Afrin Ves 2014 Out Look

Nigerian Capital Market: 2013 Review & 2014 Outlook
1

February 2014
Poised to Soar?
2
Executive Summary 4
Credit Flows and Regional Integration 4
Domestic Highlights 4
2014 - We are Cautiously Optimistic 5

Section 1: The Global Economy 7
Global Overview - Any Surprises? 8
Market - A Bullish Run 9
The United States: Outspending a Recession with an Oily Edge 10
Europe - Sprouting out the Bud 11
Asia: The Panting Tigers 12
Emerging Economies - Regionalizing Africa 12

Section 2: The Nigerian Economy and Indicators 14
Mapping Out the Landscape 2013 Parameters 15
Liquidity Developments - Prospects of a Trend Reversal 16
Credit Growth and Lending Rates - Trending Higher 17
Fiscal Indicators Downsides of a Single Stream 18
The Cocktail - MPR, CRR, NOP, STA& RDAS 20
Market Vulnerabilities -Global Impact 21
Unforeseen Domestic Consequences 22

Section 3: The Capital Market 24
The Fixed Income Market - Bond Yields to inch Higher 25
2013 in Retrospect Upping the Liquidity Game 25
FGN Bonds: The Leaders and Laggards 26
State and Corporate Bonds 28
The Growing Appetite for Eurobonds 29
AMCON Bonds: An Early Call 30
Trends to watch in 2014 32
The Equity Market 34
Global Equity Market Dynamics 34
Nigerian Equity Market A Repeat of History? 37
Key Market Drivers 38
Sector Performance: Whither Funds Flow? 40
2014 Expectations: 14.2% Market Return 44
Potential Risks in 2014 47
2014 - Scenario Analysis 48

Section 4: Company Profiles 49
5 Sectors | 20 Companies

Section 5: Appendix 71
List of Tables and Charts 72
Table of Content
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4
Credit Flows and Regional Integration
Various events in 2013 impacted the global and domestic economy, as developing
and emerging economies have had to contend with lateral credit flows across capital
markets. Fiscal policies were however designed to absorb the resultant exogenous
shocks and safeguard economic growth. These dynamics dominated the scene and
are likely to be replayed in 2014 considering the feeble global growth recorded in
2013. Global economic growth declined moderately in 2013, replacing the hitherto
engine of global growth (Brazil, Russia, India and China), the BRICs, with a new
league (Mexico, Indonesia, Nigeria and Turkey), the MINTs.
While the economic growth trajectory varied globally, equity markets grew
impressively in 2013 with the MSCI, S&P 500, UK FTSE 100, NIKKEI, CAC 40 and
XETRA gaining 34.1%, 29.6%, 16.7%, 28.3%, 23.3% and 30.9% respectively. This
performance was driven by improved confidence moderating some of the downside
risk to global growth.
In 2014, the likely decision of the U.S. Federal Reserve on the Q.E program will
expose the downsides to global capital flows particularly in emerging economies.
These economies (the BRICs) will have to weigh the benefits of a buoyant market
against the currency effect of hot money outflows.
Sub Saharan Africa (SSA) continues to show huge economic potentials with vast
natural resources and favorable demographics. However, the downside risk to the
region includes the weakening socio-economic and political conditions coupled with
worrisome global policy direction. Despite these threats, we expect the region to
pick-up pace in 2014 and grow at an average 6.1% from the 5.1% growth in 2013.
Domestic Highlights
The stable macroeconomic milieu (exchange rate and inflation) in Nigeria has been
identified as the anchor of 2013 performance achievements. The increased interest
of foreign investors in the economy and the success recorded in price and foreign
exchange stability are commendable memorabilia for the year. These achievements
were facilitated by the hawkish policy of the Monetary Policy Committee (MPC) of
the CBN.

Executive Summary
5
Despite the revenue shortfalls in the oil and gas sector, the domestic economy
rebounded impressively in the 3rd quarter of 2013 on the back of various polices
designed to boost productivity, particularly in the Agricultural sector. Other sectors
of the economy are also poised to receive a boost from the ongoing transformations
in the power sector which could very quickly bring down the cost of manufacturing
significantly. The sale of the power assets will have a direct impact on the entire
economy in 2014, boosting growth to 7.0%.
We observe that the Nigerian stock market has tracked the same path within the
last for 5 years. The Nigerian Capital Market naturally peaks and dips in quarters
that coincide with the release of earnings data. Investors typically follow this cycle
and bet on impressive performance scorecards. This highlights the significance of
earnings and dividends in investors strategy but also presents direction for arbitrage
opportunity for discerning investors.
Our 2014 Outlook
The macroeconomic landscape is poised to witness another year of crucial political
and economic themes. We highlight the key events that will significantly shape the
markets in 2014.
Fiscal tapering in the U.S. will continue to define the pulse of the Nigerian
capital market in 2014. While the market is conscious of the likely implications,
we believe that the tempo of the tapering will be the key determinant of
market direction.
We anticipate that key policy rates will stay within the current region in
Q1:2014, with no momentous changes in the nuance of the monetary
authority. Nevertheless, we expect the MPC may tweak the CRR (to 90.0% -
100.0%) and MPR (to 12.5% - 13.0%) in response to the liquidity dynamics of
2014. However, the direction of monetary policy may shift significantly if the
stance of the successor to Governor Sanusi Lamido Sanusi varies, come June
2014.
We anticipate a 3.0-4.5% depreciation in the Naira in 2014 considering the
aforementioned downside risks. In addition, we forecast an average inflation
rate of 9.5% in 2014.
The equity market is poised to witness another rally, albeit sub 2013 levels. We

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anticipate a 14.2% base case market return, and an optimistic 20.0% bull case.
We expect portfolio inflows (both foreign and domestic) to drive the market
in 2014, facilitated by increased access to a wider market through the new
XGEN trading platform.
The bond market will swing with caution in 2014 as yields are poised to trend
higher considering the medium term threats to stability i.e. political
uncertainty, a change of guard at the CBN and the impact of the U.S. Fiscal
stimulus tapering. These factors will mount pressure on domestic borrowing
cost, creating an avenue for Alpha seeking investors and therefore requires an
active stance in the market.

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Section 1
The Global Economy
8
Global Overview - Any Surprises?
2013 was anticipated as the year of inflection, considering the previous periods of
financial, economic and social distress. This period has been a learning curve for
global economies given the time spent in search of the right policy balance. Policy
makers (particularly in Europe and the U.S.) have had to contend with the
implementation of flexible, timely and credible adjustments against reoccurring
monetary shocks. A blend of monetary and fiscal policies has remained a necessary
tool in absorbing these shocks.

Paradoxically, monetary policy setting across regions varied, while fiscal policy
specifically took cognizance of the need to implement cut-backs in spending. Policies
were designed to either checkmate excesses or achieve targeted objectives.
Monetary policy in the U.S. and Europe were designed to promote growth (through
the near zero interest rates and monthly bond purchases), while emerging
economies targeted price and exchange rate stability. The year however delivered
valuable lessons that highlight the need to conquer institutional constraints (as seen
in the consistent deadlock at the U.S. Congress).

2013 Economic Growth
Economic growth across regions exhibited a mixed pattern in 2013 while capital
markets generally trended positively. Some developed economies (I.e. France, Japan
and the UK) ticked higher while growth in Germany and the US tapered. Developed
economies grew by 1.3% in 2013 and are expected to grow by 2.2% in 2014,
according to IMF forecasts. Growth in emerging economies moderated to 4.7% in
2013 (4.9% in 2012), while Sub Saharan Africa (SSA) grew by 5.1% (4.8% in 2012). A
new acronym was introduced, the MINT, to delineate a new league of countries
emerging as global engines of growth (Mexico, Indonesia, Nigeria and Turkey).
Chart 1 below shows the growth trends across select economies as well as forecasts
for 2014.

The Global Economy
9
The moderation in economic expansion across emerging economies i.e. Brazil, India
and China was predicated on several challenges, most important being the flat
growth in China (7.7% in both 2012 and 2013) due to internal adjustments within
the Chinese economy.

This impacted growth in the global economy which relies on Chinese trade flows,
with the E.U and the US feeling the greatest pinch. Nevertheless, the MINT
economies (MINT GDP Growth - 2012: 4.3%, 2013: 4.7%) are poised to drive the
global growth trends within the next decade. Economic expansion within the BRIC
nations, with the exception of China, appears to have reached a point of inflection
and trending downwards.

In absolute terms, we do not foresee any major threats to growth in emerging
economies in the medium term. Growth in this region will be driven by moderate
growth in exports and supportive fiscal and monetary policies. However, events in
the US and Europe might precipitate lower portfolio inflows to emerging
economies. However, social and political risks remain a key source of concern

Global Markets - A Bullish Run
While the economic growth trajectory varied across regions, global markets
generally had a bullish run in 2013 with equities outperforming all other asset

Chart 1: Growth Trends across Select Regions and Economies
Source: IMF, Afrinvest Research
1.4%
4.9%
2.8%
0.3%
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Adva nced
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US UK Eu ro Are a Chi na SS A
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classes globally. The MSCI, S&P 500, UK FTSE 100, NIKKEI, CAC 40 and XETRA all
closed the year higher in 2013 (with 34.1%, 29.6%, 16.7%, 28.3%, 23.26% and
30.9% gain respectively).
This bullish run in equity markets was driven principally by improved investor
confidence, moderating some of the downside risks to global growth. Although,
fiscal policy seemingly acted as a drag to growth, monetary conditions softened the
blow. In addition, the constant review of fiscal policies buffered market confidence,
indicating that authorities were constantly engaged in designing inventive ways to
solve the unending economic challenges.

The United States: Outspending a Recession with an Oily Edge
The fiscal stress in the U.S, led to long drawn out debates on the need to raise the
debt ceiling which took center stage in 2013 with a climax in November when the
U.S government shut down partially. The likelihood of a debt default questioned
the erstwhile risk free status of sovereign bonds although this event was more of
a political attack rather than a logical disagreement with the terms of the spending
bill.
Notwithstanding, the U.S economy gained momentum with 2.5% and 4.1% growth
reported in Q2:2013 and Q3:2013 respectively. The U.S manufacturing data followed
the same positive path growing by a 0.4% average in 2013. A rebound in the U.S in

Chart 2: Performance of Global Equity Indices
Source: Bloomberg, Afrinvest Research
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Emerging Markets Global Markets Frontier Markets Nigeria
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2014 will have a positive impact on other regions globally particularly China.
Afrinvest Research foresees a moderate global growth trend, with increasing focus
on the U.S. market. In addition, we believe the prices of U.S. manufactured goods
will drop gradually due to cheaper energy prices. The discovery of Shale Oil in the
U.S is changing the global oil map. Despite the moderate increase in global oil
supplies, the challenges to production in the Middle East and North Africa might
erode the gains of the new discovery. However, the U.S. still stands at a vantage
position as we commence 2014.

Europe - Sprouting out the Bud
The European economy is beginning to expand after an 18-month long subzero GDP
growth. The 18-member region has had to grapple with slumping indicators
including: financial destabilization as well as economic and social unrest. However,
conditions in the region have gradually begun to gain traction, albeit feeble.
Interest rate forward guidance and various proactive policy actions have reduced
major risks, stabilized financial conditions and deepened market confidence. The
Euro areas (EU18) GDP contracted by 0.4% in 2013 (0.7% in 2012), but is forecast to
grow by 1.0% in 2014. The regions biggest economies i.e. Germany, Italy and Spain
grew 0.5%, -1.8%, and -1.2 % in 2013, but are expected to grow by 1.6%, 0.6%,
0.6% in 2014 respectively. The UK also grew by 1.7% in 2013 and is expected to
grow by 2.4% in 2014.

Chart 3: EU GDP Growth
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EU GDP Growth rate
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Asia: The Panting Tigers
The Asian albatross, China, remains the key driver of the region. China fell short of
its extraordinary growth trajectory in 2013 to record a flat unimpressive 7.7%
growth in 2013, after attaining a 10.4% quarterly average in 2010 (see Chart 4). This
slowdown in economic performance can be linked to internal regulatory issues and
global demand dynamics. For instance, the vigor with which the Chinese economy
grew in 2012 dipped at the start of the year (7.7% Q1:2013) but moderately gained
momentum in Q3:2013 (7.8%).
Despite these downsides to growth, Asia is poised to benefit from the ongoing
expansion in Europe and the U.S, due to increasing demand for Asian exports. Other
Asian counterparts i.e. Indonesia, India, Japan, and South Korea all grew by 6.1%,
4.4%, 1.7% and 0.6% respectively in 2013. Asia and the Pacific region is expected to
pick up and is likely to remain the worlds economic engine despite the recent soft
patch in global growth and increasing volatility in international financial markets.

Emerging Economies - Regionalizing Africa
Sub - Saharan Africa (SSA) grew at a decent 5.1% in 2013. This growth was fairly
moderate despite bubbling political tensions across the region. This positive trend is
a reflection of commendable macroeconomic policies as well as robust domestic
demand. The SSA region continues to show huge economic potential with vast

Chart 4: Declining GDP in Asia
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10
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2007 2008 2009 2010 2011 2012
Indonesia
India
China
South Korea
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natural resources and favorable demographics. However, the downside risks to the
region include: the weakening socio-economic and political conditions of
neighboring countries and global policy direction. Despite these threats, the IMF
expects the region to pick-up pace in 2014, growing at an average 6.1% in 2014,
from 5.1% in 2013; supported by investment in infrastructure and production
capacity.

14
K

Section 2
The Nigerian Economy
15
Mapping Out the Landscape 2013 Parameters
The Nigerian operating environment in 2013 has been uniquely defined by certain
factors that predetermine growth dynamics, highlighting its uniqueness in
comparison to other countries. These internal or external factors have shaped the
outcome thus far and sustained the growth trajectory of the economy. These
include: the policy landscape (fiscal and monetary), liquidity dynamics, capital flows,
security challenges, political and sociocultural environment and global growth
trends. These factors define the operating business environment; potential
opportunities and market size. We present an analysis of the key indicators that
characterize the investment climate in Nigeria, highlighting the significance and
impact of each on the economic growth trend in 2013, as well as our outlook for
2014.
Economic Developments A Range Economic Signals
Developments in various segments of the real economy have varied generally, but
the sum of all parts yields a positive trend. For instance, economic activities
moderately declined in Q1:2013 to 6.2% (from 7.0% in Q4:2012), remained flat
marginally in Q2:2013 (6.2%) but rose sharply in Q3:2013 (6.8%). In contrast, the oil
and gas sector, which accounts for over 80.0% of government revenues, lost
significant traction in 2013. The sector grew (-0.5%) in Q3:2013, higher than
Q2:2013 (-1.2%) but below the 0.1% growth in Q1:2013. The sector contributed
12.5% to the countrys GDP in Q3:2013, lower than 12.9% in Q2:2013. Adding to the
woes of the Nigerian oil and gas sector is the U.S.s shift to improve oil
self-sufficiency through the increased exploration and production of Shale oil. This
development will continue to change the global oil map in 2014 and beyond.
The agricultural sector delivered an impressive outing in 2013, stimulated by various
government policies that have consistently boosted output by 5.1% in Q3:2013 from
4.5% in Q2:2013. The sector contributed 37.4% to the GDP in Q3:2013, up from
33.1% and 28.4% in Q2:2013 and Q1:2013 respectively.
The range of signals in the oil Sector, agricultural sector and the economy in general
presents mixed outlook for the economy. However, there are some positive
The Nigerian Economy & Indicators
16
highlights that are likely to take 2014 by storm, including the successful sale of
subsidiaries of PHCN as part of the transformation in the power sector.
The manufacturing industry currently contributes approximately 5.0% to the
countrys GDP. We anticipate that positive developments in the power sector will
catalyse growth in the GDP for the economy as a whole. The chart below shows the
contribution of oil & gas and agriculture to GDP in 2013.
Liquidity Developments - Prospects of a Trend Reversal
Within the last 5 years, monetary aggregates (narrow and broad money) grew
annually by approximately 33.0% and 55.0% respectively. This growth occurred
during very tumultuous times in the economy, particularly within the financial
market. The financial industry witnessed series of challenges that led to the collapse
of weaker institutions. However, in 2013, monetary aggregates took a different turn
as indicated in the 5.4% and 5.2% decline of M1 and M2 to N6.3tn and N14.4tn

respectively. The decline in broad money supply can be associated with the CBNs
tightening measures targeted at price stability. We also observed the effect of these
drastic measures in the overnight lending rates, which spiked as high as 56.6%
during a trading day on September 18, 2013.
The chart below depicts a correlated trend between Narrow Money (M1) and Broad
Money (M2). M2 marginally ticked higher and stabilized at the end of 2012, but
subsequently declined at the end of Q2:2013. M1 also picked up pace at the end of

Chart 5: Quarterly GDP Growth
Source: CBN, Afrinvest Research
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Agriculture Oil and Gas Country GDP
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Credit Growth and Lending Rates - Trending Higher
Credit to the private sector increased considerably by 6.8% in 2013 (from N15.2tn in
Dec. 2012 to N16.5tn in Dec. 2013). A key driver of this growth is the recent
participation of financial institutions in the purchase of power assets; worth
N480.0bn. The government also offered single digit interest rates (7.0%) credit to
the agricultural sector in an attempt to boost productivity, and build on plans to
diversify the economy. We anticipate the credit scheme will further boost
contribution from the agricultural sector in 2014.

Chart 6: Broad and Narrow Money (20122013)
Chart 7: Credit to the Private Sector
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Narrow Money Broad Money
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Despite these credit developments in the agricultural sector and the general
economic growth trend, the maximum and prime lending rate has not been
impacted significantly. This assumes that market players do not re-price risk
irrespective of economic trends. In addition, rates are likely to respond to negative
shocks as opposed to positive developments in the financial system. The anticipated
overhaul of the Micro-Finance Banking (MFB) system is also poised to buffer credit
expansion to the private sector.

Fiscal Indicators Downsides of a Single Stream
The Nigerian federal governments 2013 annual budget assumptions were
predicated on a deficit but with relatively prudent assumptions. The assumptions
showed the budget was driven primarily by oil revenue, thereby exposing the
narrow income-base of the government. The viability of the budget assumptions,
with the exception of oil prices, was short-lived and quickly flawed due to adverse
circumstance (oil theft and pipeline vandalism) in oil production. Governments
revenues thus faced significant pressure in 2013 due to the inability to meet the
2.5mbpd budgets target (Actual output - Q1:2013 2.29mbpd, Q2:2013 2.11mbpd
and Q3:2013 1.89mbpd) This pressure point has questioned the direction of
governments policy and highlighted the lapses associated with a mono-product
economy with less emphasis on diversification.

Source: OPEC, Afrinvest Research
Chart 8: Crude Oil price and Output in 2013
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Domestic Production (mbpd) Crude Oil Price (Bonny Light, $)
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The proposed 2014 budget is estimated at N4.6tn, 7.4% lower than the N5.0tn
budgeted for the 2013 fiscal year. The federal government moderated its
assumptions in the 2014 budget as presented by the coordinating minister of
finance on behalf of the president. The benchmark oil price was also reduced to
US$74.00 per barrel (from US$79.00 per barrel in 2013), indicating further
improvements in consolidating governments savings. A downward review in the
estimated level of oil production (2.38mbpd from 2.53mbpd), implies that the
government is conscious of the challenges in the oil sector i.e. illegal bunkering,
pipeline vandalism and potential reduction in demand by the U.S.

Other assumptions include an estimated GDP growth rate of 6.8% (from 6.5% in
2013) and a N160.00/US$1.00 exchange rate. The budget allocated 73.8% to
recurrent expenditure, 3.6% higher than the amount allocated in 2013 while the
amount allocated to capital expenditure declined 34.0%.

Source: Budget Office, Afrinvest Research
Chart 9: Government Budget in 2013 and 2014 (Proposed)
Key Budget Items 2013 2014 Change (%)
Total Revenue (N in Trn) 11.04 10.10 -8.5%
Gross Oil Revnue 7.73 6.81 -11.9%
Gross Non-Oil Revenue 3.31 3.29 -0.6%
Total Expenditure (N in Trn) 4.99 4.64 -7.0%
Recurrent Expenditure 3.37 3.54 5.1%
Non-debt 2.39 2.43 1.7%
Debt Service 0.59 0.71 20.3%
Statutory Transfer 0.39 0.40 3.1%
Capital Expenditire 1.62 1.10 -32.1%
% of Recurrent to Total Exp 67.5% 76.3% 8.8%
% of Capital to Total Exp 32.5% 23.7% -8.8%
Budget Deficit as % of GDP 1.85 1.90 5.0%
Assumptions
Benchmark Oil Price per barrel ($) 79.00 77.50 -1.9%
Oil Production (mbpd) 2.56 2.39 -6.7%
Projected Real GDP Growth 6.50% 6.75% 0.3%
Average Exchange Rate (N) 160.00 160.00 0.0%
20
A number of events in 2013 moderately rattled the economy, requiring the design
of hawkish policies that defined the liquidity dynamics through the year. The CBN
maintained a vigilant watch over monetary indicators in order to ensure a stable
and conducive environment for investments. These policies, particularly the 50.0%
CRR, have occasionally been drastic, thereby necessitating sudden adjustments and
leaving the market somewhat liquidity challenged.

The Cocktail - MPR, CRR, NOP, STA& RDAS
The focus of monetary authorities in 2013 was consistently around ensuring price
stability. The year was therefore shaped by a cocktail of policies designed to prevent
any fiscal overdrive arising from the governments spending profile, high powered
money or market liquidity dynamics. The policies included a 38.0% increase in the
Cash Reserve Requirement (CRR) on public sector deposits and MPR maintained at
12.0% for 27 consecutive months. These policies were necessitated by the growing
need to reestablish confidence in the economy, stabilize the macro economy, boost
real returns on investments and attract foreign portfolio investments (FPI).
The combination of these hawkish policies resulted in the decline in the inflation
rate to single digit (8.5% average in 2013) as depicted above. In addition, the 30.7%
Q-o-Q reduction in subscriptions at the Treasury Bills (TBs) market (PMA and OMO)
in Q3:2013 to N3.7tn is indicative of the impact of these monetary policies. This
effectively reduced the funds available to DMBs for participation in the fixed income
market.
Monetary Indicators
Chart 10: CBN Rates and Inflation
6.0%
8.0%
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14.0%
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MPR
CRR (Public)
NOP
21
Market players remain unsure as to how current trends in the economy might shape
future MPCs decisions. A potential unlikely scenario in 2014 is the reduction in the
MPR in an attempt to score political points by easing credit to the real sector.
However, this scenario constrained by the trade-off of triggering a capital inflow
reversal, hence losing grip of successes made on price and exchange rate stability. In
the meantime, the current market dynamics i.e. high MPR and stable exchange rate
favours the inflow of capital desirous of competitive return on their investments.
Despite the progress made with monetary policy, a key relationship has emerged as
a crucial threat to economic stability. The dwindling synergy between fiscal and
monetary policy has underscored the need for a balanced approach to managing
the economy. This disconnect can be observed in the rising public debt, growing
government spending, weakening revenue profile and the depletion of reserves. We
believe that the success of monetary and fiscal policies require a hand shake to
ensure a sustainable objective is achieved.
Finally, we expect the key policy rates to stay within the current region in H1:2014
with no significant changes in the nuance of the monetary authority. Nevertheless
we expect the MPC to tweak the CRR (to 90.0% - 100.0%) and MPR (to 12.5% -
13.0%) in response to the liquidity dynamics of 2014. However, the direction of
monetary policy relies primarily on the stance of the successor at the CBN, come
June 2014. With the current governors tenure expiring in May, the challenge
remains identifying and appointing an eligible successor that can fill the shoes of
the outgoing Governor Sanusi Lamido Sanusi.
Market Vulnerabilities -Global Impact
It is acknowledged that CBNs monetary policy has stabilized the value of the naira,
a 1.5% depreciation at the interbank market in 2013, compared to peers (Indian
Rupee: - 30.0%, Indonesian Rupiah: - 20.0% and South African Rand: - 22.0%).
However, global monetary policy, particularly in the U.S, continues to exert pressure
on other economies, especially smaller countries with an open economy. For
instance, indications of a reduction in the U.S bond purchase drove the Naira
southwards (to an all-time low of 162.35/US$1.00 at the interbank in September
2013), as investors rebalanced portfolios to minimize the perceived risk. This

22
highlights the significance of global macroeconomic themes in setting and adjusting
domestic policies.
The U.S Federal Reserve has delivered a clearer scope for the tapering process,
easing pressure in the market by emphasizing the reason for tapering rather than
the need to taper. We foresee a moderation in capital reversal and despite the
$10.0bn reduction in the bond buying program in the near term. However, an
increase in the tempo of tapering (to $20.0bn) will have a significant effect on the
market.
Unforeseen Domestic Consequences
The CBN brought back the Retail Dutch Auction System, in October 2, 2013 to
replace the Wholesale Dutch Auction System (WDAS). This was intended to curtail
excessive loopholes in the WDAS and avert money laundering and the dollarization
of the economy by campaign funds. This policy was also accompanied by a Know
Your Customer (KYC) requirement that mandates the reporting of all foreign
exchange transactions to the CBN. Consequently, this reduced the dollar demand at
the CBN auction by 42.0% W-o-W from October.
However, the adoption of RDAS, effective October 2nd 2013, tightened the supply
of the dollar at the parallel market segment, as seen in the 5.5% and 3.0%
depreciation at the BDC and parallel market segments respectively in Q4:2013,
yielding a 7.9% spread between the interbank and the BDC. This suggests that
either the size of the unregulated segment of the economy was underestimated or

Chart 11: Emerging Market Currencies Under Pressure
-5.0
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23
the period of short term policy pains precedes the benefits of this policy in the long
run. If the later were the case, then this policy will eventually reveal various winners
and losers, however the policy objective essentially requires more winners than
losers.

24

Section 3
The Nigerian Capital
Market
25
2014 Bond Yields to inch Higher
Global credit flows and various events in the US and Europe have sustained the
inverted shape of the yield curve of various emerging economies including Nigeria
in 2013. Investors have shown a preference for short to mid-term instruments as
long term interest rate outlook remained downward. 2014 presents interesting
investment themes in the bond market although a repeat of 2012 or 2013
impressive returns is highly unlikely. Nevertheless, the market will swing with
cautious skepticism (when 2015 politics and fiscal spending increases country risk
premium) or mixed optimism (when the CBN and DMO insist on keeping primary
market rate at above 13.0%). While the near default of U.S. Sovereign debt
instruments in October 2013 questioned the validity of a risk free investment,
bonds remain the key instrument for de-risking portfolios. We expect bond yields
to trend northwards in 2014 (towards 14.0%) as political uncertainties, transition at
the CBN and US Fiscal stimulus tapering mounts pressure on domestic borrowing
cost. Consequently, a passive stance on the market beta is unlikely to generate
alpha in 2014.

2013 in Retrospect Upping the Liquidity Game

Yields in the Nigerian fixed income market declined from a peak of 18.0% in 2012
to 12.5% by year end. This gradual decline was stimulated by the continued interest
of offshore and domestic fund managers in FGN bonds given its high risk adjusted
return relative to other frontier markets. This was further boosted by the inclusion
of FGN bonds on the JP Morgan Emerging Market Bond Index and Barclays
Emerging Markets Local Currency Bond Index (EM-LCBI) in October 2012 and March
2013 respectively.

The relatively lower yield volatility experienced in 2013 was due to a stable
monetary policy environment particularly with regards to the benchmark interest
rate (the MPR) which was held at 12.0% throughout the year. Consequently, the
capitalization of the bond market increased to N7.4tn by December 2013 comprising
of corporate bonds (N200.4bn), state government bonds (N319.0bn) and FGN bonds
(N6.9tn).
The Fixed Income Market
26
The table above presents a historical representation of the size of Nigerian debt
market.

The Leaders and Laggards

The bond market gained 6.0% in 2013 compared to 5.8% 2012, driven partly by the
inclusion of some FGN bonds on international market indices. In addition to the
attractive yields, declining inflation (averaged 8.5% in 2013) and greater liquidity
have improved the daily transaction values and volumes significantly. Total foreign
investments in FGN bonds now stand at $5.1bn, compared to $500.0m as at the
beginning of 2012. Nevertheless, the 6.0% performance of the bond market was
dwarfed by the 47.2% return recorded by the equity market. However, the countrys
inverted sovereign yield curve maintained a step-like downward shift Q-o-Q as
illustrated below.

3% 4%
93%
Corporate
Bonds
State Govt.
Bonds
FGN Bonds
Chart 12: Trend of FGN Treasury Issuances (2008 2013)
Source: DMO, Afrinvest Research
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
1M 2M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 20Y
March June
Sept. Dec.
Chart 13: The declining Sovereign Yield Curve (Q-o-Q)
27
A closer look at the secondary market in 2013 shows an impressive outing for most
of the benchmark bonds particularly the 3-year and 10-year maturities. Investors
appear skeptical on the long term interest rate outlook, given that expected
liquidity dynamics of 2014 may necessitate further tightening. In addition, the
inauguration of the Financial Markets Dealers Quotation (FMDQ) brought fresh
liquidity to the secondary market, pushing market volumes to new high of above
1,000 deals per week. The 13.05%AUG2016 bond emerged the best performing FGN
bond for the year, with a 12.8% price appreciation; followed by the 10.75%
MAR2014 with a gain of 12.3%. The table below outlines the performance of FGN
bonds in the secondary market during 2013.

Secondary Bond Market Environment
Chart 14: FGN Bonds Market in 2013
Source: NSE, Bloomberg, Afrinvest Research
FGN Bonds Maturity Size Tenor TTM Duration
Current
Yield
Coupon
2012 Price
Change
Total Return
Benchmark Bonds
13.05%FGNAUG2016 16/08/2016 160.5 3yr 2.59 2.04 12.9% 13.1% -0.3% 12.8%
16.00% FGN JUN 2019 29/06/2019 320 7yr 5.46 3.67 13.0% 16.0% -5.5% 10.5%
4.00% FGN APR 2015 23/04/2015 485.0 5yr 1.27 1.17 12.9% 4.0% 6.5% 10.5%
16.39% FGN JAN 2022 27/01/2022 463.71 10yr 8.04 4.39 13.1% 16.4% -6.9% 9.5%
10.70% FGN MAY 2018 30/05/2018 232.22 10yr 4.38 3.31 12.9% 10.7% -2.8% 7.9%
10.00% FGN JUL 2030 23/07/2030 499.56 20yr 16.52 6.59 13.2% 10.0% -6.3% 3.7%
Other FGN Bonds
10.75% FGN MAR 2014 30/03/2014 35.0 7yr 0.21 0.22 14.0% 10.8% 0.5% 11.3%
10.50% FGN MAR 2014 18/03/2014 320.0 3yr 0.18 0.17 10.3% 10.5% 0.7% 11.2%
9.20% FGN JUN 2014 29/06/2014 45.0 7yr 0.46 0.44 11.7% 9.2% 1.8% 11.0%
9.25% FGN SEP 2014 28/09/2014 100.0 7yr 0.71 0.64 12.1% 9.3% 1.5% 10.8%
15.10% FGN APR 2017 27/04/2017 351.5 5yr 3.29 2.49 13.0% 15.1% -4.8% 10.3%
15.00% FGN NOV 2028 28/11/2028 65.0 20yr 14.87 6.22 13.1% 15.0% -6.6% 8.4%
9.85% FGN JUL 2017 27/07/2017 20.0 10yr 3.53 2.73 12.9% 9.9% -1.7% 8.2%
9.35% FGN AUG 2017 31/08/2017 80.0 10yr 3.63 2.83 12.9% 9.4% -1.3% 8.0%
9.35% FGN DEC 2017 14/12/2017 20.0 10yr 3.92 3.10 13.0% 9.4% -1.8% 7.5%
12.49% FGN MAY 2029 22/05/2029 115.4 20yr 15.35 6.48 13.1% 12.5% -6.5% 6.0%
7.00% FGN OCT 2019 23/10/2019 188.9 10yr 5.77 4.32 13.0% 7.0% -2.7% 4.3%
8.50% FGN NOV 2029 20/11/2029 110.0 20yr 15.85 7.04 13.1% 8.5% -6.3% 2.2%
EUROBONDS
FGN Maturity Size ($mn) Tenor TTM Duration Yield Coupon Mid Price Rating
FGN 6.38% JUL 12,2023 12/07/2023 500 10yr 9.49 7.11 5.81% 6.38% 104.09 BB-
FGN 6.75% JAN 28,2021 28/01/2021 500 10yr 7.04 5.48 5.26% 6.75% 108.67 BB-
FGN 5.13% JUL 12,2018 12/07/2018 500 5yr 4.49 3.99 4.41% 5.13% 102.89 BB-
28
In an attempt to meet revenue shortfalls, the Federal Government issued
approximately N900.0bn of FGN bonds in 2013, through the reopening of the
5-year, 7-year, 10-year and 20-year maturities. This was implemented through the
Debt Management Office (DMO) issued N285.0bn worth of FGN bonds in Q1:2013,
N299.8bn and N195.0bn and N195.0bn, in Q2:2013, Q3:2013 and Q4:2013
respectively. As anticipated, virtually all issuances were oversubscribed by
approximately 110.0%. This substantiates the quantum of investible funds seeking
yield in the fixed income market. Nevertheless, the N974.8bn bonds issued in 2013
was 73.5% above the N547.0bn estimated borrowing in the 2013 budget. The chart
below shows the quarterly issuances of the DMO and the CBN in 2013.
State and Corporate Bonds
Municipal bond issuances did not increase significantly in 2013 relative to 2011 and
2012 despite the attractive yield environment. This can be linked to the cumbersome
and restrictive approval process as well as the declining revenue profile of the
government. Nevertheless, Lagos State defied the odds with the issuance of N87.5bn
of 7-year bonds maturing in November 2020 at a coupon of 12.5%. This bond is the
second and final tranche of the state governments N167.5bn debt issuance
program. Osun State also issued the flagship N10.0bn Sukuk bond which recorded a
20.0% oversubscription. The table below lists all State government bonds issued
from 2010 to present.

Primary Market to the Rescue
Chart 15: Primary Market Activity (2012 vs. 2013)
FGN Bonds TBills Total FGN Bonds TBills
Q1:2012 139,760 1,385,124 1,524,884 16.00% 15.30%
Q1:2013 285,000 5,374,596 5,659,596 11.10% 10.50%
Q2:2012 243,910 1,497,892 1,741,802 15.50% 14.40%
Q2:2013 299,800 2,850,504 3,150,304 12.20% 11.70%
Q3:2012 135,000 1,174,346 1,309,346 15.00% 14.00%
Q3:2013 195,000 1,259,374 1,454,374 13.50% 12.00%
Q4:2012 135,236 2,006,630 2,141,866 12.80% 12.60%
Q4:2013 195,000 826,497 1,021,497 13.00% 11.40%
Primary Market Activities 2012 vs. 2013 (N'millions) I Average True Yield
29

The Growing Appetite for Eurobonds
The past 3 years has witnessed an unprecedented surge in appetite for dollar
denominated Eurobonds amongst sovereign and corporate borrowers. The banks
have particularly topped the chart in an attempt to raise additional Tier-2 capital.
This has facilitated the issuance of longer term Eurobonds to meet the growing
demand for US Dollar denominated credit facilities. In addition, the increasing
participation of Nigerian banks in syndicated lending is equally a major driver of
Eurobond issuances. Meanwhile, the Federal Government (through the DMO) has
issued $1.5bn Eurobonds in 3 tranches of $500m since 2011. Chart 17 below captures
the Eurobond issuances so far, while Chart 18 shows the trend in FGN Eurobond
yield in 2013.

Corporate Issuances why
are they off the market?

The interest rate environment
has been quite unfavorable
for corporates keen on raising
funds in the debt market.
Since investors are likely to
demand a 5-7% risk premium
on the MPR, the resulting
bond coupon remains a huge
deterrent. However, the
existing corporate bonds in
the market are currently
performing as no case of
default has been published in
recent times.
Chart 16: State Government Bonds
Issue Year State Size (N'bn)Maturity Coupon
Lagos 57.5 2017 10.0%
Bayelsa 50.0 2017 13.5%
2010 Kaduna 8.5 2017 12.5%
Ebonyi 16.5 2015 13.0%
Edo 25.0 2016 14.0%
Benue 13.0 2016 14.0%
Delta 50.0 2018 14.5%
2011 Ekiti 25.0 2018 14.0%
Niger 9.0 2018 14.0%
Ondo 27.0 2018 15.5%
Gombe 20.0 2019 15.5%
2012 Lagos 80.0 2019 14.5%
Osun 30.0 2019 14.8%
Lagos 87.5 2020 12.3%
2013 Osun 10.0 2020 n/a
Ekiti 5.0 2020 14.5%
Niger 12.0 2020 14.0%
Nasarawa 5.0 na na
Kogi 5.0 2020 15.0%
State Bond Issuances (2010 - 2013)
30

AMCON Bonds: An Early Call
Another event that shaped 2013 was the redemption of N1.7tn of AMCON bonds
through the bonds for T-Bills exchange to the tune of the face value of individual
bond holdings. AMCON also announced the early redemption (at December 30,
2013) of a total of N3.0tn of Series II, Series III and Series IV bonds scheduled to
mature in 2014. This bond refinancing program effectively delivered a 7.0% cost
savings to AMCON relative to the 13.0% cost of the bonds as at December 2013. The
balance of N1.0tn of Series V bond will be redeemed by October 2014 making the
CBN the sole creditor to AMCON. This should create a more sustainable footing for
AMCON in managing its debt portfolio.

Chart 17: Corporate and FGN Eurobonds
Chart 18: FGN Eurobond Yield in 2013
5.31%
3
4
5
6
7
6.75% US$500M JAN 2021
Issue Date Coupon Size ($m) Tenor Maturity
GTBank May-11 7.50% 500 5 2016
Access Jul-12 7.30% 350 5 2017
Fidelity May-13 6.80% 300 5 2018
First Bank Jul-11 8.30% 300 7 2020
FGN1 Jan-11 6.75% 500 10 2021
FGN2 Jul-13 5.13% 500 5 2018
FGN3 Jul-13 6.38% 500 10 2023
31
Since DMBs hold over 60.0% of AMCON bonds, there were concerns regarding the
impact of the bond for T-Bills swap on banks balance sheet and liquidity ratios in
2014. In our view, this should not be of major concern as the balance sheet impact is
simply a decline in AMCON bonds holdings (mostly held to maturity) which is offset
by an increase in T-Bills (often held for trading). However, from a liquidity
perspective, the banks should witness marginal improvement in liquidity ratios as
T-Bills are included in the computation of liquidity ratio. Interestingly, the swap
makes the banks creditors to the federal government, thus neutralizing the default
risk on the corporate character of AMCON bonds.

Naira: Sailing Close to the Wind
The Naira had an impressive outing in 2013 with a 1.5% marginal depreciation
relative to a 10.0% average decline across emerging markets. However, 2014 is
looking like it will be a tough year for the naira. A stable naira in 2013 was
facilitated by the $26.6bn (sold by the CBN at an average of N155.75/$1.00) in
defense of the naira in 94 auctions. This was supported with the replacement of the
WDAS with the RDAS in a bid to unmask contrived demand for the greenback.
Consequently, while the official exchange rate traded between N153.00 and
N156.00, the parallel market from N158.50 depreciated faster to N173.00 during the
year. As a result, the official/street rate deviation increased from N6.23 in January to
N14.03 in December; creating a mouth-watering N7.40 average arbitrage
opportunity throughout the year. The chart below captures the trend in the
exchange rates across different market segments.

Source: FDHL Analytics, Afrinvest Research
Chart 19: Naira/Dollar Rates in 2013
155
157
159
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163
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167
169
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N12.97/US$
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32
The Yuletide induced dollar demand kept rates at a N169.90 average in December at
the parallel market while the closely monitored interbank rates remained at
N159.00/US$1.00.
Looking ahead, we expect the naira to depreciate further in 2014 closing the year at
about N175.00/US$1.00 at the parallel market. The pressure on the local currency
will emanate from the reduction in the tempo of capital inflows as foreign investors
factor in the impact of the gradual tapering of U.S. Fed QE program. Political
activities in 2014 ahead of the 2015 election would equally put more pressure, all of
which will test CBNs capacity to continue to defend the naira, thus, we anticipate
that the combined effect of these pressure points might induce the CBN to allow a
monitored depreciation of the local currency.
Trends to watch in 2014
We highlight a few themes we anticipate will come to fore in 2014:
1. Increased QE- tapering in the U.S. is expected in 2014 coupled with an end to the
zero interest rate regime in Europe. This might induce capital inflow reversals as
foreign portfolios (which hold $5.1bn of FGN bonds) rebalance risk.
Consequently, investors will demand higher yields particularly at the primary
market where we expect the government to borrow approximately N1.0tn in
2014.
2. The CBN is likely to sustain a contractionary monetary policy stance in pursuit of
its price and exchange rate stability objectives. Accordingly, an increase in the
MPR seems highly probable.
3. We anticipate inflation will inch higher in 2014 (mainly due to high liquidity
stance and low base effect). The average inflation for 2014 should be
approximately 10.0%.
4. State governments are likely to approach the bond market to raise finance
through municipal bonds issuances. This will elevate the capitalization of that
market segment by N200.0bn to approximately N500.0bn.
5. The naira will likely come under intense pressure being it is the first casualty of
capital flight and an expansion in imports. Although the CBN appears committed
to defending the local currency using the countrys dollar reserves and other

33
monetary policies, intense pressures in 2014 might justify a monitored
devaluation.
6. The 2015 elections will widen the countrys risk premium stimulating the quest
for higher risk adjusted returns across various asset classes.
7. The market will also experience improved liquidity as the new FMDQ OTC
platform becomes an increasingly ubiquitous trading window. The price
discovery advantage will go a long way in improving the liquidity and efficiency
of the market.
8. Ultimately, we expect the Nigerian capital market to sustain its generous
compensation for the embedded risks at both the primary and secondary market
segments during 2014.

34
Global Equity Market Dynamics
The global market peaked and dipped at various points in 2013 owing to
speculations that pervaded the global economy. A significant beast of burden in
the global market was the anticipation that the U.S. Federal Reserve will taper its
monthly Quantitative Easing (QE) measures i.e. a reduction in the $85.0bn monthly
bond purchase program. The impact of the QE speculations in May 2013 dampened
the Morgan Stanley Capital International (MSCI) Emerging Market Index by 20.1%
(between 08/05/2013 24/06/2013).
Despite weak economic growth (1.9% in 2013), the U.S. bourse was upbeat in 2013
with the NASDAQ and S&P 500 Indices gaining a respectable 36.0% and 29.1%
respectively. The UK equity market was not far behind, being supported by strong
valuations and rising dividends. The FTSE 100 garnered a 16.6% return in 2013. The
Asian market followed a similar trend with the Japanese Nikkei Index returning an
impressive 59.3% in 2013. This performance was bolstered by the speculation of
further monetary easing by the Bank of Japan which is expected to lift Japan from a
15-year deflation and tepid growth. The chart below shows the performance of
major market indices around the world.
The Equity Market
Chart 20: Global Equity Markets Performance
3.7%
16.2%
18.7%
23.0%
26.7%
29.1%
36.0%
59.2%
-5.0% 5.0% 15.0% 25.0% 35.0% 45.0% 55.0% 65.0%
Hang Seng
FTSE100
CAC-40
DAX
DJIA
S&P 500
NASDAQ
NIKKEI 225
35
Within the SSA region, the Ghanaian equity market was the best performing with
an impressive 81.0% growth while the Nigerian bourse followed with 47.2%.
However, the MSCI Emerging Markets (EM) Index dipped 5.7% (compared to
+15.1% in 2012) in 2013 on sell-offs from foreign portfolio investors as they reduced
their exposure in view of the U.S. tapering.
Market Return: Staying Green
The Nigerian equity market maintained its impressive form in 2013 on the back of
tighter regulations, greater transparency, better earnings and improved liquidity.
The countrys GDP growth momentum has clearly began to impact many sectors as
evidenced by the double digit growth being reported by many listed companies,
with the exception of the Banking sector (which has been affected by tighter
regulation). In addition, the introduction of a new trading platform by the Nigerian
Stock Exchange (NSE), X-GEN, enhanced market access for foreign investors further
buoying the market performance.
The NSE-ASI which commenced the year on an aggressive note rose to a year high of
42.5% on June 11, 2013, slid to 27.38% by September, and finally settled at 47.2%
by the end of the year. As seen in chart 19, the NSE-ASI stayed fairly stable and
consistently upbeat in Q1:2013. The subsequent volatility in Q2:2013 can be

Chart 21: Emerging Market Performance
21.0%
24.2%
47.2%
81.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
JSE
EGX 30
NSE
GSE-CI
36
associated with FPIs reaction to QE speculations. However calm returned in Q3 with
the Feds initial resolve to sustain QE.

The Nigerian stock market grew at a strong pace in January 2013 recording a
monthly 17.2% appreciation (the highest monthly gain in 2013). This was bolstered
by expectations of impressive FY:2012 results, corporate actions and the inflow of
foreign capital. However, profit taking took precedence the following months. The
market leapt (12.7%) in May on the back of a stable macroeconomic environment,
impressive earnings and positive regulatory reforms. The Feds subsequent

Chart 22: NSE-ASI Movement in 2013
Source: NSE, Afrinvest Research
Chart 23: NSE-ASI YTD Return (2000-2014f)
54.0%
34.3%
10.7%
65.8%
18.5%
1.0%
37.8%
74.7%
-45.8%
-33.8%
18.9%
-16.3%
35.5%
47.1%
14.2%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
0
1
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J
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-
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7
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-
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3
NSE-ASI Movement in 2013
Max Daily
Loss: 3.9%
Max Daily
Gain: 3.4%

37
announcement dampened the index marginally by 4.2% in June. In addition, the
increase in the CRR on public sector funds to 50.0% in July drove the index further
south by an additional 4.5% in August. The NSE rounded off the year on a very
strong note owing to FPI and institutional investment in large cap stocks in view of
the FY: 2013 scorecard.
Nigerian Equity Market A Repeat of History?
An analysis of the NSE ASIs 6-year quarterly performance reveals a recurrence of
periodic market trends. Afrinvest Research established that Q1 and Q4 are the most
bullish periods with the exception of 2009 (See Chart 23). However, Q2 and Q3
display mixed signals especially in years with weaker H1 performance. Premised on
this, we expect the Nigerian bourse to follow the same pattern in Q1 and Q4 2014.
We attribute this seasonal bull-runs to earnings expectations by investors especially
corporate actions (dividends and bonuses), given that most listed companies on the
NSE have December as their financial year end.
We have also observed that investors tend to take profit in Q2 culminating into
selling pressures that dampen the NSE ASI. This trend spills over to Q3 making it the
most bearish quarter in the year on average. In summary, this analysis reasserts the

Chart 24: NSE Monthly Returns and Drivers
17.2%
-0.7%
1.4%
-0.4%
12.7%
-4.2%
4.8%
-4.5%
0.9%
2.8%
3.4%
8.3%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
NSE Monthly Returns and Drivers
Sustained by
positive
Q1:2013
earnnigs and
FPIs
Driven by
FY:2012
Earnings
expectations
and FPIs
Bolstered by
foreign
investment in
Large Cap stocks

Effect of the Fed
statement about QE
tapering

Effect of the CBN
decision to increase
CRR on public sector
38
strong correlation between company scorecards and market performance. The chart
below gives a schematic overview of our analysis.

Key Market Drivers

The FPI Effect
The participation of Foreign Portfolio Investors in the Nigerian stock market
increased significantly during the year moving from 36.9% in January to 46.6% as at
November 2013. As depicted in Chart 23, foreign investors dominated transactions in
April and July with 64.5% and 62.5% respectively. These months reported a net
flows of N13.7bn and (N30.9bn) in that order. The significant outflow recorded in
July can be linked to speculation of the Feds tapering which led to massive sell-offs
across emerging markets. However, the decision of the Fed to extend QE in the U.S.
delivered relief to emerging markets as foreign investors participation improved in
subsequent months. Chart 24 below shows the total value held by FPI on the Nigeri-
an bourse from 2007 to November, 2013.
Technology: The Milestone Platform

Chart 25: 6 years NSE-ASI Trend Analysis- 2008-2013
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Q0 Q1 Q2 Q3 Q4
2008
2009
2010
2011
2012
2013
January Effect and Q1
Earnings anticipation
39
The Nigerian Stock Exchange migrated from its old trading platform (Horizon),
which has been operation since 1999, to a new trading platform, (X-GEN), in
September 30, 2013. This new platform brings with it a new securities business
model and new market participants that will change the way all stakeholders
interact in Africa's largest capital market. This technology advancement is expected
to increase foreign investors participation and transparency in the Nigerian bourse.
In addition, the platform should facilitate NSEs 2016 $1.0tn market capitalization
target. This should equally drive the Nigerian capital market's aspirations to migrate

Chart 26: Domestic and Foreign Portfolio Participation in Equity Trading
Chart 27: Foreign Portfolio Investments (2007 Nov 2013)
61.5
76.0
80.1
123.0
91.9
150.2
93.7
70.9
54.0
82.3
88.9
105.1
115.6
71.8
67.7
96.9
143.6
56.2
64.8
54.2
58.8
101.9
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13
Foreign N' Bn Domestic N' Bn
616
787
425
577
848
808
972
0
200
400
600
800
1000
1200
2007 2008 2009 2010 2011 2012 Nov-13
40
from a frontier market to an emerging market, gaining membership at the World
Federation Exchanges (WFE) and confirm its inclusion on the Morgan Stanley Capital
International (MSCI) Emerging Market Index.
Sector Performance: Whither Funds Flow?
In line with the broad index, all the NSE sector indices concluded 2013 in positive
territory. The Oil & Gas index topped the chart with a whopping 122.3% gain,
owing to significant appreciation in the price of Forte Oil Plc (1164.6%) and Conoil
Plc (231.4%). The NSE-Lotus Islamic Index (NSE LII), a Sharia compliant equity index,
followed with an appreciation of 55.1% bolstered by gains in the shares of Presco
(126.5%), Julius Berger (108.6%) and Cadbury (103.5%). The NSE Insurance Index
was the least performing with a 29.0% return.
The Liquidity Upside
Activity levels measured by average market volume rounded off 2013 with a 24.4%
gain after three years of consecutive decline (2010:4.1%, 2011:1.5% and 2012:1.3%).
We attribute this to increased investor confidence, improved FPI participation,
impressive company performance scorecards as well as the early adoption of IFRS by
listed companies.
Average volumes increased to 447.0m in 2013 from 359.0m recorded previous year.

Chart 28: NSE Sector Performance - 2013
29.0%
31.1%
31.9%
42.7%
47.2%
61.8%
122.3%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0%
NSE INSURANCE
NSE CONSUMER GDS
NSE BANKING
NSE-30
NSE-ASI
NSE LII
NSE OIL/GAS
41
Similarly, average market value improved significantly by 55.1% in 2013 compared
to 2.7% in 2012.
Top Gainers and Losers
Forte Oil Plc was the best performing stock in 2013 due to its investment in the
power sector (i.e. $132m acquisition of Geregu power plant). The price appreciated
by an impressive 1,301% within 3 months (Oct Dec), to close at N108.30 in 2013. In
the same vein, Champion Breweries Plc rallied 308.4% on the back of an agreement
with Heineken (the worlds 3rd largest brewer) to purchase a 57.0% stake of the
company. Other gainers include Evans Medical Plc (285.1%), Transnational
Corporation Plc (252.4%) and Conoil Plc (231.4%).
On the flip side, John Holt Plc was the least performing stock in in 2013 dipping
65.6%, followed by Costain (West Africa) Plc with 64.7% loss due to an alleged
liquidated takeover by First Bank. In 2013, a total of 86 gainers and 5 losers were
recorded, while 66 companies closed flat. Hence, market breadth stood at 1.9x for
2013. This is summarized in the table below.
Activity Level: Why Transcorp?
The top ten most active stocks by volumes in 2013 accounted for 54.6% of the total
market transaction. Similarly, the financial service sector was the most active sector

Chart 29: NSE Average Volumes and Values Traded (2009 2013)
385
370
364
359
447
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0
50
100
150
200
250
300
350
400
450
500
2009 2010 2011 2012 2013
Volume (mn) Value (N bn)
42
accounting for 68.6% of the total market transactions. Transcorp shares were the
most sought after in 2013 with 13.7bn shares traded on the NSE, valued at N28.5bn.
Investors are optimistic about the future prospects of the firm following the
successful acquisition of $300.0m Ughelli power plant. Other top traded stocks in
2013 include Unity Bank (8.5bn), UBA (6.6bn) and Zenith Bank (5.5bn).

Ticker
Open
Price
Close
Price
Change
(N)
%Change Ticker
Open
Price
Close
Price
Change
(N)
%Change
FO 7.73 97.75 90.02 1,164.60 JOHNHOLT 3.4 1.12 -2.28 -67.1
EVANSMED 0.87 3.85 2.98 342.5 TRANSEXPR 2.78 1.28 -1.5 -54
TRANSCORP 1.05 4.35 3.3 314.3 COSTAIN 2.66 1.24 -1.42 -53.4
CHAMPION 4.15 16.91 12.76 307.5 DEAPCAP 2.02 0.99 -1.03 -51
CONOIL 20.5 67.93 47.43 231.4 MULTITREX 0.95 0.5 -0.45 -47.4
JOSBREW 1.53 4.6 3.07 200.7 MORISON 3.3 1.91 -1.39 -42.1
LIVESTOCK 1.44 4.3 2.86 198.6 VONO 2.88 1.73 -1.15 -39.9
FIDSON 1.06 2.79 1.73 163.2 THOMASWY 1.32 0.87 -0.45 -34.1
UNIONDICON 4.22 10.45 6.23 147.6 NPFMCRFBK 1.18 0.8 -0.38 -32.2
WEMABANK 0.52 1.22 0.7 134.6 ETRANZACT 3.65 2.56 -1.09 -29.9
Top 10 Best Performing Stocks in 2013 10 Least Performing Stocks in 2013
Chart 30: Market Leaders and Laggards (2013)
Ticker
Volume
(bn)
Value (N
bn)
Close Price
TRANSCORP 13.7 28.5 3.97
UNITYBNK 8.5 5.6 0.5
UBA 6.6 50.6 8.55
ZENITHBANK 5.5 115.3 22.7
ACCESS 4.8 50.6 9.6
FBNH 4.4 79.6 15.6
GUARANTY 4.1 105.7 28.15
FIDELITYBK 3.3 9.9 2.66
FCMB 3.1 13.2 3.85
DIAMONDBNK 3 20 7.67
Top 10 Most Active Stocks in 2013
Chart 31: Top Traded Stocks
43

Chart 32: Nigerian Stock Market Snapshot
2012 2013 % Change
Total Market Capitalization N14.8tn ($95.2bn) N19.1tn ($119.9bn) 29.1%
Equities Market Capitalization N9.0tn ($57.8bn) N13.2tn ($82.9bn) 46.7%
NSE All Share Index 28,078.81 41,329.19 47.2%
NSE Lotus Islamic Index 1,769.07 2,863.12 61.8%
NSE 30 Index 1,336.07 1,907.17 42.7%
NSE Consumer Goods 838.97 1100.25 31.1%
NSE Banking Index 339.63 447.84 31.9%
NSE Insurance Index 118.49 152.87 29.0%
NSE Oil/Gas Index 152.92 339.88 122.3%
Total Volume (units) - Equities 89.2bn 110.5bn 23.3%
Total Value (Turnover) - Equities N658.2bn ($4.2bn) N1.0tn ($6.3bn) 51.9%
Avg. Daily Volume - Equities 359.5m 447.2m 24.4%
Avg. Daily Value (Turnover) - Equities N2.7bn ($17.1m) N4.0bn ($25.1m) 48.1%
No. of Listed Equities 197 197 0.0%
No. of Listed Bonds 57 55 -3.5%
No. of Listed ETFs 1 1 0.0%
No. of Listed Securities 255 253 -0.8%
No. of Trading Days 248 247 -0.4%
Avg. Exchange Rate (Naira:USD) 155.44 159.29 2.5%
NIGERIAN STOCK MARKET SNAPSHOT
44
The performance of the NSE-ASI in 2013 exceeded analysts expectations (47.1% vs.
average: 28.0%). We expect Q1:2014 to trend the historical profitable outing.
However, we expect the NSE-ASI to trade softly in Q2 as investors maintain short
term positions as a result of number of local and foreign uncertainties. Based on our
market forecasts, we anticipate the Index will close the year at approximately
47,197.93, yielding 14.2% by year end. We continue to see numerous opportunities
in the equity market on the back of improved corporate performance, attractive
valuations and tighter regulations which we believe this will spur investor interest.
The chart below depicts the key market drivers in 2014.

2014 Expectations: 14.2% Market Return
Market
Drivers
in 2014
45
New X-GEN Trading Platform
The recent introduction of a new trading platform has equipped the NSE with the
fastest trading engine in Africa. This platform will offer investors real-time access to
market prices, portfolios and also enable the execution of market orders in
real-time. It also provides access on a wide range of devices i.e. computers, tablets
and mobile devices. The X-GEN platform should encourage wider market
participation (particularly among the growing middle-class) as well as support global
investor participation in 2014.
Impressive Corporate Scorecards
Earnings have been a major driver of market performance in Nigeria. Although, the
NSE-ASI is far from perfect, stock prices fairly reflect the performance of listed
companies. Companies with high dividend payout ratio and consistent dividend and
bonus history have remained the toast of investors. However, recent policies that
have constrained non-interest income of banks are expected to compress earnings in
the sector. We anticipate a single digit earnings growth rate for the banks in
FY:2013.
Easing Listing Requirements
The management of the Nigerian Stock Exchange has begun the review of the
listing requirements for equities on the Main Board as well as on the Alternative
Securities Exchange Market (ASEM). This is to encourage more listings and improve
liquidity on the exchange.
Robust Investor Protection
Investors anxiously await the approval of rules of the Investors Protection Fund. This
will permit the Board of Trustees (BoT) of the NSE to compensate aggrieved
investors and consolidate market transparency and confidence in 2014.
SWF Funds - A Welcome Injection
The Nigeria Sovereign Fund kicked off in 2013 with an initial $1.0bn investment. This
made the fund the third largest in sub-Saharan Africa (Botswana: $6.9bn and
Angola: $5.0bn). We expect the Federal Government to increase injections to the

46
fund in 2014 of which the NSIA is expected to allocate a percentage to the listed
equities on a long term basis. This should deepen domestic participation and reduce
exposure to FPIs thereby guiding against significant decline in stock prices in event
of any external shocks.
Elimination of VAT and Stamp Duty
Following the announcement (December 2012) of the Federal Governments
elimination of stamp duties and VAT on stock market transactions (VAT: 5.0% and
Stamp Duty: 7.0%), we expect the Securities and Exchange Commission to complete
the implementation of this new directive during 2014. This will reduce the
transaction cost and increase activity level. Consequently, portfolio investors would
increase turnover ratio, creating liquidity in the NSM.
Robust Inflation Adjusted Return
The NSE was ranked as the 3rd best performing stock market globally in 2013 with a
47.2% return trailing the Ghanaian Stock Exchange (GSE) and Japanese Nikkei 225
with 81.0% and 59.2% returns respectively. This impressive form is expected to
attract new entrants to the stock market, hence, increase activity levels and boosting
liquidity. We expect inflation to average 9.5% in 2014 thus permitting a 4.7% real
return on our 14.2% base case market return expectation.
Sustained Regulatory Effectiveness
An increasing number of listed companies are being compliant with the rules of the
NSE in terms of timely release of earnings. This has been achieved by the
enforcement of sanctions on erring companies. The early release of corporate
earnings has enabled investors X-ray the performance of companies, thus,
facilitating prompt and informed investment decisions. In addition, we expect the
NSE to ensure that company forecasts are reasonably guided going forward.

47
Based on our analysis, the potential risks to the stock market in 2014, we see capital
inflow reversals as the major downside risk which could be triggered by increased
QE tapering in the U.S. and an increase in interest rates in Europe. This risk is
compounded by the dominant proportion of FPI (over 50%) in Nigerian equities. A
second risk factor is the new capital requirements for dealing member firms which
should streamline local participation in the short term.

We expect the of licensed broker dealers to reduce to 50 firms from the current 200.
Thirdly, in view of the election funds that are expected to flood the financial system
in 2014, we anticipate further tightening by the CBN especially on public sector
funds (to 100%). The liquidity risk inherent in this policy should shrink bank earnings
further with consequences on share prices. The embedded risk associated with the
2015 elections is equally material. Investors are generally on red alert with regards
to the direction of the election and its implications on macroeconomic policies.
This necessitates a higher country risk premium to justify the risks. Overall, we
envisage three potential scenarios in Nigerias equity market over 2014,
Potential Risks in 2014
48
specifically:

A Bull Case Scenario (30.0% probability), NSE-ASI at 49,595.03 (+20.0%)
This scenario assumes an optimistic performance by equities in Q1 and Q4, riding on
the back of sustained macroeconomic stability and increased participation of FPIs.
We assume a more positive bias in Q1 and Q4, driven by impressive corporate
earnings. This scenario equally assumes that global markets and commodity prices
continue to re-rate upwards, supported by sound government policies and sustained
economic recovery.
A Base Case Scenario (50.0% probability), with NSEASI at 47,197.93 (+14.2%)
This scenario assumes a dreary equity market performance in the first half of 2014 as
the U.S. continues to taper QE at moderate levels. In addition, the MPCs stance on
liquidity tightening may further dampen investors sentiment. Our base case
scenario assumes a positive bias in the second half of the year premised on
encouraging corporate earnings. In addition, the body language of the MPC is
assumed to be in favour of further tightening. This scenario also assumes global
markets and commodity prices remain at current levels.
A Bear Scenario (20.0% probability), with NSEASI at 43,850.27 (+6.1%)
This scenario assumes a negative performance by equities in Q1 and Q4 on the back
of massive capital inflow reversals, higher interest rates in Europe and the U.S.,
tighter monetary policies and heightened political uncertainty. However, we assume
a positive bias in Q3 and Q4 on impressive corporate earnings. This scenario equally
assumes that global markets and commodity prices decline sharply as global growth
softens.
Overall, our probability weighted average return for the three scenarios delivers a
14.2% return for the NSE ASI in 2014, bringing the index to 47,247.53 by year end.
2014 - Scenario Analysis
Bull Base Bear
NSE-ASI Forecast 49,595.03 47,197.93 43,850.27
Expected Market Return 20.0% 14.2% 6.1%
Probability 30.0% 50.0% 20.0%
Chart 33: 2014 Market Forecast
Source: Afrinvest Research
49

Section 4
Company Profiles
Banking Insurance Oil& Gas Consumer Goods Industrial Goods
Access Bank AIICO MRS Guinness Ashaka Cement
Diamond Bank Custodian Oando Nigerian Breweries Dangote Cement
ETI Mansard Total Dangote Sugar CCNN
FBN Holdings Continental Re
GT Bank
UBA
Zenith Bank
50
Navigating the Tide
Access Bank Plc (Access or the Bank) has inorganically evolved from
the Tier-2 space to the league of Nigerias top 5 banks, with a balance
sheet size of N1.7tn in 2013. The Bank grew from 32 operating branches
in Nigeria to 349 branches in 9 countries. Given this level of growth, the
Bank has emerged as one of Nigerias systemically important banks. The
Group recently appointed Mr. Herbert Wigwe to succeed Mr. Aigboje
Aig-Imoukhuede, in compliance with CBNs regulation that limits the
tenure of banks CEO to 10 years. The Banks customer service focus and
optimistic outlook continues to sustain its growth trajectory.

PROFITABILITY: A Modulating Slope
The Banks 9-month 2013 gross earnings dipped 3.7% Y-o-Y, from
N160.3bn to N154.4bn, partly due to restrictive monetary policies.
Interest Income declined 10.6% to N109.9bn, while interest expense
increased 8.2% to N50.3bn, leaving the Net Interest Income 22.0% lower
Y-o-Y to N59.6bn. We forecast a further 9.0% decline in interest income
and a 16.0% increase in interest expense in FY:2013 due to tighter
regulations. We are cautiously optimistic and believe the bank will
weather the storm ahead.
FY:2013 & FY:2014 Cost Drivers
Despite the increasing competition for deposits in the banking space, the
Cost of Funds declined to 4.6% in Q3:2013 (H1:2013 - 4.9%). However,
the interest expense increased 8.0% Y-o-Y in the 9M:2013 period. We
anticipate a 16.0% and 17.0% respective increase in Accesss interest
expense and operating expense to N87.5bn and N102.71bn by FY:2013.
Asset Utilization: Increasing Loan to Deposit Ratio
The Bank reported an increase in loan to deposit ratio, from 51.0% in
FY:2012 to 62.0% in Q3:2013. The Bank equally grew its loan books Y-o-Y
by 25.8% in 9M:2013, above Tier-1 average of 5.8%. We highlight the
shrinking CAR, berthing at 18.0% in Q3:2013, 3.0% higher than the
15.0% statutory requirement. Similarly, its Liquidity Ratio declined to
40.0%.
OUTLOOK: 22.9% Upside, 14.1% ROAE and 1.9% ROAA
Despite various policy hurdles, Access is fundamentally stable with sound
risk management practices. The stock currently trades at a forward P/E
and P/BV of 6.5x and 0.9x respectively. We arrived at a fair value of N8.31
and a 2014 target price of N11.80 using a blend of DDM and DCF
valuation methodologies. This presents a 22.9% upside, hence our
ACCUMULATE recommendation.
80
90
100
110
120
130
140
150 Access Bank NSE Bank 10 NSE
NSE: ACCESS
Bloomberg: ACCESS NL
ISIN NGACCESS0005
ACCESS BANK PLC
RATING ACCUMULATE
Price as at 31-12-2013 (NGN) 9.60
Target price (NGN) 11.80
Upside/Downside(%) 22.9
12 month High/Low (NGN) 10.60/9.15
LIQUIDITY
Market Cap (NGN) 219,669.6
Market Cap (USD) 1,372.9
Outstabding Shares (mn) 22,882.3
Free Float (%) 58.9
Ave Daily Volume 19,648.1
Ave Daily Value Traded(NGN) 204,056.6
Ave Daily Value Traded(USD) 32.6
SHARE PRICE PERFORMANCE
6 months (%) 20.4
Relative Change (%) (8.4)
12 Months (%) 7.9
* Relative to NSE index
FINANCIALS(NGN mn) - FY 31 DEC 2012 2013E 2014F
Gross Revenue 207.7 227.2 272.2
Interest Income 161.4 165.7 190.3
OPEX 87.5 102.7 117.6
PAT 42.3 34.0 46.5
EPS (NGN) 1.9 1.5 2.0
Total Assets 1,745.2 1,861.4 2,044.7
NAV/Share (NGN) 10.2 10.9 12.2
PROFITABILITY RATIOS 2012 2013E 2014F
RoAE 20.8 14.1 17.6
RoAA 2.5 1.9 2.4
NIM (%) 46.4 39.5 38.1
PAT Margin (%) 21.4 18.8 21.0
Cost/Income (%) 68.9 75.0 69.2
VALUATION MATRICS 2012 2013E 2014F
PE (x) 5.2 6.5 4.7
P/BV (x) 0.9 0.9 0.8
Dividend Yield (%) 8.9 7.0 9.5
Dividend Pay-out Ratio (%) 50.0 50.0 50.0
51
Maximizing Retail and SME Banking
Diamond Bank Plc (Diamond or the Bank) takes a prominent position
in the Retail and SME banking space. The Bank operates with a balance
sheet size of N1.4tn, offering services along its 3 core business lines:
Business Banking, Corporate Banking and Retail Banking. Diamond was
the first African bank to list its Global Depository Receipts (GDR) on the
London Stock Exchanges Professional Securities Market. The Bank
operates from 277 offices spread across Africa: Nigeria (250), Benin (19),
Togo (3), Senegal (3) and Cote Divoire (2), from where it serves over 3.1
million customers.

PROFITABILITY: Buffered by Interest Bearing Assets
In its 9-month 2013 results, Diamond recorded an impressive 19.0% Y-o-Y
growth in gross earnings to N131.0bn. This was driven by the 224.0%
growth in financial assets held for trading, as well as the 16.5% growth
in Loans to customers. This crystallized to a 23.0% growth in operating
income for the period, an EPS of N1.53 and an ROE of 22.4%. We believe
the bank will attain our N30.0bn PBT target for 2013, given our 22.0%
forecast growth in Net interest Income to N109.0bn.
Expenses: The cost of Business Expansion
Operating expenses was up 29.0% in the 9M:2013 period, owing to the
increase in branch expansions and employee benefits. Impairment
charges were down 28.6% Y-o-Y, despite the 26.4% growth in loans to
customers, signifying strong asset quality. Nevertheless, CIR declined
from 60.6% in FY: 2012 to 58.9% in Q3:2013. Diamond Banks Cost of
Funds (3.4%) and Cost of Risk (3.4%) remain one of the lowest in the
industry.
Capital Structure and Ratios
Diamond Bank is likely to shore up its Tier-2 capital soon (possibly
through the issuance of a Eurobond) to compete effectively in the dollar
denominated credit market. The NPL ratio (4.3%) and Coverage ratio
(108.4%) all showed an improvement from FY: 2012; whereas the NIM
(8.6%) and Liquidity Ratio (48.2%) were adversely impacted by the 50.0%
CRR policy in 2013.
OUTLOOK: 52.3% Upside
Diamond arguably has the best fundamental numbers in the Nigerian
banking sector. Our blend of DDM and DCF valuation methodologies
placed Diamond at a N9.42 intrinsic value, and a 12-month target price of
N11.19 (52.3% upside to the price as at 31/12/2013). The Banks forward
P/E and P/BV are attractive at 3.8x and 0.7x respectively, hence our BUY
recommendation.
90.0
110.0
130.0
150.0
170.0 Diamond Banking Sector NSE
NSE: DIAMOND
Bloomberg: DIAMOND NL
ISIN NGDIAMONDBK6
DIAMOND BANK PLC
RATING BUY
Price on 31-Dec-13 (NGN) 7.35
LIQUIDITY(mn)
Market Cap (USD) 665.0
Outstanding Shares 14,475.2
Free Float (%) 70.0
Ave Daily Volume 12
Ave Daily Value Traded (NGN) 82
Ave Daily Value Traded (USD) 514,745
6 months (%) 106.5
Relative Change (%) 97.1
12 Months (%) 48.8
FINANCIALS(NGN bn) - FY 31 DEC 2012 2013E 2014F
Gross Earnings 138.8 176.8 212.8
Net Interest Income (NII) 89.3 109.0 131.0
OPEX 68.5 88.4 106.4
PAT 22.1 27.8 32.8
EPS (NGN) 1.55 1.92 2.27
Total Assets 1,178.0 1,402.4 1,514.5
NAV/Share (NGN) 7.5 10.9 12.5
PROFITABILITY RATIOS
RoA 2.5 2.1 2.0
RoE 22.7 22.5 23.0
Net Interest Margin (%) 11.0 10.2 10.5
Cost to Income (%) 60.6 62.5 65.0
PBT Margin (%) 23.9 22.8 22.6
VALUATION MATRICS
PE (x) 4.8 3.8 3.2
P/BV (x) 1.0 0.7 0.6
Dividend Yield (%) - 10.5 12.3
Dividend Pay-out Ratio (%) - 40.0 40.0
52
A Pan African Scale Advantage
Ecobank Transnational Incorporated (Ecobank, ETI or the Bank)
significantly leverage the consolidation of the group. The Banks
inorganic expansion has proven beneficial to the group, wedging
regional gaps in revenues. The Nigerian market has been significantly
dampened by the recent CBN policies, streamlining the contribution of
the Nigerian business segment (from 42.0% in FY:2012 to 41.0% in
9M:2013 ). Despite the recent corporate governance challenges, we
anticipate the bank will remain resilient.

PROFITABILITY: Regional Buffers
ETIs top and bottom-line in Q3:2013 were relatively impressive
considering the recent pressure on banks earnings within the Nigerian
Banking industry. The Bank reported a whopping 23.6% and 56.0%
Y-o-Y increase in its 2013 9-month gross earnings and PBT to N232.4bn
($1,456m) and N47.8bn ($299m) respectively. The Banks regional
presence moderately insulates it from the domestic challenges in the
industry, with an impressive 12.0% PBT growth in the rest of West Africa
(Ghana, Gambia and Sierra Leone) and 36.0% in Central Africa. We
anticipate a modest 6.4% decline in the groups FY:2013 earnings,
delivered on the back of regulatory tightening in Nigeria, but improved
performance in other West African countries.
Cost Structure: CIR, OPEX and Tax
The Banks 9M:2013 CIR moderated Y-o-Y to 71.5% (from 76.5% in
9M:2012). This can be associated with the 16.1% increase in operating
expense to N166.3bn ($1,041m); however, the strong growth in topline
adequately cushioned this cost. The Bank has identified the existence of
huge potential in other regional key markets i.e. Ghana, Central and
other Southern African clusters and it intends to deepen presence in
these markets. The bank also intends to aggressively grow its loan and
deposit books for its Nigerian operations.
Despite the recent corporate governance issues, ETI remains
fundamentally stable. It currently trades at a forward P/E and P/BV of
4.8x and 0.7x respectively. We arrived at a fair value of N18.14 using a
blend of our DDM and DCF; and a 12-month target price of N19.40,
presenting a 20.0% upside. We therefore recommend an ACCUMULATE
rating on ETI.
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130.00
140.00
150.00 ETI NSE Bank 10 NSE
NSE: ETI
Bloomberg: ETI NL
ISIN TG0000000132
ETI PLC
RATING ACCUMULATE
Price as at 31-12-2013 (NGN) 16.2
LIQUIDITY 2012
Market Cap (NGN) 258.4
Outstabding Shares (mn) 16.0
Free Float (%) 58.0
Ave Daily Volume 11.4
Ave Daily Value Traded (NGN) 161.2
SHARE PRICE PERFORMANCE 2012
6 months (%) 32.0
12 Months (%) 43.5
Interest Income 215.3 233.0 262.8
OPEX 200.1 180.6 206.5
PAT 45.5 54.1 49.7
EPS (NGN) 2.9 3.4 3.1
Total Assets 3,192.0 2,653.8 2,992.5
NAV/Share (NGN) 21.8 23.7 25.1
RoAE 13.9 13.2 11.4
RoAA 1.4 1.6 1.6
NIM (%) 38.0 46.3 43.9
PBT Margins (%) 15.4 20.2 15.9
Cost/Income (%) 72.0 70.5 69.3
VALUATION MATRICS
PE (x) 5.7 4.8 5.2
P/BV (x) 0.8 0.7 0.7
Dividend Yield (%) 12.7 15.1 13.9
53
Consolidating the Elephant Status
FBN Holdings Plc (FBNH or the Group) remains the largest banking
group in Nigeria, with a balance sheet of N3.7tn as at September 2013.
FBNH reorganized its business model into a holding company structure
in 2012, aligning its business along asset management, Commercial
Banking, Insurance and Investment Banking. The recent acquisition of
ICB West Africa has positioned the Bank strategically in Africa (Ghana,
Gambia, Guinea, and Sierra Leone) and presents compelling
opportunities for future business and profit expansion.

PROFITABILITY: Leveraging Non-Banking Synergies
In its 9-month 2013 results, FBNH recorded an 11.4% and 12.0% Y-o-Y
growth in gross earnings and interest income to N290.8bn and N239.2bn
respectively. Despite the tight policy environment, the Bank recorded a
9.4% growth (to N51.6bn) in Non-Interest Income, which was primarily
driven by the 832.0% growth in foreign exchange income, 65.0% growth
in dividend income and impressive outing of the Investment Banking &
Trustee/Agency businesses.
Expenses: A Need for Greater Operational Efficiency
OPEX for the 9-month 2013 period rose 5.0% to N139.4bn Y-o-Y,
impacted by the increase in regulatory cost, particularly the AMCON Levy
and NDIC Premium. The CIR settled at 62.2% for the period. Owing to
the deterioration in some small-medium sized loan exposures,
(particularly in logistics, Oil & Gas downstream/services, real estate,
agriculture and transportation sectors), net impairment charge on credit
losses rose 60.5% Y-o-Y to N15.7 billion (H1:2013: N9.8 billion).
The acquisition of ICB is expected to consolidate First Banks elephant
status in the industry, through an addition of approximately N41.3bn
($258mn, with Ghana accounting for 60%) to its N3.7tn total assets. In a
bid to shore up Tier-2 capital and create dollar denominated assets, the
Bank issued a $300m Eurobond at 6.88% coupon in 2013. FBNHs CAR
and Liquidity Ratio stood at 20.5% and 46.6% as at September 2013.
We expect the Group to attain an EPS of N2.13 in FY2013, with a N0.92
dividend forecast for the year. Our blend of DDM, DCF and RIM valuation
methodologies put FBNH on a 12-month target price of N22.17, yielding
a 36.0% upside potential relative to the N16.30 price as at 31/12/2013.
We place a positive medium to long term outlook on the Bank and a
BUY rating.
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130.0
150.0 FBNH Banking Sector NSE
NSE: FBNH
Bloomberg: FBNH NL
ISIN NGFBNH000009
FBN HOLDINGS PLC
RATING BUY
LIQUIDITY (mn)
Outstanding Shares 32,632.08
Free Float (%) -
Ave Daily Value Traded (USD) 2.0
6 months (%) (8.9)
12 Months (%) 3.7
OPEX 192.2 239.1 263.9
PAT 75.7 69.5 72.4
EPS (NGN) 2.33 2.13 2.22
Total Assets 3,186.1 3,739.5 3,939.5
NAV/Share (NGN) 13.5 15.9 16.5
RoA 2.5 1.9 1.8
RoE 18.8 14.6 14.0
Cost to Income (%) 61.9 71.9 73.0
PBT Margin (%) 25.7 22.3 21.1
VALUATION MATRICS
PE (x) 7.00 7.65 7.35
P/BV (x) 1.21 1.03 0.99
Dividend Yield (%) 6.13 5.63 1.03
54
A Test of True Efficiency
Guaranty Trust Bank (GTBank or the Bank) has remained resilient
despite policy headwinds in 2013. The Bank consistently led the way,
implementing forward-thinking service offerings that have significantly
impacted customers access to financial solutions. GT Bank acquired Fina
Bank, Kenya, in 2013 in a bid to maximize rising opportunities in East
Africa. Despite the tight banking environment in 2013, the Bank has
remained efficient and has maintained a Cost to Income ratio of 41.8%
(9M:2013) below industry average of 60.6%. We have revised our
estimates for FY:2013 and FY:2014 to reflect recent events in the sector
and consequently forecast a 15.6% and 9.7% growth in gross earnings
and PAT respectively for FY:2013.

Adjusted FY:2013 Estimates
GT Banks 9M:2013 results showed a Y-o-Y increase of 9.3% and 8.6% in
gross earnings and PAT respectively. We have trimmed our PBT forecast
for FY:2013 by 9.7% as a result of the emerging industry dynamics. The
Banks ROAE and ROAA improved considerably to 23.3% and 3.8% in
9M:2013, compared to 16.9% and 2.7% in H1:2013 (Tier-1 bank average
ROAE:23.6% and ROAA:3.1%). The Banks total assets grew 8.1% Y-o-Y,
from N1.7tn to N1.9tn as at 9M:2013, bolstered by am 18.0% growth in
loans and advances to N925.0bn.
Cost Efficiency Remains the Watch Word
GT Bank continued to maintain its cost leadership in the industry, with a
CIR of 41.8% in 9M:2013 (industry average: 59.0%). A further breakdown
of the cost shows that depreciation accounted for the largest portion
(12.3%). The Banks Cost of Funds (CoF) settled at 3.7% in 9M:2013. We
expect the banks CIR will inch up slightly to 44.0% and 45.1% in 2013E
and 2014F as competition for private deposits stiffens.
OUTLOOK: Retaining a HOLD
Despite the decline in income, we expect GT Bank to optimize its robust
IT infrastructure, customer and deposit base. The Banks brand remains
attractive to investors, hence, trading at a premium to its P/BV of 2.7x vs
Tier 1 1.3x average P/BV. We have estimated a Dividend per Share (DPS)
of N1.96 and N2.06 for 2013 and 2014, translating to a dividend yield of
7.3% and 7.6% respectively. Our blended DCF and DDM valuation
yielded a fair value of N23.89 and 12-month TP of N28.00, giving a 3.6%
upside potential. We therefore retain our HOLD rating.
RATING HOLD
LIQUIDITY (mn)
Outstanding Shares 29,337
Free Float (%) 72.9
6 months (%) 5.7
12 Months (%) 17.5
Net Interest Income 130.7 173.2 185.1
OPEX 77.0 92.1 102.1
PAT 87.3 95.7 100.6
EPS (NGN) 2.9 3.3 3.4
Total Assets 1,734.9 1,624.2 1,865.0
NAV/Share (NGN) 9.7 10.2 11.5
RoAE 35.1 35.2 31.6
RoAA 5.2 5.8 5.8
NIM Margin (%) 9.3 9.2 10.0
Cost to Income 42.8 44.0 45.1
PBT Margin (%) 46.8 46.1 42.7
VALUATION MATRICS
PE (x) 9.2 8.3 7.9
P/BV (x) 2.8 2.7 2.3
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160 GT Bank Banking Index NSE
NSE: GUARANTY
Bloomberg: GUARANTY NL
ISIN NGGUARANTY06
GUARANTY TRUST BANK PLC
55
Sustaining the Pan-African Model
UBA Plc (UBA or the Bank) is a leading Pan African financial
institution, with presence in 19 African countries, New York, London and
Paris, from where it provides banking services to a diverse customer
group across the globe. The Bank recently divested from its non-banking
subsidiaries, while it continues to leverage its robust retail franchise to
serve approximately 7 million customers, through over 700 business
offices. The Bank has expressed a renewed drive to grow value for
shareholders through product development, channel rollout and
electronic banking solutions.

PROFITABILITY: Corporate Banking to the Rescue
UBAs Corporate Banking business segment boosted earnings in 2013 as
Net Interest Income grew by 14.0% to N78.2bn in 9M: 2013. This growth
was facilitated by the increased exposure to the Power, Upstream Oil &
Gas and the Telecoms sectors of the economy. However, the Non Interest
Income for the 9-month period decline 4.4% Y-o-Y to N51.7, in line with
the industry wide contraction. Gross earnings however grew 16.7%
Y-o-Y. Ultimately, the Bank recorded a N43.4bn PBT for the 9M:2013, a
2.8% increase. The EPS for the 9-month period increased 3.2% to N1.61.
We forecast a N51.2bn PAT for FY:2013.
Expenses: Keeping Cost within Manageable Bands
UBAs Cost of Funds was competitive at 3.5% for 9M:2013, (9M: 2012:
3.4%), while the CIR was 64.3% (Tier-1 Average: 55.4%). The Bank
appears wary of its operating expenses, as it recorded a 12.0% Y-o-Y
increase to N83.4bn. UBAs improved electronic banking platform is
expected to advance efficiency and keep operating cost within
manageable bands.
Capital Structure and Ratios: A Superior Liquidity Position
The Banks has about 77.0% low cost deposits, which stood at N2.2tn
(22.1% Y-o-Y growth) in 9M:2013, putting UBA at a vantage point in the
industry with respect to Net Interest Margin. With a balance sheet of
N2.6tn, the bank operates at a 21.4% CAR and 59.8% Liquidity Ratio;
both significantly above the statutory minimum.
OUTLOOK: Sustaining the African strategy
We are positive about the African strategy of UBA within the mid to
long term, as Africa becomes increasingly relevant. From a valuation
perspective, we place an ACCUMULATE rating on UBA. This is informed
by the 16.9% upside potential in our N10.41 12-month target price,
relative to the N8.90 price as at 31/12/2013.
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250.0 UBA Banking Sector NSE
NSE: UBA
Bloomberg: UBA NL
ISIN NGUNITYBANK3
UNITED BANK FOR AFRICA PLC
RATING ACCUMULATE
LIQUIDITY (mn)
Free Float (%) 70.0
6 months (%) (8.9)
12 Months (%) 3.7
OPEX 102.6 109.5 129.0
PAT 54.7 51.2 49.4
EPS (NGN) 1.56 1.55 1.50
Total Assets 2,272.9 2,462.7 2,759.9
NAV/Share (NGN) 5.8 6.9 7.8
RoA 2.6 2.1 1.8
RoE 31.9 22.5 19.1
Cost to Income (%) 67.3 68.7 68.6
PBT Margin (%) 23.9 22.8 22.6
VALUATION MATRICS
PE (x) 5.7 5.7 5.9
P/BV (x) 1.5 1.3 1.1
56
Dominant Corporate Presence
Zenith Bank Plc (Zenith or the Bank) remains the most capitalized
bank, the second largest lender by assets and one the nation's largest
financial institution with significant systemic importance. The Bank
clinched the most customer-focused position in Nigeria in 2013,
following a survey by KPMG. The Banks shares were listed on the
London Nigerian Stock Exchange as a GDR (Global Depository Receipt) in
March 2013, to enjoy international patronage. Zenith has continued to
lead in the corporate banking space, with total earnings accounting for
approximately 13.2% of the industrys gross earnings in 9M:2013. We
forecast a marginal growth of 8.4% and 2.7% in gross earnings and PAT
for 2013.

Interest Income - Bolstered by Credit Growth
Amid hawkish CBN policies, Zenith delivered an impressive performance
in 9M:2013, with a growth of 11.4% and 8.8% Y-o-Y in topline and
bottom line. The Banks NIM improved to 9.5% in 9M:2013 from 8.9% in
H1:2013, signifying optimal asset pricing. Zeniths asset quality remains
firm as the NPL ratio moderated to 3.1% in Q3:2013 vs 3.2% in Q3:2012.
This leap is attributed to the robust risk management strategy, as well as
the optimal diversification of its loan books. As a result, the Banks NPL
ratio ranks as one of the best in the industry.
Cost to Income Ratio - A Marginal Increase
The Banks CIR declined Q-o-Q but increased marginally Y-o-Y, due to the
downward review of COT, bank tariffs, increase in AMCON charge and
increase in staff cost. The CIR stood at 55.8% as at Q3:2013, up slightly
from 55.1% in Q3:2012. Despite intense competition for cheaper
deposits, the Banks interest expense on time deposits remains at 3.4% as
the bank focuses on cheaper source of deposits.
OUTLOOK: Strong Deposit Base to drive Earnings
Zeniths robust liquidity (63.0%) and capital adequacy (28.0%) ratios
presents compelling business opportunities. Our valuation estimates
show that Zenith trades at a forward P/BV and P/E multiple of 1.7x and
8.5x respectively. We forecast a 2013 EPS of N3.2 and a N1.64 DPS. Our
blended DCF and DDM valuation methodologies yielded a 2014 TP of
N28.88, which implies a 5.4% upside potential, hence our HOLD rating.

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160 Zenith Banking Index NSE

RATING HOLD
LIQUIDITY (mn)
Free Float (%) 83.9
6 months (%) 1.6
12 Months (%) 40.6
Net Interest Income 156.8 161.9 175.9
OPEX 119.6 139.9 162.3
PAT 98.1 100.8 118.1
EPS (NGN) 3.1 3.2 3.8
Total Assets 2,604.5 3,044.7 3,388.6
NAV/Share (NGN) 14.7 16.4 18.5
RoAE 23.9 20.6 21.6
RoAA 4.1 3.6 3.7
NIM Margin (%) 7.7 7.4 6.6
Cost to Income 52.6 55.2 55.0
PBT Margin (%) 32.1 30.9 31.1
VALUATION MATRICS
PE (x) 8.8 8.5 7.3
P/BV (x) 1.9 1.7 1.5
NSE: ZENITHBANK
Bloomberg: ZENITHBA NL
ISIN NGZENITHBNK9
ZENITH BANK PLC
57
Leveraging Domestic Supply Deficit
Dangote Sugar Refinery Plc (Dangote Sugar or the Company),
currently has a production capacity of approximately 1.4mMT per
annum, making it the largest sugar refinery in sub Saharan Africa and
second largest in the world. The company has a robust customer base,
accounting for over 70.0% of the domestic sugar market. Dangote Sugar
is poised to grow bottom line significantly in 2014 considering the wide
domestic supply deficit and the recent backward integration. The recent
appointment of Mr Graham Clark (former MD of Illovo Sugar, the largest
sugar company in Africa) as the new MD should stimulate growth
further. Premised on the aforementioned, we forecast a N137.0bn
turnover in 2014, a growth of 15.0% on our 2013 estimates.

Profitability: Keeping COGS Competitive
Dangote Sugars turnover dipped 4.4% Y-o-Y in 9M:2013 to N77.7bn, as a
result of competition from Imported sugar. Cost of goods sold (COGS)
was down 10.0% Y-o-Y in 9M:2013, due to the declining price of raw
sugar. Consequently, the PBT margin improved 4.5% to 19.2% during the
period. We estimate a turnover of N119.1bn for FY:2013. In addition,
given that raw sugar constitutes over 90.0% of the companys COGS, we
expect direct cost to moderate further in 2014 as the global price of raw
sugar (decline 28.0% Oct.2013 - Jan 2014) is likely to decline further.
Rising OPEX dampens Bottom line
Despite the 4.4% decline in turnover, Dangote Sugars OPEX spiked
57.4% Y-o-Y to N6.5bn in 9M:2013. This can be attributed to the
alarming 161.5% rise in salaries and other staff cost. Consequently, OPEX
margin advanced 3.3% Y-o-Y to 8.5% in Q3:2013. Sustaining this cost
structure will depress bottom line further in 2014.
OUTLOOK: Backward Integration to drive Volume
Over 90.0% of the edible sugar consumed in Nigeria is imported, mostly
from Brazil. In order to take advantage of the supply deficit, Dangote
Sugar is strategically positioned within the Nigerian Sugar Master Plan
(NSMP), through its backward-integration program (BIP), targeted at
increasing capacity to 1.5m tonnes by 2018. Dangote Sugar is currently
trading at a forward P/BV and P/E of 3.1x and 11.0x respectively. Our
blend of DDM and DCF techniques yielded a N10.81 fair value, and a
12-Month target price of N11.97. This presents a 2.3% upside hence our
HOLD rating.
RATING HOLD
LIQUIDITY (mn)
Free Float (%) 26.3
6 months (%) 90.2
12 Months (%) 95.0
Turnover 106,868.0 119,141.5 137,012.8
EBITDA 16,331.3 18,703.4 21,508.9
OPEX 6,879.0 9,108.4 10,474.6
PAT 10,796.3 12,743.8 14,655.3
EPS (NGN) 0.9 1.1 1.2
Total Assets 62,294.0 69,853.5 77,289.7
RoAE (%) 26.4 29.4 32.0
RoAA (%) 17.3 19.3 21.0
Gross Margin (%) 19.8 21.0 21.0
EBITDA Margin (%) 15.3 15.7 15.7
PBT Margin (%) 15.3 15.7 15.7
VALUATION MATRICS
PE (x) 7.1 11.0 9.6
P/BV (x) 1.9 3.1 2.8
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200
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NSE: DANGSUGAR
Bloomberg: DANGSUGAR NL
ISIN NGDANSUGAR02
DANGOTE SUGAR REFINERY PLC
58
Consumption Pattern: From Super Premium to Value
Brands
The rising cost of living has negatively impacted the brewery sector,
as consumers switch from super premium to low-end brands.
Guinness Nigerian Plc (Guinness or GN), the 2nd largest player
by market size, may have to contend with this challenge amid stiff
competition. GN recently launched 4 new products (Malta Guinness
low sugar, Dubic lager, SNAPP and Orijin) to increase its presence in
the value segment, as well as cushion the shrinking sales at the
high-end premium segment. Notwithstanding, we forecast a decline
of 0.6% and 2.5% in both top and bottom line in 2014, but expect a
slight pick up in 2015 by 8.2% and 19.1% respectively.

Lower Tax - Cushioning PAT in Q1:2014
The decline exhibited in top line and bottom line buttresses our concern
on the challenges in the brewer industry. GN recorded 5.4% and 29.7%
decline in turnover and PBT in Q1:2014. The decline in PAT (3.5%) was
moderated by a significant reduction in the effective tax rate of 6.7% vs
32.0% in Q1:2013. According to Management, the lower tax rate resulted
from capacity expansion program and new products development. GNs
Gross profit and PBT margin declined 2.9% and 0.7%, to close at 8.3%
and 46.7% in Q1:2014 respectively. We project a PBT and PBT margin
of N16.3bn and 13.4% for FY:2014.
OPEX margin : Advanced amid PBT Plunge
The 0.9% increase in GNs OPEX can be attributed to the 14.1% rise in
administrative cost in Q1:2014. Consequently, OPEX margin rose to
35.8%, 2.5% higher than our 2014 forecast. The 1.2% decline in finance
cost in Q1:2014 can be traced to the 6.0% reduction in overdrafts. Given
that sales expansion in the industry is driven by OPEX expansion, we
forecast a 14.3% growth in OPEX for FY:2014 to N37.1bn.
OUTLOOK: Guinness Remains Overpriced
Our FY:2014 sales forecast for Guinness shows a 6.0% decline to
N316.6bn. Despite the increase in sales of low-end value brands, we
expect the slowdown in demand for premium and mainstream brands to
dampen sales. Our valuation estimates shows that GN is trading at a
forward P/BV and P/E multiple of 9.4x and 34.9x respectively, compared
to NB (12.2x and 28.4x). We expect 2014 EPS to attain N7.50, 10 kobo
lower than FY:2013. Our weighted DCF and DDM valuation
methodologies gave a 2014 TP of N142.87, which implies a 45.0%
downside to the N260.00 price as at 31/12/2013. We recommend a SELL.
RATING SELL
Upside/Downside(%) (45.0)
LIQUIDITY (mn)
Free Float (%) 45.7
6 months (%) (8.7)
12 Months (%) (14.2)
Turnover 122,463.5 121,700.9 131,697.8
EBITDA 30,589.1 29,382.6 33,018.5
OPEX 35,813.0 37,210.8 39,993.2
PAT 11,515.0 11,224.9 13,369.3
EPS (NGN) 7.6 7.5 8.9
Total Assets 121,060.6 134,459.5 145,150.9
NAV/Share (NGN) 30.6 27.7 29.9
RoAE 28.0 27.2 31.2
RoAA 10.7 9.8 10.6
Gross Margin (%) 45.8 46.3 46.3
EBITDA Margin (%) 25.0 24.1 25.1
PBT Margin (%) 13.6 13.4 14.4
VALUATION MATRICS
PE (x) 34.0 34.9 29.3
P/BV (x) 8.5 9.4 8.7
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160 Guinness Consumer Goods NSE
NSE: GUINNESS
Bloomberg: GUINNESS NL
ISIN NGGUINNESS07
GUINNESS NIGERIA PLC
59
Moderate Turnover and Earnings Growth amid Shrinking
Beer Demand
The reduction in beer consumption due to rising cost of living
dampened Nigerian Breweries Plcs (NB or the Company)
9M:2013 turnover and earnings growth. NB controls approximately
60.0% of the Nigerian beer, with a turnover of N252.7bn in 2012. We
estimate a moderate 8.1%growth in turnover and a 2.7% decline in
PAT in FY:2013. As part of its expansion plan to boost supply, NB is
set to commission its ultramodern Can-line factory in Aba, Abia
State; valued at N15.0bn, with 2.4HL capacity. Consequently, we
expect the company to deliver a PAT of N37.0bn in FY:2013,
translating to an EPS of N4.90.
PROFITABILITY: Bolstered by Moderating Finance Cost
Growth rates of NBs top line and bottom line slowed down Q-o-Q to
5.0% and 6.0% in Q3:2013 respectively. This revealed the stiff
competition for market share, in addition to the decline in demand. NBs
finance cost moderated significantly by 16.3% to N5.7bn in 9M:2013,
despite a 9.0% increase in borrowings. We attribute this to possible
reduction in borrowing cost. We estimate a turnover of N273.2bn for
FY:2013 given the yuletide induced demand for beer in the fourth
quarter.
OPEX Margin: Sustaining a 5-Year Average
NB has been able to maintain its OPEX margin within a 5-year average
(30.6%). This was achieved due to the moderation in OPEX (11.0%
growth Q-o-Q in 9M:2013 compared to 14.2% in 6M:2013). Despite the
market risk in the Brewery sector, the prices of inputs pose a significant
threat to the industry, and may induce an increase in cost of sales and
marketing expenses.
OUTLOOK: Overpriced at N168.41
We expect demand to rise marginally in 2014 on the back of pre-election
spending. As a result, we forecast a 14.3%growth in PAT in FY:2014.
Based on our estimates, NB has a forward P/E and P/BV of 28.4x and
12.2x. Our weighted DCF and DDM valuation, gave a Target Price of
N122.59 for 2014, which implies a 27.2% premium to the market price as
at 31/12/2013. We therefore maintain a SELL rating on NB.
NSE: NB
Bloomberg: NB NL
ISIN NGNB00000005
NIGERIAN BREWERIES PLC
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RATING SELL
LIQUIDITY (m)
Market Cap (NGN) 1,273,611.4
Free Float (%) 31.74
6 months (%) 6.2
12 Months (%) 14.2
Turnover 252,674.0 273,228.4 316,580.7
EBITDA 83,028.0 78,997.1 72,548.0
OPEX 61,520.0 76,166.8 87,064.0
PAT 38,042.0 37,002.4 46,271.8
EPS (NGN) 5.0 4.9 6.1
Total Assets 253,632.4 304,621.7 307,156.1
NAV/Share (NGN) 12.4 13.5 14.9
RoAE 44.4 42.4 43.9
RoAA 15.5 15.8 16.2
Gross Margin (%) 49.6 49.9 49.9
EBITDA Margin (%) 32.9 29.9 30.9
PBT Margin (%) 22.6 23.1 23.9
VALUATION MATRICS
PE (x) 33.8 28.4 23.3
P/BV (x) 11.9 12.2 11.1
60
Betting on Scale Economies
ASHAKA Cement (Ashaka or the Company) is a subsidiary of Lafarge
Wapco, a long standing brand in the cement industry. Ashaka operates
dominantly in the North-Eastern region, producing 1.0 MT annually. The
companys forte has been endangered by the intense competition from
peers, given its slim market share (3.1% of industry installed capacity
and 4.3% of industry turnover). As part of its expansion plans, Ashaka
intends to inject N80.0bn in its business, to raise production capacity to
2.5 MT. In addition, the company intends to establish a coal power plant
to generate electricity for improved production efficiency.

PROFITABILITY: Wrestling with the Giant
Despite intense competition from Dangote Cement, Ashaka grew
revenue moderately from N16.4bn to N16.8bn in 9M:2013, a 2.8% Y-o-Y
marginal increase. The Company reported lower bottom-line
performances in its 9-month results relative to the corresponding period,
however, topline grew 2.3% to N16.8bn during the 9-month period. PAT
for the period was N1.5bn, representing a 58.8% Y-o-Y decrease.
Ashakas PAT declined 58.8% Y-o-Y, while Net Margin also shrank 9.0%
in 9M: 2013, compared to the 22.0% in 9M: 2012.
OPEX: 27.1% Y-o-Y Decline,
The Companys OPEX reduced by 27.1% Y-o-Y in its 9M:2013 result. We
believe this can be linked to the reintroduction of a more efficient
collection and distribution strategy. Cost of sales grew 29.3%, well ahead
of revenue growth. Despite the increase in COGS the Companys gross
margin increased slightly to 17.6% in Q3:2013 from 17.0% in 9M:2012.
We foresee an increase in OPEX in 2014 to N4.7bn, from N4.4bn in
FY2012.
OUTLOOK: Promising Days Ahead
We expect the ongoing expansion to boost Ashakas topline in the near
term. Consequently, we forecast a N1.76 EPS for FY:2013, yielding an
ROAE of 6.1%. Our valuations models yielded a fair value of 22.57 and
12-month target price of 25.84, presenting a 23.1% upward potential,
relative to the N20.99 price as at 31/12/2013. This informed our
ACCUMULATE rating on Ashaka.
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Ashaka Cement NSE
RATING ACCUMULATE
Price on 31/12/2013 20.99
LIQUIDITY (mn)
Free Float (%) 41.4
Ave Daily Volume 1
6 months (%) 97.6
12 Months (%) 16.9
Turnover 21.8 23.0 24.4
EBITDA 4.5 5.4 5.4
OPEX 4.4 4.3 4.7
PAT 3.1 4.0 0.0
EPS (NGN) 1.4 1.8 1.7
Total Assets 67.3 91.7 96.4
NAV/Share (NGN) 22.1 23.3 24.6
RoAE 6.0 6.1 7.4
RoAA 4.4 3.9 4.2
Gross Margin (%) 38.1 37.1 37.0
EBITDA Margin (%) 20.8 23.3 22.1
PBT Margin (%) 20.8 23.3 19.1
VALUATION MATRICS
PE (x) 15.0 11.9 12.0
P/BV (x) 0.9 0.9 0.9
ASHAKA CEMENT NIGERIA PLC
NSE: ASHAKA
Bloomberg: ASHAKACE NL
ISIN NGASHAKACEM8
61
An Intense Drive for Expansion
CCNN Plc (CCNN or the Company) is a player in the cement space
with its production capacity of approximately 500,000 mtpa (1.7% of the
industry). The company was incorporated in 1962 and commenced
production in 1967 with an initial installed capacity of 100,000 tons per
annum at the Kalambaina plant. The Company produces the sokoto
cement brand which it distributes around northern states (Sokoto,
Kebbi, Zamfara, Katsina, Kano, and Kaduna States). CCNNs production
plant in Gombe State has over 200 million tonnes of proven reserves of
limestone and is currently undergoing expansion plans to increase
capacity to 1 Million tonnes in the near term.

PROFITABILITY: Bolstered by Asset Utilization
A cursory look at CCNNs (9M:2013) numbers, revealed an uneven growth
pattern across primary performance indicators. Top line growth was
modest at single digit, while bottom line growth was strong. Revenue
grew 5.8% Y-o-Y to N12.1bn (relative with Dangote Cements 28.7%),
supported by increased asset utilization rate. The increased competition
with the industry heavyweights like Dangote Cement and WAPCO
continuously poses a threat to the company. After tax profit came in at
N1.1bn, up 25.0% Y-o-Y.
OPEX Margin: Increasing Finance Cost
CCNNs OPEX increased to N2.9bn as at 9M:2013, from N2.7bn 9M:2012.
However, the companys OPEX margin reduced marginally to 24.1% in
9M:2013 from 24.3% the corresponding period. Production cost
efficiency appears to be improving, as cost-to-sales ratio dropped to
66.0% as at 9M:2013 (69.0% in 9M:2012), attributable to less reliance on
LPFO for firing its kilns. However, finance cost increased by 20.8% in
during same period, constituting a significant drag on CCNNs PAT mar-
gin.
OUTLOOK: Promising Future
We forecast a 14.1% top line growth of to N17.3bn in FY:2013 (9M:2013 -
N12.1bn), and a 24.0% bottom line growth to N1.5bn. Based on our DCF
and DDM valuation methodologies, we arrived at a 12-month target of
N13.69. This amounts to 16.5% upside potential relative to the N11.75
price as at 31/12/2013. We affirm our ACCUMULATE rating and a positive
long term outlook on CCNN.
RATING ACCUMULATE
Current price(NGN) 11.75
LIQUIDITY (mn)
Free Float (%) 37.8
6 months (%) 99.2
12 Months (%) 121.7
Turnover 15.1 17.3 19.7
EBITDA 1.8 2.5 2.8
OPEX 3.4 4.0 4.5
PAT 1.2 1.5 1.7
EPS (NGN) 1.0 1.2 1.3
RoAE 16.33 19.17 21.64
RoAA 8.92 10.28 11.61
Gross Margin (%) 28.06 30.34 30.34
EBITDA Margin (%) 11.93 14.34 14.34
PBT Margin (%) 10.93 12.25 12.25
VALUATION MATRICS
PE (x) 10.9 8.8 7.7
P/BV (x) 1.7 1.7 1.7
Dividend Yield (%) - - -
Dividend Pay-out Ratio (%) - - -
CCNN PLC
NSE: CCNN
Bloomberg: CCNN NL
ISIN NGCCNN000003
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62
Actualizing a Pan African Ambition
Dangote Cement (DANGCEM or the Company) has continued to
perform remarkably, expanding across Africa and affirming its position
as Africas largest producer of cement. It currently has a production
capacity of 20.3mmt/pa in Nigeria and 11.2mmt/pa in other African
countries. DANGCEM intends to fund the construction of a 3000 tonne/d
bulk cement terminals and grinding units across select African countries.
The N16.0bn domestic housing unit deficit places the company on a sure
footing for the long haul. Its expansion in other African countries should
bring the total cement production capacity to 50mt by 2016. We expect
2014 to be an exciting year for the Company as it begins to reap the
benefits of its expansion drive.

PROFITABILITY: An Expansion Drive
The company reported a 9M:2013 PAT of N156.1bn, 38.3% higher than
9M:2012. This was significantly boosted by contributions from its
Nigerian operations (approximately 95.0% of group sales). The company
achieved 90.0% of our FY2013 projection in Q3:2013, boosting our
expectations for FY:2013. We forecast a FY:2013 and FY2014 turnover of
N346.5bn and N451.7bn and a PAT of N173.4 and N228.5bn respectively.
Upside of a Tax Holiday and Downside of Expansion
While operating expenses dampen performance with a 56.8% Y-o-Y
increase in the 9-month2013 result to N33.5bn, the company continues to
enjoy favorable tax policies in Nigeria. The company enjoyed a N4.4bn
capital allowance, boosting PAT to N156.1bn in 9M:2013. In addition,
DANGCEMs operating expenses grew by 57.0% during the period.
Capital Structure and Leverage
Despite the sale of a 1.5% stake in the company in June 2013, a
significant portion of the companys ownership (95.0%) is retained by the
founding owner. We anticipate further divestment of his interest in 2014
premised on its proposed listing on the London Stock Exchange (LSE).
DANGCEM currently trades at a P/E and P/BV of 21.5x and 7.1x, with a
ROAE and ROAA of 36.6% and 0.2% respectively. Based on our blend of
DDM and DCF valuation methodologies, we arrived at a fair value of
N213.17 and a target price of N241.67, a 10.4% upside potential in 2014.
We therefore recommend an ACCUMULATE on Dangote Cement.
NSE: DANGCEM
Bloomberg: DANGCEM NL
ISIN NGDANGCEM008
DANGOTE CEMENT PLC
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RATING ACCUMULATE
Price as at 31-12-2013 (NGN) 218.99
LIQUIDITY 2012
Free Float (%) 5.1
Ave Daily Value Traded(NGN) 378.7
6 months (%) 42.08
12 Months (%) 71.74
Turnover 298.5 346.5 451.7
EBITDA 146.8 233.9 332.0
OPEX 38.1 44.2 57.6
PAT 151.9 173.4 228.5
EPS (NGN) 8.9 10.2 13.4
Total Assets 673.7 805.4 910.1
NAV/Share (NGN) 24.6 30.7 37.4
RoAE 42.1 36.6 39.3
RoAA 0.2 0.2 0.3
Gross Margins (%) 60.4 70.4 76.4
EBITDA Margins (%) 49.2 67.5 73.5
PBT Margins (%) 45.5 50.0 56.0
VALUATION MATRICS
PE (x) 24.6 21.5 16.3
P/BV (x) 8.9 7.1 5.9
63
The Leading Life Insurer
AIICO Insurance Plc (AIICO or the Company) occupies a strategic
position in the Nigerian insurance space, accounting for 13.0% of the
entire industrys gross premium. The company has a dominant footing in
the life insurance business (which accounts for 53.5% of its gross
premium). The non-life business is largely driven by motor vehicle
insurance and the oil & gas business segment. AIICO operates from 20
business offices in Nigeria, and has grown its premium by a 4-year CAGR
of 52.3%. The company is in the process of expanding its operations
through the injection of additional capital to boost its entire business
portfolio.

PROFITABILITY: Back to Sustainable Profit
Aiico has continuously leveraged its broad market penetration to yield a
25.0% 5-year CAGR in profit (to N1.3bn as at FY:2012 and N0.8bn as at
9M:2013). Moving from a loss position of N28.4m in 2011, the insurer has
bounced back to profitability, boosted by the Nigerian demographics
(life insurance) and the expansion of its product portfolio to an
increasingly expanding market.
Claims: The Downside of High Mortality Rate
Life insurance contracts accounted for 60.7% of total claims in 2012. This
is partly explained by the 39.0% average mortality rate in the country,
increasing the frequency of claims on life insurance contracts. The total
underwriting expenses has sustained a declining trend since 2010. this is
due the 170.0% average increase in claims expenses recovered from
reinsurer over the same period. Nevertheless, AIICO has to manage the
expanding OPEX, particularly the impairment provision on trade and
reinsurance receivables.
AIICO operates a balance sheet size of N44.3bn, with a total equity of
N14.0bn as at 9M: 2013. The company recently streamlined its efficiency
ratios to manageable bands, with an expense and claims ratio of 45.7%
and 54.0% respectively. Investment contribution was fair at 28.3%, while
underwriting contribution averaged 71.7% as at FY:2012.
OUTLOOK: 101.9% Upside Potential
Our valuation suggests that AIICO is grossly undervalued to a tune of
101.9%, relative to the price as at 31/12/2013. Using a blend of DDM and
DFC valuation methodologies, we arrived at a 12-month target price of
N1.70, hence our BUY recommendation.
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NSE: AIICO
Bloomberg: AIICO NL
ISIN NGAIICO00006
AIICO INSURANCE PLC
RATING BUY
LIQUIDITY (mn)
Free Float (%) -
6 months (%) (8.7)
12 Months (%) 48.8
Gross Premium 21.3 25.3 27.8
Underwriting profit 4.4 5.2 3.7
OPEX 6.0 7.1 5.6
PAT 1.3 1.4 1.7
EPS (NGN) 0.19 0.20 0.25
RoA 3.8 2.1 2.7
RoE 11.6 8.5 10.7
Net Margin (%) 6.2 4.5 5.5
Combined Ratio 99.7 77.8 74.5
PBT Margin (%) 9.8 7.1 8.6
VALUATION MATRICS
PE (x) 4.41 4.2 3.4
P/BV (x) 0.5 0.5 0.5
Dividend Yield (%) 9.52 7.40 9.96
64
Capturing the SSA Reinsurance Market
Continental Reinsurance Plc (CONTINSURE or the Company) has been
a forerunner in the African reinsurance space for the past 25 years, with
operations in 43 African countries. In driving its pan African business
model, the reinsurer recently opened a new office in Abidjan, Cote
dIvoire in a bid to deepen its presence in Francophone Africa.
Anglophone West Africa accounts for 70.0% of its entire operations,
where it offers a full spectrum of Non-Life and Life reinsurance
underwriting. A new office is about to be set up in Tunis to cover
businesses in North Africa and the Maghreb countries.

PROFITABILITY: Driven by Fire & Engineering Underwriting
Continental Reinsurance has sustained a 39.0% 5-year cumulative growth
in its gross premium, which attained N11.9bn in FY: 2012 and N10.4bn in
9M:2013. The Company has a robust product portfolio, dominated by Fire
and Engineering insurance (35.0%); followed by General Accident
(16.0%) and Motor & Liability Insurance (12.0%). The company recorded
a PAT of N1.4bn in its 9M:2013 result, representing a 16.6% Y-o-Y
growth. This yielded an ROE and ROA of 13.5% and 5.6% respectively.
Expenses: An Eye on OPEX
The company has fortunately recorded a 19.0% 5-year CAGR in net
claims, which stood at N4.8bn in FY:2012 and N4.9bn as at 9M:2013.
OPEX has equally been efficiently managed as it grew 8.1% Y-o-Y to
N4.4bn as at FY:2012, and N4.1bn for its 9-month 2013. We forecast a
3.2% Y-o-Y increase in OPEX (to N5.2bn) for FY:2014.
The N25.1bn balance sheet of Continental Reinsurance puts the company
on a firm footing to accommodate further risk underwriting. This is
clearly pictured by the solvency ratio of 0.12x as at 9M:2013. The expense
ratio has averaged 43.0% over the last 4 years, even as we forecast an
expense and loss ratio of 38.0% and 48.0% respectively for FY:2013. We
equally expect the EBITDA Margin to increase to 23.0%, as revenue from
Francophone Africa is set to impact the future profitability numbers.
OUTLOOK: 20.1% Upside Potential
Our outlook on is positive, particularly with the gradual deepening of
the Nigerian insurance market; and the consequent need for reinsurance
underwriting. From a valuation perspective, our blend of DDM and DCF
valuation methodologies revealed that CONTINSURE has a 20.1% upside
potential, relative to the N1.23 price as at 31/12/2012 and the N1.48
12-month target price, hence our ACCUMULATE rating.
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CONTINSURE Insurnce Sector NSE
NSE: CONTINSURE
Bloomberg: CONTINSURE NL
ISIN NGCONTINSUR9
CONTINENTAL REINSURANCE PLC
RATING ACCUMULATE
Upside/Downside 20.1%
LIQUIDITY (mn)
Free Float (%) 36.0
Ave Daily Volume 3
Ave Daily Value Traded (NGN) 3
Ave Daily Value Traded (USD) 0
6 months (%) 0.8
12 Months (%) 61.8
OPEX 5.1 5.2 5.7
PAT 1.6 2.5 2.7
EPS (NGN) 0.16 0.24 0.26
RoE 12.7 17.6 18.7
RoA 7.1 9.2 9.8
Net Margin (%) 13.6 18.8 18.5
PBT Margin (%) 16.6 21.8 20.8
VALUATION MATRICS
PE (x) 7.84 5.2 4.7
P/BV (x) 1.0 0.2 0.2
65
Exploring the Scale Advantage
Custodian and Allied Plc (Custodian or the Company) recently
expanded the scope of its business, following the successful merger
with Crusader Insurance Plc. The new structure of Custodian consists of
a group of companies (subsidiaries) with the holding company,
Custodian and Allied Plc, having controlling equity interests in the four
subsidiaries: Custodian and Allied Insurance Limited, Custodian Life
Assurance Limited, Crusader Sterling Pensions Limited and Custodian
Trustees Limited. We expect the new structure to yield new product
lines and operating efficiencies going forward.

PROFITABILITY: Tapping into Fresh Opportunities
Custodian has sustained a positive growth in its gross premium, at a
5-year CAGR of 28.0%; yielding an underwriting profit and PAT of
N1.2bn and N2.1bn respectively in FY:2012. The recent merger with
Crusader (Nigeria) Plc has expanded income earning opportunities for
Custodian, particularly from non-insurance businesses. Although the
merger had a dilutive impact on the EPS, this is however marginal as our
forecast ROE for FY:2013 stands at 19.1% (FY:2014: 25%) compared to
the 14.1% for FY:2012.
Expenses: The Cost of Business Integration
We expect the cost of business integration to nudge OPEX higher to
N2.8bn by FY:2013 (9M:2013 N2.4bn), driven by the cost of integrating
skills, information technology and back office processes. In addition, Net
Claims incurred is expected to increase from N2.1bn in 2012 to N5.3bn in
FY:2014. As a result, we expect the expense ratio to approach 46.7% for
FY: 2014, compared to 33.3% as at FY:2012.
The merger with Crusader Plc yielded a 15.6% and 13.3% increase in the
balance sheet size and shareholders fund respectively. However, we
expect significant improvements in efficiency ratios, particularly an
increase in the investment contribution ratio to 76.0% from 33.0%
recorded in FY2012. We also anticipate increased revenue contribution
from Crusader Sterling Pensions Limited and Custodian Life Assurance
Limited.
Our valuation models estimates a 50.0% Y-o-Y increase in EPS to N0.60
by FY:2013, and a further 47.0% growth to N0.88 by FY:2014. Our DDM
valuation methodology placed Custodian at N4.37 12-month target price
(78.5% upside to the price as at 31/01/2013), hence our BUY
recommendation.
NSE: CUSTODYINS
Bloomberg: CUSTODYINS NL
ISIN NGCUSTODYIN6
Custodian & Allied Plc
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RATING BUY
LIQUIDITY (mn)
Free Float (%) 49.0
6 months (%) 32.5
12 Months (%) 60.0
OPEX 1.5 3.8 5.0
PAT 2.1 3.5 5.5
EPS (NGN) 0.40 0.60 0.93
RoE 14.1 19.1 26.8
RoA 6.7 6.7 9.7
Net Margin (%) 17.4 15.6 17.4
PBT Margin (%) 19.7 15.6 17.4
VALUATION MATRICS
PE (x) 6.1 4.1 2.6
P/BV (x) 1.0 0.8 0.6
66
Aggressive Push into Auto Insurance
Mansard Insurance Plc (Mansard or the Company) remains
committed to its mansard roof philosophy, with which the insurer
intends to provide protection to Nigerians. Following the rebranding
exercise in 2012, there is a renewed propensity to garner investment
and other income, as evidenced in the whopping 190.0% Y-o-Y growth
recorded in 2012. In addition, the recent venture into real estate through
the Mansard Place and the repositioning of Mansard Investments
Limited are important future profit drivers.

PROFITABILITY: Non-Life Business to the Rescue
Non-Life Business continues to be the most significant driver of gross
premium for Mansard, contributing 74.0% (N9.3bn) in 2012. Further
growth in 2013 has been bolstered by the Oil & Energy business line. In
addition, the Vehicle Insurance business segment rides on the reduction
of fake motor vehicle insurance. The Company recorded a PAT of N1.9bn
in 9M:2013, nudging its EPS to N0.12 from N0.09 recorded in 9M:2012.
We forecast a PAT of N2.5bn for FY:2014 yielding an EPS and a DPS of
N0.25 and N0.16 respectively.
Expenses: Wary of Underwriting Expenses
The total underwriting expenses of Mansard has come under pressure in
recent time, growing at a 5-year CAGR of 53.0% (to N4.8bn as at FY:
2012 and N3.8bn in 9M:2013). This was driven by the 72.1% average
growth in the Gross Claims Expenses over the same period, which stood
at N2.4bn as at 9M:2013 (FY:2012: N3.8bn). However, this has been
cushioned by the moderation in OPEX, particularly the management
expenses, which declined by 21.0% in FY:2012 to N1.0bn (9M:2013:
N0.87bn)
After growing its balance sheet by 29.0% from N24.0bn in 2011 to
N31.0bn in 2012, Mansard further expanded its asset size to N33.6bn as
at 9M:2013. The expense and claims ratios were 16.0% and 44.0%
respectively in 2012. We expect these ratios to attain 32.6% and 43.1% in
that order by FY:2013.
Our 2014 forecast for Mansard revealed an impressive 64.0% increase in
EPS to N0.25. This will be driven by the robust distribution network and
further reinforcement of the Non-Life business. Using a Blend of DDM
and DCF valuation techniques, we arrived at a 12-month target price of
N3.29, yielding a 38.6% upside potential and a BUY rating.
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RATING BUY
LIQUIDITY (mn)
Free Float (%) 25.0
6 months (%) 21.3
12 Months (%) 48.8
OPEX 1.1 2.4 2.5
PAT 1.6 2.5 2.5
EPS (NGN) 0.16 0.25 0.25
RoE 11.3 16.8 16.3
RoA 5.7 9.4 9.1
Net Margin (%) 12.9 19.9 16.0
PBT Margin (%) 17.5 22.9 19.0
VALUATION MATRICS
PE (x) 14.8 9.5 9.4
P/BV (x) 1.6 1.6 1.5
NSE: MANSARD
Bloomberg: MANSARD NL
ISIN NGGTASSURE05
MANSARD INSURANCE PLC
67
A Moderate Rebound - A Long Haul from Dominance
MRS Oil (MRS or the Company) continues to thrive in a very difficult
operating environment, designing strategic ways to increase its market
share of the downstream segment of the industry. PMS continues to
dominate its top-line, boosting previous weak performances. However
the impact of the delay in quota allocation and subsidy payments
appears to be impacting the companys performance. The Company
ought to ramp up its downstream dominance by increasing outlets
across the country. The performance rebound can be threatened if
sufficient measures are not employed to curtail the rising finance cost.

PROFITABILITY: Eroding Top - Line Gains
MRSs revenue rebounded by 11.5% in 2012, from a 5.1% decline in
2011. The initial slump can be attributed to rising interest expenses on
debt obligations. The companys 9M:2013 top-line grew 33.4% Y-o-Y to
N69.2bn). This growth was eroded by the high Cost of Goods Sold
(COGS), which constitute approximately 95.0% of revenue. This
highlights the high cost structure and slim margin in MRSs business.
Though the company has achieved 85.5% of our FY:2013 forecast, we
don't anticipate any surprises in the FY:2013 and FY:2014 results.
Cost Structure - Neck deep
MRSs Cost of Goods and Cost of Operations increased significantly Y-o-Y.
COGS increased 33.3% while OPEX grew 11.0% (from N3.2bn to N3.5bn).
This growth in OPEX wiped off 96.0% of the gross profit, delivering a
PBT margin of 2.0%. Finance cost also increased 26.8% from N443.6m to
N562.3m.
MRS primarily relies on equity funding while short term debt is injected
to settle operating expenses. The companys capital structure can suitably
accommodate the injection of longer term debt to develop an outreach
expansion drive.
OUTLOOK: 56.9% Over Priced, 1.1% ROAE and 0.3% ROAA
We expect MRS to consolidate its Strategic Business Units (SBUs), and
grow its business line. Its fuel and lubricant brands enjoy consumer
patronage and we expect this trend to continue in 2014. We valued MRS
at 12-month target price of N23.44 with a forward P/E and P/BV of 185.1x
and 0.7x. We recommend a SELL on the counter, given that its N54.44
price as at (31/12/2013) is 56.9% downside to our target price.
0
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NSE: MRSOIL
Bloomberg: MRSOIL NL
ISIN NGCHEVRON008
MRS OIL PLC
RATING SELL
Current price(NGN) 54.44
LIQUIDITY
Free Float (%) 32.3
6 months (%) (25.1)
12 Months (%) 129.1
Turnover 79.7 80.0 80.3
EBITDA 1.7 1.6 1.6
OPEX 5.0 5.1 5.1
PAT 0.2 0.1 0.1
EPS (NGN) 0.8 0.3 0.3
NAV/Share (NGN) 75.0 75.1 75.1
RoAE 1.1 0.4 0.4
RoAA 0.3 0.1 0.1
Gross Margins (%) 7.2 7.0 7.0
EBITDA Margins (%) 2.2 2.0 2.0
PBT Margins (%) 0.5 0.3 0.3
VALUATION MATRICS
PE (x) 29.4 185.7 185.1
P/BV (x) 0.3 0.7 0.7
68
A Strategic Acquisition
Oando Plc (Oando or the Company) is one of Africa largest
integrated energy solutions provider, comprised of 6 business units
(Marketing, Supply and Trading, Gas and Power, Energy Services,
exploration and Production and Refining). The Company recently
concluded the capital raising process of $1.6bn, for the acquisition of a
95.0% stake of ConocoPhillipss Oil Mining Lease (OML) 131, 20.0% stake
in the Oil Prospecting License (OPL) 214 and other non-operated interest
assets valued at $1.79bn. This will boost the firms upstream revenue
(exploration and production) significantly, minimizing the high cost
structure of the downstream segment.

An Optimistic Drive
Oandos top-line performance for 9M:2013 declined 21.0% Y-o-Y to
N386.3bn. This can be linked to lower PMS (petrol) volume sold and
production shortfall in its upstream assets. Oando Gas and Power (OGP)
and Oando Exploration and Production (OE&P) continue to deliver
attractive margins of 15.0% and 29.0%. The proposed acquisition of
upstream assets is poised to boost the companys performance with less
reliance on slim margin downstream segment of the market. Our
FY:2013 turnover projection has been revised downwards by 6.0% to
N668.6bn.
Sustaining Cost and OPEX Margin
The high cost nature of the downstream sector creates a very slim
margin for Oando. The COGs margin reduced marginally from 89.0% to
88.0%. However, OPEX margin increased from 6.8% to 8.3% (8.0%
average within the last 5 years).
The Company maintains a debt-equity ratio of 71.4%. Oando also intends
to leverage additional debt and equity ($1.6bn) in funding the
acquisition of ConocoPhillips assets. This highlights concerns about the
sustainability of the current capital structure.
Banking on an Upstream Upside
We have a long term view on Oando as it expands its upstream
operations. This is expected to add an average 5000bpd to production. In
addition, the Alausa IPP, the 150,000scm CNG and Apapa lube plant
remain cash cows for the company in the near term. Oando currently
trades at a P/E and P/BV value of 15.2x and 1.5x. Based on our blend of
DDM and DCF, we arrived at a fair value of N21.29 and a target price of
N24.33, an upside of 0.3%. We place OANDO on our HOLD list.
0
50
100
150
200
250 Oando NSE Oil and Gas NSE
NSE: OANDO
Bloomberg: OANDO NL
ISIN NGOANDO00002
OANDO PLC
RATING HOLD
Price as at 31-12-2013 (NGN) 24.25
LIQUIDITY
Free Float (%) 53.4
Ave Daily Volume 7,106.1
6 months (%) 5.3
12 Months (%) 96.4
Turnover 673.2 668.6 701.4
EBITDA 37.6 37.8 38.8
OPEX 49.6 48.9 51.3
PAT 10.8 10.9 10.9
EPS (NGN) 4.7 1.6 1.6
Total Assets 515.1 548.2 581.3
NAV/Share (NGN) 46.3 16.4 17.4
RoAE 10.9 10.0 9.4
RoAA 2.3 2.0 1.9
Gross Margin (%) 12.1 12.1 12.0
EBITDA Margin (%) 5.1 5.1 5.0
PBT Margin (%) 2.6 2.7 2.5
VALUATION MATRICS
PE (x) 5.1 15.2 15.2
P/BV (x) 0.5 1.5 1.4
69
A Tough Operating Environment
Total Nigeria Plc. (Total or the Company) continues to play a crucial
role in Nigerias downstream sector. The Company is the marketing
subsidiary of Total S.A Paris and operates through over 500 service
stations nationwide. The Company is the highest priced stock in the
petroleum product marketing sector of the NSE. Amid the challenging
and hostile downstream environment, Total continues to weather the
storm by increasing CAPEX in non-regulated petroleum products
(lubricants and aviation Fuel). Majority share of Total is controlled by
Total S.A. Paris (45.2%) while Elf Acquitaine Paris and Enifor Limited
hold 16.5% and 8.1% respectively.

PROFITABILITY: Driven by Demographics
Totals 9-month 2013 revenue increased 5.0% Y-o-Y to N174.3bn from
N166.4bn in the corresponding period (achieved 76.2% of our FY:2013
forecast). The gross margin also inched higher to 13.0% from 12.0% in
2012. However, PBT and PAT both declined 9.0% and 12.0% Y-o-Y in its
9M:2013 results respectively. We anticipate a weaker performance in
FY:2013 considering the decline in top-line and bottom-line
performances for 2 consecutive quarters.
Rising Administrative & Financing Cost
Similar to other oil marketing players, the huge growth in operating
expense and finance charges has continued to deter growth in Total. The
companys OPEX and finance charges grew 30.0% and 48.0% Y-o-Y in
Q3:2013 (to N16.9bn and N1.5bn respectively) owing to a difficult
operating environment and tight credit conditions. This can be solved by
raising additional equity capital or leveraging its parent company.
Thinning out the Downstream
Total continues to be at the forefront of the downstream segment, as it
strengthens its position. Despite the slimmer margin of the downstream
segment of the business, we expect Totals lubricant and non-fuel
business segments to driver its topline in 2014. Total currently trades at a
P/E and P/BV value of 16.0x and 7.0x. Based on our blend of DDM and
DCF, we arrived at a fair value of N230.23, and a 12-month target price
of N267.69, representing a 57.5% upside. We recommend a BUY on the
counter.
80
100
120
140
160
180
200
220
240 Total NSE Oil and Gas NSE
NSE: TOTAL
Bloomberg: TOTAL
ISIN NGTOTAL00001
TOTAL NIGERIA PLC
RATING BUY
Price as at 31-12-2013 170.00
LIQUIDITY
Free Float (%) 33.3
Ave Daily Value Traded(USD) 2,709.7
6 months (%) 24.5
12 Months (%) 43.7
Turnover 221.8 228.8 236.0
EBITDA 8.6 9.8 10.1
OPEX 18.6 22.3 23.0
PAT 4.7 5.7 5.9
EPS (NGN) 13.8 16.7 17.3
NAV/Share (NGN)
RoAE 43.8 47.0 42.7
RoAA 6.9 7.5 7.3
Gross Margin (%) 11.8 13.6 13.6
EBITDA Margin (%) 3.9 4.3 4.3
PBT Margin (%) 3.2 3.6 3.6
VALUATION MATRICS
PE (x) 8.8 16.0 15.5
P/BV (x) 3.6 7.0 6.2
70
ANALYSTS CERTIFICATION AND DISCLAIMER

Fair Value Estimate

Our approach to establishing fair value takes into account a weighted average of price estimates derived from a blend of
valuation methodologies including the Discounted Cash Flow (DCF) (and its variants) as well as other relative/comparable
trading multiples valuation models. However, we attach the most weight to DCF valuation methodology, particularly the
Dividend Discount Model (DDM), Free Cash Flow (FCF) model and Residual Income Valuation/Model (RIV/RIM). The
utilization of comparable trading multiples is guided by the analysts understanding of the banks fundamentals, as well as key
price drivers from the firm, industry and macroeconomic perspectives.

Investment Ratings

BUY: The expected total return over the next 12 months is 25.0% or more. Investors are advised to take positions at
the prevailing market price as at the report date.
ACCUMULATE: The expected total return ranges between 10% and 25.0% or the upside potential is above industry average.
However, cautious portfolio positioning is advised.
HOLD: Investors are advised to remain neutral as the expected total returns are not expected to exceed 10.0% based
on the prevailing market price as at the report date.
REDUCE: The expected total return of the stock ranges from nil to negative. Aggressive exit or entry may not be
appropriate, as the stock might fluctuate into a 10.0% decline over a 12-month horizon. Thus, the slim upside
potential does not adequately compensate for the inherent risk.
SELL: The stock trades at a premium to its intrinsic value and is thus expected to lose up to 10.0% or more of its
market value. Immediate exit is therefore advised at the prevailing market price as at the report date.

Ratings Summary

BUY ACCUMULATE HOLD SELL Total
Coverage Universe 6 7 4 3 20
% distribution 30.0% 35.0% 20.0% 15.0% 100.0%
71
Section 5
Appendix
72
Page No
Chart 1 Growth Trends across Select Regions and Economies 9
Chart 2 Performance of Global Equity Indices 10
Chart 3 EU GDP Growth 11
Chart 4 Declining GDP in Asia 12
Chart 5 Quarterly GDP Growth 16
Chart 6 Broad and Narrow Money (20122013) 17
Chart 7 Credit to the Private Sector 17
Chart 8 Crude Oil price and Output in 2013 18
Chart 9 Government Budget in 2013 and 2014 (Proposed) 19
Chart 10 CBN Rates and Inflation 20
Chart 11 Emerging Market Currencies Under Pressure 22
Chart 12 Trend of FGN Treasury Issuances (2008 2013) 26
Chart 13 The declining Sovereign Yield Curve (Q-o-Q) 26
Chart 14 FGN Bonds Market in 2013 27
Chart 15 Primary Market Activity (2012 vs. 2013) 28
Chart 16 State Government Bonds 29
Chart 17 Corporate and FGN Eurobonds 30
Chart 18 Eurobond Yield in 2013 30
Chart 19 Naira/Dollar Rates in 2013 31
Chart 20 Global Equity Markets Performance 34
Chart 21 Emerging Market Performance 35
Chart 22 NSE-ASI Movement in 2013 36
Chart 23 NSE-ASI YTD Return (2000-2014f) 36
Chart 24 NSE Monthly Returns and Drivers 37
Chart 25 6 years NSE-ASI Trend Analysis- 2008-2013 38
Chart 26 Domestic and Foreign Portfolio Participation in Equity Trading 39
Chart 27 Foreign Portfolio Investments (2007 Nov 2013) 39
Chart 28 NSE Sector Performance - 2013) 40
Chart 29 NSE Average Volumes and Values Traded (2009 2013) 41
Chart 30 Market Leaders and Laggards (2013) 42
Chart 31 Top Traded Stocks 42
Chart 32 Nigerian Stock Market Snapshot 43
Chart 33 2014 Market Forecast 48
Table of Charts
73
Contacts Email Tel
Afrinvest Securities Limited
Charles Egbunonwo cegbunonwo@afrinvest.com +234 1 270 1680 ext 231
Oladipo James ojames@afrinvest.com +234 1 270 1680 ext 312
Attai Uwodi (Abuja Office) auwodi@afrinvest.com 234 9 870 9157 ext 502
Taiwo Ogundipe ( Port-Harcourt Office) togundipe@afrinvest.com +234 84 461701 ext 2
Afrinvest Asset Management Limited
Mary Edosomwan medosomwan@afrinvest.com +234 1 270 1680 ext 287
Morenike Ominike mominike@afrinvest.com +234 1 270 1680 ext 286
Investment Research
Ayodeji Ebo aebo@afrinvest.com +234 1 270 1680 ext 315
Chigozie Muogbo cmuogbo@afrinvest.com +234 1 270 1680 ext 314
Oluseye Feyisitan ofeyisitan@afrinvest.com +234 1 270 1680 ext 313
Investment Banking
Onoise Onaghinon oonaghinon@afrinvest.com +234 1 270 1680 ext 172
Toyin Eribake teribake@afrinvest.com +234 1 270 1680 ext 173
For further information, please contact:
Afrinvest Securities Limited (ASL)
27 Gerrard Road
Ikoyi, Lagos
Nigeria
Tel: +234 1270 1680
Fax: +234 1 270 1689
www.afrinvest.com
CORPORATE PROFILE
Afrinvest (West Africa) Limited (Afrinvest or the Company) is a leading independent investment banking firm
with a focus on West Africa and active in four principal areas: investment banking, securities trading, asset
management, and investment research. The Company was originally founded in 1995 as Securities Transaction and
Trust Company Limited (SecTrust) which grew to become a respected research, brokerage and asset management
firm. Afrinvest (West Africa) Limited is licensed by the Nigerian Securities and Exchange Commission (SEC) as an
issuing house and underwriter. We provide financial advisory services as well as innovative capital raising solutions to
High Net-worth Individuals (HNIs), corporations, and governments. Afrinvest is a leading provider of research
content on the Nigerian market as well as a leading adviser to blue chip companies across West Africa on M&A and
international capital market transactions. The company maintains three offices in Lagos, Abuja and Port-Harcourt.
Afrinvest Securities Limited (ASL) is licensed by the Nigerian SEC as a brokerdealer and is authorized by the
Nigerian Stock Exchange (NSE) as a dealing member. ASL acts as a distribution channel for often exclusive
investment products originated by Afrinvest and AAML as well as unique value secondary market trading
opportunities in equity, debt, money market and currency instruments.
Afrinvest Asset Management Limited (AAML) is licensed by the Nigerian SEC as a portfolio manager. AAML
delivers world class asset management services to a range of mass affluent and high net worth individual clients.
AAML offers investors direct professionally managed access to the Nigerian capital markets through equity focused,
debt focused and hybrid unit trust investment schemes amongst which are the Nigeria International Debt Fund
(NIDF), Afrinvest Equity Fund (AEF), Balance Growth Fund (BGF), Ethical Investment Fund (EIF) and Guaranteed
Income Fund (GIF).
74

IMPORTANT DISCLAIMERS

This report has been issued and approved by Afrinvest Securities Limited (ASL), a subsidiary of Afrinvest (West
Africa) Limited (AWA), a leading investment banking and financial services firm in Nigeria. This report is based
on information from various sources that we believe are reliable; however, no, representation is made that it is
accurate or complete. While reasonable care has been taken in preparing this document, no responsibility or
liability is accepted for errors or fact, or for any opinion expressed herein. This document is for information
purposes only. It does not constitute any offer or solicitation to any person to enter into any trading transaction.
Any investment discussed may not be suitable for all investors. This report is provided solely for the information of
clients of ASL who are expected to make their own investment decisions. ASL conducts designated investment
business with market counter parties and intermediate customers and this document is directed only at such
persons. Other persons should not rely on this document. ASL accepts no liability whatsoever for any direct or
consequential loss arising from any use of this report or its contents. This report is for private circulation only. This
report may not be reproduced distributed or published by any recipient for any purpose without prior express
consent of ASL. Investments can fluctuate in price and value and the investor might get back less than was
originally invested. Past performance is not necessarily a guide to future performance. It may be difficult for the
investor to realize an investment. ASL and/or a connected company may have a position in any of the instruments
mentioned in this document. ASL and/or a connected company may or may not have in the future a relationship
with any of the entities mentioned in this document for which it has received or may receive in the future fees or
other compensation. ASL is a member of The Nigerian Stock Exchange and is regulated by the Securities and
Exchange Commission to conduct investment business in Nigeria.

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