Agusto Industry Outlook - H2 2012

IndustryOutlook IndustryOutlook IndustryOutlook
Agusto & Co.

RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT
Outlook on 20 industries
in Nigeria
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cialisinginnancialinstitutions,corporateandmunicipalbond
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mationforourvariousclients.
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dustriesintheNigerianeconomy,makinguseofourresearch
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signeachindustryariskrating,takingintocognisanceNi
geriasriskprole.Wegatherinformationaboutthemarketsize
andpotentialofanindustry,itskeyplayers,competitors,
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Thereportprovidesareviewof20industriesinNigeria.How
everthereportdoesnotclaimtohavealltheinformationrelat
ingtotheseindustries.Theopinionsexpressedinthisreportdo
notrepresentinvestmentorotheradviceandshouldtherefore
notbeconstruedassuch.
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Table of Contents
TheBusinessEnvironment 6
Insurance 14
Construction 20
FlourMilling 27
Oil&GasUpstream 32
MortgageBanking 36
Telecommunications 40
Media 45
Advertising 50
Aviation 54
PersonalCare 59
Breweries 63
PrivateEducation 66
Entertainment 70
Wheat 75
FoodandBeverages 80
Cement 84
AssetManagement 88
Oil&GasServicing 93
Sugar 96
BuildingMaterials 99

6
EurozoneCrisesanditsContagionEect
For the most part of 2012, the global
economyhasbeendominatedbyevents
in the Eurozone area. The crippling
sovereign debt crisis that began in
Greece has spread to other European
countries, including Italy, Portugal and
Spain. These countries have become re
cipients of bailout funds from the Euro
pean Central Bank and other multilat
eral nancial agencies after agreeing to
tight austerity measures. In response,
globalcreditagencieshavedowngraded
sovereign ratings of major European
economies from the much coveted
AAA rating. The International Mone
tary Fund (IMF) has revised the Real
GDP growth in the Euro zone from an
annual rate of about 1.4% in 2011 to
0.3% in 2012 with France, Italy and
Spainexpectedtoleadthecontractionin
growth. The Bank of England has pre
dicted zero percent growth for the Brit
ish economy in 2012. The contagion
eect of the crisis has also impacted
emerging economies, particularly those
dependent on trade with Europe and
the United States China, India and
Brazil. China itself is experiencing its
own economic challenges in 2012. Re
duced exports and rising ination have
The Business Environment Stable Outlook
China itself experi-
enced its own eco-
nomic challenges in
2012.
TheBusinessEnvironment
7
beenobstaclestotheChineseeconomys
usual double digitgrowth. China has
alsobeenaccusedbytradingpartnersof
deliberately undervaluing its currency
in a bid to stimulate demand. Despite
this move, Chinas industrial output
growth slowed to 9.2% in July 2012, the
lowest since May 2009; economic
growthinQ32012hasbeenpredictedto
remain sluggish. Nevertheless, the Chi
neseeconomyisexpectedtogrowatan
averageof8%in2012.
Nigerian Economy Stronger Than
Predicted
Amidst the subdued global economic
performance, the Nigerian economy
continues to grow at a relatively steady
pace.GDPgrowthintherstquarterof
2012isestimatedat6.2%bytheNation
al Bureau of Statistics (NBS). This was
strongerthantheforecastedgrowthrate
of5.3%,indicatingtheeconomyismore
resilient than originally anticipated.
However, when compared to the corre
sponding quarter of 2011, this repre
sents a decline by 96 basis points. The
downwardpressureongrowthhasbeen
atributed to the nationwide industrial
action following the partial removal of
the petrol subsidy and weaker consum
er demand following the higher price
levels across major segments of the
economy. The NBS has estimated GDP
growthforQ22012tobe6.56%.
RealGDPGrowthRate(Q12011Q12012)
Source:NationalBureauofStatistics
Activities in the nonoil sector remain
the catalyst for growth in the Nigerian
economy. According to the NBS, real
growth in this sector averaged 7.93% in
Q12012.Gainswerelargelyrecordedin
the telecommunications (32.83%), build
ing & construction (13.25%) and solid
minerals (11.69%) industries. However,
overallgrowthinthenonoilsectorwas
lower than the 8.73% recorded in Q1
2011onthebackofreducedagricultural
output, which slowed moderately to
4.15% compared with 5.54% in the cor
responding period of 2011. This
dropped further to 4.08%, due to sus
tained security challenges which aect
ed a large part of the farming popula
tioninthenorthernpartsofthecountry
duringtheperiod.
WhatNextforTheOilSector?
Despitemeasuresbythefederalgovern
ment to improve crude oil supply, pro
duction continues to be hampered by
incidentsofbunkering,sabotageofpro
ductionfacilitiesandgeneralsafetycon
8
cerns in the Niger Delta region. Crude
oil production declined during Q1 2012
to 2.35 million barrels per day (mbpd),
compared to 2.51mbpd in Q1 2011. Alt
hough the decline was oset by the rise
in average Bonny light crude oil prices
(which peaked in Q1 2012 at $129 per
barrel),oilGDPgrowthslowedtoaneg
ative 2.32% for Q1 2012 (2011:0.06%).
Nevertheless, crude oil continues to
play a prominent role in the Nigerian
economy, accounting for 15.8% of the
nations GDP in Q1 2012 (Q1 2011:
17.18%).
Agusto&Co.estimatesanaveragepro
ductionof2.4mbpdfortheyear2012.In
our view, this will be supported by the
coming onstream of the Usan eld op
erated by Total E&P Nigeria. Also con
tributingtothisforecastarevariouspro
jects from Mobil Producing Nigeria, as
wellasTotalE&P,whichareexpectedto
startupin2012/2013.Moreimportantly,
the government remains commited to
the peace process in the Niger Delta re
gion,whichwebelievewillhelpsustain
production.
LowBudgetImplementation
TheimpactofsanctionsagainstIranand
crisis in Syria on the global oil market
has been moderated by the resumption
of oil production in Libya. Global oil
prices, which had risen steadily in the
rst three months of 2012, declined to a
low US$93.98 per barrel in June 2012.
OilpricesareexpectedtoreboundinQ3
2012, having risen above the important
US$100 mark in August 2012. More im
portantly, prices have remained above
the indicative benchmark of $72 set for
the 2012 national budget. However, the
likelihood of full budget implementa
tion remains slim, as the Federal Gov
ernment (FG) had achieved only 12.6%
utilizationasatJuly2012.
GDPOutlook
The International Monetary Fund (IMF)
has forecast that GDP growth in Nigeria
will slow moderately to 7.1% in 2012,
with the major downside risks being fur
ther deterioration in the global environ
ment,anupsurgeinviolenceinthecoun
trysnorthernregionandweakaggregate
domestic demand due to elevated prices
across major segments of the economy.
Nevertheless, our outlook for GDP in
2012 remains positive, given the recovery
in crude oil production and facilities. In
January2012,ShellsBongadeeposhore
oil block and EA eld (which were shut
down in Q4 2011 due to leakages and
maintenance purposes) resumed produc
tion. Though bunkering and other opera
tional challenges have persisted in the
NigerDeltaregion,weareoptimisticthat
thegovernmentshouldachievethecrude
oilproductiontargetof2.48mbpd.
MonetaryPolicy
In the rst half of 2012, broad money
supply (M2) grew at a sluggish pace of
9
1.35%, reecting an annualized growth
rate of 2.7%. This rate was signicantly
lowerthanthe10.8%achievedonayear
onyearbasis.
Credit to the private sector remained
stied by borrowings from state and
federalgovernments.Publicsectorlend
inggrewby14.2%intheH12012,com
pared to a lacklustre 3.6% growth in
lending to the private sector over the
same period. In August 2012, J. P. Mor
gan announced that with eect from 1
October 2012, Federal Government of
Nigeria(FGN)bondswillbeincludedin
oneofthermswidelyusedbondindi
ces The Government Bond Index
Emerging Markets (GBIEM). The rm
selectedthreeNigerianbondissueswith
tenorsof2,7,and10yearsforinclusion
in the Index. The inclusion of FGN
bonds in the Index could potentially
atract more foreign investors, which
could result in increased foreign ex
change inow into Nigeria and should
have positive implications for the value
oftheNairaandexternalreserves.Other
benets include diversication of the
Governments funding sources, as well
asreductionintheriskofcrowdingout
the private sector. Furthermore, the
DMO forecasts that bid rates at FGN
bond auctions could be reduced, thus
reducing the Governments borrowing
costs.
To reect tightening liquidity in the
bankingsystem,ratesinallsegmentsof
the money market trended upward be
tween May and July 2012. The average
maximumlendingrateintheretailmar
ketremainedunchangedatahigh23.4%
in June, while deposit rates dropped by
1basispointto3.82%.
Citingtheneedtoreduceliquidityinthe
banking system and to minimize the
upward movement in rates, the Mone
tary Policy Commitee (MPC) retained
the Monetary Policy Rate (MPR) at 12%
with an interest rate corridor of +/ 200
basispointsinJuly2012.TheMPCalso
increased the Cash Reserve Require
ment (CRR) from 8% to 12% with eect
fromJuly25thandreducedtheNetfor
eign exchange Open Position (NOP) to
1% from 3%. In all, we expect money
market rates to remain high as ination
gures remain in doubledigit territory
and pressure remains on the domestic
currency.
RisingInation
Inationary pressures, which had re
duced slightly towards the end of Q4
2011, resurfaced in 2012. Following the
partial removal of petrol/premium mo
torspirit(PMS)subsidyinJanuary2012,
headline ination rose to 12.8% in July
2012 from a low of 11.9% in February.
AccordingtotheNBS,themajordrivers
of headline ination during the period
10
were food and nonalcoholic beverages,
housing,water,electricity,gasandother
fuels. Although ination gures have
risen in 2012, it appears the expected
eectsofthepartialremovaloffuelsub
sidy,increaseinelectricitytariandthe
introduction of new taris on popular
food imports such as rice and wheat on
generalpriceshavebeenminimal.
Nevertheless, we view the 9.5% budget
ination target in 2012 as unrealistic
despite the tight monetary policy of the
CBNandtheslowdowninGDPgrowth.
We expect ination rate to remain ele
vated in 2012, given the eects of gov
ernment spending and the countrys
continued dependence on importation
particularlyoffoodproducts.Therefore,
weatachanegativeoutlooktoination
intheshortterm.
RisingUnemployment
Due to an embargo on employment in
many public and private sector institu
tions, the national unemployment rate
increased to 23.9% in December 2011
from 21.1% in 2010. Contributing to the
growth in unemployment was sta ra
tionalisation in the banking industry, as
banks sought to streamline sta costs
following mergers and substantial in
vestments in technology ahead of the
implementation of the cashlite initia
tive. Over 6,000 employees in the bank
ing industry were disengaged in 2011,
coupledwithanadditional(estimateof)
4,200inthersthalfof2012.
RisingDebtLevels
In response to the domestic equity mar
ket crisis, regulatory authorities have
intensied eorts to deepen the debt
market. While more municipal bonds
have been issued, the industrial corpo
rateandnancialinstitutionsdebtmar
ketsremainlargelyinactive,withonlya
handful of companies issuing bonds.
Thirdquartergainsintheequitymarket
in 2012 has raised the prospects of mild
recovery, with the average market capi
talisation increasing by 12%. However,
thesustainabilityofthisgainremainsto
be seen, given the propensity for prot
taking by investors. Overall, we expect
nancing conditions to remain subdued
in the short term due to the absence of
investorcondence.
The emphasis on domestic borrowing
by municipal authorities could result in
a crowding out eect in the debt mar
ket over the medium term. In addition
to the proposed Federal Government
domestic borrowing to nance the
budget, states such as Osun and Rivers
have also indicated plans to approach
the new issues market to raise funds in
2012.
11
FGNLocalCurrencyDebt( billion)
Source: Debt Management Oce (DMO), AMCON and Agusto & Co.
estimates
Exchange Rate Stability or Potential
Devaluation?
The domestic currency has remained
under pressure in 2012, partly due to
high demand for importation, specula
tive trading and an outow of invest
ments as a result of the debt crisis in
Europe. Although the currency rallied
to 155.84/US$ in the rst quarter of
2012 on the interbank market, excess
demand for the dollar led to a further
slump in June 2012 as portfolio funds
rapidly left the country. On 8 August
2012, the naira exchanged at 160.10/
US$, compared with 158.6 in June
2012.TheWholesaleDutchAuctionSys
tem (WDAS) exchange rate hovered be
tween154.8/US$and155.9/US$inQ2
2012.
Withthevolatilityintheinterbankmar
ket, the Central Bank of Nigeria (CBN)
had to intervene to restore stability,
which led to a depletion of external re
serves. To stem this erosion, the CBN
embarked on several initiatives, which
included limiting the rates bureau de
changes could buy foreign exchange, as
wellascarryoutaforensicexamination
of banks demand for foreign exchange.
These initiatives, in addition to in
creased oil receipts, culminated in Ni
gerias external reserves peaking at
$37.02billioninmidMay2012.Asat31
August 2012, gross external reserves
stoodat$38.85billion.Thistranslatesto
animportcoverofmorethan5months,
higher than the internationally recom
mendedbenchmarkof3months.
Webelievethatthestabilityofthenaira
exchange rate is contingent on the out
look for global oil prices, as well as the
Governments ability to reduce the na
tionsdependenceonimportation.
ImportCover(Months)
Source:CBNandNBS
12
Federal Government Revenue & Ex
penditure
In2012,thefederallycollectiblerevenue
is projected at 9.406 trillion. Based on
the $72 per barrel oil price benchmark,
crude oil production of 2.48mbpd and
an exchange rate of 155/US$, the oil &
gas sector is expected to contribute
about 6.4trillion(or68%ofthefederal
ly collectible revenue). The residual
amount of 2.955 trillion is expected to
be sourced from custom duties, value
added tax, special levies and taxes
(education tax). The Federal Govern
ments share of the total federally col
lectible revenue in 2012 is estimated at
3.644trillion,whileaggregateexpendi
ture for the same period, comprising
capital expenditure (28%); recurrent ex
penditure(52%);statutorytransfer(8%);
and debt service (12%) is estimated at
4.648 trillion. This results in a 1.004
trillion decit, which is to be nanced
through debts of 794 billion; income
fromprivatization, 10billion;signature
bonuses, 75 billion; and withdrawal
from the Excess Crude Account, 225
billion.
Despite plans to incur additional debt as
contained in the 2012 budget, the FG has
indicated that it will continue to tow a
cautious path in managing the countrys
debt. As at yearend 2011, Nigerias ratio
of nominal debt to GDP, at 17.5%, was
below the internationally recommended
threshold of 40%. We forecast that the
added borrowing planned for 2012
should not increase the debt/GDP ratio
beyond 21%. However, when we factor
theeectsofFGNcontingents,essentially
AMCON guaranteed bonds, this ratio
increases to 29% which is still within ac
ceptableboundaries.
GovernmentsBudgetRevenueandExpenditure
Source: Budget Oce of the Federation 20112013 MTEF, 20122015
MTEFand2012Budgetproposal
FederalGov
ernmentsRev
enueandEx
penditurePro
le
2012 2011 2010
(
Trillion)
(
Trillion)
(
Trillion)
RevenueAvail
ablefortheFG
Budget
3.644 3.348 3.179
Capitalex
penditure
1.284 1.146 1.764
Recurrent(non
debt)expendi
ture
2.432 2.425 2.669
Statutorytrans
fers
0.373 0.417 0.183
Debtservice 0.559 0.495 0.542
Aggregateex
penditure
4.648 4.484 5.159
Fiscaldecit 1.004 1.136 1.979
Decit/GDP 2.77% 2.96% 6.06%
13
FGNDebtasaPercentageofGDP
Source:DMOandAgusto&Co.estimates
Outlook
The2012budgetdecitof 1trillion(or
2.98% of GDP) is within the 3% thresh
oldstipulatedbytheFiscalResponsibil
ity Act of 2007. Furthermore, nonoil
revenue performance is expected to re
main stable in 2012, following recent
eortstorestructuretherevenuecollect
ing agencies and the implementation of
initiatives to improve nonoil sectors.
Although the heightened security chal
lenges in the northern part of the coun
try continues to cripple social and eco
nomicactivitiesintheregion,weexpect
national economic growth to remain
stable. In addition, we believe interest
rates will experience occasional volatili
ties in 2012 which could hinder lending
to the real sector. Nevertheless, we con
sider the outlook for the Nigerian econ
omytobestable.
14
The Nigerian insurance industry in
2012 has witnessed new additives to its
landscape, such as the implementation
of the International Financial Reporting
Standards (IFRS), adoption of technolo
gy to ght fraud, and the illfated Dana
air crash. Coupled with the divestment
from insurance subsidiaries by deposit
money banks, consolidation within the
industry also adds another element to
industryoperations.TheNigerianinsur
anceindustryiscomposedof58licensed
insurance companies (14 Life, 30 Non
life,12Compositeand2Reinsurers).Itis
also supported by 706 licensed brokers,
60 loss adjusters, 2 actuary rms and
1,668 insurance agents. Each support
group belongs to an umbrella associa
tion, and it is also subject to the princi
ples of its representative groups. In ad
dition, every support branch of the in
dustryissubjecttothenationalregulato
rybodiesnotablytheNationalInsurance
Commission (NAICOM), the Nigerian
Insurers Association (NIA), Chartered
Insurance Institute of Nigeria (CIIN),
and the Nigerian Council of Registered
InsuranceBrokers(NCRIB).
In 2010, the insurance industry generat
ed an estimated gross premium of 200
billion, which translated to 0.6% of the
national GDP. In addition to the low
level ofinsurance penetration, theNige
rian insurance industry faces competi
tionfromforeigninvestorswhohavethe
capacity to deal with largeticket trans
Insurance Stable Outlook==
The insurance in-
dustry generated an
estimated gross
premium of 200
billion
Insurance
InsuranceIndustryAnswersPublicCallforAccountabilitywithInnovation
15
actions. Despite the huge Nigerian popu
lation of 168 million people and the vast
resources of the nation, the Nigerian in
surance industry in our opinion has not
been able to fully capitalize on these op
portunities.
IFRSComplianceTakesCenterStage
Still reeling from the impact of the 2008
US stock market crash on international
markets, the Nigerian insurance indus
try is currently in transition from the
existing accounting standard known as
StatementofAccountingStandard(SAS)
toanewsetofstandardscalledInterna
tional Financial Reporting Standard
(IFRS). The mandatory adoption and
implementation of IFRS requirements
by all listed public interest entities in
Nigeria by 31 December 2012 as a way
to standardize nancial reporting and
transparency may present a challenge
fortheindustry.
It is expected that four key areas in the
insurance industry will be impacted by
this transition to IFRS, notably nancial
reporting processes & outputs, disclo
sures, business metrics and sta train
ing/certication.
Financial reporting processes & out
puts: Due to the highly qualitative re
portingnatureofIFRS,thesizeofnan
cialstatementsforinsurerswillincrease.
Disclosures: The disclosure require
ments by insurers will increase signi
cantly to ensure compliance with IFRS
standards. Nigerian insurance compa
nieswouldneedtoprovidereaderswith
exhaustive explanatory notes for nan
cial adjustments in their nancial state
ments.
Business metrics: Insurance companies
willneedtoensurethatcurrentprocess
esusedincollectingandstoringdataare
IFRScompliant.
Sta training/certication: The transi
tion to IFRS by the Nigerian insurance
industrywillresultintheneedforbeter
qualied and knowledgeable insurance
personnel.
Inouropinion,thetransitionfromSAS
to IFRS may prove challenging for the
Nigerian insurance industry. For in
stance,IFRSrequirementsforinsurance
contracts (IFRS 4), allows insurance
companies to maintain existing insur
ance policy contracts if the minimum
amount of insurance liability is ade
quateafterbeingsubjectedtotheliabil
ity adequacy test. It also requires ex
tensive disclosures particularly around
the nature and extent of risks arising
from insurance contracts. This addi
The transition
from SAS to IFRS
may prove chal-
lenging for the Ni-
gerian insurance
industry.
Insurance
tional requirement to insurance con
tracts has several implications for man
agement. Management will need to re
consider its current business practices
and risk mitigation strategies. Opera
tionalcostsareboundtoincreaseasthe
industry strives to develop and main
tain IFRS compliant information tech
nology infrastructure. In addition, we
expect sta costs to rise as the industry
atractsandretainsIFRSsavvysta.The
IFRS requirements for disclosures and
insurance contracts (IFRS 4) may have
future legal ramications if insurance
companies do not carry out due dili
gence.
Taking into account the costs of transi
tion and the need for relevant infra
structure to ensure IFRS compliance, it
is debatable if the Nigerian insurance
industry will be able to meet the 31 De
cember2012deadlinefortotalIFRScon
version.Asat31July2012,onlyahand
ful of insurance companies had pub
lishedQ12012resultsinIFRScompliant
standards.
IndustryPerformanceandFledging
PublicPerception
The general public still maintains the per
ception that insurance companies for the
most part are dishonest and always look
ing for opportunities to deny claims on
underwriten policies at the slightest ex
cuse.Thispoorpublicperceptionhasbeen
further heightened by the recent and un
fortunate Dana Air crash at IjuIshaga
(Lagos) on Sunday, June 3, 2012. The ill
fated crash saw theloss of153 passengers
and crew members on board plus 10 peo
ple on ground. Investigations of the inci
dent revealed that the crashed Dana air
craft was not properly insured. It is al
leged that the local lead insurer had re
mitedonly70%ofthepremiumduetoits
foreign reinsurer but did not remit the
30% premium due to its local coinsurers.
Theselocalcoinsurersarehoweverunder
pressure to pay claims to the Dana air
crash victims family members as the for
eignreinsurerhasagreedtopayadequate
compensation to the families of the crash
16
The crashed Dana
aircraft was not
properly insured.
Insurance
victims. In addition to the issue of pre
mium remitance, Dana Airlines alleg
edly had not paid o its full premium
and at the time of the incident, it had
just paid the second out of a four part
installmentagreement.
We expect that the legal ramications
and risks associated with the Dana Air
crashwillbeongoingforboththeNige
rian Aviation and Insurance industries.
The outcome of the insurance claims
setlement may go a long way in either
improvingorfurtherdamagingthepub
lics perception of the insurance indus
try. This incident brought to light the
challenges the industry still faces in
maintaining a professional mode of
business operation in line with the
NAICOM Insurance Act 2003 regulation
ofNopremiumNoCoveroninsurance
contracts. We expect that the adoption
and implementation of International
Financial Reporting Standard (IFRS) by
the insurance industry will promote
transparency in business conduct and
improvecustomerperception.
In addition to a change in current busi
ness practices, wealso expect that the ill
fated Dana air crash will have a twofold
futureimplicationfortheNigerianinsur
anceindustry.Ononeend,Airlinepremi
umsareboundtoincrease,whichwillbe
good for the insurance industry botom
line. On the other hand, stricter industry
guidelinesmaydevelopandcouldleadto
an increased nancial burden on an al
ready challenged industry. Finally, the
incident also highlights the incapacity of
local insurers to undertake large ticket
transactions.Thedownturninthecapital
marketsthreeyearsagoledtoanerosion
of capital in the Nigerian insurance in
dustry. This has required insurance com
paniestoraiseadditionalcapitalandasat
31 January 2012, the industrys under
writingcapacityhadimproved.However
westillbelievethatspecialrisksbusiness
es especially big ticket transactions will
demandstrongercapitalization.
Technologyvs.InsuranceFraud
In the last six months, the industry has
widelyembracedtechnologyasameans
to improve eciency and ght fraudu
lentpractices.AccordingtotheNational
Insurance Association (NIA), over 70%
of vehicles on Nigerian roads carry fake
motor insurance certicates purchased
fromtheblackmarket.Theblackmarket
thrivesnanciallyfromthisillegaltrans
action because they sell vehicle owners
17
..over 70% of vehi-
cles on Nigerian
roads carry fake
motor insurance
certificates ..
Insurance
these worthless documents at a low
price. Meanwhile, genuine insurance
companies experienceleakages in motor
insurance premiums that aect their
overall revenue base. To combat this
illegal practice in motor insurance,
NAICOMincollaborationwithNIAcre
ated the Nigerian Insurance Industry
Database(NIID)projectin2011.TheNI
ID project supports the production of
traceableandveriableinsurancecerti
cates(initiallyforMotorandMarinefol
lowed by other insurance classes) at the
point of issuance thereby eradicating
fake insurance policies & claims, facili
tate recovery of stolen vehicles and en
hance accountability within the insur
ance industry. As at March 2012, the
NigerianInsuranceIndustryDatabaseis
fully operational. Motor vehicle owners
can now verify the authenticity of their
policies within 30 seconds by emailing
or sending a text message (SMS) to NI
ID.
In our opinion, this move towards a
greater reliance on technology by the in
dustry will prove benecial both to the
industry and the general insurance con
sumer. The general insurance consumer
may be more assured of the authenticity
of their insurance documents which in
turn will improve the insurance indus
trys public image and botom line in the
long run. However, this is dependent on
thestrictcompliancebythepublictopur
chase genuine insurance policies and cer
ticates coupled with increased public
awareness campaigns to inform the pub
lic about this innovative database pro
gram.
FutureGrowthOpportunities
The signing into law of the Nigerian Oil
and Gas Industry Content Development
Bill 2009 (the Local Content Policy or
Nigerian Content Act) by President
(Dr.)GoodluckJonathanon22April2010
ushered in a great opportunity for the
Nigerianoilandgasindustry.Intherst
quarter of 2012, the National Bureau of
Statistics (NBS) posited that the Nigerian
oil and gas industry accounted for 15.8%
of the national GDP. The Oil and Gas In
dustry Content Development Bill 2009
soughttosignicantlyincreasethecontri
bution of Nigerian companies in the oil
and gas industry. Companies with high
Nigerian Content and the requisite in
dustry competence were given special
considerationwhenbiddingforcontracts.
TheimplicationsofthispolicyfortheNi
gerianinsuranceindustryarevast.
18
..vehicle owners
can now verify the
authenticity of their
policies within 30
seconds ...
..NAICOM an-
nounced plans to
create a Nigerian
Oil and Gas insur-
ance pool ...
Insurance
Inordertocapitalizeonthisopportunity,on30January2012,NAICOMannounced
planstocreateaNigerianOilandGasinsurancepoolwithaninitialrevenuecapaci
ty of $20 million. Insurance companies willing to participate in the insurance pool
mustsubscribewithaminimumof$250,000perlinewith50%paidupcapital.The
pool will be supervised by a technical commitee with credible and internationally
respected managers. NAICOM hopes that the establishment of this insurance pool
willincreaselocalunderwritersstakeintheoilandgasindustry,whoseriskshave
traditionally been absorbed by foreign insurers and reinsurers who are beter
equippedtohandletheenormousriskslinkedtothisdollardenominatedindustry.
WebelievethattheNigerianinsuranceindustryisoneladenwithnumerousoppor
tunities for growth. With the huge Nigerian population of 168 million persons, the
industryhasthecapacitytobecomeoneofthebiggestintheAfricanmarkets.How
everduetohighoperatingcosts,limitedqualiedinsurancepersonnel,andapoor
publicperception&imagebasedonpastperformance,theindustrywillcontinueto
facechallengesintakingfulladvantageofthispotentialmarket.Insuranceregulato
rybodieslikeNAICOMandNIAhavetakengreatstepstoensurethattheinsurance
industry overcomes the various hurdles it faces. Regardless, the future and conse
quent protability of the Nigerian insurance industry will continue to hinge upon
willfulcompliancebyinsuranceoperatorsandconsumerstoitsinnovativeregulato
ryreforms.
19 Insurance
Like other emerging economies, the in
crease in construction activities in Nige
ria has been largely driven by economic
expansion. Other contributing factors
include a growing population and ur
banizationofmajorcitiesinthecountry.
Annual growth projections in the con
structionsectorareputataconservative
15%17%per annum from 2010 to 2020,
which should make the industry in Ni
geria amongst the fastest growing con
struction markets in the world during
this period. From Agusto & Co esti
mates,theindustrysgrowthrateactual
lyaveraged25%between2004and2008.
Despite such remarkable growth, the
industrystillaccountsforlessthan2%of
the countrys GDP. If the potentials are
harnessed eectively, it is our view that
thiscouldincreaseto4%by2020.
The potential exists in both infrastruc
ture and building construction, which
are the mainstay of the Nigerian con
struction industry though the Oil &
Gassectoralsoaccountsforasignicant
portion of industry revenue. The provi
sionofinfrastructureinNigeriaisama
jor issue for both the federal and state
governments. Nigerias Infrastructural
decit is estimated at $200billion. This
decitislargelyasaresultofinadequate
funding for infrastructure projects, the
mismanagement of public funds allocat
20
Construction Stable Outlook
Nigerias Infra-
structural deficit
was estimated at
$200billion.
Construction
FromPublictoPrivateHands
ed for infrastructure and the poor su
pervision of infrastructure projects
awarded to contractors across the
country. Budgetary allocations are also
a major challenge facing the industry
as allocated funds are insucient to
meetthevision2020desiredinfrastruc
turelevel.
Giventhesechallengesandtheneedto
keepinlinewithinternationalstandard
practice,theFederalandStateGovern
ments have embraced private sector
participation in the provision and
maintenance of infrastructure. For in
stance, in 2009 the LagosIbadan Ex
pressway was concessioned to Messrs
BiCourtneyfor 89.5bn,overa25year
period. Other notable concessioning
include the Murtala Muhammed Air
port (MMA2) Airport concession be
tween the Federal Airports Authority
of Nigeria (FAAN) and BiCourtney
Limited and the 30year concession of
theLekkiEpeExpresswaybetweenthe
Lagos State Government and Lekki
ConcessionCompany.
In addition to encouraging private sec
tor participation, another trend is the
grantingofmajorcontractstoemerging
companies other than the traditional
large construction companies. This has
resulted in emerging companies play
ingamoresignicantroleintheindus
try. The Nigerian Senate in January
2012, barred the Federal Government
from awarding contracts to Julius Ber
gerPlcandothermultinationalsdueto
theirfailuretotakepartingovernment
concession programmes. Julius Berger
Plc,amajorindustryplayer,lostinthe
bid of the lot 2 of Mile 2 to Orile road
construction project to China Civil En
gineering Construction Company
(CCECC), which was previously
awarded the $500 million Abuja light
railprojectin2011.
RoadConstructionSlowlygoing
Somewhere?
Despite the huge annual budgetary
allocations for road construction and
maintenance, Nigerian roads are still
notattheirbeststate.Majorchalleng
es faced by regulators and players
include supervision and funding of
road projects. These challengeshave
inthepastresultedinmanyroadpro
jects being abandoned and a few oth
ers exceeding the designated comple
21
The Nigerian Sen-
ate in January 2012,
barred the Federal
Government from
awarding contracts
to Julius Berger ..
Construction
tion date. For instance, the BeninOreSagamu road has been a priority project for the
federalgovernmentforoveradecade.Morerecently,improvementshavebeenrecorded
onthisroutethoughataslowpace.Otherlargeroadprojectsarestillongoingwhilea
fewothersarenearcompletionstage.Sofar,progresshasbeenrecordedintheconstruc
tion of Federal roads in Nigeria relative to previous administration. These improve
ments are driven by the commitment of the Federal Ministry of Works to enhance the
conditionsoffederalroadsinthecountry.
Aspartofmeasurestoincreaseprivatesectorparticipationintheindustryaswellasto
enhance its regulatory functions, the Federal Ministry of Works upgraded the Quality
ControlandPublicPrivatePartnershipunitsintofulledgeddepartments.Theministry
alsocreatedthedepartmentofmaterials,geotechnicsandqualitycontroltoensurequal
ityconstructionmaterialsareusedbycontractors.
MajorFederalGovernmentRoadProjects
Source:FederalMinistryofWorks
22
S/N Projecttitle ConstructionCompanies Status
1 ApapaOshodidualcarriageway JuliusBerger Ongoing
BorinoProno
2 BeninOreSagamudualcarriageway ReynoldsConstruction
Company
Ongoing
BorinoProno&Company
NigeriaLimited
3 AbujaAbajiLokojadualcarriageway ReynoldsConstruction
Company
Expectedtobecompleted
by
October2014 Dantata&SawoeCon
structionCompany
BulletinConstruction
CompanyLimited
GitoConstruzioniGener
alliLimited
4 KanoMaiduguridualcarriageway SetracoNigeriaLimited Expectedtobecompleted
byDecember2014
MothercatLimited
CGCNigeriaLimited
CCECCNigeriaLimited
Dantata&SawoeCon
structionCompanyLim
ited
5 OnitshaEnuguRoad CCCNigeriaLimited Expectedtobecompleted
byDecember2013
NigercatConstruction
Limited
6 IbadanIlorinroad RCCNigeriaLimited Completedsections
The Benin-Ore-
Sagamu road has
been a priority pro-
ject for the federal
government since
the last decade..
Construction
State governments through their minis
try of works are also actively involved
in the construction of roads and bridg
es.Potholesandotherroadhazardsare
a major concern for motorist in various
states. In Lagos and a few other states,
the government has identied the need
to involve the private sector to resolve
the aforementioned challenges facing
roadconstructionandmaintenance.
In Lagos State, construction of new
roads and bridges is important to the
transformation of the state into a mega
city to join the likes of New York City,
SaoPauloandMexicoCity.Inlinewith
its10pointAgendawhichincludecon
struction of new roads and aggressive
rehabilitation of major state roads, the
Lagos State Government in 2008 estab
lished the Lagos State PublicPrivate
Partnershiptoaccelerateinfrastructural
developmentinthestate.Itispertinent
to note that since the formation of the
LSPPP, private sector participation in
theindustryhasincreased.Thishasled
totheconcessionofmanyinfrastructur
al projects, one of which is the 30year
LekkiEpe expressway concession
agreement between the Lagos State
Government and Lekki Construction
Company. The success of this project is
expected to initiate other planned con
cessionprojectsbystategovernments.
Another major road construction pro
ject in Lagos State is the LekkiIkoyi
cable bridge, awarded to Julius Berger
in March2009and expected to be com
pletedbytheendof2012.Thebridge,if
completed, will be an alternative route
that should ease trac ow and con
nect two major locationswithin the La
gosmetropolis.
RailConstruction
In order to ensure interconnectedness
ofmajorcitiesacrossthecountryandto
aid the movement of people and goods
from one place to another, the govern
ment, in the past few years has begun
the construction of rail ways through
PPPs.OneofsuchprojectsistheLagos
lightrailmasstransitsystem.Someup
coming railway projects include the
Abuja Light rail project and the Abuja
Kaduna rail projects, both awarded to
China Civil Engineering Construction
Company.Othermajorprojectsinclude
LagostoJebbarailprojectandNigerian
Easternrailrehabilitationproject,which
was awarded to two foreign rms
23
The government,
in the past few
years has begun the
construction of rail
ways through PPPs
Construction
namely China Gezhouba Group Corpo
ration (CGGC), Esser Contracting &
Industry Limited and a Nigerian rm,
LingoNigeriaLimitedamongothers.
BuildingConstruction:NotExpectedto
Return to Previous Highs in the Near
Term
Residentialconstructionactivitiesusual
ly outpace construction for commercial
propertiesinNigeria.Withanestimated
population of 168 million, Nigerias
housingdecitisglaring,particularlyin
theurbancentres.TheFederalMortgage
Bank of Nigeria estimates the housing
decit at 16 million housing units, re
quiring over 56 trillion to nance at a
conservative 3.5 million per unit. This
means that, Nigeria needs to produce
about 800,000 housing units annually
for the next 20 years, in order to close
her housing gap. Data from the Federal
Housing Authority (FHA) shows that it
only built 30,000 housing units between
1973 and 2006. It is therefore obvious
that there is a critical housing condition
in Nigeria. This puts into perspective
the demand for construction and the
potentialfortheindustry.
Inordertoaddressthehousingshortages
in the country, the Nigerian government
through the Ministry of Lands, Housing
and Urban development has embarked
on a number of joint ventures with pri
vateinstitutions,oneofwhichistheLug
be Social/Aordable housing scheme
facilitated by the primary mortgage insti
tution.TheministryalsodevelopedaNa
tional Housing Policy (NHP), aimed at
ensuring that Nigerians have access to
decent, safe and sanitary housing, with
aordable infrastructural services. The
NHPisyettobereviewedbytheFederal
ExecutiveCouncil.However,theministry
has called for the participation of private
sector in providing aordable housing
estatesforthepopulace.
Despite governments eorts to increase
the housing stock, most of the construc
tion activities that fuelled eorts in this
marketspacehasbeenfromprivateinitia
tives individuals and developers with
funding from banks. This has declined
considerably since 2010 and the outlook
remainssubduedforthissegment.Devel
opers are increasingly nding it dicult
toatractfavorablefunding.Thoughthere
are some pockets of private demand for
construction activities, in our view, the
increase in construction activities will
mostlikelyrideonthebackofinfrastruc
turedevelopment.
24 Construction
NumberofHousingConstructionProjectsinNigeria
Source:FederalMinistryofLands,HousingandUrbanDevelopment
Both the federal and state governments have acknowledgedthat budgetary
allocationsareinsucienttofundtheinfrastructuralprojectsinthecountry.
Given that capital expenditure is insucient to address Nigerias infrastruc
tureneedsintheshorttomediumterm,itisthereforeexpectedthatconces
sions and PPPs will be the vehicle through which infrastructural develop
ment will thrive. The growing opportunities in construction activities in the
last couple of years have stimulated the entry of both local and foreign con
structioncompaniesinvarioussubsegmentsoftheindustry,especiallyresi
dential building and infrastructure. Given the nature of the PPP arrange
ments,thelargeforeignconstructioncompaniesshouldcontinuetodominate
theindustry.
Weexpectthatintheshortterm,thegrowthinconstructionactivitiesinNi
geria will remain higher than the projected global growth in the region of
15%.WebelievethattheindustryscontributiontotheNationsGDPwillnot
exceed 2% in the short term, which remains quite low when compared to
someotherAfricanCountriessuchasSouthAfrica,EgyptandGhana.
25
S/N Establishment Complet
edHous
ingUnits
Ongoing
Housing
Units
Total
Number
ofhous
ingUnits
Expectednum
berofbene
ciaries
1 MinistryofLands,
HousingandUrban
Development
28 294 322 1932
2 FederalHousingAu
thority
1,425 1,678 3,103 18,618
3 FederalMortgage
BankofNigeria
(FMBN):

EstateDevelopers
Loan(EDL)
420 4,735 5,155 30,930
PrimaryMortgage
Institutions(NHF
Mortgages)
214 214 1,284
4 PublicPrivatePartner
ship(PPP)
17,267 17,267 103,602
Total 1,873 24,188 26,061 156,366

Construction
Weanticipatearisingmarketshareamongtheemergingplayersparticularly
the China Civil Engineering Construction Company (CCECC), which has
recently been awarded many huge infrastructure projects from the Nigerian
government due to its capacity, its increasing contribution to local employ
ment as well as the refusal of other large players to partake in government
concessionprograms.
26 Construction
The Flour Milling industry in Nigeria is
an integral part of the countrys food
supply chain. The Industry produces
our for domestic consumption and ex
port to other West African countries
though records show export sales have
been low in the past three years. The
Flour Milling industry is estimated to
have generated turnover of 310 billion
in2011,up6%fromtheprioryear.Sales
growth slowed to a single digit from a
double digit, partly due to strike actions
at the Lagos sea port, which stied im
port activities in the fourth quarter of
2011. Besides, millers grappled with in
creasedsecuritythreatsandwheatcosts,
which slowed inventory buildup in the
year. Notwithstanding, industry sales
continue to benet from the countrys
largepopulationandtheincreasingpref
erenceforlowcoststaplemeals,suchas
bread,pastaandnoodles.
Approximately, 80% of our is used for
bread production, while the remaining
20%isusedforotherconveniencemeals
such as biscuits, cakes, pasta, noodles,
and semolina. Industry salesand output
have continued to grow in tandem with
demand for our based products, while
its customer base and marketing focus
haschanged.Therehasbeenashiftfrom
household users to industrial users such
as commercial bakers, fastfood restau
rants, pasta and noodles manufacturing
companies, among others. Based on the
forgoing,weforecasttheIndustryturno
ver at 340 billion in 2012, representing
a10%growthovertheprioryear
The Industry is an oligopolistic market,
dominatedby4keyplayersFlourMills
27
Flour Milling Stable Outlook
FlourMilling
We forecast the
Industry turnover at
340 billion in
2012.
IncreasingInputPrices
of Nigeria (FMN) Plc, Dangote Flour Mills (DFM) Plc, Honeywell Flour Mills (HFM) Plc
andCrownFlourMillsNigeria(CFMN)Ltdwhichjointlyaccountfor85%oftheIndus
try production volumes. Three of these key players FMN and CFMN have adopted a
groupmillingstructureviaacquisitionofmoribundmillingcompaniesandalsoincorpo
ratedpastaandnoodlesmanufacturingsubsidiaries.Theremaining14millingcompanies
are regionalplayers, which primarily engage in millingactivitiesandaccount for 15% of
theIndustrysproductionvolumesand32%oftotalinstalledcapacity.
FlourMillingIndustryPlayers
Source:IndustryPlayers
ND* Not disclosed

IncreasingCapacity&DominanceinWestAfrica
Over the last ve years, industry operators have continued to invest signicantly in ex
pansionofmillingcapacityinordertomeettheteemingdemandfromconsumers.Olam
international, the latest industry entrant, invested $107.6 million in Crown Flour Mills in
2010, and intends to invest additional $50 million, which should boost its capacity from
28 FlourMilling
Milling
Groups
Millingcompanies Capacity(MTpd)Othermembersofthegroup
FlourMillsof
Nigeria(FMN)
FlourMillsofNigeria(FMN)Plc 6,000 GoldenPastaCompanyLtd.
NigerianEagleFlourMills 1,700 GoldenNoodlesCompanyLtd.
NorthernNigeriaFlourMills(NNFM) 1,200 PremierFeedMillsCompanyLtd.
NigerMillsCompanyLtd.(NMCL) 750
MaiduguriFlourMillsLtd. 450
CrownFlour
Mills(CFM)
Group
CrownFlourMillsNigeriaLtd. 1,630
Mix&BakeFlourMillsLtd.
InterstateFlourMillsLtd. 1,300
Chagoury
GroupofCom
panies
PortHarcourtFlourMills 650
IdealFlourMills 850
NigeriaEagleFlourMill 850
NigerDeltaFlourMills 400
OtherGroups
Honeywell
Group
HoneywellFlourMillsPlc 2,610 HoneywellSuperneFoodsLtd.
DangoteGroup DangoteFlourPlc 5,000 DangoteNoodlesLtd.
DangotePastaLtd.
BUAGroup BUAFlourMillsLtd. 500 BUAPastaLtd.
StandardFlour
MillsLtd.
StandardFlourMillsLtd. ND
BendelFeeds&
FlourMillsLtd.
BendelFeeds&FlourMillsLtd. 300
LifeFlourMills
Ltd.
LifeFlourMillsLtd. ND
the current 1,630 metric tonnes per
day(mtpd)to2,380mtpd.FlourMill
of Nigeria (FMN), Dangote Flour
Mill (DFM) and Honeywell Flour
Mill (HFM) are in various levels of
completingadditionalcapacityof495
kilotonnes per annum (ktpa), 95
ktpa and 330 ktpa respectively by
2013. In March 2012, DFM commis
sionedtwolinesof250metrictonnes
each and is expected to complete the
remaining six lines by 2013, while
FMN and HFMs additional capacity
are also expected to be launched by
2013.
The Nigerian Flour Milling industry
remains the largest in West Africa in
termsofproductioncapacity,with18
milling companies jointly producing
approximately 6.9 million tonnes of
our per annum. The Industry ranks
faraheadoftheGhanaianourmill
ing industry, which is in the second
position, with 3 mills producing ap
proximately270,000mt.
ExtendedForayintoNoodles&Pasta
Production
Basedonthestrongdemandforcon
venience foods such as noodles and
pasta, major our milling companies
havediversiedintonoodleandpas
ta production. Between 2006 and
2012, ve our milling companies
Honeywell Flour Mills (HFM) Plc,
Dangote Flour Mills (DFM) Ltd,
Crown Flour Mills (CFM) Ltd, Flour
Mills Nigeria (FMN) Plc and BUA
Flour Milling Ltd established noo
dle or (and) pasta subsidiaries. Noo
dles, in particular, has shown strong
sales growth (averaging 22%) over
the last ve years, due to its aorda
bility, taste and ease of preparation.
The Nigerian Noodle market, which
commenced activities in 1996 (with
Dul Prima Foods Plcs introduction
of Indomie Noodles) has grown to
become the 13th largest noodle mar
ket in the world, and is estimated at
over 47 billion in 2012
1
. Though,
these four our milling companies
havecontinuedtoexpandtheirrange
of noodle products, the market re
mains dominated by nonour mill
ing companies such as Dul Prima
Foods Plc and May & Baker Plc
(producer of Mimee noodles). The
Pasta market is considerably bigger
than the Noodles market and is esti
mated at about 55 billion in 2012
1
.
However, this market has shown
slower sales growth (averaging 15%
over the last ve years) compared to
the noodles market. The market is
led by Dangote Pasta Ltd, followed
29 FlourMilling
1. Agusto&Co.Research
byFMN,producerofGoldenpenny.
Import Dependent Nature of the Indus
try
The Industry remains heavily depend
ent on wheat imports, due to poor do
mestic cultivation. The Industry im
ports varieties of wheat from interna
tionalcommoditymarkets,chiefamong
them are the Chicago Board of Trade
(CBOT)andKansasCityBoardofTrade
(KCBT)intheUnitedStatesofAmerica
(US). Given the high demand for bread
in the country, the Hard Red Winter
(HRW), which is used for bread pro
duction, is the most sought by millers,
accounting for 79% of the total wheat
import in the Industry. Other wheat
grains imported are Hard Red Spring
(HRS), Soft Red Winter (SRW), Durum
and White Wheat Hard (WWH) which
areusedforpastries,pastaandbiscuits.
Key industry players (largesized mill
ing companies) import wheat from the
international commodity market and
sell to smaller milling companies.
Wheat import prices are largely driven
by government restrictions in key ex
porting countries, world harvest levels,
and prices of related grains such as
corn. In the rst half of 2012, key play
ers purchased US wheat at $368 per
metric tonne and varieties from other
countries at $288340 per metric tonne.
As with the global industry, Nigerian
millers typically purchase wheat using
futurescontracts.
Volatility in International Wheat Prices
&ImplicationsfortheIndustry
International wheat prices remained
volatileforthemostof2011,duetopro
duction shortfalls occasioned by
drought threats in the United State of
America (USA), Russia, Ukraine; and
extreme rains in the United Kingdom,
France and other key wheat exporting
countries in Western Europe. The up
surge in wheat prices led to increased
cost of operations and a subdued
botom line for most import dependent
our milling industries in Africa, in
cluding Nigeria. We note that cost of
wheat accounts for between 60% and
65% of millers total cost of sales. In
2011, the rise in cost of sales of milling
companies averaged 8% over the prior
year. Overall, gross prot margin
dropped to 15% in 2012 from 18% in
2011. Margins remained subdued in the
rstsixmonthsof2012,asinternational
wheat prices continued on an upward
trend. The global benchmark price of
wheatrosemidJune2012by43%onthe
Chicago Board of Trade, as the worst
U.S. drought in 56 years and extreme
rains in Western Europe slowed global
wheat output, further fueling expecta
tionsofariseinwheatpricesinQ3and
Q4 of 2012. We believe international
30 FlourMilling
wheat prices will remain high in the

second half of 2012, and should fur
ther subdue margins of import de
pendentmillingindustries.
Regulatory Reforms & Implications
fortheIndustry
As part of its initiatives for encour
aging domestic cultivation of wheat
and cassava, the Federal Govern
ment introduced a bill mandating
40% cassava our inclusion in local
lyproducedourin2011,anda15%
levy on wheat grain imports in July
2012, bringing the eective import
duty to 20% from 5%. The upward
review of wheat import levy has in
ducedcostpressuresonmillers,ulti
mately weighing down on margins
in Q3 2012. Although the proposed
bill seeking to mandate 40% cassava
our inclusion in locally produced
our was rejected by the House of
Representatives in May 2012, if rati
ed by the Senate, this should fur
ther drive millers operating costs
upwards. Expenses relating to the
set up and processing costs for the
blending of cassava our, in line
with this policy, will reect in in
creased capital expenditure and op
erating expenses for some players
whoareyettoupgradetheirmilling
techniques. Given the likely impact
ofthedistinctivefeaturesofcassava,
particularlyitshigherwatercontent,
on production process and tech
niques, our millers expect slightly
higher operating costs in the 2012
nancialyear.
Outlook
Industry output and revenue are ex
pected to continue onan upward trend
overthecomingyears,underpinnedby
an increasing population and consum
ers preference for convenience meals.
However,weexpectmarginstoremain
subdued but satisfactory going for
ward,duetotheupwardreviewinim
port tari. In view of the additional
costs induced by the regulatory re
forms, we believe it is pertinent for
milling companies to embark on cost
management initiatives to enhance
botomline. Some milling groups have
substituted diesel plants with gas
plants, which are more cost eective.
While we note that this initiative will
initially raise operating costs, we be
lieve it will provide valuable gains in
eciency in the long term. We expect
investments into the fast growing
downstream segment noodles and
pasta markets to begin to yield good
returns to millers going forward. More
so,weconsiderthemillinggroupstobe
beterplacedforgrowthinthesedown
stream markets, given their access to
cheap our supplies and increasing
product varieties. Therefore, we expect
to see moderate improvements in mil
lers market share of thesedownstream
marketsinthemediumterm.
31 FlourMilling
The Oil & Gas Upstream Industry (the
Industry)isthelifebloodoftheNigeri
an economy. The Industry accounts for
up to 97% of the countrys exports and
80%oftotalgovernmentrevenue
1
.Nige
riahasoneoftheworldsrichestoiland
gas deposits with 37.2 billion barrels of
provenoilreservesand5.2trillionstand
ard cubic metres of proven gas reserves.
TheOilSegmentoftheIndustryhashis
torically atracted more atention from
the International Oil Companies (IOCs),
accounting for more than 90% of the In
dustrys exports with the Gas Segment
accounting for the remainder. The focus
on the more nancially viable crude oil
exports has resulted in near wholesale
neglect of the countrys vast gas poten
tial.
World oil demand has been forecast to
grow between 0.8 and 0.9 mbpd in 2012
bythetwomajorenergywatchdogs:the
International Energy Agency (IEA) and
theOrganisationofPetroleumExporting
Countries(OPEC).Theexpectedincrease
inglobaloildemandispredicatedonthe
International Monetary Funds (IMF)
worldGDPgrowthprojectionof3.4%in
2012.Thegrowthinglobaloildemandis
expected to continue into 2013. Howev
er,thereisadivergenceinexpectationas
OPECforecastsaslowdownto0.8mbpd
while IEA projects acceleration to
32 Oil&GasUpstream
Oil & Gas Upstream Stable Outlook
The growth in
global oil demand
is expected to con-
tinue into 2013
1. CentralBankofNigeria
(CBN)
InvestmentsStalledonthePassageofthePIB
1 mbpd. The gures are based on diver
gent forecasts of global GDP growth in
2013, the IEA/IMF with a buoyant 3.8%
expectation compared to OPECs more
conservative3.3%.
The price of crude oil has remained at
record highs on average in the rst six
monthsof2012withtheOPECreference
basket recording an average price of
$112 per barrel. This was in spite of a
decline for three consecutive months to
June2012,withthepricedippingbelow
$100perbarrelto$94forthersttimein
18 months. The decline was atributable
to the economic diculties in the Euro
zoneaswellasabundantcrudeoilsup
plies. The crude oil price had, however,
recovered to above $100 per barrel by
midJulyfromthelowlevelinJune.The
price of crude oil is expected to remain
above$100onaveragefor2012and2013
based on demand forecasts as well as
IEAs projection that nonOECD oil de
mandwillexceedOECDoildemandfor
thersttimein2013
1
.
The Nigerian Oil & Gas Upstream In
dustry produces on average 2.3 million
barrelsofcrudeoilandcondensatesper
day. Revised production data from the
nationaloilcompany,NigerianNational
Petroleum Corporation (NNPC), esti
mate the Industrys production in the
rst quarter of 2012 at 2.35 million bar
rels per day (mbpd). This gure was
in line with both the average annual
production and prior years production
of 2.37 mbpd but was down from 2.5
mbpd produced in the corresponding
quarter of 2011. The disruptions caused
by the oil leaks at the Bonga Oil Field
and the Nembe Trunk Pipeline meant
the volumes of the rst quarter of 2011
could not be replicated in 2012 during
the Northern hemispheres peak winter
demandperiod.
Weprojectanaverageproductionof2.4
mbpd for the Nigerian Oil & Gas Up
streamIndustryin2012.Thecomingon
streamoftheTotalE&PNigeriaoperat
ed Usan eld and gradual ramping up
to capacity of 0.18 mbpd is expected to
aidtheachievementofthislevelofpro
duction. There are a few other projects
from Mobil Producing Nigeria as well
as Total E&P Nigeria that are expected
to start up during 2012 and 2013. These
projects,listedinthetable,areexpected
to increase the Industrys production
capacitybyarespectableamount.How
ever, we forecast the Industrys average
productiontoonlyincreaseby0.1mbpd
to 2.5 mbpd in 2013 given the projected
growthinworldoildemandofbetween
0.8mbpdand1mbpd.
33
We project an av-
erage production of
2.4 mbpd for the
Nigerian Oil & Gas
Upstream Industry
in 2012
1. OrganisationforEco
nomicCooperationand
Development(OECD)
Oil&GasUpstream
ProjectsStartingUp2012/2013
Source:TotalSAandExxonMobilAnnualReportsandAccounts
The Gas Segment of the Nigerian Oil &
Gas Upstream Industry remains largely
under developed in comparison to the Oil
Segment. Up to 25% of the associated gas
produced during crude oil extraction is
still ared while the large majority of Ni
geriasnonassociatedgaselddiscoveries
remain buried and untapped. Lack of
funding and the absence of an eective
market for gas in the country have fre
quently been mooted as the main reasons
for the underdevelopment of the Gas Seg
ment of the Industry. The Nigerian gov
ernmenthasmadealltherightnoisescon
cerning the development of the countrys
gas potential and bringing an end to ar
ingthroughprogrammessuchastheNige
rian Gas Master Plan but has so far failed
to follow up with decisive action. We do
not expect to see signicant steps taken in
thisregardduring2012/2013.
The Industrys total production is current
lyshared bythe IOCsand Nigerian stake
holdersina40to60percentratioonaver
age. The Nigerian government accounted
for55%ofthetotalfromcrudeoilexports,
crude oil domestic sales, petroleum prot
tax (PPT) and royalties. The other 5% of
the total was accounted by indigenous oil
companies operating independent and
marginal elds. The 40% accruing to IOCs
does not take into cognisance the income
earned by Nigerian employees of these
companiesandbyindigenoussuppliersto
the Oil & Gas Upstream Industry. The
share for Nigerian stakeholders is there
fore potentially larger than presented in
the production analysis here and in the
chartbelow.
IOCsvs.NigeriaShareofCrudeOilProduction
Source:NNPC,CBN&Agusto&Co.estimates
The Petroleum Industry Bill (PIB), which
has been in the pipelines for longer than
mostIndustrystakeholderscaretoremem
34
Field/Operator PeakCapacity
(mbpd)
Usan/TotalE&PNigeria 0.18
OML57/TotalE&PNigeria 0.07
SatelliteFieldDevelopment/
MobilProducingNigeria
0.07
EtimAsasaPressureMainte
nance/MobilProducingNigeria
0.05
Oil&GasUpstream
ber, aims to increase Nigerias share of
total crude oil production. The govern
ments share is to be grown through
highertaxes,theshareofindigenousoil
companies increased by favourable reg
ulationandnallythecountrysshareof
the Industrys expenditure raised
through more stringent local content
requirements. This largely means lower
incomefortheIOCsandithasnotbeen
a surprise that the PIB met a hostile re
ception and faces ongoing resistance
fromthesequarters.The2012versionof
the PIB was tabled before the National
Assembly for consideration in July 2012
butcouldbesomewayfrompassage.
The delay in the passage of the PIB is
havinganegativeimpactonexploration
in the country and thus the long term
future of the Industry. A number of the
IOCs have delayed investments in the
Nigerian Oil & Gas Upstream Industry
in order to reassess decisions in full
knowledge of the provisions of the PIB
once passed. A few of the IOCs have
also been optimising their upstream
asset portfolios ahead of the PIB with
the proposed/completed divestment of
interests in oil mining leases 26, 34, 40,
42,120and121toindigenousoilcompa
nies by the various joint venture part
ners. The PIB is thus already having
some of the desired short term eects
with the local share of total production
set to increase following acquisition of
these leases by indigenous oil compa
nies.
The country still faces signicant security
challenges that are peculiar to the Oil &
GasUpstreamIndustry.Thereisrecurring
theftofcrudeoilfromproductionfacilities
that often involves vandalism, spills and
re.CrudeoiltheftinNigeriaisanopera
tion which is much organised, usually
involving a large number of people as
well as a considerable amount of re
sources such as tankers, vehicles, barges
andlocallymadeboats.Whilenotasram
pant as in the Niger Delta militant era,
there are still frequent kidnappings of oil
workers and contractors by criminal
gangswhichsometimesresultinfatalities.
Security in the Niger Delta is an issue
whichthegovernmentmusttackleswiftly
and with great resolve in order to pre
serve the integrity the countrys major
sourceofincome.
Inouropinion,theoutlookfortheNigeri
an Oil & Gas Upstream Industry in 2012
and2013isstable.
Nigerias housing shortage remains a
35
The country still
faces significant
security challenges
that are peculiar to
the Oil & Gas Up-
stream Industry.
Oil&GasUpstream
keyproblemforthecountry,asthepop
ulation grows. The country has an esti
matedhousingdecitof16millionunits,
with a 56 trillion nancing require
ment. In spite of the housing shortage
and signicant opportunities for mort
gageassetcreation,thetotalassetbaseof
theNigerianmortgagebankingindustry
stood at 357.1 billion as at December
2011
1
, reecting a marginal decline from
the previous year. The industry is con
strained by weak capitalization and in
adequate funding, which continues to
hamper the eectiveness of the sector in
closingthehousinggap.
WhentheCentralBankofNigeria(CBN)
nancial sector wide reforms com
mencedin2009withtheremovalofchief
executives of some of Nigerias largest
banks, there was very litle doubt as to
the need for and timing of those chang
es. What has however emerged in the
mortgage banking space, is the need for
sweeping changes to the underlying
structure of the industry. In 2011, the
CBN instituted wide reaching reforms
geared towards changing the operations
of the mortgage banking segment. The
key objectives of the reforms were un
veiled in an exposure draft guidelines
centered around strengthening the in
dustryandrefocusingprimarymortgage
banks(PMBs)oncoremortgagelending.
The minimum capitalization for PMBs
36 MortgageBanking
Mortgage Banking Stable Outlook
1. CentralBankofNi
geriasAnnualreportas
at31December2011.
ChangingMortgageBankingLandscape
hasbeenincreasedfrom100millionto
5 billion and 2.5 billion, depending
on the geographical coverage. National
PMBsareallowedtohavebranchesinall
parts of the country, while state PMBs
would operate within one state. In par
ticular, state PMBs are expected to pro
mote the spread of mortgage rms
across the six geopolitical zones.Agusto
&Co. is of the view that these reforms
should ultimately lead to increased
mortgagepenetrationinthelongtermif
thePMBsareabletoscalethechallenges
inretailmortgagelendinginNigeria.
The few publicly listed primary mort
gage banks have indicated interest in
raising capital from the Nigerian stock
market, prior to the expiration of the
recapitalization deadline. Nevertheless,
Agusto&Co. is of the view that most of
themortgageinstitutionswilloptforthe
State Mortgage Bank license, given the
lowercapitalizationrequirement.Outof
the100mortgagebanksoperatinginNi
geria, very few have a capital base in
excess of 5 billion. These larger PMBs
are likely to merge with, or beter still,
acquiresomeofthesmallerplayers,thus
leading to a consolidation in the mort
gagebankingspaceinthemediumterm.
CapitalBaseofListedPMBs
Source:CompanysAccounts
*Capitalbaseasat31December2011
** 2010 Audited accounts used in the absence of 2011
accounts. Aso Savings & Loans gures are as at 31
March, the other three PMIs nancial year end is 31
December.
***2009 Audited accounts used in absence of 2010 &
2011accounts.
Whilst the increase in capital base may

not translate to a reduction in Nigerias
housing decit in the near term, by in
creasing the capacity of the PMBs to
grow their risk assets and introducing
additional criteria for lending, it should
steerthemintherightdirection.
37 MortgageBanking
SnapshotofIndustryProspects
1. Industry to benet from regulatory
reformsandpossiblytranslatetolower
systemicrisk.
2. Industrys performance should be
boostedbythegrowingNigerianecono
my.
3. Funding could be supported by a rapid
branch expansion and access to low
costinternationalfunding.
4. Consolidated industry, with a relative
lystrongercapitalbase.
5. The Industry should maintain a low
level of loan losses by 2012 FYE or at
Mortgage
Institutions
CoreCapital Loans&
Advances
AbbeyBuilding
SocietyPlc
5.4Billion 7.2Billion
AsoSavings&
LoansPlc**
3Billion 38.5Billion
ResortSavings&
LoansPlc**
UnionHomes
Savings&Loans
Plc***
Overtheyears,PMBshavelentpredom
inantly to developers who have left
the mortgage industry with a high inci
dence of loan losses in the last four
years. Mortgage institutions are averse
tolendingtoretailindividuals,whoare
typically faced with the housing chal
lenge. Following the new guidelines,
PMBsareexpectedtoreducetheircom
mercialmortgages(whichiswheremost
loans to developers fall) to account for
only50%ofmortgageassets.Inaddition
to this, the licensing of a number of
credit bureaus should improve the dis
seminationofobligorinformationacross
industry players. This presents an op
portunity for PMBs to increase retail
mortgages in the near term. However,
this is dependent on the ability to de
ploy a robust enterprisewide risk man
agementframeworktopreservecapital.
The revised guideline also streamlines
the activities of PMBs to provide mort
gage nance and exclude other related
activities such as the provision of estate
management activities. Nevertheless,
other permissible activities for PMBs
include real estate construction nanc
ing,acceptanceofsavings&timedepos
its and mortgage focused demand de
posits.Giventheemphasisonmortgage
assetcreation,weexpectadeepeningof
the mortgage banking terrain, further
increasing the likelihood of the creation
of a secondary market in the medium
term.
ThetopfourPMBsaccountforthema
jorityofthemarketsmortgageassets.In
the past, deposit money banks were
strong competitors to the PMBs, owing
to beter access to low cost funding.
Nonetheless, following the introduction
ofthenewbankingmodel,theCBNhas
mandatedbankstoeitherdivestfromall
noncorebankingbusinessesortoadopt
a holding company structure as a pre
condition for providing investment
banking,insurance, mortgage and other
suchnoncorebankingservices.Anum
berofcommercialbanksnotadoptinga
holding company structure have exited
the PMB space, further reducing the
numberofPMBs.However,commercial
banks oer mortgages to a number of
their customers. The competitive struc
ture of the Nigerian mortgage banking
industry would see well capitalized
PMBs taking centre stage with a possi
bility of mergers & acquisitions. We ex
pect the toptier PMBs tomaintain their
dominance of the market. Based on the
latest available annual accounts, the
four largest PMBs accounted for 39% of
industrystotalassetand54%ofloans.
38 MortgageBanking
MarketShareofIndustrystotalassets
Source:CBN&CompanysAccounts
MarketShareofIndustrysloanportfolio
Source:CBN&CompanysAccounts
Weforeseeverylitlegrowthinmortgage
assetsby2012yearend,astheapexbank
seeks to increase industry capitalization.
In our opinion, the success of the mort
gage banking reforms will hinge on the
adoptionofanenterprisewideriskman
agementframeworkandstrictadherence
byPMBs.
Whilst many of the primary mortgage
banksareseekingtoraiseadditionalcap
ital,Agusto&Co.isoftheviewthatrais
ing equity is not in itself sucient to
grow business volumes signicantly.
There is need for lowcost long term
debt. Hence, the ability to raise the right
mix of debt and equity will remain criti
cal to the Nigerian mortgage banking
industry. Corporate governance should
also be at the fore of industry players
operations for the Nigerian mortgage
banking industry to develop in line with
itspotential.
39 MortgageBanking
Nottoolongagojustoveradecadeto
be precise Nigeria had less than
400,000connectedlinesservinghervast
population of over 120 million people.
Telecommunicationsstoodatthefringes
ofthecountryseconomicdevelopment,
with this industry providing services
describedeverysooftenasepilepticand
unreliable. Today however, telecommu
nications has become essential in virtu
allyallfacetsofnationalendeavor.This
industry now stands as a pillar of the
Nigerian economy, fostering social rela
tionshipsandenhancingproductivity&
competition in business. Following lib
eralization of the Nigerian Telecoms
Industry (the Industry) in 2001, the
Industry has become one of the fastest
growingintheworld,andisalsooneof
the most protable telecoms sectors in
Africa, atracting huge amounts of for
eign direct investment (FDI) annually.
Reforms in the Industry have also en
genderedpositiveindicesintheformof
increased private sector participation,
employment generation, increased gov
ernment revenue generation and more
aordable call rates. Furthermore, Ni
gerias telecoms subscriber base has
grownsignicantlyinthelastdecade,in
contrast to the stagnation which had
engulfed the Industry before liberaliza
tion. This has been driven largely by a
rapid uptake of voice services, given
pentup demand prior to liberalization
of the Industry. The result has been an
increaseinthecountrysphoneteleden
sity (xed and mobile lines) from a pal
try1telephonelineto145inhabitantsin
2001,tomorethan1lineforevery2per
sonsasatJune2012.
40
Telecoms Positive Outlook
Telecommunications
ASuccessStoryfortheVoiceMarket
Trends in Telecoms subscriber base and
Teledensity(20012012)
Source: Nigerian Communications Commission and Agusto & Co.
Research
Telecoms:StillaGrowthSector?
Inspiteoftheunprecedentedgrowthin
the Telecoms Industry since 2001, data
servicesstilllagconsiderablybehindthe
voiceservicesduetolowsubscriberup
take. Nevertheless, development of in
formationandcommunicationstechnol
ogy(ICT)remainsattheforefrontofthe
Federal Governments intent to place
Nigeria amongst the top 20 economies
in the world by the year 2020 (tagged
Vision20:2020).Toachievethisnational
goal, the Governments policy for the
ICT sector will be targeted at encourag
ing capacity & content development in
keyareasofICT.UndertheVision2020
development plan, the Federal Govern
mentintendstoachieve50%acquisition
of ICT skills among the nations work
forceby2015and100%by2020.Inaddi
tion,theFederalGovernmentintendsto
increasecomputerdensityto1in10,000
by2020(fromalowof1in200,000asat
2009),aswellasintegrateICTintovari
ous aspects of public living. While the
practical implications of the Govern
ments ambition remain unclear, the
implementationofthispolicyissettobe
spearheadedbytheprivatesector,while
theFederalGovernmentwillactasfacil
itator and catalyst for the expected
growth. We believe strategic eorts to
achieve these goals will translate to in
creased usage of data services by Nige
rians, which portends further growth
for the Telecoms Industry. These goals
should also engender the muchdesired
shift in service paterns from the slowly
saturating voice segment to more exi
ble, but undertapped data service mar
ket.
41 Telecommunications
BasedonrecentstatisticsfromtheNige
rian Communications Commission
(NCC), there were 102.4 million active
voice lines in Nigeria at the end ofJune
2012. Applying yeartodate growth
trends, we forecast that this number
could reach 108 million by yearend
2012, with an estimated teledensity of
75%. While this suggests tapering
growth in voice services as teledensity
approaches the 100% mark, we note
positively that our forecasts do not ac
count for users with multiple lines,
which could drastically reduce actual
teledensity to as low as 55%. We also
note the opportunities that abound in
enhanced services. In our view howev
er,thefutureofcommunicationinNige
ria lies in data services, which are con
siderably more exible in terms of the
potential services. Estimates from the
International Telecommunications Un
ion (ITU) suggest that the number of
internetusersinNigeriastoodat48mil
lionattheendofDecember2011,trans
lating to a penetration level of 28.43%.
Again, we are mindful that these statis
ticsmayonlybeindicativeastheactual
number of internet users is more di
cult to ascertain given that a number of
usersaccesstheinternetviapubliccafs,
many of which lack proper records of
customer movement. Nonetheless, we
believethelowlevelofinternetusagein
the country presents opportunities for
numerousbusinessestoengagecustom
ers on the internet through online ad
vertisingandcontentdevelopment.
Akeychallengethatmustbeaddressed
as the data segment deepens is the
countrys currently low level of broad
banduptake.Ofthecountrys48million
internet users, it is estimated that less
than 2 million are broadband subscrib
ers, which is a function of the compara
tively higher cost of broadband relative
todialup.Weareoftheopinionthatan
improvedlevelofinfrastructure,aswell
as new investments in network expan
sion, will be required from both public
and private sector sources, in order to
atain the Federal Governments ICT
policytargets.
Outlook Remains Positive, Driven by
NewInvestmentsinDataandVoice
OurprojectionsindicatethattheNigeri
an Telecoms Industry still has sucient
potentialtogrowatanannualrateofup
to 10% per annum over the next ve
years. This, in our view, will be driven
byadeepeningofthedataservicesmar
ket. Nigeria currently boasts increased
broadband capacity brought about by
the landing of international bre optic
cables such as Main One, Glo 1, SAT3
and the West African Cable System.
These cables, in which investments are
estimatedtoexceed$2billion,currently
provide over 10 terabytes of incountry
brecapacityinNigeria.Webelievethis
increasedcapacityshouldprovidefaster
broadband internet access to businesses
and individuals, whilst also making the
costofbroadbanduptakemoreaorda
bleforretailusers.
Also strengthening our positive outlook
on the Telecoms Industry is the broad
rangeofuntappedserviceswhichcanbe
provided on the data platform. We be
lieve increased data service penetration
should encourage operators to intro
duce a broader range of services, which
potentially will enhance revenues for
the Industry. Nevertheless, our positive
outlook for the Industrys data segment
couldbeconstrainedbythelowtechno
logical awareness and literacy of the
populace,poorservicequality,dearthof
capacity outside the major metropolitan
areas and rising spate of security chal
lengesacrossthecountry.
ConstraintstothePositiveOutlook
Low technological awareness: Historically,
the demand for data services in Nigeria
hasbeenconstrainedbythelowtechno
logical awareness of most members of
the populace. We believe this could re
mainabarriertogrowthinthedataser
vices segment if concerted eorts are
notmadetoincreasethelevelofacquisi
tionofbasicICTskillsinthecountry.
Poor service quality: Poor service quality
remains a perennial problem which has
negatively impacted both the data and
voicesegmentsoftheIndustry.Thishas
beenlinkedtothefastpacedgrowththe
Industry has enjoyed in the last decade,
during which service uptake appears to
have far outstripped network expan
sion.Alsocontributingtothepoorqual
ity of telecoms services is the countrys
infrastructure decit, as well as equip
ment vandalism, multiple taxation and
other operational challenges operators
face.Webelievefailuretotackletheser
vice quality problem could restrict the
Industrys longterm potential. Recog
nizingtheneedtoimproveservicequal
ity,theNigerianCommunicationsCom
mission (NCC) has consistently im
plored operators to invest in network
expansioninordertoenhancethequali
tyofservicesprovidedtosubscribers.In
some cases, the Commission has resort
ed to imposing nes on erring opera
tors. Presently, four telecoms operators
(MTN, Etisalat, Airtel and Glo Mobile)
are at loggerheads with the NCC on
their refusal to pay nes totaling 1.17
trillion imposed on them in May 2012
forfailingtheservicequalitykeyperfor
mance indicators (KPI) test adminis
teredbytheNCCforthemonthsofMarchandApril2012.
Dearthofcapacityoutsidemajormetropolitanareas:Although data network capacity has
been on the increase in recent years, the bulk of capacity remains concentrated in
Lagos,thecountryscommercialcapital.Whiledataserviceuptakeishighlycontin
gent on the acquisition of ICT skills across the country, we believe capacity rollout
shouldnonethelessbeextendedtothenumerousunderservedcommunitiesoutside
Lagos. Failure to accomplish this spread could restrict access to data services, and
ultimatelyconstraingrowthintheIndustry.
Risingspateofsecuritychallenges:The security challenges currently being experienced
in some parts of the country could also constitute an impediment to growth in the
Telecoms sector. In view of these challenges, telecoms operators face an increased
riskofequipmentvandalisation,whichcouldfurtherimpairservicequality.Inaddi
tion,theproblemofinsecuritycouldthreatennewinvestmentsandnetworkexpan
sioninunderservedareasofthecountry.
Nigeriasmediaindustryisfastgrowing
with the potential to be a more signi
cant contributor to the economy. Media
facilitates the transfer of information,
education and entertainment across the
country. A major aspect of the industry
with immense growth potential is the
broadcasting segment, which comprises
electronic media including radio and
television(TV)presentations.
The media industry, over the years, has
continued to record impressive growth
inrevenuelargelyfromadvertising.We
estimate media spends in Nigeria at
157.75 billion in 2011, a 26% increase
from 118.15 billion in 2010. TV spends
accounted for the highest share of total
media spends in 2011 (41%), followed
by outdoor advertising (28%), Print
(18%) and radio (13%). We expect me
diaspendsin2012toincreaseto 205.8
billion with outdoor and television ad
vertising accounting for 35% and 35.4%
shareoftotalmediaspendsrespectively.
We anticipate a signicant growth in
media spends particularly in the radio
and outdoor advertising segment In
45
Media Stable Outlook
Media
MoreRoomforRegionalGrowth
2013. We believe growth will be largely
drivenbyincreasedspendingfromtele
communication companies, who are
competing to increase their market
shareinNigeria.
2012BreakdownofMediaSpendsinNigeria
Source:Agusto&Co.Estimate
Pay TV Dominates the Television Seg
ment as New Entrants Gain Increasing
MarketShare
Since 1992, when the Nigerian Govern
ment allowed private sector participa
tioninthebroadcastingsector,therehas
been an increase in the number of pri
vately owned broadcasting stations. In
spite of this, governmentowned sta
tions still dominate the sector in terms
of number of players operating in this
segment. Federal Government owned
broadcasting outlets which include ra
dio and TV stations are widely spread
across the country and are managed by
the Federal Radio Corporation of Nige
ria(FRCN)andNationalTelevisionAu
thority(NTA)respectively.
The National Television Authority
(NTA) operates the largest TV network
in Nigeria with over 100 NTA stations
spreadacrossthecountry.Stategovern
ments are also establishing TV stations,
as each state aspires to own a TV and
radiostation.However,theinvolvement
of the private sector in the industry has
introduced sti competition to govern
ment owned stations, which are charac
terized with dated programmes and
visual content. A common practice
amongst private operators is tailoring
theircontenttomeettheexpectationsof
their respective target market. For in
stance, while Channels TV focuses on
disseminating information and analysis
relating to government policies as they
aect the nations economy, Ontv
launched in 2011 focuses on providing
information on entertainment and life
style.
PayTVisasegmentofTVbroadcasting
that is gaining more recognition in the
Nigerian market. Though it is relatively
expensive to obtain compared to con
nectingtoalocalTV,whichrequiresjust
a TV set and an antenna, Pay TV pro
46 Media
vides easy access to information as it
contains many TV channels including
local and foreign stations. MultiChoice
whichoperatesDSTVandGOtv,Strong
TechnologieswhichoperatesMyTVand
Daar Communication which operates
Daarsatarekeyplayersinthissegment.
In the last two years, the Pay TV seg
ment in Nigeria witnessed the entrants
ofnewplayersincludingStarTimesand
GOtv, launched in 2010 and 2011 re
spectively. While the Nigerian govern
ment in April 2012 set the deadline for
transition from analogue to digital
broadcasting by 2015, the new entrants
already use the Digital Video Broadcast
(DVB) technology the latest standard
technology which does not require a
satellite dish and installation cost, mak
ing them cheaper for subscribers. The
DVB technology also guarantees stable
transmiting signals during adverse
weatherconditions.StarTimes,whichis
alsogainingpopularityamongstNigeri
ans,isownedbyNTAStarTVNetwork
Limited, a joint venture between NTA
and Star Communication Network Co.
Limited of China. Since their entry into
the Pay TV segment, StarTimes and
GOtv, unlike other industry players,
have earned an increasing market share
largely as a result of its relatively lower
decoder prices and cheaper monthly
subscription fees. Both companies have
adopted various sales strategies which
include reducing the price of their de
codersandgivingoutfreemonthlysub
scription upon the purchase of their
products. We believe that the new en
trants will continue to increase their
market share in the short to medium
term due to the aordability and exi
bilityoftheirproductsi.e.theycancon
necttomultiplechannelswiththeuseof
adecoderandanantenna.
Increasing Number of Private Radio
Stations
Radio Stations are an important medi
um through which information is
spread to the public. In Nigeria, this
sub segment is saturated with govern
mentestablished stations, spanning
across the country. Radio stations in
Nigeria have become a major platform
for the latest news, music and infor
mationrelatingtosports,entertainment,
fashion and educational programs. A
numberofstategovernmentsownradio
stations which are mainly used to dis
perse information relating to activities
in the state. A large number of these
stations broadcast their programs using
the popular local dialects spoken in the
state.ForFGownedradiostations,wid
er network coverage is a major ad
vantage though they are characterized
bydisruptedaudiosignalsinrelationto
47 Media
othersegments.
The private radio stations segment in
clude players who are gaining wider
marketshareacrossthecountry.Among
the dominant players are Cool Fm La
gos, with outstations in PortHarcourt,
Abuja and recently Kano. Others in
clude Rhythm FM operating in Lagos,
PortHarcourt, Abuja and Benin. Mega
letrics, owners of Beat FM, Classic FM
and recentlyestablished Naija FM are
alsogainingrecognitioninthissegment.
Due to the exibility associated with
listening to radio stations people can
tunein while in trac, in the oce, on
the road, etc, many Nigerians nd it
relatively convenient to obtain infor
mationonsports,politicsandentertain
ment over the radio through their mo
biledevices,portableradiosorcarstere
os.Companiesandinstitutionstherefore
useradioadvertstoenlightenthepublic
ontheirproductsandservices.Theease
ofaccesstoradiostationshasprompted
the entry of players such as Naija Fm,
ClassicFMandCityFMamongothers.
Like TV stations in Nigeria, radio sta
tions have dierent target audiences
andemployvariousmeanstoretainand
increase the size of their audiences. For
many sport lovers, Brilla FM, a station
focused on broadcasting sports infor
mation, is the preferred choice. Other
stations like Wazobia and Naija FM,
disseminate information with use of
local dialects such as pidgin English to
capture certain population segments. In
addition to these stations are Nigeria
Info 99.3 FM, a 24hour news radio sta
tion and Trac FM, established by the
Lagos State Government to provide in
formation on trac around Lagos. Both
stations were launched in the rst half
of 2012. Advertisements on these radio
stations are therefore structured to re
ect the interest of the targeted audi
ence.
Furthermore, a recent development in
the sector is the introduction of online
and university radio stations in the
country. A few tertiary institutions in
Nigeria operate radio stations basically
to educate, entertain and enlighten stu
dentsonactivitiesaroundtheircampus
es. These stations run academic, health
related and sport programs, talk shows
andcareerprogramsamongothers.
Onlineradiohasauniquefeatureinthat
theycanbeloggedonfromanywherein
theworldwithastronginternetconnec
tivity. In Nigeria, many radio stations
own a listening platform on their web
site while a few others have their sta
tions on the iTunes music player. How
48 Media
ever, this segment is yet to achieve its
potentials in Nigeria owing to the slow
internet penetration in the country. For
Nigerians living abroad, online radio is
a medium for keeping abreast of hap
penings, events and music in Nigeria.
This segment, in 2012, witnessed the
establishment of two online radio sta
tionsinNigeria,StormFMandiGroove
radio with the aim to capture the inter
estofNigerianslivingabroad.
OutlookforMedia
Nigerias media industry is important
for the dissemination of information
across and beyond the countrys bor
ders. The industry has recorded in
creased private sector participation,
however, opportunities still avail in the
sector.Itisworthmentioningthatsome
states in Nigeria have less than ve ra
dioandTVstations,whileLagoshouses
over than 30 broadcasting stations (TV
& radio stations). We anticipate wider
coverage of privately owned broadcast
ing stations across the country, particu
larly those that operate under a group
structureliketheSilverbirdGroup,Cool
FM and Megaletrics. Over the short to
medium term, we expect the entry of
new players to compete for industry
prots as well as the introduction of
new radio stations such as talk radio
withlitleads.Inaddition,weanticipate
the increased introduction of programs
suchas vernacular, religious, communi
ty, trac programs that will focus on
dierentcustomersegments.
ListofRadioStationsownedbyTertiaryInstitu
tionsinNigeria
Source:Agusto&Co.Research
49 Media
S/N RadioStations Institution
1 LionFM91.1 UniversityofNigeria,
Nsukka
2 NounRadio105.9 NationalOpenUniver
sityofNigeria(Noun)
3 UnilagFM103.1 UniversityofLagos
4 BUFM BabcockUniversity
5 DiamondFM101.1 UniversityofIbadan
6 Unilorin89.3FM UniversityofIlorin
7 UNIZIKFM94.1 NnamdiAzikiweUni
versity,Awka
8 SearchFM92.3 FederalUniversityof
Technology,Minna
9 MadonnaRadio
93.3
MadonnaUniversity,
Okija
10 FUTAFM93.1 FederalUniversityof
TechnologyAkure
11 GreatFM94.5 ObafemiAwolowo
UniversityIfe
Theadvertisingindustryisexperiencing
rapid growth and transformation as a
result of advancement in technology
and innovation. This is evident in the
diversicationfromtraditionalmodesof
advertising to digital and online ads.
The industry in Nigeria has two major
segments, which include advertising
agency business and outdoor advertis
ing business, with each segment having
over20operationalagencies.
GlobalFirmsEntertheIndustry
Nigerias growing population and busi
ness potential are key factors that have
shaped and should continue to shape
theindustrysperformance.Globalmar
keting communication rms have iden
tied opportunities that avail in the in
dustry, and as a result, established out
lets in Nigeria as well as partnership
dealswithlocaladvertisingrms.Inthe
rst half 2012, the industry experienced
theentryoftwoglobalmarketingagen
cies, Millward Brown and BBDO, both
withstrongpresenceinEuropeandoth
er parts of Africa. This is in addition to
few global rms either operating inde
pendently or in partnership with local
rms. The entry of these two global
rms poses enormous challenges to lo
50 Advertising
Advertising Positive Outlook
TechnologyDrivingGrowth
cal advertising agencies as they bring
into the market, international standard
practices including modern advertising
techniques,aconceptwhichisstillatits
early stage of practice in Nigeria. For
eign advertising agencies play a signi
cantroleintheindustry.Thisisevident
in the recent appointment of Lefteld,
an advertising agency based in Cape
town, South Africa by FrieslandCampi
naWAMCONigeriaastheiradvertising
agencyofrecordafterabiddingprocess,
which included a host of Nigerian and
otherforeignrms.
Internet Penetration and Technological
Advancement are Driving Online Ads
Upward
Online adverts are increasingly becom
ingpopularowingtothecreativeinven
tions in technology. Social networks
havesprungupinthelastdecade,lead
ing to individuals spending more time
on facebook, twiter and other social
websites or blogs. With more newspa
pers going online and TV stations
streaming live through the internet,
there is an encroachment on the market
space enjoyed by the print media. All
thesehaveresultedinthestrategicfocus
ofmanylocaladvertisingagenciesfrom
reaching the consumer through the tra
ditional media platform to the use of
mobile phone advertising and online
platforms.Afewadvertisingagenciesin
Nigeria have realized the importance of
keepingaheadwiththeadvancementin
the use of technologyandtherefore cre
atemoreadsrelatingtotheseplatforms.
As many companies atempt to gain
wide market reach and gain access to
their target audience, blog sites and so
cial networks are becoming more popu
lar advert platforms. Thus, companies
engage in sponsorship contracts with
owners or managers of these sites. A
recent example is the 1.2 million 8
weeks sponsorship deal signed in June
2012 between Research in Motion Nige
ria and Ladies And Gentlemen Book
(LAGbook),asocialnetworkingwebsite
with over 200,000 registered members.
Thedealentailspromotionalcampaigns
for Blackberry mobile devices, display
ing images and blackberry ads on the
frontpageofLAGbookswebsite.Other
popular websites such as Linda Ikeji,
vconnect,BellaNaija,Nairalandareme
diums through which corporate and
non corporate organizations gain access
totheirtargetaudience.
Digital Billboards Set to Drive Growth
inOutdoorAdvertisingSegment
Billboards constitute the main compo
nent in outdoor advertising in Nigeria.
Thisisduetotheadvantagesassociated
with billboards. One of which is the 24
hour exposure of the billboard relative
to other forms which may last for
51 Advertising
seconds or minutes as in the case of ra
dio and TV ads. However, the outdoor
advertisingindustryisa segment in the
advertising industry where a few local
rms dominate. Prior to 2007, a signi
cant percentage of billboards in Lagos
State were owned and managed by ad
vertisingagenciesallundertheOutdoor
Advertising Association of Nigeria
(OAAN). The formation of Lagos State
Signage and Advertisement Agency
(LASAA) in 2006 to regulate practice of
outdoor advertising in Nigeria changed
the face of the industry, with the de
structionofmanybillboardsintheState
on the grounds that they were illegally
positioned and untidy. Consequently,
only a few advertising agencies sur
vived the restructuring by LASAA. Se
quentialtotheseevents,LASAAreposi
tioned itself as a commercial player in
theindustryratherthanjustbeingareg
ulator, owning a signicant number of
billboards in the State. The agency re
cently began the redesign of Apapa
Oshodi Expressway to introduce mod
ern and innovative outdoor structures
that should beautify the environment.
The Agency plans to build structures
with tower designs, boundary wall
signs, bus shelters, Vshaped designs
etc.
In 2012, the outdoor advertising seg
ment experienced the collapse of some
billboards across the country. In May
2012, two large billboards collapsed in
Abuja while in June 2012, the electronic
billboard under construction on the
thirdmainlandbridgeaxisinLagosalso
collapsed.Thiswasprimarilyasaresult
of the use of substandard materials in
the construction of these structures as
well as strong winds during the rainy
season.
A recent practice in the outdoor adver
tisingsegmentistheconstructionofdig
ital billboards as opposed to traditional
billboards. Advertising agencies have
resorted to the use of digital billboards
owing to its advantages which are not
limited to showcasing brands or prod
ucts of dierent companies on one bill
board, visibility even at night and the
beauty it provides to the environment.
Another medium of advertising that is
not commonly used today in Nigeria
but is gaining recognition is the LED
mobile ad truck. The LED mobile truck
consist ofa truck and adualsided LED
screen which can be used for multiple
functions such as product launch and
touringevents.Thisformofadvertising
is relatively exible and may have a
widemarketreachduetoitsmobility.
The Nigerian advertising industry is a
diversesectorwithpotentialsofcontrib
uting signicantly to the growth of the
52 Advertising
Nigerian economy. While we anticipate
growthintheindustryinthenearterm,
webelievethisgrowthwillbedrivenby
activities of the foreign players in the
industry. We expect that the large cor
poratebrandswillcontinuetooutsource
their adverts to the foreign players in
the industry due to their technological
prociency and international prestige.
In addition, we believe that online and
mobile truck ads will continue to in
crease in the long run as a result of the
rising internet penetration currently at
28.43% and the mobility feature associ
ated with mobile truck. We also antici
pate the use of modern electronic bill
boards particularly in Lagos State, as
part of measures to ensure beautica
tion of environment in pursuant of the
megacityobjectives.
The increasing number of foreign play
ersintheadvertisingindustryisathreat
to existing local players particularly in
the advertising agency segment. While
many Nigerian agencies struggle to
grasp new technology and introduce
creative ideas in their business strategy,
a few of these global players operating
in Nigeria DDB Worldwide, BBDO,
WPP network are not new to winning
Cannes Lions award, a global prestig
ious annual awards for professionals in
theadvertisingindustry.Theseagencies
also have the expertise, the technology
andthecreativityneededtoensurethat
the clients needs are met. As a result,
we believe their entry into the Nigerian
market will increase competition in the
sector.Weforeseeanindustrydominat
ed by foreign players in the medium
term as many local rms would not be
abletocompeteeectivelyagainstthese
globalplayers.
Amajorsuccessdriverforanyadvertis
ingcompanyisinnovationandcreativi
ty, which is still lacking amongst many
localplayersinNigeria.Afewadvertis
ing agencies adopt similar paterns or
ideas in developing commercial ads for
theirclients.Inthedetergentmarketfor
instance, most ads usually follow simi
lar plots where the detergent is intro
duced through a washing competition.
Thisshowstheextentto whichcreativi
tyisneededintheindustryinNigeria.
53 Advertising
Road transportation remains the major
channel of domestic transportation
within Nigeria. Nevertheless, the con
tinuous rise in bad road conditions in
thelastdecadehasledtoincreasedreli
ance on air travel and on the aviation
industry. The Nigerian aviation indus
try is currently characterized by the
presenceof8majorplayersoperatingin
the domestic segment, following the
withdrawal of the operating license of
Dana Air in June 2012. Arik Air, Aero
ContractorsandAirNigeriaareestimat
ed to control about 70% of the market
based on the number of aircrafts and
passengers.OtherplayersincludeChan
changi, FirstNation, IRS, ADC and
Overland Airways, who jointly account
for the balance of 30%. These players
compete on the basis of sales promo
tionsforfrequentyers,pricediscounts
for early buyers, perceived reliability of
service, punctuality of ights to sched
ule, established safety standards, im
proved catering services and a host of
value added services such as online
checkinandcarrentaladvisory.
The Gross Domestic Product (GDP) g
urefor the 1st Quarter of2012indicates
that the Nigerian Aviation sector con
tributed only 0.02% of GDP
1
, which is
low,particularlywhencomparedtooth
er developing economies such as India
54 Aviation
Aviation Negative Outlook
1. NationalBureauof
Statistics(NBS)
AwaitingBeterDays
(0.5%) and South Africa (2.1%)
2
. The
relatively poor level of performance in
the industry is atributable to factors
such as managerial ineciency, poor
maintenance culture and inadequate
airport infrastructure. These haveled to
a series of events that have unfolded in
the sector in recent years. For instance,
operationswereinterruptedattheMur
tala Mohammed International Airport
(MMA) due to a power outage which
lastedforoveranhourinJune2012.The
eect of this was that ights could not
land and passengers within the airport
were stuck in elevators. Similarly, the
Nnamdi Azikwe Airport has witnessed
up to three blackouts in the rst half of
2012 leading to the diversion of slated
ightarrivalstootherairports.
In addition, the Federal Airports Au
thorityofNigeria(FAAN)shutoutAero
Contractors, Air Nigeria, IRS Airlines,
Chanchangi and Dana Air for purport
edlyowingaircraftlandingandparking
charges, estimated at over 4 billion in
2011.
The most recent of deplorable occur
rences that has bloted the image of the
Nigerian Aviation industry is the Dana
AirCrashofJune2012.Theincidentisa
directconsequenceofthedecliningstate
of infrastructure in the industry and
highlights the improper atention given
to safety standards by industry opera
tors. It also brings to fore, the relatively
lowlevelofregulatoryenforcementand
oversightonthepartofthegovernment
agenciesregulatingthesector.
TheFederalGovernmentrecentlysetup
a Technical and Administrative Review
Panel on Domestic Airlines (TARPDA)
Commitee as a response to the Dana
Air crash to assess the level of compli
ance of all domestic airlines with the
regulations set down by the Nigerian
Civil Aviation Authority (NCAA). In
addition,TARPDAistoassesstheeec
tiveness of NCAA in its oversight func
tions over the domestic airlines.
TARPDA has unveiled ndings, which
indicateadeterioratingstateoftheavia
tion sector. It was reported that the
practices of airlines with respect to
maintenance fell below regulatory
standards and the inspection function
carried out by the NCAA personnel on
the airlines were inadequate and unsat
isfactory. The poor performance of
NCAA personnel is a consequence of
insucient training in order to possess
the required level of technical know
how.
The Nigerian Aviation industry has
beenposedwithvariouschallengesthat
have negatively impacted on its poten
tial,theseincludebutarenotlimitedto:
55 Aviation
2.InternationalAirTransport
Association(IATA)
Deteriorating aircrafts and air

ports.
The domination of the interna
tional trac arena by foreign
carriers, conning majority of
thelocalindustrytothenational
and regional segments. This is
supported by the fact that for
eign airlines carry up to 98% of
international passengers annu
ally.
High indebtedness of local air
lines due to high operational
costsandnancialmisappropri
ation.
Diculty faced by airlines in
accessing lowcost funding
amidst increasing cost of avia
tionfuel.
Dependence on foreign tech
nical assistance in key areas of
technology and labour which
have been costly for domestic
airlines.
However, various measures have been
putinplacebytheFederalGovernment
together with relevant authoritiesin the
Aviation industry. One of these is the
proposed implementation of key strate
gicinitiativesasindicatedintheNigeria
Aerotropolis plan published in August
2012 by the Ministry of Aviation which
includes:
FocusonSafetyandSecurity
InfrastructuralDevelopment
GrowingDomesticAirlines
FloatingaNationalCarrier
Aviation Fuel reduction of
costandimprovesupply
ConsumerProtection
DesignationofAirports
CreationofAgroAllied&Car
goFacilities
Designation of Free Trade
Zones (FTZ) at specied Air
portsacrosstheCountry
HubStrategy intra and inter
airportconnectivity
Review Bilateral Air Service
Agreement (BASA)/open skies
agreement
AirFarePricing
OrganizationalRestructuring
Financial Management and
revenuecreation
The Federal Government has indicated
plans to reduce the maximum age of
aircrafts from the current 22 years to
about 15 years. Players in the industry
would have to dispose their aged air
crafts to comply with the directives.
This in turn will put industry operators
in risk of survival failure in the long
term due to the fact that they have lim
ited resources to fund acquisition of
newer aircrafts and they would need
longterm funding from banks which
couldprovediculttoobtaingiventhe
higher level of risk in the industry. The
airlinescouldalsofacedicultyinnd
56 Aviation
ing markets other than Nigeria to sell
these aircrafts at favorable prices. The
average age for majority of Nigerian
Aircrafts is also over the proposed age.
For instance, the average ages in years
of aircrafts of Aero (19.2), Air Nigeria
(12.1), Arik (5.2), Associated Aviation
(23.8), Chanchangi (23.2), and IRS (21.3)
shows that most operators possess air
craftsthatareover15yearsold.
Given that most of the players in the
industry bank on the use of leased
planesforights,businessriskisaggra
vated by the fact that rental rates for
youngeraircraftsarehigherthanforthe
olderaircrafts.Whilethismightresultin
fundingconstraintforsomeoftheestab
lished operators, it could possibly give
leeway to the entry of more nancially
stable and airsafety conscious compa
niesthatwereinitiallyoverwhelmedby
the market share concentration in the
domesticaviationindustry.
However, we recognize that entry of
newairoperatorsissubjecttomorecon
scious eorts by industry regulators to
positively enhance the state of the avia
tion industry. In addition, various in
dustryproblemsofpoweroutage,inap
propriate government interference and
infrastructural decay need to be ad
dressed in order to encourage new en
trants.
NigerianAirlinesowedatotalof10bil
lion naira to Nigerian aviation agencies
in 2011
3
. This gives a clear indication of
high gearing and potential cash ow
dicultiesfacingNigerianairlines.Asa
resultoftheforegoing,aresolutionwas
reached between the Ministry of Avia
tion and the airlines for the debts owed
to the Federal Government Agencies
(NCAAandNAMA)toberepaidinless
than 36 months while ensuring they
setletheircurrentbillsastheyoperate.
Furthermore, we expect that the Avia
tionindustrywillexperienceotherPub
licPrivate Partnership (PPP) arrange
mentssuchasconcessionaryagreements
on various Airports as was done with
the BiCourtney Aviation Services Lim
ited(BASL)fortheMurtalaMuhammed
Airport(MMA)inLagos.Thiswillfacil
itate the construction of new facilities
andimprovethestateofexistingonesin
airports.
The strategic framework postulated by
the Ministry of Aviation for the devel
opmentoftheAviationindustryiscom
mendable. However, the root problems
associatedwiththeindustrysuchasthe
high rate of infrastructure deterioration
and high level of airlines debts would
continue to be major contributing fac
tors to thelow marginand high operat
ing risks in the industry. Hence, we en
57 Aviation
1. NigeriaAviationFact
Sheet(USEmbassyin
Nigeria)
visage that airlines would record losses in the short term and weaker players may
exittheindustryinlightofstiergovernmentregulations.
58 Aviation
IndustrySalesontheUpswing
The Nigerian Personal Care Industry
remains one of the key segments in the
fast moving consumer goods industry.
Withapopulationupto168millionpeo
ple, there is an assured and available
market for the Industrys products in
Nigeria given that people of all age
brackets use at least one or two of these
products daily. It is estimated that an
averageNigerianhouseholdintheurban
areas spends about 10% of its annual
disposable income on personal care
products. In spite of the declining pur
chasing power of consumers and harsh
business environment, the Nigerian Per
sonal Care Industry has achieved con
sistent sales growth in the last 5 years
andweexpectsalestoremainonanup
ward trend in the short term. We esti
mate Industrys revenue to be in excess
of 250 billionbytheendof2012.
IndustrysSales:GrowthRate
Source:IndustryPlayers&AgustoEstimates
InuxofMediumandSmallScalePlay
ersHeightensIndustrysCompetition
The growing demand for personal care
products has led to an inux of several
59 PersonalCare
Personal Care Stable Outlook
Moreproducts.MoreCompetition..NewIdeas
products comprising locally made and
imported ones. In the past, there were
just a handful of product oerings,
which were either mainly produced by
foreign owned conglomerates/large in
digenous rms or imported. However,
due to the entry of more players espe
cially medium scale and fringe players,
there has been a signicant increase in
product oerings in recent years. The
growth potential in the Industry has
also encouraged the entry of more for
eignbrandsintothemarket.
The Nigerian Personal Care Industry is
now highly competitive and no single
playerdominatesanyofthesevenmajor
product markets of the personal care
product market (Detergent, Oral Care,
Home Care, Hair & Skin, Tissue, Cos
metics&BeautyandBabyCareproduct
markets).Competitionamongplayersis
largely based on pricing, product quali
ty,productoeringandmarketingstrat
egiesinordertoincreasemarketshare.
InnovationTakesCentreStage
The intense competition in the Industry
has made innovation to be a critical
marketing tool among players. The ex
isting large players have not rested on
their oars and have introduced more
products to compete with the new en
trants. Today, the Industry oers over
100 products, which cut across many
segments.
Supportingthegrowthinproductoer
ings is the changing population de
mographics and growing consumers
knowledge. The thriving middle class
coupled with the inuence of western
lifestyle through television, magazine
andinternethavealsoencouragedplay
ers to introduce more innovative prod
ucts such asvariants of existing brands.
For instance, there are several variants
ofbeautysoapsandbodycreamforspe
cicskintypesuchasoily,dryandnor
mal skin. Furthermore, the changing
consumer lifestyle has made the Indus
try to become more gender specic and
thisisalsoamarketingstrategyusedby
players to atract consumers. Players
have extended their operations by im
porting and marketing both female and
male grooming products such as hair
creams, foot creams, skin care, after
shavecream,facialtreatmentsetc.
Packaging quality is now a major sales
driver in the Nigerian Personal Care
Industry and most Industry players
(including medium scale and fringe)
have invested heavily on their packag
ing. As a result, many products in the
Industry have been relaunched in im
provedandcolorfulpackagingtoatract
consumers. Another major strategy em
60 PersonalCare
ployedbyplayersisthelowcost/single
use packaging of products, targeted at
the low end users. Body creams and
lotions, detergents, toothpastes, dish
washingliquidaresomeoftheproducts
that are now packed in smaller units
(15g,30g,35gand50g).
Inthepast,playersconcentratedmostly
on large cities such as Lagos, Ibadan,
PortHarcourt, Kano, Kaduna, Aba,
Onitsha, etc. However, with intense
competition in these cities, Industry
players have expanded their distribu
tion networks by establishing depots
and area oces to other parts of the
country, including the remote areas.
Some of the players, especially medium
scale companies have focused on re
gionalpenetration,whilemarketleaders
who have the capacity, target the na
tionwidedistributionoftheirproducts.
WhatDoestheFutureHold?
We expect that the Industrys sales will
continue to be driven by increasing
healthawareness,thrivingmiddleclass,
the inuence of western lifestyle and
growing population of the country. The
growing health consciousness among
consumers as well as changing lifestyle
will encourage players to become more
innovative and also introduce new
61
PLAYERS PRODUCT
BRANDS
VARIANTS
UnileverNi
geriaPlc
LuxBeauty
Soap
Peach&Cream,
Strawberry&
cream,nut&
creamandEven
glow
UnileverNi
geriaPlc
CloseUp
Toothpaste
CloseUpCom
plete8action
(white),CloseUp
Completeand
CloseUpwhite
now
Procter&
GambleNige
ria
PampersDia
pers
PampersDiapers
AntiWetness
Shield
OrangeDrugs
Ltd
Deltaand
DevonSoap,
Herbalandmedi
catedsoaps
UnileverNi
geriaPlc
Lifebuoy Deofreshand
Herbal
UnileverNig
Plc
Sunlight 2in1washing
powder
AfricanCon
sumerCare
Company
DaburTooth
paste
DaburHerbal,
DaburGreenGel
PZCussons
NigeriaPlc
CanoeSoap CanoeExtraCare
andActiveFresh
PZCussons
NigeriaPlc
PremierSoap
JoySoap
PremierAntiseptic
JoySkincareTen
dersoap
Reckit&
Benkisser
DetolSoap DetolCool,Detol
ActiveDeodorant
andDetolFresh
Reckit&
Benkisser
AirwickAero
sol
Peach&Jasmine
PersonalCare
Products&Variants
Source:IndustryPlayers
products. However, weenvisage a slow
pace of growth in revenue due to the
pressure on consumers disposable in
come. Furthermore, the fast spreading
sectarian violence (Boko Haram) in the
Northern region will also aect growth
rate.Consequently,weforecastanaver
age growth rate of 10% in the next 2
years(20132014).
Similar to the manufacturing sector in
Nigeria, the Personal Care Industry has
ahighcostprole.Operatingmarginsof
players currently hovers around 10%
15%. Although, some players have in
troduced measures to reduce operation
costs which are within their control, we
do not expect signicant improvement
inprotmargins.Therecentincreasein
electricitytariscoupledwiththerising
costs of raw materials may further put
pressureonmargins.
Competitionamongplayerswillfurther
intensifyandasaresult,companieswill
continue to compete with each other on
product quality, advertising and sales
promotion and distribution network.
We, however, do not foresee players
reducing their prices given the rising
costofoperations,whichremainsama
jorchallenge.
Going forward, we believe that compa
nies who consistently focus on product
quality,innovation,ecientdistribution
network, brand awareness and promo
tional activities will continue to thrive
well in the Industry in spite of the sti
competition.
62 PersonalCare
Even as Western beer consumption
slows down due to the global economic
downturn, Nigerias brewery industry
(Industry) continues to thrive. Over
the last three years the domestic brew
ery industry in Nigeria has shown an
average growth in turnover of about
16%.
While some sectors within the Nigerian
economy have undergone various re
forms and restructuring with industries
such as banking, power and oil & gas
beingthemostnoticeable,thebreweries
industry has not been left out. The in
dustry went through some consolida
tion, whereby 25 local breweries were
reducedtofourmajorplayers(Nigerian
Breweries, Guinness Nigeria, consoli
dates Breweries and SABMiller). This
consolidation, which followed the same
paternwiththeglobalbeermarket,was
borne out of strong competition to
achieve global dominance. Due to the
growth potentials of breweries in Nige
ria, brewing multinationals have taken
position to tap into this opportunity by
investing heavily in local breweries.
This has enabled these companies ex
pand their capacity and improve com
petitiveness.
63 Breweries
Breweries Stable Outlook
TheStruggleforLeadershipandDominance
Nigerian Breweries account for 58% of
the Industrys turnover while Guinness
represents 32%, Consolidated Breweries
7%andSABMiller3%.
MarketShareofKeyPlayers
Source:Agusto&Co.Research
GrowingDemandforBeerinNigeria
The emergence of democracy and a
growingmiddleclassinNigeriahasled
toariseinthedemandforbeer.Democ
racy opened up foreigndirect invest
ment from leading breweries all over
the world, while the middle class in
creased demand for premium brands.
Brands like Star, Gulder, Harp and
Guinness Stout became the drink of
choice for the growing middle class.
Realizing this, Nigerian Breweries Plc
and Guinness Nigeria invested millions
in advertising, with Guinness using en
tertainmentwithfocusonfootballtoget
themiddleclasswhileNBPlcalsoopted
for advertising via the entertainment
route but focused solely on reality
shows like the Gulder Ultimate Search
andStarQuest.
The future is bright for the brewery in
dustry in Nigeria. With a growing mid
dle class and a large number of alcohol
consumers, the brewing multinationals
would like to garner a larger market
shareoftheindustry.Weexpectcompe
tition for market share to drive growth
in the Industry, as all key players try to
gain dominance by atracting high and
lowend income consumers. The en
tranceofSABMillerin2009throughthe
acquisition of Pabod Breweries in Port
Harcourt and Standard Breweries in
Ibadan should add another dimension
to the Industry as the company posi
tions itself towards the lowend of the
beer market with lowpriced beer. The
company, in a short time in the market
has lured those who consume home
brewed drinks such as Burukutu and
Pito. The presence of SABMiller has
made this segment more competitive,
withConsolidatedBreweries(asubsidi
ary of Nigeria Breweries) and Guinness
Nigeria trying to acquire larger market
share.
TheIndustryhasalsocreatedamultipli
er eect on the Nigerian economy, with
64 Breweries
farmers being the direct beneciaries.
Farmersofsorghum,cassavaandmaize
haveprotedfromthebreweryindustry
especially with the entry of SABMiller
which makes beer largely from sor
ghum. The growth of the Industry has
also created jobs, for instance according
to Guinness Nigeria, the recent expan
sioncreatedover2,000indirectjobsand
200 permanent jobs. SABMillers new
brewery in Onitsha is expected to em
ploy 450 people when it starts opera
tionsbytheendof2012.
Nigerian Breweries Plcs turnover and
operating prot for the 2011 nancial
year were 226 billion and 57 billion
respectively, while Guinness Nigeria
recorded turnover of 123.6 billion and
operating prot of 26.5 billion. Sales
growth for these two companies have
averaged 16% and 21% respectively
overthelastthreeyears.NigerianBrew
eries 2012 half year nancial results
showed an increase in prot before tax
(PBT) of1.25% comparedto their previ
ous year while Guinness Nigeria
showed a decline in PBT of 3%, which
was mainly atributable to high operat
ingcosts.Weprojectintheshortterma
steady increase in prots for Nigerian
Breweries as it continues consolidation
of newly acquired Breweries (Sona and
Life Breweries). On the other hand
Guinness Nigeria will try to retain its
market share through the sales of its
premium brands and we expect the
Company toincrease investment in Du
bicBreweriesinordertoacquiremarket
share in the lowend beer market. Be
yond this dominance for market share
and prot, all this gives the consumer
the power of choice, as there are lots of
varieties of beer to choose from making
the Industryvery atractive and prota
bletoinvestors.
65 Breweries
The Private Education Industry is of
greatimportancetoeveryeconomy,giv
enthatitaugmentsgovernmentfunded
education across the globe. In some
emerging market economies, particular
ly in Africa, private education is lling
an essential gap left void by most gov
ernments. This is the case in Nigeria.
Over the last ten years, growth in the
Nigerianprivateeducationindustryhas
been spurred by the countrys increas
ingpopulationinthefaceofadearthin
well run and managed schools, rising
demand for lifelong learning, the de
cline in the quality of publicly funded
education, enhancing knowledge and
skill set as well as investors increasing
interestinprivateeducation.Theindus
trys revenue, is forecast to reach 400
billion in 2012 and account for just un
der 1% of the nations Gross Domestic
Product.Weareoftheviewthatthepri
vateeducationindustrywillcontinueto
thrive due to the quality of education
oered particularly when compared
topubliceducation.
IncreasingInvestments
The industry continues to record signi
cant investments by a number of key
players and new entrants. Since the col
lapse of the public education system in
Nigeria, the private education industry
66 PrivateEducation
Private Education Positive Outlook
MovingForward
has shown steady growth. This is evi
denced by the licensing of a number of
private universities and the approval of
a number of new entrants in the basic
and post basic subsectors in recent
years. Following the Federal Govern
mentsrenewedfocusonimprovingthe
countrys education sector; nine private
universitieshavebeenissuedprovision
al licenses in the last three years. An
existing key player, Covenant Universi
ty,hasalsoestablishedasecondtertiary
institution, Landmark University to its
chainofschools.
NewlyLicensedPrivateUniversities
Source:NationalUniversitiesCommission
All segments of the private education
industry, from primary to tertiary are
capital intensive, with the tertiary seg
ment requiring the largest initial capital
outlay. Infrastructure such as land,
classroom construction and residential
(boarding) facilities have been on the
increase, following investors increasing
interest in the industry. According to
industry sources, Landmark University
has spent approximately 20 billion
($135 million) on construction works.
We believe the increasing investmentin
the private education market is largely
due to the good cash ow prole and
the relative protability of the industry.
Operating margins vary depending on
the segment of the private education
market. The basic and post basic seg
mentsearnmarginsintheregionof10%
to 20%. Revenues in the private educa
tion industry are stable and dependent
on prepaid tuition fees, which account
for90%ofrevenue,whilesaleofbooks,
stationeries, uniforms and other educa
tional items account for the balance of
10%.
Due to the high interest rate environ
ment,privateschoolsarepredominantly
nanced by equity.However,a number
of well known players in the market
haveincludeddebtintheircapitalstruc
ture.Nevertheless,mostindustryopera
torslackaccesstoadequatefunding.
Sustaining private education is very ex
pensive and could remain so in the me
67
Name Location Date
AdelekeUniversity Ede,OsunState 2011
BazeUniversity FCT,Abuja 2011
ElizadeUniversity IlaraMokin,Ondo
State
2012
EvangelUniversityAkaeze,Ebonyi
State
2012
GregoryUniversityUturu,AbiaState 2012
LandmarkUniver
sity
Omuran,Kwara
State
2011
McPhersonUni
versity
SerikiSotayo,Ogun
State
2012
SamuelAdegboy
egaUniversity
Ogwa,EdoState 2011
SouthwesternUni
versity
OkunOwa,Ogun
State
2012
PrivateEducation
dium term due to the prevailing eco
nomic situation declining purchasing
power and Nigerias poor infrastruc
ture.Recurrentexpendituresuchasaca
demicsupplies,administrative,staand
energycostscomprisethemajoroperat
ing costs; accounting for over 70% of a
playerscoststructure.Duetotheerratic
power supply in the country, most pri
vateschoolsregularlyrundieselgenera
tors.Adayschoolisestimatedtospend
anaverageof20millionperannumon
diesel.Agusto&Co.isoftheviewthat
operating costs in the Nigerian private
education Industry will remain high,
particularly as inationary pressures
persistsinthenearterm.Operatorsare
expected to counter this by increasing
tuitionfees.
RegulatoryChanges
Regulatory oversight of the private
education industry is improving, with
some favourable regulatory policies
issued in the last three years. In 2010,
some education regulatory agencies
reviewedtheimpactoftheindustryon
the nations development and thus is
sued minimum guidelines for the es
tablishment of private educational in
stitutions across all levels in every
state. For example, In Lagos State, the
Department of Private Education and
Special Programs (LAGPEP) reviewed
itsminimumstandardsforestablishing
a private educational institution in the
state, implicitly increasing the entry
andfundingrequirements.Someofthe
minimumrequirementsinclude;
SummaryofMinimumStandards
Source: Lagos State department of Private Education & Special Pro
grams
Similarly, as part of the Governments
plantoataineducationforallby2015,
the Universal Basic Education (UBE)
Act was amended, revealing new uni
ed minimum standards for establish
ment and running of schools in Nige
ria.Someofthestandardsinclude;
68 PrivateEducation
Description MinimumStandards
Building Purposebuilt;Duplex
orbungalow(UorL
Shaped)
Classrooms 15
Toilets 8
TeachingAid Educativewallchart,
wallpictures,building
blocks&toys
Equipment Balls,skitles,swings,
crossbarsplaypens
Laboratory laboratoriesforphys
ics,chemistry,intro
tech,biology,nearts
studio
SomeProposedAmendmentstoMinimumStand
ardsforBasicEducation
Source:UBEC
Furthermore, the National Educational
Research and Development Council
(NERDC) developed and introduced a
newseniorsecondaryschoolcurriculum.
This curriculum covers 34 trade and en
trepreneurial subjects, which is expected
to empower secondary school graduates
with adequate entrepreneurial skills to
establish small scale business enterprises
andintheendreducetheunemployment
rateinNigeria.
In2011,theFederalGovernmentofNige
riaannounceditsintentiontochangethe
6334schoolstructurethatwasinitiated
in 1983, back to the 654 system which
wasobtainableinthe70sandearly80s.
According to the regulators, this system
is sought to correct the structural imbal
ance in the existing system of education.
If the 654 policy is eected, this will
reducethenumberofyearsofsecondary
education, while industry players would
have unutilized resources, given that the
existing school structures accommodate
the6334schoolsystem.
We believe that the persistent change in
education policies will not allow for a
senseofdirectionandsmoothoperations
intheindustry.Inspiteofthechallenges
the private education industry faces, it
will continue to atract investors. We are
of the view that private education has
becomeanemergingassetclassforinves
tors, particularly those that seek capital
preservation. We also foresee an inow
or private equity investments in well
managed institutions in the medium
term. This will likely lead to signicant
changes in the ownership structure of
privateschools.
69
Description MinimumStandards
Teacher Minimum of NCE for pri
mary schools and a Bache
lor of Education Degree
and above for secondary
schools
Studentteacher
Ratio
35:1 (maximum of 45 stu
dents)
Studententryage 4yearsforPrimaryschool
PrivateEducation
The Nigerian Entertainment Industry
has evolved beyond movies, TV shows
andmusicforsolelypleasure.Entertain
ers are quickly realizing their craft as
brandsandsubsequently,incomegener
ating sources. Today, artistes are entre
preneurs with registered businesses.
They are also inuencing infrastructure
decisions such as the expansion of mul
tipurposehallsinhotelsthesehallsare
expandedtoenablethemplytheirtrade
to larger audiences. The biggest enter
tainment segment is themovie industry
popularly called Nollywood. Nolly
wood stars alongside musicians, come
dians and radio hosts are generating
incomeinothersectorsoftheeconomy.
TheNollywoodStory
After the movie Living in Bondage
was released in 1992, Nollywood, Ni
geriaslmindustrybeganitstransition
to growth. Today, the Industry churns
out an estimated 1000 movies per an
nummakingitthethirdlargestproduc
er of lms in the world after United
70 Entertainment
Entertainment Positive Outlook
NewIncomeSourcesforArtistes
States Hollywood and Indias Bolly
wood. In addition, the industry has
moved from a position of a notso
protable venture to an industry that
generates an estimated $500 million dol
lars per annum. Nollywood actors are
not left out in this evolution. Like their
colleagues abroad, they are extending
beyond their primary skills into other
sectors of the society. They are now en
gaged in public relations, politics, media
&advertisingandintheprocess,creating
alternative sources of income for them
selves.
NollywoodStarsinPublicRelations
All brands seek to engage consumers
atention in their advertisements and to
create awareness for their products. The
use of popular screen personalities cap
tures the atention of the public faster
and drives home the message the prod
uctwishestosayquicker.Italsoenhanc
es the credibility of the product particu
larly when the celebrity is the darling
of the public. There is a general consen
sus in the Nigerian movie industry that
It is cool to be a Nollywood star but
beter to be a Nollywood star with en
dorsements. Many Nollywood actors
aregeneratingincomeasambassadorsof
major local and international brands.
Genevieve Nnaji recently signed on as
theBrandAmbassadorofRangeRoverin
Nigeria. She gets the highly coveted
RangeRoverSportsSUVand$100,000in
the rst six months of the deal. Omoni
Oboliisalsotobepaid 10millionfor18
monthsasabrandambassadorforVenus
beauty care products. The use of artistes
asbrandambassadorsisnotanewdevel
opmentglobally,butitisquicklypicking
up in Nigeria. Nollywood stars and mu
siciansalikeare tapping into thisavenue
to generate additional income. Hafeez
OyetoropopularlycalledSakainEtisa
lat adverts is a popular brand ambassa
dor.
Hafeez
OyetoroEtisalat
Ambassador
GenevieveNnaji
RangeRover
Ambassador
OmoniOboli
VenusAmbassador
There are many others and these stars are

often ambassadors of more than one brand
in dierent industries. The table below is a
list of some popular Nollywood stars that
arebrandambassadorsofmajorproducts.
71 Entertainment
NollywoodStarsandtheBrandstheyRepresent
Source:IndustryOperatorsandAgusto&Co.Research
One pitfall in using popular faces as brand ambassadors is that product sales maybe
aectedifthestarsgethighlycriticizedbythepressformisconducts.Whatmanyrms
doistosubsequentlyrelievethemoftheirdutiesasbrandambassadorsanddisassociate
thebrandfromthenegativepress.
Nollywood&Politics
Severalartistes havealsodelvedinto politics. The table below shows some Nollywood
starsthathavepickedupappointmentswiththegovernmentandthepositionsinwhich
theyhaveservedorarecurrentlyserving.
72 Entertainment
NollywoodStars(BrandAmbassa
dors)
Brands Amountpaid Duration
GenevieveNnaji RangeRoverinNigeria $100,000 6months
OmoniOboli Venus(PZCussonsNigeria
Plc)
10million 18months
IniEdo UnitedNationsGoodwill
Ambassador
Undisclosed Undis
closed
StellaDamasus AmVictoriousFashion
Label,Houston,USA
Worthover20million
tobepaidinkind.
2years
StephanieOkereke KanekalonHairBrand Undisclosed Undis
closed
ChiomaChukwukaAkpotha HarpicToiletCleaner
(ReckitBenckinser)
$50,000 Undis
closed
FunkeAkindele GoodMamaDetergent Undisclosed Undis
closed
RamseyNouah,ChiomaChukwuka
Akpotha,IniEdo,RitaDominic,Funke
Akindele,KunleAfolayan,Monalisa
Chinda,DesmondElliot,UcheJombo,
MikeEzuronye,OdunladeAdekola,
andNonsoDiobi
GLOAmbassadors Rangesbetween10to
35million
For2years
MercyJohnson,MrIbu,UcheJombo,
EniolaBadmus,PatienceOzokworJohn
DumeloandMaryRemmy
IrokoTV.com Undisclosed Undis
closed
ArtistesinPolitics
Source:IndustryOperatorsandAgusto&Co.Research
These actors do not leave Nollywood
completely,assomeofthemcontinueto
act after their tenure in political oces.
Political appointments expose them to
service as public servants and provide
anothermeansofincomeforthem.
NollywoodandRegularTVProgramming
Outside of movies, Nollywood stars are
delving into media particularly into Tel
evision and Radio presentations. Chidi
Mokeme hosted the popular reality TV
show Gulder Ultimate Search from
June 2004 till June 2006 , Joke Silva is
MTN Project Fame Academy Principal
and a member of the shows Faculty,
Fred Amata is the anchor for the Next
Soap Star Reality TV Show and Yemi
Shodimu is a wellknown Compere
(Master of Ceremony), TV and Radio
presenter. This sojourn into TV and Ra
dio provides an alternate source of in
comeforartistes
EntrepreneurialNollyStars
Business savvy producers cum actors
like Funke Akindele are oseting pro
duction costs in movie production
through corporate sponsorships and
brand placements. In the movie, The
Return of Jenifa produced by Funke
Akindele, brands like Glo, So Klin and
theLagosStateGovernmentwereadver
tised. Corporate Sponsorship in movies
reduces cost of production thereby in
creasingprotmarginsforproducers.
In addition, producers are also generat
ing additional income through cinema
73 Entertainment
NollywoodStars PositionsAtained
RichardMofeDamijo SpecialAdvisertoDelta
StateGovernmentonYouth
andCulture
HildaDokubo SpecialAdvisertoRivers
StateGovernmentonYouth
andCulture
OkeyBakassi SpecialAssistantonYouth
andCultureinImoState
EjikeAsiegbu SpecialAssistantonEnter
tainmentinImoState
HankAnuku SpecialAdvisertoDelta
StateGovernmentonTour
ismandEntertainment
SamDede DirectorGeneral,Rivers
StateTourismDevelopment
Agency
RotimiMakinde HonourablerepresentingIfe
FederalConstituencyinthe
HouseofRepresentatives
TonyMuonagor SenatorrepresentingIdemili
NorthConstituencyinthe
HouseofAssembly
OnyekaOnwenu Chairman,ImoStateCoun
cilofArtsandCulture
NkiruSylvanus SpecialAssistant,Lagos
AairstoImoStateGover
nor
premieresoftheirmovies.Moviepremi
eres generate income that may help o
set the cost of movie production
through ticket sales at the cinemas.
Therefore, the larger the audience and
thelongeramoviestaysinthecinemas,
thegreatertherevenuefortheproducer.
ThiswasthecaseofthemovieTheRe
turn of Jenifa. The movie premiered in
major cities like Lagos, New York and
Chicago, pulled a large audience and
stayedoninthecinemasforaboutthree
months. The premieres of The Return
of Jenifa altogether generated an esti
mated 32 million. Industry operators
saythisgurewouldhavebeenmoreif
wehadmorecinemasinNigeria.Subse
quently, the movie was released to the
marketonDVDandintherstweek,it
sold over 100, 000 copies generating an
estimated 10million additional income
in a week. The Return of Jenifa high
lightstheindustryasarelativelyprot
able one particularly when the produc
tion budget for a typical Nollywood
movie ranges between $25,000 and
$50,000 (i.e 3.8million to 7.5million).
Investors such as banks and corporate
organizations can invest in the produc
tion of movies by funding the movie
production. This trend has begunin the
Nollywood Industry. Recently, Dia
mondBank,BritishBroadcastingCorpo
ration (BBC) and Afromedia, an adver
tising company in Nigeria, sponsored
the movie, The Last Flight to Abuja
whichpremieredinthecinemasonAu
gust3rd,2012.
Outlook
Nigerian Artistes are becoming aware that
there are gains available outside of their
primary crafts. Corporations now see the
need to link their businesses with popular
entertainmentartistestoincreasesalesrev
enue.Producersarelearningthatgoodsto
rylineswithqualitypicturesatractcorpo
rate sponsorship which will help to oset
part of the production cost. We foresee
moreartistesbecomingbrandambassadors
and young stars trailing the paths of their
predecessors in this form of entrepreneur
ship.
Additionally, politicians now garner sup
port from Nollywood stars. We expect
many politicians to engage the entertain
ment industry for support and dissemina
tion of their political messages in the 2015
generalelections.
Conclusively, we also foresee more inves
tors partnering with movie producers by
funding movie production and sharing the
proceedsfromsaleofmovieswiththepro
ducers. We believe this will move the in
dustrytothenextlevelofgrowth.
74 Entertainment
Nigerias growing demand for staple
foodssuchasbiscuits,bread,pasta,noo
dles etc has made wheat an important
commodityinthecountry.Thisgrowing
demand for wheat based products can
be atributed to an increasing popula
tion, rising income levels and preva
lence of quick service restaurants in the
country, among other reasons. These
factors have overtime resulted in an in
creaseinthevolumeofimportedwheat
as well as the number of players in the
wheatindustry,mostofwhichareour
millingcompanies.
The existence of relatively few wheat
farmersandimportersandalargenum
ber of buyers, coupled with rising de
mand for wheat our based products
makes the Nigerian wheat market a
sellersmarket.Followingchangingcon
sumer preferences and technological
advancement,varietiesofwheatsuchas
hard wheat, soft wheat, red winter, red
springanddurumarecurrentlyusedin
the production of our and our based
productsinNigeria.
75 Wheat
Wheat Grain Stable Outlook
EnduringImportDependence
Local Wheat Production Remains In
sucienttoMeetDemandforWheat
Nigerias wheat production remains
abysmally low with local production
accounting for 2.5% of Nigerias wheat
consumption.Thisisasaresultofunfa
vorable weather conditions, weed infes
tation; inadequate water supply and
poorfundingfacedbywheatfarmersin
thecountry.Wheatiscultivatedinsome
Northern states such as Jigawa, Kano
and Borno. Wheat grown in Nigeria is
currently estimated at 100,000 tonnes
perannumasagainsttheestimatedcon
sumption demand of 4 million metric
tonnes in 2011. Agusto & Co. does not
foresee a signicant increase in the vol
ume of local wheat production in the
near term. In our opinion, any increase
indemandforwheatwillhavetobemet
withimports.However,inthelongrun,
there is the possibility that our millers
may source for wheat locally owing to
the governments renewed eorts to
increase local wheat production by en
hancing water supply through various
irrigation projects in the Northern part
ofthecountry.
The Wheat Industry is Dominated by

Millers
The industry is dominated by few our
milling companies who are the major
importersandindustrialusersofwheat.
Amongst the our millers operating in
Nigeria are small millers who source
their wheat from the big industry play
ers.TheselargeplayersincludeDangote
Flourmills,BUAourmills,Flourmills
of Nigeria. They source their wheat
grains majorly from the U.S. and sell to
their subsidiaries as well as to other
our millers. They are also engaged in
processingwheatgrainintowheatour,
whicharethensoldtobakers.
Though Flour Mills of Nigeria accounts
for the largest volume of imported
wheat in the milling industry, other
largeplayersalsoaccountforagrowing
market share. We believe the Industry
wouldremaindominatedbyafewlarge
rms, whosecontrol is ensured by their
large our milling capacity and owner
shipofmillingsubsidiaries.
In July 2012, Tiger Brands Limited, a
South African packaged goods compa
ny, made a bid to acquire a controlling
interest in Dangote Flour Mills Plc; a
76 Wheat
movewhichifsuccessfulcouldintensify
competition in the Industry. Tiger
Brands Limited previously acquired a
stake in UAC Foods Limited a major
consumerofwheatourandDeliFoods
Limitedabiscuitproducer.Webelieve
that Tiger Brands Limited, through its
strategic acquisitions, will ensure the
sale of wheat imported and milled by
Dangote Flour Mills to its subsidiaries.
Therefore,weexpectanincreaseinDan
goteFlourMillsmarketshare.
ImportsDrivetheNigerianWheatMarket
Nigeria is one of the largest wheat im
porters in the world. Imports constitute
97.5% of total wheat consumption. It is
estimated that the country spends 635
billion yearly on wheat importation,
accounting for 6.3% of total imports in
2011. Despite eorts by the Nigerian
government to reduce the importation
of wheat in order to save foreign ex
change and promote a self sucient
economy, wheat imports compound
annual growth ratestoodat 9.92%from
2000 to 2009. This growth was largely
driven by the rising demand for wheat
basedproductswhichhasinturn,ledto
the expansion of our milling plants in
theCountry.
NigeriasWheatImport(000metrictonnes)
Source:USDA,USWheatAssociates&Agusto&Co.
TheUnitedStatesisthelargestexporter
of wheat globally and accounts for ap
proximately 90% of wheat supplied to
Nigeria. Other countries such as Cana
da,AustraliaandsomeEuropeanUnion
(EU)countriesincludingFrancearealso
suppliersofwheattoNigeria.Themajor
classofwheatimportedinNigeriaisthe
hardredwinterwheat,particularlyasit
isusedintheproductionofbreadone
of the countrys popular staple foods.
Nevertheless, there has been a steady
increase in the importation of other
typesofwheatincludingsoftredwinter
(used for production of biscuits, cakes
andpastries)andhardwhitewheat(for
breadandnoodleproduction).
In 2011, Nigerias wheat imports de
clinedby4%to3.9millionmetrictonnes,
following poor weather conditions in
major exporting countries which aect
77 Wheat
ed global output and led to an increase
in wheat prices. With droughts in the
US and ooding in some EU countries,
Agusto & Co. is of the opinion that Ni
gerias wheat imports in 2012 will re
mainatparwith2011volumes.Howev
er, we expect wheat imports to increase
moderately in 2013 owing to the antici
pated increased demand for wheat
based products and further population
growth expected in forth coming years.
We believe that there will be competi
tionfrombothArgentinaandCanadaif
new buyers, without trade relations
with the U.S. Wheat Association enter
theNigerianmarket.Canadasrelatively
lowpricedcropcouldprovidecompeti
tion for U.S. exports to Nigeria if the
quality is acceptable. Furthermore, as
ChinaandIndiaincreasewheatproduc
tion, we foresee wheat imports from
these countries increasing in the medi
um to long term, given their relatively
lowerprice.
Government Tightens Regulation,
AimstoReduceWheatImport
Inordertoreduceimportationofwheat,
theNigeriangovernmentintroducedthe
cassava policy to encourage the substi
tutionofcassavaourforwheatoorin
the bread baking process. The Obasanjo
led administration introduced the 10%
cassava inclusion policy which com
pelled our millers to include 10% of
cassavaourintheproductionofbread
in Nigeria. Owing to the failure of local
farmerstoproducehighqualitycassava
ourforindustrialusage,thepolicywas
subsequently reviewed and a gradual
complianceof5%cassavainclusionrate
wasadopted. This wasswiftlyfollowed
by the temporary closure of 12 our
mills by the Standards Organisation of
Nigeria(SON)in2007,duetononcom
pliancewiththe5%cassavapolicy.
Following the recent commitment to
reduce wheat importation by the Jona
thanledadministration,thegovernment
has concluded plans to reenforce the
10% cassava inclusion policy. It is also
expected that our millers include 60%
of wheat our and 40% of cassava our
by 2015 in the production of our. As a
resultofthispolicy,theFederalGovern
ment increased the levy on wheat our
to 65% and the levy for wheat grain to
15% eective from 1st July 2012. The
Federal Government plans to establish
18 high quality cassavaprocessing
plants with installed capacity of 240
tonnes per day across the country. We
believe that millers will make atempts
to comply with the 10% cassava inclu
sion policy to prevent their factories
from geting shut by the regulatory
agencies.
78 Wheat
TherecentmovebytheFGtoimport18cassavaprocessingplants,implementingze
ro percent import duty of cassava processing plants as well as the tari increase on
wheatandwheatourhaveshownsignsofcommitmenttothe40%cassavainclusion
goal by 2015. The objective of this policy, we believe, is achievable within the given
time frame as we expect cassava our production to increase in the long term. We
envisageregulationstobemorestringentintheshorttermparticularlyintheareaof
monitoring the wheat milling factories to ensure policy compliance. We expect in
creasedprivatesectorinvestmentoncassavaprocessingintheshorttomediumterm.
Inadditiontothe10%cassavainclusionpolicy,thegovernmentimposeda15%levy
onwheatgrainimportsand65%levyonwheatourwhilemaintainingtheirimport
dutiesat5%and35%respectively.Thenewchargesbecameeectiveonthe1
st
July,
2012.However,thegovernmentonMarch2012imposedadutyfreechargeonequip
mentforprocessingcassavaour.Webelievethatthehighercostassociatedwiththe
newimportdutywouldbepassedontotheconsumersresultinginahigherpricefor
wheatbasedproductsinthecountry.
79 Entertainment
The Food & Beverage Industry remains
the largest in the manufacturing sector
in Nigeria. Demand for the Industrys
products is strong; the countrys large
andgrowingyoungpopulationcreatesa
massive market for consumer food
products. In the last four years, the In
dustry grew by 80% to 860 billion and
is estimated to reach 1,006 billion in
2012. However, competition from im
portedfoods,erraticpowersupply,high
overheads, high borrowing costs and
low investment in research & develop
ment have put the Nigerian Food &
Beverage Industryina very uncompeti
tivesituationrelativetoitsinternational
peers.
AnnualSales( Billion)
Source:IndustryPlayers,AssociationofFood,Beverage&TobaccoEmployers
andAgusto&Co.Research
80 FoodandBeverages
Food & Beverage Stable Outlook
LowInvestmentsinResearch&Development
Imported Raw Materials Continue to
Dominate Even as Food Prices are Ex
pectedtoEscalate
Agricultural output in Nigeria remains
low partly due to farmers insucient
capital and requisite skills for acquiring
andmanagingmoderntechnology.Asa
result, the Nigerian Food & Beverage
Industry continues to depend on im
portedrawmaterials.Itisestimatedthat
Nigeria spends about $10 billion each
year on wheat, sugar, rice and sh im
ports. Volatilities in food prices in the
international markets negatively impact
the Industrys protability. While food
prices eased in the rst half of 2012,
growingconcernsoveradverseweather,
coupledwiththeincreasinginternation
al oil prices have raised concerns about
the sustainability of these low prices.
The severe drought in the United States
is expected to aect the prices of corn
and soybeans as well as other eld
crops. According to the World Bank,
wheat prices are up by more than 50%
between June and August 2012, while
corn and soybean prices have increased
by45%and30%respectively.
The agricultural sector has been identi
ed as a priority sector by the present
administration.Therehavebeenseveral
regulatory interventions such as import
restrictions, tax allowances, capacity
buildingandfundingtohelpboostagri
culturalproduceinNigeria.In2010,the
Agricultural Transformation Agenda
was launched. Under the agenda, gov
ernmenthasprovideda50billionsub
sidy to reduce the cost of farming. The
CBN has also introduced the Nigerian
IncentiveBasedRiskSharingSystemfor
Agricultural Lending (NIRSAL) and a
CommercialAgriculturalCreditScheme
(CACS). NIRSAL aims to minimize the
risk inherent in agricultural lending,
while CACS allows banks access to
about 200billiontonancecommercial
agricultural enterprises under conces
sionaryterms.Whileweexpectthatthis
should improve the availability of agri
cultural inputs in Nigeria, we believe
that structural ineciencies coupled
withthedearthofmoderntechnologyin
farming will continue to constrain the
availability of these inputs. We thus ex
pect the Food & Beverage Industry to
continue to depend on imports in the
shorttomediumterm.
InfrastructureRemainsaKeyChallenge
Poor electricity and water supply as
wellasthedeplorablestateoftheroads
inNigeriacontributetothehighoperat
ing costs of Food & Beverage compa
nies. Due to the shortage of power sup
ply, most key players have become reli
antongaspoweredgenerators.Thecost
ofacquiringandmaintainingthesegen
81 FoodandBeverages
erators adds to the Industrys over
heads. It is estimated that electricity
generation adds as much as 20% 25%
tothecostofproductionformostmanu
facturing companies. Transportation is
another critical element for the Indus
trys margins. The poor state of roads,
particularly in rural regions, leads to
diculties in geting goods and re
sources to markets or the factories. Ac
cording to the African Development
Bank, more than 80% of Nigerias road
network is in poor condition. Over the
past year, the growing insecurity in
somepartsofthecountryhasadversely
aectedtheowofgoodsandresources
between the North and other regions
withinNigeria.
The Nigerian Government has come up
with a road map to overhaul the power
industry, while signicant investments
have also been made to upgrade the
roadnetwork.Over 50billionhasbeen
alloted for the rehabilitation and
maintenanceofexistingpowerfacilities,
whileanadditional 18billionhasbeen
setasidefornewpowerprojectsin2012.
While the recent initiatives area step in
the right direction, we expect the Food
& Beverage Industry to continue to be
beleaguered by distribution challenges
intheshorttermpendingwhensecurity
challenges are fully addressed. Prior
investments in road and power infra
structure have not yet yielded signi
cantresults.
MarginsRemainPressuredbyImportDu
tiesandElevatedOperatingCosts
Other key determinants for the Indus
trys performance are import levies and
duties given the Industrys huge de
pendence on imports. Industry players
are also vulnerable to uctuations in
foreign exchange rates. Apart from raw
materials, the Industry relies on tech
nical expertise as well as plant and
equipment sourced from abroad. The
high import duties along with the esca
lating production and operating costs
negatively impact margins. While ex
change rates softened through H1 2012,
we do not foresee signicant improve
ment margins in the short term given
the deteriorating infrastructure in the
country and the expected increase in
foodprices.
Nigerias Huge Population and Favorable
Demographics Will Support Business
Growth
Nigerias huge population of over 168 mil
lion people provides immense growth op
portunitiesfortheFood&BeverageIndus
try.Thecountrysdemographicstructure
largeportionofworkingclasspeopleisa
major driver of industry sales. Further
more, the demand elasticity for the Indus
trys products is relatively low. This helps
82 FoodandBeverages
ensurethatIndustrydemandremainsfairlysteady,evenduringperiodsofsubduedeco
nomic activity. Otherfactors contributing to the growing demand forFood & Beverage
products are the inux of new products and greater awareness for healthy and up
marketgoods.WeforecastthattheIndustrysturnoverwillbeinexcessof 1trillionby
yearend2012.
83 FoodandBeverages
Thecementindustryiscurrentlyunder
going a phase of increasing domestic
production capacity. For over a decade,
cement consumption was heavily de
pendent on importation. Nigeria was
importingcementtoaugmentlocalpro
duction.Asof2001,70%oftotalcement
consumption was from imports. Subse
quently, the construction of more ce
ment plants in the last 11 years has led
to a signicant decline of cement im
ports to 20% of the nations consump
tion.
CementinNigeriatoday
Despite the signicant growth in local
cement production, the industry is still
grappling with low cement per capita
consumption. Nigeria ranks low when
compared to some countries in Africa
with a per capita cement consumption
of106kg.
84 Cement
Cement Stable Outlook
Untappedgrowthpotentials
UntappedGrowthPotential
PerCapitaCementConsumptionofSelectedAfri
canCountries
Source:Cemnet&Agusto&Co.Research
Several reasons can be atributed to low
per capita consumption of cement in Ni
geria.Theseinclude:
A signicant supply gap: Most cement fac
tories in Nigeria operate below installed
productioncapacityandthisisoneofthe
major reasons for the supply gap in the
cement industry. Local cement supply in
Nigeria rose from 10.7 million metric
tonnes in 2010 to an estimated 14.5 mil
lion metric tonnes in 2011.Meanwhile,
cementdemandinthenationrosehigher
thansupplyinbothyears.From15.8mil
lion metric tonnes in 2010, cement de
mand grew by 8% to an estimated 17.1
million metric tonnes in 2011 denoting a
supplygapof5.1millionmetrictonnesin
2010 and 2.6 million metric tonnes in
2011. Cement was imported to augment
localsupplyinbothyears.Agapinsup
plyoftenleadstoincreaseincementpric
es. In addition, the high cost of capital
involved in seting up cement factories
and expanding production capacity ag
gravates the gap in cement supply. Dan
gote Cement Plc , the most dominant
player in Nigerias cement industry with
a market share of over 60% spent
$1billion to build its Ibese Plant. Lafarge
WAPCO Cement, another key player
spentatotalof 93.9billiontoexpandits
Lakatabu plant from 2.0 million metric
tonnes to 4.5 million metric tonnes per
annum.Increasingcementdemandwith
out adequate expansion in local cement
production continues to widen the sup
ply gap, given that an estimated 75% of
Nigerias total cement supply is goten
fromlocalcementproducers.
Erratic power supply: This results in an
over dependence on alternative fuel
whichisoftenexpensive.
Hikeinfuelpricesandincreasingcement
prices: Given the historyof hikesin fuel
prices(primarilydieselprices)inNigeria,
increasing cement prices are not uncom
mon. Fuel such as LFPO (Low Pour Fuel
Oil) and Diesel are important to cement
manufacturing. LFPO is used for ring
kilns used to produce clinker and diesel
isusedinelectricitygeneratingplants.In
addition,distributiontrucksalsousedie
sel. The chart below compares the prices
ofdieseloverthelastveyearsalongside
cementprices.
Estimated Average Diesel and Cement Prices Per
Tonnefrom20072011inNigeria( )
85 Cement
Source:CompanysnancialsandAgusto&CoResearch
Nigeria, a Huge Potential for Cement Pro
duction
Nigeria has signicant deposits of lime
stoneandclay;theprimaryrawmaterials
in cement manufacturing. Limestone can
be found in over 17 states of the Federa
tion with Benue State having the largest
deposit of over 400 million tonnes. In
addition, clay of various kinds and
gradesaboundthroughoutNigeriassed
imentarybasins.
Limestone
RedClaySoil
Source:RawMaterialsResearchandDevelopmentCouncil(RMRDC)
Outlook
We believe that the supply of electricity
will improve in the medium term, as a
result of the recently signed contract be
tween the Nigerian Government and
Manitoba Hydro International for the
management of the Transmission Com
panyofNigeria(TCN).TCNisoneofthe
successorcompaniescreatedfromdereg
ulating the Power Holding Company of
Nigeria (PHCN) and it combines the
functions of transmission services pro
vider and system operators with that of
marketoperator.Although,thechallenge
oferraticpowersupplymayreduce,elec
tricity tari could increase. Notwith
standing, we expect the increase in elec
tricitytarinottoimpactsignicantlyon
the margins of the cement manufactur
ers. This is because a constant supply of
electricity will reduce the cost of power
ing plants and kilns with diesel and ex
pensiveLPFOfuelrespectively.
86 Cement
In addition, the domestic production
capacity of cement is increasing. We
believe that this will bridge the supply
gap. Various government policies and
domestic manufacturers eort are re
sponsible forthis development. In 2002,
President Olusegun Obasanjo intro
duced a backward integration policy in
the cement industry to encourage do
mesticproductionofcement.Oneofthe
achievements of the policy was that it
increased the number of cement facto
riesinNigeria.PresidentGoodluckJon
athan has proposed a ban on cement
importsinH22012tofurtherencourage
domestic production. Cement manufac
turers are also involved in this drive to
increase domestic production capacity.
Dangote Cement Plc recently signed a
MOU(MemorandumofUnderstanding)
fortheconstructionofa3millionmetric
tonneproductioncapacityplantinCala
bar. There are also several plans under
waytobuildmorecementfactories.
DangoteCementPlcExpansionPlans
Source:DangoteCementPlc
Lafarge WAPCO also expanded its
Lakatabu plant by 2.5 million metric
tonnes in December 2011. This capacity
expansion project increased the compa
nys total cement production to 4.5 mil
lionmetrictonnesfrom2.0millionmet
ric tonnes. We expect these expansions
andnewlyconstructedcementplantsto
completely eliminate cement importa
tion in the near term and increase the
per capita consumption of cement in
Nigeria.
In conclusion, the Nigerian Cement in
dustrys contribution to GDP would
increaseifthepercapitaconsumptionof
cement rises. Given that the Govern
ment is thelargest consumer of cement,
increased Government spending on in
frastructural development such as
building & road constructions would
bode well for the industry. Other as
pectsoftheeconomywouldalsobenet
from improvements in cement produc
tion. For instance, higher production of
cementcouldreducetheunemployment
rate since the industry is labour inten
sive. In addition, a higher per capita
consumption of cement could spur ad
ditional foreign direct investment in the
industry. Despite these growth poten
tials, the high cost of capital for factory
construction and expansion remains a
majorchallenge.
87 Cement
Plant Capacity
IbesePlant 6milliontonneperannum
GbokoPlant 1milliontonneperannum
ObajanaPlant Anadditional5.25million
installedcapacity
GlobalAssetManagementIndustry
Globalfundsundermanagement(FuM)
experienced a sharp decline to an esti
mated $100 trillion in 2011 (2010: $117
trillion).ThelasttimetheIndustryexpe
rienced a similar double digit percent
age decline was during the credit
crunchcrisesin2008.
In2011,theworldwitnessedcivilunrest
inNorthAfricaandtheMiddleEast(the
Arab Spring); the downgrade of the
US sovereign credit rating to AA+ by
Standard and Poors (S&P) credit rating
agency (CRA); poor growth and reces
sion in several developed economies,
and the European debt crisis which re
mainsunresolved.
The global industry has however stabi
lised in 2012. The political landscape is
more stable, and there is renewed opti
mism that the major global economies
willsoonndawaythroughtheirvari
ous crises. We therefore expect global
FuMtoreturntopre2011levelsbyyear
end.Inthelast10yearstheindustryhas
grownatanaveragerateof7%peryear.
Experience has shown that Global FuM
issensitivetovolatilestockmarketsand
sharpmovementsininterestrates.
88
Asset Management Stable Outlook
AssetManagement
RegulationContinuestoDriveGrowth
Africa: The African Asset Management
Industry accounts for less than 1% of
global FuM. However, in the last few
years it has grown at more than twice
the rate of global FuM. This phenome
nalgrowthissupportedbythedevelop
ing African population (15% of world
population), rapidly developing institu
tions, a fast growing formal sector and
everemergingmiddleclass.
Nigeria: The Nigerian Asset Manage
ment Industry grew at a compound an
nual growth rate (CAGR) of 22% be
tween 2004 and 2011. Regulation has
beenakeydriverofthisgrowth,partic
ularly the 2004 pension reform act,
whichledtothecreationoftheNational
Pension Commission (PenCom) and the
licensing of Pension Fund Administra
tors(PFAs).
The pension subsegment accounts for
over 70% of Nigerias Asset Manage
mentIndustry.PensionFuMhasgrown
at an average rate of 30% per year to
over 2.6 trillion as at 30 June 2012. We
expect this growth to continue and for
this sub segment to nish the year with
justunder 3trillioninFuM.
After pensions, insurance is the next
largest subsegment accounting for 12%
oftheIndustry.Asat31December2010,
the National Insurance Commission
(NAICOM) reported total insurance in
dustryFuMinexcessof 420billion.
The remaining 17% of the Industrys
FuMisfromprivatewealth(6%),trustee
(7%)andmutualfunds(4%).
AssetsunderManagement:Nigeria
Source:Agusto&Co
InvestorGroups
Pension Funds: Pension funds continue
to be the drivingforce behind theAsset
Management Industrys impressive
growth. In the four and a half years to
June2012,pensionassetshavegrownat
an average rate of 29% a year. This
growth is not relenting, adding over
200 billion to FuM in the rst six
monthsof2012.
Pension Fund Administrators: Following
the most recent round of consolidation,
there are now 21 PFAs licensed to open
retirementsavingsaccountsforemploy
ees. This is down from 24at thestart of
the year, following acquisition of Ama
89 AssetManagement
na Capital Pensions Limited by Sigma
Pensions Limited. Crib Pension Fund
Managers Limited and Evergreen Pen
sions Limited are also reportedly in the
process of being acquired by another
operator. The recent acquisitions were
triggered by a circular issued by Pen
Com increasing the minimum share
capital of PFAs to 1 billion from 150
million.
Regulation on Investment of Pension
FundAssets
In March 2012, PenCom issued draft
amendments to its investment guide
linesforstakeholderfeedback.Themain
revision proposed in the draft was the
introduction of a multifund structure
with 4 fund types. Three with varying
exposure limits to equity/fund style in
struments; and one specically for non
interest/ethical/Islamic investments.
Other notable proposed revisions in
clude specically providing for Islamic
investmentproductsandexchangetrad
edfunds(ETFs);andrequiringnewreal
estate investment trusts (REITs) to have
an Investment Manager of BBB(IM) or
beter.
InsuranceFunds
With 12% market share, the insurance
industry is the second largest investor
group in Nigeria. Insurance FuM grew
atanaveragerateof4.4%between2008
and2010;wellbelowthegrowthexperi
encedinthepensionsindustry.Howev
er, like the pension industry, regulation
is the key driver for growth. There are
16compulsoryinsurancepolicies,which
should generate gross premiums in ex
cess of 1 trillion annually. However
compliance is low (about 20%), and the
highlevelofcompetitioninthesectoris
causing insurance companies to under
charge. This in turn erodes the capital
baseofmanyplayersandadverselyim
pactsthegrowthintheIndustrysFuM.
We expect this trend to reverse if the
solvency levels of insurance companies
starttocomeunderpressure.
The ratio of life to nonlife business
stoodat25:75asatyearend2010.How
ever,althoughthereisnogrowthinpre
mium income from nonlife business,
lifepremiumshavegrownatanaverage
rate of 37% a year in the 5 years to 31
December 2010. The growth in life pre
miumsistheresultofthejointregulato
ry eorts of PenCom and National In
surance Commission (NAICOM) in en
forcing the compulsory life insurance
policy for those aected by the Pension
ReformAct.
90 AssetManagement
Insurance penetration in Nigeria stands
at less than 1% of the countrys GDP.
We believe there is a large opportunity
forgrowthininsuranceFuMintheme
dium to long term, as compliance and
regulationfortheindustryimprove.
MutualFunds
Between 2008 and 2011, mutual fund
assets under management (AuM) have
hovered at approximately 95 billion
(excluding venture funds) indicating no
growth. With the rest of the asset man
agementindustrygrowingatanaverage
rate of 22% a year, mutual fund market
sharehasdeclinedto4%.
AssetsunderManagement: MutualFundInvest
mentFocus
Source:SecuritiesandExchangeCommission
In the rst 6 months of 2012, mutual
fundAuMdeclinedby6%to 88billion.
The longer dated xed income, REIT
andethicalfocusedfundsaccountedfor
thedropinvalues.Inthecaseoflonger
dated xed income/bond funds. The
sharp rise in interest rates in 2011 may
have caused a mark to market shock to
the fund NAVs. This in turn may have
impaired values and caused unit hold
ers to redeem, particularly if the fund
was marketed as a low risk invest
ment.
AlthoughmutualfundAuMdeclined,6
new funds were launched in the last 2
years,withseveralmoreinthepipeline.
As mutual funds are the main products
oered by asset management compa
nies, we expect this segment to grow
particularly for funds managed by the
larger more reputable asset managers.
The recent changes in pension fund in
vestment guidelines, giving a larger al
locationtomutualfundsmayalsodrive
growthofthisinvestmentproduct.
Outlook
Investorcondenceislowinthecurrent
environment,andweexpectthistoper
sistinto2013.TheNigeriancapitalmar
kets are strongly correlated to global
markets, so we expect subdued perfor
mance as Europe continues to struggle
withitsdebtcrisis.
The SEC and the NSE have published
new regulations and guidelines aimed
atdeepeningthemarketandimproving
eciency in the hope this will bring
91 AssetManagement
back investors. Some of the new regulations published include guidelines for novel
instrumentsintheNigerianmarketsuchasexchangetradedfunds,Islamiccomplaint
investmentsandforeignfunds.
TheAssetManagementIndustryinNigeriahasalsoseenmajorchangesinstructure,
with many investors shifting to xed income investments as a result of poor con
denceintheequitymarket.Theighttosafetyhaschangedthewayassetmanag
ers in Nigeria operate; there has been shift in emphasis from equity management to
xed income management. The majority of asset managers are still building up the
capabilitytomanagexedincome.
TheNigerianAssetManagementIndustrystillfacessignicantchallenges,nonemore
sothanthechallengeofatainingthecriticalmassofassetsundermanagement.Many
assetmanagersinNigeria,bothinthepensionandnonpensionspace,havestruggled
toachievethiscriticalmass.Thishasgivenrisetoasituationwheremanyassetman
agers cannot and do not generate sucient management fees to cover their cost of
operations. Many asset managers are thus forced to either make losses or nd other
meansofcoveringoperatingexpensessuchasproprietarytrading.Weexpectthislack
ofcriticalmassintheNigerianAssetManagementIndustrytopersistinthemedium
term.
WebelievetheoutlookfortheNigerianAssetManagementIndustryisstable.
92 AssetManagement
According to the African Export Import
Bank (AFREXIM), oileld services
whichinclude:
engineering, procurement and con
struction
logisticsandtransportation
drillinganddredging
seismic data acquisition, mapping,
survey and other exploration ser
vices
operationsandmaintenance
quality, health, safety & environ
ment
materialssupplies
accountfor90%ofthecostofproducing
oil. The Oil & Gas Servicing Industry
(the Industry) in Nigeria is therefore
inextricablylinkedtotheNigerianOil&
Gas Upstream Industry. The Industry
has thus beneted from the recent sta
bility in production in Nigerias Oil &
Gas Upstream Industry. The countrys
consistent production performance of
around 2.3 million barrels per day
(mbpd)hasbeenaordedbytherela
tively improved security in the Niger
Delta since the reasonably successful
amnesty programme in 2009. The rising
priceofcrudeoilgloballyhasalsohada
positive impact on crude oil production
inNigeria.Crudeoilpriceswhichexpe
93 Oil&GasServicing
Oil & Gas Servicing Stable Outlook
WaitingonthePIB
riencedthehighesteveraverageof$107
per barrel in 2011 haven rise again in
2012 with an average price of $112 per
barrelasattheendofJuly,basedonthe
Organisation of Petroleum Exporting
Countries(OPEC)referencebasket.
NigeriasOilProductionandPriceofOPECRef
erenceBasket
Source:NNPC&OPEC
World oil demand has been forecast to
growbetween0.8and0.9mbpdin2012
andbetween0.8and1mbpdin2013by
thetwomajorenergywatchdogs:OPEC
and the International Energy Agency
(IEA). The expected increase in global
oil demand bodes well for the Nigerian
Oil & Gas Upstream and therefore the
Oil & Gas Servicing Industry. We ex
pectedproductionintheNigerianOil&
GasUpstreamtobeslightlyaboveaver
age in 2012 and 2013 at 2.4 mbpd and
2.5 mbpd respectively with some major
upstreamprojectsfromTotalE&PNige
ria and Mobil Producing Nigeria set to
comeonstream.Wethereforeexpectthe
logisticsandtransportation;drillingand
dredging; operations and maintenance;
quality, health, safety & environment;
and materials supplies segments of the
Nigerian Oil & Gas Servicing Industry
toenjoysoliddemandin2012/2013.
The Petroleum Industry Bill (PIB),
whichis expected tousher ina new era
fortheNigeriaOil&GasServingIndus
tryandmostparticularlytheindigenous
players in the Industry, has been in the
pipelines for longer than most stake
holders care to remember. The PIB is
supposedtoincreasethecountrysshare
of the income generated from oil and
gasresources.TheinterestsoftheOil&
Gas Servicing Industry in Nigeria are
advanced by provisions, which include
more stringent local content require
ments.Thehighertaxes,particularlyfor
the deep oshore production sharing
contracts, also proposed by the PIB
largelymeanlowerincomefortheInter
nationalOilCompanies(IOCs).Itthere
fore hasnt been a surprise that the bill
has met a hostile reception and faces
quite some resistance from these quar
ters.
ThePIBhasthusbecomesomethingofa
doubleedged sword as the delay in
reachingacompromiseandtheeventual
passage of the bill has led a number of
94 Oil&GasServicing
the IOCs to delay exploration and production investment decisions in the Nigerian
Oil&GasUpstreamIndustry.ThewaitinggamebeingplayedbytheseIOCs,inorder
to reassess decisions in full knowledge of the provisions of the PIB once passed, is
having a detrimental eect on new investment in the Oil & Gas Upstream Industry.
ThisisfurtheraectingtheimmediatedemandforOil&GasServicingIndustryser
vices.
The Nigerian Oil & Gas Servicing Industry, however, remains a growing industry
withthepotentialtoprovideemploymentandreturnsforNigeriaasacountry.The
localcontentdrivehasdevelopedinrecentyearswiththepassageoftheNigerianOil
& Gas Industry Content Development Act in 2010. The IOCs continue to make con
certed eorts to include the maximum amount of local content as is practicable and
todeveloptheOil&GasServicingIndustryinNigeria.
Inouropinion,theoutlookfortheIndustryisstable.
95 Oil&GasServicing
Among the wondrous economic phe
nomenaofourtimesandarmexample
of the strange eects of globalisation is
the Nigerian sugar industry. The Coun
try, with its vast arable land and burst
ing population, has remained depend
ent on imported sugar (and some other
agricultural products) for decades. Alt
hough statistics have posited that agri
culture is the largest contributor to the
Nations GDP, the Countrys food im
portation gures present a dierent
view. The Federal Government has re
peatedly announced its commitment to
developing the agriculture sector and
showcased its eorts by initiatives such
as fertilizer subsidies and micro credit
facilities; nevertheless, their eorts are
riddledwithreportsofmismanagement,
which is evidenced by the slow pace of
growth in the sector. In 2012, Nigeria
produced an estimated 65,000 tonnes of
sugar, representing a marginal increase
of 8% from the previous year. This pro
duction level is merely 4% of the esti
matedsugarconsumptionof1.6million
tonnes. Since 2001, the Government
through the National Sugar Develop
mentCouncilembarkedonaprolonged
privatisation exercise of stateowned
sugar companies, which was only con
cludedin2008.Consequently,Savannah
96
Sugar Stable Outlook
FeelingtheEectsofOverCapacity
Sugar
Sugar Company (owned by Dangote
Sugar Renery), Josepdam Sugar Com
pany and Golden Sugar Company, all
privately owned, have begun sugarcane
cultivation over a combined area in ex
cess of 11,000 hectares in 2012. Never
theless, the country is still a long way
fromimportindependence.
Raw and rened sugar is mainly im
ported from Brazil, the largest sugar
producerintheworld.In2011,rawsug
ar imports are estimated at 1.4 million
tonnes, while rened imports were
125,000 tonnes. The lower amounts of
rened sugar imported into the country
is mainly on account of the higher im
port duty (20%) relative to raw sugar
(5%) and import restrictions. Sugar is
importedovertheAtlanticOceantothe
portsinLagos.AsatJune2012,theaver
age Free on Board (fob) price of raw
sugar was $640 per tonne, with freight
charges at $55 per tonne. Raw sugar is
rened in Nigeria by two prominent
sugarreneries(DangoteSugarrenery
andBUASugarrenery).Thecombined
installed capacity from the two rener
ies at 2.3 million tonnes exceeds the na
tional sugar consumption level; howev
er, other companies are poised to estab
lish additional reneries in the short
term. Onaccount of excess supply,sug
ar rened in Nigeria is already being
exported to Niger, Senegal and Ghana,
with companies planning to increase
theirexportcapacities.
PotentialExportMarkets
Ghana: The size of the Ghanaian Sugar
marketisestimatedat$500million.Gha
naian sugar companies, the Asutsuare
and Komenda Sugar Factory, collapsed
four decades ago. Since the collapse of
thesefactories,thecountryhasdepended
on importation of sugar, estimated in
excess of 300,000 tonnes in 2012
1
. Ghana
currentlyhaslowsugarconsumptionper
capita of 12.6kg
2
(Nigeria: 10kg) and the
estimated annual increase in sugar de
mand is 2.3%
3
. The countrys thriving
pharmaceutical and beverage industries
areamongthelargestconsumersofsugar
andmolassesinGhana.Thestrongsugar
demand provides good opportunity for
Nigerian sugar producers in the short
term. However, new entrants are ex
pected in the Ghanaian sugar market,
which could eventually crowd out the
importmarket.
97
1. IndexMundi
3. TradeInvestAfrica
Sugar
SugarImportsinGhana
Source:Indexmundi
Cargill Incorporated, a leading agri
business multinational company, plans
to invest $100 million on establishing a
sugarreneryinGhana
1
.Thereneryis
expected to have an initial capacity of
450,000 metric tonnes. Once the new
factory becomes operational, it would
satisfy the demand for rened sugar in
Ghana. Consequently, we believe the
Ghanaian market would only provide
shorttermgrowthopportunityforsugar
renedinNigeria.
Senegal: The countryis thelargest sugar
caneproducerinWestAfrica.Thesugar
industry in Senegal is a monopoly, con
trolled by the Compagnie Sucrire S
ngalaise(CSS),whichiswhollyowned
by Groupe Mimran. CSS produced an
estimated100,000tonnesofrenedsug
ar in 2012 and aims to expand produc
tionto150,000tonnesintheneartermto
match the estimated domestic demand.
CSShasalsocommencedtheproduction
ofethanol.Senegalssugardecitiscur
rently satised with imports from
France and Switerland reported at
65,000 metric tonnes in 2012. Dangote
Sugar Renery has announced plans to
commence operations in Senegal in the
short term. In our opinion, the Senega
leseGovernmentsprotectionismofCSS
couldcreateanunfavorablecompetitive
environment for Nigerian companies.
Furthermore, the expansion of CSS
couldreducethesupplydemandgapin
Senegal,makingtheindustrylessatrac
tivefornewentrants.
Outlook
Although there is some potential for
export within West Africa, we believe
recent developments in these neighbor
ing countries are rapidly reducing the
opportunities.Inouropinion,theIndus
trys growth in the medium term is
more likely to be concentrated around
domestic cultivation and milling activi
ties, while the sales volume of rened
sugar would remain relatively stable.
The new sugar reneries expected to
come onstream in the near term would
be forced to compete for a share of the
Nigerian market, and a resultant price
war could thin prot margins. In our
opinion,theIndustrysoutlookisstable.
98 Sugar
1. Bloomberg
99 BuildingMaterials
Building Materials Stable Outlook
Despite the age of the construction indus
tryinNigeria,thecountrystillreliesheavi
ly on imported building materials. Local
producers continue to grapple with con
sumers preferences for imported building
itemswhichareperceivedtobebeterqual
ity. This trend limits growth in the domes
ticmanufacturingofbuildingmaterials.
The Building and Construction sector rec
orded a real growth rate of 13.25% in the
rstquarterof2012ascomparedto13.22%
recorded in the corresponding period of
2011
1
. The slight increase in the building
andconstructionsectorimpliesthatgrowth
inthebuildingmaterialsindustryisgradu
al. Thisis because thegrowth in the build
ingmaterialsindustrydependsonincrease
in construction activities in the country.
Themainfactorresponsibleforthegradual
growth in the industry is consumers pref
erence for imported items. Currently, do
mestic manufacturers are striving to im
prove the quality of their products and in
crease consumers awareness about their
products.
AnAllEncompassingIndustry
Building Materials include cement, metal
roong materials, paints and tiles. Cement
is the major building material used in the
construction industry and it has no close
substitute. Metal roong materials are of
dierent kinds: aluminum, copper, bitu
men, zinc and steel alloys. In Nigeria, zinc
and aluminum are the commonly used
1. NationalBureauof
Statistics(NBS)
GradualStridestoGrowth
metalroongmaterials.
Paintsalsocomeindierentkindsitcould
be gloss, emulsion or coating paint. Gloss
and emulsion are often used on walls in
buildings but coating paint is mainly used
for industrial purposes for instance; it is
used in the marine sector to prevent corro
sioninships.Tilesareusedasnishingma
terialsandforbeauticationpurposes.They
are primarily made from granite, ceramic
and marble. Other building materials in
clude paving stones, doors, woods, vinyl
products,ironrods,granite,etc.
CeramicTiles
IronRods
Granite
Sharpsand
PavingStones
Concrete
IndustryTrends
The Nigerian building materials market is
perceived to be saturated with an inux of
substandard imported products due to in
ecient regulation by the Standard Organi
zation of Nigeria (SON). Some unscrupu
lous Nigerian builders contracted to build
houses buy cheaper substandard building
products. Huge patronage of imported sub
standard products reduce sales and prot
marginsoflocallegitimatemanufacturersof
standard products. Another trend in the
industryisthatimporteditemsfromcertain
countriesarepreferredtolocalproducts.For
instance,SpanishandItaliantilesaresuperi
or to many domestic manufactured tiles.
SanitarywaresfromSpainandItalyarecon
sidered to be of higher quality than local
producebecausetheyaremoredurable.Im
ported doors come in a wide variety of op
tions and grades compared to locally pro
duceddoors.
We believe that these trends would be re
versed with increased public awareness
campaigns about the need to patronize lo
callyproducedbuildingmaterialsaswellas
governmentincentivestolocalproducersof
buildingmaterials.Webelievethisincentive
will create an enabling environment to al
low competition on the basis of price and
qualitywithimportedproducts.
Inux of Substandard Products: its Result
antEect
The Minister of Science and Technology,
Prof. Ita Okon Ewa recently announced the
likelihood of more building collapses in the
rainy season owing to the use of substand
ard building materials across the country.
The supply of substandard building materi
als appears to be on the rise. Between 1978
and June 2007, 101
1
buildings collapsed in
Lagos alone. The use of substandard prod
ucts was identied as the major cause of
these collapses. Furthermore, at the Stake
holdersforumofNBRRI(NigerianBuilding
and Road Research Institute) in May 2011,
the following were part of the conclusions
reached:
Building collapses are more common in
thedenselypopulatedcitiessuchasLa
gos,Abuja,EnuguandPortHarcourt.
Sixty percent of the collapses occur in
LagosStatealone.InLagosforinstance,
thehousinggapcreatesroomforrushed
construction.Thisinadditiontotheuse
of substandard goods led to Lagos ac
counting for 60% of building collapses
inthecountry.
Private, public and corporate organiza
tions own 70%, 23.3 % and 6.7% of col
lapsedbuildingsrespectively.
Useofpoormaterialsisalsoresponsible
forbuildingcollapse.
Outlook
The use of high quality building materials
makeabuildingoranyconstructiondurable
andlesspronetocollapsesparticularlydur
ingsevereweatherconditionssuchasexces
sive rainfall. The increasing incidence of
building collapses particularly due to sub
standardproductshasanegativeimpacton
investment in building and construction in
thecountry.Hence,webelievethatthegov
ernmentshouldfocusontheenforcementof
the National Building Code, guarding entry
points to reduce the inux of substandard
products in the market and to empower
code enforcement ocers to sanitize the
constructionindustry.
1. LagosStatePhysi
calPlanningand
Development
Authority
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contained herein may be reproduced, duplicated or copied by any means what-
soever without the prior written consent of Agusto & Co. Limited. Action will
be taken against companies or individuals who ignore this warning. The infor-
mation contained in this document has been obtained from sources which we
consider to be reliable but do not guarantee as such. The opinions expressed in
this document do not represent investment or other advice and should therefore
not be construed as such.
The circulation of this document is restricted to whom it has been addressed.
Any unauthorized disclosure or use of the information contained herein is pro-
hibited.
LL =
102
Agusto & Co. Limited

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th
Floor), 57 Marina
Lagos
P.O. Box 56136, Ikoyi
Tel: (234) 1 264 3571 5
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Total 1,873 24,188 26,061 156,366

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