Agusto & Co.

RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT

QUARTERLY REVIEW OF NIGERIAN INDUSTRIES ISSUE 01, OCTOBER 2010

Contents
TheMacroEconomyP.1 ElectricityP.4 Oil&GasP.6 Food&BeverageP.8

IndustryInsights
MajorEconomicIndicators: QuarterlyOutlook

RealEstateP.10 PharmaceuticalsP.12

EconomyintoNeutralasElectionstakePole
GlobalPerspective
The global economy performed better than expectedinthefirsthalfoftheyearprompting the International Monetary Fund (IMF) to revisegrowthprojectionsfor2010upwardsby 0.5% to 4.5% at the start of quarter three. A robust Asian recovery as well as wider im provement in industrial activity and private demand was held to be responsible for an annualised growth of above 5% recorded in the first quarter. The strength of the growth data also thrust the International Energy Agencytoreviseoildemandforecastsupby80 thousandbarrelsperday(kbpd)to86.6million barrels per day (mbpd), translating to a 2.2% growth for 2010 following the 1.1% decline recorded in 2009. The upward revisions were, however,notwithoutcaveat;withbothbodies warningofincreaseddownsiderisksasaresult of the highly fragile nature of the global eco nomicrecovery. expectthepricetoremainatcurrentlevelsfor the remainder of the year given International Energy Agencys forecast revision and ex pected reaffirmation of cutbacks at the next OPEC ministers meeting in October. Nigerias crude oil production is thought to be at its highestlevelsinrecentyears,withthecurrent climate of relative peace in the Niger Delta. Thecountrysproductionisexpectedtoremain strongfortherestoftheyearwithmoreprevi ously lockedin onshore and shallow offshore fieldsproducingclosertocapacity.Theradical Petroleum Industry Bill (PIB) is still awaiting a third(andfinal)readingintheSenate.Thebill is looking increasingly unlikely to be passed beforetheendoftheyearasthegeneralelec tionsslatedforearly2011approach.

Inflation:Stable InterestRates:Stable ExchangeRates:Stable GDPGrowth:Stable EquityMarkets:Stable BondMarkets:Stable

NonOilGDP(PublicSector)
The government generated revenue of 2 trillioninthefirstfourmonthsof2010,afigure which on a time apportioned basis is 25% downonthe8trillionprojectedinthebudget for2010.Thetotalfederallycollectedrevenue is expected to be closer to 6 trillion for the year, with economic conditions unlikely to

OilGDP
Crudeoilpriceshaveaveragedaround$75per barrelinthefirstninemonthsof2010incon trasttoanannualaverageof$61in2009.We

change significantly in the latter months of 2010. The country generated lower than expected oil revenues, with the PIB still not yetpassed;receiptsfrompetroleumprofittax androyaltieswereconsiderablydownonthe 2010 budget estimates. The governments nonoil revenues were also considerably lower as there was a larger than expected decline in customs and exercise duties and companiesincometaxaswellasothertaxes.

2010 with an 8.41% real growth recorded in thesecondquartercomparedto8.18%inthe corresponding period of 2009 according to the National Bureau of Statistics (NBS) quar terlyestablishmentsurvey.Theslowlychang ingfortunesofstrategicallyimportantsectors such as Banking and Telecommunications, whichhadearlierledtherationalizationdrive, positively impacted on other sectors of the economy. The growth witnessed in the sec ondquarterwaslargelydrivenbysignificantly improvedactivitiesintheRetailSectorwhich recordedarealgrowthof11.4%comparedto 11.18%recordedforthesameperiodin2009 accordingtotheNBSsurvey.TheAgricultural Sector, as usual, showed solid growth of 5.84% in the second quarter following har vests in the southern part of the country, although this was lower than the 5.94% re

The decline in these duties and taxes were largely a reflection of the economic adversi tiesthatwerefacedinsomesegmentsofthe countrys private sector in 2009 and early 2010.

NonOilGDP(PrivateSector)
Theprivatesectorhasshownimprovementin

TheNigerianbondmarketcontinuesitscrawltogreaterdepthswiththeissu anceoftwomoreStategovernmentbonds
corded for the same quarter in 2009. The Sectorisexpectedtoagainshowsolidgrowth inthelatterpartoftheyear,withthecoming harvestinthenorthernpartofNigeria.There is, however, some concern that lower than expected food inflation of 12.9% in the sec ondquartercomparedto14.7%in2009may deter farmers from significant expansionary activities. programmeintheestablishment of interven tion funds to refinance existing bank loans. TheMonetaryPolicyCommitteeatameeting attheendofSeptembertookthepreemptive step of increasing the monetary policy rate (MPR) by 0.25% to curb what could turn out tobeexcessiveinflationinlightofthecoming electionsandexpectedincreaseinliquidityof banks. The countrys external reserves have been on a decline, hovering around $37 bil lioninSeptemberfrom$42billionatthestart of the year. The fears over the reserves rot spread to the exchange rate in September with the price of $1 rising above 149 after settlingatthehigherendof 148formostof theyear.Ouroutlookforthemoneymarkets for the remainder of the year is more of the same with the inflation rate, interest rates and exchange rates all expected to remain stable.

MoneyMarkets
There is still no sign of the credit squeeze in the economy abating at the end of the third quarter of 2010. In spite of the CBNs efforts toreducetreasurybillandinterbankrates which went as low as 1.2% and 1.3% respec tivelyinAprilbanksremaincautiousregard ing lending. The evidence suggests that the economy,whichrecordedayearonyearrate of inflation of 13.7% in August according to the NBS, is in a liquidity trap; with the CBN unabletostimulatelendingbyloweringinter estrates.TheCBNcontinuestodrivethrough what could be termed a quantitative easing

Lagos,Nigeria

CapitalMarkets
TheNigerianbondmarketcontinuesitscrawltogreaterdepthswiththeissuanceoftwomore StategovernmentbondsKadunaandEbonyiinthethirdquarter.Themannerinwhichthe municipal bond market continues to thrive is in contrast to the corporate bond markets leth argy;withonlyahandfulofissuescomingtomarketinthelastfewyears.Theequitymarkethas remainedlargelybearishinthethirdquarter,withthe1.84%gainoftheNSEASIinJulyreversed bya6.23%dropinAugust.TheAgusto40Index,whichisdesignedtorepresenttheperformance ofNigerianquotedequityandtheeconomyingeneral,mirroredthedirectionoftheNSEASIin thesetwomonths.TheAgusto40,however,asisexpectedinabearmarket;outperformedthe NSEASI,gaining3.92%inJulyanddroppingonly4.67%inAugust.Thelowlystateoftheequity markethascontinuedtodeterissuerswithUnionHomesRealEstateInvestmentTrustPlcsIPO and Skye Bank Plcs special placement the only cash issues in the third quarter. However, our outlook for the remainder of the year for the equity market is stable. The Asset Management CompanyofNigeria(AMCON)isexpectedtocommenceoperationsbeforetheendoftheyear, mitigatingthebearishtrendcausedbybanksreducingtheirholdingsofmarginloans.Weexpect thebondmarket tobestable,withthepossibilityofacoupleof municipalorcorporate bonds beingissuedbeforetheendoftheyear.

Outlook
PoliticsissettodominateNigeriansocialandeconomicproceedingsoverthenexttwoquarters with the impending general elections. The Independent National Electoral Commission (INEC) receivedanapprovalinprinciplefromthelawmakerstorescheduletheelectionsforalaterdate than stipulated by the countrys constitution to allow for sufficient time to make the prepara tions. The traditional handover date of 29 May dubbed democracy day is, however, ex pected to remain unchanged under the new schedule to be put forward by INEC. The govern mentsparticipationineconomicactivitiesisexpectedtobelimitedoverthenexttwoquarters asthepolitickingforcandidatureandcampaignforelectedofficesissettotakecentrestage.We expectthistohaveanadverseknockoneffectonboththeOilandtheNonOilPrivateSectorfor thenexttwoquartersmakingourotherwisepositiveoutlookonGDPstable.

TheNigerianPowerIndustryLetsturnthe lightson
The Power Holding Company of Nigeria (PHCN) supplies most of the electricity con sumed in Nigeria, supplemented with power generatedfromprivatelyownedplants.Nige riacurrentlyhas8,300MWofinstalledgener ating capacity but is only able to generate a maximum of 3,700MW. Most businesses in Nigeria have been rendered globally uncom petitive as a result of the high costs of self generation. Thepowerindustryhasundergoneaseriesof reforms in the last ten years but with dismal results.Privatesectorparticipationisstillvery lowandmostofthenewpowerplantsareyet to be completed. In addition, most of the operationalpowerplantsarefunctioningsub optimally due to lack of maintenance, while thetransmissionanddistributionsectorhave been plagued by technical and financial losses. Upon resumption of office, President Good luck Jonathan announced that he would per sonally oversee the industry to ensure the effectiveimplementationofthenewreforms. A committee was constituted to urgently review the challenges faced by the power industry and proffer solutions. In August 2010, the President presented the blue print forachievingaminimumtargetof40,000MW by2020.Thekeypointsofthisstrategicinitia tiveare:

Theprivatizationofthegenerationand distributioncompaniesbyQ22011. The transmission company will be man aged by a private company and trans missionserviceswillberegionalized.

Abulktradercompanywillbeinstituted to handle the purchase of electricity from the generation companies for onward sale to the distribution compa niesbyyearend2010.

Electricity tariffs are to be increased from 8.50 to 22//kWh effective Q1 2011.

TheCentralBankofNigeriahaspledged thesumof200billionfortheresuscita tion of the Power Industry. In addition to this, the CBN Governor has also dis closedthat400billionwillbedeployed frompensionfundstowardscompleting powerprojects.

Privatesectorparticipationisstillverylowandmostofthenewpowerplantsare yettobecompleted.
Arethereformsenough?
Nigeriahassufficientenergyresourcestomeetthenationsdemand.Nonetheless,todoso,the industry needs investments of an estimated US$3.5 billion per annum in power infrastructure overthenexttenyears,whichinouropinion,cannotbeachievedwithoutsufficientprivatesec torinvestments.Overtheyears,thedearthoflongtermfundinghasbeenoneofthekeycon straintstotheperformanceofprivateplayersinthepowerindustry.WithCBNsrecentfunding initiatives, we expect some improvements in this area in the medium term as these funds are deployed. Tofurthersupportexternalfunding,electricitypurchasedfromthegenerationcompaniesbythe bulk trader company will be covered by a credit guarantee from the Federal Government. It is however important to note that this guarantee does not cover the full extent of the liability, which somewhat negates the attempt at making the power purchase agreements bankable. In ourview,forthereformstowork,theFederalgovernmentwillneedtofullycovertheseexpo suresuntilefficiencyconstraintsareremovedtomakeinvestorsmorecomfortable.Inaddition,

power purchase agreements should be fully matched (i.e. in terms of tenors, fixed pricing etc) with fuel supply agreements to minimize the risks inherent in the trading agreements. These criticalissuesneedtobeaddressedurgentlytomaketheindustrymoreattractivetoinvestors. Banksarealsowaryaboutlendingtothecompaniesduetothevaguepaymentterms. Another major hurdle faced by intending entrants is the commercial viability of the industry, whichthetariffhikeaimstoaddress.Nonetheless,analystshavequestionedtheaffordabilityof thenewtariffsparticularlytolowincomeearnerswithoutthesupportofgovernmentsubsidies. Inourview,consumersshouldbewillingtopaymoreaslongaselectricitysupplyissomewhat guaranteed.ItisestimatedthatNigeriansspend 80/KWHoncandlesandkerosenelampsand
70/KWHondieselandpetrol.Furthermore,evenwiththehikeintariffs,Nigeriastillhasoneof

thelowesttariffsintheAfrica(seefigure1below). Figure1:ElectricityTariffs
50 45 40 35 30 25 20 15 10 5 0 Burkina Faso Guinea Bissau Liberia Sierra Leone Gambia Ghana Nigeria

Source:PresidentialTaskForceonPower
Webelievethatthehugegapbetweenthedemandandsupplyforelectricity,coupledwithgov ernments renewedfocuspresentsalotofopportunitiesforgrowth.Considerableinvestments areexpectedtoflowintotheindustry,spurredbytherecentreforms.Sixforeignandlocalcom panieshavealreadytenderedbidsforthemanagementofthetransmissioncompany.Whenfully operational, the new transmission structure should reduce transmission losses. Privately run distributioncompaniesshouldimproverevenuecollection,ultimatelymakingtheindustrymore profitable and thus more attractive. In Nigeria, transmission losses in the Power Industry are currentlyestimatedat40%comparedtocountrieslikeGhanaandKenyaat10%. We however note thatthe pace atwhich the reforms are implemented may be slowed by bu reaucratic delays and distractions caused by the impending elections. One key point that was omitted from the road map is the issue of corruption. Over the last eighteen years, vast sums havebeenspentwithoutcommensurateresults.Whileweexpectthatefficiencygainsshouldbe derived in the medium to long term from the privatization of the unbundled companies, we believethatthesuccessofthereformsarelargelydependentonGovernmentsabilitytoensure accountabilityandstewardshipforallcontractsawarded.

Oil&Gas SovereignDebtNotes:AStepInThe RightDirection

In May 2010, the Federal Government began issuing Sovereign Debt Notes (SDNs) to im porters of petroleum products (Premium MotorSpirits(PMS)andHouseholdKerosene (HKK), as guarantee for their subsidy pay ments.ThenotesareissuedbytheDebtMan agementOffice(DMO)tothelicensedimport ers through the Petroleum Product Pricing & Regulatory Agency (PPPRA). The notes are discountableshorttermbills,liketheGovern mentstreasurybills(Tbills),butunlikeTbills, theyhaveashortertenorof45days.Toqual ify for the SDNs, an importer must deliver a cargo of PMS or HHK that meets regulatory specifications. Once this is confirmed, the note,whichcanbediscountedbycommercial banks,isissuedtothepetroleumimporterby thePPPRA.TheSDNsarebackedbytheGov ernments treasury and cover the difference betweenthelandingcostofPMSandHKKand the official pump prices of 65 and 50 re spectively. The Federal Government must be com mended for the introduction of the SDNs. In additionto forestalling the buildupof unpaid subsidies and ensuring some stability in the supply of these petroleum products, it also provides petroleum importers an alternative sourceoffundingi.e.theycaneitherdiscount thebillsiftheyareunableorunwillingtohold themtomaturityorusethemtosecuretheir short term bank borrowings. The initiative buttresses Governments resolve to address the issues of the downstream segment and represents a step towards the full deregula tion of the sector. Most of the petroleum marketers/importers have received their outstandingpaymentsandarenowrecording improved cash flows from operations. The initiative has also reignited the interest of certain marketers who had previously stopped importation of petroleum products; and as a result, have submitted applications toobtainpetroleumimportlicenses. However,afewissueshavedoggedtheintro duction of the notes. Firstly, the notes are only receivable after upfront payment of administrative and Petroleum Equalization Fund claims. Previously these fees were only deducted at source when the subsidy pay ments were effected; somewhat like a with holding tax. Some marketers have com plained about this new method and are re questing that the Federal Government re versethispolicy.Secondly,theintroductionof the notes was also accompanied by some inconsistency in the allocation of the import permits i.e. the withdrawal of petroleum importlicensesthathadbeenissuedandthe reissuance to favor some marketers that had earlier discontinued the importation of prod ucts.ThePPPRAhasbeenchallengedtomake the allocation process more transparent and review the process of allocation of import licenses. These marketers have also accused the PPPRA of favoritism towards five import ers who received more than half of the total importquotaforeachofthesequarters. Notwithstanding the furor over the granting ofpetroleumimportlicenses,themostimpor tant concern for industry stakeholders is the sustainabilityoftheinitiative.Thisisbasedon two factors. The first is the rising domestic debtprofileofthecountry;GiventheFederal Governments'planstoraisedebtintheinter nationalcapitalmarketsaswellastoincrease domestic debt issuances to fund a yawning budget deficit, there are fears that the SDNs may add to this debt burden and may be sacrificed for other seemingly more impor tant causes. The upcoming elections in 2011 alsoprovideanothercauseforconcerndueto the tendency of new regimes to abandon programsinitiatedbypreviousregimes. These two factors could easily overturn the progress recorded by the industry since the introductionofthenotes.Thesecondquarter performance (2010 Q2) of most operators reveals significant improvement over both 2010 Q1 and the corresponding quarter in 2009. According to unaudited accounts for thehalfyearended30June2010,fourofthe

Marketers havealsoac cusedthe PPPRAoffa voritismto wardsfiveim porterswho receivedmore thanhalfof thetotalim portquota.

majormarketers(OandoPlc,MRSOilNigeriaPlc,TotalNigeriaPlcandConoilPlc)recordedacom binedturnoverof 340.5billion,representinga50%increaseoverthecomparableperiodinthe

previous year. Profit after Tax (PAT) for these companies in this interim period is estimated at
12.9billion,representinga160%growthoverthecorrespondingperiodin2009andtranslating

to4%ofsales(2009:2%).Ifthistrendissustained,weexpectturnoverof 681billionandPATof
25billionat31 December2010.Inadditiontotheissuance ofthe SDNs,wenotethattheim

provement in sales is also attributable the absence of industrial actions, product scarcity and greaterefficiencybyoperatorsamongotherfactors. In a bid to sustain this trend, the PPPRA has revised the guidelines for issuing import licenses/ allocationsforQ42010.Amongtherevisionstotheguidelinesistherequirementthattheimport ers provide proof of financial backing or a letter of undertaking from a bank to finance the im ports.ThePPPRAhasalsosuspendedtheadmissionofnewfuelmarketersintotheimportalloca tion program and petroleum importers/marketers will also be prohibited from transferring their importquotastothirdparties.Thismoveisexpectedtocurtailtheactivityofportfoliomarketers whoonlybidfortheimportpermitsinordertoselltheallocationstoothermarketers. OverallAgusto&CoisoftheopinionthatfortheSDNstocontinuetoworkeffectively,theprocess ofawardingimportlicensestooperatorsmustbetransparentandefficientlymanaged.Thenew guidelinesadoptedbytheregulatoryauthoritiesforthefourthquarterof2010isamoveinthis direction and if sustained should reflect in improved performance of industry operators in the nearterm.

WhatIsHappeningInTheNigerianFood AndBeverageIndustry?
WithanestimatedNigerianpopulationof150 million growing at approximately 4% per an num; the countrys Food and Beverage Indus try(theF&BIndustryortheIndustry)was estimated at 530 billion in 2009. Despite prevailing market conditions, the Nigerian marketremainsthedelightofindustryplayers duetothelargenumberofconsumers. Between 2005 and 2008, the F&B Industry witnessed an influx of new entrants, who alongside established companies increased capacity and expanded their scope of opera tions due to buoyant economic conditions ultimatelyresultinginaveragerevenuegrowth rates in the region of 22% within this period (outpacingtheaveragenominalGDPgrowthof 20%). The growing sophistication and emer genceofthemiddleclass,increasingdesirefor convenience in the form of packaged foods andgreatermarketpenetrationcontributedto increased sales volumes. Another factor that impactedpositivelyontheIndustrysperform ance was improvements in food quality as a resultofincreasedcompetitionandregulatory enforcementbytheStandardsOrganizationof Nigeria (SON) and the National Agency for Food & Drug Administration Commission (NAFDAC). In 2009, the Nigerian economy recorded slower growth, with recessionary pressures settinginandremainingin2010.Inadditionto the decline in purchasing power of the popu lace and inflationary pressures, industry op erators currently have to contend with in creasesinoperatingcost,increaseinthecosts ofrawmaterialsandforsome,reducedaccess tofundingforbothworkingcapitalneedsand business expansion. While the impact of the depreciationoftheNairawasmostobviousin 2009, the costs of power generation in the formofdiesel;rosesignificantlybyanaverage of 21% between 2009 and August 2010. For eign exchange rates have been relatively sta ble in 2010, with US Dollar exchanging for
149.29/$ in August 2010 from 150.91/$ a

and 232.94 respectively in August 2010. ContinuedstabilityintheNairaexchangerate could bode well for the Industry in the next quarter,thoughitisunclearifpressuresonthe externalfrontcouldresultinfurtherdeprecia tionin2011. While overall industry growth remains sub dued compared to previous years, 2010 con tinuestoseeanimprovementonanumberof fronts. Interim results for the 2nd quarter, show continued growth in sales, with some improvement in margins over corresponding periods in 2009 for some operators. But as is expected, results appear to be mixed by seg ment. We believe this is due to the nature of products in each segment and the ability to passoncostincreasestoconsumers.Inaddi tion, companies that have integrated back wards and have a more diversified product baseappeartohavefaredbetter. ProfitafterTaxtoTurnoverRatio(HalfYear EndedJune2010)

Companies thathavein tegrated backwards andhavea morediversi fiedproduct baseappear tohavefared better.

Overall, competition remains keen and some segmentscontinuetofarebetterthanothers, withcontinuedgrowthridingonthebackofan increaseinproductofferingsandthemodifica tionofexistingones.Amongstsuchoperators areNestleNigeriaPlc(withnewproductslike Milo chocolate bar and Milo readytodrink canbeverage)andDangoteFlourMillPlc(new pasta variants: Alphabet and Actilease). Cad bury Nigeria Plc on the other hand has re viewed product offerings and discontinued less profitable products including Eclairs, RichocoandBubbabubblegum,whiledirecting efforts at better performing products such as Bournvita,Buttermint,andTomTom.

yearearlier.TheNairaalsoappreciatedagainst the Euro and Sterling, dropping to 191.90

 Repackaging of products into individual serving size is also a continuing trend, with the likes of UnileverPlc,andFrieslandFoodsWamcorepackingestablishedproducts;Bluebandmargarineand evaporatedPeakmilkintosinglesizeservings.Individualsizeservings,allowscompaniestocreate markets for their products across different income segments. The noodles subsegment is also recording increased competition as the likes of Honeywell, Dangote Flour Mills Plc and May & BakerPlctrytocapturemarketsharefromthedominantplayerDufilPrimaFoods;themanufac turerofIndomieNoodles. Weexpectbusinessvolumesofthefoodandbeverageindustrytopickupinthelastquarterofthe year, with the approaching holiday season. The effect of inflationary pressures, which increased from11%in2009to13%in2010andledtochangesinthemonetarypolicyrateasofSeptember 2010to6.25%,isonlyexpectedtobemorepronouncedpostholidayseasonassalesnormalize.On theforeignexchangefront,providedtheNairaremainsstableagainstmajorcurrenciesandother operatingcostsremainrelativelyunchanged,thereshouldbesomeimprovementinperformance formostindustryoperators. Despitetheindustryssensitivitytoitsoperatingenvironment:poorinfrastructureandhighoperat ingcosts;webelievethatasinpreviousperiodsofdownturn,theNigerianFood&Beverageindus try will prove to be more resilient than other industries and thus remain amongst the best per forming in the short term. This is based on our analysis of continued opportunities for market penetration,theintroductionofnewproductsandthenecessarynatureoftheindustrysproducts.

RealEstateIndustryReviewWhatdetermines whereyoulive?
In 2010, the aftershocks of the financial crisis and the shortage in commercial lending stalled renovations, building conversions and new office space developments around large cities, particularly in Lagos State. Furthermore, the economic downturn affected the emergence of new residences and businesses, especially small andmediumscaleenterprises(SMEs),company subsidiaries, branches and retail outlets. How ever,theaveragerentalpriceforofficespacein largecitieshavenotchangedsignificantly. In the residential market however, population growth, urban and intercity migration ensured somemeasureofvolatility.Nigeriahasahousing deficit of well over 16 million units. In Lagos State, 65% of the population lives in rented accommodation,sometimesspendingashighas 40 percent of their monthly income on house rent. Residential rent is the largest recurring expenditure made by the average Nigerian be tweentheagesof30and40.Thereasoncannot bemoreobvious;housingisabasicneed,itsin shortsupplyandhouseownersdemandupto2 yearsadvancepayment. In 2010, an analysis of the housing market re veals that when household income or size personnel.However,despitetheoptionofresid ingwithinanestate,thegeneralsenseofsecu rityofanentireareaisstillheldbymanyasthe greatest concern when making a residential propertyselection. As at September 2010, respondents surveyed ranked Ikoyi as the safest place to live in Lagos state. Surulere and Yaba were perceived to be less secure than Ikorodu, Ketu and Iyana Ipaja. SurulereandYabassecurityrankingisattributed totheirgrowingpopulationdensityduetointer citymigration,whichinrecenttimeshaslargely come from Ajah and the Lekki axis. This migra tionofislandersappearstohaveraisedsecurity concerns in the area, sparking fears that crimi nalsmightbeattractedtothepresenceofnew comers. In Port Harcourt, Rumibekwe ranked as the safestresidentialareatrailedcloselybyGRA.As aconsequenceofrecentRiverstateGovernment efforts in reclaiming waterfronts, the Borokiri area has experienced an increase in security. In contrast,incidencesofkidnappinginAdaGeorge has led to a decline in perceived security in the neighborhood.

Decisiondriversinproperty selection

changed (as has happened to many Nigerians), asides from affordability, the four prominent nonostentatious determinants of choice of residence are congestion, perceived environ mentalsecurity,relativedistance(centrality)and infrastructure provision. For instance, prior to 2010, the relative closeness of Ajah in Lagos State to the commercial district sparked land acquisition,constructionandinturn,anincrease inrentalratesinthearea.However,subsequent congestion in 2010 and an increase in journey timeowingtoroadworkhaveadverselyaffected rentalrates.

Distance from the central business districts

The central business districts (CBD) in Lagos StateareVictoriaIsland,MarinaandIkeja.How ever,forthepurposeofthisresearch,Marinais considered as the CBD of Lagos State. In Port Harcourt, Township is regarded as the CBD while Central area is referred to as the CBD in Abuja. We observed that residents in Lagos considered distance to the central business district in journey time as the second most im portant factor in selecting rental property and felt it offered 29% motivation when choosing a residence. InLagosState,Yabaremainedthefirstchoicefor

Security
Ouranalysisrevealsthatsecurityisthestrongest considerationinresidentialselection.Ofthefour mainconsiderationsinrentalselection,asample ofprospectivetenantsfeltthatsecurityconcerns motivatedthemby43%torentaproperty.This has given rise to the prevalence of residential estates with heightened security facilities and

proximitytothecenter,followedsequentiallyby Ikoyi, Surulere, and Apapa. As a result of the road construction on the LekkiEpe expressway whichresultsinheavytrafficcongestionatrush hour, Ajah ranked further from the CBD than Ogba/Agegeinjourneytime.

10

Infrastructure
Social amenities such as roads, water and electricityaffectthecostoflivingofresidents inanareaandsomeareasaremoreprivileged thanothersinthisregard.InLagosState,high brow areas are popular for good road net works but not so much for electricity supply. Low income areas connote the thought of poor infrastructure; however, middle income neighborhoodsareacombinationofsorts. Our research showed that tenants believed infrastructure was the third strongest influ ence on their rental decision and felt it of fered 19% motivation when selecting rental property. Most tenants were accustomed to supplementing poor electricity supply with personal generators, poor water supply with bore holes and bad road networks with a good mechanic or a four wheel drive vehicle (whentheycanaffordone).Hence,infrastruc ture is deemed less important to distance from the CBD and security. For Lagos State, Ikeja ranked as the second best location for infrastructurebehindIkoyi.TheLekkiaxistied at third with Surulere and Yaba. Apapa led

Festac Town in fourth place while Ketu and Iyana Ipaja were seen as having the poorest infrastructure among the areas sampled in LagosState.

Congestion
Thelevelofcongestioninanareacontributes tootherfactorsthataffectthechoiceofresi dence in the large commercial cities such as noise pollution, waste disposal and traffic congestion. Many of the respondents sam pled believed this factor had the least influ ence on their rental decision and felt it of fered only 9% motivation when choosing rentalproperty. In Lagos State, Ikoyi and the Lekki axis were ranked as the least densely populated areas of the state. Apapa ranked as the least densely populated residential area on Lagos mainland. The survey showed that Surulere, Yaba and Iyana Ipaja were perceived to have equalpopulationdensitiesandwereonlyless densethanKetuarea.

Infrastructure isdeemedless importantto distancefrom thecentral businessdis trictsandse curity.

Outlook
Inthethirdquarterof2010,theeconomicslowdownaffectedrentalyields;firstlybyrestricting growthinpropertypricesandsecondlybylimitingtheincreaseinrent.Morespecifically,rising insecurityinsomeareasofPortHarcourtcontributed tovolatilityintheresidentialmarketand affected growth in rental yields adversely. In Lagos State, increased journey time was a major influence on rental yields and areas along the LekkiEpe expressway were most affected. As a resultofthesefactors,therentalyieldsintheresidentialmarketreducedslightlyfromtheprevi ousyear. OtherinhibitorstotheRealEstateIndustryin2010aretherestrictionincommerciallendingand higherinflation.Asideslimitingthesupplyoffundsusedinbuildingconstruction,lowbanklend inghasalsoaffectedtheprovision ofinfrastructuretoanumber ofnewhousingestates.Infra structuraldevelopmentintheseestatesisnowcontingentonreceiptsfromthesubsequentsale of properties, which has also dwindled under current economic conditions. As a result, many earlybuyersanddevelopersintheestatesmaycontendwithpoorinfrastructureforlongerthan anticipatedandthiswouldrestrictrentalpricegrowthintheseareas. Domestic inflation and exchange rates have also affected the Real Estate Industry especially by increasingthecostofsomebuildingmaterialssuchaswood,steelandcertainchemicalsusedin paintproduction.Theconsequentialhighercostofbuildingconstructionhasaffectedthesupply of new houses in the Real Estate Industry, particularly in Lagos state, during the period under review. In spite of these factors, our opinion is that rental rates would remain stable in less populated areasofthemaincommercialcitiesovertheshortterm.InLagosstate,webelieverentalrates wouldincreasearoundthemoredevelopedareasonthemainland.

11

11

LayingTheFoundationForAnIdealDrug DistributionSystemInNigeriaAgusto& CosPerspectives

Drugcounterfeitingisaglobalproblem,ema nating from a poorly regulated distribution system.InNigeria,themainsourcesofcoun terfeitdrugsarethemultitudeofunregulated drug markets in its major towns and cities. According to the drug regulatory authority National Agency for Food, Drug Administra tion&Control(NAFDAC),illegaldrugmarkets haveexistedsincethe1960sandhavegrown innumberovertheyears. In dismantling these markets, a holistic ap proach has been proposed by some interna tional health institutions World Health Or ganisation (WHO), the United States Food & Drug Agency (US FDA) and the United States National Association of Boards of Pharmacy (NABP) which entails among other meas ures, the effective regulation of wholesale drug distribution. In most developed and emerging pharmaceutical (pharma) mar kets,drugcounterfeitinghasbeenmoderately stemmed by establishing a well structured drugdistributionsystem. Inlinewiththisglobalpractice,in2001,NAF DAC proposed the establishment of a whole sale Zonal Drug distribution system, as a major tool for restructuring the current drug distribution system in the country. This wholesale distribution system involves the establishment of drug marts in the six geo political zones in the country for local distri butionandexport.Thesedrugmartsaretobe regulatedbyNAFDAC,theStandardOrganiza tion of Nigeria (SON), the Pharmaceutical Council of Nigeria (PCN) and National Export Processing Zones Authority (NEPZA). How ever,thisproposeddistributionsystemisyet tobeimplementedduetowhatwegatherto be the huge setup costs associated with it (amongstotherfactors). Agusto & Co. believes the crux of an ideal drug distribution system is government legis lationontheregistrationofkeydistributors.It is our belief that if the Federal Government adopts the proposed Zonal Drug distribution system, as well as enacts legislation on the compulsory registration of major drug dis tributors, it would lead to a decline in the presence of counterfeit drugs. Upon review, Agusto&Co.findstheproposeddistribution system well structured, though it would re quire a significant amount of will, resources andmanpowertoregulate.Thisinouropin ion, should not be a deterrent, as healthcare touches every citizen and is one of the most important determinants of a countrys stan dardofliving; Our interpretation of NAFDACs proposed zonal drug distribution system is that regis tered wholesale dealers would have the sole righttotradeinpharmaceuticalproductsand tooperatewithinthesixgeopoliticalzonesin the country. We expect that these wholesal ers would be compelled to register the downlinks pharmacies and drug stores in their supply chain, thereby, creating a data base of the entire drug distribution chain in thecountry.Ontheotherhand,drugimport ers and manufacturers in the country would also be compelled to directly supply the six ZonalDrugMarts,NonGovernmentalOrgani sations(NGOs),public&privatehospitalsand owned pharmacies, thus reducing the prob ability of adulterated drugs infiltrating the supplychain.Furthermore,theissueofsupply shortfalls creating possibilities of counterfeit ing would be avoided under this zonal drug distributionsystem,giventhewholesaledeal erstightmonitoringoftheirdownlinks. Inconclusion,shouldtheFederalGovernment adopt the Drug Mart distribution system in the short to medium term, we expect a cut down in supplies to the illegal drugs markets and a sharp decline in the penetration of adulterated drugs in the country. These

12

12

should be achieved through the unrelenting enforcement activities of NAFDAC and the States TaskForcesonFakeDrugs.Consequently,theseshouldincreasethefortunesofbothmanufac

turingandimportingpharmaceuticalcompanies.Itisourbeliefthatwithamoreefficientdistri bution system and the recent World Health Organization Good Manufacturing Practice (GMP) certificationofmostpharmamanufacturingcompaniesinNigeria,theIndustrywillbepoisedto exceed the 16% average sales growth recorded between 2004 and 2008. However, industry players still have to contend with the harsh business environment in Nigeria, which remains a majoroffsettingfactortoperformance.Currently,thecostsofimportation(ofbothrawmateri als & finished drugs), conversion (production) and distribution remain relatively higher than in otheremergingpharmamarketsinAfricaultimatelymakingpharmacompaniesinNigerialess competitivethansomeoftheirregionalpeers.

Agusto & Co. Limited

Agusto & Co. is the foremost credit rating agency in Nigeria, specializing in financial institutions, corporate and bond ratings. We are also a research clients. As business information service providers, we publish industry re ports containing unbiased expert analysis of various industries in the Nigerian Economy. We gather infor mation about the market size and potentialofanindustry,itskeyplay ers,competitors,productsandfinan cial condition amongst others. In providing a broad overview of the industry and its key players, our analysts interpret data collected and assign each industry a risk rating, taking into cognisance Nigerias risk profile. We also conduct client specific de tailedresearch. organization providing business information for our various

Disclaimer
ThecopyrightofthisdocumentisreservedbyAgusto&Co.Limited.Nomattercontainedhereinmaybe reproduced,duplicatedorcopiedbyanymeanswhatsoeverwithoutthepriorwrittenconsentofAgusto &Co.Limited.Actionwillbetakenagainstcompaniesorindividualswhoignorethiswarning.Theinfor mationcontainedinthisdocumenthasbeenobtainedfromsourceswhichweconsidertobereliable butdonotguaranteeassuch.Theopinionsexpressedinthisdocumentdonotrepresentinvestmentor otheradviceandshouldthereforenotbeconstruedassuch. Thecirculationofthisdocumentisrestrictedtowhomithasbeenaddressed.Anyunauthorizeddisclo sureoruseoftheinformationcontainedhereinisprohibited.

Agusto & Co. Limited

UBAHouse(5thFloor),57Marina Lagos P.O.Box56136,Ikoyi Tel:(234)126435715 Fax:(234)12643576 Email:info@agusto.com Website:www.agusto.com

13