nigeria | investment research | 2019 outlook

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Nigeria | Investment Research | 2019 Outlook

24 January 2019 2

[Notes]


24 January 2019 3

Contents

Executive summary 5Capital markets perspectives 7 Equities 7 Fixed income 12The policy and political backdrop 14 Elections ahead, time to get on with life 14 An uneven reform programme 15 Domestic threats to national security 17 A steady rise in unemployment 18Drivers of the economy 21 The oil sector under pressure 21 Demand pressures in the non-oil economy 29 A few good strides forward in agriculture 33 Power sector in need of rescue 37 Banks sector: slightly improved outlook for loan growth in 2019 39 Cement sector: strong recovery in unit volume growth 45 Fast moving consumer goods sector: fx reforms buoyed growth 42 Brewers: bracing for rougher times 53 Our call for 2019 and beyond 55Monetary and fiscal policy 57 Inadequate financial intermediation 57 One-track monetary policy 58 A counter-cyclical fiscal policy 60 Heavy burden of debt service 62 State government finances: restoring stability 63 The FGN bond market 64The exchange rate 67 Workings of the market 67 Reserves and the SWF 68Company profiles (FBNQuest Capital Coverage universe) 71 Access Bank 72 Fidelity Bank 73 FCMB Group 74 Guaranty Trust Bank 75 Stanbic IBTC Holdings 76 United Bank for Africa 77 Zenith Bank 78 Dangote Cement 79 Lafarge Africa 80 Guinness Nigeria 81 International Breweries 82 Nigerian Breweries 83 Dangote Sugar Refinery 84 Flour Mills of Nigeria 85 Nestle Nigeria 86 Unilever Nigeria 87 UAC of Nigeria 88 PZ Cussons Nigeria 89 11 PLC 90 Seplat Petroleum Development Company 91 Total Nigeria 92 Okomu Oil 93 Presco 94Analyst(s) certification and disclosures 95

Prices of securities and index levels in this report are as of close of business on Wednesday, 23 January 2019 unless otherwise stated. N/US$ conversions are based on a rate of 362.7.


24 January 2019 4

[Notes]


24 January 2019 5

Executive summary We are nearing the end of a long and mostly negative campaign for the presidential election on 16 February. The incumbent, President Muhammadu Buhari of the All Progressives Congress (APC), faces a strong challenge from Atiku Abubakar of the Peoples Democratic Party (PDP). There are many other candidates, some with impressive credentials and platforms, but the majority of Nigerian voters are wedded to the two-party system. Atiku is presenting himself as pro-business and supportive of market forces. Buhari is a little wary of business, but not hostile to it. He will be campaigning on his record since 2015, social “interventions” and governance. The capacity of the new president to drive change is limited by the state’s bureaucracy and vested interests. The APC can attest to this reality after four years in power. We are not political pundits, merely informed observers like many others. The incumbent was defeated in 2015 for the first time in Nigeria but does have many advantages in his favour. Both leading candidates are northerners, one with a running mate from the south west and the other from the south east, and we expect a closer result than the margin of nine percentage points last time. We hope that the result will not be too close because of the likelihood that it would be contested in the courts and perhaps on the streets. Nigeria has a presidential term of four years and a three-month transition period, and challenges to the result would eat into the limited time available for the administration to focus on governing without having to turn its attention to the next polls. The economy is on the road to diversification. This process is at a fairly early stage, so it is appropriate that we kick off with our oil assumptions. Output including condensates is forecast to increase this year from 1.95mbpd to 2.07mbpd. Production from Total’s Egina field started in December, and we are assuming manageable levels of production leakages. The passage of the petroleum industry bill in 2019 would be an act of wishful thinking. Our take on the price, having topped US$80/b and fallen below US$50/b over a four-month period, is that it has settled in a range of +/- US$60/b. In the short term, the winter in the northern hemisphere is supportive. Additionally, the US sanctions on Iran are beginning to bite; the US pressure on Saudi to open the taps has eased; the Saudi-Russian relationship, the lynchpin of OPEC+, is in good shape: and output shortfalls in Venezuela and Libya are serious. If the price moves up too far, the shale industry in the US can respond quickly by ramping up production. We see the average spot price for Bonny Light at US$63/b this year, closing 2019 at US$65/b. Alongside a rise in oil production, our forecast for GDP growth of 2.9% this year rests upon the stimulus from the FGN’s expansionary fiscal stance. Its budgets have been consistently overambitious. Revenue shortfalls have dented capital spending plans. That said, the Federal Inland Revenue Service has reported record collections of N5.3trn in 2018, and the FGN the same for capital releases. The vice president has said that the tax revenue/GDP ratio has improved from a pitiful 6% to 8%. We can say therefore that there is some positive momentum on the fiscal side. There is also the expected rise of +/- 50% in the national minimum wage to consider: it may not


24 January 2019 6

be justified in terms of productivity but it puts money into household budgets. In the strict sense, the FGN can afford it (i.e. it can still pay salaries and maintain some capital spending) although the same is not true of most state governments. Our growth forecast is inching towards the rate of demographic expansion. Selective private investment in the Dangote complex in Lagos State and a number of agricultural projects, funded in part by the more solvent state governments, will play a secondary role. We remain well below the growth rates of before 2014, however, because household budgets have to be rebuilt. On the naira exchange rate, we are in the minority position of seeing no substantive change this year. We know that the CBN governor’s five-year term ends in June. It is unclear at this stage whether or not his term will be extended, whatever the election result. A change at the top does not necessarily translate into change across the bank. Its officials favour management of the exchange rate, however discreet, and have no experience of a rate genuinely driven by market forces. This state of affairs is the result of collective preference but also reflects the reality that the largest source of fx is a single commodity of which the largest producer is a state-owned body. We might be surprised but our view is that the CBN will maintain the preferential rate for priority transactions, and that the NAFEX rate will weaken to a range of N375 to N385 per US dollar. As for interest rates, the MPC has not changed its stance since July 2016 and is not expected to do so this year. It has settled into a comfortable ‘wait-and-see’ mindset, adamant that the macro deterioration since 2014 is the consequence of supply-side constraints beyond its influence and aware too that its firepower is limited. Local debt markets had a good run through to mid-year on the back of the policy of ‘externalisation” and healthy portfolio inflows. The tide has since turned in response to monetary policy normalisation in the US and, more recently, oil price weakness. Ultimately, such investors still have to track the oil market above all for the read-across to public finances, reserves and the exchange rate. That price has now stabilised and normalisation may well slow but the CBN will keep a lid on naira liquidity. On this basis we see scope for FGN bond yields (of 15.00% to 15.50%) to widen by up to 100bps over the year. As for equities, global and domestic headwinds are still very much present. Fundamentals are still weak and growth is yet to pick up meaningfully. With the election in view, we expect the market to remain subdued through most of Q1. Notwithstanding, and given the extent of the correction in 2018, our bottom-up valuations indicate that the index could rally as much as 17.7% this year to 37,000, signaling that current levels present re-entry opportunities. Of the sectors under coverage, banks stand out as the most attractive: although their earnings are likely to remain subdued, we believe valuations are unduly pessimistic. To buttress this point, we highlight the fact that the average dividend yield for our banks coverage universe is 10%, with 5 banks showing double-digit yields. The 10% figure compares with 4.2% this time last year. We are very selective among the non-financials. Although some are likely to show a healthy pick-up from 2018E earnings, this is flattered by base effects. We believe their recovery will be slower than the banks. In addition, many of the names we cover are close to fair value, except for cement and oil & gas, among which our preferred picks are Dangote Cement (PT N270, +42%) and Seplat (PT N1,078, +100%).


24 January 2019 7

Steep correction for the ASI in 2018 Heavy losses in consumer and some tier 1 banks

ASI projected to rise 25% in 2018

Capital markets perspectives Equities Having surged 42% in 2017 to reverse three years of consecutive losses, the All Share Index (ASI) declined -18% in 2018 to close at 31,430.50. Other catalysts were needed to sustain the momentum beyond that which fx stability and liquidity had provided from Q2 2017 onwards. Unfortunately none materalised. Instead, earnings expectations/outlook and global market trends would prove more decisive as drivers. The former – especially the outlook into 2018 – ultimately disappointed as guidance from companies indicated that earnings were likely to be subdued through 2018. With respect to global trends, emerging and frontier markets fell out of favour as US-China relations worsened under President Trump. The sell-off in the ASI was driven by consumer names. The broad fast moving consumer goods names we track and the brewers lost -29% and -35% respectively, followed by oil and gas names. Among the latter, only Seplat recorded a modest 5% gain. This marked the second year of losses for the sector. The fixed price regime under which the downstream sector operates continued to be a hindrance. A rise in crude oil prices made the importation of refined petroleum products even more unattractive given the risk of delays on subsidy claims. As a result, most operators concentrated on the marketing segment, leaving the importation aspect to the state oil company. The consumer names faced growing competition as smaller competitors which had exited due to fx scarcity in the prior years returned as the fx market stabilised. That said, demand remained weak. Consequently, topline growth was constrained and margins suffered. Of the three sectors that recorded gains, the banks (+10%) stood out. However, that performance was flattered by double-digit gains by the smallest banks. If we exclude the tier 2 and below names, the average came to -20%: all tier 1 banks lost ground, the worst being Access Bank (-36%). Prospects of a repeat of fx gains to the extent we saw in prior years were dim and a fall in fixed income securities yields weighed on earnings.

2011-2018 performance of the Nigerian All Share Index

Sector performances in 2018

Source: Bloomberg, FBNQuest Capital Research Source: Bloomberg, FBNQuest Capital Research estimates The headwinds, both domestic and global, which persisted through 2018 are still present, leading us to maintain our cautious stance on the market. In addition, on the domestic front, uncertainties surrounding the elections are likely to keep equities out of favour for

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Banks Cement Palm oil Oil &Gas

ASI FMCG Brewers


24 January 2019 8

Valuations support end-2019 close of 37,000 for the ASI Banks most attractive... ...despite potential decline in ROAEs Strong bias towards the tier 1 banks Dangote Cement the preferred cement pick Cautious on FMCG and brewers

the first quarter at least. Having said that – and despite our view that earnings are likely to remain subdued through much of 2019 – we find current valuations depressed. Having adjusted our price targets downwards after increasing our cost of risk assumption from 13% to 15% (to reflect the increase in fixed income yields), our universe shows an average upside potential of 25%. We forecast a year-end ASI close of 37,000, equivalent to a relatively conservative gain of 17.7%. Combined with an average dividend yield of 6%, we expect a total return of 23.7%. To our minds, current share prices are implying an extremely bearish outlook for earnings. While we accept that the consumer names are close to their fair values, we find banks, cement and oil and gas names significantly undervalued, with average potential upside in the 40-60% range. With respect to the banks, despite the y/y reduction in book values for our coverage universe, we expect them to report an average ROAE of 16.9% for 2018E, a y/y decline of c.-100bps. Ex-Diamond, the reduction is greater: -160bps y/y to 19.1%. The ROAE decline is reflective of bloated equity from fx related gains of prior years and a deceleration in earnings growth relative to 2017 levels. Moving into 2019E, we forecast a similar (c.-100bps) ROAE decline to around 16.0%. If we exclude Diamond Bank, our 2019E ROAE forecast of 17.9% is down by around 118bps. We continue to expect GT Bank to lead the way with an ROAE of around 30% in 2019E, followed by Stanbic (26.3%, down y/y due to a significant slowdown in earnings growth) and then Zenith at close to 21%, Access and UBA in the 14-16% range and the rest below 10%. Apart from Stanbic, all the banks in our coverage universe show double-digit upside potential. On a risk-reward basis, we continue to prefer GT Bank, followed by Zenith and then UBA. All three are rated Outperform. Moving on to the non-financials, following the recovery in cement unit volumes which started in Q2 2018, we expect the sector to deliver unit volume growth of around 10% y/y to c.20.5mmt in 2018E. On the back of the upcoming elections in February 2019, we see a deceleration in unit volume growth to around mid -single -digits in Q1 2019E. Beyond Q1, we believe unit volume will recover to high single digits as investors and developers resume previously delayed investment decisions caused by uncertainties around the elections. As such, we forecast unit volume growth of c.8% y/y to c.22.0mmt for 2019E. For Outperform-rated Dangote Cement, we expect PBT growth of 12% y/y in 2019E while for Lafarge, we forecast a modest profit of N2.1bn after two years of losses. For the consumer goods sector, going into 2019, we see the hard-pressed consumer continuing to adopt a cautious spending attitude. The impact of the proposed increase in minimum wage is unlikely to be commensurate with the sharp rise in living costs over the past five to six years. That said, we believe the sector will continue to benefit from stable macroeconomic conditions. The CBN’s unrelenting intervention in the currency market for one is an encouraging signal for manufacturers. However, we see sustained downward pressure on prices given the competitive landscape is compounded by weak consumer purchasing power and the likely increased participation of imported brands encouraged by increased FX availability potentially. Finally, pastoral conflicts in the food-producing middle-belt states remain a major flash point to watch in 2019. We anticipate that rivalry in the brewing space will intensify further. Consequently, input cost inflation will continue to be absorbed. Of more concern, the brewers will feel the pinch of another round of excise tax increments in 2019 (+N0.05/cl). With these in mind, the brewers will have to painfully adjust to structurally-lower margins. That said, we still expect that beer unit volumes will grow by single digits, but that this will be driven by the affordable segment.


24 January 2019 9

Downstream oil and gas sector deregulation, maybe Seplat in the clear on licence renewal FG policy continuity to support palm oil sector

While we expect the consumer names to see a recovery in earnings after what appears to be a dismal 2018, the market appears to have priced much of this in. As such, we see limited upside potential for this group of stocks. Moving to the oil and gas sector, a full deregulation of the downstream sub-sector will provide a significant boost to investments in retail, distribution and marketing activities. To our minds, the re-election of the present administration provides a more likely scenario of this happening. We believe a new government would be hesitant in its first year to decide in favour of a full deregulation given its economic and political gravity. In addition to our views on deregulation, we do not anticipate an end to fuel imports in 2019 following setbacks at the Dangote Refinery project. Given the rate of progress at the site we expect first gasoline production in late 2021. In many ways, the federal government had implied a reliance on this project to achieve total import substitution for petroleum products. This therefore is likely to extend Nigeria’s subsidy burden, dragging out the uncertainty that has plagued the downstream operators. For Seplat, the renewal risks for the industry which could stem from the fact that the FG is not obligated to renew ownership of licences do not apply given that the company has already renewed licences for its core assets. On balance, we believe its prospects are better going forward as domestic gas supply and utilisation picks up and the de-risking of export channels is prioritised. Our Outperform rating is underpinned by a price target of N1,078, implying upside potential of 100% from current levels. With regards to the palm oil sector, the federal government continues to encourage agro-focused investments in Nigeria. We do not expect this to change whatever the outcome of the upcoming elections because of the potential the industry holds for both food security and employment. Therefore, we expect expansion projects for both Okomu and Presco will continue into 2019 and beyond. We forecast 9% y/y growth in EPS for Okomu in 2019E but expect a flattish performance for Presco. Post our risk-free rate adjustment, both are now rated Neutral.


24 January 2019 10

FBNQuest Capital banks coverage universe – recommendations, price targets and valuation summary

Rating -old*

Rating -new* Price (N)

Price target

– old (N)

Price target

– new (N) % change

to price target Potnl up/ downside

Market Cap. N m

Market Cap. US$ m

Access OP OP 5.7 12.6 11.2 -11.4% 97.9% 163,443 451

Fidelity N N 2.29 3.25 2.87 -11.8% 25.2% 66,324 183

FCMB OP OP 1.92 3.25 2.89 -11.0% 50.8% 38,021 105

GT Bank OP OP 33.0 53.0 45.7 -13.7% 38.6% 971,228 2,678

Stanbic IBTC N N 47.5 47.5 41.2 -13.2% -13.2% 480,400 1,325

UBA OP OP 7.3 13.6 12.0 -12.0% 64.9% 247,946 684

Zenith OP OP 22.0 36.6 31.8 -13.0% 44.8% 690,723 1,904

Average n/a n/a n/a n/a n/a -12.3% 44.1% 379,726 1,449

P/E (x) EPS growth P/Book (x) ROAE 2018E Dividend

2017A 2018E 2017A 2018E 2017A 2018E 2018E Per share Yield

Access 1.8 2.4 10.4% -23.3% 0.3 0.3 14.0% 0.67 11.8%

Fidelity 3.0 3.2 236.9% -5.5% 0.3 0.3 9.8% 0.25 10.9%

FCMB 3.2 1.7 -36.6% 96.5% 0.2 0.2 12.4% 0.21 10.9%

GT Bank 5.5 5.6 25.8% -2.5% 1.6 1.7 29.7% 2.70 8.2%

Stanbic IBTC 9.4 7.0 107.1% 33.6% 2.6 2.0 32.3% 1.54 3.2%

UBA 2.6 3.8 -23.1% -30.9% 0.5 0.5 12.9% 0.84 11.6%

Zenith 4.2 3.7 8.4% 3.1% 0.8 0.9 22.8% 2.78 12.6%

Average 4.2 3.9 47.0% 10.1% 0.9 0.8 19.1% n/a 9.9%

Source: Bloomberg, FBNQuest Capital Research, (*OP: Outperform, N: Neutral, UP: Underperform)


24 January 2019 11

FBNQuest Capital Non-financials coverage valuation summary

Sector Rating -old**

Rating -new**

Price target

– old (N)

Price target

– new (N)

% change to price

target

Potential Up/

Downside

Market Cap. N m

Market Cap.

US$ m Price (N)

Dangote Cement Cement OP OP 190.0 274.5 270.0 -1.7% 42.1% 3,919,317 10,806

DSR FMCG OP N 14.5 16.0 13.9 -13.1% -4.1% 174,000 480

FMN* FMCG N N 19.5 26.3 23.5 -10.6% 20.8% 79,753 220

Guinness Nig.* Brewers N UP 71.0 68.1 57.8 -15.1% -18.5% 155,517 429

International Breweries Brewers N UP 30.3 31.1 28.2 -9.3% -6.7% 260,025 717

Lafarge Africa Cement N N 12.6 21.5 21.5 0.0% 70.9% 108,852 300

11 PLC (Mobil Oil Nig.) Oil and gas N N 180.0 292.4 245.0 -16.2% 36.1% 64,907 179

Nestle Nig. FMCG N UP 1450.0 1238.0 990.0 -20.0% -31.7% 1,149,349 3,169

NB Brewers N UP 80.0 96.4 71.8 -25.5% -10.3% 639,752 1,764

Okomu Oil Palm oil OP N 82.0 88.8 74.5 -16.1% -9.1% 78,221 216

Presco Palm oil N N 60.0 76.9 66.0 -14.2% 10.0% 68,690 189

PZ Cussons Nig.* FMCG UP UP 11.9 19.1 11.4 -40.1% -3.4% 47,050 130

Seplat Oil and gas OP OP 540.0 971.0 1078.0 11.0% 99.6% 317,760 876

Total Nig. Oil and gas N N 195.0 321.0 279.0 -13.1% 43.1% 66,207 183

UAC of Nig. FMCG N N 8.5 12.6 12.6 0.0% 48.5% 20,169 56

Unilever Nig. FMCG N N 37.0 43.3 33.0 -23.9% -10.9% 212,565 586

P/E (x) 2017A

P/E (x) 2018E

EPS growth 2018E

EV/ Sales(x) 2017A

EV/ Sales(x) 2018E

EV/ EBITDA(x)

2017A

EV/ EBITDA(x)

2018E

EPS growth 2019E

DPS (N) 2018E

Dividend Yield (%)

2018E

Dangote Cement 5.3 4.1 11.1 8.3 16.4 13.0 25.9% 21.4% 11.78 6.2%

DSR 0.7 1.0 2.9 4.5 4.4 8.5 -48.8% 32.8% 0.70 4.8%

FMN* 0.4 0.5 3.6 5.4 4.2 11.5 -63.2% 19.8% 0.88 4.6%

Guinness Nig.* 1.0 1.2 6.4 9.7 20.3 19.6 3.2% 42.1% 1.63 2.3%

International Breweries 7.4 3.2 20.7 18.1 181.9 n/a n/a -13.7% 0.00 0.0%

Lafarge Africa 1.6 1.3 17.5 8.0 n/a n/a -44.0% n/a 1.11 8.8%

11 PLC (Mobil Oil Nig.) 0.5 0.4 3.7 3.7 7.2 6.2 15.3% -11.5% 9.53 5.3%

Nestle Nig. 4.7 4.3 18.6 16.4 34.1 25.0 36.3% 1.8% 57.00 3.9%

NB 1.9 2.0 7.1 10.4 20.3 28.6 -29.0% 6.6% 2.82 3.5%

Okomu Oil 3.8 3.7 6.3 6.2 8.9 8.9 0.0% 8.5% 3.51 4.3%

Presco 2.4 2.5 4.1 4.2 2.3 10.2 -77.5% 4.6% 1.23 2.1%

PZ Cussons Nig.* 0.4 0.6 3.3 5.0 5.8 11.4 -49.3% 9.4% 0.48 4.1%

Seplat 2.2 0.7 4.9 1.1 3.2 4.6 -30.3% 13.6% 47.28 8.7%

Total Nig. 0.2 0.3 3.7 4.3 8.3 6.3 30.2% -48.3% 20.00 10.3%

UAC of Nig. 0.5 0.6 8.0 16.6 14.0 24.0 -41.7% 56.6% 0.00 0.0%

Unilever Nig. 1.1 1.8 6.1 10.8 19.8 16.6 19.2% -5.3% 0.67 1.8%

Source: Bloomberg, FBNQuest Capital Research * Year end + 1 for Guinness Nigeria, Flour Mills of Nigeria and PZ Cussons Nigeria due to their different financial year ends. **OP: Outperform, N: Neutral, UP: Underperform


24 January 2019 12

More time to “wait-and-see”

A pause for breath by the FOMC in the US Some insulation for Nigeria from the headwinds Long-term “on hold” from the MPC

Fixed income In the US the FOMC announced a widely-expected rate hike in December. Sentiment has since turned on the basis of comments from the chair, Jay Powell, and other policymakers suggesting that the pace of normalisation is set to slow in the face of global headwinds. We could therefore be looking at just two or even one hike in the Fed funds rate this year. In the Eurozone, quantitative easing has formally ended although monetary tightening may not come until Q4 2019 at the earliest. The impact of normalisation varies greatly across emerging markets. In the case of Nigeria, it has naturally pushed up the returns on the FGN’s Eurobonds and contributed to the selective retreat from its local markets. We still argue, however, that it stands apart from the more embattled EMs such as Turkey, South Africa and Argentina by virtue of its relatively healthy external balance sheet (low public and private external debt, comfortable buffer in the form of stable reserves, current account generally in surplus). Another Nigeria risk may have been overstated too. This is the idea that elections bring macroeconomic slippage. Too close a result in February could be unsettling because it would probably be contested. Our analysis of the run-up to voting in both 2011 and 2015 did not find any such slippage, however. (We looked at inflation, FGN spending, offshore transactions on the stock exchange and domiciliary bank accounts.) Monetary policy in Nigeria has been unchanged since July 2016 because the monetary policy committee (MPC) feels that it does not have the weaponry to tackle macro challenges arising from supply-side factors outside its control. We sympathise with the MPC on this score. Further, it knows well, and occasionally says, that the ‘disconnect” between its policy and the real economy blunts the effectiveness of its decisions.

FGN bond yields and the MPR (%)

FGN bond yields and CPI (%)

Source: CBN, FMDQ, FBNQuest Capital Research Source: FMDQ, NBS, FBNQuest Capital Research Its stance is unlikely to change this year, either. Inflation has settled within a fairly narrow range and moves on the basis of food prices which it does not influence. The committee has settled into what we call a ‘wait-and-see’ mode, having not acted in the past 12 months when there have been plausible grounds both to hike and cut its policy rate of 14.00%.

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16.39% Jan 2022 16.2884% Mar 202712.40% Mar 2036 MPR

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16.39% Jan 2022 16.2884% Mar 202712.40% Mar 2036 Inflation y/y


24 January 2019 13

A little more yield widening to come On the back of the CBN’s mopping-up operations

NTBs recommended for the more alert investor

Its monetary policy, as we have observed, is often synonymous with exchange-rate policy. We have commented at length elsewhere on the CBN’s preference for managed and stable exchange rates. If it identifies a threat to the stability, it does have some monetary tools at its disposal. The MPC therefore has an inherently tightening bias. Turning to market rates, FGN bond yields have widened by about 100bps over the past six months in response to normalisation in the US and the weakening of the offshore bid for naira-denominated paper, undoing the earlier benefits of the FGN/DMO policy of debt externalisation. This widening has further legs in our view of about 100bps across the curve in the year ahead. The principal driver will be the CBN’s policy to maintain tight naira liquidity through open market operations (OMOs) at times of pressure on the exchange rate, real or perceived. A secondary driver will be supply-driven (i.e. a combination of fewer offshore participants in the market and a domestic funding target for the DMO to attain). Investors are now enjoying real yields, adjusted for inflation, of about 400bps on FGN bonds; this is set to rise in the context of our forecasts. The MPC likes to stress this benefit for offshore players although their preoccupation in Nigeria is generally their ability to exit the market at will. For the more active and nimble investor, we would again recommend the NTBs on the basis of the frequent movements in liquidity conditions. There has been a noticeable shift in allocations from FGN bonds to NTBs by all investor groups in the past year. The conservative, hold-to-maturity investor could do a lot worse than exposure to Nigeria's long bonds.


24 January 2019 14

The policy and political backdrop Elections ahead, time to get on with life According to the calendar announced by the Independent National Electoral Commission (INEC), the presidential polls and those for the National Assembly are scheduled for 16 February. Elections for the state governorships and assemblies are due to follow on 02 March. While the presidential candidates have been chosen and are campaigning, their policies are unclear. The two leading contenders are the incumbent, Muhammadu Buhari of the All Progressives Congress (APC), and Atiku Abubakar of the Peoples Democratic Party (PDP). We have therefore two northerners in the ring, which tallies with the view that it is the “turn” of the north to hold the top position in the republic. Their respective running mates are the vice president, Yemi Osinbajo, and Peter Obi, once governor of Anambra State. There are many other candidates, some running on strong and internally consistent platforms, but the serious contest is between the two largest, and best funded parties. Turning to policy, the Atiku Plan sets heady targets of GDP of US$900bn by 2025, and the creation of five million jobs as well as lifting 50 million people out of poverty over the next two years. There has been some talk of floating the currency and privatising the Nigerian National Petroleum Corporation. His stance is set out as pro-business whereas Buhari could be described as wary of (but not hostile to) business. Beyond the negative campaigning and finger-pointing there are differences in nuance between the two candidates although the greater issue for both is the challenge of delivering change. Vested interests have become highly entrenched over the past four decades, and the civil service demoralised. Reformers appoint closely-knit groups of like-minded technocrats around them yet delivery requires the cooperation and hard work of government employees at lower levels of the bureaucracy. The health of the president cannot be ignored in any commentary on the elections, given that Buhari spent a good part of 2017 in the UK on medical leave. However, it is hard to believe that his campaign would be taking place if his health had not at least stabilised. We are not political commentators, and have no party affiliations. The contest of north/south west vs north/south east promises to be closer than in 2015, when Buhari secured 54.0% of valid votes cast to Goodluck Jonathan’s 45.0%. Buhari’s victory was built upon the alliance between the north (Congress for Progressive Change) and the south west (Action Congress of Nigeria, ACN) to form the APC. A similar regional understanding fell apart in 2011, giving victory to Jonathan with 57% of the national vote. Buhari’s victory in 2015 was the first defeat of the incumbent in Nigerian history, and widely praised as such. We are not convinced that we will get a repeat in February. The advantages of incumbency are substantial and the first term can be packaged as delivering some change, if not on the scale promised in 2015. Buhari has to secure the votes in the north west on the massive scale he managed four years ago, and hope that the vote in the south west comes out in his favour.

Let battle commence! Two northern heavyweights in the ring Some bold pledges by the challenger The capacity of the system to impede change

A closer contest than in 2015 expected The many benefits of incumbency


24 January 2019 15

On the APC’s record in office, the pace of change has disappointed many Nigerians, which can be explained in large part by a highly centralised system of decision-taking. The federal government (FGN) under the Buhari presidency does not do quick decisions. Nor has it been able to carry the National Assembly, in which the APC had a good majority, with it on its “change” agenda. This institutional flaw has weakened previous administrations. The loyalty of senators and representatives to their bicameral assembly comes before that to the political party on whose platform there were elected. The administration has taken some steps forward although not far enough and not fast enough for many onlookers: in the north east, on the exchange rate, on non-oil revenue collection, on cash call payments by the Nigerian National Petroleum Corporation (NNPC), on the corporation’s finances and in the Niger Delta. On governance, expectations have been high yet progress has been slow. Additionally, the FGN has pursued an expansionary fiscal stance. A consistent theme has been an increase in the share of capital items within total FGN expenditure. Ministers are hopeful that, as Nigerians go to the polls, they will start to see the completion of FGN-funded infrastructure projects in their neighbourhood. We are hoping that the conduct of the elections will match that of 2015, when Jonathan called Buhari to congratulate him even before the final results had been announced by the INEC. The verdict of election observers was highly favourable, and Nigeria’s international reputation benefited in the process. Commentators sometimes like to opine that tightly contested elections in Africa automatically bring violence/instability/macroeconomic slippage. Kenya in 2017 springs to mind in this context, and Ghana too for the slippage. We do see a closer election ahead than in 2015, and we trust that the margin of victory should be large enough to make challenges in the courts and on the streets redundant. This assumes, of course, that INEC’s role follows the job specs, which was the case in 2015. We will breathe a sigh of relief when the election process is completed (including the three-month transition period), and look forward to the return of “normality”.

An uneven reform programme The APC’s election campaign in 2015 concentrated on security in the north east, corruption and growth/employment. The administration has fared reasonably well on the first, run into formidable vested interests on the second and struggled in the face of macro headwinds, some not of its own making such as the oil price, on the third. After the election in 2015, Buhari was quoted as saying that Boko Haram, the insurgent group in the north east (now splintered into two), was “technically defeated” and that Nigeria would work closely in its military response with regional partners. At the peak of the insurgency, Boko Haram controlled territory the size of Belgium. The armed forces could be said to have won the war. Progress in resettling the estimated two million internally displaced people has been limited however, and the most exposed rural areas have been abandoned. Farm output has predictably slumped to near zero. The insurgents still have the capacity to attack the remaining village populations as well as military targets.

A subpar performance by the APC in office

Some positive steps forward, notwithstanding Including fiscal expansion A contested result the worst outcome Three core election pledges made in 2015 by the APC

Insurgents pushed back but not eliminated


24 January 2019 16

On corruption, the Buhari administration has made all the right noises for the electorate and the international community. Its underlying idea has been to plug the very substantial leakages from the annual budget and then deliver its social pledges (“interventions”) such as monthly payments to 25 million low-income Nigerians and large-scale recruitment of teachers. These “savings” are a combination of revenues due to the federation account and not paid, mostly from the oil industry and public agencies, and of expenditure that is wasteful or worse. Recoveries of looted monies and prosecution of high profile Nigerians have been very slow. The FGN’s efforts have been undermined by inertia and bureaucratic delays, notably in the judiciary. The authorities have, however, enjoyed some successes on the fiscal side including: a marked improvement in non-oil revenue collections; tighter control of the NNPC’s operational costs; reductions in the FGN’s generous travel budget; a price checker for the Bureau of Public Procurement; and the removal of ghost workers and pensioners from the payroll. Disappointments include the tax amnesty programme and asset sales. Since governance is weakest in the oil industry, the president appointed himself the minister for petroleum and Emmanuel Ibe Kachikwu as group managing director of the NNPC as well as his minister of state. Kachikwu, a senior employee of an oil major with a legal background, has achieved sizeable savings through contract renegotiations and presided over the unprecedented release of financial and operational information. The change has not been seamless, predictably. Tensions have re-emerged between Kachikwu and the new head of the corporation (who replaced him in a restructuring). The president has declined to side with the member of an elected administration in his differences with a public employee, albeit a senior one. On growth, the FGN has adopted an expansionary fiscal stance and managed to push up capital spending, although the figures have been queried. Its own spending and borrowing can only cover a smallish part of the infrastructure deficit, which requires funding of up to US$3trn over 20 years according to respected industry sources. It has to depend on the private sector and the donor community to help plug the gap because the transformation of tax collection (to fund the capital projects) will take time. Two specific policies in the news are the retail price of premium motor spirit (PMS, known elsewhere as petrol or gasoline) and the petroleum industry bill, which has languished in the assembly for ten years in different formats and under different names. (See The oil sector under pressure for more detail). We make just two related points. The FGN is reluctant to move to full deregulation of the retail price of fuel because of the said impact on inflation, the broader economy and social cohesion. In the presidency there is resistance to the “free market” solution. This stance, which we assume is not shared in the Atiku campaign, overlooks the reality that the main beneficiaries of fuel subsidies, whether they are borne by the FGN or the NNPC, are the middle class. It is unfortunate that the authorities did not move before the upward shift in the oil price in Q4 2017. Turning to the industry bill, more than ten years have been lost while oil producers in the region and beyond have upped their game. If passed, it could open the door for a turnaround in the fortunes of the corporation and the industry. Crude oil production has been falling since the mid-2000s because of underinvestment by both the NNPC and the oil majors. Without a new framework, that trend will continue.

Budget leakages plugged to fund social spending Some successes on the fiscal side And also at the NNPC Help needed to tackle the infrastructure deficit President’s resistance to fuel price deregulation Endless delays over the industry bill


24 January 2019 17

The old bill was a complicated piece of legislation and has been divided into four elements. In July the president declined to sign the element covering governance that the assembly had approved in January. The institutional interests of the assembly, as we have already argued, come before party political considerations. In our view this is the largest challenge for any civilian administration in Nigeria. It would be naive to expect the seamless passage of laws because the coalition has both the presidency and the assembly.

Domestic threats to national security

Security is a major discussion item ahead of the approaching elections. Boko Haram and similar organisations remain a major threat. A report published by the National Bureau of Statistics (NBS) in partnership with the World Bank noted that 49% of households in the north east experienced at least one incidence of violence against one of its members between 2010 and 2017, and that more than two-thirds of them were attributed to Boko Haram. The number increased each year for the period covered across the geopolitical zones surveyed (north east, north central and south south). The military has made some progress under the current administration, having won back control of some areas previously taken captive by Boko Haram. However, attacks by the insurgents, concentrated in the north eastern states, appear to have increased in recent months. They take on the familiar form of arson, suicide bombings and abductions, as well as assaults on soft targets and soldiers. The insurgents have displayed a level of sophistication that indicates they may be beneficiaries of external support. It is also possible that they are collaborating with local criminal interests and unscrupulous politicians. Operations against their activities have seen the confiscation of advanced rocket-propelled weapons, and troops have on several occasions complained about being relatively ill-equipped. There are media reports of a Boko Haram splinter group, the Islamic State West Africa (ISWA), which may be affiliated to IS. The terrorists do not practice conventional public relations and a number of attacks have gone without self-proclaimed perpetrators. A particularly serious incident took place in Rann, a town in Borno State, earlier this month. According to newswires, the extremists invaded the town, setting buildings ablaze and sending soldiers and residents of the town fleeing. A Reuters report citing military and police sources later stated that troops returned and regained control of the town. A similar event occurred at Baga in December that reportedly displaced around 30,000 people. The military released a statement in early January saying it had taken back the town following the launch of a counter attack. In April 2014 Boko Haram abducted more than 200 girls from their school in Chibok, Borno State. A little over 100 of the girls have since been released or managed to escape. However, a similar episode in February 2018 at Dapchi, Yobe State, saw the recovery of most of the girls abducted following negotiations with the FGN and a temporary ceasefire agreement. A worrying trend is that of missing and ambushed soldiers. To give one example, in mid-November insurgents attacked a military base in Metele village, Borno State, reportedly killing around 100 soldiers including the base commander. Troops have staged protests resisting deployment to high-risk regions. They have also decried the poor state of weapons at their disposal, and the leaking of privileged information to the insurgents by insiders.

Institutional vested interests a stumbling block to PIB Boko Haram threat still present

Some progress against the insurgents


24 January 2019 18

President Buhari has pledged to fortify the armed forces with the necessary resources to overcome the insurgency. The authorities are keen on acquiring equipment to this end. The Nigerian Air Force has announced it will be deploying two new fighting helicopters to the north east by the end of Q1 2019, in addition to communication and surveillance gadgets. A new commander was appointed by the army to lead operations against the insurgents in November. Major General Benson Akinroluyo replaced Major General Abba Dikko, and became the fifth appointee to the role in less than two years. Earlier this month, the chief of army staff, Lt. General Tukur Buratai, revealed new operational commanders to spearhead the fight against Boko Haram. The current administration’s analysis is that military action must be accompanied by measures to address unemployment, inequality and illiteracy. A long-term solution would entail resettling large numbers of displaced residents within the affected states as well as deploying a better trained civilian joint task force. There is little any government anywhere can do to thwart all suicide bombings, however. In the Niger Delta relative peace and stability have prevailed as security agencies and the FGN continue to deploy dialogue and negotiation. Crude output including condensates has recovered to +/-2.0mbpd. The FGN has reiterated its commitment to its development agenda for the region via the presidential amnesty programme and its more recent New Vision for the Niger Delta initiative, implemented in collaboration with the private sector, state governments and traditional rulers. There are unconfirmed reports, however, of a new crop of militants who have threatened to resume the hostilities. A threat of more recent origin is the herder-farmer conflict over access to land and resources in the Middle Belt region, which is regarded as the country’s agricultural hub. This poses an upside risk to inflation through the disruption of domestic food supply chains. A special intervention committee headed by the vice president was set up last year to address the violent disputes, but the clashes still occur occasionally. Concentrated in the central states (also known as the swing states in the context of the presidential elections), this is a challenge to the president’s re-election campaign. Nigerians will be tracking the president’s delivery on his security promises that enabled him unseat the incumbent in 2015. There have been successful operations by the security agencies, who are enjoying technical support from foreign governments. A security partnership has recently been sealed with the Chinese government but details of the memorandum of understanding signed by both countries were withheld. The defence ministry had in 2015 announced an agreement with China that involved gathering and sharing intelligence.

A steady rise in unemployment The latest unemployment/underemployment watch from the NBS shows a sustained rise in the national unemployment rate to 23.1% in Q3 2018 from 22.7% recorded in the previous quarter and 18.8% in Q3 2017. It was the fifteenth successive quarter of acceleration in the unemployment rate, and this latest figure sums up to 43.1% when we add underemployment. The underemployment rate recorded a marginal decline during the 12-month period to Q3 2018 but remained high at 20.0%.

Armed forces in search of new hardware Five commanders in the north east in two years FGN’s diplomatic stance in the Niger Delta Trouble in the Middle Belt, too Remorseless increase in unemployment


24 January 2019 19

The population of Nigerians of employment age (between the ages of 15 and 64) stood at 115.5 million in Q3 2018. Of this aggregate figure, 90.5 million were in the labour force (of employment age and willing to work), an increase of 6% y/y. Within this labour force, 39.1 million people were either unemployed or underemployed, compared with 38.3 million in Q2 2018 and 34.0 million a year earlier. Unemployment remained more pronounced among the younger population. The unemployment rate for Nigerians within the ages of 15-24 was 36.5% in Q3 2018. For the broader 15-34 age bracket, it was 29.7.

Unemployment rate (%)

Source: National Bureau of Statistics (NBS), FBNQuest Capital Research

Recession and the slow economic recovery have impacted on employment. As a result, Nigeria’s labour market continues to suffer from insufficient job opportunities. Employers will likely wait out the current weak economic growth to make any major hiring decisions. The large working population is correctly viewed as a double-edged sword, with the negative implications getting more of the attention. Commercial agriculture and manufacturing are generally thought to have the highest potential for rapid job creation. A notable reason for the low employment levels is the shortage of critically needed skills and competencies. Nigeria’s youth generally lack quality educational opportunities that can boost their competitiveness on a global scale. In the FGN’s 2019 budget proposals, allocations to the federal education ministry account for just 5.8% of total expenditure, compared with the UNESCO prescribed ratio of 15% for education. Moreover, the proposed outlay for the education ministry comprises 91% recurrent spending and just 9% for capital expenditure. In its maiden Human Capital Index (HCI), the World Bank ranked Nigeria 152 out of 157 countries, principally due to low budgetary allocations to the education and health sectors. Investing in Nigeria’s human capital will assist with shrinking the unemployment gap, particularly in the formal sector where job openings remain vacant for prolonged periods as a result of the absence of skilled labour. Although there is still much ground to be covered, the authorities have made notable strides in improving the business environment for employers. The latest Doing Business

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Impact of recession on employment still visible Nigeria 152 out of 157 on World Bank’s HCI


24 January 2019 20

report from the World Bank Group records that Nigeria slipped one place to rank 146th after moving up 24 places the previous year. However, significant improvement was recorded for indicators including start-up procedures and tax payment processes. These are attributable to the presidential enabling business environment council, which implements critical reforms in line with the FGN’s national action plan. Intervention programmes for small firms play a core role in the FGN’s job creation mandate. Official data show that micro, small and medium scale enterprises (MSMEs) provide over 60 million jobs and account for almost 50% of GDP. Unlike larger corporates, they are considered high risk by banks, and are typically unable to access skills and substantial credit to facilitate their expansion. In 2017 credit lines above N1bn, although granted to 0.5% of all borrowers, accounted for 83% of total loan disbursements. These issues are being addressed with government-led skills enhancement clinics and credit extension programmes. Another vehicle being employed is the Development Bank of Nigeria (DBN), which has capital of US$1.3bn and several DFIs among its shareholders. Its core remit is to finance the development of MSMEs. To increase its visibility, the DBN has invested in publicity campaigns and joined a global network known as the SME Finance Forum. A subsidiary, seen commencing operations this year with initial funding of US$35m, will issue partial credit guarantees to its participating lenders. Policymakers worldwide list youth entrepreneurship and development as solutions to unemployment. The Buhari administration has launched some schemes. Through the government enterprise and empowerment programme, the Bank of Industry is giving enterprising youths a headstart with seed funding. Another scheme is N-Power, a mass training project for Nigerians aged 18 to 35 years. Participants include graduates and non-graduates who are able to choose one of eight specialisations.

Net gains in the ease of doing business Focus on job creation by MSMEs Another state development bank into the fray


24 January 2019 21

Drivers of the economy

The oil sector under pressure A snapshot of the oil sector shows a number of powerful challenges. In production terms, it has recovered from a low in mid-2016, caused by widespread sabotage of pipelines and other oil infrastructure in the Niger Delta. The production losses (leakages) were without parallel (outside war zones such as Iraq and Libya). They were a combination of artisanal theft and larger criminal operations. A local act of “bunkering” can lead to the closure of a main pipeline and the declaration of force majeure. Once the FGN dropped its confrontational stance with the said militants, and moved to a diplomatic stance, it was rewarded with a pick-up in output from the low point of 1.50mbpd to +/- 2.0mbpd. The sabotage has not been eliminated. The FGN has often said that its policy of diversification away from oil requires oil revenues, so it had no choice but to negotiate to restore stability to the Niger Delta. Because the legislation for the industry, the petroleum industry bill (PIB), has been stuck in the assembly, there has been no bidding round for new acreage since 2007 and investment by the oil majors has slowed to a trickle beyond large deep offshore projects like Total’s Egina field, which began commercial production in December.

Central energy indicators

2016 2017 2018E 2019E

Crude oil output (mbpd; incl condensates) 1.82 1.90 1.95 2.07

Bonny Light (average spot; US$/b) 44 54 69 63

Oil and gas exports (US$ bn) 32.0 42.3 56.8 51.4

Total merchandise exports (US$ bn) 34.7 45.8 62.3 58.4

N/US$ (end-period) 305 306 307 310

N/US$ (average) 254 306 306 308

Source: CBN, IMF, Bloomberg, FBNQuest Capital Research estimates Rather, the majors in Nigeria have been sellers of onshore and shallow offshore leases to indigenous production companies. Over several years E&P has fallen off in the absence of a new fiscal framework for the industry, and drilling rigs have been relocated to Angola, Ghana and elsewhere. Kachikwu put production at 2.13mbpd (1.78mbpd crude and 0.35mbpd condensates) in early January. We see output (including condensates) recovering from an estimated 1.95 mbpd last year to 2.07mbpd in 2019. Our projection is well short of the assumption of 2.30 mbpd in the 2018 budget because we are allowing for some (rather than no) sabotage as well as routine maintenance. There is no unified official data source for production but metering in operation at export terminals by several agencies employing different methodologies. This places question marks around the end-product of all official planning and budget activity. There are several different data sources that can produce conflicting data and do not always specify

An unwanted record for oil production losses in 2016 Subsequent decline in leakages (sabotage) Retreat by the oil majors onshore Output at 21.3mbpd according to Kachikwu Huge gaps in the data, however


24 January 2019 22

whether their series includes condensates. For now, our preferred source of production data is the NNPC’s monthly financial and operations reports.

Average crude oil output (mbpd)

Average spot price for Bonny Light (US$/b)

Source: CBN, FBNQuest Capital Research Source: CBN, FBNQuest Capital Research Volatile oil prices in 2018: OPEC+ and President Trump key drivers

Higher oil prices were generally anticipated going into 2018 due to the threat of economic sanctions on Iran, rising global consumption and an ailing Venezuelan economy. Predictably, oil prices steadily rose through the first three quarters of 2018, with Brent peaking at US$85/b in Q3. However, things were very different from that point on, with prices declining by -38% to around US$53/b by the close of the year. The price decline was driven by a range of factors, albeit with a common denominator – US President Donald Trump. He was vocal about lower oil prices, publicly pressuring OPEC and enabling US domestic production growth. Continued support for US production saw the US become the largest crude oil producer globally, surpassing Russia and Saudi Arabia. Drillers took full advantage of higher prices and relatively low costs, especially the shale producers. The US Energy Department reported that America’s crude output hit a record 11.3mbpd in August, pushing past the Russian Ministry of Energy's August production estimate of 11.2mbpd. US production grew by more than 400,000 barrels, or nearly 4%, from July’s output of 10.9mbpd. During the last decade, US net oil imports hit 14mbpd. However, momentarily in December 2018, the country transitioned into a net. With new pipelines from the Permian in the works and at least nine terminals planned that will be capable of loading supertankers, US exports are primed to grow exponentially in the medium term.

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Steady rise in oil prices through 9M 2018


24 January 2019 23

US crude oil output (mbpd)

% change in US production, Oct 2017-2018 (‘000 barrels)

Source: EIA, FBNQuest Capital Research Source: EIA, FBNQuest Capital Research

President Trump also picked issues with China on trade which had a direct fallout on the oil markets. By mid-2018, China had imported around 500kbpd of US oil; this fell to zero following the introduction of tariffs on some Chinese goods into the US.

Weekly China imports of US crude oil shipments (‘000 bpd)

Source: National Bureau of Statistics (NBS); FBNQuest Capital Research In addition to the US-China trade dispute which increased global supply, expected sanctions on Iran which would have cut off the latter’s oil exports did not materialise as anticipated by the industry. The US granted waivers to eight countries, permitting them to continue to import Iranian Oil, blind-siding the Saudis – OPEC’s largest producer. Prior to this, the US President had urged Saudi Arabia to raise its production to compensate for impending lost exports from Iran. All else being equal, we do not believe that the Trump approach of forcing Saudi production upwards in order to maintain lower prices would be very successful this year as we expect the Saudis to approach 2019 differently. This leads us to discuss the impact OPEC+ (OPEC and non-OPEC partners such as Russia) had on oil prices in 2018, especially in Q4. In its last joint meeting in December,

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US oil exports to China fell to zero following trade war


24 January 2019 24

surprisingly, OPEC+ agreed to cut production by around 1.2mbpd effective January 2019 for an initial period of six months. OPEC cited a growing global oil supply-demand imbalance as the reason for the output cut in 2019. OPEC members will cut 800kbpd while Russia-led allies will cut 400kbpd, reducing total output by 4.5% from October levels. Results will be reviewed at a meeting in April 2019. Various supply cuts led by OPEC+ over the last two years have been the key drivers behind the over 85% rise in oil prices to a peak of c.US$85/b during this period. As such, we believe that OPEC+ can have a similar impact this time round since the block accounts for more than 50% of world oil output. We are also optimistic that partners will stick to agreements due to positive results from prior cuts. Improved operating environment for Nigerian operators There was welcomed respite for industry players in 2018 as vandalism of oil & gas facilities was curtailed following various attempts to pacify agitations within the Niger Delta. Indigenous producers, especially those reliant on export facilities in the western section of the region, such as the TransForcados System (TFS), were the biggest beneficiaries. In the prior year, disrupted production severely hurt profits for these local operators.

In 9M 2018, Seplat’s sales grew by 104% y/y to US$568m while posting a PBT of US$213m which compares to a loss before tax of -US$3m in the prior year. Sales growth was primarily driven by a 97% y/y rise in oil sales which was boosted by a 53% y/y rise in average realised prices to US$71.14/barrel and a 56% y/y rise in working interest production to 50,834 barrels of oil equivalent (boepd). Production uptime during Q3 came in at 88% (9M: 80% and in line with company internal estimates) while average reconciliation losses came in at just 7%. Gas revenues also benefitted from improved security conditions, up 48% y/y to US$127m. Seplat proposed an interim dividend of US$0.05 per share which implies a dividend yield of just below 3%. This was in addition to the US$0.05 interim paid for Q2 2018 as management sought to normalise returns to shareholders after the board suspended dividends for the 2016 and 2017 financial years. The firm also took advantage of the significant improvement in global oil prices and production by restructuring its balance sheet. In H1, Seplat successfully refinanced an existing US$300m Revolving Credit Facility (RCF) due December 2018 with a new four year US$300m RCF due June 2022. The RCF carries initial interest of LIBOR +6% payable semi-annually. Additionally, the company also raised US$350m worth of medium-term notes at 9.25%. Proceeds from both transactions were used to pay down the company’s debt and cancel prior indebtedness. Benefits from the bond issuance include the diversification of the firm’s capital base and an improvement of its liquidity position. In H2, Seplat accelerated prepayment of the RCF by c.US$100m due to a much improved liquidity position. With respect to Total, the company finally delivered its landmark ultra-deep offshore project, Egina FPSO, in December 2018. The project provides a great boost for the local content industry with 77% of project man hours executed in Nigeria. Discovered in 2003, the Egina field is located at water depths of between 1,400 and 1,700 meters, 200 kilometers offshore from Port Harcourt.

OPEC+ cuts output by 1.2mbpd in H1 2019


24 January 2019 25

The Egina FPSO is the largest ever built by Total, connected to 44 subsea wells with a daily maximum production of 200,000 barrels of oil per day. This project gives assurance to the local content push and ensures future projects of similar ambitions are executed locally. In May 2018, the Ministry of Petroleum Resources announced the approval of recommendations by the Department of Petroleum Resources to revoke three Oil Mining Leases operated by SPDC. SPDC had submitted an application for the renewal of leases for 17 acreages due to expire in 2019. The acreages were OMLs 11, 17, 20, 21, 22, 23, 25, 27, 28 31, 32, 33, 35, 36, 43, 45 and 46. OMLs 31, 33 and 36 were revoked while the DPR proposed to split OML 11 into 3 portions, with Shell retaining a portion of the previous asset. The other leases were renewed for another 20 years. Interestingly, SPDC has been denied access to OML 11, which is located in Ogoniland, since the mid-90s, following disputes with late Ken Saro-Wiwa, the community leader then. We believe the proposed split is to encourage investments in the asset.

Subsidy continues to stall growth in downstream activity The downstream industry continues to struggle because of regulatory-induced price constraints on gasoline. A steady rise in global crude oil prices has meant that the national oil company, NNPC, remains the sole importer of gasoline. In 2018, landing cost of gasoline hit above N200/litre (with implied subsidies averaging N60/litre sometimes) - well above the N145/litre pump price ceiling for the product. This has completely eliminated local private participation in the product importation. In our view, the government’s inability to adjust prices is due to the short term adverse impact it could have on economic activities, more so in the build up to general elections next month. If re-elected, the government would be in a much stronger position to review gasoline prices. Making the issue a lot worse is the non-settlement of prior subsidies inherited from previous administrations. Although the FG had reached an agreement with oil marketers, the settlement process has stalled. Performance review on the NSE In 2018, oil & gas stocks that we track shed around -13% on average, slightly outperforming the broad index. Besides Seplat which gained +4.7%, all other stocks within the sector declined y/y. Forte Oil shares were down -31.7% following the announcement of plans to sell its Ghana operations, upstream services and power generation businesses. Reasons for the sale were the deleveraging of its balance sheet and lowering financial obligations. Additionally, last month, chairman of Forte Oil, Femi Otedola, announced his decision to divest all (75%) his shares in the firm after reaching an agreement with Prudent Energy. The deal is expected to close in Q1 2019 and is the third major divestment of a key shareholder in a major marketer executed within the last three years. The other two are Ocean and Oil and Mobil Oil divestments in recent years. These divestments are setting an unwelcomed trend for the industry. Continued regulation of gasoline prices continues to put pressure on profits. Keep in mind that profit margins

Total’s 200,000bpd Egina FPSO now on stream


24 January 2019 26

for the downstream sector are traditionally meagre. Shares of Conoil, Oando, Total Nigeria (Total) and 11 Plc all declined by -17.0%, -16.5%, -11.7% and -4.7% respectively.

Oil and gas share performance vs. Index and NSEASI (%)

Listed oil marketers 9M sales growth vs PBT margin

Source: NSE, FBNQuest Capital Research Source: Company financials, FBNQuest Capital Research Topline growth for the listed petroleum marketers in 2018 was relatively weak compared with the prior year. On average, sales growth was around 9% y/y versus 14% y/y in 2017. We had expected a subdued top-line performance for major petroleum marketers due to the absence of fx privileges received in the prior year for the importation of products. 11 Plc’s (11) sales growth of 42% y/y to N125.0bn was the strongest and is largely attributable to a more aggressive business approach. Besides Mobil, Conoil and Total also posted topline y/y improvements of 8% y/y and 3% y/y respectively. For the five names we track, PBT grew by around 20% y/y on average, excluding MRS Oil and Forte Oil which posted losses in 2018 and 2017 respectively. Similar to sales, 11’s PBT growth of 29% y/y to N11.7bn was the strongest. However, the weaker growth on the PBT line was due to a gross margin contraction of -173bps y/y to 10.2% and a 22% y/y rise in opex which partially offset topline improvement. Generally speaking, operating expenses were largely curtailed, up just 4% y/y on average for the group. Net finance charges for Total and Forte advanced during the year. Total posted a net finance charge of –N2.8bn vs. a net finance income in the prior year. On the other hand, Forte’s net finance charges grew by c.14% y/y to –N2.2bn. In 9M 2018, Total’s sales of N226.9bn were flattish y/y. However, Total’s PBT was up 18% y/y to N11.4bn. A gross margin expansion of +343bps y/y to 13.6% was the primary driver for the more significant growth on the PBT line resulting from improved sales of around 7% y/y in lubricants. Management paid an interim dividend of N3.00/share, similar to 2017. Outlook The oil markets have responded positively to the recent agreement by OPEC+ to cut production for the first six months of the year by 1.2mbpd. So far this year, Brent is up 15%. It is increasingly more difficult to accurately predict short term oil prices. The unpredictability of US middle-eastern policy under the current administration is a major reason underpinning our view. Additionally, the push by the US towards energy independence will have several implications for OPEC going forward.

-35.0

-30.0

-25.0

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-15.0

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-5.0

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Seplat 11 TotalNigeria

O&GIndex

Oando Conoil NSEASI

ForteOil

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Mobil Conoil Total Forte MRS

Sales y/y PBT margin

Weak topline growth for petroleum marketers in 2018


24 January 2019 27

Last year, a bi-partisan bill was introduced in the US Senate known as the No Oil Producing and Exporting Cartels Act (NOPEC Act). The proposed legislation could pave the way for suing OPEC and its national oil companies in US courts for market manipulation. This bill is making a reappearance after falling short at various times under the previous two administrations. Nonetheless, we believe the bill could receive the required support from the legislature (given the bi-partisan support) and assent from President Trump due to his open condemnation of OPEC. We however do not expect this bill to be top priority in US politics during the first half of the year. A successful passage could significantly alter the way oil markets function going forward as several OPEC member nations will most likely abandon the organisation. In the short term, we fully expect OPEC+ cuts to effectively neutralise the impact of growing US domestic production. Domestically, discussions on reforming the oil sector are likely to resume well beyond the upcoming general elections, perhaps in Q3. The pace at which this moves depends largely on the relationship between the Executive and the National Assembly. Very little progress has been achieved over the past four years as a result of a frosty relationship between both arms of government. We do not anticipate a resumption of militant activities in the Niger Delta region. Politically, the region has very little skin in the game in the forthcoming elections. As such, we expect the status quo to remain. The primary policy focus of the government is to ensure minimal operational disruptions due to militant activities and vandalism. To this end, the NNPC recently awarded a surveillance contract to Ocean Marine Solutions (OMS) to protect the TFS. The decision was reached after consideration of huge losses on the export route in recent years and OMS’s impressive surveillance record on both the Bonny-Port Harcourt and Warri-Escravos crude evacuation lines. In 2018, over 60 days of production was lost due to incessant breaches on the TFS despite the fact that a security contract was in place. This translates to over 11 million barrels of crude oil (or US$800m in lost revenue). Unlike in previous surveillance contracts, OMS is obligated to protect the lines and bear the cost of repairs if and when there is any breach to the pipeline. This in our view is a superior proposition to the previous arrangement in which the contractor gets paid for surveillance duties only and was totally exempted from repair cost or any form of responsibility in the event of a line break or breach to the pipeline. This new arrangement retains a mandate to ensure host communities participation. We do not have details of the cost implications to the NNPC at this time.

Oil license renewals to provide a short term boost to FG revenues The latest Department of Petroleum Resources (DPR) report reveals that 42 oil block licences will expire this year. The renewals will provide a short term boost to FG revenues. In July last year, newswires reported that the DPR renewed 25 oil block licences, earning around US$1bn. The long term implications for the industry will be positive as asset ownership risks will be sorted out. This would permit a new wave of investments in the nation’s oil & gas industry. In the near term, however, we expect renewal risks to weigh negatively on industry capex because the FG is not obligated to renew ownership of licences. There is no impact on

Fears of NOPEC Act weigh heavily on oil industry outlook


24 January 2019 28

Seplat as the firm announced in Q4 2018 that it had secured consent for the renewal of its core assets OMLs 4, 38 and 41 to a new expiry date of October 21, 2028. The firm paid in full a renewal fee of US$25.9m. We expect gains on domestic gas supply and utilisation to continue this year. In December 2018, SPDC announced that it had reached Final Investment Decision (FID) on the Assa North Gas Development Project. This project is unitised with the Ohaji Field on Seplat JV’s OML 53, referred to as ANOH. At peak production, the project will deliver 300MMscf/d of gas. As part of the FID, SPDC and JV partners will invest in a gas processing plant and distribute through the Obiafu-Obrikom-Oben pipeline network. A portion of SPDC JV gas (43MMscf/d) will be supplied to Geometric Power Aba Limited following the execution of a gas supply agreement in Q4 2018. We believe that SPDC’s progress would fast track FID on the upstream and midstream elements of Seplat-NPDC JV’s portion of the ANOH project could be reached in a few weeks. Significant milestones have already been reached. In Q3 2018, Seplat announced the signing of the Shareholder Agreement and Share Subscription Agreement with the Nigerian Gas Processing and Transportation Company (NGPTC), a wholly owned subsidiary of the NNPC. The deal reduces Seplat’s capital requirements to deliver the project. Under this agreement, the NGPTC will subscribe for 50% of the shares in Assa North and Ohaji South (ANOH) gas development scheme and ANOH Gas Processing Company Limited (AGPC). The signed Shareholder Agreement will govern Seplat’s and NGPTC’s respective interests in the AGPC incorporated joint venture. De-risking export channels remains a top priority for the firm this year. We are confident that the Amukpe-Escravos pipeline will finally be set for commissioning this year. We do not anticipate any significant delays which could push delivery out for another 12 months. With regards to capital raising, we do not see new activity for Seplat in both equity and debt markets unless of course an attractive asset comes on the market. Full deregulation of the downstream sub-sector – were it to occur – will provide a significant boost to investments in retail, distribution and marketing activities. To our minds, the re-election of the present administration provides a more likely scenario of this happening. We believe a new government will be hesitant in its first year to decide in favour of full deregulation given the economic and political implications. In addition to our views on deregulation, we do not anticipate an end to fuel imports in 2019 following setbacks at the Dangote Refinery project. Given the rate of progress at the site we expect first gasoline production in late 2021. In many ways, the federal government had implied a reliance on this project to achieve total import substitution for petroleum products. This therefore is likely to extend Nigeria’s subsidy burden. An attempt by the ministry of petroleum to reduce the nation’s import burden by co-locating refineries on existing refinery sites is yet to yield fruits. One of such arrangements is with the African Refinery Port-Harcourt Limited (ARPHL). ARPHL won the rights to collocate a 100,000bpd brown-field refinery at the NNPC’s Port-Harcourt Refinery. We understand that the planned refinery, which was commissioned in 1962 - owned and operated by British Petroleum in Turkey - remains in good condition. Given that the project has received all necessary regulatory approvals, we suspect that delays may possibly be due to other issues such as funding. Nonetheless, minister of state for petroleum resources, Ibe Kachikwu, expects three private modular refineries to come on stream in 2019.

Seplat renews licenses for core assets OMLs 4, 38 and 41

Full deregulation likely to boost downstream activity


24 January 2019 29

Demand pressures in the non-oil economy

2015 saw the Achilles heel of the Nigerian economy brutally exposed. Having exceeded 4% each year from 2000 through to 2014, GDP growth slowed to just 2.8% and contracted by -1.6% in 2016 before recovering to modest expansion of an estimated 0.8% last year. The trigger, of course, was the slide in the oil price that started in mid-2014 and ran until Q4 2017. Since oil revenues still dominate foreign-exchange inflows and, to a lesser extent, budget revenues, the weak oil price environment brought acute pressures on private consumption, the public finances, official reserves and the exchange rate. The sabotage of oil industry infrastructure compounded the pain. Annual population growth is estimated at 3.1% by the CBN. A new national census was due in 2016 but postponed and is not now expected until 2020 at the earliest. The 2006 exercise has many detractors among policymakers. The healthy GDP growth through to 2014 was fuelled by the non-oil sector. It stemmed from reforms introduced by the second Obasanjo administration (2003-07) and in some sectors such as agriculture by the Jonathan presidency (2011-15), favourable weather conditions, the trickle-down from high oil prices (until June 2014) and low interest rates in developed economies. In addition to the oil price, sources close to the current APC administration would add a drawdown of more than US$20bn from the excess crude account and a sizeable accumulation of arrears due to contractors as factors.

GDP, oil and non-oil growth (% chg y/y)

Source: National Bureau of Statistics (NBS), FBNQuest Capital Research Non-oil growth has averaged a paltry 0.9% y/y in the past eight quarters, albeit on a rising trend. Household budgets have been squeezed hard: the process may have started as long ago as the halving of the fuel subsidy in January 2012 but can be directly linked to the oil price slide, allied to three naira exchange-rate devaluations (in November 2014, February 2015 and June 2016). This reversal of the trickle-down effect has been felt by households while the impact on the three tiers of governments has been uneven capital spending, job cuts and, in many cases, salary and pension arrears. The narrative of the emerging middle class has not been heard for some time.

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Oil Non-oil GDP

A recession, and gradual exit from it Its predictable origin (the weak oil price) Theories about the strong growth pre-2015 Household spending under pressure Job cuts and salary arrears


24 January 2019 30

The response of the administration has been an expansionary fiscal stance. Rather than adopt fiscal austerity as its response to recession, it took the counter-cyclical approach. Its targets for spending have been consistently aggressive. The thinking is that its heavy expenditure on the infrastructure, supported by investors and development partners, is the only way to transform the economy into a production-based model rather than the existing ‘rent-seeking” system. In time, a sharp increase in revenue collection will make a greater contribution to the cost of the overhaul but for now, the argument runs, the FGN has to step up its borrowing within prudent limits. Until its plans are rewarded and/or the oil price stages a sustained marked recovery, consumption will remain under some pressure and growth will be unexciting. We write of consumption trends although there are very few supportive indicators. The series for the national accounts by expenditure only runs to Q4 2017, three quarters behind the data based on production, but we can see the weakness of private consumption expenditure (PCE) since the start of 2015. It also shows marked seasonality, with pronounced declines q/q in the past four years in the first quarter once the holiday season has ended. The starting point among measures of consumption has to be the data series provided by the Nigerian Communications Commission (NCC, the industry regulator). About three times as many Nigerians have access to a mobile phone as to a bank account.

Trends in real GDP (% chg; q/q)

Source: National Bureau of Statistics (NBS); FBNQuest Capital Research There were 500,000 active lines in 2001 when the operating licences for mobile telephone companies were first awarded. The number had reached 172.9 million in December 2018, of which just 140,000 were fixed lines. This success is often cited by reformers as a model for industries such as petroleum refining once the controlling hand of government is removed.

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GDP Private consumption

Aggressive FGN spending targets

Unexciting growth for some time to come Very rapid expansion of mobile telephony


24 January 2019 31

Telecoms and internet access (end-period; million units)

Source: Nigerian Communications Commission (NCC), FBNQuest Capital Research We do not want to give the impression that the industry is not regulated, however. The NCC fined MTN Nigeria, the leading operator, US$5.2bn equivalent in 2015 for failing to meet the requirement for mandatory registration of SIM cards. The fine was later reduced to US$1.1bn, and the company pledged to list shares on the local stock exchange. This has become a mature market for voice products, with teledensity at 91% for a population estimated at 190 million. The operators have therefore intensified their efforts to sell new data services and so boost their average revenue per user (ARPU). Unlike mobile telephony, broadband penetration is low at around 31%. Submarine cables into Nigeria have about 340 gigabytes bandwidth capacity: most are redundant, however, because the necessary infrastructure has not been built to connect with the coastal terminals. We highlight the potential growth from a low base of mobile banking following the CBN circular in Q4 2018 setting out the rules for the new payment service banks. Mobile operators can now apply for licenses so Nigeria is moving from the old model of partnerships between IT companies and banks towards the highly successful Kenyan model. Data from the CBN put the value of mobile money transactions at N1.10trn (US$3.1bn at the NAFEX rate) in 2017, representing 1.0% of annual GDP. Mobile penetration of 100.1% in Q3 2018 in Kenya was a little ahead of Nigeria’s but the experiences diverge significantly once we move beyond vanilla products. Mobile money transactions amounted to KES2.02trn (US$20.1bn, and about 110% of GDP). The largest segment of these transactions was mobile commerce of KES1.50trn. The NCC data give us a rare take on discretionary spending. Additionally, the NBS has launched a useful series on air passenger traffic. We would welcome further measures of private consumption.

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7

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18

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8

Total active lines Active internet (GSM)

Voice products heavily sold, switch to hard sell for data Welcome CBN reform to boost mobile money Kenya the model to follow


24 January 2019 32

FBNQuest Capital manufacturing PMI readings (50 = neutral)

Source: NOI Polls, FBNQuest Capital Research Into this near-void we launched a manufacturing PMI (purchasing managers’ index), Nigeria’s first, in April 2013. The range of respondents is a representative snapshot of manufacturing companies by size. Our index has gradually matured and has now passed its five-year mark. It has developed into a useful addition to the limited supply of forward economic indicators. We have had 12 negative headline readings (i.e. below 50, and indicating that the manufacturing sector is in contraction) since our launch, the most recent in July 2018. The index has since delivered healthy positive readings. The sub-indices for output and new orders have driven the improvement whereas respondents remain wary of adding to their payroll numbers. This does not sit perfectly with anecdotal evidence of squeezed household consumption. We caution that our index is not seasonally adjusted, and that the monthly report for January generally brings a reverse in the index. It may be significant that our index covers all sizes of company, in contrast to the large listed companies (which are the main source of the anecdote). Following the rebasing of the national accounts in Q2 2014 by the NBS, which was produced with input from multilateral institutions, nominal GDP was revised upwards to the naira equivalent of US$457bn in 2012 and US$509bn in 2013. The increase from the figure for 2013 in the old series (base year 1990) was 89%. The exercise made Nigeria comfortably the largest economy in Africa and raised its profile considerably in the international financial media. It remains the largest because South Africa has had its own recession and currency weakness. The main benefit of this data revision in our view is the accurate snapshot of the size and diversity of the economy. Potential investors now have a far better view of the economy, in which the services sector has become the leading component with a 53% share in 2017, and many will be drawn by its overall size (then the 26th largest in the world). The oil economy represents just 9% of GDP, although indirect linkages push the share up to 40%-50%.

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Headline Output Workforce New orders Delivery times Stocks of purchases

FBNQuest to the rescue with own PMI Readings now comfortably in positive territory Finally, new(ish) national accounts With an accurate snapshot of the economy


24 January 2019 33

The sleeping giant of the economy Stability of government policy for the sector Soaring domestic consumption of rice Sizeable disbursements under the CBN’s ABP

A few good strides forward in agriculture

Nigeria’s agriculture sector is hugely untapped. Its potential to serve as an alternative revenue source and job generator for the country has not been realised. It accounts for over 20% of total GDP. However, despite the FGN’s import substitution strategy and related incentives, agriculture has grown at a subpar level. Over the past eight quarters, the sector grew by an average of 3.0% y/y. In Q3 2018 it grew by 1.9% y/y, with crop production accounting for 92% of the sector. It has suffered from heightened unrest in the Middle Belt, the country’s agricultural hub. Agriculture benefits from continuity in government policy. The current administration’s agriculture promotion policy adopts some initiatives of the previous order. The FGN’s target is to double the growth rate of agriculture, relative to overall GDP, through to 2020. For this report we will highlight four agric related products in Nigeria. The first is rice, arguably the most consumed staple food in the country. Nigeria is both the largest producer in West Africa and the second largest importer globally. Given its importance as a staple food, boosting production has been accorded high priority by the FGN. We understand that production is 5.8 million metric tons per year (mmt/y) while yields have remained at an average of 2.0 tons per hectare, which is about half the average achieved in most Asian countries. Meanwhile, rice consumption has risen to 7.9mmt/y.

Agricultural GDP growth (% chg y/y)

Source: National Bureau of Statistics (NBS), FBNQuest Capital Research The CBN’s anchor borrowers’ programme (ABP), launched in 2015, has been instrumental in the ramp-up of domestic rice production. The ABP is expected to empower over 10 million farmers (rice farmers inclusive). In November 2018 more than 400,000 rice farmers had benefitted from the N160bn funds disbursed under the programme. According to the agriculture and rural development ministry, N294bn was recorded as turnover by rice farmers in the first year of the programme, supported by its initial N40bn loan disbursement. The reduction in lending rates (to 9%) through the ABP has stimulated rice farming, and we expect a further boost from the Bank of Agriculture’s planned loans at 5%.

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24 January 2019 34

Private investment in the segment as well Supply of new rice mills with FGN funding

Alongside tariffs to encourage new production

The King of Morocco and a major fertiliser initiative

During the dry season later this year, an additional 120,000 farmers situated in Kano State are set to receive a loan package of N220,000 each from the ABP. This would also include farming inputs. We suspect the bulk of the beneficiaries will be rice farmers. In order to drive efficiency in input distribution and administration, the CBN is currently building a national database for smallholder farmers under the scheme. Although annual paddy rice production has risen to 17mmt/y from 5mmt over the past three years, there is still a scarcity of paddy rice, resulting in price increases. On a brighter note, Olam, a global agribusiness firm, is developing a 10,000 ha paddy farm in Nasarawa State, which is expected to yield 10mt of paddy rice per ha in two annual crop cycles. This should translate into an additional 200,000mt per annum. To attain self-sufficiency in rice, the FGN is in the process of securing 200 rice mills, which it will supply at a discount. These mills could each handle between 10 and 100 mt per day, and are due to be distributed to clusters of farmers across the country. In Q2 2018, the FGN approved the sum of N11bn for the construction of ten new rice mills across ten states. Based on official reports, there are currently 21 functional rice mills across the country, compared to just one in 2009. Lagos State government officials have disclosed that rice production will begin at the Imota mill in Ikorodu by February 2019. The production capacity is estimated at 32mt/hour. Initial projections indicate that it will facilitate the cultivation of about 32,000 ha. In terms of import controls, existing millers as well as new investors are required to have a verifiable domestic rice production plan. Both groups can import brown or finished rice at a 10% tariff and a 20% levy. However, rice traders are required to pay a higher levy of 60% but the same tariff. A second area (after rice) to highlight is fertiliser and other inputs. Similar to many developing countries, Nigeria has a huge market potential due to the need for food self-sufficiency. In the recent past, most of Nigeria’s stock of blended nitrogen, phosphorous and potassium (NPK) fertiliser was imported as a fully-finished product even though urea and limestone, which constitute roughly two-thirds of the component of each bag, are available locally. However, a presidential fertiliser initiative was launched in 2017 on the back of a visit by the King of Morocco. Geared towards a partnership between Fertiliser Producers and Suppliers of Nigeria and the OCP group, a state-owned Moroccan company and a world leader in phosphate and its derivatives, the initiative has resulted in positive steps towards boosting fertiliser production. Based on this partnership, the FGN expects to achieve additional local production of 1mmt/y of blended NPK fertiliser for wet season farming, and an additional 500,000mt for dry season farming. The Nigeria Sovereign Investment Authority (NSIA), which is spearheading investment within the initiative, revealed that 2.2mmt of fertiliser are now produced locally, compared with just 500,000mt three years ago. Furthermore, the initiative has led to the revival of 14 fertiliser blending plants and plans to resuscitate a further nine. The estimated annual fx saving from the revival of these plants is US$200m.


24 January 2019 35

New plants in the private sector A welcome rise in domestic fish production Opportunities for commercial fishing Too many rotting tomatoes

Last year the FGN placed a ban on the importation of all blends of NPK fertiliser. According to the trade association for the industry, this should result in an annual saving of US$500m. In the private sector, Notore recently installed a 2,000mt per day capacity NPK blending plant. It is also in the process of constructing another plant, which is expected to add 1.5mmt to its current production level. The company has tapped additional funding by listing on the stock exchange. The Indorama fertiliser plant, inaugurated in 2017 with a daily production capacity of 4,000mt of nitrogenous fertilisers, supplied 500,000mt of fertiliser to farmers across Nigeria in 2018. According to the company’s records, this supply catered to 53,000 farmers. In the same period, about 600,000mt of fertiliser was exported, which is expected to triple by end-December 2019. The third area to underline is fisheries, an integral part of Nigeria’s agriculture sector. Annual fish demand is estimated at 3.3mmt while domestic fish supply has risen to 1.2mmt on the back of increased government intervention. Based on the national accounts for Q3 2018, fisheries grew by 0.8% y/y, compared with a contraction of -1.3% recorded in the previous quarter. Fisheries accounted for just 1.5% of total agricultural GDP in Q3. Data from the CBN show that artisanal fish production accounted for around 77% of the 1.06mmt produced in 2017. The 7% share of industrial (trawling) fish farming indicates that the commercial segment is still largely untapped. The harsh business environment has slowed fishing activity; the cost of trawling has more than doubled over the past few years due to high operational costs. The high cost of fish feed has also been cited as a core reason for low aquaculture yields. We gather that fish feed accounts for c.75% of the total cost of production. Perhaps the reforms within the fertilizer industry will assist with driving fish feed prices downwards as most farmers attribute the high cost of fish feed to fertilizer costs. Fisheries would benefit from financial intervention schemes. The CBN has set up a few of them to support the sector and compensate for the poor supply from the banks but these have had a modest impact on the segment. The fourth area is horticulture. Tomatoes and tomato paste are core elements of the Nigerian diet. According to the sectoral roadmap, however, local tomato production only meets 36% of domestic demand. As much as US$400m is spent annually on paste imports. Lack of market access, poor handling practices and importation of tomato pastes are a few of the challenges affecting domestic producers. Kano State is one of the largest tomato growing areas in the country and the state government is currently investing in tomato farming. It recently provided 10,000 packages of improved tomato seeds and 10,000 cartons of insecticides to farmers, and is set to host the first national tomato stakeholders summit later this month. Katsina State has also boosted local tomato production primarily by the dredging of irrigation dams.


24 January 2019 36

Imported competition staged a comeback in 2018

Palm oil sector in focus Sales for the palm oil stocks we cover were flattish y/y on average in 9M 2018. Both Okomu Oil (Okomu) and Presco posted declines in two of the three quarters. In the prior year, both had benefitted from favourable central bank fx policies which excluded importers from the official fx market. As a reminder, this move by the CBN forced the average price for finished palm oil upwards by around 20%. Combined, Okomu and Presco account for less than 15% of local consumption. In 2018, the spread between the official fx market and parallel market narrowed, eliminating price gains in the prior year. Okomu’s 9M 2018 PBT of N8.7bn came in much better than expected, driven by a gross margin expansion of +114bps y/y to 86.2%. Management stated that production costs for both palm oil and rubber declined considerably during the period. We attribute this to improved energy efficiencies at the production plants following a recent site visit we made to the firm’s plantations. For Okomu, sales growth was subdued, mainly because of relatively lower rubber sales which were down -8% to N2.0bn in 9M 2018. Rubber exports were constrained due to on-going road works around Nigeria’s busiest export terminal in Apapa, Lagos. Palm oil sales were relatively flattish during the year, confirming that imported competition had made a comeback. Presco’s 9M sales declined by -4.1% y/y to N16.2bn while earnings came in flattish y/y. Similar to Okomu, a gross margin expansion of +495bps y/y to 75.7% more than offset a less-than-impressive topline performance and a double-digit growth in opex. Outlook The federal government continues to encourage agro-focused investments in Nigeria. We do not expect this to change whatever the outcome of the upcoming elections. The Buhari-led administration continued many of the programs started during the prior Jonathan government. This is primarily because of the potential the industry holds for both food security and employment. Therefore, we expect expansion projects for both Okomu and Presco will continue into 2019 and beyond.

Okomu Oil quarterly sales; Y/y sales growth and margin trends

Presco quarterly sales; Y/y sales growth and margin trends

Source: Company data, FBNQuest Capital Research Source: Company data, FBNQuest Capital Research

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Q3

2017

Q4 2

017

Q1

2018

Q2

2018

Q3

2018

Sales (N'bn) Sales growthGross margin PBT margin

-25%

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25%

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75%

100%

0

1

2

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4

5

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7

8

Q1

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017

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24 January 2019 37

We estimate an EPS growth of 9% y/y to N10.0 for Okomu in 2019E Chronic shortages of power for homes and industry

The unbundling of the state-owned PHCN

Many challenges for the new owners

Okomu currently operates a 14,000ha oil palm and 8,000ha rubber plantation. Going by management guidance, another 4,000ha of oil palm trees are to be planted this year while 1,500ha of Rubber trees are due for planting by 2020. We expect work on Extension II (new project), an 11,000ha plantation, to progress as planned. Extension II is set to double Okomu’s production by 2025 when fully developed. 8,700 hectares have been planted over the last three years, with the balance retained for the oil milling facility, staff accommodation and forest reserves. To provide some context, it takes 30 months between planting and the first harvest of oil palm fresh fruit bunches (FFB), usually between 7-8 tonnes/hectare. In the following year, production doubles and rises steadily by 1 tonne/hectare, finally peaking at around 22 tonnes/hectare. Oil palm trees typically produce at peak levels for 8 years followed by a steady decline. Management mentioned that it has approximately 160 plants per hectare on Extension II. The older plantation has fewer trees per hectare. From an earnings perspective, we estimate an EPS growth of 9% y/y to N10.0 for Okomu in 2019E. Our forecast is primarily driven by improved sales. We expect rubber exports to recover this year as construction work on the Apapa Port road is near completion. Additionally, our view is driven by an improved FFB production outlook and potentially higher yields as recently planted acreages enter maturity. We estimate CPO volume sales growth of 11% y/y to 45,700 tonnes and an oil extraction rate of 22%. We forecast flattish y/y EPS growth for Presco.

Power sector in need of rescue

Given its direct correlation to the country’s much-awaited industrial take-off, the power sector should remain firmly positioned by the FGN on the front burner. Industry sources suggest that 55% of Nigerians lack access to electricity, and that businesses suffer an average monthly power outage of 239 hours. The FGN currently estimates national energy demand at c.22,000 megawatts (MW). Meanwhile, power generation capacity from the grid stands at c.7,000MW while distribution capacity is still c.5,000MW. The cost of self-generation weighs heavily on operational costs for businesses and is consistently eroding household pockets. According to the Rural Electrification Agency, N5trn is expended yearly on importing, fuelling and maintaining generators by businesses across the country. Nigeria depends heavily on gas for its energy requirements. As a result of frequent gas shortages, power supply across the country is often epileptic. As at end-December 2018, the sector recorded losses worth N519bn due to insufficient gas supply amid dilapidated distribution and transmission infrastructure. The FGN unbundled the state-owned Power Holding Company of Nigeria (PHCN) with the objective of creating a more nimble and efficient power sector. The sale of generation companies (GENCOs) and distribution companies (DISCOs) to the private sector was hurriedly concluded in November 2013. It did not provide sufficient time for potential investors to carry out due diligence on the target assets as well as a realistic valuation. Aside from infrastructural issues, the sector suffers from poor liquidity across its value chain. This is partly linked to non-reflective cost tariffs as well as commercial losses aggravated by consumers’ apathy to payment, arising from estimated billing and poor quality of power supply in most areas. The DISCOs struggle to collect revenue from


24 January 2019 38

Tariff structure in need of major revision A CBN scheme to settle the arrears of DISCOs Funds too for the NBET FGN looking seriously at renewables

consumers due to metering and other issues, which affects their payments to GENCOs and results in a cash flow squeeze. According to the Nigerian Electricity Regulatory Commission (NERC), 3.7 million customers had been metered as at Q3 2018, representing only 45% of registered customers. Furthermore, the tariff structure needs to be revised to reflect current realities such as fx depreciation and inflation. The capital of most GENCOs and DISCOs is inadequate. Investors will need to inject more capital to lessen the debt burden they currently carry. Most importantly, much of the debt incurred by the new entrants to the industry needs to be redenominated in local currency, ideally at single-digit interest rates and for a tenor of no less than 10 years. Poor remittances from the DISCOs have made the state-owned Transmission Company of Nigeria (TCN) the most vulnerable arm of the power value chain. The expansion of the transmission network has been made possible by multilateral grants and loans. We understand that the overall funding gap in the sector now exceeds N300bn. It is estimated that the funding shortfall across the value chain increases by up to N40bn per month. The FGN, through its ministries, departments and agencies (MDAs), has responded to funding challenges in several ways. These include the CBN’s N213bn intervention fund set up in 2015 to aid settlement of the DISCOs’ outstanding payments to the industry, and now successfully disbursed. However, the sector is still in dire need of funding to catch up with capital expenditure requirements. The indebtedness of the DISCOs to service providers has been accumulating since the commencement of the Transitional Electricity Market in January 2015. The total billing to electricity consumers by the 11 DISCOs was N174bn in Q2 2018, of which just N112bn was the aggregate collection. We gather that the Nigerian Bulk Electricity Trading company (NBET) received payment of US$417.5m in August 2018 via the NSIA from the FGN, which had provided the funds to cushion the impact of sovereign risk as well as facilitate the prompt payment for power supplied by the GENCOs and independent power producers to the national grid. This should assist with boosting liquidity but will not close the gap. The FGN has recommenced the divestment of sector assets, starting with Afam Power and Yola Electricity Distribution Company. There are 19 prospective investors currently conducting due diligence on the two companies. The Bureau of Public Enterprises hopes to realise N400bn from their sale. The FGN’s timeline for the financial closure on the transactions is Q1 2019. There is growing interest around off-grid solutions. The FGN now has a target of generating 30% of its total energy from renewables by 2030. Grid expansion can be difficult, especially in rural areas due to non-commercial viability as well as high technical losses. This creates vast opportunities for off-grid renewable alternatives. Furthermore, the NNPC is considering powering its retail outlets with solar and the FGN is seeking investors for about ten large biofuel complexes across the country. Hydroelectricity is also attracting increased attention. Power generation from the three


24 January 2019 39

High single-digit earnings growth likely for banks for FY2018 Strong start to 2018, surprisingly

hydropower generation units (Kainji, Jebba and Shiroro) now accounts for c.23% of daily power generation. A better energy mix of non-renewable and green energy will accelerate the process of attaining power for all. We have estimated that if “full power” is attained and made routinely available to businesses and households, it could add up to two percentage points to annual GDP growth..

Banks sector: slightly improved outlook for loan growth in 2019 Despite the limited scope for risk asset creation in 2018, we expect Nigerian banks to report high single-digit earnings growth when they publish their full year results a few weeks from now. Much of the growth is underpinned by significant reductions in loan loss provisions and, to a lesser extent, y/y growth in non-interest income. Although we see an uptick in cost of risk in 2019E, as banks will have to recognise full impairments on their P&Ls in compliance with IFRS 9, we forecast only a -100bp average reduction in banks ROAEs for two main reasons, namely a) we expect banks to benefit from higher market interest rates - they have risen by around 200bps since H1 2018 and b) a return to loan growth which we forecast at high single digits in 2019E compared with low single digits in 2018E. Although we expect 2019E GDP growth to be below 3%, barring a significant drop in oil prices, we see NPL ratios being maintained at the mid-single-digit level. From an earnings standpoint, we expect the tier 1 banks to deliver much stronger performance than their tier 2 counterparts because of scale advantages.

H1 2018 results recap

Contrary to our expectation of subdued earnings growth at the start of 2018, our universe of banks delivered relatively strong earnings growth in H1 2018. On average, the banks delivered PBT growth of 17% y/y for H1 2018 and beat our forecast by 5%. Apart from Diamond and Access which posted y/y declines in PBT and UBA whose H1 2018 PBT was flattish y/y, all the banks that we track showed y/y PBT growth. The principal driver of earnings growth was substantial reductions in loan loss provisions because the CBN allowed banks to take a one-off impairment charge to equity in order to comply with IFRS 9. For banks under our coverage, the average cost-of-risk improved (reduced) by c.184bps to 0.9% in H1 2018. The exception was Diamond Bank whose cost of risk increased by 90bps y/y to 4.7% because of asset quality issues.

Y/y growth in H1 2018 revenue and earnings

Profit before provisions PBT PAT

Access -9.6% -11.9% -23.0%

Diamond -8.9% -69.3% -83%

Fidelity 5.1% 27.3% -23%

FCMB 14% 85.8% 48%

GT Bank 2.9% 8.4% 12.1%

Stanbic IBTC 15.6% 73.9% 76.3%

UBA 4.1% 1.1% -40.6%

Zenith -3.8% 16.5% 17.7%

Source: Company data, FBNQuest Capital Research estimates

Excluding the (positive effect from) lower loan loss provisions y/y, underlying revenue growth was more subdued. Pre-provision profits for the banks that we cover showed


24 January 2019 40

Weak loan growth & low yields behind underperformance of funding income Ex-Diamond, PBT growth for tier 2 banks outperformed tier 1

Only Zenith and GT Bank showed meaningful PBT growth amongst tier 1 banks

modest growth of 2% y/y on average, much lower than the average PBT growth of 17% y/y. Although the drivers of pre-provision profit growth were mixed, non-interest income which grew by an average of 6% y/y was a major contributor. During the period, banks capitalised on improved fx liquidity to boost their trading income. In contrast, funding income growth for H1 2018 averaged 2% y/y.

H1 2018 P&L snapshot

Funding

inc. (y/y)

Non- interest inc.

(y/y) Pre-provision profit (N m)

Pre-provision profit (y/y)

Loan lossprovisions (N m)

PBT (N m) PBT (y/y)

Impairment charge to equity H1 2018 (N m)

Impairment charge to equity

as % of PBT

Access 2.7% -21.7% 151,416 -9.6% -7,340 45,843 -11.9% -78,606 171.5%

Diamond -14.1% 6.7% 65,563 -8.9% -18,392 2,920 -69.3% -2,477 84.8%

Fidelity 9.7% -9.1% 48,264 5.1% -2,593 13,012 27.3% -24,478 188.1%

FCMB 8.5% 28.2% 51,806 14.1% -7,333 7,105 85.8% -15,239 214.5%

GT Bank -9.0% 35.8% 181,235 2.9% -2,032 109,633 8.4% -151,848 138.5%

Stanbic -2.1% 33.6% 93,997 15.6% 5,508 50,730 73.9% -10,224 20.2%

UBA 9.6% -5.0% 168,452 4.1% -6,732 58,140 1.1% -48,644 83.7%

Zenith 10.8% -20.9% 247,492 -3.8% -9,720 107,358 16.5% -108,169 100.8%


Although Nigeria exited the recession in Q2 2017, economic growth remained fragile after, with GDP growth averaging just 1.75% during H1 2018. As such, weak loan growth and low yields on government securities were the major drivers behind the lacklustre performance of funding income. Specifically, average loan growth for our banks coverage was -4.3% y/y in H1 2018, while FGN bond yields fell by around 300bps on average.

From an earnings growth perspective, PBT growth for the tier 2 banks outperformed that of their tier 1 counterparts. Excluding Diamond Bank, H1 2018 PBT growth for our tier 2 bank stocks ranged from 27% to 86%. Stanbic IBTC delivered stellar PBT growth of 74% y/y on the back of solid non-interest income growth of 34% y/y and net recoveries of c.N5.5bn. Stanbic’s PBT also surprised positively (+11%) relative to our forecast. Although FCMB’s PBT grew by 86% y/y on the back of a 27% y/y reduction in loan loss provisions and a 28% y/y increase in non-interest income, it missed our forecast by 16%.

As for Diamond, its H1 2018 PBT fell by 69% y/y. Although its pre-provision profit declined by 9% y/y, driven largely by a 14% y/y decrease in funding income, unlike its contemporaries Diamond did not see a significant reduction in its loan loss provisions. Its loan loss provisions decreased by only -3% y/y compared with reductions of -46% y/y and -27% y/y for Fidelity and FCMB respectively. Its high proportion of delinquent loans (NPL ratio of 12.6% H1 2018) mostly originated from the power and energy sectors. Even with the level of provisions in H1, the feedback from its joint conference call with Access Bank on its proposed merger indicated that that bank will have to take additional impairments of between N150bn-N180bn for the deal to sail through.

For the tier 1 banks, only Zenith and GT Bank produced meaningful PBT growth of 17% y/y and 8% y/y respectively. A common denominator for both banks was that their loan loss provisions declined by 77% y/y and 72% y/y respectively. Compared with our forecasts, PBT for both banks were broadly in line. In contrast, Access Bank’s H1 2018 results diverged markedly from those of its two larger rivals. Access’ PBT declined by 12% y/y primarily because of a 22% y/y decline in non-interest income which offset the


24 January 2019 41

declines of 29% y/y and 7% y/y in provisions and opex respectively. The weakness in the bank’s non-interest income was linked to a slow-down in income from swaps and other derivatives. Q3 2018 results recap

Q3 2018 results showed that PBT growth for our banks coverage (ex-Diamond) remained healthy at around 31% y/y (vs. 41% y/y Q2 2018). Similar to the drivers of H1 2018 results, the factors that underpinned the Q3 earnings were essentially the same: lower impairments and strong non-interest income growth. Notably, in addition to net recoveries of N295m, GT Bank’s pre-provision profits grew 19% y/y, due to stellar growth in non-interest income arising from fx revaluation gains of N25.7bn (vs. 11.7bn Q3 2017). Although a 43% y/y rise in opex offset some of the gains, its PBT still grew by 12% y/y. FCMB’s Q3 2018 PBT growth of 154% y/y was the most impressive, thanks to a 183% y/y growth in non-interest income, on the back of fx revaluation gains of N9.0bn in Q3 2018 vs. N428m Q3 2017. Zenith Bank’s Q3 2018 PBT was flat y/y. However, its PAT grew strongly by 21% y/y to N68.1bn, thanks to a tax credit of N2.5bn and a positive result of N5.8bn in other comprehensive income (OCI) vs. N2.3bn in Q3 2017.

Q3/9M 2018 y/y PBT growth

Q3 2018 9M 2018

Access 17.1% -3.6%

Diamond n/a -35.5%

Fidelity 17.1% 23.6%

FCMB 154.0% 115.9%

GT Bank 11.6% 9.5%

Stanbic IBTC 19.2% 54.2%

UBA 0.9% 1.0%

Zenith -0.7% 9.7%


Outlook

Despite the y/y reduction in book values for most banks under our coverage, we expect them to report an average ROAE of 16.9% for 2018E, a y/y decline of c.-100bps. Ex-Diamond, the reduction is greater: -160bps y/y to 19.1%. The ROAE decline is reflective of bloated equity from fx related gains of prior years and a deceleration in earnings growth relative to 2017 levels. Moving into 2019E, we forecast a similar (c.-100bps) ROAE decline to around 16.0%. If we exclude Diamond Bank, our 2019E ROAE forecast of 17.9% is down by around 118bps.

Q3 PBT grew healthily by 31% on average (ex-Diamond) Banks to report 2019E avg. ROAE of 16.9%, down c.-100bp


24 January 2019 42

Low single-digit credit growth y/y driven by fragile economic recovery Banks to continue adopting a cautious stance on loan growth

FBNQuest Capital banks universe average ROAE trend


For the most part, opportunities for lending have been few and skewed towards maintenance capex rather than expansion capex. Suffice it to say that lending opportunities for the banks have been largely constrained by the fragile economic recovery. Although Nigeria exited the recession in Q2 2017, real GDP growth averaged only 1.5% over the next six quarters leading to Q3 2018 (vs. 5.8% Q1 2013-Q4 2014). The economy’s relative underperformance can be linked to the severe slowdown of the non-oil economy which has posted an average growth of 1.1% since the return to recovery in Q2 2017, compared with a normalised average of 7.9% - over the eight quarters between 2013 and 2014 - prior to the onset of the economic slowdown. As such, excluding 2016 when loan growth for our coverage grew by 22% y/y driven by increased exposure to the oil and gas sector (and the impact of devaluation), banks’ credit extension has been constrained to low single-digits since 2015, mirroring the trends in the non-oil economy. Based on banks disclosure for 9M 2018, we do not see a divergence from the subdued loan growth trend. As such, we forecast sector loan growth of 3% y/y for 2018E.

Sector loans & GDP y/y growth trends

Source: NBS, CBN, FBNQuest Capital Research estimates

Going forward, we expect Nigeria’s GDP growth to remain under 3% in 2019E. Given the sluggish GDP growth expectations and policy uncertainties arising from the upcoming elections, we expect banks to continue to adopt a cautious stance on loan growth at least up until H1 2019E. At best, we see loan growth coming in below 5% for H1 2019E. Although we expect to see a pick-up in H2 2019 such that average loan growth for the year hits 7%, this forecast is mainly hinged on factors such as our economic growth assumption and the level of oil prices. While our loan growth forecast is an improvement

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GDP Oil Non-oil Loan (Right axis)


24 January 2019 43

We forecast 40bp increase in banks’ average cost of risk

EMTS termination of contract with Etisalat Nigeria was a major scare for asset quality…

over the 3% y/y growth that we forecast for 2018E, it pales in comparison with the normalised growth of +20% y/y that banks delivered before the onset of the recession.

Although market interest rates have risen by c. 200bps since H1 2018, we expect average net interest margins (NIMs) for our universe to remain stable at around 6% due to more expensive funding. On the back of our higher volume growth forecast and stable NIMs, we see funding income growth of 9% y/y on average for our universe. For non-interest income, we forecast a more modest average growth of 2%.

In 2018, loan loss provisions were artificially low because the CBN allowed the banks to pass substantial impairments through equity as a one-time charge. Going forward, banks will have to recognise their entire loan loss provisions on the P&L in compliance with IFRS 9. Consequently, we forecast a 40bp increase in banks’ average cost of risk to 1.6%.

With respect to asset quality, banks have generally maintained their NPL ratios in the mid-single digit range since 2017. However, the exception was Diamond Bank with an NPL ratio of 12.6% as at Q3 2018 due to specific challenges related to loans in the oil and gas (downstream) and power sectors. Loans for both sectors accounted for c.57% of its NPL portfolio as at Q3 2018.

Non-performing loans (NPL) ratio trend

Capital adequacy ratio (CAR) trend)

Source: Company data, FBNQuest Capital Research estimates Source: Company data, FBNQuest Capital Research estimates

Typically, a sizable portion of new NPL formation come from the oil and gas, general commerce and manufacturing sectors which together account for about 50% of banks’ credit exposure. As expected, the performance of the oil and gas sector is highly correlated to the oil prices. However, the general commerce and manufacturing sectors have an indirect link because proceeds from oil sales contribute about 90% of Nigeria’s fx earnings. These earnings are needed to maintain fx liquidity which are key to both sectors. As such, the relative stability of oil prices (at c.US$70 per barrel) combined with improved fx liquidity helped to curtail deterioration in asset quality for these sectors.

The major scare that emerged from an asset quality standpoint was the termination of EMTS’ (a UAE based investment group) management agreement with Etisalat Nigeria (now 9mobile) in 2017. Although several banks were exposed to 9mobile, concerns were largely overstated at the time. When viewed from a proportion of total loan book, on average, the total exposure accounted for about 2% of the loan book of our universe. At

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Access Diamond FidelityFCMB GT Bank StanbicUBA Zenith


24 January 2019 44

….however the exposure was not large enough to cause systematic NPL crisis

25% haircut and provisions ranging from 34% to 80% for banks Diamond to take additional impairments of around N150-180bn

about N80bn or c.4% of its loan book, Zenith Bank had the highest exposure. FCMB’s exposure of c.N4.5bn (<1% of loan book) was the least (Diamond was not exposed). Consequently, the exposure was not large enough to cause a systemic NPL crisis.

As part of the resolution, affected banks took a 25% haircut on the exposure and booked provisions ranging from c.34% for UBA to c. 80% for Stanbic. Following a sale process aimed at finding new investors for 9mobile, a consortium led by Teleology Holdings Limited emerged as winners with a bid sum of US$500m. Of the US300m paid by Teleology, c.US$250m was paid out to the banks (on a pro-rata basis) as part payment of 9mobile’s loans. Having made substantial provisions previously, for most banks the net exposure (i.e. ex-provisions) is less than 10% of book value. Moving into 2019E, we do not expect to see deterioration in asset quality ratios. As such, we see NPL ratios being maintained at the mid-single-digit levels. However, a major risk to our thesis is the downside risk associated with a significant drop in oil prices (i.e. to <c.US$40 per barrel).

That said, in terms of capital adequacy, our average 2018E CAR forecast for our coverage is 19.3%. As such, most banks, particularly the tier 1 banks have sufficient capital buffers going into 2019E. Regardless of the anticipated uptick to their cost of risk, we expect average CAR for our universe to be flat y/y in 2019E on the back of modest loan growth (+7% y/y) and earnings. Consequently, apart from Access which recently disclosed plans launch a tier 1 capital raise of N75bn, we do not see banks approaching the market to raise new capital, particularly when viewed from the context of depressed valuations.

In view of the modest valuations, dividends have become more attractive for our coverage – the average dividend yield for our universe is currently 9.9%. Access, Fidelity, FCMB, UBA and Zenith show yields of over 10%, and GT, 8.2%. Stanbic is the least attractive (3.2%).

Implications of Access Bank’s merger with Diamond Bank

After weeks of speculation in the local media Access Bank and Diamond Bank finally confirmed that both banks are engaged in merger talks. At an offer price of N3.13, consisting of N1.00 per share in cash and the allotment of two new Access Bank ordinary shares for every seven Diamond Bank ordinary shares held as at December 14 2018, the offer implies a 260% premium for Diamond’s shareholders. Although the full extent of the potential synergies is still being assessed, the management of Access Bank estimates pre-tax cost synergies of c.N30bn per annum over the next three years. From a funding standpoint, Access Bank also stands to benefit from Diamond’s cheaper cost of funds and higher NIMs. To put things in perspective, Diamond’s cost of funds and NIM stood at 4.0% and 5.8% as at September 2018. These compare with 5.6% and 4.9% for Access Bank for both metrics respectively.

With respect to the implications on capital, we understand that Diamond Bank will have to take additional impairments of c.N150-180bn by December 2019. Given that Diamond’s published book value is around N220bn, if we adopt a conservative stance and assume there will be more provisions and write down than is being envisaged, the implication is that there is little or no equity left in Diamond Bank. As such, working out the implied deal multiple becomes a fruitless exercise. If we put close to N200bn through Diamond’s P&L and reduce the equity by the same amount, all else being equal, this implies that the CAR of the combined entity is likely to drop from the 20-21% range we forecast for Access standalone to around 15% immediately, post-merger, say by end-2019. Anything more than N200bn in additional provisions will risk Access breaching its


24 January 2019 45

Too much uncertainty on Diamond’s asset quality position Pre-synergies, Access Bank’s ROAE likely to remain 14-15% bound; post-synergies, 18-19% is possible Strong recovery in sector unit volume in 2018

own 15% minimum CAR limit. As such, we believe that while Access indicates that its planned capital raise (rights issue, tier 2 capital) is not necessary for this transaction to close, it is not surprising that the bank added that the additional capital would give the bank sufficient buffer.

There is very little to be gained from forecasting NPLs/asset quality ratios at this point because there is too much uncertainty around this and it all depends on how the impairments are treated. We suspect that Access will want to inherit a clean book when it takes control of Diamond, meaning the loan book size will be a fraction of what it was as of Q3 2018 (N784bn gross). We would expect the loan book to decline gradually (post write-offs) as Access tries to manage its CAR and focus on executing the acquisition. Swapping maturing loans for tbills is the obvious strategy here.

With respect to earnings, we believe that there is an inverse relationship between the franchise value (deposit base) of Diamond Bank and the length of time it takes to complete the transaction. Although we doubt that Diamond will see significant erosion to its deposit base, some loss is inevitable and will eat into the unquantified revenue synergies that Access is hoping to extract from this merger. If we model just the impact of a reduced loan book because of write downs only (all else being equal), Diamond standalone is likely to remain loss making, albeit modestly, since the worst to hit the P&L should have occurred at the point of the merger. Without any synergies, given the barely profitable cleaned-up Diamond, we do not expect Access Bank’s ROAE to be much different from the 14-15% we forecast for now. Assuming all the pre-tax opex synergies of N30bn are net and realised in one full year (vs the forecast 3 years), that takes the ROAE up to 18-19%. It is therefore conceivable that revenue synergies could push Access Bank’s ROAE above 20% in the medium to longer term. As such, on paper, the deal should be earnings accretive to Access but a lot will depend on how good a job management does with the clean-up of Diamond’s loan book, its ability to protect the deposit base, how quickly the synergies can be realised and how well management manages the market’s expectations.

Cement sector: strong recovery in unit volume growth

From a volume standpoint, Nigerian cement companies performed relatively well in 2018 compared with 2017. We estimate that the sector’s unit volume grew by c.8% y/y to around 16 million metric tonnes (mmt) in 9M 2018 compared with a decline of c.-18% y/y to 14.8mmt over 9M 2017. In terms of quarterly trends, the sector’s recovery kicked-off properly in Q2 2018, with robust growth of c.22% y/y vs flattish y/y growth in Q1 2018. However, the strong momentum in Q2 was not sustained as unit volume growth decelerated in Q3 2018 to single digits. Unit volume growth in Q2 2018 was largely driven by robust demand from the building and construction sector. According to data from the Nigerian Bureau of Statistics (NBS), the construction sector grew strongly, by c. 7.7% in Q2 2018. This compares with growth rates of -1.5% and 0.5% in Q1 2018 and Q3 2018 respectively.


24 January 2019 46

DangCem benefitted more from recovery LPFO almost completely eliminated from fuel mix

Cement consumption in Nigeria and y/y growth

Source: CEMAN, Dangote Cement, FBNQuest Capital Research estimates

Of the two cement companies that we cover, Dangote cement (DangCem) benefitted more from the broad based recovery of unit volumes. Cement despatches for its Nigerian segment grew by c.12% y/y to c.10.8mmt in 9M 2018, outpacing the 8% unit volume growth that we estimate for the sector. Given that unit volume for the Pan-African segment was flat y/y, growth for the Nigerian operation was the major driver behind the Group’s combined unit volume growth of 8% y/y to 17.8mmt. Comparatively, Lafarge Africa’s (Lafarge) Nigerian unit volume growth of 8% y/y tracked sector volume growth. For Lafarge, we estimate group unit volume of 3% y/y for 9M 2018 on the back of the weak performance of its South African operations following challenges with plant reliability.

With respect to energy sufficiency, Nigerian cement firms have almost completely eliminated the utilisation of expensive low-pour fuel-oil (LPFO) from their energy mix. In addition to gas, coal and alternative fuels (AF) form a major portion of their energy needs. As an illustration, DangCem’s fuel mix for Obajana and Ibese, its largest and most functional plants in Nigeria, was 53% gas and 47% coal for the former, and 69% gas and 31% coal for the latter. These compare with 9M 2017 figures of 41% gas, 57% coal and 2% LPFO and 43% gas, 56% coal and 1% LPFO for both plants respectively. For Lafarge, the precise fuel mix proportions for 9M 2018 are not readily available. However, while its Mfamisong (UNICEM) plant runs almost entirely on gas, its Ashaka’s fuel mix is largely dominated by coal which accounts for approximately 90% of total. Likewise its Ewekoro plants run largely on gas and AF. As at H1 2018, management disclosed that the proportion of AF at Ewekoro 1 was approximately 50%. In terms of its combined fuel utilisation for its Nigerian plants, we believe that the proportion of LPFO in Lafarge’s fuel mix was in the low single digits and mainly for the Ashaka plant. .

Unlike prior years, cement prices were relatively stable at around N42,000 (US$127) per tonne during the period. However, we note that in dollar terms Nigerian cement prices still rank amongst the highest in the world.

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Consumption (m tonnes) - Left axis Y/y growth (%)- Right axis


24 January 2019 47

Volume growth the primary driver of y/y sales growth

Cement price trend Feb 2015 – date

Cement prices: Nigeria vs. African peers (US$ per tonne)

Source: Company data, FBNQuest Capital Research Source: Company, FBNQuest Capital Research

Sales and PBT trends

Unlike in the prior year when prices were the primary driver of the y/y sales growth for Nigerian cement manufacturers, in 2018 sales growth was mainly underpinned by unit volume growth, particularly from the Nigerian market. DangCem’s sales growth of 14% y/y broadly tracked the 12% y/y sales growth delivered by its Nigerian operations. Its gross and EBITDA margins also expanded by 107bps y/y and 46bps y/y to 58.0% and 49.2% respectively. Although EBITDA margin for Nigeria was stable at c.65%, the slight y/y expansion in the group’s EBITDA margin was driven by a 140bp y/y improvement in the EBITDA margin of its Pan-African operations to 18.3%. A combination of higher unit volumes in Nigeria, a better fuel mix - particularly the use of own mined coal - and improved pricing in many countries within the Pan-African region were the factors that underpinned the y/y expansion in EBITDA margin. Although opex increased by 19% y/y, it was not enough to offset the positives from sales and gross margin. Consequently, DangCem’s PBT grew by 12% y/y.

Sales, gross margin & PBT margin

Dangote Cement

Sales, gross margin & PBT margin

Lafarge Africa

Source: Company data, FBNQuest Capital Research Source: Company, FBNQuest Capital Research

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24 January 2019 48

Lafarge raising N89.2bn via rights to deleverage balance sheet

For Lafarge, 9M 2018 sales grew by 5% y/y, outpacing the low single-digit unit volume growth that we estimate for the group. Sales growth was muted by the weak performance of the South African business. However, its earnings were weighed down by a 21% y/y rise in interest expense and one-off costs (related to SAP software implementation and restructurings). Consequently, Lafarge reported a pre-tax loss of –N14.4bn for 9M 2018.

Lafarge Africa’s N89.2bn rights issue

In December 2018, Lafarge Africa made an offer to shareholders to raise c. N89.2bn by way of a rights issue. According to the announcement, the rights are being priced at N12 per share or a discount of c.10.5% to the N13.4 closing price of the shares as at December 3, 2018, a day before the announcement was made. Following the announcement, the shares have sold-off by around 7% and are now trading just slightly above the proposed offer price of the rights issue.

Assuming the shares are fully subscribed, we expect Lafarge’s share count to increase by c.86% to 16.1 billion. According to management’s statements, about N60bn of the issue proceeds will be used to deleverage the balance sheet – essentially the repayment of short term naira denominated debt - while the balance will be used to fund its working capital requirements. The rights issue is a major plank of Lafarge’s turnaround strategy which includes a) growing its market share – via a its new route-to-market strategy, b) improvement of its logistics, c) enhancing production efficiencies, d) cost optimisation and reduction of its fixed cost and e) deleveraging of its balance sheet. Lafarge’s results in recent times have been impacted negatively by a high interest burden arising from its elevated debt levels. Following the rights issue, we expect Lafarge’s net debt-to-capital ratio to improve to 0.42x from its current position of 0.68x and a potential interest savings of c. 22% from current levels. Based on our estimates and assuming all the rights are taken, we estimate a potential earnings dilution of around 46% to 2019E earnings

Lafarge’s rights issue – potential dilution to earnings

(N millions) No of shares (millions) Price (N)

Rights issue N12.0 per share 89,210 7,434 12.0

Lafarge Africa current Market cap 116,224 8,673 13.4

Lafarge Africa Market cap + rights 205,434 16,108 12.8

2019E PAT forecast pre rights (N' millions) 1,702

2019E PAT forecast post rights (N' millions) 1,702

EPS pre-rights (N) 0.20

EPS post rights (N) 0.11

Potential EPS dilution -46.2%

Pre-rights P/E (x) 68.3

Pre-rights P/E (x) 120.7

Source: Company data. FBNQuest Capital Research estimates

Outlook Following the recovery in cement unit volumes which started in Q2 2018, we expect the sector to deliver unit volume growth of around 10% y/y to c.20.5mmt in 2018E. On the back of the upcoming elections in February 2019, we see a deceleration in unit volume growth to around mid-single digits in Q1 2019E. Beyond Q1, we believe unit volume will recover to high single digits as investors and developers resume previously delayed


24 January 2019 49

investment decisions caused by uncertainties around the elections. As such, we forecast unit volume growth of c.8% y/y to c.22.0mmt for 2019E. Given the correlation between unit volume and economic activity, the assumptions driving our unit volume growth forecast include macroeconomic stability, an average crude oil price of US$60-65 per barrel and capital releases of not less than 50% of the estimated capital expenditure of N2.0trn. On a company specific basis, we forecast group unit volume growth of c.9% y/y to 23.8mmt for DangCem in 2018E. Our volume growth forecast for the group is underpinned by our expectation of an 11% y/y growth in cement dispatches in Nigeria to c.14.1mmt. This translates to group sales and PBT growth of 12% y/y and 11% y/y to c. N903.8bn and N321.6bn respectively. For Lafarge, we expect to see unit volume growth of around 9% y/y for its Nigerian operations. However, we see group cement dispatches of around 6.2mmt, implying single-digit volume growth. This translates to sales growth of around 4% y/y to N312.5bn. Having delivered a pre-tax loss of –N14.4bn over the 9M 2018 period (vs +N1.1Nbn 9M 2017), we expect Lafarge to deliver a pre-tax loss of c.-N15.3bn for 2018E. Moving into 2019E, we forecast volume growth of 12% y/y to 26.6mmt for DangCem. This translates to sales and PBT growth of 12% y/y and 14% y/y to N1.0trn and N365.2bn respectively. For Lafarge we see unit volume growth of 8% y/y to 7.9mmt in 2019E. This underpins our sales growth forecast of 4% y/y to N326.2bn. We also forecast PBT of N2.1bn.

Fast moving consumer goods sector: state of play

There is little to suggest that 2018’s sustained economic recovery translated to a meaningful pickup in consumer spending. Indeed, year-to-date results of the consumer names showed that, broadly, topline growth was held back by sluggish demand. From all indications, income levels stayed generally low whereas inflationary pressure continued to have an impact on living costs. Although latest official statistics on spending were last published in 2017 (GDP using expenditure and income approach), Euromonitor estimates that household consumption declined 15bps to US$297.3m in 2018. Our view of a lacklustre consumer environment is further reinforced by the NBS labour statistics report, which points to a record high unemployment rate of 23% and an underemployment rate of 20% as of Q3 2018. The consumer goods index failed to extend its 2017 bullish run as the market significantly marked down companies for failing to deliver growth. Stocks we track lost –32% on average, well below the main index’s loss of -18%. The worst performance came from Dangote Flour Mills (DFM, not covered) and PZ Cussons Nigeria (PZ), down 44% and 43% respectively. Besides anti-emerging market sentiments that weighed on stock prices, poor earnings most likely fueled the sell-off. Nestle Nigeria (Nestle) and Unilever Nigeria (Unilever) shares were the most resilient with loss of -5% and -7% respectively.

Macroeconomic variables still positive for unit growth


24 January 2019 50

Tough consumer environment remains key earnings depressant

Nigerian consumer goods companies’ 2018 share price performance

Source: Bloomberg, FBNQuest Capital Research Corporate earnings among FMCGs have so far been uninspiring. 9M 2018 sales and PBT were down -9% and -22% y/y on average for our coverage names. We believe that consumer weakness and heightened competition fueled by the re-entry of imported brands has constrained inflation pass-through abilities. As such, price-driven growth seen mostly through 2017 was almost non-existent in 2018. These struggles prompted innovative product launches across the spectrum. Flour Mills of Nigeria (FMN) introduced new variants of flour and pasta brands targeted at price-sensitive consumers in northern Nigeria; Nestle launched Golden Morn Puffs cereal; while Unilever reintroduced Lifebuoy soap to the market. However, it is clear that these moves have not yet provided the much-needed stimulus for growth. Year-to-date earnings on average were further squeezed by an increase in operating expenses (+11% y/y on average), driven by a ramp-up in marketing activities in a bid to capture market share. On the upside, a stable exchange-rate environment, de-leveraging, and ongoing efforts to minimise expensive debt exposures have all limited devaluation losses (which were substantial in preceding years), and brought down borrowing costs. Consequently, interest expenses declined 68% on average, while the devaluation losses recorded were minimal. That said, these were modest positives relative to the headwinds faced. Nestle and Unilever were standout performers, with 9M 2018 sales growth of 10% y/y and 11% y/y and 9M PBT growth of 24% y/y and 94% y/y respectively. With both companies citing volumes as the growth driver, we believe more of their sales growth came from their respective seasonings business – Maggi (Nestle), Knorr (Unilever), and Royco (Unilever). We also highlight that for both companies, seasonings account for the largest portion of sales.

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24 January 2019 51

Nestle and Unilever towering above peers

DSR’s performance took a hit from sugar smuggling and road congestion

Nigerian consumer goods companies’ y/y sales growth – 9M 2018

Source: Company data, FBNQuest Capital Research estimates,* for FMN and PZ Cussons Nig. Periods represented are Q4 2018 (end-Mar) – H1 2019 (end-Sep) and Q3 2018 (end-Feb) – Q1 2019 (end-Aug) respectively; others are 9M 2018 We recognise that Unilever’s recent moves aimed at repositioning its business supported sales growth. Shareholders approved the divestment of its underperforming spread business (3-4% of sales) to KKR in Q2. As such, N2.5bn in spread sales were transferred from 9M sales to discontinued operations. We estimate that sales growth would have been 273bps lower had the reallocation not occurred. 9M sales and PBT for the spread business fell 39% and 46% y/y respectively.

Nigerian consumer goods companies’ PBT margins – 9M 2018 and 9M 2017

Source: Company data, FBNQuest Capital Research estimates,* for FMN and PZ Cussons Nig. Periods represented are Q4 2018 (end-Mar) – H1 2019 (end-Sep) and Q3 2018 (end-Feb) – Q1 2019 (end-Aug) respectively; others are 9M 2018

Dangote Sugar Refinery (DSR) posted the worst performance under our FMCG coverage. PBT declined by -33% y/y, primarily due to a -28% decline in sales amid an unusually challenging environment. Contrary to 2017, DSR’s pricing power was constrained in the face of increased sugar smuggling activities supported by fx availability and lower global sugar prices (-27% y/y). By management’s own admission, smuggled unlicensed sugar has taken up c.40% of the market. As such DSR has been forced to roll back price increases that were made in 2017, with the average price of its 50kg bag falling 19% y/y. Another factor that weighed on DSR’s performance was the poor condition of the roads that lead to the ports (close to where DSR operates). By implication, the ensuing traffic gridlock limited the number of trucks required on a daily basis to evacuate production volumes.

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24 January 2019 52

Higher minimum wages could catalyse spending

More pressure coming from imported brands

Outlook for the FMCG sector Going into 2019, we see the hard-pressed consumer continuing to adopt a cautious spending attitude. As things presently stand, the squeeze on wallets is likely to persist due to inflation. That said, the prospect of a 67% rise in the minimum wage - currently being considered by the authorities – potentially improves the consumer landscape. Essentially, the multiplier effect of this could be far reaching, as the ensuing rise in income levels puts the bottom-rung consumers in a better position. Notwithstanding, the impact of this increase is unlikely to be commensurate with the sharp rise in living costs over the past five to six years. Another positive for the consumer will be the effects of sustained competition between the FMCG companies. For the companies, stable macroeconomic conditions and the CBN’s unrelenting intervention in the currency market are positives. However, we see sustained downward price pressure given that the competitive landscape is compounded by weak consumer purchasing power. Additionally, a greater participation of imported brands encouraged by increased FX availability potentially undermines the competitiveness of the companies. We believe competition will continue to be greater within the Home and Personal Care category where switching costs are low. Pastoral conflicts in the food-producing middle-belt states remain a major flash point to watch in 2019. Indeed, food inflation has picked up due to violence in this region over the last few years. While tensions were largely defused in 2018, another flare up of violence could harm harvest output for 2019. Therefore, margins for firms with animal feeds businesses such as UAC of Nigeria (UACN) and FMN could come under significant pressure. DSR has also pointed out that its sugar cultivation projects have been vulnerable to such conflicts. Yields from the company’s pioneer site, Savannah Sugar Company, came in low in Q3; communal clashes were largely responsible for this. Given these challenges, we are not ruling out additional product launches in 2019. We therefore believe promotional activities for both recent and forthcoming product launches will see an increase through the year, and this stands to eat further into earnings. Nevertheless, the possibility of additional demand brought on by wage increases is a potential catalyst for demand growth. Although this gives room for modest optimism, we are not incorporating this scenario into our forecasts yet. We expect average topline growth of 9% y/y for our coverage names. We forecast the lowest sales growth of 4% y/y and -1% y/y to N536.8bn and N73.5 for FMN and PZ Cussons Nigeria (PZ) respectively. We particularly see stronger headwinds for FMN’s animal feeds and sugar businesses, and PZ’s electrical business. For PBT, we have modelled a 64% growth on average, driven by an upsurge from UACN, following two consecutive years of negative growth (2017: -59% y/y; 2018: -79% y/y). Ex-UACN, the PBT growth comes to 15% for 2019E. We model a 13% average rise in 2019E opex but expect that this will be supported by a -39% estimated decline in net finance costs as interest and fx cost pressures fully taper off.


24 January 2019 53

Competitive pressures weighing heavily on brewers

Brewers: bracing for rougher times

For the brewers, growth headwinds gathered strength through 2018 given the continued squeeze on disposable incomes. In response, each brewer adopted aggressive pricing strategies in a bid to protect and/or grow market share. Additionally, a new tax policy which effectively increased excise duties on alcohol commenced in June. Consequently, growing earnings proved challenging. Nigerian Breweries (NB) lost volumes while Guinness Nigeria (Guinness) and International Breweries (IB), both of which grew volumes, faced cost pressures which could not be passed on to consumers. We estimate that overall volumes have grown by around 3% y/y, driven by the affordable segment. However, NB’s volumes were down 4-6% y/y, with 9M sales declining -7% y/y. Guinness’s results for Jan-Sep 2018 (year-end is June) on the other hand reflects a 4% sales growth y/y. Published results for International Breweries do not show comparable figures for the corresponding period; as such, y/y comparisons are not available. Nevertheless, we understand that IB had stronger volumes across its revenue-driving brands, implying that its 9M sales were higher y/y.

Jan-Sep 2018 headline P&L items: Y/y changes

Sales GM Net finance costs PBT

Guinness Nigeria 4.3% -1,121bps -86.0% 3.6%

International Breweries n/a -1,010bps n/a n/a

Nigerian Breweries -6.5% -218bps -33.1% 34.7%

Average n/a -783bps n/a n/a

Source: Company data, FBNQuest Capital Research

The strain on household wallets continued to translate to an increase in down-trading to much cheaper brands. Our channel checks unsurprisingly revealed that IB – which operates predominantly in the affordable lager segment (c.60% of the beer market) – was favoured because it offered brands at the most competitive prices. We also believe NB lost a sizeable portion of its southwest and Lagos market share to IB, which pushed out more volumes from its recently-commissioned US$250m plant in Sagamu (situated in the southwest, a few kilometres outside Lagos). Although Guinness remained the underdog in the value segment with growth largely supported by spirits (c.15% of sales), volumes from its affordable lager and non-alcoholic brands saw some growth during the year. We therefore believe these developments explain the volume losses suffered by NB. Meanwhile, with pricing powers constrained, product launches gathered momentum during the year. IB extended its reach in the premium lager segment (where NB presently commands leadership via Heineken) by launching Budweiser in April. NB followed in IB’s footsteps by launching premium lager Tiger beer shortly after, increasing its presence in the market. Guinness took a different approach by introducing smaller pack sizes for its affordable lager and non-alcoholic brands at wallet-friendly prices. Margins take a turn for the worse Margins for 2018 do not tell a positive story. Despite favourable fx conditions, we believe higher imported barley prices (+82.9%) - which more than offset lower sugar prices (-27%) – contributed to the squeeze in gross margins. Guinness had the worst gross margin contraction of -1,121bps, while NB’s gross margin contracted 218bps (mainly due to lower


24 January 2019 54

Margin contractions recorded across the board

Brewery sector to remain on edge in 2019

sales). IB disappointed the most in our view. Its gross margins contracted 1,011bps despite its merger with parent company AB InBev’s subsidiaries Pabod and Intafact Breweries in December 2017. This suggests that expected synergies failed to materialise. We therefore believe there may have been gross inefficiencies coming from Pabod and/or Intafact. Further down the P&L, NB’s 9M PBT of N22.5bn fell by 35% y/y. Despite lower borrowing costs recorded during the period (net finance expense: -33% y/y) and near flat opex (+2% y/y), these were not strong enough to offset lower sales. Guinness’s 9M PBT of N7.6bn grew by 4% y/y and this was supported by an 86% drop in net finance expense and a 16% reduction in operating expenses. IB in stark contrast posted a 9M pre-tax loss of -N9.2bn, with earnings eroded by a 75% increase in net finance expense. As is the case with the FMCG companies, an improved debt profile has translated to an ease in interest-cost pressures for NB and Guinness. However, IB took on additional debt for its Sagamu plant construction. This has been largely responsible for the squeeze in its bottom line. Its 9M net debt/equity ratio stood at 551%, which compares unfavourably with those of NB (18%) and Guinness (12%).

Sales, gross margins and PBT margins Guinness Nigeria

International Breweries

Nigerian Breweries

Source: Company data, FBNQuest Capital Research

Outlook: conditions to remain fragile In 2019, we anticipate that rivalry in the brewing space will intensify further. Consequently, input cost inflation will continue to be absorbed. Of more concern, the brewers will feel the pinch of another round of excise tax increments in 2019 (+N0.05/cl). With these in mind, the brewers will have to painfully adjust to structurally-lower margins. That said, we still expect that beer unit volumes will grow by single digits, but that this will be driven by the affordable segment. We see IB leading volume growth via its value beer brands, Trophy and Hero, which are gaining traction nationwide. IB’s management has stressed that its current strategy prioritises volume and market share gains over margins. While we also see IB channeling more of its focus into growing its presence in the premium segment via Budweiser, we do not see this driving volume growth over the foreseeable future. Although Budweiser is a globally-recognised name, we believe it is unlikely that IB will rattle competition in the premium segment as it did in affordables. Indeed, consumers in this segment traditionally exhibit greater brand loyalty than price-sensitivity. Coming from a low base (having lost volumes two years in a row), we expect NB to deliver unit volume growth of around 3-4% in 2019E. However, we expect margins to

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24 January 2019 55

Fragile recovery in margins

A gentle slowdown for global growth Nigeria’s strong eternal balance sheet APC to be tested on its fiscal policy

only recover slightly, and forecast a 40bp widening in gross margin. Considering the concrete steps NB is taking to bring down debt-servicing cost (such as substituting bank borrowings with cheaper commercial paper), we forecast that net finance expense will be flattish in 2019E. This underpins our PBT growth forecast of 12% y/y. We expect y/y topline growth for Guinness to be in the high single-digit range, but this will be largely driven by the spirits business. During the year, management indicated that spirits now account for 15% of sales, up from 13% previously, and suggested that demand in this segment will remain healthy. We also see growth coming from affordable lager and non-alcoholic sales, driven by smaller-sized bottles. Satzenbrau for instance now comes in a 325ml bottle; we expect this to contribute to growth in Guinness’s affordable business. We expect the impact of finance charges to be muted, thanks to an improved debt profile which followed Guinness’s 2017 rights issue. These positives support our 2019E PBT growth estimate of 6% y/y to N11bn. We see IB continuing to undercut competitors in its attempt to gain more market share. The company operates mainly in the value segment, which should continue to prove supportive following the market’s continuous shift to affordable brands. We also expect that IB will aggressively push more of its brands into the Lagos market (an important market for the brewers) following increased capacity at Sagamu. However, we see this price competition coming at the expense of margins, which are already constrained. We forecast volume-driven sales growth of 10% y/y to N127bn and a 30bp gross margin recovery y/y to 35% in 2019E. However, given IB’s debt burden following its plant expansion, we forecast –N8.3bn in pretax losses in 2019E. In our view, to ease the pressure on the bottom line, IB’s management may need to look to take further steps to reduce expensive debt and/or shift to equity sources of financing.

Our call for 2019 and beyond

This month’s World Economic Outlook update from the IMF has global growth at 3.5% this year and 3.6% in 2020. The fiscal stimulus in the US is starting to wear off, and additionally Chinese growth is projected to fall, to 6.2% this year and next. Emerging markets and developing economies take up the slack in the Fund’s latest narrative, expanding by 4.5% in 2019 vs 2.0% for advanced economies. Nigeria, however, disappoints with forecast growth of 2.0% this year, which we consider a little too low. Nigeria is, of course, a member of the global village, and vulnerable to negative movements in world financial and trade flows. The normalisation of US monetary policy is slowing, and is set to run its course sooner than previously thought. Nigeria enjoys some insulation by virtue of its low external indebtedness, both public and private sector. In our view, the FGN’s series of successful Eurobond roadshows prove the point. Investors looked beyond the unorthodox exchange-rate policy of multiple rates to Nigeria’s sound external balance sheet. The robust GDP growth of the decade through to 2014 was based in expenditure terms on robust household consumption. However, consumption growth subsequently slowed in response to insecurity in the north east and elsewhere, fiscal pressures arising from the slide in the oil price and three currency devaluations. The Buhari administration’s record for historians and, next month, the electorate will be judged on its expansionary fiscal policy. Its challenge, which it dressed up in its


24 January 2019 56

campaigning in 2015 as a “window of opportunity”, is the reality that oil provided 48% of gross federally collected revenues in 2016, recovering with the oil price and production to 58% in 2017. It wants to diversify the economy away from oil but is dependent on a strong stream of oil taxes in the short term to fund its agenda because it needs time to expand its non-oil revenue collection. We have already noted the improvement in production resulting from a decline in sabotage in the Niger Delta. The story for the price has been more complicated. In the past four months, we have seen a high of above US$80/b and a low under US$50/b for UK Brent/Bonny Light. The price has since moved within a range of +/- US$60/b, where we now expect it to settle. The bears point to record US production, led by the shale industry, and softening global demand, notably from China. In mitigation, we note that: US sanctions on Iran are starting to have an impact, the waivers notwithstanding; US pressure on Saudi to keep its taps open has eased as the spotlight has moved away from the death of the Saudi journalist in the consulate in Istanbul; OPEC+ (including Russia and other non-member allies) is showing production restraint in the context of its latest accord; producer nations such as Venezuela and Libya are struggling to come close to their quotas; and in Q1 2019 the price should enjoy some support from the winter in the northern hemisphere. The price is expected to remain close to the current range: if it starts to move higher, the US shale industry has the flexibility to ramp up output. We see an average price for 2019 for spot Bonny Light of US$63/b, with US$65/b at end-year. This provides some headroom above the US$51/b assumption in the approved 2018 budget. (We are not commenting upon the 2019 budget proposals that Buhari presented to the National Assembly in December because the legislators are preoccupied and the proposals are likely to be substantially modified.) 2019 should bring a reasonable fiscal stimulus as further improvement in non-oil revenue collection allows an increase in public capital spending. Our analysis, based upon the 2011 and 2015 polls, has shown that government recurrent spending does not take off as elections approach. Campaigning does inject some cash into the economy, and state governments will endeavor to reduce pension and salary arrears. Our forecast of 2.9% growth this year is based upon: this modest stimulus; a rise in oil production including condensates from 1.95mbpd to 2.17mbpd; private-sector investment in areas such as petrochemicals and agriculture; the ripple effects from the FGN’s infrastructure programme; and, perhaps, the settlement of arrears of close to N3trn to contractors employed by the FGN. To put our projection into some perspective, the population is still growing at faster rate.

Oil price settled in a range around US$60/b And expected to remain close to it in 2019 A higher price, and a rapid reaction from shale industry Macro impact of elections much overstated Growth seen at 2.9% this year


24 January 2019 57

Low financial intermediation in Nigeria Which blunts the impact of monetary policy Bank lending highly concentrated sector-wise Rival attraction of good yields on FGN paper

AMCON, job well done at this stage

Monetary and fiscal policy

Inadequate financial intermediation

Nigeria achieved healthy growth through to 2014 despite a lack of financial deepening. Private-sector credit extension in South Africa in 2017 was more than three times that in Nigeria, as a percentage of GDP (74.4% vs 19.6%). As well as this limited deepening, we can see from the lending data by sector for Q3 2018 that the deposit money banks (DMBs) focus their loans on oil and gas, manufacturing, and trade and commerce. The data do not show the size of borrower but we can safely say that the lending is heavily targeted at large firms, both multinational and Nigerian-owned. SMEs see very little credit from the DMBs, which tend to follow the same lending model and have similar lending skill-sets. Microfinance lending (according to the textbook definition) is negligible. There remains therefore a huge gap in the provision of credit to SMEs, which the new Development Bank of Nigeria is starting slowly to address alongside the state-owned banks for agriculture, housing and industry. This shows that: the impact of monetary policy is blunted by the scale of the unbanked economy; the gathering of data on the informal economy is a grey area, pointing to a margin of error; and, given the reluctance of the DMBs to lend to agriculture, we can understand why the CBN has entered this field with several schemes. Banks’ lending to the sector outside the scheme has increased from 1% of their loan books to about 3% in the past five years. Lending to the private sector did grow very strongly following the mandatory capital increase at banks in 2005 and their subsequent raising of additional funds in the market. It soared by 96% y/y in June 2008, led by margin lending, petroleum marketing loans and, to a lesser extent, real estate credit. All three turned sour, and necessitated the CBN bail-outs of August and October 2009. We have euphemistically termed these events Nigeria’s domestic credit event. The healthy banks which survived the bailouts have become conservative after their chastening experience. They have also been subjected to far tighter regulation by the CBN. Banks generally prefer the returns from sovereign debt markets, in which the yields on FGN bonds are now about one percentage point lower than the prime lending rates for the real economy which the DMBs report to the CBN. Yet holding government paper carries less risk and requires less maintenance on the part of the banks. The lending environment was transformed by the Asset Management Corporation of Nigeria (AMCON). The corporation’s initial remit was to cleanse banks’ balance sheets by exchanging their bad loans for its bonds, and then maximise its return on the disposal of those bad debts. The first part of its work has been completed. On the second part of its work, the corporation has a target recovery rate of 80%, which it greatly exceeded in the early days from disposing of the less troublesome assets on its books. The target becomes increasingly challenging with time.


24 January 2019 58

Limited pass-through of policy or the ‘disconnect’ Exchange rate at heart of monetary policy The MPC’s tightening bias

Financial deepening ratios ( % of GDP) Sectoral distribution of DMBs’ loans, Q3 2018 (% shares)

Source: CBN, South African Reserve Bank, FBNQuest Capital Research Source: CBN, FBNQuest Capital Research The monetary policy committee (MPC) can influence banks’ loan expansion at the margins. The passthrough from its policy rate to those for the real economy is constrained by the scale of the informal, unbanked economy. The DMBs have high cost bases which prevent them from taking on additional risks. The CBN has made its own contribution to loan expansion through its many lending schemes for agriculture, manufacturing and other sectors. Although there has been some criticism of these schemes on the grounds of their impact and their inherent bureaucracy, the CBN is meeting a need for credit that the DMBs have declined to support. Robust GDP was therefore achieved despite low financial intermediation. Over time, the DMBs will contribute to growth by boosting their loan books. We should also mention again the arrival of mobile money in Nigeria as a way to reach the unbanked (and expand the formal, tax-paying economy.)

One-track monetary policy

The CBN’s exchange-rate objective of stability is a core element of its monetary policy. It should be viewed in the context of its mission of the attainment of price stability. Given the appetite for imported goods and services as well as the limited financial intermediation, the exchange rate is a far larger input into inflation than interest rates. When pressure on the exchange rate emerges, the CBN typically responds by mopping up naira liquidity. In early December, for example, it saw some naira weakness on the parallel market and accelerated its sale of Nigerian T-bills (NTBs) through open market operatoins (OMO). Before the emergence of AMCON, the monetary policy committee (MPC) held its policy rate in an attempt to encourage credit extension and thus growth. It then moved to attacking inflation and seeking to counter an increasingly loose fiscal policy by tightening in September 2010. The scale of this tightening peaked at a landmark extraordinary meeting in October 2011 when the committee hiked the policy rate by 275bps to 12.00% and doubled the cash reserve requirement (CRR) for banks to 8%. There was a brief change of tack in monetary policy in November 2015 when the MPC cut the policy rate by 200bps to 11.00% and reduced the CRR. Neither decision had the

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2013 2014 2015 2016 2017

M2 PSCE PSCE (SA)

Oil & gas, 23.1

Manufacturing , 13.8

Government, 9.0

Trade/general

commerce, 6.9

Finance, insurance and capital market, 6.8

Others, 40.4


24 January 2019 59

No change in stance for 30 months A reference range for inflation not targeting Food prices the main mover of the headline rate

Now settled within a narrow range

desired impact on economic activity and lending volumes. The committee then reverted to tightening with interest rate hikes of 100bps in March 2016 and 200bps in July. It has held this line in the intervening 30 months, and shunned opportunities both to tighten and to ease. Initially the committee’s analysis was that the economy contracted for five successive quarters y/y through to Q1 2017, and inflation rose far above its reference range (of between 6% and 9% y/y) on account of supply-side, not demand factors. The subtext was that the CBN had not created the mess and that the MPC was not responsible for clearing it up. The committee is also aware of the “disconnect” between monetary policy and the real economy. It has settled into a ‘wait-and-see’ mindset.

Consumer price inflation (Y/y chg, %)

Source: NBS, FBNQuest Capital Research The reference range for inflation is not a formal target, and we do not see the CBN/MPC moving to such an arrangement in a hurry because of its supply-side drivers. One culprit has been the naira exchange rate, with three devaluations (in November 2014, February 2015 and June 2016), and the fx scarcity arising from the slide in the oil price through to the CBN’s adoption of new fx windows in March/April 2017. Another culprit has been sticky food prices. Core inflation has slowed with demand in the economic slowdown and settled at a single-digit level y/y for the past four months. Food price inflation, in contrast, has eased from above 20% y/y in November 2017 to 13.6% last month (December) but remains the driver of the headline rate. Explanations vary but we favour a combination of insecurity in the Middle Belt and the north east of the country, a rise in sub-regional exports of food crops rather than supplying the local market and, we suspect, indifferent harvests for some crops. A third culprit to mention is the cost to the economy of the poor hard infrastructure. The headline rate has settled into a range of between 11.0% and 11.5% y/y since June. Demand pressures have been barely discernible, and the impact of insecurity in growing areas has been less dramatic than feared. We see inflation below 12.0% y/y throughout the year, and the continuation of the MPC’s ‘wait-and-see’ too. We would not expect the appointment of a new CBN governor in June, if there is one, to have a material impact.

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All-items Core Food Imported food


24 January 2019 60

A sorry tale to share

Endless tensions with the National Assembly Control over spending at the heart of the tensions

Selected interest rates (%)

Source: CBN, FBNQuest Capital Research

A counter-cyclical fiscal policy The weak point of the FGN’s macroeconomic policy has long been the fiscal side, for which the CBN and the MPC have felt the need at times to overcompensate. We highlight three central historic issues, one of which is being resolved.

Federally collected revenue (N bn) Federally collected non-oil revenue (N bn)

Source: CBN, FBNQuest Capital Research Source: CBN, FBNQuest Capital Research Firstly, the permanent tensions between the executive and legislature have resulted in to-ing and fro-ing over the annual budget. This process took eight months in 2011. Delayed approval of the budget pushes back what should be monthly, formula-driven distributions by the Federation Account Allocation Committee (FAAC) to the three tiers of government because the formulae are centred on the annual budget’s oil assumptions. A backlog in distributions therefore develops, as well as delayed disbursement of capital releases. These tensions can be explained by the push for control over spending and have historically taken the form of disputes over the oil price threshold. Put simply, an increase in the threshold means more money to be spent by the ministries, departments and agencies (MDA), the assembly and other public bodies, and less to be saved for the proverbial rainy day. One consequence of the annual tussle, which is generally won by the assembly, is the very high level of recurrent non-discretionary expenditure.

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Inter-bank Prime lending Maximum lending

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Oil Non-oil

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Q3/

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Q4/1

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18

Q3/

18CIT VAT Customs/excise Others


24 January 2019 61

Seven months to pass the 2018 budget Pitifully low collection of non-oil revenue Modest progress to report, however Signs of resolution of the cash-calls Counter-cyclical response to weak economy

Tough fiscal targets again for 2018

The process in 2018 conforms to this pattern. The president submitted the budget proposals in November 2017, and finally signed off in June after the threshold had been lifted from US$45/b to US$47/b and then US$51/b. Last month the president submitted proposals for 2019 although their progress through the assembly will surely be derailed by the preoccupation with the elections and, perhaps, the result of those polls. A second issue is that oil still generates a high proportion of government revenues (and of foreign-exchange inflows). Oil accounted for 48% of federally collected revenues in 2016 and 58% in 2017 (thanks to a pick-up in the price). The collection of dues from the non-oil economy is constrained by overly generous tax exemptions, inadequate pay for the officials and a poor culture of paying tax in the population at large. It represented just 2.6% of GDP in 2017 (and a pitiful 6.2% when we add gross oil revenues). The total take is now closer to 8% of GDP according to the vice president. Under energetic leadership at the Federal Inland Revenue Service (FIRS), the leading collection agency, the number of taxpayers on the database has risen to 33 million thanks to data-mining across government departments with the support of external consultants. The longer term challenge is to persuade Nigerians that they should pay tax because they receive benefits from the government in return. A third weakness of fiscal policy (and the one that is in the process of being resolved) has been the inclusion of the NNPC in the federal budget. In the approved 2018 budget and the 2019 budget proposals there have been no allocations for the corporation’s obligations to its joint-venture partners (“cash calls”). Large arrears to the oil majors had accumulated. The joint ventures are now being financed on the “cost recovery” model. In the face of a slowing economy, the FGN has followed a counter-cyclical fiscal policy. It has opted to accelerate spending, mostly on the capital side, as its contribution to driving growth (and diversifying the economy). The approved 2018 budget is an extension and deepening of this stance. Aggregate FGN spending is set at N9.12trn (US$29.9bn at N305), an increase of 23% in nominal terms on the previous year’s budget and of rather more when we look at the likely outturn. Capital items are projected at N2.87trn in the FGN budget, equivalent to 31.5% of total projected spending. This is an ambitious target when we consider that capital releases had reached N820bn in mid-December (and therefore half-way through the extended budget year, which runs until the 2019 budget process is completed.) It is extremely unlikely that the budget overall will be executed in full. The projections for non-oil revenue (N1.25trn for the FGN’s share) are again very challenging. Although the chairman of the FIRS has disclosed that the service collected a record N5.3trn in the 2018 calendar year for the federation account, including petroleum profits tax, it appears that the non-oil revenue target will be missed and that capital releases will have to be trimmed. Those releases are nonetheless running at record levels according to the FGN. The 2018 budget sets the FGN deficit at N1.95trn, of which new borrowing is projected to cover N1.64trn. The external component has been fully covered by the Eurobond sales in November. The deficit would be equivalent to 1.7% of assumed GDP, and so well within the 3% of GDP ceiling in the Fiscal Responsibility Act 2007. Given the annual slippage in budget passage, it becomes very difficult to test the projections in the light of the outturns. The data from the Budget Office of the Federation


24 January 2019 62

Covered and uncovered budget deficits Domestic debt stock stable, and under control Total burden no more than 30% of GDP, we estimate Less happy story for debt service Some comfort from the DMO’s latest data

and the CBN are presented on a calendar year basis. We note that the budget office’s report for the 2017 calendar year shows a FGN deficit of N3.81trn, and so far above the target of N2.36trn. Further, the Debt Management Office (DMO) hit its funding target of N2.50trn, leaving the balance of the deficit uncovered in the traditional manner.

Heavy burden of debt service

The FGN’s domestic debt burden has risen by 43% in nominal terms in the past three years but contracted by -2% in the past 12 months due largely to the FGN/DMO policy of ‘externalisation” (deploying Eurobond proceeds to pay down domestic debt). It amounted to N12.29trn at the end of September 2018, or 10.8% of 2017 GDP. We have to add a further N2.7trn, which the FGN unearthed in December 2016 and termed the legacy of the Jonathan administration. The debts are the unpaid dues of the FGN to non-oil exporters, contractors and other private-sector parties, and are being securitised. When we add public debt obligations which are not sovereign such as those of AMCON and the NNPC, state government debt and FGN external debt of US$21.6bn, the total burden could rise to 30% of GDP under a worst case scenario. Even if Nigeria’s debt overhang was 30%, it would still compare favourably in an emerging market context. These ratios, actual and theoretical, have of course been transformed by the new national accounts.

FGN debt (N trn)

Source: Debt Management Office (DMO), FBNQuest Capital Research While the stock of public debt is modest, the FGN is alert to the rising cost of domestic debt service. Reports from the budget office tell us that total debt service, about 90% of which is due on domestic obligations, accounted for 44.5% of the FGN’s total inflows (retained revenue and assorted extras) in 2016 and 62.6% in 2017. Quarterly data from the DMO, however, show that the burden had stabilised in Q3 2018 in naira terms. We also understand that interest rate assumptions for both FGN bonds and NTBs (Nigerian T-bills) in the 2018 budget were set at levels rather higher than those currently prevailing. The projection of N2.01trn for total debt service therefore looks plausible.

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Total FGN bonds


24 January 2019 63

A strategy in place to limit the damage Most states’ dependence on the FAAC payouts And ultimately on the oil revenue Some improvement in IGR in 2017 Lagos at the head of the field

This is the background to its medium-term debt strategy, which aims for a 60/40 mix between the domestic and external debt obligations of the FGN because of the higher cost of servicing the former. The blend was 71/29 at end-September, and will move towards the target due to the Eurobond sales in November. Over the past 12 months, yields on Nigeria’s sovereign Eurobonds have widened by +/- 300bps, and those on naira-denominated FGN bonds by about 150bps. The naira bond rates are still +/- 750bps higher than US dollar rates on debt instruments of a similar tenor, which validates the cost arguments in the DMO’s strategy.

State government finances: restoring stability The steady fluctuations seen in the monthly payments by the Federation Account Allocation Committee (FAAC) to the three tiers of government is largely driven by oil export revenues. State governments (with a few exceptions) depend upon the monthly payout to maintain their core services. Broadly, the slide in the oil price from mid-2014 and lasting for more than three years meant that most state governments have inadequate funds to cover their costs. The latest monthly payout by the FAAC amounted to N813bn (US$2.65bn) in December (from November revenues), the highest since June. Since most states are unable to meet their recurrent obligations in full, let alone initiate developmental projects, they need to bolster internally generated revenue (IGR) to develop independence from the FAAC. Based on the most recent data from the CBN, total IGR accounted for 26% of states’ total revenue in 2017. Aggregate IGR increased to N765bn from N746bn in 2016. Meanwhile, total gross statutory allocations from the FAAC provided 49% of the total. NBS data, which are not always consistent with the CBN’s series but more recent, provide some hope: they show a 27.7% y/y increase in aggregate IGR to N579bn in H1 2018. Lagos has maintained its position as the leading revenue generator, achieving an IGR/total revenue ratio of 68% in 2017. Rivers was next in line with 43%. Several states posted less than 10% including a high-profile oil producing state with access to the 13% derivation formula, which is applied before the monthly division according to the set formula (52.7% for the FGN, 26.7% for the states and 20.6% for the local governments).

State governments: IGR/total revenue, 2017 State governments’ sources of revenue, 2017 (% shares)

Source: CBN, FBNQuest Capital Research Source: CBN, FBNQuest Capital Research

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48.9

IGR, 25.5

VAT, 15.8

Excess crude , 7.3

Grants & others, 2.5


24 January 2019 64

Onus on states to tap new revenue streams Debt sustainability now an issue for many states Substantial arrears on salaries and pensions Money market rates vulnerable to policy changes The JP Morgan moment in 2012 And its reversal three years later

The onus is on the state governors to boost their revenue. They could look to the non-oil economy (such as agriculture and mining), and widen the tax net to cover more of the informal sector. Property taxes are another avenue to explore, and are easier to collect if the state government has accurate records. Rivers and Akwa Ibom states achieved relatively high capital expenses in 2017, representing 75% and 55% of their respective total expenditure. There has been growing concern around debt sustainability at state government level. According to the DMO, states’ domestic debt at end-June 2018 amounted to N3.47trn, and their external debt, guaranteed by the FGN, was US$4.2bn. For the former, Lagos accounted for the highest, representing 15% of total domestic debt. However, when we consider the debt-to-IGR ratio, Ekiti state tops the list with over 5,000%. This is clearly unsustainable. Arrears in salary and pension payments have soared due to the oil price slide despite five debt relief packages under the Buhari administration: the best known have been the conversion of borrowings from DMBs into FGN long bonds, and ‘refunds’ for overpayments of debt service to the Paris and London clubs of external creditors more than a decade ago. The impact of the packages has not been transformative. According to the FIRS, states in the western region (other than Lagos) have not generated enough revenue from taxes to pay salaries, let alone initiate any developmental projects. In this context, we struggle to see how state governments will cope with the proposed hike in the national minimum wage. Aside from instilling a savings culture to curb unnecessary expenses, state governments need to identify their competitive advantage. A few states have made first steps in this direction. Kano, Plateau and Cross River fall into this category, with cotton, cereals and rice the agricultural products they leverage upon to generate internal revenue. Nonetheless, these states have been unable to achieve an IGR/total revenue ratio above 50%. Another possibility is for each state, based on its comparative advantage, to build regional clusters. This should enhance productivity, attract investment and thereby boost IGR.

The FGN bond market We observed earlier that monetary policy has limited impact on lending rates to the real economy because of the low level of financial intermediation and high cost base of the banks. The story can be different in the short term for the money market, with the driver usually being sudden changes in liquidity as a result of policy adjustments and fx interventions. The fixed-income market was transformed by the announcement in August 2012 by JP Morgan that three FGN bonds would be included in its government bond index with effect from October. This brought Nigeria onto the radar screen of other offshore portfolio investors. Yields narrowed by up to 500bps by end-year. This boost from offshore investor inflows lasted until September 2015 when JP Morgan announced the delisting of Nigeria from its bond indices, the main reason being that the CBN no longer operated a fully functioning two-way fx market. The authorities would not have been surprised because the obstacles to the two-way fx market were the administrative measures and market ploys it adopted to maintain naira exchange-rate stability.


24 January 2019 65

90-day REPO vs short-term FGN bond yields (%)

FGN bond yields (%)

Source: FMDQ, FBNQuest Capital Research

Source: FMDQ, FBNQuest Capital Research

Between October 2014 and March 2015 yields picked up by about 400bps on the macro fallout from the slide in the oil price. They moved south once it became brutally clear that the FGN had not prepared for the proverbial rainy day. The consequences were a slump in fiscal revenues, the exit of almost all offshore portfolio investors, and renewed pressure on reserves and the exchange rate. The launch of the CBN’s fx reforms in March/April 2017 (see The exchange rate below) encouraged the offshore community to return to Nigerian local debt markets as they became comfortable they could exit the new investors’ and exporters’ window (known more commonly as NAFEX) at will, and enjoy the attractive yields on offer. The FGN/DMO debt strategy of externalisation provided a further boost for investors. The FGN bond market has traditionally been underpinned by healthy demand at the DMO’s monthly auctions. In 2018 the total bid averaged N126bn against average sales of N64bn. Both averages were lower than in 2017, reflecting a lower funding target set by the FGN for the DMO but also the preference of some investors for NTBs over FGN bonds.

AUM of PFAs, Nov 2018 (% shares)

Source: National Pension Commission (PenCom); National Bureau of Statistics (NBS); FBNQuest Capital Research The banks have a significant presence at the auctions and in the secondary market, and, as we have noted, the offshore community returned in H2 2017. However, the pension

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90-day REPO 16.39% Jan 2022

9101112131415161718

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14.50% Jul 2021 16.39% Jan 202216.2884 FGN Mar 2027 12.40% Mar 2036

FGN bonds, 52.2

NTBs, 19.8

Domestic money market, 8.3

Domestic equities, 6.9

Others, 12.8

Never overlook the oil price! The return of the offshore investor after CBN fx reform


24 January 2019 66

The pivotal role of the PFAs Some room for a widening of bond yields

funds (PFAs) are now the most important players in the market. There are very few other fixed-income instruments to hold in their portfolios. In November (2018) FGN bonds accounted for 52%, and NTBs a further 20%, of their assets under management (AUM). These ratios have barely changed over the past 12 months. Their first large push into local equities since the domestic credit event of 2008 has not materialised, nor do we see it coming in the next 12 months. The normalisation of US monetary policy has helped to push FGN bond yields up by about 200bps since mid-2018 although its pace may well now be starting to slow. The CBN has also demonstrated that it will respond to pressures in the fx market by mopping up naira liquidity through aggressive open market operations (OMOs). FGN bond yields of between 15.00% and 15.50% are therefore likely to widen a little at such pressure points.


24 January 2019 67

Oil revenue at the heart of fx supply Fondness for the imported product

Ramifications of a fall in the crude price in 2008/2009

CBN habit of managing fx rates

The exchange rate Workings of the market As with budget revenues, so with foreign exchange inflows are oil earnings pivotal. Oil and gas provided US$42bn or 92% of merchandise export earnings in 2017, with the small balance mostly agricultural and related products. If we use an alternative measure of external current receipts (to include other inflows such as remittances), the ratio is still about 60%. A second point about the fx market is that Nigeria has a hearty appetite for imported goods and services. This ranges from agricultural products which the country could produce itself (such as sugar and rice), to non-consumer products which Nigeria has tried and largely failed to produce (such as steel and refined petroleum products), and to services sought after by the middle class (such as cable television fees). This legitimate demand is relatively constant, subject to currency depreciation and purchasing power constraints, while the supply of fx clearly hinges on oil and gas export revenues. When, therefore, a sharp fall in fx inflows due to the global slowdown and the crash in the oil price in Q4 2008 was quickly reflected in pressure on the naira, it became clear that the wholesale auctions run by the CBN could not meet this demand without an erosion of official reserves or a sell-off of the naira. The CBN’s reaction in January 2009 was to replace the wholesale with retail fx auctions. This and other measures effectively closed the interbank market. Not surprisingly, the exchange rate stabilised in the retail auctions on the recovery of the oil price, and the wholesale auctions resumed in July 2009.

Monthly average exchange rates (N per US$; monthly averages)

Source: CBN, FBNQuest Capital Research A central point to an understanding of the exchange-rate regime is that the authorities have instinctively favoured a managed rate to contain both import costs and inflationary pressures, and have no experience of a free float. They devalue as a last resort. We dwell

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DAS Interbank (IFEM) BDC


24 January 2019 68

Devaluation always the last resort To multiple rates in March 2017 An answer to many problems Stability of sorts (assuming no oil price crash) Heady campaign talk of floating

at length on this point because the response of the authorities to the slide in the oil price that began in Q3 2014 was similar to that in Q4 2008 and Q1 2009. The first response was the MPC decision in November 2014 to move the mid-point for the naira from N159 to N170 per US dollar and to extend the corridor to +/-5%. The upper point of the new corridor was effectively set at the then interbank rate. This was inadequate as the oil price continued to weaken, and so the pressure on the public finances and the exchange rate deepened. In February 2015 the CBN scrapped its auctions, which amounted to a de facto devaluation, and moved to intervening in the market at its “clearing” rate of N197 per US dollar. The slide in the oil price was far deeper and longer than in Q4 2008/Q1 2009 so there was no escape for the CBN. In June 2016 it announced what it termed a liberalisation and move to a floating rate regime. In reality, this was another devaluation. The CBN administered the new rate of N305 per US dollar, making small amounts of fx available for sale in anticipation of autonomous flows to transform the market. The flows never materialised and a huge gap with the parallel rate opened. The fx scarcity meant production lines grinding to a halt in the absence of imported inputs, and airlines and offshore portfolio investors queuing to repatriate their funds. Nigeria sank into a recession lasting five quarters. After three unsuccessful devaluations and with an oil price that would not recover, the authorities started to change tack in March 2017. They maintained their rate of N305 but opened new fx windows with more attractive rates, notably NAFEX for portfolio investors and non-oil exporters. Fx is available to meet legitimate demand. Turnover on NAFEX (both sides of trades) fluctuates either side of US$1bn per week, is now generally more than US$1bn per week. Manufacturers can meet their import needs, and the middle classes can access fx at will for education, hospital treatments and holidays abroad. The greater the inflows at NAFEX, the less fx the CBN has to make available in its other windows. In one sense, the CBN can point to renewed exchange-rate stability. It holds the interbank/official rate at about N306-N308 per US dollar for priority transactions, notably petroleum product imports, while the rate on NAFEX, which is independently managed and operated, has settled around N360-N365 on what the authorities term a “willing buyer/willing seller” basis. Inflows from the offshore community have declined in the past six months as some investors have exited the market under the influence of US policy normalisation. The CBN has therefore become a regular seller of fx on NAFEX. However, in our view the system, while it has some flaws, has broadly been a success. We see no reason for the CBN to unify the rates and/or move to a free float unless there is another long period of low oil prices. The Atiku camp in the election campaigning has hinted at a floating rate: we view such a move as unworkable in an economy like Nigeria’s, expect the preferential rate still in place at end-2019 and see scope for gentle depreciation on NAFEX to N375-N385. Reserves and the SWF

Gross external reserves, which include the balance in the excess crude account (ECA), stood at US$43.10bn at end-December. The 2.3% m/m increase recorded in the month


24 January 2019 69

CBN now usually a seller of fx at the NAFEX window Reserves cover still in good health ECA a poor substitute... ...for a SWF with a good structure But thwarted by state governors

can be attributed to the FGN’s latest Eurobond sales which raised US$2.86bn. However, the sales have been partly countered by two negative developments. The CBN is now a regular seller of fx at the investors’ and exporters’ window (NAFEX). The second is the apparent withdrawal on the FGN’s instructions of US$1.6bn from the excess crude account. Nigeria’s import cover at end-December covered more than 16 months’ merchandise imports, and nine months when we include services on the basis of the balance of payments to June 2018. This remains healthy cover by any criteria. Official reserves (US$ bn, 30-day moving averages)

Source: CBN, FBNQuest Capital Research The ECA, a special purpose vehicle introduced in 2004 for the purpose of saving and managing above-budget threshold revenue from crude oil sales, has been heavily depleted. The balance declined considerably to US$630m as at end-December. According to the federal finance ministry, this depletion was due to the final payment for the Paris Club refund to states. The NSIA, Nigeria’s sovereign wealth fund, was established by law in 2011 to achieve three broad mandates: build a savings base for the Nigerian people, enhance the development of Nigerian infrastructure and provide stabilisation support in times of economic stress. Its investments are made through three distinct vehicles: the Stabilisation Fund, the Future Generations Fund, and the Nigeria Infrastructure Fund. The NSIA commenced operations with seed capital of US$1bn in 2012. It has since received US$550m from the FGN in February 2014 to manage as third party assets, US$250m from dividends from Nigeria LNG and an additional US$250m from the ECA. Inflows have not materialised on the scale envisaged because state governors have blocked the intended transfers from the federation account to the authority, arguing that all inflows in the account should be distributed between the three tiers of government. Their pivotal role in powerbroking is such that we should not expect any resolution in a hurry. It would be depressing to speculate on the scale of the positive impact for reserves and the exchange rate if the wealth fund had been functioning in full since the passage of the law in 2011.

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24 January 2019 70

NSIA’s other more successful interventions

The NSIA has partnered with London-based GuarantCo to establish a credit enhancement facility in Nigeria (InfraCredit). This enables pension funds to invest in Nigerian infrastructure bonds. A credit guarantee is put in place to compensate for the absence of a good credit rating, and bring more investors into the market. It has been tried and tested successfully by GuarantCo in several African markets. Recently InfraCredit announced its successful closing of a US$25m equity investment from Africa Finance Corporation (AFC). As such, AFC is now a shareholder in InfraCredit alongside the NSIA. We expect this partnership to enhance InfraCredit’s capacity to unlock long-term local currency financing for infrastructure.


24 January 2019 71

Company profiles FBNQuest Capital coverage universe


24 January 2019 72

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 5.7 Price target (N) – new 11.2 Price target (N) – old 12.6 Up/downside potential +97.9% Market cap. (Nbn / US$m) 163 / 451 Bloomberg ACCESS NL Reuters ACCE.LG Free float 90.9%

Tunde Abidoye +234 703 005 7836 [email protected] Team +234 708 065 3174 [email protected]

Share price performance (N)

% YTD 1M 3M 12M

Absolute -16.9 -19.6 -28.9 -55.5

vs. Sector -15.8 -24.5 -34.7 -22.0

vs. NSE -15.2 -20.2 -22.0 -25.1 Source: Bloomberg, FBNQuest Capital Research

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2016 2017 2018

ACCESS ASI Rebased

Access Bank Seeking potential benefits from M&A

Cheapest amongst its peers post M&A driven sell-off Access Banks’s proposed merger with Diamond will make it the largest bank in Nigeria on a number of metrics including total assets. Both banks have large credit exposures to the corporate and commercial segments (94% for the former and 81% for the latter). However, Diamond’s relatively cheap pool of retail deposits which was c.75% of total deposits as at 9M 2018 (vs. 25% for Access) makes it an attractive acquisition target for Access. While the full extent of the synergies are still being quantified, the management of Access Bank estimates pre-tax cost synergies of c.N30bn per annum over the next three years. We believe that cost and revenue synergies and the ability to grow volumes will be earnings accretive and result in Access achieving top profitability in the medium-term. Given the read-across from the Intercontinental Bank acquisition in 2011, we do not expect these synergies to be realised immediately. We expect Access to deliver a 2018E PBT of cN92bn, up 15% y/y and implying a ROAE of c.14.0%. For Diamond, given the impact of further provisions and write-offs estimated at cN150-180bn, we expect it to report a loss in 2018E. Going forward, if we assume that the synergies are not realised, given the barely profitable cleaned-up Diamond, we do not expect Access Bank’s ROAE to be much different from the 14-15% we forecast for now. However, assuming all the pre-tax cost synergies of N30bn are realised in one full year (vs 3 years), that should take Access Bank’s ROAE up to 18-19%. Post the announcement, Access Bank’s shares have shed -24.8% (vs. +0.2% ASI). At current levels the shares are trading on 2018 P/B multiple of 0.3x or a-60% discount to the average for the sector. We believe there is potential for significant multiple expansion once the cost synergies begin to materialise. We retain our Outperform rating on the stock.

Q3 PBT up 17% y/y driven by y/y reductions in provisions and opexAccess Bank’s Q3 2018 PBT grew by 17% y/y to N24.4bn. The y/y growth in earnings was driven by the combination of a -59% y/y and a -6% y/y reduction in loan loss provisions and opex respectively. In terms of revenue, pre-provision profit was flat y/y, driven by similar (flattish) performances in both revenue lines. In contrast to the double-digit growth in PBT, PAT declined by -40% y/y because of a negative result of -N3.8bn in other comprehensive income (OCI) compared with a gain of N14.8bn in Q3 2017. Sequentially, PBT grew by 33% q/q, underpinned by a 41% q/q growth in non-interest income and a 57% q/q reduction in loan impairment charges. However, PAT came in flat q/q because of the negative surprise in OCI compared with +N1.1bn in Q2 2018. Relative to our estimates, PBT came in slightly ahead of our N22.8bn forecast. However, PAT was in line with our estimate.

Financials and valuation metrics (Dec YE)

N m unless otherwise stated 2017A 2018E 2019E 2020E

Net interest income 163,452 163,424 179,852 199,798

Other income 139,144 134,970 142,393 150,937

PBT 80,072 91,973 91,480 105,976

EPS (N) 3.11 2.39 2.49 2.89

EPS growth (Y/y) 10.4% -23.3% 4.4% 15.8%

ROAE 18.8% 14.0% 14.2% 14.7%

P/E (x) 1.8 2.4 2.3 2.0

P/B (x) 0.32 0.34 0.31 0.27

Dividend yield 11.5% 11.8% 11.9% 13.8%



24 January 2019 73

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 2.29 Price target (N) – new 2.87 Price target (N) – old 3.25 Up/downside potential +25.2% Market cap. (Nbn / US$m) 66/ 183 Bloomberg FIDELITY NL Reuters FUMG.LG Free float 98.6%



% YTD 1M 3M 12M

Absolute 12.8 18.0 17.4 -35.6 vs. Sector 13.9 13.4 11.7 -2.4

vs. NSE 14.6 17.7 24.4 -5.4 Source: Bloomberg, FBNQuest Capital Research

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2016 2017 2018

FIDELITY ASI Rebased

Fidelity Bank Healthy upside potential, but less than peers

c.10% ROAE set to be the norm We expect Fidelity Bank’s 2018E ROAE to come in at around 10%, just shy of its 2017 ROAE of 11.3% - and making it the second year of c.10% ROAE since 2012. On our forecasts, we see the bank delivering a 2018E PBT of N27.4bn or about 10% higher than management’s guidance of N25.0bn. In contrast to the flat to single-digit y/y loan growth that we forecast for most banks within our coverage, we see Fidelity’s loan book expanding by c.10% y/y in 2018E. Although its asset quality ratio (NPL/gross loans) for 9M 2018 improved by around 40bps relative to 2017 levels, the improvement was due to credit growth over 9M 2018. Going into 2019E, we forecast a slight reduction in ROAE to 9.3% and a -6% y/y decline in 2019E PBT to N25.8bn. We expect cost-of-risk to inch up as banks fully comply with IFRS 9 and report provisions on the P&L. As such, the reduction to our 2019E earnings forecast is driven by an 80bps increase in the bank’s cost-of-risk.to 1.3%. Having shed -21.3% in 2018 (vs. -17.8% NSE ASI), Fidelity bank shares reversed some of the significant gains – of c. +191.7% (vs. +42.3% ASI) - they made in 2017. With a 2018E P/B multiple of 0.3x, the shares suffered a multiple contraction of c.40% through 2018. At current levels, we see an upside potential of around c.25%. Topping up the upside potential is a dividend yield of 10.9% which is amongst the best within our coverage universe. As such, we believe that the market is undervaluing the shares.

Q3 2018 PBT up 17% y/y mainly driven by a 73% y/y Fidelity’s Q3 2018 PBT grew 17% y/y to N7.1bn, thanks to a -73% y/y reduction in impairment charges. To a lesser extent, funding income which was up by 5% y/y also contributed to the double-digit earnings growth. Following the restatement of its Q2 2018 revenue numbers, non-interest income declined by -8% y/y. Thanks to favourable base effects in other comprehensive income (OCI) – a negative result of -N898m in Q3 2017 vs. nil Q3 2018, PAT growth accelerated to 33% y/y. Sequentially, the trends diverged slightly from those on a y/y basis. PBT fell by 12% q/q on the back of a 7% q/q decline in pre-provision profits. Although impairment of loan losses fell by 63% q/q, the q/q decline in revenues proved more significant. Again thanks to base effects on the OCI line, PAT advanced by 39% q/q. Compared with our N6.7bn and N6.1bn forecasts, both PBT and PAT were broadly in line.




Other income 25,828 21,784 17,427 18,299

PBT 20,302 27,360 25,804 26,075

EPS (N) 0.76 0.72 0.74 0.74

EPS growth (Y/y) 236.9% -5.5% 2.6% 1.1%

ROAE 11.3% 9.8% 9.3% 8.8%

P/E (x) 3.0 3.2 3.1 3.1

P/B (x) 0.33 0.30 0.28 0.26

Dividend yield 4.8% 10.9% 9.6% 9.7%



24 January 2019 74

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 1.92 Price target (N) – new 2.89 Price target (N) – old 3.25 Up/downside potential +50.8% Market cap. (Nbn / US$m) 38 / 105 Bloomberg FCMB NL Reuters FCMB.LG Free float 89.5%



% YTD 1M 3M 12M

Absolute 1.6 16.4 20.8 -43.5

vs. Sector 2.7 11.7 15.0 -10.0

vs. NSE 3.3 16.0 27.7 -13.1 Source: Bloomberg, FBNQuest Capital Research

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2016 2017 2018

FCMB ASI Rebased

FCMB Group Shares trading at a discount to closest peer

Year-end rally in share price driven by stellar Q3 2018 earnings Having gained 19.6% in 2018 (vs. ASI -17.8%) FCMB was only one of two banks within our coverage that outperformed the NSE ASI in 2018. The bank’s share price performance was mainly driven by its Q3 2018 results which surprised the market positively. Following the publication of its Q3 results late in November 2018, the shares rallied strongly, gaining c.+43% over the next one month, effectively erasing the shares negative (-10.8%) return through to November. Unlike most banks whose earnings growth were primarily due to lower loan loss provisions y/y, FCMB’s underlying earnings grew strongly y/y - with pre-provision advancing by 48% y/y in Q3 2018 – and were the primary driver behind the triple-digit PBT growth in Q3. On the back of the stellar Q3 results, we forecast 2018 PBT of N20.3bn, up 77% y/y. Our earnings forecast translate to a 2018E ROAE of 12.4%, making it the bank’s best performance since 2014. Beyond 2018, we have not modelled a repeat of the fx revaluation gains that featured prominently in the 2018 results. Consequently, we forecast an -8% y/y decline in PBT to N18.8bn for 2019E. FCMB’s financial soundness ratios are also robust. While its capital ratio which stood at 18.1% as at Q3 2018 is one of the best amongst its tier 2 peers, its NPL ratio of 5.1% ranks close to the c.5.0% benchmark for tier 1 peers. At current levels, FCMB shares are trading on a 2018E P/B multiple of 0.21x or a -31% discount to the 0.3x P/B multiple for Fidelity. To our minds, we do not think this discount is justified given the similarity in their returns (ROAE) profile.

Q3 PAT up 394% y/y, driven by fx revaluation gains &OCI

In Q3 2018, FCMB delivered triple digit (+154% y/y) PBT growth to N7.7bn. The marked earnings growth was mainly driven by a 183% y/y growth in non-interest income, on the back of fx revaluation gains of N9.0bn in Q3 2018 vs. N428m for the comparable quarter of 2017. In contrast to the stellar growth in non-interest income, funding income was up by low single digits y/y. As such, pre-provision profits grew by 48% y/y. Although loan loss provisions were up by 172% y/y, the growth in pre-provision profits was more significant. Further down the P&L, the growth on the PAT line accelerated by 394% y/y to N13.2bn, thanks to a positive result of N7.6bn in other comprehensive income (OCI). The sequential trends mirrored those observed on a y/y basis. PBT and PAT grew by 99% q/q and 446% q/q respectively due to the boost from fx gains and OCI. Compared with our forecasts, PBT and PAT beat by 86% and 283% respectively due to positive surprises in non-interest income and OCI.




Other income 32,117 41,276 38,799 42,291

PBT 11,462 20,345 18,809 21,342

EPS (N) 0.59 1.16 0.81 0.92

EPS growth (Y/y) -36.6% 96.5% -30.6% 13.5%

ROAE 6.4% 12.4% 8.4% 9.0%

P/E (x) 3.2 1.7 2.4 2.1

P/B (x) 0.20 0.21 0.19 0.18

Dividend yield 5.2% 10.9% 11.3% 12.8%



24 January 2019 75

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 33.0 Price target (N) – new 45.7 Price target (N) – old 53.0 Up/downside potential +38.6% Market cap. (Nbn / US$m) 971 / 2.678 Bloomberg GTB NL Reuters GTB.LG Free float 99.9%



% YTD 1M 3M 12M

Absolute -4.2 -2.4 -9.3 -36.5

vs. Sector -3.1 -7.2 -15.1 -3.1


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GUARANTY ASI Rebased

Guaranty Trust Bank Ample upside potential post sell-off

On track to beat 2018 guidance Following a sell-off of around -15% in 2018, GT Bank shares suffered a severe multiple contraction of c.-30% from where they were at the start of the year. We find the shares attractive at current levels given the sell-off on the shares (c.-41% from the peak of N54.7 seen on 19, January 2018). Although GT Bank’s 2018E P/B multiple of 1.8x is above the trough multiple of c.1.0x that they fell to in 2016, we believe that the multiple contraction from c.2.5x provides investors a buying opportunity. On our forecasts, we expect GT Bank to deliver a 2018E PBT of c.N210bn (+5% y/y), slightly higher than management’s N205bn guidance. The key drivers behind our PBT forecast are non-interest income which was up 64% y/y in 9M 2018 – on the back of fx trading and revaluation gains – and a 79% y/y reduction in loan loss provisions. In contrast, funding income declined -10% y/y, largely reflecting a -12% contraction in the bank’s loan book over 9M 2018 and lower NIMs due to a compression in yields during the year. Regardless of the single-digit PBT growth that we forecast for 2018E, our 29.7% ROAE forecast for the bank is one of the best within our coverage – second only to Stanbic. Moving into 2019, although we do not envisage strong loan growth in H1, we forecast loan growth of 9% y/y and ROAE of 30.3%. From current levels, we see a 39% upside potential. Consequently, we retain our Outperform rating on the shares.

Q3 PBT up 12% y/y, driven by y/y growth in non-interest inc. & net recoveries

GT Bank’s Q3 2018 PBT grew by 12% y/y to N54.6bn. The double-digit earnings growth was underpinned by a 169% y/y increase in non-interest income and net recoveries of N295m (vs. loan impairments of –N1.1bn in Q3 2017). The robust growth in non-interest income completely offset a -12% y/y reduction in funding income and was the major driver behind a 19% y/y growth in pre-provision profits. Although opex was up by 43% y/y, the positives from the non-interest income and net recoveries were more significant. Below the tax line, PAT growth decelerated to 4% y/y due to a negative result of -N816m in other comprehensive income and negative base effects on the minority interest line (-N442m vs. +N382m in Q3 2017). Sequentially, PBT and PAT declined by -4% q/q and 7% q/q respectively, driven mainly by an -8% q/q decline in pre-provision profits. Relative to our forecasts, both PBT and PAT were broadly in line with our N53.8bn and N44.7bn forecasts respectively.




Other income 89,006 129,825 140,211 151,428

PBT 200,242 209,951 222,147 248,672

EPS (N) 6.05 5.90 6.27 7.02

EPS growth (Y/y) 25.8% -2.5% 6.4% 11.9%

ROAE 32.1% 29.7% 30.3% 28.6%

P/E (x) 5.5 5.6 5.3 4.7

P/B (x) 1.58 1.74 1.47 1.24

Dividend yield 8.2% 8.2% 8.6% 9.6%



24 January 2019 76

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 47.5 Price target (N) – new 41.2 Price target (N) – old 47.5 Up/downside potential -13.2% Market cap. (Nbn / US$m) 462 / 1,283 Bloomberg STANBIC NL Reuters IBTC.LG Free float 28.6%



% YTD 1M 3M 12M

Absolute -0.9 3.3 3.3 3.3

vs. Sector -0.1 -1.4 -2.5 36.8

vs. NSE 0.8 2.9 10.2 33.7 Source: Bloomberg, FBNQuest Capital Research

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2016 2017 2018

STANBIC ASI Rebased

Stanbic IBTC Holdings Strong earnings growth already priced-in

In pole position for ROAE crown in 2018 From a share price perspective, Stanbic IBTC (Stanbic) shares were about the most resilient amongst the quality bank names (ex-tier 2). In 2018, the bank’s shares gained +17.2% (vs. -17.8% ASI), second only to the 19.6% return on FCMB. Stanbic’s share price performance was underpinned by solid PBT growth of 54% y/y for 9M 2018. Although funding income for 9M 2018 surprised negatively and declined by -7% y/y (a reflection of lower NIMs), earnings growth was underscored by non-interest income growth of 24% y/y and net recoveries of N4.1bn. The strong y/y growth in non-interest income was driven by strong revenue contribution from the wealth management and corporate banking divisions which both grew their non-interest income by 24% y/y. Following the impressive earnings for 9M 2018, we forecast 2018E EPS growth of 34% y/y and ROAE of 32.3% - the best within our coverage universe. Due to PENCOM’s introduction of the multi-fund structure for the pension business, management fees are set to take a further hit to 1.33% in 2019E from c.1.43% in 2018 (vs. c.1.6% in 2017). The downward review, combined with fee-caps for mutual funds is likely to result in a slight reduction in the y/y growth trend of non-interest income for the wealth business. Although we still see strong growth in pre-provision profits over the next few years, going forward, our earnings (PBT) growth is tempered by an upward revision to our cost-of-risk assumption to 1.2% in 2019E (vs. -0.1% 2018). As such, we see PBT growth of 6% y/y for 2019E. Following the strong performance of the shares in 2018, our price target of N41.2 implies a negative return of c.-13.2%. Consequently, we keep our Neutral rating on the shares.

Double-digit PBT growth mainly driven by lower impairments y/y

Although Stanbic’s pre-provision profits were down by 3% y/y, its Q3 2018 PBT grew by 19% y/y to N19.7bn. Similar to its Q2 2018 results, a -79% y/y reduction in loan loss provisions was the key driver behind the double-digit earnings growth y/y. However, non-interest income which was up by 9% y/y also contributed. As for funding income, it fell by 17% y/y. Moving down the P&L, a negative result of -N1.5bn in other comprehensive income (OCI) reduced the PAT growth to 10% y/y relative to the PBT growth. Sequentially, PBT declined by 18% q/q, mainly because of negative base effects in loan loss provisions – net recoveries of N394m in Q2 2018 compared vs. loan loss provisions of –N1.4bn in Q3 2018 – and a 14% q/q decline in funding income. Following the negative result in OCI compared with +N743m Q2 2018, PAT fell by 27% q/q. Compared with our forecasts, PBT and PAT missed by -11% and 7% respectively due to negative surprises on both revenue lines and impairments.




Other income 89,182 106,198 121,065 134,383

PBT 61,166 86,875 91,850 97,863

EPS (N) 5.04 6.74 6.87 7.32

EPS growth (Y/y) 107.1% 33.6% 1.9% 6.5%

ROAE 31.6% 32.3% 26.3% 23.5%

P/E (x) 9.4 7.0 6.9 6.5

P/B (x) 2.61 2.01 1.66 1.41

Dividend yield 2.3% 3.2% 4.3% 4.6%



24 January 2019 77

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 7.3 Price target (N) – new 12.0 Price target (N) – old 13.6 Up/downside potential +64.9% Market cap. (Nbn / US$m) 248 / 684 Bloomberg UBA NL Reuters UBA.LG Free float 87.3%



% YTD 1M 3M 12M

Absolute -5.8 -7.6 -9.4 -40.7

vs. Sector -4.8 -12.3 -15.1 -7.3


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2016 2017 2018

UBA ASI Rebased

United Bank for Africa Shares looking attractive post sell-off

Set to deliver sub 20% ROAE for the first time since 2012 Besides 2014 when its ROAE fell to 18.4% due to the disproportionate share of low margin FCY loans on its balance sheet, UBA has delivered +20% ROAE every year since 2012. However, we expect this trend to change in 2018E. We forecast a 2018E ROAE of 12.9%, well below management’s 18% guidance. UBA’s Q2 2018 results featured a substantial negative result of –N24.2bn in other comprehensive income (OCI) which stemmed from fx translation losses from its foreign subsidiaries. Although OCI gains of N11.2bn from Q1 2018 offset some of the losses from Q2, the balance of -N11.3bn still weighed heavily on 9M 2018 earnings. We believe management’s guidance excludes the potential negative impact from other comprehensive income (OCI). As such, its 2018 share price performance of -26.0% (vs. -17.8% ASI), is the second worst within our coverage universe and largely reflects a more subdued earnings outlook relative to prior years. However, given the extent of the sell-off, we believe that the market has overreacted and the shares over-sold. UBA trades on a P/B multiple of 0.5x the second lowest amongst similar sized banks and a -42% discount to the sector’s average P/B multiple of 0.8x. At current levels, the shares provide an attractive upside potential of c.65%. Our forecast dividend of N0.84 also provide an additional potential upside of 11.6% to the potential capital appreciation. Consequently, we retain our Outperform recommendation on the shares.

Q3 PBT flat y/y, driven by weak funding income & higher provisions

UBA’s Q3 2018 PBT of N21.0bn came in flat y/y. The key drivers were a -22% y/y decline in funding income and a 14% y/y increase in loan loss provisions. Although non-interest income grew by 25% y/y, the decline in funding income proved significant and led to -7% reduction in pre-provision profits. Below the tax line, PAT fell by -16% y/y due to the combination of a higher effective tax rate of 14.6% (compared with 10.6% in Q3 2017) and a -47% y/y decline in other comprehensive income (OCI). Sequentially, PBT fell by -34% q/q because funding income and non-interest income declined by -31% q/q and -9% q/q respectively. However, PAT of N17.4bn was a marked improvement over the pre-tax loss of –N2.3bn that the bank delivered in Q2 2018 (recall that Q2 2018 PAT was weighed down by a negative result of –N24.5bn in other comprehensive income). Compared with our forecast, PBT missed by 11% mainly because of a negative surprise on the funding income line.




Other income 118,933 121,312 128,590 136,306

PBT 105,264 101,222 113,659 123,978

EPS (N) 2.77 1.91 2.50 2.73

EPS growth (Y/y) -23.1% -30.9% 30.6% 9.1%

ROAE 21.1% 12.9% 16.0% 15.8%

P/E (x) 2.6 3.8 2.9 2.7

P/B (x) 0.51 0.49 0.44 0.40

Dividend yield 11.9% 11.6% 12.1% 13.2%



24 January 2019 78

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 22.0 Price target (N) – new 31.8 Price target (N) – old 36.6 Up/downside potential +44.8% M Market cap. (Nbn / US$m) 691 / 1,904 Bloomberg ZENITHBA NL Reuters ZETH.LG Free float 90.4%



% YTD 1M 3M 12M

Absolute -4.6 -3.1 -8.3 -31.3

vs. Sector -3.5 -7.7 -14.1 2.2


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ZENITHBANK ASI Rebased

Zenith Bank 45% upside potential from current levels

Valuation gap still not justified We maintain our Outperform rating on Zenith Bank with a 12M price target of N31.8 implying a potential upside of 41.8% from current levels. Zenith Bank is among our top picks within the sector due to its strong financial soundness indicators. Its robust capital and liquidity ratios (CAR of 21.0% and LTD 55.7%) puts it in good stead to continue to deliver solid sustainable performance going forward. This is reflected in its 9M 2018 earnings, which was in absolute terms, the strongest in the sector. Its 9M PBT of N167.3bn, up +10% y/y, puts the bank on track to meet management’s 2018E PBT guidance of N210bn. Our PBT forecast of N210.7bn is similar to guidance and implies a ROAE of 22.8%. At current levels, Zenith Bank is trading on a 2018E P/B multiple of 0.9x, or a discount of c.-51% to the 1.7x P/B multiple that GT Bank is trading on. We find this multiple unjustified because their ROAE differentials – 2018E ROAE of 29.7% and 22.8% for GT Bank and Zenith respectively – do not reflect the valuation gap. We also note that Zenith Bank’s 2018E dividend potential implies a higher yield of 12.6% compared with the 8.2% yield that we forecast for GT Bank. While we do not expect the valuation gap to close completely, we expect it to narrow in the medium term.

Q3 2018 PAT up 21% y/y Zenith’s Q3 2018 PAT grew strongly, by 21% y/y to N68.1bn, thanks to a tax credit of N2.5bn and a positive result of N5.8bn in other comprehensive income (OCI) vs. N2.3bn in Q3 2017. However, above the tax line, PBT was flat y/y at c. N60bn. The flattish performance was driven by an -18% y/y decline in non- interest income and a 7% y/y rise in opex. Although funding income grew by 19% y/y, the y/y decline in non-interest income almost completely offset funding income growth and translated to a 2% y/y growth in pre-provision profits. The latter revenue line reflects derivative losses of -N20.7bn over the 9M 2018 period (compared with gains of +N28.8bn for 9M 2017) and a -49% y/y reduction in current account maintenance fees to N14.7bn for 9M 2018. Sequentially, PBT advanced by 12% q/q, driven by a 28% q/q growth in funding income and declines of -10% and -22% in loan loss provisions and opex respectively. Thanks to the tax credit and the positive result on the OCI line, PAT growth accelerated by 120% q/q.




Other income 270,561 180,794 191,642 203,140

PBT 203,461 210,742 214,695 229,839

EPS (N) 5.74 5.92 5.70 6.10

EPS growth (Y/y) 8.4% 3.1% -3.7% 7.1%

ROAE 23.7% 22.8% 20.9% 20.0%

P/E (x) 3.8 3.7 3.9 3.6

P/B (x) 0.84 0.85 0.76 0.68

Dividend yield 12.3% 12.6% 11.7% 12.5%



24 January 2019 799

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 190.0 Price target (N) – new 270.0 Price target (N) – old 274.5 Up/downside potential +42.1% Market cap. (Ntrn / US$m) 3,919 / 10,806 Bloomberg DANGCEM NL Reuters DANGCEM.LG Free float 14.7%



% YTD 1M 3M 12M

Absolute 0.2 1.6 -11.4 -29.4

vs. Sector -9.8 -12.3 2.7 -9.4

vs. NSE 1.9 1.3 -4.4 1.1

Source: Bloomberg, FBNQuest Capital Research

100

140

180

220

260

300

2016 2017 2018

DANGCEM ASI Rebased

Dangote Cement Shares trading at a discount

2018E earnings underpinned by solid unit volume growth We expect Dangote Cement to post PBT growth of c.11% y/y to N321.6bn in 2018E. Although this growth pales in comparison to the 60% y/y PBT growth that it delivered in 2017, unlike then, we expect it to be underpinned by solid unit volume growth of c.+9% y/y (vs. -6% y/y volume decline in 2017). In addition, the pioneer tax relief for Ibese lines 3&4 and Obajana line 4 which have been approved by government will most likely be reflected in 2018E earnings and result in a lower effective tax rate of c.15% for 2018E (vs. 36% for 9M 2018). Although our 2018 tax-rate assumption of 22% is higher than the 15% implied by the tax relief, it still translates to an EPS growth of 25.9%. Group unit volume growth has benefitted from the recovery of cement demand in Nigeria which posted growth of c.12% y/y in 9M 2018 compared with the flat y/y growth delivered by the Pan-African business segment. Our 2018E volume growth forecast for Nigeria is conservative. As such, there is potential upside risk to demand because favourable weather conditions in Q4 could result in faster volume growth relative to Q3. Moving into 2019E, even though we forecast a slight improvement in GDP for Nigeria to c.2.9% from c.2.0% in 2018E, we have kept our unit volume growth forecast unchanged at 11% y/y. However, we forecast Group volume growth of around 12% y/y driven by increased contribution (+14% y/y) from the Pan-African segment. Our growth forecasts for Pan-Africa is underpinned by our higher utilisation rate forecasts, particularly for Tanzania and the Republic of Congo following the switch from diesel fuel to gas for the former and production ramp-up for the latter. Our volume forecasts translate to 2019E sales and PBT growth of 12% y/y and 14% y/y to c.N1.0trn and N365.2bn respectively. Having shed-17.5% in 2018 (vs -17.8% ASI). The shares now provide a potential upside of c. +42.1% from current levels. As such, we retain our Outperform ratingon the stock.

Q3 2018 PBT down 4% y/y due to gross margin contraction & opex.DangCem’s Q3 2018 PBT declined by -4% y/y to N61.8bn. The key drivers behind the y/y decline in earnings were a gross margin contraction of -130bps y/y to 55.6% and a 19% y/y rise in opex. These negatives completely offset sales growth of 6% y/y and a -10% y/y reduction in net interest expense. Thanks to the combination of a positive result of N9.2bn in other comprehensive income (compared with –N7.9bn in Q3 2017) and a lower effective tax rate of 27.0% (vs. 31.3% in Q3 2017), PAT grew by 58% y/y to N54.2bn. Sequentially, sales and PBT declined by -16% q/q and -20% q/q respectively. Compared with our forecasts, sales missed by around 7%. However, PBT missed by a wider margin of 13% because gross margin surprised negatively. PAT also came in around 6% behind our forecast.



Sales 805,582 903,765 1,008,293 1,101,667

PBT 289,590 321,613 365,242 401,445

PBT margin 35.9% 35.6% 36.2% 36.4%

EPS (N) 11.59 14.60 17.72 19.47

EPS growth (Y/y) -32.9% 25.9% 21.4% 9.9%

P/E (x) 16.4 13.0 10.7 9.8

EV/OP (x) 14.1 10.6 9.4 8.8

Dividend yield 4.6% 6.2% 7.7% 8.4%



24 January 2019 80

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 12.6 Price target (N) – new 21.5 Price target (N) – old 21.5 Up/downside potential +70.9% Market cap. (Nbn / US$m) 109 / 300 Bloomberg WAPCO NL Reuters WAPCO.LG Free float 36.8%



% YTD 1M 3M 12M

Absolute 0.8 -0.4 -30.9 -75.1

vs. Sector -9.2 -14.3 -16.8 -55.1

vs. NSE 2.6 -0.7 -23.9 -44.7


0

40

80

120

160

2016 2017 2018

LAFARGE ASI Rebased

Lafarge Africa Earnings boost from balance sheet deleveraging

Marked underperformance of shares in 2018 Lafarge Africa shares shed -71.4% (vs ASI -17.8% ASI), the worst performance within our entire coverage universe. Although the shares underperformance was mainly driven by a series of negative earnings releases by the company, we believe that the market’s negative reaction to the company’s announcement of an N89.2bn rights issue also played a part. To put it in context, the latest rights issue comes on the heels of a larger (rights) issue of N131.7bn which was concluded in January 2018. Although the prior rights issue was used to pay down around US$226m of shareholder loans out of a total of c.US$659m, Lafarge still remained highly leveraged and exposed to foreign currency volatility. As such, excluding one-off costs related to restructurings and SAP implementation, a 21% y/y increase in interest expense was the primary driver of the pre-tax loss of –N14.4bn that the company reported for 9M 2018. Although we see 2018E sales coming in at N312.5bn, implying growth of 4% y/y, we forecast a pre-tax loss of –N15.3bn in 2018E. We forecast similar sales growth (+4% y/y) in 2019E. However, we expect Lafarge to report a pre-tax profit of N2.1bn (vs -N15.3bn 2018E) on the back of further balance sheet deleveraging and the restructuring of shareholder loans of US$293m (via extension of the term to 7.5 years with a 2 year moratorium on interest and principal). The moratorium is expected to cover about US$25m in finance related expense over the next two years. Although our price target implies a potential upside of c71%, we are keeping our Neutral recommendation on the shares because they have not yet been adjusted for the rights issue which was priced at N12.0. Assuming full subscription, we estimate a c.20% reduction to our price target.

Pre-tax loss of –N8.0bn driven by one-off costs & interest exp. Lafarge’s Q3 2018 results showed that while sales grew by 4% y/y to N72.0bn, the company reported a pre-tax loss of -N8.0bn compared with –N17.1bn Q3 2017. Although its operating EBITDA (excluding one-off items) grew by 96% y/y to N13.2bn, earnings were weighed down by high interest expense and one-off costs related to SAP software implementation and ongoing restructurings in Nigeria and South Africa. These negatives completely offset a 423bps y/y gross margin expansion to 23.8%. Thanks to a tax credit of N1.5bn, the after-tax loss narrowed to –N6.3bn. Sequentially, sales declined by 12% q/q. However, the pre-tax and after-tax losses of –N8.0bn and –N6.3bn were more significant than the losses of –N3.4bn and –N3.7bn that the company reported in Q2 2018. Compared with our forecasts, sales were in line. In contrast, the pre-tax and after tax losses diverged markedly from our–N777m and –N544m forecasts for both lines respectively.



Sales 299,153 312,450 326,160 349,311

PBT -34,032 -15,341 2,127 4,141

PBT margin -11.4% -4.9% 0.7% 1.2%

EPS (N) -2.95 -1.65 0.20 0.38

EPS growth (Y/y) n/a -44.0% n/a 94.6%

P/E (x) n/a n/a 64.0 32.9

EV/OP (x) 61.8 15.4 11.8 10.6

Dividend yield 3.3% 8.8% 4.4% 3.6%



24 January 2019 81

Rating – NEW UNDERPERFORM Rating – old NEUTRAL Price (N) 71.0 Price target (N) – new 57.8 Price target (N) – old 68.1 Up/downside potential -18.5% Market cap. (Nbn /US$m) 156 / 429 Bloomberg GUINNESS NL Reuters GUIN.LG Free float 44.4%

Fola Abimbola, CFA +234 701 329 9146 [email protected] Team +234 708 065 3174 [email protected]


% YTD 1M 3M 12M

Absolute -1.4 -1.4 -10.7 -41.0

vs. Sector 1.5 -0.7 -2.4 5.2

vs. NSE 0.4 -1.7 -3.7 -10.5


50

100

150

200

2015 2016 2017

Guinness Nig. ASI Rebased

Guinness Nigeria Improving picture offset by weak Q1

Spirits and non-alcoholic segments continue to drive topline Over the last two fiscal years (end-June) Guinness Nigeria (Guinness) has consistently delivered double-digit topline growth largely driven by its spirits and non-alcoholic segments. We however note that Q1 2019 earnings (end-Sep) were behind our forecasts due to negative surprises in sales (and margins). Q1 sales missed by 18%, while gross margin was 158bps narrower than our forecast. Besides competitive pressure, Q1 sales were also hurt bythe excise tax increase implemented in June. Nevertheless, despite the downward pressure on topline, net earnings surged on the back of balancesheet deleveraging, mostly through Guinness’ reduction of foreign-currency debt exposure. PBT was up significantly, boosted by an 84% y/y decline in net interest expense. Looking ahead, we expect competitive headwinds and an additional excise tax increase in 2019 to keep the pressure on earnings. We however believe sales from spirits will continue to support topline growth.Indeed, management at its last conference call stated that spirits now account for 15% of sales, up from 13% previously, and suggested that demand in this segment will remain healthy over the foreseeable future.Behind spirits, management cited brands in the non-alcoholic portfolio aspotential growth drivers, led by Orijin Zero; backed by a rising trend of healthification. We expect to see sales and PBT growth of 6% y/y and 14%y/y respectively in 2019E. However, our -21% price target cut to N57.8 reflects our decision to increase our risk free rate assumption by 200bps to 15%. Guinness shares are trading on a 2019E P/E of 19.6x for a 2019E EPS growth of 3.2% y/y. From current levels, the shares show a downside potential of -19%. We are therefore downgrading the shares to Underperform.

Lower net interest expense boosts Q1 bottom line Guinness’ Q1 2018 PBT and PAT increased significantly to N1.3bn and N836m respectively compared with a PBT and PAT of N41m each in the corresponding quarter of 2017. The key driver behind these increases were a 12% increase on the other income line and, more remarkably, an 84% y/y decline in net interest expense. These more than offset a y/y sales decline and gross margin contraction. Sequentially, sales fell 25% q/q, with PBT and PAT declining 40% q/q and 49% q/q respectively. Compared with our forecasts, sales missed by 18% while gross margin was 158bps narrower. Consequently, PBT and PAT missed by much wider margins of 50% and 51% respectively.

Financials and valuation metrics (Jun YE)


Sales 142,976 150,839 165,923 185,005

PBT 9,943 11,318 16,080 18,927

PBT margin 7.0% 7.5% 9.7% 10.2%

EPS adjusted (N) 3.50 3.62 5.14 6.05

EPS growth (Y/y) 26.3% 3.2% 42.1% 17.7%

P/E 20.3x 19.6x 13.8x 11.7x

EV/OP 10.7x 13.3x 9.6x 8.2x

Dividend yield 2.6% 2.3% 2.6% 2.7% Source: Company data, FBNQuest Capital Research estimates


24 January 2019 82

High leverage, depreciation undermining performance 2018 will be a loss-making year for International Breweries (IB); we are also forecasting that net earnings will remain in negative territory in 2019-20E. We believe IB experienced robust volume growth in 9M 2018, driven by its recently-commissioned Sagamu plant. We highlight that 9M 2018 sales surprised positively. PBT margin, however, was squeezed by inefficiencies that came about after IB’s 2017 merger with parent company AB Inbev’s subsidiaries, Pabod Breweries (Pabod) and Intafact Beverages (Intafact).Indeed, the company’s performance has not lived up to post-merger projections as expected synergies from the merger did not materialise. More importantly, increased finance and depreciation charges arising from the debt-fueled Sagamu expansion has completely eroded earnings, with a net loss of -N9.1bn posted for 9M 2018. Despite this performance, IB remainson the frontline in the brewery turf war. We recall for instance that the company wrote to distributors last year stressing that it did not plan raiseprices to make up for higher excise taxes. This forced NB and Guinness to roll back price increases earlier passed on. Looking at the beer market in 2019, we anticipate that IB will remain favourably positioned, considering its strong exposure to the affordable segment. However, we do not see strong enough volumes to offset depreciation- and debt-financing impacts. We forecast pretax losses of –N8.3bn and –N5.2bn in 2019E and 2020E respectively. In our view, to ease the pressure on the bottom line, IB’s management may need to take further steps to reduce expensive debt and/or shift to equity sources of financing. We have cut our price target by -9% to N28.2, but this is mainly on the back of our decision to increase our risk free rate assumptions by 200bps to 15%. From current levels, we see a downside potential of -7% to our price target. Despite this modest downside, we view it very likely that the market will overcompensate for net losses incurred overforecast periods, leaving IB’s shares in oversold territory for an extended period. As such, we downgrade the stock to Underperform.

Net earnings stuck in negative territory Recently published results, which included earnings for Pabod and Intafact, do not show comparable figures for the corresponding quarter of the prior year. As such, we were unable to do y/y comparisons in our analysis. What is clear, however, is that pre- and post-tax losses of –N3.9bn and –N4.2bn were recorded for Q3, with earnings completely eroded by opex and net interest charges. On a sequential basis, sales grew by 11% q/q, whereas contractions in margins led to a q/q deterioration in net earnings.


N m unless otherwise stated 2017A* 2018E 2019E 2020E

Sales 36,528 115,861 126,846 143,910

PBT -3,200 -11,453 -8,336 -5,247

PBT margin -8.8% -9.9% -6.6% -3.6%

EPS adjusted (N) 0.17 -1.01 -0.87 -0.55

EPS growth (Y/y) n/a -708.2% -13.7% 0.0%

P/E 181.9x -29.9x -34.7x -55.1x

EV/OP 84.5x 106.4x 66.2x 48.3x

Dividend yield 0.0% 0.0% 0.0% 0.0%

Source: Company data, FBNQuest Capital Research estimates; pre-merger FY 2017

Rating – NEW UNDEPERFORM Rating – old NEUTRAL Price (N) 30.3 Price target (N) – new 28.2 Price target (N) – old 31.1 Up/downside potential -6.7% Market cap. (Nbn / US$m) 260 / 717 Bloomberg INTBREW:NL Reuters INTBREW.LG Free float 71.0%



% YTD 1M 3M 12M

Absolute -0.8 -0.8 -5.5 -52.7

vs. Sector 2.1 -0.1 2.8 -6.6

vs. NSE 0.9 -1.2 1.5 -22.3


10

20

30

40

50

60

2015 2016 2017

INTBREW ASI Rebased

International BreweriesNot yet out of the woods


24 January 2019 83

Rating – NEW UNDERPERFORM Rating – old NEUTRAL Price (N) 80.0 Price target (N) – new 71.8 Price target (N) – old 96.4 Up/downside potential -10.3% Market cap. (Ntrn / US$m) 640 / 1,764 Bloomberg NB NL Reuters NB.LG Free float 46.8%

Fola Abimbola +234 701 329 9146 [email protected] Team +234 708 065 3174 [email protected]


% YTD 1M 3M 12M

Absolute -6.4 0.0 -8.8 -44.8

vs. Sector -3.6 0.7 -0.5 1.3

vs. NSE -4.7 -0.3 -1.8 -14.4


70

120

170

220

2015 2016 2017

NB ASI Rebased

Nigerian Breweries Competitive headwinds hitting harder

Weak Q3 fuels selloff Nigerian Breweries’ (NB) underperformance of the index in 2018 (-36.7% vs.-17.8% NSE ASI) was largely driven by its negative surprise in its Q3 2018results. The third quarter is typically the weakest quarter for brewers in Nigeria because of the rains. However, the result suggests that headwinds were most pressing during the quarter as NB delivered pre-tax losses northof N5bn. Notably, a ramp-up in competitive intensity from AB-InBev combined with the excise tax increase implemented in June weighed heavily on NB’s performance. Given that the last quarter of the year is seasonally the strongest, we expect NB’s results to be better in Q4 relative to Q3, thanks to the December festivities. We however do not expect gains from Q4 to be strong enough to reverse the negative growth suffered through the year.Consequently, our Q4 2018 forecasts translate to sales and PBT declines of -5% y/y and -32% y/y respectively in 2018E. Coming from a low base (having lost volumes over the past two years), we anticipate a 2-3% recovery in unit volume growth in 2019E. This underpins our sales and PBT growth forecast of 3% y/y and 8% y/y in 2019E respectively. We have revised up our risk free rate by 200bps to 15%. Consequently, we arrive at a new price target of N71.8. Our price target implies a potential downside of -10.3% fromcurrent levels. We downgrade the stock to Underperform. In arriving at our rating, we also considered NB’s recent relegation to a medium-priced stock from its previous status of a high-priced stock. The implication of this change is that a minimum trade of 50,000 units is now required to move NB’s share price relative to 10,000 units previously. Effectively, its share price will be stickier than it used to be.

Negative sales growth drives Q3 negative earnings

NB incurred a pre-tax loss of -N5.1bn for Q3 2018 (vs PBT of +N369m in Q3 2017). The key drivers were an 11% y/y decline in sales and a gross margin contraction of -552bps y/y to 28.5%. Although net interest expense came in -54% lower y/y, the negatives from the topline completely offset the gains on this line. Further down the P&L, the after-tax loss narrowed to –N3.6bn, thanks to a tax credit of N1.4bn compared with a tax expense of -N109m in the corresponding quarter of 2017. Sequentially, the trends mirrored those on a y/y basis. Sales fell by -27% q/q. The pre-tax and after tax losses of -5.1bn and –N3.6bn also diverged markedly from PBT and PAT of N12.3bn and N8.2bn that NB delivered in Q2 2018. Compared with our forecasts, sales missed by 13%. PBT and PAT also came in significantly behind our N1.1bn and N757m estimates.



Sales 344,563 327,334 337,154 360,755

PBT 46,630 31,922 34,443 47,881

PBT margin 13.5% 9.8% 10.2% 13.3%

EPS (N) 3.94 2.79 2.98 4.17

EPS growth (Y/y) 11.6% -29.0% 6.6% 40.1%

P/E (x) 20.3x 28.6x 26.9x 19.2x

EV/OP (x) 11.2x 17.1x 16.2x 12.2x

Dividend yield 5.1% 3.5% 3.8% 5.3%



24 January 2019 848

Rating – NEW NEUTRAL Rating – old OUTPERFORM Price (N) 14.5 Price target (N) – new 13.9 Price target (N) – old 16.0 Up/downside potential -4.1% Market cap. (Nbn / US$m) 174 / 480 Bloomberg DANGSUGA NL Reuters DANGSUG.LG Free float 27%

Uwadiae Osadiaye, CFA +234 703 305 7541 [email protected] Team +234 708 065 3174 [email protected]


% YTD 1M 3M 12M

Absolute -4.9 3.6 0.0 -27.5

vs. Sector 1.1 6.6 6.7 6.8

vs. NSE -3.2 3.2 7.0 2.9


5

10

15

20

25

2016 2017 2018

DSR ASI Rebased

Dangote Sugar RefineryImproved business outlook for 2019

PT down –13% because of +200bps upward adj. to risk-free rate Dangote Sugar Refinery (DSR) underperformed the market in 2018, declining-25% vs the ASI’s -18%. 9M 2018 sales were subdued through the year mainly due to 1) difficulties in evacuation of a major proportion of its finishedproducts from its Apapa refinery as a result of ongoing road constructionand 2) increased competition from sub-standard smuggled sugar. While there is very little DSR can do about the former, management has continued tolower product pricing in a bid to win back lost market share. Raw sugarprices, DSR’s key raw material, fell –20% in 2018 with DSR’s finished sugar prices down by a similar magnitude. Year-to-date, raw sugar prices are up +8%, however, global supply/demand factors are not supportive of higher sugar prices. Bloomberg consensus forecasts point to soft raw sugar pricessimilar to last year. We forecast a capacity utilisation of around 50% in 2019E vs. our 40% estimate for 2018. Our view is premised primarily on an improved evacuation route in Apapa as road repair works are in final stages.Given an improved outlook, we forecast sales growth of c.21% y/y toN180.1bn driven by a 20% y/y rise in sales volume to 712,000tonnes in2019E. DSR’s backward integration projects are expected to continue as planned. Last year, progress was slower-than-expected, hindered by clashes between local farmers and herdsmen at Savannah Sugar Company, Numan,as well as land disputes with host communities in Taraba State. DSR has commenced development work at the 68,000 hectares (ha) Tunga Sugarproject in Nasarawa State. The Tunga project continues to enjoy support from the host community and will receive a boost in the event the firm’s immediatepast CEO wins the upcoming governorship election in Nasarawa State. We forecast EPS growth of 33% y/y to N2.25. Our price target of N13.9 is down–13% because we have raised our risk-free rate assumption by +200bps to 15.0%. Our price target implies a potential downside of -4.1% from current levels. The shares are trading on a 2018E P/E multiple of 8.5x for 7% y/y EPS growth over the 2018-20E period. Ytd, DSR shares are –4.9% underperforming the ASI by -3%. We have moved our rating to Neutral from Outperform.

In Q3, all key line items on the P&L fell on a y/y and q/q basis In Q3, all key line items on the P&L declined y/y. Q3 sales were down -26% y/y to N32.7bn due to declines of –10% y/y and –20% y/y in finished sugar sales and prices to 131,000 tonnes and c.US$12,062/tonne respectively during the quarter. PBT and PAT both declined by around -55% y/y and -58% y/y to N6.3bn and N4.0bn respectively. Additionally, gross margincontracted by -1211bp y/y to 20.8% due to subdued prices as DSR attempted to win back market share. Sequentially, all key line items on the P&L also declined.



Turnover 204,422 149,523 180,136 197,947

PBT 53,599 32,400 39,960 40,861

PBT margin 27.1% 22.2% 23.1% 21.5%

EPS (adjusted) (N) 3.32 1.70 2.25 2.34

EPS (adjusted) growth y/y 176.4% -48.8% 32.8% 4.0%

P/E (x) 4.4 8.5 6.4 6.2

EV/OP (x) 3.2 5.1 4.0 3.8

Dividend yield (%) 8.6 4.8 6.2 6.5



24 January 2019 85

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 19.5 Price target (N) – new 23.5 Price target (N) – old 26.3 Up/downside potential 20.8% Market cap. (Nbn / US$m) 80 / 220 Bloomberg FLOURMIL NL Reuters FLOURMI LG Free float 66.2%



% YTD 1M 3M 12M

Absolute -15.8 -7.2 -5.1 -35.2

vs. Sector -9.8 -4.1 1.6 -0.8

vs. NSE -14.0 -7.5 1.8 -4.7


5

15

25

35

45

55

2015 2016 2017

FLOURMILLS ASI Rebased

Flour Mills of Nigeria Neutral rating maintained

Dimmer earnings outlook for 2019E Contrary to the trend of decent-to-strong performances over the last two fiscal years, Flour Mills of Nigeria’s (FMN) earnings appear to be taking a turn for the worse in FY 2019 (end-March). Sales and PBT for H1 2019 (end-Sep) declined by 10% y/y and 38% y/y respectively. FMN has reclassified its revenue segments with sugar, previously grouped under foods, now reported as a standalone business, while the packaging, port operations, real estate and other ancillary services are now grouped together as support services. Notwithstanding, it is clear that H1 2019 sales declined y/y across all segments. Price competition, particularly in the animal feeds and sugar businesses and high input costs in the edible oil business weighed on earnings. Management also cited a slower turnaround time in light of traffic congestions - around the Apapa Port area where the company operates - asanother key reason behind the y/y deterioration in earnings. Earnings from the agro-allied segment (17% of group sales) in particular, dipped furtherinto negative territory with pretax losses of –N2.9bn in H1 2019 compared with –N2.5bn in H1 2018. While we expect the agro-allied and sugar businesses to continue to face competitive headwinds in 2019E, we still expect the foods business to be the major contributor to sales (c.65%) and profitability. Our view is underscored by FMN’s leadership position in the Nigerian flour and pasta market – with estimated market shares of 40-42% and 58-60% respectively. A major relief for FMN is its deleveraged balance sheet post-rights issue, which led to a -32% y/y decrease in net financecharges in H1 2019. In an effort to further bring down borrowing costs, the firm issued N20bn in corporate bonds with a view to decreasing costlier debt.After adjusting our risk free rate upwards by 200bps to 15% to reflect market realities, our new price target of N23.5 implies a potential upside of +21% from current levels. We however retain our Neutral recommendation because we believe the weak earnings outlook in the near term is likely to weigh on market sentiments.

PBT down -58% y/y driven by gross margin contraction FMN’s Q2 2019 (end-Sep) results showed that PBT fell by -58% y/y to N3.1bn. The y/y decline in earnings was driven by a combination of factors including a gross margin contraction of -136bps y/y to 10.9%, a 25% y/y rise in opex and a -9% y/y reduction in sales. These negatives completely offset a -32% y/y decline in interest expense. Below the tax line, PAT fell by a wider margin of 71% y/y mainly on the back of a higher tax rate of 54.0% compared with 33.8% in Q2 2018 (end-Sep). Sequentially, sales were up by 3% q/q. However, PBT fell-41% q/q due to a gross margin contraction of 211bps q/q and a 32% q/q reduction in other operating income. Following a 2,402bp q/q rise in the tax rate to 54.0%, PAT also fell by 61% q/q. Relative to our forecasts, sales were broadly in line. However, PBT and PAT missed by 38% and 64% respectively.

Financials and valuation metrics (Mar YE)


Sales 542,670 514,023 536,796 563,456

PBT 16,542 11,407 13,668 13,136

PBT margin 3.0% 2.2% 2.5% 2.3%

EPS (N) 4.58 1.69 2.02 1.94

EPS growth (Y/y) 51.2% 63.2% 19.8% -3.9%

P/E (x) 4.2 11.4 9.6 9.9

EV/OP (x) 4.9 6.6 6.6 6.4

Dividend yield 5.2% 4.6% 5.0% 4.4%



24 January 2019 86

Rating – NEW UNDERPERFORM Rating – old NEUTRAL Price (N) 1450.0 Price target (N) – new 990.0 Price target (N) – old 1,238.0 Up/downside potential -31.7% Market cap. (Nbn / US$bn) 1,149 / 3.2 Bloomberg NESTLE NL Reuters NESTLE.LG Free float 36.6%



% YTD 1M 3M 12M

Absolute -2.4 -1.4 3.6 -1.4

vs. Sector 3.7 1.7 10.3 32.9

vs. NSE -0.6 -1.7 10.5 29.0


500

1,000

1,500

2,000

2016 2017 2018

Nestle Nig. ASI Rebased

Nestle Nigeria Moving to Underperform rating

Modest sales growth of c.7% in 2019E Nestle Nigeria’s (Nestle) 9M 2018 earnings were up 44% y/y to N33.0bn helped by a 10% y/y topline growth and +145bps y/y gross margin expansion to 42.4%. The results were in line with our expectations. We observed that sales growth for the foods segment strengthened through the year while topline for the beverage segment weakened q/q. The introduction of new brands, such as Golden Morn Puffs, and a favorable price-volume mix buoyed growth within the foods category. Looking ahead, we believe topline growth would be more modest at c.7% y/y to N287.4bn given the weak economic recovery and squeeze on consumer wallets. We expect management to maintain its focus on developing local raw material supply despite our expectation of grain prices inching higher during the dry season. For instance, our channel checks reveal that around 94% of the agricultural input for the Golden Morn Puffs is sourced locally. Similar to 2018, we do not expect a significant impact of fx-related gains/losses. Given our expectations for global crude oil prices this year we expect that the central bank would be able to hold the line on the naira. We have made no changes to our EPS forecast over the 2018-20E period. However, our new price target of N990.0 is down -20% and implies a downside potential of -31.7% at current levels.Therefore, we downgrade our rating on the stock from Neutral to Underperform. Our new target is driven by market-reflective adjustments to our risk-free rate which we have raised by +200bps to 15%. In 2018, Nestle shares declined by -4.6% outperforming the broad market by 13%. Nestle shares are trading on a 2018E P/E multiple of 25.0x for average EPS growth of 3% y/y over the 2019-2021E period.

Q3 PBT up 62% y/y to N16.2bn, driven by sales growth of 7% y/y In Q3, all key line items on the P&L advanced y/y. While Q3 sales of N68bn were up 7% y/y, PBT and PAT of N16.2bn and N11.7bn both grew by 62% y/y and 81% y/y respectively. A gross margin expansion of +158bp y/y to 45.1% and a significant decline in net finance expense to –N991m (compared with –N6.4bn in Q3 2017) which was driven by significantly lower fx-related losses also helped. This is unsurprising, however, given a less volatile fx environment in 2018. Sequentially, while sales came in flattish q/q, both PBT and PAT declined by -11% q/q and -9% q/q respectively. The q/q declines are attributed to seasonality effects as Q3 is generally Nestle’s weakest quarter. Compared with our forecasts, sales and PBT were both in line.



Sales 244,151 268,567 287,366 307,482

PBT 46,829 63,848 64,972 65,454

PBT margin 19.2% 23.8% 22.6% 21.3%

EPS (N) 42.55 58.00 59.02 59.45

EPS growth (Y/y) 325.5% 36.3% 1.8% 0.7%

P/E (x) 34.1 25.0 24.6 24.4

EV/OP (x) 20.7 18.1 17.6 17.5

Dividend yield (%) 2.9 3.9 3.9 4.0



24 January 2019 87

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 37.0 Price target (N) – new 33.0 Price target (N) – old 43.3 Up/downside potential -10.9% Market cap. (Nbn / US$m) 213 / 586 Bloomberg UNILEVER NL Reuters UNILEVER.LG Free float 60.4%



% YTD 1M 3M 12M

Absolute 0.0 0.0 -18.9 -20.3

vs. Sector 6.0 3.0 -12.2 14.1

vs. NSE 1.8 -0.3 -12.0 10.2


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2016 2017 2018

UNILEVER ASI Rebased

Unilever Nigeria Non-operating lines boosting earnings

Strong support from spreads sale and finance income We expect Unilever Nigeria’s (Unilever) sale of its underperforming spreads business (3-4% of sales) to contribute to 2019E sales growth. Post-divestment, N2.5bn in spread sales were transferred from 9M sales to discontinued operations. As such, we estimate that 9M 2018 sales growth of 11% y/y would have been 273bps lower had the reallocation not occurred.Unilever’s 9M 2018 bottom line growth was robust, with earnings supported by N2.1bn in net finance income earned over the period compared with a net finance expense of -N2.2bn in the corresponding period. This is very much to the credit of Unilever’s improved liquidity position following its successful rights issue in 2017. 9M 2018 result shows a net cash balance of N47bn versus –N2.3bn in 9M 2017. Another earnings booster for Unilever in 9M 2018 was a N2.2bn gain from the spreads business sale. Essentially, PBT surged 94% y/y to 12.6bn. Going into 2019, the main threat Unilever faces is increased competition arising from importers with increased fx access. Owing to low switching costs in the household products segment (whereUnilever plays heavily in), the impact of this could be significant. That said, we believe risks to topline will be tempered by positives coming from a repositioned business (post-spreads sale), and gains from cash investments – both of which we have reflected in our model. Having raised our risk free rate assumption by 200bps to 15%, our price target is down -24% to N33.0. Unilever shares are trading on a 2019E P/E of 17.5x for an average growth of 14% in 2019-20E EPS. From current levels, the shares show a modest downside potential of -11%. We have retained our Neutral rating on the stock.

Q3 2018 PBT and PAT up significantly Q3 2018 results showed that sales grew by 7% y/y to N24.2bn. A 5% y/y growth in the Food Products category was offset by a sales decline of -3% y/y in the Home and Personal Care segment. PBT and PAT, both of which grew significantly, were boosted by the one-off gain from the spread business’ sale. Both gross and operating margins contracted by 118bps and 366bps respectively. On a sequential basis, sales were up 8% q/q while PBT and PAT were up 41% and 42% respectively. Compared with our forecasts, while sales came in 11% behind our N27.1bn estimate, PBT was 25% higher while PAT was 29% higher.



Sales 90,771 99,596 113,026 129,420

PBT 11,207 18,059 17,109 20,319

PBT margin 12.3% 18.1% 15.1% 15.7%

EPS adjusted (N) 1.87 2.23 2.11 2.51

EPS growth (Y/y) 130.6% 19.2% -5.3% 18.8%

P/E 19.8x 16.6x 17.5x 14.7x

EV/OP 7.8x 14.3x 12.5x 10.1x

Dividend yield 1.4% 1.8% 1.7% 2.0%



24 January 2019 88

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 8.5 Price target (N) – new 12.6 Price target (N) – old 12.6 Up/downside potential +48.5% Market cap. (Nbn / US$m) 25 / 68 Bloomberg UAC NL Reuters UAC.LG Free float 93.8%



% YTD 1M 3M 12M

Absolute -12.8 -22.7 -15.0 -50.0

vs. Sector -6.8 -19.7 -8.3 -15.7

vs. NSE -11.1 -23.1 -8.0 -19.6


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2015 2016 2017

UACN ASI Rebased

UAC of Nigeria Weak spots laid bare

Headwinds strongest in feeds and real estate Although UAC of Nigeria’s (UACN) 9M 2018 sales beat our forecast by 5%, PBT missed by -83%. For the same period, sales and PBT declined by -18% y/y and -85% y/y respectively, largely driven by the Animal Nutrition and other Edibles (Grand Cereal and Livestock Feeds) and Real Estate (UPDC)businesses. A deeper breakdown shows that sales from Grand Cereal and Livestock Feeds (collectively making up 53% of group sales) declined by -33% y/y while a pre-tax loss of –N301m was recorded (vs. PBT of N1bn in 9M 2017). Management in its Q3 press release alluded to slowing demand for animal feeds owing to a declining livestock population, sustained price competition amid an oversupplied feeds market and intermittent pastoral conflicts in key markets. UPDC’s impact on the group’s bottom line was however more severe, having incurred –N4.5bn in pre-tax losses for 9M 2018. In our view, challenges faced by UACN’s major segments will persist into 2019. Specifically, increased competition by agri-business giant Olam Group remains a threat to UACN’s presence in the animal feeds market.Furthermore, we are cautious that the irresolution of pastoral conflicts infood belt regions, could lead to poorer crop output and more expensive grains. Grains are key inputs in the animal feeds and edible oils businesses. We however expect some reprieve for 2019E earnings due to the non-recurrence of one-off losses from UPDC. In 2018, UACN shares declined by -42%, well below the ASI’s decline of -18%. Currently, the shares are trading on a 2019E P/E multiple of 19.5x for an average EPS growth of 57% in 2019-20E. Although our price target of N12.6 implies a potential upside of 42% from current levels, we retain our Neutral rating on the shares considering the overall bearish picture in the near-to-medium term.

Q3 earnings slip into negative territory Q3 sales for the group plummeted -59% y/y to N18.8bn, while pre-tax and after-tax (before discontinued Operations and minorities) losses were incurred for the quarter. A gross margin contraction of -39bps y/y to 16.9% and other operating net losses of -N1.2bn (Q3 2017: N1.1bn) also contributed to the squeeze in profitability during the quarter. These negatives completely offset the gain from lower net finance costs of N583m (down -69% y/y). Consequently, UACN made -N1.6bn in pre-tax losses in Q3 versus a PBT ofN2.2bn in the corresponding quarter of 2017. Sequentially, all line items worsened with the exception of a 60bps q/q sales increase and a 7.5% q/q decline in net finance costs. Compared with our forecasts, sales beat by 17%, whereas PBT and PAT were significantly behind, given the net losses posted.



Sales 89,178 76,630 80,354 84,756

PBT 3,246 688 2,865 4,466

PBT margin 3.6% 0.9% 3.6% 5.3%

EPS (N) 0.50 0.29 0.46 0.72

EPS growth (Y/y) -74.9% -41.7% 56.6% 58.0%

P/E (x) 17.0 29.2 19.5 12.4

EV/OP (x) 15.0 69.7 19.9 12.4

Dividend yield (%) 7.6 0.0 2.8 4.9



24 January 2019 89

Rating – new UNDERPERFORM Rating – old UNDERPERFORM Price (N) 11.9 Price target (N) – new 11.4 Price target (N) – old 19.1 Up/downside potential -3.4% Market cap. (Nbn/US$m) 47/130 Bloomberg PZ NL Reuters PZ.LG Free float 27.1%



% YTD 1M 3M 12M

Absolute -2.1 10.7 3.5 -49.6

vs. Sector 4.0 13.8 10.2 -15.2

vs. NSE -0.3 10.4 10.5 -19.1


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2015 2016 2017

PZ Cussons Nig. ASI Rebased

PZ Cussons Nigeria Earnings driven by muted fx impact

EPS forecast cut by -35% over the 2019-21E period PZ Cussons Nigeria (PZ) posted a PBT growth of 55% to N1.4bn in H1 2019(end-Nov). The result was supported by a lessened fx impact; fx losses of –N525m were posted versus –N2.6bn in H1 2018. Absent fx changes, adjusted PBT for H1 was down 46% y/y. PZ’s H1 earnings were affected by weaknesses across key business lines. According to management, volumes and margins remain under pressure. Lately, PZ has focused on optimising price points and pack sizes across key brands in the portfolio but recent results still show weak topline growth relative to historical levels. Looking ahead, we see a morecompetitive business environment fraught with sluggish demand growth. We therefore believe that PZ’s White Goods segment (c.27% of sales; driven by discretionary spending) will likely to face the biggest struggle in the near term. We forecast that sales and adjusted EPS will decline by -8% y/y and -49% y/y to N74.1bn and N1.04 in 2019E respectively. We however expect the impact of easing fx pressures to offset weaker sales y/y, and forecast that unadjusted EPS (which accounts for fx devaluation losses) for 2019E will more than double to N0.97. We have cut our adjusted EPS forecasts by around -35% over the 2019-21E period. We have also rolled forward our valuation to 2020. Our new price target of N11.4 therefore implies a -40%cut and a downside potential of -3% at current levels. Our price target cut is also driven by market-reflective adjustments to our risk-free rate, whichwe increased by 200bps to 15%. PZ shares are trading on a 2020E P/E multiple of 10.4x for average EPS growth of 12% y/y over the 2020-2022E period. In 2018, PZ shares lost -43% and underperformed the broad marketwhich was down -17.8%. We retain our Underperform rating on the stock, given the weak earnings outlook over the near-to-medium term.

Q2 2019 PBT up significantly In Q2 2019 (end-Nov), sales of N19.2bn fell by 14% y/y, but PBT and PAT were up 48% y/y and 100% y/y to N1.6bn and N1.4bn respectively. However, a double-digit decline in opex and N143m recorded in FX gains more than offset any negatives coming from the y/y sales decline and a gross margin contraction of -608bps y/y to 22.4%, leading to the PBT growth. Sequentially, sales were up 21% y/y while both PBT and PAT climbed back into positive territory compared with a loss of –N205m each. Compared with our forecasts, while sales came in 4% behind our N20.0bn estimate, PBT and PAT significantly outperformed, thanks to a -33% lower-than-expected opex and the fx gain versus our fx loss estimate of –N667m.

Financials and valuation metrics (May YE)


Sales 80,553 74,148 73,547 75,018

PBT 2,314 5,915 6,930 8,564

PBT margin 2.9% 8.0% 9.4% 11.4%

EPS (N) 2.05 1.04 1.14 1.40

EPS growth (Y/y) -42.6% -49.3% 9.4% 23.6%

P/E (x) 5.8 11.5 10.5 8.5

EV/OP (x) 4.4 6.9 6.7 5.5

Dividend yield (%) 1.3% 4.1% 4.8% 5.9%



24 January 2019 90

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 180.0 Price target (N) – new 245.0 Price target (N) – old 292.4 Up/downside potential +36.1% Market cap. (Nbn/US$m) 65/179 Bloomberg MOBIL NL Reuters MOBL.LG Free float 30.0%



% YTD 1M 3M 12M

Absolute -3.0 -2.6 2.9 -13.9

vs. Sector 1.3 -2.7 -1.7 11.9

vs. NSE -1.2 -2.9 9.8 16.6


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2016 2017 2018

11 Plc ASI Rebased

11 PLC Neutral rating maintained

PT down -16% to N245.0, reflecting higher int. rate environment 11 Plc (11) had a strong 2018. PBT was up +29% y/y to N11.6bn in 9M 2018 on the back of a solid topline growth which more than offset rising operational costs. 11’s sales growth of 42% y/y was the strongest amongst its peers coming in well ahead of the industry’s average growth of +9% y/y. We attribute this growth to a number of factors 1) management’s more aggressive approach to the downstream and 2) increased investments in storage and distribution channels. In 2018, 11 increased its gasoline, kerosene and lubricants warehouse storage capacity by 15,000 metric tonnes (MT), 20,000MT and 780 sq. meters respectively. Going forward, reduced reliance on third-party infrastructure is likely to yield positive returns. We forecast an EPS decline of around –12% y/y to N25.5 for 2019E. In the near term, we do not expect any material changes to the current restrictive gasoline pricing policy. In our view, the recent decline in global crude oil prices (down –19% over the last 3 months) to c.US$61/b is likely to defer discussions on pricing. Therefore, we anticipate subdued growth for the industry in 2019. Our new price target of N245.0 is down -16% because of upward adjustments of +200bps to our risk-free rate assumption to 15.0%. Our PT implies a potential upside of +36% from current levels. Similar to Total Nigeria (Total), we maintain our Neutral rating on the stock because of a lack of near term catalysts. 11 shares declined by -5% but outperformed the NSE ASI’s -17.8% return. The shares are trading on a 2018E P/E multiple of 6.2x for an average EPS growth of 3% y/y over the 2019-2021E period, which compares to a 2018E P/E multiple of 6.3x for an average EPS decline of around -22% y/y for Total over a similar period.

Q3 2018 PAT of N3.6bn up 14% y/y In Q3 2018, sales improved by 22% y/y to N39.1bn while PBT and PAT were both up by around 14% y/y to N3.6bn and N2.4bn respectively. The topline growth and a 34% y/y rise in other income more than offset a gross margin contraction of -277bps y/y to 8.8% and a 6% rise in operating expenses. Sequentially, all key line items declined q/q. While sales declined -4% q/q, PBT and PAT both fell by -10% q/q. Compared with our estimates, although sales came in around 6% behind our N41.6bn forecast, PBT and PAT were broadly in line with our estimates. Negative surprises on both the topline and gross margin lines were more than offset mainly by lower-than-expected operating expenses.



Sales 125,257 165,840 163,850 169,913

PBT 11,138 15,302 13,543 15,807

PBT margin 8.9% 9.2% 8.3% 9.3%

EPS (N) 25.00 28.82 25.51 29.78

EPS growth (Y/y) 10.5% 15.3% -11.5% 16.7%

P/E (x) 7.2 6.2 7.1 6.0

EV/EBIT (x) 4.6 4.1 4.6 3.8

Dividend yield (%) 4.4 5.3 4.6 5.0



24 January 2019 91

Rating – NEW OUTPERFORM Rating – old OUTPERFORM Price (N) 540.0 Price target (N) – new 1078.0 Price target (N) – old 971.0 Up/downside potential +99.6% Market cap. (Nbn / US$bn) 318 / 0.9 Bloomberg SEPLAT NL Reuters SEPLAT.LG Free float 49.6%



% YTD 1M 3M 12M

Absolute -15.6 -7.6 -16.3 -19.2

vs. Sector -11.3 -7.7 -20.8 6.6

vs. NSE -13.9 -8.0 -9.3 11.2


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2016 2017 2018

Seplat ASI Rebased

Seplat Petroleum Development Co.Gas investments - a core focus in 2019

Outperform rating maintained Seplat shares gained +4.7% in 2018 outperforming the NSE ASI by around23%. This was driven primarily by a recovery in global oil prices and a y/yrise in working interest production following restored calm in the Niger Deltaregion. Looking ahead, Brent is trading above US$60/barrel (up +22% fromits recent trough), supported by recent OPEC+ output cuts and a potentialtrade deal between the US and China. We expect the commodity to oscillatearound this price level for most of the year. We forecast a modest growth ofc.3% y/y in working interest production to 58,170 barrels of oil equivalent(boepd) driven primarily by additional production from OML 4, 38 & 41.Although management remains tight lipped on capex guidance for 2019, weare positive that capex would be close to management’s 2018 estimate ofUS$100m. Our views are based on 1) Seplat has secured an extension of itslease on OMLs 4, 38 & 41 for another 20 years which significantly lowersinvestment/asset risks and 2) a recovery in oil prices. Our new price targetof N1078.0 is up 11% because of upward adjustments to our 3-year oilforward curve assumption given relatively higher price levels. Our price targetimplies an upside potential of +99.6% from current levels. Therefore, weretain our Outperform rating on the stock. Looking ahead, we expect theAmukpe-Escravos export pipeline to be completed and operational this year.The project has experienced several delays over the past year. This exportroute offers sufficient cover for the vulnerable TransForcados Export System.We also expect a final investment decision to be reached for huge gasprojects and field development at OML 53. For gas, which is the long termstrategy for Seplat, we anticipate that a conclusion on the upstream andmidstream elements of Seplat-NPDC JV’s portion of the ANOH project couldbe reached in a few weeks. At current levels, Seplat shares are trading on a2018E P/E multiple of 4.6x for an average PBT growth of c.230% over the2019-21E period.

Key positives across the P&L Seplat’s Q3 earnings showed continued y/y improvements following theresumption of exports via third-party operated TransForcados System (TFS).While sales of US$225m grew 80% y/y, PBT of US$91m advanced by 66%y/y. Sales growth was primarily driven by a 56% y/y rise in oil sales whichwas boosted by a 12% y/y rise in working interest production to 50,303barrels of oil equivalent. Realised oil and gas prices were up 53% y/y and 2%y/y to US$71.1/barrel and US$3.01MMscf/d respectively. Seplat declared aninterim dividend of US$0.05 per share. This is in addition to the US$0.05interim paid for Q2 2018 as management bids to normalise returns toshareholders after the board had suspended dividends for 2016 and 2017.



Sales 452 810 725 871

EBITDA 199 482 447 593

EBITDA margin 43.9% 59.5% 61.7% 68.1%

EPS adjusted (US$) 0.47 0.33 0.37 0.32

EPS growth (y/y) n/a -30.3% 13.6% -13.2%

EV/EBITDA (x) 4.9 1.1 1.1 0.3

DACF/share (US$) 0.0 1.1 0.4 0.8

Dividend yield 0.0% 8.7% 9.9% 8.6%



24 January 2019 92

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 195.0 Price target (N) – new 279.0 Price target (N) – old 321.0 Up/downside potential +43.1% Market cap. (Nbn / US$m) 66 / 183 Bloomberg TOTAL NL Reuters TOTAL.LG Free float 38.0%



% YTD 1M 3M 12M

Absolute -3.9 -2.5 6.6 -15.6

vs. Sector 0.4 -2.6 2.2 10.2

vs. NSE -2.2 -2.8 13.5 14.9


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2016 2017 2018

Total Nig. ASI Rebased

Total Nigeria No changes to 2019E EPS estimate

Neutral rating on the stock maintained Total Nigeria’s (Total) Q3 2018 earnings of N2.0bn were up 48% y/y butcame in behind our forecast by 35%. The major driver behind the variance was a negative surprise on the net interest expense line. According tomanagement statements, bank overdrafts rose by 4.2x q/q to N29.6bn,leading to a gearing ratio of 1.0x as at Q3 2018 vs. <0.1x prior. We expect higher debt levels to have an adverse impact on earnings in 2019. We forecasta 30% y/y rise in interest expenses in 2019E solely on increased borrowings.Last year, Total commenced efforts to sell its LPG business. In our view,divesting this business segment would have a negligible impact on profits given very limited contributions to the firm’s P&L. As at 9M 2018, thecarrying value of LPG assets was around N70m. Looking ahead, from anoperational perspective, we do not anticipate any material alterations to Total’s business strategy, with its primary focus set on product distributiongiven a restrictive product pricing regime for gasoline. Following thestreamlining of operations it would not be surprising if Total RaffinageMarketing (parent) exits the downstream business following divestments by core shareholders in other major marketers, Mobil Oil Nigeria (now 11 Plc)and Forte Oil. Broadly speaking, incessant price regulation weighs heavily on industry profits. We also believe the chances of a full deregulation of the downstream sector this year are slim. We retain our earnings outlook for 2019E. Our new price target of N279.0 is down by around –13% because we have raised our risk-free rate assumption by +200bps to 15% reflective of the higher interest rate environment. Our new price target implies anupside potential of 43%. However, we continue to retain our Neutral rating on the stock, because we do not see any near term catalysts in the absenceof an upward adjustment to gasoline pump prices currently at N145/litre. In 2018, Total shares shed -12.0% vs. the NSE ASI’s -18.0%. They are currently trading on a 2018 P/E of 6.3x for an average EPS decline of around -22% over the 2019-21E period.

Q3 earnings up by 48% y/y, driven by +457bp y/y GM expansion In Q3, sales, PBT and PAT were all up on a y/y basis. While sales grew by 4%y/y to N70.7bn, PBT was up 18% y/y to N2.8bn. The stronger growth on thePBT line was driven by a gross margin expansion of +457bp y/y to 13.8%.Sequentially, sales, PBT and PAT all declined q/q. Net finance costs rose significantly to –N1.3bn vs. a net finance income of N799m in the corresponding period of 2017. The main drivers for the swing are 1) theabsence of fx-related income in 2018 results and 2) a +15% y/y rise in interest charges to N1.3bn. Compared with our estimates, both Q3 sales andPBT came in behind by around -6% and -38% respectively. Total proposed an interim dividend of N3.00 (in line, 1.5% yield).



Sales 288,063 302,835 304,224 307,524

PBT 11,795 15,359 7,947 6,501

PBT margin 4.1% 5.1% 2.6% 2.1%

EPS (N) 23.62 30.76 15.91 13.02

EPS growth (Y/y) -45.8% 30.2% -48.3% -18.2%

P/E (x) 8.3 6.3 12.3 15.0

EV/EBIT (x) 4.5 4.8 7.0 7.7

Dividend yield (%) 8.7 10.3 5.1 4.0



24 January 2019 93

Rating – NEW NEUTRAL Rating – old OUTPERFORM Price (N) 82.0 Price target (N) – new 74.5 Price target (N) – old 88.8 Up/downside potential -9.1% Market cap. (Nbn / US$m) 78 / 216 Bloomberg OKOMUOIL NL Reuters OKOMUOI.LG Free float 94.6%



% YTD 1M 3M 12M

Absolute 7.6 7.6 2.8 14.5

vs. Sector 6.9 5.5 -5.2 14.4

vs. NSE 9.4 7.3 9.7 44.9


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2016 2017 2018

Okomu Oil ASI Rebased

Okomu Oil Moving to Neutral from Outperform

Sales growth projected at c.15% to N23.7bn in 2019E Okomu Oil (Okomu) reported quarterly average sales were flattish y/y between January and September 2018. During the 9M period, the palm oilsegment revenue growth of 3% y/y was completely offset by a -6% y/y decline in rubber sales. The biggest issue with the rubber business was constant export delays at the Apapa Port. Although management told us that it had begun to explore export options at other local ports, we do not necessarily expect an adequate substitution this year. We however expect more gains from the completion of road construction works at the Apapa. As such, we forecast rubber sales of c.7% y/y to N3.5bn. Going by management guidance, 4,000ha of oil palm trees are to be planted this year while 1,500ha of Rubber trees are due for planting by 2020. We expect work on Extension II (new project), an 11,000ha plantation, to progress as planned. Also. Extension II is set to double Okomu’s production by 2025 when fully developed. 8,700 hectares have been planted over the last three years, with the balance retained for the oil milling facility, staff accommodation and forest reserves. We see y/y sales growth of around 15% to N23.7bn for 2019E. Owing to the higher interest rate environment, we have raised our risk free rate assumption by 200bps to 15%. This adjustment translates to a -16% downward revision in our price target to N74.5. Okomu shares are trading on a 2018E P/E multiple of 8.9x for a 9% y/y growth in 2019E EPS. From current levels, the shares show a downside potential of 9%. We have moved our rating on the stock from Outperform to neutral.

QQ3 2018 PBT up 30% y/y due to a solid GM expansion In Q3, sales declined in Q3 2018 by -9% to N3.8bn for the secondconsecutive quarter. The topline decline was primarily driven by relatively lower rubber sales which were down -36% y/y to N598m. Palm oil sales were relatively flattish y/y during the quarter. However, Okomu posted strong PBT and PAT growth of 30% y/y and 718% y/y to N1.8bn and N1.3bn respectively. This growth was driven primarily by a gross margin expansion of +1552bps y/y to 86.5%. Management statements reveal that production costs for both palm oil and rubber declined considerably during the period. On a quarterly basis, sales, PBT and PAT all declined by -33%, -40% and -47% respectively. Compared with our estimates, while sales missed by 17%, PAT was broadly in line with our N1.4bn forecast.



Sales 20,262 20,579 23,726 27,542

PBT 11,135 11,033 12,771 14,410

PBT margin 55.0% 53.6% 53.8% 52.3%

EPS adjusted (N) 9.25 9.25 10.04 10.57

EPS growth (Y/y) 77.2% 0.0% 8.5% 5.3%

P/E (x) 8.9 8.9 8.2 7.8

EV/OP (x) 6.9 6.9 5.6 0.1

Dividend yield (%) 3.7 3.9 4.3 4.5



24 January 2019 94

Rating – NEW NEUTRAL Rating – old NEUTRAL Price (N) 60.0 Price target (N) – new 66.0 Price target (N) – old 76.9 Up/downside potential +10.0% Market cap. (Nbn / US$m) 69 / 189 Bloomberg PRESCO NL Reuters PRESCO.LG Free float 31.0%



% YTD 1M 3M 12M

Absolute -6.3 -3.5 13.2 -14.3

vs. Sector -6.9 -5.5 5.2 -14.4

vs. NSE -4.5 -3.8 20.2 16.2


30

40

50

60

70

80

2016 2017 2018

Presco ASI Rebased

Presco Higher stakes as competition intensifies

PT of N66.0 down by -13% reflecting higher int. rate environmentPresco’s 9M 2018 of N5.3bn came in flattish y/y. Topline decline of -4% y/y to N16.2bn and a significant decline in gains for the revaluation of biological assets were partially offset by a gross margin expansion of +495bps y/y to 75.7%. Looking ahead, Presco intends to aggressively invest in developing new acreages on its plantations. We expect expansion work on the relatively new 15,000 hectare plantation in Orhionmwon, Edo State to continue. As at 9M2018, the firm’s total debt levels were up 2.6x while capital expenditure was c.N13.5bn vs. N5.6bn a year earlier. Given the narrowing of fx rates between the official window and black market we do not expect the comeback made by imported competition to relent in 2019. Therefore, we believe thatsubdued product pricing on the back of a global supply glut and increased competition from imports would limit growth opportunities. Nonetheless, we forecast sales growth of +19% y/y to N24.0bn primarily due to base effects. We however forecast an EPS growth of c.5% y/y because of our expectations for a contraction in gross margin to 71.5% as a result of increased competition. Our new price target of N66.0 is down -13% because we have raised our risk-free rate assumption by +200bps to 15.0 reflective of the higher interest rate environment. At current levels, our price target implies a potential upside of +10.0%. In 2018, Presco shares shed -6.6%, outperforming the NSE ASI’s performance by 11.2%. We retain our Neutral rating on the stock. Presco shares are trading on a 2018 P/E multiple of10.2x for a 5% y/y growth in 2019E EPS.

Q3 2018 PBT and PAT up significantly y/y Q3 2018 results showed marked y/y improvement with PBT of N1.8bn up c.400% y/y, recovering strongly from a weak Q2 performance. The results were driven by a gross margin expansion of +1,793bp y/y to 73.8% and a gain on biological asset revaluation of N370m which compares with a loss of –N1.4bn in Q3 2017. The positives on both lines more than offset a significant y/y rise in operating expenses, driven by marketing and administrative costs. However, all key line items declined on a q/q basis. While sales were down -10% q/q, PBT declined by -23% q/q, driven by a slight gross margin contraction and double-digit rise in operating expenses. Compared with our estimates, while sales were behind by -9%, PBT was behind by -6%. Nonetheless, PAT was in line with our N1.3bn forecast because of an effective tax rate of 26.4%, compared to the 30.0% that we were modelling.



Sales 22,365 20,187 23,985 27,571

PBT 10,952 8,799 8,821 8,675

PBT margin 49.0% 43.6% 36.8% 31.5%

EPS adjusted (N) 26.25 5.90 6.17 6.07

EPS growth (Y/y) -345.9% -77.5% 4.6% -1.7%

P/E (x) 2.3 10.2 9.7 9.9

EV/OP (x) 4.5 5.1 4.8 4.4

Dividend yield (%) 3.3 2.1 2.1 2.0


Nigeria | Investment Research | 2019 outlook

24 January 2019 95 2

Research analyst certification

The research analyst(s) primarily responsible for the preparation and content of all or any identified portion of this research report hereby certifies that all of the views expressed herein accurately reflect their personal views about those issuer(s) or subject securities. Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report.

Valuation methodology Access Bank: Our N11.2 price target is based on a 0.61x P/B multiple applied to our 2019E BVPS estimate of N20.45. The 0.61x multiple is derived using a normalised DDM model. Our key assumptions are a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0%, beta of 1.35 and peak-cycle ROE of 22.0%. This initially yields a P/B multiple of 0.94x which we adjust down to 0.61x because our 2019E ROAE forecast of 14.2% is less than the peak-cycle ROE forecast in our DDM. Fidelity Bank: Our N2.87 price target is based on a 0.35x P/B multiple applied to our 2019E BVPS estimate of N8.2. The 0.35x multiple is derived using a normalised DDM model. Our key assumptions are a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0%, beta of 1.23 and peak-cycle ROE of 15.0%. This initially yields a P/B multiple of 0.6x which we adjust down to 0.35x because our 2019E ROAE forecast of 9.3% is less than the peak-cycle ROE forecast in our DDM. FCMB: Our N2.89 price target is based on a 0.29x P/B multiple applied to our 2019E BVPS estimate of N9.9. The 0.29x multiple is derived using a normalised DDM model. Our key assumptions are a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0%, beta of 1.45 and peak-cycle ROE of 15.0%. This initially yields a P/B multiple of 0.5x which we adjust down to 0.29x because our 2019E ROAE forecast of 8.4% is less than the peak-cycle ROE forecast in our DDM. GT Bank: Our N45.7 price target is based on a 2.03x P/B multiple applied to our 2019E BVPS estimate of N22.47. The 2.03x multiple is derived using a normalised DDM model to which we then apply a 20% premium based on historical trading trends. Our key assumptions are a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0% and beta of 0.85 and a peak-cycle ROE of 30.0%. The DDM initially yields a P/B multiple of 1.68x which we adjust upwards to 1.7x (before applying the premium) because our 2019E ROAE forecast of 30.3% is slightly higher than the cycle ROE forecast in our DDM. Stanbic IBTC: Our N41.2 price target is based on a 1.44x P/B multiple applied to our 2019E BVPS estimate of N28.66. Our 1.44x multiple is derived using a normalised DDM model. Our key assumptions are a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0%, beta of 0.95 and peak-cycle ROE of 32.5%. This initially yields a P/B multiple of 1.78x which we adjust down to 1.44x because our 2019E ROAE forecast of 26.3% less than the peak-cycle ROE assumption in our DDM. UBA: Our N12.0 price target is based on a 0.73x P/B multiple applied to our 2019E BVPS estimate of N16.38. The 0.73x multiple is derived using a normalised DDM model. Our key assumptions are a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0%, beta of 1.2 and peak-cycle ROE of 23.0%. This initially yields a P/B multiple of 1.0x which we adjust down to 0.7x because our 2019E ROAE forecast of 16.0% is less than the peak-cycle ROE forecast in our DDM. Zenith Bank: Our N31.8 price target is based on a 1.11x P/B multiple applied to our 2019E BVPS estimate of N28.77. Our 1.11x multiple is at a 5% premium to the fundamental P/B multiple we derive using a normalised DDM, assuming a risk-free rate of 15.0% (previously 13.0%), equity risk premium of 6.0%, beta of 0.99 and peak-cycle ROE of 25%. This initially yields a P/B multiple of 1.26x which we adjust downwards to 1.05x (before applying the premium) because our 2019E ROAE forecast of 20.9% is lower than the cycle ROE forecast in our DDM. Dangote Cement: Our N270.0 price target is derived by applying a 16.8x P/E multiple to our 2020E EPS of N19.47 and then discounting the result by a cost of equity of 21.0%. Our model makes use of a current P/E multiple of 18.6x which other international peers are trading on. This multiple is then discounted by 10% to reflect the overhang which we believe will remain on the shares until Dangote Cement’s London listing is complete or the free float is increased meaningfully. Lafarge Africa: Our N21.5 price target is derived using a DCF model over the 2019-2029E period. We assume that our terminal sales growth rate of 5% and operating margin of 15.0% are reached in 2029 after declining linearly from our 2020E estimates. Our DCF model is based on a WACC of 13.6%. The components driving our WACC include a risk free rate of 15.0%, a beta of 0.8 and an equity risk premium of 6.0%. Guinness Nigeria: Our N57.8 price target is derived using a DCF model over the 2019-2029E period. We assume that our terminal sales growth rate of 6% and operating profit margin of 12.0% are reached in 2029 after increasing linearly from our 2021E estimates. Our DCF model is based on a WACC of 19.3%. The components driving our WACC include a risk free rate of 15.0%, a beta of 0.7, an equity risk premium of 6.0% and an after tax cost of debt of 8.8%. International Breweries: Our N28.2 price target for International Breweries is derived using a DCF model over the 2019-2029E period. Our model assumes a long-term sales growth of 7% and a terminal EBIT margin of 20.0%. We assume both will be reached largely in a linear trajectory from our 2021E estimates by 2029. Our DCF model makes use of a WACC of 11.2%. Our WACC is driven by a beta of 0.9 and a risk free rate of 15.0%. Other components driving our WACC include an equity risk premium of 6.0% and an after-tax cost of debt of 9.8%. Nigerian Breweries: Our N71.8 price target is derived using a DCF model over the 2019-2029E period. Our model assumes a long-term sales growth of 7% and a terminal EBIT margin of 23% both of which we assume are reached in a linear trajectory from our 2021E estimates. Our DCF model makes use of a WACC of 17.4%. Our WACC is driven by a beta of 1.0, a risk free rate of 15.0% and an equity risk premium of 6.0%. Dangote Sugar Refinery: Our N13.9 price target is derived using a DCF model over the 2019-2029 period. Our model assumes a long-term sales growth of 4.5% and a terminal EBIT margin of 14%. We assume both will be reached in a linear trajectory from our 2021 estimates by 2029. Our DCF model makes use of a WACC of 20.1%. Our WACC is driven by a beta of 1.0 and a risk free rate of 15.0%. Other components driving our WACC include an equity risk premium of 6.0% and an after-tax cost of debt of 7%.


24 January 2019 96 2

Flour Mills of Nigeria: Our N23.5 price target is derived using a DCF model over the 2020-2030E period. Our model assumes a long-term sales growth of 5% and a terminal EBIT margin of 5% both of which we assume are reached in a linear trajectory from our 2022 estimates. Our DCF model makes use of a WACC of 15.3%. Our WACC is driven by a beta of 1.1, a risk free rate of 15.0% and an equity risk premium of 6.0%. Nestle Nigeria: Our N990.0 price target is derived using a DCF model over the 2019-2029 period. Our model assumes a long-term sales growth of 9% and a terminal EBIT margin of 20.0%. We assume both will be reached in a linear trajectory from our 2021 estimates by 2029. Our DCF model makes use of a WACC of 15.9%. Our WACC is driven by a beta of 0.8 and a risk free rate of 15.0%. Other components driving our WACC include an equity risk premium of 6.0% and an after-tax cost of debt of 8%. PZ Cussons Nigeria: Our N11.4 price target for PZ Cussons Nigeria is derived using a DCF model over the 2020-2030 period. Our model assumes a long-term sales growth of 6% and a terminal EBIT margin of 11%, both of which we assume are reached in a linear trajectory from our 2022 estimates. Our DCF model makes use of a WACC of 17.6%. Our WACC is driven by a beta of 0.4, a risk free rate of 15.0% and an equity risk premium of 6.0%. Unilever Nigeria: Our N33.0 price target for Unilever Nigeria is derived using a DCF model over the 2019-2029E period. Our model assumes on long-term sales growth of 8% and a terminal EBIT margin of 13%, both of which we assume are reached in a linear trajectory from our 2021 estimates. Our DCF model makes use of a WACC of 15.9%. Our WACC is driven by a beta of 0.7 and a risk free rate of 15.0% and an equity risk premium of 6.0%. UAC of Nigeria: We use a sum-of-the-parts (SoTP) valuation approach to arrive at our price target of N12.6. We value the Food and Bev unit using a 14.5x EV/EBIT multiple, the Property division, 1.0x EV/Sales multiple, the Paints division, 12.1x EV/EBIT and the Logistics unit, 15.3x EV/EBIT multiple. 11 Plc: Our N245.0 price target is derived using a discounted cash flow (DCF) model over the 2019-2029 period. Our model assumes a long-term sales growth of 5% and a terminal EBIT margin of 8%, both of which we assume are reached in a linear trajectory from our 2021 estimates. Our WACC is 17.1%, assuming a risk free rate of 15.0%, a beta of 0.4, 10% after-tax cost of debt and 6.0% equity risk premium. Seplat: Our N1078.0 price target is derived using a risked NAV valuation, assuming a long term Brent crude oil price of US$61/b and an adjusted average realised gas price of US$3.2/MMscf by an inflation rate of 2% over its production period (2034). We value Seplat’s 2P oil fields at N652.7/share and gas business at N143.8/share. We apply a net debt adjustment of N243.6/share and 2C contingent of N37.9/share. Total Nigeria: Our N279.0 price target is derived using a discounted cash flow (DCF) model over the 2019-2029 period. We have assumed that sales growth will rise to a terminal value of 6.0% by 2029 from our 2021 estimate of 1.1%. We assume that EBIT margin also steadily rises to a terminal value of 5.5% by 2029. Our WACC is 13.9%, assuming a risk free rate of 15.0%, a beta of 0.4, 11% after-tax cost of debt and 6.0% equity risk premium. Okomu Oil: Our N74.5 price target for Okomu Oil is derived using a DCF model over the 2019-2029E period. Our model assumes a long-term sales growth of 7% and a terminal EBIT margin of 35%. We assume both will be reached largely in a linear trajectory from our 2021 estimates by 2029. Our DCF model makes use of a WACC of 18.8%. Our WACC is driven by a beta of 0.7 and a risk free rate of 15.0%. Other components driving our WACC include an equity risk premium of 6.0% and an after-tax cost of debt of 12.4%. Presco: Our N66.0 price target for Presco is derived using a DCF model over the 2019-2029 period. Our model assumes a long-term sales growth of 9% and a terminal EBIT margin of 30%. We assume both will be reached largely in a linear trajectory from our 2021E estimates by 2029. Our DCF model makes use of a WACC of 18.4%. Our WACC is driven by a beta of 0.8 and a risk free rate of 15.0%. Other components driving our WACC include an equity risk premium of 6.0% and an after-tax cost of debt of 9.8%.


24 January 2019 97 2

Important disclosures

Analysts' compensation is based upon activities and services intended to benefit the investor clients of FBNQuest Capital Limited (“FBNQuest Capital”) and the affiliates of First Bank of Nigeria Group (“the Group”). Analysts receive compensation that is impacted by overall profitability of FBNQuest Capital which includes revenues from, among other business units Institutional Sales and Trading and Capital Markets/Investment Banking. Recommendations and movements in price target Access Bank

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 25-Jan-16 4.2 7.1 5.5 Outperform Outperform

23-Mar-16 3.9 5.5 8.3 Outperform Outperform26-Apr-16 3.9 8.3 7.7 Outperform Outperform23-Aug-16 5.9 7.7 9.7 Outperform Outperform14-Sep-16 5.5 9.7 9.7 Outperform Outperform2-Nov-16 5.7 9.7 9.0 Outperform Outperform23-Jan-17 7.1. 9.0 9.0 Outperform Outperform10-Mar-17 6.5 9.0 8.1 Outperform Outperform2-May-17 6.7 8.1 9.0 Outperform Outperform31-Aug-17 9.6 9.0 9.9 Outperform Neutral20-Sep-17 9.7 9.9 9.9 Neutral Neutral01-Nov-17 9.8 9.9 9.6 Neutral Neutral22-Jan-18 12.6 9.6 12.3 Neutral Neutral

27-Mar-18 11.4 12.3 10.8 Neutral Neutral02-May-18 11.2 10.8 10.3 Neutral Underperform31-Aug-18 9.2 10.3 12.3 Underperform Neutral30-Oct-18 8.0 12.3 12.6 Neutral Outperform24-Jan-19 5.7 12.6 11.2 Outperform Outperform

Fidelity Bank

Date Price (N) Old Target (N) New Price Target (N) Old recommendation New recommendation

25-Jan-16 1.3 2.0 0.9 Neutral Underperform

5-Apr-16 1.3 0.9 1.4 Underperform Neutral

13-May-16 1.2 1.4 1.0 Neutral Underperform

05-Aug-16 1.1 1.0 0.9 Underperform Underperform

14-Sep-16 0.9 0.9 0.9 Underperform Underperform

4-Nov-16 0.9 0.9 0.9 Underperform Underperform

23-Jan-17 0.9 0.9 0.9 Underperform Underperform

13-Apr-17 1.0 0.9 1.0 Underperform Underperform

04-May-17 0.9 1.0 1.0 Underperform Neutral

05-Sep-17 1.4 1.0 1.5 Neutral Neutral


26-Oct-17 1.62 1.48 1.77 Neutral Neutral


03-May-18 2.55 2.93 2.74 Underperform Underperform

02-Oct-18 1.70 2.74 3.11 Underperform Neutral


24-Jan-19 2.29 3.25 2.87 Neutral Neutral

FCMB Group

Date Price (N) Old Target (N) New Price Target (N) Old recommendation New recommendation


5-Feb-16 0.9 0.7 0.5 Underperform Underperform


4-May-16 1.0 1.1 1.1 Neutral Neutral

4-Aug-16 1.3 1.1 1.9 Neutral Neutral


28-Nov-16 1.1 1.9 1.1 Neutral Neutral


24 January 2019 98 2



04-May-17 0.9 1.2 1.0 Neutral Neutral



28-Nov-17 1.1 1.4 1.5 Neutral Neutral


9-Apr-18 2.35 2.37 1.51 Underperform Underperform

03-May-18 2.58 1.51 3.28 Underperform Neutral


06-Dec-18 1.50 3.01 3.25 Neutral Outperform

24-Jan-19 1.92 3.25 2.89 Outperform Outperform

GT Bank

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation

25-Jan-16 15.4 25.1 23.9 Neutral Outperform 24-Mar-16 16.0 23.9 26.1 Outperform Outperform 20-Apr-16 16.2 26.1 24.1 Outperform Outperform 31-Aug-16 26.1 24.1 23.0 Outperform Neutral 14-Sep-16 27.0 23.0 23.0 Neutral Neutral 14-Nov-16 21.5 23.0 23.8 Neutral Neutral 23-Jan-17 23.9 23.8 23.8 Neutral Neutral 16-Mar-17 25.4 23.8 28.9 Neutral Outperform 28-Apr-17 26.6 28.9 30.3 Outperform Outperform 23-Aug-17 40.7 30.3 41.6 Outperform Neutral 20-Sep-17 38.5 41.6 41.6 Neutral Neutral 20-Oct-17 41.7 41.6 43.1 Neutral Neutral 22-Jan-18 54.7 43.1 49.1 Neutral Neutral 21-Mar-18 44.5 49.1 46.0 Neutral Neutral24-Apr-18 44.5 49.1 46.0 Neutral Neutral21-Mar-18 43.9 46.0 50.4 Neutral Neutral15-Aug-18 38.3 50.4 53.4 Neutral Outperform13-Nov-18 36.5 53.4 53.0 Outperform Outperform24-Jan-19 33.0 53.0 45.7 Outperform Outperform

Stanbic IBTC Holdings


25-Jan-16 13.2 13.1 9.4 Underperform Underperform 23-Jan-17 16.1 14.7 14.7 Underperform Underperform

30-Mar-17 17.8 14.7 17.1 Underperform Neutral 27-Apr-17 23.4 17.1 25.1 Neutral Neutral 6-Sep-17 38.3 25.1 39.2 Neutral Neutral

20-Sep-17 40.0 39.2 39.2 Neutral Neutral 01-Nov-17 43.6 39.2 38.9 Neutral Neutral 22-Jan-18 46.0 38.9 44.2 Neutral Neutral

20-Mar-18 49.0 44.2 39.8 Neutral Underperform 23-Apr-18 50.0 39.8 41.3 Underperform Underperform 23-Aug-18 50.3 41.3 51.0 Underperform Neutral 31-Oct-18 52.5 51.0 47.5 Neutral Neutral 24-Jan-19 47.5 47.5 41.2 Neutral Neutral

UBA



18-Mar-16 3.7 5.6 6,1 Outperform Outperform

20-Apr-16 33 6.1 5.8 Outperform Outperform

1-Sep-16 4.4 5.8 5.8 Outperform Outperform


12-Oct-16 4.2 5.8 5.8 Outperform Outperform


5-Apr-17 5.2 5.8 6.5 Outperform Outperform


24 January 2019 99 2

2-May-17 5.8 6.5 7.2 Outperform Outperform

30-Aug-17 9.6 7.2 10.2 Outperform Neutral




28-Mar-18 11.8 12.2 13.1 Neutral Neutral

25-Apr-18 11.4 13.1 15.0 Neutral Outperform




Zenith Bank



18-Mar-16 12.3 20.9 20.1 Outperform Outperform


16-Aug-16 15.2 20.1 20.7 Outperform Outperform





3-May-17 15.5 20.0 21.3 Outperform Outperform








05-Nov-18 23.6 37.8 36.6 Outperform Outperform

24-Jan-19 22.0 36.6 31.8 Outperform Outperform Dangote Cement

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 25-Jan-16 130.0 166.9 109.8 Neutral Neutral

07-Mar-16 168.0 141.4 151.0 Neutral Neutral 26-May-16 177.0 151.0 190.5 Neutral Neutral25-Aug-16 180.5 190.5 191.1 Neutral Neutral26-Sep-16 182.0 191.1 245.9 Neutral Outperform

17-Nov-16 161.5 245.8 203.7 Outperform Outperform23-Jan-17 167.00 203.7 203.7 Outperform Outperform10-Mar-17 159.8 203.7 208.6 Outperform Outperform 18-May-17 163.0 208.6 213.1 Outperform Outperform07-Aug-17 242.0 213.1 243.8 Outperform Neutral11-Oct-17 224.0 243.8 243.8 Neutral Neutral

24-Oct-17 220.0 243.8 228.9 Neutral Neutral22-Jan-18 273.0 228.9 242.5 Neutral Neutral

26-Mar-18 255.0 242.5 245.4 Neutral Neutral04-Jun-18 223.0 245.4 277.2 Neutral Outperform24-Jul-18 236.0 277.2 283.8 Outperform Outperform



Lafarge Africa

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 25-Jan-16 82.0 104.7 109.8 Neutral Outperform 12-Apr-16 75.0 109.8 90.9 Outperform Outperform

4-Jul-16 70.0 82.6* 72.7 Outperform Neutral27-Jul-16 59.0 72.7 71.8 Neutral Outperform

26-Sep-16 56.0 71.8 89.7 Outperform Outperform 24-Nov-16 44.1 89.7 62.2 Outperform Outperform


24 January 2019 100 2

23-Jan-17 40.0 62.2 62.2 Outperform Outperform 30-Mar-17 38.9 62.2 69.2 Outperform Outperform10-May-17 48.5 69.2 63.3 Outperform Outperform25-Jul-17 61.0 63.3 75.6 Neutral Outperform11-Oct-17 56.9 75.6 75.6 Outperform Neutral22-Jan-18 52.0 75.6 72.5 Neutral Neutral19-Apr-18 45.7 72.5 46.9 Neutral Neutral 25-Jun-18 39.0 46.9 37.8 Neutral Neutral 27-Jul-18 27.5 37.8 37.0 Neutral Neutral

25-Oct-18 18.7 37.0 21.5 Neutral Neutral 24-Jan-19 12.6 21.5 21.5 Neutral Neutral

Guinness Nigeria

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 25-Jan-16 101.9 115.9 117.4 Underperform Neutral 03-Feb-16 111.2 117.4 110.5 Neutral Neutral 04-Jul-16 105.0 110.5 87.5 Neutral Underperform

23-Sep-16 80.1 87.5 80.1 Underperform Underperform 6-Oct-16 98.0 80.1 80.1 Underperform Underperform

28-Nov-16 89.0 80.1 72.7 Underperform Underperform 23-Jan-17 68.5 72.7 72.7 Underperform Neutral 03-Feb-17 63.5 72.7 69.2 Neutral Neutral 12-May-17 66.1 69.2 72.5 Neutral Neutral 22-Jan-18 120.25 72.5 91.3 Neutral Underperform

08-Feb-18 110.0 91.3 91.3 Underperform Underperform 07-May-18 103.5 91.3 103.5 Underperform Neutral 06-Sep-18 90.0 103.5 73.4 Neutral Neutral 27-Nov-18 74.0 73.4 68.1 Neutral Neutral


International Breweries


25-Jan-16 15.9 16.4 14.3 Neutral Neutral 08-Feb-16 20.5 14.3 21.0 Neutral Neutral 17-May-16 20.0 21.0 21.6 Neutral Neutral 15-Aug-16 20.0 21.6 14.2 Neutral Underperform 06-Oct-16 20.0 14.2 14.2 Underperform Underperform 11-Nov-16 19.5 14.2 16.3 Underperform Underperform 23-Jan-17 17.5 16.3 16.3 Underperform Underperform

08-Feb-17 16.2 16.3 18.0 Underperform Neutral 19-Jun-17 26.1 18.0 27.5 Neutral Neutral

09-Aug-17 34.0 27.5 29.5 Neutral Underperform 28-Dec-17 54.0 29.5 63.6 Underperform Neutral 22-Jan-18 63.0 63.6 68.3 Neutral Neutral

23-May-18 51.8 68.3 47.4 Neutral Neutral 05-Dec-18 30.8 47.4 31.1 Neutral Neutral 24-Jan-19 30.3 31.1 28.2 Neutral Underperform

Nigerian Breweries


25-Jan-16 108.0 122.9 106.9 Neutral Neutral 26-Apr-16 106.1 106.9 123.5 Neutral Neutral 20-Jul-16 135.0 123.5 92.2 Neutral Underperform 5-Oct-16 145.8 92.2 92.2 Underperform Underperform

22-Nov-16 141.0 92.2 92.2 Underperform Underperform23-Jan-17 144.5 92.2 92.2 Underperform Underperform13-Mar-17 130.0 92.2 100.1 Underperform Underperform 28-Apr-17 123.2 100.1 100.4 Underperform Underperform 17-Aug-17 185.0 100.4 128.4 Underperform Underperform 8-Aug-17 185.0 100.4 128.4 Underperform Underperform

23-Nov-17 130.0 128.4 115.4 Underperform Underperform 22-Jan-18 142.2 115.4 131.5 Underperform Underperform 21-Feb-18 128.0 131.5 109.7 Underperform Underperform


24 January 2019 101 2

25-May-18 116.1 109.7 109.7 Underperform Neutral 30-Aug-18 100.0 109.7 117.2 Neutral Neutral 14-Nov-18 82.0 117.2 96.4 Neutral Neutral 24-Jan-19 80.0 96.4 71.8 Neutral Underperform

Dangote Sugar Refinery


25-Jan-16 5.5 7.4 5.6 Neutral Neutral 24-Mar-16 6.2 5.6 6.1 Neutral Neutral 05-May-16 5.9 6.1 7.0 Neutral Neutral 11-Aug-16 6.7 7.0 6.1 Neutral Neutral

22-Nov-16 6.2 6.1 5.3 Neutral Neutral 23-Jan-17 6.4 6.1 5.3 Neutral Neutral

16-May-17 6.8 5.3 7.1 Neutral Neutral 10-Aug-17 14.3 7.1 15.6 Neutral Neutral 08-Nov-17 15.5 15.6 16.0 Neutral Neutral 22-Jan-18 20.0 16.0 19.1 Neutral Neutral 16-Apr-18 22.3 19.1 24.0 Neutral Neutral 12-Jun-18 19.9 24.0 18.0 Neutral Neutral

07-Aug-18 16.0 18.0 19.5 Neutral Outperform 08-Nov-18 13.0 19.5 16.0 Outperform Outperform 24-Jan-19 14.5 16.0 13.9 Outperform Neutral

Flour Mills of Nigeria

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 25-Jan-16 16.9 21.4 16.5 Neutral Neutral 6-Sep-16 19.8 16.5 24.9 Neutral Outperform 2-Dec-16 19.5 24.9 29.6 Outperform Outperform 23-Jan-17 18.5 29.6 29.6 Outperform Outperform

06-Feb-17 18.0 29.6 30.2 Outperform Outperform 10-Aug-17 29.0 30.2 35.0 Outperform Outperform 3-Nov-17 33.7 35.0 38.8 Outperform Outperform 22-Jan-18 30.0 38.8 46.2 Outperform Outperform 5-Feb-18 33.9 46.2 48.2 Outperform Outperform 6-Jul-18 31.0 48.2 39.6 Outperform Outperform

13-Aug-18 24.6 39.6 31.0 Outperform Outperform 08-Nov-18 18.5 31.0 26.3 Outperform Neutral

24-Jan-19 19.5 26.3 23.5 Neutral Neutral Nestle Nigeria


25-Jan-16 707.2 650.0 730.0 Underperform Neutral 31-Mar-16 700.0 730.0 769.0 Neutral Neutral 01-Jun-16 784.7 769.0 796.0 Neutral Neutral 11-Aug-16 825.0 796.0 720.0 Neutral Neutral 17-Nov-16 800.0 720.0 730.0 Neutral Neutral 23-Jan-17 720.0 720.0 730.0 Neutral Neutral 10-Mar-17 725.6 730.0 702.0 Neutral Neutral 03-May-17 745.0 702.0 750.0 Neutral Neutral 03-Aug-17 1026.4 750.0 952.0 Neutral Neutral 02-Nov-17 1250.0 952.0 1000.0 Neutral Underperform 22-Jan-18 1500.0 1000.0 1155.0 Underperform Underperform

08-Mar-18 1375.0 1155.0 985.0 Underperform Underperform 15-May-18 1530.0 985.0 1110.5 Underperform Underperform 14-Aug-18 1560.0 1110.5 1238.0 Underperform Underperform 05-Nov-18 1360.0 1238.0 1238.0 Underperform Neutral 24-Jan-19 1450.0 1238.0 990.0 Neutral Underperform

PZ Cussons Nigeria

Date Price (N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation

25-Jan-16 20.3 16.3 18.1 Underperform Underperform 29-Jan-16 21.0 18.1 18.1 Underperform Underperform 04-Apr-16 23.5 18.1 17.1 Underperform Underperform


24 January 2019 102 2

30-Aug-16 18.2 17.1 12.2 Underperform Underperform 31-Oct-16 16.5 12.2 11.9 Underperform Underperform 23-Jan-17 14.3 12.2 11.9 Underperform Underperform 10-Feb-17 11.0 11.9 14.3 Underperform Neutral 04-Apr-17 14.0 14.3 16.2 Neutral Neutral 26-Sep-17 25.2 16.2 22.5 Neutral Neutral 26-Oct-17 23.0 22.5 16.5 Neutral Underperform 22-Jan-18 22.0 16.5 20.5 Underperform Underperform 12-Apr-18 23.0 20.5 19.1 Underperform Underperform 24-Jan-19 11.9 19.1 11.4 Underperform Underperform

Unilever Nigeria

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 23-Jan-16 41.1 24.7 20.7 Underperform Underperform21-Apr-16 29.3 20.7 22.1 Underperform Underperform20-Jul-16 33.0 22.1 20.4 Underperform Underperform

09-Nov-16 48.1 20.4 20.4 Underperform Underperform23-Jan-17 33.5 20.4 20.4 Underperform Underperform

30-Mar-17 32.0 20.4 26.3 Underperform Underperform 21-Apr-17 33.2 26.3 33.0 Underperform Neutral

24-Nov-17 40.0 33.0 36.1 Neutral Neutral 22-Jan-18 47.0 36.1 42.3 Neutral Neutral 16-Apr-18 52.0 42.3 39.8 Neutral Underperform 25-Apr-18 53.0 39.8 43.1 Underperform Underperform 25-Jul-18 52.1 43.1 45.0 Underperform Underperform

07-Dec-18 38.9 45.0 43.3 Underperform Neutral 24-Jan-19 37.0 43.3 33.0 Neutral Neutral

UAC of Nigeria


25-Jan-16 19.9 42.1 33.7 Outperform Outperform 14-Apr-16 19.4 33.7 28.0 Outperform Outperform11-May-16 18.6 28.0 28.0 Outperform Outperform05-Aug-16 20.0 28.0 30.3 Outperform Outperform29-Nov-16 16.2 30.3 30.3 Outperform Outperform23-Jan-17 16.3 30.3 30.3 Outperform Outperform19-Apr-17 14.8 30.3 32.7 Outperform Outperform11-May-17 14.9 32.7 26.0 Outperform Outperform17-Aug-17 16.7 26.0 26.0 Outperform Outperform22-Jan-18 17.5 26.0 26.8 Outperform Outperform22-Jun-18 14.4 26.8 16.2 Outperform Outperform03-Sep-18 12.1 16.2 14.3 Outperform Neutral23-Nov-18 9.5 14.3 12.6 Neutral Neutral

24-Jan-19 8.5 12.6 12.6 Neutral Neutral 11 PLC


25-Jan-16 138.0 160.0 144.5 Neutral Neutral 20-Apr-16 151.3 144.5 153.0 Neutral Neutral 17-May-16 175.0 153.0 203.0 Neutral Neutral 18-Aug-16 169.0 203.0 196.0 Neutral Neutral 27-Sep-16 179.6 196.0 196.0 Neutral Neutral 08-Dec-16 323.3 196.0 193.2 Neutral Underperform 23-Jan-17 276.0 196.0 193.2 Underperform Underperform 07-Apr-17 360.0 193.2 215.0 Underperform Underperform

09-May-17 332.0 215.0 180.0 Underperform Underperform 25-Aug-17 203.1 180.0 197.5 Underperform Neutral 22-Jan-18 216.0 197.5 234.0 Neutral Neutral 20-Apr-18 181.0 234.0 283.0 Neutral Neutral 17-May-18 188.0 283.0 283.7 Neutral Neutral 29-Aug-18 180.0 283.7 298.0 Neutral Neutral 22-Nov-18 165.0 298.0 292.4 Neutral Neutral 24-Jan-19 180.0 292.4 245.0 Neutral Neutral


24 January 2019 103 2

Seplat


25-Jan-16 156.7 368.3 368.3 Outperform Outperform 04-Jul-16 330.0 368.3 437.5 Outperform Outperform 23-Jan-17 365.0 368.3 437.5 Outperform Outperform 05-Jun-17 350.0 476.7 480.5 Outperform Outperform 22-Jan-18 675.0 480.5 714.0 Outperform Neutral

23-May-18 734.7 714.0 971.0 Neutral Outperform 24-Jan-19 540.0 971.0 1078.0 Outperform Outperform

Total Nigeria


25-Jan-16 150.0 160.0 125.0 Neutral Neutral 17-May-16 175.0 125.0 209.0 Neutral Outperform 18-Aug-16 251.0 209.0 219.0 Outperform Neutral 27-Sep-16 295.0 219.0 219.0 Neutral Underperform 08-Dec-16 303.6 219.0 210.0 Underperform Underperform 23-Jan-17 287.0 219.0 210.0 Underperform Underperform

29-Mar-17 260.0 210.0 250.0 Underperform Neutral 08-May-17 255.0 250.0 225.0 Neutral Neutral 24-Aug-17 228.0 225.0 235.0 Neutral Neutral 06-Nov-17 236.0 235.0 231.0 Neutral Neutral 22-Jan-18 231.0 231.0 265.0 Neutral Neutral

20-April-18 233.8 235.0 290.0 Neutral Neutral 17-May-18 221.8 290.0 312.0 Neutral Neutral 20-Aug-18 183.0 312.0 359.0 Neutral Neutral 15-Nov-18 200.0 359.0 321.0 Neutral Neutral 24-Jan-19 195.0 321.0 279.0 Neutral Neutral

Okomu Oil

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 24-Jan-16 30.0 27.6 30.2 Neutral Neutral 14-Apr-16 30.0 30.2 32.4 Neutral Neutral

05-May-16 29.1 32.4 38.4 Neutral Neutral 03-Aug-16 35.0 38.4 38.4 Neutral Neutral 04-Oct-16 38.0 38.4 38.4 Neutral Neutral18-Nov-16 42.5 38.4 44.7 Neutral Neutral 23-Jan-17 44.0 44.7 44.7 Neutral Neutral 18-Apr-16 52.5 44.7 57.0 Neutral Neutral

04-May-17 47.1 57.0 57.0 Neutral Neutral 16-Aug-17 72.7 57.0 72.4 Neutral Neutral 10-Nov-17 65.0 72.4 68.9 Neutral Neutral 22-Jan-18 71.6 68.9 80.4 Neutral Neutral 18-Apr-18 73.5 80.4 84.5 Neutral Neutral

02-May-18 77.5 84.5 91.5 Neutral Neutral 09-Aug-18 73.1 91.5 88.8 Neutral Outperform 25-Oct-18 79.8 88.8 88.8 Outperform Outperform

24-Jan-19 82.0 88.8 74.5 Outperform Neutral Presco

Date Price (N) Old Target (N) New Price Target (N) Old recommendation New recommendation 25-Jan-16 33.0 28.3 27.9 Neutral Neutral 04-Jul-16 37.0 27.9 35.5 Neutral Neutral

10-Aug-16 38.9 35.5 44.0 Neutral Neutral 21-Dec-16 42.0 44.0 48.5 Neutral Neutral 23-Jan-17 44.1 48.5 48.5 Neutral Neutral

22-May-17 49.0 48.5 63.8 Neutral Outperform22-Sep-17 58.0 63.8 66.1 Outperform Outperform22-Jan-18 68.7 66.1 76.3 Outperform Neutral

28-May-18 75.0 76.3 85.1 Neutral Neutral06-Sep-18 60.0 85.1 71.0 Neutral Neutral13-Nov-18 66.3 71.0 76.9 Neutral Neutral



24 January 2019 104 2

FBNQuest Capital Research’s recommendation distribution

Outperform Neutral Underperform Total

Coverage universe 7 11 5 23

% distribution 30.4% 47.8% 21.7% 100.0%

Investment banking clients 2 3 1 6

% distribution 33.3% 50.0% 16.7% 100.0%

FBNQuest Capital Equity Research recommendation definitions

Outperform: The analyst expects the stock to outperform the Nigerian Stock Exchange (NSE) All Share Index over the next 12 months or the specified investment horizon.

Neutral: The analyst expects the stock to perform in line with the NSE All Share Index over the next 12 months or the specified investment horizon.

Underperform: The analyst expects the stock to underperform the NSE All Share Index over the next 12 months or the specified investment horizon.

Not Rated: The rating and price target are currently suspended to comply with regulations or firm policies such as when FBN Capital is acting as an adviser in a merger or transaction which involves the company whose rating has been suspended or due to reasons that limit the ability of the analysts to provide forecasts for the company in question.

Benchmark: The Nigerian Stock Exchange All Share Index

Price targets: Price targets reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings fall short of estimates.

Asset allocation: The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable.

Companies from which FBNQuest Capital has received compensation in the last 12 months

Outperform Neutral Underperform Total

0 3 1 4

% distribution 0.0% 75.0% 25.0% 100.0%

Important US Regulatory Disclosures on Subject Companies

This material was produced by FBNQuest Capital Limited solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LLP USA and elsewhere in the world by FBNQuest Capital Limited or an authorized affiliate of FBNQuest Capital Limited. This document does not constitute an offer of, or an invitation by or on behalf of FBNQuest Capital Limited or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which FBNQuest Capital Limited or its Affiliates consider to be reliable. None of FBNQuest Capital Limited or its affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities. Please bear in mind that FBNQuest Capital or FBNQuest Merchant Bank or its subsidiaries is the employer of the research analyst(s) responsible for the content of this report and (ii) research analysts preparing this report are resident outside the United States and are not associated persons of any US regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.


24 January 2019 105 2

Mentioned companies Price (N unless otherwise stated) Rating Applicable disclosure 11 Plc 180.0 NAB InBev EUR64.86 n/a Access Bank 5.7 OP Africa Finance Corporation n/a n/a African Refinery Port-Harcourt Limited n/a n/a Cadbury Nigeria 10.0 n/a Conoil 23.3 n/a Dangote Cement 190.0 OP III, V, VII Dangote Flour Mills 6.6 n/a Dangote Refinery n/a n/a Dangote Sugar Refinery 14.5 N Diamond Bank 2.1 n/a EMTS n/a n/a Etisalat Nigeria (9mobile) n/a n/a FCMB 1.9 OP Fidelity Bank 2.3 N Flour Mills of Nigeria 19.5 N III, IV, V, VII Forte Oil 29.5 n/a IV, VII Grand Cereals n/a n/a GuarantCo n/a n/a Guinness Nigeria 71.0 UP GT Bank 33.0 OP Honeywell Flour Mills 1.2 n/a InfraCredit n/a n/a Intafact Beverages n/a n/a International Breweries 30.3 UP Lafarge Africa 12.6 N III, IV, V, VII Livestock Feeds n/a n/a MRS Oil n/a n/a VII MTN Nigeria n/a n/a IV, VII Nestle Nigeria 1450.0 UP Nigerian Breweries 80.0 UP III, IV, V, VII Notore 62.5 n/a II, IV, VI, VII NIPCO n/a n/a NNPC n/a n/a III, IV, VII Oando 4.7 n/a III, VII Ocean Marine Solutions n/a n/a Okomu Oil 82.0 N Olam Group SGD 1.80 n/a VII OCP Group n/a n/a Pabod Breweries n/a n/a Port-Harcourt Refinery n/a n/a III, IV Presco 60.0 N PZ Cussons Nigeria 11.9 UP Seplat Petroleum Development Company 540.0 OP VII SPDC n/a n/a Stanbic IBTC 47.5 N Teleology Holdings Limited n/a n/a Total Nigeria 195.0 N UAC of Nigeria 8.5 N III, IV, V, VII UAC Property Development Company 1.7 n/a III, IV, V, VII UBA 7.3 OP UNICEM n/a n/a Unilever Nigeria 37.0 N Zenith Bank 22.0 OP VI

I. The analyst(s) responsible for the preparation and content of this report (as shown on the front page of this report) holds personal positions in a

class of common equity securities of the company to which this report relates.

II. FBNQuest Capital Limited or its Affiliates have recently been the beneficial owners of 1% or more of the securities mentioned in this report.

III. FBNQuest Capital Limited or its affiliates have managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.

IV. FBNQuest Capital Limited or its affiliates have received compensation for investment banking services from the issuer of these securities in the past 12 months.

V. FBNQuest Capital Limited expects to receive compensation for investment banking services from the issuer of these securities within the next three months.

VI. FBNQuest Capital or FBN Holdings is a market maker in the subject securities.

VII. The company is a client of FBNQuest Capital.


24 January 2019 106 2

[Notes]


24 January 2019 107 2

[Notes]


24 January 2019 108 2

Important Risk Warnings and Disclaimers This report was prepared, approved, published and distributed by FBNQuest Capital Limited (“FBNQuest Capital”) a company located outside of the United States (a “non-US Group Company”). FBNQuest Capital is a subsidiary of FBN Holdings Plc regulated by the Securities and Exchange Commission in Nigeria (SEC). This report is distributed in the U.S. by LXM LLP USA, a U.S. registered broker dealer, on behalf of FBNQuest Securities Limited, a wholly owned subsidiary of FBNQuest Merchant Bank Limited only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA. Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organisation. The information has been compiled or arrived from sources believed to be reliable and in good faith, but no representation or warranty, express or implied is made as to their accuracy, completeness or correctness. FBNQuest Capital Limited has not verified the factual accuracy, assumptions, calculations or completeness of the information. Accordingly, FBNQuest Capital Limited accepts no liability whatsoever for any direct or consequential loss or damage arising from (i) the use of this communication (ii) reliance of any information contained herein, (iii) any error, omission or inaccuracy in any such Information or (iv) any action resulting there from. FBNQuest Capital Limited provides the information for the purpose of the intended recipient’s analysis and review. Accordingly you are advised to verify the factual accuracy, assumptions, calculations or completeness of the information. FBNQuest Capital is a subsidiary of FBN Holdings Plc. FBNQuest Capital or any other subsidiary of FBN Holdings may make market or deal in the shares mentioned in this report. One or more persons of FBNQuest Capital Limited or its affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon either for their own account or on behalf of their clients. FBNQuest Capital or other subsidiaries of FBN Holdings may also take proprietary trading positions in the shares of companies discussed in this publication, and may receive remuneration for the publication of its research and for other services. FBNQuest Capital Limited or its affiliates may, to the extent permitted by law, act upon, or use the above material or the conclusions stated above or the research or analysis on which they are based before the material is published to recipients and from time to time provide investment banking, investment management or other services for, or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report. Accordingly, this document may not be considered as free from bias. Additional information may be available to FBNQuest Capital or FBN Holdings which is not discussed in this report. Further disclosure regarding FBNQuest Capital’s policy regarding potential conflicts of interest in the context of investment research and FBNQuest Capital’s policy on disclosure and conflicts in general are available on request.

© FBNQuest Capital 2019. All rights reserved. An FBN Holdings Company 16 Keffi Street, Off Awolowo Road S.W. Ikoyi Lagos Nigeria

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