NIGERIA 2016 OUTLOOK - A Slippery Path To Recovery

Nigeria Outlook 2016 A Slippery Path to Recovery...Finding the New Equilibrium

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Executive Summary

A slippery Path to Recovery

Global growth will continue to seek for balance. With the EM “commodity super cycle”

officially over, and China still trying its best to find a fulcrum, we believe global growth will

remain fragile at best over 2016. We are slightly more upbeat on the advanced econo-

mies as we expect that the US economy will continue to hobble along the recovery path

albeit at a much slower pace than the US Fed anticipates. This, we think, will have pro-

found impact on the rate of normalization. The pace of QE in the Eurozone and Japan is

also likely to quicken. A stronger dollar is likely to further test the resolve of key EM and FM

economies and their fiscal balances, while exerting further downward pressure on com-

modity prices to the detriment of many SSA economies.

Nigeria needs to make hard choices. The road to recovery is long and tortuous for Nige-

ria as the government faces hard policy choices with short term pain. The record expan-

sionary budget for 2016 is hinged on non-oil revenue, with a view to deviating from histori-

cal trend, an attempt we believe will likely be faced with execution challenges. We like

the renewed vigour for governance, strong anti-corruption drive, as well as the seemingly

stronger political will to push through reforms necessary to navigate current macroeco-

nomic challenges. What we are yet to see is a coherent economic blue-print necessary

to guide a fast paced structural shift in the Nigerian economy.

Aligning fiscal and monetary policy may require an exchange rate adjustment

It is difficult to imagine a smooth execution of the highly expansionary 2016 budget given

current macro realities especially the bearish trajectory of oil prices. The exchange rate

assumption in the budget ( i.e the Official interbank rate) stands at USD/NGN 198 with a

budget deficit of N2.2trn. As at the time of writing this report, oil price was trading at

$27.6p/b. This potentially increases the deficit to N2.4trn if the exchange rate remains un-

adjusted. However, a 27.6% adjustment in the currency will keep the proposed deficit

constant. A further scenario play around oil prices and the exchange rate required to

maintain the proposed budget deficit of 2.2trn is summarized below:

Oil Price Scenario ($ p/b) Exchange Rate (USD/

NGN)

Devaluation Target

15 502 153%

20 376 90%

25 301 52%

30 251 27%

35 215 9%

38 198 0%

United Capital Research Estimates

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Macro variables will test support levels. Our 2016 outlook is underpinned by the bearish

expectation for oil price which is expected to reverberate across key sectors of the econ-

omy. We think real GDP growth will take a fillip from increased and more productive gov-

ernment spending, hence we expect a mild recovery to 4.4% in 2016. The inflationary

path is dependent on the pass-through from an imminent currency adjustment with Offi-

cial exchange rate likely to close the year at NGN/USD 240. However, with the benefits of

a relatively higher base, and delayed transmission effect of a possible devaluation, we

expect inflation rate to average 9.5% for the year. A somewhat renewed harmony be-

tween fiscal and monetary policy will see the policy rate lowered further to 10.0% .

Expect a challenging year for naira assets. We look to see robust system liquidity over H1-

16, one of the most important themes for naira FI assets. While uncertainties around FX

will continue to hold back foreign inflows in the fixed income market within the period, we

expect that the current pricing of risk in the equities market, will continue to push momen-

tum to the FI market, with attendant decline in yields. Government’s expansionary spend-

ing which is likely to gather momentum in H2 will however place a floor on yield with the

possibility of an uptick. Overall, we project that average FI yields will trim between 100-

150bps on average over H1, barring surprises around FX.

We are bearish on equities as we expect the market to ride the roller coaster of oil price

and FPI funds flows in 2016. What’s more, the outlook for company performance in 2016

remains feeble on account of challenging operating environment. We have modeled

quarterly equity market returns on probability weighted oil price scenarios to arrive at a

forecast return of –9.2% for the year .

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Analysts

Kayode Tinuoye

Head Research, Financials

+234-706-881-6408

[email protected]

Adelayo Alabi

Consumer

+234-817-686-8065

[email protected]

Kayode Omosebi

Energy and Industrials

+234-818-1621-267 [email protected]

Moremi Obadara

Intern

+234-905-4655-278 [email protected]

United Capital Research Distribution

Bloomberg UCNR<GO>

Reuters www.thomsonreuters.com

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Contacts:

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[email protected]

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Contents Global Economic Outlook 7

Headwinds yet to dissipate 8

US: On a lonely path to tightening 9

Europe: Sailing along the QE theme amid risk trade-off 10

Asia: China leads emerging market slowdown, as spillover hits SSA 11

Global Oil Prices: Contending with a cocktail of supply shocks 13

SSA Update and Outlook 16

Economic resilience under test, is Africa still the next frontier? 17

BRVM: The big outperformer 19

South Africa: Approaching the bottom of the cycle 21

Ghana: Economy at a delicate phase, risk events still on the horizon 23

Angola: Tough times ahead 25

Mauritius: Striving for steadier growth 27

Kenya: Faltering despite strong fundamentals 29

Nigeria 2016 Outlook 31

Post-election Nigeria: Still attractive for business? 32

Real GDP: Global headwinds meet poor visibility in domestic policy 34

Budget 2016: The Budget of “Change” 37

Fiscal Outlook: Near-term vulnerabilities still in sight 40

Inflation: A monster not so frightening after all 42

Trade and External Position: Surplus shrinks, but outlook remains positive 44

Financial Markets Outlook 45

Money markets: A tale of unequal halves 46

FX: How long more can the “visible” hand hold sway? 50

Fixed Income: A story of resilience 53

Equities: A bumpy ride down the hill 56

Sector Review and Outlook 63

Banking Sector: Still battling a flurry of headwinds 63

Consumer: Riding out the hard times – industry still in transitory phase 86

Oil and Gas: Aligning 2016 projections with reality 107

Cement Sector: Attractive long term call 122

Disclaimer and Ratings Criteria 132

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Abbreviations

APC All Progressives Congress

BoE Bank of England

BoJ Bank of Japan

BVPS Book Value of Equity per Share

CAPEX Capital Expenditure

CBN Central Bank of Nigeria

CID Cote D’Voire

CIT Company Income Tax

CPI Consumer Price Index

CPMI Composite Purchasing Managers Index

CRR Cash Ration Reserve

DM Developed Markets

EBIT Earnings Before Interest and Tax

EBTIA Earnings Before Interest, Taxes, and Amortization

ECB European Central Bank

EM Emerging Markets

EPS Earnings per Share

FM Frontier Markets

FX Foreign Exchange

GDP Gross Domestic Product

m/m Month on Month

Mn Million

MoU Memorandum of Understanding

NBS National Bureau of Statistics

NGN Nigerian Naira

NGSE ASI Nigeria Stock Exchange All Share Index

NIR - Non Interest Revenue

NPL Non-performing Loan

NSE Nigerian Stock Exchange

OMO Open Market Operation

OPEC Organization of the Petroleum Exporting Countries

OPEX Operating Expenses

p/b Per Barrel

P/BV Price to Book Value

P/E Price to Earnings

PAT Profit After Tax

PMI Purchasing Manager Index

q/q Quarter on Quarter

QE Quantitative Easing

ROAA Return on Average Assets

ROAE Return on Average Equity

SOTP Sum of the Parts

SPS Sales per Share

TP – Target Price

Trn Trillion

USD ($) United States Dollar

VAT ` Value Added Tax

Vs Versus

y/y year on year

Ytd Year to Date

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Section 1

Global Economic Outlook

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Global Outlook

Headwinds yet to dissipate

While there were still a few surprises, the major drivers of global market perform-

ance in H2-15 were already fully in play from the start of the year, as extended

commodity price declines, monetary policy divergence across key geogra-

phies, and risk trade-off amongst the well-known Eurozone culprits remained the

major themes. Across the Atlantic, the fear of “Brexit” began to slowly replace

“Grexit”, even as the Turkey/Russia rancor threatened to heighten market

volatility. The latter briefly supported oil prices, although in the end the impact

was mostly transient, as global supply overhang eventually dominated. China

threw the biggest market surprise in H2 in our view, with moves by its leaders to

stimulate growth and protect its capital markets as well as investors’ capital,

only further stoking jitters across markets, even as economic numbers continued

to mostly disappoint.

All these happened on a background of widening disparity in monetary policy

positions by major Central banks globally, with the BoE, ECB and BoJ prolonged

easing monetary policies, while the US Fed summoned enough courage to raise

interest rates for the first time in nearly a decade. These together with a down-

trend in commodity prices had market-wide implications, as key EMs and FMs

bore the brunt, with fiscal balances and EM currencies coming under severe

pressure and eliciting even more varied responses from the Central Banks con-

cerned.

In shaping a prognosis for 2016, we have reviewed events that shaped market

performance in the past year. What is clear to our mind is that divergence in

monetary policies globally will continue to be the reigning theme for the first half

of the year. With outlook for commodities still benign, EMs and FMs will likely re-

main at risk, which obviously dictates a selective approach for both strategic

and tactical plays.

The overriding themes that

dominated the global economy in

2015 were declining commodity

prices and monetary policy diver-

gence across markets

EMs and FMs remain at the receiving

end of global market volatility with

fiscal balances and currencies under

pressure

2.82.2

1.61.0

2.5

1.5 1.3

-1.3

7.5

6.3

1.3

-1.0-0.6

-4

-2

0

2

4

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8Chart 1: Global growth should edge up as US stability improves

Global Real GDP forecasts (y/y, %)

2015E 2016F

Source: IMF, United Capital

Advanced Economies Euro Area Emerging Markets

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US: On a lonely path to tightening

Despite market expectations that an interest rate hike was on the horizon, US

equities started the second half of 2015 on a strong footing, with the S&P 500 ris-

ing 2.1% m/m in July. This was amid generally upbeat macroeconomic data,

which further strengthened the view that the disappointing showing in the first

quarter was due to one-off factors, mainly poor weather and port shutdowns.

Furthermore, data released showed that the US economy accelerated in the

second quarter, as GDP rose at an annualized rate of 2.3% during the three

months to June. At the same time, the figure for first-quarter GDP was revised, this

time from a 0.2% decline to positive growth of 0.6%.

Much in line with market expectations which already put the probability of a

December 2015 rate hike at c.70.0% as early as September, the US FOMC raised

the range of its benchmark interest rate by a quarter of a percentage point to

0.25% - 0.50% from 0.0% - 0.25% at the close of its 2-day policy meeting in Decem-

ber. The Chair of the Fed, Janet Yellen explained that the Committee judged a

modest increase in the federal funds rate was appropriate, even as the econ-

omy continued to pick-up recovery pace. She added that the rate hike was a

tentative beginning to a "gradual" tightening cycle, and that in deciding its next

move, attention would tilt more towards monitoring inflation, which was still some

distance behind its 2.0% target.

Broadly upbeat macroeconomic

data supported US equities at the

start of H2-15

-6.5

-2.5

1.5

5.5

9.5

Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

unemployment Equity returns

Chart 2: Despite strong labour numbers, overall mixed data and global

growth concerns to slow equities

US Monthly equity returns and unemployment rates (%)

Source: Bloomberg, United Capital

Inflation still significantly lags US Fed

target rate of 2.0% which suggests

that tightening may come at a

measured approach


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Europe: Sailing along the QE theme amid risk trade-off amongst member

countries

Across the Atlantic, the start of H2 was dominated by headlines around Greece.

After months of capital controls, murky negotiations amongst stakeholders which

included a missed payment to one of its creditors (the IMF), Greece finally

reached a deal and signed an memorandum of understanding (MOU) with its

creditors. This guaranteed further financial support premised on a third round of

economic adjustment programme. This financial package comprised of up to

€86 billion in financial assistance over three years (2015-2018) with disbursement

linked to progress in delivery of policy conditions, in accordance with the terms

of the MoU.

Outside of Greece, economic data of the Eurozone continued to improve slowly

as most economies in the region benefitted from QE support by the ECB. While

countries such as Germany, Spain and Ireland started H2 on a strong footing,

performance of some other countries notably Belgium and Italy lagged, with

weak growth and increasing unemployment from already elevated levels

combining to constitute a drag on the performance of the wider euro area. We

note that Q3-15 GDP expanded by 0.3%, and represents the tenth consecutive

quarter of growth, driven by a gradual recovery in pent-up domestic demand

and less by net trade.

The Greece bailout put paid to the

likelihood of Grexit

Source: Bloomberg, United Capital Source: Bloomberg United Capital

Beside Greece, economic perform-

ance of the Eurozone continues to

slowly improve

Despite slowly improving fundamentals which was mostly QE driven, the Euro

zone's growth picture was tinted early Q4 by more global-wide concerns. The

initial trigger for instability was China, where the authorities’ management of the

bursting of the country’s stock market bubble and the decision to devalue the

currency in August left investors severely unimpressed. Fears over China’s slow-

down and subsequent falling demand for raw materials, coupled with excess

supply, meant a further step down for commodity prices, which stoked jitters

across markets.

Global wide concerns weighed on

the Eurozone early Q4 with instability

in China leading the charge

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Moreover, the Eurozone remained well behind its inflation target of 2.0%, as it

continued to battle deflationary pressure which persisted in spite of on-going QE

(inflation came in at -0.1% in September 2015)

It was against this backdrop that investors raised expectations of an increase in

the quantum of QE even as the Draghi led ECB went dovish, stating that they will

continue to monitor growth data and will act if conditions so warranted. The mar-

ket generally interpreted the statement as “more QE for longer”. However, on

the strength of economic numbers that were released early Q4, which saw the

CPMI rise to 54.0 in October, and GDP growth close to 2%, the ECB held off mak-

ing grand changes to the on-going QE at its December meeting. Instead, it

opted to only extend the QE tenure by additional six months together with a 10

basis point cut in deposit rate to - 0.3% much to the disappointment of investors.

Consequently, Eurozone equities ended 2015 on a negative note (-6.2% return in

December), with investors clearly discontent, having set the bar high with regards

to the quantum of easing needed to provide a jolt to the ailing economy.

Asia: China leads emerging market slowdown, as spillover hits SSA

In August 2015, China surprisingly devalued its currency by lowering the rem-

minbi’s reference rate ( the rate at which the Central Bank sets the currency on a

daily basis and from which the currency is allowed to move by +/-2% against the

dollar). The currency was marked down by 1.9% marking the biggest downward

adjustment in 2015. This move by the Chinese authorities was aimed at stimulat-

ing economic growth via exports which had seen a persistent contraction.

The slowdown in the world’s second largest economy (accounting for one-fifth of

the global economy) was reaffirmed towards the end of the year as economic

data worsened on a number of metrics. The closely-watched Caixin China

manufacturing PMI reading for October continued on its downward trajectory,

posting a reading of 48.3, above September’s 47.2, but still in contractionary terri-

tory. Meanwhile, September inflation registered a lower than-expected 1.3% in-

crease year-on-year, down from August’s 1.6% rise, with the numbers continuing

to add to worries that the economy is facing prolonged deflationary pressures.

Global Market Outlook

Volatility still in sight as global growth and risk balancing takes center

stage.

Going into the first half of 2016, we believe global growth will remain fragile at

best, as the important parts continue to move in different directions. With the EM

“commodity super cycle” officially over, and China still trying its utmost best to

find a fulcrum, we believe global trade and manufacturing will remain in the

balance

The Eurozone still lies behind its infla-

tion target range

Eurozone equities ended 2015 on a

negative note reflecting investors’

disappointment with the quantum of

easing by the ECB

The slowdown in China was reaf-

firmed towards the end of the year as

economic data worsened on a num-

ber of metrics.

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This is further hinged on our projection that outlook for commodity prices, with oil

leading the charge, will remain bearish during the period. While we do not fore-

see China entering into a recession, we think a slowdown in overall demand will

still pose significant downside risk across markets.

Given the scale of the bilateral trade between China and many SSA economies,

a continued weakness of the Yuan in 2016 will continue to pressure the terms of

trade positions of these economies. According to the IMF, a 1% slowdown in

China’s domestic investment is associated with a 0.8% contraction in the export

growth rate of resource-intensive economies in SSA. Continuous adjustments to

the Yuan is likely to be negative for the growth of industrial activities in less diversi-

fied SSA economies.

For the DMs, our outlook is a little more upbeat, as we expect that the US econ-

omy will continue to hobble along a path to recovery albeit at a much slower

pace than the US Fed must have earlier anticipated. We believe this may impact

the pace of rate normalization, although we still expect that the level of tighten-

ing will be strong enough to ensure a divergent global monetary policy theme

remains dominant. Therefore, a stronger dollar is likely to further test the resolve of

key EM and FM economies and their fiscal balances, although one can argue

that many of these may be a little more prepared than a year ago to weather

the storm, or maybe it will be a case of resetting to lower expectations for these

markets.

Despite still strong deflationary pressures, we expect the Eurozone economies will

also contribute to global growth, with further QE likely on the horizon, a policy

direction also likely to be pursued by Japan. In fact, we think monetary easing in

these economies will extend into 2017, which again hints that the pace of tight-

ening in the US may be uneven as the US Fed may elect to cap the uptrend in

the dollar. The emergence of “Brexit” remains a key risk, and together with oil

price related shocks, could be a major source of market volatility in the course of

H1-16.

Overall, while the global markets are not out of the woods yet, we believe 2016

will form an additional base to the recovery theme that is slowly beginning to

gather pace, although headwinds from commodity price shocks and structural

shifts in the largest economies will likely continue to threaten. These, in our view

will continue to drive volatility across markets, with investors likely to continue to

tread cautiously, selectively balancing risk against reward across the major asset

classes.

A prolonged episode of a slow down

in oil demand from China is a key risk

for the global markets in 2016

The US economy will continue on a

path to recovery

Monetary Easing in the Euro zone

could extend to 2017

Caution will be the ruling theme as

volatility continues over H1-16

More periodic adjustments to China’s

currency in 2016 portends terms of

trade deterioration for SSA

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Global Oil Prices: Contending with a cocktail of supply shocks

Demand-supply imbalances were the major driver of crude oil prices in 2015. In

our 2015 Outlook report, we stated a base case expectation of $55-60p/b for

average oil prices in 2015.

Our view on the trajectory of oil prices was anchored on 4 factors at the time: 1)

Oil had long been trading in backwardation implying prices were almost cer-

tainly range-bound in the medium term; 2) Alternative energy sources had

gained significant traction at the time making excess supply of crude oil unavoid-

able. In fact, US Shale oil production had increased 5-fold in the prior six years; 3)

OPEC had failed to rein in excess production from its members who were faced

with acute fiscal challenges (on our estimates, Saudi’s output alone explains

c.37.0% of the variations in crude oil prices globally); 4) Supply glut aside, de-

mand had slowed considerably and a bleak outlook for emerging market

economies meant prices were likely to struggle for support.

To a considerable extent, the factors stated above, combined with faltering

global demand on account of slower growth from Europe and Asia, drove oil

prices lower to an 8-year low in 2015. As at Dec 31 2015, Brent crude averaged

$55.9p/b for 2015, closing the year at $36.7p/b, 36.0% down from its value at the

end of 2014.

Faltering global demand, as well as

supply glut exerted significant pres-

sure on oil prices in 2015

Brent averaged $55.9 p/b in 2015,

36.0% down from its 2014 close


020406080

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Chat 6: Crude oil tested successive lows in 2015

Brent crude price vs. WTI($p/b)

Brent WTI

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Iran: the new kid on the block

The Iranian deal came at an inopportune time, when the global oil market was

already oversupplied. A nuclear deal framework was struck with Iran in June 2015

in order to give international nuclear weapons inspectors access to Iranian nu-

clear facilities, and hence freeze nuclear activities for 10 years. In exchange, Iran

is expected to see trade sanctions relief. Iran’s resumption of production after a

lift-off in sanctions is expected to compound the downward pressure on prices.

Although the deal had been anticipated by the market, current prices still do not

reflect the additional supply from Iran, in our view. This is because we believe the

commodity market operates less on expectations relative to the financial mar-

kets, hence we think prices will ultimately adjust when Iranian oil finally hits the

market sometime in 2016. Though estimates vary, Iran’s oil minister Bijan Zan-

ganeh has said that his country will be able to ramp up output by 500,000 barrels

per day on resumption of production. In any case, with the 4th largest crude oil

reserves globally, we expect Iran to ultimately strive to retrieve its market share of

1 million barrels per day lost prior to the sanctions.

Shale Oil Production: Marking time or moving on?

The market witnessed a continued revolution in 2015 as significant progress made

with the unconventional US fracking technology. US oil output has been growing

at its fastest rate on record in the last 5 years. According to EIA, production of

crude oil averaged an estimated 9.3 million b/d in 2015, a 7.0% increase over

2014 and the highest rate since 1972. We note that earlier market expectation of

a gradual decline in shale output as production becomes uneconomic played

out in 2015, albeit with at a lesser scale than envisaged, largely on account of

advancement in oil rig technology. Although US rig count declined by 62.1% in

2015, horizontal rig count, the backbone of the fracking technology, fell by 59.3%

vs. 71.2% for the less efficient vertical rigs within the same period.

Currently prices do not fully reflect

expectations on Iranian production,

in our view

Source: EIA, United Capital

Rigs are falling but the efficiency of

drilling continues

15


In the last couple of years, the US has

made appreciable progress in the

shale oil technology

This suggests that overall rig count decline should not be taken at face value as

vertical rigs continue to fall much faster than horizontal rigs. Hence, we posit

that a rapid increase in the efficiency of drilling remains a downside risk to oil

prices in 2016. In the last couple of years, the US has demonstrated significant

progress in the perfection of cost-effective production of oil and natural gas

from hitherto unrecoverable reserves. Emerging consolidation in the industry is

also driving cost lower. To sum, drilling efficiency and possible further reduction

in full cycle cost of fracking are likely to make shale production withstand lower

oil prices in the medium term.

Source: Baker Hughes, United Capital Source: EIA , United Capital

The OPEC strategy: Cards not too close to the chest, waiting on Saudi

The Saudi-led OPEC strategy of defending market share has substantially driven

global excess supply of c.2.0 million bpd in the last 18 months. This excess, which

naturally goes into storage, likely to be released when storage capacity is ex-

ceeded, could further drive prices down unless production is cut back. While

most of the OPEC members are fiscally constrained to maintain current output

level, non-OPEC members’ stance on production appears to be both economi-

cally and politically motivated. To add, as emerging markets’ currencies come

under more pressure from a strengthening dollar in 2016, production will likely be

sustained at current levels in order to make up for revenue losses. For these rea-

sons, we do not expect a sharp price rebound in the near term, unless OPEC pro-

ducers cut production unexpectedly or geopolitical shocks ensue. Undoubtedly,

Saudi holds the key to a change in OPEC’s strategy. We note that Saudi, the big-

gest player in OPEC, now needs up to $105p/b to balance its annual budget

according to the IMF; hence would need to sacrifice a substantial loss of market

share for a more favourable fiscal condition. While spending cut is not likely to

have significant impact on deficit, a drawdown in reserves is likely to trigger a

downgrade in sovereign ratings which may bode ill for more international bond

issuances in the medium term.

Saudi continues to hold the key to a

change in OPEC’s strategy

16


Section 2

SSA Update and Outlook

17


Slowing global growth has varied

impacts on the economies of SSA

SSA Review and Outlook

Economic resilience under test; is Africa still the next Frontier?

SSA is a remarkably diverse geography, a feature that has helped shape growth

patterns over the past two decades. The 45 countries that make up the region

vary markedly in population sizes, income levels, social political stability, re-

source endowments, and access to international markets. We believe this diver-

sity has yielded appreciable benefits by moderating the impact of external

headwinds on the collective economic strength of the region.

Similar to 2015, we believe the economic fundamentals of the SSA economy as

a group and individually, will continue to come under severe test in 2016 as a

result of adverse global macroeconomic conditions.

Globally, growth has slowed remarkably in the last 18 months, but we have seen

marked differences in the experiences of many middle-income SSA countries.

The close integration of financially active countries to the international markets

is manifesting in a sharp adverse shock to GDP. Resource rich low-income coun-

tries with high export concentration have seen slightly more severe impacts on

domestic growth with Nigeria’s GDP down to multi-year lows.

Our base case scenarios suggest that the global economy will continue to strug-

gle to gather momentum for the most part of 2016, with activity in the Euro Area

and Japan slowing, growth in China continuing to decelerate, Brazil, Russia and

India under continuous pressure, growth in SSA, especially for key commodity

exporters will continue to weaken.

We expect global growth to slow

over 2016 with relentless pressure on

the economies of commodity-

dependent SSA

Source: IMF, Bloomberg, United Capital

18


High concentration in the export

base of most SSA countries continues

to expose them to global headwinds

Looking ahead, we believe the contribution of commodity price fluctuations to

SSA economic growth look set to remain significant, with business cycle peaks

and troughs likely to be closely linked to resource price movements for the fore-

seeable future. A viable antidote to this malaise will be a healthy dose, or more

appropriately, a wave of structural economic reforms which, in our view, are

very remote going by the historically slow progress in economic diversification

across most of our coverage SSA. For instance, revenue from hydrocarbons ex-

ports accounted for 53.9% of fiscal revenue in 2015 for the entire SSA, up from

39.5% in the early 2000s, on our estimates. The fact that most SSA economies still

have highly concentrated export bases is symptomatic of the region’s vulner-

ability to global macro shocks; with the tendency to erode gains from prior

years of economic acceleration.

Our perceived downside risk to many of our coverage SSA economies in 2016 is

the low policy buffers in these countries, a trend that has constrained their re-

sponse to the current macro-economic shocks. We reiterate that there is an

ever-increasing need for African countries to improve domestic resource mobili-

zation and enhance public expenditure efficiency.

As the global economy re-engineers itself, albeit in a step-wise direction, emerg-

ing market capital and funds inflows will be seeing drastic rebalancing and in

some cases, notable cutback with dramatic consequences on economic

growth across our SSA coverage. SSA bonds have sold off in the international

markets as investors perception of macro risk heightens amid weak domestic

response to global headwinds. For us, most far reaching would be a worse-than-

expected slowdown from China which remains strategically important for com-

modity rich but dependent SSA economies.

With a series of elections coming up in 2016, countries like Uganda, Zambia and

Ghana are set to witness dramatic changes in fiscal spending typical of most

SSA economies in an election year. For countries under our coverage, we do

not envisage significant political risks in the run-up to their respective polls. How-

ever, we believe the impact of electoral spend on fiscal policy in Ghana will be

significant, while SA’s Municipal elections will likely be a precursor to a shift in

political leanings as the wider 2019 general election approaches, with the fate

of the ruling ANC set to face a stern political test.

Policy buffers remain low across SSA

A significant slowdown from China

will compound SSA woes in 2016

Political risks remain to the downside

19



CID’s strong growth story drove the

performance of the BRVM in 2015

BRVM

The big outperformer

In 2015, the BRVM equity market outperformed peers in the SSA region on local

and foreign currency bases. Political and macroeconomic stability as well as

strong growth story in Cote d’Ivoire (CID), the largest economy in the region,

largely drove this strong performance.

CID’s impressive growth trend should persist in 2016 as the current economic

boom looks likely to be sustained in the medium term. Most sectors of the econ-

omy, from agriculture to construction, will likely continue to perform strongly. We

like the private investment led growth pattern (60.1% of the total investment) of

the region which makes growth more sustainable. Broadly speaking, the region

is somewhat decoupled from the China and other emerging market slowdown

given its limited commodity export linkages.

The success of CID’s 2015 elections points to entrenched political stability. The

successful conduct of the election which saw the re-emergence of Alassane

Ouattara in the presidential elections, with over 80.0% of the votes cast has

raised hopes for the peaceful conduct of the Legislative elections in 2016, as

well as longer term consolidation. Despite political upheavals within the CFA

franc zone, particularly in Mali and Burkina Faso, the Ivoirian economy has been

less impacted due to limited trade ties with these economies.

CID, with favourable ratings outlook, provides strong prospects for the BRVM re-

gion in 2016. CID was the only SSA sovereign to have been upgraded in 2015.

The sovereign’s rating was upgraded from B1 to Ba3 by Moody’s, with Fitch likely

to upgrade its current B rating (positive outlook) to B+ in 2016 on account of

consolidating political stability and relatively resilient macroeconomic perform-

ance.

The region is less susceptible to eco-

nomic slowdown in China and other

emerging markets

20


CID’s negligible net energy export

makes it less susceptible to oil price

declines

External performance is likely to be driven largely by the price of Cocoa, which

has been relatively favourable in spite of the downturn in global commodity

prices. CID net energy export is negligible, implying less susceptibility to oil price

declines. With the Currency (XOF) pegged against the Euro, and little political

willingness for a de-pegging, there is little exchange rate risk. Rather, a possible

weakening of the Euro due to dollar strengthening provides potential trade

competitiveness advantage though this could also mean higher debt service

and marginally higher fiscal deficit.

We expect CID’s strong growth story to support the BRVM equity market in 2016.

Market Liquidity has remained robust though the bond market is relatively less

active, with total value of trades just 18.0% of total value of trades on the Bourse

as of December 2015.


21


The South African economy appears

not yet strong enough weather cur-

rent headwinds

South Africa

Approaching the bottom of the cycle

The South African economy faced a number of headwinds in 2015, chief

among which were a tightening of the global market conditions, Southern Afri-

can drought, persistent local energy constraints, as well as commodity price

weaknesses. In our view, the economy does not yet appear strong enough to

weather these headwinds which are set to persist in 2016.

2016 elections may throw up surprises. Public support for the ruling African Na-

tional Congress is waning on the back of poor macroeconomic performance. A

bid to retain the loyalty of a sizeable portion of the urban populace has been

attributed to the recent increase in public sector wages. Due to ongoing eco-

nomic woes, the election may see the incumbent ANC lose hold of the largely

economic Guanteng which accounts for over 30.0% of the entire SA’s GDP.

Growth is expected to slow in 2016. We expect growth to slow to around 1.5% in

2016, driven largely by an expected sluggish growth in private consumption as

wage and employment conditions deteriorate. Further, tepid export demand

from a lethargic global economy, as well as low domestic business confidence,

is expected to further dampen growth. Spending may become more populist as

the election approaches, limiting growth enhancing options for the current gov-

ernment.

Currency weakness is set to persist as stronger dollar, less-than-expected dovish

Fed, as well as weak commodity prices are possible risk factors that may weigh

on the domestic currency. The Rand lost 33.7% in 2015 as the currency came

under relentless pressure. With SA credit status likely to deteriorate in 2016, the

Rand will remain under water for the most part of the year.

Growth is expected to slow in 2016


22


Source: Stat SA, United Capital

We expect a 25bps increase in the

benchmark rate in 2016

Inflation outlook is less benign than the trends seen in the last quarter of 2015

given expected pass through from ongoing Rand weakness. Given that fiscal

consolidation has been delayed as Gross Debt to GDP is likely to peak at 49.4%

in FY-19, higher than 47.5% assumed in the Feb-15 budget, a tighter fiscal deficit

will likely not be enough to suppress inflationary pressure in the medium term.

We expect measured monetary tightening. In the last MPC meeting, the SARB

appeared concerned about a build up in inflationary expectations; so we think

the series of the tightening seen in 2015 would have more of a frontloading ef-

fect. Moreover, a continued weak growth backdrop, though seen to be partly

structurally driven, will limit tightening in 2016. We therefore expect the repo rate

to move up not more than 25bps in 2016.

Table 1

South Africa Key Macro Indicators

2015 2016 2017

Real GDP(y/y, %) 1.5 1.6 1.8

Policy Rate(%) 6.25 6.5 7

Inflation rate(%) 5.4 5.7 5.8

External Reserves (USDbn) 40.6 38.7 41

Fiscal Deficit (% of GDP) 4.075 3.693 3.445

Current Account Balance -4.5 -4.56 4.47

Currency (ZAR/USD) 15.6 17.5 15.3

Source: Bloomberg

23



Ghana’s successful deal with the IMF

has created a lifeline for sustainable

recovery

Ghana

Economy at a delicate phase, risk events still on the horizon

While a downtrend in commodity prices, spiraling government debt, challenges

around electricity, and strong inflationary waves all combined to dampen eco-

nomic expansion in 2015, measures that have been taken to instill some stability

appear to be having a moderating effect, especially towards the end of the

year. As at the end of H1-15, Ghana’s total public debt rose to 94.5bn cedis

($23.7bn), a staggering c.71.0% of its GDP. However, its debt restructuring strat-

egy which focuses on issuance of longer term securities as well as a three-year

aid deal with the IMF worth $918.0mn has created a base for a gradual recov-

ery. In our view, H1-16 will give a much clearer picture of just how rocky or other-

wise, its path to recovery will be.

FX pressure continues to mount on lower commodity prices. Much in line with

most emerging and frontier markets, headwinds from exogenous events, such

as the strengthening of the US dollar contributed to the drag on Ghana’s eco-

nomic growth in 2015. In particular, the depreciation of the Cedi, which lost

18.3% over the year drove up prices of imports, eventually raising prices and

stoking inflation with the country now running a high twin deficit (current and

fiscal accounts). Benign outlook for commodities as well as expectations of fur-

ther rate hikes by the US Fed means currency pressures will likely linger in 2016.

Hence, harmonization of monetary and fiscal policies by the Government and

the Apex bank to stimulate domestic demand and increase local production

will be key to insulating the cedi a little more from market-wide shocks.

The Cedi lost 18.3% in 2015

0

5

10

15

2009 2010 2011 2012 2013 2014 2015e 2016f 2017f

Chart 14: Economy is finding some stability but political risk and

fiscal imbalances remains

Ghana Real GDP vs SSA (%,y/y)

SSA Ghana

24


While the country’s economy is be-

ginning to show signs of recovering ,

inflationary pressure remains strong

Inflation still defying the odds, but plausible expected inflows likely to halt the

Apex bank’s hawkish stance. While the country’s economy is beginning to show

hints of stability, the pressure of inflation still remained strong and unabated for

much of 2015. The Bank of Ghana has taken rather aggressive steps to stem the

tide, but results have been mixed for the most part. Despite a combined 500bps

hike in the base rate over 2015, the last of which was a 100bps upward revision

at the end of its November 2015 policy meeting (MPR is 26.0% at the end of

2015), inflation remains well above the apex bank’s target band of 8.0% +/-

2.0%. Clearly, the BOG will be looking to curb inflationary pressures over 2016,

which raises the possibility of further measured monetary policy tightening if the

upcoming November general polls is factored-in.

Sweeping changes needed in the power sector: The economy has been

plagued with power supply challenges over the past 3 years, running at 1,200

megawatts, which is c.50.0% of its total installed capacity. The issues have been

further compounded by debt ($10.0mn) owed to Nigeria for supplying gas to its

power plants. It was against this background that the Minister for power re-

signed at the end of 2015, after being unable to solve the power challenges

within the stipulated deadlines. In our view, progress around challenges pre-

sented by “dumsur” which seemed to have worsened in the past year, will be

pivotal for economic growth in 2016, and we expect to see more clarity with

regards to the privatization or otherwise of its power industry.

Despite slowly improving fundamentals, economy to remain in the balance: We

see scope for higher political risk in 2016 with its attendant impact on FX, domes-

tic prices and inflation, as the country builds up to the general elections set to

hold in November. This will likely keep the apex bank on its toes, and as such

further monetary policy tightening could be on the cards. On the other hand,

we expect oil production and some oil export incomes to come on stream in

the course of the year, which should provide additional FX denominated reve-

nue for the government, despite global supply glut concerns.

With struggles in the power sector still

evident, we expect further clarity with

regards to privatization of its power

industry in 2016

Source: National Statistics Office , United Capital

Table 2

25


Source: IMF, United capital research

There are several risk scenarios for the

Angolan economy in 2016

Angola

Tough times Ahead

With crude accounting for c.50.0% of GDP, two thirds of fiscal revenues and

c.90.0% of exports, Angola’s economy was pressured in 2015 due to crude oil

price collapse, in line with the global trend for economies heavily reliant on

commodities. Consequently, the government slashed its 2015 budget by

$17.0billion (a 25.0% reduction), with public spending also reduced by 53.0%,

further extending an era of contractionary fiscal policy. Except the pace of fis-

cal revenue diversification gathers momentum, the conditions for a hard land-

ing appears to be aligning for Angola going into 2016, as headwinds from pres-

sure on the kwanza, high unemployment (c.26.0%), political complexities and

rising debts, present tricky risk scenarios.

Tough FX policy calls awaits the Central bank, with currency pressure set to lin-

ger. Dwindling fiscal revenues and foreign reserves drove a devaluation of the

kwanza by 6.0% and 4.0% in June and September 2015 respectively, even as the

Central Bank regularly intervened in the FX market to halt the depreciating

kwanza. Furthermore, the apex bank reduced the delivery of banknotes in for-

eign currency, limited withdrawals from foreign currency accounts and encour-

aged the use of other foreign currencies such as the euro or the renminbi as an

alternative to the U.S. Dollar. Against this backdrop, Bank of America, the big-

gest supplier of dollars to Angola, decided to stop supplying Angolan commer-

cial banks with USD in Q4-15 and other banks such as Standard Chartered soon

followed suit.

Despite its efforts, the kwanza still depreciated by 31.5% over 2015. With crude

oil prices testing new lows, we believe the apex bank still has tough days ahead

in 2016, and may be forced to take more drastic measures.

The kwanza was devalued by 10.0%

in 2015

0

2

4

6

8

2009 2010 2011 2012 2013 2014 2015e 2016f 2017f

Chart 15: Pressure from currency and falling crude is setting Angola

up for a possible hard landing

Angola Real GDP vs. SSA

SSA Angola

26


Ties with China strong but may prove inhibitive. China is, by far, Angola’s largest

trading and economic partner, holding c.41.0% of Angola debts and also im-

porting about 50.0% of Angola’s oil output. With growth slowing in the world’s

second largest economy, it will likely import crude oil from Angola at a lower

rate in 2016, which will likely further hurt Angola’s economy. Furthermore, debts

owed to China (estimated at c.$20bn) carries restrictive provisions and cove-

nants, For instance, contracts from the Export-Import Bank of China require that

70.0% of projects be awarded to Chinese companies and 50.0% of procurement

materials imported from China. Such dynamics in our view, could combine to

further constitute a pull-back on growth over 2016.

Economic growth prospects to hinge on pace of revenue diversification. 2016

will likely see the government tighten further as it seeks to have a grip on the

faltering economy. In our view, economic growth prospect will be well tied to

the pace of enactment of policies that will drive fiscal revenue diversification,

barring distractions from political propaganda as the country begins prepara-

tions for the 2017 presidential polls.

We expect further monetary tighten-

ing in 2016

Strong ties with struggling China con-

tinues to bode ill for the Angolan

economy

Angola Key Macro Indicator

2015 2016 2017

Real GDP 3.8 3.6 4.1

Policy Rate 11 12 11.5

External Reserve 24.3 22.3 22.6

Fiscal deficit 4.2 4.7 4.1

Current Account Balance -7.8 -5.5 -4.9

Currency 30.8 14.3 11.1

Pressure from currency and falling crude is setting Angola up for

a possible Hard landing in 2016

Economy finding some stability but political risk and fiscal

imbalances still remain


Table 3

27


Source: IMF, National Office of Statistics United Capital

Mauritius growth trend has been rela-

tively stable despite global macro-

economic volatilities

Mauritius

Striving for steadier growth

Mauritius remains one of the most competitive countries in SSA having under-

gone successful transitions in recent times. Unlike most SSAs, commodity price

slump has been less telling on fiscal revenue and external reserves, save for a

slowdown in its traditional trade markets, Europe.

Real GDP expanded by 3.5% in 2015 slightly above a 5-year average of 3.4%.

While growth has trailed government expectations for 3 years in roll now, the

trend has remained fairly stable despite global macroeconomic volatilities.

Mauritius’ sub-capacity growth performance can be attributed to a slowdown

in the Euro area, which remains its biggest trade partner. Dec-15 GDP numbers

show a deceleration in export revenue growth (from 10.9% in 2014 to 5.6% in

2015). The 2016 budget targets a growth rate of 5.3%. We think growth will be

slower at around 3.6% as the external environment as well as falling commodity

prices continue to portend downside risk.

Shifting focus from traditional European markets could boost growth. The au-

thorities are taking steps to achieve a more diversified export revenue base

which should further reduce external vulnerability. Continued focus on Asia for

tourism should also help support growth, with strong increases in tourist arrivals

from both India and China helping to temper tepid growth in arrivals from

Europe. The manufacturing sector is slowly gathering pace with a modest

growth rate 3.8% in 2015 (vs 2.6% in 2014), higher than the growth rate of the

overall economy.

External pressure is set to persist in 2016. Official statistics for 2015 shows that net

export improved slightly to RM(41.4bn) (from -44.6bn in 2014), driven partly by

falling energy import bill despite increase in import of manufactured goods such

as machinery, as well as slower growth in export revenue. Given weak export

performance and high imports, the current account deficit is likely to remain

high in 2016. (10.3% of 2014 GDP). The ensuing pressure on the currency will likely

see the USD/MUR depreciate further to 38.5 over 2016.

The manufacturing sector is slowly

gathering momentum

The current account deficit is likely to

grow wider in 2016

28


Fiscal deficit is likely to widen on expansionary budget. The authorities an-

nounced a highly expansionary 2016 budget with 15.8% increase in total expen-

diture and focus on mega infrastructure projects. While these projects are likely

to support growth and boost the slowing construction sector, we think the huge

outlay could further widen the budget deficit given the bleak outlook for reve-

nue even as revenue is only forecasted to increase by a meagre 5.0%.

Inflationary pressure should remain subdued in the near term. As a result of be-

nign inflation, monetary policy has been broadly accommodative in the last 4

quarters. Low inflation motivated the Bank of Mauritius (BoM) to lower the repo

rate to 4.40% from 4.65% in November 2015. Given the bearish outlook for oil

prices, which forms the bulk of import bill, inflation is expected to remain con-

tained in 2016. However, the authorities’ ambitious target of 5.3% growth rate in

the 2016 budget may lead to a further cut in the benchmark rate.

Monetary policy is likely to be more

accommodative to foster stronger

growth

Huge budget outlay is set to widen

the fiscal deficit

Table 4

Source: IMF, National Office of Statistics , United Capital

29


The impact of oil price slump has

been minimal on the Kenya econ-

omy

Kenya

Faltering despite strong fundamentals

The attractive potential of the Kenyan economy continues to come under seri-

ous scrutiny as global headwinds and domestic challenges weigh on growth

prospects. A well diversified economic base has minimized the impact of oil

price slump but security-related risks remain significant with the threat of further

Al Shabab attacks. Near term, success in Kenya’s oil exploration activities will

bode well for the economy. In fact, oil exploration has been resilient to crude oil

price decline. Recent deal-flow in the East African region, with the acquisition of

five East African oil blocks by a new investor, hints at investor interest in East Afri-

can oil.

External vulnerabilities threaten growth outlook. In the last 3 years, Kenya has

intensified efforts at developing public infrastructure projects expected to pro-

vide a catalyst to growth. But the impacts are likely to be farther out in our view,

given emerging weaknesses in its regional trade partners. Owing to its diversified

economic base, the decline in oil price has been less hurtful to Kenya relative to

the rest of SSA. However, we see significant downside risks to growth on the

back of the expected lagged impact of tighter monetary policy in H2-15 as

well as exchange rate shocks.

Headline inflation is expected to test the upper band of KCB target in 2016. Infla-

tionary pressures are likely to persist in 2016. Higher food prices may stoke head-

line inflation as adverse weather conditions in Q4-15 puts pressure on prices over

H1-16. Increased political spending in H2-16 will further pressure the CPI. The po-

tential for prolonged shilling weakness over 2016 also remains a downside risk to

inflation though lower international diesel prices should temper rising fuel price

charge.

Infrastructure build-up will take time

to reflect in meaningful growth num-

bers


30


Benchmark rate may be lowered in 2016. We have pencilled in a reduction in

the central bank rate as we think the tightening cycle may have peaked. The

positive angle to such a move will be the attendant reduction in money market

rates which will be supportive of the government’s borrowing efforts in 2016.

Budget outlook is still hazy. The likely conclusion of ongoing syndicated loan

with commercial lenders is expected to temper domestic borrowing, with lesser

crowding out effect on private sector credit. Despite efforts at fiscal consolida-

tion via more rational spending, Kenya’s domestic borrowing activities will re-

main substantial especially given the increasingly lower tax revenue. Like most

of SSA, Kenya’s public finances will remain susceptible to emerging exchange

rate weaknesses, given the rise in external borrowing in recent years.

Borrowing activities will remain sub-

stantial in 2016

Table 5

Kenya Key Macro Indicators

2015 2016 2017

Real GDP (y/y, %) 5.5 5.6 5.8

Policy Rate (%) 11.5 11.0 10.4

Inflation rate(%) 6.5 6.4 6.6

Fiscal Deficit(% of GDP) -8.1 -8.8 -8.5

Current Account Balance (% of GDP) -9.1 -9.5 -9.7

Currency (USD/KES) 105 112.0 116

Source: Bloomberg

Source: IMF, National Office of Statistics , United Capital

31


Section 3

Nigeria 2016 Outlook

32


Domestic Policies and Politics

Post-election Nigeria: Still attractive for business?

The uncertainty that pervaded the air prior to the 2015 elections proved to be

significant for the Nigerian economy and financial markets, with massive portfo-

lio outflows ensuing from late 2014. Following the successful conduct of the 2015

elections and widespread recognition by the international community, consen-

sus expectations hinted at Nigeria’s ability to consolidate on her political stability

as well as strong demographic story to attract sizeable and sustainable foreign

investment flows. Post-election however, macro headwinds, FX rigidities and

minimal clarity in domestic policy direction have delayed resumption in portfolio

and FDI inflows. The key question on our mind now is whether we can expect a

reversal in this trend going into 2016.

We opine that the historic change in political party control of the machinery of

governance is largely attributable to the rather slow take-off of policy in the Bu-

hari-led administration. However, we like the renewed vigour for governance,

strong anti-corruption drive, as well as the seemingly stronger political will to

push through reforms necessary to navigate current macroeconomic chal-

lenges. What we are yet to see is a coherent economic blue-print to guide a

fast paced structural shift in the Nigerian economy. We think the government

needs to optimize the opportunity presented by current quagmire to evolve

long term policy redirection, such as fuel subsidy and taxation reforms, that is

well institutionalised and possibly designed to outlive the current government.

We recognise that public support for the new government appears to be un-

dergoing a litmus test, with the possibility of dissipating if reforms are not quick

enough to address lingering challenges.

We expect the political environment to be largely stable in 2016. The recent

progress in the tackling incessant security challenges remains business-positive.

Although the focus on retrieving looted funds is desirable and likely to boost

confidence in the government’s anti-corruption campaign, we believe a

greater share of governance effort needs to be devoted to creating more sus-

tainable funding sources to address current and future strain on the fiscal bal-

ance sheet.

We look forward to a more coherent

economic blue print to guide the me-

dium term to long term direction of

the economy

Nigerian economic fundamentals

have made little progress post-

elections

We expect the political environment

to be largely stable in 2016

33


One downside risk we see on the political terrain in 2016 is the vulnerability of the

APC to splinter group given the seeming lack of ideological underpinning even

as one might argue that what bound the coalition pre-election was the com-

mon pursuit of power.

The recently constituted cabinet can arguably be described as comprising a

healthy dose of reformists, but remains too overweight on political affiliation, in

our view. However, if significant progress can be made in key infrastructure

within the next couple of years, the ruling party can expect to hold on to power

for much longer than earlier anticipated.

Nigeria remains extremely attractive for direct investment but an age-long reli-

ance on oil means that the economy would require painful adjustments which

could impede portfolio investment in the medium term, a task we observe the

government is favourably disposed to. Hence, we expect moderated portfolio

flows in the next 2 to 3 years with attendant impact on asset price valuations.

The currency has come under severe pressure in recent times and the much-

needed adjustment has only been delayed by sheer political doggedness. That

said, physical investment will continue to ride on Nigeria’s strong demographic

credentials despite lingering structural rigidities.

A key downside risk remains the

vulnerability of the ruling APC to

splinter group

We expect moderated portfolio

inflows in the next 2 to 3 years

34


Source: NBS, United Capital

Real GDP

Global headwinds meet poor visibility in domestic policy

Nigeria’s trend real GDP retreated to multi-year lows in 2015 as global head-

winds continued to expose the structural imbalance in the economy. From an

average growth rate of 5.8% post-rebasing and overall 6.2% in 2014, real GDP

dropped to 4.0% in Q1-15, 2.4% in Q2-15, and 2.8% in Q3-15. The slowdown cut

across major sectors with manufacturing and energy sectors taking the biggest

hit.

We had anticipated growth to slow in 2015 largely on account of impending

fiscal and monetary tightening, which were the expected pro-cyclical re-

sponses to weakness in the global economy. However, delayed clarity on do-

mestic policy contributed to a bigger-than-expected slowdown. Beside the lack

of palpable policy direction, there were three main channels through which the

lower oil receipts impacted real economic activities in 2015: lower government

spending (specifically capital expenditure), constrained disposable income for

private sector expenditure, and the resultant exchange rate effects. Of the

three, the exchange rate channel had the greatest impact on the manufactur-

ing sector, given that Nigerian businesses rely heavily on imported intermediate

inputs.

Global headwinds continue to ex-

pose the structural imbalance in the

Nigerian economy

In line with our expectations, GDP

slowed to below 5.0% in 2015

35



Key sectors in cyclical trough as macro shocks exercabate

A closer look at the quarter-on-quarter GDP prints reveals mixed patterns. In our

view, Q1-15 GDP took a breather from the offsetting impact of Naira devalua-

tion on the trade balance, as well as heightened political spending, despite the

uncertainty that trailed the elections. However, as FX scarcity lingered, spurred

CBN’s tight administrative controls on the exchange rate, manufacturing activi-

ties slowed ,thus extending the negative run of manufacturing GDP through Q2-

15 and Q3-15. The impact was most telling on the Food and Beverage sub-

sector which sustained its negative y/y reading (-0.8%, -5.9% and -8.9% for Q1-

15, Q2-15 and Q3-15 respectively), while the Textile and Apparel sub-sector

maintained a flattish growth trend.

Oil GDP also came under pressure as oil price declines led to government’s fail-

ure to fund commitments to production sharing contracts, hence necessitating

frequent shut downs which negatively impacted oil output. What’s more, leak-

ages in the oil sector continued almost unabated with crude oil thefts and van-

dalism taking their toll on Oil GDP. Perhaps the most important clog to growth in

2015 was the prolonged uncertainty in the policy environment post-election,

especially the delayed cabinet appointments, which took the market by sur-

prise, hence slowing down economic activities and playing a significant role in

the sluggish trend in GDP up to Q3-15.

The decline in manufacturing GDP

was most visible on Food and Bever-

age sub-sector

Oil output also came under pressure

as oil price declines drained fiscal

cash flows needed to fund produc-

tion contracts

36


Persistently slowing non-oil GDP: cause for worry?

The mild recovery in overall GDP for Q3-15 (from 2.4% in Q2-15 to 2.8% in Q3-15)

was not reflected in non-oil GDP growth which slowed from 3.5% in Q2-15 to

3.1% in Q3-15. We highlight that the non-oil sector has assumed a downward

trend since 2013, a development we think warrants closer policy attention, if the

newly inspired non-oil revenue drive of the government is to gain considerable

traction in the medium term. A closer look at the sector reveals that growth at-

tributed to Real Estate (22.3% of non-oil GDP) as well as Information and Tele-

coms (28.9%) are at the lowest levels in the last 15 quarters with growth in Public

Administration GDP falling into negative territory for the first 3 quarters of 2015. In

our view, it appears the second round effects of oil price shocks on the real sec-

tor is set to be extended, with prolonged bearish state of the global oil market

likely to create further pressure.

Non-oil GDP has assumed a

downward trend since 2013

Growth Outlook for 2016

Hinged on hydrocarbon prices and fiscal policy direction

Our Q3-15 real GDP forecast of 3.0% came ahead NBS reported figure of 2.8%,

largely on account of bigger-than-expected slowdown in manufacturing and

construction. We have therefore revised our GDP forecast for Q4-15 to 2.9%,

implying an overall GDP growth of 3.1% for 2015. Looking further ahead, we ex-

pect real GDP to stage a mild recovery in 2016, with 4.4% growth expectation

for the year, driven by anticipated increase in government spending with larger

fiscal multiplier, higher CAPEX outlay, clearer policy direction, and moderately

accommodative monetary policy stance. We have pencilled in a sub-5.0% GDP

growth for 2016 mainly on the back of the bearish outlook for crude oil prices

which is likely to cap the growth rate of the oil sector GDP with secondary ef-

fects on the non-oil sector. Also, if ongoing FX controls persist beyond H1-16,

manufacturing GDP will likely continue to be restrained. However, the impact of

weak oil prices on the non-oil sector should be tempered by improvement in

food production especially given expected traction in curbing unrest in the

food producing North Eastern region.


We forecast 4.4% real GDP growth

for 2016

37


Source: Ministry of Budget and Economic Planning

The 2016 Budget estimates a deficit

of 2.2trn (2.2% of GDP)

Budget 2016: The budget of “Change”

In Dec-15, the FG announced the much anticipated 2016 budget dubbed the

“budget of change” with a total outlay of N6.1trn (c.US$30.5bn). The budget reit-

erates the government’s focus on Capital expenditure (CAPEX) and social wel-

fare, committing about N1.0trn (US$5bn) and N1.8trn (US$9bn) to social spending

and CAPEX respectively. The budget specified revenue of N3.86trn which is ex-

pected to be derived from oil revenue (N820bn), Non-oil revenue (N1.45trn) and

Independent revenue (N1.51trn); implying a deficit of N2.2trn (2.2% of GDP. Capi-

tal expenditure is proposed to increase to N1.8trn from N557bn in 2015 with 30%

of Capital expenditure focused solely on Power, Works and Housing (N433.4bn)

and Transportation (N202bn). Non-oil revenue comprised of Company Income

Tax (CIT), VAT, Customs and Excise duties and Federation Account levies; while

independent revenues will be via enforcement of the Fiscal Responsibility Act

2007 and public expenditure reforms in all Ministries, Departments and Agencies.

2016 Budget

Highlights 2015 2016

GDP Growth rate 5.50% 4.37%

Exchange rate (N/US$) 190.0 197.0

Crude Oil Price p/b $53.0 $38.0

Daily Production (mbp/d) 2.28 2.20

Government Revenue (N'bn) 3,452.0 3,856.0

Expenditure (N'bn)

Recurrent Exp (non-debt) 2,593.2 2,348.6

Debt service (excl N113bn - Loan retirement) 953.6 1,361.9

Capital Exp 557.0 1,760.0

Special Intervention program - 300.0

Statutory transfers 375.6 351.4

Subsidy reinvestment program 20.8 -

Aggregate expenditure 4,493.4 6,078.0

Fiscal deficit 1,041.0 2,222.0

Fiscal deficit (% of GDP) 1.09% 2.16%

Deficit doubles on higher debt service, drop in Oil revenue and increase

in CAPEX.

The 2016 budget represents an increase of 21.6% from 2015 outlay. Conse-

quently, the FG now expects a larger 2016 budget deficit of N2.2trn (vs. N2.1trn in

2015). Deficit will be financed by a combination of domestic borrowing of

N984bn, foreign borrowing of N900bn totaling N1.84trn, and misappropriated

funds recovery of N380bn.

The 2016 Budget represents an in-

crease of 21.6% over 2015 levels

Table 6

38


The 2016 Budget estimates a deficit

of 2.2tr (2.1% of GDP)

The higher expenditure was majorly driven by the N1.36trn budgeted for debt

service and a 223% increase in CAPEX to N1.8trn in 2016 with major ministries tak-

ing the largest chunk. On the revenue side, oil price benchmark was revised

lower to US$38p/b (vs. US$48p/b and US$53p/b in 2015 supplementary and initial

budget respectively) which matches average Brent oil prices over the last three

months, though recent downtrend in Brent crude to below $30p/b suggests some

headwinds may still be on the horizon. Oil production estimate has been cut by

80,000bp/d to 2.2mbp/d. FG’s share of oil revenue projections contracts from

N1.64trn in 2015 to N820bn in 2016 while projections from non-oil revenue sources

rise by 20.0% from N1.21trn in 2015 to N1.45trn. Independent revenue also rises by

208% from N489bn in 2015 to N1.51trn.

Beyond the numbers, aiming to make an impact: Prudence is key

While it appears obvious that the government is looking beyond oil, recent

downtrend in Brent crude to below $30p/b presents execution challenges. Fur-

thermore, the government’s insistence on keeping the exchange rate at N198/

US$ is quite unrealistic, deferring conclusive action with a short-term solution as

current realities do not hold this value for the Naira, hence running on an ostensi-

bly phony value for the currency; the parallel market currently trades around

N265-N280/US$ while FX reserve currently stands at US$29.2bn. However, we are

comfortable with production benchmark of 2.2mb/d which seems to be realistic

as oil production in 2015 averaged of 2.4mb/d constrained by continuous though

moderated pipeline vandalism.

Do we see swift impacts?

The significant drop in oil revenue by c.50.0% on the back of the bearish trend in

oil price has pushed deficit to a new high. The budget aims to raise non-oil tax

revenues and increase capital spending. Aligning fiscal, monetary and industry

policies is quite encouraging from the side of spurring economic growth, though

question remains on the impact of such an alignment on macroeconomic indi-

cators and the financial market.

The focus on infrastructure is expected to bode well for the economy though the

impacts will not be felt in the near-term. The CAPEX outlay of N1.8trn is expected

to be channeled towards infrastructural development with N635bn allocated to

Power, Works and housing, and transport. While we expect to see greater fiscal

discipline by the government, there is an urgent need to expand the tax base

and improve the effectiveness of revenue collecting agencies in order to shore

up non-oil revenue. The adoption of zero based budgeting approach will ensure

that resources are aligned with government’s priorities and allocated efficiently.

39


FX concerns will continue to hurt

the real sector and offset gains

from the lower interest rate environ-

ment

The Efficiency Unit set up by the government, together with effective implemen-

tation of GIFMIS and IPPIS, are expected to drive a reduction of overheads by at

least 7.0%, personnel costs by 8.0% and other service wide votes by 19.0% Subsi-

dies are expected to come in the form of lower tax rates for smaller businesses as

well as subsidized funding for priority sectors such as agriculture and solid miner-

als.

For the real sector, we think capital control in the FX market will continue to hurt

sub-sectors that are reliant on imported raw materials, a trend that continues to

offset gains from the lower interest rate environment. That said, the welfarist na-

ture of the budget will likely improve consumer wallets in the medium term,

thereby boding well for the consumer staples. The construction and industrial

sector is expected to record significant growth hinged on government’s focus on

infrastructure and expected private initiatives in that space.

Expansionary fiscal policy: Any detach?

We look at the 2014-2016 Medium Term Economic Framework (MTEF) of the gov-

ernment which projects an increase of N17trn in nominal GDP between 2012-

2016 while noting the drop in nominal FG revenue and expenditure. Thus, this in-

dicates detach of fiscal policy from economic reality. From the MTEF, nominal

GDP is projected to grow by 40.7% from N40.5trn in 2012 to N57trn in 2016 while

nominal total revenue and nominal total expenditure is projected to decline by

2.9% in the same period to N3.9trn and N4.8trn respectively. While we appreciate

the reversal of the tight fiscal policy which would undermine the government’s

aim to grow and diversify the economy and reduce unemployment rate signifi-

cantly, we think the fiscal authorities will need to do more to ensure that growth

in nominal revenue and expenditure keep up with the pace of nominal GDP

growth.

Fiscal policy needs to align with

economic realities

Source: CBN, United Capital

http://www.channelstv.com/2015/11/25/fg-establishes-efficiency-unit-to-cut-cost-of-governance/

40


Quick fiscal policy rebalancing

mainly through tax reforms is ur-

gently needed to minimise the im-

pact of lower oil revenue

Fiscal Outlook

Near-term Vulnerabilities still in sight, but a broader tax base may pro-

vide some respite

With a bleak outlook for government revenue, and the ability to manage shocks

being restricted by low fiscal savings and reserves, we expect to see a continued

strain on the fiscal balance sheet in the near term. This implies that fiscal policy

rebalancing, through tax reform and reprioritization of spending, is urgently

needed in order to boost longer-run growth. According to the IMF Boss, “the new

reality of low oil prices and low oil revenues means that the fiscal challenge fac-

ing government is no longer about how to divide the proceeds of Nigeria’s oil

wealth, but what needs to be done so that Nigeria can deliver to its people the

public services they deserve - be it in education, health or infrastructure.” This

means that hard decisions will need to be taken on revenue, expenditure, debt,

and investment going forward.

In addition to broadening the tax base, the government will need to reduce

leakages by improving compliance and enhancing collection efficiency. At the

same time, public finances can be bolstered further to meet the huge expendi-

ture needs. For example, the current VAT rate is among the lowest in the world

and well below the rates among other ECOWAS members, so some increase

should be considered. We expect to see efforts in streamlining the cost of gov-

ernment and improve efficiency of public service delivery across the federal and

sub-national governments. Transfers and tax expenditures should also be ad-

dressed.

Price modulation: An easy way to end subsidy regime

Rather than phasing out subsidy through the traditional method, the government

has introduced the price modulation approach which is an adjustment in the

pricing template on ex-cost plus freight (C+F) of petrol. From the calculations, the

adjustment led to a N5.50/liter in after C+F line items on the new Petroleum Prod-

ucts Pricing Regulatory Authority (PPPRA) template, insinuating a retail price of

N86.50/liter. The government noted the price modulation will be reviewed quar-

terly to reflect prevailing global crude oil prices with a possibility of capping it at

N97.0/liter. Thus, while we expect oil price to trade lower in 2016, we think the

government will pay little or no subsidy for most part of the year, an easy way out

to phase out subsidy completely.

We expect the government to pay

little or no subsidy in 2016 as oil

price stays relatively low

41


Monetary Policy: How far down the expansionary lane?

Going into 2016, decisions by the monetary authorities will be largely driven by

global oil price trajectory and the need for monetary-fiscal policy harmoniza-

tion. The tepid picture for growth coupled with the fiscal objective of the gov-

ernment will incline the MPC to expand monetary policy further in 2016 in order

to stimulate the economy. We therefore expect the MPR to drop further to

10.0% in H2-16 and the CRR revised to 15.0% in the same period. Furthermore,

the significant easing now raises the probability of currency adjustment going

into 2016 given the attendant pressure on system liquidity. Against the back-

ground of Nigeria’s now significantly lower real return and real interest rate, set

to be even lowered by a possible spike in inflation via the exchange rate chan-

nel, we expect continued muted FPI inflows into naira assets. Further, depending

on the pace of interest rate normalization in the US, the pressure on the domes-

tic currency is expected to linger over 2016.

We expect monetary and fiscal pol-

icy to be broadly expansionary in

2016


42


Inflation

A monster not so frightening after all

Nigeria’s Headline inflation averaged 8.9% for 2015 within CBN target band of 6-

9% with core and food inflation rates averaging 8.2% and 9.8% respectively. Ex-

change rate pass-through and the impacts of likely post-election violence were

the key drivers within sight at the beginning of the year, when we expected in-

flation to touch double digits. While a surprise political stability post-election as

well as progress in addressing security issues in the north turned out positive for

inflation, currency restriction and adjustments proved significant in stoking infla-

tionary pressures within the year.

If we disaggregate the inflation numbers into the two halves of the year, it ap-

pears that both the lagged impact of the 8.0% devaluation of the naira in the

prior year (November 2014), and more importantly, FX restriction on the 41 items

in June 2015 had significant impacts, especially on Food inflation, in the second

half of the year. In H2-15, headline, food and core inflation averaged 9.3%,

10.2% and 8.8% respectively (vs. 8.6%, 9.5% and 7.6% for H1-15). The impact was

most observable on processed food sub-component with higher prices irking

double digit food inflation. Post harvest-seasonal effect was also key in pressur-

ing food prices alongside distribution bottlenecks that persisted over 2015. Still

on the supply side, higher transportation cost on the back of fuel scarcity, as

well as pockets of insurgent attacks restricted distribution of food and exacer-

bated price pressures in the northern region.

Contrary to consensus, inflation

stayed within single digit in 2015

Cost-push factors heightened by

naira devaluation pressured headline

inflation


43


Inflation Outlook for 2016

Benign but anchored on FX trajectory

Our inflation model suggests that baring a devaluation of the Naira in 2016,

headline inflation should average 8.0-8.5% through the year. The progressive

month-on-month decline in headline inflation in 2015 underpins our expectation

of benign inflationary trends going into 2016. Although we recognize the expan-

sionary spending built into the 2016 budget as functionally correlated with infla-

tion, our expectation of more “productive” fiscal spend going forward, relative

to historical trends, should limit pass-through to prices as output gaps gradually

contract.

The impact of unconventional accommodative monetary policy stance of the

CBN is less likely to stoke inflationary pressures going into 2016, as structural fac-

tors remain most causative in Nigeria’s inflationary trends.

If we see a currency adjustment early in 2016, we would expect higher inflation-

ary pass through albeit tempered by a possible simultaneous relaxation of cur-

rent FX controls. Ordinarily, depending on the scale of currency adjustment, we

would expect up to 150-200bps shock on our inflation expectations with up to 6

months lag before a transmission to headline inflation. This implies a bear case

inflation expectation of 9.5% average for 2016.

The impact of currency devaluation

will be tempered by a possible re-

laxation of FX controls

More productive fiscal spending

should limit expenditure pass-though

to inflation

44


Trade and External Position

Trade surplus shrinks, but outlook remains positive

Nigeria recorded a cumulative trade surplus of N2.5trn for 9M-15, a sharp y/y

decline of -68.4%, driven largely by a 42.8% drop in export revenue and a mild

4.2% contraction in imports within the period. In dollar terms, the trade deficit

stood at -US$5.4bn for 9M 2015, equivalent to c.-1.0% of GDP, in contrast to the

substantial month-on-month surpluses recorded in the first nine months of 2014.

This steep deterioration in the balance of trade position is not surprising, given

that export revenue has witnessed a double whammy from continued decline

in oil prices and lower uptake for Nigerian crude by erstwhile trade partners. We

note that the sharp decline in trade balance commenced in Q4-14 when Brent

prices declined 41.2% q/q to close at $57.3p/b, culminating in a devaluation of

the naira.

Mirroring trends in the trade balances, Nigeria’s balance of payment situation

saw unabated strain for the most part of 2015 as both the current account and

capital account remained pressured. The current account deficit opened the

year at -5.1% of GDP in Q1-15, as the external reserves slipped to an all-time low

of US$29.4bn.

Going into 2016, Nigeria’s trade surplus is expected to gain some respite on

probable resumption of crude oil sales to the US as well as growing export con-

tribution from India. The US has historically accounted for 8-10% of Nigeria’s total

crude oil sales. Based on Q3-15 foreign trade statistics released by the NBS, the

US resurfaced in the league of top ten export destinations for Nigeria as crude

oil export resumed for the first time since 2013, albeit at less than 2.0% of total

value of crude sold. India’s share of total export value also increased from 15.3%

in Q3-15 to 17.5% in 2015.

2016 trade surplus should see respite

from a possible resumption of crude

oil sales to the US

Export revenue was weakened by

the twin impact of oil price decline

and lower demand for Nigerian oil


45


Section 4

Financial Markets Outlook

46



Money markets

A tale of unequal halves

Over Q3-15, a 6.8% contraction in currency outside banks neutered a 4.8% ex-

pansion in demand deposit. Hence narrow money (M1) only increased by a

marginal 2.7%. Broad money (M2) however decreased by 2.9% at the end of

the period, its first decline in seven consecutive quarters, on the back of a 5.8%

contraction in Quasi money. While credit to private sector was flattish, Net do-

mestic credit was up by 1.8%, driven by a 17.5% expansion in Credit to govern-

ment. Base money also contracted by 3.9%, reflective of the twin impact of de-

clines in both currency in circulation and Bank reserves, as both trimmed c.4.0%.

Monetary aggregate trend in Q3-15 came as no surprise, and fully captured the

impact of the ruling policies at the time. While OMO issuances were lower by

10.9% and 53.2% respectively over the quantum of issues seen in Q1 and Q2,

four key factors combined to mop system liquidity towards the end of the year:

1) A spillover from the harmonization of bank’s CRR in H1-15, which in the end

appeared to have more of a tightening impact on market liquidity, 2) Moves by

the banks to comply with the Treasury Singles Account (TSA) implementation

deadline by the Federal government (which mopped around c.N700bn), 3) The

CBN’s requirement for banks to frontload FX purchases, and 4) the announce-

ment of removal of Nigerian bonds from the JP Morgan EM Bonds Index.

Monetary aggregates contracted

sharply in Q3-15, reflecting CBN ‘s

extremely tight monetary policies

47


Average opening balance at the end of August was N133.1bn, which was

37.7% and 35.3% lower than average opening balances over Q1 and Q2 re-

spectively. The tighter liquidity conditions increased competition for funds as

evidenced by 160bps rise in deposit rates since the start of the year. The inter-

bank market was also affected by a tighter liquidity, with Q3 average rates for

3M and 6M NIBOR at 17.1% and 18.1%, 120bps and 110bps higher than what

was on offer at the end of the second quarter. Nevertheless, the greatest volatil-

ity was seen in OBB and ON rates, as both breached the 100% mark late august,

higher than the spikes seen in February. Reflecting limited credit activity as evi-

denced in the stable numbers in credit to the private sector, which have re-

mained flattish at c.N18tr from December 2014, Prime and maximum lending

rates were relatively stable over the period.

Some respite however came at the end of the quarter, as the Central bank, at

the close of its two-day policy meeting moved to ease market liquidity by re-

ducing the Cash Reserve Requirements (CRR) for the banks by 6ppts to 25%.

These moderated rates across board, and ensured that average opening bal-

ance for Q3 increased by N29.8bn to N162.9bn.

Q4: Liquidity boost as the Apex bank changes the tune…

Q4-15 saw the apex bank significantly ease its monetary stance further, in what

marked a monumental shift from its prior tightening approach as it aligned its

policy framework to the objectives of the new government which wanted to

bring down borrowing costs, and increase aggregate demand and spending.

The Central bank shaved 200bps off the monetary policy rate (MPR), dropped

the CRR for banks by 5ppts to 20% and announced an asymmetric corridor of

+200bps/ -700bps around the MPR. Furthermore, the apex bank scaled back

significantly its OMO issuances starting from August, with only three December

auctions in Q4. Total OMO issuance in Q4 was N500.1bn, significantly lower than

what was issued in the three preceding quarters.

These took Q4 average opening balance to N564.3bn, and drove a further

downtrend in rates. The 3M and 6M NIBOR shed 370bps and 300bps from third

quarter end to 13.3% and 15.1% respectively at the end of Q4, while both OBB

and O/N ended the year at1.3% and 1.7% in that order.

Tight liquidity conditions reflected in

160bps increase in deposit rates over

H1-15

A change in CBN’s monetary policy

stance occurred in Q4-15 when the

CBN cut back its OMO issuances

drastically

48



Gradual shift away from FPIs, but FX risk poses a potent challenge

While it is easy to understand the intentions of the Central bank, the timing as

well as quantum of monetary easing seen over H2 was a little surprising, given

that historically the apex bank has used the backdrop of its tight monetary

stance to keep interest rate sufficiently high enough to ensure inflow of FPIs. This

was important in our view, as it indirectly served as an auxiliary source of dollar

supply, thus providing the support needed to shore up the foreign reserves and

cushion FX volatilities.

With JP Morgan citing concerns around FX liquidity as the reason for removing

Nigeria from its bond index and crude oil prices testing new lows, one would

have thought the CBN would bite the bullet and at the very least maintain

status quo. Instead, the apex bank aligned with the presidency and took a con-

trarian view which hinted at two key beliefs; First, that the domestic Institutional

investors – mainly the PFAs and the Banks, have enough capacity to off-take

plausible sell-offs from the departing FPIs, which should ensure some stability

across markets. Second, it trusted that the administrative controls around FX

which effectively pushed the bulk of dollar demand to the parallel market, was

adequate to support the value of the currency at least in the near term, thus

negating the need the further tighten monetary policy or devalue the currency.

Amid much higher level of system liquidity which obviously caused a downtrend

in the money and FI markets, it is from the second point highlighted above,

which centers on administrative measures around FX, that new pressure points

are beginning to emerge as captured by an ever widening gap between the

official and the parallel market, in our view.

The CBN seems to be reversing its “FPI

-centric” monetary policy stance of

high interest

CBN’s new FX policy has created a

wide gap between the parallel and

Official FX markets

49


Source: CBN, FMDQ, United Capital

Robust system liquidity to place a downward pressure on market rates

Looking ahead, higher OMO maturities in H1-16 of N1.8trillion, compared to H2-

15’s 1.6trillion as well as net T-bills repayment of N56.8bn in Q1-16 is indicative of

more monetary easing, although the new issuances of the 10yr (FGN JAN 2026)

and 20yr (March 2036) bonds of between N80bn – N120bn in the same period

will likely temper the impact. While we anticipate intermittent uptick in interbank

rates as banks comply with TSA debits and frontloading of FX transactions, our

analysis of net maturities and issuances together with expectations that the on-

going controls around FX will remain at least over Q1 points to rates generally

trending marginally lower from current levels for the most part of H1-16, as the

base of liquidity widens a little further.

We deem it fit to mention that a key risk to our analysis will be the earlier than

expected devaluation of the domestic currency which, if judged sufficient by

the foreign money managers, could trigger the inflow of funds into naira assets.

In this scenario, we envisage the domestic Institutionals will seek to front run the

offshore players, which will likely see money market rates trend higher.

Despite the announcement by the Central bank that the extra liquidity from the

most recent reduction in CRR will be targeted at specific strategic sectors in a

bid to support job creation and spur growth, we think prime lending rates will

hover around current levels (16.8% at the end of 2015) in H1-16. This is due to a

myriad of headwinds facing the banks at this time, especially around FX and

plummeting oil prices which will likely continue to drive a risk-off attitude in the

near term. Key movements around the prime lending rates and credit to private

sector will likely be tied to pace of reforms in the real sector as well as more clar-

ity around FX and domestic macro policies.

Overall, we think liquidity will remain robust over H1-16, leading to lower rates

across the money market, barring surprises around the devaluation of the do-

mestic currency.

We expect an increase in market

liquidity in H1-16

A downside risk to our prognosis for

lower rates in H1-16 remains an earlier

-than-expected currency adjustment

50


Source: Bloomberg , United Capital

FX Outlook

How long more can the “visible” hand hold sway?

Of the key SSA currencies, the naira was one of the most resilient; depreciating

by only 8.0% despite two rounds of depreciation in Q4-14 and Q1-15.

While the apex bank has historically maintained a tight monetary policy regime

in a bid to preserve the domestic currency and prevent speculative FX play, it

has recently switched to more administrative controls around the FX market. In

our view, a mix of plummeting oil prices and dwindling reserves appears to be

forcing the CBN’s hands, even as the demand for the greenback heightened

on the anticipation of US Fed rate tightening and eventually removal from the

JB Morgan as well as Barclays’ bond indices. Some of these controls presently in

play include; exclusion of certain items from the official window, ban of FX de-

posits and transfers, as well as limits on the value of foreign transactions that can

be undertaking using naira denominated cards.

…as administrative controls continue to make and mar

On-going admin measures have been a two edged sword in our view. While the

naira has appeared more stable with bulk of the dollar demand effectively

shifted to the parallel market, these FX controls have also stifled the domestic

economy on the other hand, as players across the diverse sectors of the econ-

omy are being forced to the more expensive parallel market to source FX. More

worryingly is the frequency of policy adjustments around FX, which has also

been telling in our opinion, and appears to suggest that pressure from a paucity

of FX is biting more than meets the eye, with foreign reserves at current levels

only adequate to cover c.4 months of imports, amid persistently bearish outlook

for oil prices.

The Central bank has shifted from a

tight monetary policy regime to the

use of administrative controls to sup-

port the domestic currency

Naira was one of the most resilient

currencies in SSA over 2015

51


Source: Bloomberg, CBN, United Capital

The latest of these admin controls, which is the ban the sale of FX to BDCs,

throws up even more questions, and has the look of a perfect catalyst to further

widen the gap between the official and parallel markets, especially seeing that

the apex bank has not provided substantial clarity as to how bulk of the de-

mand that has been pushed to the parallel market via its prior admin measures

will be met.

What is certain at this juncture is that the CBN remains reluctant to officially de-

value the currency; a stance that appears to have some political tint even from

the neutral’s perspective. That said, a worsening balance of payment position,

pressure on the key sectors with major players unable to source for FX, much

smaller inflow of FPIs as well as sustained downtrend in oil prices, all hint that the

can is only being kicked down the road and the domestic currency would have

to shift forward one way or the other.

Plausible devaluation: dancing way behind the beat?

Even with a possible devaluation on the horizon, another germane question in

our view, is what quantum of devaluation from this point would be adequate to

ease current FX pressures and tempt the foreign money managers to return?;

bearing in mind that even without currency considerations (on the assumption

of constant currency), the current monetary easing stance by the Apex bank

has already made naira assets less attractive. Thus one would imagine that at

current levels, the quantum of devaluation would have to be considered suffi-

cient to compensate, a situation that perhaps, could have been avoided if the

apex bank had elected to bite the bullet earlier.

The recent ban of FX sales to BDC

continues to widen the gap between

the parallel and official markets

An optimal level of currency adjust-

ment is needed to reverse FPI out-

flows

52


Looking at where the naira is trading at the parallel market as well as its forward

price, we anticipate a 20-25% devaluation is conceivable from where the offi-

cial rate is at this time. Based on Mr. Emiefele’s recent statements that the apex

bank is already exploring options around FX policies which in our view suggest a

shift in the Central bank’s body language, we think there will be some clarity

before the end of H1-16. Like we earlier highlighted, impact on the markets will

mostly depend on investors’ perception on the adequacy or otherwise, of the

quantum of naira shift. Should the naira mirror the trajectory of the Angolan

kwanza, then a simultaneous forward shift in the parallel market, which mostly

implies investors’ dissatisfaction at the extent of devaluation, will likely see FX

pressures linger.

Aligning fiscal and monetary policy may require an exchange rate ad-

justment

It is difficult to imagine a smooth execution of the highly expansionary 2016

budget given current macro realities especially the bearish trajectory of oil

prices. The exchange rate assumption in the budget ( i.e the Official interbank

rate) stands at USD/NGN 198 with a budget deficit of N2.2trn.

As at the time of writing this report, oil price was trading at $27.6p/b. This poten-

tially increases the deficit at N2.4trn if the exchange rate remains unadjusted.

However, a 27.6% adjustment in the currency will keep the proposed deficit

constant. A further scenario play around oil prices and the exchange rate re-

quired to maintain the proposed budget deficit of 2.2trn is summarized below:

We expect some clarity in FX policy

direction before H1-16

Table 6

Oil Price Scenario ($ p/b) Exchange Rate

(USD/NGN)

Devaluation Target

15 502 153%

20 376 90%

25 301 52%

30 251 27%

35 215 9%

38 198 0%

Source: United Capital Research estimate

2.16 2.20

2.26 2.31

2.37 2.42

2.48 2.55

2.59 2.63

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

$40.0 $38.0 $35.0 $33.0 $30.0 $28.0 $25.0 $22.0 $20.0 $18.0

Budget deficit to widen significantly if oil prices continue to dip

Expected Budget deficit (N'trn) at different oil price levels

Source: United Capital Research estimate

53


Fixed Income

A story of resilience

Domestic institutional uptake offsets FPI apathy

In 2015, yields in the fixed income market traded mostly within a tight range for

the first three quarters, showing some resilience amid events that threatened to

increase yield volatility. However, FI yields assumed a steep downtrend towards

the end of the year, aided by much higher system liquidity and a shift in the

Central bank’s governance objectives.

With pressure mounting on the naira and crude prices trending lower, H1-15 saw

the apex bank maintain a liquidity tightening stance accompanied by an ag-

gressive OMO issuance, as it sought to curb speculative play around the USD/

NGN, remaining true to the strategy it has pursued over the last half decade.

These, together with election related concerns drove average Bonds and T-bills

yields up by 71bps and 122bps to 16.1% and 15.7% respectively, at the end of

Q1. However, Q2 saw a return of bullish sentiments as investors basked in the

euphoria of the successful change in government and a seemingly upbeat out-

look for the domestic economy. This drove a downtrend in yields across the FI

markets, with investors showing preference for the shorter end of the maturity

spectrum for the most part, perhaps connoting a cautious stance reflective of

an understanding that there were possible risk events on the horizon that could

crystallize and pressure yields to the upside.

Over 2015, naira FI assets showed

resilience despite events that threat-

ened to heighten yield volatility


FI play was more to the short end of

the maturity spectrum as investors

remained cautious mindful of possible

risk scenarios

54


Source: Bloomberg, FMDQ, United Capital

These fears played out in Q3-15, as the four key factors (highlighted in the

money market section) combined to again push yields moderately higher.

Nonetheless, while it was expected that the exclusion of domestic bonds from

the JPMorgan index had the capacity to spur a spike in yields, the domestic

Institutionals (mostly the PFAs) came to the rescue, and helped moderate the

impact of sell-offs. Furthermore, the Apex bank began to slowly ease its grip on

liquidity towards the end of quarter, impact of which was fully felt in Q4 where

the bulls became dominant, amid a much higher level of system liquidity. Over-

all, FI yields closed the year at much lower levels than year start, with bulk of the

downtrend occurring in Q4 when liquidity levels were the highest.

Yield Outlook for 2016

FI yields to be shaped by robust system liquidity, FGN borrowing profile

Having earlier argued in support of robust system liquidity over H1-16, we think

this will be one of the most important themes for naira FI assets over the period.

While uncertainties around FX will continue to hold back foreign inflows in the

fixed income market, we expect that the current pricing of risk in the equities

market (2015: -17.4%), will continue to push momentum to the FI market, even as

high liquidity levels force investors’ hands to play for lower yields than previously.

Asides from system liquidity, the profile and timing of the FGN borrowing for 2016

will also play a key role in the shaping the direction of yields over 2016, in our

view.

The Central bank eased liquidity in

Q4 and as a result FI yields trended

significantly lower

55


With c.N580bn set to mature in H2 (August 2016), we believe the pace of bor-

rowing will only gather momentum in the second half of the year, as we antici-

pate the government will be looking to keep an eye on its debt service ratio

and overall borrowing cost. This, together with our expectations of robust system

liquidity over H1 suggests that yields will likely tick lower from current levels in the

first half of the year.

Even if the government decides to spread domestic borrowings equally over

the coming 12 months in line with historical patterns, which puts monthly borrow-

ing at c.N82bn, the profile of OMO and T-bill maturities over H1suggests suggests

system liquidity will be robust enough to absorb new issues which again points at

declining yields. However, we still see scope for an uptick in yields, once the

government ramps up the pace of borrowing. Although we believe such sce-

nario will likely be delayed until the second half of the year.

We also anticipate that the bulk of domestic FI play will remain heavy at the

short end of the maturity spectrum at least over Q1, as investors remain cautious

with an eye on possible risk events that could trigger a re-pricing across the

curve. Overall, we project that average FI yields will trim between 100-150bps

on average over H1, barring surprises around FX.

56


Source: NSE, United Capital

Equities

A bumpy ride down the hill

Without a doubt, 2015 was a difficult year for Nigerian equities, with the local

bourse – The Nigerian benchmark index (NGSE Index) closing the year with a

return of –17.4% similar to other major bourses across SSA, EMs and few Devel-

oped markets. The market has commenced 2016 on a remarkably bearish path,

as equities remain engulfed with the challenges that the enveloped most of

2015.

After a bearish start to the year, a successful conduct of the elections drove a

rebound in April (+9.3%). However, the rebound proved to be a dead-cat-

bounce as fresh bouts of economic uncertainties reversed the bullish ride. For

the year, 31 stocks recorded positive returns while 88 stocks posted losses. Sell

pressure was most pronounced in the banking, consumer and Oil & Gas sectors

as these returned -23.6%, -17.4% and -6.2%% in that order.

In what follows, we assess the performance of the market in 2015 with an eye on

what lies ahead for 2016.

2015 proved to be a difficult year for

Nigerian equities

25,000

30,000

35,000

40,000

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

Nigeria ASI movement in 2015

Chart 33: Equities sustained a downward pattern in

Peaceful

elections

Election post-

ponement

Devaluation

impact

Pre-election

jitters

Economic

uncertainty

Lack of policy

direction

CBN Capital

Controls

Sustained oil

price fall

FX concerns

Monetary/Fiscal

challenges

Q1,

-8.4%

Q2,

5.4%

Q3,

-6.7%

Q4,

-8.3%

A peaceful general election drove a

short-lived rally in equities

57



BRVM 17.80% 4.70% 12,274 17

Egypt -21.50% -28.30% 30,875 36,237 9.6

Ghana -11.80% -25.50% 14,703 131 N/A

Kenya -10.60% -20.80% 19,587 6,760 12.8

Mauritius -12.70% -22.80% 5,604 3,883 14.4

Nigeria -17.40% -24.30% 41,165 90,755 9.6

South Africa 1.90% -24.00% 592,136 56,761 36.2

Tunisia -0.90% -9.30% 7,556 148 18

MSCI EM -17.00% -17.00% 6,280,440 8,597,982 12.2

MSCI Frontier -17.30% -17.30% 246,770 69,007 10.2

P.E (x)

2015 Statistics of Key SSA Equity Indices

Volume Traded

(Mn units)Market Cap (US$'mn)Return (US$)Return (Local)


Table 7


58


We expect crude oil prices to trade

lower in 2016, portending a downside

to Nigerian equities

Oil price trajectory to remain a key driver of equity market direction

Data from the last 10 years indicates that 2014 and 2015 have shown strong

correlation reading (0.97) between the Brent crude and Nigeria All Share Index

after adjusting for a series of distortions occasioned by major reforms in the Ni-

gerian Banking industry.

We expect crude oil prices to trade lower in 2016 amid a persistent global

supply glut. Furthermore, a likely stronger dollar alongside a weaker Yuan could

push oil prices down to the mid US$20s (stronger dollar and falling Yuan will

make commodities more expensive to import, including crude oil). Still on the

supply side, the possibility of a cut in OPEC production is more remote due to

the recent strain in relations between Saudi Arabia and Iran. This has effectively

put an end to speculation that OPEC might be able to agree production curbs

to lift the price of oil any time soon. Furthermore, Iranian output is expected to

increase by 550,000b/d as the sanctions are lifted.


Source: NSE, Bloomberg, United Capital

59


Source: NSE , United Capital

FPI participation will be hinged on FX

policy direction

Naira devaluation still a big bet, keeping FPIs on the sideline

Given the dominance of foreign portfolio investors in the Nigerian equities mar-

ket, (54% of total flows in November), we believe CBN’s disposition to foreign

investors will be a key driver of equities movement in 2016 as uncertainty

around FX continues to impact market sentiment.

Recall the US Fed has commenced its tightening phase, hence we expect EM

portfolio pull back to take its toll on domestic equities, depending on the pace

and timing of rate normalization. From our end, we do not expect a raise in

rates in the early part of 2016 with economic condition still fragile in China and

most EMs. We therefore think the US Fed will be less hawkish than earlier antici-

pated, at least over H1-16. These dynamics will likely test the resolve of the Ni-

gerian authorities to keep the exchange rate unadjusted.

60



Poor corporate earnings may neuter

the lure of high dividend yields

Equities in dire need of increased local participation

The dominance of foreign participation in the last 4 years has led to the mar-

ket’s seamless reaction to global shocks. Market volatility and sell pressure has

been majorly driven by capital flight, buttressing the need for increased local

participation to insulate the domestic market from external shocks and cur-

rency volatilities.

Feeble earnings expectation to override any trigger on attractive dividend

yields

At low stock prices, dividend yields for value stocks are becoming increasingly

attractive. Ordinarily, this should trigger buy-in by local institutional investors,

thus moderating the negative impact of FPI reversal. However, the challenging

business environment might constrain company’s dividend payout for FY-16,

especially the banks. The outlook on company performance in 2016 remains

feeble hinged on rocky patch and a challenging business environment. For the

banks, despite the expected reduction in cost of funds, earnings will be tem-

pered by lower yields on investment securities as well as constraints on lending

even as they continue to face degradation in asset quality on the back of ex-

posure to risky sectors.

For the consumer goods sector, even though we expect reticent growth in

earnings on the back of lower interest rate environment, exceptional cost, gov-

ernment’s focus on social spending and 2015 low base; expected devaluation

of the Naira and a shrinking consumer wallets pose risk to the sector’s perform-

ance. The bearish oil prices and expiration of hedging contracts will keep earn-

ings growth for upstream Oil & Gas sector more or less flattish while the down-

stream players will likely post modest positive performance. Also, the industrial

sector is poised to post positive numbers on account of government’s focus on

infrastructure and private investment even as players’ regional capacity ex-

pansion support earnings growth. This said, macroeconomic and fiscal con-

cerns may possibly over-shadow performance expectation.

Increased local participation is re-

quired to mitigate the impact of ex-

ternal portfolio shocks

Macroeconomic and fiscal concerns

may override the impact of corpo-

rate performance

61


We see value in select stocks for long

term domestic investors

Negative sentiments and macro headwinds have depressed valuations to a 3-

year low. The market closed the year with a P.E ratio of 9.6x compared to an

average of 10.2x and 17.5x for its African peers and global market respectively.

We see value in select stocks and find them attractive at current prices

especially for domestic investors with long-term horizon and zero currency risk

(see company profiles section for our stock recommendations).

Expected market Returns in 2016

In forecasting the equity market return for the year, we have considered the

directional impact of historical oil price movement and the Nigerian

benchmark index. The strongest co-movement has occurred in the last two

years and we expect this trend to continue over 2016.

Regressing a transformed monthly time series over a 24-month period, we

obtained the following output:

In deriving target returns for the market, we have assumed 3 oil price scenarios

( bull, bear, and base case) on a quarterly basis with weighting driven by our

expectations around possible events in each quarter and their likely impact on

oil prices. The table below summarizes our findings:

Source: United Capital

Regression Statistics

Multiple R 0.951

R Square 0.904

Adjusted R Square 0.900

Standard Error 0.046

Observations 24

ANOVA

df SS MS F Significance F

Regression 1 0.43 0.43 207.67 0.00

Residual 22 0.05 0.00

Total 23 0.48

Coefficients Standard Error t Stat P-value

Intercept 8.79 0.12 75.71 0.00

Oil Price 0.39 0.03 14.41 0.00

Table 9

62


Table 10: Equity Market Returns forecast 2016

Low oil prices could raise concern on Saudi Ara-

bia’s ability to retain its currency peg, with the FX

reserves depleting significantly on a monthly basis

with Investors likely to bet on a production cut or

devaluation in 2017/18.

More Shale Producers will be out of business even

as more oil producers might be willing to agree on

a production cut in a bid to manage fiscal and

monetary conditions.

Fundamental downward pressure on the back of

weakness in China, even as record production look

set to remain in Q1-15.

Immediate impact of the Iranian supply (the re-

lease of about 50mn barrels of oil in storage).

Global glut will continue to dominate sentiments,

with prices likely to bottom out .

Saudi Arabia and other major oil producers to con-

tinue to maintain market share, propping up sup-

ply.

A slowdown in the E&P industry with supply disrup-

tion slowly supporting prices as the year progresses.

Tension in the middle east driven by Saudi, Iran and

Yemen to support higher oil prices whilst reluctance

to cut production acts to push prices lower.

Expected cut in Shale output.

Quarter

Oil Price

Scenario

(USD p/b) Index Level Probability

Index level

(weighted)

Quaterly

returns

Q1

28 24,099 30% 7,230

25 23,057 50% 11,528

22 21,934 20% 4,387

Index Level 23,145 -19.19%

Q2

22 21,934 40% 8,774

20 21,133 40% 8,453

18 20,282 20% 4,056

Index Level 21,283 -8.04%

Q3

25 23,057 30% 6,917

30 24,757 40% 9,903

33 25,695 30% 7,709

Index Level 24,528 15.25%

Q4

28 24,099 30% 7,230

30 24,757 30% 7,427

35 26,292 40% 10,517

Index Level 25,174 2.63%

Cumulative Annual Return -9.2%

63


Section 5

Financial Services

64


Nigerian Banks

Still battling a flurry of headwinds

Nigerian banks began 2015 in a rather downbeat mode, as weak macroeco-

nomic backdrop that characterized the latter part of 2014 spilled over into the

year. There were fewer regulatory changes relative to 2014, as it appeared that

the CBN sought to cushion banks’ earnings from external shocks ,in our view. A

tougher macro economic outlook for 2016 suggests that it may take time for

current negative sentiments driving valuations to improve, though we expect

banks to continue to maintain resilience, with full scale sector crisis still highly

unlikely.

Tier-1 banks stand tall amid sector-wide challenges

The protracted macro weakness as well as uncertainty that lingered before the

2015 elections constrained banks’ earnings sharply, especially in the first half of

the year. While one-off exchange rate movements on account of heightened

naira volatility boosted NIR early in the year, gains tapered off across banks as

the CBN stepped up its FX administrative measures in a bid to defend a fast de-

preciating domestic currency. This, in addition to the ensuing devaluation of the

naira early in the year, as well as tighter monetary policy stifled the entire sec-

tor’s earnings for the most part of the year.

There were fewer regulatory changes

relative to 2014

Source: Banks’ Financials, United Capital

FX controls and tighter monetary pol-

icy constrained sector earnings in

2015

65


In spite of the challenging environment, tier-one banks remained largely resilient

with Q3-15 annualized ROE remaining flat at 20.6% (vs. 20.3% in FY -14) while tier

2 banks saw significant earnings pressure culminating in c.300bps decline in an-

nualized ROEs to11.2% as at Q3-15, ( vs. 14.5% in FY-14). The hardiness of tier-one

banks is not difficult to dimension, as their scale advantage remains key to fund-

ing cost efficiency and repricing power in a volatile rate environment. A de-

composition of sector ROEs, as shown in table 8 below suggests that tier-one

banks navigated the headwinds due to a combination of better pricing power,

superior expense profile and lower credit impairment charges.

Looking ahead, and in spite of expected difficult operating environment similar

to 2015, we expect tier-one banks to continue to deliver better value going into

2016. What’s more, they seem to be better positioned to boost ROEs with higher

leverage, relative to tier-2 banks as peer average ROE still tracks ahead of our

estimated cost of equity of 20.4%.

We expect tier-1 banks to continue to

deliver better value going into 2016

Guaranty Zenith UBA Access FBNH Tier-1 avrg Stanbic Diamond Fidelity Skye FCMB Tier-2 avrg

Net yield on total asset1

5.1% 4.5% 3.7% 3.4% 4.5% 4.3% 3.4% 4.8% 3.6% 4.6% 3.0% 4.0%

Non interest yield on asset2

2.3% 2.2% 2.4% 4.6% 1.9% 2.5% 4.2% 1.5% 1.9% 2.4% 1.1% 2.1%

Gross yield on asset 7.4% 6.7% 6.1% 8.0% 6.5% 6.8% 7.6% 6.3% 5.5% 7.0% 4.1% 6.1%

Credit impairment/Ave total assets 0.4% 0.3% 0.2% 0.5% 1.1% 0.5% 1.3% 1.1% 0.3% 0.5% 0.3% 0.7%

Risk-adjusted yield 7.1% 6.4% 5.9% 7.4% 5.4% 6.3% 6.3% 5.2% 5.1% 6.5% 3.8% 5.4%

Expenses/Ave total assets 3.1% 3.5% 3.8% 4.7% 4.0% 3.8% 4.7% 4.2% 3.9% 5.2% 2.9% 4.2%

Taxes/Ave total assets 0.7% 0.6% 0.3% 0.5% 0.2% 0.4% 0.2% 0.1% 0.2% 0.2% 0.1% 0.2%

ROA 4.3% 3.1% 2.4% 2.9% 1.6% 2.7% 1.8% 1.2% 1.3% 1.3% 1.5% 1.3%

Levarage (x) 6.3 6.6 9.7 7.3 7.9 7.4 8.6 9.4 6.5 9.3 7.0 8.1

ROE 27.1% 20.3% 22.9% 20.9% 12.5% 19.9% 16.0% 11.3% 8.7% 12.3% 10.1% 10.6%

1. Net interest Income/Ave total assets

2. Non-interest yield (NIR/Ave total assets)

Valuations at 2009 lows, as market prices in full-blown sector crisis

Driven by negative sentiments, market based valuation of Nigerian banks has

seen significant depression in the last 12 months, with multiples scaling back to

levels seen during the 2008-2009 banking crisis. Our coverage banks’ average

P/BV declined from 0.9x in December 2014 to 0.6x as at 31 December 2015.

Again, we highlight that tier-one names continue to see healthy premium pricing

relative tier-two banks with average trailing P/BV of 0.7x vs. 0.5x for tier-2 banks.

Their multiples have also contracted at a much slower rate. While the valuation

of tier-two banks have declined by almost 58.8% from year-start levels, top-tier

banks have only seen half of that scale of contraction.

For the sector as a whole, the market continues to price in macroeconomic de-

terioration and bleak outlook on banks’ share prices, even faster than we had

earlier anticipated. Concerns around asset quality, and the revenue-limiting im-

pact of regulatory pressures have swayed optimism away from the sector, even

as net sale positioning of foreign portfolio investors continue to depress pricing

across the board.


The market will continue to price in

weak macroeconomic outlook on

banks’ share

Table 11: Nigerian Banks’ ROE Sources Q3-15

66


Source:

Asset Quality: Risk overpriced, though telling on operating performance

Early in 2015, the downside risk to Nigerian banks’ asset quality stemmed largely

from their exposure to the troubled oil and gas sector. The prior year had

marked a significant increase in bank lending to both the upstream and down-

stream segments of the industry. By FY-14, sector estimated oil and gas exposure

stood at 26.0% of aggregate loan book, while the sector’s NPL accounted for

15.2% of system NPL. To the upstream segment, lending is primarily FX denomi-

nated, typically structured at US$60-70 p/b, hence restructuring through tenor

elongation is warranted whenever oil prices fall significantly below these levels.

This is especially so as the break even prices for the relevant assets usually lie

below this threshold. Our conversations with banks indicate that upstream oil

and gas risk assets were largely restructured in the course of the year. On our

estimates, these restructurings have come at a cost to banks, though providing

a cushion for asset quality.

In the downstream segment, government’s slow intervention, operational rigidi-

ties as well as adverse FX movements have combined to cap banks’ exposure

to oil marketers during the year, hence accounting for the limited NPL formation

in this segment. Going into 2016, while likely traction in the legislating the PIB

may trigger new investments, the bearish outlook for oil prices will constrain

banks’ risk appetite in the oil and gas sector. We also highlight that a further

downward pressure on oil prices may necessitate further restructuring, with at-

tendant pressure on funding income for banks in the short term .

Banks wound down exposure to Oil

and Gas sector in 2015

Restructuring in existing oil and gas

exposures came at a significant cost

for banks

67


Balance sheet growth: Muted on exogenous risk factors

System loan growth was flattish as at Q3-15 (-0.2%) as banks grappled with

macro-induced asset quality issues during the year. At the start of the year, we

were not particularly bullish on banks’ loan growth outlook in 2015. First, the sec-

tor loan growth of 24.7% y/y in 2014 hinged on the depreciation of USD/NGN

(given the sizeable proportion of FCY loans of banks estimated at 50.7% for our

coverage banks as at H1-15). Second, macroeconomic and political uncer-

tainty blighted prospects for loan growth.

By Q3-15, while tier-2 banks managed a 1.0% increase in loan book, tier-1 banks

saw a marginal -0.5% decline with Access Bank filing a 15.4% expansion in loan

book as at Q3, the biggest in the tier-1 space. Loan growth was also muted

across the sector on account of the conversion of state government loans to 20-

year FGN bonds with significant impacts on UBA, Skye and Zenith’s loan portfo-

lios with exposures ranging between 7.0% and 8.5% prior to the reclassification.

Deposit growth trended almost in the same direction as loan book with the big-

gest pressure point coming from the implementation of the Treasury Single Ac-

count. However, while system-wide deposit base declined by -2.5%, tier-1 banks

showed better resilience, with deposit growth flattish at 0.2% as at Q3-15 (FY-15e

0.3%). Access Bank again showed the biggest jump of 7.1%. On the other hand,

tier-2 banks’ deposit base contracted by -10.5% with Diamond Bank recording

the biggest decline of -15.2%.

Macro uncertainty constrained loan

growth in 2015 while the implementa-

tion of TSA muted deposit growth

across the board

Tier one banks showed better

resilience in deposit growth


68


Source:

Core operating performance: protracted headwinds mount pressure on

earnings

A largely restrictive monetary policy stance of the CBN proved challenging for

Nigerian banks in 2015. Frequent tightening policies such as increase in Mone-

tary Policy Rate (MPR), and successive hikes in Cash Reserve Requirement (CRR)

had direct impact on banks’ funding cost, with significant loss in potential in-

come despite a long spell of elevated interest rate environment. Notably, the

harmonization of the private and public sector CRR from 20.0% and 75.0% re-

spectively to 31.0% mid-Q2 resulted in a net liquidity tightening, while the imple-

mentation of the Treasury Single Account drained significant liquidity from the

system.

The pressure on spread was however not quite significant with average NIMs of

our coverage banks relatively flattish as at Q3-15 vs FY-14. We attribute this flat-

tish trend to 3 main factors: 1) Deteriorating macro conditions have forced

banks to re-price lending book upwards with average yield on earning assets

modestly up by 75 bps on average from year-start 2) Deliberate reduction in

low yielding FCY liabilities in light of weak outlook for the domestic currency as

well as tighter FX controls have helped banks stabilise margins. 3) Sizeable port-

folio of investment securities enabled banks take advantage of the elevated

yield environment.

Looking ahead, the expansionary stance of the CBN is likely to bear positively

on banks’ funding cost over 2016 as the CBN looks likely to keep a low CRR re-

gime (the last decision taken at the November 2015 Monetary Policy Commit-

tee meeting freed up to N630bn into the system). The expectation of continued

tight (or even tighter) FX controls, especially in the first half of 2016 may lead to a

slowdown in Open Market Operations (OMO), with attendant elevation in li-

quidity condition.

The restrictive monetary policy of the

CBN pressured banks’ earnings signifi-

cantly in 2015

Banks’ NIMs proved somewhat resil-

ient

Expansionary policy stance expected

to exert a downward pressure on

banks’ funding cost in 2016

69


With a dour macro outlook going into 2016, banks are likely to find loan growth

challenging over the medium term, the recent conditional CRR release by the

CBN notwithstanding. We are more optimistic on deposit growth as we expect a

combination of low base effect and a possible relaxation of strict FX policies

towards H2-16 to bode well for deposit books, especially for tier-2 banks. From a

balance sheet profitability perspective, lower funding costs for LCY deposits

(discussed above), may be somewhat tempered by the declining trend in FCY

deposits. Placed within the context of the sizeable FCY portion of banks’ loan

book, the negative growth of domiciliary deposits (-11.6% YTD as at Nov-15) may

prove NIM-negative for banks in 2016.

Capital Adequacy: Increasing need for buffer

The stringent adjustments that greeted the implementation of Basel II pressured

the Capital Adequacy Ratios (CAR) of Nigerian banks in 2015. This, in addition to

expectations of the implementation of Basel III, as well as new guidelines on the

composition of risk weighted assets widened the capital shortfalls of banks, ne-

cessitating a series of capital raising with UBA and Access Bank raising tier-1

capital during the year. Looking ahead, we expect to see more capital raising

exercises by Nigerian banks especially when viewed against the backdrop of

restricted dividend payments following new regulations by the CBN. Although

no bank is below the minimum capital requirement based on published results

as at Q3-15, our sense is that banks with a cushion of less than 150bps above the

minimum requirements will be inclined to raise more capital in 2016. Further-

more, the need for countercyclical and capital conservation buffers given

bleak economic outlook will be key drivers for increased capital raising by Nige-

rian banks in 2016. That said, we note that depressed equity valuations may

constrain tier-1 capital raise even as higher cost, as well as regulatory cap on

tier-2 capital remain additional limiting factors.

Banks are likely to find loan growth

challenging in 2016

We expect to see more capital rais-

ing exercise in 2016

Source: Banks’ Financials, United Capital Source: Banks’ Financials, United Capital

80.1% 79.7% 76.4%71.5% 68.5% 65.8% 64.3%

46.6%

10.0%

30.0%

50.0%

70.0%

90.0%

...with moderate elbow room for loan growth

Banks' Loan-to-Deposit Ratio (LDR) as at Q3-15

Regulatory Threshold

70


Sector Outlook

Near term possibilities fraught with challenges

As we stated earlier, the banking terrain is set to be challenging for banks in

2016. The implementation of the TSA has changed the deposit game for Nige-

rian banks. In addition to lowering of market shares, banks that have historically

relied on public sector deposits are now shifting attention to a more inclusive

retail play. Within our coverage, banks that saw their market share shrink the

most post-TSA implementation include Diamond, Skye, and FBNH. We note that

infractions relating to the concealment of TSA funds initially distorted the relative

impacts of the exercise, with 3 banks incurring penalties for breaching regula-

tions on TSA funds.

Making up for lost government funds will prove challenging for banks in 2016

even as the interest rate environment is likely to be less supportive for liability

growth, especially in H1-16. A continued bearish trend in oil prices will also rub

off negatively on system liquidity given attendant reduction in FCY inflows,

which is most likely to constrain deposit growth. However, a possible devaluation

of the currency will moderate these negative factors from the perspective of

nominal deposit growth, given the ample FCY deposit pool across banks. We

therefore estimate that the total sector deposit growth will moderate to 5.0% in

2016 before recovering to 7.2% in 2017, assuming appreciable improvement in

macroeconomic fundamentals.

On the asset side, the prospects for loan growth remain bleak as banks are likely

to be cautious given the underlying weak state of the economy. Most banks

guided lower loan growth quarter-on-quarter for in 2015, a trend we do not en-

visage to change materially in 2016. In our view, the recent regulation around

CRR compelling banks to show commitment to lending to the real sector before

excess cash reserves are released is not likely to prove an incentive for lending,

as the recent pressure on the currency and lower oil prices has limited the re-

coverability of risk assets. Most banks on our coverage a guiding for lower loan

growth in 2016, and understandably so, given additional pressures from regula-

tory charges for operational and market risks on conversion to Basel II. However,

the expected movement to Basel III is less likely to be onerous as most of the

requirements are already being implemented. We forecast loan growth of 6.5%

for our coverage banks in 2016 and 9.5% in 2017.

Banks’ non-interest revenue is also likely to come under pressure in the medium

term. While the reduction in the NDIC premium to 0.35% from 0.5% of total assets

as well as the re-introduction of ATM withdrawal fees charged by banks pro-

vided some support for banks’ NIR, the expected removal of COT portends re-

newed NIR pressure for banks in 2016.

Banks that saw significant loss of mar-

ket share to TSA will find the terrain

most challenging in 2016

A possible devaluation of the naira

will moderate balance sheet pres-

sures

We forecast loan growth of 6.5% for

our coverage banks in 2016

71


As we noted earlier, the possibility of lower naira funding costs for banks in 2016

is an interesting development to watch as the monetary authorities appear

likely to pursue a more accommodative policy relative to 2015. However, banks

are still heavy on lower yielding foreign currency risk assets, which makes the

direction of spreads clumsy to predict.

On capital adequacy, the unfavourable market conditions for raising tier-1

capital means that banks will be faced with some tough options in 2016: reduce

the concentration of risk-weighted assets and/or maximise internal capital re-

tention. This implies that lower dividend payouts will become a reality for banks,

with attendant impact on investor sentiments and market valuation of banks’

shares.

Unfavourable market conditions for

capital raising especially in H1 will

force banks to make tough choices

72


Access Bank Plc (ACCESS)

The moving train

ACCESS remains an impressive growth story within our coverage universe.

Consolidating on its impressive 2014 growth trends, the bank bucked the trend

of tepid balance sheet growth by Nigerian banks in 2015 to deliver 15.4% and

7.2% expansion in loan and deposit books as at Q3-15, though management

guided for a muted loan book in Q4-15. A major drag on the bank’s share

price in 2015 was negative market sentiments around its Rights Issue.

Earnings outlook brightens on downtrend in funding cost

The bank’s recently concluded tier-1 capital raise is expected to provide

further support for loan growth in 2016, having driven CAR by 120bps on

our estimate. That said, higher funding cost amid tamer asset yields pres-

sured NIMs to the downside for the most part of 2015. However, going into

2016, we expect lower cost of funds to support a recovery in spreads with

NIM forecasted at 6.0% and 6.2% in FY-16, as we expect the bank to con-

tinue to cut back on expensive deposit mix .

Loan growth to ride on improving asset quality despite headwinds

Management guided for reduced loan growth in 2015 and we expect a

further slowdown in 2016 largely on systemic and macro constraints. We

think reduced exposure to FCY loans as well as a keener eye on cost of

risks especially in the troubled oil and gas sector, will temper loan growth

to 9.7% in 2016. We are more optimistic on deposit growth as we expect

the bank’s recent stride in the retail sector/ SME segments of the market

to bode well for its liability generation.

BUY Rating maintained

We retain our BUY rating for Access with a new 12M TP of N7.95 (previously

N8.80). Access underperformed the broader benchmark index in 2015,

shedding 26.5% (vs.-17.4% for the NGSE ASI). Based on current valuation,

Access is trading at 2015E P/BV of 0.4x vs. tier-1 average of 0.6x.

Chart 44: ACCESS Share Price History

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ACCESS NGSE Index NSE Banking Index




73



74


Skye Bank Plc (SKYE)

Trudging on the weight of expectations

Market sentiment around SKYE’s shares remains largely negative, despite the

value-accretive promise of its acquisition of Mainstreet Bank in 2015. The dilut-

ive effect of expected fresh capital continues to weigh on the shares, further

compounding the impact of sector-wide challenges. In the near term, per-

formance is likely to be dampened by a spike in OPEX on account of regula-

tory charges and the consolidation of its recent acquisition.

Capital inadequacy constrains growth

On our estimates, and largely in sync with management guidance, Skye’s

CAR could fall below the regulatory limit of 15.0% by FY-15 (Q3-15 17.3%),

making a capital raising exercise inevitable in 2016. A possible movement

up on the league of Systemically Important Banks (SIB) may also trigger

the need for a higher capital buffer than earlier anticipated. We expect

this to be partly met by near-term internal capital retention and a cut

back in payout.

Market prices-in remote gains of acquisition

The scale advantage from the recent acquisition of Mainstreet Bank is

expected to be positive for Skye Bank’s historically sticky funding cost.

Hence, we have penciled in up to 100bps reduction in COF for FY-16.

However, while the sheer numerical advantage of the Mainstreet acquisi-

tion presents market share gains for Skye, earnings accretion is likely to be

hinged on the speed of integration which will also come with a spike in

personnel costs .

Despite 2015 sell-off, we maintain a HOLD rating

Skye’s shares lost 37.5% in 2015 ( vs NGSE ASI: -17.4%). While current valua-

tions remain compelling (2015P/BV of 0.1x vs. 0.6x for comparable tier-2

Nigerian banks and 0.8x for MSCI EM banks), we maintain a HOLD rating

on the stock as we expect near term earnings pressure to delay reversion

of the share price to fair value.

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5SKYEBANK NGSE Index NSE Banking Index


Chart 45: SKYE Share Price History


Bloomberg Ticker SKYEBANK NL

Reuters Ticker SKYEBAN.LG

NSE Ticker SKYEBANK

Rating HOLDCurrent Price (N) 1.58

Target Price (N) 3.38

Upside (Downside) 113.6%

Div idend Yield 0.0%

Total Return 113.6%

Historic Return

3 month -29.8%

6 month -36.8%

12 month -33.1%

YTD -37.5%

Oustanding Shares (bn) 13.9

Market Cap (NGNbn) 21.9

Market Cap (USDmn) 110.76

Av . Daily Value Traded (NGN) 22,902,990

Av . Daily Value Traded (USD) 115,672

75



76


Guaranty Trust Bank Plc (GUARANTY)

Consistent outperformer, sailing against the wind

GUARANTY remains the top pick within our coverage of Nigerian banks. We

like the bank’s premium earnings quality and superior profitability metrics;

hence we believe it stands above peer in its ability to weather further deterio-

ration in the macro backdrop. Although Q3-15 results reflect a broader indus-

try slowdown, a strong market positioning and control over operating effi-

ciency continue to support healthy earnings prospects for the bank in 2016.

Consistently tamed operating costs to shield earnings

At 44.5%, Guaranty’s Cost–to-Income Ratio (CIR) remains the lowest within

our coverage banks. While we note that the bank’s footprints expansion

within the African continent has remained OPEX- negative for some time,

we still expect strong Non Interest Revenue (NIR) drive to keep CIR within

management’s guidance of below 45.0% over the medium term, with

further support from expected decline in industry-wide funding cost.

Diversified loan book provides further edge

The bank’s loan book remains diversified, providing further comfort amid

ongoing macroeconomic weaknesses and declining asset yields. We

have seen a q/q improvement in funding mix for Guaranty, further provid-

ing stability for NIM. We expect a stronger management focus on asset

quality going into 2016 though we recognize that this may temper loan

growth. We therefore forecast 4.8% growth in loan book for 2016.

We continue to BUY GUARANTY

We retain our BUY rating for Guaranty with a 2016 TP of N31.8. The bank

continues to generate above-peer profitability and looks likely to sustain

this feat in a volatile macro environment. Guaranty sold off 27.8% in 2015

(vs.-17.4% for the NGSE ASI). Based on current valuation, Guaranty is trad-

ing at 2015E P/BV of 1.1x vs a 5-year average of 2.1x.

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GUARANTY NGSE Index NSE Banking Index

Fig. 46


Chart 46: GUARANTY Share Price History


77



78


Diamond Bank Plc (DIAMOND)

A Long wait for a new dawn

We have seen consistently high loan losses and declining NIMs pressure DIA-

MOND’s earnings in the last 3 years, with 2015 proving to be the most chal-

lenging, no thanks to macro and regulatory pressures. The recent TSA with-

drawals are expected to mute FY-15 and H1-16 deposit growth, while our re-

newed concerns around asset quality and general weakness in the economy

are likely to restrain loan growth.

Low asset quality impinges earnings

In Diamond’s Q3-15 results, we saw the run-rate of provisioning slow (-2.1%

q/q though cumulatively higher y/y (+32.7% vs Q3-14). However, com-

pared to H1-15, we note instructive changes in the bank’s NPL portfolio.

There were increases in the concentration in General Commerce (42.0%

in Q3-15 vs 35% in H1-15) and Oil and Gas (13.0% in Q3-15 vs. 11.0% in HI-

15). On the balance of risks in these two sectors, our weak macro outlook

suggests that NPL formation is not likely to materially wane for the bank,

even over 2016.

Earnings outlook dimmer on pressured funding base

Broadly downward revisions to key operating metrics in Q3-15 earnings

call hint at near term strain on profitability for Diamond. One key pressure

point remains the funding cost line where we think the scale effects of its

retail banking drive has continued to ebb. In Q3-15, annualised cost of

funds stood at 3.4% (vs. 3.2% in H1-15), slightly deviant to our observed

ruling theme in Nigerian banks within Q3-15. Expected declines in asset

yields due to lower interest rate environment will further pressure earnings.

2015 sell-off leaves ample upside for a BUY rating

Diamond’s shares lost 58.8% in 2015 (the steepest decline within our cover-

age) leaving current valuation compelling (2015P/BV of 0.2x vs. 0.6x for

comparable tier-2 Nigerian banks and 0.8x for MSCI EM banks). We main-

tain a BUY rating on the stock though we note that expected near term

earnings pressure will likely weigh on FY-15 performance, delaying market

re-pricing of the counter.

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DIAMONDBNK NGSE Index NSE Banking Index


Chart 47: DIAMOND Share Price History


79


DIAMOND: Summary Financials (N' bn)

Income Statement extracts FY-12 FY-13 FY-14 FY-15f FY-16f FY-17f

Gross Earnings 137,402 180,114 208,402 210,041 232,370 263,542

Interest Income 112,352 143,128 161,130 164,459 181,269 206,117

Interest Expense -23,030 -38,500 -51,553 -49,397 -52,130 -52,478

Impairment Charges -17,028 -23,297 -26,371 -25,780 -26,581 -29,771

Non Interest Income 25,050 36,986 47,273 45,582 51,100 57,424

Net fee and Commission Income 25,185 27,755 33,495 31,394 39,846 44,428

Profit Before Tax 27,482 32,080 28,101 24,311 32,844 39,076

Taxation -5,373 -3,535 -2,616 -3,647 -4,927 -5,861

Profit After Tax 22,108 28,544 25,485 20,664 27,917 33,214

Balance sheet extracts FY-12 FY-13 FY-14 FY-15f FY-16f FY-17f

Cash 132,196 228,322 301,393 345,683 426,672 533,340

Inv estment Securities 166,476 275,657 346,366 444,450 568,896 671,613

Loans and Adv ances to Customer 585,200 683,765 791,095 896,443 918,673 964,607

Total Assets 1,178,104 1,513,453 1,933,123 2,469,165 3,160,531 3,950,664

Total Borrowings 49,966 47,514 74,637 75,757 76,514 77,280

Customer Deposits 910,234 1,206,044 1,493,081 1,538,168 1,631,630 1,790,363

Total Equity 108,602 143,043 208,807 230,737 260,414 295,729

Total Liabilities & Equity 1,178,104 1,523,199 1,933,123 2,469,165 3,160,531 3,950,664

Summary Financials (USD'm)


Gross Earnings 912 1,124 1,136 1,061 1,174 1,331

Interest Income 746 893 878 831 916 1,041

Interest Expense -153 -240 -281 -249 -263 -265

Impairment Charges -113 -145 -144 -130 -134 -150

Non Interest Income 166 231 258 230 258 290

Net fee and Commission Income 167 173 183 159 201 224

Profit Before Tax 182 200 153 123 166 197

Taxation -36 -22 -14 -18 -25 -30

Profit After Tax 147 178 139 104 141 168


Cash 878 1,424 1,643 1,746 2,155 2,694



Total Assets 7,820 9,441 10,538 12,471 15,962 19,953

Total Borrowings 332 296 407 383 386 390

Customer Deposits 6,042 7,524 8,139 7,769 8,241 9,042

Total Equity 721 892 1,138 1,165 1,315 1,494

Total Liabilities & Equity 7,820 9,502 10,538 12,471 15,962 19,953

Key Ratios FY-12 FY-13 FY-14 FY-15f FY-16f FY-17f

Net Interest Margins 10.4% 8.9% 7.2% 6.3% 6.3% 6.5%

Cost to Income Ratio 66.6% 72.9% 70.2% 67.3% 65.6% 65.7%

Liquidity Ratio 45.3% 54.3% 55.9% 67.3% 75.8% 84.0%

Cost of Deposits 3.6% 3.8% 3.9% 4.0% 4.4% 4.4%

Cost of Funds 3.0% 3.1% 3.1% 3.2% 3.5% 3.6%

Lev erage (x) 10.6 9.3 10.7 12.1 13.4 14.6

Cost of Risks 3.4% 3.3% 3.4% 3.4% 3.5% 3.9%

Loan to Deposits Ratio 56.7% 56.7% 53.0% 58.0% 60.0% 62.0%

NPL Ratios 3.5% 5.1% 5.1% 5.0% 5.0% 4.8%

Total asset turnov er 11.7% 11.9% 10.8% 8.5% 7.4% 6.7%


80


Zenith International Bank Plc (ZENITH)

A strong tier-one play

ZENITH proved a resilient play in 2015. Buoyed by robust and liquid balance

sheet, the bank’s superior asset quality stood out amid headwinds though

margins came under intense pressure. Zenith has sold off significantly relative

to tier-1 banks and the current price now offers healthy upside to our TP.

Though performance slowed in Q3-15 after a strong Q2, we still believe that

the bank is at a pole position to claw back gains as monetary conditions nor-

malize going into 2016.

Liquid balance sheet to moderate pressure on asset yield

The pressure we observed in Zenith’s NIM especially in Q3-15 stemmed

largely from declining yield on assets. Although interest expense shot up

28.1% q/q (vs. -36.1% in Q2-15), Cost of Funds (COF) remained relatively

stable, in contrast to most tier-one banks on our coverage. The recent

reduction in CRR, is expected to bode well for Zenith’s core earnings go-

ing forward, on account of the bank’s highly liquid balance sheet, just as

relatively higher system liquidity is expected to support industry wide fund-

ing costs .

High asset quality to sustain earnings

We highlight that there would have to be a substantial deterioration in

Zenith’s asset quality to warrant a material re-rating from us as we con-

tinue to expect the bank to outperform peers in this regard. Q3-15 results

track in line with management’s earlier guidance of healthy asset quality

metrics with NPL ratio and cost of risk berthing at 1.6% and 0.7% respec-

tively, relative to 1.4% and 0.8% in Q2-15. We expect the bank’s strong

asset quality to continue to support earnings going into 2016.


We retain our BUY rating with a new 12M TP of N23.9 (previously N23.6).

Zenith underperformed the market in 2015, shedding 23.7% (vs.-17.4% for

the NGSE ASI). Zenith is trading at 2015E P/BV of 0.7x vs. tier-1 average of

0.6x. We expect Zenith to trade at a premium to the broader banking

index when the market sentiments improve.

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ZENITHBANK NGSE Index NSE Banking Index

Fig. 48


Chart 48: ZENITH Share Price History


81



82


Stanbic IBTC Holding Plc (STANBIC)

Provisionings drag earnings south

STANBIC posted significantly weak earnings scorecards through 2015. Up to H1

-15, y/y performance was masked by a high base effect from an extraordi-

nary 2014 performance. However, PBT slowed remarkably in Q3-15 results on

account of asset quality deterioration as cost of risk spiked to 8.8% (FY-14:

0.8%, H1-15: 3.7%). Stanbic has historically traded at a premium to tier-two

names, driven largely by its relatively lower free float, in our view.

Material changes in Management guidance for FY-15 calls for

concern

Subsequent to the release of its Q3-15 results where PBT fell by a record

38.9% q/q, Management made significant reductions to top and bottom

line estimates for FY-15, hinting at ongoing pressure on earnings. Loan

growth was more than halved from 10.0% to 3.0%, with cost of risk ex-

pected at <5.0% (vs. initial guidance of <2.5%). Our sense is that there

seem to be renewed strain on the bank’s asset quality given that the

Afren exposure triggered a significant provisioning in Q3-15.

Planned capital raise portends modest upside to earnings

Stanbic’s capital raising exercise, suspended due to ongoing tussle with

the Financial Reporting Council of Nigeria (FRCN), is expected to be re-

commenced in 2016. Although solvency is above regulatory threshold

(with CAR at 20.0% as at Q3-15), we still believe additional capital is

needed to further moderate cost of funds and provide a war chest for

future funding opportunities. Stanbic’s high exposure to private sector de-

posit exposed the bank to the liquidity tightening effect of the harmoniza-

tion of CRR by the CBN in Q1-15 .

Sell-off still leaves ample room for a HOLDrating

We retain our HOLD rating for Stanbic but cut our 12M TP to N16.5

(previously N19.5). The sell-off in the bank’s shares vs. (-17.4% for the NGSE

ASI). Stanbic is trading at 2015E P/BV of 0.4x vs. tier –2 average of 0.6x

Per Share Data/Valuation FY-12 FY-13 FY-14 FY-15f FY-16f FY-17f

EPS (N) 1.0 2.1 3.2 1.8 2.2 2.5

DPS(N) 0.1 0.1 0.2 0.2 0.2 0.2

BVPS (N) 8.3 9.4 11.0 12.7 15.0 17.8

PAT/Gross Earnings 0.1 0.1 0.1 0.0 0.0 0.0

Div idend Payout (%) 9.8% 4.8% 4.7% 10.0% 7.3% 8.7%

Div idend Yield(%) 0.5% 0.5% 0.7% 1.2% 1.1% 1.5%

P/E 21.1x 10.5x 6.9x 8.4x 7.0x 5.9x

P/BV 2.6x 2.3x 2.0x 1.2x 1.0x 0.8x

ROAE 6.4% 12.2% 23.4% 31.4% 15.1% 15.5%

ROAA 1.3% 1.7% 2.9% 3.8% 1.7% 1.7%

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STANBIC NGSE Index NSE Banking Index


Chart 49: STANBIC Share Price History


Bloomberg Ticker STANBIC NL

Reuters Ticker STANBIC.LG

NSE Ticker STANBIC



Upside (Downside) -0.3%


Total Return 0.4%

Historic Return

3 month -25.2%

6 month -38.8%

12 month -46.5%

YTD -38.5%






83


STANBIC : Summary Financials (N' bn)


Gross Earnings 91,860 111,226 130,611 132,708 149,539 165,359

Interest Income 57,818 62,585 72,156 78,931 86,958 93,982

Interest Expense (24,264) (25,572) (25,498) (39,252) (41,214) (43,132)

Impairment Charges (6,895) (2,667) (3,217) (19,376) (18,751) (17,168)

Non Interest Income 34,042 48,641 58,455 53,777 62,581 71,377

Net fee and Commission Income 25,568 32,900 39,267 39,573 41,552 44,876


Taxation (1,569) (3,844) (8,005) (5,339) (6,440) (7,548)

Profit After Tax 10,157 20,773 32,065 17,874 21,560 25,269


Cash 76,933 120,312 143,171 130,347 156,416 187,699



Total Assets 676,819 763,046 944,542 1,133,450 1,360,140 1,632,169

Total Borrowings 66,873 55,163 93,124 94,055 94,996 95,946


Total Equity 83,341 94,313 110,052 126,985 150,425 177,542

Total Liabilities & Equity 676,819 763,046 859,259 1,133,450 1,360,140 1,632,169



Gross Earnings 610 694 712 670 755 835

Interest Income 384 390 393 399 439 475

Interest Expense -161 -160 -139 -198 -208 -218

Impairment Charges -46 -17 -18 -98 -95 -87

Non Interest Income 226 303 319 272 316 360

Net fee and Commission Income 170 205 214 200 210 227


Taxation -10 -24 -44 -27 -33 -38

Profit After Tax 67 130 175 90 109 128


Cash 511 751 780 658 790 948



Total Assets 4,493 4,760 5,149 5,724 6,869 8,243

Total Borrowings 444 344 508 475 480 485


Total Equity 553 588 600 641 760 897



Net Interest Margins 7.5% 6.3% 5.8% 6.1% 4.6% 4.9%

Cost to Income Ratio 78.8% 75.0% 65.3% 57.0% 69.4% 67.5%

Liquidity Ratio 50.0% 69.8% 68.9% 64.8% 58.5% 65.3%

Cost of Deposits 4.4% 7.5% 6.6% 5.6% 7.2% 6.8%

Cost of Funds 2.5% 4.5% 4.4% 3.6% 4.6% 4.4%

Lev erage (x) 6.7 8.1 8.1 8.6 8.9 9.0

Cost of Risks 1.5% 2.6% 0.9% 0.8% 4.8% 4.5%

Loan to Deposits Ratio 78.9% 74.9% 69.6% 55.0% 58.0% 60.0%

NPL Ratios 7.0% 6.1% 4.4% 4.3% 9.0% 5.0%



84


FBN Holdings Plc (FBNH)

The stuttering elephant

FBNH’s earnings came under intense pressure through 2015 as rising loan loss

expenses on the bank’s significant oil and gas exposures muted bottom line

growth. Despite the bank’s dominant position in the industry, poor earnings

visibility, driven by high asset quality risk, as well stretched capital, could de-

lay earnings recovery necessary for a reversion to fair value.

Asset quality woes not over

FBNH’s Q3-15 results show a 249.0% spike in y/y loan loss provisionings,

pushing cost of risk to 3.3% as NPL ratio climbed 200bps to 4.8% (vs. 2.9%

for FY-14). Although FBN’s N46bn cumulative provisioning as at Q3-15 was

largely priced in by the market, the sustained skeweness of the bank’s NPL

portfolio towards the oil and gas sector (46.0% of loan portfolio and 22.1%

of total naira NPL as at Q3-15) continues to portend provisioning risks,

given 2016 bearish outlook for oil prices.

Capital not adequate to spur growth

FBNH has the lowest CAR among our coverage tier-1 names. We opine

that the bank might be forced to deleverage its balance sheet in 2016

given limited growth opportunities with current capital. With recent cut-

back in dividend already telling on investor sentiments, a further strain on

profitability may trigger an alternative tier-1 capital raise given an already

stretched tier-2 capital base (33.1% of tier-one as at Q3-15). The expecta-

tion of the dilutive effect of this may continue to depress the stock price.

Absence of near term catalyst warrants a HOLD rating

We expect FBNH‘s shares to stay depressed in the medium term except

we see a drastic improvement in the macroeconomic backdrop (which is

very unlikely, in our view). Although the stock presents significant upside to

our valuation estimate, having sold off massively behind peers, the ab-

sence of near term catalyst leads us to re-rate FBNH HOLD from BUY.

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FBNH NGSE Index NSE Banking Index

Fig. 50

Bloomberg Ticker FBNH NL

Reuters Ticker FBNH.LG

NSE Ticker FBNH





Total Return 81.7%

Historic Return

3 month -25.9%

6 month -47.5%

12 month -48.1%

YTD -41.3%




Av . Daily Value Traded (NGN'mn) 298,436,385

Av . Daily Value Traded (USD) 1,507,254


Chart 50: FBNH Share Price History


85



86


Section 6

Consumer

87


Nigerian Consumer

Riding out the hard times – Industry still in transitory phase

In line with recent trend, struggles of key players within the FMCG sector contin-

ued over H2-15, as new pressure points from scarcity of FX as well as higher aver-

age transportation costs, which stemmed from intermittent bouts of fuel scar-

city, increased the cost of doing business. The latter further pressured disposable

incomes from the consumer side, effectively precluding sector players from

passing-on extra costs, owing to the ready availability of substitutes as well as

low switching costs. Consequently, sales numbers slowed further on the aver-

age, industry wide.

While our call of a bearish trend for global commodities played out just like we

had anticipated, with wheat and sugar shedding 24.1% and 7.2% respectively

over 2015, we note that gains which should have accrued to sector players

(most of which still source a significant portion of their inputs from abroad) was

eroded by challenges around the paucity of FX. Over the period, the use of LCs

through banks became complicated with much longer turnaround time, owing

to a slew of policy maneuver by the apex bank to manage exchange rate and

protect domestic foreign reserves. This forced players to seek alternative and

more expensive sources of FX.

Higher cost of doing business and

lower consumer disposable income

were key constraints to earnings of

sector players in 2015


Bearish trends for global commodity

prices constituted additional pressure

points for players in 2015

65

80

95

110

125

Dec-14 Mar-15 May-15 Jul-15 Sep-15 Nov-15

Chart 51: In 2015, currency pressure eroded most of the benefits of

tepid commodity prices

Performance of key commodities vs NGN/USD

Wheat Sugar NGN Spot

88


Q3-15 results fully captured the impact of these events, as revenue growth for

sector players within our basket significantly lagged rise in COGS and distribution

costs. On an aggregate basis, sector revenue for our basket of securities grew

8.9%y/y (ex-brewers) to N200.9bn, while after-tax profits was down 22.1% y/y to

N5.4billion. Sector top line performance was driven by both Nestle and Flourmills.

While the latter remains in transition, these two heavy weights continue to dem-

onstrate a superior understanding of the ever changing dynamics of the Nige-

rian consumer terrain, in our view. Overall, in the context of the struggles of the

broader market, the NGSE consumer fared slightly better than the ASI, returning

–11.5% over H2-15 which is 290bps better than the NGSE ASI’s –14.4% return.

Industry Trends: Rising domestic and foreign interest burden driving an

attraction to raise equity via rights

Over the past five years, players in the sector have grappled with a high interest

rate environment, which was as a result of a desperate move by the apex bank

to appease the FPIs and stabilize the currency to an extent, in the face of plum-

meting crude oil prices. The Impact was further exacerbated by a 100bps hike

in the MPR to 13.0% in Q4-14 by the Central bank. This trend extended into

9M-15, as the percentage of earnings paid out as interest increased, despite a

200bps cut in MPR to 11.0%.

More recently, and asides from its impact on imported input costs, the scarcity

of the greenback is biting sector players hard especially those with foreign de-

nominated loans. We note that prior to this time, it has been a long standing

industry practice for domestic subsidiaries of foreign multinationals to obtain

relatively cheaper foreign denominated loans from their parents and pay inter-

est in foreign currency. However, with the on-going pressure on the naira which

drove 8.0% depreciation over 2015, the interest cost of these loans have been

on the rise, thereby further cringing earnings performance of these companies.

In spite of a myriad of industry chal-

lenges, the consumer sector faired

slightly better than the broader mar-

ket in H2-15


-14.4%-11.5%

-27.1%

-3.3%-4.6%

-0.8%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

NGSE ASI Consumer Banking Oil and Gas Industrial Insurance

Chart 52: The consumer sector fared better than the market in H2-15

Sectoral Performace of major equity indices in H1-15

H1-15 H2-15

89


It is in response to spiraling interesting cost that industry players began to explore

alternative capital raising options. Both UACN and Flour Mills proposed rights

issues over Q3, although with little success as sentiments in equities remained

downbeat for much of the period. Also, major brewers, Nigerian Breweries and

Guinness, also turned to commercial paper issuance to augment working capi-

tal and reduce interest burden. Despite a much lower interest rate environment,

we expect the issuance of CPs will continue to gain traction for short term fund-

ing, as the cost of issuance is significantly lower than most other sources for short

term financing. Also, with average debt to equity for our universe currently on

the rise, we believe the prospect for issuance while still strong, will be strongly

correlated to the overall direction of equity prices over the course of the year.

Flour millers and sugar refiners still plagued by overcapacity, will likely continue

to lag

Asides from the impact of FX on input costs and finance charges which is a ma-

jor challenge for the flour millers and sugar refiners, the utilization of Nigeria’s

total milling capacity for both flour and sugar was still at around 65.0% as at the

end of H1-15. Hence, excess capacity portends medium to long term risks,

which in our view raises new questions about the attractiveness of these indus-

tries. For the flour millers, in view of relatively high historical margins, recent sup-

ply dynamics points towards increasing competition, declining pricing power,

and dwindling margins. To counter this, larger industry players are tilting more

towards forward integration into more differentiable, higher margin products

such as pasta, semolina and noodles with increasing emphasis on consumers,

thereby drifting away from the traditional business-to-business approach.

The issuance of CPs is likely to gain

more prominence over H1-16, as in-

dustry players continue to seek

cheaper sources of short term financ-

Major players in the flour milling

space are tilting more toward for-

ward integration

-10.0

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UACN Unilever Guinness Nigerian

Breweries

Int Brew Flourmills Nestle

Chart 53: Interest cost eating into cash and earnings of industry players

Interest expense, CFO&PAT of industry players

Interest expense (N'bn) Cash from Operations (N'bn) PAT(N'bn)

90


Reflective of on-going challenges within the flour milling space, Dangote flour

had a torrid period over H2, which culminated in Tiger Brands withdrawing its

funding, a subsequent change of name to Tiger Brands consumer goods plc,

and an eventual re-acquisition of a 65.7% stake by Alh. Aliko Dnagote. While

still in transition however, Flour Mills currently appears to be ahead of peers,

having grown a well-diversified business that covers edible oils, impulse snacks,

agro allied, sugar and traditional flour milling business to mention a few. More-

over, an extensive backward integration process presently in place for most of

its business implies the company’s dependence on imported inputs will wane

gradually over time. Recent sale of Unicem, which in our view has been a major

drag on performance, has also helped alleviate funding pressure and proceeds

from its rights issue (if successful) should also provide a much better debt profile.

Overall, given current dynamics within the flour milling space, Flour Mills remains

our top pick as a solid option for the long haul.

The same dynamics of excess capacity is discernible in the sugar refining indus-

try, even as competition is set to further intensify. Flour Mills of Nigeria is ex-

pected to complete its new sugar mill in H1-16, to be followed by a massive

expansion of the cultivation of sugar cane in the 10,000ha land it acquired by

the River Niger. Also BUA was billed to commission its second mega sugar refin-

ery in Port-Harcourt towards the end of 2015, even as it continues to invest

heavily in its Lafiagi Sugar Company and plantation. Sugar consumption is esti-

mated at 1.5-1.6 million MT per annum with annual growth of 5-7%.

Cheap spirits taking the shine off domestic brewers, but Nigerian Breweries well

poised

For the brewers, H2-15 saw the ruling theme of mergers and acquisitions con-

tinue, with the grand merger between ABInbev and SABMiller consummated in

a deal worth a record $107.0bn. Domestically, 2015 was challenging for brewers

in general, with consumers’ pockets still constrained for the most part. Perform-

ance of the low-priced beer, which has been the major driver of industry vol-

umes in recent times, also took some hit, as small portion sized spirits, with a

much higher alcoholic content (vs. beer) and priced at a discount in some

cases, continued to gain prominence.

There is significant excess capacity in

the sugar refining space

Small portion sized spirits are compet-

ing with low priced beer for market

share

Despite current challenges , Flour mills

remain our preferred long term in-

vestment option

91


That said, revenue growth for Nigerian Breweries remained stable over Q3-15, as

synergies from recent consolidation with Consolidated Breweries, which has ex-

panded its value brand portfolio, combined with its robust distribution channels

to support volumes. Guinness on the other hand, bucked its recent turnaround

story in its latest quarterly results, reporting a tepid 3.0% growth in revenue, as its

top-performing brand - Orijin, faced intense competition from NB’s Ace Root, as

well as the branded small portion sized spirits which we highlighted earlier.

After a period of strong double digit revenue growth, International Breweries is

now feeling the heat, from the twin impact of heightened competition which

has been exacerbated by its limited distribution channel (a direct consequence

of its regional play) as well as finance charges from its foreign denominated

debts. On an aggregate basis, sector revenue and PAT was up by 13.6% and

16.8%, rising to N89.9bn and N11.5bn respectively in Q3-15, when compared to

the comparable period in 2014, with Nigerian Breweries emerging as the sector

high flyer over the period.

Guinness’s revenue growth slowed in

the last quarter due to higher compe-

tition from NB’s Ace Root.

N53.2bn

N63.2bn

N6.0bn N4.6bn

N21.0bn N21.7bn

N3.6bn N0.4bnN4.9bn N4.9bn

N0.3bn

N6.5bn

0.0

20.0

40.0

60.0

80.0

Rev (Q3-14) Rev (Q3-15) PAT (Q3-14) PAT(Q3-15)

Chart 54: Nigerian Breweries still ahead of peers in a challenging

terrain

Q3 Revenue and PAT: y/y performance of key players in the Brewery sector

Nigerian Breweries Guinness International Breweries

Source: Company financials, United Capital

92


Sector outlook

Moves by global players throw up “Patience” as the key theme

Despite a challenging consumer terrain in 2015, the FMCG sector still saw some

offshore interest, even as new players continue to seek inroads into their respec-

tive markets. An example is Kellog, the world’s largest cereal maker, who at the

end of Q3-15, set up a JV with the African arm of Singapore's Tolaram Group to

bolster its breakfast and snack food offerings in West Africa. The company also

announced its intention to pay $450 million for a 50.0% stake in Multipro, a food

sales and distribution company owned by Tolaram, with an option to buy a

stake in Tolaram's African unit. We note that Tolaram Africa Foods owns 49.0%

stake in Dufil Prima Foods Plc, the maker of Indomie noodles, Minimie snacks,

Power oil and Power pasta.

Unilever UK had earlier in 2015 successfully increased its stake in Unilever Nigeria

from 53.4% to 75.0% via a tender offer, while Diageo also raised its stake in its

local arm (Guinness Nigeria) from 53.4% to 70.0% during H2-15, through a similar

mechanism. Both moves came at a time when both domestic subsidiaries were

struggling with performance, and to our mind it appears to be a case of “smart

money” for the parent companies. In our opinion, this in itself gives some per-

spective as regards the longer term view of these “Parents” on Nigeria’s FMCG

sector. On the flip side, Nestle Switzerland (the parent of Nestle Nigeria) took a

contrarian stance, as it announced at the end of H1-15, its intention to scale

back investments across its SSA business, with Management explaining that it

had vastly over-estimated the rise of the middle class on the continent.

While the two scenarios highlighted above create two pictures with marked

differences, the common denominator in our view, is that although the global

players appear to have significantly different stance on the timing of fulfillment

of the Consumer story in Nigeria and SSA at large, it is clear that they remain

strongly drawn to the potential yet untapped across the continent. Thus these

sector events suggest that key global players are in for the long haul, with most

willing to ride out the storm. It is against this background that we believe the

Nigerian FMCG scenario calls for patience, and investors with a long term hori-

zon will likely be the ultimate winners.

We saw appreciable offshore inter-

ests in 2015, hinting at unexploited

benefits of the Nigerian consumer

sector

Nestle took a contrarian view of the

prospects of the African consumer

space by announcing a massive

scale back of investment in SSA

Recent sector events suggest to us

that foreign players are in for the long

haul

93


Tightness in Consumer wallets, no end in sight…just yet

Despite recent monetary easing moves by the monetary policy committee

(MPC), we believe the transmission mechanism to consumers remains compli-

cated in the near term with plausible risk scenarios. In addition, new electricity

tariff which is set to kick-in in February 2016, as well as ongoing issues around FX

and what it portends for inflation and prices, further provide some support for

our view. Hence, we expect pressure on consumer disposable incomes to linger

in 2016, especially over H1.

For industry players, the headroom to pass on extra costs to consumers will likely

remain limited, and in our view those that can achieve scale, cost efficiency

with robust distribution channels should fare better than peers. We expect the

Northern region’s contribution to sector top-line to gradually increase, as unrest

in the area continues to slowly ease. This point is salient, particularly for players

with factories located in the region as the overall incremental benefit for these

will likely be greater, if reality over H1-16 falls in line with our projections.

Outlook for commodity prices still benign, but currency pressures will

likely test sector resilience

While our outlook for commodity prices still remains bearish, we project that any

gains that should accrue to industry players will likely be more than offset by the

strength of on-going pressure on FX. Thus, the quantum of reprieve from cur-

rency driven volatilities on input costs and high finance charges on foreign de-

nominated loans will be strongly tied to the options that the Apex bank adopts

in tackling issues around currency, as well as the pace at which its policies as-

suage current FX scarcity, in our view. However, should the current status-quo

be maintained, then the sector players’ resilience will be tested to its limits, with

the extent of pursuant of backward integration as well as the level of exposure

to foreign denominated debts likely to come to the fore in shaping industry per-

formance in 2016.

Consumer pockets will remain tight

as macro weaknesses persist

Sector players will continue to find it

difficult to pass on extra costs to con-

sumer

Any gains from benign commodity

prices are likely to be eroded by cur-

rency weakness

94


Contingent on more upbeat sentiments in equities than presently, we believe

there is scope for players to seek new equity capital in a bid to reduce debt

exposure and interest expense. Furthermore, blue chip companies within the

sector will likely continue to favor the issuance of CPs as a source of short term

financing in a bid to lower costs, given its more competitive pricing and lesser

red tape around regulatory approvals.

For 2016, we favor players that have well diversified business models, with a

large proportion of revenue coming from exposure to agricultural sub sectors

such as food and the agro-allied businesses. Given recent struggles seen in

crude oil prices, we believe the agricultural sector will play a pivotal role in Nige-

ria’s growth story over the next five years, with players exposed to the sector

likely to grossly benefit. The brewers are likely to navigate a tricky path going

into 2016, though Nigerian Breweries, with its robust distribution channels and

wider value brand offerings (vs. peers) will likely set the pace.

Players with well diversified business

models are likely to better weather

the storm in 2016

95



Flourmill of Nigeria Plc (FLOURMILL)

Looking to fulfil promise

In its recently released results for 6M-16 ended September 30th 2015,

FLOURMILL recorded a 7.3% y/y rise in revenues to N177.6bn which equates a

15.8% increase from the previous quarter. PAT also rose by 4.5% to N24.0bn

from a year earlier. We believe Flourmill’s new business model supported by a

robust backward integration strategy is solid, and is bound to yield positive

results over the medium term

Revenue expands on gains from new product lines…

A closer look at the numbers revealed a strong showing within the quar-

ter, with Q2-16 coming in at N95.3bn, 16.8% higher y/y. We note that Q2

has historically been the weakest for Flourmills, thus making the numbers

all the more impressive. It appears as if gains from its new impulse snacks

and edible oil lines have started to trickle-in in our view, especially when

one considers the fact that Flourmill top-line growth has slowed in recent

times.

...but higher COGS blocks pass through to margins

Despite impressive revenue growth numbers, Q2-16 saw gross margin

contract by 70bps to 8.8% y/y, mostly due to a 17.7% y/y (20.1% q/q) ac-

celeration in COGS to N86.9bn which tracked ahead of revenue growth.

The rise in COGS was a little surprising given the current immobile FX envi-

ronment as well as moderation in the prices of key inputs YTD.


Having shed close to -50.0% over 2015, our 12M TP of N45.0 is more than

2x above Flour Mill’s 2015 year end price. Furthermore, the stock is cur-

rently at an EV/EBITDA of 8.4x which is at a steep discount to Emerging

market peer average of 15.5x; Hence we maintain a BUY rating.

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FLOURMILL NGSE Index NSE Consumer Index

Source: Company Financials, United Capital

Chart 55: FLOURMILL Share Price History

Per Share Data/Valuation FY-12 FY-13 FY-14 FY-15 FY-16f FY-17f

EPS (NGN) 2.8 1.8 2.1 3.3 9.0 2.1

DPS(NGN) 1.5 1.8 1.9 2.1 2.6 0.7

BVPS (NGN) 29.2 31.7 32.2 33.6 36.2 39.3

SPS 100.0 116.2 127.8 118.8 132.4 139.3

Div idend Payout (%) 0.5 99.4% 91.2% 64.4% 28.8% 33.7%

Div idend Yield(%) 0.0 2.9% 3.1% 10.1% 12.5% 3.4%

P/E 22.3 34.0x 29.7x 6.4x 2.3x 10.0x

P/BV 2.1 2.0x 1.9x 0.6x 0.6x 0.5x

P/S 0.6 0.5x 0.5x 0.2x 0.2x 0.1x

EV/EBIDTA 1.0x 0.6x 0.9x 0.8x 0.2x 0.6x

Bloomberg Ticker FLOURMIL NL

Reuters Ticker FLOURMILL.LG

NSE Ticker FLOURMILL

Rating BUY

Current Price (N) 20.8

Target Price (N) 45



Total Return 116.7%

Historic Return

3 month -8.9%

6 month -40.1%

12 month -58.4%

YTD -46.6%






96



FLOURMILL: Summary Financials (N' mn)

Income Statement extracts FY-12 FY-13 FY-14 FY-15 FY-16f FY-17f

Turnov er 258,268 301,941 332,143 308,757 325,303 352,033

Cost of sales -218,560 -264,043 -288,485 -273,390 -290,393 -311,020

Gross Profit 39,708 37,898 43,658 35,367 34,910 41,013

Other Operating Income 2,597 5,407 3,874 -685 106 1,022

Operating Expenses -21,514 -25,271 -21,803 -25,096 -28,022 -30,229

Operating profit (loss) 20,792 18,034 25,729 9,586 6,994 11,806


Taxation -4,042 -6,117 -2,786 749 -1,399 -2,380

Profit After Tax 7,761 4,760 5,442 8,474 10,944 7,022

Balance sheet extracts FY-12 FY-13 FY-14 FY-15 FY-16f FY-17f

Total Current Assets 110,174 100,844 123,604 125,333 127,339 128,292

Total Long-Term Assets 169,964 196,405 219,245 204,870 226,053 248,929

Total Assets 280,138 297,249 342,849 330,203 353,392 377,221

Total Current Liabilities 114,510 128,659 179,214 154,202 163,022 174,302

Total Long-Term Liabilities 83,143 85,031 76,225 77,202 74,302 76,392

Total Liabilities 197,653 213,690 255,439 231,404 237,324 250,694

Total Equity 82,485 83,559 87,410 98,799 116,068 126,527




Turnov er 1,714 1,714 2,072 1,683 1,643 1,778

Cost of sales -1,451 -1,753 -1,800 -1,490 -1,467 -1,571

Gross Profit 264 252 272 193 176 207

Other Operating Income 17 36 24 -4 1 5

Operating Expenses -143 -168 -136 -137 -142 -153

Operating profit (loss) 138 120 161 52 35 60


Taxation -27 -41 -17 4 -7 -12

Profit After Tax 52 32 34 46 55 35


Total Current Assets 731 629 674 633 643 648


Total Assets 1,860 1,854 1,869 1,668 1,785 1,905

Total Current Liabilities 760 803 977 779 823 880

Total Long-Term Liabilities 552 530 416 390 375 386


Total Equity 548 521 476 499 586 639


Key Ratios FY-12 FY-13 FY-14 FY-15 FY-16f FY-17f

Gross profit margin 15.4% 12.6% 13.1% 11.5% 10.7% 11.7%

EBITDA margin 9.2% 9.7% 8.1% 9.1% 9.8% 10.4%

Operating profit margin 8.1% 6.0% 7.7% 3.1% 2.1% 3.4%

PBT margin 4.6% 3.6% 2.5% 2.5% 3.8% 2.7%

Net profit margin 3.0% 1.6% 1.6% 2.7% 3.4% 2.0%

ROAE 9.4% 5.7% 6.2% 8.6% 9.4% 5.5%

ROAA 2.8% 1.6% 1.6% 2.6% 3.1% 1.9%

Opex/sales 8.3% 8.4% 6.6% 8.1% 8.6% 8.6%

Total asset turnov er 0.9 1.0 1.0 0.9 0.9 0.9

97



Nigerian Breweries Plc (NB)

Teething from value shift

In its recently released results for the period 9M ended Sept 30th 2015, NB

reported a 10.4% increase in revenue to N214.9bn, with after tax profits com-

ing in at N26.2bn, 11.8% lower than the comparable period in 9M-14. The

company also declared an interim dividend of N1.20 per share (N1.24 in 9M-

14), which equates c.36% pay-out ratio and dividend yield of 0.9%.

Higher value volumes and benign commodity prices support gross

margin expansion

Q3-15 revenue expanded by 18.8% to N63.2bn, reflective of the impact of

the recent merger with consolidated breweries, which has expanded the

brewer’s product portfolio, especially at the value end of the market. This

is much in line with the ruling theme in the domestic beer market in our

view, with consumers trading down to low-priced beer industry wide, in

response to tighter wallets from slowing broader growth.

After-tax earnings decline on higher OPEX and finance charges

In contrast, EBIT fell 14.3% to N8.9bn y/y, with the corresponding margin

contracting 5.4ppts to 14.0%. Decline seen in EBIT factors-in the twin im-

pact of higher OPEX as well as an 83.0% decrease in operating income to

N88.5mn. Overall, pre-tax and after-tax profits both fell by 24.5% and 21%

y/y to N6.6bn and N.4.7 billion respectively, with related margins down

600bps and 380bps to 10.4% and 7.4%, the latter supported by a lower

effective tax rate y/y.

Model revision leaves rating unchanged

NB is currently trading at a PE of 18.2x relative to Emerging and frontier

market peers at 21.1x. Our 12month TP is now N140.6, which maintains our

HOLD rating.


Chart 56: NB Share Price History


EPS (NGN) 5.0 5.7 5.6 5.0 5.7 6.2

DPS(NGN) 3.0 4.5 5.7 4.9 5.5 6.0

BVPS (NGN) 12.4 14.9 22.7 22.2 22.6 23.2

SPS 33.4 35.5 35.2 37.3 40.7 45.6

Div idend Payout (%) 59.6% 79.0% 102.3% 97.4% 96.5% 96.8%

Div idend Yield(%) 2.0% 3.1% 3.9% 3.6% 4.0% 4.4%

P/E 29.2x 25.6x 26.0x 27.0x 23.9x 21.9x

P/BV 11.9x 9.8x 6.4x 6.1x 6.0x 5.9x

P/S 4.4x 4.1x 4.2x 3.6x 3.3x 3.0x

EV/EBIDTA 1.0x 0.6x 0.9x 0.8x 0.2x 0.6x

Bloomberg Ticker NB NL

Reuters Ticker NB.LG

NSE Ticker NB

Rating HOLDCurrent Price (N) 136




Total Return 3.5%

Historic Return

3 month 1.5%

6 month -9.5%

12 month -21.0%

YTD -17.7%


Market Cap (NGNbn) 1,078.3

Market Cap (USDmn) 5,446.18



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NB NGSE Index NSE Consumer Index


98



NB: Summary Financials (N' bn)


Turnov er 252,674 268,613 266,372 282,354 307,766 344,698

Cost of sales -109,070 -110,947 -106,725 -112,941 -126,184 -143,049

Gross Profit 143,604 157,666 159,647 169,413 181,582 201,649

Other Operating Income 2,000 2,075 1,718 1,011 1,201 1,920




Taxation -26,569 -26,091 -24,340 -31,766 -38,188 -42,846

Profit After Tax 38,042 43,080 42,520 41,554 47,153 55,458




Total Assets 253,633 252,759 349,228 352,122 368,852 385,688




Total Equity 93,447 112,359 171,964 175,923 178,964 183,964

Total Liabilities & Equity 727,029 782,710 1,047,239 1,026,076 1,071,197 1,125,834



Turnov er 1,677 1,676 1,452 1,426 1,554 1,741

Cost of sales -724 -692 -582 -570 -637 -722

Gross Profit 953 984 870 856 917 1,018

Other Operating Income 13 13 9 5 6 10




Taxation -176 -163 -133 -160 -193 -216

Profit After Tax 253 269 232 210 238 280




Total Assets 1,684 1,577 1,904 1,778 1,863 1,948




Total Equity 620 701 937 889 904 929




EBITDA margin 33.1% 33.9% 34.7% 35.5% 36.0% 36.5%


PBT margin 25.6% 25.8% 25.1% 26.0% 27.7% 28.5%


ROAE 40.7% 38.3% 24.7% 23.6% 26.3% 30.1%

ROAA 15.0% 17.0% 12.2% 11.8% 12.8% 14.4%

Opex/sales 24.9% 25.8% 26.4% 26.9% 25.8% 23.8%


99



Guinness Nigeria Plc (GUINNESS)

Earnings behind the beat

GUINNESS recently released its Q1-16 results which saw earnings disappoint,

with revenue growing 3.3% y/y to N21.7bn, while profit after tax was down

75.6% y/y to N362.3mn. This equates to Q1-EPS of 0.24K, the lowest in our his-

torical data set which dates back to FY-07.

Has the “Orijin story” run its course?

While we had modeled-in momentum from “Orijin” into our FY-16 num-

bers, Q1-16 revenue slowed considerably, much faster than we had an-

ticipated. To our mind, it appears lingering tightness in consumer wallets

continues to drive a trade-down by consumers, even as competition in

RTD segment hots up, spearheaded by NB’s Ace root. We note that Ace

root is currently priced at a c.8.0% discount (ex-depot price) to Guinness”

Orijin

Lower finance charge not enough, as rise in COGS weighs heavily on

earnings

Gross margin contracted 7.3ppts y/y to 42.8% while COGS-to-Sales ratio

was up by the same margin, rising to 57.2% from a year earlier. In our view

this is reflective of pass through from sluggish top-line growth and the y/y

impact of FX pressure on COGS which rose 18.5% to N12.4bn. Overall,

Q1-16 PBT and PAT fell 73.6% and 75.6% to N517.6mn and N362.3mn, with

related margins also falling to 2.4% and 1.7%, 6.9ppts and 5.4ppts lower

than comparable period in 2015 respectively.

SELL rating maintained.

The stock currently trades at a trailing P/E of 19.2x compared to domestic

peer average (NB and IB) at 22.1x. Nevertheless, our 12month TP is now

N127.70, 6% lower than previously. Hence, we maintain a SELL rating.

Source: Company financials, United Capital Research

Chart 57: GUINNESS Share Price History

Per Share Data/Valuation FY-12 FY-13 FY-14 FY-15 FY-16f FY-17f

EPS (NGN) 9.4 7.9 6.4 5.3 4.7 6.4

DPS(NGN) 9.8 7.8 7.0 4.4 4.5 5.6

BVPS (NGN) 25.7 30.6 29.9 30.7 32.0 33.4

SPS 77.4 81.4 72.6 78.7 81.9 84.8

Div idend Payout (%) 103.7% 99.4% 110.0% 82.8% 95.1% 87.3%

Div idend Yield(%) 4.6% 3.8% 3.3% 3.7% 3.7% 4.7%

P/E 22.4x 26.5x 33.2x 22.7x 25.4x 18.8x

P/BV 8.2x 6.8x 7.1x 3.9x 3.8x 3.6x

P/S 2.7x 2.6x 2.9x 1.5x 1.5x 1.4x

EV/EBIDTA 1.0x 0.6x 0.9x 0.8x 0.2x 0.6x

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GUINNESS NGSE Index NSE Consumer Index

Bloomberg Ticker GUINNESS NL

Reuters Ticker GUINNESS.LG

NSE Ticker GUINNESS

Rating HOLD





Total Return 6.2%

Historic Return

3 month -22.4%

6 month -28.3%

12 month -23.8%

YTD -28.4%






100



GUINNESS: Summary Financials (N' bn)


Turnov er 116,461 122,463 109,202 118,496 123,203 129,603

Cost of sales -58,552 -58,362 -49,817 -62,604 -66,239 -69,140

Gross Profit 57,909 64,101 59,385 55,891 56,964 60,463





Taxation -6,169 -5,145 -2,108 -2,980 -1,769 -1,333

Profit After Tax 14,214 11,863 9,573 7,995 7,120 9,650




Total Assets 106,009 121,060 132,328 137,533 143,616 138,809




Total Equity 38,611 46,039 45,061 46,221 48,201 50,292




Turnov er 773 764 595 598 622 655

Cost of sales -389 -364 -272 -316 -335 -349

Gross Profit 384 400 324 282 288 305



Taxation -41 -32 -11 -15 -9 -7




Total Long-Term Assets 513 554 499 493 517 532

Total Assets 704 755 721 695 725 701



Total Liabilities 447 468 476 467 498 473

Total Equity 256 287 246 233 243 254

Total Liabilities & Equity 704 755 721 700 741 727

Key Ratios FY-12 FY-13 FY-14 FY-15 FY-16f FY-17f


EBITDA margin 19.8% 22.7% 21.5% 15.3% 15.7% 17.7%


PBT margin 17.5% 13.9% 10.7% 9.3% 7.2% 8.5%


ROAE 36.8% 25.8% 21.2% 17.3% 14.8% 19.2%

ROAA 13.4% 9.8% 7.2% 5.8% 5.0% 7.0%

Opex/sales 29.2% 29.6% 32.9% 34.6% 34.3% 34.7%


101



International Breweries Plc (INTBREW)

Tough times: the mantra for a new phase

In its recently released results for 6M-16 ended September 30th, INTBREW saw

revenue for the first six months come in flat, rising 0.7% to N10.1bn, with after-

tax profits declining 48.2% to N704.8mn. This led to H1-16 EPS of 0.21k (vs. H1-

15: 0.41k). Current run rate puts FY-16e EPS at 0.42k, 40.5% lower than FY-15

EPS of 0.59k.

Evolving consumer taste, heightened competition cringe top-line

Similar to the aggregate numbers, Q2 revenue rose 1.2% to N4.9bn, ex-

tending a disappointing run from Q1 which only saw a 0.2% rise y/y. It

would appear that intense competition from Nigerian Breweries following

its merger with Consolidated Breweries is beginning to take its toll on INT-

BREW’s market share. Furthermore, evolving consumer taste especially

emerging shift to spirits, some of which are priced at par or discount to

value beer, is beginning to tell on INTBREW’s top-line numbers, in our view.

As higher OPEX exacerbate earnings pressure

Q2-16 OPEX increased by 16.3% y/y (3.3% q/q) to N1.7bn. While a break-

down was not provided, the pattern is in line with industry wide trend for

domestic brewers as they continue to jostle for market share and protect

margins through more robust distribution channels as well as adverts and

promos. Consequently PBT and PAT margins shrank by 11.9ppts and

7.63ppts, to settle at 7.8% and 5.9% respectively.

Performance drives a Rating downgrade

On the strength of this result and adjustments to our model, we hereby

downgrade INTBREW to a SELL from a previous HOLD rating, with a 12M TP

of N15.90, which is 0.6% below its last close price. The stock currently

trades at a PE of 24.6x (vs. Emerging market peers at 21.2x.)


Chart 58: INTBREW Share Price History

Per Share Data/Valuation FY-14 FY-15 FY-16f FY-17f FY-18f FY-19f

EPS (NGN) 0.64 0.59 0.45 0.40 0.47 0.62

DPS(NGN) 0.2 0.3 0.2 0.3 0.3 0.4

BVPS (NGN) 3.4 3.7 3.6 4.5 5.3 6.2

SPS 5.6 6.3 6.6 7.0 7.6 8.5

Div idend Payout (%) 31.3% 50.8% 44.8% 75.4% 64.0% 64.8%

Div idend Yield(%) 1.0% 1.5% 1.0% 1.9% 1.9% 2.5%

P/E 30.9x 34.0x 44.3x 40.2x 34.1x 25.9x

P/BV 5.8x 5.4x 5.5x 3.5x 3.0x 2.6x

P/S 3.5x 3.2x 3.0x 2.3x 2.1x 1.9x

EV/EBIDTA 1.0x 0.6x 0.9x 0.8x 0.2x 0.6x

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INTBREW NGSE Index NSE Consumer Index

Bloomberg Ticker NTBREW NL

Reuters Ticker INTBREW.LG

NSE Ticker INTBREW

Rating SELL





Total Return 0.4%

Historic Return

3 month -10.4%

6 month -15.9%

12 month -38.5%

YTD -28.0%






102



INTERBREW:Summary Financials (N' bn)

Income Statement extracts FY-14 FY-15 FY-16f FY-17f FY-18f FY-19f

Turnov er 18,494 20,649 21,818 22,980 25,092 28,102

Cost of sales -9,591 -11,588 -12,706 -14,012 -15,291 -17,091

Gross Profit 8,903 9,061 9,112 8,968 9,801 11,011





Taxation -1,820 -869 -830 -790 -856 -956

Profit After Tax 2,106 1,947 1,472 1,310 1,545 2,032

Balance sheet extracts FY-14 FY-15 FY-16f FY-17f FY-18f FY-19f



Total Assets 24,371 30,172 31,922 36,042 39,652 43,749




Total Equity 11,270 12,168 11,887 14,849 17,463 20,286



Income Statement extracts FY-14 FY-15 FY-16f FY-17f FY-18f FY-19f

Turnov er 123 129 119 116 127 142

Cost of sales -64 -72 -69 -71 -77 -86

Gross Profit 59 57 50 45 50 56





Taxation -12 -5 -5 -4 -4 -5


Balance sheet extracts FY-14 FY-15 FY-16f FY-17f FY-18f FY-19f



Total Assets 162 188 174 182 200 221




Total Equity 75 76 65 75 88 102


Key Ratios FY-14 FY-15 FY-16f FY-17f FY-18f FY-19f


EBITDA margin 37.1% 32.4% 34.3% 36.2% 35.6% 34.4%


PBT margin 21.2% 13.6% 10.6% 9.1% 9.6% 10.6%


ROAE 18.7% 16.0% 12.4% 8.8% 8.8% 10.0%

ROAA 8.6% 6.5% 4.6% 3.6% 3.9% 4.6%

Opex/sales 21.1% 22.4% 23.8% 24.4% 24.7% 25.6%


103



UAC of Nigeria Plc (UAC)

Threading the rocky path, but still attractive

UAC recently released its results for third quarter ended 30th September,

wherein revenue declined 9.8% to N54.6bn on an aggregate basis, with a

Profit After Tax of N962.5mn, down 79.4% from comparable period in 2014

Revenue contracts, extends 2015 trend

Q3-15 reaffirmed what has been a tough year for UAC, with revenue

down 15.1% y/y (flat on Q2-15) to N17.2bn as struggle cuts across each of

its eight major subsidiaries. In line with the pattern seen in the previous

quarter, UPDC led revenue declines in percentage terms (-48.0% y/y),

while top-line numbers for its restaurant business (the QSRs), as well as

Grand Cereals and Portland Paints also contracted by 14.0%, 10.0% and

19.0% respectively. Revenue performance for UAC Foods, MDS Logistics

and Cap Paints was mostly flat on the previous year, with Livestock Feeds

the only bright spot from a revenue point of view (+17.0% y/y).

Higher finance charge and OPEX push earnings farther south

The company recorded an operating loss of N1.1bn in Q3-15, on the back

of a 94.4% y/y spike in OPEX to N5.1bn, likely indicative of distribution chal-

lenges especially up north. Bottom-line was further pressured by a 3x rise

in net finance charges to N487.4mn, as well as an additional N473mn

charge (N2.1bn in Q2), which according to management, relates to the

valuation review of its hotel assets. Consequently, the company recorded

pre-tax and after-tax loss of N1.4bn and N2.2bn respectively.

Still attractive from a valuation standpoint

Having lost 22.3% YTD, our 12M TP of N37.20 is at a 40.9% premium to its

last close price which maintains our BUY rating. UAC is on a trailing P/E

and EV/EBITDA of 12.1x and 8.0x vs. Emerging market peer average of

18.0x and 9.1x respectively.


Chart 59: UACN Share Price History


EPS (NGN) 2.1 2.9 3.4 3.6 4.5 5.0

DPS(NGN) 1.2 1.7 1.8 1.8 2.2 2.5

BVPS (NGN) 31.5 37.3 67.0 68.5 71.5 74.6

SPS 36.2 41.0 44.6 43.7 47.5 52.0

Div idend Payout (%) 58.4% 59.5% 51.5% 50.0% 50.0% 50.0%

Div idend Yield(%) 2.6% 3.7% 3.7% 8.7% 10.7% 12.1%

P/E 22.3x 16.2x 14.0x 5.8x 4.7x 4.1x

P/BV 1.5x 1.3x 0.7x 0.3x 0.3x 0.3x

P/S 1.3x 1.2x 1.1x 0.5x 0.4x 0.4x

EV/EBIDTA 1.0x 0.6x 0.9x 0.8x 0.2x 0.6x

Bloomberg Ticker UACN NL

Reuters Ticker UACN.LG

NSE Ticker UACN

Rating BUYCurrent Price (N) 20.75




Total Return 79.7%

Historic Return

3 month -34.1%

6 month -50.0%

12 month -52.1%

YTD -39.0%






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UACN NGSE Index NSE Consumer Index

104



UACN: Summary Financials (N' bn)


Turnov er 69,632 78,714 85,654 83,921 91,220 99,810

Cost of sales -50,582 -59,878 -66,472 -64,201 -67,221 -72,102

Gross Profit 19,050 18,836 19,182 19,720 23,999 27,708

Other Operating Income 171 5,669 3,391 1,290 1,029 1,893




Taxation -6,634 -8,322 -7,569 -6,433 -8,271 -10,092

Profit After Tax 4,111 5,642 6,528 5,760 7,132 8,019




Total Assets 122,975 125,014 130,360 135,414 146,452 157,665




Total Equity 60,601 71,605 128,694 131,632 137,263 143,312




Turnov er 462 491 467 424 461 504

Cost of sales -336 -374 -362 -324 -340 -364

Gross Profit 126 118 105 100 121 140





Taxation -44 -52 -41 -32 -42 -51





Total Assets 816 780 711 684 740 796




Total Equity 402 447 702 665 693 724

Total Liabilities & Equity 816 780 1,005 947 993 1,041



EBITDA margin 19.1% 18.2% 13.1% 11.4% 15.4% 17.3%


PBT margin 15.4% 17.7% 16.5% 14.5% 16.9% 18.1%


ROAE 6.8% 7.9% 5.1% 4.4% 5.2% 5.6%

ROAA 3.3% 4.5% 5.0% 4.3% 4.9% 5.1%

Opex/sales 11.1% 11.8% 11.9% 13.2% 14.6% 14.8%


105



Nestle Nigeria Plc (NESTLE)

Performance more than priced in, solid option farther out

NESTLE recently released results for the 9M ended September 30th 2015,

wherein revenue grew 5.2% y/y to N108.0bn while PAT was up 2.2% to

N17.2bn. The company declared an interim dividend of N10 which equates a

1.2% dividend yield, using its 2015 year-end price. Despite impressive results,

valuation still appears rich with Nestle currently trading at a P/E of 23.7x vs. EM

peer average of 22.8x

Gross margin benefits from volume momentum…

Following a slow to start to the year, which saw revenue contract by

17.5% y/y in Q1-15 owing to the impact of election related events on de-

mand, the company has slowly built momentum with Q2-15 revenues ex-

panding by 13.6% y/y. Q3-15 revenue numbers further accelerated by

18.6%y/y to N42.1bn (+9.6% q/q), mostly driven by higher volumes across

key product lines as the headroom for price hike remain restricted given

on-going constraints on consumer wallets.

…as lower finance cost boosts earnings

While OPEX rose 6.5% y/y to N8.2bn mostly driven by a 26.1% rise in Distri-

bution expense to N7.1bn y/y which more than offset a 4.7% decline in

admin expense to N1.1bn, EBIT was up 52.2% y/y to N11.1bn, largely re-

flecting pass-through from robust gross profit. Overall, both pre-tax and

after-tax profits rose by 63.9% and 66.1% to N10.2bn and N8.3bn, with re-

lated margins also increasing by 6.7ppts and 5.7ppts to 24.3% and 19.9%

respectively.

Performance impressive, but priced-in

Despite impressive results, valuation still appears rich with Nestle currently

trading at a P/E of 22.7x (FY+1: 27.6x) vs. Emerging market peer average

of 23.8x (FY+1: 20.6x). Our 12m TP of N796.23 is at 3.5% discount to 2015

close. We maintain a SELL rating


Chart 60: NESTLE Share Price History


EPS (NGN) 26.7 34.0 28.4 22.9 26.7 30.4

DPS(NGN) 12.6 20.0 17.7 21.7 25.4 28.9

BVPS (NGN) 43.1 51.2 45.3 46.9 52.0 58.1

SPS 147.2 167.8 180.7 179.6 184.6 195.7

Div idend Payout (%) 47.1% 58.9% 62.4% 95.0% 95.0% 95.0%

Div idend Yield(%) 1.5% 2.4% 2.1% 2.5% 3.0% 3.4%

P/E 31.7x 24.8x 29.7x 37.6x 32.2x 28.3x

P/BV 19.6x 16.5x 18.6x 18.3x 16.6x 14.8x

P/S 5.7x 5.0x 4.7x 4.8x 4.7x 4.4x

EV/EBIDTA 1.0x 0.6x 0.9x 0.8x 0.2x 0.6x

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NESTLE NGSE Index NSE Consumer Index

Bloomberg Ticker NESTLE NL

Reuters Ticker NESTLE.LG

NSE Ticker NESTLE

Rating SELLCurrent Price (N) 860

Target Price (N) 796



Total Return -7.4%

Historic Return

3 month 4.9%

6 month 1.2%

12 month 0.0%

YTD -15.0%






106



NESTLE: Summary Financials (N' bn)


Turnov er 116,707 133,084 143,329 142,404 146,403 155,202

Cost of sales -62,603 -76,298 -82,099 -79,332 -83,839 -86,403

Gross Profit 54,104 56,786 61,230 63,072 62,564 68,799





Taxation -3,913 -3,789 -2,210 -4,969 -7,301 -9,489

Profit After Tax 21,137 26,931 22,236 18,122 21,202 24,113




Total Assets 88,963 108,208 104,904 106,721 107,140 107,432




Total Equity 34,185 40,595 35,939 37,202 41,202 46,110




Turnov er 775 830 781 719 739 784

Cost of sales -416 -476 -448 -401 -423 -436

Gross Profit 359 354 334 319 316 347





Taxation -26 -24 -12 -25 -37 -48

Profit After Tax 140 168 121 92 107 122




Total Assets 591 675 572 539 541 543




Total Equity 227 253 196 188 208 233




EBITDA margin 25.6% 27.9% 24.7% 25.6% 26.1% 27.6%


PBT margin 21.5% 23.1% 17.1% 16.2% 19.5% 21.7%


ROAE 61.8% 66.3% 61.9% 48.7% 51.5% 52.3%

ROAA 23.8% 24.9% 21.2% 17.0% 19.8% 22.4%

Opex/sales 20.7% 21.8% 22.3% 23.8% 24.0% 24.6%


107


Section 7

Oil and Gas

108


Oil and Gas Sector

PIB: Breaking the laws into modules In our H2-2015 Outlook, we presented a case for a review of the framework for

the passage of the Petroleum Industry Bill (PIB), preferring a split of the bill into

parts, in order to allow for quick fixes in the industry and enhance the speed of

legislation. In Q4-15, the Federal government advanced a new legislation to the

National Assembly, The Petroleum Industry Governance and Institutional Frame-

work Bill 2015. The bill aims to enable a favorable environment for investment in

the sector by excluding fiscal terms in the PIB originally designed to increase the

government’s take in the sharing formula. The new bill also creates efficient

structures for the regulators and promotes lucidity.

The bill further seeks to split the Nigeria National Petroleum Corporation (NNPC)

into two (2), namely National Oil Company (NOC) and the Nigerian Petroleum

Asset Management Company (NPAM). We believe the move to break-up the

NNPC will solve its funding problem as a fraction of Nigeria's oil output comes

from JVs in which NNPC holds the majority stake. However, NNPC has faced

issues in meeting its share of costs owing to the dwindling revenue of the gov-

ernment on the back of lower oil prices. The relaxed fiscal terms in the new legis-

lation is expected to support investment in the sector amidst lower oil prices.

The NOC will be a fully commercial entity operating as an integrated oil and

gas company, expected to make profits and raise its own funding, keep its

revenues, deduct costs directly and pay dividends to the government. In addi-

tion, the company will be partially privatized with at least 30.0% of its shares di-

vested within six (6) years of its incorporation. We estimate about US$5bn as ini-

tial funding for the company from the NNPC.

NPAM on the other hand, is expected to manage assets where the government

is not obliged to provide any upfront funding which includes oil licenses run un-

der the production-sharing agreements, as independent oil companies cover

operating cost and pay tax and royalties on output.

Furthermore, the bill also seeks to create a Nigeria Petroleum Regulatory Com-

mission (NPRC) to oversee oil license bid rounds and fuel prices, while a Special

Investigation Unit would also be set up under the NPRC with the powers to seize

items and make arrests without a warrant.

The disintegration of the PIB will allow

for quick fixes in the oil and gas

industry

A possible split of the NNPC will

significantly solve its funding problems

The NOC is expected to be a fully

commercial entity operating as an

integrated oil and gas company

109


Upstream Sector

Oil Price: Are conditions for a Floor and Resistance coming together?

As stated earlier, our outlook for crude oil prices remains bearish. We note that

prices are nearing working cost especially for shale producers, thus shale pro-

duction will start to fall later in the year. At that mid US$20s, high-cost

U.S. producers will be forced to halt production, shrinking the global supply glut

and rebalancing the market. Also, we expect demand to pick up later in the

year supported by lower prices. Lower oil prices are the antidote for lower oil

prices, meaning that as unremitting lower prices are preventing new E&P today,

a stronger demand growth, relative to supply, would ensue in the future to push

up prices. This mishmash of drags and drivers will in due course lead to a bot-

toming out of global crude oil prices in the first half of 2016 and a mild recovery

in H2-16, in our view.

Oil price will likely bottom out in H1-16

with a mild recovery expected in H2-

16


110


Upstream Players: Aligning 2016 projections with reality

Lower global oil prices have cringed upstream players’ earnings in the last 18

months with sustained bearish trend likely to pose bigger challenges in 2016.

More importantly are the North American producers who face the risk of bank-

ruptcies as a number of them filed for Chapter 11 bankruptcy protection or out-

of-court pact on the back of difficulties in servicing high debts amid the plum-

meting values of oil and gas assets.

We note that many North American shale producers, international and national

oil companies, have financial hedges in place that have protected them at

various levels from the falling oil prices. Therefore, many of them, despite the low

oil prices, have continued to find it profitable to produce at their existing pro-

duction volumes. However, many of these hedges have started to fall off over

H2-15. Our understanding is that most hedges, set up during the time of high oil

prices, ended in Q4-15. This means that these producers will now have to fully

face the prospect of producing and selling oil at the current low prices. This,

potentially, could lead to significant downward review of production volumes

and earnings prospect.

Bringing it home, we expect lower prices, foggy climate in the domestic busi-

ness environment as well as exchange rate challenges to necessitate substan-

tial cuts in spending and investments over 2016. We note that top drillers in Ni-

geria hedged about 50.0% of liquids in 2015 due to a great deal of uncertainty

in early part of the year which allowed companies seal good deals on hedging.

That said, the likes of SEPLAT and OANDO are not likely to strike hedging deals

comparable to 2015 as futures continue to point far below 2015 average of

US$50p/b, thus constraining earnings and margins for these players. However,

we expect earnings to improve going into H2-16 based our projections of a mild

recovery in oil prices with increased gas revenue providing further boost.

Sustained bearish trends in oil prices

present grave challenges for up-

stream players in 2016

Hedging deals comparable to 2015,

are less likely to be struck in 2016

111


Source:

Indigenous producer, Oriental Energy Resources, recently noted that it has sus-

pended development drilling to keep a lid on expenditure and focus on main-

tenance, rather than expansion in production due to the low oil price environ-

ment. Thus, the company does not expect any significant production growth in

2016 because of current restriction on CAPEX, but intend to resume drilling ac-

tivities in late 2016, if crude prices rebound.

Upstream: Low valuations to ignite increased M&As

As E&Ps continue to cut costs, slash capital investment, while tapping cash re-

serves to counteract tumbling cash flows, the focus is shifting from growth to

survival. Despite widespread predictions that financial stress would lead to a

rupture of corporate consolidation in 2015, the industry saw up to US$25bn in

corporate deals (exc. Shell-BG) albeit the lowest in the last eight (8) years. Un-

certainty about how low prices would go and the timing of any recovery made

it difficult for parties to reach agreement on price. Shell’s agreement to acquire

BG Group was an exception to this trend. The financial might of both compa-

nies and the long term premeditated benefits of the transaction overshadowed

the concerns about short term commodity prices and supply-demand balance.

However, given the new industry paradigms, we expect to see significant in-

crease in transaction value, driven in large part by corporate consolidation. Af-

ter concentrating on short-term responses to the steep plunge in oil prices, the

more financially stable firms are now considering longer term strategic moves,

including the opportunity to acquire attractive assets from distressed sellers.

Also, market expectation of no significant oil price recovery in the near term will

make it easier for buyers and sellers to reach agreement on price.

We expect significant increase in

M&A transaction volume in 2016 on

the back of depressed valuations


112


Domestic upstream players also seen in acquisition drive

The domestic upstream sector with ample production supply and reserves is

struggling to adjust output while balancing financial uncertainty. Indigenous

companies, depressed profitability margins and expiring hedging contracts in

2015 will drive strategic acquisition/divestiture activity, reduced drilling, well

abandonment and even bankruptcy. While the larger companies in the sector,

the “IOCs” are equipped to withstand a prolonged downturn, mid-level produc-

ers are confronted with survivability obstacles.

Market tickle-down factors resulting from the downward trend in crude and

natural gas commodity prices have stifled drilling new wells and completing

wells that have been drilled. All of this has instigated the unavoidable: dis-

tressed revenue, inevitable unemployment and underutilization of equip-

ment. In summary, the outlook for the upstream sector is cloudy. However, for

the foreseeable future, Nigeria’s exploration and production companies must

be nimble in order to adapt to the ever-changing global energy influences.

Gas Supply: what lies ahead for the power sector?

Gas supply shortage remains the biggest constraint to power generation in Ni-

geria. However, the increase in gas price to US$2.50/mmscf has created a com-

pelling case for gas producers to explore, produce and monetize their gas re-

sources, a development that is expected to lead to considerable traction in gas

supply to the power sector in the medium term. Our baseline expectation is for

gas-to-power supply to come at over 1,000 mmscf/d from current levels of

727.8mmscf/d over 2016. However, we note that this would be barely sufficient

to close the current gap. The NERC’s electricity generation projections for 2015-

2024 under the Multi Year Tariff Order (MYTO 2) estimates a 15.0% CAGR in load

projection with gas-fired (thermal) power plants generating an average of

88.0% over the period.

Consequently, we look to see more incentives to push gas producers from flar-

ing more gas to supplying to the power sector. Given that power utility compa-

nies are currently highly levered, we expect the government to create more

incentives geared towards reduced taxes and royalties for gas production to

encourage further gas monetization.

Similar to global upstream, expired

hedging contracts will drive strategic

acquisitions/divestiture

The outlook for the upstream sector

remains foggy

Following the increase in gas prices,

gas monetization is gradually gaining

traction

113


Source: NNPC

Source: NNPC, United Capital

Traction seen across Refineries: but for how long?

According to the NNPC, Nigeria’s struggling oil refineries are back in production

as the Port Harcourt, Warri and Kaduna refineries were producing a total of

6.76mn litres of fuel per day, projected to rise to more than 10mn litres per day

by the end of January and 30% of national PMS supply in 2016. The breakdown

indicated that the Port Harcourt refinery produces about 4.09mn litres, Kaduna

refinery produces 1.29mn litres, while Warri refinery produces 1.38mn litres. Nige-

ria’s fuel consumption is roughly 35-50mn litres per day, leaving a wide gap be-

tween the targeted refinery production and what it will need to import; best

case situation is 25% local and 75% importation, and worst case is what we are

experiencing now. Thus, fuel importation will persist in 2016 though prices will be

stable, hinged on the price modulation model.

However, the traction in refinery production in 2016 may be constrained by

crude deliveries to the plants hinged on the new operational model which refin-

eries will run in the course of the year. The model suggests that refineries would

operate as semi-autonomous entities, buying and refining petroleum products

and making remittances to the government.

Nigeria’s refineries are slowly getting

back to production

Refineries Capacity Utilisation (Nov-15)

Operational Parameters WRPC PHRC KRPC Jan - Nov 2015

Opening Stock (MT) 190,000 264,787 39,172 2,417,688

Crude Received (MT) 0 0 0 1194062

Total Crude Available (MT) 190,000 264,787 39,172 3611750

Closing Stock (MT) 190,000 264,787 39,172 2,656,213

Crude Processed (MT) 955537

(i) Finished Products (MT) 1,075 4,810 1,280 682,901

(ii) Intermediate Products (MT) 0 1,324 3,519 71,304

(iii) Plant Consumption (MT) 1,075 7,413 2,239 167,910

(iv) Losses (MT) 0 3,927 0 33,424

Plant Capacity (kpd) 125 210 110 445

Capacity Utilisation 0% 0% 0% 4.71%

Losses 0% 0% 0% 3.50%

Plant Consumption 0% 0% 0% 17.57%

Table 9

New operating model will likely con-

strain crude oil deliveries to refineries

114


Source:

Has the new price modulation phased out subsidy?

Rather than phasing out subsidy through the traditional method, the govern-

ment has introduced the scientific price modulation approach which is an ad-

justment in the pricing template on ex-cost plus freight (C+F) of petrol. Based on

the new Petroleum Products Pricing Regulatory Authority (PPPRA) pricing tem-

plate, adjustment was made on handy items (ex-cost plus freight of product).

Thus, this resulted in N5.56/litre reduction after the C+F line items on the pricing

template. The government noted the price modulation will be reviewed quar-

terly to reflect prevailing global crude oil prices with a possibility of capping it at

N97.0/liter.

The risk to this approach is an upward trend in crude oil price which will make

the government pay subsidy. While it is clear that subsidy removal will have an

immediate impact on the public, we think the awareness and call for subsidy

removal has grown beyond bounds and might not be felt as some consumers

pay N100-N150/litre in recent times.

On the flip side, the recent price modulation which takes away subsidy in the

near term will improve fuel supply in H1-16, thus shore up earnings of down-

stream players as fuel accounts for 70.0% of revenue, on our estimate.

Long-term earnings prospects still hinged on an outright deregulation...

In our view, the potential of the downstream sector will remain untapped for as

long as the government interferes in the value chain of downstream business.

Subsidy removal will likely result in improved market efficiency and profitability

as downstream sector players will explore pricing dynamics to boost investment.

We reiterate that the potential in the downstream sector could only be

unleashed in a deregulated and competitive environment. Taking a cue from

deregulated products like diesel and lubricant and the healthy margins for play-

ers, it clearly shows that a similar dynamics for PMS will enable players to lever-

age economies of scale to grow earnings. However, we align with the govern-

ment’s stance on the need to boost domestic refining capacity before deregu-

lation can occur.

…but diversification and retail expansion will support profitability in 2016

Players in the industry have begun to push sales of non-regulated petroleum

products through enhanced distribution and retail network. Given that petrol

sales promotes sales of other petroleum products, evenly distributed service sta-

tion will help drive sales of non-regulated products. Furthermore, growing market

share will play a major role. Petrol margin is slim at 10.0% of pump price, hence

operating profitability can best be enhanced by pushing volumes and market

share. Players with low market share will end up as fringe players with heavy in-

vestment outlays yielding low returns.

Price modulation should be positive

for downstream players as fuel supply

increases

Deregulation should enhance the

ability of downstream players to lev-

erage scale

Non-regulated petroleum products

hold the key to margin expansion

115


Near term profitability hinges on greater cost efficiency

Given our expectation of a long route to deregulation, we believe cost man-

agement will be a major driver of profitability in the medium term. We expect

OPEX-to-sales ratio to drop by 4bps to 6.9% for 2016 though retail drive of few

players will exert pressure. We think players like Mobil will continue to be pres-

sured by its higher operating leverage relative to the industry with OPEXto-sales

ratio of 10.0% versus peer average of 7.5% despite its past stellar performances

in cost efficiency. Overall, we think downstream players will need to manage

cost efficiently especially for deregulated products. We expect to see a decline

in industry cost-to-sales to 88.3% and an average of 88.5% for the next 5 years

though reduction in petrol price and other cost factors will pressure top line and

stifle margin in the short term.

Cost efficiency will be a key driver of

profitability in 2016

Source: Company filings, United Capital

116



Seplat Petroleum Development Company (SEPLAT)

Building resilience on gas

SEPLAT’s 9M 2015 results showed a drop in revenue by 9.8% y/y to N83.0bn.

The performance was broadly in line with the trends observed in Q1-15 and H1

-15, though Q3-15 declines came in softer than expected on the back of in-

crease in gas output and gas prices which moderated the impact of softer oil

receipts. Overall, 9M-2015 numbers came in better than expected and we

look to see more traction for FY-15E earnings to be driven by the gas business.

Gas output sustains traction on capacity expansion

We observe the traction in gas revenue as a percentage of total revenue

(+8ppts in Q1-15 to 15.0% in 9M-2015) on the back of an increase in gas

output to 122mmscf/d and c.50% rise in gas prices which drove gas sales

to US$26.3m. According to management, the increase in gas output was

buoyed by the instigation of supplementary gas processing capacity at

the Oben Plant of c.150mmscf/d. We expect increased support from the

gas business to drive full year revenue (estimated gas supply capacity at

c.30% of power generation in Nigeria).

Expiration of hedging deals, a downside risk to earnings

Seplat oil revenue in 9M-15 was relatively upbeat hinged on its hedging

deal of 4.4mmbbl of liquids at US$52p/b, which we consider a good deal

as oil price outlook was clouded with uncertainties. However, given the

market expectation of lower oil prices in 2016, we do not expect Seplat to

a strike a deal close to that of 2015. Thus, we expect this to soften oil reve-

nues in 2016, especially over H1-16 with a mild recovery in H2-16.

We maintain our BUY rating but revise downward our TP

We revise downward our FY-15 revenue forecast to N100.2bn (previously

N115.1bn) and PAT at N22.0bn (previously N25.4bn) based on our bearish

outlook on oil price. Nevertheless, we expect to see significant growth in

gas revenue. We revise our TP downward to N340.65 (from N470.60) but

maintain a BUY on the stock.


Chart 67: SEPLAT Share Price History


EPS (NGN) 31.3 158.4 75.3 45.9 64.6 75.4

DPS(NGN) 0 0 0 10.12 11.3 12.5

BVPS (NGN) 70.28 292.9 464.8 521.8 616.8 762.4

SPS 23 23 23 23 23 23

Div idend Payout (%) 0.0% 0.0% 0.0% 22.0% 17.5% 16.6%

Div idend Yield(%) 0.0% 0.0% 0.0% 5.0% 5.6% 6.2%

P/E 14.3x 2.8x 6.1x 4.4x 3.1x 2.7x

P/BV 6.4x 1.5x 1.0x 0.4x 0.3x 0.3x

P/S 19.5x 19.6x 20.1x 8.8x 8.8x 8.8x

Bloomberg Ticker SEPLAT NL

Reuters Ticker SEPLAT.LG

NSE Ticker SEPLAT

Rating BUY

Current Price (N) 203




Total Return 67.9%

Historic Return

3 month -12.9%

6 month -39.9%

12 month -51.7%

YTD -45.3%






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SEPLAT NGSE Index NSE Oil and Gas Index

117



SEPLAT: Summary Financials (N' mn)


Turnov er 99,181 140,166 127,959 100,163 132,498 140,395

Cost of sales 39,749 52,699 52,105 50,504 62,042 65,670

Gross Profit 59,432 87,467 75,854 49,659 70,456 74,725

Operating Expenses 10,053 11,465 25,031 19,503 20,086 25,678



Taxation 29,626 -14,769 0 0 0 0

Profit After Tax 17,326 87,624 41,648 25,400 35,760 41,740




Total Assets 140,563 210,810 439,793 580,186 600,010 596,450




Total Equity 28,389 117,152 257,183 288,689 341,266 421,818




Turnov er 658 874 698 506 669 709

Cost of sales 264 329 284 255 313 332

Gross Profit 395 546 413 251 356 377

Operating Expenses 67 72 136 99 101 130



Taxation 197 -92 0 0 0 0

Profit After Tax 115 547 227 128 181 211


Total Current Assets 491 622 1,414 1,923 2,020 1,785

Total Long-Term Assets 442 693 984 1,007 1,010 1,228

Total Assets 933 1,315 2,397 2,930 3,030 3,012



Total Liabilities 745 584 995 1,472 1,307 882

Total Equity 188 731 1,402 1,458 1,724 2,130

Total Liabilities & Equity 933 1,315 2,397 2,930 3,030 3,012



EBITDA margin 80.3% 54.2% 39.7% 26.3% 21.4% 24.6%


PBT margin 47.3% 52.0% 32.5% 25.4% 27.0% 29.7%


ROAE 61.0% 120.4% 22.3% 9.3% 11.4% 10.9%

ROAA 12.3% 49.9% 12.8% 5.0% 6.1% 7.0%

Opex/sales 10.1% 8.2% 19.6% 19.5% 15.2% 18.3%

Debt-to-equity 395.1% 79.9% 71.0% 101.0% 75.8% 41.4%


118



Oando Plc (OANDO)

Awaiting the “new” Oando

OANDO released its much anticipated FY-14, Q1-15, H1-15 and 9M-15 earn-

ings; posting losses of N184bn, N21bn, N35bn and N48bn respectively. The

losses were due to asset impairments and write-downs, provisioning for receiv-

ables, delays in fuel import allocation and FX losses. While we expect these

drags to be sustained in coming quarters, weighing in the company’s perform-

ance, we look to see the completion of the company’s restructuring, divest-

ment and sale of struggling business.

Deleveraging on downstream divestment

We have adjusted divestment of the downstream business on the as-

sumption the divestment will be completed in 2016. Thus, we only consider

Oando’s 49.0% stake in the proposed structure. According to manage-

ment, the divestment of the downstream is expected to make less bur-

densome its books by c.US$410mn whilst proceeds from the divestment

would be used to pay part of debt from the COP assets acquisition. Total

Oando’s debt currently stands at US$1.7bn; therefore, we estimate that

the proceeds from the downstream divestment will reduce total debt to

US$1.4bn and save c.N30.0bn in finance charge in coming quarters.

New structure supports balance sheet optimisation

Based on Dec-15 shareholder’s approval, Oando has elected to become

a pure E&P company. Oando is expected to raise N80bn equity capital

by way of rights issue in 2016. We think these moves will further help to op-

timise balance sheet, improve capital structure distorted from the 2014

and 2015 impairments, and focus on E&P operations

We place OANDO under Watch

Using SOTP methodology, we arrived at a TP of N8.50, after adjusting for

divestment, sale of OES and equity capital raise. Its new E&P status in the

near-term exposes the company more to risk of lower oil prices. However,

we place the company under watch pending completion of restructur-

ing, divestment and sale of struggling business, while we also expect to

see additional impairment provision in the near-term.


Chart 68: OANDO Share Price History


EPS (NGN) 4.7 -0.4 -14.9 -5.1 0.5 0.5

DPS(NGN) 0.75 0.3 0 0 0.05 0.1

BVPS (NGN) 44.95 23.3 0.6 0.6 0.6 0.6

SPS 55.9 37.4 35.3 10.4 12.9 13.4

Div idend Payout (%) 15.8% -77.2% 0.0% 0.0% 10.5% 19.0%

Div idend Yield(%) 4.6% 1.8% 0.0% 0.0% 0.8% 1.7%

P/E 3.4x -42.8x -1.1x -1.2x 12.4x 11.2x

P/BV 0.4x 0.7x 27.1x 9.5x 9.3x 9.2x

P/S 0.3x 0.4x 0.5x 0.6x 0.5x 0.4x

Bloomberg Ticker OANDO NL

Reuters Ticker OANDO.LG

NSE Ticker OANDO

Rating U.R


Target Price (N) U.R

Upside (Downside) n/a


Total Return n/a

Historic Return

3 month -48.4%

6 month -65.2%

12 month -71.6%

YTD -63.4%






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OANDO NGSE Index NSE Oil and Gas Index

119



OANDO: Summary Financials (N' Mn)


Turnov er 673,182 449,873 424,678 125,560 155,490 160,932

Cost of sales 591,560 380,605 355,496 74,580 78,650 81,403

Gross Profit 81,622 69,268 69,182 50,980 76,840 79,529

Other Operating Income 4,569 5,135 68,785 42,376 44,480 46,037


Operating profit (loss) 34,126 16,550 -139,667 -10,577 14,328 14,829

Profit Before Tax 17,554 713 -171,323 -55,425 12,500 13,350

Taxation 6,768 5,389 7,959 5,500 6,780 7,017

Profit After Tax 10,786 -4,676 -179,282 -60,925 5,720 6,333




Total Assets 515,064 585,429 889,373 720,500 700,430 724,945




Total Equity 130,867 162,368 45,507 30,468 80,000 42,472




Turnov er 4,469 2,806 2,315 634 785 813

Cost of sales 3,927 2,374 1,938 377 397 411

Gross Profit 542 432 377 257 388 402


Operating Expenses 377 299 1,513 433 459 431

Operating profit (loss) 227 103 -761 -53 72 75

Profit Before Tax 117 4 -934 -280 63 67

Taxation 45 34 43 28 34 35

Profit After Tax 72 -29 -977 -308 29 32


Total Current Assets 969 1,401 1,063 154 54 56


Total Assets 3,419 3,652 4,848 3,639 3,538 3,661

Total Current Liabilities 2,019 823 1,128 214 193 200

Total Long-Term Liabilities 531 1,817 3,472 3,271 2,940 3,247


Total Equity 869 1,013 248 154 404 215




EBITDA margin 6.5% 4.8% -49.1% -28.7% -7.0% 5.0%

Operating profit margin 5.1% 3.7% -32.9% -8.4% 9.2% 9.2%

PBT margin 2.6% 0.2% -40.3% -44.1% 8.0% 8.3%

Net profit margin 1.6% -1.0% -42.2% -48.5% 3.7% 3.9%

ROAE 10.3% -3.4% NA NA NA NA

ROAA 7.4% 3.0% NA NA NA NA

Opex/sales 0.0% 10.6% 65.4% 68.2% 58.5% 53.1%


120



Total Nigeria Plc (TOTAL)

Riding on retail prowess

In its 9M-2015 numbers, TOTAL recorded a 10.0% drop in revenue to N159.3bn

on the back of lower PMS volumes during the period. Sales volume during the

period was constrained by the distribution challenges and operating environ-

ment from subsidy backlogs, among others. We hold a positive view for the

downstream business in 2016 and expect this to bode well for the company

Upbeat in Earnings from a clearer coast

On the back of lower crude oil prices and the new PPPRA pricing tem-

plate (price modulation), we note the increase in PMS margin for retailers

by 8.7% to N5.0/liter. Thus, we expect this to bode well for Total hinged on

its strong retail network and market share in the industry. Furthermore,

drop in crude oil prices is positive for production cost especially in its spe-

cialty segment which contributes about 30.0% to revenue, thereby sup-

porting margin growth. Also, no subsidy payment in the near will help its

working capital management.

Rising cost likely to constrain margin

We note the increase in OPEX expenses on the back of rising distribution

and administrative expenses as the company continue to build its new

fuel stations across the country and enhance its distribution network. Thus,

we expect this to constrain margin growth in 2016. However, the drop in

PMS price to N86.50/litre is likely to support volume growth which Total will

be well positioned from a distribution and retail network point of view

We maintain our HOLD rating

We forecast a 9.0% growth in revenue in 2016 to N215.2mn which is

weighty on our positive outlook and growth expectation in the sector. We

forecast EBITDA and EBIT margin to come in at 2.4% and 2.8% respectively.

Our 2016 TP is N146.12, thus maintain our HOLD rating for the stock.


Chart 69: TOTAL Share Price History

Bloomberg Ticker TOTAL NL

Reuters Ticker TOTAL.LG

NSE Ticker TOTAL





Total Return -0.5%

Historic Return

3 month -2.0%

6 month -8.1%

12 month -6.6%

YTD 3.2%






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TOTAL NGSE Index NSE Oil and Gas Index


EPS (NGN) 13.8 15.7 13.0 7.6 15.3 53.1

DPS(NGN) 0.2 0.2 11.0 7.0 14.7 35.0

BVPS (NGN) 33.3 39.0 41.0 45.1 49.6 54.6

SPS 641.6 701.5 708.7 576.8 633.9 709.9

Div idend Payout (%) 1.5% 1.3% 84.4% 92.5% 96.2% 65.9%

Div idend Yield(%) 0.1% 0.1% 7.1% 16.3% 34.3% 81.4%

P/E 11.2x 9.9x 12.0x 5.7x 2.8x 0.8x

P/BV 4.6x 4.0x 3.8x 1.0x 0.9x 0.8x

P/S 0.2x 0.2x 0.2x 0.1x 0.1x 0.1x

EV/EBIDTA 4.9x 5.9x 4.6x 4.6x 4.6x 4.6x

121



TOTAL: Summary Financials (N' Mn)


Turnov er 217,844 238,163 240,619 195,841 215,210 241,035

Cost of sales 191,632 209,462 212,714 169,432 185,054 200,050

Gross Profit 26,211 28,701 27,905 26,409 30,156 40,985

Other Operating Income 1,217 1,172 1,180 1,290 1,450




Taxation 2,786 2,786 1,135 1,370 1,436 1,890

Profit After Tax 4,671 5,334 4,423 2,568 5,202 18,037




Total Assets 76,067 79,404 95,512 105,064 115,570 127,127




Total Equity 11,302 13,241 13,930 15,323 16,855 18,541




Turnov er 1,446 1,486 1,312 989 1,087 1,217

Cost of sales 1,272 1,307 1,160 856 935 1,010

Gross Profit 174 179 152 133 152 207





Taxation 18 17 6 7 7 10





Total Assets 505 495 521 531 584 642




Total Equity 75 83 76 77 85 94




EBITDA margin 5.0% 4.6% 4.4% 3.8% 2.4% 2.9%


PBT margin 3.4% 3.4% 2.3% 2.0% 3.1% 8.3%


ROAE 41.3% 43.5% 32.6% 17.6% 32.3% 101.9%

ROAA 6.9% 6.9% 5.1% 2.6% 4.7% 14.9%

Opex/sales 8.5% 8.8% 8.8% 12.0% 11.5% 9.3%

Debt-to-equity 131.7% 125.4% 112.6% 202.0% 210.0% 190.0%


122


Section 8

Industrials

123


Source: Globalcem, United Capital

Nigeria Cement Sector

Attractive long term call

With a 21million metric-ton annual cement consumption (expected to grow at

10.0% yearly), the Nigerian cement industry continues to present robust growth

opportunities for the long term. Also, cement consumption per capita remains

below SSA average. Going into 2016 and beyond, we expect significant in-

crease in y/y budget outlay for infrastructure spending to bode well for the reve-

nue of cement players.

Will recent wave of M&A provoke a re-organization in Nigeria?

We expect to see a wave of merger and acquisitions in SSA cement industry

over 2016 as major cement players contend for share in the market. Suddenly

LafargeHolcim has become the biggest cement producer on the continent,

followed by HeidelbergCement, Dangote and PPC. SSA has become a sweet

spot for the global players as established markets continue to flounder even as

growth in Asian and South American markets slackens. However, should SSA

development growth slow it may cast a poor light on our mega-merger expec-

tations in 2016. Dangote Cement is growing fast and it may overtake Heidle-

bergCement soon as the second largest cement producer in Africa. Yet it may

not be plain sailing for the Nigerian company. Dangote continues to challenge

the dominance of LafargeHolcim in SSA, where it generates c.US$5bn in reve-

nue. Dangote aims to increase its integrated cement capacity to 63MMT by

2018.

The successful completion of the merger between Lafarge Group of France and

Swiss company Holcim has produced a giant firm worth around €43bn

(US$60bn) with operations in 90 countries and 20.0% of the global market out-

side China. The merger places the group as the clear leader in the building ma-

terials industry in the world as plans to deliver annual savings of €1.4bn

(US$1.54bn) within the next three years will support earnings growth.

SSA has become the sweet spot for

the global players as established mar-

kets continue to flounder.

Increased 2016 budget outlay should

bode well for cement sector players

124


Source: Company filings, United Capital

With a combined global capacity of 386MMT per annum, LafargeHolcim

through Lafarge Africa Plc leads the building materials market in SSA and has

grown into a diversified building solutions group with broad product portfolio

and various iconic brands. This was on the back of its acquisition of Lafarge S.A’s

interests in Lafarge affiliate companies.

While we expect to see some re-organization and reshuffling by the new com-

pany, we do not expect any significant change in the competitive landscape,

at least in the medium term. That said, we have identified Nigeria and Morocco

as the main countries where the two companies are likely to re-organize their

operations.

Will a possible Naira devaluation impact earnings?

Following the devaluation of the Naira in Q4-14 and Q1-15, cement players re-

corded high cost of production which hampered bottom-line growth, given

that c.50.0% of cost inputs are exposed to FX. Dangote Cement reported a 9.7%

increase in production cost for FY-14 while cost-to-sales ratio increased to 36.5%

from 33.8% y/y. However, judging from H1-15 financials, cement players seem to

have re-organized their operations, majorly through regional expansion and

reduction in imports, to ease the impact of the weak currency on margins, thus

shielding profit margins from currency shocks. In light of this, we think a possible

devaluation expected in 2016 may have a mild negative impact for cement

players. However, a weaker Naira is expected to shore up offshore earnings,

especially for Dangote Cement and LafargeHolcim.

The impact of FX exposure seems to

be waning as cement players re-jig

operating models

We expect to see re-organisation of

operations in Nigeria and Morocco

by LafargeHolcim

125


Coal substitution strategy set to boost energy supply

Disruptions in energy supply slowed the operations of cement players over 2015

as Interruptions to gas and low-pour fuel oil (LPFO) weighed on both sales and

margins. Further, gas supply challenges resulted in the use of heavy oil for the

plants which has been a major cost driver. Energy cost accounts for c.30.0% of

the total cost of cement production, which is reflective of high cost of fossil fuels

as well as recurrent scarcity of gas. Such scarcity forces producers to resort to a

more expensive fossil fuel such as LPFO, consequently pushing up production

cost and impairing production volumes. This forced cement players to settle for

alternatives in a bid to curb production downtimes. Players are currently on-

boarding coal energy as a substitute of LPFO aimed at minimizing disruptions

and managing energy cost (the cost of procuring electricity is 2x the cost of

generating power using coal).

Cement players continue to explore

alternatives to gas supply to minimise

production downtimes

Source: Company updates, United Capital

We expect energy cost saving meas-

ures to gain traction among players in

2016

Company Plant Biomass LPFO Coal

CCNN Sokoto Plant

Gboko

Ibese

Obajana

Ashaka

Atlas

Ewekoro

Unicem

Dangote Cement

Lafarge

Production and Operating marginDangote Cement recently completed its domestic coal mills across all its plants

while Ashaka Cement continues to benefit from its coal mine in Gombe, as coal

substitution increased from 35.0% to 70.0% in FY-14. Lafarge plants in Ewekoro II

and Sagamu have also witnessed increasing use of biomass for its energy mix for

production. This largely drove the improved industry efficiency in FY-14 with cost-

to-sales ratio dropping to 66.1% (from 70.4% in FY-13). That said, we would expect

to see a relatively stable energy supply in 2016 with little or no disruptions.

Table 10

126


Housing Deficit and Private Investment may shore up growth

Housing deficit in Nigeria is projected at 30million units by 2043 (from 17million

units currently). As at end of 2015, investment in housing accounts for 0.4% of

total investment in Nigeria which is relatively low compared to emerging mar-

kets average of 10.0%. Despite the dwindling government revenue which will

impact on capital expenditure and government’s housing plans, we still expect

to see opportunities for industrial and construction activities emanating from

current housing deficit. The private sector’s interest in housing and the Nigerian

Mortgage Refinancing Company Plc (NMRC) will buoy growth in this space

which is expected to support revenue of industrial goods players.

We expect about 60-70% of housing needs to be funded by the private sector

especially in the middle and upscale housing market. The NMRC plans to pro-

vide US$1bn towards high-single digit to low-double digit mortgage financing

aimed at resolving the finance challenge with housing in Nigeria. DANGCEM

and LAFARGE have attributed revenue growth in its Nigeria operations to pri-

vate sector sales.

Demand-Supply Dynamics: Capacity expansion will drive cement price

south

Cement companies have been aggressive on boosting capacity which drove

industry installed capacity by 31.0% to 38.15MMT as at FY-14, majorly driven by

Dangote Cement’s new production lines in Obajana and Ibese. While cement

production has grown significantly and steadily over the years, growth in ce-

ment prices has contracted due to demand-supply imbalance. We expect

more installed capacity in 2016 from cement players coupled with higher ca-

pacity utilization levels; CCNN recently announced a N48bn investment aimed

at increasing the company’s installed capacity by about 200% to 1.5MMT. Also,

Lafarge Africa commenced a 5.5MMT capacity installation at Ashaka Cement

and UNICEM.

While we note the government’s focus on infrastructure and housing alongside

private investment, we do not expect significant growth in demand for 2016.

We maintain our Nigeria volume expectation at 14.0MMT and 15.1MMT for 2015

and 2016 respectively. Capacity expansion by cement players with marginal

cement demand growth in Nigeria on the back of macroeconomic and fiscal

headwinds is expected to intensify competition and drive cement prices down-

wards in 2016.

We bring to mind the cement price cut by most companies in Q4-14 (an aver-

age of 20.0%) in response to weak consumer demand in the course of capacity

expansion and improved capacity utilization. However, the devaluation of the

Naira during the period which pushed production cost up and constrained bot-

tom-line growth, led to an upward revision of prices to cushion the effect of de-

valuation and sustain margins.

There is a significant scope for hous-

ing sector development as

investment in housing currently ac-

counts for a meagre 0.4% of GDP

Dangote Cement and Lafarge attrib-

ute revenue growth in Nigeria to pri-

vate sector demand

Demand-supply mismatch continues

to exert downward pressure on

cement prices in Nigeria

127


Dangote Cement already initiated an 18.0% price cut

In Sep-15, Dangote Cement decided to cut prices in its home market (Nigeria)

in an attempt to boost cement consumption and compete with imports, a price

cuts to its 3X cement brand by N6,000 (US$30.23) per ton. Management noted

that its coal substitution strategy across all its plants has helped cut energy cost,

enabling it reduce the price of cement which brings average selling price down

from N32,900 per ton to N26, 900 per ton. The company also expects the lower

price to boost export to neighboring countries as Nigeria serves as anchor for

clinker and cement exports to neighboring West Africa markets such as Ghana.

We recall that the company had an unsuccessful price cut in Dec-14 due to

logistics and distribution issues which led to a trivial loss of market share. On this

note, we expect other cement players to cut prices as Dangote Cement re-

mains the market leader in the industry. However, sales volume is not likely to rise

significantly as cement consumption remains relatively price inelastic.

The price cut by Dangote Cement

will likely force other players to adjust

price downwards

The benefit of Dangote’s coal substi-

tution strategy motivated a cut in

price

128



Dangote Cement Plc (DANGCEM)

Stronger footing expected at home and abroad

In its 9M-15 results, DANGCEM recorded top and bottom line growth of 17.8%

and 12.5% y/y respectively, with EPS coming in at N9.8 (18.8% y/y). The num-

bers were buoyed by gains emanating from recent regional capacity expan-

sion. We believe DANGCEM’s regional expansion and expected volume

growth in Nigeria will support earnings growth over the medium term.

Revenue buoyed by Africa operations despite Nigeria’s drag

Based on 9M-15 numbers, contribution of Africa operations rose notably

by 39.0% to 1.9MMT. According to management, DANGCEM has gained

over 40% of the Senegalese cement market at 2.7MMT per annum while

market share in Cameroon, Ethiopia, SA and Zambia continue to improve.

However, Nigeria volumes declined by 1% y/y to 2.98MMT though market

share increased to 59% on the back of price cuts. Our positive outlook for

the cement sector in Nigeria on the back of CAPEX growth will buoy vol-

ume growth in Nigeria supported by recent price cut. Furthermore, we

expect Africa operations to sustain traction in 2016.

Cost pressure contracts margins

Despite impressive revenue growth, cost pressure from regional expansion

leading to increase in material cost, coupled with higher depreciation

charge drove contraction in margins as Gross margin, PBT and PAT mar-

gins came in lower at 62.0%, 45.7% and 43.2% (vs. 64.3%, 48.6% and 45.7%

for 9M-14 respectively). We expect recent cost saving measures to bode

well for margins going forward; it’s recent investment in coal would further

support cost efficiency.


We revise our FY-16 revenue forecast to N550.5bn (previously N565.2bn),

but maintain our cost of sales forecast at N203.5bn. We have also revised

our EPS estimate down to N13.2 (N15.0). Our TP now stands at N190.75

(previously N195.69).


Chart 71: DANGCEM Share Price History


EPS (NGN) 8.51 11.81 9.36 15 20.22 29.18

DPS(NGN) 3 7 6 9 12.13 17.51

BVPS (NGN) 23.3 32.0 34.7 45.0 53.5 64.6

SPS 17.5 22.7 23.0 32.3 40.4 51.3

Div idend Payout (%) 35.3% 59.3% 64.1% 60.0% 60.0% 60.0%

Div idend Yield(%) 1.8% 4.0% 3.5% 5.3% 7.1% 10.3%

P/E 20.0x 14.6x 18.1x 11.3x 8.4x 5.8x

P/BV 7.3x 5.4x 4.9x 3.8x 3.2x 2.6x

P/S 9.7x 7.6x 7.4x 5.3x 4.2x 3.3x

Bloomberg Ticker DANGCEM NL

Reuters Ticker DANGCEM.LG

NSE Ticker DANGCEM

Rating BUY

Current Price (N) 170




Total Return 12.3%

Historic Return

3 month 0.0%

6 month -3.9%

12 month -5.5%

YTD -15.0%






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129



DANGCEM: Summary Financials (N' mn)


Turnov er 298,454 386,177 391,639 550,012 688,094 873,880

Cost of sales 118,304 142,517 143,058 203,584 233,952 288,380

Gross Profit 180,150 243,660 248,581 346,428 454,142 585,500

Other Operating Income




Taxation 25,188 34,856 18,131 23,682

Profit After Tax 145,024 201,198 159,501 255,610 344,494 497,325



Total Long-Term Assets 534,307 695,123 847,617 893,959 990,856 1,147,964

Total Assets 658,202 843,203 984,721 1,155,660 1,328,648 1,532,169




Total Equity 404,537 550,093 591,887 730,057 919,795 1,069,616

Total Liabilities & Equity 658,202 843,203 984,721 1,155,660 1,328,648 1,532,169



Turnov er 1,981 2,409 2,135 2,778 3,475 4,414

Cost of sales 785 889 780 1,028 1,182 1,456

Gross Profit 1,196 1,520 1,355 1,750 2,294 2,957



Operating profit (loss) 972 1,222 1,020 1,524 1,884 2,436

Profit Before Tax 900 1,190 1,007 1,467 1,831 2,392

Taxation 0 0 137 176 92 120

Profit After Tax 963 1,255 869 1,291 1,740 2,512


Total Current Assets 822 924 747 1,322 1,706 1,940


Total Assets 4,369 5,260 5,368 5,837 6,710 7,738

Total Current Liabilities 903 1,020 1,247 1,196 979 993

Total Long-Term Liabilities 781 808 894 953 1,086 1,343


Total Equity 2,685 3,432 3,226 3,687 4,645 5,402




EBITDA margin 58.3% 59.5% 57.0% 59.0% 58.1% 58.6%


PBT margin 45.5% 49.4% 47.2% 52.8% 52.7% 54.2%


ROAE 35.8% 42.2% 27.9% 38.7% 41.8% 50.0%

ROAA 22.0% 26.8% 17.5% 23.9% 27.7% 34.8%

Opex/sales 13.6% 12.8% 16.6% 16.2% 14.9% 16.2%

Debt-to-equity 62.7% 53.3% 66.4% 58.3% 44.5% 43.2%


130



Lafarge Africa Plc (WAPCO)

Positive outlook despite cost concerns

WAPCO published its 9M-15 results showing weak performances across major

items. On the back of low operational efficiency and cost pressure in SA busi-

ness, EBIT, PBT and PAT declined by -12.4%, -11.6% and -7.0% accordingly. The

contraction in gross margin to 32.4% (vs. 34.7% y/y) and a rise in OPEX (25% y/

y) coupled with a 354.9% rise in net interest expense largely drove the weak

9M earnings.

Steady improvement in Wapco and Ready-to-Mix (RTM) business

The modest growth in revenue was driven by the pooled outcome of im-

provement in Wapco and the RTM segment which grew by 31% and 11%

respectively, offsetting the drag from SA business. Notably, the decline in

Ashakacem performance on the back of the unrest in the company’s

factory in 2015 combined with weak cement volumes (c.1.5MMT) to cap

overall volume growth within the period. We expect improvement in alter-

native energy supply to prop up capacity utilization in 2016 while CAPEX

focus will support cement volume growth in Nigeria.

Cost efficiency may weaken further

We highlight the steady increase in Cost-to-Sales ratio from 65.7% in H1-15

to 71.9% in 9M-15. Asides the drop in volume, pressures from fixed costs

continue to constrain margins. OPEX-to-Sales increased significantly by

3.7% for the fourth quarter running following the launch of its key distribu-

tion strategy (Route to Market). We note UNICEM negative contribution

(N200mn) on the back of to unrealized foreign exchange loss on revalua-

tion of foreign currency denominated borrowings.

Target Price revised downward but BUY rating maintained

We revise our FY-16 estimate downward. Notably, we cut our revenue

growth to 9.5% (previously 12.1%) and forecast cost-to-sales margin at

70.5% (previously 68.7%). Our 12-month target price is revised to N122.50

(previously N126.88). WAPCO currently trades on a P/E multiple of 13.2x

compared with 12.6x for EM peers.


Chart 72: WAPCO Share Price History


EPS (NGN) 4.9 13.8 7.8 8.0 9.5 11.7

DPS(NGN) 1.2 3.39 3.84 4.17 4.65 5.83

BVPS (NGN) 22.82 32.0 34.7 45.0 53.5 64.6

SPS 19.3 45.2 45.2 49.5 62.7 70.3

Div idend Payout (%) 24.5% 24.6% 49.2% 51.8% 49.0% 50.0%

Div idend Yield(%) 1.4% 4.0% 4.5% 4.3% 4.8% 6.0%

P/E 17.2x 6.1x 10.9x 12.0x 10.2x 8.3x

P/BV 3.7x 2.6x 2.4x 2.2x 1.8x 1.5x

P/S 4.4x 1.9x 1.9x 2.0x 1.5x 1.4x

Bloomberg Ticker WAPCO NL

Reuters Ticker WAPCO.LG

NSE Ticker WAPCO

Rating BUY





Total Return 26.8%

Historic Return

3 month -2.2%

6 month -2.3%

12 month 21.0%

YTD 20.2%






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WAPCO NGSE Index NSE Industrial Index

131



WAPCO: Summary Financials (N' mn)


Turnov er 87,965 206,073 205,845 225,400 285,730 320,005

Cost of sales 55,566 138,754 137,364 158,642 196,475 215,298

Gross Profit 32,399 67,319 68,481 66,758 89,255 104,707

Other Operating Income




Taxation 6,553 3,309 6,537 6,090 6,641 6,946

Profit After Tax 14,712 60,953 34,661 36,650 43,233 53,120



Total Long-Term Assets 128,141 229,896 847,617 893,959 990,856 1,147,964

Total Assets 151,949 298,126 305,878 340,599 364,122 418,895




Total Equity 68,359 171,025 191,642 208,347 213,555 246,860




Turnov er 584 1,286 1,122 1,138 1,443 1,616

Cost of sales 369 866 749 801 992 1,087

Gross Profit 215 420 373 337 451 529





Taxation 43 21 36 31 34 35

Profit After Tax 98 380 189 185 218 268


Total Current Assets 158 426 747 1,322 1,706 1,940

Total Long-Term Assets 851 1,434 4,620 4,515 5,004 5,798

Total Assets 1,009 1,860 1,667 1,720 1,839 2,116




Total Equity 454 1,067 1,045 1,052 1,079 1,247




EBITDA margin 32.6% 27.0% 26.7% 25.8% 21.9% 23.3%


PBT margin 24.2% 31.2% 20.0% 19.0% 17.5% 18.8%


ROAE 21.5% 50.9% 19.1% 18.3% 20.5% 23.1%

ROAA 9.7% 27.1% 11.5% 11.3% 12.3% 13.6%

Opex/sales 7.4% 3.7% 11.8% 11.7% 8.7% 7.7%

Debt-to-equity 122.3% 74.3% 59.6% 63.5% 70.5% 69.7%


132


Investment Rating Criteria and Disclosure

United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold

and Sell. These generic ratings are defined below;

Buy: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price

is greater than our estimated cost of equity.

Hold: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is

less than the cost of equity, however, the expected total return on the stock is greater than or equal to

the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR – 200bps; i.e

10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Sell: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is

less than the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR –

200bps; i.e. 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like

equity, especially as we consider the average 4.5% total transaction cost for an average retail investor.

NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR;

meaning Not-Rated. We may not rate a stock due to investment banking relationships, other sources of

conflict of interests and other reasons which may from time to time prevent us from issuing a rating on

the shares (or other instruments) of a company.

Please note that we sometimes give concessional rating on stocks, which may be informed by technical fac-

tors and market sentiments.

Current Stock Rating Dispersion and Relationship

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively

referred to as “UCAP”) that research analysts may not be involved in activities that suggest that they are rep-

resenting the interests of UCAP in a way likely to appear to be inconsistent with providing independent invest-

ment research. In addition, research analysts’ reporting lines are structured so as to avoid any conflict of inter-

ests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s Investment

Banking or Sales and Trading departments. However, such sales and trading departments may trade, as prin-

cipal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those

Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients

from probable conflicts of interest that may arise in the course of its business relationships.

Analyst Certification

The research analysts who prepared this report certify as follows:

133


1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report.

2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indi-rectly) to the specific recommendations, estimates or opinions expressed in this report.

Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or

beneficial interest in securities or related investments discussed in this report, potentially giving rise to a con-

flict of interest which could affect the objectivity of this report. Material interests which UCAP may have in

companies or securities discussed in this report are disclosed: UCAP may own shares of the company/subject covered in this research report.

UCAP does or may seek to do business with the company/subject of this research report

UCAP may be or may seek to be a market maker for the company which is the subject of this research report

UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this re-search report

UCAP may be likely recipient of financial or other material benefits from the company/subject of this re-search report.

Disclosure keys

a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this re-

port

b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a

Board member, Officer or Director of the Company or has influence on the company’s operating deci-

sion directly or through proxy arrangements

c. UCAP is a market maker in the publicly traded equities of the Company

d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of

the Company

e. UCAP beneficially own 1% or more of the equity securities of the Company

f. UCAP holds a major interest in the debt of the Company

g. UCAP has received compensation for investment banking activities from the Company within the last 12

months

h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in

the next 6 months

i. The content of this research report has been communicated with the Company, following which this re-

search report has been materially amended before its distribution

j. The Company is a client of UCAP

k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer

United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available informa-

tion as well as analysts’ knowledge and opinion on the markets and companies covered; albeit UCR neither guarantees

its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital

(UCAP) nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suf-

fered from the reliance on this report as it is not an offer to buy or sell securities herein discussed. Please note this report is

a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Manage-

ment. UCAP is registered with the Securities and Exchange Commission and its subsidiary, UBA Securities Limited is a deal-

ing member of the Nigerian Stock Exchange. For enquiries, contact United Capital Plc, 12th Floor, UBA House, 57 Marina,

Lagos. ©United Capital Plc 2015.*

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