All hands on deck for rising African consumer tide March · PDF fileAll hands on deck for rising African consumer tide... March 2012 Analysts ... Cadbury Nigeria ... We initiate our

Imara SSA FMCG Sector Report

All hands on deck for rising African consumer tide...

March 2012 Analysts Farai Vengesai +263 774 712 323 [email protected] Batanai Matsika +263 772 889 556 [email protected]

www.imara.co

Table of Contents

Executive Summary ................................................................................................................ 2

Valuation Summary................................................................................................................. 3

Key performance Ratios and Comparatives .................................................................................... 4

Africa, the last consumer frontier… ............................................................................................. 5

Profiling the SSA consumer ....................................................................................................... 7

FMCG Manufacturing in SSA ....................................................................................................... 8

Nigeria: FMCG manufacturing and consumer consumption trends ........................................................ 8

Ghana: FMCG manufacturing and consumer consumption trends ......................................................... 9

Zimbabwe: FMCG manufacturing and consumer consumption trends ..................................................... 9

Cadbury Nigeria .................................................................................................................... 10

Dangote Flour Mills Plc. .......................................................................................................... 14

Flour Mills of Nigeria Plc ......................................................................................................... 18

Nestle Nigeria Plc. ................................................................................................................ 22

PZ Cussons Plc. .................................................................................................................... 30

Unilever Nigeria Plc. .............................................................................................................. 30

UAC of Nigeria PLCPlc. ........................................................................................................... 34

Fan Milk . ........................................................................................................................... 38

Unilever Ghana . ................................................................................................................... 42

Dairibord Zimbabwe Limited. ................................................................................................... 46

Innscor Africa Limited ............................................................................................................ 50

Glossary of Terms

BMI Business Monitor International

COMESA Common Market for East and Southern Africa

ECOWAS Economic Community of West African States

EAC East African Community

FMCG Fast Moving Consumer Goods

GDP Gross Domestic Product

IAS Iama Africa Securities

Maghreb Union Agreement Aiming for economic unity between Arab countries in North Africa

NGN Nigerian Naira

OECD Organisation for Economic Co-operation and Development

SADC Southern African Development Community

SSA Sub Saharan Africa

GHS New Ghana Cedi

Historically, war and famine characterised the African continent. However, out of this unfortunate characterisation, a compelling story of a large and rapidly growing market for fast-moving consumer goods (FMCGs) is quickly gaining currency. While huge gains recorded in terms of democratisation, creation of a business friendly policy frameworks and regional integration can be cited as key catalysts, we nonetheless believe that a paradigm shift on the notion of Africa as a business opportunity is occurring at an opportune moment as demographic dynamics and other world events are all favouring Africa. Africa’s allure as an investment destination is clearly rising and its huge consumer base is poised to have a significant say in directing investment by FMCG companies. We are of the opinion that this opportunity extends directly to portfolio investors, targeting companies whose fortunes are shaped by developments in the consumer market. Our bullish sentiments on the telco and beer & beverages industry for instance are informed to a large degree by our belief in the potential of the SSA consumer, and this report initiates our coverage on producers of fast-moving consumer goods other than the two mentioned above. The report discusses the key drivers to the compelling African consumer story focusing in particular on SSA and a selection of major listed FMCG producers. We paid particular attention to strategies being implemented and their effectiveness in SSA’s unique business setting with the aim of identifying those best poised to generate value for shareholders. Africa’s market for consumer goods is growing and is doing so in real terms. The strong population growth, estimated at 2.2% per annum, coupled by a notable decline in poverty levels, with the below USD 1.0 per day survivors estimated to fall by 10 percentage points to 2020, are a living testimony to our argument. Furthermore, rapid urbanisation estimated at 2.0% per annum, driven in the main by a burgeoning youthful and economically active population with dynamic tastes and the means to purchase consumer goods, points to the long term durability of this trend. No wonder estimates point to 221.0m basic-needs consumers entering the African consumer market by 2015 as fast paced GDP growth, averaging c6.0%, helps more Africans graduate from poverty. (Mckinsey / Accenture) The same cannot be said for the developed world whose debt driven challenges are curtailing growth. Sales for consumer goods are accordingly growing at a relative snail’s pace, leaving multinational FMCG companies to look elsewhere for growth. The BRICs have for a long time been the obvious destination, but events of the past decade have clearly demonstrated what the brave can reap by daring to invest in frontier markets. SSA resultantly stands out as probably the last consumer frontier offering, collectively as a region, income, population size and growth that can rival emerging markets such as India, Brazil and Russia. The opportunity is, however, not easily realised. SSA lags the developed world in many facets, the infrastructure deficit being the most notable. This makes the region a high cost producing centre and makes distribution a nightmare. But, the brave are not to be deterred, with large multinationals, including the likes of Unilever and Nestle, making significant investments across the region to retool and expand their operations. Retailers of FMCGs have been making similar moves; YUM Brands and WalMart stand out as big international brands seeking a slice of the SSA consumer cake. Our research showed that spiking commodity prices and weak currencies, well pronounced especially in 2010 and 2011, saw a dramatic fall in profit margins for FMCG companies. The impact was felt mainly by those importing a significant portion of their throughput. 2012 has, however, brought some relief as currencies largely stabilised and key raw materials like wheat continued their south bound descent. We thus largely expect some improvements across the sector. We initiate our coverage with buy recommendations on Flour Mills Nigeria, PZ Cussons, UACN, Dairibord Zimbabwe Limited and Innscor Africa Limited. We advise accumulating Fan Milk shares, while rating Dangote Flour Mills a good purchase for speculative purposes. We initiate with hold recommendations on Cadbury, Nestlé (Nigeria) and Unilever Ghana and, lastly, rate Unilever Nigeria a sell owing to a rich valuation in a market likely to rotate and go underweight defensives.

Executive Summary

2

Valuation Summary

Company Year end

T+1 T+2 T+1 T+2 T+1 T+2

Nigeria

Cadbury Dec-10 207.0 208.3 14.9 11.9 2.2 1.8 - -

Dangote Flour Mills Dec-10 157.2 408.1 22.6 20.1 5.7 5.9 1.6 1.7

Flour Mills of Nigeria Mar-11 773.5 1,517.4 15.1 11.8 1.8 1.6 1.9 2.4

Nestle Nigeria Dec-10 2,221.7 520.3 21.0 23.7 17.6 14.3 3.1 2.8

PZ- Cussons May-11 481.2 451.2 14.7 19.8 1.8 1.6 3.6 2.6

Unilever Nigeria Dec-10 690.0 344.2 20.0 19.4 11.6 10.4 4.0 4.1

UACN Dec-10 297.4 375.2 7.3 6.4 1.2 1.1 7.5 8.5

Ghana

Fan Milk Dec-10 158.3 89.3 12.0 10.0 3.6 3.0 0.0 0.0

Unilever Ghana Dec-11 320.5 180.6 15.1 12.8 5.4 4.7 4.0 4.1

Zimbabwe

DZLH Dec-10 58.2 118.1 6.5 4.8 1.2 1.1 3.4 4.6

Innscor Jun-11 310.5 637.4 9.0 6.6 2.6 2.0 12.2 13.1

Market

Cap (USD)

Consumer

spend

(USD) T+1

PER (x) PBV (x) Div. Yield (%)

Current

Price (USD)

Target Price

(USD)

Upside/

Downside (%) Rating Comment

Nigeria

Cadbury 0.066 0.075 13.0 HOLD

Cadbury is rehabilitating in the wake of the Kraft takeover.

While it builds a history of good performance, we urge

caution.

Dangote Flour Mills 0.031 0.043 35.3 SPEC. BUY

Corporate governance issues and poor performance in 2012

weighed down performance, but there is room to remedy all

these.

Flour Mills of Nigeria 0.412 0.705 71.3 BUY

Our preferred destination among Nigerian stock covered

herein. Turnaround at loss making entities and new value

adding ventures to drive earnings.

Nestle Nigeria 2.803 3.084 10.0 HOLD

The new flower gate factory is a game changer. Economies of

scale and exports drive to underpin profitability

PZ- Cussons 0.151 0.215 42.6 BUY

Strong position in both HPC products and White goods coupled

with discount market ratings makes a good investment case.

Unilever Nigeria 0.182 0.166 (9.0) SELL

Sector rotation in the wake of increasing appetite for risk

likely to dampen prospects for a company that depicted

strong defensive traits in 2011.

UACN 0.182 0.252 37.9 BUY Diversified with interests in manufacturing

and real estate. The business model is overweight on the

highly defensive food sector (c67% contribution to turnover).

Ghana

Fan Milk 1.429 1.603 12.1 HOLD/ACCUM

Offers exposure to Ghana's consumer growth story, driven

mainly by the expected growth in disposable incomes. The

expansive distribution network also ensures a massive

consumer catchment

Unilever Ghana 5.128 5.660 10.4 HOLD

Strong performance to continue, but rich valuations to curtail

upside.

Zimbabwe

DZLH 0.175 0.250 42.9 BUY

Dairibord has continued to reinvigorate itself as a growth

stock, through multiple investment projects earmarked at

building capacity.

Innscor 0.640 0.924 44.4 BUY

Increasing volumes and efficiency on the back of a stabilising

economic environment to push valuations up

3

Key performance Ratios and Comparatives

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PER (T+1) times

444

Pedestrian growth in sales volumes of consumergoods and the inability of consumer demand to risefrom the 2008/9 economic meltdown inspired abysshave all but impaired growth prospects for companieswhose fortunes are tied to developed worldconsumers. For growth, therefore, the world islooking to emerging markets and recent trends, astestified by the moves of some large multinationalssuch as Wal-Mart, Nestle and Bharti, show that Africais now in play, being a prime target continent, ascompanies look beyond the usual BRIC nations.

Africa is transforming and its business environment isimproving significantly (as shown by the map below).Democracy is growing deep seated roots and thepolitical outlook of the continent has vastlyimproved. Its population is not only growing fast, buturbanising rapidly while getting richer at the sametime. The continent is also making significant stridesto integrate, with clear indications that success inthis endeavour will generate another ‘India like’economy in a single swoop. Significant infrastructuredevelopments are enabling businesses and its citizenscan now access consumer products in line with theirnew aspirations and growing wealth.

On the other hand, all is not rosy for developedeconomies. Demand for consumer goods is currentlygrowing at a snail’s pace. Demographic developmentspoint to a doubling of the dependence ratio to 50% by2050 (for OECD nations), while Africa’s economicallyactive population burgeons during the same period.The consumers in the developed world, like theirgovernments, are saddled with significant debt thatis likely to take a while to unwind. Consumer spend

will clearly be curtailed by the on-goingdeleveraging. A volatile operating environment onthe back of the aforementioned unsustainablesovereign indebtedness all add up to create a toughconsumer market in the developed world. With Africaproviding many positives in comparison to thechallenges of the developed markets, the shift inattention is only natural.

In this paper, therefore, we discuss the drivingelements for Africa’s consumers. We profile his/herunique traits and appraise efforts by somemanufacturers of fast moving consumer products toexploit the market. We identify companies, in ourcoverage universe, that look better placed to benefitand create value for shareholders.

Key growth drivers for SSA consumers

McKinsey identified Africa’s consumer goods andservices as the leader in a quartet of the foremostbusiness opportunities in Africa. Euromonitor, on theother hand, estimates that SSA consumer spendinggrew by an average 4% between 2000 and 2010 toreach USD c600bn and is expected to break the USD1.3tn mark by 2020. Fig 1, below shows forecastannual revenue on the four leading sectors by 2020.

Fig. 1 Forecast annual revenues for Africa’s foremostbusiness opportunities according to McKinsey Global.

Source: McKinsey Global Institute, IAS

The key factors that are expected to underpin SSAconsumer spend are discussed below.

a) Africa is getting richer

Research indicates that poverty is declining in Africa.Maxim Pinkovskiy and Xavier Sala‐i‐Martin in thepaper entitled ‘African Poverty is Falling...MuchFaster than You Think’ demonstrated how, by 2006,the proportion of the SSA population surviving onUSD1 a day registered a ten percentage point declinefrom c43% in the 1990s.

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Africa, the last consumer frontier…

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Fig. 2 USD1/day poverty and GDP Growth

Source: Maxim Pinkovskiy and Xavier Sala-i-Martin, 2010

Fig. 2 also demonstrates the inverse relationship between GDP growth and poverty, which has profound implications for the future evolution of SSA’s consumer market. SSA GDP is growing at a faster pace than its population with the continent’s collective GDP expected to exceed USD 2.6tn, while consumer spend, likewise, is forecast to exceed the USD 1.3tn mark by 2020. This should see poverty levels decline significantly. Accenture, for instance, estimates that by 2020, USD1 per day poverty levels in Africa will fall to 20%. This implies that more people will have discretionary income and hence the demand for consumer goods will inevitably increase. Fig.3 shows how SSA’s consumer market is expected to evolve as more and more people look beyond purchasing basic goods. Fig.3 SSA households stratification by income

b) Rapid urbanisation Africa as a continent has 52 cities with more than 1.0m residents, almost the same number as in Europe and more than Latin America, according to McKinsey

Global. Expectations are that by 2030, half of Africa’s population will live in cities, with the ratio strengthening to two thirds by 2050. This is positive for FMCG manufacturers. The urban population is often more productive, hence it has higher disposable income. Secondly, with distribution being a significant challenge in Africa, urbanisation simplifies logistics to deliver products to the market as people will be concentrated in a relatively smaller area.

c) Population implosion with forecasts pointing to 2bn people by 2050

Africa’s population reached the 1.0bn mark in 2010 and is expected to have doubled by 2050. Between 2010 and 2050, Africa’s economically active population is forecast to grow from 56% to 66% at a time that most of the developed nations and major emerging markets’ populations will be ageing and moving into the dependent category. This is the single largest source of future demand for FMCGs in Africa. Fig.4 shows the burgeoning economically productive population for Africa. Fig. 4 Africa’s forecast population by 2050 and age group stratification.

Sources: Accenture, UN Population Division 2010

d) Africa fast integrating economically There is a vision to create a continent wide free trade area and the recently launched action plan by the African Union (January 2012) is expected to accelerate realisation of this dream. We concede it will take time until this becomes a reality, but great strides have been made at the regional level with economic communities like SADC, EAC, Maghreb Union, ECOWAS and COMESA already showing significant levels of integration. Integration avails larger markets to manufacturers of FMCGs and allows them to unlock economies of scale.

6

Profiling the SSA consumerAfrica has for a long time been painted as a war torn,poverty and disease stricken continent; ‘the DarkContinent’, a perception that has justifiably startedto wear off. While one cannot deny that a significantportion of the African population does fit into thevarious metrics that define poverty, the major onebeing that a third of the people in SSA survive on lessthan USD 1 per day, the future is clearly brighter.There is general consensus that approaches toassessing the consumer market that work indeveloped markets may not help in fullyunderstanding the African consumer. The experienceof the telecommunications industry has been an eyeopener. For example, SSA’s cell phone penetrationlevel of c60% has been a revelation. Not many wouldhave predicted the speed with which cell phoneshave been taken up owing to the experience with thesame product in the developed world, but innovationhelped unlock Africa’s potential. The same can alsobe said for manufacturers of FMCGs. Their success ishinged on how well they understand the market andtailor make appropriate products and strategies toaccess it. Of all the classifications on the Africanconsumer, Accenture, in itspaper entitled ‘TheDynamic African Consumer Market: Exploring GrowthOpportunities in Sub-Saharan Africa’,did a sterlingjob in stratifying consumers into segments that allowproper analysis. We have adopted the same approachand analysed prospects of our firms under coverage inrelation to their strategies in serving the varioussegments. We paid special attention to strategiesaimed at the ‘rising strivers whose purchasing poweris poised for a huge leap. Accenture stratified themarket into basic survivors, working families, risingstrivers, cosmopolitan professionals and the affluent.

a) Basic Survivors.At the bottom of the pack are the basic survivors whomake up between 50% and 60% of the population ofAfrica. These are the people that have for yearsgrabbed the headlines and fortified Africa’sperception as a charity case. Basic survivors typicallyearn less than USD 100 each month and make cashpurchases mainly at open markets usually on a day today basis. They live in urban slum areas or ruralareas. It is clearly difficult to envisage a marketamong the basic survivors, but this segment is freefrom expenses faced by its peers which make itsdollar go further. They don’t pay rent and theireducation and health expenses are often met bygovernment or donor agencies and hence theirmeagre income is available for purchasing consumergoods. To exploit the opportunity, some companieshave resorted to very innovative concepts likereducing the pack size of their products, often tosingle use portions. Additionally, companiesincorporate the operators at open markets in theirdistribution plans.

b) Working familiesWorking families are the second largest consumergroup and are slightly wealthier than basic survivorsearning between USD 100- USD 200. They treasurestability and routine and usually wait for the monthend cheque to fund their purchases. A significantportion of their income is spent on their childrenwho, through education, typically find their way outof poverty. This segment also relies on open marketswhere they believe they can strike better bargainsthan in formal supermarkets and general dealers.

c) Rising StriversThe Rising Strivers group is the bread and butter ofthe African consumer market. The segmentconstitutes between 10% -16% of the SSA populationand is growing as more people graduate from beingbasic survivors and working families. They representAfrica’s emergence from low-income to middle-income economies and are the primary drivers behindSSA’s consumer growth. They earn between USD 250and USD 750 per month and are brand conscious,treasuring things such as convenience and value;hence their shopping habits differ significantly fromthe first two segments. They typically live in theurban areas and can afford such ‘luxuries’ as clearbeer. The emergence of supermarkets and shoppingmalls especially in West Africa can be attributed tothe influence of this group as they have madeorganised retailing make economic sense.

d) Cosmopolitan ProfessionalsThis covers those in white collar jobs like your typicalmiddle manager. They constitute between 2% -3% ofSSA’s population and live in urban areas. They arebusy with work but often have active social lives. Asa result, these consumers value pragmatic productsbut are also brand conscious and influenced by themedia. They earn between USD700 and USD 1,000permonth and many of them studied abroad hence theirshopping habits are influenced by their overseasstays. They shop in supermarkets and their access towhite goods means they spend big and are noteveryday shoppers.

e) The affluentThe affluent of Africa have disproportionately highpurchasing power, and are considered wealthyregardless of where they travel across the globe.They mainly live in cities, have studied or workedabroad, prefer malls and upscale retail stores, accessa wide variety of global media, and use credit cardsto a greater extent than their peers. Their income issubstantially higher than the CosmopolitanProfessionals and typically more than USD 1,200permonth. They have a pronounced preference forluxury brands. While purchasing power is high, theyare not really as important in dictating trends inAfrican consumer market as the previous threesegments.

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FMCG manufacturing in SSA is gathering momentum. A spate of capacity additions across the region largely by multinationals, the likes of Unilever and Nestle, has been a notable development coming on the heels of similar moves by beer brewers. Retailing is also gaining momentum, Wal-Mart, Shoprite and Yum Brands are notable names making significant inroads in the region. A few years ago, this rush was unthinkable. Developments in the telco industry opened the world’s eyes on the potential that lies beneath the much publicised poverty and warfare that had characterised Africa. The SSA market is however not an easy one. It will take non-traditional methods to extract value from it. The telco industry, as an example, showed that with innovation, the SSA market can be a source of growth. Infrastructure deficit pushes manufacturing prices higher... FMCG manufacturing in Africa is not easy, it is certainly a lot more challenging compared to the environment under which manufacturers in developed markets operate. The continent has a significant infrastructure deficit, with power as well as road and rail networks being the most notable. These make Africa a high cost manufacturing zone as companies often resort to more expensive alternatives. It is not uncommon to find a company generating its own electricity and owning a fleet of trucks to smoothen production and distribution, facilities that are otherwise readily available in developed markets. Fragmented and small markets – economies of scale difficult... SSA as a market is comparable to India, but this potential is masked under the continent’s political boundaries that prohibit movement of goods, services and people. Efforts are underway to try and break these barriers. Africa, under NEPAD, is even trying to coordinate infrastructure development, but there is still a long road before this potential is unlocked. As such factories are sometimes small which does not allow benefits from economies of scale.

Throughput supply base often thin... Manufactures in Africa often rely on imported raw materials. This is sad especially for agricultural products given that the continent has vast tracks of unexploited agricultural land. Companies like Nestle for instance are known to be tapping into this potential, but in the main, manufacturers are often left to the mercy of currency fluctuations and international commodity prices. However, in the midst of all these difficulties, manufactures are doing business and adding to their capacities to consolidate their hold on the African consumer market which is yet to boom.

Nigeria: FMCG manufacturing and

consumer consumption trends The consumer market in Nigeria is estimated at cNGN 15.0tn with the food and drinks (including alcoholic) being the largest component. Major drivers are not too different from factors already discussed for the whole of the SSA region, but Nigeria stands out with regards to its demographic dynamics and the profound influence that western culture is having on consumer tastes. Nigeria is home to c168m people, the majority of whom are youthful and still have a lot more productive years ahead of them. This makes the country the eighth most populous in the world, and the World Bank forecasts that by 2050, Nigeria would have risen to fourth place. Fig 5 shows Nigeria’s actual and forecast consumption per capita and growth up to 2015. Fig. 5 Nigeria per capita consumption forecasts to 2015.

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Consumer tastes are transforming in Nigeria and western culture is at the centre of this development. Food items like pasta and noodles which are not of Nigerian origin now make up a significant portion of the population’s diet as well as consumer spend. Champagne, for instance, is a recent addition to the drink basket now largely being demanded by the affluent Nigerian consumer. In fact according to a Paris-based magazine Jeune Afrique, Nigerians are the biggest consumers of champagne in Africa, consuming twice the amount that South Africa consumes in a year. Organised retailing is peaking in Nigeria, although when considering its population size, it is fair to say that it is yet to take off. South Africa’s Shoprite, which entered Nigeria way back in 2005, has indicated plans to expand its network. Wal-Mart’s Massmart on the other hand has a few Game stores, although indications are that it plans to expand the count by between 10 -20 shops beginning this year.

FMCG Manufacturing in SSA

8

Nonetheless, most consumer transactions broadly happen in convenience shops, kiosks and open markets. FMCG manufactures in Nigeria are however poised for a difficult 2012. The removal of fuel subsidies will not only hike production costs, but will significantly reduce purchasing power among consumers leading to significant margin erosion. The planned electricity tariff revision will also have similar implications. We believe that companies that recently improved capacity will fare better as benefits from improved efficiency and volumes will offset the negative impact. Those that are yet to invest in capacity will however feel the full knock of the margin squeeze.

Ghana: FMCG manufacturing and consumer consumption trends Ghana’s domestic demand story is exciting. Oil production is expected to be ramped up in 2012, while cocoa production is looking up as well, which all should add up to robust growth in 2012 and beyond. The World Bank forecasts 9.0% and 8.0% growth in 2012 and 2013, respectively, which should see a tremendous improvement in discretionary income. BMI’s forecasts point to per capita GDP for Ghana breaking the USD 4,000 mark, firmly placing the country among middle income economies. Of note also are expectations that oil revenues will be spread relatively wider in Ghana than has been the case with most of its fellow Africa oil economies. Fig. 6 Ghana per capita consumption forecasts to 2015.

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Source: BMI/IAS

While the oil story will underpin consumer consumption growth going forward, Ghana’s youthful and rapidly growing population will be another critical driver. BMI forecasts consumption to grow close to 20% annually up to 2015 which is shown in Fig.6. Added to that, Ghana stands out in terms of ease of doing business in comparison to its West African peers. Ghana is thus likely to to see relatively more investment in FMCG manufacturing and organised retailing ahead of Nigeria.

Zimbabwe: FMCG manufacturing and consumer consumption trends Zimbabwe is on a firm recovery path from its ‘lost decade ’ever since the economy dollarised. Growing purchasing power has been the prime driver, although teething challenges still remain, like the liquidity squeeze in the banking industry at the beginning of 2012. However, in 2012, the manufacturing sector is expected to grow by 6% with growth driven mainly by food (6%), wood and furniture (8%), metals and metal products (11%), and non-metal products (25%). The manufacturing sector’s capacity utilisation has picked up in some subsets including the consumer goods sector. For example foodstuffs capacity utilisation is expected to reach 57% in 2012 from 38% recorded in 2010, whilst for drinks, tobacco & beverages, it is expected to reach a high of 95%. In some sub sectors such as clothing, textiles and printing, it has however remained low, averaging around 25% while the textile and ginning industry capacity utilisation is expected to decline further to 19.0% from about 23.0% achieved in 2010.

Unlike some of its SSA peers ex-SA, Zimbabwe has positives that can spur growth in the FMCG sector. Organised retailing has been around for a while and road and rail networks, although grossly unkempt, allow some degree of efficiency in distribution. However, challenges like power outages and a fairly small market still remain. The companies we focus on in this report, namely Innscor Africa Limited and Dairibord Zimbabwe Limited are doing well, having weathered the decade long economic meltdown, which goes to show what innovation can do for companies operating in the midst of chaos.

9

Cadbury is rehabilitating. Having turned a corner from a streak of debt driven losses between 2006 and 2010, the company is looking to consolidate its position, beginning with a streamlined product portfolio and a transformed leadership. An NGN 22bn capital call allowed the company to extinguish its debt and the board has since been restructured to incorporate Kraft sponsored reformists and results are already showing on its financials that are now on a positive trajectory. Legacy issues pertaining to misstated income in 2008 and the aforementioned losing streak are however expected to continue weighing down the share price despite an improvement in performance. We however expect the market to eventually warm up to its transforming fortunes. � Reduced cost of capital driving performance. Performance has recently been driven by reduced interest costs following the repayment of crippling debt. The product range has been streamlined and factories re-tooled which has improved efficiency. We envisage future value creation coming from expanding the product portfolio while continuing to increase efficiencies. � Kraft takeover positive. The Kraft link was not only positive in the unfolding restructuring, but has opened up future opportunities, chief among them being the ability to open up opportunities for expanding the product range by picking from an even wider Kraft range. � Dividend payment expected to resume. Cadbury was a good dividend paying stock prior to the advent of financial losses that impaired its performance. It last declared a dividend of NGN 0.013per share in 2006 and we expect the company to resume paying dividends soon. We believe that this and the turnaround story provide room for upside at the current price, although a history of good performance is prerequisite for a better rating. HOLD

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG

Cadbury Nigeria

BLOOMBERG: CADBURY:NL HOLD

Current price (NGN) 10.52

Current price (USD) 0.07

Target price (NGN) 11.89

Upside/Downside (%) 13.0

12 month High/Low (NGN) 29.48; 10.17

Liquidity

Market Cap (NGN m) 32,919.1

Market Cap (USD m) 207.0

Shares (m) 3,129.2

Free Float (%) 25.0

Ave daily value traded ( USD' 000) 946.5

Ave daily volume ('000) 134.0

Share Price Performance

6 months (%) (47.3)

Relative change (%)* (37.2)

12 months (%) (62.4)


* Relative to NSE index

Financials (NGN m) - FY 31 Dec 2010 2011F 2012F

Revenues 29,170.0 33,115.3 39,473.9

EBITDA 2,057.0 3,973.8 4,736.9

Attributable earnings 1,181.0 2,202.2 2,777.1

EPS (NGN) 0.38 0.70 0.89

DPS (NGN) - - -

NAV/Share (NGN) 4.16 4.86 5.75

RATIOS

RoAE 9.2 15.6 16.7

RoAA 4.4 7.5 8.5

Gross Margins (%) 31.7 28.4 28.4

EBITDA Margins (%) 7.1 12.0 12.0

Net Margins (%) 4.0 6.7 7.0

VALUATION RATIOS

PBV (x) 2.53 2.16 1.83

PER (x) 27.87 14.95 11.85

Dividend Yield (%) - - -

Dividend pay-out ratio (%) - - -

STRENGTHS WEAKNESSES

Strong global brand. Unable to pay dividend due to

Backward integration with- negative reserves

cocoa processing firm. Profit margins lag those of peers

Leveraging on research and- (especially Nestle)

development of parent.

OPPORTUNITIES THREATS

Growing per capita income. Poor infrastructure.

Expanding the product range to Stiff competition bringing

include Kraft brands. profit margins down.

Enhancing local sourcing of raw

materials.

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NSE-ASI CADRURY:NL

Cadbury vs NSE ASI (Rebased)

10

Cadbury’s history in Nigeria dates back to the1950s when the business specialised in sourcing cocoa beans for export. In the 1960s, a packing venture was added and subsequently evolved into a fully-fledged manufacturing operation. This was eventually incorporated into Cadbury Nigeria Limited in January 1965. The company went public and listed on the Nigerian Stock Exchange in 1976. Cadbury produces sugar confectionery, chewing gum and food beverages for Nigerian and the West African sub-regional markets. Some of its leading brands include; Tom Tom, Bournivita and Trebor Buttermint. It has a 93.25% owned subsidiary, Stanmark Cocoa Processing Company, that specialises in processing cocoa beans into several high quality cocoa by-products (such as cocoa butter, cocoa powder, cocoa cake and cocoa liquor) for local and export markets. The unit provides 100% of Cadbury’s cocoa requirements. Cadbury’s operations can be split into two broad segments; the confectionery and food drinks segment which produce Bournivita, Tom-Tom, Ahomks ginger and Buttermint. This is the largest and historically accounts for more than 73% of group revenue, and the Intermediate cocoa products segment which produces cocoa powder, cocoa butter, cocoa liquor and cocoa cake. About 27% of group revenue comes from this segment. Streamlined product range turning around Cadbury’s fortunes... Cadbury took a strategic decision to halt the production of some of its famous brands such as Richoco, Stimorol, Bubba bubble gum and Eclairs and redeployed resources towards the development and expansion of its core profitable brands: Bournivita, Tom-Tom and Buttermint. The strategy is working and 9M 11 results confirm that enhanced management focus and improved production capacity have been positive for both volumes and margins. Debt repayment ensured top line growth filtered through to the bottom-line… Y-o-y revenue grew 19.0% for 9M 11, driven in the main by continued volume recovery. With 100% of cocoa throughput being sourced locally, Cadbury was insulated from the pressure on profit margins witnessed at other FMCG manufacturers, emanating largely from the high cost of imports. Gross margins consequently improved by 6% to 31.9%. EBITDA margins, likewise, added 190 bps to? 17.7% which is in line with its regional peers. The company is now free of the hitherto crippling debt, and as such it managed to translate this solid top-line performance to net profit which grew 23.6% (y-o-y).

Shareholding Structure Nature of Business

9M 11 Financials Summary Review of Operations and 9M 11 Results

Income Statement (NGN m) 9M 10 9M 11 % ch

Revenue 20.73 24.67 19.0%

Gross profit 6.24 7.87 26.1%

EBITDA 3.27 4.37 33.6%

PBT 1.78 2.19 23.0%

PAT 1.27 1.57 23.6%

Balance Sheet (NGN m) 9M 11 9M 11 % ch

Non current Assets 11.52 12.06 4.7%

Inventory 3.40 2.78 -18.2%

Cash 6.54 11.20 71.3%

Other assets 6.82 6.88 0.9%

Total Assets 28.28 32.88 16.3%

Non current Liabilities n/a

Creditors 2.68 2.20 -17.9%

Borrowings 1.00 n/a

Other liabilities 12.70 15.18 19.5%

Shareholders' funds 12.90 14.50 12.4%

Total liabilities and equity 28.28 32.88 16.3%

Gross margins (%) 30.1 31.9 6.0%

EBITDA margins (%) 15.8 17.7 12.3%

Net margins (%) 6.1 6.4 3.9%

ROA (%) 6.0 6.4 6.3%

ROE (%) 13.1 14.4 10.0%

11

We are cautiously bullish on Cadbury’s future prospects; we believe there has to be a sustainable trend of growth before its recovery is deemed durable. We however see profitability improving with consolidation and expansion of the product range. Applying local market knowledge to adapting international brands from parent Cadbury has been in Nigeria for a long time and it has had a winning formula in accessing the market which remains relevant, despite the changes in the market place. We believe that the Kraft connection is the single most important factor setting it apart from peers. Nigerian consumer tastes are changing and western culture is having a significant influence to this evolution. In Kraft, Cadbury has a handy ally which has a rich portfolio of products that are tried and tested and can be easily adapted to the Nigerian market. Consolidation and broadening of product range... Underpinning our bullish outlook is the possibility of broadening the product offering. Restructuring called for focus on Bournivita, Tom Tom, and Butter Mint, products with a solid market pedigree that could easily generate cash. With the turnaround solidifying, expanding the product range is natural. We expect the product portfolio to incorporate both discontinued lines and new items from the Kraft Foods portfolio. Efficiency to underpin profitability The capital call saw the company extinguish its NGN16.6bn loan with the balance of cNGN5.4bn being applied to reengineer the business. The result has not only been a return to profitability but improving efficiency, and we expect the latter to play a pivotal role in value creation going forward. Dividend payment likely to resume Prior to 2006, Cadbury was a good income stock but it stopped paying dividends as losses bit and general reserves turned negative. The loss making position has since turned and we expect the reserves position to turn as well at the latest by 2013, paving the way for the company to resume dividend payments. Cadbury is on the mend, but its journey is just beginning and a trend is yet to form before a verdict can comfortably be passed. We believe there is room for improvement on operations profitability underpinned largely by the expansion of its product offering. On the other hand a resumption of its dividend payment policy will also prop up the attractiveness of its shares. Our DCF model prescribes a value of KES 11.65 to Cadbury, which is 10.8% higher than the current price. Hold

Valuation and Recommendation

Outlook

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

(5,000)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2007 2008 2009 2010 2011F 2012F

Revenue (NGN m)-LHS EBITDA (NGN m)- LSH

PAT (NGN m) -LHS EBITDA Margins (%) - RHS

PAT margin (%) -LHS

Cadbury : Financial analysis

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

5,000

10,000

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30,000

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40,000

2007 2008 2009 2010 2011F 2012F

Total Assets (NGN m) LHS Asset Growth (%)- RHS

Cadbury: Total asset growth

(4.00)

(2.00)

-

2.00

4.00

6.00

8.00

10.00

2007 2008 2009 2010 2011F 2012F

EPS (NGN) NAV/ Share (NGN)

Cadbury: EPS and NAV

12

CADBURY (NIGERIA) 3YR CAGR COMPARISON31 DEC (NGN m) 2007

Income Statement

Revenue 19,937

EBITDA (1,288)

EBIT (2,537)

PBT (4,198)

PAT (721)

Balance sheet

Non-current assets 15,984

Current assets 8,299

Total assets 24,283

Total Equity 35

Non-current liabilities 3,047

Current liabilities 21,201

Total Equity and liabilities 24,283

Ratios

Shares in issue (million) 1,092.4

EPS (NGN) (0.7)

DPS -

NAV per share 0.0

Other Ratios

Revenue growth

EBITDA Margins -6.5%

Operating margins -12.7%

Net margins -3.6%

Total Assets growth

Current Ratio 0.39

RoAA

RoAE

CADBURY (NIGERIA) 3YR CAGR COMPARISON2007 2008 2009 2010 2011F 2012F

19,937 24,298 25,586 29,170 33,115 39,474

(1,288) 533 741 2,057 3,974 4,737

(2,537) (853) 154 1,736 3,096 3,908

(4,198) (2,848) (2,380) 1,952 3,146 3,967

(721) (2,690) (1,240) 1,181 2,202 2,777

15,984 14,588 14,308 13,941 13,686 17,559

8,299 9,313 10,940 14,386 16,494 17,476

24,283 23,901 25,248 28,327 30,181 35,034

35 (3,013) 12,666 12,944 15,217 17,994

3,047 3,734 3,570 3,097 2,416 2,416

21,201 23,180 9,012 12,286 12,548 14,624

24,283 23,901 25,248 28,327 30,181 35,034

1,092.4 1,102.5 1,479.1 3,129.2 3,129.2 3,129.2

(0.7) (2.4) (0.8) 0.4 0.7 0.9

- - - - -

0.0 (2.7) 8.6 4.2 4.9 5.8

21.9% 5.3% 14.0% 13.5% 19.2%

-6.5% 2.2% 2.9% 7.1% 12.0% 12.0%

-12.7% -3.5% 0.6% 6.0% 9.4% 9.9%

-3.6% -11.1% -4.8% 4.0% 6.7% 7.0%

-1.6% 5.6% 12.2% 6.5% 16.1%

0.39 0.40 1.21 1.17 1.31 1.20

-11.2% -5.0% 4.4% 7.5% 8.5%

180.7% -25.7% 9.2% 15.6% 16.7%

2012F 3YR CAGR

39,474 13.5%

4,737

3,908

3,967

2,777

17,559 -4.5%

17,476 20.1%

35,034 5.3%

17,994

2,416 0.5%

14,624 -16.6%

35,034 5.3%

3,129.2

0.9

5.8

19.2%

12.0%

9.9%

7.0%

16.1%

1.20

8.5%

16.7%

13

Dangote Flour Mills (DFM) is a growing company thatis currently completing capacity addition projects inpursuit of its strategic thrust of creating greatereconomies of scale. The company, however, saw itsshare price dip significantly in H2 11 as its belated2010 financials were released, but not before thesuspension of the company from trading on the NSE.While the suspension was a significant catalyst forthe downward spiral, a decline in earnings amidst aspike in wheat and transportation prices was alsopivotal in consolidating the price drop. The trendcontinued in 2011 with profit margins dippingsignificantly as wheat prices remained firm. Thereare, however, indications that the price of wheatmay ease off in 2012, but we do not believe it will besufficient to enable the company to match its FY 10performance. Model exposed to international wheat pricesDFM is not as diversified as some of its peers in FMCGmanufacturing as it relies heavily on imported wheatmainly from the USA. This leaves the companyexposed to price shocks in international wheat pricesand the inherent exchange rate risk. Expanding market share in a growing marketDFM has been in the industry for close to 7 years andin that short space of time managed to acquire c30%market share. Its plants are relatively newer andhence more efficient, while capacity expansions openup economies of scale which should all help it expandmarket share further in a growing market. Sell off looks overdoneThe share price slipped c68% in H2 11.Whilejustifiable given a slump in performance, the sell offhowever looks overdone. Efforts to address corporategovernance issues that sparked the slide are likely tobring quick wins, while the anticipated retracementfrom the oversold territory will deliver decent upsidein 2012. We therefore expect the share price tobottom and recoup some of its losses. SpeculativeBuy

Dangote Flour Mills Plc.

Mills

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG

BLOOMBERG: DANGFLOU:NL SPEC. BUYCurrent price (NGN) 5.00

Current price (US$) 0.03


Upside/Downside 35.32%

12 month High/Low (NGN) 35.28; 21.82%

LiquidityMarket Cap (NGN m) 25,000

Market Cap (USD m) 157

Shares (m) 5,000

Free Float (%) 27.0


Ave daily volume ('000) 2,218.8

Share Price Performance6 months (%) (67.8)


12 months (70.9)



Financials (NGN m) - FY 31 Dec 2010 2011F 2012FRevenues 67,601 64,885 68,353

EBITDA 7,728 4,133 4,354

Attributable earnings 2,762 1,069 1,201

EPS (NGN) 0.54 0.22 0.25

DPS (NGN) 0.20 0.08 0.09

NAV/Share (NGN) 5.43 5.65 5.90

RATIOSRoAE (%) 9.9 4.0 4.3

RoAA (%) 2.0 0.8 0.9

Gross Margins (%) 19.5 13.7 13.7


Net Margins (%) 4.0 1.7 1.8

VALUATION RATIOSPBV (x) 5.43 5.65 5.90

PER (x) 9.26 22.58 20.13

Dividend Yield (%) 4.0 1.6 1.7

Dividend pay-out ratio (%) 37.0 35.2 35.2

STRENGTHS WEAKNESSESExpansion improving efficiency, Model exposed to international

volumes and market share wheat prices and exchange rate risk

Newer and more efficient factories Smaller in size compared to peers

Capacity for complex logistics needed Narrower product range

in Nigerian distribution Poor corporate governance history

OPPORTUNITIES THREATSNigeria is a growing market Significant investment by competitors

Possibilities of expanding product with backing of huger global firms

range Exchange rate volatility

Evolving shopping trends that has Volatility in prices of imported wheat

seen the rise of organised retailing

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NSE-ASI DANGFLOU:NL

Dangote Flour vs NSE ASI (Rebased)

141414

Dangote Flour Mills took form following the unbundling by Dangote Industries Limited (DIL) of its erstwhile flour division in 2006. DIL commenced flour operations in 1999 with initial installed capacity of 500MT per day at its Apapa mill and expanded this capacity tenfold to 5,000mt per day, adding, at the same time, three other locations, in Kano (500mt per day), Calabar (1,500mt per day) and Ilorin (1,000mt per day). In addition, the company expanded its product offering to include flour based products that are gaining popularity in Nigeria owing to changing consumer taste. The 100% owned Dangote Pasta Limited and Dangote Noodles Limited are direct products of the expansion strategy while Dangote Agro Sacks Limited ties up the company’s hold of the flour value chain. Revenue for the nine months to September 2011 declined by a marginal 3.8% indicating stagnation in volumes, while cost of production soared with DFM’s gross margins falling from 22% to 12%. Gross profit consequently halved and with the company maintaining leverage close to year end levels, the net income margin slipped from 12.8% to 1.6%. Gross profit started declining in Q4 10 as firming wheat and transportation prices significantly eroded margins. The trend continued into 2011 and these, supported by interest payments, connived to weigh down profitability, a trend that we expect to see up to year end 2011. Plant expansion to power volumes going forward... Dangote has so far committed NGN 7bn to expand the production capacity of its flour operations. Under the project, milling operations capacity will be increased by 61% to 7,300mt/ day. Upgrades at Calabar (1,000mt to 2,000mt/day) and Llorin (500mt to 1000mt/day) have since been completed, while the addition at Apapa (from 1,000mt to 2,500mt/day) will be completed in Q2 12. The idea is to improve volumes and enhance profitability through economies of scale. Product range expanding and enabling exports... DFM is constructing its semolina mills which are expected to have a 1,500mt/ day capacity of Danvita. Commissioning is expected in Q2 12 as well, and this will be among the few Nigerian plants dedicated to semolina production. Additionally the company started exporting its products to neighbouring countries like Chad, Cameroon and Niger. While this is still at exploratory stages, we believe exports will be value adding as they hedge the import bill and unlocks benefits from the government’s export promotion programme.


Revenue 54.26 52.21 -3.8%

Gross profit 12.17 6.40 -47.4%

PBT 7.07 0.94 -86.7%

PAT 6.95 0.84 -87.9%

Gross margins (%) 22.4 12.3 -45.3%

Net margins (%) 12.8 1.6 -87.4%

0

5

10

15

20

25

30

Flour Spaghetti Sacks Danvitaand

Semolina

Bran Macaroni

Cost of Sales (NGN bn) Gross Profit (NGN bn)

Naira (billio

n)

Revenue split analysis across products

Source: company Reports/ IAS


Review of Operations and 9M 11 Results 9M 2011 Financial Summary

15

DFM’s share price declined significantly in H2 11 following the release of itsbelated FY 10 results that heralded the start of the decline in earnings generation. The slide in valuations was buttressed by the subsequent release of quarterly financials up to 9M 11 that showed a continued decline in profitability. FY 11 earnings are therefore likely to show a significant decline y-o-y.We however,expect DFM’s fortunes to turn in 2012 as key factors behind the reduced profitability are changing for the better. Wheat prices to soften… The FY 10 earnings were significantly weighed down by wheat prices which spiked significantly in H2 10 and peaked at the beginning of 2011. The prices gradually eased off from a peak of USD 354.49/butoUSD 275.03/buat the end of 2011. Indications are that the price will continue softening which should augur well for DFM’s profit margins. However, DFM ordinarily locks forward prices of wheat and keeps about two months cover at its factories; hence the impact of the softening prices is unlikely to filter into the FY 11 results. We expect benefits from softer wheat prices to start accruing in Q1 2012. Capacity expansion to underpin profitability... DFM is scheduled to install 1,500t per day capacity of semolina at Apapa, and increase agro sacks capacity from 31m bags per month to 51m bags per month. The Apapa plant will help broaden the product range while increased capacity of agro sacks will help improve volumes and efficiency. Additionally semolina is one product that has comparatively wider margins than flour hence the capacity additions will help lift up EBITDA margins in 2012 and beyond. Debt to however remain a drag... Interest payments magnified the slow operating earnings growth. The company’s interest coverage ratio stood at 3.1x at the end of 2010 and we expect it to end at c1.49x by the end of 2011. DFM has substituted bank loans with debt from the parent company. We however do not expect this to turn the situation around. We expect debt to remain a drag until such a time that either margins recover significantly, or the capital structure is transformed in favour of equity finance. DFM’s share price seems to be consolidating close to NGN 4.0 having dipped from NGN 15.50 in H2 11. Our DCF model, on the other hand, produced a price of NGN 6.77 which is 35.32% higher than the current price. We expect improving operating profitability to drive a rerating of the share price and DFM to recoup some of its losses. Key risks however remain the international wheat prices and any volatility of the naira. Speculative Buy.


Outlook

0%

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12%

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16%

-

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2007 2008 2009 2010 2012F 2013F



PAT margin (%) -LHS

Revenue : Contribution by product line

Source: company Reports/ IAS

-10.0%

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-

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2,007 2,008 2,009 2,010 2012F 2013F


Dangote Flour Mills: Total asset growth

0%

5%

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15%

20%

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30%

35%

40%

-

0.20

0.40

0.60

0.80

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2007 2008 2009 2010 2012F 2013F

EPS (NGN) -LHS DPS (NGN) -LSH Payout Ratio (%) -RHS

Dangote Flour Mills : EPS, DPS and Dividend Payout

16

DANGOTE FLOUR MILLS- 3YR CAGR COMPARISON31 DEC (NGN m) 2007

Income Statement

Revenue 42,153 47,927

Gross profit 4,736

EBITDA 2,655

PBT 675

PAT 561

Balance sheet

Non current assets 27,358 33,051

Current assets 30,762 35,700

Total assets 58,120 68,751

Current liabilities 35,398 43,538

Non current liabilities 576

Equity 22,145 24,630

Equity and Liabilities 58,120 68,750

Ratios

Shares in Issue 5,000.0 5,000.0

EPS (NGN) 0.1

DPS (NGN) -

NAV per share 4.4

Other ratios

Revenue growth

Gross Margin 11.2%

EBITDA Margin 6.3%

NI Margin 1.3%

Current Ratio 0.87

RoAE 12.90%

RoAA

DANGOTE FLOUR MILLS- 3YR CAGR COMPARISON2008 2009 2010 2012F 2013F

47,927 61,388 67,601 64,885 68,353

9,639 12,827 13,203 8,903 9,379

6,258 9,234 7,728 4,133 4,354

3,167 5,375 4,912 1,244 1,461

2,989 5,562 2,723 1,107 1,242

33,051 35,566 41,230 42,713 44,323

35,700 28,259 28,995 28,514 28,365

68,751 63,825 70,225 71,227 72,688

43,538 34,841 38,841 38,988 39,422

582 560 4,237 4,374 4,596

24,630 28,423 27,147 28,250 29,488

68,750 63,824 70,225 71,613 73,506

5,000.0 5,000.0 5,000.0 5,000.0 5,000.0

0.6 1.1 0.5 0.2 0.2

0.2 - 0.2 0.1 0.1

4.9 5.7 5.4 5.7 5.9

14% 28% 10% -4% 5%

20.1% 20.9% 19.5% 13.7% 13.7%

13.1% 15.0% 11.4% 6.4% 6.4%

6.2% 9.1% 4.0% 1.7% 1.8%

0.82 0.81 0.75 0.73 0.72

12.90% 21.17% 9.88% 4.03% 4.34%

2.36% 4.20% 2.03% 0.78% 0.86%

2013F 3YR CAGR

68,353 17.1%

9,379 40.7%

4,354 42.8%

1,461 93.8%

1,242 69.3%

44,323 14.7%

28,365 -2.0%

72,688 6.5%

39,422 3.1%

4,596 94.5%

29,488 7.0%

73,506 6.5%

5,000.0

0.2

0.1

5.9

5%

13.7%

6.4%

1.8%

0.72

4.34%

0.86%

17

Flour Mills Nigeria (FMN) has probably the most exciting prospects among Nigerian food producers in the universe of our coverage list. The company has very attractive valuations, 50% market share of the flour market in Nigeria, arguably one of Nigeria’s most valuable brands, a good portfolio of projects that are at their infancy and poised for growth and is among Nigeria n companies with the most diverse portfolios of business lines. Our buy call on the counter thus comes naturally and FMN tops our list of preferred destinations among Nigerian FMCG producers. � Rights issue oversubscribed FMN completed an 8 for 33 rights issue aimed at raising NGN28bn in Q1 12. The proceeds will be used for expunging debt and furthering the company’s investments in food, agro-allied, cement businesses and power projects. We were of the view that investors should follow their rights and the issue was subsequently oversubscribed by about 24% signifying the belief in the market that the issue is value adding. � Pipeline of projects with long term value

addition capacity FMN is presently involved in capital projects such as Kaboji Farm (cultivation of maize, soybeans and cassava), the Sugar Plantation Farm in Niger State (cultivation of sugar-cane), the Sugar Refinery in Lagos and a power project. The aforementioned rights issue is expected to partly fund completion of these projects with benefits expected to come soon. � Significant headroom for share price

appreciation FMN’s share price did not go up alongside some of its peers who defied the general market slide of 2011. Losses at the cement plant coupled with soaring wheat prices blurred the outlook for the company and saw the share price decline. Fortunes have since turned for these operations and we expect the price to rerate and close the gap on its way to catching up with its peers. BUY

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG

Flour Mills of Nigeria Plc

BLOOMBERG: FLOURMIL:NL BUY






Liquidity

Market Cap (NGN m) 122,994


Shares (m) 1,879

Free Float (%) 40.0




6 months (%) (25.5)


12 months (8.2)

Relative change (%)* 17.4


Financials (NGN m) - FY 31 March 2011 2012F 2013F

Revenues 238,797 241,267 286,071

EBITDA 24,923 25,327 30,030


EPS (NGN ) 8.5 4.3 5.6

DPS (NGN ) 2.6 1.2 1.6

NAV/Share (NGN ) 26.6 36.6 40.8

RATIOS

RoAE 5.5 5.8 6.7

RoAA 16.4 14.9 14.4

Gross Margins (%) 16.8 15.7 16.4

EBITDA Margins (%) 10.4 10.5 10.5

Net Margins (%) 3.6 4.2 4.5

VALUATION RATIOS

PBV (x) 2.5 1.8 1.6

PER (x) 7.7 15.1 11.8




Diversified product range Diverse portfolio may shroud

Huge market share (50% flour) management focus

Strong brand (Golden Penny) Vulnerable to exchange rate risk

Attractive valuations and international commodity prices

Expanding product range Cement model prone to import bans


Capital call aimed to reduce debt Cement business under threat from

Expansion projects value adding expansion by peer like DCP

in the future Expansion by competitors

Expanding customer base especially those with international

Evolving consumer tastes flair

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NSE-ASI FLOURMIL:NL

Flour Mills of Nigeria vs NSE ASI (Rebased)

18

Flour Mills Nigeria (FMN) has arguably the mostdiverse product range among Nigerian consumergoods producers. The company operates the largestflour mill in Nigeria, has 60MW electricity generatingcapacity, packages and retails cement and fertiliseras well as operating a host of other complementarybusinesses that includes a bulk sea terminal,trucking, manufacture of industrial sacks, flour basedpasta and stock feeds. The units are horizontallyintertwined along the company’s value chain andprovide the group with unrivalled agility andefficiency in delivering its offerings to consumers.The company markets its products under the GoldenPenny brand, arguably one of the most valuablebrands in Nigeria which has allowed it to easilyexpand its product offering.

FMN’s portfolio of products can be broadly stratifiedinto about six segments which are discussed below:

The food division: This segment is the biggest andaccounts for 65% of group revenues and comprises of: Wheat Products, housing one of the world’s

biggest flour mills, a 6,250 tonne per day plant inApapa Lagos, which is key to FMN’s control of 50%of Nigeria’s flour market. The unit produces theGolden Penny Flour brand, as well as other wheatbased products like semolina and wheat offalslargely for the Lagos market, and;

Pasta Products which took form way back in 1972as the first Nigerian pasta plant and as such itsrelatively longer history in the markets gives it anedge over the competition. Products are alsomarketed under the Golden Penny Brand.

Cement business: FMN engages in the importationand distribution of bulk cement (under the Burhamname) and operates a cement joint venture (UNICEM)with Holcim of Switzerland and Lafarge France atMfamosing in Cross Rivers State.

Packaging products: FMN holds a 70% stake inBAGCO, a NSE listed stock that specialises in theproduction of quality sacks that are widely used inthe industrial and agricultural sectors. The unit hasthe capacity to produce 36.0m sacks per month andlargely supplies the cement and flour plants’packaging needs.

Golden Transport Company: Although formallyincorporated as a company in 2008,it has been inoperation right from the inception of Flour MillsNigeria Plc. It operates a fleet of 500 trucks and hasplans to expand it to 1,000 by 2015. The companyensures smooth logistics in transporting throughput tofactories and distributing finished goods to theconsumers.

Port Operation, Apapa Bulk Terminal: The terminalprovides an array of facilities in terms ofconsolidations, warehousing, open storage areas,packing, repair facilities and even office complexes.While profitably serving its client base, the unit playsa significant role in FMN’s value chain given itssignificant cement and fertilizer imports.

Kaboji Farm: The 10,000hafarm was initiallyestablished as a joint venture initiative betweenNorthern Nigeria Flour Mills (NNFM) and Flour Mills ofNigeria (FMN) to provide maize for the NNFM maizemill in Kano. In 2008, FMN bought out NNFM, makingKaboji Farms a 100% subsidiary of FMN. Other thanmaize, the farm also produces soya beans, rice andcassava.

Premier feed Mills: The stock feed unit took form in2008 following the takeover of Premier Feed Mills byFMN. The company produces stock feed under theTopfeeds brand which has significant market share inWest Africa. It recently commissioned a 0.3mt peryear plant in Ibadan and is looking to consolidate itsplants and have 0.6mt per year by 2013.

Fertilizer business: This was established as a whollyowned subsidiary of FMN in 1997 specialising infertilizer blending, distribution and supply. The unithas since been divisionalised and markets its productsunder the Golden Fertilizer brand.

Operational Review

Shareholding StructureNature of Business

52%

48% ExcelsiorShippingcompany

Others

Flour Mills of Nigeria: Shareholding structure

Source: Company Reports/IAS

65%

15%6% 6% 2% 6%

FoodCementFertilizerPackingPort OperationsLivestock Feeds

Flour Mills of Nigeria: Revenue Split


191919

Revenue growth of 17.5% was underpinned by volume growth on the back of capacity expansion at the flour mills. Gross margins however slipped with the flour mills leading in this regard, despite the softening of global wheat prices. Debt taken on during the 9M under review weighed down net income as PBT slipped 14% and net margins went down 25% to 4.9%.

The company increased leverage courtesy of an NGN 37.5bn loan costing 12% per annum, raised as the first tranche of its NGN 70bn debt issue program. About half the funds refinanced existing debt while the remainder was applied to on-going capacity expansion and working capital requirements.

FMN has since raised equity capital via a rights issue for the purposes of expunging some of this medium term debt and to fund expansion in the agro-industrial industry. We expect this to reduce both the debt component on the capital structure and interest obligations for the group.

FMN our top pick... We are bullish on FMN’s prospects. The company tops our picks in Nigeria among FMCG producers. We believe it presents a compelling turnaround story, with the struggling units expected to continue recovering while a solid pipeline of value adding investments will start coming on line in 2012. Its products look geared to benefit from the Nigerian consumer’s changing tastes while it has relatively cheap valuations vis-à-vis its peers. Drivers of weak performance in 2011 abating... Soaring input costs, especially imported wheat, underpinned in the main by a weaker naira and burgeoning interest rate obligations following the introduction of further leverage in the business model sent earnings declining for 9M 12. We expect the trend to be reflected in the year end financials. The year 2012 has seen stability returning to the Naira and the wheat price in particular showing signs of weakening further. Additionally, the company undertook a capital call that we expect to help reduce leverage and at the same time prop up its agricultural related earnings. We are therefore expecting the trend to change and the company to post strong earnings growth going forward. Product portfolio still growing... FMN has a sizable portfolio of diversified assets yet it continued to add units that integrate well into the group and allows it to have more control of its value chain. We expect the sugar mill under construction and the plantations being expanded to boost earnings growth, although not in the current year.

Strong free cash-flow generation underpinned by turning around operations that have, hitherto, been loss making and an expanding product portfolio guided our DCF valuation to a price of NGN 123.45 for FMN which is 88.61% above the current level. Our buy call is further strengthened by a comparatively lower valuation for FMN at a time that the defensive nature of its peers saw their valuations soar in a falling market. We expect the share price to rerate together with the market and the gap with its peers to close in the process. BUY.

9M 2012 Financial Review 9M 2012 Financials Summary

Outlook Valuation and Recommendation


Revenue 122.7 144.2 17.5%

Gross profit 18.9 21.0 11.1%

EBITDA 8.6 8.1 -5.8%

PBT 11.9 10.2 -14.3%

PAT 8.1 7.1 -12.3%

Balance Sheet (NGN m) Q2 12 Q3 12 % ch


Inventory 29.4 27.0 -8.2%

Cash 5.1 4.5 -11.8%


Creditors 4.8 5.9 22.9%

Borrowings 2.7 22.4 729.6%



Working Capital 26.7 14.3 -46.4%

Net Assets 42.1 50.3 19.5%

Gross margins (%) 15.4 14.6 -5.5%

EBITDA margins (%) 7.0 5.6 -19.9%

Net margins (%) 6.6 4.9 -25.4%

NAV per share (NGN) 22.4 26.8 19.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2008 2009 2010 2011 2012F 2013F

Revenue (NGN m)-LHS EBITDA (NGN m)- LSH PAT (NGN m) -LHS EBITDA Margins (%) - RHSPAT margin (%) -LHS

Flour Mills of Nigeria: Financial analysis

20

FLOUR MILLS NIGERIA-3YR CAGR COMPARISON31 MARCH (NGN m) 2008

Income Statement

Revenue 127,662

Gross Profit 20,917

EBITDA 15,378

PBT 9,877

PAT 6,340

Balance sheet



Total assets 109,150



Equity 35,057


Ratios

Shares in issue 1,557.7

EPS (NGN) 4.1

DPS (NGN) 0.9

NAV per share 20.5

Other Ratios

Revenue growth

Gross margins 16.4%

EBITDA Margin 12%

Net Margins 5%

Current Ratio 1.11

RoAA

RoAE

FLOUR MILLS NIGERIA-3YR CAGR COMPARISON2008 2009 2010 2011 2012F

127,662 180,068 206,608 238,797 241,267 286,071

20,917 23,075 46,066 40,185 37,805 46,840

15,378 17,844 29,468 24,923 25,327 30,030

9,877 5,469 24,439 16,445 14,646 18,829

6,340 3,815 16,517 8,487 10,106 12,992

50,878 70,173 90,425 88,618 101,829 106,920

58,272 67,367 53,095 74,643 84,807 94,739

109,150 137,540 143,520 163,261 186,636 201,659

52,522 64,949 52,732 56,239 47,145 51,436

21,570 35,180 37,521 57,028 54,114 55,037

35,057 37,390 53,267 49,997 85,377 95,186

109,149 137,519 143,520 163,264 186,636 201,659

1,557.7 1,710.8 1,708.1 1,879.2 2,334.8 2,334.8

4.1 2.2 9.7 8.5 4.3

0.9 0.9 2.0 2.6 1.2

20.5 20.0 29.2 24.1 34.3

41% 15% 16% 1%

16.4% 12.8% 22.3% 16.8% 15.7%

12% 10% 14% 10% 10%

5% 2% 8% 4% 4%

1.11 1.04 1.01 1.33 1.80

3.1% 11.8% 5.5% 5.8%

11% 36% 16% 15%

2013F 3YR CAGR

286,071 23.2%

46,840 24.3%

30,030 17.5%

18,829 18.5%

12,992 10.2%

106,920 20.3%

94,739 8.6%

201,659 14.4%

51,436 2.3%

55,037 38.3%

95,186 12.6%

201,659 14.4%

2,334.8

5.6

1.6

38.3

19%

16.4%

10%

5%

1.84

6.7%

14%

21

The NGN 12bn Flowergate factory in Nigeria’s Ogun State doubled capacity for Nestle Nigeria’s foremost brand, Maggi, and is expected to underpin profitability of a business that otherwise ranks high among Nigeria’s well managed companies. FY 11 earnings were boosted by tax rebates emanating from capex at the same plant. While the rebate will not recur, we believe added capacity set the group on solid footing to record growth in earning for FY 12.Valuations unfortunately look dearer than peers and as such we do not expect out of the ordinary share price appreciation going forward. � Pole position on key products... The company is on pole as regards manufacturing of food seasonings and chocolate drinks, while the strength of its brands makes them good candidates for purchase as discretionary incomes improve and consumers get to be more brand and value conscious. Additionally, margins are much wider compared to those of its peers. � Government exporters’ incentives enabled

regional exports to commence in 2011... Nestle exported NGN 1.7bn worth of product into Central and West Africa and management expects volumes to grow in 2012.Angola will be added to the list of its export destinations. � Huge but manageable debt... The company has the highest debt to equity ratio in its sector (160%), funded largely by a loan from the parent - Nestle SA. Interest coverage of 7.6x on the other hand makes this debt sustainable and of no immediate threat to equity holders. � Dividend payment remains key attraction... A generous dividend payment history and strong free cash-flow generation are key attraction points for Nestlé’s. We however, believe that rich valuations will curtail upside on the share price to about 10%. Nonetheless, we favour holding the shares owing to our belief that an opportunity to buy them cheaper is unlikely to come. Hold.

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG

Nestle Nigeria Plc.

BLOOMBERG: NESTLE:NL HOLD




Upside/Downside 10.0


Liquidity


Market Cap (USD m) 2,222

Shares (m) 793

Free Float (%) 25.0




6 months (%) 11.8


12 months 42.8




Revenues 82,726 97,961 111,969

EBITDA 21,175 23,586 26,999


EPS (NGN) 19.08 21.20 18.81

DPS (NGN) 12.55 13.95 12.37

NAV/Share (NGN) 18.75 25.28 31.08

RATIOS

RoAE 99.2 96.3 66.8

RoAA 23.4 26.1 20.8

Gross Margins (%) 43.8 42.7 42.7

EBITDA Margins (%) 25.6 24.1 24.1

Net Margins (%) 14.3 15.2 17.2

VALUATION RATIOS

PBV (x) 23.8 17.6 14.3

PER (x) 23.4 21.0 23.7




The largest by market cap Nigeria a high cost nation

cheap local sourcing with a strong Premium pricing of products

out grower program Imports 40% of inputs making

Strong brand name and financial it prone for FX fluctuations

backing from parent company


Rising discretionary income Capacity expansions by peers mean

Deficit in terms of FMCG producers intense competition

Changing taste favouring Nestle Volatility in the NGN

products that are more of 'luxuries'

Organised retailing coming up

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NSE-ASI NESTLE:NL

Nestle Nigeria vs NSE ASI (Rebased)

22

Nestle Nigeria is 62% owned by Nestlé S.A. of Switzerland which controls not only the strategic thrust of the organisation but has been pivotal in transferring the technology that earned Nestle Nigeria’s products their premium tag. It is the leading producer of food seasoning and powdered chocolate drinks in Nigeria. The company operates two factories; one each in Agbara (the oldest) and Sagamu (Flowergate, commissioned in Q1:11).

Nestlé’s business can be broadly segmented into food and beverages; the former historically accounting for c62% of revenue and c73% of net profit while the latter represents 38% and 27% of group revenues and profit, respectively.

The food division includes brands such as Maggi, Golden Morn, and baby products like Cerelac, Nutrend, Nan and Lactogen. The beverages division on the other hand houses the Milo, Chocomilo, Nido, Nescafe and Nestle Purelife brands. Maggi, a food seasoning culinary and Milo, a powdered chocolate are the dominant brands, contributing between them c80% of group earnings. Production capacity expansion... The company has recently been expanding production capacity in Nigeria after receiving support from the Ogun State government, for its Agbara plant, located near Lagos. The company invested NGN 12bn at the Flowergate factory which has doubled capacity for Maggi and underpins its dominance in the food seasoning market. Soaring inputs costs and a weaker naira dragged performance... FY 11 performance was boosted by tax allowances, allowing the company to post impressive bottom line results despite the headwind evident during the year. Soaring input costs and the weak naira dampened performance for the first three quarters of 2011. Nestle however posted a modest 1.6% PBT growth y-o-y at FY 11 compared to a decline for 9M 11, indicating improved performance in the fourth quarter. We expect this trend to be carried forward in 2012 underpinned by a stable Naira and improved volumes. Good relations with growers and distributors paying off... Nestle is among the best run Nigerian companies and buttresses this with its policy of forging strategic working relations with the local farming community via its ‘creating shared value’ policy. Additionally, the company has cemented relationships with distributors arranging working capital for them at the height of the Nigerian banking crisis.

Operations Review


FY 11 Financials Summary

Income Statement (NGN m) FY 10 FY 11 % ch

Revenue 80.1 98.0 22.3%

Gross profit 36.2 40.8 12.6%

EBITDA 18.9 21.7 14.7%

PBT 18.2 18.5 1.6%

PAT 12.6 16.8 33.4%

Balance Sheet (NGN m) FY 10 FY 11 % ch


Inventory 8.5 4.8 -43.0%

Cash 3.1 1.1 -65.4%


Creditors 4.1 7.5 84.7%

Borrowings 3.4 6.8 99.5%



Gross margins (%) 45.2 41.6 -7.9%

EBITDA margins (%) 23.6 22.2 -6.2%

Net margins (%) 15.7 17.2 9.1%

NAV per share (NGN) 18.8 29.6 58.0%

0%

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25%

30%

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40,000

60,000

80,000

100,000

120,000

140,000

2007 2008 2009 2010 2011E 2012F 2013F



PAT margin (%) -LHS

Nestle Nigeria: Financial analysis

23

Dominance in the seasoning and chocolate drinkmarket to underpin performance...Nestle dominates the food seasoning and chocolatedrink niches and we expect this to underpinprofitability going forward. The Flowergate factorycommissioned in 2011 will help improve both volumesand efficiency and we expect the impact to besignificant in 2012 on the back of ramped upproduction and the fact that it will cover the fulltwelve months.

Stable earnings growth trend to be maintained...The company has historically exhibited strong andstable earnings growth, a trait that we expect to bemaintained in 2012 and beyond. Driving this has beenvolume growth that averaged c10% over the past fiveyears and robust margins spurred by the premiumpricing on the company’s brands. Our expectation ofgrowing volumes and widening margins suggestsNestle should find it easy to maintain the trend in2012.

Regional exports to increase and help hedge theimport bill…Management confirmed that the company will look atadding Angola to its Nestle-to-Nestle exports into theregion. A structure put in place by the Nigeriangovernment to promote exports is what makes thecompany’s model economic. This will allow thecompany to push more volumes and benefit fromeconomies of scale, which are essential on the backof added capacity. On the other hand, we believethat exports will also help Nestle hedge its importbill. The company imports c40% of its inputs leaving itexposed to international commodity prices andexchange rate fluctuations. Funding these usinginternally generated foreign currency takes awayexchange rate risk and goes a long way to stabilisingthe company’s earnings.

Nestle is the most capitalised amongst all thecompanies covered in this report. Valuations arehowever dearer compared to its peers and we believeroom for upside is curtailed because of this. Sectorrotation on the other hand suggests some sellingahead as risk appetite peaks and investors shundefensives. Its huge investment in capacity, however,will go some way in mitigating the above negatives.We expect volumes to grow on improved efficiencyand hence profit margins. This should maintain thetempo on strong free cash flow generation goingforward. Our DCF valuation led us to a target priceof NGN 490 which is 10% above the current price.HOLD

Outlook


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2,007 2,008 2,009 2,010 2011E 2012F 2013F


Nestle Nigeria: Total asset growth

0%

20%

40%

60%

80%

100%

120%

-

5.00

10.00

15.00

20.00

25.00

2007 2008 2009 2010 2011E 2012F


Nestle Nigeria: EPS, DPS and Dividend Payout

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2007 2008 2009 2010 2011E 2012F

RoAE (%) RoAA (%)

Dangote Flour Mills: RoAE and RoAE

242424

NESTLE NIGERIA -3YR CAGR COMPARISON31 DEC (NGN m) 2007

Income Statement

Revenue 44,028

EBITDA 9,625

PBT 8,464

PAT 5,442

Balance sheet



Total Assets 21,252



Equity 6,236


Ratios

Shares in issue 660.4

EPS (NGN) 8.2

DPS (NGN) 8.4

NAV Per share 9.4

Other Ratios

Revenue growth

EBITDA Margin 21.9%

PBT margin 19.2%

Net margin 12.4%

Current ratio 1.31

RoAE

RoAA

NESTLE NIGERIA -3YR CAGR COMPARISON2007 2008 2009 2010 2011E 2012F

44,028 51,742 68,317 82,726 97,961 111,969

9,625 13,055 17,297 21,175 23,586 26,999

8,464 11,862 13,783 18,244 18,643 21,589

5,442 8,332 9,783 12,602 16,808 14,912

10,436 13,817 25,405 40,242 42,496 44,875

10,816 15,342 21,848 20,105 25,874 29,970

21,252 29,159 47,253 60,347 68,369 74,845

8,237 11,094 22,014 19,456 19,722 16,706

6,779 9,035 14,696 26,027 28,606 33,504

6,236 9,030 10,543 14,864 20,041 24,634

21,252 29,159 47,253 60,347 68,370 74,845

660.4 660.7 792.7 792.7 792.7 792.7

8.2 12.6 14.8 19.1 21.2 18.8

8.4 12.6 12.6 12.6 13.9 12.4

9.4 13.7 13.3 18.8 25.3 31.1

17.5% 32.0% 21.1% 18.4% 14.3%

21.9% 25.2% 25.3% 25.6% 24.1% 24.1%

19.2% 22.9% 20.2% 22.1% 19.0% 19.3%

12.4% 16.1% 14.3% 15.2% 17.2% 13.3%

1.31 1.38 0.99 1.03 1.31 1.79

109.2% 100.0% 99.2% 96.3% 66.8%

33.1% 25.6% 23.4% 26.1% 20.8%

2012F 2013F 3YR CAGR

111,969 127,981 23.4%

26,999 30,860 30.1%

21,589 24,931 29.2%

14,912 17,221 32.3%

44,875 49,307 56.8%

29,970 34,255 23.0%

74,845 83,563 41.6%

16,706 19,059 33.2%

33,504 34,473 56.6%

24,634 29,939 33.6%

74,845 83,471 41.6%

792.7 792.7

18.8 21.7

12.4 14.3

31.1 37.8

14.3% 14.3%

24.1% 24.1%

19.3% 19.5%

13.3% 13.5%

1.79 1.80

66.8% 63.1%

20.8% 21.7%

25

Strong market position in both white goods andhome and personal care (HPC) products has traditionally been the driver behind robust earnings growth, but lately, plant rehabilitation ensured enhanced efficiency and profitability. The completion of ‘project unity’ is expected to buttress the already strong cash generation, securing capacity to continue paying a generous dividend and improve the payout ratio in future. PZ Cussons (PZ) is among our top picks for Nigerian FMCGs. Our buy call is premised upon its discount rating relative to peers albeit having robust earnings growth and the existence of a model made for the moment in the Nigerian FMCG space. � Volume growth to underpin performance... Management confirmed that H1 12 financials were broadly driven by growth in volumes. HPC brands leading in this regards included Premier, Joy and Canoe soaps, Zip detergent powder and Morning Fresh dish wash. We expect this growth tempo continue through to year end, maintaining the robust earnings growth recorded in H1 12. � Strategic partnerships underpinning a rapidly

expanding product offering… In addition to feeding off R&D efforts and management expertise from the parent company, the company enjoys further benefits from a host of strategic partnerships initiated at the parent level. This has allowed quick turnaround in product launches and hence unparalleled agility in bringing solutions to the fast evolving tastes of the Nigerian consumer. � Strong earnings growth potential and headroom

for share price appreciation… PZ has an impeccable history of strong and sustained earnings growth over the years which cannot be matched by peers. This is set to persist, underpinned by the completed expansion and refurbishments.We envisage significant upside especially as valuations catch up with peers. BUY.

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG

PZ Cussons Plc.

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GSE-CI PZ:NL

PZ Cussons Nigeria vs NSE ASI (Rebased)

BLOOMBERG: PZ:NL BUY






Liquidity



Shares (m) 3,175

Free Float (%) 25.0




6 months (%) (19.2)


12 months (6.7)



Financials (NGN m) - FY 31 May 2011 2012F 2013F

Revenues 65,878 71,744 78,133

EBITDA 9,462 5,807 7,475


EPS (NGN) 1.64 0.76 1.22

DPS (NGN) 0.86 0.40 0.64

NAV/Share (NGN) 13.6 14.0 14.7

RATIOS

RoAE 13.1 5.7 8.9

RoAA 8.2 3.4 5.1

Gross Margins (%) 28.0 16.0 21.3


Net Margins (%) 7.9 3.3 4.9

VALUATION RATIOS

PBV (x) 1.8 1.7 1.6

PER (x) 14.7 31.9 19.8




Diversified portfolio of products Prone to international commodity

Newer and efficient plant prices and NGN fluctuations

Strong market positions in almost Comparatively lower profit

all of its products margins

Cheaper valuations


Baking sector turnaround to spur Nigerian market attracting bigger

consumer lending players especially in white goods

Increasing disposable income Increasing competition in HPC

Growing working population products from local players

26

PZ Cussons Nigeria is a 66% owned subsidiary of PZCussons UK and is among the largest HPC producers inNigeria. The company’s product range includesbathing soaps and washing detergents. PZ, through itssubsidiary - Haier PZ (a JV between PZ and the HaierGroup) - is also engaged in the importation, assemblyand sale of branded white goods such asrefrigerators, air conditioners, televisions and DVDplayers. The company also markets a range ofelectrical product like fans and coolers through adistribution agreement with Thermocool EngineeringCompany (TEC), a subsidiary of its parent companyPZ Cussons UK. PZ is also active in the Nigerian foodmarket, where it markets a range of nutritionalproducts produced by Nutricima (a JV between itsparent company and Glanbia of Ireland), includingpowdered and evaporated milk under the Nunubrand. Other nutrition products marketed by PZinclude – Coast and Olympic milk, First Energy drinkand Yo! yoghurt.

PZ has made significant investments under its‘Project Unity’ initiative aimed at enhancing capacityand efficiency to its production and distributionfacilities. The project was completed in 2010 andhence 2011 was the year in which production wasramped up and the company could see the benefits ofimproved volumes and efficiency.

The first half financials reflected an improvement onthe top line, where volume growth underpinnedrevenue growth of 21%. This was however nottranslated into better profitability as gross marginsshed 44% to 18% on the back of a spike in input costs.The company imports a significant portion of itsthroughput and rising commodity prices coupled witha weaker naira dampened profitability at a time thatthe company should have been benefiting fromimproved efficiencies. Raw materials such as tallowand palm oil used in the production of HPC products,went up during the first half and outweighed gainsfrom a decline in aluminium, used in PZ’s whitegoods and electrical appliances business. Further tothat, certain costs previously classified as marketing,distribution and administrative expenses were re-classified as cost of sales in H1 12 leading to theabnormally low gross margin. Nonetheless, PBThalved indicating that soaring operating costs alsohelped to weigh down overall profitability.

A stabilising naira and softening commodity prices arecrucial in turning around performance. H2 12 startedon a positive note, although it will be a mammothtask to cover lost ground if FY 11 performance is tobe matched. We are however bullish on the long-term prospects for PZ given the bigger and moreefficient production facilities.

Review of Operation and 9M 11 Results H1 12 Financials Summary

Shareholding StructureNature of Business

Income Statement (NGN m) 6M 11 6M 12 % chRevenue 26.8 32.5 21.2%

Gross Profit 8.9 6.0 -32.1%

PBT 2.6 1.3 -50.0%

PAT 1.8 0.8 -56.6%

Gross Margins 33.2 18.6 -44.0%

Net margins 6.8 2.4 -64.2%

73%

27%

Branded customergoods

White goods

PZ Cussons: Contribution to group revenue


0%

2%

4%

6%

8%

10%

12%

14%

16%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2008 2009 2010 2011 2012F 2013F

Revenue (NGN m)-LHS EBITDA (NGN m)- LSHPAT (NGN m) -LHS EBITDA Margins (%) - RHSPAT margin (%) -LHS

PZ Cussons Nigeria: Financial analysis

66%

34%PZ CussonsUK

Others

PZ Cussons Nigeria: Shareholding structure


272727

Strategic alliances underpinning expansionmoves...PZ continues to make value adding moves with therecent strategic joint venture with Singapore’sWilmar International Limited to construct a palm oilrefinery in Nigeria being noteworthy. The project isscheduled to be completed by the end of Q2 13 andrequires USD27m over the space of two years. In thelong run, we expect this to reduce the sensitivity ofthe business model to imported raw materials andentrench the stable earnings growth observable overthe past decade.

Growing white goods market share...The company is Nigeria’s number 2 player in HPCgoods after Procter & Gamble, and has captured asignificant portion of the white goods market, whichis commendable, given that it is younger in thebusiness relative to its peers. LG Electronics,Samsung and Sharp which have been in the Nigerianwhite goods markets for longer dominate and holdbigger chunks of the market compared to PZ. Wehowever expect this strong market position tounderpin profitability especially given indicationsthat market size will only but grow going forward.

Expansions and upgrades to enhance volumes andmargins going forward...In 2010, PZ Cussons announced the completion of‘Project Unity’, which was aimed at improving itsmanufacturing and distribution facilities. It largelyinvolved the upgrading of the white goodsmanufacturing and distribution facilities in Ilupeju-Lagos State and erecting a new Detergent Tower inIkorodu- Lagos State (completed at the end of 2009).The project brought on board modern machinery,efficiency that comes with newer equipment as wellas increased capacity. With both volumes andmargins, thus set for improvement, we expect this tounderpin profitability going forward.

We expect the FY 2012 outturn to show a significantslowdown in earnings growth. The bottom-line halvedat half year and we do not believe any recovery inmargins in the second half will enable the group toeclipse its FY 11 performance. Top line growth wasstrong and was underpinned by volume growth whichis positive and signifies the strength of the businessmodel. We remain bullish on PZ regardless of thementioned slow down. We believe input costswitnessed in the first half will gradually reverse,while the huge tax obligation levied during the sameperiod is once off and unlikely to recur. We thereforemaintain our buy call with a target price of NGN34.23. BUY

Outlook


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

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30,000

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2,008 2,009 2,010 2,011 2012F 2013F


PZ Cussons Nigeria: Total asset growth

44%

45%

46%

47%

48%

49%

50%

51%

52%

53%

-

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2008 2009 2010 2011 2012F 2013F


PZ Cussons Nigeria: EPS, DPS and Dividend Payout

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2008 2009 2010 2011 2012F 2013F

RoAE (%) RoAA (%)

PZ Cussons Nigeria: RoAE and RoAE

282828

PZ CUSSONS- 3YR CAGR COMPARISON31 MAY (NGN m) 2008

Income Statement

Turnover 65,945

Gross Profit 16,300

EBITDA 7,652

PBT 6,880

PAT 3,951

Balance sheet

Non current Assets 18,143

Current Assets 32,254

Total Assets 50,397


Non current liabilities 2,508

Shareholders' Funds 32,714

Minority Interest 1,062

Equity 33,776

Equity and liabilities 50,397

Ratios


EPS 1.2

DPS 0.6

NAV/ share 10.6

Other ratios

Revenue 21.6%

Gross margins 24.7%

EBIDTA margins 11.6%

NI margins 6.0%

Current Ratio 2.29

RoAA 8.3%

RoAE 12.5%

PZ CUSSONS- 3YR CAGR COMPARISON2009 2010 2011 2012F 2013F

63,801 62,668 65,878 71,744 78,133

18,833 17,287 18,453 11,446 16,620

9,169 9,351 9,462 5,807 7,475

7,666 7,951 8,025 4,430 6,069

4,814 5,302 5,218 2,399 3,861

21,512 24,738 25,035 26,719 27,643

33,384 34,231 43,892 46,092 50,547

54,896 58,969 68,927 72,811 78,190

14,944 15,268 22,087 23,845 26,210

2,813 3,369 3,671 4,397 5,220

35,565 38,708 41,193 42,334 44,171

1,574 1,623 1,975 2,235 2,590

37,140 40,331 43,169 44,569 46,761

54,896 58,969 68,927 72,811 78,190

3,166.8 3,174.7 3,176.4 3,176.4 3,176.4

1.5 1.7 1.6 0.8 1.2

0.7 0.9 0.9 0.4 0.6

11.7 12.7 13.6 14.0 14.7

-3.3% -1.8% 5.1% 8.9% 8.9%

29.5% 27.6% 28.0% 16.0% 21.3%

14.4% 14.9% 14.4% 8.1% 9.6%

7.5% 8.5% 7.9% 3.3% 4.9%

2.23 2.24 1.99 1.93 1.93

9.1% 9.3% 8.2% 3.4% 5.1%

14.1% 14.3% 13.1% 5.7% 8.9%

2013F 3YR CAGR

78,133 0.0%

16,620 4.2%

7,475 7.3%

6,069 5.3%

3,861 14.7%

27,643 14.4%

50,547 6.7%

78,190 9.4%

26,210 17.2%

5,220 -5.2%

44,171 7.3%

2,590 48.1%

46,761 8.2%

78,190 9.4%

3,176.4

1.2

0.6

14.7

8.9%

21.3%

9.6%

4.9%

1.93

5.1%

8.9%

29

Unilever Nigeria stands out in terms of a dearer market rating relative to its peers and comparatively slower earnings growth. Since the beginning of 2010, the share price has largely been range bound, oscillating between NGN 22.00 and NGN 30.00, preserving value on the backdrop of a very weak stock market in 2011. Efficiency gauges are historically inferior to peers, a trait that we do not expect to change which further supports our opinion of a rich valuation. Dividend pay-out is generous and we expect it to be kept closer to 80%. Dividend yield, however, is very low compared to peers. � Capacity expansion underpins volume growth Unilever is expanding its capacity and had plans in 2010 to invest NGN 20bn (EUR 100m) over a period of three years. Volumes growth in 2011 can be attributed to this program and we expect it to enhance performance in the future as focus will naturally shift to improving efficiency. � Product innovation alive to customer needs The company generates more than 45% of its revenue selling NGN 10 (USD 0.07) units. This is born out of a deliberate strategy to seek ways of providing cheaper alternatives of its products by packaging them into smaller and more affordable sizes to every household. This resonates well with the SSA market where about 63% of the population is made up of ‘basic survivors’. � The sales and distribution model modernised Unilever has c75,000 distributors in Nigeria which is difficult to rival. Additionally, it recently introduced the use of barcode scanners which makes distribution more efficient and is critical at this stage given the massive sales promotion drive underway. � Sector rotation to drag down valuations We recommend switching from Unilever owing largely to the premium valuations and our opinion that rotation from defensives as risk appetite increases will dampen Unilever’s share price. SELL

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG

Unilever Nigeria Plc.

BLOOMBERG: UNILEVER:NL SELL




Upside/Downside -8.97%


Liquidity



Shares (m) 3,783

Free Float (%) 40.0




6 months (%) 7.4


12 months 12.7




Revenues 46,808 54,720 60,074

EBITDA 6,807 8,150 8,948


EPS (NGN) 1.11 1.45 1.49

DPS (NGN) 1.07 1.16 1.20

NAV/Share (NGN) 2.20 2.49 2.79

RATIOS

RoAE 50.6 61.8 56.5

RoAA 8.4 9.3 8.1

Gross Margins (%) 37.3 36.5 37.4

EBITDA Margins (%) 14.5 14.9 14.9

Net Margins (%) 8.9 10.0 9.4

VALUATION RATIOS

PBV (x) 13.2 11.6 10.4

PER (x) 26.1 20.0 19.4




Expanding its capacity Relatively dearer valuations

Portfolio of strong brands Comparatively slower earnings

Generous dividend policy growth

Efficient distribution system

supported by aggressive sales


Efficiency and economies of scale Migration to brands that are

with a newer and bigger plant perceived to be superior

Growing Nigerian population Capacity expansions by peers to

Organised retailing boon for big increase competition

manufacturers like Unilver

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GSE-CI UNILEVER:NL

Unilever Nigeria vs NSE ASI (Rebased)

30

Unilever is a subsidiary of Unilever Overseas Holding, an Anglo-Dutch consumer products group that owns 50% of its outstanding share capital. The company is involved in the manufacturing and marketing of high quality consumer products in the foods, home and personal care categories. The company was established in 1923 and subsequently listed on the Nigerian Stock Exchange in 1973.Its major brands include Omo, Sunlight, Lux, Close Up, Vaseline and Pears Baby, Blue Band, Knorr and Lipton tea.

Unilever’s business can be split into two broad segments; the food and home & personal care (HPC) segments. The former houses brands like Blue Band, Knorr and Lipton tea, while major brands for the latter include Omo, Sunlight, Lux, Close Up, Vaseline and Pears Baby. Unilever has a respectable market share within the Nigerian HPC market, and is among the top three in the country. In the personal care products, the company is second only to PZ Cussons, with Close Up being the number one toothpaste brand in Nigeria. The HPC business historically provides 57% of group revenue. The food division on average accounts for 43% of group revenues and Blue Band is the number one margarine brand, while Knorr seasoning comes second after Maggi.

The company posted an impressive set of 9M 11 financial results. Volume growth on the back of the on-going capacity expansion and plant modernisation were the key driver and our expectations are that this trend will continue into 2013 as the group wraps up its EUR 100m expansion program. After tax profit grew 26% (y-o-y), a decline from the 61% growth for H1 11. The high base set in Q3 10 and soaring input costs were the major drivers for the slowdown. Nonetheless, profitability improved as net margins grew by 60 basis points y-o-y. Unilever significantly increased its marketing initiatives in 2011 and undertook upgrades to its distribution system with the introduction of barcode scanners being the most notable. When this is coupled with arguably one of Nigeria’s widest distribution networks, the volume driven growth seen in 2011 is set to be maintained in 2012. Additionally, improvements in the sales and distribution model are apparent following the outsourcing of warehousing and distribution activities. Of note is the reduced lead time and improved product availability in the market.

Operations Review


FY 11 Financials Summary


Revenue 46.8 54.7 16.9%

PBT 6.2 8.0 29.8%

PAT 4.2 5.5 31.3%

Operating Margins 13% 15% 11.0%

Net margins 8.9 10.0 12.4%

0%

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2007 2008 2009 2010 2011F


Unilever Nigeria: Financial analysis

31

Unilever to remain in tune with market developments… We expect the company to maintain a business model that is alive to the realities of the SSA consumer market. We believe Unilever’s business model has been widely hailed as suited to extracting value from SSA markets, Nigerian included. The company’s thrust to produce products in small units, often single use packages, makes it possible to serve the biggest market in SSA, the market of ‘basic survivors’. Additionally, the strategy also makes the products suitable for retailers who either run open market stalls or kiosks allowing the company to capture the full potential margin, compared to a situation where these retailers buy larger units for repackaging. This is then augmented by a pool of distributors which is unrivalled in Nigeria. The company also led in offering support to distributors at the height of the liquidity crunch, which has built loyalty. We believe these all combine to ensure Unilever maintains profitability. Risk appetite to see capital switching from defensives like Unilever… Unilever depicted strong defensive traits in the face of a generally declining market in 2011, where it added c12% when the market shed c22%. The company was thus a haven for storing value in the falling market. With indications that investors are now seeking to add on risk in 2012, a switch from companies like Unilever is expected. Our call for investors to take profits from the counter is generally inspired by this expectation.

Expansion and refurbishments have allowed larger volumes and wider margins which should underpin profitability in 2012 and beyond. However, rotation from defensives with growing risk appetite, comparatively slower earnings growth relative to peers, premium market ratings and the existence of better looking opportunities in the FMCG space all point to the likelihood of a share price decline for Unilever.

Our DCF valuation, on the other hand, led us to a target price of NGN 25.70, which is 11.3% lower than the current level. The biggest risk to our valuation is the low free float that can support the share price at the current relatively high levels. Nonetheless, we recommend taking profits and seeking better opportunities elsewhere. SELL.

Outlook


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-

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2,007 2,008 2,009 2,010 2011F 2012F


Unilever Nigeria: Total asset growth

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2007 2008 2009 2010 2011F


Unilever Nigeria: EPS, DPS and Dividend Payout

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50.0%

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70.0%

2007 2008 2009 2010 2011F 2012F

RoAE (%) RoAA (%)

Unilever Nigeria: RoAEand RoAE

32

UNILEVER NIGERIA- 3YR CAGR COMPARISON31 DEC (NGN m) 2007

Income Statement

Turnover 33,991

Gross Profit 11,413

EBITDA 3,411

PBT 2,013

PAT 1,297

Balance sheet

Non current assets 8,641

Current Assets 11,712

Total assets 20,353

Current Liabilities 12,741

Non current liabilities 2,581

Shareholders' Equity 5,031

Equity and liabilities 20,353

Ratios


EPS 0.3

DPS -

NAV per share 1.3

Other ratios

Revenue growth 33.0%Gross margins 33.6%

Net margins 3.2%

Current ratio 0.92

RoAE 24.0%

RoAA 2.76%

UNILEVER NIGERIA- 3YR CAGR COMPARISON2008 2009 2010 2011F 2012F

37,377 44,481 46,808 53,443 58,672

13,017 17,389 17,446 19,999 21,956

5,242 7,368 7,756 9,117 10,022

4,145 5,661 6,152 7,675 8,426

2,597 4,094 4,181 5,029 5,521

9,056 9,975 11,740 13,017 14,433

14,436 13,706 14,196 19,345 21,682

23,493 23,682 25,935 32,362 36,115

13,743 12,405 14,395 19,362 21,653

3,068 3,074 3,205 3,659 4,017

6,682 8,203 8,335 9,341 10,445

23,493 23,682 25,935 32,362 36,115

3,783.3 3,783.3 3,783.3 3,783.3 3,783.3

0.7 1.1 1.1 1.3 1.5

0.3 0.7 1.1 1.1 1.2

1.8 2.2 2.2 2.5 2.8

10.0% 19.0% 5.2% 14.2% 9.8%34.8% 39.1% 37.3% 37.4% 37.4%

6.9% 9.2% 8.9% 9.4% 9.4%

1.05 1.10 0.99 1.00 1.00

44.3% 55.0% 50.6% 56.9% 55.8%

5.92% 8.68% 8.43% 8.63% 8.06%

2012F 3YR CAGR

58,672 11.3%

21,956 15.2%

10,022 31.5%

8,426 45.1%

5,521 47.7%

14,433 10.8%

21,682 6.6%

36,115 8.4%

21,653 4.2%

4,017 7.5%

10,445 18.3%

36,115 8.4%

3,783.3

1.5

1.2

2.8

9.8%37.4%

9.4%

1.00

55.8%

8.06%

33

EQUITY RESEARCH

NIGERIA

MARCH 2012

FMCG SECTOR

UAC of Nigeria plc Nigeria’s food behemoth... In H1 2011, UAC of Nigeria plc disclosed a sum of NGN 5.4bn, relating to the profit realised from the NGN 9.2bn sale of a 49.0% stake in UAC Foods Ltd to Tiger Brands of South Africa. While the proceeds are expected to be reinvested to help improve capacity in operations and increase market share, particularly in the refined edible oil food line, we view the investment by Tiger Brands as strategic as it should also increase the variety of the company’s product portfolio. A diversified business model. While UACN is a

diversified conglomerate with interests in manufacturing and real estate, we like the fact that the business model is overweight on the highly defensive food sector (c67% contribution to turnover). Increased competition in the foods industry, the price stickiness characterising some of the products and the dearth of personal credit however remain a source of concern. There are also indications that UACN management is mapping out a plan for smaller businesses like GM Nigeria (auto sales), UNICOM and UAC Registrars. We believe that spinning-off the businesses would create more value as the group focuses on key areas that contribute meaningfully to group earnings.

Cheap relative to Nigerian FMCG peers. While we also have concerns on the performance of non-food related businesses given their high cyclicality and dependence on credit financing, we opine that UACN’s main strength lies within its defensive food business. On current valuations, UACN trades at 9.7x 2010 earnings, a discount to its SSA peer average of 16.0x. We place a BUY rating on the stock, having established a target price of NGN 40.00 per share, which is based on a blend of valuation methodologies.

BLOOMBERG:UACN:NL BUY


Current price (USD) 0.2 Target price (NGN) 40.0 Target price (USD) 0.3 Upside/Downside (%) 20.5%

12 month High/Low (NGN) 42.5; 28.0Liquidity Market Cap (NGNm) 53,127.9 Market Cap (USDm) 334.6 Shares (m) 1,600.7 Free float 35%Ave Monthly value traded (NGNm) 43.1Ave Monthly volume (m) 1.1Share price performance6 Months (%) 39.0 -14.9%Relative change (%)* -11.7%12 Months (%) 33.3 -0.3%Relative change (%)* 12.9%*Relative to MSCI IndexFinancials (NGN'000) - FY 31 Dec 2010 2011F 2012FRevenues 52,313,682 59,660,184 68,609,211EBITDA 11,360,765 12,226,299 14,407,934PAT 5,450,801 6,432,263 7,512,709EPS (NGN) 3.4 4.0 4.7DPS (NGN) 1.1 2.2 2.6NAV/Share (NGN) 22.7 24.7 26.5RATIOSRoAE 8.6% 9.9% 10.7%RoAA 3.2% 3.6% 3.9%Gross Margins (%) 31.4% 27.3% 28.0%EBITDA Margins (%) 21.7% 20.5% 21.0%Net Margins (%) 10.4% 10.8% 11.0%VALUATION RATIOSPBV (x) 1.5 1.3 1.3 PER (x) 9.7 8.3 7.1 Dividend Yield (%) 3.3% 6.7% 7.8%Dividend payout ratio (%) 32.3% 55.0% 55.0%

STRENGTHS WEAKNESSESWide range of product offerings that appeals to There is a need to invest significantly so as to maintain

a broader segment of the market. its position in the market given that the consumerDiversification entails the spread of risk across industry in Nigeria is attracting more attention fromvarious sectors of the economy. multinational firms.The group is benefiting through its strategic partners

such as Tiger Brands in various areas such as expertise,new brands and product sourcing.OPPORTUNITIES THREATSThe strong growth in consumer demand in Nigeria Stiff competition is looming from well capitalisedIncreased demand in low-cost confectionery. multinationals such as Nestle and Cadbury.Rising demand for bottled water on the back of An increase in raw material and energy costs implieshealth concerns is likely to benefit its water business that the group will struggle to maintain its margins.0.00

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NSE-ASI UACN:NL

UACN vs NSE ASI (Rebased)

34

Double digit growth across income statement lines. UACN released its unaudited financial results for Q3 2011 showing a 20.2% rise in turnover to NGN 44.6bn (USD 283.3m), while PBT and PAT increased by 9.9% and 10.4% to NGN 5.6bn and NGN 4.2bn respectively. A dip in margins was an indication of pricing pressure and competitive threats. Pre and post tax margins dipped by 120bps and 80bps from 13.8% and 10.3% to 12.6% and 9.5% respectively. Overall, PAT was up 10.2% on the year to NGN 4.2bn (USD 26.8m). Management cited various reasons for the increase in the cost profile of the various business segments. The food division was particularly affected by the constant rise in commodity prices (wheat/flour, sugar and energy), while the ongoing banking reforms also had a negative impact on suppliers and distributors as access to credit was limited, thereby limiting overall demand. Strategic partnership with Tiger Brands bearing fruit. Management indicated in its Q3 2011 results release that benefits were being realised from the partnership with Tiger Brands. For example, the snacks division of UAC Foods saw a 26.0% y-o-y growth on the back of enhanced operational and technical efficiencies. The introduction of an additional line in UACN’s snack division in August 2011 and the restoration to full capacity of the bottled water business line (SWAN), following relative socio-political stability in Jos, also spurred the growth in revenues. UACN and Tiger Brands have concluded a strategic partnership in which UACN would hold a 51% equity stake in the Joint Venture and Tiger Brands 49%. The two companies would exercise joint management control in the venture. The JV consists of UACN's food and dairy operations as well as the SWAN water business. We note that the JV provides UACN with the necessary business platform for expansion into FMCG product categories in which it already has expertise and other new portfolios relevant to the Nigerian market. The financial strength and complementary product lines of Tiger Brands also enables the group to pursue substantial growth opportunities as the JV provides an opportunity to create complementary brands, assets, skills and leading positions in chosen market categories.

Income Statement (NGN 000) Q3 2010 Q3 2011 % Δ

Turnover 37,110,000 44,600,000 20.2%

Profit before tax 5,130,000 5,640,000 9.9%Income tax expense (1,290,000) (1,410,000) 9.3%Profit after tax 3,840,000 4,230,000 10.2%Margins Q3 2010 Q3 2011

PBT Margin 13.8% 12.6%PAT Margin 10.3% 9.5%

Shareholder StructureNumber of holdings Number of Number of Percentage %

1 - 500 10,296,693 35,594 0.64%501 - 1,000 16,629,106 23,236 1.04%1,001 - 5,000 245,887,877 110,781 15.36%5,001 - 50,000 196,860,528 17,378 12.30%50,001 -100,000 49,350,714 713 3.08%100,001 - 500,000 134,700,367 647 8.41%500,001 -1,000,000 81,130,343 110 5.07%1,000,001 - 10,000,000 286,743,405 108 17.91%10,000,001 - and over 579,121,289 17 36.18%

1,600,720,322 188,584Source: IAS/Company Reports

Foods and Beverages, 66.8%

Real Estate, 14.6%

Paints, 7.0%

Logistics, 6.3%

Commercial vehicles, 3.3%

Hospitality, 1.1% Others, 0.7%

Pensions, 0.3%

Revenue Contribution Chart (FY 2010)

0%

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-

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2005 2006 2007 2008 2009 2010 2011F 2012F

UACN: Financial Analysis

Turnover (NGNm)-LHS EBITDA (NGNm)-LHS PAT (NGNm)-LHSEBITDA Margin-RHS PAT Margin-RHS

Source: IAS/Company Reports

Nature of Business Shareholder Structure

Q3 2011 Financials Summary Operations and Q3 2011 Review

UAC of Nigeria plc (UACN) is a Nigerian-public company and is one of the largest diversified businesses in the private sector. It is a leading food-focused company in Nigeria but also operates in the manufacturing and processing, services, logistics and warehousing, automobile and real estate sectors of the economy. The company has re-aligned its food business architecture to unlock the values inherent in the various operations and achieve superior performance. In line with this initiative, the food business is now operated through the following units: UAC Restaurants, UAC Dairies and UAC Foods. UAC Restaurants operates all the restaurant brands – Mr Bigg's, Nando's, Chicken Inn, Creamy Inn, Pizza Inn, Dial-A-Delivery and Village Kitchen. The company's other portfolios include UACN Property Development Company Plc (UPDC) and Warm Spring Waters Nigeria Limited, the producer of “GOSSY” Spring Water.

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New JV opportunities still exist. UACN has also indicated that it is currently undergoing discussions with various potential strategic partners and has plans to expand, especially in its animal feed and oil mill operations. There has been news that Kaizen Venture Partners, a private equity firm focused on providing rescue financing to companies in SSA is looking to invest in Mr. Bigg’s, one of UACN’s fast food restaurants businesses. The deal is expected to give Kaizen the right to operate 19 Mr. Bigg’s outlets located at Mobil petrol stations throughout Lagos, Ibadan and Abuja and will be managed by a newly established company called Special Brands. Leveraging on business diversification. While the performance of the non-food sectors (registrars, automobiles, paints, real estate and logistics among others) remains highly cyclical, we highlight the fact that UACN’s business model remains well diversified with roots in different sectors of the economy. As of FY 2010, the Property division (UAC-PROP) accounted for 15% and 42% of turnover and pre-tax-profit respectively. However, the tight credit environment and government regulation such as the recent Lagos Tenancy Law will largely shape the property market going forward. We therefore opine that the current operating environment may warrant a slowdown in the property market. Hence we expect the resilient business divisions (food and beverage segment) to cushion the company’s performance in the short to medium term. Real estate strategy focused on mid-tier investments. Management has indicated that its real estate business segment, UAC Property Development Company (UPDC), will aggressively focus on mid-tier investments, as against premium investments in the past, with plans to expand to Ikeja GRA in Lagos State, Abuja and Port-Harcourt. This is to help increase market presence, as well as take advantage of higher rental yields (7.0% - 8.0% in Abuja compared to 4.0% - 5.0% in Lagos). The lull in the real estate market has also limited the contribution of that segment to the company’s bottom line even as rising commodity prices, poor infrastructure and a reduction in consumer spending have also posed considerable challenges to the firm’s operations.

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UACN: Return Measures

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Outlook and Valuation

A growth-focused strategy. UACN plans to explore growth opportunities organically and inorganically. Organically, it has embarked on the installation of a third production line in its snack business (‘Gala’) to help meet the growing market demand. There are also plans to upgrade capacity in the Swan Water production line. Inorganically, the company plans to merge (or acquire where necessary) with related entities, particularly in its quick service restaurant (QSR) and logistics business segments. Management has previously indicated that an MoU had been signed with a strategic partner in the QSR line and talks have reached an advanced stage. This, in our view, is likely to add significant value to operations in terms of systems and processes, while leveraging on UACN’s brand and retail footprint. Valuation and Recommendation On current valuations, UACN trades at 9.7x 2010 earnings, a discount to its SSA peer average of 16.0x. We reiterate our positive stance on the long term prospects of UACN and expect to see new partnerships and JVs create synergies, which should translate to higher earnings. We therefore place a BUY rating on the stock, having established a target price of NGN 40.00 per share, based on a blend of valuation methodologies.

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UACN- 5 YEAR CAGR COMPARISON

31 DEC (NGN'000) 2005 2006 2007 2008 2009 2010 2011F 2012F 5yr CAGR Balance SheetIntangible Assets 267,545 234,080 200,640 167,200 133,765 100,046 105,048 110,301 -17.9%Fixed Assets 10,964,432 10,514,664 22,260,155 27,258,773 30,131,154 30,355,423 31,873,194 33,466,854 22.6%Long term investments 4,468,279 4,578,687 34,377,950 45,324,475 26,410,542 23,368,806 25,705,687 28,276,255 39.2%

Current Assets 10,711,281 12,356,366 22,281,427 22,456,073 37,391,777 48,548,161 52,050,843 56,239,417 35.3%

Total Assets 26,411,537 27,683,797 79,120,172 95,206,521 94,067,238 102,372,436 109,734,772 118,092,827 31.1%Shareholders' funds 14,180,253 16,099,218 29,687,654 41,060,242 37,486,708 36,406,001 39,562,615 42,421,246 20.8%Minority Interest 906,563 1,303,488 4,860,923 6,700,133 7,477,028 9,181,670 9,890,654 10,605,312 58.9%Current Liabilities 8,670,290 7,793,795 23,614,665 37,943,784 37,478,368 32,061,302 34,848,853 37,975,337 29.9%

Long-term Liabilities 2,654,432 2,487,296 20,956,930 9,502,362 11,625,135 24,723,463 25,432,650 27,243,636 56.3%Total Equity and Liabilities 26,411,538 27,683,797 79,120,172 95,206,521 94,067,239 102,372,436 109,734,772 118,245,531 31.1%Income StatementTurnover 27,118,696 28,403,237 37,155,171 53,489,253 56,495,948 52,313,682 59,660,184 68,609,211 14.0%Cost of Sales (20,090,052) (21,271,768) (27,408,878) (39,033,311) (40,753,799) (35,863,475) (43,393,560) (49,398,632) 12.3%Gross Profit 7,028,644 7,131,469 9,746,293 14,455,942 15,742,149 16,450,207 16,266,623 19,210,579 18.5%Operating Profit 2,918,381 3,058,344 4,899,895 8,455,124 7,568,029 7,037,723 8,105,910 9,321,796 19.2%Share of profit of associates 560,160 639,003 12,775 11,215 11,607 17,316 18,182 19,091 -50.1%Interest income 374,615 221,067 407,567 263,290 516,920 354,441 1,018,073 891,172 -1.1%Finance charges (693,510) (550,032) (583,754) (922,043) (1,447,756) (1,863,753) (2,173,635) (2,565,940) 21.9%PBT 2,724,842 3,893,668 6,004,604 8,778,646 8,076,451 7,093,520 8,370,767 10,291,382 21.1%Taxation (915,581) (1,074,352) (1,449,939) (1,989,286) (1,899,343) (1,642,719) (1,938,504) (2,778,673) 12.4%PAT 1,809,261 2,819,316 4,554,665 6,789,360 6,177,108 5,450,801 6,432,263 7,512,709 24.7%RatiosEPS (NGN) 1.1 1.8 2.8 4.2 3.9 3.4 4.0 4.7DPS (NGN) 1.0 1.0 1.7 2.0 1.3 1.1 2.2 2.6NAV/Share (NGN) 8.9 10.1 18.5 25.7 23.4 22.7 24.7 26.5Dividend Cover (x) 1.1 1.8 1.7 2.1 3.0 3.1 1.8 1.8Dividend Yield 3.4% 3.4% 5.9% 6.9% 4.5% 3.8% 7.6% 8.9%Growth RatiosSales growth (%) 4.7% 30.8% 44.0% 5.6% -7.4% 14.0% 15.0%OP growth (%) 2.7% 84.2% 79.8% -6.8% 0.5% 8.4% 18.8%EBITDA growth (%) 16.1% 18.7% 20.9% 19.0% 21.7% 20.5% 21.0%PBT growth (%) 42.9% 54.2% 46.2% -8.0% -12.2% 18.0% 22.9%PAT growth (%) 55.8% 61.6% 49.1% -9.0% -11.8% 18.0% 16.8%MarginsGross margin 25.9% 25.1% 26.2% 27.0% 27.9% 31.4% 27.3% 28.0%OP margin 9.9% 9.7% 13.6% 17.0% 15.0% 16.3% 15.5% 16.0%EBITDA Margin 15.4% 16.1% 18.7% 20.9% 19.0% 21.7% 20.5% 21.0%PBT margin 10.0% 13.7% 16.2% 16.4% 14.3% 13.6% 14.0% 15.0%PAT margin 6.7% 9.9% 12.3% 12.7% 10.9% 10.4% 10.8% 11.0%Effective tax rate 33.6% 27.6% 24.1% 22.7% 23.5% 23.2% 23.2% 27.0%

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EQUITY RESEARCH

GHANA

MARCH 2012

FMCG SECTOR

Fan Milk Ghana Essien’s Secret and Ayew’s favourite… Fan Milk is a consumer-goods company that operates in Ghana. The company distributes ice cream, frozen yoghurt and milk through a network of c12,000 bicycles, pushcarts and kiosks. It has been adding more distribution centres and may build a new plant in 2014 as it seeks to increase sales in the country. As part of its marketing effort, Fan Milk signs famous Ghanaian footballers such as Essien and Ayew as the “face” of Fanice and Fanyogo, its flagship products. Such marketing efforts, in our view have been pivotal in instilling brand loyalty in Fan Milk’s product offerings. The products’ association with footballers ensures that they are perceived by consumers as “nutritious drinks”, which is a key positive in our view. The domestic demand story looks exciting. It is our

view that oil production in Ghana has and will continue to propel real GDP growth into double digits. Furthermore, rising cocoa and gold production are likely to make an important contribution to economic activity. We are optimistic that Ghana will continue to be a major economic outperformer over the coming years on a regional and global level. Consumer companies such as Fan Milk, therefore, look well placed to grow strongly over the next few years.

The stock offers an avenue into Ghana’s exciting growth story. At a PER (hist.) of 13.7x, Fan Milk Ghana looks demanding relative to some of its SSA peers such as Zimbabwe’s Dairibord Holdings. However, we believe the stock offers an opportunity to tap into Ghana’s compelling oil driven consumer growth story. We have derived a target price of GHS 2.50 (based on a DCF and comparative valuation), indicating 12.1% potential upside. ACCUMULATE

BLOOMBERG: FML HOLDCurrent price (GHS) 2.23

Current price (USD) 1.33 Target price (GHS) 2.50 Target price (USD) 1.50 Upside/Downside (%) 12.1%12 month High/Low (GHS) 3.11; 1.76Liquidity Market Cap (GHSm) 264.7 Market Cap (USDm) 158.3 Shares (m) 118.7 Free float 30%

Ave Monthly value traded (GHS 000) 125Ave Monthly volume (000) 55.9 Share price performance6 Months (%) 2.58 -14%Relative change (%)* -10%12 Months (%) 2.49 -10%Relative change (%)* 3%*Relative to MSCI IndexFinancials (GHS 000) - FY 31 Dec 2010 2011F 2012FRevenues 109,280 139,382 155,411 EBITDA 29,267 33,319 38,853 Attributable earnings 18,851 21,981 26,549 EPS (GHS) 0.16 0.19 0.22 DPS (GHS) 0.02 0.02 0.03 NAV/Share (GHS) 0.53 0.63 0.75 RATIOSRoAE 32.9% 32.1% 32.5%RoAA 25.5% 25.5% 27.9%Gross Margins (%) 54.7% 50.8% 52.0%EBITDA Margins (%) 26.8% 23.9% 25.0%Net Margins (%) 17.3% 15.8% 17.1%VALUATION RATIOSPBV (x) 4.2 3.6 3.0 PER (x) 13.7 12.0 10.0 Dividend Yield (%) 0.9% 1.1% 1.3%Dividend payout ratio (%) 13.0% 13.0% 13.0%

STRENGTHS WEAKNESSESGhana’s leading dairy producer. Will have to invest significantly to scale up

Strong brand heritage. business over the next few years.Expansive distribution network. Could be squeezed out if multinational dairyNegligible/no gearing on balance sheet. firms show greater interest in Ghana.

OPPORTUNITIES THREATSOnset of domestic oil production is expected to lead Growing multinational investment interest to significant disposable income strengthening which in Ghana will make the market more competitiveshould provide strong upside to the dairy industry. Ghana may not manage oil as well as expected

Long-term income growth will allow Fan Milk and therefore GDP growth rates and disposable to further segment its product portfolio and target incomes may remain stagnate.higher margin growth.

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GSE-CI FML:GN

Fan Milk vs GSE-CI (Rebased)

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Lackluster financial performance. Fan Milk reported revenue growth of 5.3% to GHS 109.3m (USD 65.0m). We note that the slow growth was largely a result of an increase in the price of some of its products at the beginning of the year. Gross profit increased 3.9% to GHS 59.7m as the company’s cost of sales rose at a faster rate of 7.0%. The GP margin declined by 80 basis points to 54.7% (FY 2010: 55.4%). A decline in operating profits. The effect of rising distribution costs (climbed 13.0%) and depreciation charges, led to a 5.5% decline in operating profit to GHS 23.2m, giving an OP margin of 21.2% (FY 2010: 23.7%). Finance costs during the year also increased while depreciation charges also increased. Overall, PBT was down 2.2% y-o-y whilst PAT declined 2.7% to GHS 18.9m (USD 11.2m) from GHS 19.4m in FY 2010. A strong balance sheet. While financial performance for the year was lacklustre, we continue to witness continuous growth in the company’s balance sheet as total assets increased 16.0% on the year to GHS 79.3m (USD 47.2m). The company’s gearing levels have remained largely negligible without any long term debt obligations. In terms of liquidity, the group’s current ratio at 2.52x still remains healthy despite the deterioration from 2.68x in FY 2010. Competitive threats also looming in the market. Management perceives competition to be that which vies for the disposable income of consumers. This extends beyond ice creams imported into the country and includes carbonated soft drinks (CSDs) and (lower denominated) mobile phone top ups. Fanice, Fanyogo and Tampico face stern competition from a number of brewery and bottling companies (Coca Cola, Guinness Ghana Breweries and Accra Brewery). Despite this, the company continues to command c90% share of the smaller-unit products (Fanice and Fanyogo). We expect Fan Milk to continue to maintain its market share given its aggressive marketing strategy.

Fan Milk Ghana Key Brands

Income Statement (GHS 000) FY 2010 FY 2011 % ΔRevenue 103,775 109,280 5.3%

Cost of Sales (46,273) (49,549) 7.1%Gross Profit 57,502 59,731 3.9%Operating Profit 24,552 23,211 -5.5%Other Income 1,261 2,030 61.0%Profit before tax 25,813 25,251 -2.2%Income tax expense (6,443) (6,400) -0.7%Profit after tax 19,370 18,851 -2.7%EPS (GHS) 0.16 0.16 0.0%Balance Sheet (GHS 000) FY 2010 FY 2011 % ΔTotal Assets 68,391 79,349 16%

NAV 52,098 62,404 20%Current Assets 38,861 35,578 -8%Current Liabilities 14,525 14,140 -3%Current ratio 2.68 2.52 -6%

Shareholder Structure % ShareholdingFan Milk International A/S 55.5%

Enterprise Insurance Company 8.0%SCBN/ JP Morgan Chase Onshore 4.2%SCBN/Epack Investment Fund 1.9%Other Shareholders 30.5%Source: IAS/Company Reports

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Fan Milk: Financial Analysis

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Operations and FY 2011 Review FY 2011 Financials Summary

Fan Milk Ghana (FML) was incorporated in 1960 as Ghana Milk Company by a group of Scandinavian investors with the objective of producing milk to compliment the protein requirements of Ghanaians. The main product of the company at incorporation was pasteurised milk. In 1962, the company underwent significant changes by changing its name to Fan Milk Limited and widening its product range to include ice cream, yoghurt and ice lollies. Fan Milk’s milk-based products consist of a wide range of ice creams and yoghurts, while Tampico, a citrus fruit drink and ice lollies make up the fruit-based products. The company offers products under Fanyogo, Fanice, FanGold, FanChoco, Tampico, and FanPop brand names. Fan Milk International A/S together with the Industrialisation Fund for Developing Countries (IFU) are the majority shareholders of FML. An interesting point is to the fact that Fan Milk’s roots can be traced to Denmark, which is ranked number three in the top ice cream consuming countries, after USA and New Zealand.

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The expansive distribution network to remain a key competitive advantage. The company has a strong distribution network which includes shops, service stations and bicycle vendors (that source their product from strategically situated depots) and exclusively sells Fan Milk products. Fan Milk vendors (>12,000) as well as its agents (c1.0m) play an important part by ensuring maximum cross-country penetration of Fan Milk products. The company also interacts with its trade and channel members to ensure that they understand the key handling requirements of the products, cold-chain management and good practises of selling. In 2010, about 460 top agents were taken through training workshops in Accra, Kumasi, Takoradi and Tamale. The top 50 were also engaged in a two–day conference with management at Akosombo. Overall, c1,100 agents were trained in 2010. In addition, the company offers support to its agents/distributors in the form of equipment (Bicycles/Push Carts, Deep Freezers and coolers) as well as credit facilities.

Fan Milk Ghana Hygiene Station

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Fan Milk: Return Measures

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Fan Milk Ghana as a food and beverages company, strives to maintain high quality control standards in line with the Food and Drugs Board of Ghana. This has also worked as a barrier to entry in the food sector, especially for the small players given the high quality standards sought.


Management to focus on managing costs. We highlight that effective cost management will be crucial in remaining profitable in the medium to long term. Management has also indicated that it will be placing a great emphasis on product development, marketing spending and investment into distribution as it looks to significantly grow its sales and earning power over the next few years. The company’s outlook hinges on the improvements in domestic demand. Generally, Ghana’s domestic demand story looks increasingly exciting. We view Ghana as West Africa’s most well rounded and equitable growth story given that oil production is expected to continue propelling real GDP growth into the double digits. The World Bank estimates real GDP growth of 9.0% in 2012 for Ghana. The 2010 Oil & Gas Journal’s (OGJ) annual reserves and production survey attributes 660.0m bbl of proven oil reserves to the country. We also expect the oil-led growth spurt to have positive spill-over effects to the non-oil sectors of the economy. Rising cocoa production and strong private investment are also making an important contribution to economic activity. While we also have concerns of certain weaknesses in the macro economy (inflation and external debt levels), we remain long term bulls on Ghana, given that is likely to remain a major economic out performer over the coming years. We would therefore expect Fan Milk to leverage off its strong position and capitalise on the opportunities provided by the economic takeoff Ghana is going through. Fan Milk Chief Executive Jesper B. Jeppesen has said that domestic oil production and subsequent economic growth will probably have a sharp and direct bearing on the firm’s performance. Valuation and Recommendation We anticipate FML to consolidate its market dominance and grow further considering the fact that the national economy is estimated to grow at 12.0%. At a PER (hist.) of 13.7x, Fan Milk Ghana looks demanding relative to some of its SSA peers such as Zimbabwe’s Dairibord Holdings. However, we believe the stock offers an opportunity to tap into Ghana’s compelling consumer growth story. We have derived a target price of GHS 2.50 (based on a DCF and comparative valuation), indicating 12.1% potential upside. ACCUMULATE.

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FAN MILK- 5 YEAR CAGR COMPARISON

31 DEC (GHS 000) 2006 2007 2008 2009 2010 2011 2012F 2012F 5yr CAGR Balance SheetNon current Assets 10,816 11,481 15,084 23,269 29,530 43,711 45,897 48,191 32.2%Current Assets 7,632 12,226 17,774 27,845 38,861 35,578 47,371 48,637 36.1%Total Assets 18,448 23,707 32,858 51,114 68,391 79,289 93,268 96,828 33.9%Equity 12,050 15,494 21,410 35,082 52,126 62,404 74,494 89,096 38.9%

Stated Capital 6,000 6,000 6,000 6,000 10,000 10,000 10,000 10,000 10.8%Retained earnings 6,050 9,494 15,410 29,082 42,126 52,404 64,494 79,096 54.0%Non Current liabilities 910 683 808 1,330 1,735 2,805 2,945 3,093 25.3%Current Liabilities 5,488 7,530 10,640 14,702 14,530 14,080 16,985 20,500 20.7%Total Liabilities 6,398 8,213 11,448 16,032 16,265 16,885 19,930 23,592 21.4%Total Equity & Liabilities 18,448 23,707 32,858 51,114 68,391 79,289 94,424 112,688 33.9%Income StatementRevenue 32,375 41,068 55,041 82,471 103,775 109,280 139,382 155,411 27.5%Cost of Sales (16,982) (21,448) (28,599) (38,460) (48,293) (49,549) (68,565) (74,597) 23.9%Gross Profit 15,393 19,620 26,442 44,011 55,482 59,731 70,817 80,814 31.2%

Distribution costs (7,875) (9,834) (12,569) (18,628) (22,342) (22,531) (27,564) (30,827) 23.4%Administrative expenses (2,969) (3,814) (4,873) (6,184) (8,432) (13,817) (16,903) (18,904) 36.0%Operating profit 4,549 5,972 9,000 19,199 24,708 23,383 26,350 31,082 38.7%Other income 247 253 500 1,177 1,261 2,030 3,094 4,795 52.4%Finance costs (305) (221) (113) (201) (156) (162) - - -11.9%Net Profit before tax 4,491 6,004 9,387 20,175 25,813 25,251 29,444 35,877 41.2%Tax (1,180) (1,650) (2,333) (5,019) (6,443) (6,400) (7,463) (9,328) 40.2%Net Profit after tax 3,311 4,354 7,054 15,156 19,370 18,851 21,981 26,549 41.6%RatiosEPS (GHS) 0.17 0.22 0.36 0.77 0.16 0.16 0.19 0.22DPS (GHS) 0.05 0.06 0.08 0.10 0.02 0.02 0.02 0.03NAV/Share (GHS) 0.61 0.78 1.09 1.78 0.00 0.53 0.63 0.75Dividend Cover (x) 3.64 3.83 4.80 7.70 8.00 7.69 7.69 7.69Dividend Yield 2.1% 2.6% 3.4% 4.5% 0.9% 0.9% 1.1% 1.3%Growth RatiosSales growth 26.9% 34.0% 49.8% 25.8% 5.3% 27.5% 11.5%EBITDA growth 35.3% 43.7% 92.2% 28.4% -1.1% 13.8% 16.6%OP growth 31.3% 50.7% 113.3% 28.7% -5.4% 12.7% 18.0%PBT growth 33.7% 56.3% 114.9% 27.9% -2.2% 16.6% 21.8%PAT growth 31.5% 62.0% 114.9% 27.8% -2.7% 16.6% 20.8%MarginsGross margin 47.5% 47.8% 48.0% 53.4% 53.5% 54.7% 50.8% 52.0%EBITDA margin 19.1% 20.3% 21.8% 27.9% 28.5% 26.8% 23.9% 25.0%OP margin 14.1% 14.5% 16.4% 23.3% 23.8% 21.4% 18.9% 20.0%PBT margin 13.9% 14.6% 17.1% 24.5% 24.9% 23.1% 21.1% 23.1%PAT margin 10.2% 10.6% 12.8% 18.4% 18.7% 17.3% 15.8% 17.1%Effective tax rate 26.3% 27.5% 24.9% 24.9% 25.0% 25.3% 25.3% 26.0%

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Unilever Ghana (Unilever) targets to double revenues by 2015 from its 2010 outturn. It seeks to achieve this while restructuring the business to focus on its ‘knitting’ - the HPC products that have been the bedrock of its parent company for years and helped earn its position of repute in the business world. This is all unfolding on the back of a transforming Ghana. Her newly found oil wealth looks set to transform the country into a middle income nation capable of consuming more of Unilever’s products than ever before. We are therefore bullish on prospects for both the consumer market in Ghana and Unilever, but expect upside to be limited owing to rich valuations. � Restructuring positive for margins, efficiency

and income stability Unilever has for a number of years now been disposing of its non-core assets such as plantations and focusing more on production and distribution of HPC products. This will leave the business model directly exposed only to the dictates of development in the consumer market and not agriculture related variables thereby bringing stability and predictability to earnings. � Product range widening and enhancing the

company’s hold on Ghanaian HPC market. The company is successfully applying its vast knowledge of the Ghanaian consumer market to adapt product lines that are highly successful in other African nations to the local market. We expect this to underpin the company’s grip on Ghana’s consumer market going forward. � Changing shopping trends a boon for Unilever. Shopping malls and supermarkets are springing up in Ghana as consumers seek more convenience and become more value conscious. This is positive for the company as it creates a market that counterfeiters and smaller inefficient competitors cannot access. � Rich valuations to curb upside. We believe that Unilever is poised to maintain its earnings growth tempo, but we do not expect to translate into share price appreciation owing largely to full valuation. HOLD.

BLOOMBERG: UNIL:GN HOLD

Current price (GHS) 8.00


Target price (GHS) 8.83


12 month High/Low (GHS) 8.00; 5.67

Liquidity

Market Cap (GHS m) 500.0

Market Cap (USD m) 320.5

Shares (m) 62.5

Free Float (%) 34.0




6 months (%) 7.7


12 months 47.3



Financials (GHS m) - FY 31 Dec 2010 2011F 2012F

Revenues 240.9 281.7 329.4

EBITDA 48.3 53.3 62.3

Attributable earnings 39.9 39.2 46.4

EPS (GHS) 0.51 0.53 0.62

DPS (GHS) (0.35) (0.37) (0.43)

NAV/Share (GHS) 1.27 1.47 1.71

RATIOS

RoAE 51.1 45.7 46.7

RoAA 26.8 23.8 25.2

Gross Margins (%) 32.2 30.2 30.2

EBITDA Margins (%) 20.0 18.9 18.9

Net Margins (%) 16.6 13.9 14.1

VALUATION RATIOS

PBV (x) 6.3 5.4 4.7

PER (x) 15.7 15.1 12.8

Dividend Yield (%) (4.4) (4.6) (5.4)

Dividend pay-out ratio (%) (69.6) (69.6) (69.6)


Portfolio of strong brands with Prone to international commodity

equally strong positions in the market price fluctuations

Technology transfer from parent Rich valuations

Strong earnings growth

Efficient distribution network


Increasing purchasing power Competition like PZ Cussons

Tapping into the parent's product increasing eating away market share

portfolio to get to the market quicker

Changing shopping patterns makes

access to market easier

EQUITY RESEARCH

GHANA

MARCH 2012

FMCG

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GSE-CI UNIL:GN

Unilever Ghana vs GSE-CI (Rebased)

Unilever Ghana Plc.

42

Unilever is a subsidiary of Unilever Overseas Holding, an Anglo-Dutch consumer products group that owns 50% of its outstanding share capital. The company is involved in the manufacturing and marketing of high quality consumer products in the foods, home and personal care categories. The company was established in 1923 and subsequently listed on the Nigerian Stock Exchange in 1973.Its major brands include Omo, Sunlight, Lux, Close Up, Vaseline and Pears Baby, Blue Band, Knorr and Lipton tea.

Unilever’s business can be split into two broad segments; the food and home & personal care (HPC) segments. The former houses brands like Blue Band, Knorr and Lipton tea, while major brands for the latter include Omo, Sunlight, Lux, Close Up, Vaseline and Pears Baby. Unilever has a respectable market share within the Nigerian HPC market, and is among the top three in the country. In the personal care products, the company is second only to PZ Cussons, with Close Up being the number one toothpaste brand in Nigeria. The HPC business historically provides 57% of group revenue. The food division on average accounts for 43% of group revenues and Blue Band is the number one margarine brand, while Knorr seasoning comes second after Maggi.

The company posted an impressive set of 9M 11 financial results. Volume growth on the back of the on-going capacity expansion and plant modernisation were the key driver and our expectations are that this trend will continue into 2013 as the group wraps up its EUR 100m expansion program. After tax profit grew 26% (y-o-y), a decline from the 61% growth for H1 11. The high base set in Q3 10 and soaring input costs were the major drivers for the slowdown. Nonetheless, profitability improved as net margins grew by 60 basis points y-o-y. Unilever significantly increased its marketing initiatives in 2011 and undertook upgrades to its distribution system with the introduction of barcode scanners being the most notable. When this is coupled with arguably one of Nigeria’s widest distribution networks, the volume driven growth seen in 2011 is set to be maintained in 2012. Additionally, improvements in the sales and distribution model are apparent following the outsourcing of warehousing and distribution activities. Of note is the reduced lead time and improved product availability in the market.

Operations Review


9M 11 Financials Summary


Revenue 46.8 54.7 16.9%

PBT 6.2 8.0 29.8%

PAT 4.2 5.5 31.3%

Operating Margins 13% 15% 11.0%

Net margins 8.9 10.0 12.4%

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Unilever Nigeria: Financial analysis

43

Weaning of non-core units to continue…Unilever is set to continue with its strategic thrust ofridding itself of non-core assets and focusing on itscore HPC products. It is expected to conclude the saleof its stake in Twifo Oil Palm Plantation sometime in2012 as efforts to bring to an end its directinvolvement in farming continues. We expect this toremain a key driver of wider margins enjoyed by thecompany in 2011.

Product range expansion expected to continue…Unilever is replacing units being sold off by a cocktailof products adopted from its business elsewhere inthe region. Products like Lifebuoy soap and Sunlight2-in-1 are doing well in other African countries andhave recently been introduced to the Ghanaianmarket. Unilever is leveraging on its knowledge ofthe local market in Ghana to successfully adapt theseproducts and we expect this to be positive for bothvolumes and margins in 2012 and beyond.

Ghana transforming and has probably the mostinteresting consumer story in SSA…Save for the demographic dividend that makes theNigerian consumer story catchy, Ghana also poses acompelling case in as far as the potential of theconsumer market is concerned. Oil production isbeing ramped up and agricultural output, cocoaproduction in particular, is also looking up. Of notealso is the fact that among its oil exporting peer inthe region, Ghana’s wealth is the one more likely tobe distributed more evenly given its bettergovernance record. As such, we expect Ghana’s oilwealth to produce comparatively more middleincomers than for its peers which will underpingrowth in consumer consumption. GDP per capita isexpected to break the USD 4,000 mark in 2012,making the country a middle income nation.

We envisage marginal upside on the company’s shareprice, as if anything, Unilever shows more signs ofbeing fully valued. Headline ratings still suggest richvaluations especially coming out of strong earningsgrowth in 2011. The business transformation on theother hand provides a strong basis to expect similarperformance in 2012. Our hold call is based on ourview that better buying opportunities are unlikely topresent themselves at a later date and hencemaintaining a position in the shares sounds desirable.Past trading trends of the counter and the fact thatGhana stocks are generally hard to come by dosupport this opinion.

Our DCF valuation model produced a target price ofGHS 8.83 representing 10.4% upside from the currentprice. Hold

Outlook


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Unilever Ghana: RoAE and RoAE

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UNILEVER GHANA- 3YR CAGR COMPARISON

31 DEC (GHS '000) 2007 2008 2009 2010 2011 2012F 2013F 3YR CAGR

Income Statement

Revenue 139,054 165,590 163,863 181,153 240,902 281,700 329,408 13.3%

Gross profit 34,763 49,238 31,792 51,216 77,591 85,187 99,614 16.4%

EBIDTA 19,102 30,408 7,458 29,225 48,263 53,305 62,333 16.6%

PBT 13,167 29,768 2,777 25,683 48,448 48,573 57,394 17.6%

PAT 11,268 26,060 2,527 20,742 39,930 39,228 46,353 15.3%

Balance sheet

Non current assets 51,883 55,049 55,589 46,821 54,283 53,495 54,547 -0.5%

Current assets 43,700 74,425 61,734 92,803 104,041 118,415 141,145 11.8%

Total Assets 95,583 129,474 117,323 139,624 158,324 171,910 195,692 6.9%

Current Liabilities 25,307 47,704 45,859 57,725 72,156 73,043 80,903 14.8%

Non current liabilities 4,424 4,761 2,960 5,268 6,608 6,890 8,141 11.5%

Equity 65,854 77,009 68,505 76,631 79,560 91,977 106,649 1.1%

Equity and Liabilities 95,585 129,474 117,324 139,624 158,324 171,910 195,693 6.9%

Ratios

Shares in issue 62,500 62,500 62,500 62,500 62,500 62,500 62,500

EPS 0.18 0.36 0.03 0.31 0.51 0.53 0.62

DPS 0.11 0.12 0.11 0.21 0.35 0.37 0.43

NAV/Share 1.05 1.23 1.10 1.23 1.27 1.47 1.71

Other Ratios

Revenue growth 19.1% -1.0% 10.6% 33.0% 16.9% 16.9%

Gross margins 25.0% 29.7% 19.4% 28.3% 32.2% 30.2% 30.2%

EBITDA Margins 13.7% 18.4% 4.6% 16.1% 20.0% 18.9% 18.9%

NI Margins 8.9% 17.6% 2.6% 12.9% 16.6% 13.9% 14.1%

Current Ratio 1.7 1.6 1.3 1.6 1.4 1.6 1.7

RoAE 41% 6% 32% 51% 46% 47%

RoAA 26% 3% 18% 27% 24% 25%

45

Dairibord Holdings Limited Still milking good profits… Ever since the Zimbabwean economy moved to a multi-currency regime in 2009, we have consistently insisted investors on the ZSE take advantage of consumer-driven stocks such as Dairibord Holding Limited (DHL). DHL, in our view is one company that has managed to sail through the vagaries of the operating environment in the country and has taken advantage of the use of multi-currencies to make investment decisions and global procurement strategies. Clearly, in line with our prognosis, the growth has been shown by the share price performance as it has gained c90% since dollarisation. We are confident in the management team. We rate

the management at Dairibord as proven given the various initiatives that they have implemented to ensure that milk volumes are improved at national and company level. Currently, management is carrying out several strategies through its Milk Supply and Development Unit (MSDU) to boost milk supply. This involves heifer importation schemes and the resuscitation of dairy co-operatives and extension services to farmers. Other measures aimed at improving company efficiencies have revolved around the use of generators and boreholes to mitigate against the erratic utilities supply and brand building so as to fight of competition from imports.

Fundamentals to continue improving. The group is

targeting volume growth of 20%, revenue growth of at least 23% and a further improvement in the operating profit margin to 12% in FY 2012. In terms of valuation, the stock remains cheap relative to its SSA peers. Based on a DCF and comparative valuation approach, we have derived a target price of USD 0.25, implying 47.3% upside potential. BUY

EQUITY RESEARCH

ZIMBABWE

MARCH 2012

FMCG SECTOR

STRENGTHS WEAKNESSESQuasi monopoly with strong brands. Milk is a basic good and price sensitive.

Value added products Capacity utilisation levels still low at c40.0%.Regional presence(i.e. Malawi) Limited control on milk supply from farmers.Strong management team with a solid track record.Defensive product lines (mainly food items).Innovative in terms of new product developmentstrategies e.g NutriplusOPPORTUNITIES THREATSRegional expansion in new markets that have high Cheap imports from SA pose some competitive threatsper capita consumption levels. Prolonged time to recovery.Recovery of domestic milk consumption levels. Exchange rate risk in Malawi and fuel shortages.

Growing domestic milk volumes and the back of High stock-feed prices on farms and related shocks sucha recovery in dairy farming in the country. as disease outbreaks.

BLOOMBERG: DZL:ZH BUYCurrent price (USc) 17.0

Target price (USc) 25.0 Upside/Downside (%) 47.3%12 month High/Low (USc) 30.0; 17.0Liquidity Market Cap (USDm) 58.2 Shares (m) 343.1 Free float 32%Ave Monthly value traded (USD'000) 40Ave Monthly volume (000) 283.9 Share price performance

6 Months (%) 23 -26%Relative change (%)* -23%12 Months (%) 21 -19%Relative change (%)* -6%*Relative to MSCI IndexFinancials (USD'000) - FY 31 Dec 2011 2012F 2013FRevenues 95,983 118,059 139,310 EBITDA 13,356 16,641 21,778 Attributable earnings 7,074 9,549 12,985 EPS (USc) 2.04 2.75 3.74 DPS (USc) 0.45 0.61 0.82 NAV/Share (USc) 13.45 14.67 16.53 RATIOSRoAE 18.3% 21.4% 26.2%RoAA 11.9% 14.0% 17.0%Gross Margins (%) 32.0% 32.0% 33.0%EBITDA Margins (%) 13.9% 14.1% 15.6%Net Margins (%) 7.4% 8.1% 9.3%VALUATION RATIOSPBV (x) 1.3 1.2 1.0 PER (x) 8.3 6.2 4.5 Dividend Yield (%) 2.6% 3.6% 4.9%Dividend payout ratio (%) 22.0% 22.0% 22.0%

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INDUSTRIAL INDEX DZL:ZH

DZL:ZH vs ZSE Industrial Index (Rebased)

46

Some attention-grabbing financial results. Dairibord reported an impressive set of FY 2011 results as revenue grew 28% to USD 96.0m, in line with management guidance. The growth was largely driven by a 20% growth in volumes, higher realised average prices and an improvement in the proportion of high value added products in the sales mix. An improvement in margins at the operating level. We note that the company’s OP margin improved from 10.4% in FY 2010 to 11.3% despite the increase in costs relating to fuel, utilities and labour. We ascribe this to management’s deliberate effort of managing costs and improving efficiencies across the group. PBT grew slower than operating profit. While operating profit increased 39%, PBT was up 22.2% largely due to an increase in finance costs from USD 0.29m in FY 2010 to USD 0.37m. In addition, there was a loss of USD 0.5m relating to its associate, Charhons, which is largely suffering from undercapitalisation. Management has however indicated that it is currently working on disposing of its stake in the loss making unit. A reward through dividends. Overall, PBT went up 22% to USD 9.9m although a higher tax charge led to a lower increase of 14% in PAT to USD 7.2m. EPS was up 11% from the prior period due to the effect of exercised share options. The group declared a final dividend of US 44c, indicating a dividend cover of 4.5x. Balance sheet looking healthy. We note that total assets grew 19.0% y-o-y to USD 64.5m given the investment in PPE over the years. Furthermore, trade and other receivables grew by 64% and inventory levels increased 19% as the group increased stocks to support improving activity. The group has also disclosed a sum of USD 0.61m as “assets classified as held for sale” relating to Mulanje Peak Foods in Malawi (a 100% packaging subsidiary of Dairibord Malawi Limited). Management has also indicated that the board has decided to divest out of the business given the chronic raw materials shortages that the unit continues to suffer. Gearing levels remain manageable. We note that the group’s net gearing ratio was well contained as it declined from 10% in FY 2010 to 8.0%, giving management more room to sweat the company’s assets. Total borrowings for the year increased 6.0% from USD 5.4m in FY 2010 to USD 5.7m (USD 1.4m long term loans and USD 4.3m short term loans). The average cost of borrowings currently sits at 10.6% p.a. Management highlighted that the group managed to arrange a USD 4.0m, 5-year, 11.0% p.a. loan facility from PTA Bank. Liquid milks and foods remain the cash cows. The liquid milks division registered 26% volume growth while the Foods division volumes increase by 19%. In terms of revenue contribution, liquid milks constituted 36.0% whilst foods contributed 31.0%.

Income Statement (USD 000) FY 2010 FY 2011 % ΔRevenue 74,982 95,983 28.0%

Operating profit 7,800 10,846 39.0%Profit before tax 8,154 9,967 22.2%Attributable Profit 6,142 7,074 15.2%HEPS (USc) 1.8 2.0 11.9%Balance Sheet (USD 000) FY 2010 FY 2011 % ΔTotal Assets 54,224 64,525 19%NAV 36,002 43,574 21%Current assets 18,541 26,113 41%Current liabilities 13,553 15,279 13%Current ratio 1.4 1.7

Cashflow (US$) FY 2010 FY 2011 % ΔC/f from operating activities 2,575 5,444 111%C/f from investing activities (3,326) (5,969) 79%Cf from financing activities 1,406 1,069 -24%Closing cash and cash equiv 1,678 2,256 34%

Shareholder Structure % ShareholdingBarclays Zimbabwe Nominees P/L - NNR 15.9%

Serrapin Investments (Pvt) Ltd 15.4%Old Mutual Life Assurance Company 15.2%Stanbic Nominees (Pvt) Ltd 6.1%Fed Nominees P/L 4.9%Source: IAS/Company Reports

Beverages, 32.0%

Foods, 31.0%

Liquid Milks, 36.0%

Logistics, 1.0%

Revenue Contribution by Portfolio

Source: Company Reports

DZPL, 54.0%

Lyons, 37.0%

DML, 8.0% NFB, 1.0%

Revenue Contribution by SBU

Source: Company Reports


Operations and FY 2011 Review FY 2011 Financials Summary

Dairibord Holdings Limited (DHL) is a ZSE-listed producer and marketer of dairy, food and beverage products. The company has over 50 brands and owns 100% of Dairibord Zimbabwe Limited (DZPL), Martindale Trading Limited (t/a Lyons) and NFB Logistics. The company also has a 68.4% stake in Dairibord Malawi Limited. The company has factories in Zimbabwe and Malawi and is majority owned by local funds and individuals.

47

Operating environment in Malawi remains exigent. It is important to note that while Dairibord Malawi Limited commands c60% market share, the market is relatively small with demand levels estimated at about 0.5m litres/month. Dairibord Malawi currently contributes about 8.0% to group revenues. Management has also indicated that the operating environment has been adversely affected by the incessant foreign currency shortages. In addition, low levels of disposable income have also had adverse effects on demand. As a strategy however, the unit will be increasing exports to Zimbabwe, Zambia, Tanzania and Mozambique so as to offset the effect of foreign currency shortages. Strategies geared towards improve raw milk supply from dairy farmers. We highlight that Dairibord’s main bottleneck has been the limited raw milk supply in the country. From highs of over 60m litres of raw milk intake in 2005, the intake declined to a low of around 26.0m litres. However, there has been a gradual increase in the trend. The group is therefore carrying out several strategies to try and boost milk supply including a heifer importation scheme, resuscitation of dairy co-operatives and extension services to farmers. We consider these initiatives instrumental in growing milk supply levels. Demand levels outstripping supply. A key highlight during the company’s FY 2011 financials presentation was that there is a milk supply shortage in the country given that current supply stands at 4.5m litres a month against an estimated demand of 7.5m litres a month. As a result, this has created room for imports, largely from neighbouring countries such as South Africa. Nonetheless, management remains confident on the brand loyalty that it has built. We also note that milk consumption per capita remains at a low of 8.0 litres against a peak of 25.0 litres and 56 litres for countries such as South Africa. We would therefore expect notable improvements as the economy continues to recover allied with the re-emergence of the middle income class in the country.

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Dairibord Holdings: Financial Analysis

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Dairibord Holdings: EPS & DPS

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Dairibord Holdings: Return Measures

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Capex projects to remain a key feature. Management has indicated a capex budget of USD 10.0m has been set for FY 2012. This will largely be directed towards increasing production capacity for value added lines, enhancing distribution capacity and efficiencies, investing in cold chain facilities and milk supply development. Management targets double digit growth in FY 2012. The group is targeting volume growth of 20%, revenue growth of at least 23% and a further improvement in the operating profit margin to 12%. Furthermore, management also expects the group’s raw milk intake to grow by 6.0% on the back of various initiatives. The group will however continue to import milk powders to compliment local raw milk supply. Valuation and Recommendation On a comparative valuation matrix that includes peers such as Fan Milk Ghana and Nestle Nigeria, Dairibord looks cheap at a PER (Hist.) of 8.3x. Forward ratings (PER of 6.2x) are also undemanding relative to its peers (SSA PER average of 16.0x). Dairibord, in our view has continued to reinvigorate itself as a growth stock, through multiple investment projects earmarked at building capacity. Based on a DCF and comparative valuation approach, we have derived a target price of USD 0.25, implying 47.3% upside potential. BUY

48

DAIRIBORD HOLDINGS- 2 YEAR CAGR COMPARISON

31 DEC (USD'000) 2009 2010 2011 2012F 2013F 2yr CAGR Balance SheetNon current Assets 32,770 34,530 37,170 40,311 45,949 6.5%Current Assets 12,464 19,694 25,750 31,580 35,184 43.7%Total Assets 45,233 54,224 64,525 71,891 81,133 19.4%Equity

Shareholders Funds 28,965 34,819 42,652 46,528 52,434 21.3%Non Current liabilities 4,132 5,379 5,729 5,454 4,989 17.7%Current Liabilities 6,647 8,495 10,955 15,374 18,519 28.4%Total Liabilities 10,779 13,874 16,685 20,827 23,508 24.4%Total Equity & Liabilities 45,233 54,224 64,525 71,891 79,032 19.4%Income StatementRevenue 43,425 75,187 95,983 118,059 139,310 48.7%Cost of Sales (29,531) (51,299) (65,268) (80,280) (93,338) 48.7%Gross Profit 13,894 23,888 30,715 37,779 45,972 48.7%Total operating costs (9,255) (16,109) (19,869) (23,959) (27,410) 46.5%

Operating profit 4,638 7,779 10,846 13,820 18,562 52.9%EBITDA 6,387 10,895 13,356 16,641 21,778 44.6%Finance costs (436) (404) (366) (518) (474) -8.3%Net Profit before tax 4,010 8,017 9,854 13,302 18,088 56.8%Tax (915) (1,876) (2,780) (3,753) (5,103) 74.4%Net Profit after tax 3,096 6,142 7,074 9,549 12,985 51.2%Minorities (25) - - - - Attributable earnings 3,121 6,142 7,074 9,549 12,985 50.6%RatiosEPS (USc) 0.88 1.77 2.04 2.75 3.74 4.31DPS (USc) 0.00 0.00 0.45 0.61 0.82 0.95NAV/Share (USc) 9.13 10.98 13.45 14.67 16.53 18.35Dividend Cover (x) 4.54 4.54 4.54 4.54Dividend Yield 2.6% 3.5% 4.7% 5.4%Growth RatiosSales growth 73.1% 27.7% 23.0% 18.0%EBITDA growth 70.6% 22.6% 24.6% 30.9%OP growth 67.7% 39.4% 27.4% 34.3%PBT growth 99.9% 22.9% 35.0% 36.0%PAT growth 98.4% 15.2% 35.0% 36.0%MarginsGross margin 32.0% 31.8% 32.0% 32.0% 33.0%EBITDA margin 14.7% 14.5% 13.9% 14.1% 15.6%OP margin 10.7% 10.3% 11.3% 11.7% 13.3%PBT margin 9.2% 10.7% 10.3% 11.3% 13.0%PAT margin 7.1% 8.2% 7.4% 8.1% 9.3%Effective tax rate 22.8% 23.4% 28.2% 28.2% 28.2%

49

Sustained volume growth, increased efficiencies and tight working capital management continue to drive profitability. Cash generation remains strong, providing capacity for growth, through organic expansion, acquisitions, adding new brands and entering new markets. In our view, the sectors in which the group is invested are recovering and currently exuding growth rates in excess of that of the economy. Innscor’s fundamental strength is that it is the perfect blend of defensive and complementary businesses. Additionally, the stabilised Zimbabwean business environment provides an opportunity for the group to unbundle and unlock value to shareholders, longer-term. � Strong cash generation Due to its orientation towards FMCGs, Innscor’s business is generally not capital intensive. As a result, cash generation is strong and return on assets and capital employed high. EBITDA / OCF conversion is above 100%, implying capex can be funded from operating cash flow, which will enable Innscor to increase its dividend payout ratio over time. � Earnings leverage from franchise system Fast Foods and retail outlets operate as franchise units, although the majority are owned by Innscor. Earnings leveraged on a strong franchise system can provide significant earnings momentum as franchise income outstrips the fixed nature of the franchise support system. � Valuation attractive In our view, Innscor’s valuation is attractive considering the impressive growth prospects and defensive nature of the earnings. Innscor’s earnings per share growth rate can improve substantially when the economic environment fully recovers, making the counter an excellent early economic recovery cycle

candidate. We maintain our recommendation. BUY

EQUITY RESEARCH

ZIMBABWE

MARCH 2012

FMCG

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INDUSTRIAL INDEX INAF:ZH

Innscor vs ZSE Industrial Index (Rebased)

BLOOMBERG: INAF:ZH BUY


Target price (USD) 0.92

Upside/Downside 61.1

12 month High/Low (USD) 0.70; 0.53

Liquidity


Shares (m) 541

Free Float (%) 34.4

Ave daily volume (m) 195.7


6 months (%) (6.5)


12 months (0.1)



Financials (USD m) - FY 30 June 2010 2011F 2012F

Revenues 516.1 637.4 777.7

EBITDA 47.7 77.5 101.9

Attributable earnings 26.1 38.6 52.1

EPS (USD) 4.8 7.1 9.6

DPS (USD) 1.2 2.4 3.2

NAV/Share (USD) 18.8 24.2 31.3

RATIOS

RoAE 15.06 15.06 15.06

RoAA 8.83 8.83 8.83

Gross Margins (%) 35.8 35.8 35.8

EBITDA Margins (%) 9.23 9.23 9.23

Net Margins (%) 5.1 6.1 6.7

VALUATION RATIOS

PBV (x) 3.4 2.6 2.0

PER (x) 13.3 9.0 6.6

EV/EBITDA 11.4 7.0 5.3




Uncorrelated portfolio of Strong competitive

defensive businesses environment

Strong brands Conglomerate feel

Vertical integration

Geographical diversification


Continued regional growth Cheap imports from SA

Franchise expansion Prolonged time to recovery

Growth in disposable incomes

Stronger retail presence with

Spar franchise

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Innscor is a Zimbabwe-based diversified company engaged in the provision of fast foods services, the production and selling of biological assets (protein, starch and other dry groceries) and the manufacture and selling of household commodities. Business lines comprise retail; milling and manufacturing; distribution and wholesale; regional fast foods, and export sectors. Its brands include Baker's Inn, RedSeal, Chicken Inn, Pizza Inn, Colcom and National Foods among others. Innscor operates in a number of countries in SSA, among them Zambia, Malawi, Kenya, Ghana and Senegal, Nigeria and Kenya.

Innscor reported a robust set of financials showing attributable earnings of USD 22.5m, up 59.3% y-o-y for EPS of 4.2 US cents a share. The attributable earnings were just shy of FY 2011 reported earnings of USD 26.1m. The strong performance was anchored by strong volume growth, increased efficiencies and tight working capital management. EBITDA margins expanded 181bps to 12.0% resulting in EBITDA growing faster than turnover. PBT was enhanced by a USD 5.1m profit on the disposal of National Foods shares as Innscor reduced its stake to 37.8% through a disposal to Tiger Brands. Bakeries & Fast Foods division comprises the Group’s Bakery operations which are based in Zimbabwe as well as all the Fast Food operations across the African continent. Volumes for bakeries accelerated by 60% y-o-y on improved capacity and efficiencies. Installed capacity increased to 400,000 loaves a day after the commissioning of a 3rd line in Harare and the upgrade of the Bulawayo plant. Capacity is expected to increase to 500,000 loaves per day in September 2012 after the installation of a 3rd line in Bulawayo. Fast Foods customer counts for Zimbabwe increased by 8% y-o-y. An additional 11 new counters were opened in Zimbabwe. Regional customer counts grew by 13%. In additional 32 regional counters are expected to open by December 2012. The SPAR division consists of the SPAR Corporate Store retail operations in Zimbabwe, the SPAR Distribution Centre in Harare and the SPAR Corporate Store retail operations in Zambia. Zimbabwe Corporate Stores reported a 24% growth in revenue and a small trading profit of USD 0.3m. The unit posted a PBT loss of USD 1.4m due to high interest and depreciation charges. Further rationalisation of the store network to focus on larger stores is likely. SPAR Distribution Centre supported 40 SPAR member stores, 2 SPAR Express Stores, 10 SaveMor branded stores and 2 TOPS bottle stores. Zambia Corporate stores recorded a 12% increase in revenue on a same store basis. However, profitability declined on lower margins and new store reopening costs. The unit operated 6 corporate stores and 5 franchised outlets.

The protein division consists of Colcom Holdings Limited and the Group’s associate investment in Irvine’s Zimbabwe (Pvt) Ltd. The former maintained its strong cash generation trait underpinned by volume growth of 20% and modest growth in both revenue and profitability. Irvine’s, on the other hand, posted volume growth of 32%, 21% and 10% for chicken, day old chicks and table eggs, respectively. Focus is on improving production, factory and distribution efficiencies.


Operations and FY 11 Review 9M 11 Financials Summary

Income Statement (USD' 000) H1 2011 H1 2012 % change

Turnover 255,554 319,510 25.0%

EBITDA 25,996 38,278 47.2%

Net finance income (1,136) (1,771) 55.9%

Share of associates 3,437 3,373 -1.9%

PBT 23,369 34,495 47.6%

Attributable earnings 14,109 22,480 59.3%

EPS (USc) 2.6 4.2 59.0%

EPS (USc) -excluding Natfoods disposal 2.6 3.2 23.8%

Balance Sheet (USD' 000) FY 2011 H1 2012

Total Assets 246,102 285,214 15.9%

NAV 101,725 120,939 18.9%

Current Assets 107,296 134,597 25.4%

Current Liabilities 111,074 120,923 8.9%

Current ratio 0.97 1.11 15.2%

Cash flow (USD' 000) H1 2011 H1 2012

Operating activities 21,812 21,134 -3.1%

Investing activities (24,985) (5,750) -77.0%

Financing activities 3,882 (9,737) n/a

Innscor top 10 shareholdersShareholder Vol. (m) %

1 ZMD Investments P/L 101.8 18.8%

2 H M Barbour P/L 100.2 18.5%

3 Old Mutual Group 34.7 6.4%

4 Sarcor Investments P/L 22.5 4.1%

5 Fed Nominees P/L 19.7 3.6%

6 Pharaoh Limited NNR 17.0 3.1%

7 Muzika Rubi Holdings P/L 11.3 2.1%

8 Schutex Investments P/L 10.0 1.8%

9 City & General Holdings P/L 9.8 1.8%

10 Barclays Zimbabwe Nominees 9.2 1.7%

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Distribution Group Africa operates in Zimbabwe, Zambia and Malawi. It houses a number of leading brands such as Colgate, Kellogg’s, Johnson & Johnson and Tiger Brands. Volumes grew by 19% y-o-y for the Zimbabwe business. GP margins were squeezed although costs were well contained resulting in improved profitability. Volumes increased by 19% for the regional business (Zambia and Malawi). National Foods is separately listed on the ZSE and is Zimbabwe’s biggest food item producer. It runs wheat and maize milling plants and packs a wide array of dry groceries. Tiger Brands of South Africa and Innscor jointly own the controlling stake in the company. For H1 12, volumes grew 18% y-o-y to 194,000 metric tones. Efficiencies continue to improve on better procurement, line automation and enhanced logistics. TV Sales & Home is a credit retailer specialising in home appliances and decor. It is wholly owned by Innscor. For H1 12, exceptional results were reported as units sold increased by 45% y-o-y. The debtors’ book increased to over USD 9.0m at the end of H1 12. Capri manufactures and imports branded white goods for sale locally and in the region. Volumes for H1 12 grew 64% y-o-y on improved manufacturing quality and an increased range of products and finishes. New lines included microwaves, washing machines and driers. There are plans in place to install a new fridge plant followed by a new freezer plant. Other associates include Shearwater, an adventure activity company of good repute in the southern Africa region and Natpak which manufactures packaging material. The former contributed positively to group earnings, while the latter posted a small loss.

The group continues to focus on managing costs and driving volume growth. Innscor’s cash generation remains impressive and it should continue to generate substantial free cash flow, which creates financial flexibility (for dividends, acquisitions, stock repurchase, among other applications). Although its fortunes are aligned to the Zimbabwe economy at large, the sectors in which the group is invested are recovering and are currently growing in excess of growth of the overall economy. We expect per share earnings growth rate to improve substantially when the economic environment recovers fully, making it an excellent early economic recovery cycle candidate. Further, its fundamental strength lies in its perfectly blended defensive and complementary businesses. In our view, Innscor’s valuation is attractive considering the impressive growth prospects and defensive nature of the earnings. BUY


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INNSCOR - 5 YEAR CGR COMPARISON

30 JUNE (USD m) 2008 2009 2010 2011 2012F 2013F 3YR CAGR

Income Statement

Turnover 228.3 254.8 403.5 516.1 637.4 777.7 31.2%

Gross profit 138.6 87.6 138.0 184.6 228.0 278.2 10.0%

EBIT 112.7 8.1 22.5 38.7 65.4 86.8 -30.0%

PBT 189.7 9.7 26.6 41.3 65.0 87.7 -39.8%

PAT 152.7 10.9 21.6 32.7 48.4 65.4 -40.2%

Attributable Income 55.4 9.1 15.8 26.1 38.6 52.1 -22.2%

Balance sheet

Non current assets 85.5 90.9 89.4 134.6 173.9 212.9 16.3%

Current assets 59.9 91.9 123.2 111.5 134.9 161.8 23.0%

Total Assets 145.4 182.8 212.6 246.1 308.8 374.8 19.2%

Non current liabilities 3.3 13.9 15.2 39.6 46.9 42.1 130.0%

Current Liabilities 22.0 43.7 60.3 73.0 91.1 111.5 49.3%

Equity 120.2 125.2 137.2 133.4 170.8 221.1 3.6%

Total Liabilities and equity 145.4 182.8 212.6 246.1 308.8 374.8 19.2%

Ratios

Weighted shares 541.3 541.3 541.3 541.3

EPS (USc) 10.2 1.7 2.9 4.8 7.1 9.6

DPS (USc) - - 0.8 1.2 2.4 3.2

NAV per share (USc) 17.8 18.7 21.0 18.8 24.2 31.3

Other Ratios

Sales growth 37.1% 11.6% 58.3% 27.9% 23.5% 22.0%

Gross margin 60.7% 34.4% 34.2% 35.8% 35.8% 35.8%

EBITDA margin 50.0% 5.4% 7.2% 9.2% 12.2% 13.1%

NI Margin 24.3% 3.6% 3.9% 5.1% 6.1% 6.7%

Current Ratio 2.7 2.1 2.0 1.5 1.5 1.5

RoAA 5.5% 8.0% 11.4% 13.9% 15.3%

RoAE 7.4% 12.1% 19.3% 25.4% 26.6%

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Capital Securities Botswana Ground Floor, Exchange House Block 6, Plot 64511 Fairgrounds, Gaborone, Botswana Tel: + 267 318 8886 Cell: + 267 7 132 1421 + 267 7 162 4390

Imara Africa Securities (A division of Imara SP Reid) Imara House, Block 3, 257 Oxford Road, Illovo, Johannesburg, 2146 South Africa Direct line: +27 11 550 6223 Mobile: +27 82 468 8126 Tel: +27 11 550 6200 Fax: +27 11 550 6295 Imara Securities Angola SCVM Limitada Rua Rainha Ginga 74, 13th Floor, Luanda, Angola Tel: +244 222 372 029 /36 Fax: +244 222 332 340

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Imara S P Reid (Pty) Ltd Imara House, Block 3, 257 Oxford Road, Illovo, Johannesburg, 2146 South Africa Tel: +27 11 550 6200 Fax: +27 11 550 6295 Member of the JSE Securities Exchange

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Stockbrokers Zambia Ltd 2nd Floor (Wing), Stock Exchange Building Central Park Corner Church/Cairo Roads P O Box 38956 Lusaka Zambia Tel: +260 211232455 Fax: +260 211224055 Member of the Zambia Stock Exchange

This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara S.P. Reid (Pty) Ltd, (“Imara”) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including their respective associated companies (together “Group Companies”), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. © Imara Africa Securities (A division of Imara SP Reid)

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