of these

risks and knows the level of liquidity needed to both

drive growth and ensure systemic stability. As a result,

our assessment is that given the considerable amount

of banks’ cash sitting with the CBN, it is unlikely the

regulator will let banks slide beneath its defined

liquidity threshold. We also expect that at some point,

the monetary authorities may take a softer stance in its

LDR-related and discretionary CRR debits given

considerably weaker macro conditions, currency

devaluation and the slow pace of inflation uptrend.

As with NPLs, expected credit

losses (ECLs) are likely to increase

in FY’20 to reflect weaknesses in

the economy. However, we

believe that a potential surge in

credit impairments could be

moderated by regulatory

forbearance and the COVID-19

induced leeway regarding banks’

application of IFRS 9 ECL

requirements.

0.0%

50.0%

100.0%

150.0%

200.0%

ACCESS FBNH FCMB FIDELI TY GTB STANBIC UBA ZENITH

FY'19 Q1'20 Reg requirement

30.2% The rate at which coverage banks

grew interbank borrowings in

Q1’20 (FY’19: +50.4%) likely in

response to CBN’s persistent CRR

debits.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Figure 16: NPL ratio has been recovering from recession highs Figure 17: Banks’ liquidity ratio moderated in Q1’20 on average

Source: NBS; Company financials; CardinalStone Research Source: NBS; Company financials; CardinalStone Research



CBN’s interest rate cut bodes well

for funding costs

While current circumstances suggest that banks’

earnings are likely to be challenged in FY’20, the latest

cut in the policy rate could portend positively for banks’

funding costs. Our analysis suggests that FBNH, with the

largest savings deposit base in the industry, is likely to

be the biggest winner with over N3.5 billion in potential

interest cost savings. UBA (N2.4 billion), ACCESS (N2.4

billion) and ZENITHBANK (N2.1 billion) are other big

winners. ACCESS most notably benefitting from its low

cost deposit acquisition from the now defunct Diamond

Bank.

2.3

3.5

0.8 0.9

1.9

0.3

2.4

2.1

ACCESS FBNH FCMB FIDELITY GTB STAN BIC UBA ZENITH

COVID-19 related shocks could

burrow into banks’ capital buffers

Higher loan losses and the FX impact on risk-weighted

assets are likely to put a dent on banks capital adequacy

ratios in FY’20. Other than FBNH (15.5%), FCMB (17.2%)

and FIDELITY (18.3%), all other banks in our coverage

are at least 500 bps above the regulatory capital

adequacy ratio requirement, per latest audited

numbers, increasing their likelihood to absorb potential

losses.

Assuming a 10% rise in risk-weighted assets (RWA),

banks within our coverage can potentially absorb N62.3

billion on average in potential losses based on FY’19

numbers, with GTB (N172.3 billion), ZENITHBANK

(N153.9 billion) and STANBIC (N89.5 billion) having the

largest buffers. In contrast, FBNH would need to

capitalize as much as N31.8 billion in retained earnings

and qualifying tier 2 capital to achieve regulatory

minimum levels and an additional N66.4 billion to

create a 200 bps buffer which is our minimum comfort

level. Likewise, though likely to stay above regulatory

minimum in our scenario, ACCESS, FCMB and

FIDELITYBK would need to capitalize N32.1 billion,

N17.0 billion and N4.9 billion, respectively, in retained

earnings and qualifying tier 2 capital to achieve a 200

bps CAR buffer.

Finally, we evaluate that STANBIC1 (+800 bps), GTB

(+750 bps), ZENITHBANK (+380 bps) and UBA (+350 bps)

would have considerable capital legroom (in excess of

200 bps over minimum capital requirements) in the

event of a 10% and 15% rise in RWAs.

SCENARIO 1: Impact of a 5% growth in RWA on CAR

Bank FY'19 regulatory

capital (N’billions)

Minimum capital requirement

(N’billions)

Capacity to absorb losses

(N’billions) Impact on CAR FY’19 CAR

ACCESS 538.72 480.76 57.96 16.8% 17.6%

FBNH 466.35 475.48 (9.14) 14.7% 15.4%

FCMB 191.51 175.63 15.87 16.4% 17.2%

FIDELITY 214.06 184.38 29.68 17.4% 18.3%

GTB 517.50 329.47 188.03 23.6% 24.7%

STANBIC 201.54 106.93 94.61 18.8% 19.8%

UBA 268.11 207.09 61.02 19.4% 20.4%

ZENITH 759.32 577.93 181.39 19.7% 20.7%

1STANBIC’s regulatory minimum CAR is 10% versus 15% for other banks in our coverage

Figure 18: Potential interest cost savings following MPR cut

(N’billions)









(N’billions)



ACCESS 538.72 503.65 35.07 16.0% 17.6%

FBNH 466.35 498.13 (31.78) 14.0% 15.4%

FCMB 191.51 184.00 7.51 15.6% 17.2%

FIDELITY 214.06 193.16 20.90 16.6% 18.3%

GTB 517.50 345.16 172.34 22.5% 24.7%

STANBIC 201.54 112.02 89.52 18.0% 19.8%

UBA 268.11 216.96 51.16 18.5% 20.4%

ZENITH 759.32 605.45 153.87 18.8% 20.7%





(N’billions)



ACCESS 538.72 526.54 12.18 15.3% 17.6%

FBNH 466.35 520.77 (54.42) 13.4% 15.4%

FCMB 191.51 192.36 (0.85) 14.9% 17.2%

FIDELITY 214.06 201.94 12.12 15.9% 18.3%

GTB 517.50 360.85 156.65 21.5% 24.7%

STANBIC 201.54 117.11 84.43 17.2% 19.8%

UBA 268.11 226.82 41.29 17.7% 20.4%

ZENITH 759.32 632.97 126.35 18.0% 20.7%





ACCESS BANK PLC

Cost pressures could impede earnings growth

We forecast weak earnings for FY’20, dragged by higher ECLs

amidst increasing operating cost burden. Our estimates assume

cost of risk rising nearly two-fold to 1.2%, while cost to income

ratio edges 50bps higher due to COVID-19 induced delay in

actualizing some merger synergies.

We expect net interest income to be pressured by moderating

asset yields and weaker loan growth (+7.0%). However, it is

likely that NIM could avoid a steeper fall on realization of some

post-merger funding cost synergies.

We see scope for NIR improvement, partly supported by

potential trading gains compared to net trading losses in FY’19.

We view the N84.3 billion derivative gains in Q1’20 as largely

one-off and project lower potential gains in subsequent

quarters. We also see NIR support from loan recoveries (N15

billion as at Q1’20) but expect the pace to slowdown in

subsequent quarters. Net fee income could flatten (-1.5% YoY)

on COVID-related weaknesses.

We worry about efficiency for ACCESS in FY’20. Although

Management has alluded to improved cost synergies (c.N33.0

billion in potential savings), we note that some expense lines

are already at, or more than, 50.0% of amounts incurred over

FY’19 and could potentially worsen. In effect, our projected

15.3% growth in pre-provision income for FY’20 could be

undermined by a 16.2% jump in operating costs.

Valuation

Following adjustments to our estimates we slash our 12-month

Target Price (TP) to N7.82 (previous: N11.97). Our TP implies a

28.0% upside to our ref price, hence we retain our BUY rating.

BLOOMBERG: ACCESS NL

BUY

Target Price: N7.82

Ref Price: N6.10

Upside/(Downside): +28.0%

Market Cap: N216.8 bn

Financial Summary 2018A 2019A 2020E 2021F 2018A 2019A 2020E 2021F

N’millions $’millions

Net interest income 173,578 277,229 262,900 300,889 450 718 681 780

Non-interest income 138,229 112,109 185,905 161,599 358 290 482 419

Net impairments (14,657) (20,189) (39,842) (28,421) (38) (52) (103) (74)

Operating costs (193,962) (253,770) (294,845) (295,101) (502) (657) (764) (765)

Profit before taxes 103,188 115,379 114,118 138,966 267 299 296 360

Loans to customers 1,993,606 2,911,580 3,081,126 3,315,136 5,165 7,543 7,982 8,588

Deposits from customers 2,564,908 4,255,837 4,549,611 4,592,768 6,645 11,025 11,787 11,898

Total assets 4,954,157 7,146,610 7,503,941 7,879,138 2,835 8,515 19,440 20,412

Total liabilities 4,463,645 6,536,417 6,816,596 7,101,930 1,564 6,934 17,660 18,399

Shareholders funds 490,512 610,193 687,345 777,208 1,271 1,581 1,781 2,013

Financial ratios FY'19 FY'20 FY'21

NIM 6.6% 5.0% 5.4%

Cost of risk 0.7% 1.2% 0.8%

Cost to income 65.2% 65.7% 63.8%

ROE 17.9% 15.1% 16.2%

ROA 1.6% 1.3% 1.5%

NPL ratio 6.0% 7.2% 6.7%

Loan to deposit 72.9% 73.0% 77.4%

Multiples FY'19 FY'20 FY'21

P/E 2.24x 2.25x 1.84x

P/B 0.36x 0.32x 0.28x

Div yield 10.7% 8.9% 12.5%

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9


ASI ACCESS


1-year price performance (rebased)



ECOBANK TRANSNATIONAL INCORPORATED

Currency risks come to the fore amidst pandemic

The fundamental case for ETI appears to have weakened in light

of COVID-19, considering its impact on loan recoveries, cost of

risk and currency translation (due to the strengthening of the

dollar—ETI’s presentation currency). Consequently, we project a

21.7% fall in FY’20 earnings and revise our price target to N5.72.

We project lower net interest income following rate cuts in ETI’s

key markets. For instance, the Ghana Central Bank crashed rates

to an 8-year low and reduced reserve requirements, while the

Central Bank of West African States (BCEAO) allowed banks to

fill liquidity needs at the floor of its policy rate band.

Non-interest income could slide on lower fees and commission

income. This could be impacted by the downward review of fees

and electronic banking costs by the Bank of Central African

States (BEAC) and BCEAO, similar to measures by the CBN

earlier in the year. We also anticipate a decline in credit fees on

weaker loan growth.

More so, the lender has hinted that the COVID-19 induced

implications for cost of risk could be severe, given its exposures

across Services (24.0%), Oil & Gas (18.0%) and Manufacturing

(13.0%). Also worsening the net impairments is the likely fall in

loan recoveries, which could potentially relate to the impact of

COVID-19 on collateral values and recovering businesses. This is

significant, in our view, given that ETI’s earnings has, in recent

times, largely been propelled by significant loan recoveries.

Valuation

We revise our 12-month target price to N5.72 reflecting

significantly lower loan recoveries, slower pace of recovery in

Nigeria and increased currency risks. However, our revised TP

suggests a potential 34.6% upside to our ref price of N4.25,

hence we retain our BUY rating on the counter.

BLOOMBERG: ETI NL

BUY

Target Price: N5.72

Ref Price: N4.25



0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1


ASI ETI





Net impairments (106,750) (48,317) (76,675) (70,733) (343) (134) (199) (183)

Operating costs (349,041) (388,313) (418,311) (437,106) (1,123) (1,073) (1,084) (1,132)




Total assets 8,195,043 8,621,940 9,370,098 9,838,603 22,582 23,641 24,275 25,489




NIM 4.2% 4.5% 4.4%

Cost of risk 1.4% 2.0% 1.8%

Cost to income 66.2% 69.0% 69.0%

ROE 13.0% 13.0% 13.3%

ROA 1.2% 0.8% 0.9%

NPL ratio 9.7% 11.7% 10.9%

Loan to deposit 60.5% 59.3% 57.5%


P/E 1.41x 1.87x 1.67x

P/B 0.18x 0.17x 0.15x





FBN HOLDINGS PLC

Years of clean-up could soften COVID-19 blow

We project FY’20 earnings to rise 16.1% YoY after normalizing

for the discontinued insurance operations. Key drivers to our

earnings growth include the potential gain from the sale of the

insurance business, lower ECL charges following years of

aggressive credit assets clean-up, and slower growth in

operating costs in line with Management’s guidance.

On regulatory compliance, Management has guided that it can

potentially pull its CAR out of the fringes through earnings

capitalization and the consequent unlocking of Tier 2 capital.

Also, with over N1.5 trillion sitting in the coffers of the CBN as

cash reserve, the lender is confident that it will not breach

defined liquidity thresholds. Notwithstanding, we conservatively

retain our concerns and cut our price target to N7.47 (previous:

N8.69) to reflect these risks, but retain our BUY rating.

Specifically, we expect NII to moderate 10.4% on weaker asset

yields but project NIR to rise 6.1% after adjusting for

discontinued operations. Additional upside potential for NIR can

be unlocked by higher than expected FX revaluation and asset

disposal gains.

We see scope for improved efficiency in FY’20 with operating

costs falling 2.0% after adjusting for discontinued operations

and non-recurring expenses. Likewise, cost of risk is forecast to

ease to 2.2% (FY’19: 3.0%) following years of clean-up.

Valuation

Our revised TP of N7.47 (previous: N8.69), implies a 50.9%

upside to our ref price of N4.95, and an exit PB of 0.38x, a

discount to Tier 1 banks median PB of 0.45x. We retain our BUY

rating on the counter.

BLOOMBERG: FBNH NL

BUY

Target Price: N7.47

Ref Price: N4.95

Upside/(Downside): 50.9%


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Net impairments (86,911) (51,133) (46,819) (48,015) (225) (132) (121) (124)

Operating costs (263,706) (314,662) (285,115) (300,778) (683) (815) (739) (779)




Total assets 5,568,316 6,203,526 6,872,836 7,440,618 14,426 16,071 17,805 19,276




NIM 6.4% 5.3% 5.7%

Cost of risk 3.0% 2.2% 2.0%

Cost to income 70.0% 68.0% 65.0%

ROE 12.4% 11.0% 13.0%

ROA 1.3% 1.2% 1.4%

NPL ratio 10.2% 8.2% 8.0%

Loan to deposit 48.0% 49.9% 52.1%


P/E 2.54x 2.42x 1.86x

P/B 0.27x 0.24x 0.22x

Div yield 4.2% 4.3% 16.8%





FCMB GROUP PLC

Earnings could slide on macro woes

We project a 19.8% decline in earnings for FY’20 largely

weighed by higher loan loss provisions and cost pressure.

Consequently, we expect ROE to shrink to 6.7% from 9.0% in

FY’19.

We see scope for net interest income (NII) improvement

supported by moderating funding costs following improvement

in low-cost deposit acquisition (CASA ratio has improved to

73.7% in Q1’20 from 66.8% in Q1’19 and 69.8% in FY’19).

Non-interest revenue (NIR) could potentially slowdown in

FY’20E. (-5.6%) on weaker net fee income. The fall is likely to be

offset by AM fees and revaluation gains. It is likely that the

potential acquisition of AIICO pensions, if completed, might

elevate AM fees on account of a much larger AUM size

(+38.0%), however, we have not factored this in our projections

pending execution of the deal.

We model an 8.8% increase in operating expenses due to the

impact of the reversal of litigation provisions in FY’19, driving a

200 bps increase in cost to income ratio to 71.5%. We project

cost of risk to increase to 2.0% from 1.3% in FY’19 driven by

higher provisioning and lower loan recoveries (c.34.% of net

impairments in FY’18 and FY’19 respectively). Elsewhere, we

view, with concern, Management’s guidance towards

restructuring 50.0% of its loan book as an indication of credit-

related vulnerabilities with potential to impair earnings in

subsequent fiscal years.

Valuation

Following adjustment to our estimates, we cut our 12-month TP

to N1.87 (previous: N2.04) reflecting an exit PB of 0.17x and a

potential 1.3% discount to our reference price of N1.90. Hence,

we retain our HOLD rating.

BLOOMBERG: FCMB NL

HOLD

Target Price: N1.87

Ref Price: N1.90

Upside/(Downside): -1.3%


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Net impairments (14,113) (13,747) (17,245) (18,021) (37) (36) (45) (47)

Operating costs (79,224) (76,901) (83,119) (95,353) (205) (199) (215) (247)


Loans to customers 681,326 754,391 862,269 948,496 1,765 1,954 2,234 2,457

Deposits from customers 821,747 943,086 1,100,701 1,205,187 2,129 2,443 2,852 3,122

Total assets 1,431,298 1,668,505 1,918,781 2,110,659 3,708 4,323 4,971 5,468


Shareholders funds 183,427 200,665 211,331 226,290 475 520 547 586


NIM 5.2% 4.9% 5.0%

Cost of risk 1.8% 2.0% 1.9%

Cost to income 75.0% 73.0% 71.0%

ROE 9.0% 6.1% 8.2%

ROA 1.1% 0.7% 0.9%

NPL ratio 3.7% 4.7% 4.2%

Loan to deposit 80.0% 78.3% 78.7%


P/E 2.17x 3.00x 2.09x

P/B 0.19x 0.18x 0.17x

Div yield 7.4% 5.0% 8.1%





FIDELITY BANK PLC

Loan losses to stymie earnings

We project FY’20 earnings to slide 19.9% YoY, dragged by higher

impairment charges (versus net impairment reversals in FY’19)

and weaker non-interest income due to lower fee-based

earnings. On regulatory ratios, we expect asset quality to

weaken, however, both liquidity (Q1’20: 31.6%) and capital

adequacy (Q1’20: 17.7%) ratios are likely to remain within

regulatory guidance through FY’20. All-in, ROE is likely to come

in weaker at 9.3% in FY’20E but improve to 11.2% in FY’21E.

Net interest income is forecast to improve driven by lower

funding costs. We are, however, worried about the potential

impact of CBN’s interest rate reduction on intervention loans as

c.60.0% of the bank’s on-lending facilities (c.12.5% of total

loans) are likely to be impacted by this measure,

Non-interest revenue could weaken 8.3%, dragged notably by

lower fees and commission income. Likely pressure points

include lower credit and e-Business related fees. A likely respite

for non-interest revenues could come from higher revaluation

gains. As at Q1’20, the bank had $240 million in net FX assets.

We project a modest decline in cost to income ratio to 71.4%

(FY’19: 73.4%), but expect cost of risk to rise to 0.7% from -0.1%

in FY’19 reflecting the likely non-recurrence of impairment

reversals observed in FY’19 and COVID-19 induced credit risks in

exposed sectors.

Valuation

We cut our 12-month TP to N2.04 (previous: N2.30) to reflect

adjustments to our earnings estimate. Our TP reflects an exit PB

multiple of 0.23x (a 10.4% discount to 4-year historical average)

and suggests a 13.8% upside to ref price of N1.79. We retain our

HOLD on the counter.

BLOOMBERG: FIDELITY NL

HOLD

Target Price: N2.04

Ref Price: N1.79



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ASI FIDELITYBK





Net impairments (4,215) 587 (8,376) (8,505) (11) 2 (22) (22)

Operating costs (72,128) (81,992) (83,957) (94,564) (187) (212) (218) (245)


Loans to customers 906,623 1,178,935 1,288,576 1,417,434 2,349 3,054 3,338 3,672

Deposits from customers 979,413 1,225,213 1,360,780 1,485,325 2,537 3,174 3,525 3,848

Total assets 1,719,883 2,114,037 2,325,441 2,557,985 4,456 5,477 6,024 6,627




NIM 5.8% 5.5% 5.7%

Cost of risk -0.1% 0.7% 0.6%

Cost to income 73.4% 71.4% 69.5%

ROE 13.3% 9.3% 11.2%

ROA 1.5% 1.0% 1.2%

NPL ratio 3.3% 5.1% 4.1%

Loan to deposit 96.2% 94.7% 95.4%


P/E 1.82x 2.28x 1.75x

P/B 0.22x 0.20x 0.19x

Div yield 11.2% 6.6% 11.4%





GUARANTY TRUST BANK PLC

COVID-19 pangs to test lender’s resilience

We model a 9.0% decline in FY’20 earnings to N179.0 billion

dragged by higher loan loss provisions (+3.0x) and operating

costs (+10.7%). Positively, we see notable support for earnings

from both FX revaluation and trading gains. Asset quality could

deteriorate to 7.7% (FY’19: 6.5%) due to COVID-19 induced

weaknesses, lower recoveries and devaluation impact on FCY

loans (c.92.0% of Oil & Gas loans are USD denominated).

We forecast a moderate slowdown in net interest income FY’20

as lower asset yields offset the impact of a fall in funding costs.

Non-interest income is likely to increase 4.7% largely due to

revaluation gains and FX trading income which are likely to

offset the projected slowdown in loan recoveries (11.2% of NIR

in FY’19) due to COVID-19 induced decline in collateral values.

We also see possible decline in net fees and commission

income, dragged by lower credit and other transaction related

fees.

Operating expenses (+10.7%) is likely to increase at its fastest

pace in three years, driven by higher regulatory (20.0% of

operating costs) and depreciation & Amortization (19.0% of

operating costs) expenses with cost to income ratio projected at

38.9% (FY’19: 35.6%)

We also model a 2.5x jump in cost of risk to 0.8% reflecting a

potential three-fold rise in loan loss charges to N14.9 billion.

Valuation

Adjustments to our model result in a new 12-month TP of

N31.37 (previous: N39.14), implying an exit PB of 1.16x (a 30.7%

discount to the its 4-year average PB of 1.68x). Our TP suggests

a potential upside of 45.9% relative to our reference price of

₦21.50. We retain a BUY rating on the counter.

BLOOMBERG: GUARANTY NL

BUY

Target Price: N31.37

Ref Price: N21.50







Net impairments (4,906) (4,912) (14,925) (15,018) (13) (13) (39) (39)

Operating costs (127,128) (130,971) (144,961) (160,858) (329) (339) (376) (417)




Total assets 3,287,343 3,758,918 4,134,810 4,548,291 8,516 9,738 10,712 11,783




NIM 10.5% 9.0% 9.2%

Cost of risk 0.3% 0.8% 0.7%

Cost to income 35.6% 38.9% 37.1%

ROE 30.9% 24.1% 25.3%

ROA 5.6% 4.5% 5.0%

NPL ratio 6.5% 7.7% 6.8%

Loan to deposit 61.9% 66.1% 69.5%


P/E 3.24x 3.55x 2.94x

P/B 0.92x 0.80x 0.69x

Div yield 13.9% 11.3% 15.3%

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STANBIC IBTC HOLDINGS PLC

Regulatory prudence gives comfort

We forecast overall earnings to come in weaker in FY’20 (-5.5%

YoY), dragged by higher ECLs amidst slowdowns in net interest

income. Positively, however, we like that STANBIC’s regulatory

ratios are well in line with regulatory guidance: Liquidity ratio at

144.2% (Regulatory limit: 30.0%) and Capital Adequacy Ratio at

17.5% (Regulatory limit: 10.0%).

Net interest income (NII) could moderate on lower asset yields.

Although, it is likely that lower funding costs could cushion the

fall in NIMs, reflecting the bank’s recent initiatives towards

replacing its more expensive deposits with cheaper alternatives

which have improved to 86.7% of total deposits (vs 65.9% and

76.2% in FY’18 and FY’19 respectively).

We forecast a modest growth in non-interest revenue (+5.4%),

helped by higher Asset Management fees (57.0% of fee income)

which could offset a potential weakness in other fee incomes.

Also supporting NIR is our forecasted 18.0% growth in trading

revenue for the year.

Cost to income ratio (FY’20E: 52.0% vs FY’19: 50.4%) could be

pressured by higher regulatory costs (AMCON charges leapt

40.7% in Q1’20 related to the near 30.0% growth in total assets)

amidst weaker operating revenues. Elsewhere, impairment

charge is forecast to soar more than six-fold due to lower loan

recoveries and higher ECL provisions. Accordingly, we estimate

a 70bps increase in cost of risk to 1.0%.

Valuation

We cut our 12-month TP to N39.61 (previous: N47.14), which

suggests an exit PB of 1.20x, a 35.1% discount to the bank’s 4-

year average of 1.85x. Our TP represents a potential upside of

36.6% to our reference price of N29.00. Hence, we rate the

counter a BUY.

BLOOMBERG: STANBIC NL

BUY


Ref Price: N29.00



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Net impairments 2,940 (1,632) (7,122) (6,267) 8 (4) (18) (16)

Operating costs (95,601) (94,029) (100,094) (118,937) (248) (244) (259) (308)


Loans to customers 458,946 556,383 712,170 783,387 1,189 1,441 1,845 2,030

Deposits from customers 807,692 637,840 1,022,236 1,124,459 2,092 1,652 2,648 2,913

Total assets 1,663,661 1,876,456 2,476,922 2,724,614 4,310 4,861 6,417 7,059


Shareholders funds 239,667 302,229 351,197 408,842 621 783 910 1,059


NIM 4.8% 4.0% 4.1%

Cost of risk 0.3% 1.0% 0.8%

Cost to income 50.4% 52.0% 51.3%

ROE 27.3% 21.7% 23.3%

ROA 4.2% 3.3% 3.4%

NPL ratio 3.9% 5.0% 3.4%

Loan to deposit 87.2% 69.7% 69.7%


P/E 3.97x 4.30x 3.44x

P/B 1.00x 0.88x 0.75x

Div yield 10.3% 7.0% 10.2%





UNITED BANK FOR AFRICA PLC

Higher provisioning could drag ROE

We project a 3.9% decrease in FY’20 earnings to N85.6 billion,

reflecting lower non-interest revenue amidst higher operating

costs and loan loss provisions. This, consequently, pulls our ROE

lower to 14.0% versus 16.6% in FY’19. On regulatory ratios, we

assume a 1.2% deterioration in NPL ratio to 6.5%, while noting

that both liquidity (46.1%) and capital adequacy (20.4%: bank

only) ratios are still comfortably in line with regulatory

requirements.

Net interest income (NII) is likely to benefit from lower funding

costs, though, we remain cautious of the impact of higher

interbank borrowing, possibly fueled by the CBN’s intermittent

CRR debits. NII could also be supported by double-digit loan

growth (amidst falling rates) which the bank is optimistic it can

sustain given opportunities in less exposed COVID-19-sectors

across its key markets.

In contrast, we are less optimistic regarding non-interest

revenue (NIR) expectations on weaker e-business, credit and

trade transaction fees. A likely support, though, could stem

from FX and derivative gains reflecting the bank’s $261 million

long net open position and $1.2 billion in swaps and forward

position with the CBN.

We model a 29.4% increase in loan loss provisions, suggesting a

15bps increase in cost of risk to 1.0%, and expect a 1.4%

increase in operating expenses to drive an additional 80bps

uptick in cost to income ratio.

Valuation

We cut our 12-month TP to N7.70 (previous: N10.06), reflecting

an exit PB multiple of 0.40x and a potential upside of 25.2% to

our ref price of ₦6.15. We retain our BUY rating on the counter.

BLOOMBERG: UBA NL

BUY

Target Price: N7.70

Ref Price: N6.15



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Net impairments (4,529) (18,252) (23,620) (23,384) (12) (47) (61) (61)

Operating costs (197,342) (217,167) (224,140) (243,867) (511) (563) (581) (632)




Total assets 4,869,738 5,604,052 5,662,466 6,151,397 12,616 14,518 14,670 15,936




NIM 6.1% 6.1% 6.4%

Cost of risk 0.9% 1.0% 0.9%

Cost to income 62.7% 63.2% 61.3%

ROE 16.6% 13.9% 15.5%

ROA 1.7% 1.5% 1.8%

NPL ratio 5.3% 6.5% 6.2%

Loan to deposit 56.0% 56.0% 56.0%


P/E 2.38x 2.49x 2.03x

P/B 0.35x 0.32x 0.29x

Div yield 16.3% 14.1% 17.2%





ZENITH BANK PLC

Outlook still favourable despite COVID-19 scare

We project a 9.8% decline in earnings to N186.0 billion driven

by higher impairment charges (+75.5%) and lower non-interest

income (-6.3%). We also model a 1.2ppts deterioration in Stage

3 loans to 8.0%, and forecast ROE to come in lower at 18.8%

(FY’19: 23.8%). Notwithstanding, we hold a favourable outlook

for the lender given its strong capital buffers and earnings

generating capacity. We believe that any potential COVID-19

dent to earnings in FY’20 is likely to be short-lived. Hence,

though we cut our TP to N22.67, we retain our BUY rating.

Net interest income is likely to ease slightly higher (+3.3%) on

lower funding costs as the bank accelerates its low cost deposit

drive. In contrast, we anticipate slower NIR growth on weaker

fee income and trading gains. A respite for NIR is likely from

higher FX revaluation gains.

Operating expenses is likely to be driven by higher regulatory

costs (20.0% of total opex), though the inflationary impact on

other cost items could be muted by lower pressures on

expenses relating to travels, occupancy, entertainment and

general administration. Overall, we expect cost to income ratio

to be relatively unscathed at 47.7% (FY’19: 46.4%).

The growth in impairments is reflective of our assumption of

increased loan provisioning on account of the bank’s exposure

to risk sectors. Consequently, cost of risk is projected to rise 40

bps to 1.6%.

Valuation

We cut our 12-month TP to N22.67 (previous: N28.46) per

share. Our TP reflects an exit PB multiple of 0.68x lower than its

4-year average of 0.86x and suggest a potential upside of 44.9%

relative to our ref price of ₦15.65. We retain our BUY rating on

the counter.

BLOOMBERG: ZENITHBA NL

BUY


Ref Price: N15.65



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Net impairments (18,372) (24,032) (42,180) (40,212) (48) (62) (109) (104)

Operating costs (225,500) (231,825) (235,264) (262,162) (584) (601) (609) (679)




Total assets 5,955,710 6,346,879 7,108,504 7,819,355 15,429 16,443 18,416 20,257


Shareholders funds 815,751 941,886 1,051,975 1,170,364 2,113 2,440 2,725 3,032


NIM 7.1% 6.6% 6.8%

Cost of risk 1.2% 1.5% 1.3%

Cost to income 46.4% 47.7% 47.2%

ROE 23.8% 18.4% 19.4%

ROA 3.4% 2.7% 2.9%

NPL ratio 6.8% 7.6% 7.2%

Loan to deposit 57.8% 59.2% 59.2%


P/E 2.35x 2.68x 2.28x

P/B 0.52x 0.47x 0.42x

Div yield 19.1% 14.9% 19.7%





Consumer Goods: When

will the sleeping giants

rise?

We expect the consumer goods sector to witness material earnings decline in 2020 due to the current health-cum-economic

crisis. Social distancing measures pose a threat to product distribution while supply chain disruptions reduce the scope for

output growth. According to the World Bank, COVID-19 could increase the national poverty headcount by 2.4ppts YoY to

42.5% by year-end; and the implied increase in consumer price sensitivity is likely to limit the ability of coverage companies

to pass on rising cost. In any case, unfriendly regulations and intense competition have already made it difficult for

consumer goods companies to translate the positives from Nigeria’s demographic characteristics into sound financials.

NESTLE:NL could be head and

shoulder above all

ROE averaged 22.7% across our coverage in the last five

years, with NESTLE leading the pack with 73.9%. The

FMCG giant also boasted the second-highest net income

margin and the lowest margin volatility in the review

period. Even though we expect a material deterioration

in profitability metrics in FY’20, NESTLE appears better

positioned to weather the coming storms. DANGSUGAR

also ranked well in terms of defensive measures in the

last 5-years (ROE, margin volatility, and debt/equity ratio

of 27.6%, 4.6%, and 3.4% respectively), but

communicated backward integration efforts are yet to

take profitability metrics to a more desired level. This

delay and the health-induced cap on the growth of sugar

consumption are real concerns.

Brewers may have a tough year

NB and Guinness have seen their profitability shaved off

by rising competition, consumer downtrading, stiffer

regulations, and high promotional intensity. We believe

the competitive landscape has been materially affected

by the activities of International Breweries Plc (INTBREW)

due to the introduction of Budweiser (2018) and

aggressive campaigns in the value brand segment. The

heated competition may have also made it difficult for

players to transfer the burden of sin taxes to final

consumers without jeopardizing market share since

2018.

In our view, NB appears the better-positioned brewer

in the space. The industry leader boasts an average

ROE of 15.7% (vs. 6.8% for GUINNESS) and lower

earnings volatility over the last five years. We,

however, note that while others switched to low

leverage positions in FY’18, NB saw its debt to equity

ratio surge from 4.8% in FY’17 to 33.2% in FY’19. The

implication is that finance expense may provide added

earnings pressure in FY’20 despite moderation in

yields and refinancing efforts.

NB55%Guinness

22%

Interbrew23%


Figure 19: Market share in the brewery space



The buzz around border closures

Nigeria shut its borders to neighbouring West African

nations in August 2019. The objective of the move was to

partly improve the fortunes of some FMCG names that

were burdened by illegal importation of competitive

products. In line with this expectation, DANGSUGAR,

FLOURMILL, and NESTLE reported revenue growths of

29.9%, 16.7%, and 15.1%, respectively, between October

2019 and December 2019 (vs 7.1%, 5.7%, and 6.7%

apiece January through December). In Q1’20,

DANGSUGAR (+24.9% YoY) was able to maintain a decent

revenue growth while NESTLE recorded a surprise 90bps

moderation in sales. Apart from UACN, which was

pegged back by its discretionary segments, our coverage

FMCG companies appear to have witnessed a significant

initial lift after the border closures were instituted,

followed by a moderation in growth in the first three

months of 2020.

In addition to sales volume growth, DANGSUGAR

reported a rare improvement in sugar prices in Q1’20.

Before the border closures, domestic sugar price was

under significant pressure due to the activities of

smugglers. These activities created stiff competition for

local consumer companies (and this includes non-sugar

producers) that are involved in B to C activities. Given

the current health crisis, we expect the borders to

remain shut for longer than was previously expected.

This extended closure is likely to support the top-line

growth of producers heavy in B to C activities in FY’20,

even though margins may be negatively affected by

naira depreciation, reduced access to raw materials,

and high production lead time.

NGN weakness to stoke cost

worries

The naira was adjusted downwards at the official

windows in March 2020 amid depleting dollar earnings

and rising panic-buying at the parallel markets. For us,

this renewed currency pressures is likely to weaken

consumer purchasing power and erode margins in

FY’20. The impact on margins could stem from two

areas: 1.) passthrough from imported raw materials

and 2.) exposure due to foreign currency-

denominated liabilities.

Although concerns on the latter front became sparse

following recent balance sheet restructurings,

exposures related to the former remain widespread.

Across our coverage, we estimate that raw material

exposure to FX is at least 50.0%. UACN, for instance,

imports about 80.0% of its raw materials for paint

production (14.0% of the business) from abroad.

Imported raw materials also constitute 50.0% and

25.0% (apiece) of the raw materials required for

packaged food (22.0% of the business) and animal

feeds (62.0% of operations) segments, respectively.

Similarly, FLOURMILL imports almost 100.0% of its

required wheat (c.62.5% of total raw materials) while

brewers rely on foreign barley. Given these exposures,

we expect foreign currency losses to be commonplace

in the sector in 2020. 7.1%

12.4%

6.7% 5.7%

29.9%

11.7%15.1% 16.7%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

DANGSUGAR UACN NESTLE FLOURMIL

Jan 2019 - Dec 2019 Oct 2019 - Dec 2019

Jan 2020 - March 2020

Figure 20: Revenue growth rates after border closure


80%

63%

50%

50%

40%

20%

DANGSUGAR

FLOURMILL

GUINNES

NB

UACN

NESTLE

Figure 21: Estimated % of imported raw materials




All in, we have a broadly negative FY’20 earnings outlook

for our consumer coverage companies. However, we

believe that NESTLE is slightly ahead of the curve in many

respects. The company’s historically sound defensive

characteristics is already highlighted in this work, but there

are other major arguments for the FMCG giant.

These arguments include:

1. Well diversified product portfolio

2. Market leadership across seasoning and a few

beverage segments

3. Robust distribution networks/outlets

4. High local sourcing of raw materials and packaging

materials

9.3% 12.3%2.0%

6.8%

22.4%

3.1%1.0%

84.1%

1.7%

15.7%

33.2%

4.4%

27.6%

3.4% 4.6%

73.9%

29.2%

1.7%

5-year mean ROE Debt/equity (Last full year) Earning volatility

UACN GUINNESS FLOURMILL NB DANGSUGAR NESTLE

Figure 22: 5-Year ROE, leverage ratios, and margin volatilities of consumer coverage names




DANGOTE SUGAR PLC

Growth could falter on COVID-19 push

We cut our FY’20 EPS forecast for DANGSUGA NL to N1.75

(previous: N1.77). We worry about prolonged delays to

implementation of the Backward Integration Project (BIP) and

possible cost overruns, and thus taper our outlook and cut our

TP by 21.9% to N11.28 (SELL).

Revenues is likely to come in weaker for FY’20 owing to softer

sugar prices and volumes. Although prices appeared to have

risen 5.1% in Q1’20 vs FY’20 average, we note that the slump in

global prices, now forecast to be softer in the 2020/2021 cycle,

and slower demand could force a downward shift in prices.

We project an uptick in production costs as lower sugar prices

are offset by FX constraints and supply chain disruptions.

DANGSUGA NL imports more than 80.0% of its raw sugar needs,

leaving it susceptible to global trade disruptions and FX

fluctuations. These, in addition to higher operating costs

attributable to energy, distribution and rising inflation, could

pressure EBITDA margins (-1.3ppts YoY)

On the BIP, management has guided to protracted delays fueled

by host community relation issues and impact of COVID-19 on

delivery of equipment. We also note impact of currency

devaluation on overall costs to completion, indicating a

likelihood of higher borrowings in the near to mid-term.

Levered free cashflows appear robust, the highest levels in at

least 17 quarters, and solvency ratios (Current ratio: 1.3x; Quick

ratio: 0.8x) appear within our comfort levels

Valuation

Following adjustments to our estimates, we cut our 12-month

TP to N11.28 (previous: N15.84) which is a 6.0% discount to our

ref price of N12.00. Our downward price review reflects an exit

PE of 6.4x, at par with its 5-year average. We rerate the counter

a SELL.

BLOOMBERG: DANGSUGA NL

SELL


Ref Price: N12.00





Revenue 150,373 161,086 160,870 165,935 390 417 417 430

EBITDA 40,135 36,288 35,004 39,758 104 94 91 103


Income taxes (12,625) (7,459) (6,999) (8,015) (33) (19) (18) (21)

Profit after taxes 21,976 22,361 20,997 24,044 57 58 54 62

Total assets 175,117 193,706 197,194 211,191 454 502 511 547

Total liabilities 76,141 85,569 79,288 80,654 197 222 205 209



EBITDA margin 22.5% 21.8% 24.0%

Net margin 13.9% 13.1% 14.5%

RoA 12.1% 10.7% 11.8%

RoE 21.6% 18.6% 19.4%

Asset turnover 87.4% 82.3% 81.3%

Current ratio 129.3% 142.6% 153.4%

Quick ratio 79.2% 84.7% 95.1%

Debt to equity 1.2% 3.0% 3.0%


P/E 6.44x 6.86x 5.99x

EV/EBITDA 4.20x 4.53x 3.94x

EV/Sales 0.79x 0.79x 0.77x

Div yield 9.2% 8.4% 10.0%



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ASI DANGSUGAR



FLOUR MILLS OF NIGERIA PLC

FY’19/20 numbers could come in unscathed

As expected, border closures had a positive impact on FMN in

Q3’19/20. The company grew revenue by 16.7% YoY in the

quarter, with one-third of this growth attributed to the impact

of border closures. Volume increased by 8.0% as the B2C sugar

business, agro-allied, and food segments gained tractions.

Consequently, PBT rose by 22.9% YoY aided by a sharp

contraction in finance cost that was driven by balance sheet

restructuring. We also expect full year earnings growth to be

supported by the base effect implied by the huge tax charge in

FY’18/19. In addition, since naira repricing and COVID-19

lockdowns became effective only in the last month of the full-

year period, passthrough to earnings is likely to be muted.

Warning signs for coming financial year abound

Farther out, we see scope for slight earnings pressure as growth

momentum slows across discretionary segments and naira

devaluation & trade route disruptions take toll on cost. Notably,

restrictions in global trade could impinge on the supply and cost

of wheat, which, according to management, is almost entirely

imported and constitutes 60.0% to 65.0% of total raw materials

required for production. Management also noted slight

disruptions in the supply of enzymes, additives, and spares from

Europe due to lockdown measures. That said, FMN's prior resort

to hedging and repricing of products as well as CBN’s reduction

of lending rates and extension of moratorium could place a floor

on earnings weakness beyond the current financial year.

Valuation

Following adjustments to our model, we cut our 12-month TP to

N21.34 (vs. N25.65 previously). Our TP is at a 25.5% premium to

our ref price of N17.00 and implies a target PE of 7.6x. FMN is

trading at FY'20/21 EV/EBITDA and PE ratios of 4.5x and 6.05x

respectively (compared to 7.0x and 9.0x apiece for select peers).

We have a BUY recommendation on the stock.

BLOOMBERG: FLOURMILL NL

BUY


Ref Price: N17.00





Revenue 542,670 527,405 564,323 524,820 1,406 1,366 1,462 1,360

EBITDA 51,225 33,826 34,233 25,158 133 88 89 65


Income taxes (2,782) (6,174) (4,940) (3,144) (7) (15) (13) (8)


Total assets 408,348 416,822 426,034 442,294 1,058 1,080 1,104 1,146



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EBITDA margin 6.4% 6.1% 4.8%

Net margin 0.8% 2.0% 1.4%

RoA 1.0% 2.7% 1.7%

RoE 2.7% 7.6% 4.5%

Asset turnover 127.8% 133.9% 120.9%

Current ratio 97.6% 118.3% 129.6%

Quick ratio 23.6% 38.8% 50.8%

Debt to equity 84.1% 82.9% 77.0%


P/E 17.43x 6.05x 9.50x


EV/Sales 0.29x 0.27x 0.29x

Div yield 7.1% 5.3% 5.9%





GUINNESS NIGERIA PLC

Impairment loss to compound earnings woes

Sales of alcohol and other recreational drinks could materially

decline in FY’19/20 and by extension in FY’20/21 on stifling

competition alongside coronavirus containment measures. On

one hand, we believe revenues will likely be pressured by the

heightened competition in the local market and limited inflows

from exports due to land border closures. In addition, the

current restrictive measures are likely to remain intact until

the last quarter of the calendar year as new cases of COVID-19

remains on the high side. We forecast FY’19/20 revenue to

decline by 9.9% YoY to N118.5 billion in FY'19/20 and a further

5.8% YoY in FY’20/21. With limited legroom to alter prices to

reflect new excise duties and VAT, we expect gross margin to

remain largely flat at 31.0% in FY’19/20 and FY’20/21 despite

the notable the improvement in 9M’19/20 (32.1%).

PAT is also likely to be pressured by a two-fold YoY jump in

interest expense as well as a forecast N4.0 billion impairment

loss in the current financial year. An increase in short term

borrowings (to finance working capital) and naira devaluation

are likely to be the main drivers of interest expense pressures.

Elsewhere, management has warned that the company will be

recording a significant impairment charge on assets that were

generating sub-optimal returns in FY’19/20. In our view,

Guinness is likely to report an after-tax loss of N3.4 billion in

FY’19/20. We however expect a rebound in FY’20/21,

projecting profit after tax of N2.1 billion. Our estimate is

premised on a slightly lower net finance costs (-20.4% YoY)

amid declining yield environment and impact of the previous

year’s low base.

Valuation

Adjustments to our model result in a 12-month TP of N15.54

for the counter and a 11.8% upside relative to our reference

price. We, therefore, retain our HOLD rating on the stock.

BLOOMBERG: GUINNESS NL

HOLD


Ref Price: N13.90





Revenue 142,976 131,498 118,495 111,605 370 341 307 289

EBITDA 22,788 17,831 9,370 13,726 59 46 24 36


Income taxes (3,226) (1,620) (813) (1,011) (8) (4) (2) (3)

Profit after taxes 6,718 5,484 (3,354) 2,148 17 14 (9) 6

Total assets 153,255 160,793 156,742 151,511 397 417 406 393





Net margin 4.2% -2.8% 1.9%

RoA 3.5% -2.1% 1.4%

RoE 6.2% -3.8% 2.5%


Current ratio 121.5% 142.5% 140.7%

Quick ratio 69.1% 86.0% 83.6%

Debt to equity 22.4% 23.8% 19.0%


P/E 5.55x n/m 14.17x


EV/Sales 0.27x 0.30x 0.32x

Div yield 11.0% 0.0% 5.6%



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NESTLE NIGERIA PLC

COVID-19 to test company’s mettle

We cut our FY’20 EPS forecast for NESTLE to N55.70 (previous:

N71.70) and project lower dividend payout (80.0% vs 4-year

average of 107.3%) reflecting concerns about a potential strain

on cashflows due to COVID-19 induced uncertainties. We expect

ROE to slow to 92.4% (FY’19: 95.4%) and cut our TP by 11.9% to

N1,455.22 (BUY).

We retain our positive top line outlook on sustained household

spend on consumer necessities, although we cut our growth

expectation to 3.0% from 10.0% to account on softer demand

due to sustained ban on large gatherings and events.

Though NESTLE locally sources more than 80% and 90% of its

raw and packaging materials respectively, we anticipate the

impact of global supply disruptions, FX concerns and higher

inflation to lead to weaker EBITDA margins (-4.4ppts).

Bottom line (-3.4% YoY) could be support by lower interest costs

due balance sheet deleveraging in Q1’20. Solvency ratios remain

favourable, though COVD-19 induced working capital needs

could force reopening of short term credit lines. Albeit, this is

unlikely to materially impact interest costs in our view.

Levered free cashflows appear robust, the highest levels in at

least 5 quarters, and could be supported through FY’20 by

possible deferment of planned capex as well as lower finance

costs.

Valuation

We cut our 12-month TP to N1,455.22 (previous: N1,628.39).

Our price review reflects adjustments for slower growth and

lower expected dividend payouts in FY’20—FY’21 fiscal years.

Notable risks to our estimates are reinstatement of lockdown

measures which could adversely disrupt the company’s supply

chain and distribution networks. Our TP reflects a 23.8% upside

to ref price of N1,175, hence, we rerate the counter a BUY.

BLOOMBERG: NESTLE NL

BUY

Target Price: N1,455.22

Ref Price: N1,175.00





Revenue 266,275 284,035 292,556 310,823 690 736 758 805

EBITDA 71,995 79,513 71,459 78,526 187 206 185 203


Income taxes (16,743) (25,441) (18,922) (21,113) (43) (66) (49) (55)


Total assets 162,334 193,374 183,195 190,443 421 501 475 493




EBITDA margin 28.0% 24.4% 25.3%

Net margin 16.1% 15.1% 15.8%

RoA 25.7% 23.4% 26.4%

RoE 95.4% 92.4% 94.0%

Asset turnover 159.7% 155.4% 166.4%

Current ratio 85.3% 89.7% 91.5%

Quick ratio 58.0% 62.4% 62.2%



P/E 21.66x 20.39x 21.09x

EV/EBITDA 12.62x 14.48x 13.09x

EV/Sales 3.20x 3.11x 2.93x

Div yield 5.0% 6.0% 3.8%



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NIGERIAN BREWERIES PLC

COVID disruptions to weigh on earnings

We cut our EPS forecast to N0.89 vs (previously N2.3) to reflect

the potential impact of COVID-19 on operations, higher equity

risk premium, recent naira devaluation and weaker

macroeconomic outlook. Consequently, we update our target

price to N33.4 (previously N66.7) and revise our rating to a HOLD

COVID-19 prompted lockdown measures may drive a contraction

in beer volumes in 2020 due to materially lower activity in the

events and entertainment industry. We expect an 11.6% YoY

decline in revenue to N285.5 billion amid limited scope for price

increases due stiff industry competition We also envisage a

55.7% contraction in PAT to N7.1 billion as material cost inflation

and currency devaluation may eat into gross margins (-2.6 ppts

YoY to 38.0%) and EBITDA margins (-0.8 ppts YoY to 20.2%). On

devaluation exposure, we highlight that its 18.6 million euros net

liability as at FY’19 is likely to offset tamer net asset positions in

USD (8.0 million) and GBP (257 thousand). We recognize

earnings visibility may be shrouded by elevated levels of

uncertainty and thus risks to our estimates are high. Our

assumptions include a strong recovery in Q4’20 to partially

mitigate potential weaknesses in the Q2’20 and Q3’20, however

we do not rule out the possibility of negative earnings in FY’20 if

this fails to materialize.

Lower finance cost may cushion earnings fall - We forecast a

12.8% moderation in finance cost to N10.3 billion as we expect

NB to continue to access favourable rates on its ST borrowings.

Through its commercial paper (CP) program, NB’s weighted

average cost of debt sits at 7.1% YtD vs 13.1% in 2019

Valuation

We value NB using a blended approach of DCF, DDM and P/E

multiples to arrive at our target price of N33.0. Our revised TP

implies a total return of 14.2% ,comprising of a 3% dividend yield

and 11.2% capital appreciation. Thus necessitating a HOLD

recommendation

BLOOMBERG: NB NL

HOLD


Ref Price: N30.00





Revenue 324,389 323,007 285,516 308,557 840 837 740 799

EBITDA 73,214 67,936 57,602 67,388 190 176 149 175


Income taxes (9,984) (7,246) (3,355) (6,475) (26) (19) (9) (17)


Total assets 388,263 382,777 328,600 323,650 1,006 992 851 838




EBITDA margin 21.0% 20.2% 21.8%

Net margin 5.0% 2.5% 4.9%

RoA 4.2% 1.9% 4.1%

RoE 9.6% 4.2% 8.7%


Current ratio 52.0% 52.9% 61.5%

Quick ratio 24.4% 28.1% 35.7%

Debt to equity 33.2% 23.3% 22.3%


P/E 14.90x n/m 15.88x


EV/Sales 0.90x 0.94x 0.82x

Div yield 6.7% 2.3% 6.3%



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UAC OF NIGERIA PLC

FX concerns and weak demand could hurt earnings

Deterioration across key macro indices is likely to affect

consumption dynamics in Nigeria and cascade to an 11.2% YoY

decline in revenue from continuing operations to N70.3 billion

for UACN in 2020. Specifically, we expect pressures from the

discretionary arms of the business (packaged foods & logistics)

to mask revenue gains in animal feeds & edible oil. According to

management, the paints and logistics businesses were tracking

only 25.0% and 75.0% (apiece) of 2019 revenue growth

trajectory during the lockdown having been negatively impacted

by border closures. These tracking rates were lower than that of

animal feeds and edible oil businesses (80.0%), which were

notably lifted by the border enforcements.

The knock-on effect of weaker top-line, naira depreciation,

supply chain disruptions, and double-digit inflation is also likely

to drive EBITDA margin 3.7ppts lower YoY to 6.6% in the current

year (Q1’20: 9.1%). Ultimately, we expect earnings to contract

by 38.9% YoY to N3.3 billion in FY’20. Return on average

equities (from continuing operations) is also likely to decline to

6.6% in FY’20 (vs. 9.9% in FY’19) in our view.

Valuation

We have a 12-month TP of N8.26, which represents a 13.2%

upside relative to our ref price of N7.30 and a HOLD

recommendation by our ratings scale. Expected earnings

weakness suggests that fundamental catalysts to share prices

are likely to be scarce in the next two quarters. However, a

confirmation of the UPDC & UPDC REITS unbundling programs

could drive share price slightly higher.

The key risks to our expectations include volatilities of raw

material prices, further naira devaluation, and a delay in

planned unbundling/restructuring programmes.

BLOOMBERG: UACN NL

HOLD

Target Price: N8.26

Ref Price: N7.30


Market Cap: N21.0bn



Revenue 70,474 79,202 70,323 81,458 183 205 182 211

EBITDA 5,949 8,107 4,609 5,905 15 21 12 15


Income taxes (1,838) (2,111) (1,538) (1,688) (5) (5) (4) (4)


Total assets 130,972 107,595 106,031 111,341 339 279 275 288





Net margin 6.7% 4.6% 4.4%

RoA 4.5% 3.1% 3.3%

RoE 9.9% 6.6% 7.0%


Current ratio 174.3% 165.4% 171.8%

Quick ratio 111.5% 81.8% 85.2%

Debt to equity 12.9% 13.6% 14.4%


P/E 5.53x 6.44x 5.86x


EV/Sales 0.11x 0.13x 0.11x

Div yield 1.4% 1.4% 1.6%



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Upstream Oil & Gas:

Uncertainty encapsulated

Hard to bet on oil prices amidst

coronavirus

COVID-19 decimated global oil demand, with lockdown and

containment measures leading to high inventory stockpiles.

In May, OPEC forecasted a 9.1% YoY contraction in average

oil demand to 90.59 mb/d for 2020. This expectation also

firmed up its resolve to extend its sharpest coordinated oil

production cut in history (c.9.7MB/d) by another month in

June, even though compliance level has been low across a

few countries. So far, gradual reopening of economies and

output curtailment in non-OPEC+ zones have also

supported prices. Yet COVID-19 fears and non-compliance

to agreed cuts are key risks to the oil price outlook, with

countries like Nigeria reportedly in violation in April and

May. All considered, supply glut is expected to be

significantly wider in 2020 despite anticipated moderation

in demand weakness in H2’20.

Nigeria achieved only a 52.0% compliance rate to OPEC+

agreement in May as production fell by 260kb/d MoM to

1.61mb/d. Historical records of non-compliance and the

new budget assumption of 1.8mb/d suggest that the

country is unlikely to achieve 100.0% compliance in the

coming months. In our view, domestic oil production is

likely to average 1.55 mb/d (ex-condensates) in 2020.

Elsewhere, we forecast 2020 average price of Nigeria’s

crude at $35/bbl (vs $38.02/bbl for Brent in EIA estimates).

The implied downside to Brent reflects increasing

competition for a declining consumer base. We recall that

Nigerian blends sold for as low as $10/bbl in April (Brent

April average: $27/bbl) as a flotilla of cargoes at the ports

heightened concerns over insufficient storage spaces

globally.

Figure 23. Supply glut is likely to widen in 2020 (mb/d)

Source: OPEC; CardinalStone Research

98.899.7

90.6

99.7 99.6

93.1

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2.0

2.5

3.0

86.0

88.0

90.0

92.0

94.0

96.0

98.0

100.0

102.0

2018 2019 2020E

Global demand Global supply Supply glut

1214 15

19

2730

40

Saudi Arabia Ecuador Nigeria(Onshore)

Iraq US Nigeria(Deepwater)

Angola(Offshore)

Production cost ($/bbl) 2020E price ($/bbl)

Figure 24. Nigeria’s upstream players may cover cost in 2020

Source: OPEC; CardinalStone Research

Impairment of oil & gas assets is on

the cards

Impairment losses could mask the impact of recent

recoveries in oil prices on upstream oil & gas firms at the

end of the financial year. We note that oil and gas assets

are typically impaired to reflect changes in expected future

cash flows in line with oil and gas price outlook. This

potential cash flow challenge could necessitate balance

sheet and CAPEX plan restructurings in coming months.

However, companies with bullet principal repayments debt

structures are likely to better weather these short-term

challenges.



Downstream Oil & Gas: PMS price

modulation may fail to bolster

margins

Flexibility of PMS pricing has

improved

The downstream oil & gas sector has experienced a few

transformations since the outbreak of coronavirus and the

subsequent crash in crude oil prices. Most notably, the

government slashed PMS price to N125/litre (from N145/

litre previously) and removed subsidy on the product in

March 2020 - drawing inspiration from the oil price crash in

Q1'20. Aided by a new monthly pricing template, PPPRA

now frequently provides PMS pricing guidance on behalf of

the government. However, with PPPRA mostly dictating

margin outcomes for downstream players (irrespective of

company-specific cost), we opine that full deregulation is

yet to be achieved in the sector. Even though a few players

have intermittently taken advantage of lower crude oil

prices to bring in PMS, the majority continue to rely on the

NNPC for product supply due to issues with cost and

availability of FX.

Downstream sector PMS margin reached a six-month peak

in May (c.N15.50 by our estimates), before declining to

February levels of N11.70 in July. Despite the recent

fluctuations, PMS margin is still at the pre-coronavirus level

on the average. We also do not expect any material shift in

PMS margin dynamic for the sector in 2020 due to the

“politically” hot nature of the subject in Nigeria.

Retail price Ex depot price Margin

Feb'20 145.00 133.28 11.70

Mar'20 125.00 113.28 11.70

Apr'20 123.50 113.28 10.20

May'20 123.50 108.00 15.50

Jun'20 121.50 108.00 13.50

Jul'20* 143.80 132.10 11.70

Devaluation to offset impact of lower

oil price on lubes

In our view, the huge contraction in crude oil price should

ordinarily lead to a decline in the cost of importation of

deregulated products (such as lubes) for downstream

players. But significant currency pressures and disruption of

global supply chain are likely to offset the impact of oil

market changes on cost. Besides, locally imposed COVID-19

restrictions could cap scope for revenue growth and leave

margins largely unchanged in these segments.

34.7%

-2.8%

20.0%

8.7%

0.5%-3%

7%

17%

27%

37%

-

200

400

600

800

FY'16 FY'17 FY'18 FY'19 FY'20E

Revenue Revenue growth

145

125 124 124 122

144

0

10

20

30

40

50

60

100

110

120

130

140

150

Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20

Retail PMS price (N/litre) - LHS

Average crude oil price ($/bbl) - RHS

Figure 25. PMS prices now track changes in crude oil market

Source: PPPRA; CardinalStone Research

Figure 26. PMS margin has been mostly stable (N/litre)


Figure 27. Sector revenue and growth trend (N’billion)




7.3%

8.7%

18.9%

19.4%

21.3%

23.8%

MRS

CONOIL

OANDO

MOBIL

TOTAL

ARDOVA

7.0%

7.2%

17.7%

18.9%

22.0%

27.2%

ARDOVA

MRS

CONOIL

OANDO

TOTAL

MOBIL

4.8%

4.9%

8.7%

10.7%

18.0%

53.0%

MRS

MOBIL

CONOIL

OANDO

ARDOVA

TOTAL

PPPRA PRODUCT PRICING TEMPLATE (PMS)

6-Mar-20 16-Mar-20 2020E 2021E

Exchange rate N/$ 306.95 306.95 360.95 386.50 400.00

Crude Oil price ($/bbl) 54.56 34.2 39.49 39.49 45.00

$/MT 466.43 247.35 337.60 337.60 384.70

Cost+Freight 106.78 56.62 90.90 97.30 114.80

Lightening Expenses 8.74 8.74 8.74 8.74 8.74

Landing cost 115.52 65.40 99.60 106.00 123.50

Distribution Margins 19.37 19.37 19.37 19.37 19.37

Expected Open Market Price (N/litre) 134.89 84.73 118.98 125.41 142.86

Ex-Depot for Collection 133.28 113.28 133.28 133.28 133.28

Approved retail price (Upper band) (N/litre) 125.00 143.80 143.80 143.80

Discount (Premium) to EOMC 10.11 40.27 24.82 18.39 0.94

Deregulation to favour industry

titans

In the event of full deregulation, TOTAL, ARDOVA, and

OANDO are likely to be the prime gainers because of their

relatively broad channels and sound logistic platforms.

We expect full deregulation to unlock up to N205.8 billion

in value for the sector, but note that the politically

sensitive nature of PMS is unlikely to allow for the

adoption of a 100.0% dependence on a price mechanism.

Post-pandemic, we expect a V-shaped recovery in

volumes for fuels and lubricant business lines as activities

gradually return to prior levels. We, however, maintain a

cautious stance on ATK revenues, with International Air

Transport Association (IATA) guiding that air travels may

recover more slowly than the rest of the economy post-

pandemic.

Figure 28. PMS market share

Source: IPMAN; CardinalStone Research

Figure 29. ATK market share Figure 30. Lubes market share

Figure 31. Naira devaluation and recovery in crude oil price could drive PMS price higher




11 PLC

Real estate may fail to support core weaknesses

11 Plc has historically generated c.38.0% of its earnings from

properties. Plans to finalise the acquisition of Lagos Continental

Hotel (through its subsidiary) also suggests that this pattern

could subsist in the coming years. Although there is no official

update on the transaction, the six-fold surge in the purchase of

fixed asset component of investing cash flows to N18.3 billion in

2019 could be a pointer to ongoing deals. Given the current

economic challenges and their adverse impact on the hospitality

space, we expect the acquisition to linger into 2021. According

to the company, it would require significant investments to

bring the facility to 5-star rank after the transaction.

For the 2020 financial year, we project a 7.8% growth in

revenue to N205.8 billion, supported by sustained traction in

both Fuels (+8.0% YoY) and Lubes (+4.1% YoY) business lines.

This growth comes short of the first-quarter revenue increase

(+17.8% YoY) due to the expected weakness in the second and

third quarters of the year. After-tax profit is, however,

forecasted to decline by 29.9% in 2020, weighed by a potential

increase in the cost of sales. We note that the impact of the

increasing cost would have been sterner but for a projected

N8.0 billion from rental income.

Valuation

Our 12-month target price of N177.26, suggests an 2.2% upside

to our reference price and HOLD recommendation on the stock.

We note that the stock has rallied c.32.4% since its proposed

delisting at its board meeting in March. MOBIL currently trades

at FY’20 P/E of 10.04x compared to an average of 7.5x across

MEA peers.

BLOOMBERG: MOBIL NL

HOLD


Ref Price: N173.40





Revenue 164,610 191,676 205,798 221,192 426 497 533 573

EBITDA 16,489 16,671 12,598 13,856 43 43 33 36


Income taxes (4,367) (4,224) (2,960) (3,366) (11) (11) (8) (9)


Total assets 70,661 91,199 92,864 98,012 183 236 241 254





Net margin 13.9% 13.1% 14.5%

RoA 12.1% 10.7% 11.8%

RoE 21.6% 18.6% 19.4%


Current ratio 112.6% 123.3% 138.1%

Quick ratio 25.8% 13.2% 30.1%



P/E 7.04x 10.04x 8.83x


EV/Sales 0.27x 0.25x 0.23x

Div yield 4.8% 3.3% 3.7%

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ARDOVA PLC

Base effect to suppress earnings

ARDOVA has been one of the fastest-growing downstream

entities in the last two years. Nigerian revenues (ex-power &

Ghanaian business) grew by 56.3% YoY in 2018 and a further

31.1 YoY% in 2019. Since the Prudent Energy acquisition in

2019, ARDOVA has successfully consolidated revenue gains. In

the first quarter of 2020, for example, ARDOVA grew revenues

by 22.3% YoY aided by strong growth in its Fuels business

(+24.6% YoY). We, however, expect the suspension of air travel

and lockdown measures imposed on notable commercial

centres (Lagos, Abuja, and Kano) to cap product sales in the

second and third of the year. Because of this, we forecast 2020

revenues at N192.1 billion (+8.8% YoY).

Margins are likely to be weaker in the 2020 fiscal year (EBIT

margin: 1.9% in 2020 estimates from 4.1% in 2019) despite

management efforts to keep operating cost at bay. ARDOVA,

through its parent company, took advantage of the narrow

window at the end of March to import PMS into the country at

favourable rates. Yet, the high base effect from the N2.4 billion

asset disposal gain of 2019 could leave earnings significantly

lower in 2020 (-72.7% YoY to N1.1 billion).

Valuation

Our target price of N14.42 represents a potential upside of 7.2%

relative to our reference price N13.45 due to massive selloffs

earlier in the year. ARDOVA trades at a FY’20 EV/EBITDA and P/

E of 2.36x and 16.40x compared to an average 6.9x and 7.6x for

its MEA peers. We rate the counter a HOLD (vs SELL previously).

Upside risks to our forecast lie in the Improved liquidity in the

FX markets, resumption of international trade and a complete

deregulation of the downstream sector.

BLOOMBERG: ARDOVA NL

HOLD


Ref Price: N13.45





Revenue 134,706 176,551 192,102 219,242 349 457 498 568

EBITDA 4,371 7,076 3,613 4,574 11 18 9 12


Income taxes (397) (739) (267) (296) (1) (2) (1) (1)

Profit after taxes 631 3,915 1,068 1,182 2 10 3 3

Total assets 60,730 47,019 56,287 57,797 157 122 146 150





Net margin 2.2% 0.6% 0.5%

RoA 7.3% 2.1% 2.1%

RoE 26.2% 6.5% 7.0%

Asset turnover 327.7% 371.9% 384.4%

Current ratio 120.5% 119.8% 120.6%

Quick ratio 72.4% 70.5% 72.8%

Debt to equity 16.0% 49.2% 59.3%


P/E 4.47x 16.40x 14.82x


EV/Sales 0.05x 0.04x 0.04x

Div yield 8.6% 3.7% 4.0%

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SEPLAT PETROLEUM DEVELOPMENT COMPANY PLC

Brace up for a difficult year

Save for impairment losses on oil & gas assets, SEPLAT would

face less pressure from the impact of weaker oil prices. The

company hedged 4.5 MMbls at $50/bbl until September 2020

and has a c.$10 per barrel cost of production, but weaker

expected cash flows from oil & gas assets could still drive

significant impairment losses in 2020. Away from the potential

damage from lower oil prices, we see legroom for a 10.0%

increase in crude production to 26.3kb/d primarily due to the

acquisition of Eland. Our projection also takes into account the

well-drilling program on legacy fields in the last six months of

2019 and renewed optimism over a pickup in demand in

Switzerland (c.60.5% of crude revenue). Elsewhere, pipeline

vandalism and liquidity constraints of gas turbine plants are

likely to cascade to a 23.7% YoY contraction in gas production to

100 Mmscfd, in our view. Overall, we expect SEPLAT to report a

27.1% YoY plunge in revenue to $508.7 million in 2020.

We also expect SEPLAT to record a $21.3 million loss in 2020,

stoked by its $145.5 million impairment loss and a forecasted

2.5x jump in finance expense to $84.1 million. The impairment

charge on its Oil & Gas properties was due to a re-assessment of

future cash flows following the fall in crude oil prices. Similarly,

our expectations for the high-interest expense is driven by the

$350 million revolving loan facility drawn in December 2019 to

partly finance the Eland acquisition.

Valuation

Given our weak expectations for earnings in the short-term and

the higher equity risk premium investors could demand, we

have updated our forecasts and revised our target price

downwards to N494.47. Our TP represents a 28.10% upside on

the stock, mostly due to a higher exchange rate of N360/$

(N306/$ previously) and recent market selloffs. We retain our

BUY rating on the counter.

BLOOMBERG: SEPLAT NL

BUY


Ref Price: N386.00





Revenue 228,391 214,157 196,345 235,977 746 698 509 611

EBITDA 133,227 124,609 65,553 104,149 435 406 170 270

Profit before taxes 80,599 89,914 (6,867) 36,667 266 293 (18) 95

Income taxes (35,748) (8,939) (1,373) (14,667) (117) (29) (4) (38)

Profit after taxes 44,851 80,975 (8,240) 22,000 149 277 (21) 57

Total assets 766,671 1,004,233 1,168,404 1,215,112 2,497 3,271 3,027 3,148

Total liabilities 275,199 450,425 502,985 527,693 896 1,467 1,303 1,367



EBITDA margin 58.2% 33.4% 44.1%

Net margin 39.7% -4.2% 9.3%

RoA 9.6% -0.7% 1.8%

RoE 16.3% -1.2% 3.3%


Current ratio 149.6% 163.9% 146.6%

Quick ratio 136.1% 149.3% 132.9%

Debt to equity 43.8% 42.9% 38.7%


P/E 2.20x nm 10.20x


EV/Sales 1.26x 1.73x 1.44x

Div yield 39.4% - 7.7%



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TOTAL NIGERIA PLC

Earnings set to remain subdued in FY’20

In 2019, TOTAL retained its spot as the market leader in the

PMS, AGO, ATK, and Lubricant markets, supported by over 500

retail stations across the country. However, we expect this

strong market position to weaken in 2020, as competitors

accelerate their retail footprint. This market share loss, which

has already resulted in revenue contraction in four consecutive

quarters, is likely to add to pressures from movement

restrictions in 2020. We, therefore, see legroom for a 10.0%

decline in revenue to N265.9 billion in 2020 on projected 10.0%

and 2.0% contractions in the Petroleum Products and Lubricants

segments, respectively. Top-line pressures are likely to be worse

in the second quarter and milder in subsequent ones, due to the

gradual easing of movement restrictions.

In our view, lubricant cost savings from the fall in crude oil

prices will not be sufficient to offset the impact of the drastic

slowdown in business activities noticed since Q2’20. All in, we

expect TOTAL to record N1.0 billion loss in the current financial

year compared to the N2.3 billion profit posted in the prior

year. This loss is likely to be partly driven by an expected

weakness in revenue and an increasing cost environment.

Continued price regulation in the PMS space and knock-on

effect of movement restriction on overall fuel consumption is

also likely to stoke extra pressures.

Valuation

We have slightly adjusted our target price downwards to N95.00

to reflect the projected operational weaknesses in the short-

term. TOTAL is currently trading at a FY’20 EV/EBITDA of 6.33x ,

compared to its MEA peer average of 9.3x, apiece. We have a

SELL rating on the counter.

BLOOMBERG: TOTAL NL

SELL


Ref Price: N97.50





Revenue 307,988 292,177 265,889 281,993 798 757 689 731

EBITDA 13,886 16,257 9,408 11,662 36 42 24 30

Profit before taxes 12,098 3,071 (804) 1,186 31 8 (2) 3

Income taxes (4,138) (792) (207) (306) (11) (2) (1) (1)

Profit after taxes 7,961 2,279 (1,011) 880 21 6 (3) 2

Total assets 132,521 133,788 124,764 124,779 343 347 323 323





Net margin 0.8% -0.4% 0.3%

RoA 1.7% -0.8% 0.7%

RoE 7.7% -3.8% 3.5%

Asset turnover 219.4% 205.7% 226.0%

Current ratio 87.8% 85.1% 87.1%

Quick ratio 53.7% 51.8% 51.7%

Debt to equity 140.8% 150.4% 133.7%


P/E 14.53x -32.73x 37.62x


EV/Sales 0.20x 0.22x 0.21x

Div yield 6.9% 0.0% 2.1%

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Oil Palm: Global price

trajectory makes U-turn on

global shocks

H1’20 in review

Global oil palm prices are likely to decelerate in 2020 on

plunging demand for edible oils and its derivative

products due to COVID-19 containment measures. The

recent plunge in biodiesel prices may also provoke a

switching from the use of edible oil (as an energy

source) to more traditional options such as crude. These

drivers, as well as rising inventory levels, may also

explain why price-sensitive buyers are reportedly

holding off purchases in anticipation of further fall in

prices.

The decline in CPO prices is likely to affect producers

ability to invest in inputs, leaving legroom for reduced

plantings. In the first six months of the year, demand

shocks and rising inventory levels sent CPO prices

tumbling by 21.7% to $551/ton in June from $704/ton

in January. Despite the weaker price outlook (relative to

the first half), we note that current prices still implies a

17.6% upside relative to 2019 levels.

Domestic industry could weather

COVID-19 curveball

Historically, weaknesses in the global oil palm industry

usually reflect in domestic CPO prices. However,

recent border closures (to curb smuggling and prevent

the spread of COVID-19) and naira repricing may

weaken the price correlation in FY’20. We, therefore,

expect Nigerian CPO prices to increase by 2.8% YoY to

c.N360,000/ton in 2020 (vs N349,000/ton previously).

640

320350

550

100

1875

265325

Benin Ghana Nigeria

Imports Exports Consumption deficit

400

450

500

550

600

650

700

750

Apr-19 Jul-19 Sep-19 Nov-19 Jan-20 Feb-20 Apr-20 May-20

Figure 32. COVID-19 negatively impacted on CPO prices in

H1’20 (in USD)

Source: Bloomberg

Figure 33. Neighboring countries likely import and re-export

to Nigeria (in thousands MT)

Source: World Bank; PWC, MBPD; CardinalStone Research

In our view, domestic production is likely to increase on

expanded capacity, backward integration, and continued

border closure. Given that markets are, effectively,

separated by the disruption in the global supply chain,

internal factors are likely to cascade to a higher

domestic premium on global prices of 1.7x (compared to

1.6x in 2019). This expected premium could provide

support for the earnings of local firms in 2020.



Crises could strengthen investment

case for the sector

Import substitution policies have resulted in preferential

FX and trade treatments to indigenous agricultural

commodity producers. The border closures and potential

FX-induced increase in domestic patronage are other

arguments in favour of the sector.

Listed agricultural commodity producers thrived during

the last rescission, with Okomu Oil Plc (OKOMU) and

Presco Plc (PRESCO) growing profits by over 100.0% YoY

and 82.0% YoY (apiece) in 2016. Notably, 2016 also saw

sharp naira depreciation and FX restrictions.

We expect the operations of domestic players to be

mostly unaffected by the COVID-19 disruptions, given

the essential nature of their business. Similarly, our

coverage companies are also likely to experience stable

cost increases despite the naira devaluation because of

their low dollar exposures. Elsewhere, we expect CBN’s

moratorium on principal repayments and reduction of

intervention rates from 9% to 5% to positively impact

cashflow and full-year earnings.

57.0% 57.0%

70.0%

15.0%

50.0%

77.0%

CPO Volume REVENUE PAT ( ex reval gain)

OKOMU PRESCO

Figure 34. FX crisis and import restrictions favoured domestic

producers in 2016 (% growth)

Source: Company financials, CardinalStone Research



OKOMU OIL PALM COMPANY PLC

Well positioned despite COVID disruptions

We slightly lowered our 12-month Target price for Okomu Oil

Palm Company plc (OKOMU) to N82.12 (previously N87.82),

reflecting higher uncertainty posed by COVID-19 induced shocks

and higher cost environment. We however maintain our BUY

rating on the counter with a 16.5% upside.

We forecast revenue growth of 11.2% to N20.9 billion after two

consecutive years of negative growth (average turnover growth

2018-2019E: -3.4%) centered on higher production and higher

CPO prices expected in 2020 (vs 2019). For CPO volumes, this

will likely be buoyed by harvests from matured areas of

previous years’ planting (over 1800 more hectares of matured

land) in 2020 versus 2019E. Additionally, we expect the impact

of land border closures and a refocus of local producers towards

securing domestic supply chains to support volumes in FY’20

However, the earnings impact of greater CPO revenue may be

dampened by expected contraction in rubber sales (which are

100% exported) as global containment measures have reduced

rubber demand. For costs, we expect rising inflation and the

opening of new areas to oil palm harvesting and rubber tapping

to pressure costs in FY’20. Consequently, driving gross and

EBITDA margin contractions of 0.3 ppts YoY and 1 ppt YoY,

respectively. While we expect mild negative impact of recent

CBN devaluation on financing cashflows, lack of access to FX

may delay expansion plans. Furthermore, we envisage the

sustenance of effective tax rates of 30% (2014-2018 average:

18.1%), more in line with regulation tax rates to weigh on

earnings in FY’20. All in, we model 11.2% YoY increase in PAT to

N5.6 billion in FY’20E

Valuation

We have target price of N82.1 for OKOMU, which currently

trades at a marginal discount to peers, with a forward P/E of

12.0x compared to a mean of 16.7x for its EMEA peers

BLOOMBERG: OKOMU NL

BUY


Ref Price: N70.50





Revenue 20,258 18,867 20,987 28,523 52 49 54 74

EBITDA 10,260 7,354 7,836 14,162 27 19 20 37


Income taxes (1,835) (2,474) (2,411) (4,153) (5) (6) (6) (11)


Total assets 38,418 43,596 46,877 53,752 100 113 121 139




EBITDA margin 39.0% 37.3% 50.3%

Net margin 26.8% 26.8% 34.5%

RoA 12.3% 12.4% 21.6%

RoE 17.5% 19.4% 33.2%


Current ratio 324.9% 185.4% 229.8%

Quick ratio 219.1% 137.7% 179.1%

Debt to equity 30.8% 39.7% 24.9%


P/E 13.32x 11.98x 6.07x

EV/EBITDA 11.20x 10.27x 6.13x

EV/Sales 5.37x 4.83x 3.16x

Div yield 5.0% 5.7% 5.7%



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PRESCO PLC

Rising price environment to pressure earnings in FY’20

Considering the impact of COVID-19 on our near to midterm

outlook on CPO prices, higher price environment and revised

equity risk premiums, we cut our target price (TP) for Presco Plc

(PRESCO) to N58.2 (vsN73.6 previously).

We forecast revenue growth of 7.8% YoY in FY’20E on expected

increase in CPO output (FY’20E: 53,486.2MT vs FY’19:

43,757.4MT) and stronger price projection (2020F: N361,000/

ton; 2019: N349000/ton). On the former, Presco is likely to

leverage its recent increase in palm oil milling capacity to

90tons/hr (compared to 60tons/hr previously) in Q1’20.

Additionally, we believe that the recent completion of a 350MT/

day palm kernel crushing plant (increasing total capacity to 410

MT/day), a new 30 MT/hour palm kernel shell broiler and plans

to complete vegetable oil fractionalization plant by H2’20 bodes

well for volume growth in the medium term. We envisage

stronger operating profit margin of 36% (v 32% in FY’19) on

expectation of a normalization in COGS margin, which climbed

by 13 ppts YoY in FY’19. However, despite our expectation of

slightly firmer CPO prices , PRESCO is likely to report a

revaluation loss on biological assets in FY’20 as its last valuation

occurred in January, when CPO prices hit its highest levels on 48

months on sentiment of burgeoning global demand.

Additionally, borrowing of N21.9 billion, albeit at concessionary

rates under 9% below (versus weighted average interest rate of

14.6% as at 9M’19), may raise finance costs by 4.5% in FY’20.

Overall. while we forecast a 28.4% growth in operating profit for

FY’20, PAT is likely to moderate by 4.3% to N3.7 billion, skewed

by potential revaluation losses.

Valuation

We have a 12-month target price of N58.22 and a BUY rating on

the counter. Presco currently trades at a P/E multiple of 12.9x

compared to an average of 16.2x for its EMEA peers. We have

projected FY’20 ROE of 10.3% for the company.

BLOOMBERG: PRESCO NL

BUY


Ref Price: N47.45





Revenue 21,345 19,724 20,890 23,402 55 51 54 61

EBITDA 11,513 7,749 10,504 12,502 30 20 27 32


Income taxes (2,037) (2,221) (1,578) (2,095) (5) (6) (4) (5)


Total assets 58,679 70,733 68,372 68,067 152 183 177 176




EBITDA margin 39.3% 50.3% 53.4%

Net margin 19.5% 17.6% 20.9%

RoA 5.9% 5.2% 6.8%

RoE 14.7% 10.3% 11.8%

Asset turnover 318.6% 369.1% 382.3%

Current ratio 79.4% 80.0% 77.4%

Quick ratio 67.1% 51.5% 51.2%

Debt to equity 88.7% 78.3% 80.2%


P/E 12.36x 12.89x 9.71x


EV/Sales 3.48x 3.28x 2.93x

Div yield 3.8% 4.2% 4.2%



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Telecoms: More defensive than

most, but not problem free

Knocking MTNN off its perch won’t

be lightweight

MTNN continues to dominate the landscape with its

mobile subscription market share of 37.3%. Globalcom

and Airtel are close with 28.1% and 27.3% apiece, while

9Mobile is far behind with 7.4%. In our view, the

primary drivers of choice of MNOs in Nigeria include the

cost of data, service quality, the strength of brands, and

breadth of coverage. Yet at the bottom of the pack,

9Mobile has seen its growth potential restricted by

other factors such as the uncertainties surrounding its

transition and restructuring in recent years. Other

players are likely to struggle to displace MTNN in the

near-term, with the industry recently repricing its

offerings to increase its market competitiveness.

Favourable population demographics and low

penetration levels suggest that the subscriber base is

likely to continue growing. We, however, view NCC’s

recent restriction of mobile phone users to three (3)

SIM cards as a downside risk to subscriber base growth

expectation.

Data is a hub of opportunities

The Nigerian National Broadband Plan (NBP) re-

echoed the importance of telecoms to economic

diversification and growth in March 2020. Based on

the information in the presidential mandate of the

plan, a 10.0% increase in broadband penetration

should result in a 2.6% to 3.8% growth in GDP (vs 1.6%

GDP increase in ITU’s study on low income countries).

By our estimates, the projected growth band of the

government would translate to an extra domestic

output of between N1.8 trillion and N2.7 trillion

annually, the bulk of which would emanate from

MTNN, Airtel, Globalcom, and 9Mobile. The goal of

delivering data download speeds of c.25Mbps and

c.10Mbps in urban and rural areas apiece, as well as

increasing coverage levels to 90.0% of the population

by 2025 (vs 39.6% currently), further highlights the

opportunities in the data market. Although the plan

aims at reducing data price to c.N390 per GB by 2025

(vs an average of N,1000 per GB in 2019), it leaves

room for significant growth in revenue via increased

penetration.

We expect capital importation into the telecoms sector to decline by 33.3% YoY to $630 million in 2020 on heightened

macro uncertainties and weaker profit outlook on possible investment projects. However, telecoms is likely to retain a

significant share of GDP, with its projected output growth expected to contrast a deceleration in broad macro. The sector

currently accounts for 10.9% of GDP and is mostly driven by four major Mobile Network Operators (MNOs: MTNN;

Globalcom, Airtel, and 9Mobile). These MNOs provide services to c.99.5% of 184.7 million active lines (NCC, Dec. 2019),

68.0% of which are connected to the internet.

Figure 35. Data prices in Nigeria vs select countries ($/GB)

Source: NCC, CardinalStone Research

Displacing MTNN won’t be a walk in the park for other telcos

0.5% 0.5 %

3.4%

1.7%

3.1%

2.2%

0.0%

1.0%

2.0%

3.0%

4.0%

0

2

4

6

8

10

12

India Egypt Rwanda Nigeria Kenya SouthAfrica

Price in USD as % of Avg Income - RHS

Price in USD - LHS



Coronavirus and telecoms: cause

for panic?

According to NCC, data dependence has increased in

Nigeria because of the lockdown measures instituted to

curb the spread of coronavirus. Most people now rely

on the internet to work from home, watch & download

video contents, and engage in various social media

activities. Consumers who ordinarily spend most of their

time at work using dedicated office internet connection

for official and personal use now spend more time at

home resorting to high consumption of personal data,

hence spend more on data subscriptions. Notably, the

NCC noted that a few other consumers using unsecured

Wi-Fi devices are also experiencing data theft as they

increase internet reliance. The position of the NCC on

increased data usage is also consistent with that of

MTNN, even though the industry leader raised early

concerns about some moderation in voice revenue in its

Q1’20 result statements due to a decline in physical

data recharges.

We expect the sector to record revenue growth in FY’20

as concerns over the voice segment taper on gradual re-

opening of the economy. However, the simultaneous

occurrence of naira depreciation is likely to result in

higher operating expense (tower deals are a concern on

this front) and increased finance cost across the sector.

According to MTNN, a 10.0% naira depreciation is likely

to result in a 2ppts margin contraction for its business.

Given that MTNN is the most defensive in the sector, we

expect the recent 18.0% naira adjustment to drive net

margins lower by at least 3.6ppts in FY’20 in the sector.

994938 931

545

114

944

630

2014 2015 2016 2017 2018 2019 AnnualizedQ1'20

Capital importation into telecoms (million'$)

Average (million'$)

5.0%

1.5% 0.95% 1.0% 2.0% 2.9%

-1.9%

-5.7%

-2.0%

1.9%

11.5%

15.0%

11.3% 12.2% 11.3% 12.2% 11.4%

4.6%

Q1

'16

Q2

'16

Q3

'16

Q4

'16

Q1

'17

Q2

'17

Q3

'17

Q4

'17

Q1

'18

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

Q3

'19

Q4

'19

Q1

'20

2020

E

Real GDP growth Telecoms GDP growth

Source: NCC, CardinalStone Research

Figure 37. MTNN dominates in terms of subscriber

market share

Figure 36. Foreign flows into telecoms may be weaker in 2020

Source: NBS, CardinalStone Research

Figure 38. Telecoms GDP growth is likely to be pulled down by broad macro weakness in 2020

Source: NBS, CardinalStone Research



MTN NIGERIA PLC

Rising cost could cap earnings growth

We expect MTNN to grow revenue by 15.0% YoY to N1.3 trillion in

FY'20 (Q1’20: +16.6% YoY). This growth in top-line is likely to

reflect significant traction in data (+55.0% YoY) and interconnect

& roaming sales, which could partially offset expected slowdown

in growth of voice revenue. Notably, there has been a widespread

switch to virtual communication since the outbreak of the

pandemic. As a result, many customers have gained exposure to

several OTT apps for personal and business communication at the

expense of traditional channels such as mobile calls.

Devaluation to stoke material cost pressures

We, however, expect earnings to remain flat at N201.23 billion in

FY’20 due to rising operating cost and increasing finance expense.

Operating cost pressures are likely to stem from the 18.0% naira

devaluation in March 2020 and 2.5ppts increase in VAT to 7.5% in

February. Specifically, the former could increase network

operating cost since tower deals are costed in dollars every

quarter. According to management, a 10.0% naira depreciation (in

isolation) is likely to result in a 2ppts margin contraction for

MTNN. Similarly, higher finance expense could reflect the impact

of devaluation on debt service of dollar obligations. As at Q1'20,

external debt stood at $84.9 million, representing 50.0% of total

debt stock. For the medium-to-long-term, we retain our bullish

outlook on the company partly owing to its sustained data-related

CAPEX efforts.

Valuation

We have a 12-month target price of N149.36 and a BUY rating on

the counter. MTNN currently trades at an EV/EBITDA of 4.1X

compared to 7.6x for its EMEA peers. We have a projected FY’20

ROE of 93.8% for the company.

BLOOMBERG: MTNN NL

BUY


Ref Price: N118.00


Market Cap: N2,401.8 bn



Revenue 1,039,118 1,169,735 1,345,496 1,513,733 2,692 3,030 3,486 3,922

EBITDA 433,976 629,919 643,147 691,776 1,124 1,632 1,666 1,792


Income taxes (75,657) (87,993) (94,698) (102,835) (196) (228) (245) (266)


Total assets 941,740 1,525,571 1,608,199 1,757,349 2,440 3,952 4,166 4,553

Total liabilities 722,387 1,380,885 1,323,727 1,370,043 1,871 3,577 3,429 3,549

Shareholders funds 219,352 144,686 284,472 387,305 568 375 737 1,003


EBITDA margin 53.9% 47.8% 45.7%

Net margin 17.3% 15.0% 14.4%

RoA 16.4% 12.8% 13.0%

RoE 111.0% 93.8% 65.1%


Current ratio 66.0% 56.6% 55.2%

Quick ratio 52.0% 44.0% 44.7%

Debt to equity 285.1% 152.1% 103.9%


P/E 11.88x 11.94x 10.99x


EV/Sales 2.25x 1.96x 1.74x

Div yield 5.5% 5.9% 6.4%



0.5

0.7

0.9

1.1

1.3


ASI MTNN



Cement: Seized by the

pangs of the pandemic

We expect the Nigerian cement sector to face a challenging financial year on account of the coronavirus pandemic. The

sector’s full recovery is also likely to take at least two years, in line with the macro guidance of African finance

ministers. Upside to expectations may stem from foreign demand following commissioning of export terminals in the

country’s former capital city of Lagos

-4.35

-5.48

-6.26

-5.32

1.83

-4.16-4.56

-1.92

Q1'16 Q2'16 Q3'16 Q4'16 Q1'7 Q2'17 Q3'17 Q4'17

-7% We project the Nigerian cement

volumes to contract by 7.0% YoY

to 20.2Mt in 2020

COVID-19 may mean lower cement

volumes for producers

The spread of COVID-19 has altered the global economic

outlook for 2020. The pandemic has led to border closures

as well as restrictions on construction and other non-

essential business activities mostly at the behest of

authorities. Thus, CW Group expects African cement

demand to moderate by c.5.0% in 2020. In our view,

Nigerian cement market (-7.0% YoY to 20.2Mt in FY’20E) is

likely to underperform the rest of Africa, given that

imposed restrictions are mostly in the main construction

hubs of Lagos and Abuja, which cumulatively account for

c.48.0% of the country’s GDP. Even though the FG has

resolved not to allow the pandemic to distort spending

initiatives (N10.8 trillion of which CAPEX accounts for

23.0%), lessons from the 2016 downturn suggest that

meeting expenditure targets may be a tall order in 2020.

About 10% of total sector sales is attributable to

corporates who are often working for or with the

government. This suggests that passthrough from

weak government expenditure is likely to be minimal.

Macro-economic passthrough to private

consumption is, therefore, likely to be the primary

challenge of cement consumption in 2020.

Figure 39: Cement (% of GDP) contracted in 7 out of 8

quarters in 2016 - 2017

Source: NBS; CardinalStone Research

Figure 40: 2016 featured FG’s lowest CAPEX

implementation rate in 5 years

Source: Budget Office; CardinalStone Research

0.6 0.6

0.2

1.4

1.7

1.21.1

0.6

1.6

2.2

2.9 2.9

2014 2015 2016 2017 2018 20 19

Capex implentation Capex Budget

The last crude oil price crash

Capex implementation Capex Budget



Heightened competitive

environment likely to sustain

marketing and promotional

commitments

Considering the projected demand contraction, we expect

prices to remain mostly flat in 2020 as players look to

protect market share amid current shocks. Notably, the

N150 price increase in 50kg bag of cement in April 2019

was largely offset by discounts as cement producers try to

incentivize demand in a typically slow second half of the

year. In FY’20, we see scope for more promotional efforts

in the mold of DANGCEM’s “Bag of Goodies” and WAPCO

“Ember Buy and Win” promo of 2019.

4.0

1.1

8.6

2.0

DANGCEM WAPCO

FY'18 FY'19

52.6%

40.1% 37.8%

48.3%43.3% 43.2%

20.3%

2.3%

10.1%

26.2%29.5% 27.6%

0%

10%

20%

30%

40%

50%

60%

FY'15 FY'16 FY'17 FY'18 FY'19 FY'20

DANGCEM WAPCO

For every N100 in sales,

DANGCEM spent N0.96 in

promotional expenses in FY’19

compared to N0.45 in FY’18

For every N100 in sales,

WAPCO spent N0.95 in

promotional expenses in FY’19

compared to N0.54 in FY’18

Currency devaluation poised to

stoke additional cost pressures

Naturally, the interaction of this promotional intensity

and the recent devaluation is likely to stoke cost

pressures in FY’20. Among other supporting premises for

this view, we note that gas contracts are invoiced in naira

but priced in dollars and that a few players partially rely

on imported coal. Dependence on foreign-sourced

gypsum is also a potential drag on operating performance

amidst currency-related woes. For DANGCEM, forex

earnings from exports and operations in the Pan African

markets may provide some cushion to the impact of

currency devaluation on costs.

Figure 41: Advertisement expenses (N billion) doubled in

FY’19 among manufacturers


Figure 42: FY’20 EBITDA margins are projected higher

compared to FY’16/17 lows




DANGOTE CEMENT PLC

BUY rating retained despite temporary blip

FY’20 earnings will likely decline on top-line weakness and

higher income tax deductions, following the expiration of

pioneer tax grants on Ibese Lines 3 & 4 and Obajana Line 4 in

February 2020. In our view, an effective tax rate of c.30.0% in

FY’20 (vs 19.9% in FY’19) will offset the base effect from high

operating expenses last year. Notably, the company recorded a

surge in distribution cost in FY’19 as a result of an increase in its

truck fleet and the proportion of sales distributed by trucks.

Even though promotional and marketing initiatives are also

likely to be high in FY’20 as manufacturers strive to minimize

inventory accretion as a result of the movement restriction

enforced in Nigeria, EBITDA margin could remain flat YoY at

43.2% on the impact of the high base effect.

However, margin pressures are likely to resume after the

operating line with drags coming in the form of higher interest

expense N64.7 billion (vs N50.1 billion in FY’19) and taxes. Our

view on the former is premised on the assumption of more debt

buildup to part-finance the proposed share buyback while the

latter is linked to the expiration of pioneer tax status already

highlighted.

Valuation

We revise our 12-month TP to N186.4 (compared to N191.56

previously) to reflect a higher equity risk premium and an

adjustment for a 4% share buyback this year compared to our

earlier expectation of a 10% implementation. Our TP implies a

47.9% capital appreciation on current market price due to

aggressive equity selloffs. The company’s relatively robust cash

flow position and ROAE also support an unchanged BUY rating

on the stock

BLOOMBERG: DANGCEM NL

BUY


Ref Price: N126.00


Market Cap: N2,147.1 bn



Revenue 901,213 891,671 822,188 854,141 2,335 2,310 2,130 2,213

EBITDA 435,261 385,809 358,065 377,881 1,128 1,000 928 979


Income taxes 89,519 (49,958) (62,662) (64,158) 232 (129) (162) (166)

Profit after taxes 390,325 200,521 146,212 149,701 1,011 519 379 388

Total assets 1,694,463 1,741,351 1,695,948 1,784,730 4,390 4,511 4,394 4,624

Total liabilities 707,850 843,414 1,004,707 1,142,758 1,834 2,185 2,603 2,961



EBITDA margin 43.3% 43.2% 44.0%

Net margin 22.5% 17.8% 17.5%

RoA 11.7% 8.5% 8.6%

RoE 21.3% 18.4% 22.5%


Current ratio 64.5% 48.2% 49.4%

Quick ratio 25.1% 13.9% 18.4%

Debt to equity 41.0% 73.2% 98.3%


P/E 10.71x 13.22x 12.91x


EV/Sales 2.09x 2.27x 2.18x

Div yield 12.7% 7.2% 7.4%

0.5

0.6

0.7

0.8

0.9

1.0

1.1


ASI DANGCEM





LAFARGE AFRICA PLC

Medium-to-long term case remains compelling

The current pandemic and oil price declines are likely to rein in

demand for cement and harm cash flows in 2020. Thus, even

though we retain a bullish medium-to-long-term view on the

company, we cut our 12-month TP to N16.90 to reflect potential

difficulties in FY’20 and FY’21 alongside a higher equity risk

premium required by investors due to these challenges.

Earnings could be materially weaker in FY’20

We believe the implementation of cost-cutting measures could

partly taper the impact of lower cement volumes on margins,

even though the ongoing crisis is likely to delay the

commissioning of Ashaka’s captive power plant project. There

could also be legroom for more finance cost savings for the

business following significant balance sheet repairs in the last

few years. In addition, the decision to deploy proceeds from the

sale of LSAH for the settlement of parent company dollar

obligations appears more compelling in view of the ongoing

currency crisis. That said, the knock-on effect of weaker top-line

is likely to drive earnings lower by 15.2% YoY despite a

potentially low effective tax rate. Elsewhere, cashflows are likely

to be negatively impacted by operating and working capital

weaknesses. Working capital weakness is likely to be driven by

inventory buildup due to crisis-induced demand slowdown.

Valuation

Notwithstanding the current shock, Lafarge remains a

compelling proposition in the medium-to-long term due to its

recent restructurings. Notably, the company’s cash flow

position is likely to recover strongly in FY’22 alongside an

expected pick up in domestic macro. The stock is trading on a

FY’20E EV/EBITDA of 3.6x compared to 9.1x for Bloomberg

EMEA peers. We have a Target Price of N15.40 and

a BUY recommendation on the stock.

BLOOMBERG: WAPCO NL

BUY


Ref Price: N11.00





Revenue 217,813 212,999 187,439 181,254 564 552 486 470

EBITDA 57,079 62,876 51,822 47,984 148 163 134 124

Profit before taxes (1,510) 17,892 15,178 14,569 (4) 46 39 38

Income taxes 9,607 (2,374) (2,014) (2,185) 25 (6) (5) (6)

Profit after taxes 8,097 15,518 13,164 12,384 (23) 298 34 32

Total assets 540,737 497,152 481,037 486,351 1,401 1,288 1,246 1,260

Total liabilities 406,004 152,238 132,133 120,964 1,052 394 342 313



EBITDA margin 29.5% 27.6% 26.5%

Net margin 7.3% 7.0% 6.8%

RoA 3.0% 2.7% 2.6%

RoE 6.5% 3.8% 3.5%


Current ratio 88.9% 91.6% 104.1%

Quick ratio 41.8% 39.6% 53.2%

Debt to equity 18.6% 15.5% 12.1%


P/E 11.42x 13.46x 14.31x


EV/Sales 0.88x 1.00x 1.03x

Div yield 9.1% 5.9% 5.6%

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9


ASI WAPCO




DISCLOSURES

Disclosure

Analyst Certification

The research analyst(s) denoted by an “*” on the cover of this report certifies (or, where multiple research analysts are primarily responsible

for this report, the research analysts denoted by an “*” on the cover or within the document individually certifies, with respect to each

security or issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report accurately articulate the

research analyst(s) independent views/opinions, based on public information regarding the companies, securities, industries or markets

discussed in this report. (2) The research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the

specific recommendations, estimates or opinions expressed in this report.

Analysts’ Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon various

factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include

revenues from, among other business units, Investment Banking and Asset Management.

Investment Ratings

CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell.

Buy ≥ +15.00% expected share price performance

Hold +0.00% to +14.99% expected share price performance

Sell < 0.00% expected share price performance

A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least +15.00% between the current price

and the analyst’s target price

An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +0.00% and +14.99%,

A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than 0.00% is

expected, between the current price and analyst’s target price.

A NEGATIVE WATCH is given to equities whose fundamentals may deteriorate significantly over the next six (6) months, in our view.

CardinalStone Research distribution of ratings/Investment banking relationships as of July 20, 2020

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any

security recommended herein. You can contact the analyst named on the front of this note for further details.

Frequency of Next Update: An update of our view on the company (ies) would be provided when next there are substantial developments/

financial news on the company.

Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as “CardinalStone”) that research analysts may not be involved in activities that suggest that they are representing the interests of Cardinal Stone in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in CardinalStone’s Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, based on the research analyst’s published research. Therefore, the

proprietary interests of those Sales and Trading departments may conflict with your interests.

Rating Buy Sell Hold Negative Watch

% of total recommendations 63% 8% 29% 0%

% with investment banking relationships

0% 0% 0% 0%


DISCLOSURES

Company Disclosure: CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could,

unintentionally, affect the objectivity of this report. Material interests, which CardinalStone has with companies or in securities discussed in

this report, are disclosed hereunder:

a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company c. CardinalStone is a market maker in the publicly traded equities of the Company d. CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of the

Company e. CardinalStone beneficially own 1% or more of the equity securities of the Company f. CardinalStone holds a major interest in the debt of the Company g. CardinalStone has received compensation for investment banking activities from the Company within the last 12 months h. CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the next

3 months i. The content of this research report has been communicated with the Company, following which this research report has been

materially amended before its distribution j. The Company is a client of CardinalStone k. The Company owns more than 5% of the issued share capital of CardinalStone l. CardinalStone has other financial or other material interest in the Company

Company Disclosure

11 Plc

Access Bank Plc

Ardova Plc H

Dangote Cement Plc

Dangote Sugar Refinery Plc

Ecobank Transnational Incorporated

FBN Holdings Plc G

FCMB Group Plc E & J

Fidelity Bank Plc

Flour Mills of Nigeria Plc

Guaranty Trust Bank Plc

Guinness Nigeria Plc

Lafarge Africa Plc G & J

MTN Nigeria Plc

Nestle Nigeria Plc

Nigerian Breweries Plc

Presco Plc

Seplat Petroleum Development Company Plc

Stanbic IBTC Holdings Plc

The Okomu Oil Palm Company Plc J

Total Nigeria Plc J

UAC of Nigeria Plc E

United Bank for Africa Plc

Zenith Bank Plc


DISCLOSURES

Important Regional Disclosures

The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies) within the

past 12 months. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S., the

following are important disclosures regarding any Non-U.S. analyst contributors: The Non-U.S. research analysts (denoted by an * in the

report) are not registered/qualified as research analysts with FINRA; and therefore, may not be subject to the NASD Rule 2711 and NYSE Rule

472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Each analyst (denoted by an *) is a Non-U.S. Analyst and is currently employed by Cardinal Stone.

Legal Entities Legal entity disclosures: CardinalStone Partners is authorized and regulated by the Securities and Exchange Commission (SEC) to conduct

investment business in Nigeria.

Contact:

5 Okotie Eboh street,

Ikoyi, Lagos, Nigeria

12 Dar Es Salaam street,

WuseII, Abuja, Nigeria

+234-1 631 2225, +234-1 710 0433

[email protected]

www.cardinalstone.com

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