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2011 Outlook

VETIVACAPITAL MANAGEMENT LIMITED

SUMMARY

Global Outlook: Positive but Fragile

We align with the broad projections that emerging and frontier markets would

remain drivers of global growth even as advanced economies focus on debt,deleveraging and fiscal consolidation (see our report titled Underlying

Assumptions – 2011 Outlook dated January 4, 2011). Notwithstanding the

positives of the emerging markets, it is important to watch out for rising

inflationary threats on the back of increasing commodities and energy prices.

Nigeria – Our Crystal Ball

Political Risks...gradually waning? With voting at the primaries adjudged

as being relatively free and fair, we see it as a pointer to the April genera

polls. In our view, this is expected to gradually douse the impact of politica

uncertainty in the financial markets. Notwithstanding, we do not utterly

discount the likelihood of other outcomes.

GDP growth to reach 7% in 2011: We allude to government’s projection o

at least 7% growth, though slightly lower than IMF’s forecast of 7.4%. We

expect that the non-oil sector particularly agriculture, retail and wholesale

trade would continue to drive economic growth. However, we believe

consumer expenditure would sluggishly rise in 2011, even as increases in civi

servants’ wages would have minimal impact on aggregate disposable income.

Still, impending inflationary pressures would impact negatively on rea

disposable income.

Inflation to remain in double digits in 2011: Inflationary pressures are

prevalent and we believe inflation will remain in double digits in 2011 despite a

contractionary policy stance by the CBN. Pre-Election spending spree

increasing energy and food prices and the implementation of the deregulationpolicy in H2’11, are the most obvious threats to inflation. Following from this

interest rates are expected to continue to spike upwards even as bond yields

become more attractive.

Exchange rate to remain steady: As revealed by CBN’s renewed stance on

exchange rate stability, the naira would likely remain stable in 2011, within

the N150/US$ (+3/-3%) band as the MPC has taken steps to constrict dollar

demand pressure through the hike in the interest rate environment. More

importantly, oil futures are projected to remain >$90/barrel in 2011. This,

alongside stable oil production volumes supports healthy reserves. We

however, do not discount the possibility of some level of volatility in H1’11

especially as the April elections draw near.

We remain bullish on equities: Notwithstanding, the expected rise in yields

on fixed income securities and the implied preference over other asset classes,

we make a case for equities given the current low valuations of Nigerian

equities. Lending support to this is the fact that investment alternatives are

limited and the fixed income market is shallow. Therefore, we project a base

case return of 18% for NSE ASI, which would largely driven banking (Zenith

Bank, Access Bank and First Bank), Oil and Gas (Oando), and Consumer

stocks (Dangote Flour and Flour Mills).



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Vetiva Sector Classification, Redefined

We have redefined our Sector classification. This new classification, which is

based on Global Industry Classification Standards differs slightly from the

Nigerian Stock Exchange classification of sectors. It has been done with a view

to allowing us carry out clearer comparison across companies, industries and

sectors in accordance with global best practice. In some cases, we have

combined two or more industries with similar drivers to form a sector, but are

conscious of subtle peculiarities within industries. We now introduce 3 new

sectors. The companies have been reclassified based on the nature of their

principal business.

The Vetiva Consumer Sector comprises manufacturers and distributors of

essential food, beverages and tobacco, producers of non-durable household

goods and personal care products, food and drug retailing companies as wel

as hyper markets and super centres. It also include non-essential food and

beverage, automotive and household durable goods, consumer retailing and

restaurants.

The Vetiva Energy Sector comprises companies whose businesses are

dominated by either of the following activities; exploration, production,marketing, refining, transportation of oil and gas products; companies

engaged in the construction or provision of oil rigs, drilling equipment, and

energy related services are also included in this category

The Vetiva Infrastructure Sector includes companies whose core business

area is closely related to the built environment. These include manufacturers

of building materials such as cement, steel, wires, and companies involved in

road, rail, housing and other types of construction activities.

Vetiva Research Equity Ratings Guide Revisited

After considering a number of factors, including the expected volatility in the

equity market and break-even positions for investors, appropriately factoring

in transaction costs of c.4% (entry and exit costs), we effect changes in ou5-tier rating system. Our new rating bands are as follows:

Buy: ≥+25.00% expected total return – refers to stocks that are highly

undervalued but with strong fundamentals and where potential return in

excess of or equal to 25.00% is expected to be realized between the current

price and analysts’ 12 month target price.

Accumulate: +10.00% to +24.99% expected total return - refers to

stocks that are undervalued but with good fundamentals and where potentia

return of between 10.00% and 24.99% is expected to be realized between the

current price and analysts’ 12 month target price.

Neutral: +5.00% to +9.99% range expected total return - refers to

stocks that are correctly valued with little upside or downside where potentia

return of between +5.00 to +9.99% is expected to be realized between


Reduce: -5.00% to +4.99% expected total return - refers to stocks that

are overvalued but with good or weakening fundamentals and where potentia

return of between -5.00% and +4.99% is expected to be realized between


Sell: <-5.00% expected total return - refers to stocks that are highly

overvalued but with weak fundamentals and where potential return lower than

-5.00% is expected to be realized between current price and analysts’ 12

month target price.



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Sector Outlook

Banking Sector: Risk gives way, eyes on fundamentals

We are overtly upbeat on 2011 earnings, as the key drags on growth fizzle

out. Aside our modest outlook on loan growth which is expected to enliven

interest income as well as fee and commission books, the steady uptick in the

overall yield environment will provide support for appreciable growth in FY’11

earnings over 2010 levels. Our top calls in the sector are ZENITHBANK,

ACCESS and FIRSTBANK. These three banks have an expected return of 27%

25% and 17% respectively.

Consumer Sector: Tough year ahead...efficiency, requisite

The global factor of rising commodity prices, and constrained domestic credit

growth will combine to pose challenges for companies within the consumer

sector in 2011. It is worthy to note that these stress points would play

differently for the sub-sectors within the Consumer industry. Importantly, the

ability of consumer companies to improve and sustain production efficiencies

would gird against some of these pressures. In the consumer space, we are

bullish on Dangote Flour and Flour Mills on the basis of our expected return of29% and 11% respectively.

Energy Sector: Elections to slow reforms

With far reaching reforms in the pipeline in of the oil, gas and power segments

of the Energy industry, electioneering for the April polls seems to be shifting

the focus of the legislators, and also the ability of the executive arm o

government to focus on implementation. We note that for most segments, less

activity on the reforms would be felt pre-election, whilst the Government is

likely to put more focus on the pressing issues in the Energy Industry, post-

elections. Our top shot in the sector remains Oando, based on our estimated

return of 32%.

Infrastructure Sector: Set for mixed realities

Our focus on the building materials sub sector is on the cement producers, as

they dominate the infrastructure sector. The outlook for the cement producers

follows from our overall expectations of slow infrastructure development. In

line with the additional capacities expected to come on stream this year, the

sub sector is set to witness a major boost in cement supply. On consumption

we expect some improvement in Q1’11 given the onset of the dry season. The

construction sub sector will still be dependent on government capita

expenditure. We expect a reduced level of government contract awards and

mobilization as focus on elections stalls decision making in government

quarters. Notwithstanding the strong fundamentals of the sector, most of the

stocks are stretched at current prices. However, we remain bullish on Lafarge

WAPCO and Julius Berger based on our estimated potential return of 18% and

14%.

Insurance Sector: Searching for value

With the Nigerian economy forecast to grow at 7.0% in 2011, and given rising

income levels and higher risk awareness among the populace, we are

cautiously optimistic about the demand for insurance products. However,

intense competition with rate undercutting, moderate returns from

investments, and adjustments to the new regulatory guidelines is likely to

continue to taper short-term profitability. Our favorite in the Insurance space

remains Custodian and Allied Insurance based on our estimated return o

32.1%



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2011 Outlook


Capital Markets: High Expectations Amid Uncertainty

Our expectation is that the equity market will close 2011 18% up, with

the benchmark index ending the year at 29,246.49. In our view, this base

case scenario would be driven by a 30% return by banks, while Petroleum

Marketing and our new Infrastructure (includes building materials and

construction companies) sectors are forecast to return 18% and 9%

respectively. We expect our new Consumer group to return 15%, however,

sub sector forecast puts Food & Beverages at 21%, the Brewers at 12%, while

the Conglomerates will throw in a 6% return. As in 2010, we believe the

Insurance sector would once again lag the broader market with 2011 return

forecast at 5%.

Our Bull case estimate for the equity market performance rises 606

bps above our base case scenario to 24%. Again the banks will lead with

a 40% return, Petroleum Marketing and Consumer sectors will follow with 25%

and 19% respectively. The Infrastructure sector will post 18% return, while

Insurance counters will return 10%.

Our Bear case estimate sees equities returning 10% for the year. Thisscenario forecasts banks adding 25%, the Petroleum Marketing and Consumer

sectors posting gains of 10% and 6% respectively, while the Infrastructure

and Insurance sectors will shed 4% and 5% respectively.

Given the expected hyperactivity in local Bond issuances by AMCON and the

federal government early in the year, we expect the bond market to continue

to attract capital flows as bond yields would trend higher in 2011, hence

shaving off, only slightly though, some of the potential investments in equities

Stronger still, the uncertainty in the Nigerian Political environment might delay

significant investments in the capital markets further into the year as

investors exhibit caution over the outcome of the elections.



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CONTENTS

Global Outlook ........................................................................................7

Nigeria ...................................................................................................8

2010: Nursing the Wounds ..................................................................8

Spill Overs Into 2011 ............................................................................. 12

2011 Outlook: Our Crystal Ball ................................................................ 15

Capital Markets: High Expectations Amid Uncertainty ................................ 18

Sector Outlook ...................................................................................... 20

Banking Sector: Risk Gives Way, Eyes on Fundamentals ....................... 20

Consumer Sector: Tough Year Ahead, Efficiency, Requisite ..................... 60

Energy Sector: Elections To Slow Reforms .......................................... 106

Infrastructure Sector: Set For Mixed Realities ..................................... 130

Insurance Sector: Searching For Value ............................................... 154

Investment Ratings.............................................................................. 163

Contacts ............................................................................................. 164

Disclosure ........................................................................................... 165



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Global Outlook: Positive But Fragile Recovery

Emerging Market (EM) economies are projected to remain the drivers of globa

growth in 2011, sustaining the trend witnessed in 2010, though at a modest

rate this time. We anticipate the growth in the Developed Economies (DE) wil

remain a drag on overall growth as the world’s largest economies battle to

resolve their fiscal issues. The United States (US) is likely to adopt fisca

consolidation in trying to reduce its deficits which may taper growth. In the

euro zone, on the other hand, attention will be on the possibility of the debt

contagion of other countries in the region and the continuing viability of a

single European currency. Potential rise in oil and other global commodity

prices is likely to fuel inflation pressures in the EM region. On the other hand,

narrowing supply slacks and higher inflation expectations support a gradua

rise in inflation in the DE. There is likely to be a gradual push towards globa

rebalancing between the world’s surplus and deficit countries. Implementation

of global rebalancing will be challenging in the short-term as it will put

pressure on consumption patterns with adverse effects on economic growth.

0

1

2

3

4

5

6

7

8

9

10

2007 2008 2009 2010 2011F

Advanced

Emerging

GLOBAL INFLATION TREND

Source: IMF, Vetiva Research

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Q1'11 Q2'11 Q3'11 Q4'11

Emerging

World

Advanced

QUARTERLY GDP FORECAST FOR 2011

Source: IMF, Vetiva Rese



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Nigeria

2010…Nursing the Wounds

Economy forges on

In line with the projection for overall 2010 growth of 7.85%, real GrossDomestic Product (GDP) has continued to trend by an estimated 7.23%,

7.69% and 7.86% in Q1, Q2 and Q3, with a projected Q4 growth of 8.29%

This shows strong growth over 2009 which recorded growth of 4.50%, 7.45%

and 6.96% over the same periods.

The growth in the economy continues to be driven by the non-oil sector,

especially agriculture, with support from wholesale and retail trade, and

services. Growth in the Agricultural sector is largely driven by the expansion of

land under cultivation while the whole and retail trade sector has benefitted

from the dearth of the manufacturing sector. The contribution from the oi

sector, on the other hand, has received a boost in recent times, owing to the

improvement and stability of oil production output at an average of 2.2 million

barrels per day (bpd) and strong crude oil prices averaging $80.92/barrel in

2010.

Figure 2: Crude Oil Prices and Domestic Oil Production2010

Source: Vetiva Research, CBN

Oil – GDP has continued to

be a drag on overall GDP

Figure 1: QoQ Real GDP Growth (%)2009 - 2010


Non-Oil GDP has consistently determined the direction of overall

GDP.



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Currency held steady

During the year, the CBN depended on the reserves to defend the naira and

sustain it within the stated +3/-3% (N150/US$) band. The Nigerian

government has over the years depended on crude oil as its main source of

government revenue and foreign exchange earnings. This has meant that the

Central Bank’s ability to defend the position of Naira has been largely

dependent on the strength of revenues accruing from crude oil sales; and on

fluctuations in crude oil prices. Gross external reserves were put at $32.35

billion as at 31 December, 2010 amounting to its 2010 decline of 23.70%. The

Federal Accounts Allocation Committee (FAAC) made about 5 withdrawals from

the Excess Crude Account (ECA) in 2010 including $1 billion as outflow for the

establishment of Sovereign Wealth Fund (SWF) which is expected to replace

the ECA. The reserves came under pressure in the last few months of the year

end due to increased dollar demand from importers and subsequently, in lieu

of the elections. The balance in the ECA closed the year at $300 million.

Preparation for 2011 elections…

The early part of 2010 was filled with uncertainties, first about the state of

health of the then President, Umaru Yar’adua. The anxiety eventually doused

on his death on the 5th of May, and the assumption into office of Goodluck

Jonathan. Second was the suspense of the President on his intentions to run

for office in 2011, with focus on zoning as a major obstacle. The underlying

argument was that it will be the North’s turn in 2011 because Olusegun

Obasanjo served two terms (1999-2007) and the Northerner, Yar-Adua, less

than one (2007-2010) before being succeeded by Jonathan (from the

Southern state of Bayelsa in the Niger Delta). After initiating some needed key

reforms, such as the ousting of the erstwhile elections Chairman, Prof. Morris

Iwu, and establishing a road map for the power sector, to set the stage,

Jonathan eventually broke the silence and declared his intentions to run for

office as he gave a speech in Eagle’s Square on September 15, 2010.

Figure 3: Foreign reserves (‘$Millions) and Exchange Rates (NGN/US$)2010

Source: Vetiva Research CBN

The CBN intervened to support thecurrency with the external reserves, resulting in its YTDdecline of 23.70%.

Uncertainties characterized theearly part of 2010 until President Goodluck Jonathan declared hisintentions to run for the office of President, after reorganizing somekey agencies.



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...Catered for by an expansionary fiscal stance…

Initially, a fiscal stimulus budget of N4.1 trillion in expenditure was proposed

to spur the economy to growth in 2010. The budget was eventually increased

to N5.2 trillion through supplementary budgets and amendments to cater for

additional expenses especially towards the 2011 elections. As at October 2010,only 43% of actual capital spending had been used; the recurrent expenditure

on the other hand was on target. Estimated government revenue was N3.2

trillion, resulting in a budget deficit of N1.9 trillion (equivalent to c. 6.1% of

GDP). The deficit gap was largely financed through the issuance of domestic

bonds and withdrawals from the ECA as detailed above.

... which was out of sync with the CBN’s restrictive policy

The apex bank’s resolve to embark on a contractionary policy became

apparent at the Monetary Policy Committee (MPC) meeting of September 21

2010 amid potential inflationary pressures all year round. On the back of this

the Monetary Policy Rate (MPR) was upped 25bps to 6.25% and the StandingDeposit Facility (SDF) rate to 3.25%. As a direct response to this

announcement, rates in the interbank market which had remained relatively

low (except for temporary illiquidity spikes) soared, reaching a one-year high

of 13.75% (12 Nov 2010) while NIBOR also peaked at 13.46% on the same

day. In the November MPC meeting, the MPR was left unchanged at 6.25%

however, the Standing Deposit Facility (SDF) rate was hiked by 100bps to

4.25% in a bid to address inflation expectations.

Supply factors underpin high yields in the Bond market

Tighter monetary conditions and increased issuance of bonds continued to

exert upward pressure on money market and bond yields in the year under

review. Specifically, FGN bond issuances increased significantly, underpinned

by the expansionary fiscal policy of the Federal Government. From an initially

planned bond issue program of about N700 billion, it allotted N1.1 trillion as at

December, with Banks accounting for c.53% of the total allotment. Discount

Houses and Pension Fund Administrators (PFA) followed closely at 10% and

12% respectively. Interestingly, the government scheduled an auction for

December, which made it the first time a bond issuance will be made in

December of any year.

The budget was increased to N5.2trillion, resulting in a deficit of N1.9

trillion, which was financed throughthe issuance bonds and withdrawals from ECA.

The MPC’s use of contractionary

measures by increasing interest rates led to an overnight hike ininterbank market rates and NIBOR.

Expansionary fiscal policy by thegovernment led to increase in bond

issuance, which resulted in highbond yields.



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Inflation finished the year at a 13-month low of 11.8%

Inflation eventually began to moderate in November in response to the rate

hikes by the MPC. In detail, it hit a 13-month low of 11.8% YoY in December

2010 after peaking at 15.6% in February while it averaged 13.8%. Whilst we

recognize the pass-through impact of the hike in the MPR and StandingDeposit Facility Rate (September and November respectively), we are cautious

to say that this declining trend in overall prices was as a result of the base

effect. We recall the CPI basket was re-weighted in August and the larges

component, the Food Index, was revised lower from 64.8% to 50.7%. We

believe this re-basing has had an effect on current trend and expect a

correction going forward.

Figure 4: Inflation (%)YoY and MoM 2010


Inflation declined to 11.8% in

December 2010 as a result of thecombined effects of MPC rate hikes

and reweighting of the CPI basket.



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SPILLOVERS INTO 2011

Elections, Elections, Elections

A host of factors in Nigeria, including reforms across various sectors of the

economy, remain hinged on the outcome of the April polls. In our January2011 note, “Underlying Assumptions – 2011 Outlook”, we reviewed the

political terrain and gave 3 scenarios prior to the conclusion of the Presidentia

Primaries. Now that the primaries have come and gone, this is how each party

stands:

Peoples Democratic Party (PDP) – President Goodluck Jonathan

Action Congress (AC) – Mallam Nuhu Ribadu

All Nigeria Peoples Party (ANPP) – Mallam Ibrahim Shekarau

Social Democratic Mega Party (SDNP) – Mr Pat Utomi

Congress of Progressives Change (CPC) – Muhammadu Buhari

National Conscience Party (NCP) – Dele Momodu

We expect the 2011 presidential polls to be keenly contested amongst the topsix candidates. However, we have narrowed our possible scenarios to two:

Scenario 1: PDP vs other parties (Probability: 70%)

Come April, the final face-off is among PDP’s Jonathan, the CPC’s Muhammadu

Buhari, the AC’s Nuhu Ribadu, and candidates from the relatively smaller

parties. Under this scenario, we expect Buhari, ANPP’s Shekarau and Ribadu to

split Northern votes. Jonathan’s chances of winning the elections are bright.

Scenario 2: PDP vs Coalition (Probability: 30%)

An unlikely merger between the CPC and the AC produces one strong

candidate to contest the polls with PDP’s Jonathan. Whoever emerges as the

candidate for the combined parties would wield very strong clout in the North

and South-West. Under this scenario we expect a very tight contest between

the PDP and the combined party. Jonathan’s chances are greatly reduced.

Deregulation in the offing

One of the most contentious issues in the Nigerian economy remains the

question of deregulation of the petroleum sector. Whilst the federa

government has adopted a temporary solution to solving the age-long problem

of petroleum subsidy reimbursements, via the issuance of discountable

Sovereign Debt Notes to product importers, the burden, in terms of the high

cost to the government, remains very challenging. Thus, we anticipate that

the full deregulation of the downstream sector would be broached post-

election, as it is unlikely that the government would aim to deal with the

sensitivities and labour related issues arising from a price-hike, which wouldbe the immediate effect of the policy implementation pre-elections. Post

deregulation, we expect increased competition in the market place as entry

barriers in the supply and distribution network would be removed.

Six Presidential candidates

emerged after the primaries; thecontest is now pitched betweeneither PDP and other parties, or PDP and a coalition.

Post-election, government may embark on the deregulation of thedownstream sector, as petroleumsubsidy reimbursement is very challenging.



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Addressing infrastructural deficiencies, how soon?

Nigeria’s poor state of infrastructure remains a huge drag on its progress in

global competitiveness. On the Global Competitiveness Index compiled by the

World Economic Forum, Nigeria has continued to fall in the ranks from 94 of

134 countries in 2008, to 99 of 133 countries in 2009 and 127 of 139

countries in 2010. Analyzing the criteria for this ranking reveals that Nigeria

has continued to fall short in institutional reforms, infrastructure development

and improvements in the educational sector. Hence economic development is

getting more constrained thereby pushing the country further down in the

rankings.

Top on Nigeria’s list of short-comings is the poor performance of the energy

sector. Manufacturers continue to cite unreliable power as the most binding

constraint to efficient production, and small scale industries are unable to grow

their businesses. Succor, however, came underway when in August 2010, the

President, Goodluck Jonathan unveiled the Power sector roadmap aimed at

improving power supply to residential, commercial and industrial consumers

Whilst it is laudable that the government has set the ball rolling in a quest toget this reform right, only time will tell the extent to which this reform will be

actualized.

Waiting for the credit taps to open

Since the marked slowdown in credit growth in 2009, credit to the private

sector has continued to witness a sluggish trend. Apt to say the government

has been the beneficiary of credit with a 55.61% growth in 2010, compared to

private sector growth of 12.02%. The dearth of credit has been less of an

issue for larger and more established corporations. We have seen a lot of

companies approach the capital market for funds to cater for their financing

needs. Manufacturing industries, small and mid-tier companies have been at

the receiving end of the banks’ aversion to credit extension. This has not been

reflective in the growth of the economy, as the major contributor to GDP

(Agriculture) is largely informal and not dependent on credit. It may still be a

long wait for credit taps to start flowing, though in the interim, lending wil

continue to tilt towards the low risk, higher end of the market as the banks

contend with non-performing loans.

Dependence on crude oil

As at Q3’10, crude oil revenue accounted for 74.2% of total government

revenues (vs non-crude oil revenue at 25.8%). However, non-oil GDP remain

the main driver of growth, contributing 84.8% in Q3’10 compared to Oil GDP

at 15.2%. The government is preparing Nigeria’s Vision 2020 which focuses ondiversification of the economy away from oil. Vision 2020 will articulate the

government’s goal of placing Nigeria among the top 20 economies in the

world. At present the country’s economic structure reflects an undiversified

economy that is highly dependent on a capital-intensive oil sector, with a

traditional agricultural sector accounting for the bulk of employment. Without

well laid down infrastructure to provide support for the manufacturing and

service sectors, it may be increasingly difficult to diversify the revenue base o

the economy.

As banks are still contendingwith non-performing loans,they prefer to grant credit to

low risk institutions at thehigher end of the market.

Nigeria’s undiversified

economy continues to rely largely on Crude oil for revenue, however non-oil GDP remains the main driver of economic growth.

Continued dilapidation of institutions, infrastructure and education has caused Nigeria’s GCI rank to fall from 99 in 2009 to 127 in 2010.

Government is set to tackleunreliable power supply, a major economic constraint, with thePower Sector Roadmap.



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2011 Outlook


Unemployment remains a key challenge

The economy has sustained economic growth without creating jobs as

unemployment rose from c.14.9% in 2008 to c.19.7% in 2010 despite

economic growth >7%. The Government sees this as a key challenge, as

detailed in its 2011 budget proposal and is expected to take decisive actions to

tackle it. We believe the establishment of labour – intensive industries throughthe creation of public infrastructure projects will immediately impact the leve

of employment.

Finances of the sub-nationals

The governments of sub-nationals are likely to meet relatively empty

treasuries when the next administration returns, and the challenge becomes

how they will fund themselves. With the President not needing further favours

from the states, it only means they will have to meet expenditure from the

regular monthly FAAC allocation and Internally Generated Revenue (IGR). The

capital market would have been the next viable option, but the CBN’s

guidelines on bond participation intended to make states more fiscallyresponsible would restrain such participation.

We align with theGovernment’s employment creation strategy as detailed in

the 2011 budget speech. Webelieve the creation of labour-

intensive industries will immediately impact unemployment.

We anticipate the sub-nationals will need more fundsto support their finances and are likely to approach thebond market for such capital.



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2011 OUTLOOK – OUR CRYSTAL BALL

GDP growth to reach 7% in 2011

The main drivers of GDP growth have been the Agricultural, Wholesale and

Retail Trade, and Crude Oil sectors, and we believe that these sectors wil

continue to support growth in 2011 with the non-oil sector yet again outpacing

the oil sector. The IMF has a growth forecast of 7.4% whilst the FG in its 2011

budget has a similar projection at 7%. We see output growth at 7% in 2011.

Agriculture: Barring major alterations to weather patterns, we expect

agricultural output to be stable enough to provide a steady boost for the

sector and overall output. Also in favour of the sector is the increase in

global food prices which may encourage farmers to harvest more crops

Incentives underway to promote the sector include a World Bank $185

million Commercial Agriculture Development Programme (CADP) for states

in Nigeria.

Currently only 5 states are implementing the programme and the World

Bank has further put in place an additional $50 million for states that

achieve a 30% implementation rate in 2011. We are optimistic that all these

factors will boost the productivity and performance of the agricultural sector

in Nigeria.

Crude Oil: Oil production which has been on an upward trajectory in recent

times becomes susceptible to increased volatility even as we approach the

2011 elections. Also, considering the gradual resurgence of attacks on oi

installations in the Niger Delta over the last few months, there are risks to a

stable level of production in the year. In our note, “Underlying Assumptions

– 2011 Outlook”, we provided our views on the outlook of crude oil prices

this year. Though its prognosis tilts favourably to the north, its sustenance in

that trajectory remains hinged on the performance of the global economyespecially the US, Asia and Europe.

The direction of crude oil exports are tilted towards the Americas, Asia and

Europe with the United States accounting for c.30% of imports. Despite a

positive 2011 outlook for the regions, growth remains very fragile and may

be tipped over by the slightest negative developments such as a slowdown

in the Chinese economy and a deepening of the debt crisis in Europe. Crude

oil prices peaked at its 27-Month high on the 17th of January this year,

which feeds in favourably in terms of revenue for the Nigerian economy.

Consumer spending to improve, albeit slightly

From a contraction of c. -9.5% in 2009, we believe real disposable household

will commence a steady positive rise by the time 2010 figures are released

The growth in income will reflect the fact that wage growth has managed to

keep pace with inflation. In 2010, inflation averaged 12.6%, while we estimate

wage growth to be around 13.9%. Consumer expenditure is also estimated to

have increased by c.14% in 2010 which is positive for the retail and trade

sector. Going forward, we expect consumer expenditure to sluggishly rise as

the economy moves from recovery to expansion, and also supported by the

implementation of wage increases for civil servants, medical personnel, and

University lecturers amongst others.

Government incentives,anticipated good weather and increase in global food pricesis expected to provide a boost to the agricultural sector.

Sustenance of oil pricesremain hinged on theperformance of the global economy.

Implementation of wageincrease will likely improveconsumer spending.



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2011 Outlook


Inflation to rise steadily in 2011

The September MPR hike and the November SDF corridor adjustment have

significantly eased YOY inflation. The 12-month inflation rate fell from a peak

of 15.6% in February to 11.8% in December and is likely to continue to fall in

the early months of 2011 as the base effect kicks in. However, we believe

inflationary pressures are prevalent and are likely to increase as we approach

Q2 of 2011, with election spending spree set to kick in. months of 2011 as it

continues to ride on the effect of the CPI re-basing. More importantly, it has

become clearer that the causes of inflation are more structural than liquidity

driven. As such, we expect inflation to remain in double digits in 2011 in spite

of interest rate hikes by the Monetary Policy Committee (MPC).

Coupled with this is the recent depreciation of the Naira (declined by 1.1%

against the Dollar December to date) which we expect will push up the cost of

imported goods, thereby putting pressure on headline inflation through the

imported inflation index. As we switch from politics to policy in the second half

of the year, we expect the implementation of the deregulation of the

petroleum sector to take effect with short-term consequences which include

increase in consumer prices.

Exchange rate to remain steady

Crude Oil prices as projected above $90/barrel and stable oil production

volumes lend support to a stable exchange rates regime in 2011. In our

opinion, the naira is likely to remain comfortable within the N150/US$ (+3/-

3%) band as the CBN will be in a better position to defend the currency than it

was in 2010 on the back of a healthy reserves position. However, we do not

discount the possibility of some level of volatility under abnormal conditions as

witnessed in December 2010. For Q1’11, uncertainty around the outcome of

the April elections is likely to put some pressure on the naira with increased

outflows of funds and little inflow.

Infrastructural spending to support economic growth

Fiscal policy should support growth through an ongoing improvement in

infrastructure spending. Notably, the Federal Government in its medium term

budgetary frame-work (based on National Implementation Plan for NV2020)

has a fiscal commitment to sustained spending on capital projects.

Further to this, the 2011 Budget Policy statement published in December

stated the establishment of an Infrastructure roadmap which has identified 50

priority projects that must be executed to enhance economic productivity. The

budget speech stated that provision had been made for some of these projects

in the 2011 budget whilst depending on private sector financing for the rest

This is an encouraging first step in the right direction though we note that the

allocation of N1,005 billion to capital expenditure is 26.6% lower than the

N1,370 billion allocation in 2010.

Election spending and deregulation of the petroleumsector – forerunners of inflationary pressure.

With an allowance for volatility in Q1’11, the naira is expected to remain stable through2011.

Infrastructure road mapexpected to improve structural gaps in the economy.



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2011 Outlook


We believe the government will depend a lot more on the private sector for

financing. For this purpose, the framework for a Viability Gap Fund (VGF) is

being designed in conjunction with the Infrastructure Concession and

Regulatory Commission (ICRC), and the World Bank to provide grants for

projects which have been identified as suitable for a PPP (Public Private

Partnership) arrangement. In our opinion, we are not likely to see much of

infrastructural activities until the successful conclusion of the April 2011

elections.

Budget Deficit expected to widen away from projection

Government’s fiscal stance in 2011 remains uncertain. One on hand, it alludes

to a fiscal consolidation strategy and projects a deficit of 3.62% from 6.10% in

2010. On the other hand, we have very little information on its plans. The

Debt Management Office (DMO) is yet to release an issuance calendar for its

debt auctions but auctioned only $60 billion in January, a significantly lower

amount from the monthly averages in 2010. If the budget follows its usualpattern, we anticipate a high probability of an upward budgetary revision

especially after the elections. This is expected to cause the budget deficit to

widen further in the course of the year. Contrary to 2010, the government in

its 2011 budget cites reducing reliance on domestic borrowings which means

more external borrowings. This implies vulnerability to the volatility and

uncertainty of the external environment with implications for external debt.

Though the budget alludes toa fiscal consolidation strategy,there is a high probability of

its upward revision.



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2011 Outlook


CAPITAL MARKETS

High Expectations amid Uncertainty

Spirits Rekindled as Gains Return

The year 2010 opened with trades trending up, as investors adapted to theinitial shock of the Banking reforms of late 2009. As the fates of the Banks

took shape, cautious trading resumed in the Banking sector. Riding on this,

and backed by surges in the Building Materials and Food & Beverages sectors,

the All Share Index (ASI) rose through Q1’10 to peak at 28,029.78 (+34.51%)

in April. Thereafter, the firm stance of the Central Bank of Nigeria (CBN)

against the use of Bank stocks as collateral, administrative shake-ups in the

NSE (dismissal of the then DG, Dr. Okereke-Onyiuke and other executives) as

well as ripples of the Euro-zone sovereign debt crisis watered down trade

volumes, softening the momentum of the market over the tail-end of Q2’10

and early Q3’10. However, news on the operations of AMCON and the

noteworthy listing of Dangote Cement Plc revived interest the Market through

Q4’10 to keep the market vibrant, enabling it close the year 18.9% up at

24,770.52.

Beyond Satisfactory

Laudable for reversing the losses of the last two years to pitch the Index close

for the year in line with our forecast range of 24,603.33 (+18.06%) to

25,293.15 (+21.37%), 2010 was more remarkable for the positives it held

Returning confidence in the bourse which saw foreign participation surge 88%

in 2010, and wider trading hours introduced in December led to a 16%

increase in traded volumes, meaning liquidity was improving from recent lows

of 2009. Fresh listings towards the end of the year brought more sectors

(most notably, the Building Materials sector) to the fore of the market

evening out the spread of Index movement and softening the grip of the bankson the market. This is expected to overshadow concerns raised by the

potential delisting of Nigerian Bottling Company and urge further foreign

investment in 2011. With the consummation of sizable M&A deals such as the

Dangcem-BCC combination, as well as the announcement of joint ventures like

the UAC-Tiger Brands deal and inklings of more to come, 2010 has set the

stage for further market growth in 2011 as investors anticipate performance-

based appreciation in the stocks of quoted companies.

News on the operations of AMCON and the noteworthy listing of Dangote Cement Plc revived interest the Market through Q4’10 to keep themarket vibrant, enabling it close the year 18.9%



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2011 Outlook


Reforms Underway

Further on, refreshed talks about the Petroleum Industry Bill have placed its

passage behind the elections. On eventual execution, the bill would incite

shake-ups in the sector, with probable emergence of new companies built on

the local content clause even as existing ones flourish. Though the pay-offsfrom the reforms fall in the long-term, increased interest in the sector is bound

to influence the stock market positively. In addition, on the slim chance that

the Power sector reforms take shape in 2011, other sectors that are heavy

energy spenders would enjoy the advantage of lower operating expenditure

via reduction in power costs.

Within the stock market, the transformation that began last year is expected

to start yielding dividends this year in the form of improved transparency

more internal efficiency, and credible leadership. For one, the proposed

upgrade of the trading platform through partnership with the American

Express Company (AMEX) would help the market optimize the recent

extension of trading hours. This would draw the spotlight to the Nigerian

bourse as economic fog clouds Europe and foreign capital searches foralternative investment destinations, especially Emerging and Frontier markets.

Optimism Rife, AMCON Breathes New Life

Banking on the gains of the last trading year, a number of factors are bound to

whet investors’ appetite over 2011. While many await the conclusion of the

general elections to get a clearer picture of how events will unfold going

forward, activities that kick-started last year would continue to shape the

market. Now that AMCON is in full swing, the Banks would take centre-stage

Beyond improvements in the financial standings of affected institutions, the

loan acquisition process is expected to free up funds which can then be

chanelled into the broader economy.

Bond Yields look up

Driven by the incessant sovereign debt issuance in 2010 (an estimated N1.09

trillion), bond yields saw a sharp rise across all maturities. Despite the

protracted low interest rate environment, investors rode on the fiscal deficit

and increasing debt profile of the government to demand higher returns

Though the matching upsurge of fixed income demand on the heels of

investors’ flight to safety relatively suppressed the short-end of the yield

curve, the impact was marginal as reflected in the 502bps and 135bps

increase on 3-year and 7-year tenor instruments (relative to the 704bps surge

on 20 year tenor). With due acknowledgment of the growing appetite of banks

to grow their loan books and the consequential impact of such asset allocation

on the yield curve; even as banks are prime players of the bonds market, we

do not see a sharp decline in yields, particularly as the monetary authority

stands poised to tighten the system. It is interesting to note that yields have

marginally retraced steps in the few trading days of the year as supply in the

secondary market eases on expectation of modest reduction in domestic

borrowing going forward, especially as the government tests the global market

with the launch of its debut US$500 million bond.

The proposed upgrade of thetrading platform throughpartnership with the AmericanExpress Company (AMEX)would help the market optimize the recent extensionof trading hours.

We do not see a sharp declinein yields, particularly as themonetary authority standspoised to tighten the system



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2011 Outlook


SECTOR OUTLOOK

Banking: Risk gives way, eyes on fundamentals

We are overtly upbeat on 2011 earnings, as the key drags on growth fizzle

out. Aside our modest outlook on loan growth which is expected to enliven

interest income as well as fee and commission books, the steady uptick in

overall yield environment will provide support for appreciable growth in FY’11

earnings over 2010 levels.

Shifting goalpost; 2010 marks the inflexion

2010 can be aptly described as an inflexion year in the Nigerian banking

sector, as reflected in the striking shift in goalposts across all relevant

benchmarks; (1) Dramatic slowdown in credit creation as revealed by the

5.8% growth in overall credit to the private sector, a far cry from the 5-year

(2005 to 2009) CAGR of 58% (2) Increased hedge in “risk-free” liquid assets

with resultant balance sheet liquidity of c.42%; an apparent evidence o

extreme risk aversion, particularly when the 25% regulatory requirement isput into perspective; (3) Focus on capital preservation as against profitability

with implication on Return on Average Equity (RoAE); (4) Keen adoption of

“prudent provisioning” to provide hedge for probable loan loss (5) Cost

efficiency-based competition in contrast to post-consolidation rivalry over

balance sheet size; (6) Improved disclosure and transparency, perhaps stil

below international best practices, but far ahead of historic norm; (7) A

ground halt in the rally for deposits as banks sit on highly liquid asset,

suggesting little or no need for fresh funds in the interim.

Apt to say that the foregoing synchronized episodes in the Nigerian banking

system, are not just a fall-out of the H2’09 CBN/NDIC rounds of stress tests

but also of complimentary reforms and zero-tolerance for non-compliance

stance of the apex bank. The CBN’s streams of risk management reforms,

though with inevitable short term pains, have significantly changed the

business models of banks with consensus expectations of sustainable long-

term gains. While we are cautious to say that the apex bank is yet overdone

with strict reforms as it stands poised to consolidate on the modest stability

achieved in the last four quarters, we see the CBN putting up a relative

forbearance culture, especially as it persuades banks to buy-into its salient

objective of easing real sector financing.

Profitability and easing risk to lubricate credit channels

While the conservative stance of banks has augured well for balance sheet

strength and capital preservation, we believe the need for an optimal balancebetween profitability and solvency will incite banks’ return to their core

business of credit creation. In addition to our outlook of profitability-propelling

growth in private sector credit, the relative NPL relief on the back of AMCON’s

purchase of eligible toxic assets will lubricate credit channels, as balance

sheets become stronger with wider room for risk absorption. To our mind,

declining default risk gauged by improving cashflows of corporate and

households will serve as further lubricants for credit flows going forward.

The CBN’s streams of risk management reforms, thoughwith inevitable short termpains, have significantly changed the business modelsof banks



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2011 Outlook


Notwithstanding our view of banks’ appetite to resume private sector credit

growth, we assert that lenders will, in the near-term, tilt towards the high-end

of the market to minimize credit risk, albeit with matching lower returns

Contrary to the post-consolidation experience when banks “knocked on doors”

to extend loans, the recent NPL blight and fears of further toxic asset

formation have largely eroded banks’ enthusiasm to compete over creditgrowth numbers and loan book size. Banks’ operation over the last six

quarters have been dominated by balance sheet repairs as reflected in

domineering focus on NPL recovery and restructuring. 2010 saw barely 5.8%

growth in private sector credit; a far cry from the 5-year CAGR track record of

58%.

Given the impact of this unusual aversion to risk assets creation on

profitability, as reflected in the declining industry RoAE (from an attractive

historical average of c.20% to a FY’09 abysmal level of 2.2%), we believe

banks will renew interest in loan creation to engender shareholders value

accretion. Though, Q3’10 earnings scorecards show an encouraging annualised

return on equity of 10.7%, we are cautious to say that the sustainability ofthis appreciable RoAE recovery requires increased loan transaction volumes

which is a key driver of interest as well as fees and commissions income.

Source: CBN, Company Financials, Vetiva Research

Growth in private sector credit still down as banks take asylum in “risk-free” assets (5.8% in 2010 Vs 5-year CAGR of 58.5%)

We assert that lenders will, inthe near-term, tilt towards the

high-end of the market tominimize credit risk, albeit with matching lower returns



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2011 Outlook


Balance sheets to crawl out of risk asylum

We see managements across our value lenders fine-tuning operationa

guidelines and in particular, credit approval procedures in preparation for a re-

launch into the loan market (the highest risk assets on banks’ balance sheets).

In view of this, we assert that the currently high internal liquidity in the

system will somewhat dry up in the near term as banks set new targets forAsset-Liability Management (ALM), tilted towards the risk asset class.

The flight to safety over the last four quarters overshot banks’ exposure to

“risk-free” instruments as reflected in the currently high balance sheet liquidity

(c.42% Vs. regulatory requirement of 25%) with a preference for government

securities which was largely fuelled by incessant sovereign and sub-nationa

debt issuance.

In our opinion, this was a short term conservative strategy to preserve capital,

given fears of further NPL formation, and we thus look forward to cautious

portfolio rebalancing. It was also a simultaneous necessity for a few banks

with Capital Adequacy Ratios (CAR) in the threshold of management guidance

(most Nigerian banks set 15% internal CAR guidance, 500bps above

regulatory minimum). An attempt by the apex bank to narrow banks’ balance

sheet asylum is the regulation on maximum allowable investment in sub-

national debt issuance which is expected to marginally incite banks

resumption to private sector financing.

We believe the relative unattractiveness of the Standing Deposit Facility (SDF)

will further compel banks’ asset reallocation. Our position on near term asset

allocation is supported by the shift in asset allocation between the second and

third quarters of 2010 when banks initiated slight growth in loan books to

propel earnings recovery especially as money market rates remain

unattractive.

Time series of banking sector balance sheet split; lenders take asylum in“risk-free” investment securities

An attempt by the apex bank to narrow banks’ balancesheet asylum is the regulationon maximum allowable

investment in sub-national debt issuance which isexpected to marginally incitebanks’ resumption to privatesector financing.

Source: Company Financials, Vetiva Research



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2011 Outlook


NPL woes are behind, asset quality continues to improve

While we look forward to a steady decline in NPL ratios on the back of modest

loan growth outlook, we appreciate NPL level declines as against ratio, as we

believe that this is a better indicator of improving quality of assets rather than

the effect of loan growth on NPL ratio. To our mind, asset quality woes are

behind, as we see the 2009/10 NPL levels and ratios as the peak of the cycle,with expectation that improving economy-wide liquidity and stability will scale

down the default risk in both corporate and consumer loans.

Our outlook of modest rally in crude oil price and equity market recovery

minimises the risks of loan default from these volatile markets which largely

erupted the NPL blight.

More importantly, banks will, in the near term, distance their balance sheets

from volatile sectors, thus reducing the risk of near term NPL formation. With

the new stringent regulations on margin trading and repeal of universa

banking licence, banks’ probable irrational exuberance towards risk assets

creation is curbed. Though the CBN (as indicated in the new prudentiaguidelines effective H2’10) plans to gather quarterly data over the next 5

years to guide its regulations on dynamic provisioning which is expected to

replace the general provisions on performing loans, we expect banks to initiate

this provisioning approach of their own volition. Nonetheless, it is noteworthy

that the current coverage ratio (percentage of NPLs that is provisioned for) of

our banking picks is adequate, especially the Tier-1 players with ≈100%

threshold coverage (ex-UBA and FBN).

Asset yields to look-up, albeit slowly

While the market-wide low interest rate environment took its toll on banks

asset yields in 2010, we expect money market rates to retrace steps post-CBN

guarantee on interbank dealings, which ends H1’11. Our outlook is reinforced

by expectation of interbank and peer money market rates is our expectation o

a gradual hike in monetary policy rates as insulation from probable inflation

threats. The 2010 dramatic plunge in rates across all maturities in money

market instruments with subsequent impact on banks’ asset yield can be

traced to the protracted accommodative policy rate, coupled with the extended

guarantee on interbank transactions and all foreign lines of credit.

Sector NPL continues to trend downward while coverage advances; areflection of improving asset quality

To our mind, asset quality woes are behind, as we see

the 2009/10 NPL levels and ratios as the peak of the cycle,with expectation that improving economy-wideliquidity and stability will scaledown the default risk in bothcorporate and consumer loans




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2011 Outlook


We expect the initiated uptrend in money market rates to rub-off positively on

overall asset yield of the lenders; nevertheless, we are conservative on returns

on loan books given the increased focus of players on the highly competitivehigh-end of the market (blue-chip corporate with low default risk) which has

abruptly constrained the loan pricing power of banks. Contrary to conventiona

focus of Tier-II banks on consumer financing, the heightened risk has changed

the order of the game, as all players roll-out blueprints to grow their share of

the low risk corporate market and minimize exposure to the high risk (but high

returns) Consumer/SME financing segment. Overall, we look forward to a slow

rebound in interest earning asset yields, with FY’11 expectation of 11.5%. As

against the startling 13.4% average yield on interest earning assets in FY’09

Nigerian banks saw a depression in asset yield with Q3’10 scorecards revealing

an average yield of 10.6%.

Recovering money market rates to catalyse a reverse in asset yield

Recovering money market rates to catalyse a reverse in interest earningsasset yield; we look

Overall, we look forward to a

slow rebound in interest earning asset yields, withFY’11 expectation of 11.5%

Source: CBN, Vetiva Research




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2011 Outlook


Source: FMDA, Vetiva Research

Cheap funding gradually winds-up

We see the cheap funding environment gradually winding up as we look

forward to a steady climb in deposit rates; an expectation partly hinged on

CBN’s imminent cautious tightening of the system. More importantly, banks

resumption of loan growth will spur modest demand for deposit with

expectation of higher pricing as they exhaust their current liquidity gap

especially as we observe that a considerable portion of most banks’ liquidity is

locked (in relatively illiquid long term sovereign and sub national bonds), with

less near-term flexibility. Relative to Q3’10 level, our projections show that

banks’ average cost of funds will climb 190bps by FY’11; from 5.4% to 7.3%.

Over 2010, the relatively high aversion of banks towards loan creation haltedthe rally for deposits, as the lenders sit on huge liquid assets with little or no

need for fresh funds. At the other end of the spectrum, investors’ flight to

safety accelerated the flow of funds to banks in the form of time deposits, thus

suppressing rates to historic lows. Given that an average of 70% of banks

balance sheets is funded with deposits, the crash in deposit rates thus offers

cheap funding for the lenders, albeit with less investible opportunities given

current market dynamics.


FY’11 cost of funds to climb 190bps, in our opinion.

Money Market rates, on the way up

Banks’ resumption of loangrowth will spur modest demand for deposit withexpectation of higher pricing



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2011 Outlook


Net Interest Margin to take heat of cost-yield imbalance

Premised on our outlook of a modest surge in funding cost with less

proportionate rebound in asset yield, we see the Net Interest Margin (NII) o

banks taking the heat of this imbalance. Contrary to the cost-yield dynamics in

2010 when plunging funding cost more than proportionately compensated for

declining asset yield, we see a transpose in the matrix going forward as NIIshrinks on the back of narrowing spread between cost of funds and asset

yields. Nonetheless, we expect increased volume and higher asset turnover to

offer adequate cushion for operating income levels and growth.


Cost efficiency: the emerging “game play”

Emerging industry dynamics have changed the order of competition, as cost

efficiency becomes a key competitive metric, in contrast to historic rivalry ove

balance sheet size. Both players and the regulators are investing in cost

reduction innovations as this becomes a prime driver of profitability. Prior to

the 2009 tide, the sector’s operating cost-to-income ratio hovered 58%, a

reflection of the high level of earnings. While operators have significantlyscaled down operating cost from an unprecedented level of 94% of income in

FY’09 to a relatively comfortable ratio of 70.6% in Q3’10, we see further cost

efficiency going forward, as earnings growth resumes. In addition to the

statistical effect of growing earnings on cost-to-income ratio, we are upbeat

that the varying cost control strategies being implemented across the players

will buoy efficiency in the near-to-medium term. Overall, we look forward to

an appreciable 6.9% decline to bring cost-to-income ratios to 63.7% in FY’11.


We see narrowing net interest margins on the way

Lenders to put a hold on cost; 2011F cost-to-income ratio of 63.7%

While operators havesignificantly scaled downoperating cost from an

unprecedented level of 94% of income in FY’09 to a relatively comfortable ratio of 70.6% inQ3’10, we see further cost efficiency going forward, asearnings growth resumes



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2011 Outlook



The earnings growth story begins

Although banks’ earnings are highly driven by interest and discount income

which commands an average of c.70% of top-lines, the significance of non-

interest income cannot be ruled out. In addition to expected surge in fee and

commission (a key non-interest income head) which will be largely driven by

loan growth, we opine increased income from other non-interest income

windows. Increased volume in foreign exchange deals on the back of

continued openness of the economy and improving systemic liquidity. While

the CBN remains “cautiously committed” to naira stability, we are believers in

a relatively more volatile 2011 FX environment with more arbitrage

opportunities for banks, especially with the revocation of Class A licence of

Bureaux De Changes (BDCs) which confines all “block FX trades” to the banks.Without ignoring the fact that divestitures from non-core banking operations

may pose a slight drag on non-interest earnings growth in the near term, we

assert that the net effect of the discontinued operation will be compensated for

by increased asset turnover, particularly that the contribution of these classes

of business to top- and bottom- lines are marginal.


Figure 1: Growth stories from both top- and bottom- lines; a reflection of low base and loan growth resumption.

FY’11 top line growth on the heels of increased transaction volumes

In addition to expected surgein fee and commission (a key non-interest income head)which will be largely driven by loan growth, we opineincreased income from other non-interest income windows



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2011 Outlook


New licence regime; a focus on core commercial banking

The repeal of universal banking licence is expected to effectively take effect in

H2’11 given the 9-12 months ultimatum handed banks. It is noteworthy that

First Bank of Nigeria Plc and United Bank for Africa Plc have settled for the

holding company structure which will permit them to carry on with all existing

subsidiary businesses. We suspect Stanbic-IBTC and FCMB to also opt for thismodel given the significance of their non-banking operations, although they

are yet to declare their shareholders’ resolutions. Guaranty Trust Bank, Zenith

and mid-tiers, Access, Skye, and Diamond have applied for the Internationa

banking licences with expectation that the other cleared players (Ecobank,

Sterling and Unity) will pick national banking licences with the exemption of

Wema which has earlier applied to limit its operation to its core region; South-

West. Apt to say that while the HoldCos will retain all their current subsidiaries

including offshore businesses which simultaneously qualifies them as

international banks, the non-HoldCos will divest from all non-allowable

operations which includes Insurance Underwriting, Loss adjusting services

Asset Management, Broker/Dealer, Issuing House and proprietary Trading.

Relying on the foregoing resolutions of our coverage universe, we do not

expect the new nomenclature to affect the performance of the HoldCo players

as they carry on with their current subsidiaries, with possibility of acquiring the

divested businesses from peers. As regards those divesting, we believe it is a

positive development given our view of their earnings split.

We observe the non-allowable operations contributes <10% to their top-lines

and an average of <5% to bottom-lines.

License Category

Minimum

Capital Scope of Operation Remarks

Regional N15 billionOperate within minimum of six (6) and

Maximum of twelve (12) contiguous states,

within two (2) geopolitical zones. Key lapse is

the inability to carry out Settlement functions

Wema has filed application

operate in the South

region

National N25 billionEntitle to carry our business in all the states of

the Federation

We see Unity and Sterling

treading this path

International N50 billion

Operate in all states of the Federation and

Offshore countries of its choice subject All other banks

to its compliance with host country regulations

While the HoldCos will retainall their current subsidiaries

including offshore businesseswhich simultaneously qualifies

them as international banks,the non-HoldCos will divest from all non-allowableoperations



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2011 Outlook


AMCON brings succour; progress amid odds

As AMCON (the bad bank) makes progress in its mandate to relieve banks of

their NPL weights, we look forward to further liquidity ease in the economy

Having swapped the Eligible Banks Assets of 21 banks (All NPL of intervened

lenders and margin-related toxic assets of non-intervened peers) on the last

day of 2010 with its Consideration bonds, we see a sigh of relief in banks

balance sheets with expectation of improving their operational flexibility going

forward. We bring to fore the obvious fact that the 10.125% annualized yield

on AMCON’s consideration bond (zero-coupon with a 3-year tenor) is a

startling near-term earnings buffer when put into perspective of the zero

return on NPL.

Beyond AMCON’s positive rub-offs on the operations of the banks and the

subsequent impact on their earnings, we believe that other sectors will take

their share of the dividends of this intervention programme. Of particular

significance is our outlook on the real estate market which has been bogged

down by the banking sector cyclone. The price erosion in real estate assets in

the last six quarters was majorly on the back of banks’ forced-sale of

collaterals in respect of the real estate-backed NPLs; an attempt to recove

their capitals. Even though AMCON might continue on foreclosures, we expect

this to be at a gradual pace, thereby relieving pressure on real estate prices.

Notably, the positive reaction of the stock market to AMCON’s deal as

reflected in the rally across all banking counters with ripple effect on other

sectors on the bourse. Of particular significance is the continued rally and

increased liquidity on the shares of the intervened banks which on the average

outperformed the sector and overall market in 2010 with impressive

consolidating returns year-to-date. Nevertheless, we assert that the rally on

this basket is unsustainable as they are speculative. Pending the

consummation of M&A deals amongst this class of lenders, which we believe

will shape their fundamentals; we maintain our value investing strategy. Thishowever does not suggest an outright aversion to speculative trades as we wil

continue to key into indentified opportunities, but with proven technica

strategies.

BankEquity

(N'bn)*NPL (N'bn)* AMCON's Consideration (N'bn

Intercontinental Bank Plc (368.88) 526.21 146.00

Afribank Plc (249.89) 357.10 NA

Union Bank Plc (235.22) 113.56 239.00

Bank PHB Plc (189.45) 346.84 140.00

Finbank Plc (119.61) 157.42 44.00

Oceanic Bank Plc (108.31) 664.77 200.00

Spring Bank Plc (90.65) 130.52 23.00

Wema Bank Plc** (45.84) 70.61 15.20

* Based on Q3'10 positions

**WEMA has successfully recapitalized, meeting the N15bn requirement to operate as a regional bank

The positive reaction of thestock market to AMCON’s deal as reflected in the rally acrossall banking counters withripple effect on other sectorson the bourse



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2011 Outlook


Key highlights of December 31st, 2010 NPL Purchase

The Book Value of the NPLs is estimated at around N1.95 trillion.

The Consideration Value based on AMCON’s valuation stands at N770.58

billion; Listed equities-backed NPLs - 60% premium over the 60-day average

price of listed equities ending November 15, 2010; Unlisted equities- Anaverage of book value and comparable multiples. For real estate backed

NPLs – banks’ valuation of collaterals were used with the caveat of review

over 2011 if the valuation of banks is found to be significantly beyond the

fair values which will be determined over the course of the year;

Unperfected NPLs were acquired at 5% of book value.

The Face Value of the consideration bonds grossed N1.04 trillion; an implied

annualised yield of 10.125%.

An estimate of 45% of the NPL is backed by listed equities, 10% non-listed

equities and the remaining 55% are either collateralised by real estate o

unperfected.

What next?

Following the success of the first phase of the NPL purchase, the bad bank

indicated plans to reopen the deal for the purchase of other NPL of banks

which is expected to be around N500 billion. Nevertheless, recapitalising the

intervened banks to zero equity level is top priority. While an estimation of the

amount required to nil off the negative equity of the intervened banks is hazy

due to the dearth of information on a number of them, we believe the bad

bank still needs between N1.5 – N1.8 trillion to meet its objective of equating

the balance sheets of these banks.

Source: NSE, Vetiva Research

AMCON’s N3 trillion bond, can the market absorb this?

We recall that the issuance of consideration bonds as against regular bonds on

December 31, 2010 was to meet up the timeline, given that a regular bond

issuance requires necessary filings and other bureaucratic due processes which

would have missed the bad bank’s time table. As the market looks forward to

the imminent issuance of the N3 trillion AMCON regular bond, we find it apt to

highlight our view that the bulk of the proposed N3 trillion will be issued via a

non-cash deal, given our gauge of current market liquidity.

Figure 1: Return profile of CBN-intervened banks; AMCON fuels gains



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January 2011 31

The Tipping Point

2011 Outlook


After all is said - go long banks

With an average base case of 30% upside over the next 12 months, we

believe our banking basket is worth buying, as this suggests an alpha return

when put in the context of the average required return on emerging market

equities. Still, we are inclined to the “most attractives” in our basket. Ourranking is largely shaped by fundamental return potential, inherent risk in the

banks’ earnings and market sentiments. With due cognisance of the hanging

political risk and probable tail-end of strict industry reforms cum still-weak

resumption in loan creation appetite - key downside risks that may suppress

improving fundamentals and expected overall market rally, we believe our

banking picks are adequately positioned to weather moderate random shocks

and thus suggest an early long position in our value players. Our banking

universe currently trades at a weighted P/BV of 1.6x, a huge discount to the

2.1x and 2.2x respective book value multiples of South African (SA) and Asian

peers.

Although our banks have a lower 2010 average RoAE of 2.2% (Vs. 17% and

19% for SA and Asian lenders), we assert that the stage is set for a relatively”seamless” earnings generation profile, given the cleaner balance sheets,

easing business risk and improving industry-wide prospects, with expectations

of excess returns from our top picks. Aside the fact that 2010 was a recovery

year, the currently high balance sheet liquidity of our value lenders offers wide

room for flexibility and subsequent exploitations of market opportunities

Further reinforcing our assertion of relative cheapness of our banking counters

to their emerging market peers is the adequate capitalization of Nigerian

banks (average CAR ratios of 20% Vs. 12% emerging market players and

10.5% 2019 BASEL III target). These comfortable measures of our banks

vulnerability to business risk coupled with the recent systemic cleansing

underpin our belief of the modest solvency of our value pack (leverage ratio

stands at a comfortable level of c.15%).


Figure 1: Nigerian banks remain the cheapest emerging market toasts

Our banking universe currently trades at a weighted P/BV of 1.6x, a huge discount to the2.1x and 2.2x respective book value multiples of SouthAfrican (SA) and Asian peers

Undervalued

Region



[Type text]

January 2011 32

The Tipping Point

2011 Outlook



Figure 1: banking counters back in black, delivering positive returns in 2010



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January 2011 33

The Tipping Point

2011 Outlook


First Bank of Nigeria Plc (FBN)

Scale and Scope Economies are “Good Buys”

Our fundamental valuation of Nigeria’s largest lender is compelling, trading at

respective trailing book value multiple of 1.5x (vs. 2.1x African peers). Given

the bank’s strong fundamentals and our upbeat outlook on its near term

earnings and asset quality, we are comfortable with our 12-months base case

fair valuation of its equity which stands at N18.11. This estimate of the

bank’s share; an equally-weighted blend of Free Cash Flow to Equity and

Excess Returns Models, implies 14.8% upside relative to the current market

price. FBN’s equity deserves our “ACCUMULATE” rating.

Investment thesis

Size offers further scale efficiency prospects: With its balance sheet

size, age-long brand and diversified financial service offerings, FBN is wel

positioned to take advantage of the business opportunities in Nigeria. With

the bank’s resolve to adopt a holding company structure following CBN’s

repeal of universal banking model, we do not see any downside risk to its

earnings base and believe it will leverage on its size and scope to explorecost efficiency prospects. The FBN-Sanlam synergetic foray into the

underwriting market is timely given ceding underwriting business from

erstwhile bank subsidiaries and firming noose on insurance policy

regulations, particularly in the high margin oil and gas segment which we

believe is a prime target of FBN-Sanlam. We see a potential to outcompete

current players.

One of the exemplary risk managers: Despite having the biggest loan

portfolio (18% of the system) with relative exposure to higher-risk longer-

tenor and retail-end of the market compared to Tier-1 peers, FBN’s NPL of

5.8% is one of the lowest in the industry; albeit, we think there is need for

a strong hold to avert deterioration.

Earnings quality, our attraction: While our view of FBN’s current asset-

liability management (ALM) and cost structure suggest a mild FY’11 post-

tax earnings growth of 14.5% (FY’11 PAT of N56.7 billion; an implied RoAE

of 15.6%), the quality of the earnings outlook gauged by risk asset quality

and FBN’s appreciable disclosure offers an attraction. The bank’s net open

position in the interbank market may post upside earnings surprise as the

slop e of money market rates becomes steeper. We note that cost

implications of on-going restructuring will be a source of earnings growth

suppression for FBN as we expect FY’11 cost-to-income ratio to hove

61.9%; however, it will pay-off in the near-term

Forecast Summary FY'09A FY'10E FY'11F FY'12F FY'13

Earnings Per Share (N) 0.11 1.42 1.62 1.98 2.4

Price to Earnings (x) 128.81 11.20 9.84 8.05 6.6

Dividend Per Share (N) 0.10 0.78 0.89 1.09 1.3

Dividend Yield (%) 0.7% 4.9% 5.6% 6.8% 8.3

Net Assets Per Share (N) 10.59 10.05 10.78 11.67 12.7

Price to Book (x) 1.33 1.59 1.48 1.37 1.2

NPL Ratio (%) 8.2% 5.8% 5.5% 5.4% 5.2Source: Company Financials, Vetiva Research

SIC INFORM ATION

dress Samual Asabia P lace

35 Marina, Lagos.

bsite www.firstbankplc.com

anagement (Chairman) P rince A jibo la A fonja

D/CEO Bisi Onasanya

ancial Year End December

change Lis ting Nigerian Sto ck Exchange

mbol Bloo mberg: FIRSTBA:NL

WNERSHIP STR UCTURE (%)

tail Shareholders 63.8%

titutional Shareholders 36.2%

ARE STAT IST ICS

ares in issue (M) 32,638

are Price (N) 15.89

rket Cap. (N'm) 520,576

rket Cap. (USD'm) 3,490

e Float (%) 63.80%

ly Average Value Traded (N'000) 302,018

ly Average Value Traded (USD'000) 2,025

ar high (N) 16.12

ar low (N) 13.73

LUATION M ETRICS

ok Value (N'm) 309,559

iling P/E (x) 11.95

B (x) 1.68

. Yield (%) 0.6%

E (%) 14.0%

verage Ratio (x) 7.83ST BANK VS BANKING VS NSE ASI PERFORMANCEd 04/01/2010

Source:Company; Vetiva Research



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January 2011 34

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010E 2011F 2012F

Gross Earnings 91,163 155,725 196,408 234,790 275,147 316,877

Interest earnings 62,579 100,703 162,041 180,608 211,652 241,891

Interest expense (18,357) (33,787) (65,884) (61,552) (81,083) (92,633

Net interest income 44,222 66,916 96,157 119,056 130,569 149,259

Non Interest Income 28,584 55,022 34,367 54,182 63,496 74,986

Operating income 72,806 121,938 130,524 173,238 194,064 224,245

Operating expenses (44,931) (68,004) (78,339) (111,525) (121,615) (137,366

Provision for risk assets (2,021) (6,423) (40,625) (4,160) (6,636) (5,014

Profit Before Tax 25,854 47,511 11,560 57,553 65,813 81,865

Taxation (5,218) (10,747) (8,396) (11,740) (13,482) (16,319

Profit After Tax 20,636 36,764 3,164 45,814 52,331 65,545

Balance Sheet (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Cash and balances with CBN 61,844 88,351 70,332 54,960 60,456 92,333

Interbank Placement 264,405 560,879 514,193 549,604 563,344 615,556

Investment Securities 317,971 338,579 395,328 489,647 549,604 646,334

Loans and advances 217,995 466,096 1,078,452 1,199,861 1,383,291 1,553,137

Other Assets 31,664 44,275 66,061 149,892 140,149 123,111

Property and equipment 17,548 30,054 47,980 54,234 56,670 62,697

Total Interest Earning Assets 862,215 1,453,905 2,058,305 2,294,072 2,556,694 2,907,361

Total Assets 911,427 1,528,234 2,172,346 2,498,198 2,753,514 3,093,169

Customer deposits 599,689 700,182 1,512,422 1,698,775 1,841,172 2,062,112

Borrowings and Managed Funds 129,835 247,037 183,697 72,820 72,820 66,789

Other Liabilities 98,276 229,161 166,669 396,128 479,750 565,500Interest bearing liabilities 729,524 947,219 1,696,119 1,771,595 1,913,992 2,128,901

Total Liabilities 827,800 1,176,380 1,862,788 2,167,722 2,393,742 2,694,402

Ordinary share capital 5,238 9,945 14,504 16,319 16,319 16,319

Reserves 78,389 341,909 295,054 314,157 337,957 367,059

Equity 83,627 351,854 309,558 330,476 354,276 383,378

2008 2009 2010E 2011F 2012 E

Growth (%)

Gross Earnings 70.8% 26.1% 19.5% 17.2% 15.2%

Operating Income 67.5% 7.0% 32.7% 12.0% 15.6%

Profit Before Tax 83.8% -75.7% 397.9% 14.4% 24.4%

Profit After Tax 78.2% -91.4% 1348.0% 14.2% 25.3%

Profitability (%)

Net Interest Margin 5.8% 5.5% 5.5% 5.4% 5.5%

Return on Average Equity 16.9% 1.0% 14.3% 15.3% 17.8%

Return on Average Assets 3.0% 0.2% 2.0% 2.0% 2.2%

Net Profit Margin 23.6% 1.6% 19.5% 19.0% 20.7%



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January 2011 35

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010E 2011F 2012F

Gross Earnings 611 1,044 1,317 1,574 1,845 2,124

Interest earnings 420 675 1,086 1,211 1,419 1,622

Interest expense (123) (226) (442) (413) (544) (621

Net interest income 296 449 645 798 875 1,001Other income 192 369 230 363 426 503

Operating income 488 817 875 1,161 1,301 1,503

Operating expenses (301) (456) (525) (748) (815) (921

Provision for risk assets (14) (43) (272) (28) (44) (34

Profit Before Tax 173 319 77 386 441 549

Taxation (35) (72) (56) (79) (90) (109

Profit After Tax 138 246 21 307 351 439

Balance Sheet (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Cash and balances with CBN 415 592 471 368 405 619



Loans and advances 1,461 3,125 7,230 7,230 8,044 9,273

Other Assets 212 297 443 443 1,005 940

Property and equipment 118 201 322 322 364 380

Total Interest Earning Assets 5,780 9,747 13,798 15,379 17,139 19,490

Total Assets 6,110 10,245 14,563 14,697 16,876 19,023

Customer deposits 4,020 4,694 10,139 10,139 11,388 12,343

Other borrowings 870 1,656 1,231 1,231 488 488

Other Liabilities 659 1,536 1,117 1,117 2,656 3,216

Interest bearing liabilities 4,891 6,350 11,370 11,876 12,831 14,272

Total Liabilities 5,549 7,886 12,488 12,488 14,532 16,047

Ordinary share capital 35 67 97 109 109 109

Reserves 526 2,292 1,978 2,106 2,266 2,461

Total Equity 561 2,359 2,075 2,215 2,375 2,570

2008 2009 2010E 2011F 2012F

Efficiency Ratios (%)

Cost of Funds 4.0% 5.0% 3.6% 4.4% 4.6%

Yields on Assets 8.7% 9.2% 8.3% 8.7% 8.9%

Cost to Income Ratio 61.0% 91.1% 66.8% 66.1% 63.5%

Asset Quality, Liquidity & Solvency (%)

NPL Ratio 1.5% 8.2% 5.8% 5.5% 5.4%

Coverage Ratio 134.8% 67.1% 75.0% 75.0% 72.0%

Liquid Asset to Total Asset 64.6% 45.1% 43.8% 42.6% 43.8%

Loan-to-deposit ratio (LTD) 67.9% 75.5% 74.6% 79.1% 79.1%

Capital Adequacy Ratio (CAR) 40.7% 19.8% 18.4% 18.4% 17.9%

Equity-to-Total Asset (Leverage) 23.0% 14.2% 13.2% 12.9% 12.4%



[Type text]

January 2011 36

The Tipping Point

2011 Outlook


Zenith Bank Plc (ZENITH)

A Focused Player of the Corporate Niche

While we think current market pricing is reminiscent of the bank’s relatively

low capital deployment, we note that the conservatism of ZENITH played out

well in the dawn of NPL blight as it stands out with modest asset quality (NPL

ratio of 6.4%). A further attraction to ZENITH is its requisite hedge against

unforeseen earnings shocks especially with its >100% coverage over NPLs.

Having modelled our near term outlook on ZENITH’s asset allocation, funding

and implied earnings generation prospects, we arrive at a 2011 target price

of N20.24, an appreciable capital gain potential of 26.5% when put in the

perspective of its current price of N16.00. In expectation of this alpha return,

we rate ZENITH a “BUY”.

Investment thesis

Crash in money market rates suppresses earnings potentials; we

see a more diversified portfolio going forward: Being a key player of

short term money market instruments, ZENITH took a large chunk of the

steep decline in rates. TBills and placements (with CBN and other banks)

constituted 43% of the bank’s asset as at Q3’10 with barely 17%

contribution to interest income. We estimated an annualized yield of 2.9%

on this asset basket as against ZENITH’s 2010E funding cost of 3.1%, thus

translating to a negative explicit return of 20bps.

…Nonetheless, we see a more diversified asset portfolio going

forward: With an outlook of a slightly bullish risk appetite in the near

term, it is apt to say that ZENITH’s further penetration of the loan market

will complement the expected upturn in money market rates to deliver a

more attractive RoAE of 15% in FY’11F and medium term average of 18%

Planned divestiture from non-core banking operations will bode well for

ZENITH, in our opinion given our view of its earnings split. It’s CAR of 32%

and balance sheet liquidity of 59% offer room for balance sheet flexibility

Contrary to its peers whose balance sheets are relatively locked, ZENITH’s

current ALM offers room for flexibility and will thus engender the bank’s

portfolio rebalancing as the risk environment eases.

Retail deposit mobilization to buoy earnings growth and margins:

While ZENITH remains averse to retail lending, given high risk of default,

we observe that the bank is increasingly penetrating this market for cheap

deposit mobilization. We believe this will offer support for margins as it

improves on its capital deployment. We look forward to a FY’11 post-tax

profit of N57.5 billion; a reflection of appreciable loan growth expectation of

10% and improved cost-to-income ratio of 62% as the bank outsource non-

core back-end functions and scales down other operating cost heads.


Earnings Per Share (N) 0.82 1.40 1.83 2.09 2

Price to Earnings (x) 16.58 11.43 8.74 7.64 6

Dividend Per Share (N) 0.45 0.77 1.01 1.15 1

Dividend Yield (%) 3.3% 4.8% 6.3% 7.2% 8.

Net Assets Per Share (N) 13.48 11.41 12.24 13.18 14

Price to Book (x) 1.01 1.40 1.31 1.21 1

NPL Ratio (%) 6.0% 6.4% 6.2% 5.6% 5.2

SIC INFORM AT ION

dress Zenith Heights, Plot *7,

Ajo se Adeogun, V.I, Lagos.

bsite www.zenithbank.com

nagement (Chairman) M acaulay P epple

/CEO Godwin Emefiele


hange Lis ting N igerian St ock Exchange

mbol ZENITHBA : NL


ail Shareholders 37.0%

itutional Shareholders 63.0%

ARE STAT IST ICS


are Price (N) 16.00

rket Cap. (N'm) 520,885


e Float (%) 52.8%


ly Average Value Traded (USD'000) 2,306

ar high (N) 16.70

ar low (N) 15.01

LUATION M ETRICS


iling P/E (x) 12.12

B (x) 1.40

. Yield (%) 2.8%

E (%) 11.5%

erage Ratio (x) 4.96

ITH BANK VS BANKING VS NSE ASI PERFORMANCEed 04/01/2010

Source: Company; Vetiva Research



[Type text]

January 2011 37

The Tipping Point

2011 Outlook



Gross Earnings 94,880 208,294 277,300 185,646 231,982 266,529


Interest expense (19,039) (53,598) (83,957) (39,561) (54,227) (62,208)




Operating expenses (48,333) (92,250) (113,288) (87,819) (102,605) (117,299)

Provision for risk assets (1,832) (6,327) (39,865) (3,321) (3,297) (4,855)


Taxation (6,897) (4,126) (14,482) (10,989) (14,371) (16,434)

Profit After Tax 18,780 51,992 20,603 43,956 57,482 65,734


Cash and balances with CBN 111,055 239,562 126,779 80,615 98,529 132,423Interbank Placement 127,764 312,624 341,830 331,416 394,116 419,339

Investment Securities 380,213 1,248,233 468,230 716,574 788,232 838,679


Other Assets 28,879 46,288 20,091 35,829 33,500 55,176


Total Interest Earning Assets 907,143 2,246,257 1,635,165 1,839,408 2,049,801 2,278,880

Total Assets 972,822 2,343,487 1,733,875 1,952,665 2,167,638 2,427,754

Customer deposits 634,493 1,185,893 1,173,917 1,271,920 1,379,406 1,522,864


Other Liabilities 199,927 220,752 112,009 131,201 176,991 240,422

Interest bearing liabilities 656,440 1,198,094 1,224,898 1,284,696 1,392,182 1,533,705

Total Liabilities 856,367 1,418,845 1,336,907 1,415,897 1,569,173 1,774,127


Reserves 109,953 335,976 325,976 342,617 368,484 398,064

Equity 114,586 344,348 338,535 358,316 384,183 413,763

2008 2009 2010E 2011F 2012 E

Growth (%)

Gross Earnings 119.5% 33.1% -33.1% 25.0% 14.9%

Operating Income 104.0% 21.7% -22.4% 21.7% 14.9%


Profit After Tax 176.9% -60.4% 113.3% 30.8% 14.4%

Profitability (%)







[Type text]

January 2011 38

The Tipping Point

2011 Outlook



Gross Earnings 734 1,137 1,654 1,191 1,363 1,523

Interest earnings 494 782 1,192 821 940 1,050


Net interest income 302 505 792 467 533 587

Other income 240 354 462 370 423 473

Operating income 542 860 1,254 837 956 1,060


Provision for risk assets (53) (76) (329) (114) (51) (23


Taxation (26) (48) (29) (43) (76) (106

Profit After Tax 144 274 16 64 177 249


Cash and balances with CBN 871 1,346 457 537 534 570




Other Assets 301 578 605 605 685 628



Total Assets 7,984 11,215 10,379 10,047 11,940 13,268

Customer deposits 6,072 8,938 8,351 8,351 9,020 9,922Other borrowings 450 272 353 353 134 134

Other Liabilities 335 699 423 423 1,027 1,187




Reserves 1,088 1,249 1,180 1,180 1,149 1,229

Total Equity 1,127 1,306 1,252 1,252 1,236 1,316

2008 2009 2010E 2011F 2012F

Efficiency Ratios (%)Cost of Funds 3.5% 4.5% 4.0% 4.2% 4.3%

Yields on Assets 8.9% 12.2% 8.4% 8.6% 8.6%



NPL Ratio 3.5% 8.3% 9.5% 8.5% 8.0%

Coverage Ratio 86.9% 68.7% 60.0% 70.0% 70.0%







[Type text]

January 2011 39

The Tipping Point

2011 Outlook


United Bank for Africa Plc (UBA)

Targeting Opportunities Beyond Borders

While the current market price of UBA shares (N11.17) translates to a 4

premium over its BVPS appears fair when the current challenges of the ban

put into perspective, we find it apt to say that this market pricing is bearrelative to the near term fundamentals of the bank. UBA has an attract

branch network in key financial hubs (700 branches- highest single-b

footprint in Nigeria) despite having the lowest equity base among the Tie

players. We believe the bank is well positioned to harvest budding banka

opportunities in the African continent. Our DCF valuation uplifts the shares

UBA with a base case 2011 target price of N12.80; an appreciable return ups

of 14.8%. Thus, we suggest investors “ACCUMULATE” UBA.

Investment thesis

Still relatively bogged down by the 2009 NPL shock; All eyes are

UBA’s Q3’10 annualised RoAE of 6% (Vs. Tier-1 peer average of 16%).

believe its 2010 share price erosion of 15%, a gross underperformance whviewed in the context of the banking sector gain of 18.7%, is a reflection

investors concern over this negative real return on equity. We think the ban

FY’11 profitability will still lag peers as UBA contends with a relatively loc

balance sheet on the heels of narrow capital buffer and asset quality issu

albeit UBA’s near term prospect remains compelling on valuation.

Continued foray into offshore markets may post upside earnin

surprise: Amid the 2009/10 industry lull, UBA, in its pan-African bank vis

continues to penetrate new markets. Its Zambia, Guinea and Mozambiq

shops have kicked-off as Congo and Mali warm up to commence operati

thus the bank stands set to bring its footprint to 25 strategic markets. T

spread of UBA should in the long-term post earnings surprises if w

managed. However we think that over the near to medium term, UBA contend with cost challenges, as barely c.30% of the offshore operations br

in positive numbers due to stiff dominance of first movers in those marke

Relying on UBA’s track record, it takes c.12 fiscal quarters to break-even

the offshore networks, with cost pressures on the Group.

FY’11 earnings to mirror current balance sheet challenges: Our FY

earnings (top and bottom- lines) forecasts of N203.3 billion and 26.4 bil

are driven by our outlook on UBA’s current operational flexibility, as reflec

in its current balance sheet. The earnings expectation, which is driven b

cost-to-income ratio of 88%, translates to a RoAE recovery of 14.8% (with

average of 21.2% over the next 5-years).


Earnings Per Share (N) 0.11 0.37 1.02 1.43 1.

Price to Earnings (x) 98.03 31.42 11.40 8.13 6.

Dividend Per Share (N) 0.10 0.26 0.56 0.79 0.

Dividend Yield (%) 0.9% 2.2% 4.8% 6.8% 8.3

Net Assets Per Share (N) 7.90 6.69 7.15 7.80 8.

Price to Book (x) 1.37 1.74 1.63 1.49 1.


ASIC INFORM AT ION

dress UBA House

57 Marina, Lagos, N igeria

ebsite www.ubagroup.com

anagement (Chairman) Chief Ferdinand Alabraba

D/CEO Phillips Oduoza

nancial Year End December

change Lis ting Nigerian St ock Exchange

mbol UBA: NL

WNERSHIP ST RUCTURE (%)

tail Shareholders 23.00%

titutional Shareholders 77.00%

HARE STAT IST ICS


are Price (N) 11.17

arket Cap. (N'm) 301,359

arket Cap. (USD'm) 2,020

ee Float (%) 23.00%

ily Average Value Traded (N'000) 7,317,486

ily Average Value Traded (USD'000) 49,055

ar high (N) 11.65

ar low (N) 9.15

ALUATION M ETRICS


ailing P/E (x) 32.85

B (x) 1.52

v. Yield (%) 0.9%

OE (%) 4.6%

verage Ratio (x) 9.24

A VS BANKING VS NSE ASI PERFORMANCEsed 04/01/2010




[Type text]

January 2011 40

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010E 2011F 20

Gross Earnings 109,512 169,581 246,725 177,663 203,344 227,

Interest earnings 73,724 116,704 177,848 122,526 140,237 156,


Net interest income 45,075 75,350 118,189 69,652 79,490 87,

Non Interest Income 35,788 52,877 68,877 55,137 63,107 70,

Operating income 80,863 128,227 187,066 124,788 142,596 158,


Provision for risk assets + EI (7,863) (11,402) (49,032) (16,950) (7,671) (3,4

Profit Before Tax 25,419 48,029 6,637 15,986 37,727 52,

Taxation (3,923) (7,204) (4,262) (6,396) (11,286) (15,7

Profit After Tax 21,496 40,825 2,375 9,590 26,441 37,

Balance Sheet (N'Mill) 2007 2008 2009 2010 F 2011 F 201

Cash and balances with CBN 129,897 200,820 68,225 80,046 79,620 84,

Interbank Placement 440,418 574,295 470,195 408,746 487,089 587,

Investment Securities 205,648 302,389 239,948 391,715 412,152 419,

Loans and advances 320,406 447,618 606,616 661,051 738,316 829,

Other Assets 44,926 86,294 90,255 102,187 93,671 104,

Property and equipment 49,747 61,575 73,042 59,364 62,571 71,

Total Interest Earning Assets 1,096,369 1,525,122 1,384,984 1,541,559 1,717,178 1,922,

Total Assets 1,191,042 1,672,991 1,548,281 1,703,109 1,873,420 2,098,

Customer deposits 905,806 1,333,289 1,245,650 1,345,456 1,480,002 1,657,

Borrowings and Managed Funds 67,148 40,558 52,705 20,000 20,000 20

Other Liabilities 50,010 104,282 63,097 153,263 177,129 207,

Interest bearing liabilities 972,954 1,373,847 1,298,355 1,365,456 1,500,002 1,677,

Total Liabilities 1,022,964 1,478,129 1,361,452 1,518,719 1,677,131 1,885,

Ordinary share capital 5,748 8,622 10,778 12,934 12,934 12,

Reserves 162,330 186,240 176,051 171,456 183,355 200,

Equity 168,078 194,862 186,829 184,390 196,289 212,

2008 2009 2010E 2011F 201

Growth (%)

Gross Earnings 54.9% 45.5% -28.0% 14.5% 11

Operating Income 58.6% 45.9% -33.3% 14.3% 10

Profit Before Tax 88.9% -86.2% 140.9% 136.0% 40

Profit After Tax 89.9% -94.2% 303.8% 175.7% 40

Profitability (%)

Net Interest Margin 5.7% 8.1% 4.8% 4.9% 4

Return on Average Equity 22.5% 1.2% 5.2% 13.9% 18

Return on Average Assets 2.9% 0.1% 0.6% 1.5% 1

Net Profit Margin 24.1% 1.0% 5.4% 13.0% 16



[Type text]

January 2011 41

The Tipping Point

2011 Outlook



Gross Earnings 734 1,137 1,654 1,191 1,363 1,523

Interest earnings 494 782 1,192 821 940 1,050

Interest expense (192) (277) (400) (354) (407) (463)

Net interest income 302 505 792 467 533 587Other income 240 354 462 370 423 473

Operating income 542 860 1,254 837 956 1,060

Operating expenses (319) (461) (881) (616) (652) (682)

Provision for risk assets (53) (76) (329) (114) (51) (23)


Taxation (26) (48) (29) (43) (76) (106)

Profit After Tax 144 274 16 64 177 249


Cash and balances with CBN 871 1,346 457 537 534 570




Other Assets 301 578 605 605 685 628



Total Assets 7,984 11,215 10,379 10,047 11,940 13,268


Other borrowings 450 272 353 353 134 134

Other Liabilities 335 699 423 423 1,027 1,187




Reserves 1,088 1,249 1,180 1,180 1,149 1,229

Total Equity 1,127 1,306 1,252 1,252 1,236 1,316

2008 2009 2010E 2011F 2012F


Cost of Funds 3.5% 4.5% 4.0% 4.2% 4.3%

Yields on Assets 8.9% 12.2% 8.4% 8.6% 8.6%


Asset Quality, Liquidity & Solvency (%)NPL Ratio 3.5% 8.3% 9.5% 8.5% 8.0%

Coverage Ratio 86.9% 68.7% 60.0% 70.0% 70.0%







[Type text]

January 2011 42

The Tipping Point

2011 Outlook


Guaranty Trust Bank Plc (GUARANTY)

A “Defensive Cyclical” Play

Aside quantitative fundamentals, we believe GUARANTY’s IFRS reporting wh

dates back to its GDR listing on the London Stock Exchange (13% of its eq

via Nominee Accounts) has been another selling point for the shares a

presents strong appeal to foreign fund managers whose perceived holding in

bank cannot be downplayed. Revving on investors’ appetite for this paradoxic

“defensive cyclical” feature, GUARANTY is priced at 130% premium to its bo

value, (55% premium over Tier-1 peer average). Relying on our base case D

valuation, we believe the value of the bank is N20.57/share. Hence the mar

has been fair in GUARANTY’s pricing and we are “NEUTRAL” on it as it porte

a rich valuation of barely 5.2% upside.

Investment thesis

Harvesting the dividends of efficiency: Within barely 2 decades

establishment, GUARANTY steadily rode on its efficiency (from co

profitability and service delivery perspectives) to gain global inves

confidence. We bring back to mind the 2009 cyclone which uplifted GUARANfrom all key benchmarks; RoAE of 13% (Vs. industry average of 2.2%)

NPL of 11% (relative to industry average of 12%).

Hands on cost, earnings on the growth ladder: While we are upbeat t

FY’10 earnings (which is in the pipeline) will ride on low base to post a c.5

growth, we assert that this feat will moderate in FY’11. Albeit, guided by

outlook on GUARANTY’s balance sheet, we look forward to a 12% growth

after-tax earnings (NGN42.2 billion). Apt to say that the bank’s earni

stability is buoyed by its cost efficiency and modest asset quality. To our m

the bank’s <60% post-provisionings cost to income ratio is helped by its s

and customer demographics. A large portion of the bank’s staff falls in

lower end of the list, a reflection of its age and purely organic growth strate

While the bank’s coverage over NPL reinforces our confidence in its asset earnings quality, we will like to see a downward trend in toxic assets level.

No considerable downside from divestiture, in our view: The bank’s

proactive weaning and subsequent listing of its underwriting subsidiary;

GTAssure, minimize the impact of CBN’s new license regime as we do not

see significant challenge to the performance of the bank from its resolution

to divest non-core banking operations which, on our estimate, currently

contribute 2.4% and 1.8% respectively to top- and bottom- lines. We

however think the next challenge for GUARANTY is its lean branch footprint

which may be a drag on its ability to fully explore its brand prospects





Dividend Yield (%) 2.9% 4.4% 4.9% 5.7% 6.2


Price to Book (x) 1.55 2.25 2.07 1.89 1.7


BASIC INF ORM ATION

A ddress P lot 1669, Oyin Jolayemi Str.,

Victoria Island, Lagos.

Website www.gtbank.com

Management (Chai rman) O luwole Sunday Oduyemi

M D/CEO Tayo Aderinokun

inancial Year End December

Exchange Listing N igerian Sto ck Exchange

Symbol Bloo mberg: GUARA NTY:NL

Sector Banking

Country Nigeria

OWNERSHIP STRUCTURE (%)

Retail Shareholders 39.69%

nstitutional Shareholders 47.10%

o reign 13.21%

S HARE S TATIS TICS

Shares in issue (M ) 23,317

Share Price (N) 19.70

M arket Cap. (N'm) 467,510

M arket Cap. (USD'm) 3,134

ree Float (%) 39.69%

M onthly Average Value Traded (N'000) 288,511

M onthly Average Value Traded

USD'000) 1,934

Year high (N) 20.50

Year low (N) 17.76

VALUATION M ETRICS

Book Value (N'm) 199,339

Trailing P/E (x) 12.96

P/B (x) 2.30

Div. Yield (%) 2.3%

ROE (%) 17.8%

everage Ratio (x) 5.70



[Type text]

January 2011 43

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010E 2011F 2012

Gross Earnings 48,567 104,120 162,550 155,275 172,500 195,44







Provision for risk assets and EI (253) (4,042) (37,527) (6,993) (6,939) (6,79


Taxation (2,523) (6,862) (4,276) (9,277) (10,254) (11,86

Profit After Tax 13,194 28,316 23,687 37,108 41,014 47,46

Balance Sheet (N'Mill) 2007 2008 2009 2010 F 2011 F 2012





Other Assets 53,789 68,153 16,288 17,597 19,709 38,76


Total Interest Earning Assets 411,822 854,939 1,003,724 1,102,588 1,237,783 1,447,02

Total Assets 486,491 962,722 1,066,504 1,173,154 1,313,933 1,550,44

Customer deposits 294,546 472,271 698,063 762,550 867,196 1,023,29



Interest bearing liabilities 352,609 535,167 775,881 847,224 950,718 1,056,82

Total Liabilities 436,505 780,688 874,259 964,210 1,086,532 1,301,68


Reserves 45,986 174,572 182,918 197,285 215,742 237,10

Equity 49,986 182,034 192,245 208,944 227,400 248,76

2008 2009 2010E 2011F 2012

Growth (%)

Gross Earnings 114.4% 56.1% -4.5% 11.1% 13.3

Operating Income 131.6% 49.2% -2.7% 5.9% 13.1

Profit Before Tax 123.8% -20.5% 65.9% 10.5% 15.7

Profit After Tax 114.6% -16.3% 56.7% 10.5% 15.7

Profitability (%)

Net Interest Margin 7.2% 8.5% 6.9% 6.5% 6.4

Return on Average Equity 24.4% 12.7% 18.5% 18.8% 19.9

Return on Average Assets 3.9% 2.3% 3.3% 3.3% 3.3

Net Profit Margin 27.2% 14.6% 23.9% 23.8% 24.3



[Type text]

January 2011 44

The Tipping Point

2011 Outlook



Gross Earnings 326 698 1,090 1,041 1,156 1,310

Interest earnings 215 457 802 733 826 936



Other income 111 241 288 308 330 374

Operating income 237 548 818 796 843 954




Taxation (17) (46) (29) (62) (69) (80)

Profit After Tax 88 190 159 249 275 318


Cash and balances with CBN 217 423 241 197 264 364Interbank Placement 637 1,470 1,511 1,809 1,938 1,975


Loans and advances 776 2,807 3,777 3,931 4,642 5,491

Other Assets 361 457 109 118 132 260



Total Assets 3,261 6,454 7,150 7,865 8,808 10,394



Other Liabilities 562 1,646 660 784 910 1,641

Total Interest bearing liabilities 2,364 3,588 5,201 5,680 6,373 7,085



Reserves 308 1,170 1,226 1,323 1,446 1,589

Total Equity 335 1,220 1,289 1,401 1,524 1,668

2008 2009 2010E 2011F 2012F


Cost of Funds 5.0% 6.2% 4.5% 5.2% 5.3%

Yields on Assets 10.8% 12.9% 10.4% 10.5% 10.4%



NPL Ratio 1.8% 11.8% 7.6% 7.5% 7.2%

Coverage Ratio 118.4% 48.9% 75.0% 75.0% 75.0%







[Type text]

January 2011 45

The Tipping Point

2011 Outlook


Stanbic-IBTC Bank Plc (IBTC)

Investment Banking is the Cash Cow

IBTC which is largely an investment bank, with 76% of gross earnings tracea

to Wealth Management and Investment banking operations, needs to furt

diversify its business to avert probable regulatory constraint in the near te

Though yet to announce, we think a HoldCo licence is sine non qua non for IB

In line with its conventional ride on positive investors’ sentiments, the equity

the bank is currently priced at a 137% premium to its book value (an expens

valuation relative to the average P/BV of 1.1x of Nigerian Tier-II lenders). J

as a review of technical metrics on IBTC suggests that the current price is f

our DCF valuation is rich, as we arrive at a base case target price

N10.02/share for IBTC. This valuation presents a 4.6% downside risk; albeit

are “NEUTRAL” on IBTC given market sentiments.

Investment thesis

Penetrating the market faster than we anticipated: With IBTC’s rec

aggressive organic growth, we suspect the bank has rescinded its ear

interest in acquiring a CBN-intervened bank. In spite of the lull in the indusover 2010 IBTC added >50 branches to gross up its footprint to 128. In

opinion, this aggressive move of IBTC to deepen its personal and busin

banking segment may not be unconnected with the implied stance of CBN

direct banks’ focus to core financial intermediation and its strategy

harvesting the attractive spread in the retail market.

Spearheading the loan growth story: While not immune to the heighte

risk in the credit market, as at Q3’10, IBTC has grown its loan book by 3

(relative to FY’09 level), a reflection of its proactive steps to take

advantage of the waiver on the erstwhile regulatory cap on Loan-to-Dep

(LTD) ratio of 80%. IBTC’s LTD currently stands at 105%. While

aggressive appetite for risk is fuelled by the depressed yield on money mar

instruments, and also supported by its high CAR (still 27.8% from 35.0%FY’09), the bank takes on the risk of asset quality deterioration.

We look forward to FY’11 PAT flight of 55%: In addition to ou

expectation of earnings rub-off from loan book expansion, we believe the

bank will further leverage on its rich investment banking income profile to

post a startling 55% bottom line growth in FY’11, as we look forward to a

post-tax earnings of N16.9 billion. Our confidence in IBTC earnings outlook

becomes stronger when we consider the recovery in the capital market; a

core niche of the bank. Our earnings forecast which translates to a RoAE of

18.3% is premised on the bank’s ability to achieve our target CIR of 62%.


Earnings Per Share(N) 0.43 0.54 0.87 1.02 1.2

Price to Earnings (x) 17.21 19.13 11.91 10.11 8.2Dividend Per Share(N) 0.30 0.30 0.48 0.56 0.6

Dividend Yield (%) 4.0% 2.9% 4.6% 5.4% 6.6%Net Assets Per Share(N) 4.29 4.54 4.93 5.39 5.9

Price to Book (x) 1.74 2.28 2.10 1.92 1.7

NPL Ratio (%) 14.7% 9.3% 8.5% 8.0% 8.0%Source: Company Financials, Vetiva Research

ASIC INFORMATION

ddress I.B .T.C. P lace, Walter Carringto n

Victoria Island, lagos

ebsite www.stanbicibtc.com

anagement (C hairman) A tedo N. A . P et erside

D/CEO Chris Newson


xchange Listing Nigerian Sto ck Exchange

ymbol Bloo mberg: IBTCCB:NL

WNERSHIP STRUCTURE (%)

etail Shareholders 12.00%

stitutional Shareholders 88.00%

HARE STATISTICS

hares in issue (M) 18,750

hare Price (N) 10.50


arket Cap. (USD'm) 1,298

ee Float (%) 12.00%

aily Average Value Traded (N'000) 27,643

aily Average Value Traded (USD'000) 185.3

ear high (N) 11.38

ear low (N) 9.20

ALUATION M ETRICS

ook Value (N'm) 82,984

ailing P/E (x) 21.88

/B (x) 2.37

v. Yield (%) 2.9%

OE (%) 10.8%


NBIC IBTC VS BANKING VS NSE ASI PERFORMANCEed 04/01/2010




[Type text]

January 2011 46

The Tipping Point

2011 Outlook



Gross Earnings 28,651 61,240 59,781 52,679 69,069 79,119







Provision for risk assets and EI (2,044) (5,020) (4,858) (1,336) (1,728) (2,434)


Taxation (3,142) (2,632) (2,204) (3,938) (6,325) (7,452)

Profit After Tax 7,850 11,995 8,138 10,127 16,264 19,161






Other Assets 11,762 19,455 27,538 16,109 18,525 21,304



Total Assets 315,107 351,253 341,286 402,717 463,125 532,594







Reserves 66,644 72,003 72,122 75,662 82,981 91,604

Equity 76,019 81,378 81,497 85,037 92,356 100,979

2008 2009 2010E 2011F 2012 E

Growth (%)

Gross Earnings 113.7% -2.4% -11.9% 31.1% 14.6%



Profit After Tax 52.8% -32.2% 24.4% 60.6% 17.8%

Profitability (%)







[Type text]

January 2011 47

The Tipping Point

2011 Outlook



Gross Earnings 192 411 401 353 463 530




Other income 86 136 125 130 170 195





Taxation (21) (18) (15) (26) (42) (50)

Profit After Tax 53 80 55 68 109 128



Interbank Placement 533 748 516 513 621 714

Investment Securities 822 635 614 614 648 683

Loans and advances 533 660 741 741 1,166 1,409

Other Assets 79 130 185 185 108 124



Total Assets 2,112 2,355 2,288 2,300 2,802 3,207

Customer deposits 479 638 1,134 1,134 1,134 1,397


Other Liabilities 940 1,089 266 910 1,003 1,214

Interest bearing liabilities 663 720 1,476 1,220 1,483 1,679



Reserves 447 483 483 507 556 614

Total Equity 510 546 546 570 619 677

2008 2009 2010E 2011F 2012F


Cost of Funds 7.3% 6.0% 3.5% 3.9% 4.0%

Yields on Assets 13.4% 13.6% 10.4% 11.3% 11.2%



NPL Ratio 14.3% 14.7% 9.3% 8.5% 8.0%

Coverage Ratio 66.9% 70.2% 80.0% 80.0% 80.0%







[Type text]

January 2011 48

The Tipping Point

2011 Outlook


Access Bank Plc (ACCESS)

A Tenacious Brand Posing Challenge to Market Leaders

We bring back to mind investors’ acknowledgement of the attractive near te

earnings potentials of ACCESS as reinforced by the positive returns of its sha

amid 2009 investors’ aversion to banking counters. Notwithstanding

appreciable gains recorded in the last two years, our base case valuation wh

stands at N12.80/share justifies the gains with an attractive potential ret

outlook of 25.4%, thus informing our “BUY” rating on ACCESS.

Investment thesis

Bridging the gap; ACCESS may join the big-4 Nigerian lenders so

To our mind, ACCESS tenacity to join the Tier-1 players may come to fruit

earlier than anticipated as the bank steadily bridges the gap from loan mar

share perspective. Amid fears of heightened credit risk, the bank grew

balance sheet and loan book by 18% and 10% correspondingly. We belie

ACCESS’ capital buffer as reflected in its CAR of 28% offers adequate leew

for its convergence with Nigeria’s big-4 lenders. While we are buyers

efficiency as against bungling rivalry for size, we are confident that ACCErelative hold on costs will buoy well for its organic expansion, especially as

look forward to cost savings on the heels of a maturing low cost retail a

and imminent scale economies. With its steady organic growth a

penetration of the retail market which we believe will complement a mod

brand in the corporate space, ACCESS may post earnings surprise beyond

FY’11 outlook of N22.8 billion.

Improving asset quality and reporting are laudable: ACCESS’ fru

balance sheet repair is laudable, from a NPL of 19% in FY’09 to 11% as

Q3’10 with expectation that the sale of its margin-related NPLs to AMCON

further scale down the bank’s toxic assets. More importantly, we h

relative comfort in the quality of ACCESS’ earnings, given its mod

coverage of +80% over NPLs and improved disclosure. Though the bank maintain a dual reporting till regulatory cut-off date set at January 20

ACCESS has implemented full conversion of its system to IFRS.

Suppressed margin is an interim phenomenon, correction loom

Though the bank’s Q3’10 net interest margin contracted by 60 basis po

YoY due to less than proportionate decline in funding cost relative to yield

assets, we see a marginal correction in 2011 ALM as easing risk environm

engenders the bank’s balance sheet restructuring. On the heels of our mod

cost-to-income ratio outlook of 62% for ACCESS, we look forward to a FY

PAT of N22.8 billion, an implied RoAE of 12.7%.

Forecast Summary FY'09A FY'10E FY'11F FY'12F FY'Earnings Per Share (N) -0.27 0.79 1.27 1.62

Price to Earnings (x) nm 12.99 8.08 6.35

Dividend Per Share (N) 0.00 0.44 0.70 0.89

Dividend Yield (%) 0.0% 4.2% 6.8% 8.7% 10


Price to Book (x) 0.74 1.06 1.00 0.93

NPL Ratio (%) 19.0% 11.0% 9.5% 8.5% 7

SIC INFORMATION

dress Plot 1665, Oyin Jolayemi Str.,

Victoria Island, Lagos.

bsite www.accessbankplc.com

nagement (Chairman) G. Oyebode

D/CEO A. I. Aig-Imoukhuede


hange List ing N igerian Sto ck Exchange

mbol Bloo mberg: ACCESS:NL

WNERSHIP ST RUCTURE (%)


itutional (Domestic) 37.68%

eign 27.06%

ARE STATISTICS


are Price (N) 10.19

rket Cap. (N'm) 184,070


e Float (%) 35.26%


lly Average Value Traded (USD'000) 768.9

ar high (N) 11.10

ar low (N) 9.50

LUATION M ETRICS


iling P/E (x) 14.35

B (x) 1.06

. Yield (%) 3.9%

E (%) 7.4%

erage Ratio (x) 4.90CESS VS BANKING VS NSE ASI PERFORMANCEsed 04/01/2010


CESS VS BANKING VS NSE ASI PERFORMANCEsed 04/01/2010



[Type text]

January 2011 49

The Tipping Point

2011 Outlook



Gross Earnings 27,881 57,999 66,076 101,378 124,699 147,250








Profit Before Tax 8,043 18,846 (2,705) 19,685 30,385 38,635

Taxation (1,960) (2,993) (921) (5,512) (7,596) (9,659)

Profit After Tax 6,083 15,853 (3,626) 14,173 22,789 28,976






Other Assets 8,778 32,405 20,732 24,142 29,970 35,964


Total Interest Earning Assets 310,604 997,823 645,069 783,088 920,804 1,084,340

Total Assets 328,615 1,045,699 693,746 832,495 977,349 1,147,511


Borrowings and Managed Funds 0 14,652 46,349 - - -



Total Liabilities 300,230 873,708 525,400 658,629 814,874 1,001,633


Reserves 24,896 163,733 159,357 164,922 175,177 188,216

Equity 28,385 171,805 167,488 173,866 184,121 197,160

2008 2009 2010E 2011F 2012 E

Growth (%)

Gross Earnings 108.0% 13.9% 53.4% 23.0% 18.1%


Profit Before Tax 134.3% -114.4% -827.7% 54.4% 27.2%

Profit After Tax 160.6% -122.9% -490.9% 60.8% 27.2%

Profitability (%)


Return on Average Equity 15.8% -2.1% 8.3% 12.7% 15.2%

Return on Average Assets 2.3% -0.4% 1.9% 2.5% 2.7%

Net Profit Margin 27.3% -5.5% 14.0% 18.3% 19.7%



[Type text]

January 2011 50

The Tipping Point

2011 Outlook



Gross Earnings 187 389 443 680 836 987




Other income 74 116 124 184 226 256




Profit Before Tax 54 126 (18) 132 204 259

Taxation (13) (20) (6) (37) (51) (65)

Profit After Tax 41 106 (24) 95 153 194



Interbank Placement 857 3,693 625 1,005 1,127 1,264

Investment Securities 298 1,114 673 673 1,060 1,205


Other Assets 59 217 139 139 162 201



Total Assets 2,203 7,010 4,651 4,877 5,759 6,755


Other borrowings 0 98 311 311 - -

Other Liabilities 592 2,922 248 248 565 842




Reserves 167 1,098 1,068 1,068 1,106 1,174

Total Equity 190 1,152 1,123 1,123 1,166 1,234

2008 2009 2010E 2011F 2012F


Cost of Funds 4.5% 2.4% 5.6% 6.4% 6.6%

Yields on Assets 6.2% 5.8% 10.4% 10.7% 10.9%


Asset Quality, Liquidity & Solvency (%)NPL Ratio 3.7% 19.0% 11.0% 9.5% 8.5%

Coverage Ratio 117.9% 37.1% 65.0% 70.0% 70.0%







[Type text]

January 2011 51

The Tipping Point

2011 Outlook


Skye Bank Plc (SKYE)

Retail Bank of the South

SKYE’s modest brand in the retail and public sector segments of the south

part of Nigeria continues to pay-off as it guarantees the bank a steady flow

cheap funding. Having convinced the market with an annualised Q3’10 Ro

recovery of 11.5%, the shares of the bank enjoyed improving inves

confidence, as it delivered a startling 60% returns in 2010. Nevertheless, S

still trades at a P/BV of 1.2x; an attraction when put in the context of its FY

PAT growth outlook of 27% and near term average RoAE of 18.4%. Relying

our DCF valuation, we advice investors to “ACCUMULATE” SKYE with

expectation of 16% return over the course of the year based on our base c

target price of N10.86.

Investment thesis

Resolution of capital challenges to engender SKYE’s operation: Dri

by its resolution to opt for an international banking licence, SKYE rai

additional N11.4 billion in H2’10 via a special placement which was 9

subscribed at N7 – N7.1 book building band. The bank thus grosses its equcapital to N106.9 billion. It is apt to say that the fresh capital injection w

also necessitated by its lean CAR which stood at 101 basis points ab

management’s guidance of 15% in FY’09.

Eyes on high-end corporate, poised to reduce retail loan exposu

While trying to recover from the doldrums of the loan loss cyclone with

worrying FY’09 NPL of 19%, the bank turns attention to the high-end of

market with a keen passion to reduce exposure to its conventional high-

retail niche which accounted for +80% of historical loan book. While

observe SKYE’s eagerness to grow its loan book with corporate credit, we th

the bank’s risk asset creation is largely constrained by its relatively fra

liquidity position; 380bps below new regulatory threshold of 30%.

therefore look forward to see another tranche of capital raising.

Margin resilience to sustain attractive earnings growth outlook: Tho

the current balance sheet position of the bank will put a constraint on 20

operations with impact on earnings potential, we are upbeat on our FY’11

outlook of N13.3 billion (12.5% of RoAE) given SKYE’s margin resilience.

outlook on SKYE’s margin performance is informed by its exploitation of ch

retail and public sector deposits and exposure to the higher margin l

market. SKYE has exclusive and partial internally generated revenue (IG

collection in key commercial hubs, including Lagos and Rivers state. We th

the bank can post upside surprise if it clamps down its cost-to-income ra

beyond our outlook of 73%.

Forecast Summary FY'09A FY'10E FY'11F FY'12F FY'

Earnings Per Share (N) 0.00 0.79 1.01 1.24 1

Price to Earnings (x) nm 11.96 9.43 7.67 5

Dividend Per Share (N) 0.05 0.44 0.55 0.68 0

Dividend Yield (%) 0.9% 4.6% 5.8% 7.2% 9


Price to Book (x) 0.72 1.21 1.15 1.07 0

NPL Ratio (%) 15.0% 14.5% 13.5% 13.0% 12Source: Company Financials, Vetiva Research

ASIC INFORM AT ION

ddress 3, Akin Adesola Str.,

Victo ria Island, Lagos.

Website www.skyebankng.com

anagement (Chairman) A lhaji M . A . K. Smith

D/CEO Kehinde Durosinmi-Etti


xchange Lis ting Nigerian Sto ck Exchange

ymbolBloomberg:

SKYEBANK:NL


etail Shareholders 71.39%

stitutional Shareholders 28.61%

HARE STAT IST ICS

hares in issue (M) 13,220

hare Price (N) 9.49


arket Cap. (USD'm) 841

ree Float (%) 71.39%

aily Average Value Traded (N'000) 88,479

aily Average Value Traded (USD'000) 593

ear high (N) 10.17

ear low (N) 8.80

ALUATION M ETRICS

ook Value (N'm) 106,859

railing P/E (x) 11.03

/B (x) 1.17

iv. Yield (%) 0.5%

OE (%) 10.6%


KYE BANK VS BANKING VS NSE ASI PERFORMANCEased 04/01/2010




[Type text]

January 2011 52

The Tipping Point

2011 Outlook



Gross Earnings 41,720 78,277 131,521 90,046 96,242 109,621







Provision for risk assets and EI (2,595) (4,113) (34,847) (5,617) (4,505) (4,474)

Profit Before Tax 7,970 21,474 844 13,110 16,628 20,438

Taxation (2,085) (5,456) (968) (2,622) (3,326) (4,088)

Profit After Tax 5,885 16,018 (124) 10,488 13,303 16,350

Balance Sheet (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 FCash and balances with CBN 17,823 40,255 31,144 33,207 44,630 51,324




Other Assets 135,652 148,548 35,523 66,414 74,383 85,541



Total Assets 447,992 790,708 632,511 664,137 743,833 855,408


Borrowings and Managed Funds 27,157 37,744 36,285 - - -





Reserves + Minority Interest 27,819 90,997 84,638 96,829 102,816 110,173

Equity 31,571 96,789 90,430 103,439 109,426 116,783

2008 2009 2010E 2011F 2012 E

Growth (%)

Gross Earnings 87.6% 68.0% -31.5% 6.9% 13.9%

Operating Income 85.1% 37.8% -21.5% 4.2% 13.6%


Profit After Tax 172.2% -100.8% -8557.8% 26.8% 22.9%

Profitability (%)







[Type text]

January 2011 53

The Tipping Point

2011 Outlook



Gross Earnings 280 525 882 604 645 735




Other income 83 154 211 117 116 133





Taxation (14) (37) (6) (18) (22) (27)

Profit After Tax 39 107 (1) 70 89 110



Interbank Placement 604 1,455 821 312 399 516



Other Assets 909 996 238 238 445 499



Total Assets 3,003 5,301 4,240 3,745 4,616 5,149



Other Liabilities 819 1,046 373 373 865 1,012




Reserves 186 610 567 567 649 689

Total Equity 212 649 606 606 693 734

2008 2009 2010E 2011F 2012F


Cost of Funds 4.9% 10.1% 6.0% 6.8% 6.8%

Yields on Assets 12.0% 17.0% 13.0% 13.2% 13.2%



NPL Ratio 3.7% 15.0% 14.5% 13.5% 13.0%

Coverage Ratio 102.2% 79.4% 80.0% 85.0% 85.0%







[Type text]

January 2011 54

The Tipping Point

2011 Outlook


Diamond Bank Plc (DIAMOND)

Retail Lender; Wide Spread Too Inciting to Let Go!

While DIAMOND plans to entrench its presence in the high-end corpor

market, its near term blueprints are more focused on growing its share in

retail space, in our opinion. We believe the bank’s stance is largely influencedthe relatively attractive wide spread in this niche, especially as it rebalances

portfolio of liabilities to scale down funding cost. Interestingly, the shares

DIAMOND continues to hover its 2008 levels as it closed relatively flat in 20

and 2010 (respectively -0.8% and +2%). From a valuation perspective,

believe DIAMOND which currently trades at a 24% premium to its book valu

still cheap, given our target price of N10.82. We see an attractive 24% upside

current price and advise you “ACCUMULATE” DIAMOND.

Investment thesis

Cheap funding and sustained high retail lending rates; drivers

margins: As a complement to its conviction of bankable opportunities in

retail-end of the loan market, the bank achieved an impressive rebalancing

its deposit mix, with cheaper funding sources (savings and dema

constituting 74% of deposit base. Given our expectation of a sustained h

rates on retail loan and DIAMOND’s improving access to cheap funds, we

upbeat on its net interest margin which peaked at 10.3% in Q3’10 and exp

it to be a core driver for near term profitability.

High NPL mirrors retail lending risk: Despite modest coverage of +80

all eyes are on DIAMOND’s worrying NPL which stood at 16.8% in Q3’10 (

mid-tier peer average of 12%). It is imperative to note that the obstinate N

ratio is also reflective of the 7.9% YoY decline in loans, as this obscures the

billion recovery in toxic assets in the last three quarters. Apt to say that t

high percentage of NPL is a mirror of the bank’s sizable exposure to the re

end of the credit market which commands >50% of the bank’s loan book.

FY’11 RoAE still suppressed; albeit, we see swift near term recove

Though the bank’s lending appetite may be constrained in the near term a

rebalances portfolios to shore-up its declining CAR (15.4%, 680bps Y

decline), we are convinced that the bank’s top and bottom- lines will ride

resilient yield on assets and improving cost structures (declining funding a

operating costs) to deliver our FY’11 outlook of N113.8 billion and N12.0 bil

respectively. While this earnings projection translates to a RoAE of 10.6%

huge discount to its estimated cost of equity of 17.5%, we believe the mar

s hould price-in the expected RoAE recovery post 2011 hurdle (an average

17.1% over the near term).

Forecast Summary FY'09A FY'10E FY'11F FY'12F FY'

Earnings Per Share (N) -0.56 0.55 1.02 1.12

Price to Earnings (x) nm 16.43 8.85 8.05

Dividend Per Share (N) 0.00 0.30 0.56 0.62

Dividend Yield (%) 0.0% 3.3% 6.2% 6.8% 8


Price to Book (x) 1.01 1.19 1.12 1.06

NPL Ratio (%) 19.7% 16.7% 16.0% 15.0% 14Source: Company Financials, Vetiva Research

SIC INFORM ATION

dress Plot 1261, Adeola Hopewell,

Viscto ria Island, Lagos.

bsite www.diamondbank.com

nagement (Chairman) HRM Igwe N.A.U. Achebe

D/CEO Emeka Onwuka


change Lis ting Nigerian St ock Exc hange

mbol Bloo mberg: DIAMOND:NL

ctor Banking

untry Nigeria



itutional Shareholders 80.00%

ARE STATISTICS


are Price (N) 8.71

rket Cap. (N'm) 130,277

rket Cap. (USD'm) 873

e Float (%) 20.00%


ly Average Value Traded (USD'000) 570.2

ar high (N) 9.27

ar low (N) 7.50

LUATION METR ICS


iling P/E (x) 19.36

B (x) 1.19

. Yield (%) 0.0%

E (%) 6.1%

verage Ratio (x) 5.84



[Type text]

January 2011 55

The Tipping Point

2011 Outlook



Gross Earnings 39,484 60,438 67,736 86,586 98,042 106,577








Profit Before Tax 9,008 16,214 -12,374 11,090 20,587 22,646

Taxation (1,921) (3,393) 4,200 (3,161) (5,867) (6,454)

Profit After Tax 7,087 12,821 (8,174) 7,929 14,720 16,192






Other Assets 29,203 73,234 50,306 44,642 43,494 47,142



Total Assets 320,419 625,670 650,757 637,742 701,516 785,698







Reserves 49,610 110,676 98,855 101,978 108,602 115,888

Equity 54,310 117,256 106,093 109,215 115,839 123,126

2008 2009 2010E 2011F 2012 E

Growth (%)

Gross Earnings 53.1% 12.1% 27.8% 13.2% 8.7%

Operating Income 57.8% -11.7% 56.7% 11.3% 8.1%

Profit Before Tax 80.0% -176.3% -189.6% 85.6% 10.0%

Profit After Tax 80.9% -163.8% -197.0% 85.6% 10.0%

Profitability (%)







[Type text]

January 2011 56

The Tipping Point

2011 Outlook



Gross Earnings 265 405 454 580 657 714




Other income 95 166 111 150 170 165Operating income 204 322 285 446 497 537




Taxation (13) (23) 28 (21) (39) (43)

Profit After Tax 48 86 (55) 53 99 109



Interbank Placement 174 920 682 684 705 790



Other Assets 196 491 337 337 299 292



Total Assets 2,148 4,194 4,363 4,047 4,331 4,810



Other Liabilities 170 413 194 194 349 428




Reserves 333 742 663 663 684 728

Total Equity 364 786 711 711 732 777

2008 2009 2010E 2011F 2012F


Cost of Funds 3.6% 5.2% 4.0% 4.8% 4.8%

Yields on Assets 8.9% 9.3% 11.5% 12.4% 12.5%



NPL Ratio 4.4% 19.7% 16.7% 16.0% 15.0%

Coverage Ratio 88.7% 64.5% 85.0% 85.0% 85.0%







[Type text]

January 2011 57

The Tipping Point

2011 Outlook


First City Monumental Bank Plc (FCMB)

Taking a Deeper Dive into the Low-End of the Market

The equity of FCMB still trades at par with its book value (P/BV of 1.0x

average peer pricing of 1.2x). Our valuation uplifts the shares of this bank giv

our outlook on its near term fundamentals (better than tier-II peer’s as

quality and earnings potentials). Though we look forward to a negative exc

return from FCMB in FY’11 (a RoAE of 12.1% Vs. our banking industry cost

equity of 17.5%), our base case DCF valuation which stands at N9.50 implie

justified P/BV of 1.16x. Going by the current price of FCMB (N8.20), an inves

with a 12-month horizon should harvest 15.9% capital gain. We theref

suggest that value investors “ACCUMULATE” FCMB.

Investment thesis

Deposit and near term profitability outlook buoys appetite for re

penetration: As part of the strategic repositioning to cushion the impact

intensifying competition in the investment banking space and exp

opportunities in the low-end of the commercial banking market, FCMB take

deeper dive into retail market. Though, the retail banking SBU continuespost losses as it is yet to reach critical mass, the growth trajectory has b

impressive. Also providing succour to the bank is the impressive earni

profile of Credit Direct Limited; a complementary retail SPV which contribu

+20% to FCMB’s Q3’10 bottom-line. We are optimistic that this infant segm

will be another cashcow for the bank in the near term.

IFC investment to accelerate growth momentum: The finance arm of

World Bank; International Finance Corporation (IFC) invested US$70 mil

(≈N10.5 billion) in FCMB in the last quarter of 2010. The funding; a sen

loan of US$50 million and US$20 million convertible debt which is dedicated

agribusiness and education sector financing, will accelerate the bank’s fo

into the retail market. Though the bank’s appetite to acquire one of

rescued banks appears to be waning, we are cautious to say that FCMB mrevisit this inorganic growth path, especially as its deal with IFC inclu

probable acquisition finance of a distressed bank.

Our expected FY’11 EPS of N1.02 justifies FCMB’s cheapness: Our

outlook on the bank’s earnings potential translates to a FY’11 PAT of N16.7

billion (EPS of N1.02 and RoAE of 12.1%). It is imperative to highlight that

this earnings expectation on FCMB is informed by a cost-to-income ratio

(CIR) of 61% and net interest margin (NIM) of 6.52%. Our view of FCMB’s

cost efficiency (CIR) is largely informed by its imminent top-line growth of

35.3%. As regards NIM, we believe the improving liability mix of the bank

(low-cost deposits and term loan now account for c.51% of balance sheet

funding) will justify of outlook.

Forecast Summary Dec'09 FY'10E FY'11F FY'12F FY'13

Earnings Per Share (N) -0.03 0.54 1.02 1.25 1.4

Price to Earnings (x) nm 15.10 8.01 6.57 5.6


Dividend Yield (%) 0.0% 3.6% 6.9% 8.4% 9.7%


Price to Book (x) 0.90 1.00 0.95 0.89 0.8

NPL Ratio (%) 14.8% 7.0% 6.5% 6.0% 5.5%Source: Company Financials, Vetiva Research

BASIC INFORMATION

Address 17A Tinubu Street,

Lagos.

Website www.firstcitygroup.com

Management (Chairman) Dr. Jonathan AD Long

GMD/CEO Ladi O. Balogun

Financial Year End December

Exchange Lis ting N igerian Stock Exchange

Symbol FCMB: NL


Retail Shareholders 18.8%

Institutional Shareholders 81.2%

SHARE STATISTICS

Shares in issue (M) 16,271


Market Cap. (N'm) 133,424

Market Cap. (USD'm) 894

Free Float (%) 18.8%

Daily Average Value Traded (N'000) 51,543

Daily Average Value Traded (USD'000) 346

Year high (N) 8.20

Year low (N) 7.50

VALUATION M ETRICS

Book Value (N'm) 133,355


P/B (x) 1.00

Div. Yield (%) 0.0%

ROAE (%) 4.6%

Leverage Ratio (x) 3.84

FCMB VS BANKING VS NSE ASI PERFORMANCEebased 04/01/2010




[Type text]

January 2011 58

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F

Gross Earnings 52,819 71,658 35,206 61,056 82,634 96,782







Provision for risk assets + EI (3,159) (21,846) (5,733) 2,982 (1,323) (953)

Profit Before Tax 20,517 4,774 (479) 11,785 22,209 27,083

Taxation (5,408) (779) - (2,946) (5,552) (6,771)

Profit After Tax 15,109 3,995 (479) 8,838 16,657 20,312

Balance Sheet (N'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F





Other Assets 31,813 11,750 8,913 2,555 8,816 6,759



Total Assets 467,337 515,602 425,916 511,099 587,763 675,928

Customer deposits + Interbank 251,223 321,219 248,356 337,325 387,924 452,872






Reserves 125,516 120,920 120,920 124,897 132,393 141,533

Equity 133,651 129,055 129,055 133,033 140,528 149,669

2009April 2009Dec 2010E 2011F 2012F

Growth (%)

Gross Earnings 35.7% -50.9% 73.4% 35.3% 17.1%Operating Income 23.3% -63.3% 106.1% 43.5% 17.6%

Profit Before Tax -76.7% -110.0% nm 88.5% 21.9%

Profit After Tax -73.6% -112.0% nm 88.5% 21.9%

Profitability (%)







[Type text]

January 2011 59

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F

Gross Earnings 354 480 236 409 554 649




Other income 152 108 44 108 164 192Operating income 292 360 132 272 391 460


Provision for risk assets (21) (146) (38) 20 (9) (6)


Taxation (36) (5) - (20) (37) (45)

Profit After Tax 101 27 (3) 59 112 136

Balance Sheet (USD'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F


Interbank Placement 1,306 1,107 375 480 591 680



Other Assets 213 79 60 60 17 59



Total Assets 3,133 3,456 2,855 3,050 3,563 4,058



Other Liabilities 212 182 117 117 102 227




Reserves 841 811 811 837 888 949

Total Equity 896 865 865 892 942 1,003

2009April 2009Dec 2010E 2011F 2012F


Cost of Funds 5.4% 4.8% 6.4% 6.3% 6.3%

Yields on Assets 12.3% 6.5% 10.2% 11.2% 11.4%



NPL Ratio 10.1% 14.8% 7.0% 6.5% 6.0%

Coverage Ratio 80.6% 65.5% 80.0% 85.0% 90.0%







[Type text]

January 2011 60

The Tipping Point

2011 Outlook


Consumer Sector: Tough Year Ahead, Efficiency Requisite

The global factor of rising commodity prices, and constrained domestic credit

growth will combine to pose challenges to companies within the Consumer

sector in 2011. It is worthy to note that these stress points would play

differently for the sub-sectors within the Consumer industry. For example,

whilst producers of essential foods such as sugar and flour can, to someextent, pass on costs to consumers, manufacturers of personal and household

products, retail chains, and ‘white goods’ suppliers will find it more difficult to

do same. Importantly, the ability of consumer companies to improve and

sustain production efficiencies would gird against some of these pressures

Given the experience of these companies in the Nigerian market, it is our

belief that they are positioned to weather the difficult road ahead.

Rising Commodity Prices to Pressure Input Costs

Global commodity prices, especially food, are at near-term highs and

consensus estimates are for further increases. Commodity prices, which are

majorly influenced by factors affecting supply and demand, surged in 2010

largely due to the climate change that evolved into severe weather conditions

in the ‘Black Region’ which represents countries such as Russia, Australia,

Ukraine, Kazakhstan and the EU that are the major producers of food

commodities. Global wheat, sugar and coarse grain inventory are currently

forecast to drop significantly, wiping out nearly all the build-up of the past

several years. Falling U.S. corn and EU barley inventory account for 80% of

the global coarse grains decline. Conversely, 60% of the reduction in wheat

inventory is shared among Russia, Kazakhstan, the EU, and Canada. Sugar’s

estimated surplus production is down from a forecast 6.2 million tons to an

estimated 3 million tons.

Following a warning by the United Nations Food and Agriculture Organization

(UN FAO) of a “food price shock”, futures prices have also surged, stokingconcerns of a food crisis of similar proportions to that seen in 2008. In

November 2010, the UN FAO had stated in their “Food Outlook Global Market

Analysis” report that major food supplies would not sink to 2008 levels in

2010/11.

Floods in Australia, excessively hot weather in Latin America and climate

change-induced bad weather in the Black Region have also contributed to the

upward pressure on prices, as outlook for output continues to be reviewed

downwards. The United States Department for Agriculture (USDA) revised

global outlook for crop harvests after the warning, as supply shocks continue

to pressure already high prices. For example, wheat prices are expected to

remain volatile especially in H1’11, while wheat futures have risen 80% since

June 2010.

Weather conditions are not expected to abate in the nearest future; as such

there might be periods of sustained increases in food commodity prices. This

anxiety has impacted other food commodity prices such as rice, which should

ordinarily be on the decline due to improving supply and stock conditions

However there seems to be a bandwagon effect, as all food commodities are

headed north. We review major commodities that are key input for Nigerian

manufacturers.

Global commodity prices,especially food, which aremajorly influenced by factorsaffecting supply and demand,

are at near-term highs and consensus estimates are for further increases.

Floods in Australia, excessively hot weather in Latin America,climate change-induced bad weather in the Black Region aswell as political unrest in Coted’Ivoire have contributed toprice pressures, as outlook for output continues to bereviewed downwards.



[Type text]

January 2011 61

The Tipping Point

2011 Outlook


Wheat Prices

The outlook for wheat prices is quite dampened as demand outstrips supply;

although we had earlier stated in our report in the month of August - ‘Wheat

Prices - No Cause for Alarm’ - that the global output far outstrips globa

demand/consumption, and this situation held up until September. We also

highlighted a major risk to our analysis being an extension of the ban onwheat exports by Russia.

The above stated risks did play out unfortunately and as a result the present

situation and outlook for wheat prices seems gloomy for the rest of the year as

it appears that there is a shortfall in global supply. This is further exacerbated

by expectations of tighter supplies of high-quality wheat with a sharp

reduction in grain quality in 2011 for Germany, Canada and Australia. For the

two major flourmillers, Flour Mills and Dangote Flour, we expect the above to

impact on margins but the effect will vary for both companies.

We are of the opinion that Flour Mills also has a wealth of experience in this

sector given its 50 years existence and would have long ago devised means of

dealing with this issue. On the other hand, Dangote Flour maybe relatively

more exposed in terms of shocks to its bottom-line. Overall, expectation is

that flour millers should have been proactive and hedged prices as far out as

possible. In any case, we expect flour millers to pass on costs if the burden

becomes too heavy.

Sugar Prices

There’s growing anxiety about a shortfall in global prices of sugar premised

majorly on an appreciation of the Brazilian Real. Brazil is the largest producer

and exporter of sugar and an appreciation in its currency portends expensive

exports from Brazil, as more dollars will buy less exports. Brazil accounts for

24% of world production, while Asia accounts for 37%. Production in Asia is

down by 1.4 million tons to 60.3 million.

610

620

630

640

650

660

670

680

690

2008/09 2009/10 2010/11

Production Consumption

SUPPLY FALLS AS DEMAND RISES2008 – 2010 (DEC)

Deficitof

22MT

Source: USDA; Vetiva Research

2

3

4

5

6

7

8

9

10

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

WHEAT PRICES(July 2009 – December 2010) Dollars per Bushel

Source: Bloomberg; Vetiva Researc

The outlook for wheat prices isdampened as demand

outstrips supply, exacerbated by expectations of tighter supplies of high-quality wheat

with a sharp reduction in grainquality in 2011 for Germany,Canada and Australia.

We expect soaring wheat prices to impact margins for the two major flour millers but the effect will vary for bothcompanies. Should the burdenbecome too heavy, the flour millers may pass on costs toconsumers.



[Type text]

January 2011 62

The Tipping Point

2011 Outlook


2010/11 production in India is estimated at 25.7 million ton, up one million,

China at 12.7 million tons, down 1.4 million, and Thailand at 6.9 million tons,

down 300,000 tons. Production in the EU-27 is estimated at 14.8 million tons

up 900,000 tons. Exports from Brazil are estimated at 26.9 million tons, down

1.6 million tons from the May forecast. Thailand is estimated to export 4.7

million tons, down 500,000 tons from May, and shipments from Australia arepegged at 3.8 million tons, up 50,000 tons.

In 2010, sugar began on a low key, as we saw prices taking a breather from

its northwards run in the previous year. Even though there were periods of

spikes earlier in the year, this was not sustained given high supply and

production levels. Consequently, sugar prices continued to plummet fromrecord highs. There was a reversal of fortunes in the later part of the year as

the trend of low sugar prices upturned and prices began a gradual ascent in

August, and by November were trading at 30-year highs driven by bad harvest

in major producing areas such as Brazil, India and China.

Even though, sugar production levels are still in line with consumption

speculations are that the global recovery may spark a rise in consumption

hence creating a deficit in global supply and production of sugar. Globa

consumption is rising and prices are moving upwards further exacerbated by

the increasing use of sugar cane for alternative source of power/fuel, e.g

Ethanol.

Cocoa Prices

In the cocoa market, the major driving force of the upsurge in prices is the

perceived lack of investment in the sector by the producers, most of which are

poor farmers in West Africa. The bulk of cocoa (c.75%) traded in the

international market is sourced from West Africa, in which most of the farmers

are poor and receive little or no assistance from their Governments towards

financing large/industrial scale production of cocoa, hence most remain on a

small-medium scale. Nigeria is the 4th largest producer of cocoa in the world

after Ivory Coast, Indonesia and Ghana.

130

135

140

145

150

155

160

165

Production Consumption

2008/09 2009/10 2010/11

PRODUCTION STILL OUTSTRIPS

CONSUMPTION

Source: USDA; Vetiva Research

SUGAR PRICE TREND 2010(July 2009 – December 2010) Cents per Pound

Source: Bloomberg; Vetiva Research

15

20

25

30

35

40

45

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Even though production levelsare still in line with

consumption, global consumption is rising pushing

up price, further exacerbated by the increasing use of sugar cane for alternative source of ower/fuel.

The perceived lack of investment in the sector by the producers, most of whichare poor farmers in West Africa who account for c.75%of world cocoa supply, is amajor driver of prices.



[Type text]

January 2011 63

The Tipping Point

2011 Outlook


We note that the increase in global cocoa prices in 2010 was quite moderate

compared to 2009 prices which were at record highs. Our expectations are for

cocoa prices to gradually firm up, owing to political uncertainty surrounding

top producer Ivory Coast, amid dwindling production. Production of Cocoa

from the Ivory Coast has been consistently decreasing and was down by

175,000 tons in 2008/09 crop year. The cocoa harvest in Ivory Coast hasfallen by more than 15% in last five years, a base effect that pushed the

prices to peak levels in 30 years; this mainly due to diseases such as swollen

shoot and black pod.

The confectionery companies such as Nestle and Cadbury are usually not as

sensitive to the volatility in their input prices as the flour millers, so we expect

the impact on the these companies to be relatively mild. Also, we note that

both Cadbury and Nestle have invested in backward integration given Nigeria’s

position as one of the top producers of cocoa in the world, most of these

companies have to the best of their abilities hedged against upsurge in input

prices.

Barley & Sorghum

With EU production at a 10-year low and a Russian ban on grain exports

contracting world supply of barley may serve to further aggravate already high

prices. Already, 2010/11 estimates from the USDA indicate that consumption

far outstrips production and that harvest yields are dropping (see graph

below).

For sorghum, another mainstay ingredient for the brewers, expectations are

that production would match or slightly outstrip world consumption (accordingto the United States Department of Agriculture) so price should remain stable.

Nigeria is the second largest producer of sorghum in the world and consumes

almost all its produce, with Nigerian Breweries’ sorghum plantation initiative

providing significant headroom for it to manage costs on this front. However,

exchange rate shocks are a possible downside risk to this stability, especially

for Guinness which still imports the crop, although our expectations for a

stable exchange rate diminish this threat significantly. At any rate, the

brewers currently import about 25%-35% of their input needs through joint

purchase agreements with their parent companies, so we expect that they

have hedged against these risks.

COCOA PRICES(December 2008 – December 2010) Dollar per metric ton

Source: Vetiva Research

2,200.00

2,400.00

2,600.00

2,800.00

3,000.00

3,200.00

3,400.00

3,600.00

3,800.00

Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

Our expectations are for cocoaprices to gradually firm up,owing to political uncertainty surrounding top producer Ivory Coast, amid dwindling

production.

The confectionery companiessuch as Nestle and Cadbury are usually not as sensitive tothe volatility in their input

prices as the flour millers, sowe expect the impact on thethese companies to berelatively mild.

It is unlikely brewers will pass

the pressures on toconsumers, in terms of pricehikes in the near term, as they would seek to consolidate

brand loyalty and volumessales, given persistent competition from new entrantsin the market.



[Type text]

January 2011 64

The Tipping Point

2011 Outlook


Source: Index Mundi, Vetiva Research

100

150

200

250

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

0

0.

1

1.

2

2.

3

120

125

130

135

140

145

150

155

160

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

Production Consumption Yield

Source: USDA, Vetiva Rese

BARLEY PRICES(December 2007 – December 2010) US Dollars per metric ton

WORLD BARLEY PRODUCTION, CONSUMPTION ANDYIELD

(2000 – 2010)

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

Q3'10

Q4'10

Credit Annualized Growth

Source: CBN, Vetiva Research

Credit to Private SectorLHS - Naira Trillions

Overall, it is unlikely that if these pressures continue, the brewers will passthem on to consumers, in terms of price hikes in the near term, as they would

seek to consolidate brand loyalty and volumes sales, given persistent

competition from new entrants in the market. Also, returns from growth in

volume sales on the back of increased marketing spend should provide a

buffer to significant erosion of earnings.

Access to Credit Remains a Source of Worry

Like many manufacturers, Consumer companies have felt the pinch of slower

demand and tighter credit as consumers have reduced discretionary spending.

Also, wholesalers and distributors have faced challenges to funding working

capital positions for pushing products into the market. With growth in credit to

the private sector forecast at c.15% (Vetiva Research estimates) for 2011, animprovement from 2010 levels (5%), but skewed toward low-risk blue chips

access to credit would still remain tight for middlemen, thus impacting on their

ability to reach markets.



[Type text]

January 2011 65

The Tipping Point

2011 Outlook


For the consumer, our expectation is that as governments implement the

increase in wages of civil servants (who make up the largest portion of forma

sector), disposable income will rise marginally (3% growth in real wages). We

recognize that many state governments have raised concerns about thei

ability to sustain this new salary levels, and that the federal government

already pays close to the new minimum wage. Thus, it is unlikely that theincrease, when it happens, would significantly boost overall disposable income.

No Major Surprises on the Policy Front

Over the years, Government policies have remained relatively stable; few

changes that have been made have been to protect the manufacturing

companies within the country. We do not envisage radical changes in this

arena in the course of the year.

Although there’s a probability of a new Government coming to power; if that

happens, we largely expect policies not to be too distant from the established

policies of the incumbent.

Efficiency, Distribution and Diversification will Determine Winners

While external shocks from commodity prices are expected to put pressure on

consumer companies, the winners the sector will be companies with relatively

easy access to funding and efficient distribution network. Diversification across

various product ranges can also be a critical success factor. Our preference wil

be for products that are able to withstand economic cycles.

While external shocks fromcommodity prices areexpected to put pressure onconsumer companies, our preference will be for productsthat are able to withstand economic cycles.



[Type text]

January 2011 66

The Tipping Point

2011 Outlook


NESTLE NIGERIA PLC

Thriving on Expansion & Innovation

We have upgraded our recommendation on Nestle to an ‘ACCUMULATE

based on a revision of our Target Price using the DCF methodology. We

arrived at a target price of N448.20. Nestle now trades at an upside

potential of 21.6% relative to our target price. Nestle has the highest

Return on Equity (99.96%) in the Food & Beverage sector as a whole

We remain optimistic about the prospects of the company in the next 2

years based on its expansion and drive towards increasing market share.

Investment Thesis

Reaping the Benefits of Organic Growth: In 2010, Nestle began to

reap some of dividends of its on-going expansion plans. The company had

earlier carried out a feasibility study on its product extension and in the

process discovered new markets, especially in previously untapped

regions. As a result, Nestle’s 2010 earnings spiked, having completed the

extension of its Agbara plant with the new products being delivered to the

ready and established markets. In the current year, we expect the newplant at Sagamu Ogun state to come on stream; this, in our opinion,

portends a significant improvement in market share and turnover driven

majorly by volume growth.

Input Price Volatility Checked: In our opinion, Nestle remains

relatively insulated from the impending food commodity price crisis

Nestle has partnered with some local farmers in ensuring the supply of its

input such as Maize, Soya Beans and Cocoa to act as buffer against globa

food price volatility. Judging by precedence in 2010 a year in which food

commodity price skyrocketed, Nestle was largely shielded from the

impact of this external shock due to its investment in backward

integration. Furthermore, the company is also in partnership with

agricultural research institutes such as University of Agriculture, Abeokuta

(UNAAB) in a bid to sustain quality and output.

Earnings Outlook: Our outlook for Nestle is buoyant given the factors

earlier highlighted; the key point being the coming on stream of the new

plant, which is expected to boost turnover significantly. Hence, for FY’11

we expect Turnover growth of 52.0% and After Tax Earnings growth of

45.2% (N127.2bn and N18.2bn) and a Forward EPS of N27.58 implying a

Forward PE of 13.4x and Dividend of N19.30.

Forecast Summary FY'09A FY'10F FY'11F FY'12F FY'13


YoY Change (%) 17.43% 28.13% 45.29% 41.05% 24.74%Price to Earnings (x) 24.88 19.42 13.37 9.48 7.6


YoY Change (%) 0.00% 28.54% 19.65% 41.05% 24.74%

Dividend Yield (%) 3.41% 4.38% 5.24% 7.39% 9.22%


YoY Change (%) 16.76% 17.91% 11.46% 11.43% 11.65%

Price to Book (x) 23.09 19.58 17.57 15.76 14.1Source: Company Financials; Vetiva Research

0.6

0.8

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1.2

1.4

1.6

1.8

2

Nestle F & B Index NSE ALSI


NESTLE VS F&B VS NSE ASI PERFORMANCERebased 04/01/2010

BASIC INFORMATION

Address 22-24, Industrial Avenue,

Ilupeju, Lagos State

Website www.nestle.com

Management (Chairman) Chief Olusegun Osunkeye

MD/CEO Mr. Martin Woolnough


Exchange Listing Nigerian Stock Exchange

Symbol Bloomberg: NESTLE:NL

Sector Food & Beverages

Country Nigeria


Nestle CWA Ltd, Ghana 59.1

Nestle S.A. Switzerland 3.2

Others 37.7

SHARE STATISTICS

Shares in issue (M) 660.0



Market Cap. (USD'm) 1632.0

Free Float (%) 37.70

Year high (N) 401.00

Year low (N) 239.50

VALUATION METRICS

Book Value (N'm) 10,544.0


P/B (x) 25.4Div. Yield (%) 4.4

ROAE (%) 99.96

Debt/Equity (%) 113.0



January 2011 67

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 44,027 51,742 68,317 83,688 127,206 165,368

Cost of Sales -27,805 -31,301 -39,957 -45,950 -55,140 -65,066

Gross Profit 16,222 20,442 28,360 37,738 72,066 100,303

Operating Expenses -7,826 -8,538 -12,628 -15,090 -28,790 -36,702

Core Operating Profit 8,396 11,904 15,732 22,648 43,276 63,600

EBITDA 9,624 13,168 17,297 22,832 32,422 44,418

Depreciation & Amortization 1,229 1,265 1,565 1,800 1,890 1,947

EBIT/Operating Profit 8,396 11,904 15,732 21,032 30,532 42,471

Interest Payable & Charges 0 -67 -2,046 -2597.368 -3347.368 -4,097

Profit Before Taxation 8,463 11,862 13,783 18,435 27,184 38,374

Taxation -3021 -3,531 -4,000 -5,899 -8,971 -12,663

Profit After Taxation 5,442 8,332 9,784 12,536 18,214 25,710

BALANCE SHEET (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Fixed Assets 10,436 13,817 25,405 33,026 41,283 49,539

Inventories 5,226 6,415 10,698 11,981 14,378 16,103

Debtors 2299 4,304 3,403 4,151 5,064 6,178

Bank and cash balances 2,336 3,643 1,764 3,898 4,873 6,091

Other Receivables and Current Assets 956 979 854 1,158 1,107 4,583

Total Assets 21,252 29,159 44,250 54,214 66,705 82,494

Other Creditors 2,395 3,001 3,123 3,748 4,872 5,847

Creditors & Accruals 1,117 1,831 1,185 1,422 1,777 3,199

Short Term Loan - - 3,000 3,600 4,500 7,650

Amount Due 1766.313 3695.131 5,840 11,176 17,036 20,001

Taxation 2362.998 1,982 4,662 5,594 7,217 10,464

Long-Term Loans - 5,980 11,921 11,921 11,921 11,921

Provision for Gratuity 5598.9 447.7 671.0 671 1,006 1,508

Prior Year Dividend 596 584 1201 1441 2017 3731

Deferred Taxation 1180 2607 2103 2,208 2,500 2,720


Share capital 330 330 330 330 330 330

Share premium 32 32 32 32 32 32

Revaluation Reserves 186 186 186 195 195 195

Retained Earnings 5,687 8,482 9,995 11,875 13,300 14,896

Total Equity 6,237 9,030 10,544 12,432 13,857 15,453



January 2011 68

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD’Mill) 2007 2008 2009 2010 F 2011 F201

Turnover 295 347 458 561 853 11

Cost of Sales -186 -210 -268 -308 -370 -4

Gross Profit 109 137 190 253 483 6

Operating Expenses -52 -57 -85 -101 -193 -2

Core Operating Profit 56 80 105 152 290 4

EBITDA 65 88 116 153 217 2

Depreciation & Amortization 8 8 10 12 13

EBIT/Operating Profit 56 80 105 141 205 2

Interest Payable & Charges 0 0 -14 -17 -22 -

Profit Before Taxation 57 80 92 124 182 2

Taxation -20 -24 -27 -40 -60 -

Profit After Taxation 36 56 66 84 122 1

BALANCE SHEET 2007 2008 2009 2010 F 2011 F 2012

Fixed Assets 70 93 170 221 277 3

Inventories 35 43 72 80 96 1

Debtors 15 29 23 28 34

Bank and cash balances 16 24 12 26 33

Other Receivables and Current Assets 6 7 6 8 7

Total Assets 142 195 297 363 447 5

Other Creditors 16 20 21 25 33

Creditors & Accruals 7 12 8 10 12

Short Term Loan - - 20 24 30

Taxation 16 13 31 38 48

Long-Term Loans - 40 80 80 80

Provision for Gratuity 38 3 4 4 7

Prior Year Dividend 4 4 8 10 14

Deferred Taxation 8 17 14 15 17

Total liabilities 101 135 226 280 354 4

Share Capital 2 2 2 2 2

Share Premium 0 0 0 0 0

Revenue and Capital reserve 1 1 1 1 1

Shareholders Fund 38 57 67 80 89 1

Total Equity 38 38 38 38 38



January 2011 69

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012 E

Growth (%)

Turnover growth 17.5% 177.1% 22.5% 52.0% 30.0%

Growth in Core Operating profit 41.8% 32.2% 44.0% 91.1% 47.0%

Growth in EBITDA 36.8% 31.4% 32.0% 42.0% 37.0%

Growth in PBT 40.2% 199.1% 33.7% 47.5% 41.2%

Growth in PAT 53.1% 221.6% 28.1% 45.3% 41.2%

Profitability (%)

Return on Equity 109.1% 100.0% 109.1% 138.6% 175.4%

Return on Assets 33.1% 26.7% 25.5% 30.1% 34.5%

Return on Invested Capital 35.4% 28.4% 31.0% 35.9% 40.7%

Growth rate (g) 0.6% 15.3% 16.4% 41.6% 52.6%

Margins (%)

EBITDA/Sales 25.4% 25.3% 27.3% 25.5% 26.9%

EBIT/Sales 23.0% 23.0% 25.1% 24.0% 25.7%

Gross Profit Margin 39.5% 41.5% 45.1% 56.7% 60.7%

Pretax Income/Sales 22.9% 20.2% 22.0% 21.4% 23.2%


Liquidity Ratios (x)

Quick ratio 0.7 0.1 0.3 0.3 0.2

Cash ratio 0.3 0.1 0.1 0.1 0.1

Current ratio 1.4 1.0 0.8 0.7 0.6

Net interest coverage (x) 176.5 7.7 8.1 9.1 10.4

Days in inventory 45.3 57.2 52.3 41.3 35.5

Days in accounts payable 12.9 6.3 6.2 5.1 7.1

Days in cash 25.7 9.4 17.0 14.0 13.4

Days in receivables 30.4 18.2 18.1 14.5 13.6

Capital Structure

Financial leverage (debt to equity) 66.2% 113.1% 436.1% 460.0% 509.0%

Payout ratio 99.5% 84.7% 85.0% 70.0% 70.0%

Total equity/Total assets 31.0% 23.8% 22.9% 20.8% 18.7%

Retention ratio 0.5% 15.3% 15.0% 30.0% 30.0%

Per Share Data

EPS 12.61 14.81 18.98 27.58 38.90

DPS 12.55 12.55 16.13 19.30 27.23

NAPS 13.67 15.96 18.82 20.98 23.38

Sales/Share 78.34 103.43 126.70 192.59 250.18



January 2011 70

The Tipping Point

2011 Outlook


FLOUR MILLS OF NIGERIA PLC

Deepening Consumer Focus

We reiterate our ‘BUY’ rating on ‘Flourmills’ guided by our revised Targe

Price of N90.16, which implies an upside potential of 30.7%. We employe

a DCF methodology to arrive at our one year target price. We acknowledgFlourmills’ diversification further into the consumer space, a strategy whic

would help weather shocks and potential to improve margins.

Investment Thesis

Expanding Focus: Flourmills has made clear its intention to expand it

business/product offering horizon in the FMCG sector, thereby extendin

focus to other flour-based and food-based products, given the increasin

demand for Semolina Pasta, Noodles and Semovita etc. This is large

supported by the preference for whole-wheat variants due to increase

health awareness by the general populace. Flourmills is seeking to increas

capacity in these segments, as well as positioning itself for the expo

market. Flourmills has embarked on the construction of a sugar refinery o

750,000 MT per annum, which according to the company is expected t

come on board in the second quarter of 2012.

Diversification, Paying-Off: Although consensus expectation is tha

wheat prices will continue to rise in 2011. We posit that the effect will b

less severe on Flourmills. This, in our opinion, is based on its wel

diversified portfolio spanning the production and marketing of Flour, Pasta

fertilizer, cement, ports operation e.t.c. We note that input cost constitut

c.80% of total cost and thus weighs on margins significantly, however, flou

millers are usually able to successfully transfer a significant portion of thes

cost to the consumers. In terms of earnings in 2011, the key driver o

income is expected to be cement. Flourmills increased its stake in it

associate cement manufacturer, UNICEM, from 22% to 28%. UNICEM has

2.5 million tons cement plant in calabar.

Earnings Outlook: Our FY’11/12 projection for Sales and Earnings stand

at N237.6 billion (8.0% YoY) and N19.2 billion (9.0% YoY), hence w

expect a Forward EPS of N10.20, Forward PE of 6.8x and Dividend o

N2.14. Flourmills has the lowest PE amongst its peers, hence, the mos

attractive from a relative valuation stand point.



YoY Change (%) 17.43% 28.13% 45.29% 41.05% 24.74



YoY Change (%) 0.00% 28.54% 19.65% 41.05% 24.74

Dividend Yield (%) 3.10% 3.98% 4.77% 6.72% 8.39


YoY Change (%) 16.76% 17.91% 11.46% 11.43% 11.65

Price to Book (x) 25.37 21.52 19.30 17.32 15.Source: Company Financials; Vetiva Researc

0.6

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1.6

1.8

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2.2

2.4

FMN F & B Index NSE ALSI


FMN VS F&B VS NSE ASI PERFORMANCERebased 04/01/2010

ASIC INFORMATION

ddress 2, Old Dock Road,

Apapa, Lagos State

ebsite www.fmnplc.com

anagement (Chairman) G.S. Coumantaros

ce - Chairman Ahmed A. Joga

nancial Year End March

xchange Listing Nigerian Stock Exchange

ymbolBloomberg:

FLOURMILL:NL

ector Food & Beverages

ountry Nigeria


xceisor Shipping Co. Ltd 51.6

thers 48.4

HARE STATISTICS

hares in issue (M) 1879.0



arket Cap. (USD'm) 1033.2

ee Float (%) 48.41

ear high (N) 76.50

ear low (N) 36.20

ALUATION METRICS

ook Value (N'm) 53,266.0

ailing P/E (x) 8.6

B (x) 2.6

v. Yield (%) 2.4

OAE (%) 37.4

ebt/Equity (%) 70.4



January 2011 71

The Tipping Point

2011 Outlook



Turnover 127,662 180,068 206,613 83,688 127,206 165,368

Cost of Sales -106,745 -156,993 -160,542 -45,950 -55,140 -65,066

Gross Profit 20,917 23,075 46,071 37,738 72,066 100,303

Other operating income 5,080 2,138 1,188 -15,090 -28,790 -36,702

Interest received and similar income 2,939 4,108 22,648 43,276 63,600

Operating Expenses -16,119 -16,236 -26,923

EBITDA 11,894 20,783 34,003 22,832 32,422 44,418



Taxation -3515 -1,579 -7,491 -5,899 -8,971 -12,663



Assets Employed 50,878 70,173 90,424 33,026 41,283 49,539

Inventories 20,306 30,672 31,311 11,981 14,378 16,103

Debtors 5376 5,348 6,355 4,151 5,064 6,178


Other Receivables and Current Assets 13,229 11,493 9,040 1,158 1,107 4,583

Total Assets 109,150 137,520 143,519 54,214 66,705 82,494

Short Term Creditors 52,523 64,949 52,732 3,748 4,872 5,847

Long Term Creditors 21,571 35,181 37,521 1,422 1,777 3,199


Share capital 777 854 854 940 940 854

Share premium 5867 5867 5867 5,867 5,870 5,871

Capital Reserve 4128 4124 4124 4,124 4,124 4,124


Revenue/General Reserve 20320 22505 38171 56,994 74,926 84,382

Non Controlling Interest 3130 3205 3415

Shareholders' Equity 35,058 37,391 53,267 68,760 86,695 96067



January 2011 72

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD’Mill) 2008 2009 2010 2011 F 2012 F 2013 F

Turnover 856 1207 1385 561 853 110

Cost of Sales -716 -1052 -1076 -308 -370 -43

Gross Profit 140 155 309 253 483 672

Operating Expenses 34 14 8 -101 -193 -24


EBITDA 80 139 228 153 217 298



Taxation -24 -11 -50 -40 -60 -8


BALANCE SHEET 2008 2009 2010 2011 F 2012 F 2013 F

Fixed Assets 341 470 606 221 277 33

Inventories 136 206 210 80 96 10

Debtors 36 36 43 28 34 4

Bank and cash balances 130 133 43 26 33 4

Other Receivables and Current Assets 89 77 61 8 7 3

Total Assets 732 922 962 363 447 553

Other Creditors 352 435 354 25 33 3

Creditors & Accruals 145 236 252 10 12 2


Share capital 5 6 6 6 6

Share premium 39 39 39 39 39 3

Capital Reserve 28 28 28 28 28 2

Revaluation Reserves 6 6 6 6 6

Revenue/General Reserve 38 38 38 38 38 3

Non Controlling Interest 38 38 38 38 38 3

Shareholders' Equity 38 38 38 38 38 38



January 2011 73

The Tipping Point

2011 Outlook


2009 2010 2011 F 2012 F 2013 F

Growth (%)

Turnover growth 41% 15% 6% 8% 3%

Growth in EBITDA 40% 62% 15% -27% 59%

Growth in PBT -44% 347% 3% 9% 9%

Growth in PAT -39% 335% 4% 9% 9%

Profitability (%)

Return on Equity 11% 37% 51% 44% 43%

Return on Assets 3% 12% 11% 10% 10%

Return on Net fixed assets 9% 31% 41% 38% 39%

Return on Invested Capital 36% 31% 22% 11% 22%

Growth rate (g) 8% 30% 41% 35% 33%

Margins (%)

EBITDA/Sales 12% 16% 14% 0% 0%

EBIT/Sales 10% 14% 15% 9% 14%

Pretax Income/Sales 3% 12% 11% 12% 12%

Net Profit Margin 2% 8% 8% 8% 9%


Quick ratio 0.40 0.25 0.37 0.28 0.34

Cash ratio 0.31 0.12 0.13 0.14 0.15

Current ratio 1.04 1.01 0.89 0.86 0.83



Days in accounts payable 9 10 10 2 2

Days in cash 40 11 13 14 17

Days in receivables 14 13 20 11 15

Cash Conversion Cycle 67 58 24 31 37

Capital Structure

Financial leverage (debt to equity) 94% 70% 65% 47% 35%

Interest bearing debt/Total assets 26% 26% 26% 21% 16%

Payout ratio 22% 20% 20% 21% 24%

Total equity/Total assets 27% 37% 40% 44% 46%

Retention ratio 78% 80% 80% 79% 76%

Per Share Data

EPS 2.28 9.92 9.36 10.20 11.12

DPS 0.50 2.00 1.87 2.14 2.67

NAPS 21.89 31.18 36.59 46.13 51.12

Sales/Share 105.40 120.94 117.09 126.46 129.82



January 2011 74

The Tipping Point

2011 Outlook


DANGOTE FLOUR MILLS PLC

Still Attractive, Despite Headwinds

We revised our Target Price for ‘Dangflour’ to N24.62. Despite like

pressure on earnings from rising price of wheat on the global scene, ou

target price still gives a 28% potential upside, hence, our ‘BUY’ ratinon the stock at its current trading price of N19.11.

Investment Thesis

Expansion on Track: Our optimism on Dangflour in the 2011 financia

year is generally premised on the company’s efforts at increasing capacity

Even though Dangflour is the second largest flour miller in Nigeria with a

installed capacity of c.4500MT per day, Dangflour remains focused on on

going expansion plans that would see current installed capacity climb b

c.2000MT per day. This is in order to meet the growing consumption an

demand for flour and wheat based products in the country. Asides this

Dangflour also recently acquired a fleet of trucks to aid distribution of it

products across the nation as well as in a bid to reduce handling cost.

Growing Wheat Consumption, a Positive: There has been an increas

in the flour per capita consumption in Nigeria over the past 7-8 years

growing at a CAGR of c.7.7%. Nigeria currently has annual whea

consumption per capita of about 25kg, relative to average global whea

consumption per capita of 67kg, as well as one of the lowest whea

consumption rates in the world. Growth in flour consumption can b

attributed to the growing health consciousness of the Nigerian populace an

higher demand for wheat bread, semolina and pastries. There has als

been an increase in noodles consumption and Dangflour has positioned t

tap into this demand with the launch of its own brand of noodles.

Earnings Outlook: Our forecast is that Dangflour’s Turnover growth foFY’11 is 20.0% while After Tax Earnings will grow by 2.4% (Turnover

N84.7 billion; PAT - N7.3 billion). Our forecast is mainly tempered by ou

outlook on wheat prices which points northwards. We expect a Forward EP

of N1.45, Forward PE of 11.6x and Dividend of N1.09.



YoY Change (%) 86.05% 24.98% 4.32% -7.32% -25.15



YoY Change (%) 60.00% 27.41% 6.70% -7.32% -25.15

Dividend Yield (%) 4.21% 5.36% 5.72% 5.30% 3.97


YoY Change (%) 15.59% -0.25% 18.36% 19.83% 20.04

Price to Book (x) 3.34 3.35 2.83 2.36 1.9Source: Company Financials; Vetiva Researc

0.5

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Dangflour F & B Index NSE ALSI


DANGFLR VS F&B VS NSE ASI PERFORMANCERebased 04/01/2010

BASIC INFORMATION

Address 8, Rycroft Road,

Apapa, Lagos State

Website www.dangote-group.com

Management (Chairman) Alhaji Aliko Dangote

MD/CEO Mr. Rohit Chaudhry



Symbol Bloomberg: DANGFLOUR:NL


Country Nigeria


Dangote Industries Ltd 73.0

Others 27.0

SHARE STATISTICS



Market Cap. (N'm) 95,500.0



Year high (N) 25.82

Year low (N) 10.42

VALUATION METRICS



P/B (x) 2.9

Div. Yield (%) 4.8

ROAE (%) 21.0

Debt/Equity (%) 0.0



January 2011 75

The Tipping Point

2011 Outlook



Turnover 42,153 47,927 61,388 70,596 84,715 97,423

Cost of Sales -37,417 -38,288 -45,180 -50,602 -68,312 -78,559

Gross Profit 4,736 9,639 16,208 19,995 16,403 18,864

Operating Expenses 1,156 4,456 9,585 13,367 9,975 11,792

Other Income 174 1,012 246 295 1,243 1,305

Interest expense -655 -2,399 -4,437 -3,550 -3,585 -3,765

EBITDA 1,331 5,469 9,831 13,662 11,218 13,097

Depreciation 0 -1,802 -2,604


Profit Before Taxation 676 3,167 5,374 10,112 7,632 9,333

Taxation -114.1 -178 187 -3,034 -382 -2,613

Profit After Taxation 562 2,989 5,561 7,079 7,250 6,719


Assets Employed 27,358 33,051 35,238 33,026 41,283 49,539

Inventories 11,428 9,911 8,246 9,921 12,059 15,027

Debtors 8108 15,876 16,976 18,463 19,630 22,087

Bank and cash balances 1,680 1,648 512 1,070 1,966 1,966

Other Receivables and Current Assets 9,546 8,264 5,045 5,267 2,547 0

Total Assets 109,150 137,520 143,519 54,214 66,705 82,494


Long Term Creditors - - - - -


Share capital 2500 2500 2500 2,500 2,500 2,500

Share premium 11807 11807 11807 11,807 11,807 11,807

Revaluation Reserves 0 0 0 0


Shareholders' Equity 22,145 24,630 28,469 33,612 40,278 41535



January 2011 76

The Tipping Point

2011 Outlook



Turnover 283 321 412 473 568 653

Cost of Sales -251 -257 -303 -339 -458 -527

Gross Profit 32 65 109 134 110 126

Operating Expenses 8 30 64 90 67 79

Other Income 1 7 2 2 8 9

Interest expense -4 -16 -30 -24 -24 -25

EBITDA 9 37 66 92 75 88

Depreciation



Taxation -1 -1 1 -20 -3 -18



Fixed Assets 183 222 236 221 277 332

Inventories 77 66 55 67 81 101

Debtors 54 106 114 124 132 148



Total Assets 732 922 962 363 447 553

Other Creditors 237 292 296 302 303 306

Creditors & Accruals - - - - - -


Share capital 17 17 17 17 17 17

Share premium 79 79 79 79 79 79

Capital Reserve 0 0 0 0 0 0





January 2011 77

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012 E

Growth (%)


Growth in EBITDA 311% -96% 5454% -18% -4%

Growth in PBT 369% 70% 88% -25% -8%

Growth in PAT 432% 86% 27% 2% -5%

Profitability (%)

Return on Equity 12.78% 21% 25% 23% 20%

Return on Assets 4.71% 8% 10% 10% 8%



Growth rate (g) 2% 6% 7% 6% 34%

Margins (%)

EBITDA/Sales 11.41% 16.01% 19% 13% 13%

EBIT/Sales 7.65% 11.77% 19% 13% 13%

Pretax Income/Sales 6.61% 8.75% 14% 9% 10%

Net Profit Margin 6.24% 9.06% 10% 9% 7%


Quick ratio 0.40 0.40 0.43 0.48 0.53

Cash ratio 0.04 0.01 0.02 0.04 0.04

Current ratio 0.82 0.94 1.07 1.23 1.42


Days in inventory 87 49 51 52 56


Days in cash 13 3 6 8 7


Capital Structure

Financial leverage (debt to equity) n/a n/a n/a n/a n/a

Interest bearing debt/Total assets 30% 32% 29% 28% 26%

Payout ratio 84% 72% 72% 75% -75%


Retention ratio 16% 28% 28% 25% 175%

Per Share Data

EPS 0.60 1.11 1.42 1.45 1.34

DPS 0.50 0.80 1.02 1.09 1.01

NAPS 4.93 5.69 5.68 6.72 8.06

Sales/Share 9.59 12.28 14.12 16.94 19.48



January 2011 78

The Tipping Point

2011 Outlook


CADBURY NIGERIA PLC

A Phoenix-like Stance

We have reduced our rating on Cadbury to “REDUCE” from Accumulate

despite the strong recovery in operations witnessed in 2010. Our revise

Target price of N28.05 presents an upside downside of 1%. Ouvaluation is based solely on the DCF methodology. The stock was th

highest gainer in the sector in the 2010 year, appreciating 144%.

Investment thesis

Re-emergence: Following the refinancing phase of Cadbury in the las

quarter of 2009, the company has continued on an upward growt

trajectory ever since then. Cadbury has re-strategized and restructured it

operations in the past one year and is therefore poised to take advantag

of the opportunities within the sector. The company has gradually sustaine

is market share; the rationalizing of its manufacturing processes ha

enabled Cadbury to actively compete in its sub sector. Furthermore, w

note that the company’s streamlining of its product portfolio has enabled

focus on core competencies, as well as leverage on its competitiv

advantage going forward.

Increasing consumption of Confectioneries and Beverages: Th

increase in demand for products of the Food & Beverage sector such as fas

foods, confectioneries, packaged drinks and beverages e.t.c as underpinne

by the increasing population, improving standard of living and the gradua

increase in disposable income, and changing habits, has aided growth fo

quality brands such as Cadbury. This increase further instigated Cadbury t

focus on its more profitable brands (such as, Richoco, Stimorol, Bubb

bubblegum and Eclairs).

Earnings Outlook: Based on our FY’10 positive estimate of N28.27 billio

and N1.68 billion for top and bottom lines. Our FY’11 projection for Sale

and Earnings stands at N33.5 billion (16.0% YoY) and N2.5 billion (68.6%

YoY) respectively, hence, we expect a Forward EPS of N0.81, Forward PE o

31.8x.


Earnings Per Share (N) -0.39 0.48 0.81 1.28 1.

YoY Change (%) n/a 21.10% 68.63% 59.12% 12.22



YoY Change (%) 0.00% 0.00% 0.00% 0.00% 23.44

Dividend Yield (%) 0.00% 0.00% 0.00% 1.36% 1.68


YoY Change (%) 0.00% 0.00% 17.82% 16.76% 15.42

Price to Book (x) 0.00 6.22 5.28 4.52 3.Source: Company Financials; Vetiva Researc

0

0.5

1

1.5

2

2.5

3

3.5

Cadbury F & B Index NSE ALSI

CADBURY VS F&B VS NSE ASI PERFORMANCERebased 04/01/2010


BASIC INFORMATION

Address Lateef Jakande Road,

Ikeja, Lagos State

Website www.cadburynigeria.com

Management (Chairman)Dr Uduimo Justus Ituesli

MD/CEO Mr. Wallace Garland



Symbol Bloomberg: CADBURY:NL


Country Nigeria


C adbury Schweppes Oversea Plc 46.3

Nigerians 53.7

SHARE STATISTICS





Free Float (%)

Year high (N) 34.84

Year low (N) 9.97

VALUATION METRICS

Book Value (N'm) n/a


P/B (x) n/a

Div. Yield (%) n/a

ROAE (%) n/a

Debt/Equity (%) n/a



January 2011 79

The Tipping Point

2011 Outlook



Turnover 8,042 9,878 11,868 11,200 11,927 12,509

Cost of Sales (5,759) (5,709) (6,704) (6,664) (7,097) (7,380)

Gross Profit 2,283 4,169 5,164 4,536 4,830 5,129

Operating Expense (591) (640) (762) (661) (716) (751)Core Operating Profit 1,692 3,530 4,402 3,875 4,115 4,378

EBITDA 138 1,611 1,964 1,635 1,729 1,876

Depreciation & Amortization (321) (343) (369) (362) (387) (413)

EBIT/Operating Profit (183) 1,268 1,595 1,273 1,342 1,463

Interest Payable & Charges (387) (537) (346) (127) (127) (127)

Interest received - - - - - -


Taxation (34) (150) (505) (367) (389) (428)

Profit After Taxation 138 1,531 1,812 779 827 909


Non-Current Assets

Fixed Assets 4,017 4,655 4,950 5,452 5,795 6,605

Capital work in progress 439 4 66 - - -

Current Assets

Inventories 3,016 2,424 2,510 2,823 3,006 3,126

Debtors 775 717 1,002 1,066 1,135 1,191



Total Current Assets 4,663 4,137 4,787 5,075 5,595 6,110

TOTAL ASSETS 9,118 8,795 9,803 10,526 11,390 12,715

Current Liabilities


Other Creditors - - - - - -

Short Term Loan 553 1,092 671 1,218 1,218 1,218

Taxation 40 39 210 367 389 428

Total Current Liabilities 5,575 3,631 4,327 4,709 4,947 5,148

Non-current Liabilities

Long-Term Loans - 633 507 380 253 126

Provision for Gratuity 320 360 490 802 1,041 1,727

Deferred Taxation 76 195 262 - - -

Total Non-Current Liabilities 396 1,188 1,259 1,182 1,294 1,853

TOTAL LIABILITIES 5,970 4,819 5,586 5,891 6,241 7,001Net Assets 3,148 3,976 4,217 4,635 5,149 5,714



January 2011 80

The Tipping Point

2011 Outlook


INCOMESTATEMENT (USD’Mill) 2007 2008 2009 2010 F 2011 F2012

F

Turnover 134 163 172 194 225 265

Cost of Sales -101 -115 -113 -114 -130 -146

Gross Profit 32 48 58 80 95 120

Operating Expenses -16 -5 9 26 29 45

Other Income -13 -14 -19 0 -3 -4

Interest expense 0 0 -6 -12 -1 -1

EBITDA 0 0 0 0 0 0

Depreciation


Profit Before Taxation -32 -19 -16 14 25 40

Taxation 23 1 8 -4 -8 -13

Profit After Taxation -5 -18 -8 10 17 27

BALANCE SHEET 2007 2008 2009 2010 F 2011 F2012

F

Fixed Assets 107 98 96 102 106 109

Inventories 21 24 20 21 22 23

Debtors 17 26 19 19 19 19

Bank and cash balances 16 11 34 35 36 38Other Receivables and CurrentAssets 2 1 0 0 0 1

Total Assets 163 160 169 173 179 185


Creditors & Accruals -20 -25 -24 -23 -23 -23


Share capital 4 4 10 10 10 10

Share premium 48 48 107 107 107 107


Revenue/General Reserve -82 -101 -61 -51 -33 -15

Minority Interest 0 0 0 0 0 0




January 2011 81

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012 E

Growth (%)


Growth in EBIT -70% -284% 17% 12% 56%

Growth in PBT -41% -16% 190% 74% 59%

Growth in PAT 279% -55% 221% 69% 59%

Profitability (%)

Return on Equity 184.84% -26% 11% 16% 22%

Return on Assets -11.42% -5% 6% 10% 15%

Return on Net fixed assets -21% -10% 20% 17% 26%


Growth rate (g) 185% -26% 11% 16% 29%

Margins (%)

EBIT/Sales -2.88% 5.03% 13% 13% 17%

Pretax Income/Sales -11.72% -9.30% 7% 11% 15%

Net Profit Margin -11.33% -4.83% 5% 8% 10%


Quick ratio 0.24 0.87 0.88 0.88 0.89

Cash ratio 0.07 0.56 0.57 0.58 0.59

Current ratio 0.40 1.21 1.23 1.24 1.27

Net interest coverage (x) -0.33 0.46 2.25 11.52 11.68



Days in cash 25 72 65 59 52


Capital Structure

Financial leverage (debt to equity) n/a n/a 3% 3% 3%

Interest bearing debt/Total assets n/a n/a 2% 2% 2%

Payout ratio n/a n/a 0% 0% -30%

Total equity/Total assets n/a n/a 55% 63% 71%

Retention ratio n/a n/a 100% 100% 130%

Per Share Data

EPS -2.50 -0.39 0.48 0.81 1.28

DPS 0.00 0.00 0.00 0.00 0.39

NAPS -2.74 4.05 4.55 5.36 6.26

Sales/Share 22.07 8.18 9.24 10.72 12.65



January 2011 82

The Tipping Point

2011 Outlook


GLAXOSMITHKLINE CONSUMER NIG. PLC

Ahead of the Pack

We upgrade our rating on ‘GlaxoSmith’ to a “BUY” from an Accumulat

based on a positive earnings outlook for 2011. We arrived at a Target Pric

of N37.17 which gives an upside potential of 39.2% relative to the curren

market price.

Investment thesis

Regulatory Cleansing Brighten Prospects: The company ha

consistently delivered on value, even though our outlook on its servic

healthcare sector is Neutral, premised on the under developed state of th

industry. . We acknowledge the National Agency for Food and Dru

Administration and Control (NAFDAC)’s efforts at ridding th

pharmaceutical industry of fake and substandard products, but we also not

that a lot still needs to be done to establish a well-structured healthcar

delivery system. GSK has over the years benefitted from the Over-The

Counter (OTC) market, having carved a niche for itself especially with itPanadol brand (the leader in the analgesic market). The OTC market is

very important and large segment given the poor state of healthcar

delivery in Nigeria.

On-going Plant Upgrade and Product Expansion - GSK has embarke

on the modernization of its manufacturing process, and expansion of it

product portfolio. We are beginning to see the results of product expansio

with the introduction of Horlicks and Panadol with Optizorb in Q3’10. Th

Company has also strengthened the marketing and distribution of it

products to improve consumer awareness and acceptance. GSK’s upgrad

of plants is expected to increase efficiency and speed up productio

process. We expect these initiatives to continually impact favourably on th

company’s sales and profitability profile going forward.

Earnings Outlook: Our FY’11 projection for Sales and Earnings stands a

N19.1 billion (18.0% YoY) and N2.2 billion (13.7% YoY), hence we expect

Forward EPS of N2.26, Forward PE of 11.5x and Dividend of and N1.04. Ou

expectation is that GSK will continue to maintain its leadership position i

the consumer healthcare sector and leverage on competitive advantage o

parent R&D support and product innovation.



YoY Change (%) 33.26% 11.74% 13.74% 6.94% 15.20%

Price to Earnings (x) 14.90 13.33 11.72 10.96 9.5Dividend Per Share (N) 0.75 0.85 1.04 1.14 1.3

YoY Change (%) 25.00% 13.96% 21.67% 9.27% 15.20%

Dividend Yield (%) 2.83% 3.23% 3.92% 4.29% 4.94%


YoY Change (%) 20.76% 19.72% 14.82% 32.00% 8.83%

Price to Book (x) 3.85 3.22 2.80 2.12 1.9Source: Company Financials; Vetiva Research


GSK VS HEALTHCARE VS NSE ASI PERFORMANCERebased 04/01/2010

BASIC INFORMATION

Address 1, Industrial Avenue,

Ilupeju, Lagos State

Website www.gsk.com

Management (Chairman) Chief Olusegun Osunkeye

MD/CEO Mr. Chidi Okoro


Exchange Lis ting Niger ian Stock Exchange

Symbol Bloomberg: GLAXOSMITH:NL

Sector Healthcare

Country Nigeria


Setfirst Limited 27.3

SmithKline Beecham Plc 19.1

Others 53.6

SHARE STATISTICS






Year high (N) 31.50

Year low (N) 20.85

VALUATION METRICS



P/B (x) 3.9

Div. Yield (%) 2.1

ROAE (%) 13.5

Debt/Equity (%) 0.0



January 2011 83

The Tipping Point

2011 Outlook



Turnover 9,915 12,545 14,952 16,149 19,055 22,485

Cost of Sales -6,042 -7,177 -8,444 -8,537 -9,818 -11,290

Gross Profit 3,874 5,368 6,508 7,611 9,238 11,195

Operating Expenses -2,739 3,581 -3,955 -4,034 -4,800 -5,713

EBIT 1,174 2,738 3,971 3,236 3,947 4,421

Interest Expense -8 -886 -1,500 -480 -24 -28

Core operating profit 1,134 1,786 2,553 3,577 4,437 5,482


Taxation -329.572 -574 -768 -854 -841 -991



Assets Employed 3,516 3,961 4,788 5,644 6,651 7,839

Inventories 2,544 2,539 3,494 2,463 4,065 5,813

Debtors 2147 1,918 1,646 3,452 2,963 4,445

Bank and cash balances 512 1,192 2,149 2,321 3,482 3,830

Total Assets 8,719 9,610 12,078 13,880 17,161 21,927


Long Term Creditors 0 0 0 0 0 0


Share capital 478 478 478 478 478 478

Share premium 51 51 51 51 51 51



Shareholders' Equity 4,602 5,451 6,583 7,881 9,049 13,510



January 2011 84

The Tipping Point

2011 Outlook



Turnover 66 84 100 108 128 151

Cost of Sales -41 -48 -57 -57 -66 -76

Gross Profit 26 36 44 51 62 75

Operating Expenses -18 24 -27 -27 -32 -38

EBIT 8 18 27 22 26 30

Interest Expense 0 -6 -10 -3 0 0

Core operating profit 8 12 17 24 30 37


Taxation -2 -4 -5 -6 -6 -7


BALANCE SHEET 2007 2008 2009 2010 F 2011 F2012

F

Fixed Assets 24 27 32 38 45 53

Inventories 17 17 23 17 27 39

Debtors 14 13 11 23 20 30


Total Assets 58 64 81 93 115 147





Share premium 0 0 0 0 0 0


Revenue/General Reserve 27 33 40 49 57 80




January 2011 85

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012 E

Growth (%)


Growth in Core Operating profit 57% 43% 40% 24% 24%

Growth in EBIT 96% 30% 17% 13% 12%Growth in PBT 59% 33% 12% 9% 10%

Growth in PAT 53% 33% 12% 14% 7%

Profitability (%)

Return on Equity 25% 28% 26% 26% 21%

Return on Assets 14% 16% 15% 14% 12%



Growth rate (g) 37% 16% 15% 14% 11%

Margins (%)

EBITDA/Sales 18% 20% 22% 21% 20%

EBIT/Sales 22% 27% 20% 21% 20%

Pretax Income/Sales 15% 17% 17% 16% 15%

Net Profit Margin 10% 11% 12% 11% 10%


Quick ratio 0.94 0.82 1.19 1.28 1.56

Cash ratio 0.36 0.46 0.48 0.69 0.72

Current ratio 1.70 1.58 1.70 2.08 2.66




Days in cash 35 52 52 67 62Days in receivables 56 40 78 57 72

Capital Structure

Financial leverage (debt to equity) n/a n/a n/a n/a n/a

Interest bearing debt/Total assets n/a n/a n/a n/a n/a

Payout ratio 45% 42% 43% 46% 47%


Retention ratio 55% 58% 57% 54% 53%

Per Share Data

EPS 1.33 1.78 1.99 2.26 2.42

DPS 0.60 0.75 0.85 1.04 1.14

NAPS 5.70 6.88 8.24 9.46 12.49

Sales/Share 13.11 15.63 16.88 19.92 23.50



January 2011 86

The Tipping Point

2011 Outlook


Guinness Nigeria Plc

Further growth expected on capacity expansion

Given its niche in the stout segment, rapid growth in Harp volumes, an

growing beer consumption in Nigeria, our outlook on Guinness is positive. W

expect ongoing capacity expansion to position Guinness to tap into this growtstory. Following adjustments in our DDM valuation model, our 12 month targe

price now stands at N195.01. However, at its current price of N220.00, th

stock is trading at a downside of 23.8% to our target value, hence ou

“REDUCE” rating.

Investment thesis

Significant market share, but lager competition rife: Although Guinnes

controls about 25% of the Nigerian beer market, stiff competition, especially i

the larger space, may imply escalating marketing spend. The company ha

seen significant growth in volumes of its Harp and Malta Guinness brands, bu

market share defence is crucial to fend off competition. Importantly, in orde

for Guinness to compete favourably outside of its niche stout market anconsolidate brand loyalty, there must be further innovation in terms o

advertisement, product re-launching and rebranding. Also, on account of th

rise in the price of raw materials such as barley and hops, margins ar

expected to be strained. We note that the quality and brand of the Guinnes

Stout would help maintain its market position at an attractive 25%.

Increased capacity to boost sales, TBA Portfolio Expansion: Coming o

a massive capital expenditure, production capacity is expected to rise to abou

6 million hectolitres (mhl), as well as increasing packaging capacity, we expec

this volume growth to boost sales (current capacity utilization c. 95%). I

addition, over the past several years, the Diageo Group has concentrated o

its core competencies in the spirits industry; we judge that the Guinnes

brand, especially in a market such as Nigeria, will play an important long-termrole in that segment. The importance of beer as a gateway to other alcoholi

beverages such as spirits supports our position that further growth of th

Nigerian beer portfolio would be a keen priority.

Earnings Outlook: We project revenue growth of 15.8% to N126.6 billion fo

FY’11, supported by increasing sales in Harp and Malta Guinness. O

profitability, we forecast PAT to grow at a rate of 30.0% to N17.9 billion

Implied P/E multiple is 18.6x (on N12.11 2011 EPS) with EV/EBITDA multip

of 10.5x.

Forecast Summary FY'09A FY'10A FY'11F FY'12F FY'13F


YoY Change (%) 14% 1% 30% 21% 15%Price to Earnings (x) 17.97 20.46 18.60 15.41 13.40


YoY Change (%) 25% 10% 25% 21% 15%

Dividend Yield (%) 4.55 4.33 4.68 5.65 6.50


YoY Change (%) -14% 8% 8% 9% 9%

Price to Book (x) 7.72 8.22 8.80 8.09 7.40Source: Company Financial; Vetiva Researc

0.8

1

1.2

1.4

1.6

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

GUINNESS NSE ASI BREWERIES


Guinness vs Breweries vs NSE ASI PerformanceRebased to December 31, 2009

BASIC INFORMATION

Address 24, Oba Akran Avenue

Ikeja, Lagos

Website www.guinness-nigeria.com

Management (Chairman) Babatunde Savage

MD/CEO D.M Hainsworth

Financial Year End June


Symbol Bloomberg: GUINNESS:NL

Sector Breweries

Country Nigeria


DIAGEO 53.8

Others 46.2

SHARE STATISTICS

Shares in issue (M) 1,475.0



Market Cap. (USD'm) 2,175.4


Daily Average Value

Traded (N'000) 60,947.1

Daily Average Value

Traded (USD'000) 408.6

Year high (N) 190.56

Year low (N) 124.51

VALUATION METRICS



P/B (x) 8.6

Div. Yield (%) 8.3

ROAE (%) 50.3

Debt/Equity (%) 0.0



January 2011 87

The Tipping Point

2011 Outlook



Turnover 69,173 89,148 109,367 126,648 145,969 166,979

Cost of Sales -35,611 -46,510 -61,672 -68,770 -78,824 -89,668

Gross Profit 33,562 42,639 47,695 57,878 67,146 77,311



EBITDA 19,993 24,408 24,385 29,931 36,188 41,521


Operating Profit 16,883 20,843 20,331 25,583 30,946 35,567

Other Income 159 227 780 - - -

EBIT 17,042 21,069 21,111 25,583 30,946 35,567

Interest Received 1,730 1,212 254 1525 1953 2380

Interest Payable & Charges -437 -2,026 -1,052 -838 -1199 -1480

Exceptional Item -1,243 -1,263 -325 - - -


Taxation -5,232 -5,451 -6,252 -8,406 -10,144 -11,669



Fixed Assets 36,733 35,898 38,245 48,711 56,142 62,938

Intangible Assets 1,311 1,807 1,382 1,021 659 298

Inventories 12,867 16,848 16,153 20,073 23,135 26,465

Debtors 7,063 9,504 9,537 10,877 11,975 13,056


Total Assets 73,191 73,869 78,397 97,422 112,284 128,446


Bank Overdrafts 3,705 6,897 - 4,656 7,051 8,708

Deferred Tax Liability 7,886 8,094 8,356 10,384 11,968 13,691

Term loan - - 1,299 - - -

Provision for gratuity 4,589 3,108 3,895 4,840 5,578 6,381


Share capital 737 737 737 737 737 737

Share premium 1,546 1,546 1,546 1,546 1,546 1,546

Revaluation Reserves 3,738 3,303 3,296 3,296 3,296 3,296

Revenue Reserve 30,842 25,938 28,620 31,299 34,533 38,252

Total Equity 36,863 31,525 34,199 36,879 40,112 43,832



January 2011 88

The Tipping Point

2011 Outlook



Turnover 464 598 733 849 979 1119

Cost of Sales -239 -312 -413 -461 -528 -601

Gross Profit 225 286 320 388 450 518



EBITDA 134 164 163 201 243 278

Depreciation & Amortization 21 24 27 29 35 40

Operating Profit 113 140 136 172 207 238

Other Income 1 2 5 - - -

EBIT 114 141 142 172 207 238

Interest Received 12 8 2 10 13 16

Interest Payable & Charges -3 -14 -7 -6 -8 -10

Exceptional Item -8 -8 -2 - - -


Taxation -35 -37 -42 -56 -68 -78



Fixed Assets 246 241 256 327 376 422

Intangible Assets 9 12 9 7 4 2

Inventories 86 113 108 135 155 177

Debtors 47 64 64 73 80 88


Total Assets 491 495 526 653 753 861


Bank Overdrafts 25 46 - 31 47 58

Deferred Tax Liability 53 54 56 70 80 92

Term loan - - 9 - - -

Provision for gratuity 31 21 26 32 37 43


Share Capital 5 5 5 5 5 5

Share Premium 10 10 10 10 10 10

Revenue and Capital reserve 25 22 22 22 22 22


Total Equity 247 211 229 247 269 294



January 2011 89

The Tipping Point

2011 Outlook


2008 2009 2010 2011 E 2012 E

Market Position

Nigerian Beer market size (mhl) 14.5 15.0 16.6 18.2 19.8

Beer market volume growth 16.0% 3.4% 10.6% 9.5% 8.7%

Population (mn) 147.81 151.87 156.05 160.34 164.75

Beer PCC (litres) 9.8 9.9 10.6 11.3 12.0

Guinness market share 25.0% 26.0% 28.0% 28.2% 28.5%

Guinness volume 3.6 3.9 4.6 5.1 5.6

Price/mhl 19,082.17 22,858.51 23,544.27 24,721.48 25,932.84

Growth (%)

Volume 20.8% 7.6% 19.1% 10.3% 9.9%

Price/mhl -8.1% 19.8% 3.0% 5.0% 4.9%

Turnover growth 11.1% 28.9% 22.7% 15.8% 15.3%

Core Operating profit 18.7% 23.5% -2.5% 25.8% 21.0%

Growth in EBITDA 17.7% 22.1% -0.1% 22.7% 20.9%

Growth in PBT 23.9% 10.5% 0.3% 29.3% 20.7%

Growth in PAT 11.8% 14.2% 1.4% 30.0% 20.7%

Profitability (%)



Gross Margin 48.5% 47.8% 43.6% 45.7% 46.0%

EBITDA Margin 28.9% 27.4% 22.3% 23.6% 24.8%

EBIT Margin 24.6% 23.6% 19.3% 20.2% 21.2%

Pretax Profit Margin 26.5% 22.7% 18.6% 20.7% 21.7%


Per Share Data

Earnings/share 8.0 9.2 9.3 12.1 14.6

Dividend/share 6.0 7.5 8.3 10.3 12.4

Net Asset/share 25.0 21.4 23.2 25.0 27.2

Sales/Share 46.9 60.4 74.2 85.9 99.0

Valuation Multiples

P/E (x) 10.9 18.0 20.5 18.2 15.1

P/B (x) 3.5 7.7 8.2 8.8 8.1

Dividend Yield (%) 6.8% 4.5% 4.3% 4.7% 5.6%

EV/EBITDA (x) 5.9 10.0 11.0 10.5 8.6



January 2011 90

The Tipping Point

2011 Outlook


Nigerian Breweries Plc

A Play on intrinsic value

Our target value on NB based on our revised DDM valuation is N85.86. N

now trades at an upside potential of 4.7% relative to our target value and w

revise our rating on the stock to “REDUCE”. In our opinion, the vast rally iprice on the back of news of Heineken’s acquisitions, which pushed the price t

N91.83, further stretched valuation for NB. However, should we see som

more pull back in price; we would still play the beer market at these attractiv

valuations in order to buy into the underlying growth story.

Investment thesis

Pressure from input costs, but enhanced local content strategy t

provide buffer: Following the challenging outing brewers had in 2009

recovery in volume growth and profitability improved in 2010. However, give

the sensitivity of margins to our valuation, the continued rise in the prices o

key inputs (barley, aluminum) could weaken our outlook. However, th

continuous drive of the local content (production inputs) initiative is our basi

for positive margin outlook for NB. We note that any slack in this regard coul

further enlarge NB’s susceptibility to commodity price volatility, FX risk an

margin depression.

Strong Parent Support to Possibly Fend-off Competition: In ou

Breweries Sector Update (Brewing Growth, Malting Value published in Octobe

2010) we had highlighted the potential source of alpha that exists through th

direct acquisition and repositioning of fringe players. The recent acquisition o

five breweries by the Heineken N.V. group weakens the competitive threa

from new entrants like SAB Miller because it reduces available acquisitio

targets. Given the synergies Heineken could derive from merging its bee

businesses in Nigeria, its management may explore consolidating NB

Consolidated Breweries and the newly acquired subsidiaries. This scenaricould be a potential game changer for the Nigerian beer market.

Earnings Outlook: We forecast that NB’s revenue would grow by 17.0% t

N213.55 billion by FY’11. We expect scale and cost reductions to deliver PAT o

N38.2 billion, a 37.0% increase from 2009 figures. Also, we expect EBI

margins to increase to 26.4% by 2011 from FY’10E of 26.1%.

Source: Company Financial; Vetiva Researc

Forecast Summary FY'09A FY'10F FY'11F FY'12F FY'13F


YoY Change (%) 9% 15% 19% 17% 16%



YoY Change (%) 9% 9% 19% 17% 16%Dividend Yield (%) 5.95 4.59 5.59 6.57 7.63


YoY Change (%) 45% 3% 4% 4% 5%

Price to Book (x) 10.07 13.81 12.96 12.41 11.82

BASIC INFORMATION

Address 1, Abebe Village Road

Iganmu, Lagos

Website www.nbplc.com

Management (Chairman) Chief Kola Jamodu

MD/CEO N.A Vervelde



Symbol Bloomberg: NB:NL

Sector Breweries

Country Nigeria


Heineken N.V. 54.1

Others 45.9

0.8

1

1.2

1.4

1.6


NB NSE ASI BREWERIES


NB vs Breweries vs NSE ASI PerformanceRebased to December 31, 2009

SHARE STATISTICS




Market Cap. (USD'm) 4,555.4


Daily Average Value Traded

(N'000) 159,819.9


(USD'000) 1,071.4

Year high (N) 82.21

Year low (N) 53.00

VALUATION METRICS



P/B (x) 18.5

Div. Yield (%) 3.8

ROAE (%) 70.8

Debt/Equity (%) 2.9



January 2011 91

The Tipping Point

2011 Outlook



Turnover 111,748 145,462 164,207 182,508 213,550 248,16

Cost of Sales -52,564 -74,562 -88,734 -94,904 -110,405 -127,55

Gross Profit 59,184 70,900 75,472 87,604 103,144 120,610



EBITDA 32,587 42,543 48,457 54,684 63,962 74,353


Operating Profit 27,876 37,519 41,400 47,258 56,214 66,00

Other Income 249 192 145 159.39 191.26 219.9

EBIT 27,357 36,778 41,662 47,611 56,355 65,985

Net Interest Received 519 741 - - -

Net Interest Payable - - -263 -353 -141 1


Taxation -8,933 -11,818 -13,490 -15,123 -17,988 -21,12


BALANCE SHEET (N'Mill) 2007 2008 2009 2010 F 2011 F 2012

Fixed Assets 50,195 63,558 69,003 72,453 79,698 87,66

Investment 150 150 150 150 150 15

Inventories 16,157 20,741 22,065 25,551 30,324 35,24

Debtors 7,858 3,930 3,795 4,533 5,417 6,47


Total Assets 90,548 104,413 106,988 117,836 137,586 155,096


Taxation 7,298 9,246 13,462 14,367 17,089 20,06

Dividend 4,170 19,667 4,567 6,106 7,263 8,52

Differed Taxation Liability 11,360 14,110 14,322 17,616 21,316 25,15

Provision for gratuity 6,591 3,298 3,777 3,966 4,164 4,372


Share capital 3,781 3,781 3,781 3,781 3,781 3,78

Share premium 4,568 4,568 4,568 4,568 4,568 4,56

Capital Reserves 7,325 7,240 7,095 7,095 7,095 7,09

General Reserve 27,509 16,639 31,125 32,732 34,643 36,88

Total Equity 43,183 32,228 46,570 48,177 50,088 52,332



January 2011 92

The Tipping Point

2011 Outlook



Turnover 749 975 1101 1223 1432 1664

Cost of Sales -352 -500 -595 -636 -740 -855

Gross Profit 397 475 506 587 691 809



EBITDA 218 285 325 367 429 498

Depreciation & Amortization 35 39 46 47 51 56

Operating Profit 187 252 278 317 377 442

Other Income 2 1 1 1.07 1.28 1.47

EBIT 183 247 279 319 378 442

Interest Received 3 5 0 0 0 0

Interest Payable & Charges 0 0 -2 -2 -1 0


Taxation -60 -79 -90 -101 -121 -142Profit After Taxation 127 172 187 215 256 301


Fixed Assets 336 426 463 486 534 588

Investment 1 1 1 1 1 1

Inventories 108 139 148 171 203 236

Debtors 53 26 25 30 36 43


Total Assets 607 700 717 790 922 1,040


Taxation 49 62 90.24 96 115 135

Dividend 28 132 31 41 49 57

Differed Taxation Liability 76.16 94.59 96 118.10 142.90 168.62

Provision for gratuity 44 22 25 27 28 29


Share Capital 25 25 25 25 25 25

Share Premium 31 31 31 31 31 31

Revenue and Capital reserve 49 49 48 48 48 48


Total Equity 289 216 312 323 336 351



January 2011 93

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012

Market Position

Nigerian Beer market size (mhl) 14.5 15.0 16.6 18.2 19.

Beer market volume growth 16.0% 3.4% 10.6% 9.5% 8.7%

Population (mn) 147.81 151.87 156.05 160.34 164.7

Beer PCC (litres) 9.8 9.9 10.6 11.3 12.

NB market share 57.0% 60.0% 58.0% 57.8% 57.7%

NB volume 8.3 9.0 9.6 10.5 11.

Price/mhl 17,599.73 18,245.21 18,975.01 20,337.42 21,777.3

Growth (%)

Volume 18.1% 8.9% 6.9% 9.2% 8.5%

Price/mhl 10.2% 3.7% 4.0% 7.2% 7.1%

Turnover growth 30.2% 12.9% 11.1% 17.0% 16.2%

Core Operating profit 35.0% 13.5% 14.3% 18.4% 17.1%

Growth in EBITDA 30.6% 13.9% 12.9% 17.0% 16.2%Growth in PBT 34.6% 10.3% 14.2% 18.9% 17.4%

Growth in PAT 35.7% 8.6% 15.1% 18.9% 17.4%

Profitability (%)



Gross Margin 48.7% 46.0% 48.0% 48.3% 48.6%

EBITDA Margin 29.2% 29.5% 30.0% 30.0% 30.0%

EBIT Margin 25.3% 25.4% 26.1% 26.4% 26.6%


Net Profit Margin 17.7% 17.0% 17.6% 17.9% 18.1%Per Share Data

Earnings/share 3.4 3.7 4.2 5.1 5.

Dividend/share 3.4 3.7 4.0 4.8 5.

Net Asset/share 4.3 6.2 6.4 6.6 6.

Sales/Share 19.2 21.7 24.1 28.2 32.

Valuation Multiples

P/E (x) 10.1 16.8 20.7 17.0 14.

P/B (x) 8.1 10.1 13.8 13.0 12.

Dividend Yield (%) 9.9% 6.0% 4.6% 5.6% 6.6%

EV/EBITDA (x) 5.8 9.4 11.9 9.8 8.



January 2011 94

The Tipping Point

2011 Outlook


PZ Cussons Nigeria plc

Despite Improved Efficiency, We Are Underweight

We downgrade our rating on PZ to an “SELL” given that the stock is tradin

at an expected downside of 28.1% to our 12 month target price of N26.50

based on the DDM valuation methodology.

Investment Thesis

White Goods sales growth expected, but high input costs threaten: A

credit and discretionary spending gradually picks up, we expect the mos

impact to be on PZ’s high value electrical segment (especially refrigerators an

freezers). The renovation and re-launch of many of the personal and hom

care products reflects an attempt at market share re-capture, as man

consumers switched to cheaper, private label alternatives following th

economic downturn of 2009. However, expectations of high input prices i

2011 would continue to weigh on costs. The announcement of a joint ventur

agreement with the African subsidiary of Singapore-based Wilma

International Limited to establish a palm oil refinery as well as an edible oils

spreads and margarines business is geared toward securing the availabilit

and quality of oil ingredients, as well as expansion in the food and nutritio

category. With this backward integration (palm oil refinery expected in 2013

input cost pressure should ease going forward.

Efficiency Gains from Investment: PZ’s margins are expected to furthe

improve based on efficiency gains from investments in its manufacturin

operations and supply chain facilities in 2009/10 (“Project Unity”; PZ’s N1

billion investments spend). We expect efficiency gains from Project Unity t

continue to impact gross profit margin. Our expectation is a 100-150 bp

increase in gross margins over the next two years owing to this investment.

Earnings Outlook: Our outlook for PZ is dampened by expectations of slac

demand and high input costs. For FY’11 we expect a 1.4% decline in Turnove

but PAT growth of 8.4% (N61.7 billion and N5.7 billion respectively) and

Forward EPS of N1.81 implying a Forward PE of 18.5x and a Dividend o

N1.09.

Forecast Summary FY'09A FY'10A FY'11F FY'12F FY'13F


YoY Change (%) 22% 10% 8% 28% 17%



YoY Change (%) 10% 26% 27% 28% 17%

Dividend Yield (%) 4.32 2.92 3.24 4.15 4.83


YoY Change (%) 9% 9% 9% 6% 7%

Price to Book (x) 1.41 2.41 2.59 2.42 2.25

Source: Company Financial; Vetiva Research

BASIC INFORMATION

Address

45/47, Town Planning

Way

Ilupeju Industrial Estate,

Lagos

Website www.pzcussonsng.com

Management (Chairman) E.C Edozien

MD/CEO Christos Giannopoulos

Financial Year End May


Symbol Bloomberg: PZ:NL

Sector Conglomerates

Country Nigeria


PZ Cussons Plc, UK 66.1

Others 33.9

0.8

1

1.2

1.4

1.6


PZ CUSSONS CONGLOMERATES NSE ASI


PZ Cussons vs Conglomerates vs NSE ASI PerformanceRebased to December 31, 2009

SHARE STATISTICS







(N'000) 23,309.6


(USD'000) 156.3

Year high (N) 39.00

Year low (N) 24.97

VALUATION METRICS



P/B (x) 2.4

Div. Yield (%) 2.9

ROAE (%) 14.3

Debt/Equity (%) 6.1



January 2011 95

The Tipping Point

2011 Outlook



Turnover 55,239 63,801 62,668 61,777 71,585 84,156

Cost of Sales -49,645 -44,967 -45,381 -43,862 -50,109 -58,909

Gross Profit 16,300 18,833 17,287 17,915 21,475 25,247

S & D Expenses -5,594 -6,991 -6,021 -5,560 -6,443 -7,574

Administrative Expenses -4,169 -4,024 -3,481 -3,707 -3,937 -4,629


Other Operating Income 98 124 309 325 341 358

EBITDA 7,750 9,293 9,661 10,394 12,881 15,068

Depreciation -1,114 -1,351 -1,567 -1,421 -1,444 -1,666

EBIT 6,636 7,942 8,094 8,974 11,437 13,402


Profit before Exceptional Item & Tax 6,223 7,671 7,951 8,894 11,381 13,270

Exceptional Item -243 - - - - -


Taxation -1,600 -2,340 -2,367 -2,846 -3,642 -4,246Profit After Taxation 4,380 5,331 5,585 6,048 7,739 9,023

Minority Interest -429 -512 -283 -302 -387 -451

Profit Attributable to Members 3,951 4,819 5,302 5,746 7,352 8,572


Fixed Assets 18,143 21,512 24,738 22,615 25,522 30,004

Inventories 21,996 20,632 15,354 17,651 21,787 27,076

Debtors 7,335 6,919 8,507 8,687 9,337 10,977

Bank and cash balances 2,860 4,346 10,333 6,205 5,602 5,123Other Receivables and CurrentAssets 64 1,488 38 - - -

Total Assets 50,397 54,896 58,969 55,158 62,248 73,179Borrowings 1,541 8 - 440 480 467

Trade creditors 739 592 1,522 1,384 1,494 1,464

Other Creditors and accruals 4,147 4,875 5,260 4,413 5,291 6,220

Due to parent company 6,235 7,204 6,303 1,638 3,953 9,325

Taxation 1,451 2,265 2,184 1,931 2,179 2,561

Long Term Liabilities

Deferred Taxation 2,508 2,813 3,369 2,968 3,349 3,937

Minority Interest 1,062 1,574 1,623 1,379 1,556 1,829


Share Capital 1,588 1,588 1,588 1,588 1,588 1,588

Share Premium 6,878 6,878 6,878 6,878 6,878 6,878

Revenue Reserves 16,654 19,585 22,727 25,025 27,966 31,395Revaluation Reserves 7,594 7,514 7,514 7,514 7,514 7,514

Total Equity 32,714 35,565 38,708 41,006 43,947 47,375



January 2011 96

The Tipping Point

2011 Outlook



Turnover 370 428 420 414 480 56

Cost of Sales -333 -301 -304 -294 -336 -39

Gross Profit 109 126 116 120 144 169

S & D Expenses -38 -47 -40 -37 -43 -5Administrative Expenses -28 -27 -23 -25 -26 -3


Other Operating Income 1 1 2 2 2

EBITDA 52 62 65 70 86 10

Depreciation -7 -9 -11 -10 -10 -1

EBIT 44 53 54 60 77 9

Interest Payable & Charges -3 -2 -1 -1 0 -

Profit before Exceptional Item & Tax 42 51 53 60 76 8

Exceptional Item -2 0 0 0 0


Taxation -11 -16 -16 -19 -24 -2


Minority Interest -3 -3 -2 -2 -3 -

Profit Attributable to Members 26 32 36 39 49 5

BALANCE SHEET 2008 2009 2010 2011 F 2012 F 2013

Fixed Assets 122 144 166 152 171 20

Inventories 147 138 103 118 146 18

Debtors 49 46 57 58 63 74



Total Assets 338 368 395 370 417 491Borrowings 10 0 0 3 3

Trade creditors 5 4 10 9 10 1

Other Creditors and accruals 28 33 35 30 35 4

Due to parent company 42 48 42 11 26 6

Taxation 10 15 15 13 15 1


Deferred Taxation 17 19 23 20 22 2



Share Capital 11 11 11 11 11 1

Share Premium 46 46 46 46 46 4

Revenue Reserves 112 131 152 168 187 21Revaluation Reserves 51 50 50 50 50 5

Total Equity 219 238 259 275 295 318



January 2011 97

The Tipping Point

2011 Outlook


2008 2009 2010 2011 E 2012 E

Growth (%)

Turnover growth 21.4% 15.5% -1.8% -1.4% 15.9%

Growth in Core Operating Profit 36.9% 19.6% -0.4% 11.1% 28.3%

Growth in EBITDA 27.7% 19.9% 4.0% 7.6% 23.9%

Growth in PBT 11.7% 28.3% 3.7% 11.9% 28.0%

Growth in PAT 12.5% 22.0% 10.0% 8.4% 28.0%

Profitability (%)

Return on Equity 12.5% 14.1% 14.3% 14.4% 17.3%

Return on Assets 8.3% 9.2% 9.3% 10.1% 12.5%

Margins (%)

EBITDA/Sales 11.8% 14.6% 15.4% 16.8% 18.0%

EBIT/Sales 10.1% 12.4% 12.9% 14.5% 16.0%



Liquidity Ratios

Current ratio 2.3 2.2 2.2 3.3 2.7

Inventory Coverage (x) 16.1 29.3 56.8 113.0 204.6




Cash Conversion Cycle 175.0 168.2 139.7 140.4 141.8

Asset Utilization

Inventory Turnover (x) 2.2 2.1 2.5 2.7 2.5

Asset Turnover (x) 1.4 1.2 1.1 1.1 1.2

Fixed Assets Turnover (x) 3.2 3.2 2.7 2.6 3.0

Per Share Data

Earnings/share 1.24 1.52 1.67 1.81 2.31

Dividend/share 0.62 0.68 0.86 1.09 1.39

Net Asset/share 10.30 11.20 12.19 12.91 13.84

Sales/Share 20.8 20.1 19.7 19.4 22.5

Valuation Multiples

P/E (x) 12.7 16.5 18.8 18.5 14.5

P/B (x) 1.5 2.2 2.6 2.6 2.4

Dividend Yield (%) 3.9% 2.7% 2.7% 3.2% 4.1%

EV/EBITDA (x) 6.2 8.4 10.21 9.9 8.3



January 2011 98

The Tipping Point

2011 Outlook


Unilever Plc

Overpriced, in our view

We downgrade to a “SELL” rating, given that the stock (at a current shar

price at N30.00) has an expected downside of 26.1% to N22.17, our 12 mont

target price. Our target valuation is based on the DCF and DDM methodologywith Unilever fair value rolled one year forward at its weighted average cost o

capital. It is our belief that the stock’s price is reflective of the premium tha

investor’s place on the blue-chip nature of the company, with its constan

dividend payout and good corporate governance.

Investment Thesis

Market leadership unchallenged across niches: The expected increased

albeit slight, growth in consumer spending and credit environment shoul

positively impact on Unilever’s efforts, as the company continues its bran

investment in a bid to solidify her strong market presence. Product portfoli

optimization has been on the front burner with continuous product innovatio

and retail market penetration. In the detergent market, additional marke

share has been captured with the launch of Sunlight and the re-launch of OM

which are currently gulping advert and promotional spends. In Oral car

market, where Unilever has an estimated market share of 80%, Close Up ha

been performing quite impressively with innovative variants to ward-o

competition.

2011 recovery, hinged on cost savings: On the average, Unilever secure

about 48% of its input needs from import and this dependency has resulted i

the exposure of margin to the combined risk of commodity volatility and F

movement. Savings have been achieved on finance cost which reduced b

77% over the past year following the 2009 deleveraging of its US$20 millio

loan which infused some FX risk to earnings. Barring additional uptake of mor

expensive domestic borrowing, there should be no pressure on margin fromfinance cost. Apt to say that our expectation of sustained earnings rebound i

2011 is hinged on effective cost management.

Earnings Outlook: Our FY’11 projection for Sales and Earnings stands a

N53.3 billion (13.0% YoY) and N5.3 billion (25.0% YoY), hence we expect

Forward EPS and Forward PE of N1.40 and 21.4x respectively. Ou

expectations of a rebound in earnings growth in 2011 is driven by resumptio

in double-digit sales growth, powerful base effect and efficiency gain.



YoY Change (%) 57.66% 3.96% 24.54% 13.41% 13.39%



YoY Change (%) 57.48% 4.08% 24.54% 13.41% 13.39%

Dividend Yield (%) 3.84% 4.14% 4.62% 5.24% 5.95%


YoY Change (%) 22.77% 9.97% 11.37% 13.10% 12.79%

Price to Book (x) 12.87 11.28 11.30 9.99 8.86Source: Company Financial; Vetiva Researc

BASIC INFORMATION

Address 1, Billings Way, Oregun

Ikeja, Lagos

Website www.unilevernigeria.com

Management (Chairman) Apostle H.I. Alile

MD/CEO T. Boedinger



Symbol Bloomberg: UNILEVER:NL

Sector Conglomerates

Country Nigeria


Unilever Overseas Holdings B.V. 50.0

Odua Group of Companies 50.0

0.8

1

1.2

1.4

1.6

1.8


UNILEVER CONGLOMERATES


Unilever vs Conglomerates vs NSE ASI PerformanceRebased to December 31, 2009

SHARE STATISTICS







(N'000) 53,524.5


(USD'000) 358.8

Year high (N) 31.29

Year low (N) 19.00

VALUATION METRICS



P/B (x) 14.4

Div. Yield (%) 2.4

ROAE (%) 12.0

Debt/Equity (%) 3.8



January 2011 99

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010 F 2011 F 2012

Turnover 33,991 37,377 44,481 47,150 53,280 60,20

Cost of Sales -22,578 -24,361 -27,092 -28,762 -32,501 -36,72

Gross Profit 11,413 13,017 17,389 18,389 20,779 23,48

S & D Expenses -1,484 -1,692 -2,076 -2,829 -2,984 -3,37

Administrative Expenses -7,376 -6,853 -8,252 -8,016 -8,525 -9,57


EBITDA 3,411 5,243 7,750 7,544 9,271 10,53

Depreciation -858 -770 -689 -951 -1,074 -1,21

EBIT 2,553 4,472 7,061 6,593 8,197 9,32



Exceptional Item - - -563 - -

Taxation -717 -1,548 -1,567 -2,003 -2,494 -2,82



Fixed Assets 8,641 9,056 9,975 11,316 12,787 14,44

Inventories 5,083 4,632 4,927 4,632 5,002 5,35

Debtors 3,463 4,369 3,495 4,019 4,212 4,41

Bank and cash balances 1,562 2,706 1,981 2,080 2,184 2,29Other Receivables and CurrentAssets 1,604 2,729 3,304 3,449 3,533 3,68

Total Assets 20,353 23,493 23,682 25,496 27,718 30,18

Trade creditors 2,365 3,711 2,255 2,030 1,827 1,64


Due to related companies 1,069 1,553 1,928 1,966 2,006 2,04

Bank Overdraft 4,036 2,615 1,500 1,650 1,815 1,99

Taxation 490 1,005 1,769 2,043 2,544 2,88


Deferred Taxation 747 1,290 1,148 1,240 1,339 1,44

Retirement Benefits Obligation 1,833 1,778 1,927 1,965 2,004 2,04


Share Capital 1,892 1,892 1,892 1,892 1,892 1,89

Share Premium 46 46 46 46 46 4

Revenue Reserves 237 237 237 237 237 23


Total Equity 5,031 6,682 8,203 9,021 10,047 11,36



January 2011 100

The Tipping Point

2011 Outlook



Turnover 228 251 298 316 357 404

Cost of Sales -151 -163 -182 -193 -218 -246

Gross Profit 77 87 117 123 139 157

S & D Expenses -10 -11 -14 -19 -20 -23

Administrative Expenses -49 -46 -55 -54 -57 -64


EBITDA 23 35 52 51 62 71

Depreciation -6 -5 -5 -6 -7 -8

EBIT 17 30 47 44 55 62



Exceptional Item - - -4 - - -

Taxation -5 -10 -11 -13 -17 -19

Profit After Taxation 78 120 412 690 1,333 1,854


Fixed Assets 58 61 67 76 86 97

Inventories 34 31 33 31 34 36

Debtors 23 29 23 27 28 30



Total Assets 136 157 159 171 186 202

Borrowings 16 25 15 14 12 11

Trade creditors 32 33 33 37 41 45


Due to parent company 27 18 10 11 12 13

Taxation 3 7 12 14 17 19


Deferred Taxation 5 9 8 8 9 10



Share Capital 13 13 13 13 13 13

Share Premium 0.3 0.3 0.3 0.3 0.3 0.3

Revenue Reserves 1.6 1.6 1.6 1.6 1.6 1.6


Total Equity 34 45 55 60 67 76



January 2011 101

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012 E

Growth (%)

Turnover growth 10.0% 19.0% 6.0% 13.0% 13.0%

Growth in EBITDA 53.7% 47.8% -2.7% 22.9% 13.6%

Growth in PBT 105.9% 50.2% 0.6% 24.5% 13.4%

Growth in PAT 141.0% 57.7% 4.0% 24.5% 13.4%

Profitability (%)

Return on Equity 44.3% 55.0% 49.4% 55.6% 56.2%

Return on Assets 11.8% 17.4% 17.3% 19.9% 20.8%

Margins (%)

EBITDA/Sales 14.0% 17.4% 16.0% 17.4% 17.5%

EBIT/Sales 12.0% 15.9% 14.0% 15.4% 15.5%



Liquidity Ratios

Cash Ratio 0.2 0.2 0.2 0.2 0.1

Current ratio 1.1 1.1 1.1 1.0 1.0

Inventory Coverage (x) 13.7 8.4 19.7 20.4 19.3





Asset Utilization

Sales to Cash (x) 13.8 22.5 22.7 24.4 26.3


Asset Turnover (x) 1.6 1.9 1.8 1.9 2.0

Fixed Assets Turnover (x) 0.4 0.4 0.4 0.5 0.5

Per Share Data

Earnings/share 0.69 1.08 1.12 1.40 1.59

Dividend/share 0.68 1.07 1.11 1.39 1.57

Net Asset/share 1.77 2.17 2.38 2.66 3.00

Sales/Share 9.9 11.8 12.5 14.1 15.9

Valuation Multiples

P/E (x) 39.5 25.8 23.9 21.4 18.9

P/B (x) 15.3 12.9 11.3 11.3 10.0

Dividend Yield (%) 2.5% 3.8% 4.1% 4.6% 5.2%

EV/EBITDA (x) 19.5 13.6 13.4 12.2 10.7



January 2011 102

The Tipping Point

2011 Outlook


UACN Plc

Diversified Conglomerate, Straining for the Top

At current price (N39.00), a 6% upside to our N42.17 one year target price

we are “NEUTRAL” on UACN. Our valuation is based on the DC

methodology, with the target price rolled forward by the weighted averagcost of capital.

Investment thesis

Restructuring in the Offing; UACN announced plans to restructure it

businesses, unbundling operating divisions into limited liability companies i

order to transform into a holding company by 2012. The first move in th

direction is the merging of the UAC Foods and UAC Dairies divisions, alon

with their shares in the wholly-owned subsidiary, Spring Waters Nigeri

Limited, to form UAC Foods Limited. We expect the company to seek viabl

opportunities for partnerships to boost its other business lines and laud th

company’s priority of growing the logistics business, boosting the Gran

Cereals and Oil Mills business as well as repositioning the UAC Restaurantdivision. We expect growth in the properties arm of the company (UPDC), t

be muted this year as credit to the private sector for mortgages may remai

slow, boosted slightly by annuity property such as the Golden Tulip Hotel an

cost savings from cheaper, longer term financing.

Brand Portfolio Expansion on New Joint Venture with Tiger Brands

The resultant lower consumer discretionary spending, tighter credit as well a

higher energy costs following the economic downturn significantly affected th

dairy products, real estate and restaurant businesses. UACN’s Joint Ventur

agreement (in principle) with Tiger Brands Limited of South Africa to sell 49%

of the authorized shares of the resulting UAC Foods Limited is expected t

provide brand portfolio expansion as well as renewed growth prospects anefficiencies for the business and its contribution to the UACN Group.

Earnings Outlook: With its vibrant agri-business, the inherent potential fo

UPDC in Nigeria’s huge housing deficit, we forecast FY’11 turnover growth of o

19.3% and After Tax Earnings growth of 18.5% (N59.9bn and N4.5bn) and

Forward EPS of N2.81 implying a Forward PE of 14.41x and Dividend of N1.98



YoY Change (%) -4% -24% 18% 17% 21%



YoY Change (%) -35% -9% 42% 17% 21%

Dividend Yield (%) 3.54 3.17 4.24 4.98 6.01


YoY Change (%) -3% -16% 5% 5% 6%

Price to Book (x) 0.83 1.20 1.54 1.47 1.39Source: Company Financial; Vetiva Research

BASIC INFORMATION

Address UAC House

1-5 Odunlami Street,

Lagos

Website www.uacnplc.com

Management (Chairman) Udoma Udo Udoma

MD/CEO Larry E. Ettah



Symbol Bloomberg: UACN:NL

Sector Conglometrates

Country Nigeria


Directors' Interest 0.9

Actis Africa Fund LLP 9.0

Others 90.1

0.8

1

1.2

1.4

1.6

1.8


UACN CONGLOMERATES NSE ASI


UACN vs Conglomerates vs NSE ASI PerformanceRebased to December 31, 2009

SHARE STATISTICS







(N'000) 55,692.2


(USD'000) 373.3

Year high (N) 58.48

Year low (N) 36.16

VALUATION METRICS



P/B (x) 1.5

Div. Yield (%) 3.2

ROAE (%) 23.8




January 2011 103

The Tipping Point

2011 Outlook



Turnover 37,155 53,489 56,496 50,234 59,914 72,0

Cost of Sales -27,409 -39,033 -40,754 -36,319 -43,138 -51,8

Gross Profit 9,746 14,456 15,742 13,915 16,776 20,1

S & D Expenses -819 -1,215 -1,436 -1,256 -1,498 -1,8Administrative Expenses -4,782 -4,645 -6,016 -5,526 -6,591 -7,9



EBITDA 6,798 11,150 10,683 10,137 11,925 14,0

Depreciation -1,735 -2,045 -2,196 -2,499 -2,636 -2,8

EBIT 5,063 9,105 8,487 7,638 9,289 11,1

Interest Payable & Charges -584 -922 -1,448 -1,001 -1,351 -1,8

Finance Income 408 263 517 276 300 3

Share of profit of associated companies 13 11 12 12 13

Profit from disposal of assets 1,105 324 508 559 615 6


Taxation -1,450 -2,005 -1,899 -1,721 -2,039 -2,3Profit After Taxation 4,555 6,776 6,177 5,763 6,827 8,0

Minority Interest -954 -2,605 -2,158 -1,959 -2,321 -2,7

Profit Attributable to Members 3,601 4,171 4,019 3,804 4,506 5,2


Intangible Assets 201 167 134 100 67

Fixed Assets 22,260 27,272 30,131 31,520 33,552 36,6

Investment Properties 32,255 27,861 24,206 25,610 31,155 34,0

Long term investments 2,123 2,074 2,204 2,265 2,157 2,2

Properties under construction - 15,275 14,511 15,760 19,172 20,9

Stocks & work in progress 7,528 9,621 10,245 10,835 13,181 14,2

Debtors & Prepayments 9,520 9,045 7,105 8,865 10,784 11,7

Cash & bank balances 5,233 4,092 5,531 3,544 9,759 10,9Total Assets 79,120 95,406 94,067 98,498 119,827 131,0

Trade creditors 4,519 11,979 7,689 8,865 10,784 11,7

Bank loans/overdrafts 6,250 9,521 12,857 12,625 26,027 31,8

Taxation 1,875 2,404 2,565 2,462 2,996 3,2


Dividends Payable 1,362 1,283 1,616 1,674 2,037 2,2

Deferred Taxation 1,078 3,042 2,450 2,462 2,996 3,2

Creditors(due after one year) 18,392 6,879 6,933 7,612 7,765 7,1

Provision for liabilities and charges 1,487 1,941 2,243 2,364 2,876 3,1


Share Capital 640 640 640 800 800 8

Share Premium 4,255 4,255 4,255 4,255 4,255 4,2

Capital Reserve 1,984 1,984 1,984 1,984 1,984 1,9Revaluation reserve 13,946 21,234 18,503 18,503 18,503 18,5

Other reserve 127 142 148 127 127 1

Retained Profit 8,736 10,503 11,956 13,858 15,660 17,7

Total Equity 29,688 38,760 37,487 39,528 41,330 43,4



January 2011 104

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INCOME STATEMENT (USD’Mill) 2007 2008 2009 2010 F 2011 F 2012

Turnover 249 359 379 337 402 4

Cost of Sales -184 -262 -273 -243 -289 -3

Gross Profit 65 97 106 93 112 13

S & D Expenses -5 -8 -10 -8 -10 -

Administrative Expenses -32 -31 -40 -37 -44 -

Core Operating Profit 28 58 56 48 58


EBITDA 46 75 72 68 80

Depreciation -12 -14 -15 -17 -18 -

EBIT 34 61 57 51 62

Interest Payable & Charges -4 -6 -10 -7 -9 -

Finance Income 3 2 3 2 2

Share of profit of associated companies 0.1 0.1 0.1 0.1 0.1 0

Profit from disposal of assets 7 2 3 4 4

Profit Before Taxation 40 59 54 50 59

Taxation -10 -13 -13 -12 -14 -

Profit After Taxation 31 45 41 39 46

Minority Interest -6 -17 -14 -13 -16 -

Profit Attributable to Members 24 28 27 25 30

BALANCE SHEET 2008 2009 2010 2011 F 2012 F 2013

Intangible Assets 1.3 1.1 0.9 0.7 0.4 0

Fixed Assets 149 183 202 211 225 2

Investment Properties 216 187 162 172 209 2

Long term investments 14 14 15 15 14

Properties under construction 0 102 97 106 129 1

Stocks & work in progress 50 64 69 73 88

Debtors & Prepayments 64 61 48 59 72 Cash & bank balances 35 27 37 24 65

Total Assets 530 640 631 660 803 87

Trade creditors 30 80 52 59 72

Bank loans/overdrafts 42 64 86 85 174 2

Taxation 13 16 17 17 20


Dividends Payable 9 9 11 11 14


Creditors(due after one year) 123 46 46 51 52

Provision for liabilities and charges 10 13 15 16 19



Share Premium 29 29 29 29 29 Capital Reserve 13 13 13 13 13

Revaluation reserve 93 142 124 124 124 1

Other reserve 0.9 1.0 1.0 0.9 0.9 0

Retained Profit 59 70 80 93 105 1

Total Equity 199 260 251 265 277 29



January 2011 105

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2008 2009 2010 E 2011 E 2012 E

Growth (%)

Turnover growth 44.0% 5.6% -11.1% 19.3% 20.3%

Growth in EBITDA 64.0% -4.2% -5.1% 17.6% 17.5%

Growth in PBT 46.2% -8.0% -7.3% 18.5% 17.4%

Growth in PAT 48.8% -8.8% -6.7% 18.5% 17.4%

Profitability (%)



EBITDA Margin 20.8% 18.9% 20.2% 19.9% 19.4%

EBIT Margin 17.0% 15.0% 15.2% 15.5% 15.5%




Current ratio 0.6 0.6 0.6 0.6 0.6

Inventory Coverage 9.9 5.9 7.6 6.9 6.1




Asset Utilization (x)


Asset Turnover (x) 0.6 0.6 0.5 0.5 0.6

Fixed Assets Turnover 0.5 0.5 0.6 0.6 0.5

Per Share Data

Earnings/share 3.3 3.1 2.4 2.8 3.3

Dividend/share 2.0 1.3 1.2 1.7 2.0

Net Asset/share 30.3 29.3 24.7 25.8 27.1

Sales/Share 41.8 44.1 31.4 37.4 45.0

Valuation Multiples

P/E (x) 10.9 11.7 15.8 14.1 12.0

P/B (x) 1.2 1.3 1.5 1.5 1.5

Dividend Yield (%) 5.6 3.5 3.2 4.2 5.0

EV/EBITDA (x) 5.2 5.7 7.6 6.7 6.0



January 2011 106

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51.00

44.36

38.22

26.6124.77 24.51

23.33

16.8515.48

13.05

27.82

7.00

22.00

0

10

20

30

40

50

Source: UPDEA; Power Sector Roadmap, NERC MYTO

Relative Electricity Tariffs in other African Countries…

Naira/kwh

*Rates incurred by the consumer, whilst the government paid a subsidy of N3.64**Based on an analysis by the Presidential Task Force on Power (PTFP)

The Energy Sector: Elections to slow reforms

With far reaching reforms in the pipeline in the oil, gas and power segments o

the Energy industry, electioneering for the April polls seems to be shifting th

focus of the legislators, and also the ability of the executive arm of governmen

to focus on implementation. We note that for most segments, less activity othe reforms would be felt pre-election, whilst the Government is likely to pu

more focus on the pressing issues in the Energy Industry, post-elections.

The Power Sector – Implementing the Roadmap

Tariff hike imminent

We expect the major review of the Multi Year Tariff Order (MYTO) to b

completed during the course of the year as part of the Federal governmen

plans to revamp the Power Sector. Notably, a new Board for the Nigeria

Electricity Regulatory Commission (NERC), was recently inaugurated, and woul

be responsible for the completion of the major tariff review. The review whic

comes ahead of its initial 2013 schedule is expected to fully reflect thnecessary costs in the generation, transmission and distribution segments, s

as to guarantee the financial viability of the potential private investments in th

Nigerian Power Sector. With interests burgeoning in the sector, partly fuelled b

the incumbent President’s initiation of an implementation roadmap for th

previously stalled Power Sector Reforms, we believe that the tariff review wou

be completed by the April 2011 timeline posited by the NERC Board, whils

actual implementation should follow within the year. We expect the retail tari

structure to be increased by as much as 100%, as the current tariffs are fa

below what is obtainable in other African countries and cost reflective estimate

by the Presidential Task Force on Power (PFTP).

Implementing the power sector roadmap in 2011, we expect theretail tariff structure to beincreased by as much as 100%



January 2011 107

The Tipping Point

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Slightly behind schedule, but consistency should impact success level

Though some of the key milestones of the Roadmap, such as the targe

generation level for December 2010 and April 2011, the conclusion of the MYT

review, and the approval of the Expression of Interests (EOI’s) for powe

generating companies, were initially scheduled for end January 2011, w

believe that the reform process is still much on track. More progress would b

made in the course of the year, which we anticipate would lead to th

completion of key milestones such as the privatisation and concessioning of th

generation companies, while divesting interests in the distribution companie

However, we hold that political factors, such as a possible change in th

incumbent Federal Government post-elections, would likely slow down th

implementation of the Roadmap.

Upstream Oil Sector – Waiting on the Elections

Amidst the expected rise in oil prices, revenues from the upstream segment ar

expected to improve the government’s fiscal positioning, especially a

production volumes have experienced some form of stability, on the back oearly successes of the Amnesty Program. However, we note that som

considerable risks still abound, as some disruptions in the last two to thre

months point to a gradual re-surgence of some militant groups, which if re

current through the year could lead to intermittent shut-ins in some assets

culminating in a less than expected production. More importantly, we judg

that activities in the upstream space would largely be dependent on the Apr

elections and its outcomes. Notably, the segment is facing far reaching reforms

which when concluded would re-organise players and the operation

frameworks in the industry.

Passage of the Petroleum Industry Bill (PIB)

We expect that progress on the all encompassing reform bill for the Oil and Ga

industry would stall in the first half of the year, as members of both legislativ

chambers shift focus from their primary legislative duties to the April elections

and in most cases, their personalised re-election bids. Also, slight changes i

the post-election legislature might also increase the time span to passage, a

some key proponents who have been involved in the Bill’s procession in th

National Assembly are likely not to return to the legislative chambers. Notably

the Chairman, Senate Committee on Petroleum Resources (Upstream), Senato

Lee Maeba, who has been in the forefront of the Bill’s procession an

amendments in the upper chamber, recently lost his primaries re-election bi

under the Peoples Democratic Party (PDP). Given the foregoing, we expec

significant national discourse on the legislation to really resume in the secon

half of the year, where pressing clauses which are currently in contention wou

again take centre stage. Such contentious issues include the increased oil tak

of the Federal Government through higher royalties and taxes, revised fisca

framework for offshore projects, amendment on a 10% equity stake for th

communities etc. We note also that the initial bill, as proposed by the Oil an

Gas Sector Reform Implementation Committee, has gone through a series o

amendments, taking in some concerns of the stakeholders.

Despite delay in achieving key milestones, we believe progresswill be made in the course of year.This will be well supported of theincumbent president returns topower after the April elections

Reforms, when completed would

re-organise the players and theoperational framework in theindustry

Passage of the PIB will likely stall till H2’11



January 2011 108

The Tipping Point

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Proposed Oil Licensing Rounds

Whilst the Minister of Petroleum had repeatedly, in the last year, expresse

optimism about the licensing round for new oil blocks and a marginal field bi

program, both rounds failed to take place in 2010. We anticipate that th

Government would again broach the idea of holding the rounds this yea

However, due to current stalemate with the passage of the Petroleum Industr

Bill (PIB) and the April elections, we believe that if such an oil bid round holds

would be in the second half of the year, post-elections.

Firstly, we judge that a pre-election round would not generate the require

confidence from the participating Oil and Gas companies, who can recall th

litigations and license withdrawals that trailed the 2007 licensing rounds

Moreover, the multi-national oil companies would be more comfortable wit

knowing the contents of the final version or reforming legislation (PIB), t

guarantee that they have a fair idea of the contractual terms for which they ar

bidding.

Gas – Pushing through with new pricing

In a bid to encourage supply of natural gas by the producing International O

Companies (IOC’s), the Federal Government created a pricing framework whic

increased the cost of natural gas to power plants from $0.20/mmbtu t

$1/mmbtu from December 2010, with transitional increases to $2/mmbtu b

2013. Subsequently, these increments would be guided by the country

inflation and capped at export parity. In addition, it also revised the framewor

for pricing natural gas being sold to the manufacturing firms, such that

segmented relationship exist between the Producer and Wholesaler/Loca

Distribution Company(LDC), and the LDC and manufacturing companies (en

user). While pricing between the Wholesaler and LDC is still indexed to Low

Pour Fuel Oil (LPFO, a cap of $3/MCF has now been introduced. For the LD

and the manufacturers, the sales price would be based on a mutual agreemenbetween the parties. A transition arrangement was also introduced between th

gas producers and the LDC, which caps the pricing thus: 2012 - $2/mcf; 2013

$2.50 and beyond 2013 - $3 (adjusted for inflation).

Gas supply to power should witness a boost

With the new gas pricing initiative, the traditional complain of inadequate ga

supply to the power plants should subside, as the pricing framework ca

support the gas production initiatives from the Oil Companies. Also, th

implementation of robust commercial agreements between the power plant

and the oil companies, as well as a partial risk guarantee by the World Bank

should increase the confidence level in gas suppliers that they would receiv

payments for their supplies, especially from the government controlled powe

plants, which have had a history of defaulting in payments. The impact of th

revisions have started feeding through, as reflected by the delivery of 50ms

of gas to the Nigerian Gas Company from Pan Ocean’s Ogharefe plant from

November 2010, following an agreement between Panocean/NNPC JV and th

Egbin Power Plant for the supply of 65mscf/day in June 2010 for a ten yea

period.

The Next oil licensing rounds arelikely to held post – elections and

passage of the PIB

2011 ushers in a new pricingregime for natural gas

With the new gas pricinginitiative, the traditional complainof inadequate gas supply to thepower plants should subside, asthe pricing framework can support the gas production initiatives fromthe Oil Companies.



January 2011 109

The Tipping Point

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67% 65% 66%61% 60%

29% 30% 28%32% 30%

4% 5% 6% 7% 10%

2007 2008 2009 2010E 2011F

Major Marketers Independents NNPC Retail

Market Share Adjustments for RetailersPercent

Source: NNPC Annual Reports; Vetiva Research estimates

Gas price to be stable for manufacturers

The pricing framework would also reduce the volatility previously witnessed b

manufacturers in periods of high oil prices, when the reflective price of Lo

Pour Fuel Oil (LPFO) is upwardly driven. Consequently, the cap of $2/mcf u

until 2012 would ensure that natural gas prices to manufacturers stays stabl

around its current prices. This should provide a hedge for most manufacturer

in the current year, when oil prices are trending higher.

Downstream Marketing

NNPC to play a more active role in the mix

The retail subsidiary of the Nigerian National Petroleum Corporation, NNP

Retail Limited is positioned to play more actively in the distribution of refine

petroleum products through its acquired retail outlets. From under 200 reta

outlets, the company embarked on a massive acquisition of existing reta

outlets which saw its retail outlets under the Company’s control surge to ove

500 outlets in 2010.This includes 12 floating stations, 37 mega stations an

469 affiliate stations. The retail expansion is part of the NNPC’s strategy t

increase its control of product distribution by gradually ramping up marke

share, thereby curbing the influence presently wielded by the major marketers

Landing costs of petroleum products...another astronomic rise!

As the global economy experiences a fragile recovery with positive impacts o

the crude oil prices, costs of refined petroleum products which feed from crud

prices are set for another major hike. Consequently, the cost of importing thes

products into Nigeria would again reach high levels, with similar impacts on th

Federal Governments subsidy exposures.

We expect the retail subsidiary of the NNPC to play a moreconspicuous role in thedistribution of petroleum products

We expect the costs of refined petroleum products to inceasefollowing the trajectory of the highcrude oil prices



January 2011 110

The Tipping Point

2011 Outlook


65.00

50.00

129.37

138.34

-

30

60

90

120

150

Premium Motor Spirit (PMS) House Hold Kerosene (HHK)

Current Retail Price Expected Market Price

Reflective price hike if deregulation happens now…

Naira/Litre

Source: PPPRA; Vetiva Research

99%176%

*Expected market price is based on the PPPRA template on the 18 th of January, 2011

Though the major product importer into the country, the NNPC, had give

guidance of two ‘crude for refined products swap deals’ in December 2010

which should cater for half of the country’s import requirements, there are n

clear indications how it would be priced. Consequently, as oil prices inch u

during the year, we expect the hikes to reflect in the prices of unregulate

products like Aviation Turbine Kerosene (ATK), Automotive Gas Oil (AGO) anLow Pour Fuel Oil (LPFO), while the impact on regulated products like Premium

Motor Spirit (PMS) would be borne by the government, unless a policy shift

effected.

Deregulation debate likely to be broached post-election

Concerns on the Federal Governments execution of the deregulation policy

likely to wait till after the election. We believe that the interim funding throug

the Excess Crude Account would subsist, as the incumbent President who is

candidate in the Presidential elections is unlikely to attempt the policy shift pre

election, as the immediate impact would be public outcry, which would great

impact his, chances at the polls. However, a calmer post election environmen

might lead the government to rejuvenate its plans to implement thderegulation policy. We note that the recurrent requirement to fund thes

subsidies from the publicly monitored Excess Crude Account would like

heighten calls for the implementation of the deregulation policy from differen

quarters in the year.

Still import dependent

Dependence on imported refined petroleum products is going to subsist i

2011, as the moribund government refineries are unable to meet domest

requirements. However, some headway would be gotten on potential refineries

if and when the deregulation policy is passed in the course of the year. We not

also that an extra 12,000 bpd is expected from the possible commencement o

the Amakpe Refinery (due in March), though policy and product pricing issue

might delay lifting of petroleum products from the refinery.

Concerns on the Federal Governments execution of thederegulation policy is likely to wait till after the election.



January 2011 111

The Tipping Point

2011 Outlook


Oando Plc

An Outlet to Ride the Opportunities in the Energy Space

At our slightly revised DCF valuation for the energy conglomerate, we obtain

target range of N95.79 – N105.28. This indicates a midpoint of N100.38

which underpins an upside potential of 32% relative to the stock’s currenprice. We note also that our valuation on its high margin Exploration

Production Business is based on a conservative $80/bbl crude oil price an

moderated growth rates in oil production volumes, peaking at 9,080 bpd

2015. We judge that near term acquisitions of producing assets throug

various outlets and the inflow of funds from its marketing subsidiary (OML

divestment has the potential of increasing our valuation range by >20%. Thus

we maintain a “BUY” rating.

Investment Thesis

The upstream and midstream upside. Oando has invested extensively

the upstream and midstream segments of the energy value chain. This give

the company interests in 11 upstream assets and ownership of an extensiv

gas pipeline infrastructure in Lagos and the South East, with plans to exten

coverage to other states in the South West. Our base estimates on Oando

business segments proffer a >20% PBT CAGR to 2015, in both Exploration

Production and Gas & Power Divisions, while the Energy Services Division ha

an intrinsic potential PBT CAGR of >50%.

Industry reforms should provide added advantage. Favourab

conclusion of the ongoing reforms in Nigeria’s Oil and Gas sector, which woul

result in the passage of the much debated Petroleum Industry Bill (PIB)

should increase, geometrically, the company’s potential. As an indigenou

player, the legislation, would allow more upstream acquisitions, internation

partnerships’ and favourable fiscal terms.

Earnings Outlook; We anticipate a 15% YoY growth in the Group’s aggregatrevenues to N432.3 billion for FY’11, while we forecast that PAT would gro

more aggressively, by c.31% to N13.9 billion. Fuelled by increase

contributions from its Exploration & Production Division, improved margins i

its Gas & Power and Energy Services Divisions, we believe that aggregate EBI

and PBT margins would improve to 7.6% and 5.2% in FY’11, from ou

estimates of 7.3% and 4.7% respectively in FY’10.

Source: Company Financials, Vetiva Researc

*The Company’s FY’10 outstanding shares includes additional shares from its scrip and right issueeffectively doubling in its issued shares with obvious effects on its’Per Share’ metrics

ForecastSummary FY'09A FY'10F* FY'11F FY'12F FY'13F FY'14

EPS (N) 11.16 5.87 7.67 9.60 11.34 12.8

YoY Change (%) 21.00 -47.37 30.58 25.26 18.09 13.5

P/E (x) 8.43 13.45 10.30 8.22 6.96 6.1

DPS (N) 3.00 1.46 1.91 2.39 2.82 3.2

YoY Change (%) -50.00 -51.32 30.58 25.26 18.09 13.5

Div. Yield (%) 3.19 1.85 2.41 3.02 3.57 4.0

NAPS (N) 58.91 47.69 53.51 60.81 69.42 79.2

YoY Change (%) 18.77 -19.05 12.21 13.63 14.17 14.0

P/B (x) 1.60 1.66 1.48 1.30 1.14 1.0

BASIC INFORMATION

Address 2, Ajose Adeogun Street

Victoria Island, Lagos, Nigeria

Website www.oandoplc.com

Management J A Tinubu (Group Chief Executive)

O Boyo (D/Group Chief Executive)


Exchange ListingPrimary Listing: Nigerian Stock

Exchange

Secondary Listing: Johannesburg

Stock Exchange

Symbol Bloomberg: OANDO:NL

Sector Petroleum Marketing

Country Nigeria

OWNERSHIP STRUCTURE

Shareholders % Ownership

Ocean & Oil Invstmnts 24.67

Others 75.33

SHARE STATISTICS

Shares in issue (Mn) 1,810.17


Market Cap. (N'm) 135,762.75



Daily Average Value Trad 147,238.56

Daily Average Value Trad 987.05

Year High (N) 128.50

Year Low (N) 53.00

VALUATION METRICS


P/E (x) 12.78

Price/Book (x) 1.57

Div. Yield (%) 3.19%

ROE (%) 20.56


0.50

0.70

0.90

1.10

1.30

1.50

4-Jan 4-Apr 3-Jul 1-Oct 30-Dec

O ANDO PLC PMIndex NSE ASI

OANDO vs PM INDEX VS NSE ASI

Source:NSE; Vetiva Research



January 2011 112

The Tipping Point

2011 Outlook


Income Statement (N' Mill) 2007 2008 2009 2010F 2011F 2012

Turnover 185,892 339,420 336,860 376,984 432,291 485,62

Cost of Sales -164,443 -295,714 -301,283 -326,092 -373,931 -420,06

Gross Profit 21,449 43,706 35,577 50,893 58,359 65,55


Other Operating Income 2,471 1,816 11,713 2,945 2,724 3,06

EBITDA 8,720 22,655 27,538 33,097 39,306 45,75


Interest Payable & Similar charges -1,297 -10,668 -11,826 -13,600 -14,960 -16,00

Interest received 871 4,549 3,571 3,928 4,321 4,75


Taxation -1,333 -2,399 -3,415 -7,085 -8,506 -10,20

PAT 5,480 8,343 10,097 10,628 13,878 17,38

Balance Sheet (N'Mill) 2007 2008 2009 2010F 2011F 2012

Fixed Assets 33,070 89,903 131,713 144,884 166,617 191,610

Intangible Assets 29,714 22,351 23,970 26,367 29,003 30,454

Long term investments 10 2 1 2 2 2

Long term receivable 11,138 14,545 18,783 18,783 18,783 18,783

Deferred Tax Asset - 1,044 1,944 1,944 1,944 1,944

Total Non-Current Assets 73,932 127,845 176,411 191,980 216,350 242,792

Inventories 24,730 16,069 9,693 19,387 21,325 23,458

Debtors & Prepayments 46,813 93,703 96,743 87,069 82,715 78,580

Loan receivable - 1,180 6,923 - - -



Total Assets 162,684 287,778 315,531 319,433 335,387 356,13



Share capital 377 452 453 905 905 905

Share premium account 29,878 29,717 29,735 50,401 50,401 50,401



Shareholders' Equity 47,229 44,728 52,312 84,799 95,155 108,127



January 2011 113

The Tipping Point

2011 Outlook


Income Statement ($' Million) 2007 2008 2009 2010F 2011F 2012F

Turnover 1,246 2,275 2,258 2,527 2,898 3,256

Cost of Sales -1,102 -1,982 -2,020 -2,186 -2,507 -2,816

Gross Profit 144 293 239 341 391 439



EBITDA 58 152 185 222 263 307


Interest Payable & Similar charges -9 -72 -79 -91 -100 -107

Interest received 6 30 24 26 29 32


Taxation -9 -16 -23 -47 -57 -68

PAT 37 56 68 71 93 117

Balance Sheet (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 222 603 883 971 1,117 1,285

Intangible Assets 199 150 161 177 194 204Long term investments 0 0 0 0 0 0

Long term receivable 75 98 126 126 126 126

Deferred Tax Asset - 7 13 13 13 13

Total Non-Current Assets 496 857 1,183 1,287 1,450 1,628

Inventories 166 108 65 130 143 157

Debtors & Prepayments 314 628 649 584 555 527

Loan receivable - 8 46 - - -


Total Current Assets 595 1,072 933 854 798 760

Total Assets 1,091 1,929 2,115 2,141 2,248 2,387

Total Current Liabilities 639 1,283 1,517 904 882 869

Total Liabilities 773 1,628 1,758 1,563 1,599 1,650


Share premium account 200 199 199 338 338 338


Retained Earnings 42 49 100 153 223 309




January 2011 114

The Tipping Point

2011 Outlook


2008 2009 2010F 2011F 2012F

Growth

Turnover Growth 82.6% -0.8% 11.9% 14.7% 12.3%

Growth in Core Operating profit 65.9% -21.7% 5.0% 5.0% 5.0%

Growth in EBITDA 159.8% 21.6% 20.2% 18.8% 16.4%

Growth in PBT 57.7% 25.8% 31.1% 26.4% 23.3%Growth in PAT 52.2% 21.0% 5.3% 30.6% 25.3%

Profitability

Return on Equity 18.1% 20.6% 15.2% 15.2% 16.8%

Return on Assets 3.7% 3.3% 3.3% 4.2% 5.0%

Return On Total Capital 4.8% 4.5% 4.8% 5.8% 6.6%

Operating ROE 36.5% 44.3% 39.2% 36.1% 37.5%

Operating ROA 7.5% 7.2% 8.6% 10.1% 11.2%

Margins

Gross Profit 12.9% 10.6% 13.5% 13.5% 13.5%

EBITDA/Sales 6.7% 8.2% 8.8% 9.1% 9.4%

EBIT/Sales 5.0% 6.5% 7.3% 7.6% 8.0%

Exceptional Item 0.0% 0.0% 0.0% 0.0% 0.0%



Asset Utiisation

Sales to Cash (x) 6.9 13.1 18.0 28.8 43.0


Asset turnover (x) 1.2 1.1 1.2 1.3 1.4

Fixed Assets (x) 3.8 2.6 2.6 2.6 2.5

Liquidity Ratios

Cash ratio (x) 0.3 0.1 0.2 0.1 0.1

Current ratio (x) 0.8 0.6 0.9 0.9 0.9

Acid Test (x) 0.8 0.6 0.8 0.7 0.7

Interest Coverage (x) 1.6 1.8 2.0 2.2 2.4

Days in inventory (x) 17.3 10.5 18.8 18.0 17.6Days in accounts payable (x) 55.8 98.7 82.1 64.4 51.6

Days in receivables (x) 100.8 104.8 84.3 69.8 59.1


Capital Structure

Interest bearing debt/Total assets 0.6 0.5 0.4 0.5 0.5

Debt to Total Capital 0.8 0.8 0.6 0.6 0.6

Debt to Equity 4.1 3.0 1.6 1.6 1.5

Payout ratio 0.7 0.3 0.2 0.2 0.2

Total equity/Total assets 0.2 0.2 0.3 0.3 0.3

Retention ratio 0.3 0.7 0.8 0.8 0.8

Financial Leverage 6.4 5.9 3.7 3.5 3.2

Per Share Data

EPS 9.22 11.16 5.87 7.67 9.60DPS 6.00 3.00 1.46 1.91 2.39

NAPS 49.60 58.91 47.69 53.51 60.81

Sales/Share 375.10 372.19 208.26 238.81 268.28

EBITDA/Share 25.04 30.43 18.28 21.71 25.28



January 2011 115

The Tipping Point

2011 Outlook


Mobil Oil Nigeria Plc

Hedging Downstream Risks With Real Estate

We revise our “Neutral” rating on Mobil Oil Nigeria Plc to “ACCUMULATE

premised on depreciation in the company’s share price. Our DCF base

valuation methodology for the company indicates a target price range oN170.45 – N177.93. Thus, our midpoint of N174.09 supports a 23% upside t

the stock’s current market price.

Investment Thesis

Streamlined for efficiency; Coming off a manpower rationalization in 2008

with resultant labour cost reduction in 2009, Mobil is positioned for efficienc

going forward. The company is increasing investments in technology drive

processes, to boost efficiency in the low margin downstream business, whil

expanding capacity in the higher margin lube segments. However, we expect

marginal contraction in FY’11 margins, as higher fixed operating cost

outpaces revenue growth.

Real estate as succour for downstream business; Mobil currently has thhighest profitability margins in the downstream marketing space, as it earn

an attractive rent from its prime real estate in the Lekki area of Lagos. In a bi

to improve its earnings stream from the real estate asset, the compan

invested about N1.1 billion and N1.2 billion in 2008 and 2009 respectively i

modernising the asset, as part of a program which was to be completed i

2010. The property is occupied by its sister company – Mobil Producing Niger

Unlimited. Recurrent proceeds from rental income would continue to impac

positively on the company’s bottom line.

Stable dividend payout. Mobil has maintained a consistent historica

dividend payout, satisfying the needs of investors who are in search of

sizeable dividend income. It has a 5 year average payout of 90%, informin

our assumption of an 85% payout over our forecast period. Thus, wanticipate a yet-to-be declared FY’10 DPS of N10.78 (D/Yield: 7.7%), whils

projecting FY’11 DPS of N10.99 (D/Yield: 8.0%).

Earnings Outlook. We expect revenues to be somewhat flat in 2011

projected at N62.2 billion, YoY growth of 5%. Similarly, we expect PAT t

record a 2% YoY growth to N3.9 billion. Though remaining relatively high in it

sector, we expect PBT and PAT margins to slow from 9.2% and 6.4% in FY’1

to 8.9% and 6.3% respectively in FY’11.

Sources: Company Financials, Vetiva Researc


EPS (N) 9.46 12.68 12.93 14.34 17.2

YoY Change (%) 65.34 34.11 1.95 10.87 20.1

P/E (x) 10.45 11.12 10.90 9.84 8.1DPS (N) 7.00 10.78 10.99 12.19 14.6

YoY Change (%) 40.00 54.01 1.95 10.87 20.1

Div. Yield (%) 7.09 7.65 7.79 8.64 10.3

NAPS (N) 13.90 15.80 17.74 19.89 22.4

YoY Change (%) 47.23 13.69 12.27 12.12 12.9

P/B (x) 7.11 8.92 7.95 7.09 6.2

Address 1, Mobil Road

Apapa Lagos, Nigeria

Website www.exxonmobil.com

Management Onakoya ( Chairman/MD)

Fiscal Year End December

Exchange Listing Primary Listing: Nigerian

Stock Exchange

Symbol Bloomberg: MOBIL:NL


Country Nigeria


Mobil Oil Corp. U.S.A 60.00

Others 40.00

SHARE STATISTICS

Shares in issue (Mn) 300.50





Daily Average Value Traded (N'0 13,294.04

Daily Average Value Traded (US 89.12


Year Low (N) 93.00

VALUATION METRICS


P/E (x) 10.31

Price/Book (x) 8.46


ROE (%) 81.04


BASIC INFORMATION

OWNERSHIP STRUCTURE

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20


MOBIL PMIndex NSE ASI

MOBIL VS PM INDEX VS NSE ASI




January 2011 116

The Tipping Point

2011 Outlook


Income Statement (N' Million) 2007 2008 2009 2010F 2011F 2012F

Turnover 54,542 66,741 62,032 59,241 62,203 67,179

Cost of Sales -48019 -59334 -54300 -50947 -53494 -57774

Gross Profit 6523 7407 7732 8294 8708 9405

Core Operating Profit 1258 2341 2656 3554 3732 4199Other Operating Income 1972 1873 2332 2681 2950 3156

EBITDA 3230 4214 4987 6236 6682 7355


Interest Payable & Similar charges -274 -404 -526 -578 -619 -650

Share of Profit of Associated Companies 262 -97 219 439 110 121

Profit on Ordinary Activities 2654 3182 4066 5445 5551 6154

Exceptional Item -889 -638 0 0 0 0


Taxation -634 -825 -1224 -1633 -1665 -1846

PAT 1,131 1,719 2,842 3,811 3,886 4,308

Balance Sheet (N'Million) 2007 2008 2009 2010F 2011F 2012F

Non-Current Assets

Fixed Assets 8,698 10,092 11,669 12,486 13,360 14,295


Stocks 3,264 3,899 4,378 4,816 5,298 5,828

Debtors 4,673 4,374 4,687 5,155 5,671 6,238

Deferred Tax Asset 35 499 426 448 470 494

Cash and short term deposits 133 60 22 257 16 113


Total Assets 18,561 19,915 22,070 24,114 25,835 28,053


Total Assets Less Current Liabilities 5,075 7,029 9,512 8,980 10,258 11,322

Non-Current liabilities

Deferred Tax Liability 1,276 1,206 1,297 1,297 1,297 1,297

Deferred Revenue - 2,221 4,253 2,552 3,190 3,541

Provision for Liabilities and Charges 1,550 766 -215 383 440 506

Total Non-Current Liabilities 2,826 4,192 5,335 4,232 4,927 5,344


Share capital 120 150 150 150 150 150

Share premium account 14 14 14 14 14 14

Reserves 2,114 2,672 4,012 4,584 5,166 5,813

Shareholders' Fund 2,248 2,837 4,177 4,748 5,331 5,977

Total Equity & liabilities 18,561 19,915 22,070 24,114 25,835 28,053

2008 2009 2010F 2011F 2012F 2012F

Growth

Turnover Growth 7.3% 22.4% -7.1% -4.5% 5.0% 8.0%

Growth in Core Operating profit -2.3% 86.1% 13.4% 33.8% 5.0% 12.5%

Growth in EBITDA -0.4% 30.5% 18.3% 25.0% 7.2% 10.1%

Growth in PBT -30.4% 44.1% 59.9% 33.9% 1.9% 10.9%

Growth in PAT -34.1% 51.9% 65.4% 34.1% 1.9% 10.9%



January 2011 117

The Tipping Point

2011 Outlook


Profitability

Return on Equity 44.5% 67.6% 81.0% 85.4% 77.1% 76.2%

Return on Assets 6.3% 8.9% 13.5% 16.5% 15.6% 16.0%

Return On Total Capital 28.2% 34.4% 44.7% 56.0% 53.4% 57.0%

Operating ROE 104.9% 144.8% 124.7% 125.1% 120.2% 118.2%

Operating ROA 14.8% 19.1% 20.8% 24.2% 24.3% 24.8%

Margins

Gross Profit 12.0% 11.1% 12.5% 14.0% 14.0% 14.0%

EBITDA/Sales 5.9% 6.3% 8.0% 10.5% 10.7% 10.9%

EBIT/Sales 4.9% 5.5% 7.0% 9.4% 9.7% 9.9%

Exceptional Item -1.6% -1.0% 0.0% 0.0% 0.0% 0.0%

Pretax Income/Sales 3.2% 3.8% 6.6% 9.2% 8.9% 9.2%

Net Profit Margin 2.1% 2.6% 4.6% 6.4% 6.2% 6.4%

Asset Utiisation

Sales to Cash (x) 410.2 1,113.1 2,845.6 230.3 3,837.8 594.6

Inventory Turnover (x) 16.7 17.1 14.2 12.3 11.7 11.5

Asset turnover (x) 2.9 3.4 2.8 2.5 2.4 2.4

Fixed Assets (x) 6.3 6.6 5.3 4.7 4.7 4.7

Liquidity RatiosCash ratio (x) 0.0 0.0 0.0 0.0 0.0 0.0

Current ratio (x) 0.6 0.7 0.8 0.7 0.7 0.8

Acid Test (x) 0.4 0.4 0.4 0.4 0.4 0.4

Interest Coverage (x) 9.7 9.1 8.3 9.7 9.8 10.3

Days in inventory (x) 24.8 24.0 29.4 34.5 36.1 36.8

Days in accounts payable (x) 60.3 35.7 53.6 68.5 70.5 69.8

Days in receivables (x) 31.3 23.9 27.6 31.8 33.3 33.9

Cash Conversion Cycle -4.2 12.2 3.4 -2.2 -1.0 0.9

Capital Structure

Interest bearing debt/Total assets 0.1 0.2 0.1 0.1 0.1 0.1

Debt to Total Capital 0.4 0.6 0.3 0.4 0.3 0.2

Payout ratio 1.0 0.9 0.7 0.9 0.9 0.9

Total equity/Total assets 0.1 0.1 0.2 0.2 0.2 0.2Retention ratio 0.0 0.1 0.3 0.2 0.2 0.2

Financial Leverage 8.26 7.02 5.28 5.08 4.85 4.69

Per Share Data

EPS 4.71 5.72 9.46 12.68 12.93 14.34

DPS 4.70 5.00 7.00 10.78 10.99 12.19

NAPS 9.35 9.44 13.90 15.80 17.74 19.89

Sales/Share 226.88 222.10 206.43 197.14 207.00 223.56

EBITDA/Share 13.44 14.02 16.60 20.75 22.24 24.48



January 2011 118

The Tipping Point

2011 Outlook


Total Nigeria Plc

Good Market Position...But Overpriced

Whilst Total’s business size, consistent market share retention and efficienc

attract us to the stock, we believe the counter is fully valued. From our DC

based valuation methodology, we obtain a target price range of N189.96

N197.32. This indicates a midpoint of N193.38, which highlights an expecte

downside potential of 17% (relative to its current market price), thu

compelling our “SELL” rating. However, we note that a depreciation in th

company’s share price in the near to medium term would result in a revision o

our rating , as we believe its fundamentals, relative to peers, remain stron

and look to partake in its desirable dividend payouts for our stable incom

portfolios.

Investment Thesis

Parent Company Support. Total benefits immensely from the relationsh

with its parent company in France, Total Societe Anonyme, which controls

62% interest in the Nigerian downstream business. This ensures stablproduct supplies from its affiliate company, Total AMO Paris, France. Also

leveraging on the respected Total brand, the company currently controls th

highest market share in the higher margin lubricant and specialties segmen

Due to Total’s growth in this space, the marketing of lubricants and specialtie

accounted for 10.4% of its revenue in FY’09, relative to 8.7% in FY’08, whils

Gross Profit contribution from the segment increased to 27.5% in FY’09 from

21.5% in FY’08. We expect FY’10 numbers in the segment to also come

strong.

A Play on Dividends. Total has consistently maintained a high dividen

payout, averaging 98% for the five years ending FY’09. Whilst c.30% of th

payout is effected after the release of its Quarter 3 results, the balance o

c.70% is paid out on release of audited financials.

Earnings Outlook. We expect revenues to record a 13% YoY growth t

N185.6 billion for FY’11, while we anticipate that its PAT would moderate b

17% YoY to N4.4 billion. We recall that the FY’10 earnings were boosted by a

exceptional income from the sale of an asset. Consequently, we expect PB

and PAT margins to slow from 4.7% and 3.2% in FY’10 to 3.4% and 2.4%

respectively in FY’11, whilst its DPS drops c.17% to N12.63 (Div. Yield

5.4%).

Sources: Company Financials, Vetiva Research


EPS (N) 11.69 15.50 12.89 15.82 18.0

YoY Change (%) -9.68 32.60 -16.81 22.74 13.9P/E (x) 12.75 15.10 18.15 14.79 12.9

DPS (N) 11.68 15.19 12.63 15.51 17.6

YoY Change (%) -9.67 30.03 -16.81 22.74 13.9

Div. Yield (%) 7.84 6.49 5.40 6.63 7.5

NAPS (N) 20.57 20.88 21.13 21.45 21.8

YoY Change (%) -3.94 1.51 1.24 1.50 1.6

P/B (x) 7.24 11.21 11.07 10.91 10.7

Address 4, Afribank Street

Victoria Island, Lagos, Nigeria

Website www.ng.total.com

M anagement D Thiolon (M anaging Director)


Exchange ListingNigerian Stock Exchange

Symbol Bloo mberg: TOTAL:NL


Country Nigeria

Shareho lders % Ownership

Total Societe Anonyme 45.24

Elf A quitane S.A. 16.48

Enifor Limited 8.12

Others 30.16

Shares in issue (M n) 339.52


M arket Cap. (N'm) 79,448.11

M arket Cap. (USD'm) 532.60


Daily A verage Value Traded (N'000) 13,294.04

Daily A verage Value Traded (USD'000) 89.12


Year Low (N) 142.50

VALUATION METRICS


P/E (x) 15.16

Price/Book (x) 9.50


ROE (%) 55.69


BASIC INFORMATION

OWNERSHIP STRUCTURE

SHARE STATISTICS


0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00


TOTAL PMIndex ASI

TOTAL VSPM INDEX VS NSE ASI



January 2011 119

The Tipping Point

2011 Outlook



Turnover 137,340 177,412 178,570 164,285 185,642 207,919

Cost of Sales (120,410) (158,265) (156,571) (140,463) (159,652) (178,810

Gross Profit 16,930 19,147 22,000 23,821 25,990 29,109

Core Operating Profit 4,993 6,372 7,181 7,237 7,428 8,992Other Operating Income 671 1,157 644 709 780 858

EBITDA 5,664 7,529 7,825 7,946 8,208 9,850


Interest Payable (77) (269) (516) (362) (416) (478

Profit on Ordinary Activities 4,829 6,508 6,163 6,338 6,437 7,900

Exceptional Item - - - 1,400 - -


Taxation -1,573 -2,115 -2,195 -2,476 -2,060 -2,528

PAT 3,255 4,393 3,968 5,262 4,377 5,372


Non-Current Assets

Fixed Assets 9,944 11,237 12,648 13,912 15,304 16,834


Current Assets

Inventory 9,245 9,539 11,290 12,419 11,177 12,854

Debtors and prepayments 12,860 16,904 18,881 18,503 19,428 21,371

Due from related companies 197 311 408 469 539 620

FX purchased for imports 44 27 3,781 3,781 3,781 3,781

Bank balances, deposits and cash 5,837 2,005 512 1,746 4,261 2,924


Total Assets 39,672 41,771 49,701 53,191 57,025 61,111


Share Capital 170 170 170 170 170 170

Capital reserve 263 263 263 263 263 263

General reserve 5906 6836 6550 6655 6742 6850

Shareholder's Fund 6,339 7,269 6,983 7,088 7,176 7,283



January 2011 120

The Tipping Point

2011 Outlook


Income Statement ($' Million) 2007 2008 2009 2010F 2011F 2012

Turnover 921 1,189 1,197 1,101 1,244 1,394

Cost of Sales (807) (1,061) (1,050) (942) (1,070) (1,199

Gross Profit 113 128 147 160 174 19



EBITDA 38 50 52 53 55 6


Interest Payable (1) (2) (3) (2) (3) (3

Profit on Ordinary Activities 32 44 41 42 43 5

Exceptional Item - - - 9 -


Taxation -11 -14 -15 -17 -14 -1

PAT 22 29 27 35 29 36

Balance Sheet ($'Million) 2007 2008 2009 2010F 2011F 2012

Non-Current Assets

Fixed Assets 67 75 85 93 103 11

Total Non-Current Assets 77 87 99 109 120 13

Current Assets

Inventory 62 64 76 83 75 8

Debtors and prepayments 86 113 127 124 130 14

Due from related companies 1 2 3 3 4

FX purchased for imports 0 0 25 25 25 2

Bank balances, deposits and cash 39 13 3 12 29 2

Total Current Assets 189 193 234 247 263 27

Total Assets 266 280 333 357 382 410

Total Current Liabilities 204 212 264 286 312 33


Capital reserve 2 2 2 2 2

General reserve 40 46 44 45 45 4

Shareholder's Fund 42 49 47 48 48 49



January 2011 121

The Tipping Point

2011 Outlook


2007 2008 2009 2010F 2011F 2012

Growth

Turnover Growth 8.5% 29.2% 0.7% -8.0% 13.0% 12.0%

Growth in Core Operating profit 31.4% 27.6% 12.7% 0.8% 2.6% 21.1%

Growth in EBITDA 37.9% 32.9% 3.9% 1.5% 3.3% 20.0%Growth in PBT 48.6% 34.8% -5.3% 25.5% -16.8% 22.7%

Growth in PAT 29.4% 34.9% -9.7% 32.6% -16.8% 22.7%

Profitability

Return on Equity 53.8% 64.6% 55.7% 74.8% 61.4% 74.3%

Return on Assets 9.9% 10.8% 8.7% 10.2% 7.9% 9.1%


Operating ROE 76.6% 94.6% 91.9% 92.9% 93.4% 112.7%

Operating ROA 14.1% 15.8% 14.3% 12.7% 12.1% 13.8%

Margins

Gross Profit 9.6% 8.0% 11.5% 12.9% 9.0% 9.0%

EBITDA/Sales 2.9% 3.2% 4.7% 6.7% 5.6% 5.6%

EBIT/Sales 2.0% 2.6% 3.9% 5.0% 4.2% 4.2%

Exceptional Item 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%



Asset Utiisation

Sales to Cash (x) 24 88 349 94 44 7

Inventory Turnover (x) 15 19 16 13 17 1

Asset turnover (x) 3 4 4 3 3

Fixed Assets (x) 14 16 14 12 12 1

Liquidity Ratios

Cash ratio (x) 0.2 0.1 0.0 0.0 0.1 0.

Current ratio (x) 0.9 0.9 0.9 0.9 0.8 0.

Acid Test (x) 0.6 0.6 0.6 0.6 0.6 0.

Interest Coverage (x) 60.2 23.9 12.7 18.1 16.0 17.

Days in inventory (x) 28.0 22.0 26.3 32.3 25.6 26.

Days in accounts payable (x) 49.9 47.2 49.0 60.1 58.2 57.

Days in receivables (x) 34.2 34.8 38.6 41.1 38.2 37.

Cash Conversion Cycle 12.3 9.6 15.9 13.3 5.6 6.

Capital Structure

Interest bearing debt/Total assets 0.1 0.0 0.1 0.1 0.1 0.

Debt to Total Capital 0.2 0.1 0.4 0.4 0.4 0.

Debt to Equity 0.3 0.2 0.6 0.7 0.8 0.

Payout ratio 1.0 1.0 1.0 1.0 1.0 1.

Total equity/Total assets 0.2 0.2 0.1 0.1 0.1 0.

Retention ratio 0.0 0.0 0.0 0.0 0.0 0.

Financial Leverage 6.3 5.7 7.1 7.5 7.9 8.Per Share Data

EPS 9.59 12.94 11.69 15.50 12.89 15.8

DPS 9.50 12.93 11.68 15.19 12.63 15.5

NAPS 18.67 21.41 20.57 20.88 21.13 21.4

Sales/Share 404.51 522.53 525.95 483.87 546.77 612.3



January 2011 122

The Tipping Point

2011 Outlook


MRS Oil Nigeria Plc

Recovering Lost Market Share

Our DCF valuation methodology for the MRS Oil indicates a target price rang

of N86.02 – N89.44. This indicates a midpoint of N87.68, which underpins a

upside potential of 32% relative to the stock’s current price. Thus, wmaintain an “BUY” rating.

Investment Thesis

Leveraging on New Core Investor; MRS is gradually regaining marke

share, which was eroded during the transition period of the divestmen

process. Apart from receiving products from its primary supplier, th

Petroleum Products Marketing Company (PPMC), the company also source

refined products through the extensive trading network of its parent compan

– MRS Holdings Limited. The company is currently growing awareness on it

brand, as the divestment process also entailed a change in the Texac

branded stations and lubricant products to the MRS brand and product range.

Strategic Expansions across the Retail Space; MRS is expanding its reta

network, though with preference for the Retailer Owned Retailer Operate

(RORO), which comes with little or no capital expenditure requirement. Whils

the company had initially disclosed its target expansion of 150 retail outlet

per year, we believe that its expansion would be somewhat moderated due t

relative competition in the downstream space.

Dividend income still expected. Though the new Management is yet t

come up with a specific dividend policy, we expect that it would maintain th

30% payout effected in FY’09 in FY’10, and increase it to 40% in FY’11. Thus

we expect a DPS of N2.63 in FY’11, translating to a dividend yield of 4.0%.

Earnings Outlook. We expect revenues to increase marginally; rising 2% Yo

to N78.4 billion by FY’11. However, we expect its PAT to drop by c.7% to N1.billion. Whilst we expect gross margins in FY’11 to remain stable at 9%, w

anticipate that PAT margin would slow from an estimate of 2.3% for FY’10 t

2.3% in FY’11.

S



EPS (N) 4.14 6.45 5.77 4.58 5.0

YoY Change (%) n/a 55.82 -10.51 -20.60 10.7

P/E (x) 38.65 10.32 11.54 14.53 13.1

DPS (N) 1.25 2.12 2.63 4.17 5.1

YoY Change (%) n/a 69.41 24.29 58.50 22.3

Div. Yield (%) 0.78 3.18 3.95 6.27 7.6NAPS (N) 11.68 16.62 20.57 24.74 29.8

YoY Change (%) 54.87 42.31 23.76 20.28 20.6

P/B (x) 13.69 4.01 3.24 2.69 2.2

Address 8, Macarthy Street

Onikan, Lagos, Nigeria

Website www.mrsoilnigplc.com

Management L V Tanoe (Managing Director)



Symbol Bloomberg: CHEVRON:NL


Country Nigeria


Corlay Global S.A. 60.00

ZSLA/CFOZ 7.58Others 32.42

Shares in issue (Mn) 253.99





Daily Average Value Traded (N' 1,897.98

Daily Average Value Traded (U 12.72

Year High (N) 91.35

Year Low (N) 69.79

VALUATION METRICS


P/E (x) 16.04

Price/Book (x) 4.27


ROE (%) 43.06

SHARE STATISTICS

BASIC INFORMATION

OWNERSHIP STRUCTURE



January 2011 123

The Tipping Point

2011 Outlook



Turnover 72,628 48,688 74,603 76,841 78,378 84,648

Cost of Sales (64,940) (44,419) (68,973) (69,925) (71,324) (76,607)

Gross Profit 7,688 4,269 5,630 6,916 7,054 8,042

Selling and Distribution Costs (1,720) (1,231) (916) (1,026) (1,129) (1,242)

Administrative Expenses (1,386) (1,439) (1,143) (1,223) (1,296) (1,374)

Other Operating Expenses (1,371) (1,435) (1,363) (1,444) (1,531) (1,608)

Other Income 181 151 77 31 34 37

EBITDA 3,392 314 2,285 3,253 3,132 3,855


EBIT/Operating Profit 2,744 (389) 1,688 2,596 2,409 3,061

PBT 2,995 (306) 1,721 2,637 2,458 3,116

Taxation (1,036) 80 (670) (844) (786) (997)

PAT 1,959 -225 1,051 1,793 1,671 2,119

BALANCE SHEET (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 FNon-Current Assets

Property, plant and equipment 3,838 3,422 3,036 3,340 3,740 3,927

Prepayments (non-current) 149 140 147 162 178 196


Current Assets

Stock 3,244 2,146 4,845 4,360 5,450 4,905

Receivables & Prepayments 7,518 5,566 7,306 8,037 7,233 6,148

Cash & Cash Equivalents 6,188 57 1,274 1,754 1,119 3,426


TOTAL ASSETS 20,937 11,330 16,608 17,653 17,721 18,603


Total Non-Current Liabilities 1,367 1,275 773 773 773 773

Net Assets 4,045 1,915 2,966 4,221 5,224 6,283

Capital and Reserves

Share capital 127 127 127 127 127 127


Shareholder's Fund 4,045 1,915 2,966 4,221 5,224 6,283



January 2011 124

The Tipping Point

2011 Outlook


INCOME STATEMENT ($'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 487 326 500 515 525 567

Cost of Sales (435) (298) (462) (469) (478) (514)

Gross Profit 52 29 38 46 47 54

Selling and Distribution Costs (12) (8) (6) (7) (8) (8)

Administrative Expenses (9) (10) (8) (8) (9) (9)

Other Operating Expenses (9) (10) (9) (10) (10) (11)

Other Income 1 1 1 0 0 0

EBITDA 23 2 15 22 21 26


EBIT/Operating Profit 18 (3) 11 17 16 21

PBT 20 (2) 12 18 16 21

Taxation (7) 1 (4) (6) (5) (7)

PAT 13 (2) 7 12 11 14

BALANCE SHEET ($'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Non-Current Assets

Property, plant and equipment 26 23 20 22 25 26

Prepayments (non-current) 1 1 1 1 1 1


Current Assets

Stock 22 14 32 29 37 33

Receivables & Prepayments 50 37 49 54 48 41

Cash & Cash Equivalents 41 0 9 12 8 23


TOTAL ASSETS 140 76 111 118 119 125


Total Non-Current Liabilities 9 9 5 5 5 5

Net Assets 27 13 20 28 35 42



Retained Earnings 13 12 19 27 34 41

Shareholder's Fund 27 13 20 28 35 42



January 2011 125

The Tipping Point

2011 Outlook


2008 2009 2010 F 2011 F 2012 F

Growth (%)

Turnover Growth -33.0% 53.2% 3.0% 2.0% 8.0%

Growth in Core Operating profit -94.9% 1253.1% 45.9% -3.9% 23.3%

Growth in EBITDA -90.7% 627.7% 42.4% -3.7% 23.1%

Growth in PBT n/a n/a 53.2% -6.8% 26.8%Growth in PAT n/a n/a 70.6% -6.8% 26.8%

Profitability (%)

Return on Equity -7.6% 43.1% 49.9% 35.4% 36.8%

Return on Assets -1.4% 7.5% 10.5% 9.4% 11.7%

Return On Total Capital -7.6% 43.1% 49.9% 35.4% 36.8%

Operating ROE -13.0% 69.2% 72.3% 51.0% 53.2%

Operating ROA -2.4% 12.1% 15.2% 13.6% 16.9%

Margins (%)

Gross Profit 8.8% 7.5% 9.0% 9.0% 9.5%

EBITDA/Sales 0.6% 3.1% 4.2% 4.0% 4.6%

EBIT/Sales -0.8% 2.3% 3.4% 3.1% 3.6%

Exceptional Item 0.0% 0.0% 0.0% 0.0% 0.0%

Pretax Income/Sales -0.6% 2.3% 3.4% 3.1% 3.7%

Net Profit Margin -0.5% 1.4% 2.3% 2.1% 2.5%

ASSET UTILIZATION 2008 2009 2010F 2011F 2012F

Sales to Cash (x) 858.9 58.5 43.8 70.0 24.7


Asset turnover (x) 4.3 4.5 4.4 4.4 4.6

Fixed Assets (x) 14.2 24.6 23.0 21.0 21.6


Cash ratio (x) 0.0 0.1 0.1 0.1 0.3

Current ratio (x) 1.0 1.0 1.1 1.2 1.3

Acid Test (x) 0.7 0.7 0.8 0.7 0.8

Days in inventory (x) 16.1 23.7 20.7 25.4 21.2

Days in accounts payable (x) 59.7 61.0 58.1 52.4 47.5

Days in receivables (x) 41.7 35.7 38.2 33.7 26.5

Cash Conversion Cycle -1.9 -1.6 0.8 6.7 0.1

Capital Structure

Payout ratio 0.0% 30.2% 30.0% 40.0% 50.0%

Total equity/Total assets 16.9% 17.9% 23.9% 29.5% 33.8%

Retention ratio 100.0% 69.8% 70.0% 60.0% 50.0%

Financial Leverage 5.9 5.6 4.2 3.4 3.0

Per Share Data

EPS -0.89 4.14 7.06 6.58 8.34

DPS 0.00 1.25 2.12 2.63 4.17

NAPS 7.54 11.68 16.62 20.57 24.74

Sales/Share 191.69 293.73 302.54 308.59 333.28

EBITDA 1.24 9.00 12.81 12.33 15.18



January 2011 126

The Tipping Point

2011 Outlook


Conoil Plc

Increased Investments to Improve Performance

We maintain our “BUY” rating on Conoil Plc, at its current market price. Usin

the DCF valuation methodology, we obtain a target price range of N49.37

N52.09. This indicates a midpoint of N50.72, which underpins an upsid

potential of 26%.

Investment Thesis

On an expansionary thrust; Conoil has embarked on an expansion of it

current retail distribution capacity through a combination of an upgrade o

existing outlets, acquisition of additional outlets, as well a constructing a ful

fledged service range mega stations. The company is also investing in th

expansion of its storage capacity, through the upgrade of current depo

facilities in Apapa, Warri and Kaduna, and the construction of new storag

tanks in Apapa, Port-Harcourt and Calabar to complement the current storag

capacities in the locations. This storage expansion is expected to sav

transportation costs. The company is also expanding into Togo and GhanaThese initiatives should improve the company’s near term top lin

performance, amidst challenges in the wider industry.

Strengthening its hold on the aviation business; In addition to onshor

and offshore retail expansion projects, Conoil is investing in infrastructure t

support Aviation Fuel sale. The company has historically maintained a sizeab

market share in the distribution of Aviation Fuel, accounting for c.9% of th

volume distributed in FY’09. Conoil has procured new bowsers to boost th

speed of its service delivery to airlines. It has also put up new and re-activate

a number of aviation fuel stations at different locations to meet up th

increasing demand of its customers.

Earnings Outlook; We anticipate a 12% YoY growth in aggregate revenues t

N432.3 billion for FY’11, supported primarily by its recent expansionar

efforts. Similarly, we expect PAT to come in at N98.11 billion, 15% ahead o

our FY’10 estimates. Whilst we expect PBT margins to slow from 3.98% i

FY’10 to 3.95% in FY’11, we anticipate moderate improvements in its PA

margin to 2.5% in FY’11 from 2.3% in FY’10, due to a drop in our effective ta

rate assumption from 36% to 34%.



EPS (N) 3.33 3.21 3.68 4.24 5.4

YoY Change (%) 27.18% -3.63 14.72 15.12 29.1

P/E (x) 23.53 12.50 10.90 9.46 7.3

DPS (N) 1.50 1.61 1.84 2.12 2.7

YoY Change (%) 50.00 7.04 14.72 15.12 29.1

Div. Yield (%) 1.91 4.00 4.59 5.28 6.8

NAPS (N) 19.47 21.08 22.92 25.04 27.7

YoY Change (%) 13.59 8.25 8.74 9.25 10.9

P/B (x) 4.03 1.90 1.75 1.60 1.4

ddress Bull Plaza

38/39 Marina, Lagos.

ebsite www.conoilplc.com

anagement asikaran (Managing Director)


xchange Listing Primary Listing: Nigerian

Stock Exchange

ymbol Bloomberg:CONOIL:NL

ector Petroleum Marketing

ountry Nigeria

hareholders % Ownership

onpetro Limited 74.40

thers 25.60

HARE STATISTICS

hares in issue (Mn) 693.95


arket Cap. (N'm) 27,855.15

arket Cap. (USD'm) 186.73

ee Float (%) 25.60

a ily Ave rage V alue Traded (N'000) 4,675.89

aily Average Value Traded (USD'000) 31.35

ar High (N) 56.14

ar Low (N) 27.63

ALUATION METRICS

ook Value (N'm) 15,245.00

E (x) 12.50

ice/Book (x) 1.83

v. Yield (%) 3.74%

OE (%) 18.20

ebt/Equity (%) 66.77

ASIC INFORMATION

WNERSHIP STRUCTURE

60

80

00

20

40

60

80

00

20


CONOIL PMInde x ASI

CONOIL VS PM INDEX VS NSE ASI



January 2011 127

The Tipping Point

2011 Outlook



Turnover 86,848 124,214 101,853 87,594 98,105 112,821

Cost of Sales -74,992 -111,223 -89,022 -74,893 -84,370 -98,154

Gross Profit 11,855 12,990 12,831 12,701 13,735 14,667Core Operating Profit 6,658 7,368 6,613 7,104 7,858 8,496

Other Operating Income 372 230 1,406 281 309 340

EBITDA 7,029 7,598 8,019 7,385 8,167 8,836


Interest Payable -1,611 -2,631 -2,513 -2,010 -2,211 -2,322

PBT 3,759 3,282 3,785 3,482 3,874 4,328

Taxation -1,166 -1,461 -1,473 -1,254 -1,317 -1,385

PAT 2,593 1,821 2,312 2,228 2,557 2,943


Fixed Assets 8,991 8,222 8,139 8,953 9,848 10,833


Stocks 7476 6516 4095 4464 4821 5303


Cash and bank balances 952 14592 10572 9373 9097 8865


Total Assets 39,380 56,796 39,774 41,624 44,861 48,416

Current Liabilities


Total Assets Less Current Liabilities 15,129 13,811 15,774 17,015 18,207 19,701


Deferred taxation 1,292 1,110 1,436 1,436 1,436 1,436

Retirement benefit obligation 1,078 - - - - -

Provision 377 385 403 423 444 466

Staff Retirement benefits 402 424 424 424 424 424




Share capital 347 347 347 347 347 347

Share premium account 3,825 3,825 3,825 3,825 3,825 3,825

General reserve 5,238 5,151 6,769 7,884 9,162 10,633

Revaluation Reserve 2,570 2,570 2,570 2,570 2,570 2,570

Shareholders' Fund 11,980 11,893 13,511 14,625 15,904 17,375



January 2011 128

The Tipping Point

2011 Outlook


Income Statement ($' Million) 2007 2008 2009 2010F 2011F 2012F

Turnover 582 833 683 587 658 756

Cost of Sales -503 -746 -597 -502 -566 -658

Gross Profit 79 87 86 85 92 98



EBITDA 47 51 54 50 55 59


Interest Payable -11 -18 -17 -13 -15 -16

PBT 25 22 25 23 26 29

Taxation -8 -10 -10 -8 -9 -9

PAT 17 12 16 15 17 20

Balance Sheet ($'Million) 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 60 55 55 60 66 73


Stocks 50 44 27 30 32 36


Cash and bank balances 6 98 71 63 61 59


Total Assets 264 381 267 279 301 325

Current Liabilities


Net Current Assets/(Liabilities) 41 37 51 54 56 59

Total Assets Less Current Liabilities 101 93 106 114 122 132


Deferred taxation 9 7 10 10 10 10Retirement benefit obligation 7 - - - - -

Provision 3 3 3 3 3 3

Staff Retirement benefits 3 3 3 3 3 3


Total Liabiities 205 314 191 196 210 224



General reserve 35 35 45 53 61 71

Revaluation Reserve 17 17 17 17 17 17

Shareholders' Fund 80 80 91 98 107 116



January 2011 129

The Tipping Point

2011 Outlook


2007 2008 2009 2010F 2011F 2012F

Growth

Turnover Growth -4.1% 43.0% -18.0% -14.0% 12.0% 15.0%

Growth in Core Operating profit 8.4% 10.7% -10.3% 7.4% 10.6% 8.1%

Growth in EBITDA 5.6% 8.1% 5.5% -7.9% 10.6% 8.2%

Growth in PBT -8.6% -12.7% 15.3% -8.0% 11.2% 11.7%Growth in PAT -7.7% -29.8% 27.0% -3.6% 14.7% 15.1%

PROFITABILITY

Return on Equity 22.3% 15.3% 18.2% 15.8% 16.7% 17.7%

Return on Assets 7.1% 3.8% 4.8% 5.5% 5.9% 6.3%


Operating ROE 46.1% 49.5% 49.6% 39.0% 39.9% 40.0%

Operating ROA 14.7% 12.3% 13.0% 13.5% 14.1% 14.3%

MARGINS

Gross Profit 13.7% 10.5% 12.6% 14.5% 14.0% 13.0%

EBITDA/Sales 8.1% 6.1% 7.9% 8.4% 8.3% 7.8%

EBIT/Sales 6.2% 4.8% 6.2% 6.3% 6.2% 5.9%



ASSET UTILIZATION

Sales to Cash (x) 91.2 8.5 9.6 9.3 10.8 12.7

Inventory Turnover (x) 11.6 19.1 24.9 19.6 20.4 21.3

Asset turnover (x) 2.2 2.2 2.6 2.1 2.2 2.3

Fixed Assets (x) 9.7 15.1 12.5 9.8 10.0 10.4

LIQUIDITY RATIOS

Cash ratio (x) 0.0 0.3 0.4 0.4 0.3 0.3

Current ratio (x) 1.3 1.1 1.3 1.3 1.3 1.3

Acid Test (x) 0.9 1.0 1.1 1.1 1.1 1.1

Interest Coverage (x) 3.3 2.2 2.5 2.7 2.8 2.9

Days in inventory (x) 36.4 21.4 16.8 21.8 20.9 19.7

Days in accounts payable (x) 11.4 5.5 21.7 28.4 27.0 24.8

Days in receivables (x) 92.3 80.7 60.8 78.5 78.5 75.8

Cash Conversion Cycle 117.3 96.6 55.9 71.8 72.4 70.7

CAPITAL STRUCTURE

Interest bearing debt/Total assets 0.4 0.6 0.2 0.2 0.2 0.2

Debt to Total Capital 1.1 0.9 0.4 0.4 0.4 0.4

Debt to Equity 1.2 2.9 0.7 0.6 0.5 0.5

Payout ratio 0.7 0.4 0.5 0.5 0.5 0.5

Total equity/Total assets 0.3 0.2 0.3 0.4 0.4 0.4

Retention ratio 0.3 0.6 0.5 0.5 0.5 0.5

Financial Leverage 3.3 4.8 2.9 2.8 2.8 2.8

PER SHARE DATA

EPS 3.74 2.62 3.33 3.21 3.68 4.24

DPS 2.75 1.00 1.50 1.61 1.84 2.12NAPS 17.26 17.14 19.47 21.08 22.92 25.04

Sales/Share 125.15 178.99 146.77 126.22 141.37 162.58

EBITDA 10.13 10.95 11.56 10.64 11.77 12.73



January 2011 130

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Infrastructure Sector: Set for Mixed Realties

Governments’ CAPEX – main driver of development

Federal Government: Typical of most Sub-Saharan African economies, 2011

being an election year, holds mixed possibilities for infrastructural developmen

in Nigeria. As, government remains the biggest spender on physicinfrastructure, we expect new infrastructure spend to be at low levels for th

first half of 2011 given our view of increased spending towards electioneering

In the second half of the year, we may begin to see a steady rise i

infrastructure spend as the new government settles in. Despite th

expectation, we note that capital expenditure received lesser priority in th

proposed 2011 budget, representing only 23.8% of total budget, as compare

to recurrent expenditure which stood at 58.7% (see table below). Mor

worrisome is the historically low level of capital budget implementation; a

estimated average of 50% over the last 5 years.

State Governments: For the states which would be holding gubernatoria

elections in 2011, the expectations on infrastructure development is largel

similar to federal government’s as pre-elections spend and uncertaint

regarding the policies of the new government would typically shift focus awa

from capital expenditure. Notwithstanding, we still see project developments i

the few states that will not hold elections this year. For instance, Edo state i

currently in the process of issuing a N25 billion 7-year tenor bond; c.45% o

which is aimed a financing infrastructural projects. With a deepening of th

sub-national debt market, we expect more states, especially the ones, wit

new governors to embark on infrastructure bond issuance in the course of th

year.

Prospects in the longer term

Sub-national governments - more pivotal to development: With Nigeriainfrastructure development receiving more emphasis in recent times, w

believe the potential for infrastructural development in Nigeria would be mor

realisable through sub-national governments (state and local governments

2009 data from the CBN shows that state and local governments accounted fo

52% of aggregate expenditure, implying that public spend is largely overweigh

on sub-national expenditure. On a broader note, governments’ expenses (sub

nationals and federal) have historically been significantly skewed toward

recurrent expenditure. We note however that state governments appear t

focus more on capital projects as CAPEX account for 46.2% of total state

government expenditure (vs 33% for federal and local government

respectively). It is apparent therefore that sub-national governments, especial

states, would be essential to sustainable infrastructure development in longeterm.

Pre-elections federal government infrastructure spend would beconsiderably minimal

We expect to see continuingactivity in infrastructuredevelopment amongst few states

that would not hold gubernatorial elections in April

Sub-national governments arepivotal to infrastructuredevelopment as they account for alarger portion of aggregateexpenditure



January 2011 131

The Tipping Point

2011 Outlook


Sources: CBN 2009 annual report, Vetiva Researc

Financing gaps – still a major hurdle: Governments’ heavy reliance o

crude oil revenue (approximately constitute 60% of governments aggregat

revenue) poses major constraint on infrastructure financing. Following from ou

opinion that sub-national governments would be more pivotal to infrastructur

development, it is expedient that sub-national governments need to devis

ways to access alternative financing sources. To our mind, the successf

issuance of the US$500 million debut Euro bond will further unlock globa

development funds for Nigeria. Apart from federal allocations and borrowing

we believe that Private Public Partnerships (PPP) may be be a veritable sourc

of infrastructural development in the country. The Lekki Concession Company

a PPP arrangement of Lagos state which financed the 33km Lekki expressway i

a good case in view. With FAAC allocations used mainly for recurrent spend an

internally generated revenue constituting a minimal portion of total revenue o

most states, the available options for infrastructure financing are Public Privat

Partnerships and debt.

Building Materials

Minimal growth anticipated as elections pre-occupies key consumers

Our focus on the building materials sector is on the cement producers give

their dominance in the sector. The outlook for the cement producers follow

from our overall expectations of slow infrastructure development in the nea

term. In line with the additional capacities (13.2 million tonnes per annum

expected to come from Dangote Cement and Lafarge WAPCO this year, th

sector is set to witness a major boost in cement supply. Therefore, th

dynamics of cement supply would even change further as imports become quit

negligible.

Governments aggregate expenditure and percentage composition of recurrentexpenditure in total expenditure (2009)

To fast-track the development of physical infrastructure, Sub-national governments need todevise other means of funding

beyond federal allocations

The cement sector is set towitness major boost in supply though minimal consumptiongrowth is expected



January 2011 132

The Tipping Point

2011 Outlook


On cement consumption, we expect some improvement in Q1’11 given th

onset of the dry season. This should accelerate cement consumption as th

weather becomes more conducive for concrete projects). However, we still d

not anticipate strong demand given our overall anticipation of a general slow

down down in infrastructure spend, particularly as private sector credit growt

remains relatively weak.

Better credit flows may post demand upsides than we think

With the speed of AMCON’s activities, we note that the banking sector may b

faster positioned to resume strong lending to the real sector, than ou

expectation of 15% growth in private sector credit. Post elections, we believ

the certainty in the political scene in terms of policy continuation an

governance, coupled with a much stronger banking sector balance shee

should result in a gradual boost in cement demand. Based on latest Q3’1

results of the cement producers, we estimate a decline of 11% in cemen

consumption relative to 2009 level. Thus, our estimated 2010 cemen

consumption stands at 13.3 million tonnes.

In line with our anticipation of an improved credit environment and a modes

boost in cement demand post elections, our forecast for 2011 cemen

consumption stands at 17.7 million tonnes (33% growth over our 201

estimate). On the back of our assumption of capacity utilisation (inclusive o

the expected capacities additions from Dangote Cement and WAPCO), w

estimate that cement production for 2011 would be around 17.2 million tonnes

implying a marginal importation need of 0.5 million tonnes.

Further into 2012, we expect to see stronger demand and purchasing powe

especially if the on-going power sector reforms are assiduously implemented.

Nevertheless, we anticipate that cement production would out-pac

consumption in the short term and exports to neighbouring African countrie

might only be possible during this period.

Cement Consumption, Production and Imports in million tonnes

Sources: Industry sources, Vetiva Research Estimat

Given positive expectations on thebanking sector reforms and AMCON activities, we hope to see

major improvement in lending tothe real sector post elections

Thus we believe cement demand would rally on the bank of credit accessibility in the real sector



January 2011 133

The Tipping Point

2011 Outlook


Construction

Although private sector participation in infrastructure development is growing

the construction sector still depends heavily on government capita

expenditure. Typical of the seasonal pattern in the industry, we expect majo

activities in the first quarter of the year, partly because of the dry season an

the roll-over of 2010 budget into the Q1’11. However, we would not likely se

major increase in new contracts after this period, given the expected shift o

focus to elections.

Post-elections, we do not foresee major boost in construction contracts from

government. The lower allocation to CAPEX in the proposed 2011 budget attes

to this; though we do not rule out the possibility of increased allocation t

CAPEX in subsequent supplementary budgets. Whilst noting the increasin

number of players in the construction industry, we believe Julius Berger wou

still continue to dominate the sector given its unique advantage of having mor

experience and the implied economies of scale. Among the new entrants, w

note that China State Construction Engineering Corp. which was contracte

(projects summing up $23.8 billion) around mid 2010 to build three refinerie

and a petrochemical plant in Nigeria, can potentially become a major contende

for market dominance with Julius Berger in the longer term, especially a

government seeks financing through Public Private Partnerships fo

infrastructural project.

Despite growing involvement of the private sector, players in theconstruction industry still depend more on access to government contracts

Whist acknowledging that supplementary budgets may still be passed, the 2011 budget draft supports lesser capital expenditure; this fuels our expectation minute growth inconstruction after election



January 2011 134

The Tipping Point

2011 Outlook


Dangote Cement Plc

The titan of Nigeria’s cement industry

Following adjustments in our DCF valuation model, our one year target pric

range for Dangote Cement now stands at N133.20 – N148.70 with a midpoin

of N139.35 obtained from a 20%/80% weighted EV/EBITDA and DCF targeprices of N121.23 and N143.89 respectively. Thus, at its current price o

N130.08 , the stock is trading at an expected upside potential of 5.4% t

target price of N139.35, hence we downgrade our rating of DangCem t

“NEUTRAL” from “Accumulate”.

Investment thesis

Dominant Market Share: Through its 5 million tonnes Obajana Plant,

million tonnes Gboko (BCC) Plant and 6 million tonnes import terminals i

Lagos, Port/Harcourt and Onne, Dangote Cement controls close to 60% of th

Nigerian cement market and it’s unarguably the giant of the industry

Dangote Cement’s Obajana plant is the biggest cement plant in Nigeria an

the second largest in Africa. As stated by Dangote Cement’s management, a

additional 6 million tonnes cement plant in Ibese, which is billed to b

completed by Q1’11 and Obajana’s 3rd and 4th lines, also billed to b

completed by H1’11, would push Dangote Cement’s market share to c.70% o

the market, giving the company a relatively monopolistic advantage based o

accretion of huge benefit of economies of scale.

Modern and highly energy efficient plants: Dangote Cement Plants us

the most modern technology in cement production as its rotary kilns emplo

the pre-calciner dry process for converting raw meals into clinker. The Plant

are perhaps the most efficient in Nigeria as Pre-calciner dry kilns have th

least energy consumption level of about 4.03GJ/tonne of clinker produced, an

are among the most energy efficient globally. We see this as a key advantag

given the incessant stoppage of production usually encountered by loca

cement manufacturers as a result of energy problems. Other stron

investment cases for Dangote Cement include the proximity of its plants etc.

Strong Earnings Outlook: We project that Dangote Cement’s revenue wou

grow by 66.1% and 31.5% to N346 billion and N455 billion by FY’11 and FY’1

respectively. On profitability, we forecast that EBITDA margins would steadi

rise to 63.6% and 66.1% by FY’11 and FY’12 from our estimate of 57.8% a

FY’10. Also, we expect EBIT margins to increase to 59.2% and 62.2% by FY’1

and FY’12 from FY’10 estimate of 51.3%.

Sources: NSE, Vetiva Researc

Forecast Summary FY'09* FY'10F FY'11F FY'12F FY'13

EPS (N) 3.97 6.64 12.83 17.85 20.65

YoY Change (%) 76.4 67.3 93.2 39.1 15.7P/E (x) 31.9 19.9 10.3 7.4 6.4

DPS (N) 2 4.98 9.32 12.96 14.99

YoY Change (%) 0 149 87.1 39.1 15.7

Div. Yield (%) 1.6 3.8 7.1 9.8 11.3

NAPS (N) 10.2 12.23 15.74 20.61 25.42

YoY Change (%) 117 19.9 28.7 30.9 23.3

P/B (x) 27 10.8 8.4 6.4 5.2

0.85

0.90

0.95

1.00

1.05

Oct-10 Nov-10 Dec-10

Dangcem BMIndex ASI

DANGCEM VS BM VS NSE ASI PERFORMANCE

Rebased 26/10/2010

Sources: NSE, Vetiva Research

BASIC INFORMATION

Address

Alfred Rewane

Close, Ikoyi

Lagos State

Website

www. angote-

cement.com

Management Chairman Aliko Dangote

MD/CEO Daljeet Ghai

Financial Year End

Exchange Listing ian Stock Exchange

Symbol berg: Dangcem:NL

Sector Building Materials

Country Nigeria


DIL 95.5

Others 4.5

SHARE STATISTICS



Market Cap. (N'Mn) 2,053,110

Market Cap. (USD'Mn) 13,764

Free Float (%) 4.5

(N'Mn) 779.5


(USD'Mn) 52.3

Year high (N) 135

Year low (N) 120

VALUATION METRICS



P/B (x) 13.0

Div. Yield (%) 1.5

ROAE (%) 53.3




January 2011 135

The Tipping Point

2011 Outlook



Turnover 34,596 61,906 189,621 208,500 346,332 455

Cost of Sales (8,183) (14,054) (94,345) (82,463) (111,757) (116,7

Gross Profit 26,413 47,852 95,276 126,037 234,575 338

Operating Expenses (4,992) (9,470) (17,422) (5,421) (15,931) (37,8

Core Operating Profit 21,420 38,382 77,853 120,616 218,643 300

EBITDA 21,420 38,382 77,853 120,616 218,643 300

Depreciation & Amortization (5,462) (5,982) (11,527) (13,577) (15,308) (17,

EBIT/Operating Profit 15,958 32,400 66,326 107,039 203,335 283

Interest Payable & Charges (6,137) (8,647) (6,043) (993) (456) (1,

Profit Before Taxation 9,820 23,753 60,283 106,046 202,879 282

Taxation (630) (8,665) (2,384) (3,181) (4,058) (5,6

Profit After Taxation 11,623 17,960 61,392 102,864 198,821 276


Fixed Assets 130,519 135,622 186,393 215,788 277,546 289

Investments - - 99 99 99

Inventories 2,790 5,043 13,374 11,690 15,842 16

Debtors 876 2,924 6,826 7,505 12,467 16

Bank and cash balances 6,291 5,264 10,733 48,668 117,961 208

Other Receivables and Current Assets 28,005 87,867 98,913 108,761 180,660 237

Total Assets 168,481 236,720 316,339 392,511 604,574 769,

Creditors & Accruals 1,879 2,411 4,715 1,467 4,311 10

Other Creditors 9,833 17,205 65,349 71,855 119,356 157

Short Term Loan 20,823 78,339 18,061 10,644 7,724 79

Taxation 631 1,336 4,347 5,285 7,812 9

Long-Term Loans 77,211 56,890 49,620 102,120 70,745 38

Provision for Gratuity 34 67 981 2,169 3,602 4

Prior Year Dividend - - - - 137,745 139

Deferred Taxation - 7,959 9,475 9,475 9,475 9

Total Liabilities 110,410 164,208 152,548 203,014 360,770 449,

Share Capital 500 500 500 7,747 7,747 7

Share Premium 42,430 42,430 42,430 42,430 42,430 42

Revenue and Capital reserve 15,141 29,582 113,752 125,342 119,482 233

Shareholders Fund 58,071 72,512 157,668 175,519 169,659 283

Minority Interest - - 6,122 6,945 8,535 10

Total Equity 58,071 72,512 163,790 189,497 178,194 319,



January 2011 136

The Tipping Point

2011 Outlook



Turnover 294 497 1,287 1,345 2,234 2,

Cost of Sales (70) (113) (641) (532) (721) (7

Gross Profit 225 384 647 813 1,513 2,

Operating Expenses (42) (76) (118) (35) (103) (2

Core Operating Profit 182 308 529 778 1,411 1,

EBITDA 182 308 529 778 1,411 1,

Depreciation & Amortization (46) (48) (78) (88) (99) (1

EBIT/Operating Profit 136 260 450 691 1,312 1,

Interest Payable & Charges (52) (69) (41) (6) (3)

Profit Before Taxation 84 191 409 684 1,309 1,

Taxation (5) (70) (16) (21) (26) (

Profit After Taxation 99 144 417 664 1,283 1,

BALANCE SHEET 2007 2008 2009 2010 F 2011 F 201

Fixed Assets 1,110 1,089 1,265 1,392 1,791 1,

Investments 0 0 1 1 1

Inventories 24 40 91 75 102

Debtors 7 23 46 48 80

Bank and cash balances 53 42 73 314 761 1,

Other Receivables and Current Assets 238 706 672 702 1,166 1,

Total Assets 1,433 1,901 2,148 3,337 5,141 6,5


Other Creditors 84 138 444 611 1,015 1,

Short Term Loan 177 629 123 91 66

Taxation 5 11 30 45 66

Long-Term Loans 657 457 337 868 602


Prior Year Dividend 0 0 0 0 1,171 1,


Total Liabilities 939 1,319 1,036 1,726 3,068 3,8


Share Premium 361 341 288 361 361

Revenue and Capital reserve 129 238 772 1,066 1,016 1,

Shareholders Fund 494 582 1,070 1,492 1,443 2,

Minority Interest 0 0 42 59 73

Total Equity 494 582 1,112 1,611 1,515 2,7



January 2011 137

The Tipping Point

2011 Outlook


2008 2009 2010 E 2011 E 2012

Growth (%)

Turnover growth 78.9% 206.3% 10.0% 66.1% 31.5%

Growth in EBITDA 79.2% 102.8% 54.9% 81.3% 37.7%

Growth in PBT 117.3% 139.5% 66.3% 91.3% 39.1%

Growth in PAT 54.5% 241.8% 67.6% 93.3% 39.1%

Profitability (%)



EBITDA Margin 62.0% 41.1% 57.8% 63.1% 66.1%

EBIT Margin 52.3% 35.0% 51.3% 58.7% 62.2%




Quick ratio 1.06 0.97 1.26 1.85 2.2

Cash ratio 0.19 0.05 0.12 0.55 0.8Current ratio 1.14 1.02 1.40 1.98 2.3




Activity Ratios (x)

Sales to cash 11.76 17.67 4.28 2.94 2.1

Sales to inventory 22.19 37.60 15.59 29.63 28.7

Sales to total assets 0.26 0.60 0.53 0.57 0.5

Sales to total fixed assets 0.46 1.02 0.97 1.25 1.5

Production Data

Capacity(million tonnes) 8.00 8.00 8.00 19.00 20.0

Production (million tonnes) 3.19 5.00 6.18 11.58 16.1Average Utilization 39.9% 62.5% 77.3% 60.9% 80.5%

Import terminal capacity 6.00 6.00 6.00 6.00 6.0

Import terminal utilisation 53.0% 42.9% 36.0% 34.7% 31.2%

Revenue/tonne (N'000) 25.00 25.35 25.35 25.35 25.2

Per Share Data

Earnings/share 35.92 122.78 6.64 12.83 17.8

Dividend/share1 0.00 2.00 4.98 9.32 12.9

Net Asset/share 116.114 145.02 12.23 15.74 20.6

Sales/Share 123.81 379.24 13.46 22.35 29.4

Valuation Multiples

P/E (x) 3.35 31.9 19.9 10.3 7.4

P/B (x) 1.04 27.0 10.8 8.4 6.4Dividend Yield (%) 0.0% 1.6 3.8 7.1 9.8

EV/EBITDA (x) 53.35 26.30 16.98 9.29 6.8



January 2011 138

The Tipping Point

2011 Outlook


Lafarge WAPCO plc

Unrelenting in defending market position

We maintain our “ACCUMULATE” rating on Lafarge WAPCO given that th

stock is trading at an expected upside of 19% to N51.62 – the midpoint of ou

one year target price range N48.77 – N54.45 for the stock. Our target price

based on a one year target DCF and EV/EBITDA fair values weighted mor

towards the DCF methodology.

Investment thesis

Robust Revenue Upside: Lafarge WAPCO’s on-going expansion to 4.2 millio

tonnes annual capacity implies a potential c.100% revenue upside from it

current levels assuming that prices remain constant. Using a more realist

assumption that price would perhaps moderate slightly downwards, to mak

its cement competitive in comparison to Dangote Cement (as Lafarge WAPCO

per tonne cement price is currently higher than Dangote Cement’s); we st

foresee at least 70% – 80% upside on its current revenue. Whilst noting tha

the timeline for Lafarge WAPCO to achieve this revenue growth is based on thspeed of ramping up capacity utilisation at the new plant, we estimate that it

revenue wo uld more than double (110% growth relative to 2009 level) b

2014.

Strong Parent Support: Also, being the biggest Nigerian subsidiary of th

Lafarge Group is an added advantage given the leadership position of th

group in the global building materials industry and the resultant gains in term

of product research, innovation and quality from which Lafarge WAPCO ha

been benefitting. We believe Lafarge’s product innovation would particularly b

a key area in which Lafarge WAPCO can be competitively positioned agains

Dangote Cement in Lagos and south west market. Lafarge Group recentl

patented a new cement brand (Sensium® technological cements) which

100% dust free and has started testing the product in the South-East Francmarket.

Earnings Outlook: We forecast that Lafarge WAPCO’s revenue would gro

by 61% to N68.8 billion by 2011 from our FY’10 estimate of N42.8 billion; thi

would stem from ramping up of the new 2.2 million tonnes plant. At this poin

we anticipate an average capacity utilisation rate of 60%. On profitability, w

project that EBITDA margins would rise to c.33% by FY’11 from 21% at FY’09

Also, we expect EBIT margins to increase to 26.3% by 2011 from 18% as a

FY’09 and FY’10E of 25.9%.

Forecast Summary FY'09 FY'10F FY'11F FY'12F FY'

EPS (N) 1.68 2.37 4.1 5.05 5

YoY Change (%) -55.1 40.6 73.1 23.1 1

P/E (x) 25.8 18.3 10.6 8.6

DPS (N) 0.1 0.24 0.5 2.02 2

YoY Change (%) -83.3 136.8 111.1 303.6 1

Div. Yield (%) 0.2 0.5 1.2 4.7

NAPS (N) 14.56 16.69 19.15 22.18 25

YoY Change (%) 8.1 14.6 14.7 15.8 1

P/B (x) 3.0 2.6 2.3 2.0

Sources: Company Financials, Vetiva Research

.9

.2

.5

.8

Dec-09 Apr-10 Aug-10 Dec-10

WAPCO BMIndex ASI

WAPCO VS BM VS NSE ASI PERFORMANCE

ebased 31/12/2009


ASIC INFORMATION

ddress Elephant Cement House,

Ikeja, Lagos State

Website www.lafargewapco.com

anagement (Chairman) Olusegun OsunkeyeD/CEO S.A AbdelKader


xchange Listing Nigerian Stock Exchange

ymbol Bloomberg: WAPCO:NL

ector Building Materials

ountry Nigeria


afarge (foreign) 60

dua Group of Companies 10

gerian Public 30

HARE STATISTICS

hares in issue (M) 3,001.60

hare Price (N) 43.4

arket Cap. (N'Mn) 130,269.4

arket Cap. (USD'M) 873.30

ree Float (%) 29.99

aily Average Value Traded

N'000) 52,951

aily Average Value Traded

USD'000) 354

ear high (N) 46.17

ear low (N) 29.55

ALUATION METRICS

ook Value (N'Bn) 50.3

railing P/E (x) 19.4

/B (x) 2.6

iv. Yield (%) 0.2

OAE (%) 11.3

ebt/Equity (%) 56.7



January 2011 139

The Tipping Point

2011 Outlook



Turnover 38,665 43,274 45,590 42,864 68,817 74,2

Cost of Sales (21,945) (25,026) (30,513) (22,847) (35,785) (37,1

Gross Profit 16,720 18,247 15,077 20,017 33,032 37,

Distr. & Admin. Expenses (4,843) (4,542) (5,224) (4,865) (10,323) (11,1


EBITDA 11,877 13,705 9,853 15,152 22,710 25,9

Depreciation & Amortization (1,378) (1,580) (1,576) (4,045) (4,618) (4,7


Interest Payable & Charges (831) (228) - - - (3,1


Taxation (1,358) (1,781) (4,182) (3,999) (5,789) (2,8



Non-Current Assets

Total fixed Assets 33,356 43,121 69,681 87,301 93,115 95,6

Long Term Investments 60 60 60 60 60

Current Assets

Inventories 8,572 10,083 12,517 9,372 14,680 15,2

Debtors - 166 185 174 280 3


Other Receivables and Current Assets 4,388 2,364 1,092 1,715 2,753 2,


Total Assets 50,596 61,769 87,163 101,494 117,894 119,6

Current Liabilities


Other Creditors 1,461 1,422 1,056 1,341 2,152 2,3

Short Term Loan 4,713 7,113 - - 8,632 15,

Taxation 1,842 1,212 1,044 - -

Total Current Liabilities 15,748 18,099 10,674 9,325 27,726 36,


Long-Term Loans - - 24,793 24,793 24,793 9,2

Provision for Gratuity 1,748 1,758 2,801 717 3,661 3,6

Deferred Taxation 294 1,455 5,183 2,072 4,225 4,0





January 2011 140

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010 F 2011 F 20

Turnover 329 347 310 286 444

Cost of Sales (187) (201) (207) (152) (231) (2

Gross Profit 142 147 102 133 213

Distr. & Admni Expenses (41) (36) (35) (32) (67) (Core Operating Profit 101 110 67 101 147

EBITDA 101 110 67 101 147

Depreciation & Amortization (12) (13) (11) (27) (30) (

EBIT/Operating Profit 89 97 56 74 117

Interest Payable & Charges (7) (2) - - - (


Taxation (12) (14) (28) (27) (37) (


BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 E 2011 F 20

Non-Current Assets

Total Fixed Assets 284 346 473 582 621

Long Term Investments 0.5 0.5 0.4 0.4 0.4

Current Assets - - -


Debtors - 1 1 1 2



Total Current Assets 146 149 118 96 168

Total Assets 430 496 592 678 789

Current LiabilitiesCreditors & Accruals 66 67 58 53 109


Short Term Loan 40 57 - - 56

Taxation 16 10 7 - -

Total Current Liabilities 134 145 72 62 179


Long-Term Loans - - 168 165 160



Total Non-Current Liabilities 17 26 223 184 211

Total Liabilities 151 171 295 246 390

Net Assets 279 325 297 431 371



January 2011 141

The Tipping Point

2011 Outlook


2007 2008 2009 2010 E 2011 E 2012 E

Growth (%)

Turnover growth -2.5% 11.9% 5.4% -6.0% 60.5% 7.8

Growth in EBITDA -15.2% 15.4% -28.1% 53.8% 49.9% 14.4

Growth in PBT -1.6% 9.5% -29.9% 24.0% 62.9% -0.3

Growth in PAT 4.7% 0.7% -55.1% 40.6% 73.1% 23.1

Profitability (%)

Return on Average Equity 38.7% 30.7% 12.0% 15.2% 22.9% 24.4

Return on Average Assets 22.6% 20.0% 6.8% 7.5% 11.2% 12.8

EBITDA Margin 30.7% 31.7% 21.6% 35.4% 33.0% 35.0

EBIT Margin 27.2% 28.0% 18.2% 25.9% 26.3% 28.6

Pretax Profit Margin 30.0% 30.0% 20.0% 26.0% 26.0% 24.0

Net Profit Margin 28.9% 26.0% 11.1% 16.6% 17.9% 20.4


Quick ratio 0.6 0.4 0.2 0.6 0.3 0

Cash ratio 0.3 0.3 0.3 0.1 0.3 0

Current ratio 1.1 1.0 1.6 0.6 0.9 0

Days in inventory 113.3 136.0 135.2 174.9 122.7 147

Days in accounts payable 110.3 110.6 93.8 153.4 110.7 170Days in receivables 0.2 0.7 1.4 1.5 1.2 1

Activity Ratios (x)

Sales to cash 9.2 7.2 12.6 14.9 9.8 13

Sales to inventory 4.6 3.8 3.5 4.9 2.9 4

Sales to total assets 0.8 0.7 0.5 0.4 0.6 0

Sales to total fixed assets 1.2 1.0 0.7 0.5 0.7 0

Production Data

Capacity(million tonnes) 2.0 2.0 2.0 2.0 4.2 4

Production (million tonnes) 1.7 1.7 1.6 1.5 2.5 2

Average Utilization (%) 85.0 84.0 80.0 76.0 60.0 67

Revenue/tonne (N'000) 22.7 25.8 28.5 28.2 27.5 26

Per Share Data (N)

Earnings/share 3.72 3.75 1.68 2.37 4.10 5.Dividend/share 1.20 0.60 0.10 0.24 0.50 2.

Net Asset/share 10.93 13.48 14.56 16.69 19.15 22.

Sales/Share 12.88 14.42 15.19 14.28 22.93 24.

Valuation Multiples

P/E (x) 10.2 10.1 25.8 18.3 10.6 8.

P/B (x) 3.5 2.8 2.6 2.3 2.0 1.

Dividend Yield (%) 3.2% 1.6% 0.2 0.5 1.2 4.

EV/EBITDA (x) 9.7 11.4 3.0 2.6 2.3 2



January 2011 142

The Tipping Point

2011 Outlook


AshakaCem Plc

Positive Outlook...But Rich Valuation

We downgrade our recommendation on Ashaka to a “SELL” (previous

“Reduce”) given that the stock (at a current share price at N29.49) now ha

an expected downside of 15% to N25.13, the mid-point of our target pric

range N24.20 – N26.19. Our target valuation is based on the DCF an

EV/EBITDA methodology.

Investment thesis

Rising costs savings: The most compelling attraction to Ashaka Cement,

our view, is its potential to sustain long term efficiency and profitability despit

its relatively low scale of production. According to management’s insights, th

company can achieve 60% -70% savings in energy costs, when fu

substitution of LPFO with coal is achieved. Nonetheless, we have discounte

management’s expectation and assumed only a 55% savings in energy costs

Whilst noting that Ashaka will not likely meet its projection oncoal utilisatio

level in 2010, (management achieved only coal utilisation rate as at half yearelative to a 60% projection), we still maintain long term optimism on it

operating efficiency, though we have adjusted our expectation to reflect a lon

time frame for the company to reach peak (c.100%) coal utilisation

Therefore, we project that EBITDA margins would increase to 35% by FY’1

and 42% by FY’15 (from 9% at FY’09). Similarly, we forecast an EBIT margi

of 32% by FY’12 and 40% by FY’15, (from 5.9% at FY’09)

Zero Debt Status: According to insights from Ashaka’s management, the co

mine project completed by the company last year was purely financed b

internally generated cash-flows and funding from the parent company. Th

debt free status of the company implies that it can make significant saving

from zero interest expense and boost bottom-line earnings. This, coupled wit

the expected rise in profitability from achieving higher operating efficiencyenhances the potential return, in form of dividend payments, to it

shareholders.

Earnings Outlook: We forecast that Ashaka’s revenue would grow by 15.6%

to N21.0 billion by FY’11. Consistent with our expectations on Ashaka

operating efficiency; we project that EBITDA margins would rise to 35.8% b

FY’11 from 8.9% at FY’09 and FY’10E of 24.6%. Also, we expect EBIT margin

to increase to 31% by 2011 from 5.9% as at FY’09 and FY’10E of 19.3%.

Forecast Summary FY'09 FY'10F FY'11F FY'12F FY'13

EPS (N) 0.47 1.13 1.95 2.66 3.2

YoY Change (%) -63 140.4 72.6 36.4 23.

P/E (x) 62.7 26.1 15.1 11.1 9.

DPS (N) 0 0.5 0.87 1.19 1.4

YoY Change (%) -100 n/a 74 36.8 22.

Div. Yield (%) 0 1.7 2.9 4 4.

NAPS (N) 6.6 6.49 7.58 9.05 10.

YoY Change (%) 3.1 -1.7 16.8 19.4 20.

P/B (x) 4.5 4.5 3.9 3.3 2.Sources: Company Financials, Vetiva Researc

1.0

1.5

2.0

2.5


Ashaka BMIndex ASI

ASHAKACEM VS BM VS NSE ASI PERFORMANCE

Rebased 31/12/2009


BASIC INFORMATION

Address

Ashaka Works,

Ashaka Gombe State

Website n/a

Management (Chairman) E.E Ikwue

MD/CEO M.M Daggash


Exc hange Listing erian Stoc k Exchange

Bloomberg Ticker AshakaCem:NL


Country Nigeria


Lafarge (foreign) 50.2

Others 49.8

SHARE STATISTICS





Free Float (%) 49.8

Daily Average Va lue Traded (N'000) 38,136.90

Daily Average Va lue Traded (USD'000) 255.6

Year high (N) 28.5

Year low (N) 11.39

VALUATION METRICS

Book Value (N'Bn) 15.9


P/B (x) 4.2

Div. Yield (%) 0

ROAE (%) 12

Debt/Equity (%) 0



January 2011 143

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2006 2007 2008 2009 F 2010 F 2011 F 2012

Turnover 16,772 16,473 21,378 17,194 18,189 21,025 23,35

Cost of Sales (8,794) (10,868) (14,039) (11,771) (11,846) (10,132) (9,79

Gross Profit 7,978 5,605 7,339 5,423 6,343 10,893 13,56Selling and distri. Expenses (2,408) (1,486) (1,437) (432) (771) (1,472) (1,63

Core Operating Profit 5,570 4,120 5,902 4,991 5,572 9,421 11,93

EBITDA 5,948 4,452 2,697 3,785 1,533 4,481 7,52

Depreciation & Amortization (436) (514) (519) (526) (966) (1,008) (1,05

EBIT/Operating Profit 4,016 2,183 3,265 1,007 3,515 6,521 8,77

Interest Payable & Charges - - - - - -

Profit Before Taxation 4,952 2,513 3,430 1,324 3,515 6,521 8,77

Taxation (1,574) (1,361) (911) (1,422) (984) (2,152) (2,80

Profit After Taxation 3,378 1,153 2,519 943 2,531 4,369 5,96

Dividends 1,087 1,106 597 - 1,126 1,944 2,65

Retained Earnings 2,291 47 1,922 943 1,405 2,425 3,3

BALANCE SHEET (N'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012

Non-Current Assets

Fixed Assets 2,685 3,811 5,686 5,218 19,478 19,522 19,63

Work in Progress 5,333 8,891 10,901 13,849 2,981 3,030 3,03

Current Assets

Inventories 4,931 4,220 4,706 4,707 5,017 4,292 4,14

Debtors 1,674 386 139 88 100 115 12

Bank and cash balances 3,798 2,137 1,636 850 508 5,062 9,08

Other Receivables and Current Assets - 2,785 1,958 908 1,200 1,388 1,54

Total Current Assets 10,403 9,528 8,440 6,552 6,826 10,856 14,90

Total Assets 18,421 22,230 25,027 25,618 29,285 33,408 37,56

Current Liabilities

Creditors & Accruals 887 1,151 1,921 2,296 1,099 1,986 2,20

Other Creditors 3,341 6,164 7,269 5,967 4,892 5,655 6,28

Short Term Loan - 968 - - - -

Taxation 1,661 1,687 928 1,385 984 2,152 2,80

Total Current Liabilities 5,890 9,971 10,117 9,648 6,976 9,792 11,29


Long-Term Loans - - - - - -

Provision for Gratuity 408 836 982 1,648 2,862 1,994 1,61

Deferred Taxation 526 710 1,144 1,181 1,920 1,621 1,34

Total Non-Current Liabilities 934 1,546 2,125 2,829 4,783 3,615 2,95

Total Liabilities 6,824 11,518 12,242 12,477 11,758 13,407 14,25Net Assets 11,598 10,713 12,785 13,142 14,085 15,489 17,91



January 2011 144

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD'Mill) 2007 2008 2009 F 2010 F 2011 F 2012

Turnover 140 172 117 121 136 1

Cost of Sales (92) (113) (80) (79) (65) (6

Gross Profit 48 59 37 42 70

Selling and distri. Expenses (13) (12) (3) (5) (9) (1

Core Operating Profit 35 47 34 37 61

EBITDA 38 22 26 10 29

Depreciation & Amortization (4) (4) (4) (6) (7)

EBIT/Operating Profit 19 26 7 23 42

Interest Payable & Charges - - - - -


Taxation (12) (7) (10) (7) (14) (1


Dividends 9 5 - 8 13

Retained Earnings 0 15 6 9 16

BALANCE SHEET (USD'Mill) 2007 2008 2009 F 2010 F 2011 F 2012

Non-Current Assets

Fixed Assets 32 46 35 130 126 1

Work in Progress 76 88 94 20 20

Current Assets


Debtors 3 1 1 1 1



Total Current Assets 81 68 44 46 70

Total Assets 189 201 174 195 216 2

Current Liabilities -



Short Term Loan 8 - - - -

Taxation 14 7 9 7 14

Total Current Liabilities 85 81 66 47 63


Long-Term Loans - - - - -



Total Non-Current Liabilities 13 17 19 32 23

Total Liabilities 98 98 85 78 86

Net Assets 98 98 85 78 86



January 2011 145

The Tipping Point

2011 Outlook


2007 2008 2009 2010F 2011F 201

Growth

Turnover growth 29.8% -19.6% 5.8% 15.6% 11.1% 12.8

Growth in EBITDA -39.4% 40.3% -59.5% 192.3% 68.0% 30.5

Growth in PBT -49.2% 36.5% -61.4% 165.4% 85.5% 34.6

Growth in PAT -65.9% 118.6% -62.6% 168.4% 72.6% 36.6

Profitability



EBITDA Margin 16.4% 17.7% 8.9% 24.6% 35.8% 42.1

EBIT Margin 13.3% 15.3% 5.9% 19.3% 31.0% 37.6




Quick ratio 0.5 0.4 0.2 0.3 0.7 1

Cash ratio 0.2 0.2 0.1 0.1 0.5 0Current ratio 1.0 0.8 0.7 1.0 1.1 1

Days in inventory 153.7 116.0 146.0 149.8 167.7 157

Days in accounts payable 36.8 55.2 53.0 52.6 46.3 81

Days in receivables 22.8 4.5 2.4 1.9 1.9 1

Activity Ratios (x)

Sales to cash 7.7 13.1 20.2 35.8 4.2 2

Sales to inventory 3.9 4.5 3.7 3.6 4.9 5

Sales to total assets 0.7 0.9 0.7 0.7 0.7 0

Sales to total fixed assets 1.3 1.3 0.9 0.9 1.1 1

Production data

Capacity(million tonnes) 0.9 0.9 0.9 0.9 0.9 1

Production (million tonnes) 0.7 0.9 0.7 0.7 0.8 0

Utilization (%) 79.7 101.1 76.5 83.9 97.0 73

Revenue/tonne ('000) 24.3 24.9 26.5 25.5 25.5 25

Per Share Data

Earnings/share 0.58 1.27 0.47 1.13 1.95 2.

Dividend/share 0.10 0.30 0.00 0.50 0.87 1.

Net Asset/share 5.39 6.43 6.60 6.49 7.58 9.

Sales/Share 8.27 10.74 8.64 8.12 9.39 10.

Valuation Multiples

P/E (x) 49.0 22.4 62.7 26.1 15.1 11.

P/B (x) 5.3 4.4 4.5 4.5 3.9 3.

Dividend Yield (%) 0.03 1.1 0.0 1.7 2.9

EV/EBITDA (x) 23.5 16.8 41.4 14.2 8.4 6

Financial Ratios – Actual and Forecasts



January 2011 146

The Tipping Point

2011 Outlook


CCNN Plc

Operational Uncertainties Dampen Earnings Outlook

We maintain a “SELL” rating on CCNN, given that the stock (at a current shar

price at N14.52) has an expected downside of 55% to N8.05 the midpoint oour target price range N7.60 – N9.30 Our target valuation is based on the DC

and EV/EBITDA methodology.

Investment thesis

Present capacity inadequate to sustain market share: CCNN is th

last of the cement producers to announce definitive plans around it

expansion. While there have been indications from management that th

company may expand capacity to 1.4 million tonnes, timelines and funding fo

the expansion are still unclear. Compounded by its obsolete state, CCNN

500,000 tonnes plant is grossly inadequate to position the compan

competitively in the industry. We highlight that CCNN has one of the highes

cement prices in the industry, evidently as a result of its higher energy costsrelatively obsolete technology and small production capacity. Due to supp

deficit which has historically plagued the Nigerian cement industry and CCNN

relative isolation in North-West Nigeria, revenue growth has been somewha

sustained through price increases. We recall in 2009 that the compan

increased its cement price (per tonne) by c.12% and has consistently hike

prices YoY since 2006. In-fact in FY’09 earnings, c.60% of revenue growt

came from the 12% increase in price. However, in our view, CCNN is unlike

to continue to enjoy such revenue growth from price increases as it ha

historically done.

Increasing cost exert additional pressure on top-line: CCNN is st

having challenges getting around its increasing energy costs to remai

efficient and adequately profitable. In its FY’09 accounts, management hastated the huge increase in energy costs (c.40%) arising from transportatio

expenses incurred in moving imported LPFO from the south to its plan

(located in Sokoto, North-West Nigeria).

Earnings Outlook: We forecast that revenue would grow by 6.5% to N11.

billion by 2011 from our FY’10E of N11.2 billion. We believe EBITDA margin

would remain relatively flat at 14.5% based on our FY’10 and FY’11 estimates

Also, we project that EBIT margins would remain flat at 11.3% in FY’10 an

FY’11.

S



EPS (N) 1.44 0.62 0.66 0.72 0.88

YoY Change (%) 18.0 -56.9 6.5 9.1 21.8

P/E (x) 10.08 23.42 22.00 20.17 16.56

DPS (N) 0.90 0.23 0.25 0.27 0.33

YoY Change (%) 0.0 -74.4 8.7 8.0 22.9

Div. Yield (%) 6.2 1.6 1.7 1.9 2.3

NAPS (N) 3.36 3.74 4.15 4.6 5.15

YoY Change (%) 5.0 11.3 11.0 10.8 11.9

P/B (x) 4.3 3.9 3.5 3.2 2.80.9

1.2

1.5

1.8

2.1


CCNN BMIndex ASI

CCNN VS BM VS NSE ASI PERFORMANCE

Rebased 31/12/2009


BASIC INFORMATION

Address Kilometre 10, Kalambaina Road,

Sokoto State, Nigeria

Website www.sokotocement.com

Management(Chairman) Abdulsamad Rabiu

Managing Director Alf Karlsen


Exchange Listing

Primary Listing: Nigerian Stoc

Exchange

Symbol Bloomberg: CCNN:NL


Country Nigeria

BUA Group 51

Nasdal Bap Limited 11.6

Kebbi, Sokoto, Kaduna, 15

Other Nigerians 15

Ferrostal A.G 0.1

Dantata Invst. & Sec. 7.1

SHARE STATISTICS



Market Cap. (N'Mn) 18,073.80


Free Float (%) 15

Daily Average V alue

Traded (N'000) 17,249.30

Daily Average V alue


Year high (N) 25.9

Year low (N) 12.7



P/B(x) 3.9

Div. Yield (%) 6.3

ROAE (%) 44.2

Debt/Equity (%) 12

VALUATION METRICS




January 2011 147

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2011 Outlook



Turnover 8,042 9,878 11,868 11,200 11,927 12,50

Cost of Sales (5,759) (5,709) (6,704) (6,664) (7,097) (7,38

Gross Profit 2,283 4,169 5,164 4,536 4,830 5,12

Operating Expense (591) (640) (762) (661) (716) (751


EBITDA 138 1,611 1,964 1,635 1,729 1,87


EBIT/Operating Profit (183) 1,268 1,595 1,273 1,342 1,46

Interest Payable & Charges (387) (537) (346) (127) (127) (127

Interest received - - - - - -


Taxation (34) (150) (505) (367) (389) (428

Profit After Taxation 138 1,531 1,812 779 827 909


Non-Current Assets

Fixed Assets 4,017 4,655 4,950 5,452 5,795 6,60

Capital work in progress 439 4 66 - - -

Current Assets

Inventories 3,016 2,424 2,510 2,823 3,006 3,12

Debtors 775 717 1,002 1,066 1,135 1,19




Total Assets 9,118 8,795 9,803 10,526 11,390 12,71

Current Liabilities


Other Creditors - - - - - -

Short Term Loan 553 1,092 671 1,218 1,218 1,21

Taxation 40 39 210 367 389 428



Long-Term Loans - 633 507 380 253 126

Provision for Gratuity 320 360 490 802 1,041 1,72

Deferred Taxation 76 195 262 - - -

Total Non-Current Liabilities 396 1,188 1,259 1,182 1,294 1,85


Net Assets 3,148 3,976 4,217 4,635 5,149 5,71



January 2011 148

The Tipping Point

2011 Outlook



Turnover 68 79 81 75 77 8

Cost of Sales (49) (46) (46) (44) (46) (48

Gross Profit 19 33 35 30 31 3

Operating Expense (5) (5) (5) (4) (5) (5


EBITDA 1 13 13 11 11 1


EBIT/Operating Profit (2) 10 11 8 9

Interest Payable & Charges (3) (4) (2) (1) (1) (1

Interest received - - - - -


Taxation (0) (1) (3) (2) (3) (3


BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012

Non-Current Assets

Fixed Assets 34 37 34 36 37 4

Capital work in progress 4 0 0 - -

Current Assets

Inventories 26 19 17 19 19 2

Debtors 7 6 7 7 7




Total Assets 78 71 67 70 73 8

Current Liabilities


Other Creditors -

Short Term Loan 5 9 5 8 8

Taxation 0 0 1 2 3



Long-Term Loans - 5 3 3 2

Provision for Gratuity 3 3 3 5 7 1

Deferred Taxation 1 2 2 - -


Total Liabilities 51 39 38 39 40 4

Net Assets 27 32 29 31 33 3



January 2011 149

The Tipping Point

2011 Outlook


2007 2008 2009 2010F 2011F 201

Growth (%)

Turnover growth 26.2% 22.8% 20.1% -5.6% 6.5% 4.9

Growth in EBITDA 1066.6% 21.9% -16.7% 5.8% 8.5% 16.6

Growth in PBT 878.3% 37.8% -50.5% 6.1% 9.9% 21.2Growth in PAT 1012.4% 18.3% -57.0% 6.1% 9.9% 21.2

Profitability (%)



EBITDA Margin 1.7% 16.3% 16.5% 14.6% 14.5% 15.0

EBIT Margin -2.3% 12.8% 13.4% 11.4% 11.3% 11.7




Quick ratio 0.30 0.47 0.53 0.48 0.52 0.

Cash ratio 0.05 0.11 0.14 0.09 0.13 0.

Current ratio 0.84 1.14 1.11 1.08 1.13 1.Days in inventory 173.62 173.90 134.29 146.03 149.89 151.

Days in accounts payable 321.15 241.67 155.26 178.24 164.63 167.

Days in receivables 34.46 27.57 26.43 33.70 33.68 33.

Activity Ratios (x)

Sales to cash 28.29 24.71 18.95 25.05 17.89 12.

Sales to inventory 2.67 4.08 4.73 3.97 3.97 4.

Sales to total assets 0.88 1.12 1.21 1.06 1.04 0.

Sales to total fixed assets 1.80 2.12 2.37 2.03 2.03 1.

Production Data

Capacity(million tonnes) 0.50 0.50 0.50 0.50 0.50 0.

Production (million tonnes) 0.34 0.38 0.41 0.39 0.41 0.

Average Utilization 68.5% 76.0% 81.6% 77.0% 82.0% 86.0

Revenue/tonne (N'000) 23.48 25.99 29.09 29.09 29.09 29.

Per Share Data

Earnings/share 0.12 1.22 1.44 0.62 0.66 0.

Dividend/share 0.10 0.90 0.90 0.23 0.25 0.

Net Asset/share 2.51 3.17 3.36 3.74 4.15 4.

Sales/Share 6.40 7.86 9.45 8.92 9.50 9.

Valuation Multiples

P/E (x) 118.90 11.48 10.08 23.42 22.00 20.

P/B (x) 5.59 4.42 4.3 3.9 3.5 3

Dividend Yield (%) 0.7 6.4 6.2 1.6 1.7 1

EV/EBITDA (x) 127.38 10.92 8.96 10.75 10.17 9.



January 2011 150

The Tipping Point

2011 Outlook


Julius Berger Plc

Strong fundamentals in the construction industry

We maintain an “ACCUMULATE” Rating on Julius Berger, given that the stoc

(at a current share price at N54.00) has an expected upside of 14.4% t

N61.80, the midpoint of our target price range N57.40 – N66.20. Our targevaluation is based on the DCF methodology, with Julius Berger fair value rolle

one year forward at its weighted average cost of capital.

Investment thesis

Strong earnings prospect...Julius Berger remains the strongest liste

construction firm; its history of proven job quality in the Nigerian constructio

space is largely unrivaled. In view of the rising emphasis on physica

infrastructural development in Nigeria, we believe it is necessary for investor

to have some exposure to such infrastructure-linked equities like Julius Berge

in a bid to benefit directly from the expected boom in the longer term. Th

renewed interest in the power sector also offers Julius Berger some growt

opportunities; we believe the company would participate actively in thconstruction works in the power sector due to its dominant market share

FG’s construction contracts

...though reputational risk calls for caution: Julius Berger, towards the ta

end of Q3’10 agreed to a plea bargain over its alleged involvement in the $18

million bribery scandal between Halliburton and the Federal Government o

Nigeria. The company was consequently required to pay $29.5 million fine (c

N4.425 billion), payable in two instalments. We had noted (in our previou

earnings update on Julius Berger) the impact of Julius Berger’s risin

reputational risk on its earnings profile. Though the company is given th

opportunity to pay the legal fine in the Halliburton case in two instalments, w

believe the liability would have some major impact on FY’10 and FY’11 net

earnings and more importantly cash flows, especially because of thcharacteristically low profit margins of the business.

Earnings Outlook: We forecast that Julius Berger’s revenue would grow b

15.0% to N184.3.0 billion by FY’11 from our FY’10E of N160.3 billion. O

profitability we anticipate that EBITDA margins would somewhat be steady a

14.4% by FY’11, having declined from 15.4% to 14.4% (our estimate fo

FY’10). Also, we expect EBIT margins to decline 3.6% from our FY’10E o

5.7% and FY’09 figure of 3.6%.


EPS (N) 2.70 2.80 2.90 4.00 5.0

YoY Change (%) 28.6 3.7 3.6 37.9 25

P/E (x) 9.55 19.3 18.6 13.5 10

DPS (N) 2.40 2.40 2.50 3.40 4.2

YoY Change (%) 33.3 0.0 4.2 36.0 25

Div. Yield (%) 9.3 4.4 4.6 6.3 7

NAPS (N) 6.50 6.90 7.40 8.00 8.7

YoY Change (%) 18.2 6.2 7.2 8.1 8

P/B (x) 4.0 7.8 7.3 6.8 6Sources: Company Financials, Vetiva Researc

0.6

1.3

1.9

2.5


JBerger Const. Index ASI

JBERGER VS BM VS NSE ASI PERFORMANCE

Rebased 31/12/2009


BASIC INFORMATION

Address Utako District

Berger Junction, Abuja

Website www.julius-berger.com

Management (Chairman) AVM (Dr.) Nura Imam (Rtd)

MD/CEO Engr. W. Goetsch


Exchange Listing Primary Listing: Nigerian Stock Exchange

B lo ombe rg Tic ker Bloo mbe rg : JBERGER:NL

Sector Construction

Country Nigeria


Bilfinger 49.9

Lagos State Govt. 10.1

Benue State Govt. 5.3

Others 34.8

SHARE STATISTICSShares in issue (M) 1,200



Market Cap. (USD'M ) 418.2

Free Float (%) 34.8

Daily Average Value

Traded (N'000) 23,099.90

Daily Average Value


Year high (N) 61.88

Year low (N) 25.79

VALUATION METRICS

Book Value (N'Mn) 6,972


P/B (x) 9.3

Div. Yield (%) 4.7

ROAE (%) 45.6

Debt/Equity (%) 0



January 2011 151

The Tipping Point

2011 Outlook



Turnover 79,074 114,029 150,358 160,282 184,324 221,18

Cost of Sales (66,243) (96,786) (123,102) (131,431) (151,146) (181,375

Gross Profit 12,831 17,243 27,256 28,851 33,178 39,81

Distr. & Admni Expenses (4,435) (5,610) (6,437) (5,802) (6,673) (8,00Core Operating Profit 8,396 11,632 20,819 23,048 26,506 31,80

EBITDA 8,748 12,736 23,169 23,048 26,506 31,80

Depreciation & Amortization (5,595) (6,922) (12,977) (13,842) (19,858) (24,673


Interest Payable & Charges - (573) (747) (1,983) (1,464)


Taxation (1,384) (2,733) (6,144) (3,843) (1,659) (2,283



Non-Current Assets

Fixed Assets 24,000 28,574 48,689 60,574 72,416 85,70

Long Term Investments 5,684 - 2,000 2,000 2,000 2,00

Current Assets

Inventories 9,901 12,146 15,222 17,463 20,083 24,10

Debtors 30,873 45,171 47,083 58,754 67,567 81,08

Bank and cash balances 3,947 22,844 9,047 - 8,924

Other Receivables and Current Assets 14,149 29,694 32,659 32,183 37,011 44,41


Total Assets 183,608 246,894 271,443 312,821 346,403 380,26

Current Liabilities


Other Creditors 74,640 114,530 119,880 146,691 168,695 202,43

Short Term Loan 118 4,290 8,094 10,458 50,240 35,69

Taxation 1,389 2,184 3,954 3,843 1,659 2,28



Long-Term Loans - - 3,569 1,740 -

Provision for Gratuity 3,975 4,582 6,304 8,066 11,317 14,72



Net Assets 4,117 5,635 6,644 7,829 8,327 8,84




January 2011 152

The Tipping Point

2011 Outlook


INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 672 916 1,021 1,034 1,189 1,427

Cost of Sales (563) (777) (836) (848) (975) (1,170)

Gross Profit 109 138 185 186 214 257

Distr. & Admni Expenses (38) (45) (44) (37) (43) (52)


EBITDA 74 102 157 149 171 205



Interest Payable & Charges - (5) (5) (13) (9) -


Taxation (12) (22) (42) (25) (11) (15)


BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 FNon-Current Assets

Fixed Assets 204 229 331 391 467 553

Long Term Investments 48 - 14 13 13 13

Current Assets - - - - - -

Inventories 84 98 103 113 130 155

Debtors 263 363 320 379 436 523

Bank and cash balances 34 183 61 - 58 -



Total Assets 1,561 1,982 1,843 2,018 2,235 2,453

Current Liabilities


Other Creditors 635 920 814 946 1,088 1,306

Short Term Loan 1 34 55 67 324 230

Taxation 12 18 27 25 11 15

Total Current Liabilities 664 1,014 923 1,064 1,452 1,586


Long-Term Loans - - 24 11 - -

Provision for Gratuity 34 37 43 52 73 95



Net Assets 35 45 45 51 54 57

Source: Annual Report, Vetiva Research



January 2011 153

The Tipping Point

2011 Outlook


2007 2008 2009 2010 E 2011 E 2012

Growth

Turnover growth 39.0 44.2 31.9 6.6 15.0 2

EBITDA Growth 13.1 45.6 81.9 -0.5 15.0 2PBT Growth 182.8 66.2 80.2 -23.5 -28.2 37

PAT Growth 6008.9 41.8 31.6 2.5.0 4.3 3

Profitability

Return on Average Equity 36.3 40.9 45.6 41.9 41.1 5

Return on Average Assets 2.0 2.2% 2.3 2.0 1.6

EBITDA Margin 11.1 11.2% 15.4 14.4 14.4 14

EBIT Margin 3.6 4.0% 5.1 6.8 5.7 3

PBT Margin 4.0 4.6% 6.3 4.5 2.8 3

PAT Margin 2.2 2.2 2.2 2.1 1.9 2

Per Share Data

Earnings Per Share 1.47 2.09 2.75 2.82 2.94 4Dividend Per Share 1.25 1.75 2.40 2.40 2.51 3

Net Assets Per Share 4.70 5.54 6.52 6.94 7.37 7

Sales Per Share 65.89 95.02 125.30 133.57 153.60 184

Valuation Multiples

P/E (x) 36.7 25.8 19.6 9.55 19.3 18

P/B (x) 11.5 11.8 4.0 7.8 7.3 6

Dividend Yield (%) 10.9 9.2 9.3 4.4 4.6 6

EV/EBITDA (x) 2.5 3.4 4.7 4.7 4.9 6

Source: Company Financials, Vetiva Researc



January 2011 154

The Tipping Point

2011 Outlook


Insurance Sector: Searching for Value

With the Nigerian economy forecast to grow at 7.0% in 2011, and given risin

income levels and higher risk awareness among the populace, we ar

cautiously optimistic about the demand for insurance products. Howeve

intense competition with rate – undercutting, moderate returns frominvestments, and adjustments to the new regulatory guidelines is likely t

continue to taper short-term profitability.

What shaped performance in 2010?

While we await the FY’10 results of the Insurance companies, their performanc

up till Q3’10 gives some indication of what to expect. We forecast a c. 28%

growth in industry Gross Premiums and a modest c. 2% rise in industry After

Tax Profits. As explained in our company updates (Custodian and Allied

GTAssur), we expect two major lines to adversely impair the profitability o

Insurance companies: Investment Income and Provision for bad debts.

Most local institutional investors (insurance companies inclusive), weroverweight fixed income and underweight equities. We note that yields in th

bond market witnessed an upward trend across most maturities, leading to

slide in prices and mark-to-market losses. Equities on the other hand recorde

a gain of 18.9% in 2010.

Regulations became more stringent in 2010 with efforts by the regulato

NAICOM, to stamp out unethical practices and improve the Industry

credibility. One of the key issues in the Sector relates to the menace o

premiums owed to Insurance companies by Brokers, who as earlier indicated

remain the major conduit of Insurance policy/product sales, especially t

corporates. We expect the FY’10 results to reflect the impact of the ne

provisioning guidelines which mandate the treatment of outstanding premium

as follows:

• Under 90 days: No provision

• 91-180 days: 50% provision

• Above 180 days: 100% provision

Given the aforementioned, we anticipate bottom-line profitability will b

strained in FY’10.

What will shape performance in 2011 and beyond?

Better Enforcement of Mandatory Insurance Policies

A major factor which has limited the Nigerian Insurance Market from reachin

full potential has been the lax enforcement of insurance policies and laws i

Nigeria. In Nigeria, between 1987 and 2004, 16 insurance products wer

directly or indirectly made compulsory, of which six are very prominent an

capable of generating about 58% of the insurance premium income. Howeve

these products have remained largely undeveloped and unenforced.

We are cautiously optimistic about the demand for insuranceproducts in 2011

We expect Investment Incomeand Provision for bad debts to

impair the profitability of Insurance companies in 2010

We expect the better enforcement of the six mandatory insurancepolicies in 2011 to provide a boost to industry gross premiums



January 2011 155

The Tipping Point

2011 Outlook


In this regard the National Insurance Commission (NAICOM) launched the “Th

Nigeria Insurance Market Development and Restructuring Initiatives (MDRI)" i

a bid to ensure the enforcement of the compulsory insurance products startin

September 2009. Recently, the regulator embarked on an aggressiv

awareness campaign to educate and enlighten the populace on the benefits o

purchasing insurance products.

This was part of the steps undertaken to tackle low public awareness thereb

deepening insurance penetration (0.73% of 2009 GDP). Though it is sti

difficult to measure the effect of the public awareness in monetary terms, w

are optimistic that it will gradually begin to impact patronage of insuranc

products.

Oil and Gas Insurance

We see oil and gas insurance as an engine of growth in the near to medium

term, given the increased focus in that segment by insurance companies an

the gap needed to meet the government’s target of 70% local content. A ke

step taken to actualize this target is the enactment of the Nigerian Oil and GaContent Development Act 2010 (“The Act”). The Act aims at increasing, and i

certain cases gives exclusivity to Indigenous participation and use of loca

resources in the Oil & Gas Industry and this has opened opportunities fo

support industries like insurance. Issues around the capacity of insuranc

companies to underwrite such huge risks have been cleared with local capacit

defined as “the aggregate capacity of all Nigeria registered insurers an

reinsurers”. Local capacity shall be fully exhausted prior to any application fo

approval to reinsure any Nigeria Oil & Gas risk overseas. We believe YoY growt

in this segment will begin to ramp this year thereby impacting the performanc

of insurance companies.

Gradual expansion of the retail space

The Nigerian insurance industry has historically been dominated by the broke

channel, through which a bulk of total premium income is sourced, especially i

the corporate space thus making insurance brokers indispensible. However, i

recent times other channels such as bancassurance, direct marketing and direc

sales channels, are gaining importance as a channel to reach out to othe

growth areas such as the retail space. This effort has already started paying o

for some companies and we believe it is one which could spur heavy growth i

the industry. We believe the time is ripe to explore micro-insurance as it ha

the potential of reaching a large segment of Nigeria’s underserved market. Th

requires a cautious and well thought after business model, as micro-insuranc

has a higher risk exposure compared to conventional insurance and it is mor

susceptible to volatile cash flows from the low-income market. Micro insuranc

could be offered in different areas, including health risks like illness, injury

death, property damages and agricultural risks.

“Local capacity” to underwriterisks is defined as the aggregatecapacity of all Nigeria registered

insurers and reinsurers

We anticipate a gradual opening

up of the retail market for insurance in 2011



January 2011 156

The Tipping Point

2011 Outlook


Despite these opportunities, challenges remain prevalent

Premiums rates will remain under pressure due to intense competitio

on the more profitable lines such as Motor insurance, Oil & Ga

insurance and Life Insurance

Falling premium income without a corresponding reduction in claims

likely to drive down profits

Reliance on investment portfolios to generate sufficient income an

gains for net profits would subject them to the volatility of the financia

markets

Shortage of trained insurance professionals and technicians at all levels

Dependence on overseas reinsurers is likely to continue until th

industry is properly consolidated. This may require raising more capita

The Catalysts

To strategically position the insurance industry to benefit from thes

opportunities, we believe there should be a catalyst to spark competitiveness i

the industry. This, in our opinion, should be consolidation through M& activities and recapitalisation.

Recapitalisation

Despite a largely successful round of recapitalisation, culminated in 2007, w

believe most insurers remain under capitalised to take optimal advantage of th

opportunities in the Nigerian environment and beyond while maintaining

healthily diversified portfolio of risks. In this regard, the Nigerian Insuranc

Commission (NAICOM) issued guidelines for Insurance companies wishing t

underwrite oil and gas insurance, increasing capital requirement to N7 billio

for lead underwriters and N6 billion for other underwriters. Nonetheless, les

than half of the insurers in the country have capitalization in excess of N

billion.

Mergers and Acquisitions

We believe conditions are apt for Insurers to start taking serious steps toward

embarking on non-regulatory induced mergers and acquisitions. We believ

mergers will further strengthen companies both capital and technical wise an

put them on a better footing to underwrite big ticket risks and compet

favourably locally and across the continent. Also, size will allow more viabl

competition than the present rate cutting and indiscriminate rivalry among s

many players offering relatively undifferentiated products.

We believe there will be a need for industry consolidation in 2011through M&A’s or Recapitalization



January 2011 157

The Tipping Point

2011 Outlook


Custodian and Allied Insurance Plc (CAI)

Value Remains Intact

CAI has continued to blaze the trail amongst most insurers, surpassing th

bottom-line performance of most of its peers; a trend we believe will b

sustained owing to its traditionally strong performance and competitive edgeThe company has consistently outperformed the Insurance index recordin

YTD return of 10.1% against the Insurance index’s -27.9%. The stock

currently trading at an upside potential of 27.8% to N4.09, the mid-point o

our fair value range of N3.92-N4.29 our 12 month target price. We maintain

“BUY” rating on CAI Plc.

Investment thesis

Strong premium growth: This growth is to be driven largely by CAI’s moto

andenergy Insurance portfolios. We note that Motor has historically been th

largest contributor to Gross Premiums (2009: 24%, 2008: 29%)

however,CAI’s improving competence in energy underwriting is increasing

contributing to top line numbers 38% in 2009, up from 16% in 2008. CA

clinched the mandate as the lead underwriter for the Nigerian Nationa

Petroleum Corporation – Consolidated Insurance Policy (NNPC CIP) account

2010 and this further ratifies their competence in the oil & gas space. W

believe the company is well positioned to benefit from the Nigeria Oil and Ga

Content Development act given its experience and competence (financial an

technical), in underwriting oil and gas transactions.

Possible inclusion to business line: In recent years, life insurance busines

in Nigeria has recorded significant mileage, aided by better compliance wit

mandatory Insurance policies. In this regard, we refer to the Statutory Grou

Life Policy-this policy has supported the strong YoY growth of Gross Premium

in the life insurance seg ment. CAI is evaluating plans to re-access this fasgrowing Insurance class (5year CAGR: 26%), and may consider an M&A in th

medium-long term to achieve this objective.

Strong Earnings Outlook: We project that CAI’s Gross Premiums would gro

by 31.1% and 25.9% to N10.6 billion and N13.3 billion by FY’11 and FY’1

respectively. On profitability, we forecast that PAT would rise by 16.9% an

23.4% to N2.6 billion and N3.1 billion by FY’11 and FY’12.

Source: Company Financials; Vetiva Researc

ForecastSummary FY'09A FY'10F FY'11F FY'12F FY'13F

EPS (N) 0.37 0.44 0.45 0.56 0.65

YoY Change (%) 12.1 18.9 2.27 24.4 16.1

P/E (x) 8.65 7.27 7.11 5.71 4.92

DPS (N) 0.17 0.18 0.21 0.26 0.30

YoY Change (%) -5.6 5.8 16.9 23.4 16.3

Div Yield (%) 5.31 5.62 6.57 8.11 9.43

NAPS(N) 2.17 2.37 2.82 3.24 3.70

YoY Change (%) 16.0 9.2 19.1 14.8 14.3

P/B (x) 1.47 1.35 1.13 0.99 0.86

CUSTODYINS VS INSURANCE INDEX VS NSE ASI PERFORMANCE(Rebased 31/12/2009)

Source: NSE; Vetiva Research

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4


Custodyins Insura nce Index ASI

Address 14B, Keffi Street

S.W. Ikoyi, Lagos

Website www.custodianinsurance.com

Management (Chairman) Chief Michael Ade Ojo

MD/CEO Mr Wole OshinFinancial Year End December


Symbol Bloomberg: CUSTODYINS:NL

Sector Insurance

Chief M Ade Ojo 17.56

Mr Oshin 13.53

Mr 'Toni Ogunbor 9.09

Others 59.82

SHARE STATISTICS

Shares in issue (M) 5101

Share Price (N) 3.2

Market Cap. (N'm) 16323.2


Free Float (%) 53.7


N'Mn) 11.6

USD'Mn) 0.1

Year high (N) 3.2

Year low (N) 3.15



P/B (x) 1.35

Div. Yield (%) 5.31

ROAE (%) 16.93

VALUATION METRICS

BASIC INFORMATION




January 2011 158

The Tipping Point

2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 2,715 4,102 5,277 8,086 10,432 13,457

Premium Earned 2,069 2,830 3,596 5,145 6,667 8,359

Commissions Earned 91 110 103 162 209 269

Investment and Other Income 662 1,302 1,345 1,080 1,392 1,795

Claims Incurred -565 -847 -1,021 -1,379 -1,765 -2,188

Management Expenses -535 -650 -791 -1,214 -1,736 -2,483

Underwriting expenses -515 -726 -752 -872 -959 -1,103

Other expenses -152 -169 -461 -573 -677 -916


Taxation -139 -290 -132 -394 -492 -586


BALANCE SHEET (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Assets

Cash at bank and in hand 132 240 595 714 857 1,028

Short-term deposits 1,671 7,363 8,173 9,808 11,769 14,123Due from Insurance Companies, Agents andDebtors 870 1,186 1,491 1,670 1,870 2,094

Other Assets 2,565 2,587 3,351 3,750 4,453 5,320

Fixed Assets 427 566 550 605 665 732

TOTAL ASSETS 5,665 11,942 14,160 16,546 19,614 23,297

Liabilities

Current Liabilities 349 566 451 677 1,015 1,523

Insurance Funds 687 1,177 2,240 3,248 4,060 5,075Deferred Taxation 64 82 91 109 136 170

Other Liabilities 0 1,170 234 234 0 0

TOTAL LIABILITIES 1,100 2,995 3,016 4,268 5,211 6,768

Net Assets 4,565 8,947 11,144 12,278 14,402 16,529



January 2011 159

The Tipping Point

2011 Outlook


INCOME STATEMENT ($'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 18.10 27.35 35.18 53.91 69.55 89.71

Premium Earned 13.79 18.87 23.97 34.30 44.45 55.73

Commissions Earned 0.61 0.73 0.69 1.08 1.39 1.79Investment and Other Income 4.41 8.68 8.97 7.20 9.28 11.97

Claims Incurred -3.77 -5.65 -6.81 -9.19 -11.77 -14.59

Management Expenses -3.57 -4.33 -5.27 -8.09 -11.57 -16.55

Underwriting expenses -3.43 -4.84 -5.01 -5.81 -6.39 -7.35

Other expenses -1.01 -1.13 -3.07 -3.82 -4.51 -6.1

Profit Before Taxation 7.04 12.33 13.46 15.67 20.87 24.89

Taxation -0.93 -1.93 -0.88 -2.63 -3.28 -3.9

Profit After Taxation 6.13 10.39 12.58 13.21 17.59 20.98

BALANCE SHEET ($'Mill) 2007 2008 2009 2010F 2011F 2012F

Assets

Cash at bank and in hand 0.88 1.60 3.97 4.76 5.71 6.85

Short-term deposits 11.14 49.09 54.49 65.39 78.46 94.15Due from Insurance Companies, Agents andDebtors 5.80 7.91 9.94 11.13 12.47 13.96

Other Assets 17.10 17.25 22.34 25.00 29.69 35.47

Fixed Assets 2.85 3.77 3.67 4.03 4.43 4.88

TOTAL ASSETS 37.77 79.61 94.40 110.31 130.76 155.31

Liabilities 0.00

Current Liabilities 2.33 3.77 3.01 4.51 6.77 10.15

Insurance Funds 4.58 7.85 14.93 21.65 27.07 33.83

Deferred Taxation 0.43 0.55 0.61 0.73 0.91 1.13

Other Liabilities 0.00 7.80 1.56 1.56 0.00 0.00

TOTAL LIABILITIES 7.33 19.97 20.11 28.45 34.74 45.12

Net Assets 30.43 59.65 74.29 81.85 96.01 110.19



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2011 Outlook


GTAssur plc

Emerging Retail Insurance Leader

GTAssur has gradually stamped its authority as an emerging retail insuranc

leader, supported by its bancassurance model. The stock is valued based o

the excess return methodology thus obtaining a fair value range N1.73- N1.91This indicates a midpoint of N1.82, which gives a “zero” return (relative to it

current market price), thus compelling our “REDUCE” rating. However, w

note that a decline in the company’s share price in the near to medium term

would result in a revision of our rating, as we believe its strong fundamentals

relative to peers.

Investment thesis

Retail distribution supports premiums from the Non-Life segment

GTAssur’s direct distribution strategy through the bancassurance and agenc

platforms, which is primarily aimed at encouraging retail participation, ha

begun yielding positive results. We note that its motor insurance portfol

which drives retail sales growth, witnessed a 51.2% YoY increase in premiumincome to N1.3 billion in 2009 and contributed 28.9% to GPI. As at H1’10

retail sales contributed about 25% to topline numbers, a climb from 18% as a

FY’09. We note there are concerns around GTBank’s divesture especially wit

the deployment of the bancassurance model, however, we do not expect an

major alteration in the company’s strategy, especially relating to retail sale

penetration. We believe the divestiture presents GTAssur with an opportunit

to expand its business relationship with other players in the banking industry.

Good Management Team: GTAssur has a highly skilled management team

as well as top of the range expertise in its investment management activitie

that has delivered strong investment income over the years. The company ha

also developed a wide bouquet of products and services that cover bot

corporate and individual insurance products.

Strong Balance Sheet: GTAssur is well capitalized with an equity base o

about N16.9 billion (Solvency Margin at FY’09 – 434%), well above th

regulatory requirement. This enables the company underwrite relatively large

sized risks and play in key sectors such as the oil and maritime.

Earnings Outlook: We project that GTAssur’s Gross Premiums would grow b

30.4% and 23.7% to N9.2 billion and N11.3 billion by FY’11 and FY’1

respectively. On profitability, we forecast that PAT would rise to N1.3 billio

and N1.7 billion by FY’11 and FY’12.

Source: Company Financials; Vetiva Research


EPS (N) 0.05 0.09 0.13 0.17 0.2

YoY Change (%) -0.8 0.7 0.5 0.3 0

P/E (x) 35.25 20.90 13.84 10.49 8.2

DPS (N) 0.09 0.07 0.11 0.14 0.1

YoY Change (%) -40.0 -22.6 50.9 32.0 25

Div Yield (%) 4.95 3.83 5.78 7.63 9.5

NAPS(N) 1.26 1.29 1.35 1.46 1.5

YoY Change (%) -10.5 1.8 5.3 8.0 5

P/B (x) 1.47 1.42 1.34 1.24 1.1

Address Santa Clara court

Plot 1412, Ahmadu Bello

Way, Victoria Island, Lagos

Website www.gtaplc.com

Management (Chairman) Mr Victor Osibodu

MD/CEO Mrs Yetunde Ilori



Symbol Bloomberg: GTAssure:NL

Sector Insurance

Guaranty Trust Bank 67.68

Africinvest Limited 5.38

Others 26.94

SHARE STATISTICS






Daily Average Value

Traded (N'Mn)8.8Daily Average Value

Traded (USD'Mn) 0.1

Year high (N) 1.82

Year low (N) 1.52


Trailing P/E (x) 31

P/B (x) 1.44

Div. Yield (%) 4.84

ROAE (%) 6.82

BASIC INFORMATION


VALUATION METRICS

GTASSURE VS INSURANCE VS NSE ASI PERFORMANCE(Rebased 31/12/2009)


0.6

0.8

1

1.2

1.4

1.6


GTAssure InsurIndex ASI



January 2011 161

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2011 Outlook


INCOME STATEMENT (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 2,061.7 3,117.8 4,537.0 7,013.0 9,146.8 11,311.8

Premium Earned 1,170.1 1,682.7 2,372.0 3,927.3 5,213.7 6,674.0

Commissions Earned 85.2 120.1 160.1 179.3 200.9 225.0

Investment and Other Income 1,312.5 126.7 1,402.2 700.0 1,400.0 1,722.0

Claims Incurred (362.7) (585.3) (947.6) (1,182.0) (1,737.9) (2,149.2)

Management Expenses (887.0) (1,088.7) (1,184.3) (1,706.0) (2,149.6) (2,708.5)

Underwriting expenses 210.7 350.5 520.3 556.0 914.7 1,131.2

Other expenses (41.0) (96.5) (103.5) (216.7) (282.6) (349.5)

Profit Before Taxation 1,100.5 2,001.3 1,312.2 1,145.9 1,729.8 2,282.5

Taxation (279.2) (125.3) (796.0) (275.0) (415.1) (547.8)

Profit After Taxation 821.2 1,876.0 516.2 870.9 1,314.6 1,734.7

BALANCE SHEET (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Assets


Short-term deposits 5,338.5 10,465.4 8,657.0 10,861.2 13,544.9 16,891.9Due from Insurance Companies, Agentsand Debtors 988.0 2,618.4 2,010.2 2,650.0 3,492.7 4,603.4

Other Assets 797.0 2,261.0 5,134.0 3,750.0 4,687.5 5,859.4

Fixed Assets 664.3 794.9 910.0 605.0 724.0 866.4

TOTAL ASSETS 7,976.1 16,490.0 17,170.7 18,159.0 22,833.3 28,724.9

Liabilities

Current Liabilities 424.7 2,195.6 673.5 677.0 846.9 1,059.5

Insurance Funds 555.3 932.4 1,595.0 2,437.0 3,723.5 4,758.3


Other Liabilities 647.0 1,023.0 2,086.0 2,806.0 3,774.1 4,698.7

TOTAL LIABILITIES 1,677.1 4,181.0 4,546.1 6,032.6 8,434.5 10,628.1

Net Assets 6,298.7 12,309.6 12,625.0 12,901.0 13,534.0 14,621.0



January 2011 162

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INCOME STATEMENT ($'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 13.7 20.8 30.3 46.8 61.0 75.4

Premium Earned 7.8 11.2 15.8 26.2 34.8 44.5

Commissions Earned 0.6 0.8 1.1 1.2 1.3 1.5

Investment and Other Income 8.8 0.8 9.4 4.7 9.3 11.5

Claims Incurred (2.4) (3.9) (6.3) (7.9) (11.6) (14.3)

Management Expenses (5.9) (7.3) (7.9) (11.4) (14.3) (18.1)

Underwriting expenses 1.4 2.3 3.5 3.7 6.1 7.5

Other expenses (0.30) (0.60) (0.70) (1.40) (1.90) (2.30)

Profit Before Taxation 7.30 13.30 8.80 7.60 11.50 15.20

Taxation (1.90) (0.80) (5.30) (1.80) (2.80) (3.70)

Profit After Taxation 5.5 12.5 3.4 5.8 8.8 11.6

BALANCE SHEET ($'Mill) 2007 2008 2009 2010F 2011F 2012F

Assets


Short-term deposits 35.6 69.8 57.7 72.4 90.3 112.6

Due from Insurance Companies, Agents and Debtors 6.6 17.5 13.4 17.7 23.3 30.7

Other Assets 5.3 15.1 34.2 25.0 31.3 39.1

Fixed Assets 4.4 5.3 6.1 4.0 4.8 5.8

TOTAL ASSETS 53.2 109.9 114.5 121.1 152.2 191.5

Liabilities

Current Liabilities 2.8 14.6 4.5 4.5 5.7 7.1

Insurance Funds 3.7 6.2 10.6 16.3 24.8 31.7


Other Liabilities 4.3 6.8 13.9 18.7 25.2 31.3

TOTAL LIABILITIES 11.2 27.9 30.3 40.2 56.2 70.9

Net Assets 42.0 82.1 84.2 86.0 90.2 97.5



January 2011 163

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2011 Outlook


INVESTMENT RATINGS

Vetiva uses a 5-tier ratings system for stocks under coverage: BuyAccumulate, Neutral, Reduce and Sell.

Buy ≥ +25.00% expected absolute price performance

Accumulate +10.00% to +24.99% expected absolute price performance

Neutral +5.00/+9.99% range expected absolute price performance

Reduce -5.00% to +4.99% expected absolute price performance

Sell < -5.00% expected absolute price performance

Definition of Ratings

Buy rating refers to stocks that are highly undervalued but with stronfundamentals and where potential return in excess of or equal to 25.00%expected to be realized between the current price and analysts’ target price.

Accumulate rating refers to stocks that are undervalued but with goofundamentals and where potential return of between 10.00% and 24.99%expected to be realized between the current price and analysts’ target price.

Neutral rating refers to stocks that are correctly valued with little upside odownside where potential return of between +5.00 and+9.99% is expected tbe realized between current price and analysts’ target price.

Reduce rating refers to stocks that are overvalued but with good or weakeninfundamentals and where potential return of between -5% and -+4.99%expected to be realized between current price and analysts’ target price.

Sell rating refers to stocks that are highly overvalued but with wea

fundamentals and where potential return in excess less than -5% is expecte

to be realized between current price and analysts’ target price.



CONTACTS

For further details, kindly contact

Vetiva Capital Management Limited

Plot 266B Kofo Abayomi Street

Victoria IslandLagos, Nigeria

Tel: +234-1-4617521-3

Fax: +234-1-4617524Email: [email protected]

[email protected]

Vetiva Research Email

Pabina Yinkere Head, Research [email protected]

Adedayo Idowu Analyst, Economic Research,

Insurance

[email protected]

Adedoyin Adelakun Analyst, Consumer (Food & Beverages)

[email protected]

Abiola Rasaq Analyst, Banking [email protected]

Tosin Oluwakiyesi Analyst, Infrastructure [email protected]

Olamidun Laniyan Analyst, Consumer (Breweries,

Conglomerates)

[email protected]

Vetiva Wealth Management

Damilola Ajayi Head, Wealth Management [email protected]

sales @ Vetiva [email protected]



January 2011 16

The Tipping Point

2011 Outlook


DISCLOSURES SECTION

Analyst Certification

The research analysts who prepared this report certify as follows:1. That all of the views expressed in this report articulate the research analys

independent views/opinions regarding the companies, securities, industries or mardiscussed in this report.

2. That the research analyst(s) compensation or remuneration is in no way conne(either directly or indirectly) to the specific recommendations, estimates or opinexpressed in this report.

Other Disclosures

Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may hfinancial or beneficial interest in securities or related investments discussed in this reppotentially giving rise to a conflict of interest which could affect the objectivity of report. Material interests which Vetiva may have in companies or securities discussed in report are herein disclosed:

Vetiva may own shares of the company/subject covered in this research report.

Vetiva does or may seek to do business with the company/subject of this rese

report

Vetiva may be or may seek to be a market maker for the company which is the subof this research report

Vetiva or any of its officers may be or may seek to be a director in the company wh

is the subject of this research report

Vetiva may be likely recipient of financial or other material benefits from

company/subject of this research report.

Disclaimer

This research report is based on public information which the research analyst(s) conscredible and reliable. Facts and views presented in this material have not been reviewedand may not reflect information known to, professionals in other business areas of Vetincluding the investment banking team, as Vetiva has established information bar

between its Research team and certain business groups. Whilst reasonable care has btaken in preparing this document, no responsibility or liability is accepted either by Vetits officers or any of its employees for any error of fact or opinion expressed herein.reliance should be placed on the accuracy, fairness or completeness of the informacontained in this report as it has not been verified by the research analyst(s) involvethe companies whose securities have been referred to except as otherwise disclosNeither Vetiva nor any of its officers or employees including the research analystwarrant or represent the accuracy or completeness of information set out in this report. ratings, forecasts, estimates and opinions set forth in this report constitute the analysposition as at the date of this report and may not necessarily be so after the report datethey are subject to change without notice. It is also instructive to note that a compapast performance is not necessarily indicative of its future performance as estimates based on assumptions that may or may not be realized.

The value, price or income from investments mentioned in this report may fall as werise due to economic conditions, industry cycles, market indices, operational or financonditions of companies or other factors. Thus, Vetiva and its officers and employees snot accept liability for any loss arising from the use of this report or its contents in ma

investment decisions or recommendations. This report provides general information onlyis not intended to provide personal investment advice and does not take into accountspecific investment objectives, financial situation and the particular needs of any speperson. Investments discussed in this report may not be suitable for all investors andreader(s) should independently determine their suitability and evaluate the investment rassociated with such investments. All investors are solely responsible for their investmdecisions. Any decision to purchase or subscribe for securities in any offering must be basolely on existing public information on such security or the information in the prospeor other offering document issued in connection with such offering, and not on this repo



The Tipping Point

2011 Outlook


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Such ideas or recommendations reflect the different time frames, assumptions, views analytical methods of the persons who prepared them, and Vetiva is under no obligatio

ensure that such other trading ideas or recommendations are brought to the attentioany recipient of this report. To the extent this report discusses any legal proceedingissue, it has not been prepared as nor is it intended to express any legal conclusion, opior advice. Information relating to the tax status of companies whose securities discussed in this report is not intended to provide tax advice or to be used by anyonprovide tax advice. By accepting this research report, you agree to be bound by foregoing limitations. Vetiva Capital Management Limited is registered with the SecuritieExchange Commission to conduct Financial Advisory, Fund/Portfolio Management, Trusteeship business in Nigeria. This document is for information purposes only andprivate circulation. No portion of this document may be reprinted, sold or redistribuwithout the written consent of Vetiva Capital Management Limited. Vetiva research repodisseminated and available primarily electronically, and, in some cases, in printed form.

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