Vetiva Research Report : Ahead of the Curve by TBG London

2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

TABLE OF CONTENTS

EXECUTIVE SUMMARY .........................................................

GLOBAL OVERVIEW ............................................................

ECONOMIC REVIEW AND OUTLOOK....................................... 16 REVIEW OF 2010 BUDGET ................................................... 28 CAPITAL MARKET REVIEW ................................................... 32 SECTORAL PERFORMANCE ............................................... 35 BOND MARKET REVIEW ................................................... 49 PORTFOLIO ALLOCATION ..................................................... 54 SECTORAL REVIEW ............................................................. 56 THE BANKING SECTOR .................................................... 57 THE NIGERIAN INSURANCE SECTOR .................................. 132 THE BREWERIES SECTOR................................................. 146 THE CONGLOMERATES SECTOR ........................................ 160 THE FOOD AND BEVERAGES SECTOR................................. 175 THE HEALTH CARE SECTOR .............................................. 207 THE PETROLEUM MARKETING SECTOR ............................... 217 THE BUILDING MATERIALS SECTOR .................................. 239 THE CONSTRUCTION SECTOR ........................................... 257

Vetiva Equity Research E: research @vetiva.com T: 234-1-2700657 Oluwakemi Owonubi Head, Research Division Gbadebo Bammeke Senior Analyst Adedoyin Adelakun Analyst Adesoji Solanke Analyst Uduakobong Equere Analyst Oluwaseun Oyegunle Analyst

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2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

EXECUTIVE SUMMARY Our analysis of the prospects for growth in the Nigerian economy in this report, places in context the link between a global economic recovery, the impact this will have on global production levels, output and growth, as well as the resulting implications for the demand of commodities/resources that serve as inputs into the productive processes of many developed global economies. We acknowledge the recovery in two key emerging markets; China and India, and applaud the ability of the Chinese to have seemingly replaced strong export market growth with an internally generated demand base. We however, note that the success recorded thus far has been due to a huge stimulus package, which focused on encouraging consumer demand and expenditure on capital goods, real estate, and public sector expenditure on infrastructure. However, the strength and sustainability of the Chinese recovery will be determined by the impact of the Chinese Government’s reining in of what has until recently, been a liberal policy towards money supply. We believe one of the first such steps is the recent increase in the Reserve Requirement Ratio for Chinese banks (excluding specialized rural agricultural lenders), by 50 basis points. For the developed economies which include the United States, United Kingdom and other mature European markets, recent economic indicators continue to suggest appreciable increases in productive output. However, whilst resurgence in output levels over the last one or two quarters suggest a return to growth, the combination of high unemployment levels and high debt levels for consumers (who have been the backbone of growth in these developed economies over the past 10 – 15 years) appear to suggest that a convincing recovery is still some way off. The likelihood of a double dip recession or W-shaped recovery for the developed economies remains a possibility, even as they appear to stage a gradual comeback. Now, these strong and not-so strong recoveries among emerging and developing economies have been driven by gradual increased productive activities, one which has also meant increased demand for energy fuels, including oil. This demand has partially been responsible for rise in oil prices, and this has also meant increasing revenues for oil dependent countries such as Nigeria. The success of the Federal Government’s Amnesty Programme (initiated in August 2009) seems to be precariously set at the moment, in light of the absence of the President, who had been the major proponent of the Amnesty Programme for over two months. Following frustrations vented by the Niger Delta militants in recent weeks, we have seen a call-off of the ceasefire and a commencement of militant activities in the region, which calls for an appraisal of previously measured successes of the Amnesty Programme.

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The success or otherwise of the programme is critical to the Government’s fiscal plans for 2010. Government revenue was severely threatened by the fall in oil prices in 2008 and part of 2009. The recovery in prices for most of the latter half of 2009, as well the increase in production volumes in the final months of the year (as the positive effects of the Amnesty began to be felt), has meant increased revenue earnings for the Nigerian Government. This came as a welcome relief after months of supplementing monthly allocations for the Federal, State and Local Governments with withdrawals from the Excess Crude Account. A review of the 2010 budget shows a planned Capital Expenditure of N1.3 trillion, a 74% increase over the N789 billion budgeted last year. The planned focus is on the completion of key infrastructure projects, including that for the generation of 10,000MW of electricity by 2011, and complementing of the existing road and aviation networks with serviceable rail and marine infrastructure to deliver a truly intermodal and modern transportation system. The budget also projects a 22% increase in recurrent expenditure. Key assumptions in the President’s Budget Speech include a $57 per barrel benchmark price for crude, as well as an expected 2.088 mpd production target for 2010. In this report, we present out views on the budget assumptions, as well as their feasibility and potential impacts on Government activities. Our key economic forecasts are stated below: x x x

GDP Growth: 5.90% Inflation: 13.5% Naira/Dollar Exchange Rate: N150 – N155

In our review of the Capital Market in 2009, the Nigerian Stock Exchange’s All Share Index (NSE-ALSI) declined 33.78% to close at 20,827.17. However, due to a number of listings during the year, the decline in market capitalisation was lower, coming in at 28.29%. Notably, market capitalisation dipped to N4,989.39 billion from N6,957.45 billion in FY’08, and its peak of N7,038.38 billion on the 2nd of June. We note that after an initial bearish tide in the first quarter of the year, the market appeared relatively stable mid-year, but was pressured further downwards, as investors sought to exit Banking equities in the middle of a crisis in the Sector, with spiral effects on other stocks. The top gainers in the market were two cement players; Benue Cement Company Plc (“BCC”) and the Cement Company of Northern Nigeria (“CCNN”), as they gained 138% and 134% respectively. Both companies posted very strong quarterly results in 2009 and made interim dividend payments, with appreciable dividend yields in a market that had lost significant value. Even with the crisis, balance sheet realignments and provisioning levels in the Banking Sector, GT Bank was the highest gainer within the Banking Sector recording a gain of 20.2%. We believe the market is due a recovery after almost two years of bearish activity. Based on our expectations for different sectors, we forecast the NSE ALSI to close the year between 25,401 and 28,694, indicative of a return within the range of 22% and 38% by year end. Our outlook hinges largely on an expected recovery in the economy and an anticipated gradual improvement in liquidity, on the back of activities in the financial sector and Government expenditure.

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With equity market performance serving as a leading indicator of the economy and company performances, equity prices are expected to pick up ahead of the broader economy. We note that the risks to our outlook include the failure of the Amnesty Programme and falling oil prices. In line with our top-down approach to securities analysis and following our review of key global economies, the domestic socio-political and economic framework, as well as Government’s planned activities, we conclude the report with a detailed review of key sectors which we believe present fundamental opportunities for investors in 2010. We also highlight our stock picks within these sectors. All analyses and recommendations are made based on prices as at December 31 2009, while Naira/Dollar conversions are based on the CBN Official Rate as at same date (N148.10:$1). However, our stock ratings are made using prices as at the 31st of January 2010.

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GLOBAL OVERVIEW Though it appears that a recovery is in full swing globally, its quality seems to be choppy and varied across different countries. An IMF Report released in October 2009, titled “Sustaining the Recovery”, states that though a gradual recovery has started, the challenge remains being able to sustain it. The IMF revised upwards its growth forecast for the world in 2009 from a 1.4% contraction, which it forecast in July, to -1.1%. In recent months however, it has become clear that though a recovery has commenced and some growth is being witnessed across various countries, it can rightly be called a ‘jobless recovery’. This assessment is being made following the record and rising rates of unemployment being witnessed in many developed countries. The table below shows the range of growth and unemployment figures for key countries including the US, UK, and some countries in Europe and Asia. GROSS GROSS DOMESTIC DOMESTIC PRODUCT PRODUCT (GDP) (GDP) FIGURES FIGURES Selected Selected Asia-Pacific Asia-Pacific Countries Countries -- GDP GDP figure figure as as at at September September 2009* 2009*

10.00% 8.00% 6.00% 4.00% 2.00%

Sri Lanka

*Vietnam

New Zealand

Phillipines

*Singapore

Malaysia

Hong Kong

Thailand

Taiwan

Indonesia

S.Korea

India

Australia

Ͳ4.00%

China

Ͳ2.00%

Japan

0.00%

Ͳ6.00% * Figures for Vietnam and Singapore as at December 2009

Source: Vetiva Research, Bloomberg

Growth in China was strong in 2009, with the country recording increasing QoQ growth, (Q1 - 6.1%, Q2 - 7.9%, Q3 - 9.1% and Q4 – 10.7%). This resulted in an average of 8.45% for 2009, well in line with its IMF forecast of 8.5% as its final 2009 YoY GDP growth performance. However, further to the recent upward revision of its 2008 GDP growth rates at the end of 2009, there are strong expectations that GDP statistics for the first three quarters of 2009, will also be revised upwards, effectively resulting in much higher growth rates than those already released.

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China’s growth was driven primarily by its stimulus package which helped increase private consumption capacity, expenditure on real estate infrastructure, and private housing investments. Economic activities in China also influenced the demand for resources from other Asian trading partners such as South Korea, Taiwan, Singapore and Japan, and had a direct impact on output levels in these countries. The growth achieved has also been commendable in view of dwindling exports to the US, its major export market. However, can this growth be sustained, as the Chinese Government takes key steps away from an expansionary monetary policy regime that has aided this recovery? The People’s Bank of China recently announced a hike in its Reserve Requirement Ratio, taken in a bid to tighten liquidity which has fuelled activities in the Real Estate markets, and also to address inflationary pressure concerns. JOBLESS RATES – SELECTED ASIA-PACIFIC COUNTRIES Unemployment figure as at September 2009*

S - Unemployment Rate Percent)

8.00%

1.00%

n-09

9.50%

0.00%

y-09

9.40%

r-09

8.90%

r-09

8.60%

b-09

8.20%

n-09

7.70%

c-08

7.40%

v-08

•Represent data as at September 2009 •**Represent data as at October 2009

Source: Vetiva Research, Bloomber

6.90%

ct-08

6.60%

p-08

6.20%

g-08

As already highlighted, major economies including the United States, United Kingdom and much of Europe, are experiencing what has been classified as a jobless recovery.

6.10%

ul-08

5.80%

n-08

5.50%

y-08

5.40%

r-08

5.00%

r-08

5.10%

b-08

4.80% Source: Vetiva Research, Bureau of Economic Analysis

Japan

9.40%

*Sri Lanka

2.00%

ul-09

*New Zealand

9.70%

*Phillipines

3.00%

g-09

*Singapore

9.80%

*Malaysia

4.00%

p-09

Hong Kong

10.10%

**Thailand

5.00%

ct-09

Taiwan

10.00%

Australia

6.00%

v-09

South Korea

10.00%

China

7.00% c-09

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An assessment of the success of the US’s approach to addressing the economic recession could be deemed successful or not, based on the metric of measure. If growth and output were to be used, then some progress would be deemed to have been made. The outlook for growth in the United States has improved. Following three consecutive quarters of contractions in productive output (Q4‘08: -1.90%, Q1’09:-3.30%, Q2’09:3.80%), the pace of shrinkage finally slowed in Q3 2009, as GDP contracted by a relatively lesser 2.6%.

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Growth in the latter half of 2009 was boosted by Government economic stimulus packages; which included the Cash for Clunkers programme, the provision of tax credits for first time home buyers, the extension of unemployment insurance for workers who lost their jobs in the deteriorating economy and tax cuts.

UNITED STATES GDP (Quarterly) (September 2007 – September 2009) 4.00% 3.00%

2.70%

2.50% 2.00%

2.00%

1.60%

1.00%

0.00%

0.00% Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

-1.00% -2.00%

-1.90% -2.60%

-3.00% -4.00%

-3.30% -3.80%

-5.00% Source: Vetiva Research, Bureau of Economic Analysis

The effectiveness of some of these policy actions have been limited, we believe, because as is typical with the use of fiscal policies during a recession, the stimulus funds would first be used by investors to improve/augment their savings and pay-off debt, before utilising these funds in other means that would directly impact economic activity. However, where the success of the approach is to be judged by the level of unemployment, then it could largely be said to have been unsuccessful. Upon the passage of the stimulus bill in February 2009, some Obama administration officials noted that the stimulus program would save or create about 600,000 jobs by August 2009. By August however, the US economy had lost about two million jobs, a figure that has grown further, placing the total number of unemployed persons at 15.3 million as at December 2009. Though the magnitude/actual number of job losses has reduced over the months, the unemployment rate has risen to 10% from 6.1% in August 2008, before the fall of Lehman Brothers, and 5% in December 2007, at the start of the recession. We note that monthly job losses have moderated substantially, from average job losses per month of 691,000 in the first quarter of 2009 to about 69,000 per month in the final quarter of 2009. The US Recovery still seems to be fraught with issues and challenges, finding a way to generate real growth key amongst them. The next issue we believe the US Fed will soon need to address is when to start reeling in the expansionary effort and increase interest rates. The timing of this is critical, as it would set the stage for an assessment of whether this gradual recovery is real and can be sustained. The US Government will also have an uphill task on its hands managing the huge debt book built up over the last about 18 months. The IMF forecast a 2.7% contraction for the US economy in 2009, and a recovery to 1.5% growth in 2010.

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Europe

GDP GROWTH FIGURES (Selected Countries in Europe: September 2009*) 3.1% -2.5% -15.6% -19.0% -14.2% -5.4% -8.3% -5.7% -4.8% -7.1% -7.1% -4.7% -2.5% -8.9% -7.4% -5.2% -1.7% -2.9% -0.7% 1.7% -1.3% -5.0% -3.4% -4.0% -8.9% -4.0% -4.6% -2.3% -5.1% -4.8% -4.1%

-25% -20% -15% -10% -5%

Iceland Cyprus Estonia Latvia Lithuania Bulgaria Slovenia Croatia Slovakia Hungary Romania Czech Republic Portugal Finland Ireland Denmark Greece Austria Norway Poland Switzerland Sweden Belgium Netherlands Russia Spain Italy France United Kingdom Germany Eurozone

Source: Vetiva Research, Bloomberg

The Euro area (made up of member countries, including the United Kingdom) has also begun to show some signs of recovery, with recent data showing that the decline in growth experienced in the first two quarters of 2009 have started to moderate. Strong performances in France and Germany in the second quarter of 2009, marked a rebound from the recession that had plagued the countries and the Euro area. In the United Kingdom, where the services (banking, insurance and other business services) sector accounts for a significant proportion of UK’s Gross Domestic Product, output and growth have suffered declines in view of the crisis across financial and consumer markets. This feature in itself gives an indication as to why the recovery has been quicker in countries like France and Germany, but not in the United Kingdom. Germany is the largest economy in Europe and has a large industrial output base that is also heavily export oriented. France, Europe’s second largest economy, also has a large and diverse industrial base and has staged a rebound on the back of a recovering global productive base. Europe has however, also suffered from high unemployment rates which are expected to trend even higher, amidst fears of the exhaustion of Government stimulus packages, which had hitherto helped ensure continued wage payments in public and private firms. The strength of the recovery in Europe will be impacted by unemployment levels, which has risen to record highs over a recessionary period that has spanned the last 18 months. The graph below show GDP levels and Unemployment Rates for selected countries in Europe:

* Finland and Iceland only show data as at June 2009

UNEMPLOYMENT FIGURES (Selected Countries in Europe: November 2009)

* Figures as at September 2009 ** Figures as at October 2009 *** Figures as at December 2009

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Bulgaria

Croatia

Slovakia

Hungary***

Romania

Czech Republic

Finland

Poland

Switzerland

Sweden

Netherlands

Russia

Spain*

Italy*

France*

United Kingdom**

Germany***

Eurozone**

20% 18% 18% 16% 16% 12% 14% 11% 11% 12% 10% 10% 9% 9% 9% 10% 8% 8% 8% 8% 8% 8% 8% 5% 6% 4% 4% 2% 0%

Source: Vetiva Research, Nigeria Bureau of Statistics

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An assessment of these economies, as well as prospects for growth within them is key to our review, for reasons which include the following: (i) the recovery expectations for these countries are important to the recoveries for the demand of goods and services, and by extension oil demand to finance the increased production activity; (ii) the strength of oil demand and oil prices in 2010 is a major driver of Nigerian Government revenue performance. We maintain that Asia will lead the global recovery, followed closely by select emerging and developing market economies; commodity rich economies will also benefit from the recovery, even as demand for commodities increase and commodity prices continue to trend northwards. However, within the return to recovery in Asia, we note that there will be changes in the world structure for export demand from countries like China and other strong export markets globally. Consumers in the US, who have historically accounted for a very strong portion of world demand, are unlikely to return to pre-crisis demand levels in the near term, as they grapple with trillions of Dollars in losses from falling house prices and stock markets declines. Thus, China will have to look to increase its domestic demand (though China has 20% of the worldâ&#x20AC;&#x2122;s population, it accounts for only 3% of global consumption), as well as explore other potential export markets. In the US, we expect the slow recovery to continue, with some policy focus placed on improving the unemployment levels and creating real growth on main street.

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SOCIO-POLITICAL REVIEW President Yar’adua’s Absence Little has been revealed about the situation of the health of Umaru Yar’Adua, Nigeria’s 58-year-old president, since the 23rd of November, 2009, when he was taken to the King Faisal Specialist Hospital and Research Centre in Jeddah, Saudi Arabia. Tests undertaken at the hospital confirmed the President is suffering from Acute Pericarditis- an inflammation of the walls surrounding the heart. President Yar’Adua also has a chronic kidney complaint and has sought treatment abroad on several occasions. Nigeria now appears rudderless in choppy waters, due to ongoing doubts surrounding the health of President Umaru Yar’Adua. Publicly, senior officials from the ruling People’s Democratic Party have however, dismissed calls for the President to stand down and for Goodluck Jonathan, the Vice-President, to take over, calling instead on the nation to pray for the President’s speedy recovery. On the 15th of December 2009, the Attorney General and Justice Minister, Mr. Michael Aondoakaa, affirmed that Yar’Adua could effectively perform his official functions even while outside the country, stating that the constitution does not state that the president must be physically present before he can discharge the duties of his office. Repeated claims that the President was set to return have been rife, and indications that he signed the N353.60 billion ($2.4 billion) 2009 Supplementary Budget from his sickbed on the 29th of December, have been greeted with widespread scepticism. The national and international impact of his absence from office might have far- reaching implications that are yet to be observed. Examples of critical areas include the NigerDelta situation and a fitting reaction to events of the 25th of December 2009, where an individual of Nigerian descent attempted to blow-up an aircraft flying into Detroit, United States. The nation waits with bated breath for the return of the President or an appropriate response from the Government, which would plug the power vacuum created by his absence. The actions that arise from this state of affairs would shape both the political and economic arena. It is important enough to determine the issue of national survival. Niger-Delta and the Now Fragile Amnesty Programme The crisis in the Niger Delta region of Nigeria has attracted increased international attention due to the growing security threat it poses to Nigeria, oil production volumes and its impact on international oil prices. Although the Niger Delta problem has been around for years, the emergence of militant pressure groups added a new dimension to the crisis. Their activities in the outgoing year almost crippled the sector, with volumes of crude oil production from the region decreasing dramatically. In an effort to manage the crisis, the Federal Government granted amnesty to the militant groups in the region for a 60-day period effective from the 6th of August 2009. To hasten the implementation of the programme, President Umaru Musa Yar'Adua immediately set up the Disarmament Committee, led by the Minister of Defence, Maj.-Gen. Godwin Abbe (rtd).

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The committee offered the militants monetary inducements, as well as training in skills that would enable them to contribute to society. At the expiration of the October 4 deadline given by the Federal Government, it was reported that approximately 15,000 militants turned in their weapons and surrendered under the Amnesty Programme. This helped to restore normalcy to the region, with some of the blown pipelines now undergoing repairs. The International Oil Companies (IOC) regained confidence and consequently Nigeria's oil output increased from the lowest level of about 1.2 million barrels per day to 2.45 million at some point in December 2009, allowing the nation to exceed its OPEC quota. To show commitment to maintaining peace and security in the region, the Federal Government also offered to transfer 10% ownership in all its Oil and Gas ventures to the residents of the communities in the oil-producing Niger Delta. This could translate to a monetary value of well over N50 billion (Source: Financial Times Article, 18th October 2009) in the first year. Unfortunately, towards the end of the year, some militants resumed their activities in the region. The Movement for the Emancipation of the Niger Delta (MEND) attacked a major crude oil delivery pipeline which operates in the creeks of Abonnema, Rivers State. The Group said it carried out the action to protest the prolonged absence of ailing President Umaru Yar‘Adua from the country, adding that it was not comfortable with the slow pace of implementation of the post-Amnesty Programme in the Niger Delta. MEND said it would not accept a situation in which the future of the region would be tied to the fate of Yar‘Adua, adding that it had thus reviewed the indefinite ceasefire. These actions raise the question of whether or not the stability in the region so far has been a facade. Is the MEND action only a taste of what is to come and can deep and lasting security be ever achieved in the region? These challenges are a fallout of the political uncertainty arising from the void at the Presidency, as well as the lack of direction from leadership of the Federal Government. Anambra State Elections: Setting the Precedent for 2011. Ahead of the gubernatorial election scheduled for the 6th of February 2010 in Anambra State, Nigerians, members of the international community and the media are watching very closely as the state is confronted with diverse political issues that have raised the political temperature of the state. The conduct of these elections is seen by many to be the forerunner and key indicator for the general elections in 2011. One topical issue in the unfolding of the gubernatorial race has been the challenge created by the ruling People’s Democratic Party (PDP) over their candidature. Prof. Chukuma Soludo, former Governor of the Central Bank of Nigeria emerged as the PDP candidate in a process that has polarised the Peoples Democratic Party in the State. In order to meet the October 9 deadline given for the submission of the names of its candidates to Independent National Electoral Commission (INEC), the PDP put forward Soludo as its candidate and Senator Emma Anosike as his running-mate. The selection of Soludo as the flag bearer of the PDP precipitated various suits and counter suits. In defiance to pending court cases, the PDP not only nominated Soludo, but had by early December 2009, started campaigning to the state indigenes to vote for Professor Soludo in the February polls.

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In light of the less than democratic manner in which Soludo was appointed as PDP’s flag bearer in the polls, other PDP aspirants sought solace in the legal system. However, this was all in futility, as the final case at the Supreme Court held that the lower court order (Court of Appeal) restraining Soludo from parading himself as the candidate of the PDP in the election was "unnecessary and uncalled for." Subsequently, it ordered INEC to grant Soludo all the privileges and rights accorded other candidates running for the Anambra State governorship election. The approach of the election coincides with a critical time in the nation’s political clime. Electoral and constitutional reforms are issues topping the mind of electorates. Though commitments have been made to conclude on changes to the electoral process by March 2010, previously set deadlines have not been kept. The conduct and outcome of the elections will demonstrate whether or not Nigeria has learnt any lessons from previous mistakes and is ready for change. Nigerians and the international community are watching to see how INEC will execute its responsibilities, particularly in this instance when it is overseeing the electoral proceedings in just one state. INEC ought to recruit for Anambra, a credible Resident Electoral Commissioner (REC), and ensure that all resources are deployed to make the election free and fair, not one reminiscent of the fiasco that occurred during the Ekiti State elections in April 2009. If the nation fails with Anambra now, it makes any hope for electoral reform very unlikely. With subsisting political clouds surrounding the Presidency and with the whole world watching, it is key to get the Anambra experience right. The Petroleum Industry Bill The Petroleum Industry Bill has been sponsored by the Executive arm to reform the Oil and Gas industry in order to improve on the general efficiency of the Sector. The bill seeks to create a much more transparent administrative system, where all interested parties can access information and indicate interests on given ventures/projects in the Oil and Gas industry. It attempts to amend aspects of the Petroleum Profit Tax Administration Act, in addition to clearly stating procedures for bidding processes and retention of licenses and leases. It also seeks to simplify the receipt of petroleum revenues by putting more emphasis on rents and royalties, and less on taxes. It is hoped that that the legislation would make the sector more attractive to international and local investors, encourage competition, stimulate growth and sustainable development in the industry. The new bill will also repeal several of the existing oil industry legislations and necessitate an overhaul in the manner the Nigerian oil and gas sector operates. Further to these, are fears that 16 oil blocks (held since 1968 under Joint Venture Contracts and for which their leases are currently under a one-year term, having expired between November and December 2008) may form part of the 23 blocks currently being targeted by the Chinese National Offshore Oil Corporation (CNOOC). CNOOC recently made a $50 billion offer to the Federal Government to acquire a 49% stake in these JVCs. This all-encompassing bill has pitched the Government against the IOCs, with the Federal Legislators in the middle. Inevitably, there has been intense lobbying on the part of the International Oil Companies to minimize the impact that some of these changes would have on their businesses. 3

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Furthermore, the uncertainty surrounding the Bill has prompted IOCs to suspend new investments, especially in deep offshore, where the PIB will likely impose stiffer conditions on the operators. Oil majors are citing lack of enabling legislation, multiple taxation and issues affecting the Production Sharing Contracts (PSCs) as reasons for channelling major investments to Ghana, Angola, Senegal, Gabon, Australia and Brazil. Some of the companies have put on hold investments in major Oil and Gas projects, as well as in new ones pending the passage of the PIB. The Minister of State for Petroleum Resources, Odein Ajumogobia, has however, stated that Government would not stop any oil company from exiting the country's oil industry on reasons related to the proposed PIB. Though there were intimations that the Bill would be passed before the end of 2009, it is believed that such passage will be delayed until the first quarter of 2010. Further to this, the prospect of change in leadership at the Presidency in light of the current void, may affect the feasibility of the above stated timelines. Government’s Failure to Achieve 6000 Megawatts It is without a doubt that the crisis in the Nigerian Energy Sector has stood in the way of socio-economic transformation. The epileptic power supply situation is exacerbated by unending gas shortages, vandalization of power lines and power distribution losses. The Government, in a bid to improve the power situation, pledged to generate 6,000 MW of electricity in the country by December 2009, while proposing another generation capacity of 10,000 MW by December 2011. In line with this commitment, the Government continued to budget and invest significant funds into the project. The Federal Government early in 2009, approved the disbursement of $5.3 billion from the Excess Crude Account in order to meet key monetary requirements of the Power Sector. The FG had embarked on the resuscitation of the abandoned NIPP following an agreement it reached with the State Governments to refinance it. However, as mentioned above, the generation of electricity has been adversely affected by deficiencies in gas supply and delays to the repairs on the Escravos-Lagos gas pipeline. The Government has been unable to live up to its promises, as by the 31st of December it was reported that power generation was at 3,500 megawatts. If the generation of 6,000 or 10,000 MW is actualized in Nigeria, it would go a long way towards improving livelihood of a majority of self-employed individuals and growing enterprises, which would benefit from the improvement in power supply. The manufacturing sector, the service industry and particularly activities of Small and Medium Enterprises (SMEs), will also be hugely impacted owing to the fact that a substantial proportion of their working capital is spent on alternative sources of power which ultimately places a premium on the cost of commodities produced locally. For example, diesel and LPFO (alternative energy sources) costs make up about 40-50% of total cost for cement producers, with a similar cost profile (higher in some cases) across many other manufacturers.

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ECONOMIC REVIEW AND OUTLOOK In this review, we examine the movements of key economic indicators through the year, with specific focus on activities in the second half of 2009. We also undertake some comparison of our half year expecations (further to our H1’09 report) relative to actual experience. Some of these include: (i)

GDP Growth

(ii)

Oil Production

(iii) Oil Prices (iv) Inflation (v)

Interest Rates

(vi) Exchange Rate (vii) Government Revenue and Movement in Foreign Reserves Gross Domestic Product Growth Economic growth figures for Q3 and Q4 2009 as estimated by the Nigerian Bureau of Statistics are put at 7.07% and 8.23%, a steady increase from 4.50% and 7.22% for Q1 and Q2 2009 respectively. Reports show that oil sector production and growth strengthened significantly in the second half of the year. This improvement has been largely attributed to the success of the Federal Government’s Amnesty Programme for militants in the Niger Delta. However analyst perceptions are that the figures being reported do not accurately reflect occurrences in the economy, a viewpoint that appears to be supported by the following: Tightness in liquidity as has been experienced in the economy for the most part of 2009 (Money supply targets were significantly below the indicative benchmarks of the CBN on several fronts for 2009) Government, which has historically been the largest spender in the Nigerian economy, suffered a significant drop in revenue in 2009, which led to monthly allocations to the State and Federal Governments being augmented from the Excess Crude Reserve at various points during the year. Government’s revenue projections fell short of expectations both from the oil and non-oil revenue sectors Banking Sector credit to the private sector was practically nonexistent in the latter half of 2009, following the clean-up activities by the regulators in the Sector The relative success of special intervention funds provided during the course of the year to provide credit to special sectors such as agriculture, has been unclear These and other indicators impact on the sectoral growth indices that contribute to GDP growth and serve as the basis for doubts surrounding the GDP growth figures. -

We note that the non-oil sector was still the key driver of growth in 2009, with strong contributions expected from Agriculture, Telecommunications and likely Building and Construction. We do not expect to see any significant contributions from Finance, Insurance and Industry, as they would likely record negative YoY growth rates in 2009, in light of the challenges to economic fundamentals of these Sectors over the last 12 months. 5

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GDP Sectoral Growth Break Down for 2009 FY'08 GDP Growth Agric ulture Crude Petroleum & Natural Gas Manufacturing Telecommunications & Post Finance & Insurance

5.98%

Q1'09 4.50%

Q2'09

Q3'09

7.22%

Q4'09

7.07%

FY'10

8.23% 5.90%

6.27%

5.46%

6.10%

5.99%

n/a

7.00%

-6.19%

-8.08%

2.01%

0.71%

n/a

1.20%

8.89%

7.03%

8.17%

8.36%

n/a

6.00%

34.02% 31.75% 33.63%

34.69%

n/a

30.00%

4.42%

4.10%

n/a

4.00%

Building & Construction

13.07% 13.12% 11.82%

4.82%

4.21%

10.69%

n/a

13.70%

Real Estate

11.79%

12.70%

n/a

10.60%

9.47%

10.48%

Overall GDP growth for 2009 is estimated at 6.90 percent, relative to 5.98 percent in 2008. * Pls note that 2010 growth estimates by sector should be viewed and analysed relative to performance figures for the previous periods

Source: Nigerian Bureau of Statistics, FY'10 figures are Vetiva estimates

Our GDP forecast for 2009 as provided in our Half Year Review report (“Revived Spirits - An Inflexion Point) was put at 4.5%. We had revised it downwards from our 6% estimate provided earlier in our 2008 year end, 2009 outlook report. Our downward revision was premised on what appeared to be the worsening situation in the Niger Delta at that time, as well as our outlook for oil prices. However, recovery in oil production and prices in the latter half of the year, boosted domestic economic output and served as the basis for the strong recovery in growth in Nigeria for 2009. The IMF World Economic Outlook published in October 2009, states that though growth in Africa has slowed as a result of the collapse of global trade and disruptions in the global financial market, it is expected to gain momentum as the global recovery gets underway. IMF estimate of economic growth for Nigeria in 2009 is 2.9% and for 2010, 5.0%. We believe these figures would partially reflect the IMF’s views on global economic sentiments, the internal upheaval within Nigeria’s financial system, as well as the country’s macro and socio-political outlook. Our outlook for GDP in 2010 is influenced by our growth expectations for the oil and non-oil sectors. We expect relatively strong growth from the non-oil sector, as indicated in the table above. We however, anticipate the recovery staged by crude oil production in the second half of 2009 will experience some weakness going forward, as the peace brokered with the Niger Delta militants via the Amnesty Programme, currently appears threatened. This influenced our estimate of marginal growth estimate in the sector’s activities. Growth in Agriculture will be appreciable, on the back of our expectation of good weather conditions, as well as Government’s intention to make credit accessible to operators in the sector. We note that the N200 billion Agriculture Fund is yet to be fully disbursed or utilised as primarily intended in the agriculture and other agro-allied sectors. Bottle necks that have plagued the disbursement of the funds include lack of proper understanding by Bankers of the working capital requirements and cash cycles of farmers, as well as the wide-scale existence of subsistence, as opposed to commercial farming in Nigeria. We are yet to see any appreciable progress on incentives to other key non-oil sectors to encourage growth; thus, we expect only slight improvements in growth relative to previous periods.

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A marginal decline is expected in the Finance & Insurance Sector, even as Banks start to stabilise following last year’s clean-up. For the Insurance Sector, considering that the pace of underwriting business is closely linked to underlying economic activities, we expect insurance and underwriting activities will only see strong growth after economic and business activities have gained some momentum. In view of Government’s planned CAPEX in the 2010 budget and the fact that the year ahead is penultimate to an election year, where there is traditionally some increased level of expenditure on infrastructure, we expect to see some strong contribution to GDP from the Building and Construction Sector. On the back of the above analysis and considerations, our GDP growth expectation for 2010 is 5.90%. Oil Production In our assessment of Nigeria’s oil production levels, at the 2009 half year point, we noted that the oil sector continued to suffer losses, as production volumes regressed on the back of repeated attacks by militants in the Niger Delta, which hosts a significant portion of Nigeria’s oil producing assets. However, in August 2009, the Federal Government launched an Amnesty Programme, which began with a 60-day offer by the Federal Government to arms-carrying militants in the Niger Delta region. The offer included granting these militants immunity from criminal persecution, as well as a promise to provide them with jobs, professional training and loans, in a bid to speed up economic and social development in the Niger Delta. The offer which closed on 04 October 2009, reportedly saw many of the key militant commanders and their fighters accept the amnesty proposal. A review of the developments of the Amnesty Programme showed some progress in the initial months, as the region experienced relative peace and oil production resumed in areas previously made inaccessible by the militant activities. Estimates provided by the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) as at September 2009, indicated that Nigeria had lost N37 billion worth of petroleum products to militant attacks of flow stations belonging to different multinational oil companies in the country. However, advancements with the Amnesty Programme appear to have reversed these trends, as the graph overleaf shows the growth in oil production volumes over the past few months till January 2010. Data also shows that the increases noted have been due to recoveries in output from offshore acreages, now accessible due to the effect of the Amnesty Programme. The proposed figure for January 2010 represents load schedules expected from various flow stations with a cumulative total of 2.053 mbpd. Nevertheless, following the recent absence of President Yar’Adua, (he had been the pivotal figure through the initiation and progress of the Amnesty Programme), and the fact that he did not handover to Vice-President, Goodluck Jonathan, to act in his absence, has led to reported inconsistencies in the implementation of the Amnesty Programme.

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OIL PRODUCTION (Million Barrels per day) Estimated Month end figures

2.50

2.00

1.89

1.79

1.76

1.72

1.79

1.72

1.68

1.71

1.84

1.86

1.91

2.01

2.05

1.50

1.00

0.50

0.00 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09

Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Source: Vetiva Research, Bloomberg

Community leaders have stated that the President’s absence has forced former rebels to start rethinking their participation in the programme, and analysts’ views are that the slow progress in implementing the postAmnesty Programme could provoke fresh attacks. The possible impacts of this would be a renewed threat to oil production volumes, which have ramped up from 1.68mbpd at its lowest level in 2009, to 2.01mbpd as at December 2009. Oil Prices Oil prices movements in 2009 were guided by the prospects of a recovery in global economies, as well as speculative activities of investors in commodities. Strong growth in some Asian countries (China, India, Indonesia), gradual improvement in the economies of major countries in Europe, the United Kingdom and the United States, have created demand for oil and driven prices to period highs. Speculative activities in the commodities markets, as investors sought and continue to seek investment alternatives away from now relatively weaker asset classes like the US Dollar (following its depreciation), have caused substantial levels of investment capital flowing from the financial to the commodities markets. Oil prices have trended upwards, rising from a low of $39.85 and trading close to $80 at the end of the year. The chart overleaf shows the movement in oil prices through 2009. The two sets of prices represent Nigeria’s “Bonny Light” and “Forcados Nigeria” variants. The price improvements have impacted positively on Nigeria’s macro fundamentals over the period. As has been stated previously, oil export earnings represent 90% of the Federal Government’s revenue; thus, the period of low prices also meant reduced earnings. An average price of $63.1 per barrel through 2009, relative to a budget bench mark of $45 for the year, ensured some support for shortfalls in Government revenue arising from challenges to Government revenue sources.

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2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

OILPRICES PRICES OIL (Dollarsper perBarrel) Barrel) Weekly WeeklyPrices Prices––January Januaryto toDecember December2009 2009 (Dollars

80 Nigerian Bonny Light Spot Prices Forcados Nigeria Spot Prices

30 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09

Jul-09

Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

Source: Vetiva Research, Energy Information Administration

Inflation Movements in the Consumer Price Index (CPI), as measured by Headline YOY inflation were varied all through the year. From a 2-year peak of 15.1% as at December 2008, it dropped to 11.2% as at half year 2009 and fell further to 10.4% by September. The gradual decreases during H1’09 were attributed to tightening liquidity, following reductions in money supply early in the year. Owing to the reduction in Government revenue, Government expenditure had also fallen, negatively impacting on general economic activity. Whilst acknowledging these falls in YOY Headline Inflation, the chart below shows a steady growth in the MoM movements, one that appeared to eventually reflect in gradual increases in the index from September. In addition, the slight drop (0.1%) in the CPI between June and July also appeared to be an indication of the slowdown in the rate of deceleration in the Index, as had been witnessed from the beginning of the year.

INFLATION YoY and MoM movements (%)

4.5%

15.1% 14.0%

4.0%

14.6%

14.3%

3.5% 3.0%

16.0% Month-on-Month movements 14.0% Year-on-Year movements 13.3% 13.2% 12.4% 11.6% 12.0% 11.1% 10.4% 11.2% 11.0% 10.0%

2.5% 8.0%

2.1% 2.0%

1.8%

1.0% 0.5%

6.0%

1.8%

1.5%

1.1% 0.8%

0.8% 0.5%

0.6% 0.6%

0.5%

4.0% 0.5%

0.7%

0.0%

2.0% 0.0%

Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Source: Vetiva Research, Nigeria Bureau of Statistics

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In July 2009, the CPI rose by 11.1%, a decline over the previous month’s 11.2% increase. We note a fall in food prices and Core Inflation for the corresponding period from 8.5% and 13.1% respectively in June to 8.3% and 12.9% in July. The slowing growth in general prices levels was attributed to a liquidity contraction within the financial and economic system. Even as Broad Money Supply (M2) declined to N8.8 trillion in July from N9.07 trillion, a 2% drop, relative to 1.5% growth for the same period in 2008. In August 2009, Headline Inflation eased further, with the CPI growing by just 11% YOY, the lowest level in 15 months. Similar drops in the core and Food Inflation index, (which moderated from 8.3% and 12.9% in July to 8.0% and 12.7% in August), influenced the further declines. Improvements in agricultural yields, declines in disposable income and consumer expenditure, unavailability of credit have negatively affected both corporate and consumers expenditure profiles. These further led to reductions of inflationary pressure on general prices levels. In September 2009, the CPI recorded another strong decline in the Headline Inflation rate, falling to 10.4%, using the YOY measure from 11.0% in 2009. This represented the lowest levels in 16 months, and appeared to be some indicator that the regulator’s target of single digit inflation could be realisable. Both Core and Food Inflation also recorded drops in their indices falling to 7.4% and 12.5% respectively for the period. Both metrics represented the lowest values in at least 6 months. The declines were reportedly driven by increased agricultural output, favourable weather conditions, and slowed growth in credits, as huge loan provisioning and write-offs within the Banking Sector led to a cut back on lending. In October 2009, the index recorded a sharp jump to 11.6%, increasing by 120bps over the previous month, and marking the first increase since the beginning of the year. The corresponding Core and Food Inflation indices also showed steep increases to 8.9% and 13.5% respectively from 7.4% and 12.5% in the previous month. The steep increases had been heralded by strong growth in the MoM movements in different inflation indices. The increase appeared to have been driven by the after-effects of the Federal Government’s $2 billion stimulus package, which was part of an expansive fiscal monetary stance as well as the CBN’s quantitative easing programme, which saw the inflow of N620 billion into the 8 troubled banks.

NON-FOOD INFLATION YoY and MoM movements (%)

Month-on-Month movements Year-on-Year movements

4.5% 4.0% 3.5%

11.8% 10.9%

10.4%

10.7% 9.9%

3.0% 8.0%

2.5% 2.0%

8.5%

8.0%

7.4%

8.0%

1.5% 1.0% 0.6%

0.6% 0.5%

-0.5%

8.9%

8.3%

1.8%

7.2%

6.0%

1.2%

0.8%

1.1%

0.5% 0.8%

4.0% 2.0%

0.3%

0.0%

12.0% 10.0%

1.5% 1.0%

14.0%

-0.1% Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-08 Jan-09

0.0%

Source: Vetiva Research, Nigeria Bureau of Statistics

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As at November 2009, Headline Inflation (as measured by YOY movements in the CPI) reportedly stood at 12.4%, illustrating the gradual growth in MoM inflation figures, which commenced in September 2009. Non-Food Inflation inclined, rising to 10.7%, while the Food Index grew at the same rate of 13.5% in the previous month. The growth was attributed to the continued impact of Government’s expansive fiscal policy stance, as well as the CBN’s continued focus in ensuring liquidity and funding in the economy. December saw inflation rising 12.0% and 0.4% YoY and MoM respectively. Average monthly food prices rose by 0.7%, caused by a rise in the price of food items as cassava staples, yam, meat, sea food, onions, fresh tomatoes and vegetables. However, a decline in prices of items like maize, millet and sorghum countered the inflationary pressures of the other rising products. Core Inflation stood at 9.7% YoY, due to slight increases in the prices of cooking gas, liquid fuels and some household goods and equipments. Entering 2010, our expectations are that the only way to go is up. This will be influenced by action points including: The proposed deregulation of the downstream sector Quantitative easing measures, which the CBN will likely maintain in 2010 Anticipated injection of new capital into Rescued Banks (R8) Rising international commodity prices Increased Government expenditure in 2010, considering that it is penultimate to an election year Thus, our average inflation forecast for 2010 is 13.5%.

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Interest Rates and MPR Movements Interest rates were mixed during the course of the year, though the factors behind their movements were varied. At the beginning of the year, the general apathy amongst lenders in the interbank market had driven rates to record highs, as high as 29.5% in the second quarter of the year. Weighted average interbank rates went up from 17.62% to 22.15% in March 2009. As at April 2009, when the third MPC meeting was held, the pressure in the interbank markets and the subsisting high rates were attributed to liquidity tightness in the financial system. In a bid to address this challenge, as well as other key issues that had been identified as major pressure points on monetary policy, the Monetary Policy Rate (MPR) was reduced by 175 bps from 9.75% to 8.00%. This reduction marked the last key policy change, with respect to the MPR, by the Professor Chukwuma C. Soludo led CBN. As at June when the new CBN Governor took over, interbank rates were still at period highs. The weighted average interbank call rate stood at 18.6% in June, and ranged between 21% and 22% in July. Only the 7th of July 2009, the CBN Governor publicly commented on the issue of persistently high interest rates. He established that the high interbank rates were driven by the refusal of banks to lend to one another due to high perceived counter-party risk; thus, though the CBN announced the immediate commencement of steps to address this perception (through the special audit, appropriate resolution frameworks and enhanced disclosure/transparency in financial statements), it also recognised the need to take immediate action to provide some form of assurance to operators in the Banking Sector. This led the CBN to announce that it would guarantee all interbank placements through to March 2010. This was recently extended to December 2010, in view of the impact an expiration of the deadline would have on risk perception and liquidity in the financial system. The subsequent cleanup in the sector, has also helped to significantly reduce the perception of counterparty risk amongst operators. The chart below shows the movements in interbank overnight rates, from January 2009 till date. INTERBANK MONEY MARKET RATES (Percent) Overnight Rates

35.00%

30.00%

Represents peak of 29.50%

25.00%

20.00%

Rates gradually fall to as low as 10% upon the announcement of the guarantee of interbank placements

Another jump upon the August 14 revelation of the irst list of 5 banks, who were reportedly responsible for 90% of loans at Expanded Discount Window, but then a quick fall to as low as 4% on August 20th 2009

15.00%

10.00%

5.00%

0.00%

Source: Vetiva Research, Energy Information Administration

Source: Vetiva Research, Energy Information Administratio

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In his first assessment of the current developments in the Nigerian economy, specifically interest rates, the new CBN Governor, Mallam Sanusi Lamido Sanusi, noted the wide spread which existed between deposit and lending rates. He also highlighted the key factors which were affecting interest rates spreads, including operating expenses, regulatory reserve requirements, market structure, inflation, credit and default risks (which are high in Nigerian credit markets) and profit targets of various banks. A keen evaluation of these factors provides clarity on why lending rates have remained perpetually high in Nigeria, despite repeated efforts at achieving the converse. The Governor also outlined some short and mid-term measures that the CBN intended to embark on in order to address these key issues. As the chart on the preceding page shows, interbank rates appear to have trended lower in recent months, and will likely remain at those low levels, save for the usual spikes experienced just before the monthly allocations of Government revenue are effected. Lending rates however, are expected to remain at current high levels for some of the reasons given by the Governor. Other reasons include: (i) the recent activities in the Banking Sector, which led to a diminution in the capital base of many banks; (ii) the experience of the bankers in the recent default and loan write-offs; and (iii) our view on inflation and expectations that it will continue to trend upwards in 2010.

MONTHLY AVERAGE INTEREST RATES (July 08 – July 09: Percent)

25.0%

14.0% 12.0%

20.0%

10.0% 15.0%

8.0% 6.0%

10.0%

Deposit rates on right axis Prime lending rates on left axis

4.0%

5.0%

2.0%

0.0% Jul-09

Jun-09

May-09

Apr-09

Mar-09

Feb-09

Jan-09

Dec-08

Nov-08

Oct-08

Sep-08

Aug-08

Jul-08

0.0%

Source: Vetiva Research, Nigeria Bureau of Statistics

Exchange Rates Exchange rate movements in the second half of the year were stable relative to those in the first half. The return to the Retail Dutch Auction System and reduction in Net Open Position of Banks to limit speculative demand within the market in January 2009, may have had the desired impact effect of moderating and stabilising demand within the official market. However, the impact was felt in the parallel market, as the spread between official and parallel market widened significantly as shown in the chart overleaf.

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FOREIGN EXCHANGE VOLATILITY JAN – DEC 09 (N/$)

200.0 190.0

BDC & Parallel market rates converged when interbank f orex trading commenced May ending. All three rates have gradually converged w ith the return to the WDAS, removal of restrictions and a more liberalised and market driven system. CBN has endeavoured to meet demand at the Of f icial market, giving comf ort to market players

180.0 170.0 160.0 150.0 140.0

CBN AVG: N147.37

130.0

BDC AVG: N153.78

CBN

BDC

PARALLEL

PARALLEL AVG: N162.13

120.0 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09

Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Source: CBN, FDHL Analytics, Vetiva Research

We also note that demand continued to rise in the official market, though the CBN mostly did not supply enough to meet this demand. We also believe some of the demand which were typically executed through banks and the official market were moved through the parallel market, again fuelling the increase in prices in that market. Policy actions taken during the first half of the year also stifled unregulated access to foreign exchange by the Bureau de Changes (BDCs). This action however, also served to limit foreign exchange volumes outside the official network, further fuelling the depreciation of the Naira in the parallel market. However, we believe that restrictions placed by the CBN during this period were also driven by a fall in Government’s revenue. The Federal Government revenue had been impacted by the fall in oil prices, as well as the reduction in Nigeria’s oil production output levels. The reduced inflow into the economy constrained supply to the market, leaving the CBN as the main source of foreign exchange supply to the economy. Following the stability achieved in the RDAS official market, the Central Bank decided at its July 2009 MPC meeting to return to the Wholesale Dutch Auction System, as well as increase the Net Open Position for banks to 5%. The earlier placed restrictions on Bureau De Changes (BDCs) were also reduced. Following these announcements, the CBN ensured largely that demand for Forex at the official market was met at the twice weekly WDAS auctions. This gradually built up the market’s confidence in the ability of the CBN to meet forex demand. This we believe, helped companies and banks plan better and limit their foreign exchange demand to only immediate needs, and also gradually eliminated the potential attractiveness of speculation on the Naira.

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The CBN Governor gave more comfort as to the direction of the exchange rate, by noting that monetary policy was focused on maintaining the Dollar at N150/US$1, within a +/-3% band i.e. between N145.50 and N154.50. We believe the CBN’s ability to maintain this rate will be based on the strength of the FGN’s earnings over the next few months. Though Government earnings have strengthened in recent months, there are apparent threats to oil export earnings, which are the major source of Government revenue. Our outlook for the exchange rate is that it will be stable at least it the first few months of the year. However, political uncertainties have meant a speculative build up of demand volumes at the WDAS market in the first few weeks of January 2010, even as lack of clarity on the situation in the Presidency has caused companies to try to lock in their currency needs at current rates. We expect to see some depreciation in the months of March/April, as multinationals demand funds to repatriate dividends earned for the previous year. Nevertheless, weak earnings in 2009 may reduce the magnitude relative to previous years. Key issues with respect to the political leadership, the success of the Amnesty Programme (which currently seems to be threatened) and oil price movements, will influence oil export earnings, and by extension, the CBN’s ability to meet forex demand and keep the exchange rate at desired levels. We also recognise that there are other potential sources of foreign exchange earnings into the Country, which include but are not limited to forex earnings by oil majors, FDIs, and Diaspora remittances. Thus, our expectation for 2010 is that the Naira/Dollar exchange rate would lie between N150 – N155. Government Revenue and Foreign Reserve Movement Government revenue reduced quite significantly in the first half of the year; actual revenue fell short of the budget across various revenue lines. Based on key assumptions in the 2009 budget, the total revenue accruable for distribution to the three tiers of Government for 2009 was projected at N895.85 billion for each quarter and N1.791 trillion for the 6 months ending June 2009. However, oil production only averaged 2.1 mbpd as at the end of the second quarter, compared to the 2.292 mbpd expected for 2009. A closer analysis of the figure for the half year show that for oil revenue, crude oil sales underperformed against the budgeted estimate of N923.21 billion by N91.76 billion (or 9.94%) as at end of the second quarter. Petroleum Profits Tax, Gas Tax, and Gas sales similarly underperformed against the budgeted estimates of N319.39 billion, N23.9 billion, and N126.62 billion by N43.66 billion (or 13.67%), N23.9 billion (or 100%), and N82.33 billion (or 65.02%) respectively. However, Royalties exceeded the budgeted estimate of N159.71 billion by N22.14 billion (or 13.86%) for the period. However, there were improvements in the second half of the year, as the Federal Government, with the President as the key initiator, successfully agreed an Amnesty deal that included a ceasefire with the Niger Delta Militants. This gradually led to a jump in oil production volumes and a restoration in Government revenue. 25

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The fall in Government revenue led to a decline in monthly Federal Account Allocation Committee (FAAC) allocations, which eventually had to be made up through deductions from the excess crude account. It is estimated that about $5.5billion was withdrawn from the excess crude reserve between January and December 2009 to augment Government expenditure. However in December 2009, for the first time through the year, a transfer was made back to the Excess Reserve account to the tune of $95 million, on the back of higher oil prices globally. There were also significant reductions in the country’s Foreign Reserves, especially in the early months of 2009 when the Government had tried to defend the currency from further deprecation, having depreciated by 13.17% in 2008 (majorly in December). Overall, the Naira depreciated by 12.83% in 2009. The chart below shows the movements in the Foreign Reserve as well as reviews on the movements in the Excess Crude Reserves through 2009. MOVEMENT IN FOREIGN EXCHANGE RESERVES (JAN – DEC 2009) (US Dollars) Estimated Month end figures 50.1

49.0 48.0

47.0

45.0

43.3 43.3 41.7 40.9

43.1 42.1

Nov. 09

Oct. 09

Sep.09

Aug.09

Jul. 09

Jun. 09

May. 09

Apr. 09

Mar. 09

Feb. 09

Jan. 09

The Excess Crude Account stood at about $20 billion at the start of the year An estimated $5.3 billion was 42.4 approved to be withdrawn in phases from The Excess Crude Account in order to allow the government meet its target for producing 6,000MW by the end of the year At different intervals during the year FAAC allocations were augmented with funds from to Excess Crude Account (approx. $6 billion) The last of such allocations was in the November FAAC allocation for the month of October, where N121 billion from the Excess Crude Account was withdrawn. However, $95 million was transferred to the Excess Crude Account in December for the month of October due to improving oil prices and production output The account was estimated at $6.4 billion in Mid December 2009

Dec. 09

Source: Vetiva Research, FMF

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REVIEW OF 2010 BUDGET Though a breakdown of the key expenditure lines of the 2010 budget have not been provided, in this section we review the assumptions which form the basis upon which the budget was prepared and give an assessment of the 2010 target metrics.

REVIEW OF 2010 BUDGET Assumptions

PROJECTIONS Naira Billions

2010

2009

Budget

2.088

2.292

-8.9%

$57

$45

26.7%

Oil Production Target (m/bpd)

Oil Price Benchmark

Inflation Rate

11.2%

8.2%

GDP Growth rate

6.10%

8.90%

% Change

Projected Expenditure (trn)

4.079

2.870

42.1%

Revenue (trn)

2.517

1.778

41.6%

Deficit Estimate (trn)

1.562

1.092

43.0%

Statutory Transfers (bn)

180.28

140.69

28.1%

Debt Servicing (bn)

517.07

283.65

82.3%

10.

Recurrent Expenditure (trn)

2.011

1.649

22.0%

11.

Capital Expenditure (bn)

1,370

789.74

73.6%

12.

Total Expenditure (trn)

4.079

3.102

31.5%

13.

Benchmark Exchange Rate

N/$150

N/$117

28.2%

Source: Vetiva Research, 2010 Presidential Budget Speech

The President’s budget speech, as presented to the National Assembly in November 2009, provided highlights of strategic measures that had so far been taken by the Federal Government to address the slowdown in domestic growth, in the aftermath of the economic downturn and its impact of the Nigerian economy through weakened Government earnings. Some of these measures include:

The establishment of a special intervention fund to provide credit facilities for commercial farming and support necessary agroprocessing linkages to support the economy (Agric. – N200 billion; Textile – N100 billion; N10 billion to BOI in Dec 2009)

Revision of tariffs and fiscal incentives to enhance productivity in the real sector and facilitate rapid economic growth. A Presidential Task Force has been set up to identify priority sectors to benefit from these measures

Financial management reform in the public sector with greater emphasis on increasing non-oil revenue through the reform of the Customs Service and the Federal Inland Revenue Service, as well as the audit of Internally Generated Revenue (IGR)

Establishment of an Asset Management Company (AMC) to assist in restructuring and further improving the balance sheet of banks and enhance the flow of credit to the real sector

Acceleration of investments in the Niger Delta with a special intervention fund of N114 billion as provided under the 2009 Supplementary Budget

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2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT BUDGET REVIEW

Level of Implementation of the 2009 Budget Updated data as at Q2’09 from the Budget Office of the Federal Ministry of Finance, showed a 42% capital expenditure utilisation rate, though the actual level of implementation varied across sectors. Only 27% or 12 Ministries, Departments and Agencies (MDAs) implemented over 70% of their CAPEX allocations; including the Federal Capital Territory, the Niger Delta and Aviation ministries, whilst others including Education, Transport, and Police Affairs/Formation and Commands, performed below the overall average. Challenges identified by the Budget Office Monitoring and Evaluation Teams to achieving improved utilisation rates of the budget, include MDAs starting new projects when new ones are yet to be completed, overloading the same contractors, and the fall in Government revenue during the 2009 fiscal year. Estimates show that Government was likely unable to implement 60% of the budget in 2009.

Analysis of 2010 Budget Assumptions The key elements of the budget as presented, are the budget benchmark oil price, which was put at $57 in the budget speech, and projected production volumes at 2.088 mbpd. Oil Production Target We believe that the feasibility of the budget target will be determined largely by progress made with the Niger Delta Amnesty Programme. Unfortunately, the absence of the President for over 70 days (as at report date) has stalled any progress on the implementation of the Amnesty Programme. The situation also appears to be deteriorating from the cease-fire status quo that was agreed as part of the Amnesty deal. Two weekends into 2010, Chevron, a major operator in the upstream oil sector, confirmed the closure of some of its facilities in the Delta, following attacks by alleged militants, and the production shut in of 20,000 barrels per day from the platforms supplying through pipelines that had been damaged in the attacks. Though the Movement for the Emancipation of the Niger Delta (MEND) confirmed that it did not carry out the attacks, it sanctioned them, giving a January 30 deadline for determining whether it would end an earlier agreed cease fire agreement. Oil production volumes climbed to 1.905 mbpd by November 2009 (from lows of c.1.6 mbpd in June 2009), inching further up to 2.005 mbpd by December 2009. The progress in increased production volumes has been attributed to renewed access to acreages and production facilities. The Nigerian loading schedule for January 2010 indicates an expected total volume of 2.053 mbpd. However, we note that average production volumes for 2009 are put at 1.77 mbpd.

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2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT BUDGET REVIEW

Putting the above factors in context, makes the oil production target in the 2010 budget seem feasible. However, we caution and note that its likelihood depends heavily on the success of the Amnesty Programme; thus, key steps need to be taken immediately to ensure its success, with an overall view and understanding of the implications on the economy. Oil Prices The budget proposes a price benchmark of $57 per barrel. Crude oil traded at an average of $61.65 in 2009, and we forecast an average price of between $80 and $83 per barrel through 2010. Oil prices as at the date of this report was $76.67, falling from highs of around $80, which they had attained earlier in the year. Oil prices have been influenced partly by the rebounds in key economies like China and India, as well as the prospects of a recovery in developed economies like the United States and the larger European markets. Speculations on the weakened Dollar, the likelihood of its strengthening, as well as speculative and fundamental demand for commodities and how this has driven prices upwards have all impacted on oil prices. Given these assumptions, we believe the proposed oil price target for the budget benchmark has been well selected. We also note the spread between the anticipated average price of oil and the benchmark will accrue to the Excess Crude Reserve, replenishing a reserve that has been drawn down from about $20bn in January 2009 to an estimated $6.4 billion by mid December 2009. Inflation We follow up on our analysis of inflation trends as noted in the 2009 review above, and note that the budget target of 11.2% may not be realisable. As at November 2009, inflation stood at 12.4%, and recently released December figure put the value at 12%, implying a decline, we still forecast an uptick based on the following factors. -

The proposed deregulation of the downstream sector, which in view of international oil price movements and the actual landing cost of petrol (excluding the Federal Government subsidy), will imply an almost 100% increase in the cost of fuel

Quantitative easing measures by the Central Bank, which are likely to continue in line with its resolve to keep the economy liquid

Government expansionary fiscal outlay; 74% increase in capital expenditure relative to 2008, and a 22% increase in recurrent expenditure relative to 2009

2010 being the penultimate year to an election year, and where traditionally, Government expenditure records significant increases

Benchmark Exchange rates The budget assumes an exchange rate of N150/US$1, which we believe is in line with the CBN’s exchange rate policy, which intends to keep the rate at N150/US$1, within a +/- 3% band. However, in view of potential scenarios which could play out, the CBN’s likely response would partly determine exchange rate movements. 29

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2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT BUDGET REVIEW

As discussed earlier, if strong Government expenditure is experienced, leaving the economic system saturated with funds and breeding an already endemic imports culture, there could be significant pressure on the CBN to fund these Dollar based requirements. However, this argument could be countered by the expectation that for Government expenditure to be so strong, Government would also have earned Dollar revenue via oil exports. There are also other potential sources of funding which would include: anticipated foreign injections into the recapitalisation of banks, via foreign acquirers; commitments of investment into the sector from new entrants (China, Russia, Europe; as well as a foreign reserve that is steadily been replenished again, as oil prices and production volumes recover, relative to last year.

The budget was tagged a Fiscal Stimulus Budget, with the 74% increase in Capital Expenditure (from N798 billion in 2009 to N1.37 trillion in 2010) to be focused on projects targeted at fulfilling Governmentâ&#x20AC;&#x2122;s objective of implementing a strategic plan that will stimulate economic growth, launch the nation onto a trajectory of sustained development and propel Nigeria to a position as one of the top twenty economies in the world by the year 2020. Broadly, these projects, as stated in the budget speech, will encompass the following: 1. 2.

Enhancing the existing power infrastructure to deliver 10,000 MW by the end of 2011 Complementing the existing road and aviation networks with serviceable rail and marine infrastructure to deliver a truly intermodal and modern transportation system Economic diversification, emphasised by the development of the agro-allied processing, telecommunications and other non-oil sectors to achieve a broader base for employment generation and wealth creation Continuing a multifaceted and holistic approach to addressing the situation in the Niger Delta; ensuring security, but also focusing on developing infrastructure, grass roots empowerment, and the preservation and restoration of the environment

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

CAPITAL MARKET REVIEW Equity Market Performance Equities closed in the red for the second straight year, as the Nigerian Stock Exchange’s All Share Index (NSE-ALSI) declined 33.78% to close at 20,827.17. However, due to a number of listings during the year, the decline in market capitalisation was lower, coming in at 28.29%. Notably, market capitalisation dipped to N4,989.39 billion from N6,957.45 billion in FY’08 and its peak of N7,038.38 billion on the 2nd of June. We note that after an initial bearish tide in the first half of the year, the market appeared relatively stable mid-year, but was pressured further downwards, as investors sought to exit Banking equities in the middle of a crisis in the sector, with spiral effects on other stocks.

NSE ALSI Vs. MARKET CAPITALISATION (December 2004 – December 2009)

70,000

14,000

Index

Market Cap

60,000

12,000

50,000

10,000

40,000

8,000

30,000

6,000

20,000

4,000

10,000

2,000

0 Dec-04

0 Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Source: NSE ; Vetiva Research

Equities listed during the year also suffered similar price pressures, with a large number of them shedding significant value from their listing dates. LIST. MONTH

LIST. PRICE

CLOS. PRICE

% CHANGE

African Alliance

LISTING

Sep-09

3.50

0.87

-75.14%

Afromedia

May-09

2.92

0.80

-72.60%

Beco Petr.

Oct-09

2.50

2.53

1.20%

Courteville

Apr-09

2.50

0.50

-80.00%

E-Tranzact

Jul-09

4.80

6.40

33.33%

GT Assurance

Nov-09

3.00

2.15

-28.33%

Honeywell

Oct-09

8.50

0.00%

HIS

Jan-09

5.00

4.24

-15.20%

McNichols

Dec-09

0.95

1.02

7.37%

MTECH

Jun-09

2.50

0.91

-63.60%

Pinnacle Point

Mar-09

6.00

7.28

21.33%

Portland Paints

Jul-09

10.00

5.67

-43.30%

Resort Savings

Nov-09

0.95

0.50

-47.37%

Unity Kapital

Dec-09

2.50

2.38

-4.80%

Source: NSE; Vetiva Research

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Market Activity Investor scepticism during the period was apparent from the level of activity recorded. Gradual improvements which were recorded in the average daily volume traded by May and June were short lived, as the Banking saga affected trading activity in subsequent months. Average Volume traded declined from 512.04 million units in June to 418.08 million units and subsequently to 359.02 million units in December. On the other hand, Average market turnover declined from N4.25 billion in June to N3.14 billion and afterwards to N2.24 billion in December.

AVERAGE TURNOVER Vs AVERAGE VOLUME TRADED (Jan. 2009 – Dec. 2009)

Average Turnover Average Turnover (N'billions)

Average Volume Average Daily Volume (Million units)

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Source: NSE ; Vetiva Research

Market Recovery Compared to markets in other regions, the Nigerian Market lagged heavily, returning -34% YTD compared to an average of +66% in our South American universe. Argentina’s (Merval) Index was the best performing Index, returning 115%, its best performance since 1991 and reversing a 50% drop in 2008. Markets have rallied on the back of strong domestic demand from a budding middle class, and its leverage to the commodities market as growth in Brazil, Mexico, Chile, Colombia and Peru is expected to be somewhere in the range of 5% to 6% in 2010, outpacing the more subdued economic expansion forecasted in the developed world. Asian markets also performed strongly. China’s Shanghai SE composite IX returned 82% YTD, on the back of strong inflows from developed markets and increased spending due to a $568 billion stimulus by the Chinese Government. India was also up over 81%. Despite liquidity problems and high deficits, Eastern European markets posted strong growth in the year, Russia strongly outperforming with a growth of 129% in the year, as its market’s confidence soared with the bounce back in oil prices. Our Eastern European market universe gained an average of 77%.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

NSE ALSI Vs. LATIN AMERICAN MARKETS

NSE ALSI Vs. ASIAN MARKETS

December 2009

114.95%

81.78%

63.00%

82.66%

60.05% 45.17%

56.96%

53.45%

46.86%

Chile

81.03%

43.52%

Brazil

Venezuela

Columbia

Argentina

Mexico

Nigeria

Philippines

China

Pakistan

India

Malaysia

Nigeria

-33.78% -33.78% Source: Bloomberg; Vetiva Research

Source: Bloomberg; Vetiva Re

NSE ALSI Vs. EASTERN EUROPE MARKETS

NSE ALSI Vs. M/EAST AND AFRICAN MARKE

December 2009

128.62%

51.68%

96.64%

73.40%

79.93%

28.63% 21.44%

60.68% 46.85%

10.22%

30.19%

1.06% South Af rica

Egypt

Morocco

Tunisia

Qatar

UAE

Nig

-5.40% Russia

Czech Republic

Bulgaria

Romania

Kazakhstan

Turkey

Poland

Nigeria

-33.78% -33. Source: Bloomberg; Vetiva Research

Source: Bloomberg; Vetiva Re

Middle East/African markets were much slower than their emerging/frontier market counterparts, with Tunisia recording the strongest growth of 52%, while our universe returned an average of 18%. Nigeria, Ghana and Kenya were among the African markets which had negative returns in the year. New Equity Issues Due to the prevalent uncertainty in the equities market there were limited equity offerings during the course of the year. Whilst no ‘Initial Public Offering’ was embarked upon, only two Companies embarked on equity offerings – Eterna Plc (Offer for Subscription and Rights Issue) and Cadbury Nigeria Plc (Rights Issue).

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

SECTORAL PERFORMANCE Banking Sector On the back of heightened pessimism and risk aversion towards Banking equities in H2’09, predicated by investors’ concerns about the outcome and implications of the CBN special audit of Nigerian Banks, the Vetiva Banking Sector Index declined by 32.74% in H2’09, relative to its 10.99% performance in H1’09. As expected, topping the Sector’s YTD losers were the bailed-out Banks, with Wema Bank, Finbank and Intercontinental Bank recording losses of 93.49%, 89.09% and 87.56% respectively.

BANKING SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 110.0 100.0 90.0 80.0 70.0 60.0

YTD: -40.13% 50.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09 Source: Vetiva Research

Insurance Sector The Insurers were the worst performing group on the Exchange, as provisions for doubtful debts and diminution in the value investments took their toll on results, with a number of listed insurers reporting huge losses. The sell-off in the sector saw about a third of Insurance stocks drop to their par value.

INSURANCE SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 110.0 95.0 80.0 65.0 50.0 35.0

YTD: -67.70%

20.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09 Source: Vetiva Research

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Food and Beverages Sector In 2009, the Food and Beverages Sector witnessed increased level of activity, on the back of perceived stability and safety of players in the Sector (in terms of financial performance). This was premised on the defensiveness of the sector relative to the financial services sector, which was directly hit by the impact of the global economic meltdown. The most outstanding result and returns for the year reported in the Food and Beverages Sector was Dangote Flour (with the release of its FY’08 and Q3’09 results), which far exceeded market expectations, as most investors did not foresee this performance. This performance was closely followed by NNFM (a subsidiary of Flour Mills). Though the distress in the Banking Sector and global economy took its toll on a few companies within the Sector in 2009, some stocks exhibited resilience, staging a graceful rebound before the end of the year (Flour Mills and NBC for example). Companies like Nestle remained steady performers and maintained their dividend payment levels, thereby delivering value to its stakeholders. In our opinion the Food and Beverages Sector lived up to its expectation of a store of value in challenging times.

FOOD/BEVERAGES SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 120.0 110.0 100.0

YTD: -6.19%

90.0 80.0 70.0 60.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09

Source: Vetiva Research

Breweries Sector The share price performance of the Brewers in 2009 was one of the strongest in the market, as they recorded relatively impressive results, especially in the first half of the year. The Vetiva Breweries Sector Index returned 27% YTD, outperforming the market by 61%, a performance we believe was fundamentally justified. That said, we believe challenges faced by Brewers in H2’09 will hold steady in 2010 and we expect results to be modest at best, except for major upturns in the economy and an improvement in liquidity.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

BREWERIES SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 150.0

130.0

YTD: +26.83% 110.0

90.0

70.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09

Source: Vetiva Research

Building Materials Sector The Sector emerged the best performing sector on the NSE in 2009, as indicated by the 69.34% YTD gain in the Vetiva Building Materials Sector Index. The Sector fared better in the first quarter (42.71%), as against the second quarter (18.66%). We are of the view that the Sector’s outstanding performance was initially driven by investors’ flight to safety following disclosures that the Banking Sector was overly exposed to the stock market and the oil and gas sector. We are of the view that investors’ preference for Cement Companies over the other non-financial companies was mainly driven by the Sector’s stellar earnings performance, which in turn was driven by expansion and restructuring programmes undertaken by companies therein. We believe that the Pioneer Status, usually conferred on companies that undergo Greenfield Investments in the Sector, also contributed to the impressive performance of these companies. This status exempts such companies from making tax payments over a 3-yr period, with the possibility of a 2-yr extension. We note that the top 2 best performing stocks on the NSE were cement companies: Benue Cement Company Plc and Cement Company of Northern Nigeria Plc.

BUILDING MATERIALS SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 200.0

175.0

150.0

YTD: +69.34% 125.0

100.0

75.0

50.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09

Source: Vetiva Research

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Petroleum Marketing Sector Though Petroleum Marketing equities remained somewhat resilient despite the general bearish trend in 2008, the much anticipated market correction in their pricing took centre stage during the course of the 2009 financial year. The Sector’s Index shed 40.54% and 36.50% respectively in H1’09 and H2’09 respectively, which cumulatively translated to a YTD decline of 62.24%. We note that the declines in the Sector were led by African Petroleum and Eterna Oil & Gas Plc, which were placed on technical suspension in 2008, following their bids to raise additional capital. They shed 88.60% and 83.99% respectively.

PETROLEUM MARKETING SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 105.0 95.0 85.0 75.0 65.0 55.0

YTD: -62.24% 45.0 35.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09 Source: Vetiva Research

Conglomerates Sector

The Conglomerates as a group were the second best performers (by capital appreciation) last year, benefiting from reaction to relatively superior results and risk aversion, as investors fled the banks and insurers, towards businesses with less degrees of uncertainty. Our expectations for 2010 however, are somewhat less optimistic than 2009.

CONGLOMERATES SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 140.0

YTD: +28.75%

130.0 120.0 110.0 100.0 90.0 80.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09 Source: Vetiva Research

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Healthcare Sector The Healthcare Sector performed favourably in terms of improving and sustaining its earnings quality. The defensive nature of the products shielded it from the impact of the slowdown in the economy. This unusual defiance, in the face of challenges to the broader economy, helped arouse interest in the Sector for the first time in many years. Most importantly, the stocks we had recommended as at HY’09 performed outstandingly well. The Share price performance of GSK was one of the highest in terms of returns, as the stock gained an impressive 52.59% YTD. However, we note that it was the only stock within the Sector which experienced positive returns in terms of capital appreciation in 2009.

HEALTHCARE SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 110.0

100.0

YTD: -2.76% 90.0

80.0

70.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09

Source: Vetiva Research

Construction Sector The Sector was one of the worst performing in 2009, despite the general bias for non-financial stocks. In spite of the enormous opportunities in the Sector, which are a product of the supply deficits in the infrastructure and housing sectors, the Sector still could not deliver the required returns to win investors’ attention. We however, opine that the inability of players within to post strong earnings margins may be responsible for its lacklustre performance on the NSE. The Sector’s average after tax margin is approximately 5%, compared to 25% for the Building Materials Sector.

CONSTRUCTION SECTOR INDEX PERFORMANCE (Jan - Dec 2009) 100.0 90.0 80.0 70.0

YTD: -43.81% 60.0 50.0 40.0 Jan-09

Mar-09

May-09

Jul-09

Oct-09

Dec-09 Source: Vetiva Research

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

NSE Sector Weighting as at FY’09 Following the equity sell-offs in the Banking Sector during the course of the year, its composition of the market’s total capitalisation continued to decline. From 55.4% at H1’09, it dropped to 45.1% as at the end of the financial year. However, within the same period the composition of Fast Moving Consumer Goods (FMCG) has inched up, showing the characteristic resilience of the industry in a bearish market. Notably, the Food and Beverages Sector’s proportion of the market increased from 8.3% to 12.1%, while the Breweries and Conglomerates Sectors increased from 9.4% and 3.3% to 12.1% and 4.6% respectively.

NSE SECTOR DISTRIBUTION (December 2009 Vs June 2009)

Dec 2009

1.2% 4.6%

June 2009

9.7%

9.2% 1.2% 3.3%

Banking

3.4%

4.1%

Breweries Food and Bev

4.1%

Petroleum Marketing

45.1%

6.0%

Building Materials

5.8%

Insurance

5.1%

55.4% 8.3%

Conglomerates Construction Others

12.1% 9.4%

12.1% Source: NSE ; Vetiva Research

Price Movement & Market Activity Fuelled by the positive performance and anticipated expansions of the Cement companies, as well as the usual resilience of players in the Fast Moving Consumer Goods Industry, companies in both sectors of the Nigerian Stock Exchange dominate the price appreciation table for the 2009 financial year. The Cement players (Benue Cement Company and Cement Company of Northern Nigeria) topped the tables, gaining 138.94% and 133.77% respectively. For the losers, five of the troubled Banking institutions appeared on the top 10 decliners table, reflecting the sell-offs in the Sector. We note that the worst performer of the year, Wema Bank (93.49%), was on technical suspension till February 2009, and subsequently lost significant value, having been flat through the market decline of 2008. As usual, the Banks, due to their high number of shares outstanding, dominated trade charts, while only four slots on the ‘Top 10 Most Capitalized’ table were not filled by the Sector’s players.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

TOP TEN GAINERS FY'09

% Change BENUE CEMENT COMPANY PLC 138.94% CEMENT CO. OF NORTH.NIG. PLC 133.77% P Z CUSSONS NIGERIA PLC 122.42% UNILEVER NIGERIA PLC 78.23% N NIG. FLOUR MILLS PLC 54.31% GLAXO SMITHKLINE CONSUMER NIG. P 52.59% E-TRANZACT INTERNATIONAL PLC 33.33% NIGERIAN BREWERIES PLC 29.79% GUINNESS NIG PLC 28.14% NESTLE NIGERIA PLC 25.10% TOP TEN VOLUME TRADED FY'09 ACCESS BANK PLC UBA PLC WEMA BANK PLC FIRST BANK OF NIGERIA PLC GUARANTY TRUST BANK PLC ZENITH BANK PLC INTERCONTINETAL BANK PLC FINBANK PLC FIRST CITY MONUMENT BANK PLC OCEANIC BANK INTERNATIONAL PLC

Mn Units 6,348 5,405 4,913 4,804 4,413 3,823 3,209 3,004 2,929 2,902

TOP TEN LOSERS FY'09 CAPITAL OIL PLC WEMA BANK PLC EQUITY ASSURANCE PLC FIRST ALUMINIUM NIGERIA PLC AFRICAN PETROLEUM PLC FINBANK PLC IKEJA HOTEL PLC INTERCONTINENTAL BANK PLC BANK PHB PLC SPRING BANK PLC TOP TEN MARKET CAP.

% Change -95.73% -93.49% -90.12% -88.94% -88.60% -88.09% -87.82% -87.56% -87.11% -86.40% ( N'Billion)

FIRST BANK OF NIGERIAL PLC. NIGERIAN BREWERIES PLC ZENITH BANK PLC GUARANTY TRUST BANK PLC UBA PLC GUINNESS NIGERIA PLC DANGOTE SUGAR REFINERY PLC BENUE CEMENT COMPANY PLC NESTLE NIGERIA PLC STANBIC IBTC BANK PLC

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407.54 401.00 341.60 289.13 232.81 188.05 181.20 168.41 158.20 140.10

2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Year 2010 Outlook We believe the market is due a recovery, after almost two years of bearish activity. Based on our expectations for different sectors, we forecast the Index to close the year between 25,401 and 28,694, indicative of a return within the range of 22% and 38% at year end. Our outlook hinges largely on an expected recovery in the economy and anticipated gradual increase in liquidity, on the back of activities in the financial sector and government expenditure. We believe a lot of the effects of the reforms in the Banking Sector (which played its own role in keeping performance dampened during the year) will begin to yield fruit in terms of improved confidence and risk appetite. The establishment and commencement of operations by the Asset Management Company (AMC) is expected to kick start liquidity into the market, while recovery in oil prices and an apparent success of the Niger Delta Amnesty Programme, should keep the Naira stable, allowing more incentives for foreign investors to invest in the Nigerian market as valuations of other emerging/frontier markets are becoming relatively richly priced. With equity market performance serving as a leading indicator of the economy and company performances, equity prices are expected to pick up ahead of the broader economy. We note that the risks to our outlook include the failure of the Amnesty Programme, falling oil prices, possible devaluation of the Naira and the failure of the AMC. Guiding Assumptions for Sectoral Outlook Banking Sector Bull Case (+50%): Having lost 40.34% in market capitalization in 2009, we hold a positive view on Nigerian Banking equities in 2010, and expect in our bull case scenario, a 50% upside in 2010. This however, depends largely on the liquidity situation in the capital market and wider economy, the effective take-off of the Asset Management Company in 2010, speedy resolution to the ownership situation of the troubled Banks, success of Bank recoveries and a pick-up in lending. We also believe the release of improved Banking results subsequent to the 31st December 2009 results, will spur investor sentiments towards the Sector. We assign a 55% probability to this scenario. Base Case (+30%): While our base case expectation still reflects our optimism for the Sector’s performance, our assumptions herein include a delayed improvement in the level and quantity of liquidity in the market, delays/challenges to the effective take-off of the Asset Management Company, delayed resolution and clarification as to the ownership structure of the troubled Banks, and a delay in lending recovery. We assign a 30% probability to this scenario. Bear Case (+10%): Our expectation herein is hinged on our earlier assumptions not playing out as planned, most especially if post 31 December 2009 results indicate a worsening asset quality situation for the Banks. However, considering that the equity market typically picks up ahead of fundamentals, we still expect a positive performance for the Sector. We estimate a 15% probability to this scenario.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Insurance Bull Case (+45%): Our bull case assumes that the Insurance Sector returns strongly to profitability in 2010. This upbeat surprise in our view, will cause a huge reversal of sentiments, with the same magnitude the selloff took place in 2008/2009. A prerequisite for this is a strong rally in the stock market, without which substantial write backs from recovery in the value of stock prices will not occur. We assign a probability of 35% to this scenario. Base Case (+20%): Our base case has the same assumptions as our bull case, albeit more relaxed, considering a partial recovery in the market and relatively better results than in 2009. Scepticism of the sustenance of the positive trend would cause less upside than our bull case. We place a 50% probability on this scenario. Bear Case (-5%): Our bear case assumes Insurers continue to provide for losses and hence report poor results. With prices already or very close to par in many cases (hence little or no downside risks), we believe a loss of more than 5% is quite improbable. We assign a probability of 15% to this scenario. Breweries Sector Bull Case (+30%): Valuation-wise, itâ&#x20AC;&#x2122;s our opinion that the Brewers are already stretched at current prices, factoring in our expectation of lukewarm performance in early 2010 before a gradual recovery in the latter part of the year. However, we do not rule out the possibility of a positive surprise on the upside. This could be fundamentally driven by better than expected results from an earlier than expected recovery in consumption and lending, or technically driven by a rally across board in the market, especially considering that the brewers have a lot of goodwill in the market. All things being equal, we assign a probability of 30% to this scenario. Base Case (+15%): Our base case scenario factors in our neutral stance on the brewers at current prices. It assumes a slow first half of the year, with decreased top line growth and lower margins, but with an upturn in H2, premised on a recovery in economic activity. We believe our neutral position will hold sway if there is no extended rally in the market and equities continue to trade sideways, with little bias on the upside pending an economic recovery and ease in liquidity. We assign a probability of 60% to this scenario. Bear Case (-5%): Our bear case would occur if market conditions remain gloomy, the economy worsens and the brewers face even higher cost pressures from tighter liquidity and a decline in the Naira. Should these events prevail, we expect the Brewers to outperform other sectors, which we believe will be more adversely affected. We assign a 15% probability to this scenario.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Petroleum Marketing Sector Bull Case (+30%): We expect investor interest in the Sector to increase following the announcement of an actual take off date, as well as the implementation of an effective framework for the deregulation of the downstream petroleum sector. The exercise, which is expected to boost the performance of the marketers, would increase investor expectations and increase the value of the securities. We assign a 40% probability to this scenario. Base Case (+15%): For our base case, we assume moderate growth in companies’ earnings, with high dividend payouts being consistent and previous financial performances being key price drivers. We assign a 30% probability to this scenario. Bear Case (+10%): We anticipate moderate increases in equity prices, which currently trade at a discount to their target valuations. We assign a 30% probability to this scenario. Food and Beverages Sector Bull Case (+25%): Here, we expect the Food and Beverages Sector to close the year in positive territory. This bull scenario is premised largely on the favourable movement of macroeconomic indicators (such as interest rate, exchange rate, energy prices etc.) that influence the sector. The Food and Beverages Sector Index gained 15.84% in the Q4’09, gained a marginal 4.32% in Q3’09, and recorded a YTD loss of 6.19%. Hence, we estimate a 25% gain for the sector in a bullish market, which will be propelled by improved performance of the companies based on improved macroeconomic conditions. We assign a 50% probability to this scenario. Base Case (+12%): In this scenario, we have tempered down our above optimism. This is based on an assumption that the key indicators stated above will remain favourable, but slightly less than expected, and companies will respond slowly to improvements in the macro-economy. We assign a 30% probability to this scenario. Bear Case (-5%): This scenario gives room for probable unfavourable contingencies, such as unexpected fluctuations in the key macroeconomic indicators. Our assumption is that the macro picture may take an unexpected turn; therefore, companies herein will be affected somewhat by the prevailing challenges in the real sector. We assign a 20% probability to this scenario.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Building Materials Sector Bull Case (+40%): We are less optimistic compared to last year, due to the remarkable price appreciations witnessed by a majority of the Cement Sector’s stocks. These appreciations have had the effect of drawing their prices closer to our target prices for these companies. We however, note that a majority are still trading at significant discounts to our target prices. We assign a 30% probability to this scenario. Base Case (+30%): In light of the Sector’s stellar performance in 2009, we are positive that the flight to safety bias exhibited by investors, expected impressive earnings performance, the ongoing capacity expansion within the sector, amongst others, should still see the Sector post appreciable returns in 2010. We assign a 50% probability to this scenario. Bear Case (+10%): We however note that aside attractive valuations, some other technical factors determine the capital market’s performance, and thus, we are not ruling out the possibility of a bearish market even though the odds are low. We assign a 20% probability to this scenario. Conglomerates Sector Bull Case (+25%): Our bull case estimates a 25% gain in the Conglomerates’ Index. In this scenario, we assume the market experiences a rally across board (the conglomerates included) returning at least 10% in the year, combined with positive surprises in terms of results from the Conglomerates. This, in our opinion will require a recovery of some sort in the economy and added liquidity in the market. We assign a probability of 35% to this scenario. Base Case (+15%): In our base case scenario, we assume that the status quo holds- risk aversion continues for the better part of the year, while the conglomerates’ report results relatively better than their peers though slower than the recent past. We place the highest weight (55%) on this scenario. Bear Case (+5%): Our bear case assumes the Conglomerates post negative surprises in terms of results. This will likely occur if the Naira takes a further downward hit, input costs skyrocket without absorption by the consumer and the stock market suffers further losses. In this case though, we don’t envisage the conglomerates shedding their share prices. We however don’t place a high weighting on this scenario, assigning a probability of 20%.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Construction Sector Bull Case (+30%): We premise this return expectation on a higher execution of the Country’s budget in 2010, though this has historically fallen below 50%. Given the fact that the Sector is known for posting relatively low margins, we believe an increase in business activity will augur well for it in 2010. We assign a 20% probability to this scenario. Base Case (+15%): This return expectation is premised on the budget execution remaining in line with historical levels of below 50%. We assign a 60% probability to this scenario. Bear Case (+5%): Given the prevailing political challenges, as well as the strong potential for diversion of public funds for the financing of coming elections, we may see the execution level of the budget fall below historical levels. We assign a 20% probability to this scenario. Healthcare Sector Bull Case (+10%): In this scenario, we expect the Healthcare Sector to hover around the green zone in 2010. Though the Sector lost 2.76% in 2009, we are of the view that bullish sentiments will favour the Sector’s tickers on the back of an improvement in the macro picture and continued resilience of the sector. We assign a 40% probability to this scenario. Base Case (+3%): In this scenario, we believe the general economic conditions will remain at status quo. Our estimate here is based on the assumption that macro conditions stay unchanged. We assign a 30% probability to this scenario. Bear Case (-5%): In our bear scenario, we are assuming that the macro picture deteriorates further e.g. unexpected fluctuations in the key macroeconomic indicators. Our assumption is that the macro picture may take an unexpected negative turn, affecting companies herein in some way. We assign a 30% probability to this scenario.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

BANKING SECTOR OUTLOOK

INSURANCE SECTOR OUTLOOK

120

100

Bull Case: +45%

Bull Case: +50% Bear Case:+10%

20 0 Jan-09

Dec-09

Dec-10

Bear Case:-5%

40 20 0

Jan-09

Dec-09

Source: Vetiva Research

BREWERIES SECTOR OUTLOOK

FOOD AND BEVERAGES SECTOR OUTLOOK 120

150 140

110

130

100

120 110

100

Bull Case: +30%

Bull Case: +50%

Bear Case:-5%

Bear Case:+10% 70

70 60

Dec-10 Source: Vetiva Research

Jan-09

Dec-09

Dec-10

Jan-09

Dec-09

Dec-10

Source: Vetiva Research

PETROLEUM MARKETING SECTOR OUTLOOK 120

CONGLOMERATES SECTOR OUTLOOK

Bull Case: +30% Bear Case:+10%

100

Source: Vetiva Research

150 140 130

120

110

Bull Case: +25%

100

Base Case:+5%

90 20

80 Jan-09

Dec-09

Dec-10

Dec -09

Jan-09

OTHER SECTORS

BUILDING MATERIALS SECTOR OUTLOOK

110

250

100

200

Bull Case: +15%

90 150

100

0 Jan-09

Dec-10 Source: Vetiva Research

Source: Vetiva Research

Bear Case:+10%

Bull Case: +40% Bear Case:+10%

70 60 50

Dec-09

Dec-10

Source: Vetiva Research; NSE

Jan-09

Apr-09

Jun-09

Dec-09 Source: Vetiva Research; NSE

‘Ahead of the Curve’

Bull Case 50%

13.53% - 22.55%

45.10%

Base Case 30%

BANKING

Bull Case 30%

1.82% - 3.63%

12.10%

Base Case 15%

BREWERIES

Bull Case 25%

1.45% - 3.03%

12.10%

Base Case 12%

FOOD & BEV.

Bull Case 30%

Bull Case 45%

25,401 – 28,694

0.82% - 1.85%

4.10%

Base Case 20%

INSURANCE

Bull Case 25%

0.69% - 1.15%

4.60%

Base Case 15%

CONGLOMERATES

Bull Case 15%

Source: Vetiva Research

1.09% - 1.64%

10.90%

Base Case 10%

OTHERS

We note and acknowledge that there will be periods of rallies/falls, mispricing and volatility during the period, which could provide speculative opportunities for investors.

1.80% - 2.40%

6.00%

Bull Case 40%

BUILD. MAT.

Base Case 30%

22% - 38%

0.77% - 1.53%

5.10%

Base Case 15%

PET. MKTG

Please note that these indicate our Sector Performance Outlook for 2010.

N.B.

NSE ALSI PERFORMANCE

RANGE

MARKET CAP. WEIGHT

UPSIDE POTENTIAL

SECTORS

EQUITIES MARKET PERFORMANCE OUTLOOK AND SECTOR CONTRIBUTION TO OUTLOOK

2009 Review | 2010 Outlook

CAPITAL MARKET REVIEW

2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

BOND MARKET REVIEW Bonds Have Outperformed Equities Last year, a slowdown in the economy, coupled with liquidity constraints, put downward pressure on the prices of traditional asset classes in the Nigerian market, such as stocks and real estate. In contrast, the bond market remained buoyant; the FGN bond market returned 22% in 2009, significantly outperforming the equity market which dropped 34% in the year.

FGN BOND MARKET vs. NSE ALSI (YTD)

FGN BOND MARKET vs. NSE ALSI (2007-2009)

100%

2.0 FGN BOND

NSE ALSI

75%

80%

FGN BOND

Rebased 31/12/06 =1

NSE ALSI

1.8

60%

+49%

1.6

40%

1.4 22%

20%

14%

1.2

1.0

-20%

0.8

-40%

0.6

-34% -46%

-60% 2007

2008

-38%

0.4 2009

Dec-06

Jun-07

Dec-07

Source: NSE, Access Bond Index, Vetiva Research

Jun-08

Dec-08

Jun-09

Source: NSE, Access Bond Index, Vetiva Research

Rapid Growth Witnessed Since the reopening of the FGN Bond market in 2003, the Debt Management Office (DMO) has offered FGN bonds worth N2.51 trillion which have attracted subscriptions of N4.55 trillion while N2.52 trillion has been allotted (average bid to cover of 1.81x). In 2009 alone, the DMO successfully raised N675.50 billion from the market - over 31% increase relative to N515 billion raised in 2008, and more than the combined amount of N532.91 billion raised between 2003 and 2006. Value of trades in the FGN bond market has increased almost four times the amount recorded in 2006, mainly influenced by the introduction of Primary Dealers/Market Makers (PDMM) in 2006, playing an active role in the issuance, sale and marketing of FGN Bonds. Between January and October 2009, turnover in the FGN bond market was N14.68 trillion (NSE - N0.57 trillion) up from N3.95 trillion in 2006 (NSE - N0.46 trillion).

FGN BOND MARKET GROWTH Amount in Naira’ Trillions

Value Outstanding Market Cap Value Traded

14.7

10.1

4.0

0.6

1.5

1.7

1.9

2.3

0.5 2007

2008

*as at October 2009

2009* Source:FDHL, Vetiva Research

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Bond Rush Difficulty in accessing funds from conventional sources has constrained State Governments and Corporates to exploring other financing means, thus resulting in a rush towards debt issuances via bonds in recent times. In 2009, alone we have seen at least four states including Lagos, Kwara, Imo and Niger raise a total of N91.5 billion from the market with many other issuances scheduled to happen this year. On the corporate side, the Banks have taken the lead with GTBank, UBA, FirstBank, Access, Diamond Bank amongst others proposing bond offerings, seeking to raise up to N1.8 trillion over the next few years. For the non-financials, the National Aviation Holding Company (NAHCO) has hinted at N5 billion bond offering, while Oando also has a N200 billion bond/equity programme scheduled. STATE GOVERNMENT BONDS ISSUED (2009) Nomenclature Issue Date Tenor (yrs) Coupon (%) Lagos State Fixed Rate Bond, 13.00% February 9, 2014 [Series 1] 9-Feb-09 5 13 Imo State Fixed Rate Redeemable Callable Bond,15.50% June 30, 2016 [Series 1] 30-Jun-09 7 15.5 Kwara State Fixed Rate Redeemable Callable Bond,14.00% August 5, 2014 [Series 1] 5-Aug-09 5 14 Niger State Fixed Rate Redeemable Callable Bond,14.00% October 7, 2014 [Series 1] 7-Oct-09 5 14

Total

Amt (N'Billions)

50.0

18.5

17.0

6.0 91.5

The GTBank Experience - Testing the Nigerian Corporate Bond Market Guaranty Trust Bank recently concluded the first tranche of a two-year N200 billion debt issuance programme, raising N13.165 billion ($90 million) through 5-year tenured bonds issued at par with 13.5 percent annual coupon. Considering the long dearth of corporate bond issuances in the Nigeria market prior to this, we believe the GTBank issuance means success in some respects for the corporate bond market but more importantly it lends some clarity to the state of the market, mindset of participants and the future of other corporate issues. Key takeaways include the following: Market appetite might be overestimated: We believe the relatively low level of subscription, N13.165 billion, out of an initially proposed aggregate principal amount of up to N100 billion, (representing 6.58% of GTBank’s total planned N200 billion 2-yr bond programme) in the first tranche, already gives indications that except market conditions change or more attractive issue terms are offered, the bank may not successfully raise the needed capital within the time frame of its 2-yr programme. In the same vein, we believe that other ambitious programmes as have been announced by other corporates (some of which are up to N500 billion bond) might be overestimating the market’s appetite and are likely to suffer shortfalls within the planned time ranges, where issue terms do not adequately factor in market’s expectations.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

The market expects to be paid higher yields for taking on the risks of a Corporate Bond: Given the strong GT Bank brand and management, the Bank’s comparatively excellent performance in the turbulent 2009 financial season, its strong rating (“Aa” - Agusto), as well as the first mover advantage it enjoyed with the launching its bond programme well ahead of its peers, the level of subscription achieved suggests that it will be relatively more difficult for any other Bank or Corporate to secure cheaper funding for similar bond structures (5-yr senior, unsecured, nonconvertible) in present market conditions. Thus the anomaly of corporates issuing unsecured bonds at coupons lower than ISPO guaranteed State Governments is not expected to subsist. Other considerations are factored in for corporate bonds: Apart from the implied yields and credit spread considerations, demand for corporate bonds might be affected by the present lack of liquidity and difficulty in secondary trading; thus institutions with strong liquidity needs will have little incentive to invest. Also, corporate bonds are presently taxable unlike Federal and State Government bonds - a factor which may be a discouraging to non-tax exempt investors. Guidelines on Corporate Bonds Minimum rating for Corporate bonds that Pension Funds can invest in, reduced from "AAA" to "A" Per-issue/ issuer limit for pension funds increased from 2.5 per cent to 5 per cent. Maximum % of Pension assets that can be invested in Corporate bonds now set at 30 per cent. Plans by the Federal Government to grant 10 years tax holiday to investors in Corporate Bonds SEC has fanalized arrangements with the IFC for a resident adviser on bond issues Bond Building issuance system introduced Source: Vetiva Research

Nigeria’s Debt Profile

NB: Market capitalization market and 2008 annual used for the calculation outstanding as a percentage

of bond GDP was of bonds of GDP.

As a percentage of GDP, Nigeria’s total public debt stood at 11.48% (13.40% according to CIA estimates) as at the end of 2008 and was 110th out of 126 countries profiled by the Central Intelligence Agency (CIA). Compared to other emerging markets and the Debt Relief International Threshold of 45%, Nigeria’s overall debt profile also seems very comfortable. Nigeria’s domestic bond market as a percentage of GDP stands at an estimated 9.5%, remaining one of the lowest in the world. Compared to emerging East Asian countries, Indonesia (19.3%), Malaysia (81.3%), Philippines (36.5%), Singapore (74.1%) and Thailand (60.6%) which have comparable GDP with Nigeria, Nigeria’s bond market still has a lot of catching up to do. For Nigeria’s bond market to grow to the level of East Asia’s by 2014 (domestic bond market as a percentage of GDP at 58.2)%; assuming GDP grows 6% a year, Nigeria’s domestic bond market will have to grow at a CAGR of 52.4% for the next five years. We note that Nigeria’s FGN bond market grew 66% in market capitalisation between November 2008 and 2009 and the expected proliferation of state bonds and corporate bond issues is expected to further boost growth in the next few years.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Plans to Issue International Debt Nigeria’s budget deficit is projected to hit N1.56 trillion ($10.4 billion) in 2010 or 4.8% of Gross Domestic Product, and the Nigerian Government has indicated plans to issue a $500 million (N75 billion) Eurobond as part of the means to finance this deficit. The international market for bonds is going to be competitive this year as other emerging market economies also have plans to take advantage of the expected economic recovery this year. Emerging market countries which have expressed interest in issuing international bonds in 2010 include: Turkey, Indonesia, Kazakhstan, the Philippines, Romania, Brazil amongst others. Proposed Emerging Market Bond Issues (2010) Country

Rating (S&P)

Size of bond

Czech Republic

$16.3 billion

Russia

$8-10 billion

BBB

Turkey

N/A

BB-

Indonesia

N/A

BB-

Kazakstan

$500 million

BB-

Phillippines

$2 billion

BB-

Vietnam

$1 billion

Belarus

N/A

B+

Hungary

$1.5 billion

BBB-

Latvia

N/A

Lithuania

N/A

BBB

Poland

N/A

A-

Romania

$2.2 billion

BB+

Slovania

N/A

Angola

$4 billion

N/A

Brazil

N/A

(Baa3)

Colombia

$504 Million

BBB-

Mexico

N/A

BBB+

Venezuela

$5 billion

BBSource: Bloomberg

The Debt Management Office (DMO) has given indications that it will raise up to N700 billion ($4.7 billion) for the government in the domestic market this year. The planned issue is almost 10 times the planned foreign bond offering, highlighting the fact that the foreign offering will represent a relatively minor source of capital raising this year. Secondly, going by yields on recent bond offerings, it may be more expensive for the Nigerian government to issue a foreign bond, while government paper of equivalent tenures can be issued at relatively cheaper rates in the domestic bond market. At the most recent November 2009 FGN auction, issuances of 3, 10 and 20-year bonds respectively were oversubscribed at marginal yields of 6.75 per cent, 8.32 per cent and 8.50 per cent. Going by Sri lanka’s (B+ Fitch rating vs BB- for Nigeria) five year international offering which was recently concluded at 7.75% yield in October 2009, including issuance costs, there is the likelihood of similar costs if the Nigerian Government chooses to issue debt internationally. However despite our cost concerns, we opine that there could be other justifications for the issuance of Nigerian government paper internationally. One of them is the need to create a reference rate for sovereign Nigerian debt that would serve as a “benchmark” for subsequent planned issuances in the international markets by Nigerian companies and sub-nationals, one which is currently non-existent. This benchmark rate will help local companies better price these bonds.

The Challenges, the Future and Implication for the Markets As noted above, the market has grown significantly especially in the last two years; however it is not without its challenges. There is still a lot to be done with respect to price discovery, the use of repos to facilitate funding and liquidity, employing derivatives in order to manage portfolio exposure to risks, product innovation and diversity, a robust trading platform, and data availability amongst other issues. While the regulators also have a key part to play, we believe the evolution of the market will be largely driven by market participants as witnessed in other developed markets. Further to this, ICAP Plc the world's largest inter-dealer broker, has applied to provide a secondary bond trading platform in Nigeria.

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2009 Review | 2010 Outlook CAPITAL MARKET REVIEW

Key to watch this year will be the direction of inflation and interest rates and how yields react to these indicators. After a strong rally in prices and decline in yields in 2009, a primary concern is whether the current low yields are sustainable, especially in the face of inflation which we expect to remain high. We believe that as the market becomes less risk averse, bond prices will come under pressure, as market players will pay more attention to fundamentals and money will gravitate towards relatively underpriced asset classes. Adopting the “Fed model” which postulates overvalued if the yield on the 10-year bond is the stock market, the FGN bond market seems on-the-run 10-year FGN bond stands at 8% earnings yield of 13% for listed equities.

that the bond market is less than earnings yield of overvalued as yield on the compared to our forward

On the successful take-off of the Asset Management Company, we believe there will be a positive impact on the stock market and stock prices. Thus, there are chances that corporates who have previously indicated bond issuance programmes will choose to exploit the equity route due to demand shortfalls in the bond market, as well as the expected hike in yields. Based on our expectation of a hike in rates, we believe the best bonds to hold will be the short/intermediate tenured bonds (3/5 year bonds) due the larger duration (sensitivity to change in interest rates) of the longer maturity bond. In conclusion, though there might be some near term volatility, we have an optimistic outlook for the bond market and expect it to continue developing rapidly, with growth in market size expected to average 45% over the next three years.

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2009 Review | 2010 Outlook PORTFOLIO ALLOCATION

PORTFOLIO ALLOCATION In our HY’09 review report, we constructed two equity portfolio allocations; one targeted at a risky aggressive investor, “Risky Aggressive”, and the other at a conservative risk-averse investor, “Guaranteed Conservative”. We present the performances of these two portfolios below: Guaranteed Conservative Stock

Price- 22/07/2009 Price- 31/12/2009 % Return Weight(%) Weighted Return (%)

GT Bank Custodian NB

13.97

15.50

10.95%

18.00%

1.97%

2.40

2.86

19.17%

14.00%

2.68%

50.60

53.02

4.78%

16.00%

0.77%

131.05

127.50

-2.71%

14.00%

-0.38%

UACN

37.00

36.75

-0.68%

12.00%

-0.08%

Unilever

11.94

18.50

54.94%

10.00%

5.49%

GSK

15.45

22.40

44.98%

8.00%

3.60%

2.98

4.35

45.97%

8.00%

3.68%

Guiness

NASCON

100.00% 17.73%

Risky Aggressive Stock

Price- 22/07/2009 Price- 31/12/2009 % Return Weight(%) Weighted Return (%)

Diamond Bank

6.01

7.40

23.13%

8.00%

Skye Bank

4.88

5.49

12.50%

12.00%

1.85% 1.50%

Stdsure

0.93

0.55

-40.86%

9.00%

-3.68%

IEI

1.10

0.63

-42.73%

9.00%

-3.85%

50.60

53.02

4.78%

7.00%

0.33%

Unilever

11.94

18.50

54.94%

6.00%

3.30%

Oando

85.70

93.99

9.67%

8.00%

0.77%

Flour Mills

18.99

36.00

89.57%

8.00%

7.17%

GSK

15.45

22.40

44.98%

7.00%

3.15%

2.00

1.78

-11.00%

7.00%

-0.77%

BCC

34.35

43.01

25.21%

11.00%

2.77%

WAPCO

26.00

30.00

15.38%

8.00%

1.23%

Fidson

100.00% 13.78%

Of the two portfolios, we had expected our “Risky Aggressive” portfolio to post a higher return, but the contrary was the case. Our expected return for the “Risky Aggressive” and the “Guaranteed Conservative” portfolios were 21.03% and 12.19% respectively. The only rational explanation for the variance between our expectation and actual performance is that the market direction determines which of the two investment features of a risky portfolio (high risk or high return) is magnified. The aggressive portfolio would have outperformed the conservative portfolio, if the market was upward trending in 2009. The market’s negative performance in 2009 amplified the “high risk” feature of the aggressive portfolio, consequently resulting in the portfolio’s relatively lower performance when compared to the conservative portfolio.

‘Ahead of the Curve’

2009 Review | 2010 Outlook PORTFOLIO ALLOCATION

However, our “Risky Aggressive” and “Guaranteed Conservative” portfolios significantly outperformed the market by 47.46% and 51.31% respectively, highlighting the possible soundness of our stock selection process. Our attribution analysis of the returns posted by these portfolios indicated a bias for non-financials. This is in line with our expectation that investors would display a flight to safety bias in their stock selection process when constructing the model portfolios. Premised on our Capital Market Expectation, which adopts a top-down approach and involves the formation of an Economic Outlook, a Sector Outlook, and finally Stock Selection, we have reviewed our allocation for our two portfolios in light of the prevailing market conditions. The criteria for selecting a stock in our Conservative Portfolio now focuses on “Value Stocks” with the highest potential returns, while the criteria for the Risky Aggressive Portfolio focuses on “Growth Stocks” with the highest potential return. We base our calculation of potential return on our target values. Our time horizon ends June 30, 2010. GUARANTEED CONSERVATIVE Stock

Sector Outlook

Expected Return (N)

Selection Criteria*

Sector

Weight Allocation (N)

GT Bank

DY, CA

Banking

12.00%

120,000

38.00%

165,600

Stanbic IBTC

DY, CA

Banking

12.00%

120,000

38.00%

165,600

Custodian

DY, CA

Insurance

7.00%

70,000

25.00%

87,500

GT Assurance

DY, CA

Insurance

7.00%

70,000

25.00%

87,500 138,120

Flour Mills

DY, CA

Food & Beverages

12.00%

120,000

15.10%

Dangote Flour

DY, CA

Food & Beverages

8.00%

80,000

15.10%

92,080

Unilever

DY, CA

Conglomerates

10.00%

100,000

18.00%

118,000

Oando

DY, CA

Petroleum Mktg

8.00%

80,000

19.50%

95,600

Nigerian Breweries

DY, CA

Breweries

8.00%

80,000

17.25%

93,800 103,200

BCC NASCON

Building Materials

8.00%

80,000

29.00%

DY, CA

Food & Beverages

8.00%

80,000

15.10%

100.00%

1,000,000

TOTAL PORTFOLIO

92,080 1,239,080

Portfolio Return

23.91%

*DY - Dividend Yield; CA - Capital Appreciation RISKY AGGRESSIVE Selection Criteria*

Sector

Weight Allocation (N)

Diamond Bank

Stock

Banking

18.00%

180,000

38.00%

1.47

248,400

Access Bank

Banking

18.00%

180,000

38.00%

1.40

248,400

Zenith Bank

Banking

17.00%

170,000

38.00%

1.03

234,600

GSK

DY, CA

Healthcare

11.00%

110,000

3.40%

0.75

113,740

DY, CA

Petroleum Mktg

12.00%

120,000

19.50%

1.00

143,400

CCNN

Building Materials

12.00%

120,000

29.00%

1.00

154,800

Lafarge WAPCO

Building Materials

12.00%

120,000

29.00%

0.98

154,800

100.00%

1,000,000

TOTAL PORTFOLIO

Sector Outlook

Beta

Expected Return (N)

1,298,140

Portfolio Return BETA ADJUSTED RETURN

29.81% 1,489,755

Adjusted Portfolio Return

48.98%

*DY - Dividend Yield; CA - Capital Appreciation

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW

Sector Review and Company Analysis

SECTORAL REVIEW The following section of the report provides an analysis of major sectors in the Nigerian Equity Market, with highlights of key activities within each sector, factors that affected performance therein till date, as well as our outlook for the sector. Further to this, we list the stocks in our coverage universe within the different sectors, presenting our investment case of each company, an analysis of the company and its most recently released results, our valuation, investment recommendations and ratings based on this valuation. The table below presents a summary of the 34 companies which we have analysed and reviewed, showing our fair value ranges, forward P/Es and P/Bs, as well as forward dividend yields. SECTOR

COMPANY

1 BANKING

GTBank

18.71 - 22.67

5.56

1.23

9.17%

Diamond Bank

10.13 - 12.97

4.64

0.78

11.79% 6.81%

Zenith Bank

9.54 - 11.77

7.64

0.90

IBTC

6.51 - 7.77

8.81

1.51

7.38%

Acc ess Bank

6.51 - 7.77

4.99

0.63

12.03%

Skye Bank

8.72 - 10.16

4.42

0.55

11.32%

UBA

14.85 - 16.76

6.19

1.01

8.07%

First Bank

16.21 - 19.41

8.10

1.13

6.79%

8.60 - 10.24

9.28

0.85

5.93%

FCMB 2 INSURANCE

3 BREWERIES

Custodian

3.77 - 4.21

6.70

2.99

8.06%

GTAssur

2.20 - 2.54

10.04

1.43

7.97%

52.82 - 57.73

11.04

9.74

9.06%

125.78 - 129.42

16.13

5.69

4.65%

Nigerian Breweries Guinness

4 CONGLOMERATES

5 FOOD & BEVERAGES

UACN

45.17 - 49.10

6.98

0.91

5.39%

Unilever

16.98 - 19.23

12.48

8.38

10.51%

21.90 - 26.92

12.71

2.75

2.38%

Dangote Flour

13.57 - 15.52

6.11

1.62

5.40%

Flour Mills

45.84 - 53.80

7.32

1.09

2.73%

6.59 - 7.56

7.10

2.07

9.15%

222.32 - 241.12

16.38

14.74

5.86%

NASCON Nestle Seven-Up

6 HEALTHCARE

7 PETRO. MARKETING

31.87 - 38.18

8.64

1.71

5.32%

NBC

21.47 - 23.5

10.79

1.08

2.96%

DSR

15.55 - 18.83

9.39

4.38

7.45%

GSK

27.83 - 32.19

9.69

2.14

4.65%

Fidson

2.19 - 2.40

5.66

0.43

12.38%

Oando

109.26 - 121.12

7.78

1.50

9.64%

73.74 - 83.39

4.70

0.51

19.14%

122.45 - 131.17

10.30

6.55

9.23%

82.80 - 89.95

8.86

8.73

10.95%

WAPCO

43.52 - 47.33

10.83

1.71

3.33%

BCC

50.36 - 55.51

6.58

3.75

5.81%

CCNN

19.83 - 21.31

7.79

4.98

9.63%

Costain

11.86 - 13.16

4.22

0.41

5.26%

Julius Berger

32.07 - 32.91

9.55

2.80

7.75%

AP Total Chevron 8 BUILDING MAT.

9 CONSTRUCTION

FAIR VALUE FORWARD FORWARD FORWARD RANGE (N) PE (x) P/B (x) D/YIELD

Source: Vetiva Research

NB: All our stock ‘RATINGS’ are made based on 31 January 2010 prices.

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

THE BANKING SECTOR Similar to H1’09, regulatory-induced events (mainly from the special audit) continued to dominate news coming from the Banking Sector in H2’09; and like we had previously noted, events during this period were spurred mainly by the Federal Government’s decision to replace the helmsman at the Central Bank of Nigeria (CBN) on the 3rd of June 2009. The special audit of all the Country’s Banks by Sanusi Lamido Sanusi (an experienced risk manager and Banker with two of Nigeria’s biggest Banks, UBA and First Bank), led to the eventual part-lifting of the veil of uncertainty which had eclipsed the Sector for such an elongated period, in the aftermath of the global recession and liquidity crisis. Despite the improved clarity on the Banks however, we did not see a strong positive reaction from the market post-release of 30th September results from all the Banks. In actuality, our Banking Index shed a more significant -13.77% from October 2nd (when the second audit results were announced) till year end, relative to the -6.76% it shed between August 14th (when the first audit results were announced) and October 2nd2009.

THE NSE ALSI & VETIVA BANKING INDEX MOVEMENT Rebased 03 June 2009 = 1

1.00

Between Sanusi’s appointment as CBN Governor on the 3rd of June 2009 and October 2nd (when the second audit results were released), the NSE ALSI shed -25.49%, while the Vetiva Banking Index shed -33.43%.

Between October 2nd and 2009 year end, the NSE ALSI shed an additional -7.42%, while the Vetiva Banking Index shed -13.77%. Over the period, both shed -23.11% and -32.80% respectively.

NSE ALSI VETIVA BANKING INDEX 0.54 Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09 Source: NSE, Vetiva Research

Having reviewed H1’09 events in the Banking Sector in our “2009 Half Year Review Report: Inflexion Point”, and subsequently issued two Banking Update reports: “Black Friday” and “Now the Audit is Over”, we seek to align the focus here on H2’09 events in the Sector and give more clarity on the emerging Nigerian Banking Sector along the lines of the three pillars (‘3Rs’) of Sanusi’s tenure as CBN Governor: x x x

Regulation Risk Management Reporting

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING REGULATION Special Audit...The 1st Step to Systemic Cleansing Following his resumption as Governor of the CBN, one of Mallam Sanusi Lamido Sanusi’s initial objectives was to verify the extent to which Nigerian Banks had been affected by the value erosion in oil and equity prices, two asset classes which had returned significant value to investors over the past 3-4 years and enjoyed considerable financing from Banks in their search for returns on equity. Having not seen Nigerian Banks reporting any considerable weaknesses in the aftermath of the meltdown, Sanusi was of the conviction that the implied losses were probably being concealed, a conviction naturally shared by many market participants. To tackle this challenge, the Governor initiated a special audit of all Deposit Money Banks (DMBs) in the Country, focussing on 3 areas: x x x

Liquidity Capital Adequacy Corporate Governance

The special audit was conducted by a joint team auditors from the CBN and Nigeria Deposit Insurance Corporation (NDIC) in two batches; the result for the first batch was announced on August 14th (analysed in our ‘Black Friday’ report), while that of the second batch was announced on October 2nd (analysed in our ‘Now the Audit is Over’ Report). 24 Banks were audited and according to the CBN announcements, 14 passed on all parameters, 1 was found wanting on two grounds, while the remaining 9 were found to be in a ‘grave situation’ (in other words, found wanting on all three grounds): AUDITED BANKS First Bank of Nigeria Plc Zenith Bank Plc United Bank for Africa Plc Guaranty Trust Bank Plc Access Bank Plc Skye Bank Plc Diamond Bank Plc Fidelity Bank Plc First City Monument Bank Plc Stanbic IBTC Bank Plc Ecobank Nigeria Plc Sterling Bank Plc Citibank Nigeria Ltd. Standard Chartered Bank Ltd Unity Bank Plc Oceanic Bank Int'l Plc Intercontinental Bank Plc Union Bank Plc Afribank Plc Finbank Plc Bank PHB Plc Equitorial Trust Bank Ltd. Spring Bank Plc Wema Bank Plc

LIQUIDITY ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ X X X X X X X X X

C/ADEQUACY ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ X X X X X X X X X X

C/GOVERNANCE ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ X X X X X X X X X

Source: CBN, Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING In light of the discoveries made by the CBN following the special audit of the Banks, the decisions taken with respect to the troubled Banks can be broadly categorized as follows: INDICTED BANKS Oceanic Bank Int'l Plc Intercontinental Bank Plc Union Bank Plc Afribank Plc Finbank Plc Bank PHB Plc Equitorial Trust Bank Ltd. Spring Bank Plc Wema Bank Plc Unity Bank Plc

MD & EDs REMOVED ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ -

NON EXEC. DIR. REMOVED ¥* ¥ -

JUNE 30 2010 RECAPITALISATION ¥ ¥

CAPITAL INJECTION** ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ -

*Dr. Mike Adenuga Jr. (CON) was removed as Non-Executive Director of ETB, but later returned to the Board **The CBN provided N620 billion as liquidity support and long term loans in the form of Tier 2 capital; N420 billion into the first 5 and N200 billion into the latter 4 Source: CBN, Vetiva Research

BANK Oceanic Intercontinental Union Bank Afribank Finbank Bank PHB ETB Spring Bank

OLD MD Mrs. Cecilia Ibru Mr. Erastus Akingbola Mr. Bartholomew Ebong Mr. Sebastian Adigwe Mr. Okey Nwosu Mr. Francis Atuche Mr. Ike Oraekwuotu Mr. Charles Ojo

NEW MD Mr. John Aboh Mr. Lai Alabi Mrs. Funke Osibodu Mr. Nebolisah Arah Mrs. Suzanne Iroche Mr. Cyril Chukwuma Mr. G.O. Folayan Mrs. Sola Ayodele Source: CBN, Vetiva Research

We note that though Equitorial Trust Bank (ETB) was announced as being in a ‘grave situation’, the CBN subsequently revised its position on the Bank, following the execution of a ‘Deed of Covenant’ by the Bank’s shareholders, detailing the following terms: x x

x x

Their willingness to recapitalize the Bank by injecting additional capital latest by June 30 2010 Restructuring, diversification and enlargement of the Bank’s capital base, either by way of a public offering of shares, securing a core investor or merger with a local bank within a 1 year period Addressing the Bank’s corporate governance issues, which were mainly ascribed to its previous Executive Management team Reconstituting the Board of Directors through the retirement of two Non-Executive Directors and the appointment of four new Non-Executive Directors, including Dr. Mike Adenuga Jnr. (CON), an erstwhile member of the Board, subject to the approval of the CBN Convening a general meeting of the Bank’s shareholders to ratify, through a resolution, all the nominated appointments to the Bank’s Board

While Sanusi was largely unwilling to extend the other troubled Banks such a generous lifeline, he noted that his positive disposition towards ETB was aided by the Bank’s relatively small market share (<1%), its being unlisted, absence of margin-related exposures, and Dr. Adenuga’s quick repayment of N26 billion in loans previously classified as non-performing.

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Whilst the CBN’s decisions were far-reaching and helped improve clarity on the colour of Nigerian Banks’ Balance Sheets considerably, it certainly did not come without its attendant consequences. A plethora of lawsuits, legislative proceedings and social debates challenging the angle from which the CBN tackled the problems in the Sector emanated, alongside a rapid ‘flight to safety’ from the troubled Banks. Even as the causal factors for heightened counterparty risk concerns among the Banks prior to the special audit can be understood, lending practically ground to a halt afterwards, as preference for cash and loan recoveries became the order of the day. With the CBN guaranteeing interbank lending activities, it helped unlock credit on this front; however, this did not translate to a liquidity flow to the real economy. This somewhat misplaced attitude of Banks (especially the cleared ones, despite CBN and Federal Government’s liquidity boosting measures) was further exacerbated by the approaching December year-end requirement for all DMBs. Troubled Banks (30 Sept. 09) N'Millions Oceanic Bank Int'l Plc (9 months) Intercontinental Bank Plc (7 months)

Gross Earnings 2009 2008 % Chg 46,830 112,265 -58.29%

Total Provisions & Exc. Items 2009 2008 % Chg (315,115) (1,161) 27041.69%

Profit/(Loss) Before Tax 2009 2008 % Chg (400,901) 36,542 -1197.10%

24432.92%

(447,451)

33,033

-1454.56%

(258,694)

221,079

-217.01%

(36) 702388.89%

(222,858)

14,193

-1670.20%

(146,154)

136,722

-206.90%

(71,188)

16,924

-520.63%

(107,270)

(142,947)

119,770

161,822

-25.99%

(436,686)

Union Bank Plc (6 months)

97,506

59,715

63.29%

(252,896)

Afribank Plc (6 months)

64,238

43,284

48.41%

(84,151)

Finbank Plc (11 months) Bank PHB Plc (15 months)

(1,780)

0.00%

2009 (69,206)

Net Assets 2008 254,406

% Chg -127.20%

-24.96%

59,542

50,187

18.64%

(120,640)

(1,359)

8777.12%

(94,357)

9,713

-1071.45%

(85,107)

139,039

-161.21%

214,400

87,228

145.79%

(450,644)

(4,628)

9637.20%

(438,647)

25,970

-1789.05%

(139,420)

167,666

-183.15%

-12.61%

(80,711)

(60,426)

32,040

30,768

Spring Bank Plc (5 months)

9,294

12,803

-27.41%

(18,163)

(28,373)

-35.98%

(23,303)

Unity Bank Plc (Not Stated)

35,932

33,769

6.41%

(7,700)

(226)

3312.51%

(8,728)

Wema Bank Plc (6 months)

9,146

14,352

-36.28%

TOTAL (N) TOTAL (N148.1 = $1)

(26,665) 2,724

-420.40%

33.57% 4.13%

(36,263)

(600)

5943.77%

(29,433)

1,413

-2183.72%

(52,175)

38,585

-235.22%

(1,722,257) (11,629)

(38,163) (258)

4412.93% 4412.93%

(1,736,867) (11,728)

113,847 769

-1625.62% -1625.62%

(906,697) (6,122)

784,891 5,300

-215.52% -215.52%

Source: NSE, Bank Public ations, Vetiva Researc h

NB: this is a combined analysis; thus, some individual Banks did report operating profits.

We note also, that a cost saving drive swept through the Sector, which saw most of the troubled Banks and some of the cleared, laying off staff in considerable sums in Q4’09, an activity which spurred labour unions and the Federal Government to action in protest, considering that the Banks are the largest employers in the organized private sector. A closer look at the special audit result reveals the systemic importance of the troubled Banks, considering that they held 35.6% of industry assets, 36.11% of total loans and 34.52% of total deposits (NB: Unity Bank and Equitorial Trust Bank have been excluded from CBN computations here). According to the CBN, these 8 Banks held 60.75% of industry NPLs. The extent of their illiquid state was further reflected in their 30th September 2009 results, which showed vastly eroded earnings and gross undercapitalisation in all of them; including Union Bank, which had earlier released its FY March 2009 results (subsequent to the special audit) and reported positive Net Assets, having factored in N107.08 billion in provisions for loans and investments. Looking closer at the above table, the 9 troubled Banks reported combined losses before tax of N1.74 trillion ($11.73 billion), having factored in total provisions and exceptional items of N1.72 trillion ($11.63 billion). Our analysis indicates that based on these figures, their normal banking operations were not yielding positive returns, as their combined operating earnings would have been a loss of N14.61 billion ($98.65 million).

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Having factored in all provisions from the CBN special audit, the Balance Sheet of the troubled Banks featured negative net assets, with the exception of Unity Bank. Collectively, the group’s net asset position had plunged into negative territory by as much as N906.70 billion ($6.12 billion) as at 30 September 2009 ending. While the results of these Banks were indeed alarming and represented the highest level of losses reported in Nigerian corporate history, a statement made by the CBN subsequent to the release of all the results is what raises some level of concern for us, especially for the cleared Banks. The CBN noted that: “Following more detailed investigations, the new management of these banks found the situation in a number of the affected Banks to be worse than had been originally thought. A number of issues only came to light after the CBN had put in place new Management teams who therefore had access to greater and more up to date information. As a result of these findings, the Banks had to make provisions over and above the CBN’s initial recommendations”.

Surely, the CBN special audit was in our view, a necessary step to bring more clarity on the true financial condition of Nigerian Banks in the aftermath of deep value erosions in global oil markets and the domestic equity market. However, while we now have a clearer picture of the Sector, now classified under two heads – ‘cleared’ and ‘troubled’ -, some questions still remain pertinent in light of the CBN’s statement above:

...the 2006 Code of Corporate Governance contains guidelines on equity ownership, Board membership, management quality, industry transparency, due process, data integrity, disclosure requirements, risk management and role of auditors.

Can we say the worst is over the Nigerian Banking Sector? Did the special audit address all the niggling issues, considering that new Management in the troubled Banks made more discoveries which required them to make more provisions than their special audit reports had suggested? Should we expect further provisioning shocks from the cleared Banks?

With regards to the worst being over, we believe so. The special audit tackled the apparent challenges plaguing the Banks – Margin and Oil & Gas Loans -, for which the CBN mandated the Banks to make full provisions, as at 30th September 2009 in line with their individual special audit report requirements. However, considering the nature of reports that emanated for the troubled Banks subsequent to their special audit, revealing gross corporate mis-governance in them, this brings to question the rigor of the CBN/NDIC regulators in identifying such issues during their special audit of the cleared Banks. With the CBN’s reassurance that the scale of mis-governance discovered in the cleared Banks was lightweight relative to the troubled Banks (the individual special audit reports of the cleared Banks detailed issues other than required provisions), and its plans to release a harmonised code of corporate governance by Q1’10, this should provide some succour to the market with respect to our highlighted concerns. Explaining the Aggressive Provisions We have previously noted lessened likelihood for provisions of similar magnitude featuring in Banks financials in 2010, considering the exceptional circumstances which caused the sharp increase in 2009. However, considering the sharp rise in non-performing loans (NPLs) in 2009, coverage ratios failed to keep pace for a number of the cleared Banks, especially in the Tier 2 space (Access Bank : 65.12%; Skye Bank: 76.59%; FCMB: 80.40%; Diamond Bank: 84.07%).

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

CLEARED BANKS* Ecobank Nigeria Sterling Bank Access Bank Skye Bank Stanbic IBTC Fidelity Bank Diamond Bank** FCMB** Std. Chartered UBA First Bank Zenith Bank GTBank Citibank Nigeria

NPL RATIO (%) 29.00 20.10 19.52 17.82 17.09 16.20 15.10 12.91 10.00 8.79 8.17 3.53 3.07 2.65

COVERAGE RATIO (%) 54.21 N/A 65.12 76.59 111.09 100.02 84.07 80.40 288.94 109.70 64.47 217.48 179.67 853.59

*All figures are as at 30th September, 2009

We note that though Banks may have Coverage Ratios <100% (seemingly short of prudential standards), they could indeed have fully provided for their non-performing exposures in line with Prudential Guidelines. An appreciable portion of additional provisions we saw in 2009 arose from ‘mark to market’ charges for Banks’ margin-related credits and equity proprietary positions, and this distorted the normal interpretation of Coverage Ratios. Thus, depending on its level of exposure to margin loans, a Bank may have fully provided for other loan classes in line with Prudential Guidelines, but the level of erosion suffered on its margin-related exposures is what determines how much provision is made, which lowered Coverage Ratios (Gross Provisions/NPLs) for most of the Banks relative to what would have been if the Banks stuck to the previous practice of checking consistent loan servicing and time-past-due.

**FCMB and Diamond Bank are October 31st *Source: Bank Publications, Vetiva Research

NONPERFORMING LOAN • Where interest or principal is due and unpaid for 90 days or more • Interest payments equal to 90 days interest or more have been capitalized, rescheduled or rolled over into a new loan

Classifications

Definition of Classes

1. Sub-Standard

• Unpaid principal and/or interest remain outstanding for more than 90 days but less than 180 days.

2. Doubtful

• Unpaid principal and/or interest remain outstanding for at least 180 days but less than 360 days and are not secured by legal title to leased assets or perfected realizable collateral in the process of collection of realization.

3. Lost

• Unpaid principal and/or interest remain outstanding for 360 days or more and are not secured by legal title to leased assets or perfected realizable collateral in the process of collection of realization.

General Provision

Specific Provisions

•Interest overdue by more than 90 days should be suspended and recognized on cash basis only

• SubStandard: 10% of outstanding balance

•Principal repayments that are overdue by more than 90 days should be fully provided for and recognized on cash basis only

• Doubtful: 50% of outstanding balance • Lost: 100% of outstanding balance

Source: CBN Prudential Guidelines for Licensed Banks; Vetiva Research

Despite this challenge, we note that a considerable portion of the NPLs were non-margin related and fully provided for in accordance with Prudential Guidelines, and it is from these class of loans we believe the risk of additional provisions in 2010 arises. We are optimistic on the performance of the equities market in 2010, and as such, mark-downs made on margin loans in 2009 will naturally be written back. The expected passage of the Asset Management Company (AMC) bill and its take-off in H1’10, will further boost liquidity levels in the Banks as their toxic assets are taken off. Considering however, that the chances of economic fundamentals and private sector spending picking up in the near term are slim, we believe the other classified loans will stay non-performing for such a period that as they mature into new classes of non-performance under Prudential Guidelines, additional provisions are made. This will pressurize profit margins. Irrespective of this, we do not expect to see additional provisions of the magnitude recorded in 2009 repeat in 2010, a position supported further by the aggressiveness of 2009 provisions, an anticipated pick-up in equity market indices, and the successful take-off of the Asset Management Company during the year.

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

NIGERIAN BANKING SECTOR CAPITALISATION Pre and Post Special Audit (N’billion)

334 333

ZENITH 308

FBN UBA

183 177

GTB

162

ACCESS FIDELITY

132 140

FCMB

129 140

189

112

DIAMOND

110 95

SKYE

87 77 86

IBTC ECOBANK NIG.

CITIBANK

40 35

STD. CHRTD.

37 34

UNITY

32 31

STERLING

30 30 -52

WEMA

-69

OCEANIC

218

-81 -60

SPRING

-85

FINBANK AFRIBANK

-143

139

-107

-139

PHB

250

-146

UBN INTERCONT

337

193 208

-259

-300

221

-200

-100

Net Assets Post- Audit

100

200

300

400

Net Assets Pre-Audit Source: NSE, Bank Publications, Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

NIGERIAN BANKING SECTOR BY TOTAL ASSETS Figures are as at 30 September 2009 (N’billion)

2,200 2,033

1,760

1,687 1,562

1,320 1,072

1,016 928

880

802

736 652

582 500 426

440

409 332

327

261

229

206

191

173 100

0 FBN

Zenith

UBA GTBank UBN Oceanic Interc.

PHB

Access Skye

Diam .

FCMB

Ecob.

Fidel.

IBTC

Unity S/Chtd

Citi

Sterln

Finb.

Spring Wem a

Source: NSE, Bank Publications, Vetiva Research

NIGERIAN BANKING SECTOR RANKING BY TOTAL LOANS Figures are as at 30 September 2009 (N’billion) 862

658 545 445 380

336

315

279

272 214

173 116

FBN

Zenith

UBA

GTBank Access

Diam

PHB

FCMB

Skye

Ecob.

Fidelity Unity

IBTC

Wema

Citi

S/Chtd

Source: Bank, Vetiva Research

NIGERIAN BANKING SECTOR RANKING BY TOTAL DEPOSITS Figures are as at 30 September 2009 (N’billion) 1,262

1,198 1,090

NIGERIAN BANKING SECTOR STATS (N'Billion)* 30 Sept 09 ( N ) 30 Sept 09 ($) Total Assets 14,298 97 Total Shareholders Funds 1,935 13 Total Loans 4,858 33 Total Deposits 7,454 50

701

660 430

381

315

248

246

202

184

163

141

129

102

IBTC

Citi

Wema

*Being data summary of graphs presented herein Source: Bank Publications, NSE, Vetiva Research

UBA

FBN

Zenith

PHB

‘Ahead of the Curve’

GTBank Skye

Access Diam.

FCMB

Ecob.

Unity

Fidelity S/Chtd

Source: Bank, Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

In our view, the conclusion of the special audit and the release by Banks of their results for the period ended 30th September 2009, recognizing fully the provisions from the special audit, marked the end of the first critical step towards systemic cleansing. From a regulatory viewpoint, focus is now on building capacity within the regulatory structure; fast-tracking the implementation of risk-based, consolidated and cross border supervision frameworks; easing the flow of credit, particularly to the real sector of the economy; improving governance structures and practices in the financial services sector; and improving confidence in the economy in general. MPC Decisions...Pro-Market Sanusi chaired his first Monetary Policy Committee (MPC) meeting on the 7th of July 2009, a little over a month after his resumption of office. Following the meeting, a number of decisions were taken, such as the lowering of interbank lending rates, the improvement of liquidity in the financial system and removal of restrictions in the financial markets. Specifically, the decisions included the removal of the deposit and lending caps, the reduction of the Monetary Policy Rate (MPR) to 6% from 8%, return to Wholesale Dutch Auction System (WDAS) from Retail Dutch Auction System (RDAS) and an increase in Banks’ Net Open Position to 5% from 2.5%. The decisions taken in the 2nd meeting on the 1st of September were less aggressive relative to the 7th July meeting. The Committee decided to keep the MPR unchanged at 6% p/a, maintain the interest rate corridor at ±2% around the MPR, and approved-in-principle, the establishment of an Asset Purchase Facility Fund for effective liquidity injection and credit easing targeted at specific areas of the economy. The meeting held a month prior to the announcement of the second audit results, a time when counterparty risk concerns still dominated the markets, especially with respect to Banks in the second batch. Sanusi’s final MPC meeting of 2009 held on the 3rd of November, wherein decisions taken were largely aimed at boosting liquidity in the system. Banks’ recourse to the standing deposit facility and non-use of the standing lending facility in the latter-half of October 2009, suggested a need to reset the rates on standing facilities. Hence, the CBN left the MPR unchanged at 6%, while the rate on the standing lending facility was left unchanged at +2% and that on the standing deposit facility left at -4% relative to the MPR. The CBN also announced a quantitative easing strategy to bridge an estimated N500 billion gap between monetary aggregates and their 2009 benchmarks, revolving around modalities for the functioning of the AMC. It also lifted the temporary ban on the usage of Bankers Acceptances and Commercial Papers (BA/CPs) ahead of the release of new treatment and utilisation guidelines. In light of the significant provisions the Banks had already made, the CBN suspended the 1% general provision requirement for Banks for 2009, and noted that it will issue new prudential guidelines in Q1’10. The issue with Banks’ increased preference for cash via an expanding asset base with the CBN was subsequently addressed via a circular dated 8th December 2009, requiring that effective 1st January 2010, each DMB would have a maximum of three accounts with the Apex Bank and all others closed and balances appropriately transferred: x x x

Current Account RTGS (Settlement) Account CRR (Cash Reserve Requirement) Account

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Bankers Committee Retreat...Positioning Economic Intermediation

Banks

for

Effective

The Bankers Committee, comprising the CBN Governor and his deputies and Bank CEOs, convened a retreat from the 11th – 13th of December 2009, themed "The Role of the Nigerian Financial System in Economic Development”. At the meeting, the CBN Governor and Banks' CEOs collectively emphasized the critical role financial institutions should play in national development and noted that unfortunately, the structure of lending to the Nigerian economy is such that the bulk of aggregate credit is channelled mainly to financial market operators and traders, to the neglect of key aspects of the real economy such as power, agriculture, transportation, Small and Medium Enterprises (SMEs) etc. They recognized that while the Nigerian financial system has grown significantly over the past five years, its contribution to growth and development of the real sector requires improvement. The Bankers also expressed their concerns that the overall state of infrastructure, particularly the provision of power which is critical for economic growth and prosperity, has remained weak as a result of insufficient investments. Also, the Agriculture Sector which employs about two-thirds of Nigerians and is the highest sectoral contributor to the nation’s GDP, is yet to reach its potential as a key contributor to national revenues and export earnings. In light of these challenges, the Bankers agreed to key into the CBN Governor’s vision for a Nigerian financial sector that plays the dual role of ‘enabler’ as well as ‘engine’ of real sector growth. Thus, 3 key investment areas were identified:

Power Transportation Agriculture

To monitor the Banks’ progress in line with their commitments, a standing sub-committee of the Bankers Committee to coordinate implementation of the program and provide feedback to the CBN and Bank CEOs was formed. In furtherance of the meeting’s broad agenda, we highlight the CBN Governor’s recent statements with respect to the possibility of classifying Banks along the lines of their specialised intervention roles in the economy; thus, the N25 billion capital base will remain as a minimum for just Universal Banking. What does this mean? Capital base requirements for Nigerian Banks may now be stratified according to scope of the institution’s operations; thus, Banks not focussing on Universal Banking may have lower capital base requirements. In effect, we may see an increase in the number of Banks in the Country over time, as this stratification effectively reduces barriers to entry. We note however, that all Nigerian Banks (cleared ones) have Shareholders Funds in excess of N25 billion; thus, this stratification may not mean too much for them, especially if they plan to retain their current level of operations and Balance Sheet size as a base for future growth.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

RISK MANAGEMENT Consolidated and Risk-Based Supervision...Towards Effective Risk Management Consolidated Supervision is not another new terminology in the Nigerian financial services industry, as its idea has been in place since April 1994, when the CBN undertook to facilitate a formal framework for the coordination of regulatory and supervisory activities in the Nigerian financial sector, through the establishment of the Financial Services Coordinating Committee (FSCC). Although the Committee has been in existence since 1994, it was only accorded legal status by the 1998 amendment to Section 38 of the CBN Act and its name subsequently changed to Financial Services Regulation Coordinating Committee (FSRCC). Members of this Committee include: x x x x x

Central Bank of Nigeria (Chairman) Securities and Exchange Commission National Insurance Commission Corporate Affairs Commission Federal Ministry of Finance

This Committee represents the closest the Nigerian financial system has gotten to consolidated supervision, considering that its objectives include to: x Coordinate the supervision of financial institutions x Cause the reduction of arbitrage opportunities usually created by differing regulatory and supervisory standards among supervisory authorities in the Country x Deliberate on problems experienced by any member in its relationship with any financial institution x Eliminate any information gap encountered by any regulatory agency in its relationship with any group of financial institutions x Articulate the strategies for the promotion of safe, sound and efficient practices by financial intermediaries x Deliberate on such other issues as may be specified from time to time

...the CBN has signed MOUs with the Central Banks of some countries.

...signing of MOUs on cross border supervision to determine markets Banks can expand to.

While this Committee has been in place for a while, one can rightly query its effectiveness in the sighting and prevention of recent shocks to the financial system. Sanusi’s appointment as CBN Governor has seen him advocate strongly for an effective consolidated supervision regime being put in place in the Country, considering how helpful it can be with regards to the sharing of information amongst regulators, avoidance of regulatory overlaps and establishment of a ‘mutual’ relationship amongst regulators. Since the basic tenets of this strategy are already on ground, we believe the CBN as Chairman, only needs to revamp and restructure the processes. We note however, that in light of the global expansion drive of Nigerian financial institutions in the past few years, the CBN is also seeking to establish a working relationship with the Central Banks of other countries where Nigerian Banks have and will likely extended their outreach to. Such countries include the United Kingdom, Ghana, Liberia, Gambia, SouthAfrica amongst others. We note that this relationship will largely involve regular information exchange between both institutions. Banks will also be constrained with respect to the markets they can operate in, as this will depend on the CBN having signed an MOU with the regulator in the target market.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

In November 2005, the CBN as a first step towards the commencement of risk-based supervision in Nigeria, released the Framework for Risk-Based Supervision of Banks in Nigeria. This framework required routine and regular stress testing of Banks, which the CBN Governor recently alluded to the Apex Bank having not done for the 14 Banks allocated to it under a scheduled arrangement with the Nigerian Deposit Insurance Corporation (NDIC). In light of this, the Apex Bank has revised the supervisory framework and also directed Banks to develop and submit their risk-based management framework to it. According to the CBN Deputy Director of Financial Sector Surveillance, Kingsley Moghalu, "Banks would under the new dispensation, be required to further strengthen their risk management process, while the present supervisory methodology of risk-based and consolidated supervision with special emphasis on macro-prudential regulation and sound stress testing practices, would be pursued more vigorously by the Apex Bank”. In this regard, the CBN will be releasing a new harmonised and comprehensive corporate governance code in Q1’10, which it intends to enforce strictly with the use of sanctions.

The Walker Review...A Guide to Corporate Governance in Nigeria Sir David Walker, a former Chairman of Morgan Stanley International and former Director of the Bank of England, presented his consultative review on corporate governance in UK Banks and other financial institutions on the 16th of July 2009, which was commissioned by the UK Prime Minister in light of the critical loss and failure witnessed in the UK Banking system. This document was recently revealed as a working text for the corporate governance review process being carried out by the CBN and its consultants, and we examine it here with a view to getting a better understanding of what to expect in the CBN’s harmonized code of corporate governance for Nigerian Banks. We believe this is relevant, in light of structural shortcomings inherent in Nigerian Banks’ Boards, which contributed largely to the excessive exposure of some Banks to the equity market and downstream petroleum sector. “Better governance will not guarantee that there will be no repetition of the recent highly negative experience for the economy and for society as a whole, but will make a rerun of these events materially less likely”...The Walker Review

The themes of the report were as follows: x

x x

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He retained the Combined Code of the Financial Reporting Council (FRC), specifically the “comply or explain” principle and that no new primary legislation was needed. He maintained that the chief deficiency of Banks and Other Financial Institutions (BOFI) was behavioural not organisational. Specifically, there was the need to foster an environment in which Boards get challenged. Non-Executive Directors (NEDs) should be charged to focus on risk issues separately from the executive risk committee process. Fund managers and other shareholders should engage more productively with their investee companies over long-term objectives. There should be enhanced attention on remuneration policies in respect of variable pay, disclosures and incentives.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

On the back of these themes, Sir David Walker analysed key areas of UK governance regulation and made some recommendations as follows: Board Size, Composition and Recommendation He noted the disproportionate increase in the size of Banks’ Boards in recent years and that experience has shown that no particular Board composition is consistently preferable. Also, given the risk complexities involved in Banks and Other Financial Institutions (BOFIs), there is a greater need for industry experience on their Boards of Banks than on that of non-financial institutions. Some recommendations made in this regard include: x

BOFI Board should provide NEDs with thematic business awareness sessions, to ensure that they have the knowledge and understanding to contribute. NEDs should give greater time commitment: “minimum expected time commitment of 30 to 36 days in a major Bank Board should be clearly indicated in letters of appointment and will in some cases, limit the capacity of the NED to retain or assume Board responsibilities elsewhere”. NEDs should equally be thoroughly scrutinized like EDs.

Functioning of the Board and Evaluation of Performance His main observations here were with regards to NEDs needing to be more contributory on Banks’ Boards. He also noted that apart from the inadequacy of their financial experience, the failure of NEDs to challenge the executive on substantive issues was a serious shortcoming. Thus, Chairmen are responsible for ensuring improved contribution from the Board’s NEDs. Recommendations herein include: x x

NEDs should be ready, able and encouraged to challenge and test proposals on strategy put forward by the executive. The Chairman should be expected to commit a substantial amount of time, have convincing leadership experience, and be responsible for leadership of the Board. He should also be proposed for annual re-election. The Board should undertake evaluation of its performance with external facilitation every second or third year, and the evaluation statement should be published in the annual report to assist shareholders’ understanding of the main features of the evaluation process.

The Role of Institutional Shareholders: Communication and Engagement Here, he noted that a company’s performance will be influenced by the decisions of shareholders or their fund management agents. The misalignment of the interests between the shareholder and the Board causes what the Review refers to as “agency problem”. He observed that the disposal of stock is “an uncertain influence on decision-taking by the Board and a relatively blunt means of communication between owner and Board”. In some cases, the shareholder’s motivation is related to longterm perspective, which the Board should be made aware of. He also believed in the need for productive communication between shareholders and Boards, which should help Directors manage the Company’s affairs better.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

A strong recommendation here was: x

The Board should be aware of any material changes in the share register and the Financial Services Authority (FSA, the equivalent of the CBN) should be ready to contact major selling shareholders to understand their motivation.

Risk Governance He noted that as is normal in financial business, the strategy of a BOFI inevitably involves arbitrage of risk and very often involves high leverage. On recent experience, BOFI Boards are under regulatory constraint in the taking of risk and leverage. The Review also considered how effective governance of risk by the Board can be achieved alongside enhanced regulation and supervision, such as in the form of capital and liquidity requirements. He recommended herein, the following: There should be a Board-level risk committee established separately from the audit committee and chaired by a NED, taking responsibility for oversight and advice on the current risk exposure and future risk strategy. x The Board risk committee should as a matter of good practice, draw on external advice. The risk report should be included as a separate report within the annual report. x Risk committees should have the power to scrutinise strategic transactions involving acquisition or disposal and where necessary, block big transactions. Remuneration x

The Review noted that “if Banks are to be able to contribute to the nation’s economic recovery and wellbeing, it is of critical importance that remuneration practices be reconstructed to provide incentives in support of sustainable performance.” The Review also made proposals on the structure of remuneration, provisions for incentive deferment, appropriate linkage to performance and fuller disclosure. Recommendations made here include: x

The remuneration committee’s remit should cover firm-wide pay with particular emphasis on the risk dimension, and the Committee’s Chairman should face re-election if the risk report attracts less than 75% shareholder approval. The remuneration committee should oversee the pay of highly paid non-Board executives, and should disclose such "high-end" remuneration in bands. There should be a significant deferral in incentive payments for all “high-end” executives based on specific risk adjustment mechanisms.

In view of the above, we believe the Management structure of Nigerian Banks will face very significant restructurings in the near term, mainly with a view to improving their efficiency as a group and increasing the value contribution of all parties, Executive and Non-Executive alike. One of such restructurings, which is regulatory-induced, is the enforcement of a succession plan in Nigerian Banks, which will see the stepping down of some Bank MDs who have been in office for periods in excess of 10 years. Affected Banks include Zenith Bank, UBA and Skye Bank.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

The weightiest question on investors’ minds is: are there capable replacements for these MDs to carry on their vision and business strategy? We are affirmative in this regard and note that there are qualified in-house Management staff who can receive the baton of leadership from the departing MDs and further enhance their Bank’s business strategy. With this in mind, we are of the view that the Management change will go a long way in limiting the level of corporate mis-governance in the industry going forward and position the Banks on a new path of sustainable growth. New Lending Rules...A Challenge to Retail Lending One of the key requirements lacking for an efficient credit extension system in Nigeria has been the absence of functioning credit bureaus to assist Banks in gaining easy access to customer information. This helps prevent such occurrences as that of individuals accessing multiple credits from different Banks, despite having a poor credit history. To check this, the CBN in 2009, licensed two credit bureaus which have begun operations: XDS Credit Bureau Limited and CRC Credit Bureau Limited. Though awareness of the nature and scope of their operations is still relatively low, the CBN Governor recently shed some light on the new measures Banks will be taking with respect to lending in 2010. One of such measures will be the usage of the National ID card as a precondition for accessing Bank loans. Also, all financial institutions are required by the credit bureau operational guidelines, to have data exchange agreements with at least two credit bureaus, and are also required to obtain credit reports from at least two credit bureaus before granting any facility to their customers. Acknowledging the credit risk monitoring benefit of these measures, we note that their eventual implementation will pose a restriction to lending, especially in the retail market, which typically has the highest default rate and such borrowers are likely to have adaptation issues with the new lending regime. This we believe however, will be a short term challenge, which will be overcome by increased awareness and transparent application of the rules by financial institutions. REPORTING New Reporting and Disclosure Standards

...some Banks like Diamond Bank, Access Bank, FCMB, UBA and GTBank had already improved their disclosure standards to an extent, ahead of the new requirement

...the CBN has released its minimum disclosure standards for Banks’ 2009 year end results, which is very elaborate and in our view, prepares Banks for some of the rigors of IFRS reporting.

Coming from an era of substandard financial reporting by Nigerian Banks, who had been slow to embrace improved financial disclosure and transparency, the enforcement by the CBN of a new guide for the reporting of Banks’ 30th September 2009 results was well received by the market as a sign of even better disclosure to come with Bank’s quarterly reports in the near future. Sanusi recently revealed that the CBN is working with the SEC and NSE to prepare detailed information disclosure requirements for the Banks and quoted companies to ensure that end of year figures to be published every December are accompanied with enhanced information disclosures beyond the normal NSE requirements to help restore investors’ confidence. This revelation was a strong positive for investors, not only in the Banking Sector, as they would now have improved disclosure levels accompanying result releases by quoted Companies. We are of the expectation that quarterly disclosure levels should also be enhanced alongside that of year-end results.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

New Guidelines for Bankers Acceptances and Commercial Papers

...the previous practice involved the booking of the spread on the yields in Other Income.

To ensure the uniform practice and correct treatment of Bankers Acceptances (BAs) and Commercial Papers (CPs) by Banks and Discount Houses in Nigeria, the CBN on the 18th of November 2009, issued a guideline in this regard. The comprehensive guideline which took effect from that date however, gave all existing transactions and syndications a transition period up till the 31st of March 2010. In other words, while the new accounting treatment for BA/CPs applied immediately for new transactions, existing ones were given a transition period till 31st of March 2010 (especially with respect to bringing qualifying ones on-Balance Sheet, according to the new guidelines). This implies that for existing BA/CP transactions that qualify to be brought on-Balance Sheet, as they mature and are rolled over (if so) during the transition period, Banks will pass the appropriate Loan/Deposit entries on their Balance Sheet and also add the corresponding Interest Income and Expense on these “new loans and deposits” to the Interest Income and Interest Expense lines respectively on their Income Statement. It has been observed that over the years, the practice of concealing nonperforming loans off-Balance Sheet had become prevalent among Nigerian Banks; therefore, with the CBN now requiring them to bring on-book all qualifying BA/CP transactions, we observed an uneven net-impact on September 2009 Balance Sheets, with Loan growth in a period of almost total credit freeze, typically exceeding deposits (we attribute this partly to the underfunding of some of the previously off-Balance sheet exposures). We note that while some Banks have historically booked their BA/CP transactions on-Balance Sheet, the lack of an industry standard treatment of these assets caused some to book them off-Balance Sheet. The guideline also had a mixed impact on Banks’ Income Statements, as observed growth in Interest Income in a period of sharply higher NPLs could not be linked directly to new credit extensions or increased risk asset pricing. We expect the inconsistency impact of this guideline however, to ease off with December 2009 results (as most existing bills prior to the new guidelines should have matured), and a true picture of Banks’ gross earnings to start reflecting in Q1’10 financials. IFRS...The Evasive Reporting Standard The CBN has time and again, stated its plan for Nigerian Banks to adopt the International Financial Reporting Standards (IFRS) as the guide for their financial reporting. However, the deadline for its adoption by Nigerian Banks continues to change, thus creating uncertainties as to when it will eventually take off. While some Banks like Access Bank, Guaranty Trust Bank, UBA and First Bank have adopted the reporting standard, some like Zenith Bank have stated their intention to report in IFRS for their December 2009 results. In 2009, the CBN gave Nigerian Banks a deadline of December 2010 to adopt the IFRS reporting standard, while the NSE mandated all quoted companies to follow suit latest by December 2011. We believe that it was in light of the accompanying challenges to the adoption of IFRS (harmonization with existing standards, integration challenges etc.) and the recent crisis which hit the Nigerian Banking Sector, that the CBN recently revealed that it is working on ensuring the full adoption of IFRS by December 2012, subject to the approval of the Nigerian Accounting Standards Board. We believe that by 2010 ending, the troubled Banks should have sorted out all outstanding issues with respect to ownership and their financials, to enable them adopt the standard as well.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

OTHER KEY EVENTS IN THE SECTOR Finbank to Implement Islamic Banking in Nigeria Having already initiated it in the Gambia, Finbank announced its plan to commence Islamic Banking in Nigeria. The Bank had acquired a 70% shareholding in the Arab Gambia Islamic Bank (AGIB), and through its staff in the Gambia, its Nigerian workers were educated on the functionalities of Islamic Banking preparatory to its introduction in Nigeria. The idea of Islamic Banking has continued to be touted around the Nigerian Banking space, with Jaiz Bank (a potential Nigerian Islamic Bank) last reported to still be in search of the required capital to commence operations. To further promote the business proposition of Islamic Banking in Nigeria, the Islamic Development Bank (IDB), which has Nigeria as its fifth largest shareholder worldwide, will be holding a business and investment forum scheduled for February 2010. S&P Suspends Intercontinental Rating; Fitch Downgrades Nigerian Banks Intercontinental Bank, in the aftermath of August 14 events, had its ratings suspended by Standard & Poor’s Rating Services “as a result of the delay, insufficiency, and uncertainty of financial information provided by Intercontinental”. The ratings company lowered Intercontinental’s counterparty credit rating to ‘B-/C’ and removed all ratings from CreditWatch, where they were placed with negative implications on the 18th of August, 2009. In a statement, the agency noted that “the negative outlook on Intercontinental, prior to the suspension of the ratings, reflects our view that asset quality, profitability, and liquidity are likely to continue to deteriorate given the toughened economic and operating environment in Nigeria, as well as Intercontinental’s own damaged reputation”. Fitch Ratings on its part was active on Nigerian Banks also, downgrading its rating on some of them on the back of asset quality deterioration concerns, while giving positive ratings to just a few. A summary of its rating decisions in Q4’09 is as follows: x

First Bank of Nigeria Plc: Fitch downgraded First Bank of Nigeria Plc's Individual Rating to 'D/E' from 'D' and simultaneously affirmed the Bank's Long-term Issuer Default Rating (IDR) of 'B+', Short-term IDR of 'B', Support Rating of '4' and Support Rating Floor of 'B+'. The Outlook on the Long-term IDR remained Stable, while it also affirmed its National Long and Short-term ratings of 'A+(nga)' and 'F1(nga)' respectively. Diamond Bank Plc: Fitch Ratings downgraded the Bank’s Individual Rating to 'D/E' from 'D'. The agency simultaneously affirmed its Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook, Short-term IDR at 'B', Support at '4' and Support Rating Floor at 'B'. Fitch also affirmed the Bank's National ratings at Long-term 'A-(nga)' and Short-term 'F2(nga)'. Access Bank Plc: Fitch affirmed the Bank’s National Long-term rating at 'BBB-(nga)' and its National Short-term rating at 'F3(nga)'. Stanbic IBTC Bank Plc: Fitch affirmed Stanbic IBTC Bank Plc's National Long and Short-term ratings at 'AAA(nga)' and 'F1+(nga)' respectively. Guaranty Trust Bank Plc: Fitch affirmed GTBank’s ‘AA-(nga)’ rating.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

GTBank Raises N13.165 billion in Debt Issuance Programme Owing to the tight liquidity situation in the Nigerian economy and the uneven nature of Banks’ deposits/asset matching structure, a number of Banks announced plans to raise mainly debt capital of a combined sum of N2.13 trillion ($14.38 billion) over a period of about two years. While the preference for debt over equity may be justified, in light of investors’ aversion towards the equities market having suffered considerable capital erosion in recent times, it is the likelihood of success in raising these funds that poses a risk to the trend.

PROPOSED CAPITAL RAISINGS BY NIGERIAN BANKS N’Billions

First Bank

100

UBA

100 500

200

Zenith Bank GTBank

200

Diamond Bank Fidelity

500

200

FCMB

300

Skye Access Source: Annual Accounts, EGM Notices, Vetiva Research

GTBank opened the order book for the first tranche of its N200 billion Debt Issuance Programme on the 9th of December 2009, raising N13.165 billion out of the N100 billion offered at a 13.5% coupon. The success rate achieved by a Bank of GTBank’s standing can be said to have been poor and serves as an indicator of the market’s depth and coupon requirements from corporate bonds. We believe the coupon offered by GTBank was a key challenge in the marketing of its bond; thus, we believe the 13.5% coupon is likely to serve as a minimum benchmark for future issuances by Nigerian corporates in the near future. ATM Relocation Shifted Again, as CBN Licences ATM Consortia On the 7th of April 2009, the CBN issued a circular to all Banks requiring them to re-deploy all their off-site ATM machines to their premises by the 30th of June 2009. Noticing inadequate compliance efforts on the part of the Banks however, the Bank extended the deadline by two months to the 31st of August 2009. In order to ensure the success of the redeployment exercise and proper commencement of operations by the appointed ATM consortia, the CBN issued another circular on the 27th of August 2009, further extending the deadline to the 31st of March 2010.

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

The CBN also awarded licences to two firms, Chams Access Nigeria Limited (a subsidiary of Chams Plc) and Cooperative Support Services, to operate Independent Automated Teller Machine consortium services. A copy of the licence issued by the CBN, dated December 14, 2009, stated that the firms had been granted Approval-in-Principle and that the CBN would conduct a post-Approval-in-Principle visit to the firms in April 2010 to ensure their readiness and compliance with regulatory requirements. OUTLOOK Asset Management Company The successful take-off of the Asset Management Company (AMC) will be a key determinant of how events play out in the Nigerian Banking Sector space and capital market in 2010. The broad aim for establishing the AMC is to boost liquidity and encourage lending in the Banking system through a process whereby the AMC purchases the toxic assets (mainly equitylinked exposures) on the Banks’ Balance Sheets. The CBN had intended to get the proposed Bill passed by the House of Assembly before the 31st of December 2009, but having not been able to achieve this, the CBN now plans to get the Bill passed latest by February ending to mid-March 2010. As a lot now depends on the Bill’s successful passage, we take a closer look at some of its proposals.

...it could cost the AMC c.N1 trillion to soak up all NPLs in the Banking Sector.

...keen focus will need to be placed on lending practices post-establishment of the AMC.

The AMC will have the power to issue bonds or other debt instruments for the acquisition of Banks' non-performing loans and will also have the power to provide equity capital and borrow without guarantee. According to Sanusi, it could cost the AMC c.N1 trillion ($6.75 billion) to soak up all the non-performing loans in the Banking Sector, which would go a long way in boosting the capitalisation levels of the troubled Banks especially and help them resume their lending roles in the economy. Though the CBN may designate any class of Bank assets as eligible for purchase, according to the draft Bill, it seems the primary asset class will be capital market related exposures, due to valuation ease. Ahead of the passage of the Bill, the CBN had in October 2009, requested all DMBs to forward details of their classified facilities. Specifically, the requested compilation covered details of collaterals obtained for classified loans, securities owned by subsidiaries in respect of proprietary positions, investments and crystallized underwriting investments, and Banks’ securities held in respect of proprietary positions, investment and crystallized underwriting investments, all valued as at 30th September 2009. Whilst we are positive on the general concept of the AMC and note its historical achievements in other countries in aiding GDP growth postrecession, our main concern here is how well the AMC will succeed in boosting lending in Nigeria. Recent experiences from United States (US), shows that private sector lending picked up post-implementation of the Toxic Assets Relief Programme (TARP); however, this has been skewed largely to the financial markets which fuelled another bull run (the DJIA closed 2009 +19% YTD) and led to an earnings boost for the trading and investment banking divisions of these Banks. Conversely, their core lending divisions have continued to show weaknesses, as NPLs have not shown significant improvement, thus causing US Banks to book additional provisions. Will this scenario replay itself in the Nigerian Banking Sector?

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2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INDICATIVE STRUCTURE FOR AMC BORROWER

BANK A

BORROWER

BANK B

BORROWER

BANK C Proceeds from Loan Recovery

Consideration for Assets

Funds

Toxic Assets

ASSET MANAGEMENT COMPANY OF NIGERIA (AMCON)

BOND INVESTORS Debt Service

FGN Guarantee

FEDERAL GOVERNMENT

Management Services

3RD PARTY ASSET MGERS Source: CBN, Vetiva Research

Some key features of the proposed AMC include: x x x

x x x

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Intended life of 10 years The AMC will acquire qualifying loans from Deposit Money Banks Asset acquisition to be funded by bonds issued by the AMC and guaranteed by the Federal Ministry of Finance o The bonds will be given to Banks in exchange for the loans o Bonds will be tradable with the CBN for liquidity The AMC will be managed by a Board to be approved by the President Independent parties will be appointed to manage the assets and facilitate NPL recovery Funds accruing to AMC will be from debt collections/fund performance will be used to pay down interest and principal on bonds issued AMC earnings will be tax exempt

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Lending

...the need to generate ample returns on burgeoning cash vaults will force Banks to unlock credit in 2010.

We believe hindsight works well in our favour here. Though our Banking crisis lagged that of other Countries, thus amplifying the focus on Nigeria’s Banking Sector, we are in a position to avoid a repetition of the post-TARP lending practices in Nigeria. As mentioned earlier, the Bankers Committee agreed to key into the CBN Governor’s vision for a Nigerian financial sector that plays the dual role of ‘enabler’ as well as ‘engine’ of real sector growth; however, we believe this requires a conscious policy that would promote real sector lending. This we believe is the real challenge that behove in the aftermath of the establishment of the AMC; that is, getting Banks to focus their lending on the real sector. We expect recent experiences of the troubled Banks should have taught a lesson in many quarters, as to the disadvantages of excessive and concentrated lending practices which tend to create asset bubbles. We believe that Banks will be faced with a return-generating challenge in 2010, which will naturally force them to unlock their vaults and start lending once again, having frozen credits for most of H2’09.On the back of this, we are positive on the chances of the regulator in channelling lending to growth sectors of the economy in 2010 and beyond.

...we expect loans to meet companies’ working capital requirements will dominate at the outset

...While some Banks are likely to return to profit as early as Q1’10 (only slowly though), we still expect some to report losses.

Acknowledging that lending itself does not just commence overnight, but that it now requires more credit risk appraisal processes and an adjustment to new lending practices, we see loan growth of at least 20% YoY in 2010 (compared to +62% YoY in 2008). However, we expect the fundamentals of the economy to pick up only steadily through the year, with activities in H1’10 proving the slowest. In light of this, we expect existing NPLs will further mature into advanced provisions classes in line with the existing Prudential Guidelines. This will put the heaviest pressure on Banks’ margins in Q1’10 and subsequently ease off through the year, more so because the bulk of the non-performing loans had already been provided for in 2009. However, considering that equity market exposures are now being marked to market, a bull run in the equity market (we have already seen initial signs of this), will be a positive for Banks’ earnings in 2010. Cost Management Through much of Q4’09, Banks’ focus was on loan recoveries, which we had previously expressed our concerns as to how successful they would be in light of glaring challenges to consumer spending and growing unemployment. Another focus of Banks during this period was on cost reduction, mainly via a review of internal processes to achieve some level of optimization. The structure of Nigerian Banking is such that Banks still play the branch game, which requires considerable recurrent expenditures (mainly with respect to asset maintenance and staff cost). The high level of illiteracy in the Country may not be unconnected with the need for this strategy to penetrate previously unbanked areas. In many developed economies, ‘brick and mortar’ Banking has long been moved to the background; but in Nigeria where distrust still prevails in most unbanked areas, there is still a need for physical presence to convince people to bank.

...the CBN will be liaising with Banks on what an ideal profit margin should be for them.

Irrespective of these challenges however, it appears the Banks can still do with improvement to some of their current operational models, and most have identified such necessary improvement areas and initiated appropriate steps. Sanusi has also voiced his concerns on the high operating cost structure of Nigerian Banks and the CBN’s willingness to assist in this regard.

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Some of such steps we expect to see being put in place in the coming year include a realignment of objectives from short term profitability (boosted by compensation benefits), centralization of such operations as acquisition and treasury, collapsing of branches and a restructuring of workforce, and possibly infrastructure sharing through innovative means. Mergers and Acquisitions

...Unity Bank is in talks to raise $200 million in equity and $300 million in debt from a foreign investor ahead of its recapitalisation deadline.

...Tier 1 Banks may have to restrict their spotlights to the smaller troubled Banks, should they be planning to participate in the M&A process.

...absence of previous consolidation experience in the Banking Sector makes us less optimistic on the chances of GTBank or Zenith Bank emerging as acquirers.

The Nigerian Banking Sector is poised for another round of consolidation, following regulatory action on 10 Banks in the aftermath of the special audit. Financial advisers appointed by the CBN are working with the Boards and Management of the troubled Banks to explore all options for securing their stability and long-term future growth. One of the Banks which was given a lifeline expiring on the 30th of June 2010 to recapitalize, Unity Bank Plc, seems likely to beat the deadline first, having revealed that it is in talks to raise $500 million (N74.05 billion) from a foreign investor by March 2010. This announcement only goes to confirm our previously stated view that the Bank was a potential host to foreign acquisition plays. The Bank however, is not masked from domestic acquirers. Unity Bank aside, the advisers are still working with the 9 other Banks with a view to finding the best solution to their capitalisation shortfalls, and a few institutions have registered and revealed their interest in an M&A play on the troubled Banks (3 South African institutions: First Rand, Standard Bank and Old Mutual; 3 local Banks: Fidelity Bank, Skye Bank and First Bank). However, we believe more local interest exists in the acquisition process. This is on the back of the asset offering of the troubled Banks, which may appeal to local Banks still pursuing a growth strategy as part of their medium to long term plans. In our ‘Now the Audit is Over’ report, we noted that the growth trajectory for Nigerian Banks remains steep, especially when one considers that the Sector’s Leverage Ratio is c.6%. Thus, we are of the view that room for growth still exists for the Tier 1 Banks, which makes us believe that Banks with acquisition experience in the industry may position as acquirers in this round of consolidation. The CBN Governor’s plan to ensure that no Bank controls more than 20% market share may also be a hindrance to Tier 1 Banks’ participation; therefore, their spotlights may be restricted to the smaller Banks, since none of the Tier 1 Banks controls up to 15% market share yet. We believe however, that the value proposition of such a small Bank must outweigh the risks, for a compelling acquisition case to present. CLEARED BANKS (%)* Fidelity Bank Zenith Bank FCMB Stanbic IBTC GTBank UBA Access Bank First Bank Diamond Bank Skye Bank AVERAGE

CAR 50.75 37.00 40.00 33.00 18.40 19.30 25.30 21.93 20.00 16.00 28.17

LIQUIDITY 54.01 57.00 44.00 51.00 42.00 41.00 33.50 36.70 35.00 27.00 42.12

*As at 30 Sept. 2009, except FCMB & Diamond (31st Oct. 09) Source: Bank Publications, Banks, Vetiva Research

With the CBN holding a stakeholders meeting of the 10 troubled Banks and successfully seeking their collaboration with respect to their recapitalization, all seems set for another round of consolidation in the industry.

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Capital Market Performance We are overweight on the Nigerian Banking Sector at current valuations. Trading at a 31 December 2009 price/book multiple of 0.98x and 2010 forward price/earnings multiple of 6.62x, we believe Banking valuations were overdone in the bear market of 2009 and present a compelling investment opportunity for discerning investors. The undervaluation of the Sector is not without reason, as the heightened risk perception towards it, further accentuated by the outcomes of the CBN/NDIC special audit, caused investors to seek haven in other less risky sectors in 2009. The Sector lost -40.13% in 2009, relative to the broader market’s loss of 33.78%. VETIVA COVERAGE ACCESS BANK DIAMOND BANK FIRST BANK FCMB GTBANK SKYE BANK IBTC UBA ZENITH BANK AVERAGE

31 DEC 2010F FORWARD 2010F FORWARD PRICE (N) EPS (N) P/E (x) BVPS (N) P/B (x) 7.60 1.52 5.00 12.02 0.63 7.40 1.60 4.63 9.47 0.78 14.05 1.74 8.07 12.53 1.12 7.16 0.77 9.30 8.38 0.85 15.50 2.79 5.56 12.62 1.23 5.49 1.24 4.43 10.00 0.55 7.47 0.85 8.79 4.95 1.51 10.80 1.74 6.21 10.73 1.01 13.60 1.78 7.64 15.04 0.90 6.62 0.95 Source: Vetiva Research

Pulling the curtain on 2009 and focussing on the year ahead, we are of the view that from a fundamental business view point, Nigerian Banks (the cleared ones) are financially solid as a group, though asset quality concerns still dominate in some quarters. Looking at the Banks in our coverage universe, they present an average +29.81% upside relative to the lower band of our valuation ranges, while current valuations imply a +53.14% upside relative to the upper band of our valuation ranges. VETIVA COVERAGE Zenith Bank First Bank UBA GTBank Access Bank Diamond Bank Skye Bank FCMB Stanbic IBTC AVERAGE

VALUATION PRICE AS AT IMPLIED IMPLIED RANGE (N) 31 DEC. 09 (N) LOWER UPSIDE UPPER UPSIDE 18.96 - 23.05 13.60 39.41% 69.49% 16.21 - 19.41 14.05 15.37% 38.15% 14.85 - 16.76 10.80 37.50% 55.19% 18.71 - 22.67 15.50 20.71% 46.26% 11.39 - 13.21 7.60 49.87% 73.82% 10.31 - 12.08 7.40 39.32% 63.24% 8.72 - 10.16 5.49 58.83% 85.06% 8.60 - 10.24 7.16 20.11% 43.02% 6.51 - 7.77 7.47 -12.85% 4.02% 29.81% 53.14% Source: Vetiva Research

The attainment of our fair values for these Banks however, depends on a couple of factors which we believe investors should keep a keen eye out for in 2010: x x x x x x

Economic and capital market liquidity Effective take-off of the AMC Speedy resolution of the ownership situation in the troubled Banks Success of loan recoveries and a pick-up in lending Release of improved Banking results The asset quality situation in the cleared Banks

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Guaranty Trust Bank - Company Overview BASIC INFORMATION

Financial Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: GUARANTY:NL

Sector

Banking

Guaranty Trust Bank Plc (‘GTBank’ or ‘the Bank’) obtained its commercial banking license on the 1st of August 1990 and commenced Banking operations in Nigeria on the 11th of February 1991. The Bank has evolved through the years to become a major player in the industry, through the use of innovative Banking solutions to win market share. Largely known for its strong presence in the Corporate Banking space, recent events in the Banking Sector have seen the Bank’s positive view by the public win it an increased share of the retail market. Listed on the London Stock Exchange (Eurobond and Global Depository Receipts), we estimate the Bank currently controls c.7% and c.9% of industry Assets and Shareholders Funds respectively.

Country

Nigeria

Key Review Highlights

1669 Oyin Jolayemi Street

Address

Victoria Island, Lagos, Nigeria Website

www.gtbplc.com

Management

Owelle Gilbert P. C hikelu (C hairman) Mr. Olutayo Aderinokun (MD/C EO)

In line with our expectations, GTBank continued to post relatively strong earnings in 2009 despite the gale that swept over the Banking Sector in H2’09, which resulted in some of its peers declaring losses and slowed top line performance.

Accounting treatment of Bankers Acceptances/Commercial Papers (BA/CPs) distorted the reading of GTBank’s top line growth figures in Q2 and Q3’09, due to the bringing on-book of some previously offBalance Sheet BA/CPs.

Owing to the CBN special audit, which recommended additional provisions of N20.789 billion on the Bank’s books, Q3’09 After Tax Earnings growth slowed to +2.54% YoY.

Adequately capitalised with a CAR of 18.4% and liquid with a 42% Liquidity Ratio, GTBank is well poised for a continuation of its growth trajectory (Leverage Ratio: 5.58x), which will be supported by its 2year N200 billion Debt Issuance Programme, of which N13.165 billion was raised at 13.5% coupon in the first tranche.

We believe the Bank’s Loan/Deposit Ratio will be a key indicator to watch going forward, considering the Bank’s often high Loan/Deposit ratio. Though it stood at 92% in Q2’09, it improved to 71% in Q3’09.

We value the Bank between N18.71 – N22.67. Priced at N15.50 by the market on the 31st of December 2009, GTBank’s pricing gives one of the slimmest lower-upside potentials in our coverage universe at +20.71%. In light of its price rally in 2010, we place a ‘Neutral’ rating on the Bank.

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Nigerians

100.00

FREE FLOAT (%)

95%

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

18,653,748,614

SIZE AND VALUE TRADED Market C apitalization

Average Volume Traded ('09)

N 'Bn

289.13

$ 'Bn

1.95

Units

17,789,850

DIVIDENDS AND BONUS ISSUES Type

Year

Final

Dec-08

N1.00

Scrip Issue

Dec-08

1 for 4

Final

Feb-08

N0.70

Interin

Feb-08

N0.25

Scrip Issue

Feb-08

1 for 11

Forecast Summary Earnings Per Share (N) YoY Change (%)

DEC 2008A DEC 2009F DEC 2010F DEC 2011F DEC 2012F 1.90

1.63

2.79

3.34

4.35

22.61%

-14.30%

71.33%

20.00%

30.00%

Price to Earnings (x)

8.17

9.53

5.56

4.64

3.57

Dividend Per Share (N)

1.00

0.73

1.42

1.84

2.39

YoY Change (%)

5.26%

-26.82%

94.17%

29.41%

30.00%

Dividend Yield (%) Net Assets Per Share (N) YoY Change (%)

6.45% 12.20 2.16%

4.72% 10.56 -13.40%

9.17% 12.62 19.45%

11.86% 14.54 15.24%

15.42% 17.05 17.24%

Price to Book (x)

1.27

1.47

1.23

1.07

0.91

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Neutral’ rating on the stock.

BA/CP reclassification distorted growth picture for the Bank in 2009…

Strong asset quality…

Debt Issuance Programme to help smoothen asset/liability timing mismatches…

Accounting treatment of Bankers Acceptances/Commercial Papers (BA/CPs) distorted the reading of GTBank’s top line growth figures Q2 and Q3’09, due to the bringing on-book of some previously off-Balance Sheet BA/CPs. Though the Bank reported YoY growth in Gross Earnings of +72.10% to N114.50 billion, we believe the reclassification of these assets was a key driver of this growth, considering the net impact the CBN directive has on Interest Income and Other Income. Having provided the sum of N24.25 billion as Loan Loss Expense in its Q2’09 figures (inclusive of the N20.789 billion recommended by the special audit team), GTBank’s Q3’09 provisions were relatively unchanged. With NPLs reducing by N4.43 billion in the 3-month period to September 2009, the Bank’s NPL Ratio improved to 3.08% as at Q3’09 ending, relative to 3.71% as at Q2’09. Notably, GTBank had the best asset quality (measured by NPL Ratio) among all listed and cleared Banks as at 30 September 2009. With its Coverage Ratio standing at 180%, it gives the Bank more than adequate headroom for some further deterioration in asset quality in the near term. Despite the tough operating terrain which prevailed through most of 2009, which led to a deterioration in the Cost/Income Ratio ExProvisions (CIR) of many Banks, GTBank’s CIR improved to 47% from 52% as at FY’08. The Bank recently closed the first tranche of its N200 billion 5-year fixed rate senior unsecured non-convertible bonds, having raised the sum of N13.165 billion out of the N100 billion offered at a 13.5% coupon. We previously noted our view that the coupon offered could have been the key challenge to the bond offering, despite GTBank’s first mover advantage in the market. However, we believe the cleared coupon will serve as a benchmark for future issues from Nigerian Banks in the near term.

Q2’09 CONTRIBUTIONS TO REVENUES AND PBT By Business Lines

REVENUE CONTRIBUTION

PBT CONTRIBUTION

10%

Corporate Banking

10%

25%

Retail

42% 16% 64% 29%

Commercial Banking Others

Source: Company, Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

On review of the Bank’s bond offering document, we note that 50% of the funds were planned for investments in the Telecommunications and Manufacturing sectors. Other planned investment outlets include Oil and Gas (25%), Transportation and Logistics (10%), Public/Private Partnerships (12.5%) and Infrastructure/Utilities (12.5%).

CONTRIBUTION TO INTEREST INCOME

Metrics*

100% Customers

80%

Current Price Trailing EPS**

60% Financial Institutions

40% Securities Trading

20%

Interest Income

UBA

FBN

GTBank

13.60

10.80

14.05

15.50

0.65

-0.34

0.11

1.54

Trailing PE

20.84

-31.93

125.61

10.05

NAPS

13.31

8.97

10.62

9.80

P/B Multiple (x)

1.02

DPS 0%

Zenith

1.70

1.20

1.32

1.58

1.00

1.35

1.00

DY (%)

12.49%

9.26%

9.61%

6.45%

Payout Ratio

55.12%

38.33%

N/A

54.05%

ROAE

4.81%

-3.76%

0.67%

8.82%

CONTRIBUTION TO INTEREST EXPENSE

ROAA

0.94%

-0.45%

0.11%

1.74%

100%

Outstanding Shares (mn)

Source: Company Financials, Vetiva Research

Customers

80%

25,117

21,556

29,006

18,654

*All figures are as at 30 September 2009; DPS is as at last FY **First Bank EPS is annualized

60%

Source: Company Financials; Vetiva Research Financial Institutions

40% 20%

Outlook 2010

For its FY’09 results, we forecast Gross Earnings and After Tax Earnings of N153.60 billion and N30.34 billion respectively, which translates to a Forward EPS of N1.63, with a DPS of N0.73. Our forecast in supported by an expected improvement in the Bank’s profitability margins to 21.42% (PBT) and 18.21% (PAT), up from Q3’09 levels of 16.79% and 12.62% respectively.

A scrip issue would be in line with the Bank’s recent FY declarations, though we believe this may be on an expanded number of shares.

In light of its strong position in the corporate market, we believe GTBank will be host to relatively higher demand for credit from its clients in H1’10, though this hinges on an improvement in economic fundamentals to support new investments.

Whilst we forecast a 20% growth in topline for GTBank in 2010, we expect a significant improvement in profitability margins to 30% (PBT) and 26% (PAT), supported by loan recoveries and write-backs for classified margin-related exposures.

We expect GTBank’s loan growth to slightly underperform the Sector in 2010, as we expect Management to keep a close eye on its Loan/Deposit ratio.

Our models value GTBank at 1.62x 2010F book, as we believe the Bank is well positioned to take advantage of emerging opportunities in the Banking Sector.

Securities Trading

0% Interest Expenses Source: Company Financials, Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

GTBANK SHARE PRICE Vs. VOLUME TRADED 52 week high:N17.05 52 week low:N8.25 Average Price:N12.60 Avg Vol Traded (‘000): 17,789 Beta:0.83

Share Price (Naira) 27 22 17 12 7 12000

Volume Traded (‘0000)

10000 8000 6000 4000 2000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings Interest & Discount Income Interest Expense Net Interest & Discount Income Other Income Operating Income Operating Expenses

DEC 09F

2010F

2011F

104,120

DEC 08A

166,575

199,890

239,868

68,208

118,268

137,924

163,110

INCOME STATEMENT ($'Mill)

DEC 09F

2010F

2011F

703

1,125

1,350

1,620

Interest & Discount Income

461

799

931

1,101

Interest Expense

151

304

364

437

310

495

567

664

242

326

418

518

552

821

985

1,182

Gross Earnings

22,363

44,975

53,970

64,764

45,845

73,293

83,954

98,346

35,912

48,307

61,966

76,758

81,757

121,600

145,920

175,104

Operating Income Operating Expenses

Net Interest & Discount Income Other Inc ome

DEC 08A

42,538

56,636

71,960

86,353

287

382

486

583

PBT Before Provisions

39,219

64,964

73,959

88,751

PBT Before Provisions

265

439

499

599

Provision For Risk Assets

4,042

29,276

13,992

14,392

Provision For Risk Assets

198

35,177

35,688

59,967

74,359

238

241

405

502

Profit Before Tax And EI Exceptional Items Profit Before Tax Tax

35,177

35,688

59,967

74,359

6,862

5,353

7,996

11,993

Profit Before Tax And EI Exceptional Items Profit Before Tax

238

241

405

205

351

421

Tax

502

Profit After Tax

28,316

30,335

51,971

62,366

Profit After Tax

191

Dividend Payable

14,923

13,651

26,505

34,301

Dividend Payable

101

179

232

Retained Earnings

12,686

16,684

25,466

28,065

Retained Earnings

113

172

189

DEC 09F

2010F

2011F

Balance Sheet

DEC 09F

2010F

2011F

Balance Sheet

DEC 08A

Assets Cash & Balances With CBN Due From Other Banks & Financial Institutions Short Term Investments (Treasury Bills) Bills Discounted

63,082

9,684

13,220

15,472

Cash & Balances With CBN

219,260

143,455

195,831

211,563

Due From Other Banks & Financial Institutions

62,216

220,700

298,417

334,974

Short Term Investments (Treasury Bills)

74,560

121,385

150,639

176,302

Bills Disc ounted

418,779

474,504

662,813

793,360

Loans And Advances

Advances Under Finance Lease

5,514

7,528

8,810

Deferred Taxation

42,043

60,256

84,801

Other Assets

68,025

Loans And Advances

Other Assets

52,676

Long Term Investments

17,018

Investment Properties

15,086

Fixed Assets

39,630

43,681

59,629

69,788

Intangibles (Goodwill) Total Assets

354

42,578

58,123

962,722

1,103,498

1,506,394

1,763,023

472,271

681,165

949,028

1,145,965

27,747

37,878

44,331

232,562

118,186

161,337

164,492

Taxation Payable

9,485

7,869

10,742

12,572

Deferred Taxation

3,475

674

921

Dividend Payable

62,897

70,754

111,048

123,412

780,688

906,445

1,271,020

1,491,789

Liabilities

Other Liabilities

Long Term Borrowings Total Liabilities

426

969

1,322

1,429

420

1,490

2,015

2,262

503

820

1,017

1,190

2,828

3,204

4,475

5,357

Advanc es Under Finance Lease

356

284

407

573

Long Term Investments

115

287

392

459

Investment Properties

102

Fixed Assets

268

295

403

471

Deferred Taxation

0.248798109

Intangibles (Goodwill) Total Assets

104

6,500

7,451

10,171

11,904

Share Capital Total Capital & Reserves Minority Interest

3,189

4,599

6,408

7,738

187

256

299

798

1,089

1,111

Taxation Payable

1,077

Deferred Taxation

Dividend Payable

Long Term Borrowings

425

478

750

833

5,271

6,120

8,582

10,073

9,327

170,530

187,726

226,047

261,907

177,992

197,053

235,374

271,234

4,042

Shareholders Funds

182,034

197,053

235,374

271,234

Total Liabilities & Equity

962,722

1,103,498

1,506,394

1,763,023

414,475

364,154

512,174

581,798

1,377,197

1,467,652

2,018,567

2,344,820

Contingent Accounts Total Assets & Contigents

Due To Other Banks & Fin. Inst. Other Liabilities

Total Liabilities Capial & Reserves

7,462

Reserves

Deposits

1,570

Capial & Reserves

Per Share Ratios

DEC 08A

DEC 09F

2010F

2011F

Average Assets

849,208

1,033,110

1,304,946

1,634,708

Average Shareholders Funds

172,689

189,544

216,214

253,304

Per Share Ratios

DEC 08A

DEC 09F

2010F

2011F

Earnings

1.90

1.63

2.79

3.34

Dividends

1.00

0.73

1.42

1.84

Net Assets

11.93

No. of Shares Outstanding

14,923

10.56

12.62

14.54

18,654

Growth Rates

DEC 08A

Gross Earnings

28%

60%

20%

PBT

29%

68%

24%

PAT

34%

71%

20%

Total Assets

31%

15%

37%

17%

Loan & Advances

45%

13%

40%

20%

Deposit Growth Rate

30%

44%

39%

21%

Shareholders Funds

11%

19%

15%

DEC 09F

2010F

2011F

Share Capital Reserves Total Capital & Reserves

Total Liabilities & Equity Contingent Accounts Total Assets & Contigents

1,526

1,768

1,202

1,331

1,589

1,831

6,500

7,451

10,171

11,904

2,799

2,459

3,458

3,928

9,299

9,910

13,630

15,833

Profitablilty

DEC 09F

2010F

2011F

DEC 08A

Interest Margin

67%

62%

61%

60%

Dividend Payout Ratio

53%

45%

51%

55%

Retention Ratio

47%

55%

49%

45%

Return on Average Equity Return on Average Assets

16%

24%

25%

Cost/Income (Ex-Provisions)

52%

47%

49%

Cost/Income (Normalized)

57%

71%

59%

58%

PBT Margin

34%

21%

30%

PAT Margin

27%

18%

26%

Effective Tax Rate

20%

15%

13%

16%

Liquidity

DEC 08A

DEC 09F

2010F

31%

2011F

Deposit Growth Rate

30%

44%

39%

21%

Loans/Deposits

89%

70%

69%

Capital Adequacy/Asset Quality Loan Loss Provisions to NPLs

DEC 08A

DEC 09F

2010F

2011F

119%

190%

213%

Loan Loss Provision/Total Loans

Non-Performing Loans to Total Loans

Equity/Total Assets Leverage Ratio (x)

‘Ahead of the Curve’

63 1,268

Shareholders Funds

Debt/Total Assets

50 1,151

Minority Interest

Debt/Equity

1,480

Liabilities

Deposits Due To Other Banks & Fin. Inst.

DEC 08A

Assets

35%

36%

47%

262%

46%

19%

18%

16%

15%

5.29

5.60

6.40

6.50

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Diamond Bank Plc - Company Overview BASIC INFORMATION Address

Plot 1261, Adeola Hopewell Street Victoria Island, Lagos, Nigeria

Website

www.diamondbank.com

Management

HRM Igwe Nnaemeka Alfred Ugochukwu (C hairman) Emeka Onwuka (MD/C EO)

Financial Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: DIAMONDB:NL

Sector

Banking

Country

Nigeria

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Actis DB Holdings Ltd.

Diamond Bank Plc (‘Diamond Bank’ or ‘the Bank’) is a fully licensed universal bank in Nigeria, offering financial services including investment, commercial and retail banking, securities dealing, custodian and insurance services. Converted to a Public Liability Company in February 2005, the Bank got listed on the Nigerian Stock Exchange on 27th May of the same year. Following the successful raising of additional capital via a GDR offering in 2007, the Bank got listed on the Professional Securities Market (PSM) of the London Stock Exchange (LSE) on the 11th of January 2008. Diamond Bank’s strategic focus is the retail/SME markets, which it has sought to penetrate through the use of innovative Banking products and savings marketing campaigns. Based on 30 September 2009 figures, we estimate the Bank currently controls c.4% and c.6% of industry Assets and Shareholders Funds respectively.

14.79

Others

85.21

FREE FLOAT %

61.89

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

14,475,237,126

SIZE AND VALUE TRADED Market C apitalization

Average Volume Traded ('09)

N 'Bn

116.50

$ 'Bn

0.79

Units

11,934,569

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'09

0.09

Final

FY'08

0.56

Final

FY'07

0.44

In line with CBN 30 September 2009 result publishing requirement, Diamond Bank published its Q2 October 2009 results, posting a slim +7.82% YoY growth in Gross Earnings to N53.18 billion, while PAT came in considerably lower -98.89% YoY at N114.38 million. Absolute growth parameters were however, not the key focal points in the results, but the Bank’s worsened asset quality during the 2nd quarter, in light of Management’s Q1’09 view that considerable additional provisions were unlikely in subsequent results. The Bank booked additional provisions of N4.96 billion during the quarter to 31, October 2009 (Q1’09: N7.69 billion), increasing risk premiums on the Bank’s valuation. Diamond Bank’s Balance Sheet (Total Assets and Contingents) recorded a +19.66% QoQ growth to N769.76 billion, an impressive growth in light of the challenging business climate in the period under review. Total Assets and Deposits were up +30.20% and +37.98% respectively QoQ, while Contingent Accounts declined by -17.18% QoQ. Being retail/SME market focused, and having non-performing exposures to the equity and downstream petroleum marketing sectors, risks associated with Diamond Bank’s business strategy came to the fore following the special audit of its books. We value the Bank between N10.87 – N12.81. Priced at N7.40 by the market on the 31st of December 2009, Diamond Bank’s pricing translates to an indicative lower-upside potential of +39.32%. In light of this, we place an ‘Overweight’ rating on the Bank.

Forecast Summary

APR 2009A 8M DEC 2009F DEC 2010F DEC 2011F DEC 2012F

Earnings Per Share (N) YoY Change (%)

0.36

0.13

1.60

2.13

-63.16%

20.71

56.22

4.64

3.47

2.51

0.09

0.00

0.87

1.17

1.46

YoY Change (%)

-83.93%

-100.00%

33.82%

25.40%

Dividend Yield (%) Net Assets Per Share (N YoY Change (%)

1.22% 7.91 -11.28%

0.00% 7.88 -0.31%

11.79% 9.47 20.13%

15.78% 10.72 13.21%

19.79% 12.48 16.43%

Price to Book (x)

0.94

0.78

0.69

0.59

Price to Earnings (x) Dividend Per Share (N)

1112.09%

33.82%

2.94

-63.33%

37.93%

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Overweight’ rating on the stock.

BA/CP reclassification distorted growth picture for the Bank in 2009…

Surprising additional indicate further erosion quality…

provisions in asset

Posting a slim +7.82% YoY growth in Q2’09 Gross Earnings to N53.18 billion, Diamond Bank’s After Tax Earnings were eroded by surprising additional loan loss provisions booked during the quarter; thus, PAT came in considerably lower -98.89% YoY at N114.38 million. Having posted Gross Earnings of N23.99 billion for the 3-month period ended July 2009, we saw Diamond Bank gross additional top line earnings of N29.19 billion over the next 3 months to October 2009 (a +21.68% growth QoQ). Though an impressive QoQ performance, we highlight the impact of the Central Bank of Nigeria’s (CBN’s) 18th November 2009 guideline on Banks’ treatment of existing Bankers Acceptances and Commercial Papers (BA/CPs) on Diamond Bank’s topline performance. We also believe that the increased classification of some of the Bank’s loans as non-performing during the year, had its impact on Diamond Bank’s Interest Income line. Thus, while BA/CP reclassification coupled with Interest Income on new credits (though minimal) helped boost the Group’s Interest Income line, the suspension of interest on an expanded portfolio of non-performing loans weighed down the positive impact of this growth. Whilst additional provisions seem to have been an incessant feature in the last season of Banking earnings releases in 2009, we did not expect to see any further provisions in Diamond Bank’s Q2’09 results, more so on the back of Management’s earlier indication (prior to our Q1’09 report on the Bank) of limited risk of additional provisions featuring in subsequent results. However, supporting explanations provided by Management indicate that the crystallization of a contingent liability and mark to market charges for margin exposures of Diamond Capital, coupled with additional provisions for nonperforming accounts (on the back of their maturity into new provision classes, as required by the Prudential Guidelines) were the main reasons behind the provision increase.

DIAMOND BANK NPL RATIOS Percentage

15.10

9.00 7.98

FY Apr 09

‘Ahead of the Curve’

Q1 Jul 09

Q2 Oct 09 Source: Bank, Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Subsidiary losses performance lower…

drag

group

Comparing figures for the Bank versus the Group, Cost/Income Ratio Ex-Provisions (CIR) for the Bank stayed flat relative to FY April level at 55.79% (FY’08/9: 54.81%), while that of the Group recorded a marked deterioration to 62.14% from 57.53% as at FY’08/9. In this regard, we note that the challenging economic and capital market terrain took its toll on Diamond Bank’s subsidiaries during the quarter, thus leading them to record a combined Loss Before Tax of (N3.60 billion) for the period.

DIAMOND BANK PROFITABILITY BY BUSINESS SEGMENTS Profit Before Taxation (N’Millions)

4,800

1,200

Regional Businesses

Public Sector

Corporate Banking

Subsidiaries

-1,200

-3,600

Source: Bank, Vetiva Research

Loan growth was restricted to small corporates and SMEs during the quarter…

Adequately capitalized and liquid with CAR and Liquidity Ratios of 20% and 35% respectively…

Having observed that the losses posted by some of its subsidiaries (mainly Diamond Capital, on which we expatiate on later) negatively impacted financial performance at the Group level, we note that Diamond Bank’s ability to rein in costs at the Bank level is attributable to the implementation of some cost management initiatives advised by Oliver Wyman (an international management consulting firm). One of such initiatives now implemented is the centralization of the Bank’s receipt and payment system, which has reduced the volume of such activities executed at multiple locations across the Country. Though we adduced some of the asset growth observed on Diamond Bank’s Balance Sheet to the reclassification, we note that new credit extension also played a part. The re-iterated stance by many Nigerian Banks of a reduced risk appetite and focus on recoveries, also held for Diamond Bank. Actual loan growth was sharply lower compared to previous periods and new loans during the quarter were mainly to small corporates and SMEs in relatively ‘minute’ amounts, as well as other small and cash/payroll-backed facilities. Relative to Q1’09, Diamond Bank’s Capital Adequacy and Liquidity Ratios experienced an improvement, rising to 20% and 35% respectively from 18% and 28%. Depending on the success level of the Bank’s proposed capital raising programme (Total Size: N200 billion), these ratios are likely to witness further improvement, at least prior to the effective deployment of the funds raised for investment purposes. The low success rate of GTBank’s 1st tranche indicates likely challenges to the Bank’s capital raising drive.

‘Ahead of the Curve’

2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

Metrics* Current Price

FCMB

Diamond

Access

IBTC

5.49

7.16

7.40

7.60

Annualized EPS

(1.20)

(0.04)

0.01

(1.07)

0.27

Trailing PE

(4.57)

(182.35)

702.44

(7.08)

27.27

7.47

NAPS

8.20

7.93

7.76

9.88

4.11

P/B Multiple (x)

0.67

0.90

0.95

0.77

1.82

DPS (Last FY) DY (%)

Diamond Bank is the top Banking play in the Nigerian retail space…

Skye

Payout Ratio

0.60 10.93%

0.09

0.70

0.40

0.00%

1.22%

9.21%

5.35%

43.39%

0.00%

25.33%

54.70%

64.86%

ROAE

-14.52%

-0.49%

0.13%

-10.58%

6.35%

ROAA

-2.00%

-0.15%

0.02%

-2.65%

1.23%

Outstanding Shares (mn)

11,584

16,271

14,475

16,437

18,750

*All figures except Diamond (31 July) are as at 30 September 2009; DPS is as at last FY Source: Company Financials; Vetiva Research

Outlook 2010

‘Ahead of the Curve’

We estimate Diamond Bank’s FY’09 (8-months) Gross and After Tax Earnings at N73.82 billon and N1.91 billion respectively. Our PAT forecast translates to a Forward EPS of N0.13.

Management expects credit extension will pick up steam by Q2’10 and grow by about 20-30% YoY. We believe this will depend largely on the level of success achieved with its loan recoveries, deposit mobilization, the proposed capital raising and improvements in the larger economy.

For Diamond Bank, we believe its lending will be mainly limited to known clients who have a proven track record in debt servicing, considering the high default witnessed on its retail lending portfolio in 2009. We expect risk taking to take a less aggressive stance, even as the pace of the economy and Government’s economic direction will suggest new areas of spending. However, we expect such opportunities or new areas will include those in project and infrastructure finance.

Our models value Diamond Bank at 1.17x 2010F book, with an average forecast cycle ROE of 21%. We believe Diamond Bank’s investments in the retail market position it well to take advantage of niche growth opportunities in emerging business sectors as economic fundamentals pick up.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

DIAMOND BANK SHARE PRICE Vs. VOLUME TRADED 60

52 week high:N10.44 52 week low:N3.95 Average Price:N6.70 Avg Vol Traded (‘000): 11,475 Beta:1.15

Share Price (Naira)

50 40 30 20 10 0 80000

Volume Traded (‘000)

60000 40000 20000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill)

APR 09A

DEC 09F

2010F

2011F

Gross Earnings

108,979

73,820

132,876

170,081

Interest & Discount Income

77,825

55,365

95,670

120,757

Interest Expense

35,831

23,622

39,863

49,323

Net Interest & Discount Income Other Inc ome

41,993

31,743

55,808

71,434

INCOME STATEMENT ($'Mill) Gross Earnings

APR 09A

DEC 09F

2010F

2011F

736

498

897

1,148

Interest & Discount Inc ome

525

374

646

815

Interest Expense

242

160

269

333

Net Interest & Discount Income

284

214

377

482

29,881

18,455

37,205

49,323

202

125

251

333

Operating Income

71,874

50,197

93,013

120,757

Operating Income

485

339

628

815

Operating Expenses

41,349

32,481

55,808

69,733

Operating Expenses

279

219

377

471

30,525

17,717

37,205

51,024

PBT Before Provisions

206

120

251

345

14,465

7,973

11,906

Provision For Risk Assets

3,252

29,233

39,119

197

264

197

156

209

PBT Before Provisions Provision For Risk Assets Profit Before Tax And EI

30,525 24,623

Profit Before Tax

5,902

3,252

29,233

39,119

730

1,346

6,139

8,215

Profit After Tax

5,172

1,905

23,094

30,904

Dividend Payable

1,303

12,632

16,904

Dividend Payable

Retained Earnings

3,841

1,895

10,335

13,830

Retained Earnings

APR 09A

DEC 09F

2010F

2011F

Balance Sheet

Profit Before Tax And EI

Exc eptional Items Tax

Other Income

Assets

Exc eptional Items Profit Before Tax

206 166

Tax Profit After Tax

264

114

APR 09A

DEC 09F

2010F

2011F

Assets

Cash & Balances With CBN Due From Other Banks & Financial Institutions Short Term Investments (Treasury Bills) Bills Discounted Loans And Advanc es

54,767

22,567

24,257

28,858

137,638

118,556

137,458

163,527

11,502

19,878

24,257

28,858

Cash & Balances With CBN

370

164

195

Due From Other Banks & Financ ial Institutions

929

801

928

1,104

134

164

195

Short Term Investments (Treasury Bills) Bills Disc ounted

152

285,345

340,515

436,632

519,440

1,927

2,299

2,948

Advances Under Finance Lease

6,150

5,828

8,086

9,619

Advances Under Financ e Lease

Deferred Taxation

4,416

4,537

8,086

9,619

Deferred Taxation

Loans And Advanc es

3,507

Other Assets

78,995

32,639

40,429

48,096

Other Assets

533

220

273

325

Long Term Investments

66,458

74,446

80,858

96,193

Long Term Investments

449

503

546

650

2,651

3,242

8,086

9,619

34,156

37,176

40,429

48,096

231

251

273

325

Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

682,078

659,385

808,579

961,925

466,890

474,996

582,469

706,149

8,558

3,203

3,928

4,673

60,969

46,882

61,129

76,954

Liabilities

Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

4,606

4,452

5,460

6,495

3,153

3,207

3,933

4,768

412

317

413

520

Liabilities

Deposits Due To Other Banks & Fin. Inst. Other Liabilities

Taxation Payable

3,827

2,869

3,518

4,185

Taxation Payable

Deferred Taxation

3,525

3,552

4,356

5,182

Deferred Taxation

Dividend Payable

Dividend Payable Long Term Borrowings Total Liabilities

164 23,708

13,781

16,172

9,619

567,640

545,283

671,571

806,763

Capial & Reserves Share Capital Reserves Total Capital & Reserves Minority Interest

7,238

106,446

129,323

147,333

114,004

113,683

136,560

154,570

434

397

487

579

114,438

114,080

137,047

155,149

Total Liabilities & Equity

682,078

659,364

808,618

961,912

157,194

105,502

129,373

153,908

839,272

764,865

937,991

1,115,820

APR 09A

DEC 09F

2010F

2011F

Total Assets & Contigents

Per Share Ratios

Total Liabilities

24 -

29 -

35 -

160

109

3,833

3,682

4,535

5,447

Capial & Reserves 7,238 106,766

Shareholders Funds

Contingent Acc ounts

Long Term Borrowings

Share Capital Reserves Total Capital & Reserves

721

719

873

995

770

768

922

1,044

4,606

4,452

5,460

6,495

1,061

712

874

1,039

Minority Interest Shareholders Funds Total Liabilities & Equity Contingent Acc ounts Total Assets & Contigents

Profitablilty

5,667

5,165

6,333

7,534

APR 09A

DEC 09F

2010F

2011F

Average Assets

653,874

670,731

733,982

885,252

Interest Margin

Average Shareholders Funds

115,847

114,259

125,564

146,098

Dividend Payout Ratio

25%

55%

Retention Ratio

75%

100%

45%

18%

21%

APR 09A

DEC 09F

Earnings

0.36

0.13

Dividends

Per Share Ratios

0.09

Net Assets

7.88

No. of Shares Outstanding

14,475

7.85

APR 09A

Gross Earnings

58%

59%

2011F

Return on Average Equity

1.60

2.13

Return on Average Assets

1.17

Cost/Income (Ex-Provisions)

58%

65%

60%

58%

9.43

10.68

Cost/Income (Normalized)

58%

94%

69%

68%

14,475

DEC 09F

2010F

2011F

PBT Margin

22%

23%

17%

18%

12%

41%

21%

80%

-32%

PBT

-64%

-45%

799%

34%

Liquidity

PAT

-60%

-63%

1112%

34%

Deposit Growth Rate

11%

23%

21%

-3%

23%

19%

Loans/Deposits

61%

72%

75%

74%

Loan & Advances

19%

28%

Deposit Growth Rate

11%

23%

21%

Capital Adequacy/Asset Quality

Shareholders Funds

-2%

20%

13%

Loan Loss Provisions to NPLs

Total Assets

80%

Effec tive Tax Rate

57%

0.87

2010F

PAT Margin Growth Rates

54%

28%

Non-Performing Loans to Total Loans Debt/Equity Debt/Total Assets Equity/Total Assets Leverage Ratio (x)

‘Ahead of the Curve’

DEC 09F

2010F

2011F

19%

Loan Loss Provision/Total Loans

APR 09A

DEC 09F

2010F

2011F

110%

88%

100%

13%

12%

110% 12% 11%

15%

12%

21%

12%

17% 5.96

17% 5.78

17% 5.90

16% 6.20

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Zenith Bank Plc – Company Overview BASIC INFORMATION Address

Plot 87 Ajose Adeogun Street Victoria Island, Lagos, Nigeria

Website

www.zenithbank.com

Management

Macaulay Pepple (Chairman) Jim Ovia (GMD/CEO)

Financial Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: ZENITH:NL

Sector

Banking

Country

Nigeria

Zenith Bank Plc (‘Zenith Bank’ or ‘the Bank’) was established in May 1990 and commenced Banking operations in Nigeria in July of the same year. Growing at a CAGR of 74% over the past 5 years, the Bank is now the second biggest Bank in Nigeria by Total Assets (c.12% market share), while it controls c.17% of industry Shareholders Funds. Strong in the blue chip corporate lending market, Zenith Bank leverages on its 300 strong branch network and technology driven solutions to grow deposits and source cheap funding to service its blue-chip clients. Operating in the UK, Ghana, Sierra Leone and with a representative office in South Africa, Zenith Bank recently commenced operations in the Gambia , having obtained its Banking license on the 30th of December 2009.

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Nigerians

100.00

FREE FLOAT

87.40

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

25,117,195,029

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Bn

341.59

$ 'Bn

2.31

Units

15,597,062

DIVIDENDS AND BONUS ISSUES Type

Year

Q2'08/9 Final

Scrip Issue FY'08

Final

FY'07

1 for 2 1.70 1.00

Sustained topline performance featured through most of 2009 except for Q4’09, when Gross Earnings performance fell short by 42% relative to average run-rate during the financial year. Gross Earnings for the 3month period to 30 September 2009 dipped to N32.39 billion, relative to an average run-rate of N55.54 billion in the three previous quarters. Having decided to book N18.55 billion in exceptional provisions in its Q3’08/9 results, Zenith Bank had the least required additional provisions of all listed Nigerian Banks with just N7.59 billion being recommended by the regulator, minimal addition which was in line with our expectations. Risk concentrations in Zenith Bank’s loan book are minimal, in light of its well diversified structure; no Sector holds >10% loan book share. As at 30 September 2009, the Transportation Sector held 12% share. Zenith Bank is currently the most capitalised and one of the most liquid Banks Bank in Nigeria, with September 2009 Capital Adequacy and Liquidity Ratios of 37% and 57% respectively. This places the Bank in a strong position to take advantage of emerging opportunities in the developing Nigerian economy. Whilst such strong financial ratios are a positive from a view point, we believe keeping the ratios at these levels for too long will ultimately imply less than optimal use of funds and capital, and less than optimal returns for the Bank and investors alike. We value the Bank between N18.96 – N23.05. Priced at N13.60 by the market on the 31st of December 2009, we believe this pricing significantly undervalues the Bank. With an indicative lower-upside potential of +39.41%, we place an ‘Overweight’ rating on the Bank. Forecast Summary

15M SEP 2008A 15M DEC 2009F DEC 2010F DEC 2011F DEC 2012F

Earnings Per Share (N)

3.10

YoY Change (%)

1.00

1.78 77.84%

2.32 30.21%

3.25

55.87%

-67.77%

40.40%

Price to Earnings (x)

4.38

13.59

7.64

5.87

4.18

Dividend Per Share (N)

1.70

0.40

0.93

1.16

1.69

YoY Change (%)

69.88%

-76.44%

131.20%

25.20%

46.02%

Dividend Yield (%) Net Assets Per Share (N) YoY Change (%)

12.49% 20.70 64.70%

2.94% 13.66 -34.00%

6.81% 15.04 10.10%

8.52% 16.43 9.25%

12.44% 18.53 12.75%

Price to Book (x)

0.66

1.00

0.90

0.83

0.73

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Overweight’ rating on the stock.

Strong profitable performance relative to its peers post-audit…

12M September 2009 results saw Gross Earnings and Profit Before Tax and Exceptional Items come in at N199.00 billion and N47.16 billion respectively, significantly below our estimates of N223.73 billion and N51.46 billion respectively. We also note that in light of a N26.14 billion Exceptional Provision booked for the 12-month period, After Tax Earnings came in at a considerably lower N16.39 billion, relative to the N35.02 billion reported for the previous corresponding period (YoY: 53.19%).

QUARTERLY GROSS AND AFTER TAX EARNINGS (N’Billions)

57.65

56.92

52.04

32.39

11.11 Gross Earnings performance fell short by 42% relative to average run-rate during the financial year…

9.19

Q2 Gross Earnings

5.77 Q3 -9.67 After Tax Earnings

Source: Bank, Vetiva Research

Cost management concerns feature in Zenith Bank’s September 2009 results…

‘Ahead of the Curve’

also 12M

Interest Income continued to be the main contributor to Zenith Bank’s Gross Earnings, as we observed a marked increase to 73.63% of Gross Earnings, up from 68.36% in the previous corresponding period (NB: previous corresponding = 12-month period ended September 2008). Such increased contribution we believe arose not mainly from higher lending rates in the year under review (as Interest Income grew only +28.62% YoY, despite a +45.71% YoY growth in Net Loans), but due to the lethargic growth pace of international/domestic trade and capital market activities, which caused Other Income to remain flat with a -0.45% growth rate YoY. Our view is asserted by the fact that risk asset yields contribution to Interest Income shrank to 59% relative to 65% the previous year, while Placements/short term funds and bond trading/holdings income contribution grew to 40%. Like many of its peers, Zenith Bank witnessed a continued climb in its Operating Costs, albeit with a less than commensurate growth in Operating Income (ex-provisions). As expected, Cost/Income Ratio (ex-provisions) jumped to 62.56%, up from 55.34% in the previous corresponding period. We would like to see Management place emphasis on moderating this ratio downwards in the near term, by further leveraging on its IT processes base to improve delivery.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Zenith Bank’s relatively minimal additional provisions were in line with our expectations, as stated in our ‘Black Friday’ report…

For its Q3’08/09 results, Zenith Bank reported an Exceptional Item figure of N18.55 billion, arising mainly from margin-related exposures and some other challenging pockets in its loan book. Following the special examination of its books, the Regulator required the Bank to make an additional provision of N7.59 billion on its Q3’08/09 exceptional provision, thus bringing total additional provision for the 12-month period ended September 2009 to N26.14 billion. In comparison to the level of additional provisions we have seen other Nigerian Banks make (relative to previous levels) following the special examination of their books, Zenith Bank’s provision level was the least, as it had already booked 70.96% of its current provision prior to the audit. This in our view is indicative of the Management’s proactive nature in dealing with asset quality challenges.

GROSS NON-PERFORMING LOANS AND PROVISIONS (N’Billions)

Coverage Ratio: 217%

NPLs Provisions

54.72

Coverage Ratio: 143% 9.56

13.73

FY Sept 08

+299%

25.16 +163%

12M Sept 09 Source: Bank, Vetiva Research

The Bank’s strong financial position is usually overlooked by the market…

Zenith Bank also reported the second best NPL Ratio as at 30 September 2009, at 3.53%. Further supporting our view of limited risks of significant further deterioration in the Bank’s asset quality is its strong Coverage Ratio estimated at 217%, which places Zenith Bank on a strong earnings recovery path going forward. At the end of the period under review, Zenith Bank had Liquidity and Capital Adequacy Ratios of 57% and 37% respectively, positions we had noted granted it a strong probability of emerging from the CBN special audit relatively unscathed. Whilst such strong financial ratios are a positive from a view point, we believe keeping the ratios at these levels for too long will ultimately imply less than optimal use of funds and capital, and less than optimal returns for the Bank and investors alike. Thus, we believe Zenith Bank can flog its assets more efficiently to deliver superior returns relative to its peers. This in our view presents a strong investment case for Zenith Bank, as the inherent potential presented by its strong financial position is typically overlooked by the general market.

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Metrics*

Zenith

UBA

FBN

GTBank

13.60

10.80

14.05

15.50

0.65

-0.34

0.11

1.54

Trailing PE

20.84

-31.93

125.61

10.05

NAPS

13.31

8.97

10.62

9.80

P/B Multiple (x)

1.02

Current Price Trailing EPS**

DPS

1.70

1.20

1.32

1.58

1.00

1.35

1.00

DY (%)

12.49%

9.26%

9.61%

6.45%

Payout Ratio

55.12%

38.33%

N/A

54.05%

ROAE

4.81%

-3.76%

0.67%

8.82%

ROAA

0.94%

-0.45%

0.11%

1.74%

Outstanding Shares (mn)

25,117

21,556

29,006

18,654

*All figures are as at 30 September 2009; DPS is as at last FY **First Bank EPS is annualized Source: Company Financials; Vetiva Research

Outlook 2010

As is typical with the quick release of Zenith Bank’s FY results, we expect FY’09 results sometime in March 2010...

We expect Zenith Bank’s deposit base would remain relatively flat till 2009 year end, as Management noted its plan to reduce its average cost of funds, having pegged deposit rates on new funds at 15%.

We forecast FY December 2009 Gross Earnings and PAT at N244.23 billion and N25.14 billion respectively, which translates to a Forward EPS of N1.00, with an estimated Dividend Per Share of N0.40 (supported by the Bank’s strong liquidity position). The further deterioration in the capital market in Q4’09 is the strongest risk to our earnings and dividend expectations, as we are confident in the quality of the Bank’s loan book post-audit.

In light of expected slowdown in establishment of new branches in 2010, we expect Management’s focus to be on the optimization and performance consolidation of existing branches and operations.

Acknowledging market’s succession risk concerns for Zenith Bank, we note the existence of cohesion in strategic statements, following our meetings with different Management personnel. Also, considering the appointment of Mr. Godwin Emefiele as MD/CEO Designate and the existence of 6 Executive Directors with at least 15 years of experience with the Bank on the average, we expect the baton change to be somewhat seamless. We believe this Management change implies a new growth pattern for the Bank, which we would be observing keenly

Whilst Zenith Bank has announced plans to also raise fresh funds via a N300 billion bond issuance programme in tranches, we believe a desire to be primed for any observed investment opportunities necessitates this move. Thus, whilst there is a need to smoothen out asset/liability maturities/mismatches, we believe Zenith Bank will approach the market only when a clear investment opportunity presents, for which the funds to be raised can be utilised, as it is presently adequately financed.

Mr. Emefiele was the Bank’s Deputy Managing Director prior to this appointment…

Supported by Management’s desire to improve its transparency and disclosure, we expect the Bank to match industry standards with the release of its 15M December 2009 results..

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Also, with its ability to generate funding at rates cheaper than the highest coupon offered on recent State Government offerings (15.5%), the attractiveness of a bond issuance may be seen by the Bank as not too appealing in the near term

In light of the M&A opportunities in the Banking Sector, we are less optimistic about Zenith Bank’s willingness to position as an acquirer in the industry, considering that its expansion strategy has been organic, and it is still highly capitalized with a 37% CAR.

Our models value Zenith Bank at 1.38x 2010F book, with an average forecast cycle ROE of 18%. We do not expect a sharp change in Management’s liquidity preference, which weighs in on our ROE expectations.

ZENITH BANK SHARE PRICE Vs. VOLUME TRADED 50

52 week high:N29.00 52 week low:N10.11 Average Price:N14.69 Avg Vol Traded (‘000): 15,597 Beta:1.17

Share Price (Naira)

40 30 20 10 0 10000

Volume Traded (‘0000)

5000

0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings Interest & Disc ount Income Interest Expense Net Interest & Discount Income Other Income

15M SEP 08A

15M DEC 09F

2010F

2011F

208,294

244,231

238,800

298,500

142,390

188,058

174,324

211,935

53,598

63,500

57,312

65,670

88,792

124,558

117,012

146,265

INCOME STATEMENT (N'Mill) Gross Earnings

15M SEP 08F

15M DEC 09F

2010F

2011F

1406.44

1649.10

1612.43

2015.53

Interest & Discount Income

961.45

1269.80

1177.07

1431.03

Interest Expense

361.90

428.76

386.98

443.42

599.54

841.04

790.09

987.61

444.99

379.29

435.35

584.50

1044.54

1220.33

1225.44

1572.11

Net Interest & Discount Income Other Income

65,904

56,173

64,476

86,565

Operating Income

154,696

180,731

181,488

232,830

Operating Income

Operating Expenses

92,250

112,346

109,848

143,280

Operating Expenses

622.89

758.58

741.72

967.46

421.64

461.75

483.73

604.66

42.72

75.71

96.75

100.78

386.98

503.88

PBT Before Provisions

62,446

68,385

71,640

89,550

PBT Before Provisions

Provision For Risk Assets

6,327

11,212

14,328

14,925

Provision For Risk Assets

56,119

59,226

57,312

74,625

Profit Before Tax And EI Exceptional Items Profit Before Tax

56,119

27,000 32,226

57,312

Profit Before Tax And EI

378.92

Exceptional Items

74,625

Profit Before Tax

182.31

0.00

217.60

386.98

503.88

4,126

7,090

12,609

16,418

27.86

47.87

85.14

110.85

Profit After Tax

51,992

25,136

44,703

58,208

Profit After Tax

351.06

169.73

301.85

393.03

Dividend Payable

28,446

10,055

23,246

29,104

Dividend Payable

192.07

67.89

156.96

196.51

Retained Earnings

23,163

15,082

21,458

29,104

Retained Earnings

156.40

101.84

144.89

15M SEP 08A

15M DEC 09F

2010F

2011F

Balance Sheet

Cash & Balances With Cbn

Tax

Balance Sheet

Tax

399.91

0.00 378.92

15M SEP 08F

15M DEC 09F

2010F

Assets

Assets Cash & Balances With Cbn

239,562

86,650

68,007

76,777

Due From Other Banks & Financial Institutions

147,898

495,635

680,068

767,766

Due From Other Banks & Financial Institutions

Short Term Investments (Treasury Bills)

788,842

230,330

Short Term Investments (Treasury Bills)

Bills Discounted

Loans And Advanc es Advances Under Finance Lease

451,638 4,678

160

207,959 675,867 6,932

226,689

1,100,464

9,068

10,237

51,990

58,939

40,947

Long Term Investments

63,784

138,639

181,351

204,737

Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

50,943

69,320

113,345

127,961

Loans And Advanc es

585

459

518

999

3,347

4,592

5,184

5,326

1,404

1,531

1,555

3,050

4,564

6,276

7,431

Other Assets

Advanc es Under Finance Lease

272

351

398

276

Long Term Investments

431

936

1,225

1,382

Deferred Taxation

40,326

Deferred Taxation

1,618

Bills Disc ounted

929,426

Other Assets

Investment Properties

Fixed Assets

344

468

765

864

Intangibles (Goodwill)

1,787,832

1,732,991

2,266,892

2,559,219

1,185,893

1,109,114

1,496,149

1,765,861

Total Assets

12,072

11,701

15,306

17,280

8,007

7,489

10,102

11,923

Liabilities

Liabilities Deposits Due To Other Banks & Fin. Inst.

Deposits Due To Other Banks & Fin. Inst.

Taxation

5,690

4,679

6,574

7,422

Taxation

Deferred Taxation

1,960

2,253

3,400

3,071

Deferred Taxation

Dividend Payable

Other Liabilities Long Term Borrowings

Total Liabilities

213,102

239,153

317,365

307,106

34,570

34,660

65,513

62,957

1,441,214 1,389,825 1,889,077 2,146,441

Share Capital

8,372

Reserves Total Capital & Reserves Minority Interest Shareholders Funds Total Liabilities & Equity Contingent Accounts

Total Assets & Contigents Per Share Ratios Average Assets Average Shareholders Funds Per Share Ratios

12,559

335,976

328,182

362,763

395,100

344,348

340,740

375,322

407,659

2,269

2,426

2,494

5,118

346,618

343,167

377,815

412,777

1,787,832

1,732,991

2,266,892

2,559,219

724,298

589,217

782,078

921,319

2,512,129 2,322,208 3,048,970 3,480,537 15M SEP 08A

15M DEC 09F

2010F

2011F

1,380,387

1,760,411

1,999,942

2,413,055

231,536

344,892

360,491

395,296

15M SEP 08A

15M DEC 09F

2010F

2011F

Earnings

3.10

1.00

1.78

2.32

Dividends

1.70

0.40

0.93

1.16

Net Assets No. of Shares Outstanding

Other Liabilities

1,439

1,615

2,143

2,074

233

234

442

425

9,731 9,384 12,755 14,493

Share Capital Reserves Total Capital & Reserves

Shareholder's Funds Total Liabilities & Equity Contingent Acc ounts

Total Assets & Contigents Profitablilty

2,216

2,449

2,668

2,301

2,534

2,753

2,340

2,317

2,551

2,787

12,072

11,701

15,306

17,280

4,891

3,979

5,281

6,221

16,962 15,680 20,587 23,501 15M SEP 08A

15M DEC 09F

2010F

62%

66%

67%

Dividend Payout Ratio

55%

40%

52%

50%

Retention Ratio

45%

60%

48%

50%

12%

15%

Return on Average Equity Return on Average Assets

22%

Cost/Inc ome (Ex-Provisions)

60%

62%

61%

62%

Cost/Inc ome (Normalized)

64%

68%

20.70

13.66

15.04

16.43

PBT Margin

27%

25,117

PAT Margin

25%

10%

19%

20%

22%

15M DEC 09F

2010F

13%

24%

17%

-2%

25%

Liquidity

PBT

119%

-43%

78%

30%

Deposit Growth Rate

87%

-6%

35%

PAT

182%

-52%

78%

30%

Loans/Deposits

38%

61%

62%

84%

-3%

31%

13%

Shareholders Funds

38%

18%

Capital Adequacy/Asset Quality

87%

-6%

35%

18%

Loan Loss Provisions to NPLs

198%

-1%

10%

55%

50%

15M DEC 09F

2010F

2011F 18% 62% 2011F

144%

198%

234%

10%

17%

15%

Equity/Total Assets Leverage Ratio (x)

‘Ahead of the Curve’

15M SEP 08A

15M DEC 09F

Non-Performing Loans to Total Loans Debt/Total Assets

15M SEP 08A

Loan Loss Provision/Total Loans Debt/Equity

25%

2011F

120%

Deposit Growth Rate

69%

16,745 15M SEP 08A

Loan & Advances

2011F

Interest Margin

Gross Earnings

Total Assets

2,269 2,325

Minority Interest

Effective Tax Rate

Growth Rates

Long Term Borrowings

Total Liabilities

Capial & Reserves

196.51 2011F

19% 5.16

20% 5.05

17% 6.00

225% 7%

2% 16% 6.20

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Stanbic IBTC Bank Plc - Company Overview BASIC INFORMATION Address

IBTC Plaza Walter Cartinton Victoria Island, Lagos, Nigeria

Website

www.stanbicibtcbank.com

Management

Mr Atedo Peterside (Chairman) Mr Chris Newson (CEO)

Financial Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: IBTCCB:NL

Sector

Banking

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Standard Bank Group

50.70

Others

49.30

FREE FLOAT (%)

16.50

SHARES IN ISSUE Date

Stanbic IBTC Bank Plc (‘IBTC’ or ‘the Bank’) is the product of the merger between Stanbic Bank Nigeria Limited and IBTC Chartered Bank Plc, a business combination announced on the 31st of March 2008. IBTC is structured into three divisions: Corporate and Investment Banking; Personal and Business Banking; and Wealth Management. With the combined entity having been in operation for less than two years, its biggest division is its Corporate and Investment Banking Division; whose service offerings include debt and equity advisory, structured and project finance, trades services, transactional banking and lending, global markets, custody, private clients services and private equity funding. Though a Bank with a vision to become a relevant player in Nigeria’s Baking space in the next 5 years, it currently controls c.2% and c.4% of industry Assets and Shareholders Funds respectively.

Key Review Highlights

Shares Outstanding

Dec-09

18,750,000,000

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Bn

140

$ 'Bn

Units

2,870,828

DIVIDENDS AND BONUS ISSUES T ype

Year

Final

FY'08

N0.40

Final

FY'07

N0.25

Final

FY'06

N0.30

Q3’09 results for the period ended 30 September 2009, showed Gross Earnings coming in at N42.80 billion (-9.20% YoY), while After Tax Earnings declined -64.84% YoY to N3.72 billion. Whist we had previously noted our expectation of less significant provision shocks from IBTC relative to its peers, we saw the Bank report Exceptional Items (net) of N5.91 billion, arising subsequent to the CBN/NDIC joint special examination of its books. Considering the exceptional provisions booked (which is +17.65% higher than FY December 2008 provisions of N5.02 billion), IBTC’s profitability margins retracted sharply to 11.93% (PBT) and 8.69% (PAT), down from the 27.17% and 20.32% recorded as at Q2 June 2009. Consequently, the Bank’s Trailing EPS declined by -44.88% QoQ to N0.27. Relative to the sharp deterioration we had observed in IBTC’s Q2’09 Cost/Income Ratio when compared to FY’08 (rising from 54% to 64%), it appeared IBTC largely managed to keep costs in check, as CIR (exprovision) stayed relatively flat in Q3 at 64%. With gross Non-Performing Loans of N20.66 billion, IBTC’s September 2009 NPL Ratio stood at 17.09% (up from 14.28% as at FY’09). Notably, the Bank’s asset quality had been a concern prior to the merger, and we are of the view that a considerable portion may already be classified as lost. We value the Bank between N6.51 – N7.77. Priced at N7.47 by the market on the 31st of December 2009, we place a ‘Neutral’ rating on the Bank. Forecast Summary

Earnings Per Share (N) YoY Change (%)

2009F

2010F

2011F

0.64

0.47

0.85

1.23

52.80% -25.92%

Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

2008A

78.90%

44.66%

2012F 1.65 34.19%

11.68

15.76

8.81

6.09

4.54

0.40

0.28

0.55

0.80

1.07

60.00% -28.91%

93.80%

44.66%

34.19%

5.35% 4.34 7.05%

3.81% 4.39 1.09%

7.38% 4.95 12.84%

10.67% 5.63 13.64%

14.32% 6.47 15.08%

1.72

1.70

1.51

1.33

1.15

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Neutral’ rating on the stock.

Shrinking operating performance, right from top line…

CONTRIBUTION TO GROSS EARNINGS By Business Segments 6M Jun 09

9M Sep 09

Corporate & Investment Banking

14%

Increased weighting of Corporate and Investment Banking in Group Gross Earnings…

26%

60%

Personal & Business Banking

11%

24% 65%

Wealth Management

Source: Company Financials, Vetiva Research

‘Ahead of the Curve’

During the quarter however, we saw Gross Earnings garner N15.68 billion, a run-rate higher than the N13.56 billion average booked in the first two quarters. Increased Transactional Banking volumes continued to support headline earnings, coupled with income from foreign exchange and money market activities. Relative to the sharp deterioration we had observed in IBTC’s Q2’09 Cost/Income Ratio when compared to FY’08 (rising from 54% to 64%), it appeared IBTC largely managed to keep costs in check, as CIR (exprovision) stayed relatively flat in Q3 at 64%. However, we believe that costs may have experienced some further deterioration during Q3’09, in light of the possibility of Q2’09 CIR being cum-provision, while Q3’09 is ex-provision (we did not have full Q2’09 P&L figures to check this).

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Additional provisions from CBN/NDIC special audit pressure earnings…

Asset quality issues had prevailed premerger…

Despite lower Capital Adequacy and Liquidity Ratios in Q3, IBTC remains one of the most liquid and capitalized Banks in Nigeria…

Whist we had previously noted our expectation of less significant provision shocks from IBTC relative to its peers, we saw the Bank report Exceptional Items (net) of N5.91 billion, arising subsequent to the CBN/NDIC joint special examination of its books. IBTC’s CBN recommended additional provisions (gross) stands at N12.08 billion, of which we note that c.N1 billion was for Margin Loans, while the balance was split almost evenly across Manufacturing, Oil & Gas, FMCG and Retail. Considering that the Bank made special recoveries amounting to N6.18 billion on the classified accounts, its Exceptional Items balance reduced to N5.91 billion as reported for the period under review. With an NPL Ratio of 17.09%, we estimate the Bank’s Coverage Ratio at 111.09%, an improvement from 66.88% as at FY December 2008. We note however, that high NPLs have been a common feature in IBTC’s financials prior to the business combination, which causes us to believe majority of the classified loans are lost and fully provided for. Looking at the Bank’s Balance Sheet, we note the sharp reduction in IBTC’s Cash/Balances with CBN and bond holdings, which Management attributes to the reduced yields on such assets during the quarter. Hence, during the quarter, a Balance Sheet restructuring saw IBTC increase its net loans somewhat in search of higher returns in the form of Interest Income, thus causing its Liquidity Ratio to drop QoQ to 51% from 79% as at Q2 June 2009. The increased appetite for risk, coupled with the moderate decline in its Net Assets, translated to a 500bps reduction in its Capital Adequacy Ratio to 33% from 38% as at Q2 June 2009. Despite the reduction in its Liquidity and Capital Adequacy Ratios, IBTC remains one of the most liquid and capitalized Banks in Nigeria as at September ending.

Metrics* Current Price

Skye

FCMB

5.49

7.16

Diamond

Access

7.40

7.60

IBTC 7.47

Annualized EPS

(1.20)

(0.04)

0.01

(1.07)

0.27

Trailing PE

(4.57)

(182.35)

702.44

(7.08)

27.27

NAPS

8.20

7.93

7.76

9.88

P/B Multiple (x)

0.67

0.90

0.95

0.77

1.82

DPS (Last FY)

0.60

0.09

0.70

0.40

0.00%

1.22%

9.21%

5.35%

DY (%) Payout Ratio

10.93%

4.11

43.39%

0.00%

25.33%

54.70%

64.86%

ROAE

-14.52%

-0.49%

0.13%

-10.58%

6.35%

ROAA

-2.00%

-0.15%

0.02%

-2.65%

Outstanding Shares (mn)

11,584

16,271

14,475

16,437

1.23% 18,750

*All figures except Diamond (31 July) are as at 30 September 2009; DPS is as at last FY Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Outlook 2010

In line with the Bank’s FY December 2009 forecast of N58.11 billon and N8.89 billion in Gross and After Tax Earnings respectively, we anticipate a N0.28 Dividend Per Share from an Earnings Per Share of N0.47, which translates to a Payout Ratio of 60% (supported by the Bank’s strong liquidity position and foreign ownership).

In light of the M&A winds currently blowing over the Banking Sector, we believe the Stanbic IBTC merger story, strong capital adequacy ratio and ownership structure position it as a consolidator in the industry. Management recently revealed that it has registered its acquisition intent for one of the troubled Banks, as part of steps to increase its market relevance in Nigeria.

IBTC remains a delicate play for investors in our view, and believe the premium at which the stock is priced may become increasingly justified over time. Investors seem to be pricing in strong positive news from future acquisitions and also place a premium on the stock due to the Standard Bank brand and the existence of a strong risk management process/framework in the Bank (IBTC’s aggressive selldown on margin exposures in 2008 serves as a pointer to this).

Our models value IBTC at 1.42x 2010F book, with an average forecast cycle ROE of 24%. We believe IBTC’s will utilise some of its excess capital to generate risk assets that will drive its growth story as a stand-alone Bank (we have not factored in any potential acquisition numbers in our models).

STANBIC IBTC BANK SHARE PRICE Vs. VOLUME TRADED 20

52 week high:N10.46 52 week low:N4.27 Average Price:N7.05 Avg Vol Traded (‘000): 2,870 Beta:1.05

Share Price (Naira)

15 10 5 0 21000 18000

Volume Traded (‘0000)

15000 12000 9000 6000 3000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

100

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings

DEC 08A

DEC 09F

2010F

2011F

INCOME STATEMENT ($'Mill)

DEC 09F

2010F

2011F

471

659

61,241

58,105

69,726

97,616

414

392

Interest & Discount Inc ome

40,973

40,092

47,414

67,355

Interest & Disc ount Income

277

271

320

455

Interest Expense

18,611

13,945

16,037

21,476

Interest Expense

126

108

145

Net Interest & Discount Income Other Inc ome Operating Income

22,362

26,147

31,377

45,880

20,267

18,013

22,312

30,261

42,629

44,160

53,689

76,141

Gross Earnings

DEC 08A

Net Interest & Discount Income Other Income Operating Income

177

212

310

137

122

151

204

288

298

363

514

22,982

26,490

31,377

42,951

155

179

212

290

PBT Before Provisions

19,647

17,670

22,312

33,190

PBT Before Provisions

133

119

151

224

Provision For Risk Assets

5,020

1,092

1,395

2,928

Provision For Risk Assets

14,627

16,578

20,918

30,261

Profit Before Tax And EI

112

141

204

Exc eptional Items

Operating Expenses

Profit Before Tax And EI Exc eptional Items Profit Before Tax

4,730

14,627

11,848

20,918

30,261

Operating Expenses

151

Profit Before Tax

141

204

2,962

5,020

7,263

11,994

8,886

15,898

22,998

Profit After Tax

107

155

Dividend Payable

7,500

5,332

10,333

14,949

Dividend Payable

101

Retained Earnings Balance Sheet

4,064

3,554

5,564

8,049

DEC 08A

DEC 09F

2010F

2011F

Assets Cash & Balances With CBN Due From Other Banks & Financ ial Institutions

6,910

3,899

4,536

96,741

97,470

113,406

Short Term Investments (Treasury Bills)

14,549

Bills Discounted

75,978 98,398

Advanc es Under Financ e Lease Other Assets Long Term Investments Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

Retained Earnings Balance Sheet

4,262

3,455 -

3,899 -

107,106 6,910

128,661 7,798

4,536 158,768 9,072

19,455

34,550

42,887

49,899

65,646

74,077

77,116

15,433

24,185

31,190

36,290

Due From Other Banks & Financ ial Institutions

869

1,072

Advances Under Finance Lease

131

233

290

337

Long Term Investments

211

245

Intangibles (Goodwill)

2,372

2,333

2,633

3,063

Deposits

643

1,003

1,211

1,440

Due To Other Banks & Fin. Inst.

555

444

479

543

500

210

206

240

80,473

Other Liabilities

74,034

31,095

30,567

35,519

Other Liabilities

Total Assets Liabilities

5,821

3,455

3,899

4,536

Deferred Taxation

378

518

624

771

Deferred Taxation

Dividend Payable

12,201

13,820

11,696

13,609

269,877

263,239

297,050

348,110

Capial & Reserves

Per Share Ratios Average Shareholders Funds Per Share Ratios

521

163

213,203

Average Assets

500

104

70,919

Total Assets & Contigents

443

Fixed Assets

179,345

Total Liabilities & Equity

Investment Properties

65,784

Contingent Acc ounts

Deferred Taxation

148,567

Total Capital & Reserves

Other Assets

95,240

Shareholders Funds

31 766

723

82,202

Minority Interest

26 658

664

Due To Other Banks & Fin. Inst.

Reserves

47 653

513

Deposits

Liabilities

78 753

Loans And Advances

453,623

Share Capital

54 2011F

Short Term Investments (Treasury Bills)

389,881

Total Liabilities

38 2010F

Bills Disc ounted

345,504

Borrowings`

24 DEC 09F

Cash & Balances With CBN

351,253

Taxation Payable

27 DEC 08A

Assets 11,587 111,592

Loans And Advances Deferred Taxation

Tax

2,632

Profit After Tax

Tax

Taxation Payable

Long Term Borrowings Total Liabilities

3 -

1,822

1,777

2,006

2,351

Capial & Reserves 9,375

9,375

71,290

71,989

82,518

94,939

80,665

81,364

91,893

104,314

711

898

936

1,179

81,376

82,263

92,829

105,494

351,253

345,502

389,879

453,604

50,861

31,095

31,190

40,826

402,114

376,597

421,069

494,430

DEC 08A

DEC 09F

2010F

2011F

333,180

348,379

367,692

421,752

78,697

81,820

87,546

99,161

Share Capital Reserves Total Capital & Reserves

481

486

557

641

545

549

620

704

2,372

2,333

2,633

3,063

343

210

211

276

2,715

2,543

2,843

3,338

DEC 08A

DEC 09F

2010F

2011F

Minority Interest Shareholders Funds Total Liabilities & Equity Contingent Acc ounts Total Assets & Contigents

Profitablilty Interest Margin

55%

65%

66%

Dividend Payout Ratio

63%

60%

65%

Retention Ratio

37%

40%

35%

68% 35%

15%

11%

18%

23%

DEC 08A

DEC 09F

2010F

2011F

Return on Average Equity

Earnings

0.64

0.47

0.85

1.23

Return on Average Assets

Dividends

0.40

0.28

0.55

0.80

Cost/Inc ome (Ex-Provisions)

54%

60%

58%

56%

Cost/Inc ome (Normalized)

Net Assets No. of Shares Outstanding Growth Rates Gross Earnings

4.30 18,750 DEC 08A

4.34

4.90

5.56

18,750

DEC 09F

2010F

2011F

66%

62%

61%

60%

PBT Margin

24%

20%

30%

31%

PAT Margin

20%

15%

23%

24%

Effective Tax Rate

18%

25%

24%

114%

-5%

20%

40%

PBT

33%

-19%

77%

45%

Liquidity

PAT

DEC 08A

DEC 09F

24%

2010F

2011F

53%

-26%

79%

45%

Deposit Growth Rate

Total Assets

11%

-2%

13%

16%

Loans/Deposits

Loan & Advances

24%

20%

23%

Deposit Growth Rate

33%

56%

21%

19%

Capital Adequacy/Asset Quality

13%

14%

Loan Loss Provisions to NPLs

67%

113%

138%

181%

Loan Loss Provision/Total Loans

10%

18%

20%

22%

Non-Performing Loans to Total Loans

14%

16%

15%

12%

Debt/Equity

15%

17%

13%

Shareholders Funds

Debt/Total Assets Equity/Total Assets Leverage Ratio (x)

33%

56%

21%

103%

72%

DEC 08A

3% 23% 4.32

DEC 09F

4% 24% 4.20

19% 74%

2010F

2011F

24%

23%

4.20

‘Ahead of the Curve’

4.30

101

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Access Bank Plc - Company Overview BASIC INFORMATION Address

Plot 1665 Oyin Jolayemi Street Victoria Island, Lagos, Nigeria

Website

w w w.accessbankplc.com

Management

Mr Gbenga Oyebode (Chairman) Mr Aigboje Aig-Imoukhuede (MD/C

Financial Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: ACCESS:NL

Sector

Banking

Country

Nigeria

Access Bank Plc (‘Access Bank’ or ‘the Bank’) was incorporated as a private limited liability company on the 8th of February 1989 and commenced business on the 11th day of May in the same year. Converted to a public limited company on the 24th of March 1998, its shares were listed on the Nigerian Stock Exchange on the 18th of November 1998. The Bank was issued a Universal Banking license by the CBN on the 5th of February 2001; 7 years on (FY’08), it now has 9 foreign and 3 local subsidiaries. Access Bank’s strategy is focused on optimising operating efficiency through its lean and agile Banking structure, which leverages on minimal but highly skilled manpower and efficient technology solutions for service delivery. Based on 30 September 2009 figures, we estimate the Bank currently controls c.5% and c.8% of industry Assets and Shareholders Funds respectively.

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Stanbic Nominees Nig. Ltd

15.77

United Alliance Limited

7.41

Others

76.82

FREE FLOAT

76.82

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

16,437,259,273

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Bn

124.92

$ 'Bn

0.84

Units

26,466,984

DIVIDENDS AND BONUS ISSUES Type Final

Y ear FY'09

N0.70

Final

FY'08

N0.65

Final

FY'07

N0.40

Recording a +30.77% YoY growth in Q3 September 2009 Gross Earnings to N64.33 billion, Access Bank posted a Loss After Tax of (N11.76 billion) for the period. The Bank’s loss position was not totally unexpected, considering that its Q1’09 scorecard had already given signals of the Bank’s weakened asset quality, in light of Management’s monthly provisioning plan to FY’09. In our Q1’09 Earnings Release Report on Access Bank, we had discussed plans by the Bank’s Management to continue its monthly provisioning of N700 million as general provisions on risk assets (an activity which commenced September 2008). Thus, with its N2.1 billion in General Provisions and N1.9 billion in Specific Provisions as at Q1’09, Access Bank reported total Q1’09 provisions (classified as Exceptional Items) of N4.0 billion for the Bank (Group: N4.23 billion). Following the CBN special audit of the Bank’s books during its second quarter however, we saw the regulator recommend the sum of N30.89 billion as additional provisions on the Bank’s books. Thus, with Q2’09 gross provisions rising sharply to N55.27 billion (FY’08/9: N14.53 billion) and NPLs also rising to N84.87 billion (FY’08/9: N9.67 billion), Access Bank’s Coverage Ratio now stands at 65.12% (FY’08/9: 150.23%); and NPL Ratio is now 19.52% (FY’08/9: 2.24%). We value the Bank between N11.39 – N13.21. Priced at N7.60 by the market on the 31st of December 2009, Access Bank’s pricing gives the second highest indicative lower-upside potential of +49.87% in our coverage universe. Thus, we place an ‘Overweight’ rating on the Bank. Forecast Summary

Earnings Per Share (N)

‘Ahead of the Curve’

(0.10)

1.52

2.04

2.81

33.82%

37.93%

Price to Earnings (x)

5.92

-73.90

4.99

3.73

2.70

Dividend Per Share (N)

0.71

0.00

0.91

1.22

1.69

YoY Change (%)

9.17%

-100.00%

33.82%

37.93%

Dividend Yield (%) Net Assets Per Share (N) YoY Change (%)

9.34% 11.42 7.28%

0.00% 10.50 -8.11%

12.03% 12.02 14.52%

16.10% 13.14 9.36%

22.20% 14.73 12.09%

Price to Book (x)

0.67

0.72

0.63

0.58

0.52

101

1.28 30.71%

YoY Change (%)

102

Mar 09A 9M DEC 2009F DEC 2010F DEC 2011F DEC 2012F

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Overweight’ rating on the stock. Access was among the second batch of Banks to be audited, which placed it in relatively worse light that the initially cleared 5…

The sum of N2.3 billion recovered between July and September 2009, boosted FX/Other Income…

The Nigerian Banking space in the period under review (July – September 2009) was largely dominated by heightened risk concerns by Banks’ customers and investors alike. Prior to the announcement of the second round of special audit results, Banks like Access Bank were perceived in relatively worse light than the 5 Banks which had already been cleared, thus leading to an unavoidable loss of deposits (flight to safety occurrences) and in some instances, increased cost of funds for the uncleared Banks. For Access Bank, its financial performance during that 3-month period can be said to have been resilient, considering that the Bank’s Net Interest Income for the period declined by just N1.41 billion relative to its performance in Q1’09. We believe this decline may not be unconnected to increased cost of funds during this period. Access Bank in our view remains one of the most cost-efficient Banks in the Nigerian Banking space, and its operating efficiency drive has seen its Cost to Income Ratio (ex-provisions) average 53.14% over the last 3 reporting periods (FY’08/9, Q1’09 & Q2’09). For the 3-month period ended 30 September 2009, Access Bank’s CIR (ex-provisions) stood at 46.11%, a strong improvement from the 56.05% recorded in Q1’09. Thus, CIR (ex-provisions) for the 6-month period ended 30 September 2009 stood at 50.87%, a strong position relative to its peers – FCMB: 73.36%; IBTC: 64.29%; Skye Bank: 64.15%; and Diamond: 62.14%.

PEER COST TO INCOME RATIO(EX-PROVISIONS) Last Reporting Period (%)

73.36 64.29

64.15

62.14

Average 62.96% 50.87

Access Bank in our view remains one of the most cost-efficient Banks in the Nigerian Banking space…

FCMB

IBTC

Skye

Diamond

Access

Source: Banks, Vetiva Research

Following the CBN/NDIC special audit of its books, the regulator recommended an increase in Access Bank’s provision level by N30.89 billion, which brings the Bank’s gross provision as at Q2’09 ending to N55.27 billion (FY’08/9: N14.53 billion). With NPL growth outpacing provision growth however (increasing from N9.67 billion as at FY’08/9 to N84.87 billion this quarter), Access Bank’s Coverage Ratio deteriorated to 65.12%, down from 150.23% as at FY’08/9.

‘Ahead of the Curve’

103

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Access Bank coverage Ratio at 65.12% suggests risks of additional provisions in near term results, though not as significant as we saw in its Q2’09 results…

We believe a significant portion of Access Bank’s NPLs are currently classified as Substandard (10% specific provision) or Doubtful (50% specific provision), which contributes mainly to its Coverage Ratio being at 65.12%. Whilst the Bank’s NPLs may have been adequately covered as at Q2’09 ending (based on Prudential Guidelines and marking to market for margin exposures), a strong risk of additional provisions featuring in the Bank’s books prevails for near term results, especially as some of these non-performing exposures mature into new non-performance classes (with higher provision level requirements) under Prudential Guidelines.

ACCESS BANK GROSS NON-PERFORMING LOANS AND PROVISIONS (N’Billions)

Coverage Ratio: 65.12% 84.87

NPLs Provisions

+785%

55.27 Coverage Ratio: 117.95% 9.59

11.31

FY MARCH 08

Coverage Ratio: 150.23% 9.67

+388%

14.54

FY MARCH 09

Q2 SEPT. 09 Source: Bank, Vetiva Research

Access Bank’s Balance Sheet continues to take on a risky posture, with liquidity tightness still dominating…

104

‘Ahead of the Curve’

We note that the CBN special audit led the Bank to classify a number of large concentrated exposures as non-performing; in particular, Institutional Banking clients in the Telecoms, Power, Oil & Gas, and Financial Services sectors. Having upped its recovery drive for nonperforming exposures, Management notes that it recovered the sum of N2.3 billion in September, and recovered a further N7 billion between October and November (and this recovery is what drives our 78% recovery assumption by FY’09). Access Bank’s Balance Sheet continues to take on a risky posture, with liquidity tightness still dominating, as its Loan/Deposit Ratio still indicates considerable leverage and liquidity tightness at 99.53%. This is however, an improvement from its Q1’09 level of 119.46%. Deposits shrank -20.84% in Q1’09 relative to FY’08/9, but had ramped up by +12.01% as at Q2’09 ending. We note that Access Bank’s deposit base is relatively concentrated, with the 20 largest depositors accounting for 28.9% of total Deposits as at FY’08/9 (Source: Fitch Ratings). Also, with Term Deposits comprising 56% of total Deposits, high cost of funds continues to be a challenge to the Bank’s earnings. Management notes that one of the ways it seeks to reduce this cost is via an efficient Transfer Pricing Model (managing funds to optimise Net Interest Margins across the Group).

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Access Bank reported Capital Adequacy and Liquidity Ratios of 25.30% and 33.50% respectively (relative to Q1’09 levels of 34.7% and 28% respectively), comfortable positions when compared to regulatory minimums of 10% and 25% respectively. Metrics*

Current Price

Skye

FCMB

Diamond

Access

IBTC

5.49

7.16

7.40

7.60

7.47

Annualized EPS

(1.20)

(0.04)

0.01

(1.07)

0.27

Trailing PE

(4.57)

(182.35)

702.44

(7.08)

27.27

NAPS

8.20

7.93

P/B Multiple (x)

0.67

0.90

DPS (Last FY)

0.60

7.76

9.88

4.11

0.95

0.77

1.82

0.09

0.70

0.40

DY (%)

10.93%

0.00%

1.22%

9.21%

5.35%

Payout Ratio

43.39%

0.00%

25.33%

54.70%

64.86%

-14.52%

-0.49%

0.13%

-10.58%

6.35%

ROAE ROAA

-2.00%

-0.15%

Outstanding Shares (mn)

11,584

16,271

0.02% 14,475

-2.65% 16,437

1.23% 18,750

*All figures except Diamond (31 July) are as at 30 September 2009; DPS is as at last FY Source: Company Financials; Vetiva Research

Outlook 2010

We forecast Access Bank’s 9-month results to 31 December 2009 at N90.06 billion for Gross Earnings, while we expect a Loss After Tax of (N1.69 billion). Our underlying assumptions include a 78% success rate on Management’s N10 billion recovery target for the three months ending December 2009. Though Management has stated its non-willingness to take advantage of the CBN’s 1% provisioning guideline for its FY December 2009 financial reporting, we look to see how this plays out, on the back of our observed indications by one of its peers to take advantage of this waiver. The likely establishment of the Asset Management Company in Q1’10, we expect will to a large extent, help address our liquidity concerns for Access Bank. In addition, the Bank’s proposed corporate bond issuance programme of N25–N30 billion in tranches is also expected to somewhat assuage the Bank’s tight liquidity position. Our models value Access Bank 1.02x 2010F book, with an average forecast cycle ROE of 20%. With a P/B multiple of 0.77x, we believe Access Bank is undervalued at current market price, despite our asset quality and liquidity concerns.

‘Ahead of the Curve’

105

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

ACCESS BANK SHARE PRICE Vs. VOLUME TRADED 20

52 week high:N10.85 52 week low:N3.54 Average Price:N5.44 Avg Vol Traded (‘000): 26,467 Beta:1.02

Share Price (Naira)

15 10 5 0 45000

Volume Traded (‘0000)

36000 27000 18000 9000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

106

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings

MAR 09A

DEC 09F

2010F

2011F

109,341

90,057

144,091

184,436

Interest & Discount Inc ome

82,710

67,542

103,745

132,794

Interest Expense

37,534

28,818

51,873

64,553

45,176

38,724

51,873

68,241

Net Interest & Discount Income Other Inc ome

INCOME STATEMENT ($'Mill) Gross Earnings

MAR 09A

DEC 09F

2010F

2011F

738

608

973

1,245

Interest & Disc ount Income

558

456

701

Interest Expense

253

195

350

436

305

261

350

461

Net Interest & Discount Income

26,631

22,514

40,345

51,642

180

152

272

349

Operating Income

71,807

61,239

92,218

119,883

Operating Income

485

413

623

809

Operating Expenses

37,685

32,871

48,991

59,020

Operating Expenses

254

222

331

399

34,122

28,368

43,227

60,864

230

192

292

411

PBT Before Provisions Provision For Risk Assets Profit Before Tax And EI Exc eptional Items Profit Before Tax Tax

8,442

7,310

11,527

18,444

25,680

21,058

31,700

42,420

506

23,094

26,185 5,371

Profit After Tax

20,814

Dividend Payable

11,506

Retained Earnings Balance Sheet

9,528 MAR 09A

(2,037) 346 (1,690)

Cash & Balances With CBN Due From Other Banks & Financial Institutions Bills Discounted Loans And Advances Advances Under Financ e Lease Deferred Taxation

31,700

42,420

6,657

8,908

125

173

142

214

286

156

Profit Before Tax

(14)

214

177

Tax

33,512

Profit After Tax

141

15,026

20,107

Dividend Payable

(1,690)

10,017

13,405

Retained Earnings

(11)

2010F

2011F

Balance Sheet

DEC 09F

(11)

MAR 09A

DEC 09F

286

169

226

101

136

2010F

2011F

Assets 50,244

28,820

35,543

40,719

102,785

83,889

103,456

118,525

20,185

41,661

51,379

58,862

Cash & Balanc es With CBN

339

Due From Other Banks & Financial Institutions

694

566

699

800

Short Term Investments (Treasury Bills)

136

281

347

397

Bills Disc ounted

418,194

394,255

456,364

522,832

3,726

3,805

4,693

5,376

Advanc es Under Finance Lease

2,575

3,176

3,638

Deferred Taxation

52,247

64,433

73,818

Long Term Investments

65,534

37,568

46,330

53,078

Intangibles (Goodwill)

Profit Before Tax And EI

25,043

22,938

Fixed Assets

Provision For Risk Assets

Other Assets Investment Properties

PBT Before Provisions

Exc eptional Items

Assets

Short Term Investments (Treasury Bills)

Other Income

897

24,982

26,191

32,300

37,004

Loans And Advances

195

240

275

2,824

2,662

3,081

3,530

353

435

498

Other Assets

155

Long Term Investments

442

254

313

358

Investment Properties

Fixed Assets

169

177

218

250

1,738

1,806

2,227

2,551

710,326

672,816

799,901

916,404

430,097

403,690

522,744

617,892

Due To Other Banks & Fin. Inst.

30,183

47,097

59,742

49,241

Due To Other Banks & Fin. Inst.

204

318

403

Other Liabilities

49,300

42,791

41,405

52,283

Other Liabilities

333

289

280

353

6,586

6,728

8,298

15,115

Taxation Payable

102

Total Assets Liabilities Deposits

Taxation Payable

Long Term Borrowings Total Liabilities

Reserves Total Capital & Reserves Minority Interest

Deposits

Dividend Payable

8,961

Long Term Borrowings

525,138

500,306

632,188

734,531

Total Liabilities

8,107

163,401

187,793

205,658

171,508

195,900

213,765

184,160

Share Capital Reserves Total Capital & Reserves

1,009

1,660

2,281

172,517

197,560

216,046

Shareholders Funds

Total Liabilities & Equity

710,326

672,816

829,752

950,603

Total Liabilities & Equity

Per Share Ratios

5,401

6,188

2,904

2,726

3,530

4,172 332

3,378

4,269

4,960

3,546

142,634

148,020

174,248

199,627

852,960

820,836

1,004,000

1,150,230

MAR 09A

1,189

1,103

1,268

1,389

1,243

1,158

1,323

1,443

4,796

4,543

5,603

6,419

Minority Interest

1,029 185,188

Total Assets & Contigents

12 4,543

Capial & Reserves 8,107 176,052

Shareholders Funds

Contingent Accounts

12 4,796

Deferred Taxation

Capial & Reserves Share Capital

Total Assets Liabilities

Deferred Taxation Dividend Payable

Intangibles (Goodwill)

Contingent Ac counts Total Assets & Contigents

963

999

1,177

1,348

5,759

5,542

6,779

7,767

MAR 09A

DEC 09F

2010F

2011F

DEC 09F

2010F

2011F

Average Assets

872,136

691,571

736,358

858,152

Interest Margin

55%

57%

50%

51%

Average Shareholders Funds

178,524

178,853

185,039

206,803

Dividend Payout Ratio

55%

60%

Retention Ratio

45%

100%

40%

MAR 09A

DEC 09F

2010F

2011F

Return on Average Equity

12%

-1%

14%

16%

1.54

2.07

Return on Average Assets

0.93

1.24

Cost/Inc ome (Ex-Provisions)

52%

54%

53%

49%

Cost/Inc ome (Normalized)

64%

66%

65%

PBT Margin

24%

-2%

22%

23%

PAT Margin

19%

-2%

17%

18%

Effective Tax Rate

21%

-17%

21%

Per Share Ratios Earnings

1.28

Dividends

0.70

Net Assets

11.36

No. of Shares Outstanding

16,214

Growth Rates Gross Earnings PBT

MAR 09A

(0.10) 10.58

12.08

13.18

16,214

DEC 09F

89%

-18%

39%

2010F 60%

2011F

Profitablilty

28%

-108%

-1656%

34%

Liquidity

31%

-108%

-1581%

34%

Deposit Growth Rate

22%

-6%

29%

18%

-31%

-5%

19%

15%

Loans/Deposits

97%

98%

87%

85%

Loan & Advances

70%

-6%

16%

15%

Deposit Growth Rate

22%

-6%

29%

18%

-7%

15%

PAT Total Assets

Shareholders Funds

Capital Adequacy/Asset Quality Loan Loss Provisions to NPLs

MAR 09A

DEC 09F

2010F

2011F

2010F

2011F

150%

76%

95%

103%

Loan Loss Provision/Total Loans

13%

14%

Non-Performing Loans to Total Loans

17%

14%

Debt/Equity

Debt/Total Assets

26%

25%

24%

Equity/Total Assets Leverage Ratio (x)

3.84

3.90

4.05

4.24

106

‘Ahead of the Curve’

107

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Skye Bank Plc - Company Overview BASIC INFORMATION Address

3 Akin Adesola Street Victoria Island, Lagos, Nigeria

Website

www.skyebankng.com

Management

Alhaji Musiliu Smith (Chairman) Mr. Akinsola Akinfemiwa (MD/CEO

Financial Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Ex

Symbol

Bloomberg: SKYEBANK:NL

Sector

Banking

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Ibile Holdinigs Limited

12.36

Other Nigerian Citizens and Asso

87.64

FREE FLOAT %

87.64

SHARES IN ISSUE Date

Skye Bank Plc (‘Skye Bank’ or ‘the Bank’), formerly Prudent Bank Plc, is a public limited liability company incorporated on the 8th of December 1989 and issued with a Banking license on the 7th of February 1990 to carry out all classes of Merchant Banking business in the Country. Commencing operations on the 2nd of May, 1990, the Bank’s name was changed from Prudent Merchant Bank to Prudent Bank Plc with effect from the 18th of February, 2000. However, following the consolidation directive to Nigerian Banks, Skye Bank Plc emerged in January 2006 as the merger product of 5 Banks: Prudent Bank, EIB International Bank, Bond Bank, Reliance Bank and Cooperative Bank. Aggressively leveraging its Balance Sheet post consolidation, the Bank grew its Total Assets by +354% within a 2-year timeframe (2006 – 2008). Based on 30 September 2009 figures, we estimate the Bank currently controls c.4% and c.5% of industry Assets and Shareholders Funds respectively.

Key Review Highlights

Shares Outstanding

Dec-09

11,584,970,080

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Bn

63.60

$ 'Bn

0.43

Units

10,088,192

DIVIDENDS AND BONUS ISSUES T ype

Year

Final

FY'08

N0.60

Final

FY'07

N0.35

Final

FY'06

Following the CBN special audit of its books, Skye Bank Plc released its results for the 12-month period ended 30th September 2009, grossing top-line earnings of N106.70 billion (FY Sept. 08: N78.28 billion). However, After Tax Earnings was eroded, as the Bank reported a loss position of (N13.92 billion) for the period under review. We note that the Bank’s Gross Earnings performance exceeded its own forecast of N98.62 billion, while the outcome of the special audit of its books caused After Tax Earnings to fall significantly short of Management’s forecast of N16.02 billion for the comparable period. Following the audit, the Central Bank recommended additional provisions of N32 billion, to bring the Bank’s gross provision level to N51 billion. With non-performing loans of N56.23 billion (NPL Ratio: 17.82%), we estimate Skye Bank’s Coverage Ratio at 76.59%. Having pursued an aggressive growth strategy in the previous financial year, which saw its Balance Sheet size grow to N1.03 trillion as at FY’07/8, Skye Bank felt the necessity to deleverage considerably in the period under review, which coupled with other factors, led to a 28.56% shrinkage in its Balance Sheet to N734.06 billion. Its CAR at 16% is the lowest in its peer group. Management recently revealed its plan to acquire one of the troubled Banks. We value the Bank between N8.72–N10.16. Priced at N5.49 by the market on the 31st of December 2009, Skye Bank’s pricing gives the highest indicative lower-upside potential of +58.83% in our coverage universe. Thus, we place an ‘Overweight’ rating on the Bank. Forecast Summary

Earnings Per Share (N) YoY Change (%)

FY'08A 1.38

FY'09F

FY'10F

(0.64)

1.24

FY'11 1.71

FY'12F 2.23

76.32%

37.50%

30.68%

Price to Earnings (x)

3.97

-8.58

4.42

3.21

2.46

Dividend Per Share (N)

0.60

0.00

0.62

0.85

0.96

71.43%

-100.00%

37.50%

12.39%

YoY Change (%)

10.93% 8.36 100.19%

0.00% 8.76 4.83%

11.32% 10.00 14.20%

15.57% 11.09 10.88%

17.50% 12.47 12.44%

Price to Book (x)

0.66

0.63

0.55

0.50

0.44

YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

Source: Company Financials; Vetiva Research

107

108

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Overweight’ rating on the stock. Gross Earnings performance was sustained, though credit-loss charges weighed down earnings…

Operating in a highly challenging environment over the past 12 months, Skye Bank managed to sustain Gross Earnings performance, recording a strong +36.31% YoY growth to N106.70 billion, up from N78.28 billion as at FY’07/8. Whilst noting that the Bank’s last released results were for the Q2 period ended 31st March 2009, a comparison of H2’08/9 Gross Earnings with H1’08/9, indicates a +6.51% improvement (N55.03 billion vs. N51.67 billion). However, having recorded the sum of N13.73 billion in Profit Before Tax for H1’08/9, the exceptional provisions arising from the CBN special audit in H2’08/9 threw the Bank into a loss position for the 12M period to September 2009, as it posted a Loss Before Tax of (N13.14 billion). Following the CBN special audit of its books, the regulator recommended that Skye Bank book additional provisions of N32 billion, to bring its gross provision level to N51 billion (considering that the Bank had already booked the sum of N19.47 billion prior to the audit). A breakdown of the Bank’s gross provisions is shown below:

SKYE BANK GROSS PROVISIONS BREAKDOWN 12M September 2009

Capital Market Others Capital Market related provisions comprised a quarter of the Bank’s September 2009 gross provisions…

CBN RECOMMENDED ADDITIONAL PROVISIONS

25% Real Estate

38%

Manufacturing 15% 3% 5%

14%

Oil & Gas INITIAL PROVISIONS Source: Management Presentation, Vetiva Research

Cost management challenges further pressured earnings, in light of slow growing income from operations…

With an NPL Ratio of 17.82%, our analysis puts the Bank’s Coverage Ratio at 76.59%, considering that non-performing loans stand at N56.23 billion. While Management expects a recovery of N10 billion by FY December 2009 (having recovered N2.2 billion from its Transcorp exposure), we have factored in a recovery of N5.03 billion in our FY’09 forecast. Similar to its peers, Skye Bank’s cost management profile worsened in the period under review, as its Cost to Income Ratio (ex-provisions) deteriorated to 64.15% from 51.60% as at FY’07/8. Comparing Skye Bank’s CIR Ex-Provision to its peers however, its position is largely comparable – FCMB: 73.36%; IBTC: 64.29%; and Diamond: 62.14%. Access Bank has the lowest CIR ex-provisions amongst its peers of 50.87%.

‘Ahead of the Curve’

109

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Skye Bank aggressively deleveraged its Balance Sheet in 2009…

Cost management strategies as outlined by Management include a more cautious approach to its local and global expansion drive, a reduction in its branch network by 5%, strict budgetary control and review of its expense processes, amongst others. Having pursued an aggressive growth strategy in the previous financial year, which saw its Balance Sheet size grow to N1.03 trillion as at FY’07/8, Skye Bank felt the necessity to deleverage considerably in the period under review, which coupled with other factors, led to a 28.56% shrinkage in its Balance Sheet to N734.06 billion. During the year, Skye Bank aggressively paid down N27.12 billion of its foreign currency denominated borrowings, a move which was necessitated both by the recall of funds by the creditors (some repayments were made at a discount to principal) due to the global financial crisis, and increased exchange rate risk owing to the devaluation of the Naira. Skye Bank’s Capital Adequacy Ratio stands at 16.00%, while its Leverage Ratio stands at 6.40x, positions which indicate considerable room for growth in coming years, supported by the infusion of some debt capital. We note however, that compared to its peers, these ratios may indicate a less steep growth trajectory for the Bank, as its Capital Adequacy Ratio is the lowest, while its Leverage Ratio is the highest. As the prospects of the Nigerian Banking industry takes on a new dimension, it will be pertinent to see how planned capital raising and M&A activities of Nigerian Banks play out, as we believe it will be a critical step for their growth and success in coming years.

Metrics* Current Price

Skye

FCMB

5.49

7.16

Diamond

Access

7.40

7.60

IBTC 7.47

Annualized EPS

(1.20)

(0.04)

0.01

(1.07)

0.27

Trailing PE

(4.57)

(182.35)

702.44

(7.08)

27.27

NAPS

8.20

7.93

P/B Multiple (x)

0.67

0.90

DPS (Last FY)

0.60

7.76

9.88

4.11

0.95

0.77

1.82

0.09

0.70

0.40

DY (%)

10.93%

0.00%

1.22%

9.21%

5.35%

Payout Ratio

43.39%

0.00%

25.33%

54.70%

64.86%

ROAE

-14.52%

-0.49%

0.13%

-10.58%

6.35%

ROAA

-2.00%

-0.15%

0.02%

-2.65%

Outstanding Shares (mn)

11,584

16,271

14,475

16,437

1.23% 18,750

*All figures except Diamond (31 July) are as at 30 September 2009; DPS is as at last FY Source: Company Financials; Vetiva Research

Outlook 2010

110

‘Ahead of the Curve’

We forecast Skye Bank’s 15-month results to 31 December 2009 at N129.89 billion for Gross Earnings, while we expect a reduced Loss After Tax of (N7.41 billion), supported by our assumption of N5.03 billion in recoveries by FY December 2009.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Mr. Durosinmi Etti was the MD/CEO of Eko Internaional Bank (EIB) Plc prior to the merger…

Having been affected by the CBN 10-year tenure requirement for Nigerian Banks, Skye Bank appointed its Deputy Managing Director, Mr. Kehinde Durosinmi Etti, as Group Managing Director Designate. Key to watch will be his vision for the Bank and how he executes the Bank’s consolidation plans. On the back of its strong relationships with the Lagos State (commercial nerve centre of Nigeria) and Rivers State (one of the largest oil producing states) Governments, Skye Bank’s revenue collection activities for these states continue to represent a competitive edge for it in the near term, due to the low-cost nature of the funds. In view of expectations that Government will be the largest spender in 2010, as well as its drive to improve tax collection capabilities in the coming year (as seen in the on-going improvements in Lagos State), Skye Bank’s relationships should position it well to be amongst the top Banks in the revenue collection space. As has been seen for many other Banks, Skye Bank also has in the pipeline, a hybrid offering to the tune of N100 billion over a 2-year time frame, and is likely to test the market with a first tranche of N50 billion in Q1’10, as stated by Management. For Skye Bank (likewise many of its peers), we expect to see additional provisions feature in 2010, as the economy struggles to pick up and its retail lending book shows further weaknesses from waning consumer spending, thus limiting debtors’ ability to service their loans. Though the magnitude of any such provision is expected to be relatively smaller than what has been witnessed so far, the magnitude further depends on the successful setting up of the Asset Management Company in 2010. Our models value Skye Bank at 0.94x 2010F book, with an average forecast cycle ROE of 19%.

SKYE BANK SHARE PRICE Vs. VOLUME TRADED 20

52 week high:N8.17 52 week low:N3.44 Average Price:N5.29 Avg Vol Traded (‘000): 10.088 Beta:1.13

Share Price (Naira)

15 10 5 0 80000

Volume Traded (‘0000)

60000 40000 20000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

110

‘Ahead of the Curve’

111

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings

SEP 08A

DEC 09F

2010F

2011F

INCOME STATEMENT ($'Mill) Gross Earnings

SEP 08A

DEC 09F

2010F

2011F

529

877

648

811 592

78,277

129,887

96,028

120,035

Interest & Discount Income

55,319

105,208

73,942

87,626

Interest & Disc ount Inc ome

374

710

499

Interest Expense

20,544

46,759

31,689

37,211

Interest Expense

139

316

214

251

34,775

58,449

42,252

50,415

235

395

285

340

22,958

24,679

22,086

32,410

155

167

149

219

57,733

83,128

64,339

82,824

Operating Income

390

561

434

559

Operating Expenses

Net Interest & Discount Income Other Income Operating Income

Net Interest & Discount Income Other Inc ome

31,931

55,851

37,451

46,814

216

377

253

316

PBT Before Provisions

25,802

27,276

26,888

36,011

PBT Before Provisions

174

184

182

243

Provision For Risk Assets

4,113

7,124

7,682

10,803

Provision For Risk Assets

21,689

20,152

19,206

26,408

146

136

130

178

Operating Expenses

Profit Before Tax And EI Exc eptional Items Profit Before Tax Tax

21,689 5,671

27,145 (6,993) 420

Exc eptional Items Profit Before Tax

146

19,206

26,408

4,801

6,602

14,404

19,806

Profit After Tax

108

Tax

183

(47)

130

3 (50)

178

134

Profit After Tax

16,018

Dividend Payable

6,950

7,202

9,903

Dividend Payable

Retained Earnings

9,068

(7,412)

7,202

9,903

Retained Earnings

(50)

2010F

2011F

Balance Sheet

SEP 08A

(7,412)

Profit Before Tax And EI

DEC 09F

Balance Sheet

SEP 08A

DEC 09F

2010F

2011F

272

282

Assets

Assets 40,255

42,067

41,752

Cash & Balanc es With CBN

284

271

217,016

32,524

43,797

50,103

Due From Other Banks & Financ ial Institutions

1,465

220

296

Short Term Investments (Treasury Bills)

63,858

54,852

58,396

58,453

Short Term Investments (Treasury Bills)

431

370

394

395

Bills Discounted

38,466

32,481

21,898

25,051

Bills Disc ounted

260

219

148

169

244,731

277,665

350,376

409,173

1,652

1,875

2,366

2,763

4,756

10,820

14,599

16,701

148,548

88,793

94,893

116,906

11,943

46,623

Cash & Balanc es With CBN Due From Other Banks & Financial Institutions

Loans And Advances Advanc es Under Finance Lease Deferred Taxation Other Assets Long Term Investments Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

40,147

Loans And Advances Advances Under Financ e Lease Deferred Taxation Other Assets

58,453

3,280

14,599

16,701

Investment Properties

29,806

36,497

41,752

Fixed Assets

1,003

Long Term Investments

54,746

367 20,528 -

32 -

Intangibles (Goodwill) Total Assets

338

113

600

641

789

370

395

113

139

201

315

246

282

5,337

4,179

4,929

5,638

3,378

2,834

3,368

3,881

135

140

166

189

852

436

514

588

790,468

618,910

729,949

835,046

500,212

419,752

498,855

574,771

20,000

20,799

24,531

28,062

Due To Other Banks & Fin. Inst.

126,195

64,510

76,083

87,038

Other Liabilities

Taxation Payable

4,767

284

335

384

Deferred Taxation

1,491

1,500

1,769

2,024

Deferred Taxation

Dividend Payable

Liabilities

Liabilities Deposits Due To Other Banks & Fin. Inst. Other Liabilities

Borrowings` Total Liabilities

41,254

10,588

12,487

14,285

693,919

517,433

614,061

706,565

5,792

Reserves Total Capital & Reserves Minority Interest Shareholders Funds Total Liabilities & Equity Contingent Ac counts Total Assets & Contigents

Per Share Ratios Average Assets Average Shareholders Funds Per Share Ratios

88,962

93,193

104,233

114,326

94,754

98,985

110,025

120,118

Share Capital Reserves Total Capital & Reserves

10 -

12 -

14 -

279

4,685

3,494

4,146

4,771

5,840

8,350

115,865

128,469

Shareholders Funds

790,708

618,893

729,926

835,033

Total Liabilities & Equity

772 811

5,339

4,179

4,929

5,638

Contingent Ac counts

1,599

794

838

1,071

6,938

4,973

5,766

6,710

SEP 08A

DEC 09F

2010F

2011F

117,593

124,091

158,659

736,486

854,017

993,692

SEP 08A

DEC 09F

2010F

2011F

619,350

704,689

674,430

782,498

Interest Margin

64,054

99,125

108,663

122,167

Dividend Payout Ratio Retention Ratio

2011F

Return on Average Equity

25%

1.38 0.60

Net Assets

8.18 11,584 SEP 08A

(0.64) 8.54

704 743

236,762

2010F

629 668

1,027,470

DEC 09F

601 640

Minority Interest

2,476 101,461

Dividends

Gross Earnings

Total Liabilities

2,035

Earnings

Growth Rates

Long Term Borrowings

96,789

SEP 08A

No. of Shares Outstanding

Taxation Payable

Capial & Reserves

Capial & Reserves Share Capital

Deposits

Total Assets & Contigents

Profitablilty

63%

56%

57%

58%

43%

50%

57%

100%

50%

-7%

13%

16%

1.71

Return on Average Assets

-1%

0.62

0.85

Cost/Inc ome (Ex-Provisions)

55%

67%

58%

57%

9.50

10.37

Cost/Inc ome (Normalized)

62%

76%

70%

PBT Margin

28%

1.24

11,584

DEC 09F

2010F

2011F

-5%

20%

22%

PAT Margin

20%

-6%

15%

17%

Effec tive Tax Rate

26%

-6%

25%

88%

66%

-26%

25%

PBT

172%

-132%

-375%

38%

Liquidity

PAT

172%

-146%

-294%

38%

Deposit Growth Rate

87%

-16%

19%

15%

77%

-22%

18%

14%

Loans/Deposits

49%

66%

70%

71%

126%

13%

26%

17%

87%

-16%

19%

15%

Capital Adequacy/Asset Quality

209%

14%

11%

Loan Loss Provisions to NPLs

Total Assets Loan & Advanc es Deposit Growth Rate Shareholders Funds

2011F

79%

82%

14%

13%

14%

Non-Performing Loans to Total Loans

18%

16%

14%

11%

Leverage Ratio (x)

‘Ahead of the Curve’

2010F

2011F

Equity/Total Assets

DEC 09F

2010F

102%

Debt/Total Assets

112

SEP 08A

DEC 09F

Loan Loss Provision/Total Loans Debt/Equity

111

SEP 08A

43%

10%

98%

12%

16%

15%

8.17

6.10

6.30

6.50

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

United Bank for Africa Plc - Company Overview BASIC INFORMATION Address

UBA House, 57 Marina, Victoria Island, Lagos, Nigeria

Website

ww w.ubagroup.com

Management

Mr. Ferdinand Alabraba (Chairm Mr. Tony Elumelu (MD/CEO)

Financial Y ear End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: UBA:NL

Sector

Banking

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Nigerians

80.35

Stanbic Nominees Nigeria Ltd.

14.57

Monte dei Paschi Disienca, Italy

0.77

United Bank for Africa Plc (‘UBA’ or ‘the Bank’) has a history that dates back to 1948, when the British and French bank Limited (BFB) commenced business in Nigeria. Following Nigeria’s independence from Britain, UBA was incorporated to take over the business of BFB. Today’s UBA is the product of the 2005 merger between United Bank for Africa Plc and Standard Trust Bank (STB) Plc, which were then Nigeria’s third and fifth largest Banks in the Country respectively. The enlarged UBA then assimilated another entity, Continental Trust Bank, which was then a majorly STB-owned subsidiary. With a vision to be ‘Africa’s Global Bank’, UBA is a significant player in the domestic market, controlling 20% market share of branches and ATMs in the Country (709 branches and 1,687 ATMs). With 7.1 million customers, UBA banks the largest number of Nigerians. Present in 11 African countries and 4 non-African countries (as at September 2009), UBA’s growing share of global trade and fund flows cannot be overlooked. Based on 30 September 2009 figures, we estimate the Bank currently controls c.11% and c.10% of industry Assets and Shareholders Funds respectively.

International Finanace Corp.

1.80

African Development Bank

1.57

Key Review Highlights

Palp-Pcap Sub 2 Limited

0.94

FREE FLOAT (%)

58.00

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

21,556,462,463

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Bn

232.81

$ 'Bn

1.57

Units

21,923,182

DIVIDENDS AND BONUS ISSUES Type Final Interim

Y ear FY'08 FY'08

N0.75 N0.25

Scrip Issue Final

FY'08 FY'07

1 to 2 N1.20

Final

FY'06

N1.00

Following the special examination of its books by the CBN/NDIC joint team, we saw UBA’s 12-month September 2009 Gross Earnings witness considerably slower growth (+16.85%) to N198.15 billion; while earnings moved into the red, with the Bank recording a (N7.29 billion) Loss After Tax. The loss arose due to an Exceptional Item charge of N41.08 billion, comprising special assets, exceptional provisions by the Bank as at Q3’08/9, additional provisions from the CBN/NDIC audit, and a special recovery of N21.19 billion on its Transcorp loan. The Bank’s international expansion drive continued to drive operating cost upwards, as Cost to Income Ratio Ex-Provisions (CIR) spiked to 73% from 55% as at FY’08 (NB: CIR was 67.2% as at Q3’08/09). We note that during the quarter (July – September) also, UBA began operations in Kenya and Chad, commencements we believe may have contributed to the increased cost from its ex-Nigeria operations. UBA’s Capital Adequacy Ratio (CAR) stands at 16.4%, up from 14% after the CBN/NDIC special examination of its books; and with a Loan to Deposit Ratio of 46.6%, UBA’s Balance Sheet is lowly leveraged. We value the Bank between N14.85 – N16.76. Priced at N10.80 by the market as at the 31st of December 2009, this pricing gives an indicative lower-upside potential of +37.50%. In light of its price rally in 2010, we place an ‘Accumulate’ rating on the Bank.

Forecast Summary

FY SEP 2008A 12M SEP 2009A 15M DEC 2009F DEC 2010F DEC 2011F

Earnings Per Share (N)

3.04

YoY Change (%)

(0.34)

0.01

1.74

2.60

63.21%

Price to Earnings (x)

3.55

-31.93

823.02

6.19

Dividend Per Share (N)

1.18

0.00

0.87

1.30

-1.79%

49.31%

YoY Change (%)

10.91% 11.30 -22.70%

0.00% 8.97 -20.60%

0.00% 8.99 -20.48%

8.07% 10.73 19.41%

12.06% 12.46 16.14%

Price to Book (x)

0.96

1.20

1.01

0.87

YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

112

- 13190.52%

49.31% 4.15

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

113

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Accumulate’ rating on the stock.

Slowed economic activities impact top line growth in Q4…

Gross Earnings performance fell short by 42% relative to average run-rate during the financial year…

GROSS EARNINGS AND N/INCOME Naira Millions Gross Earnings

Net Income

198,148 169,581

40,825

-7,292 12M Sep 09

FY’08 Source: NSE, Vetiva Research

UBA reported considerably slow growth in Gross Earnings relative to its established run-rate in 2009, as we saw top-line increase by N37.55 billion QoQ relative to an average quarterly increase of N53.53 billion in the previous three quarters. Management attributed this to the following: A slowdown in lending, which saw the Bank’s core loan book stay relatively flat QoQ (net loans increased by N10 billon QoQ) The drop in interest rates during the period (interbank rates especially, as interbank loans comprise 74% of UBA’s liquid assets) A decline in Interest Income, which fuelled the reduced proportion of interest income in the earnings mix to 72.72% from 76.00% as at Q3’08/09 (FY’08: 68.82%) Slowdown in economic activities UBA also recorded thinning interest margin at 57% of Interest Income (65% as at FY’08), which posed a drag on operating income growth. YoY, this increased by just +5% to N132 billion. As a result, PBT Before Exceptional Items only recorded a N2.35 billion growth QoQ, while it declined by N20.77 billion YoY. The Bank’s international expansion drive continued to drive operating cost upwards, as Cost/Income Ratio Ex-Provisions (CIR) spiked to 73% from 55% as at FY’08 (NB: Cost/Income Ratio was 67.2% as at Q3’08/09). We note that during the quarter (July – September) also, UBA began operations in Kenya and Chad, commencements we believe may have contributed to the increased cost from its ex-Nigeria operations. Considering that the breakeven cycle for new markets which the Bank still plans to commence operations in is a minimum of about two years, we believe the add-on costs from its expansion drive may continue to strain profitability growth in the near term. However, with its cost management initiative, we expect CIR to trend downwards marginally to 70% by December 2009, and 63% by December 2010. As at Q3’08/09, UBA had made a N17.18 billion provision for losses (net of Special Asset amortization of N4.10 billion), an amount Management believed was aggressive in light of its conservative risk management posture. This figure comprised margin provisions of N11.7 billion, and other loan provisions of N5.48 billion (including Transcorp). Following the CBN/NDIC special examination however, we saw the examination team recommend an additional N40.00 billion provision on the Bank’s books. Whilst such a provision increase was significant in our opinion, we note that a considerable portion of this related to the UBA/Transcorp loan transaction During the quarter, Management made appreciable progress in its Transcorp loan recovery efforts. UBA successfully secured a 1-year promissory note from the Federal Government priced at 8.28% for the sum of N21.19 billion (for the Transcorp Loan), and this amount represents the Special Recovery netted off by the Bank from its total Exceptional Items.

113

114

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

TOTAL ASSET SPLIT 12M Sept 2009

4% 4%

Liquid Assets Loans

35% Contingents

26%

Fixed Assets

27%

Investments

Other Assets Source: Bank, Vetiva Research

COMPOSITION OF LIQUID ASSETS

UBA has a well diversified Balance Sheet structure, with 35.3% of its asset portfolio in liquid assets and a strong Liquidity Ratio of 45.5% (Q3’08/09: 42.0%). We note that the Bank brought on book its offBalance Sheet BA/CPs (in line with the CBN directive); and this now constitutes part of its gross loan portfolio. Further to this however, we highlight the flat growth in the Bank’s deposit base QoQ (+2.86%) following the reclassification, which Management stated occurred during the quarter under review. UBA’s deposit base is the 3rd largest in the Banking Sector, supported by its strong distribution network comprising 709 branches. Its deposit base is also considerably retail (73%), as opposed to its loan book which is mostly focused on corporate lending (72%). This apparent divergence supports the Bank’s strong Net Interest Margin at 5.9%, and avails it the benefit of sourcing cheap cash for on-lending to its corporate clients. UBA’s Capital Adequacy Ratio (CAR) stands at 16.4%, up from 14% after the CBN/NDIC special examination of its books. With a Loan to Deposit Ratio of 46.6%, UBA’s Balance Sheet appears lowly leveraged at 8.08x, down from 8.59x as at FY’08. Relative to its peers however, the Bank’s Balance Sheet is the most leveraged: Zenith – 5.04x; First Bank – 6.60x; and GTBank – 5.58x.

12M Sept 2009

3% 3%

Metrics*

Zenith

UBA

FBN

GTBank

13.60

10.80

14.05

15.50

0.65

-0.34

0.11

1.54

Trailing PE

20.84

-31.93

125.61

10.05

NAPS

13.31

8.97

10.62

9.80

P/B Multiple (x)

1.02

Balances with Other Banks

20% Govt. Securities

Current Price Trailing EPS**

74%

Balances with CBN

Cash

Source: Bank, Vetiva Research

DPS

1.70

1.20

1.32

1.58

1.00

1.35

1.00

DY (%)

12.49%

9.26%

9.61%

6.45%

Payout Ratio

55.12%

38.33%

N/A

54.05%

ROAE

4.81%

-3.76%

0.67%

8.82%

ROAA

0.94%

-0.45%

0.11%

1.74%

Outstanding Shares (mn)

25,117

21,556

29,006

18,654

*All figures are as at 30 September 2009; DPS is as at last FY **First Bank EPS is annualized Source: Company Financials; Vetiva Research

Outlook 2010

We forecast FY December 2009 Gross Earnings and PAT at N239.27 billion and N283.68 million respectively, which translates to a Forward EPS of N0.01.

Having announced a designate replacement for its outgoing MD, in the person of Mr. Phillips Oduoza (formerly the Bank’s Deputy Managing Director in charge of Southern Nigeria operations), we watch to see how he carries along both the Bank’s vision and African business strategy, focal points when analysing the UBA equity.

114

‘Ahead of the Curve’

115

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

According to Management at its September 09 results presentation, the Bank was to issue the first tranche of its N500 billion 2-year capital raising programme (N50 billion) in Q4’09, following the completion of a book building process. The debt stock is to be callable after 5 years, subject to regulatory approval, and Management also noted that N100 billion (20%) of the total amount is planned to be raised via equity i.e. private placement of Global Depository Receipts to be listed on the London Stock Exchange.

UBA N500 BILLION PROPOSED CAPITAL RAISING PROGRAMME

Debt Balance

N350 bn

N50 bn

N100 bn

First Tranche - Initially Planned Q4'09

Equity

This is planned to be a GDR offering, with the eventual aim of listing on the London Stock Exchange (LSE) by Q2/Q3 of 2010.

Source: Bank, Vetiva Research

116

‘Ahead of the Curve’

We expect the Bank to test the market with the first tranche sometime in 2010, which will go long was in adequately positioning the Bank for its entry into some other markets with higher capital adequacy requirements.

However, in light of our observed subscription challenges with the first tranche of GTBank’s debt issuance programme, UBA’s recent $150 million loan arrangement with AfDB should temper negative impacts of success risks to its proposed debt issuance programme. The loan was sourced under AfDB’s Emergency Liquidity Facility (ELF) and Trade Finance Initiative (TFI). The Facility Loan is to be used to shore up the Bank’s shrinking foreign currency lines resulting from the financial crisis and to minimize disruptions to UBA’s operations, which includes financing of projects relating to infrastructure, Small and Medium Enterprises (SMEs) and corporate development. As for the trade finance loan, it is intended to fund UBA’s trade finance operations, including the provision of short-term credit for import and pre-export finance.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Having strong Banking acquisition experience (in Nigeria and Africa alike) and an industry assets market share of c.11%, we believe UBA may be willing to bring its experience to bear by acquiring one of the troubled Banks, though Management has noted that its strategic focus remains the African market.

Our models value UBA at 1.47x 2010F book, with an average forecast cycle ROE of 26%, hinged on expected strong contributions from the Bank’s ex-Nigeria operations in the medium term to Group performance figures.

UBA SHARE PRICE Vs. VOLUME TRADED 50

52 week high:N17.5 52 week low:N6.67 Average Price:N11.49 Avg Vol Traded (‘000): 21,923 Beta:1.24

Share Price (Naira)

40 30 20 10 0 5000

Volume Traded (‘0000)

4000 3000 2000 1000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

117

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings Interest & Discount Income Interest Expense Net Interest & Discount Income Other Inc ome Operating Income Operating Expenses

DEC 09F

2010F

2011F

169,581

SEP 08A

239,273

227,871

262,052

116,704

177,062

159,510

183,436

41,354

71,782

63,804

73,375

75,350

105,280

95,706

110,062

52,877

62,211

68,361

78,616

128,227

167,491

164,067

188,677

Operating Income Operating Expenses

INCOME STATEMENT ($'Mill) Gross Earnings

MAR 09A

DEC 09F

2010F

2011F

1,145

1,616

1,539

1,769

Interest & Discount Income

788

1,196

1,077

1,239

Interest Expense

279

485

431

495

509

711

646

743

357

420

462

531

866

1,131

1,108

1,274

Net Interest & Discount Income Other Inc ome

68,796

117,614

103,645

114,419

465

794

700

773

PBT Before Provisions

59,431

49,877

60,423

74,258

PBT Before Provisions

401

337

408

501

Provision For Risk Assets

2,616

2,142

7,921

8,221

Provision For Risk Assets

56,815

47,735

52,502

66,037

384

322

355

446

Profit Before Tax And EI Exceptional Items Profit Before Tax Tax

8,786

44,588

7,032

48,029

3,147

45,470

66,037

7,204

2,864

7,875

9,906

283

Profit Before Tax And EI Exceptional Items Profit Before Tax

301

324

307

254

379

127

190

127

190

DEC 09F

2010F

2011F

Tax

Profit After Tax

40,825

37,594

56,132

Profit After Tax

276

Dividend Payable

15,807

18,797

28,066

Dividend Payable

107

Retained Earnings

25,432

283

18,797

28,066

Retained Earnings

172

DEC 09F

2010F

2011F

Balance Sheet

SEP 08A

Assets

MAR 09A

446

Assets

Cash & Balances With CBN

200,820

94,601

102,924

124,910

Cash & Balances With CBN

1,356

639

695

843

Due From Other Banks & Financ ial Institutions

574,295

536,070

617,542

724,478

Due From Other Banks & Financ ial Institutions

3,878

3,620

4,170

4,892

Short Term Investments (Treasury Bills)

256,368

141,901

164,678

174,874

Short Term Investments (Treasury Bills)

1,731

958

1,112

1,181

Bills Discounted

Loans And Advances

447,618

567,603

843,974

1,086,717

Bills Discounted Loans And Advances

Advances Under Finance Lease

Deferred Taxation

Other Assets

86,294

70,950

92,631

112,419

Long Term Investments

46,021

81,987

82,339

94,932

61,575

78,834

144,093

4,730

10,292

1,672,991

1,576,676

2,058,474

2,498,199

1,373,847

1,266,008

1,646,779

1,973,577

32,936

74,946

123,508

157,087

Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

179,870 -

Liabilities

3,022

3,833

5,699

7,338

Other Assets

583

479

625

759

Long Term Investments

311

554

556

641

Investment Properties

Fixed Assets

416

532

973

Intangibles (Goodwill)

11,296

10,646

13,899

16,868

11,119

13,326

Total Assets

1,215 -

Liabilities

Deposits Due To Other Banks & Fin. Inst. Other Liabilities Taxation Payable

97,641

94,601

5,606

Deferred Taxation

993

Dividend Payable

Long Term Borrowings Total Liabilities

1,478,129

158

Reserves Total Capital & Reserves Minority Interest Shareholders Funds Total Liabilities & Equity Contingent Accounts Total Assets & Contigents

Per Share Ratios

222

506

Other Liabilities

659

639

834

1,061

1,750

1,749

Deferred Taxation

Dividend Payable

22,215

1,382,981

1,827,185

2,229,576

Long Term Borrowings Total Liabilities

9,981

1 -

12 -

150

9,338

12,338

15,055

Capial & Reserves 8,622

10,779

177,397

213,923

250,350

193,041

188,176

224,702

261,129

1,821

5,518

6,587

7,495

194,862

193,695

231,289

268,624

1,672,991

1,576,676

2,058,474

2,498,199

616,734

504,536

699,881

874,370

2,289,725

2,081,213

2,758,355

3,372,569

DEC 09F

2010F

2011F

1,624,834

1,817,575

2,278,337

Average Shareholders Funds

181,470

194,278

212,492

249,956

Per Share Ratios

SEP 08A

DEC 09F

2010F

2011F

0.01

1.74

2.60

2.37

Dividends

Taxation Payable

184,419

SEP 08A

Earnings

8,548

1,432,017

Average Assets

9,276

Due To Other Banks & Fin. Inst.

Capial & Reserves Share Capital

Deposits

0.92

Net Assets

11.19

No. of Shares Outstanding

17,244

0.87

1.30

8.73

10.42

12.11

21,558

DEC 09F

2010F

2011F

Share Capital*

1,245

1,198

1,444

1,690

Total Capital & Reserves

1,303

1,271

1,517

1,763

Total Liabilities & Equity

11,296

10,646

13,899

16,868

4,164

3,407

4,726

5,904

15,461

14,053

18,625

22,772

DEC 09F

2010F

2011F

Reserves

Contingent Accounts Total Assets & Contigents

Profitablilty

SEP 08A

Interest Margin

65%

59%

60%

Dividend Payout Ratio

39%

50%

Retention Ratio

61%

100%

50%

Return on Average Equity

22%

18%

22%

Return on Average Assets

Cost/Income (Ex-Provisions)

54%

70%

63%

61%

Cost/Income (Normalized)

56%

72%

68%

65%

PBT Margin

28%

20%

25%

PAT Margin

24%

16%

21%

Growth Rates

SEP 08A

Gross Earnings

120%

41%

-5%

15%

PBT

119%

-93%

1345%

45%

Liquidity

PAT

Effective Tax Rate

15% SEP 08A

91% DEC 09F

17% 2010F

15% 2011F

182%

-99%

13191%

49%

Deposit Growth Rate

47%

-8%

30%

20%

Total Assets

84%

-6%

31%

21%

Loans/Deposits

33%

45%

51%

55%

Loan & Advances

55%

27%

49%

29%

Deposit Growth Rate Shareholders Funds

87%

-8%

30%

20%

Capital Adequacy/Asset Quality

198%

-1%

19%

16%

Loan Loss Provisions to NPLs

2011F

106%

10%

Non-Performing Loans to Total Loans

6.5%

Equity/Total Assets Leverage Ratio (x)

‘Ahead of the Curve’

2010F

109%

Debt/Total Assets

DEC 09F

87%

Debt/Equity

118

SEP 08A

Loan Loss Provision/Total Loans

11%

10%

101%

12%

11%

8.59

8.14

8.90

9.30

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

First Bank of Nigeria Plc - Company Overview BASIC INFORMATION Address

35 Marina, Victoria Island, Lagos, Nigeria

Website

w w w .firstbanlnigeria.com

Management

Dr. Ayoola Oba Otudeko, OFR (Chairman) Mr Stephen Olabisi Onasanya (GMD)

Financial Y ear End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: FIRSTBAN:NL

Sector

Banking

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Nigerians

100%

FREE FLOAT (%)

96.5

SHARES IN ISSUE

First Bank of Nigeria Plc (‘First Bank’ or ‘the Bank’), incorporated locally as Standard Bank of Nigeria Limited, was listed on the Nigerian Stock Exchange in March 1971. It is unarguably the oldest and biggest Bank in Nigeria by Total Assets, having customers in excess of 4.2 million, with 536 service locations nationwide. Seeing Nigeria as its core market, the Bank has despite its size, limited its foreign operations to just 2 subsidiaries in the UK and France and representative offices in China and South Africa. Coupled with its listing on the Nigerian Stock Exchange, the Bank also has an unlisted Global Depository Receipt. In 2005, it acquired 2 Banks, MBC International Bank Limited and FBN (Merchant) Bankers Limited. Clearly still a growing Bank, with a Leverage Ratio of 6.60x, the Bank has recorded a CAGR of 39% between 2004 and 2009. Based on 30 September 2009 figures, we estimate the Bank currently controls c.14% and c.16% of industry Assets and Shareholders Funds respectively.

Key Review Highlights

Date

Shares Outstanding

Dec-09

29,006,297,207

SIZE AND VALUE TRADED Market Capitalization

Average Volume Trade

N 'Bn

407.54

$ 'Bn

2.75

Units

19,238,457

DIVIDENDS AND BONUS ISSUES Type

Year

Final Scrip Issue

FY'09 FY'09

N1.35 1 for 6

Final Scrip Issue

FY'08 FY'08

N1.20 1 for 4

Final

FY'07

N1.00

First Bank’s Q2 September 2009 results showed a +32.36% YoY growth in Gross Earnings to N128.32 billion and a -1.18% decline in PBT Before Provisions and Exceptional Items to N32.70 billion. On the back of additional credit-loss provisions of N29.51 billion, After Tax Earnings came in at a considerably reduced N2.16 billion, declining 90.90% YoY. Whilst Management notes that it fully provided for the amount of N20.1 billion in the results, which represents CBN’s recommended additional provisions in the Bank’s books for the period under review (6-months to 30 September 2009), we note that 40% of this figure represented margin facilities and share-backed loans (N8.0 billion). With an NPL Ratio of 8.17% and gross non-performing loans of N74.38 billion, we estimate First Bank’s gross provisions at N47.96 billion, which represents a 64.47% Coverage Ratio as at September end. Our key concern for First Bank is the quality of its loan book, which we fear may show continued signs of weakness in the near term. We believe First Bank is well positioned to take advantage of the new growth trajectory which presents for Nigerian Banks. However, a focal point for us will be how it marries its growth story with operational efficiency and customer satisfaction, key success factors in our view for a Bank of First Bank’s size. We value the Bank between N16.21 – N19.41. Priced at N14.05 by the market on the 31st of December 2009, this pricing presents the slimmest indicative lower-upside potential of +15.37% in our coverage universe. In light of its price rally in 2010, we place a ‘Neutral’ rating on the Bank. Forecast Summary

Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

118

MAR 09A 9M DEC 2009F DEC 2010F DEC 2011F DEC 2012F 0.51

0.44

1.74 299.64%

2.36 35.20%

3.12

-72.59%

-13.76%

32.45%

27.93

32.39

8.10

5.99

4.53

1.35

0.20

0.96

1.30

1.72

12.50%

-85.47%

388.45%

35.20%

32.45%

9.61% 13.57 -23.29%

1.40% 10.98 -19.08%

6.82% 12.53 14.08%

9.22% 13.92 11.15%

12.21% 15.75 13.10%

1.04

1.29

1.13

1.01

0.90

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

119

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Neutral’ rating on the stock. First Bank was among the first group of audited and cleared Banks by the CBN…

Earnings mix stayed relatively unchanged, compared to the 6-month period to March 2009…

First Bank recorded strong top-line figures at N128.32 billion (+32.36% YoY) for the 6-month period ended September 2009, maintaining its Q4’08/09 level by grossing an average of N64.07 billion per quarter. This growth was supported by the Bank’s measured preference for risk during the period (net loan growth of +16.49% relative to March 2009, though a -1.29% decline YoY), coupled with increased lending and placement rates in the period under review. We note that while the Bank’s earnings mix remained unchanged relative to the 6-month period to March 2009 (Interest Income currently contributes 72.52% to Gross Earnings, compared to 73.55% in the 6-month period to March 2009), income from interbank placements staked an incremental claim on Interest Income (rising from 15.6% in the 6-month period to March 2009, to 22% currently). YoY however, income contribution from interbank placements shrank to 22% from 37.8% in the 6-month period to September 2008; a shrinkage reflective of relatively lower counterparty risk concerns amongst players in the interbank market.

INTEREST INCOME MIX 6-Month Periods 11%

16%

22%

81%

77%

38%

32%

59%

56%

6M Mar 08 Loans & Advances

6M Sep 08

6M Mar 09 Placements & Deposits

6M Sep 09 Others

Source: Company Financials, Vetiva Research

Long-term strategy for cost improvement will be via aggressive revenue growth, to ensure that Operating Income growth outpaces Operating Expenses…

120

‘Ahead of the Curve’

First Bank’s results showed Operating Expenses (ex-provision) on the climb, growing +29.35% YoY, while Operating Income grew by a slower +15.65% YoY. Consequently, Cost/Income Ratio (exprovisions) increased to 61.66%, up from 55.13% as at Q2 September 2008; and we observed similar CIR increases amongst its peers YoY (UBA: 54.77% to 73.00%; Zenith: 55.34% to 62.56%). One of the Bank’s cost management initiatives is centralised processing (a move which many other Banks seem to have adopted in recent times), whereby First Bank processes some of its transactions and manages various cost centres on a regional scale. Although there are other cost-saving measures in place, Management notes that its long-term strategy for CIR improvement will be via aggressive revenue growth, to ensure that Operating Income growth outpaces Operating Expenses.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

CBN RECOMMENDED PROVISIONS

6-Month Period to September 2009 Others

10 8

Margin Facilities & Share-Backed Loans Oil & Gas

Source: Company Financials, Vetiva Research

We note that as at FY March 2009, First Bank recorded a Provision for Risk Assets of N16.79 billion (70% represented specific charges on loans), and also Exceptional Items of N26.11 billion (82% covered its Managed Funds under a guaranteed principal fund arrangement). Considering that these asset impairment charges were considerable at the time, as they fuelled a -65.73% decline in After Tax Earnings, we had expected First Bank’s additional provisions (if any) would not be too significant to translate to further earnings erosion. With the release of this result however, we saw the Bank report N29.51 billion as additional Provision for Risk Assets (+871.55% growth from last year’s N3.04 billion); an addition attributable mainly to the CBN/NDIC special examination of its books, which recommended 68% of the provisions (N20.1 billion). According to Management, First Bank has fully accounted for all identifiable troubled exposures in line with the Prudential Guidelines and banking standards; thus, no delinquent overhangs exist. With this in mind however, we note that First Bank’s Coverage Ratio for non-performing exposures stands at 64.47%, with an NPL Ratio of 8.17%. This under-coverage of non-performing exposures raises some concern for us, considering that Management has a target Coverage Ratio of >100% as part of its Risk Management Framework.

GROSS NON-PERFORMING LOANS AND PROVISIONS (N’Billions)

NPLs

Coverage Ratio: 64.47%

Provisions

74.38 Coverage Ratio: 64.08%

+944%

47.98

36.49 Coverage Ratio: 134.75% 7.13

23.38

+399%

9.61

Mar-08

Mar-09

Sep-09 Source: Bank, Vetiva Research

The Bank did not benefit as much as we expected from ‘Black Friday’ events…

First Bank remains the biggest Bank in Nigeria, with a total Balance Sheet size of N2.95 trillion (+12.85% YoY). YoY, Total Assets and Deposits were up +13.50% and +40.71% respectively; over the 6month period to September 2009 however, we saw these balances grow by just +1.16% and +0.27% respectively. We expected First Bank to have benefited more from the ‘flight to safety’ which ensued following ‘Black Friday’ events). Owing to Black Friday’s events however, First Bank’s average cost of funds shot up to 6.7%, up from 5.4% in the 6-month period to March 2009. However, yield on interest bearing assets increased by a more significant 2.8ppt to 13.2%, which fuelled an improvement in Net Interest Margin to 8.1%, up from 6.4% in the 6-month period to March 2009.

‘Ahead of the Curve’

121

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

CAR and Liquidity Ratios stood at 37% and 19.5% respectively…

As at September ending, First Bank’s Liquidity and Capital Adequacy Ratios stood at 37.0% and 19.5%, relative to regulatory minimums of 25% and 10% respectively. We note that First Bank is the largest player (supply) in the interbank market, with N626.86 billion in interbank placements as at September end, which represents 67.34% and 30.83% of its Liquid and Total Assets respectively.

TOTAL ASSETS MIX – INCREASINGLY LIQUID ASSETS SKEWED FY Sept. 08 Vs 12M Sept. 09 Q2 SEP. 08

Q2 SEP. 09

Liquid Assets

8% 36%

Risk Assets

46% Long Term Investments

49%

43%

Fixed and Other Assets

Source: Company Financials, Vetiva Research

FUNDING MIX – INCREASINGLY DOMINATED BY DEPOSITS FY Sept. 08 Vs 12M Sept. 09 Q2 SEP. 08

Q2 SEP. 09

Deposits

19%

15% Long Term Borrowings

48% 15% 1%

14% 59%

Other Liabilities

Shareholders Funds

Source: Company Financials, Vetiva Research

The Bank’s strong financial position is usually overlooked by the market…

122

‘Ahead of the Curve’

In light of recent events in the Nigerian Banking space, opportunities abound for the highly discerning investor with the required financial muscle to take advantage of presenting opportunities. First Bank holds such an enviable position, especially when one considers its strong liquidity and capital adequacy positions. First Bank plans to raise N500 billion via a Debt Issuance Programme over a 2-year period, and has received shareholders’ approval for this capital raising. The bond issue which will be redeemable and have a fixed coupon, will have a 5-year tenor. In light of our observations as to the success achieved by the firstmover in recently announced corporate bond issuances, challenges to debt issuance programmes are apparent; the coupon we believe, is a key attraction for investors, and the first-mover’s (13.5%) serves as a benchmark for future issuances by other corporates.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Metrics*

Zenith

UBA

FBN

GTBank

13.60

10.80

14.05

15.50

0.65

-0.34

0.11

1.54

Trailing PE

20.84

-31.93

125.61

10.05

NAPS

13.31

8.97

10.62

9.80

P/B Multiple (x)

1.02

1.20

1.32

1.58

DPS

1.70

1.00

1.35

1.00

Current Price Trailing EPS**

DY (%)

12.49%

9.26%

9.61%

6.45%

Payout Ratio

55.12%

38.33%

N/A

54.05%

4.81%

-3.76%

0.67%

8.82%

ROAE ROAA Outstanding Shares (mn)

0.94% 25,117

-0.45% 21,556

0.11% 29,006

1.74% 18,654

*All figures are as at 30 September 2009; DPS is as at last FY **First Bank EPS is annualized Source: Company Financials; Vetiva Research

Outlook 2010

We forecast FY December 2009 (9-month) Gross Earnings and PAT at N187.38 billion and N12.65 billion respectively, which translates to a Forward EPS of N0.44, with an estimated Dividend Per Share of N0.20 (45% payout ratio).

Our key concern for First Bank is the quality of its loan book, which we fear may show continued signs of weakness in the near term. In Q1’10, we believe focus will remain largely on recoveries and implementation of new strategies for the new financial year, and as such, lending may only pick up significantly in Q2’10 onwards. However, Management has noted its measured risk preference, which we believe will not completely bar it from new credit extension to target areas in the near term.

We believe First Bank is strongly positioned as a consolidator in light of emerging business combination opportunities in the Banking Sector.

However, a focal point for us will be how it marries its growth story with operational efficiency and customer satisfaction, key success factors in our view for a Bank of First Bank’s size.

Our models value First Bank at 1.40x 2010F book, with an average forecast cycle ROE of 21%, supported by Management’s growth plans in the near to medium term.

‘Ahead of the Curve’

123

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

FIRST BANK SHARE PRICE Vs. VOLUME TRADED 50

52 week high:N24.86 52 week low:N12.7 Average Price:N16.60 Avg Vol Traded (‘000): 19,238 Beta:0.71

Share Price (Naira)

40 30 20 10 0 15000

Volume Traded (‘000)

12000 9000 6000 3000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

124

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill)

MAR 09A

DEC 09F

2010F

2011F

Gross Earnings

218,287

187,383

261,087

326,359

156,932

138,663

187,983

220,292

Interest & Discount Income Interest Expense Net Interest & Discount Income Other Income Operating Income Operating Expenses

INCOME STATEMENT ($'Mill) Gross Earnings Interest & Discount Income

54,908

64,647

84,853

94,644

102,024

74,016

103,129

125,648

Interest Expense

58,706

48,720

73,104

106,067

160,730

122,736

176,234

231,715

Operating Income Operating Expenses

Net Interest & Discount Income Other Income

MAR 09A

DEC 09F

2010F

2011F

1,474

1,265

1,763

2,204

1,060

936

1,269

1,487

371

437

573

639

689

500

696

848

396

329

494

716

1,085

829

1,190

1,565

90,141

74,204

100,518

125,648

609

501

679

848

PBT Before Provisions

70,589

47,595

75,715

106,067

PBT Before Provisions

477

321

511

716

Provision For Risk Assets

16,790

29,000

15,665

19,582

Provision For Risk Assets

113

196

106

132

53,799

18,595

63,966

86,485

363

126

432

584

Profit Before Tax And EI Exc eptional Items Profit Before Tax Tax Profit After Tax

26,113

Profit Before Tax And EI

27,686

18,595

63,966

86,485

15,117

5,950

13,433

18,162

Exc eptional Items

12,569

12,645

50,533

68,323

Profit After Tax

Profit Before Tax Tax

176

187

126

432

102

584 123

341

461

Dividend Payable

33,566

5,690

27,793

37,578

Dividend Payable

227

188

254

Retained Earnings

(20,997)

6,955

22,740

30,745

Retained Earnings

(142)

154

208

MAR 09A

DEC 09F

2010F

2011F

Balance Sheet

MAR 09A

DEC 09F

2010F

2011F

Balance Sheet Assets

Assets

Cash & Balanc es With CBN

140,403

41,534

49,416

56,544

Due From Other Banks & Financial Institutions

764,048

685,306

716,532

819,882

17,697

23,882

28,414

32,513

Bills Discounted

153,347

207,668

247,080

282,718

Loans And Advanc es

740,397

892,974

1,136,568

1,300,503

11,769

10,383

12,354

14,136

Short Term Investments (Treasury Bills)

Advances Under Finance Lease Deferred Taxation Other Assets

51,888

68,531

81,536

93,297

Long Term Investments

84,574

100,511

144,295

165,107

Investment Properties Fixed Assets Intangibles (Goodwill) Total Assets

6,098

5,815

6,918

7,916

39,693

40,080

47,686

54,565

2,009,914

2,076,684

2,470,801

2,827,180

Liabilities Deposits

Cash & Balanc es With CBN

948

280

334

382

5,159

4,627

4,838

5,536

119

161

192

220

Bills Discounted

1,035

1,402

1,668

1,909

Loans And Advanc es

4,999

6,030

7,674

8,781

Due From Other Banks & Financial Institutions Short Term Investments (Treasury Bills)

Advances Under Finance Lease

Deferred Taxation

70 -

Other Assets

350

463

551

630

Long Term Investments

571

679

974

1,115

Investment Properties

Fixed Assets

268

271

322

368

Intangibles (Goodwill)

Total Assets

13,571

14,022

16,683

19,090

Liabilities 1,287,752

1,225,243

1,457,772

1,696,308

Deposits

8,695

8,273

9,843

11,454

Due To Other Banks & Fin. Inst.

170,410

202,892

244,856

274,802

Due To Other Banks & Fin. Inst.

1,151

1,370

1,653

1,856

Other Liabilities

154,958

287,167

359,742

401,843

Other Liabilities

1,046

1,939

2,429

2,713

102

116

Taxation Payable

10,713

Taxation Payable

Deferred Taxation

13,634

12,668

15,072

17,246

Deferred Taxation

Dividend Payable

Dividend Payable Long Term Borrowings Total Liabilities

35,042

30,150

1,672,509

1,758,121

2,107,593

2,420,349

Capial & Reserves Share Capital

14,503

304,007

348,850

389,380

Total Capital & Reserves

337,405

318,510

363,353

403,883

Total Liabilities & Equity

2,009,914

2,076,630

2,470,946

2,824,232

696,378

872,207

988,320

1,130,872

2,706,292

2,948,838

3,459,266

3,955,104

DEC 09F

2010F

2011F

1,769,074

2,043,299

2,273,742

2,648,990

344,630

327,957

340,931

383,618

DEC 09F

2010F

2011F

Contingent Ac counts Total Assets & Contigents Per Share Ratios Average Assets Average Shareholders Funds

Total Liabilities

MAR 09A

Share Capital* Reserves

204

11,871

14,231

16,343

MAR 09A

2,194

2,053

2,356

2,629

Total Capital & Reserves

2,278

2,151

2,453

2,727

Total Liabilities & Equity

13,571

14,022

16,684

19,070

4,702

5,889

6,673

7,636

18,273

19,911

23,358

26,706

MAR 09A

DEC 09F

2010F

2011F

Contingent Ac counts Total Assets & Contigents

Profitablilty Interest Margin Dividend Payout Ratio Retention Ratio

Per Share Ratios

237 11,293

Capial & Reserves 12,431 324,973

Reserves

Long Term Borrowings

65%

53%

55%

57%

267%

45%

55%

-167%

55%

45%

45% 18%

Return on Average Equity

15%

Earnings

0.51

0.44

1.74

2.36

Return on Average Assets

Dividends

1.35

0.20

0.96

1.30

Cost/Inc ome (Ex-Provisions)

56%

60%

57%

54%

Cost/Inc ome (Normalized)

67%

84%

66%

PBT Margin

13%

10%

25%

27%

PAT Margin

19%

21%

55%

32%

21%

Net Assets No. of Shares Outstanding Growth Rates Gross Earnings

13.57

10.98

12.53

13.92

24,862

29,006

MAR 09A

DEC 09F

2010F

2011F

Effective Tax Rate

40%

-14%

39%

25%

PBT

-42%

-33%

244%

35%

Liquidity

PAT

MAR 09A

DEC 09F

63%

2010F

2011F

-66%

300%

35%

Deposit Growth Rate

71%

-5%

19%

16%

Total Assets

32%

19%

14%

Loans/Deposits

62%

73%

78%

77%

Loan & Advances

59%

21%

27%

Deposit Growth Rate

71%

-5%

19%

16%

Capital Adequacy/Asset Quality

Shareholders Funds

-4%

-6%

14%

11%

Loan Loss Provisions to NPLs

14%

MAR 09A

DEC 09F

2010F

2011F

64%

63%

77%

Loan Loss Provision/Total Loans

Non-Performing Loans to Total Loans

Debt/Equity Debt/Total Assets Equity/Total Assets Leverage Ratio (x)

10%

111%

17%

15%

14%

5.96

6.52

6.80

‘Ahead of the Curve’

7.00

125

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

First City Monument Bank Plc - Company Overview BASIC INFORMATION 17A Tinubu Street

Address

Victoria Island, Lagos, Nigeria Website

www.firstcitygroup.com

Management

Dr. Jonathan Long (Chairman) Mr. Ladi Balogun (MD/CEO)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: FCMB:NL

Sector

Banking

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Foreigners

32.1

Nigerian

67.9

FREE FLOAT %

83.44

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

16,271,192,202

First City Monument Bank Plc (‘FCMB’ or ‘the Bank’) was incorporated as a private limited company on the 20th of April, 1982, and was granted a Banking license on the 11th of August of the following year. On the 15th of July 2004, the Bank changed its status from a private limited liability company to a public limited liability company and was subsequently listed by Introduction on the Nigerian Stock Exchange on the 21st of December 2004. Between December 2005 and February 2006, the Bank acquired Cooperative Development Bank Plc, Nigerian American Bank Limited and Midas Bank Limited, with a view to achieving the CBN’s N25 billion capitalisation deadline. With 150 branches nationwide, the Bank has a Banking subsidiary in the UK (FCMB UK), and a representative office in South Africa. Based on 30 September 2009 figures, we estimate the Bank currently controls c.3% and c.7% of industry Assets and Shareholders Funds respectively.

Key Review Highlights

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Bn

116.50

$ 'Bn

0.79

Units

11,934,569

DIVIDENDS AND BONUS ISSUES T ype

Year

Final

FY'08

N0.50

Final

FY'07

N0.35

Final

FY'06

N0.13

FCMB reported FY’08/9 Gross and After Tax Earnings of N71.66 billion and N3.99 billion respectively, well below our expectations of N92.71 billion and N11.66 billion respectively. Figures for the 6-month period to 31 October 2009 indicated unabated operating challenges, as Gross and After Tax Earnings declined by -13.70% and -105.11% to N35.21 billion and (N479.18 million) respectively. An additional provision of N24 billion was recommended by the CBN in the Bank’s FY’08/9 results, of which N14 billion was recognized as at FY’08/9, while the Bank recognized N10 billion in its Q1’09 results. Owing to the significant additional provisions recorded by the Bank which eroded earnings, FCMB’s FY’08/9 EPS declined to N0.25 from a Trailing EPS of N1.13 recorded as at Q3’08/9. FCMB also recorded a Trailing EPS of (N0.45) for Q1’09, a loss position which improved as at Q2’09 to (N0.36) due to recoveries made during the period. FCMB reported a Capital Adequacy Ratio of 40% as at Q2’09, which represents a 30% buffer above regulatory minimum of 10%. We note however, that this ratio was also reported at 40% as at FY’08/9, and we attribute this to the relative stability of the Bank’s Risk Weighted Assets and Shareholders Funds in both periods. Liquidity Ratio was reported at 44% for the Q2’09 period, down from 54% as at FY’08/9. We value the Bank between N8.60–N10.24. Priced at N7.16 by the market on the 31st of December 2009, FCMB’s pricing gives a moderate lower-upside potential of +20.11%. In light of its price rally in 2010, we place a ‘Neutral’ rating on the Bank.

Forecast Summary

APR 2009A 8M DEC 2009F DEC 2010F DEC 2011F DEC 2012F

Earnings Per Share (N) YoY Change (%)

0.25

0.32

0.77

1.14

1.57

-73.56%

30.22%

141.30%

47.20%

37.93%

29.17

22.40

9.28

6.31

4.57

0.00

0.10

0.42

0.62

0.86

342.39%

47.20%

37.93%

YoY Change (%)

0.00% 7.93 -3.44%

1.34% 8.13 2.45%

5.93% 8.38 3.09%

8.72% 8.46 1.04%

12.03% 8.54 0.95%

Price to Book (x)

0.90

0.88

0.85

0.84

Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

Source: Company Financials; Vetiva Research

125

126

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Investment Summary In the following segments, we review the Bank’s performance in 2009, with a view to justifying our ‘Neutral’ rating on the stock. Slow Gross Earnings performance in the period following FY’08/9 results, owed largely to suspended interest on sharply higher NPLs…

FCMB reported FY’08/9 Gross and After Tax Earnings of N71.66 billion and N3.99 billion respectively, well below our expectations of N92.71 billion and N11.66 billion respectively. Figures for the 6-month period to 31 October 2009 can be said to have indicated unabated operating challenges, as Gross and After Tax Earnings declined by -13.70% and -105.11% to N35.21 billion and (N479.18 million) respectively. We had expected additional loan-loss provisions to drive the Bank’s earnings into negative territory (as stated in our Banking Update Report: Now the Audit is Over...); however, we note that the Bank’s ability to take advantage of its having three results outstanding by spreading the additional loan loss provisions over two periods (FY’08/9 and Q1 July), can be said to have helped assuage the extent of loss declared in a single period. The Bank’s CBN recommended additional provisions was N24 billion, of which N14 billion was recognized in the FY’08/9 financials, while the Balance of N10 billion was recognized in Q1’09. Having made recoveries of N5.68 billion for the Group (Bank was N5.2 billion) during the second quarter (August to October 09), its additional provision level was reduced to N5.73 billion as at Q2’09 ending.

FCMB ADDITIONAL PROVISIONS (INCOME STATEMENT) Naira Billions

21.90

CBN Recommended Provisions Extra Provisions

The split its CBN recommended additional provisions between FY’08/9 and Q1’09 results…

7.90

11.45 1.15

14.00

Recoveries 5.68

10.00 5.73 FY Apr 09

Q1 Jul 09

Q2 Oct 09 Source: Bank, Vetiva Research

Cost management challenges further pressured earnings, in light of severance packages and slow income growth…

FCMB’s income was also pressured by rising operating expenses amidst declining income lines, a position which continued from FY’08/9 through to Q2’09. Our analysis indicates that the Bank continues to face challenges in its attempts to rein in costs, as CIR (ex-provisions) at the Bank level continues to be worse than that of the Group. Management attributed the deteriorating nature of its CIR to severance packages associated with some of its downsizing activities and the sharply reduced income from both funding and non-funding sources.

‘Ahead of the Curve’

127

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

With NPLs spiking sharply, we have observed also a sharp increase in the Bank’s gross provisions, though the growth in NPLs has outpaced the growth in Provisions (at least from a nominal viewpoint):

FCMB GROSS NON-PERFORMING LOANS AND PROVISIONS (N’Billions)

Coverage Ratio: 80.40%

NPLs Provisions

Coverage Ratio: 80.64%

40.15 32.28

29.87

+659%

24.09 Coverage Ratio: 127.76% 5.29

+378%

6.76

FY APRIL 08

FY APRIL 09

Q2 OCT. 09 Source: Bank, Vetiva Research

BA/CP reclassifications may have contributed to some of the observed growth in deposits…

The Bank reported CAR and Liquidity Ratios of 40% and 44% respectively…

128

‘Ahead of the Curve’

Relative to FY’08/9, FCMB’s deposit liabilities suffered a sharp drop by -42.24% to N185.53 billion as at Q1‘09 (FY’08/9: N321.22 billion), though this balance had increased +33.86% to N248 billion as at Q2’09 ending. Management notes that a major reason for the reported decline was the deliberate pay down of expensive wholesale funds, while the improvement as at Q2’09 is due to a gradual ramp up in its retail deposits following the announcement of the results of CBN special audit. We believe the some of the observed growth in the Bank’s Q2’09 deposits may also be attributed to the bringing on-book of some of its off-Balance Sheet BA/CPs. Net Loans have remained largely flat despite the Bank’s sharply higher non-performing loans, and we believe the reason for this may not be unconnected with the bringing on-book of some of the Bank’s offBalance Sheet BA/CPs (which probably lessened the reducing impact of NPLs). Due to these reasons (declining deposits and stable net loans), the Bank’s Loan/Deposit Ratio worsened to 112.21%, up from 84.40% as at FY’08/9. We believe that it would be challenging for FCMB to lower this ratio to the CBN recommended level of 80% in the near future, as loan growth (to preserve asset yields) is likely to outpace deposit growth in 2010. FCMB reported a Capital Adequacy Ratio of 40% as at Q2’09, which represents a 30% buffer above regulatory minimum of 10%. We note however, that this ratio was also reported at 40% as at FY’08/9, and we attribute this to the relative stability of the Bank’s Risk Weighted Assets and Shareholders Funds in both periods. Liquidity Ratio was reported at 44% for the Q2’09 period, down from 54% as at FY’08/9.

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

Metrics* Current Price

Skye

FCMB

Diamond

Access

IBTC

5.49

7.16

7.40

7.60

7.47

Annualized EPS

(1.20)

(0.04)

0.01

(1.07)

0.27

Trailing PE

(4.57)

(182.35)

702.44

(7.08)

27.27

NAPS

8.20

7.93

P/B Multiple (x)

0.67

0.90

DPS (Last FY)

0.60

7.76

9.88

4.11

0.95

0.77

1.82

0.09

0.70

0.40

DY (%)

10.93%

0.00%

1.22%

9.21%

5.35%

Payout Ratio

43.39%

0.00%

25.33%

54.70%

64.86%

-14.52%

-0.49%

0.13%

-10.58%

6.35%

ROAE ROAA

-2.00%

-0.15%

Outstanding Shares (mn)

11,584

16,271

0.02% 14,475

-2.65% 16,437

1.23% 18,750

*All figures except Diamond (31 July) are as at 30 September 2009; DPS is as at last FY Source: Company Financials; Vetiva Research

Outlook 2010

Subsequent to the release of its last results, FCMB released forecast figures for the remaining two months of the current financial year, which indicated a strong improvement in the Bank’s profitability by FY December 2009. The Bank expects to earn PBT (after provisions) of N7.61 billion for the 2-month period, an improvement attributable to:

Write-back of N2.64 billion from General Provisions made in its FY’08/9 results (for the Bank), effectively taking advantage of the CBN waiver of 1% general provision on performing loans for year 2009 Additional recoveries on provisioned accounts

With FCMB being the first Bank to acknowledge willingness to take advantage of the CBN waiver, we look to see how financial reporting plays out for other Banks when their FY’09 results are released in 2010. In line with the Bank’s forecast for the remaining 2 months of the current financial year, we estimate 8-month FY December 2009 Gross and After Tax Earnings at N47.12 billon and N5.20 billion respectively. This translates to a Forward EPS of N0.32; we forecast a DPS of N0.10 (in consideration of Management’s stated intention to pay a dividend). We believe the strongest earnings driver for FCMB, at least in the near term, will be its cost management, which as we noted earlier, is yet to yield much success especially at the Bank level, notably because of its weakening earnings profile as has been witnessed in current results. With NIM at 3%, Term Loans constituting 55% of total deposits and CIR (Bank) at 82%, we believe the Bank faces an uphill task in having to either aggressively reduce expenses (interest and/or operations related costs) or aggressively grow income (amidst declining yields on Government paper and a challenged economic climate). We expect strong contributions from the Bank’s investment banking/trading businesses in 2010, as it captures increased trade flows from foreign investors in the Nigerian equity space.

‘Ahead of the Curve’

129

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

FCMB also has debt capital raising plans which have indicative Q1’10 timelines. The Bank estimates the first tranche at about N30 billion, out of a total programme size of c.N100 billion, with a ‘likely’ coupon of between 13-15%. Management notes that its debt issuance programme will likely be executed in three tranches, highlighting though that it is yet to receive shareholder and regulatory approval for the programme. Our models value FCMB at 1.11x 2010F book, with an average forecast cycle ROE of 16%.

FCMB SHARE PRICE Vs. VOLUME TRADED 20

52 week high:N8.99 52 week low:N3.38 Average Price:N6.03 Avg Vol Traded (‘000): 11,934 Beta:1.06

Share Price (Naira)

15 10 5 0 21000 18000

Volume Traded (‘0000)

15000 12000 9000 6000 3000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

130

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BANKING

INCOME STATEMENT (N'Mill) Gross Earnings

APR 09A

DEC 09F

2010F

2011F

71,658

73,820

132,876

170,081

Interest & Discount Income

55,566

55,365

95,670

120,757

Interest Expense

17,941

23,622

39,863

49,323

37,625

31,743

55,808

71,434

Net Interest & Discount Income Other Income

INCOME STATEMENT ($'Mill) Gross Earnings

APR 09A

DEC 09F

2010F

2011F

484

498

897

1,148

Interest & Discount Income

375

374

646

Interest Expense

121

160

269

333

254

214

377

482

Net Interest & Discount Income

815

16,092

8,010

17,810

26,053

109

120

176

Operating Income

53,717

25,442

51,733

69,475

Operating Income

363

172

349

469

Operating Expenses

27,097

18,846

32,227

39,080

Operating Expenses

183

127

218

264

13,718

19,506

205

Other Income

PBT Before Provisions

26,620

30,395

PBT Before Provisions

180

132

Provision For Risk Assets

21,846

6,592

5,937

7,599

Provision For Risk Assets

148

Profit Before Tax And EI

4,774

7,126

16,962

24,967

115

169

Exceptional Items Profit Before Tax Tax

4,774

7,126

16,962

24,967

Profit Before Tax And EI

Exceptional Items

Profit Before Tax

115

125

APR 09A

DEC 09F

2010F

2011F

779

1,924

4,410

6,492

Profit After Tax

3,995

5,202

12,552

18,476

Profit After Tax

Dividend Payable

1,560

6,903

10,162

Dividend Payable

Retained Earnings

3,995

3,641

5,648

8,314

APR 09A

DEC 09F

2010F

2011F

Balance Sheet Assets Cash & Balances With CBN Due From Other Banks & Financial Institutions Short Term Investments (Treasury Bills) Bills Discounted Loans And Advances Advances Under Finance Lease Deferred Taxation

11,965

15,948

18,178

Cash & Balances With CBN

55,574

63,791

75,501

Due From Other Banks & Financial Institutions

4,430

7,169

17,040

23,709

24,238

2,622 271,103 2,114

276,830 1,441

319,167 2,658

3,030

1,292

5,316

6,059

7,562

26,579

30,540

Long Term Investments

30,267

29,500

42,527

48,476

Total Assets

21,001

21,890

31,895

36,357

515,602

423,095

531,590

605,950

Liabilities Deposits

108

123

1,115

375

431

510

Short Term Investments (Treasury Bills)

Bills Discounted

363,570

1,300

Intangibles (Goodwill)

Balance Sheet

165,146

10,450

Fixed Assets

Retained Earnings

169

Assets

Other Assets Investment Properties

Tax

Loans And Advances

18 1,831

Advances Under Finance Lease

115

164

2,155

2,455

Deferred Taxation Other Assets

160

1,869 10

179

206 327

Long Term Investments

204

199

287

Investment Properties

Fixed Assets

142

148

215

245

Intangibles (Goodwill)

3,481

2,857

3,589

4,091

Total Assets Liabilities

321,219

253,857

329,586

381,748

2,169

1,714

2,225

2,578

Due To Other Banks & Fin. Inst.

27,016

8,547

10,632

16,179

Due To Other Banks & Fin. Inst.

182

109

Other Liabilities

22,446

12,693

19,988

18,178

Other Liabilities

152

135

123

Taxation Payable

2,584

1,002

1,063

1,212

Taxation Payable

Deferred Taxation

2,097

2,083

2,126

2,424

Deferred Taxation

Dividend Payable

Dividend Payable Long Term Borrowings Total Liabilities

11,184

12,693

31,895

48,476

386,546

290,875

395,290

468,217

8,136

Capial & Reserves Share Capital Reserves Total Capital & Reserves Minority Interest

120,920

124,082

128,169

129,580

129,055

132,217

136,305

137,716

132,217

136,305

137,716

Total Liabilities & Equity

515,602

423,092

531,595

605,933

42,161

67,695

90,370

96,952

557,763

490,787

621,966

702,885

Per Share Ratios

Total Liabilities

APR 09A

DEC 09F

Share Capital Reserves Total Capital & Reserves

Total Liabilities & Equity Contingent Accounts Total Assets & Contigents

Profitablilty

2010F

2011F

Average Assets

491,469

469,349

477,343

568,770

Interest Margin

131,353

130,636

134,261

137,010

Dividend Payout Ratio

APR 09A

DEC 09F

2010F

2011F

Return on Average Equity

Retention Ratio

Earnings Dividends Net Assets No. of Shares Outstanding Growth Rates Gross Earnings

8 16

215

327

2,610

1,964

2,669

3,161

0.25 7.93 16,271 APR 09A

816

838

865

875

871

893

920

930

3,481

2,857

3,589

4,091

285

457

610

655

Shareholders Funds

Average Shareholders Funds Per Share Ratios

Minority Interest

129,055

Total Assets & Contigents

Long Term Borrowings

Capial & Reserves

Shareholders Funds

Contingent Accounts

Deposits

3,766

3,314

4,200

4,746

APR 09A

DEC 09F

2010F

2011F

68%

57%

58%

59%

30%

55%

100%

70%

45%

13%

3% 56%

0.32

0.77

1.14

Return on Average Assets

0.10

0.42

0.62

Cost/Income (Ex-Provisions)

50%

74%

62%

Cost/Income (Normalized)

8.13

8.38

8.46

16,271

DEC 09F

2010F

2011F

91%

100%

74%

67%

PBT Margin

10%

13%

15%

PAT Margin

11%

16%

27%

26%

Effective Tax Rate

36%

80%

28%

PBT

-77%

49%

138%

47%

Liquidity

PAT

-74%

30%

141%

47%

Deposit Growth Rate

28%

-21%

30%

16%

Loans/Deposits

84%

109%

97%

95%

Total Assets

10%

-18%

26%

14%

Loan & Advances Deposit Growth Rate

45%

15%

14%

28%

-21%

30%

Shareholders Funds

16%

-3%

Capital Adequacy/Asset Quality Loan Loss Provisions to NPLs Loan Loss Provision/Total Loans Non-Performing Loans to Total Loans Debt/Equity Debt/Total Assets Equity/Total Assets Leverage Ratio (x)

APR 09A

DEC 09F

2010F

2011F

2010F

2011F

81%

83%

85%

15%

10%

19%

18%

16%

10%

93%

23%

35%

25%

31%

26%

23%

4.00

3.20

3.90

‘Ahead of the Curve’

4.40

131

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

THE NIGERIAN INSURANCE SECTOR Within the last twelve to eighteen months, the excitement that trailed the recapitalisation of the Nigerian Insurance industry has quelled slowly. The most apparent proof has been the >80% drop in prices of quoted insurers from their March 2008 values and 68% from the beginning of 2009, as the Insurance Sector has been the worst performing major sector on the Nigerian Stock Exchange over the last twelve months.

NIGERIAN INSURANCE SECTOR VS NSE ALSI 1.00 Rebased: 31/12/08 =1

0.80

-34% YTD

0.60

-68% YTD

0.40

NSE ALSI

INSURANCE

0.20 Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09 Source: NSE; Vetiva Research

While it’s much bigger financial service counterparts- the Banks- have been at the centre of the storm in the beleaguered Nigerian financial system, Nigerian Insurers have faced challenges of their own. Within the 2008 and 2009 financial years, Insurers have shown reduced top line growth, declining profitability (losses in some cases), depleted balance sheets and thinning margins. For most Insurers, the root causes of the lull in performance could be narrowed to losses made on quoted investments, poor underwriting results due to high claims, provisions for bad/ doubtful debts and in some cases foreign exchange losses. Below, we dimension those issues that have affected Insurers’ performance over the past twelve months and have in turn significantly eroded confidence in the Nigerian Insurance business and our outlook for the future. Demand for Insurance Products has been affected Reduced consumer spending arising from the economic slowdown has impacted negatively on insurance expenditure in Nigeria (which is mostly discretional). Furthermore, with limited new projects being executed and significantly reduced business volumes, risks undertaken in the country has been negatively altered resulting in lower patronage of insurance products by the corporate sector especially in business lines like Marine and Oil and Gas.

132

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Claims levels have also surged- underwriting results pressured The industry has witnessed an increase in claims partly due to devastation arising from fires in factories of some major manufacturers in the country. Last year and the better part of this year also saw an increase in the vandalisation of oil and gas installations in the country due to militant activities in the Niger Delta region. The economic slowdown has caused people and corporations to be less disposed to spending on safety and precautionary measures, leaving them vulnerable to dangers and consequently resulting in claims. In addition, policy holders have been more aggressive with respect to following up claims that would have normally been overlooked in more buoyant times. NIGERIAN INSURANCE INDUSTRY NET CLAIMS

NIGERIAN INSURANCE INDUSTRY UNDERWRITING MARGINS

60%

Naira’ Billions

53% 20.3 20

50%

Expected to drop to 2005 levels 40%

40%

40% 35%

15 12.3

30%

10.0

10 7.8

8.7

20%

10%

0% 2004

2005

2006

2007

2008E

Source: NIA; Vetiva Research

2004

2005

2006

2007

2008E

2009F

Source: NIA; Vetiva Research

Provisions for doubtful debts reach an all-time high A major problem that has plauged the industry over time has been the non-remittance of premiums collected by brokers (which are responsible for >80% of all premiums collected). Aided by the prior lax enforcement of the treatment of provisions for bad/doubtful debts by National Insurance Commission (NAICOM), the industry’s chief regulator, the levels of outstanding debts has soared over time on the books of Insurers, constituting more than 20% of assets in some cases. Recently, however, the regulator has increased supervision and enforced appropriate treatment for outstanding debt accrued over the years. This led to unprecedented level of provisions for bad/doubtful debts, which had an adverse effect on profits especially in the 2008 & 2009 fiscal years. Investment Income also hit Post consolidation, prior to full deployment of newly raised capital, Nigerian Insurers had deployed a major portion of their funds into the then booming stock market. This was largely responsible for the strong performance recorded by many insurers in 2007 and spurred on Insurers to set out more funds chasing quoted equities while the proportion of quoted equities in Insurers portfolios reached as high as 70-80% in early 2008. With the 46% fall in the NSE All Share Index in 2008 and 38% in 2009, Insurers profits have taken a hit due to investment losses and provisions for diminution in quoted investments. But the crisis is not limited locally On the global scale, the financial crisis affected insurance premium growth mainly in the second half of 2008. According to Swiss Re, for the first time since 1980, insurance premiums in 2008 declined in real terms (adjusted for inflation), recording a 2% drop, with non-life insurance falling by 0.8% and life premiums falling faster by 3.5%.

‘Ahead of the Curve’

133

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

While underwriting results remained strong especially in emerging markets, returns from investments were poor, putting profits and Shareholder capital under severe pressure, though most Insurers had enough risk capital to absorb losses. The industry’s capital shrank by 1520% in non-life and 30-40% in life insurance. GLOBAL INSURANCE PREMIUM (REAL) GROWTH 2008 -2.0% -0.80%

World

-3.5%

-3.4% -1.90%

Industrialized Countries

-5.3%

11.1% Emerging Markets

7.10% 14.6%

-10%

-5%

0% Total

5% Non-Life

10%

15%

Life Source: Swiss Re; Vetiva Research

Our key concern is survival In our view, liquidity and not solely profits is vital. Nigerian Insurers need to see themselves as more of asset protectors than just managers. Thus, caution and competence are extremely necessary in deploying assets. Our approach is stay as liquid as possible; we favour diversity as opposed to concentration of investable assets, stable-predictable returns as against highest return potential and delegation to and liaison with professionals rather than in-house speculation on assets classes. We remain long-term optimistic Despite the present apparent gloom, we remain positive on the potentials of the industry. In our opinion, if sustainability is going to be attained, growth will have to be fuelled by fundamentals and not indiscriminate deployment of “excess capital” to bubble opportunities. Awareness and confidence are already being built and is expected to continue as Insurance companies create more bespoke insurance products and meet timely payment of legitimate claims, which is in turn is dependent on due diligence and professionalism in assessing risks and charging adequate premiums for providing cover. These, in addition to the creation of the right regulatory framework and enforcement of laws will make Nigerian Insurers clear winners.

134

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2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Mixed outlook for 2010; Our outlook for the Insurance Sector 2010 is mixed, but we are strongly optimistic in the longer term (beyond 2010). For 2010, subdued economic power will continue to affect demand for policies and thus we expect slower premium growth in the first half of the year. Poor Investment returns will also make insurers’ bottom-line figures fare badly; Provisions for doubtful debts, we believe, are not yet a thing of the past and this should also affect profits with just a tad less magnitude than 2009. Asset recovery and a more buoyant economy should however make 2011 a more favourable year for Insurers as we expect demand for Insurance products to increase with improvement in spending power and liqudity. Despite our optimism, we remain mindful of the challenges of corporate governance, historical apathy towards insurance products and weak enforcement of policies. Nevertheless, we also acknowledge efforts and progress being made by NAICOM, in putting in place a strong and viable framework for insurance to thrive in the country. A code of corporate governance for the industry was released in the first half of 2009; an awareness campaign by insurers has been supported and the commission recently flaged-off a movement for the enforcement of compulsory insurance products, code-named "The Nigeria Insurance Market Development and Restructuring Initiative (MDRI).” Efforts by stakeholders have started paying off, partly evidenced by the c.49% estimated YoY gross premium growth in 2008 despite a global slowdown. We believe the Nigerian Insurance Sector will benefit strongly from: A growing population with increasing awareness and a huge propensity to increase spending as the economy recovers from present constraints. We are strongly optimistic on the prospects for bancassurance and retail insurance. Increased enforcement of the local content policy and cabotage laws is expected to increase premium growth in the Oil and gas insurance and Marine Insurance business lines respectively. Business lines like Third Party Motor Insurance, Builders Liability, Occupiers' Liability, Workmen's' Compensation Insurance; Health Care Professional Indemnity and the statutory group life insurance which have the potential to literally transform the industry if improvement in compliance is accomplished in line with the statutory provisions in the Insurance Act. We forecast insurance penetration (Premiums as a % of GDP) to reach 2% by 2013, from its present level of c.0.7%. Though still low compared to an average of 3.6% and 6.0% in Africa and Asia respectively, our expectations represent an expected CAGR of 40% over the next five years.

‘Ahead of the Curve’

135

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Guaranty Trust Assurance Plc - Company Overview BASIC INFORMATION Address

Plot 928 Bishop Aboyade Cole Street Victoria Island, Lagos, Nigeria

Website

www.gtaplc.com

Management

V B Osibodu (Chairman) T Runsewe (Chief Client Officer)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg:GTASSURE:NL

Sector

Insurance

Country

Nigeria

OWNERSHIP AND FREE FLOAT (PRE LISTING) Shareholders

% Ownership

Guaranty Trust Bank Plc.

73.70

AfricInvest Limited Others

5.17 21.13

SHARES IN ISSUE Date

Guaranty Trust Assurance Plc (“”GT Assur”) was incorporated as “Heritage Assurance Limited” in June 1989 to transact only General Business. The Company was listed on the Nigerian Stock Exchanges in November 2005. GTAssur’s General Business products include Motor Insurance, Householders Insurance, Travel Insurance, Burglary Insurance, Professional Indemnity, Bonds, Energy Insurance amongst others. In the Life Business segment, GTAssur offers group life insurance and various individual life insurance and investment-linked products. The Life products are mainly sold from Bancassurance sales points in 108 GTBank branches and FCMB in 20 of its branches. The Insurer has two wholly owned noninsurance subsidiaries – Assur Asset Management Limited and Barista Property Development Limited – which is a Special Purpose Vehicle (SPV) incorporated for the Company’s estate interests.

Shares Outstanding

Dec-09

10,000,000,000

DIVIDENDS AND BONUS ISSUES Type

Year

Interim

FY'09

N0.05

Final

FY'08

N0.15

Final

FY'07

N0.06

SIZE AND VALUE TRADED Market Capitalization

Key Review Highlights

N 'Mn $ 'Mn

Average Volume Traded ('09)

In July 2007, the Company was rated A+ by Agusto & Co. Rating Agency and declared a PBT of N1.1 billion in 2007. Its rating was upgraded to Aain July 2009. The Company expects to get a rating by A.M. Best (one of the global insurance rating agencies) in 2010. As at October 2009, Shareholders Funds stood at N13 billion, while Total Assets stood at N18 billion. The Company was listed on the Stock Exchange in November 2009.

Units

21,500 145 26,355,236

GTAssur has maintained strong financial performance since the entry of the current management in 2004. From N136.29 million GPI recorded in December 2004, headline figures have grown almost 30 fold in the space of 5 years, reaching N5.32 billion as at October 2009. 38% of revenues are derived from the Corporate Business Group, 31% from the energy group, 16% from public sector and 15% from retail. In 2008, GTA sourced 60% of Non-Life premium income through Bancassurance sales points, Agency network and Direct Marketing. In the Group Life segment, 70% was sourced by Direct Marketing, 28% via Brokers and 2% by Bancassurance; while in Individual Life Insurance, 91% of premiums was sourced through Direct Marketing and 9% via Bancassurance. GTAssur has made huge investments in growing its Retail insurance infrastructure despite the present unpopularity of insurance in this segment. The Retail market on the other hand, has remained largely untapped, with less than 10% of Nigeria’s over 150 million population remaining uninsured. GTAssure has put measures in place to tackle the problems that underlie the low insurance rates in the retail market Our fair value range for GTA is N2.22 to N2.54 and we place a Neutral rating on the stock. Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

134

136

‘Ahead of the Curve’

FY'08A

FY'09E

0.21 0.16 30.54% -23.77% 10.03 13.15 0.15 0.15 150.00% -1.93% 6.98% 6.84% 1.43 1.40 13.64% -2.46% 1.50 1.54

FY'10F

FY'12F

FY'13F

0.21 0.27 0.33 31.02% 26.99% 20.15% 10.04 7.91 6.58 0.17 0.19 0.23 16.46% 11.11% 20.15% 7.97% 8.85% 10.64% 1.50 1.59 1.64 7.56% 5.80% 3.32% 1.43 1.35 1.31

FY'11

0.38 15.53% 5.70 0.26 15.53% 12.29% 1.75 6.46% 1.23

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

INVESTMENT SUMMARY GROSS PREMIUM BREAKDOWN

While GTAssur has a strong presence across all segments of the Nigerian Insurance market (2008 market share est. 3%), the Company has shown increasing proclivity towards the Retail end of the business, which presently contributes 15% of Gross Premiums. GTA is a market leader in this segment and with its strong Agency network and Bancassurance deployment from 128 branches of 2 Banks, the Company is well positioned to benefit from the vast upside in the Nigerian Retail space which is below 10% penetrated.

Gross Premium Income (GPI) has grown at a CAGR of 104% over the last three years, while PAT has expanded by a CAGR of 308% over the same period. In 2008, it recorded GPI (N4.14 billion) growth of 101%, faster than the Nigerian Insurance Association’s (NIA) estimate of 64% for the Industry. Post-tax profits came in well above peers at N1.87 billion, indicating a ROAE of 20%, up from 2% in 2005. We expect ROAE to hit 25% by 2014.

GTAssur is one of the 5 non-Bank subsidiaries of Guaranty Trust Bank Plc, a Tier 1 Bank in Nigeria with over 154 local branches and 5 offshore subsidiaries. With the huge existing and potential synergistic opportunities for Bancassurance, we believe brand loyalty both from the parent and self-grown by the Insurer, will be a key competitive advantage for GTAssur in the yet fragmented Nigerian Insurance Market.

The Company paid N0.05 interim dividend post-listing last year, and is now qualified for PFA investments.

In our view, GTAssur is managed by one of the most proactive Management teams in the Industry. The top 4 members of Management have an average of over 15 years business experience. However, a key differentiator is their understanding of the operating terrain, evidenced by structures put in place and bespoke product offerings. We also believe GTAssur has one of the best investment management teams in the Industry.

December 2008

15%

38% 16%

Corporate C Business Group O R P O Energy R A T E S Public Sector

31% Retail

Source: Company, Vetiva Research

GPI SPLIT BY BUSINESS SEGMENTS December 2008

0.2%

Life

4% Motor

9% 25%

Oil & Gas

10% Marine General Accident

10% 21% 21%

Fire Engineering Aviation

Source: Company Financials, Vetiva Research

BEFORE AND AFTER TAX EARNINGS PERFORMANCE N’Millions/Percent 2,300

60%

Profit Before Tax

Peer Metrics

GT ASSUR

CUSTODIAN STDINSURE

Current Price (N)

2.15

2.86

0.55

Current EPS (N)

0.21

0.33

0.10

10.24

8.67

5.50

Profit After Tax 1,900

40%

PBT Margin 1,500

PAT Margin

P/E (x) 20%

1,100

0% 700

-20%

300

-40%

-100 10M Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Source: Company Financials, Vetiva Research

DPS (N)

0.15

0.19

0.05

6.98%

6.64%

9.09%

Payout Ratio

69.96%

53.78%

49.14%

ROE (Average)

19.93%

19.19%

21.25%

ROA (Average)

15.34%

7.79%

17.72%

Outstanding Shares(mn)

10,000

4,971

8,393

Dividend Yield

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

137

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Whilst noting our belief that the Nigerian Insurance market has huge upside potential, we believe the Corporate market will become extremely competitive for the Brokers going forward, thus increasing the relevance of the Retail segment for growth and profitability. It is in this context we expect GTAssur’s investments in its Retail infrastructure to give it a competitive edge in the Industry in the medium term.

Outlook

138

‘Ahead of the Curve’

We expect GTAssur to record Gross Premium Income of N5.72 billion by FY’09, indicative of a 38% YoY growth. Our expectation is that PBT will come in at N2.05 billion (2% YoY growth), slightly lower than the Company’s N2.20 billion indicative forecast. We expect Underwriting Profit of N1.48 billion, 23% YoY growth, with Investment and Other Income recording a 10% YoY growth to close the year at N2.3 billion. We note GTAssur had recorded N1.75 billion as at October 2009; thus, we are expecting additional N0.65 billion in the last two months of the current financial year. We believe that given the lull in the investment markets, GTAssur will likely be pressed to realize gains from one of its trading properties to meet our/its forecast.

That said, we expect stronger results from 2010 onwards, hinged on a recovery in the economy and asset prices. We expect GPI to grow at a CAGR of 38% over the next four years from 2009, reaching N21.04 billion by 2013. We expect growth from Retail Insurance to contribute increasingly to topline, while increased consumer spending and regulatory enforcement of some insurance products should sustain growth. We also expect Life Insurance would be a strong driver of premiums in the future.

Our expectations are that PAT will grow at a CAGR of 23% from 2009 to reach N3.77 billion by 2013. We believe Investment Income would grow at a CAGR of 26% to reach N6.04 billion by 2013, while we expect Underwriting Profit to reach N4.70 by 2013 (CAGR – 34%). As at FY’08, the Underwriting Profit/Investment Income split was 49%/51%, and we expect this to tilt to 44%/56% by 2013, as we expect Underwriting Costs to increase with the competition.

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

GT ASSURE SHARE PRICE Vs. VOLUME TRADED 3.50

Share Price (Naira)

3.00

6 week high:N3.29 6 week low:N1.79 Average Price:N2.22 Avg Vol Traded (‘0000): 2,635.5 Beta:2.13

2.50 2.00 1.50 20000 15000

Volume Traded (‘0000)

10000 5000 0 Nov-09

Dec-09 Source: Nigerian Stock Exchange

‘Ahead of the Curve’

139

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

INCOME STATEMENT (N'Mill)

2006A

2007A

2008A

2009F

2010F

2011F

Income

INCOME STATEMENT ($'Mill)

2006A

2007A

2008A

2009F

2010F

2011F

Income

Gross Premiums

1,067

Outward Reinsurance Premiums Net Premium Income

(239) 828

Provision For Unexpired Risk

(681)

5,719

8,006

(2,059)

(2,882)

(4,035)

2,560

3,660

5,124

7,173

(801)

(1,121)

Outward Reinsurance Premiums Net Premium Income

7.2

38.6

54.1

75.7

(4.6)

(10.7)

(13.9)

(19.5)

(27.2)

5.6

13.9

9.3

17.3

24.7

34.6

48.4

(1.5)

(1.4)

(0.7)

(3.9)

(5.4)

(7.6)

3,088

4,323

6,053

Earned Premium

4.1

7.9

16.6

20.9

29.2

40.9

Investment Income

386

1,313

2,096

2,400

3,120

3,962

Investment Income

2.6

8.9

14.2

16.2

21.1

26.8

151

169

1,056

2,601

4,684

5,639

7,612

10,204

126

363

798

1,144

1,601

2,242

145

188

216

Underwriting/Commission Expenses

106

211

458

618

865

1,211

Increase In Life Fund

133

152

175

202

Management Expenses

433

887

1,198

1,430

2,002

Operating Expenses

672

1,501

2,682

3,488

Underwriting Profit

429

659

1,200

1,477

Profit Before Taxation

384

1,100

2,001

279

294

Other Income Operating Income

189

Charges

Provision For Unexpired Risk

28.0

(1.6)

2,453

135

(572)

Gross Premiums

1,170

(107)

11,208

611

(210)

4,144 (1,584)

Earned Premium

Commission Received

(217)

2,062

1,380

Commission Received

0.3

Other Income

0.1

0.2

Operating Income

7.1

17.6

0.6

Claims Incurred/Paid (Net)

0.8

Increase In Provision For Doubtful Debts

0.0

0.9 -

1.0 -

1.1 -

1.3 -

31.6

38.1

51.4

68.9

2.4

5.4

7.7

10.8

15.1

0.1

0.7

1.0

1.3

1.5

Charges

Claims Incurred/Paid (Net) Increase In Provision For Doubtful Debts

Taxation Profit After Taxation

Underwriting/Commission Expenses

0.7

1.4

3.1

4.2

5.8

Increase In Life Fund

0.2

0.9

1.0

1.2

1.4

2,802

Management Expenses

2.9

6.0

8.1

9.7

13.5

18.9

4,831

6,672

Operating Expenses

4.5

10.1

18.1

23.6

32.6

45.1

2,026

2,789

Underwriting Profit

2.9

4.5

8.1

10.0

13.7

18.8

2,151

2,781

3,532

Profit Before Taxation

2.6

7.4

13.5

14.5

18.8

23.8

125

516

640

812

Taxation

0.6

1.9

0.8

3.5

4.3

5.5

821

1,876

1,634

2,141

2,719

Profit After Taxation

2.0

5.5

12.7

11.0

14.5

18.4

Proposed Dividends

2.0

8.9

9.9

11.6

12.9

Retained Earnings

1.6

3.5

3.8

1.1

2.9

5.5

Proposed Dividends

300

1,313

1,471

1,713

1,903

Retained Earnings

243

521

564

163

428

816

Net Earnings Computation Underwriting Profit

8.2

Net Earnings Computation 429

659

1,200

1,477

2,026

2,789

Underwriting Profit

2.9

4.5

8.1

Investment Income

386

1,313

2,096

2,400

3,120

3,962

Investment Income

2.6

8.9

14.2

16.2

21.1

26.8

Net Earnings

814

1,972

3,296

3,877

5,146

6,752

Net Earnings

5.5

13.3

22.3

26.2

34.7

45.6

2007A

2008A

2009F

2010F

2011F

BALANCE SHEET (N'Mill)

2006A

ASSETS

10.0

13.7

18.8

BALANCE SHEET ($'Mill) Assets

Cash At Bank And In Hand Short Term Investments Debtors And Prepayments Deferred Acquisition Expenses

188

350

508

609

731

5,150

5,339

10,465

11,826

13,600

15,640

680

988

2,618

2,880

3,168

3,485

1,611

1,289

1,547

1,856

138

212

158

Trading Properties Long Term Investments Deferred Tax Statutory Deposits

500

123

664

795

954

1,097

1,262

6,182

7,976

16,490

18,138

20,747

23,767

199

425

2,196

1,317

1,844

2,582

189

264

396

594

Insurance Funds

323

555

795

1,351

1,891

Taxation Payable

241

169

186

223

199

337

586

1,055

1,372

1,784

4,174

5,727

7,875

Fixed Assets Total Assets

LIABILITIES

Cash At Bank And In Hand Short Term Investments Debtors And Prepayments

0.1

1.3

2.4

3.4

4.1

4.9

34.8

36.0

70.7

79.9

91.8

105.6

4.6

6.7

17.7

19.4

21.4

23.5

Deferred Acquisition Expenses

0.2

0.5

0.6

Trading Properties

10.9

8.7

10.4

12.5

Long Term Investments

0.9

1.4

0.3

0.4

0.7

1.1

Deferred Tax

0.1

0.2

0.3

Statutory Deposits

0.2

3.4

Fixed Assets

0.8

4.5

5.4

6.4

7.4

8.5

41.7

53.9

111.3

122.5

140.1

160.5

17.4

Total Assets

0.3

Liabilities

Creditors And Accruals Outstanding Claims

Deposit Administration Deferred Tax Asset Total Liabilities

Creditors And Accruals

1.3

2.9

14.8

8.9

12.5

Outstanding Claims

0.2

0.5

1.3

1.8

2.7

4.0

2,647

Insurance Funds

2.2

3.7

5.4

9.1

12.8

17.9

268

Taxation Payable

0.5

1.6

1.1

1.3

1.5

1.8

Deposit Administration

1.3

2.3

4.0

7.1

9.3

12.0

846

1,677

3,934

4,843

2,500

4,375

5,000

Share Capital

312

297

3,073

3,396

3,595

3,108

Share Premium

Capital And Reserves Share Capital Share Premium Contingency Reserve

Deferred Tax Asset

0.1

0.3

0.2

Total Liabilities

5.7

11.3

26.6

28.2

32.7

16.9

29.5

33.8

2.1

2.0

20.8

22.9

24.3

21.0

38.7

53.2

Capital And Reserves

561

888

1,316

1,860

Contingency Reserve

0.5

3.8

6.0

Capital Reserve

2,500

Capital Reserve

16.9

Retained Profit/(Loss)

111

766

2,017

2,180

2,609

3,424

Retained Profit/(Loss)

0.7

5.2

13.6

14.7

17.6

23.1

Shareholders Funds

5,336

6,299

12,526

13,964

15,020

15,892

Shareholders Funds

36.0

42.5

84.6

94.3

101.4

107.3

TOTAL LIABILITIES & RESERVES

6,182

7,976

16,460

18,138

20,747

23,767

Total Liabilities & Reserves

41.7

53.9

111.1

122.5

140.1

160.5

Contribution To Net Earnings Ratio

2011F

FINANCIAL RATIOS

2006

236

2007

2008

2009F

2010F

2011F

Exposure And Risk Retention Net Premium Income/Insurance Funds Net Premium/Risk Reserves Retention Rate (Net Premium/Gross Pre

257%

249%

322%

271%

15%

20%

19%

24%

30%

39%

1.6

8.9

12.6

2006

2007

2008

2009F

2010F

Underwriting Profit/Net Earnings

53%

33%

49%

47%

Investment Income/Net Earnings

47%

67%

51%

53%

2006

2007

2008

2009F

2010F

2011F

86%

79%

76%

77%

72%

67%

11%

92%

86%

81%

84%

82%

78%

67%

62%

64%

Growth Rates

2006

2007

2008

2009F

2010F

2011F

Gross Premiums

119%

93%

101%

38%

40%

Net Premiums

105%

67%

85%

43%

40%

Insurance Funds/Net Premium (Times)

0.39

0.40

0.31

0.37

60%

91%

110%

26%

40%

Risk Reserves/Net Premium (Times)

6.83

4.97

5.20

4.18

3.30

2.58

1585%

240%

60%

15%

30%

27%

Per Share Data

2006A

2007A

2008A

2009F

2010F

2011F

52%

54%

82%

23%

37%

38%

EPS

0.03

0.16

0.21

0.16

0.21

0.27

Capital Adequacy Equity Cushion

Earned Premiums Investment Income Underwriting Profit Assets

Insurance Funds/Total Assets Risk Reserves/Total Assets

84%

29%

107%

10%

14%

15%

DPS

PBT

2290%

187%

82%

29%

27%

NAPS

PAT

975%

179%

128%

-13%

31%

27%

Shares Outstanding (Millions)

Profitability

0.06

0.15

0.17

0.55

1.26

1.43

1.40

1.50

1.59

9,685

5,000

8,750

10,000

2006

2007

2008

2009F

2010F

2011F

17%

18%

19%

20%

Loss/Claims Ratio

21%

31%

33%

37%

Effective Tax Rate

23%

25%

6.26%

24%

23%

Combined Ratio

38%

49%

51%

57%

Return On Average Equity (Roae)

14%

19.93%

12%

15%

18%

Investment Income Ratio

63%

112%

85%

78%

72%

65%

Return On Average Assets (Roaa)

12%

15.34%

11%

12%

Operating Ratio

-25%

-63%

-34%

-21%

-15%

-8%

Underwriting Profit Margin

40%

32%

29%

26%

25%

Premium To Surplus Ratio (Times)

0.16

0.22

0.20

0.26

0.34

Pbt Margin

36%

53%

48%

38%

35%

32%

Pat Margin

28%

40%

45%

29%

27%

24%

74%

85%

96%

84%

0.45 84%

138

140

‘Ahead of the Curve’

Average Return On Investment Portfolio

2006

2007

2008

2009F

2010F

24%

23.73%

19%

22%

0.19

Underwriting Expense Ratio

Earned Premium/Net Premium Written

Profitability

78%

2011F 24%

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Custodian & Allied Insurance Plc - Company Overview BASIC INFORMATION Address

14B, Keffi Street South West Ikoyi, Lagos, Nigeria

Website

www.custodianinsurance.com

Management

O B Oshin (Managing) O A Odunsi ( Deputy Managing)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: CUSTODYIN:NL

Sector

Insurance

Country

Nigeria

OWNERSHIP AND FREE FLOAT* Shareholders

% Ownership

Chief Micheal Ade Ojo

17.56

Mr Oluwole Oshin Mr Tony Ogunbor Others

13.53 9.09 59.82

Free Float (%)

5.37

*as at FY'08

Custodian & Allied Insurance Plc (“Custodian”) is a general insurance company which was incorporated in August 1991. Custodian expanded into the provision of life insurance in 2001 but later sold its life business to Leadway Life Assurance Company Limited in 2007. Following the recapitalization directive by NAICOM in 2005, Custodian raised capital through a private placement, before merging with Signal Insurance Company Limited in May 2006, and with Fire, Equity and General Insurance Company Limited in February 2007. The Company was listed by introduction on the Nigerian Stock Exchange (NSE) in June 2007. Custodian raised additional $750 million capital in March 2008, through a rights issue and an initial public offer. In August 2008, the Company issued a $10 million convertible loan stock to Aureos Africa Interim Facility LLC, a private equity firm.

Key Review Highlights

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

5,138,771,267

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'08

N0.19

Final

FY'07

N0.12

Final

FY'06

N0.10

13,702

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn $ 'Mn

Units

2,949,211

Custodian has recorded strong growth top line in recent times, with gross premium increasing at a CAGR of 45.91% from N0.62 billion to N4.10 billion between 2003 and 2008. Within the same period, PAT grew at a CAGR of 70.39% from N0.11 billion in 2003 to N1.56 billion in 2008, on the back of strong underwriting and investment income. Underwriting income grew at a CAGR of 43.45% while investment income grew at a CAGR of 43.45%, reaching N1.26 billion in 2008. In our opinion Custodian has thrived in a large part due to its understanding of the market and its proactive management which we regard as one of the best in the industry. Motor insurance continues to be the strongest contributor to top line (due to its mandatory status). This is in line with segmental contribution in 2008, when the Motor insurance business line contributed 44% of gross premiums. Accident, Marine, Fire, Engineering and Oil& Gas have also traditionally contributed healthily to top line. The Insurer has however been exploring new opportunities and has gained some ground especially in energy insurance. Custodian lost 7%, outperforming our Insurance Sector benchmark by 75%. We believe this is testament to the premium placed on the stock relative to its peers. The stock closed the year at a N2.86, trading at a Trailing P/E of 7.99x and a price to book of 1.26x, relative to a sector average of 15.0x and 0.81x. Our fair value range for Custodian is N3.77 to N4.21 and we place an Overweight rating on the stock. Forecast Summary

FY'08A

FY'09E

FY'10F

FY'12F

FY'13F

Earnings Per Share (N)

0.33 42.09% 8.78 0.19 58.33% 6.64% 2.11 85.04% 1.35

0.33 2.54% 8.56 0.19 0.20% 6.66% 2.43 14.87% 1.18

0.43 0.52 0.64 27.82% 20.77% 23.47% 6.70 5.55 4.49 0.23 0.28 0.34 21.09% 20.77% 23.47% 8.06% 9.74% 12.02% 2.99 3.69 4.53 23.41% 23.21% 22.93% 0.96 0.78 0.63

0.80 25.76% 3.57 0.43 25.76% 15.12% 5.95 31.15% 0.48

YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'11

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

141

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Investment Summary

142

‘Ahead of the Curve’

The company’s outstanding number of shares increased to 5.14 billion, following the conversion of US$8 million of the US$10 million Unsecured Variable Coupon Redeemable Convertible Loan Stock issued to Aureos Africa Interim Facility LLC (leaving a balance of US$2 billion unconverted). The conversion, we believe is a testament of confidence in the business and its long term prospects. We expect Aureous to retain a board seat and continue to add value in terms of technical expertise, corporate governance and cost management.

Custodian’s credit rating was recently upgraded from “A” to “A+” by Global Credit Rating Company (GCR) South Africa, as the Company’s solvency margin (Shareholders’ funds relative to Net Premiums) has remained above 200% over the past three years increasing to 282% as at FY’08, (relative to the regulatory minimum of 15%) indicating a strong ability to meet unexpected liabilities.

As at Q3’09 the company reported a capital base of N10.8 billion, more than three times the regulatory required for non-life insurers ( N3 billion) and one of the highest among peers (general business insurers),. This gives the Company leverage to participate in big ticket transactions like marine insurance and oil and gas insurance where a small capital would have posed a challenge. For instance, for participation in oil and gas insurance, NAICOM requires a minimum capital base of N6 billion while a minimum capital base of N7 billion is required for lead underwriters. In line with this, Custodian recently won the Nigerian National Petroleum Corporation's Consolidated Insurance Policy (NNPC-CIP) for 2010/2011. The NNPC insurance premium for 2009/2010 was US$42,425,916.80.

Custodian has continued to be among the most profitable insurance companies in the country. PBT and PAT Margin reached 45.1% and 38.0% respectively, the highest among listed insurance companies. The Margins have been at an average of 38.7% and 33.5% respectively over the four years between 2004 and 2008. Despite raising capital in 2008, ROAE and ROAA remain among the highest in the industry, at 21.26% and 17.73% respectively.

On the investment side, given the volatility in the stock market and lull in the real estate market, Custodian has mainly focused on investments in the money market. Given the Company’s high level of outstanding cash and highly liquid investments (over N7.3 billion as at FY’08), as well as gross premiums generated, Custodian has been able to report decent and stable investment results unlike most of its peers. Management however, plans to deploy funds to higher yielding asset classes like real estate as the investment terrain improves

Custodian’s last released result (Q3’09), showed Gross Premiums and PAT of N4.03 billion and N1.22 billion respectively. Headline figures showed a YoY increase of 32.97% (coming in 5.77% below our forecasts of N4.28 billion) while Post Tax Earnings grew 14.51% YoY (12.01% lower than our expectations of N1.39 billion). The Insurer’s trailing Earnings per Share decreased marginally to N0.36 from N0.37 as at Q2’09.

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Over the last four quarters, Custodian’s top line growth has trended downwards, pressured by slow consumer spending especially in discretionary insurance business lines. Although revenue from motor insurance, in which Custodian is a market leader, has remained strong due to its compulsory nature, the prevalence of fake motor insurance policies has stifled growth that would have otherwise provided a buffer in these challenging times

Custodian’s PBT and PAT Margins declined to 34.84% and 30.32% respectively, from 41.41% (PBT) and 35.21% (PAT) as at Q3’08, which we attribute to reduced income from investments and underwriting profitability.

PROFITABILITY RATIOS

Peer Metrics

(Percent)

50%

Underwriting ProfitMargin

PBT Margin

PAT Margin

GT ASSUR

CUSTODIAN STDINSURE

Current Price (N)

2.15

2.86

0.55

40%

Current EPS (N)

0.21

0.33

0.10

35%

P/E (x)

10.24

8.67

5.50

45%

30%

DPS (N)

25%

0.15

0.19

0.05

6.98%

6.64%

9.09%

Payout Ratio

69.96%

53.78%

49.14%

ROE (Average)

19.93%

19.19%

21.25%

ROA (Average)

15.34%

7.79%

17.72%

Outstanding Shares(mn)

10,000

4,971

8,393

Dividend Yield

20% 15% 10% 5% 0% 2007

2008

2009E

2010F

Source: Company Financials

Source: Company Financials; Vetiva Research

Outlook

Though Custodian’s performance has moderated relative to previous years due to challenges in the economy and its industry, the Company continues to outperform its peers with head & bottom line growth and profitability margins remaining stronger than the broader industry. We expect this to continue in the future and anticipate a bounce back with improvement in consumer spending and recovery of asset prices

In light of Q3’09 results and our expectations for Q4’09, we have revised our FY’09 Gross Premiums forecast 5% downwards to N5.44 billion from N5.74 billion, whilst also trimming our PAT forecast 9% to N1.70 billion from N1.86 billion. Our Earnings projection translates to a Forward EPS of N0.36 and we expect a final dividend per Share of N0.15 by FY’09. (Custodian had already paid out a N0.05 interim dividend prior to the release of Q3’09 results)

We expect Custodian to record stronger results in 2010 as Gross Premium are expected to grow 40% YoY to N7.61 billion, partly premised on the NNPC account won by Custodian for 2010/2011. Our forecast for 2010 PAT stands at N2.19 billion, indicative of a YoY growth of 29.1%. We expect investment income to be stronger, premised on the start of a recovery in the stock market and other asset classes and also a fall through from top line.

‘Ahead of the Curve’

143

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

Looking forward, we expect Gross premiums to grow at a CAGR of 37.87% to reach N19.14 billion by 2013, while we expect PAT to reach N4.11 billion by 2013, indicative of a CAGR of 21.14%. Our bullish Gross premium forecasts are based on an expected growth in the industry based on planned regulatory intervention in making more insurance classes less discretionary in line with the Market Development and Restructuring Initiative (MDRI), which has a goal from insurance penetration to reach 3% by 2012 from the present level of 0.7% and for industry premiums to reach N1trillion from the present level of N160 billion in 2008.

CUSTODIAN & ALLIED INS. SHARE PRICE Vs. VOLUME TRADED 6.00

52 week high:N3.10 52 week low:N1.32 AveragePri ce:N2.43 Avg Vol Traded (‘0000): 2,949.21 Beta:1.05

Share Price (Naira)

5.00 4.00 3.00 2.00 1.00 8000

Volume Traded (‘0000)

4000

0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

144

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW INSURANCE

INCOME STATEMENT (N'Mill) Gross Premiums Outward Reinsurance Premiums Net Premium Income Provision for unexpired risk Premium Earned Commission Received

2006

2007

1,609 (227) 1,382 (32) 1,350

Other Income

(482) 2,233 (163) 2,069

2009 F

4,102 (933) 3,169 (339) 2,830 110

2010 F

2011 F

5,435

7,609

(1,250)

(1,826)

(2,730)

4,185

5,783

7,771

(380) 3,805 152

(533) 5,250 210

10,501

(735) 7,036

91 30

266

627

1,255

1,714

2,142

2,678

Lease Operating Income Investment Income

2008

2,715

281

Profit on disposal

Total

INCOME STATEMENT ($'Mill)

2006

Gross Premiums

10.9

Outward Reinsurance Premiums

(1.5)

Net Premium Income Provision for unexpired risk Premium Earned

9.3 (0.2) 9.1

2007 18.3

2008 27.7

2009 F

2010 F

36.7

(3.3)

(6.3)

(8.4)

15.1

21.4

28.3

2011 F

51.4

70.9

(12.3)

(18.4)

39.0

52.5

(1.1)

(2.3)

(2.6)

(3.6)

(5.0)

14.0

19.1

25.7

35.5

47.5

Commission Received

0.3

Lease Operating Income

0.2

0.3

Investment Income

1.8

4.2

0.6

8.5

0.7

11.6

1.0

14.5

1.4

18.1

1.9

Other Income

0.1

0.0

0.1

11.3

19.1

28.7

38.6

51.7

67.9

Profit on disposal

1,674

2,822

4,243

5,722

7,660

10,058

Expenses

Total Expenses

Claims paid

301

565

847

1,413

1,872

2,520

Claims paid

2.0

3.8

5.7

9.5

12.6

17.0

Underwriting expenses

333

515

726

955

1,318

1,766

Underwriting expenses

2.2

3.5

4.9

6.4

8.9

11.9

9.0

12.8

Commission paid less deferred cost Management expenses Provision for doubtful debts/ Bad debt written off

Commission paid less deferred cost 350

535

930

1,330

1,901

272

376

505

Provision for doubtful debts/ Bad debt written off

0.3

0.6

0.5

1.8

2.5

109

152

210

Bad debts written off

0.3

0.5

0.7

1.0

1.4

Direct Lease Expenses

0.0

Finance Charges- Interests

0.0

0.1

0.0

0.1

Total

7.1

11.9

16.2

24.9

34.1

46.7

Underwriting Profit

5.1

7.3

9.2

10.7

15.3

20.5

Profit on ordinary activities

4.2

7.1

12.5

13.7

17.6

21.2

Bad debts written off

650

Direct Lease Expenses

Finance Charges- Interests

Transfer to Deposit Administration Fund

Total

Underwriting Profit

Profit on ordinary activities

Profit before taxation Taxation Profit after taxation

BALANCE SHEET (N'Mill)

1,046

1,766

2,392

3,687

5,057

6,915

761

1,081

1,367

1,589

2,271

3,031

627

1,056

1,851

2,036

2,602

3,143

627

1,056

1,851

2,036

2,602

3,143

139

291

336

409

493

562

917

1,560

1,700

2,194

2,650

2007

2010 F

2011 F

2012F

2008

2009

132

240

359

539

809

1,347

1,671

7,363

9,204

11,505

14,381

Short-term Investments

874

1,462

1,146

1,433

1,791

2,239

Companies, Agents and Brokers

648

870

1,186

1,601

2,161

2,917

Debtors and prepayments

113

153

160

192

231

277

Short-term deposits

Advances under Finance Lease Deferred acquisition expenses Long-term investments Statutory deposits Fixed assets

2.4

3.6

4.4

6.3

3.4

Transfer to Deposit Administration Fund

Assets Cash at bank and in hand

Management expenses

Profit before taxation

4.2

7.1

Taxation

0.4

0.9

2.0

2.3

2.8

3.3

Profit after taxation

3.8

6.2

10.5

11.5

14.8

17.9

BALANCE SHEET ($'Mill)

12.5

13.7

2010 F

17.6

2011 F

21.2

2007

2008

2009

Cash at bank and in hand

0.3

0.9

1.6

2.4

3.6

2012F

5.5

Short-term deposits

9.1

11.3

49.7

62.1

77.7

97.1

Assets

113

141

176

119

176

261

386

540

482

736

921

1,151

1,438

320

335

352

369

388

5.9

9.9

7.7

9.7

12.1

15.1

Companies, Agents and Brokers

4.4

5.9

8.0

10.8

14.6

19.7

Debtors and prepayments

Short-term Investments

0.8

1.0

1.1

1.3

1.6

1.9

Advances under Finance Lease

0.3

0.5

0.6

0.8

1.0

1.2

Deferred acquisition expenses

0.3

0.5

0.8

1.2

1.8

2.6

Long-term investments

3.6

3.3

5.0

6.2

7.8

9.7

Statutory deposits

0.3

2.2

2.3

2.4

2.5

2.6

Fixed assets

2.0

2.9

3.8

5.2

7.1

9.6

102

130

165

296

426

566

770

1,047

1,424

4,009

5,664

11,941

15,120

19,195

24,434

Current Liabilities

552

349

566

849

1,273

1,909

Current Liabilities

3.8

5.7

8.6

12.9

Insurance Funds

414

687

1,177

1,703

2,409

3,409

Insurance Funds

2.8

4.6

7.9

11.5

16.3

23.0

Deposit Administration Fund

Total Assets

Liabilities

Total Assets

Liabilities

Deposit Administration Fund

3.7

2.4

Deferred Taxation

103

129

161

Deferred Taxation

0.2

0.4

0.6

0.7

0.9

1.1

Total Liabilities

989

1099

1825

2654

3811

5479

Total Liabilities

6.7

7.4

12.3

17.9

25.7

37.0

20.4

30.8

68.3

84.2

103.9

128.0

2006

2007

2008

2009

Net Assets

RATIOS

3,020

2006

4,565

2007

10,117

2008

12,465

2009

15,384

2010

18,955

2011

EXPOSURE AND RISK RETENTION Net premium income/ Insurance Funds

Net Assets

RATIOS

325%

269%

246%

240%

228%

Underwriting Profit/Net Earnings

40.2%

42.5%

28.1%

47.5%

60.8%

74.0%

Investment Income/Net Earnings

Retention rate

85.9%

82.2%

77.3%

77.0%

76.0%

74.0%

54.8%

68.8%

51.1%

32.5%

40.0%

38%

GROWTH RATES

74%

63%

52%

69%

66%

62%

25.9%

36.7%

47.9%

31.4%

33.8%

37.7%

CAPITAL ADEQUACY

Growth in Total Income

Growth in Net Premiums

2011

CONTRIBUTION TO NET EARNINGS 333%

Net premium income/ Risk reserves

Growth in Gross Premiums

2010

Equity Cushion

Risk Reserves/ Total Assets

82%

80%

78%

11.3%

12.6%

14.0%

38.2%

34.4%

53%

37%

34%

38%

34.0%

100.1%

36.5%

25.0%

25%

42.3%

42.0%

26.5%

16.2%

42.9%

33.5%

PER SHARE DATA

84%

41%

111%

27%

27.3%

EPS

0.17

0.23

0.33

0.43

0.52

Growth in PBT

89.5%

68.3%

75.3%

10.0%

27.8%

21%

DPS

0.10

0.12

0.18

0.19

0.23

0.28

Growth in PAT

98.7%

63.1%

70.2%

8.9%

29.1%

20.8%

Growth in Assets

32.1%

85% 9.9%

135.9%

Growth in Underwriting Profit

42.0%

81% 12.1%

56%

Growth in Investment Income

61.6%

75% 10.3%

510.2%

Growth in Earned Premiums

55.4%

Insurance Funds/Total assets

Insurance Funds/ Net Premium Income. Risk Reserves/Net Premium (times)

Dividend Payout Ratio Plowback Ratio NAPS

PROFITABILITY Underwriting expense ratio Claims/loss ratio Combined ratio Investment income ratio Operating ratio

86%

93%

95%

58%

50%

43%

30.0%

30.8%

37.1%

40.7%

41.7%

43.9%

2.49

2.35

3.56

2.10

1.64

1.35

60%

52%

54%

60%

39.7%

47.7%

46.2%

40.0%

0.89

1.14

2.11

2.43

2.99

3.69

PROFITABILITY 25%

25%

26%

25%

22.3%

27.3%

29.9%

37.1%

35.7%

35.8%

46.9%

52.2%

55.6%

62.2%

60.8%

Average return on investment portfolio Effective tax rate

60.9%

Return on Average Equity

20%

30%

44%

45%

41%

38%

Return on Average Assets

27.2%

21.8%

11.2%

17.2%

20.0%

22.9%

Underwriting profit margin

13%

20%

16%

10.4%

13.2%

15.7%

16.5%

15.7%

27.4%

24.2%

21.3%

15.1%

15.8%

15.4%

18%

19%

18%

13%

12%

47.3%

39.8%

33.3%

29.2%

29.8%

28.9%

Premium to surplus ratio (times)

0.46

0.49

0.31

0.34

0.38

0.41

PBT Margin

0.39

0.45

0.37

0.34

0.30

Premium earned/net premium written

98%

93%

89%

91%

PAT Margin

35%

34%

38%

31%

29%

25%

145

â&#x20AC;&#x2DC;Ahead of the Curveâ&#x20AC;&#x2122;

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

THE BREWERIES SECTOR A year of mixed events As at HY’09, the Brewers were among the best performers in the market, with the Vetiva Brewery Sector Index returning 22% YTD, strongly outperforming the NSE ALSI which lost 15% over the same period. Nigerian Breweries FY’08 results with accompanying strong dividend payout as well as strong Q1 and Q2 results from Guinness (all in the first half of the year) attracted investors as flight from the beleaguered financial sector towards apparent defensive sectors ensued. The second half of the year was however less positive both in terms of stock and operational performance. The Sector’s Index was up only 4%, as results, first from Guinness (FY’09 and Q1’10) and then Nigerian Breweries (Q3’09), pointed to a less resilient Brewery Sector, bowing to external pressures from a slowdown in consumption and lending coupled with a fall in the Naira, which affected costs of inputs. Below we look at major themes which shaped the Breweries industry in 2009 (especially H2’09) and our expectations for the future.

NIGERIAN BREWERIES SECTOR VS NSE ALSI (2009) 1.60

Rebased: 31/12/08 =1

+27% YTD

1.40

1.20

1.00

-34% YTD

0.80 NSE ALSI

0.60 Jan-09

Mar-09

May-09

Jul-09

BREWERIES Sep-09

Nov-09 Source: NSE; Vetiva Research

Economic slowdown and its effects on the Brewers From early on in the year, signs of a slowdown in consumer spending had already begun to set in. First to feel the pinch was the luxury goods segment, as consumers were constrained to provide themselves with necessities in the face of reduced buying power. The effect was slower however, on the brewers due to the staunch drinking culture of alcohol loyalists in the country, as many making the Brewers initially seem as defensive as the producers of basic goods. Towards midyear however, the brewers started feeling weakening demand pressures, combating this by an increase in prices (Guinness and Nigerian Breweries increased prices during the year). Consumption volumes were also affected by the banking crisis in August which affected credit lines of major distribuotrs and their ability to move products effectively to the market. In addition, social unrest in the South-East region of the country also affected volumes in the typically heavy demand region as the Naira depreciated during the year, hiking costs of imported inputs, which still constitute up to 40% of industry input needs.

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2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

YOY GROWTH BY QUARTER 50% 44%

43% 38%

40% 30% 20%

29% 30% 26%

25%

27% 22%

20%

19%

16%

10%

0% Oct- Dec 2008

Jan-Mar 2009

Apr-May 2009

Jun-Sept 2009

-10% -16%

-20% -30% -40%

Guinness Sales Growth Guinness PAT Growth

NB Sales Growth NB PAT Growth -38% -42%

-50% Source: NSE; Vetiva Research

Expansion in the year Nigerian Breweries successfully commissioned its Aba Malting plant which had consumed investments of over N10 billion since it was acquired in 2008. The 30,000 MT plant is automated with cutting edge technology and is reputed to be the biggest of its kind in the world. The Company also added on several brewing lines, one for its Fayrouz non-alcoholic line in Ibadan and another in Kaduna, simultaneously installing canning lines for its various product lines. In September, the Company commissioned a new brew house in Lagos whose capacity stands at 500,000 hectolitres, with an additional 500,000 hectolitres expected on stream in 2010. These brew houses are expected to increase NB’s total capacity to c.10 million hectolitres per annum. Guinness also revealed its current expansion programmes at both the Lagos and Benin breweries and it is expected that this will result in additional capacity of at least 1 million hectoliters to the existing combined capacity of roughly 4.8 million hectolitres per annum as at FY’08. SAB Miller expanded its operations into the Nigerian market late 2008/ early 2009 through the acquisition of two regional brewers- Pabod brewery, situated at Port Harcourt in the south of the country and Standard Breweries in Ibadan, west of the country. The company through a subsidiary called Strategic Alliance JV 2, bought 70% of Pabod, reintroducing brands such as Grand Lager and Grand Malt. According to SABMiller Nigeria MD, Johan de Kok, Pabod currently produces 30 000 hectolitres, and the company is planning an eight fold increase in output to 250,000 hectolitres by February 2010. SABMiller has also announced that it is actively looking for more business opportunities in Nigeria. Survival Strategies As we mentioned earlier, an initial reaction to the slowdown in consumption especially by the premium brewers (Nigerian breweries and Guinness) has been an increase in prices – a strategy geared towards capitalizing on brand loyalty. This has been supported by the re-launching of products like Harp and Amstel Malta with enriched content. There has also been increased focus brand marketing and reinforcement, with the canning of most products in the brewers’ portfolio in a bid to take products directly to the consumer.

‘Ahead of the Curve’

147

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Efforts have also been geared at cost reduction. NB has recorded some success in reducing costs following the implementation of its Total Cost Management (TCM) programme in line with the Heineken group’s global cost reduction strategy. Some of the key steps implemented have included: outsourcing non-core functions like security and forklift driving, implementation of SAP (an enterprise resource planning software) and switching to a Defined Contribution Pension scheme from the Defined Benefit Scheme. As a result of these cost reduction strategies, fixed expense as a proportion of revenues is projected to fall to below 30% in FY’ 09 from as high as 41% in 2005. In attempting to take advantage of the lower income class spending power, economy brewers like Sona Breweries and Consolidated Breweries have intensified marketing and brand promotion of their relatively cheaper brands of beer and malt to attract the large informal market as well as the low economic class. Additionally, there have been rebranding efforts aimed at enforcing the “cheap but quality” message in a bid to capture less financially empowered drinking loyalists from the premium brewers and brands. SAB Miller also seems to be focused on the low-end market via its acquisition of regional brewers with cheaper and lower price range products. If SAB Miller’s strategy in markets like Angola and Uganda is anything to go by, then we are likely to see the company focus on using cheaper inputs such as locally produced cassava which should result in low-priced alternatives for the informal alcohol consumers at sizable cost differential compared to the premium beers in a bid to push an effective “quality for cheap” message. Across board, there have been aggressive efforts at reaching the consumer through informal retail outlets. More local raw material inputs are also being explored both to control costs and vulnerability to exchange rates. Furthermore, the Brewers are also making efforts to manufacture cans and corks locally by partnering with and buying stakes in local manufacturers. Outlook For the current year, we have a neutral stance on the Brewers. Firstly we believe most of the advantages they had last year in terms of defensiveness and operating efficiency have already been factored in their price outperformance relative to other sectors and the Index. From a valuation perspective, the brewers are currently richly priced relative to substitute investments in the market. Additionally, we expect spending to remain slow in the first half of the year, which we believe does not augur well for consumption volumes as well as profits which will likely also come under pressure from increasing costs of inputs in the international market. Difficulties with obtaining credit as well will likely hamper the ability of wholesale distributors to effectively push products to the market. That said, we expect the economy brewers to emerge relative winners given the current slowdown in disposable income and credit. With reduced spending power, a number of avid drinking loyalists will rather gravitate towards cheaper substitutes than reduce intake. Also the economy brewers should be able to rein in on costs much more effectively than the larger brewers who had made huge investments in recent times. Historically, the high end brewers (NB and Guinness) have been able to pass on increase in production cost to consumers, benefiting from their dominance and strong brand loyalty, however this is unlikely to be as successful in the near term with increased competition and an already stretched consumer.

148

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2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Looking beyond the near-term, however, the Breweries Sector presents a strong value proposition. The Nigerian economy despite a slowdown in growth globally, is estimated by the Nigerian Bureau of Statistics to have grown by 5.9% in 2009 and real GDP is expected to grow by over 5% in the next five years till 2014 and is expected to be accompanied by increase in per capital income. Nigeria’s real per capita income has increased at a CAGR of 4.1%, compared to a CAGR of 2.9% for Africa and is expected by the IMF to grow at a CAGR of 3.5% in real terms. This is expected to support beer consumption in the country. Beer consumption in the country has increased at a CAGR of almost 10% from 9.5 million hectoliters (mhl) in 2004 to 15.4 mhl in 2008, against the global average of 4.3% over the same period. However, consumption per capita which stands at 10 litres per annum (2008) lags below the peak of 17.1 litres in 1983 and consumption per capita of other African countries like Zambia (12.4 litres), Kenya (12.7 litres), Zimbabwe (18.3 litres) and South Africa (91.0 litres). We attribute our continued confidence in the untapped growth potential of the Nigerian market to the aforementioned premises. ALCOHOL CONSUMPTION PER CAPITA (litres) Other Africa Uganda

4.4 5.4 8.3

Ghana Ethiopia DRC

3.4 5.5

Cameroon

28.6 32.9

Angola Tanzania

9.7

Nigeria

Kenya South Africa

12.7 55.8 Source: Canadean, IMF

Furthermore the large and fast growing population and thus favourable demographics presents a bull case for the future of the beer industry in the country. With a population of 151 million people as at 2008, Nigeria is Africa’s most populous country and added to that, strong population growth CAGR of 4% from 124 million in 2003. This strong growth is expected to continue with the United Nations projecting that the population of Nigeria will reach 289 million by 2050 as Nigeria has recently undergone the start of a population explosion due to higher fertility rates. Assuming consumption per capita reaches 20 litres per annum, using the UN’s estimate for population; total consumption in the country would hit 58 mhl by 2050. Youth under the age of 15 currently represent 45% of Nigerian’s population and we believe this stream of over 65 million individuals present a huge potential market and a compelling long term investment case for the Nigerian Brewery Sector.

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2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Guinness Nigeria Plc - Company Overview

BASIC INFORMATION Address

24 Oba Akran Avenue Ikeja, Lagos, Nigeria

Directors

B.A. Savage(Chairman)

Fiscal Year End Exchange Listing

D. M Hainsworth (Man. Director) June Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: GUINNESS:NL

Sector

Breweries

Country

Nigeria

Guinness Nigeria plc, a subsidiary of the Diageo group, was established 1962, and officially listed on the Nigerian Stock Exchange in 1965. The Company is currently the second largest producer of beer in the country, controlling 25% market share and is involved in the brewing, packaging and marketing of leading brands including Guinness Foreign Extra Stout, Guinness Extra Smooth, Malta Guinness, Harp Lager beer, Gordon's Spark, Smirnoff Ice, Satzenbrau and Top Malt. The brewer concentrates its production from breweries in Ogba and Benin.

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Guinness Overseas Ltd

46.03

Atalantaf Limited

7.77

Others

Key Review Highlights

46.20

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

1,474,925,519

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'09

Final

FY'08

N6.00

Special Cash

FY'08

N6.80

Final

FY'07

N4.50

Final

FY'06

N3.20

Scrip Issue

FY'06

1 for 4

N7.50

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

188,053

$ 'Mn

1,270

Units

421,697

Guinness continued to record strong top line growth during the year despite lower consumption and the liquidity crunch. FY June 09 results showed YoY top line growth of 29% stronger than 11% in FY June 08, while Q1 September 10, showed YoY top line growth of 22%. However, earnings continued to weaken, failing to keep up with Turnover growth (FY’09 YoY growth of 14.2% and Q1’10 decline of 38%) due to higher raw material costs exacerbated by a depreciating Naira and increased staff costs (staff costs increased 30% in FY’09 and continued on the uptrend in the 2010 financial year). The Company, which leads the stout and malt markets, introduced a new malt drink- Top Malt- in August 2009. The product is aimed at the lower segment of the market and compliments Malta Guinness which serves the middle/upper end of the market. The company is operating at over 80% of its current capacity of 4.7 million hectolitres and plans to increase capacity to 6 million hectolitres by 2011.This has come on the back of significant expansion by its main rival, Nigerian Breweries as well as increased competition by the smaller brewers as well as the entry of SAB Miller into the fast growing Nigerian market. In 2009, Guinness returned 28% in capital gains and paid a dividend of N7.50 for the 2009 financial year (Dividend Yield – 6% based on the year’s closing price). The stock closed the year trading at a P/E of 14.9x, trading slightly higher than Nigerian Breweries’ 13.67x. At year end Guinness traded at 5.96x book value, 37% cheaper NB in book value terms. Our fair value range for Guinness is N125.78 to N129.42 and we place a Neutral rating on the stock. Forecast Summary Earnings Per Share (N) YoY Change (%)

‘Ahead of the Curve’

FY'10F

9.18

7.90

14.17% -13.91%

FY'11F

FY'12F

FY'13F

11.19

13.99

16.52

41.59% 25.03%

18.05%

15.85

13.89

16.13

11.39

9.11

7.72

Dividend Per Share (N)

12.80

7.50

5.93

8.39

10.49

12.39

41.59% 25.03%

18.05%

184.44% -41.40% -20.97%

Dividend Yield (%) Net Assets Per Share (N)

10.04%

5.88%

4.65%

6.58%

8.23%

24.99

21.37

22.40

27.02

32.33

38.45

YoY Change (%)

16.51% -14.48%

4.80%

20.60% 19.68%

18.93%

Price to Book (x)

8.04 11.82%

FY'09A

Price to Earnings (x)

YoY Change (%)

150

FY'08A

5.10

5.97

5.69

4.72

3.94

9.72%

3.32

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Investment Summary At current price we are Neutral on Guinness but remain positive on the prospects of the business especially in the long term.

Guinness is the second largest player in the Nigerian alcoholic beverage market, accounting for 25% percent of the market, behind Nigerian Breweries which controls 60%. However Guinness maintains a strong hold on the stout market with its Guinness Foreign Extra Stout and Guinness Extra Smooth brands. The two brands are among the strongest brands in the Nigerian Market and command unrivalled loyalty. In addition to the stouts, Guinness has a diversified portfolios of other brands comprising lagers, malt drinks and other alcoholic and nonalcoholic readyǦtoǦdrink categories

Over the last five years (FY’04-FY’09), Guinness has grown revenues at a compounded rate of 14% reaching N89.1 billion as at FY’09, supported by increase in consumption, introduction of new products and rebranding & re-launching of existing products. In 2009 sales growth was 29% with volume up 22%, driven by Guinness, Malta Guinness and Harp which all took price increases in the period. Smirnoff Ice performed well with volume up over 50% while Malta Guinness showed double-digit net sales growth with growth affected positively by the bottle relaunch in 2008.

Post-tax profits have however lagged sales in growth, recording a CAGR of 8.5% in the five year period between FY’04-FY’09. This has come on the back of increased raw material costs, erratic energy supply, higher advertising/product promotion spend and increasing costs of generating energy, all serving to increase cost of sales and reduce gross profit margins from 60.4% in FY04 to 47.8% as at FY09.

The Company has made concerted efforts to achieve operational efficiency by implementing stringent waste reduction strategies, optimizing resource utilization and improving its Procurement functions. Also the Company has deployed gas plants at its Lagos and Benin plants in a bid to ensure relatively cheaper and constant energy. At present, the company sources the bulk (about 65%) of its raw materials locally and plans to increase the proportion of local inputs going forward to reduce the company’s vulnerability to currency risks and volatility of input prices in the international market. Guinness is also increasingly focusing on replacing barley with sorghum procured from local farmers. The use of locally produced sorghum is expected to significantly improve cost efficiency, as it has historically been cheaper than barley. The initiatives above are expected to boost margins in the future and align bottom-line growth more with that of top line.

Strong industry presence…

Consistent strong sales growth

Pressured Profit Margins…

Margins expected to recover…

‘Ahead of the Curve’

151

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

The Company has maintained a dividend policy, as typical for Companies with multinational ownership such as the major Brewers. As was reflected in the Company’s FY’08/9 benefit announcement, the Company proposed a dividend of N7.50 per share, reflecting a dividend payout ratio of 81% (Guinness has maintained an average payout of 72% over the past 5 years). We believe that the Company will sustain this dividend payout ratio going forward.

Outlook 2010

The early part of the year should see consumption and Margins remain under pressure for the Brewery Sector in general, as liquidity remains tight and costs difficult to pass on to the consumer. However we expect Guinness to perform relatively better than the industry in sales based on brand loyalty with the stouts, and continued penetration of Harp lager, Smirnoff ice and Malta Guinness.

Looking forward, we expect Guinness to continue to record strong growth, with sales projected to reach N181 billion by 2014- implying a 5-yr CAGR of 15.20%. Growth is expected to be driven by Guinness’ strong diversified product portfolio, product innovation, continued aggressive branding and rebranding and advertising. From a broader perspective, the Nigerian beer market is still poised to record strong growth in consumption per capital to double from present from 10 litres per annum (one of the lowest among peers on the African continent) in the next 10 years. In addition, a strong growing population with 45% under the age of 15, points to a strong consumption outlook for the Nigerian Brewery industry.

Earnings outlook in the near term faces challenges, as we expect a 14% dip YoY by FY June 10. We however expect a strong recovery in earnings subsequently as a result of higher efficiencies and moderated increases in staff costs. Given the current level of oil prices and oil production, the Naira is expected to remain stable which should lend support to declining Margins. On the offsetting side, advertising spend will likely remain high while the entry of SAB Miller into the market creates potential intense competition and reduced market share especially in the long term, and could also restrain traditional price increases which had helped support sales and by extension profits.

Guinness expected to perform relatively better in Top line…

Strong outlook for volumes…

Near term challenges to earnings; Margins expected to improve...

PROFITABILITY RATIOS

Peer Metrics

(Percent)

30%

EBIT Margin

PBT Margin

PAT Margin

Current Price (N)

25%

Trailing EPS (N)

20%

P/E (x) DPS (N)*

15%

Dividend Yield 10%

0% 2007

2008

2009 Source: Company Financials

152

‘Ahead of the Curve’

Guinness

127.50

53.02

8.51

3.88

14.98

13.67

7.50

3.40

5.88%

6.41%

Payout Ratio

65.00%

97.71%

ROE (Average)

39.60%

68.16%

ROA (Average)

18.42%

26.37%

Outstanding Shares(mn)

1474.93

7562.56

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

We project after tax Earnings to grow at a five year CAGR of 16.25% from 2009, reaching N41.08 billion by 2014. PBT Margin for FY’10 is expected to be 16.38%, from which we expect a recovery to 20.0% in 2011, reaching 22.71% by 2014.

GUINESS SHARE PRICE Vs. VOLUME TRADED 300

52 week high:N144.55 52 week low:N67.65 Average Price:N113.94 Avg Vol Traded (‘000): 421,697 Beta:0.73

Share Price (Naira)

240 180 120 60 0 4000 3500 3000 2500 2000 1500 1000 500 0

Volume Traded (‘000)

Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

153

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

INCOME STATEMENT (N'Mill)

2007

2008

2009

2010 F

2011 F

2012 F

62,265 (34,144) 28,121 (8,545) (5,349)

69,173 (35,611) 33,562 (10,515) (6,164)

89,148 (46,510) 42,639 (14,000) (7,796)

101,629 (57,929) 43,700 (16,261) (8,994)

117,890 (65,429) 52,461 (18,862) (10,315)

136,752 (73,846) 62,906 (21,880) (11,966)

14,227

16,883 159 17,042 (437) 1,730

20,843 227 21,069 (2,026) 1,212

18,446 306 18,752 (2,541) 1,728

23,283 413 23,696 (2,358) 2,240

29,060 558 29,617 (2,735) 2,598

13,932 3,110

17,504 3,565

14,696 4,056

19,083 4,613

14,800 (4,193) 10,607

18,336 (1,243) 17,093 (5,232) 11,861

20,255 (1,263) 18,992 (5,451) 13,541

17,939 (1,286) 16,653 (4,996) 11,657

Dividends NOPAT Retained Earnings

(6,637) 10,034 5,887

(18,879) 11,810 5,224

(11,062) 15,619 4,692

(8,743) 13,756 2,914

BALANCE SHEET (N'Mill) Non Current Assets Fixed Assets Intangible Assets Debtors and Prepayments

30,125

Turnover Cost of Sales Gross Profit Distribution & Admin Expenses Advertising & Promotion Expenses Core operating profit/ Other income EBIT Interest (Paid) & Similar charges Interest Received EBITDA Depreciation & Amortisation PBT and Ex. income Exceptional Income Profit before taxation Taxation Profit after taxation

14,227 (1,540) 2,197 11,464 2,764 14,800

2009

2008

2009 2010 F

420 (231) 190 (58) (36)

467 (240) 227 (71) (42)

602 (314) 288 (95) (53)

686 (391) 295 (110) (61)

796 (442) 354 (127) (70)

923 (499) 425 (148) (81)

Core operating profit/ Other income EBIT Interest (Paid) & Similar charges Interest Received

96 96 (10) 15

114 1 115 (3) 12

141 2 142 (14) 8

125 2 127 (17) 12

157 3 160 (16) 15

196 4 200 (18) 18

24,370 5,247

EBITDA Depreciation & Amortisation

94 21

118 24

99 27

129 31

165 35

23,578

29,481

23,578 (7,074) 16,505

29,481 (8,844) 20,636

PBT and Ex. income Exceptional Income Profit before taxation Taxation Profit after taxation

77 19 100 100 (28) 72

124 (8) 115 (35) 80

137 (9) 128 (37) 91

121 (9) 112 (34) 79

159 159 (48) 111

199 199 (60) 139

(12,379) 16,623 4,126

(15,477) 20,773 5,159

Dividends NOPAT Retained Earnings

(45) 68 40

(127) 80 35

(75) 105 32

(59) 93 20

(84) 112 28

(105) 140 35

2007

2008

203 2 205

248 9 4 260

242 12 3 257

279 13 292

321 14 335

369 15 384

Current Assets Stocks Debtors & Prepayments Deposits for imports Cash and bank balances

86 45 0 149

87 44 1 102

114 61 27 39

123 73 39

133 86 39

145 101 39

2010 F

2011 F

268 30,393

35,898 1,807 399 38,104

41,283 1,951 43,234

47,475 2,107 49,583

54,596 2,276 56,872

Current Assets Stocks Debtors & Prepayments Deposits for imports Cash and bank balances

12,721 6,662 26 22,007

12,867 6,529 108 15,108

16,848 9,105 3,991 5,821

18,246 10,744

19,760 12,678

21,401 14,960

5,822

5,823

5,824

Total Assets

71,809

73,191

73,869

78,046

87,844

99,057

2012F

5,000 26,568

15,369 3,981 798 3,705

17,958 5,493 794 6,897

18,317 6,591 834 7,035

18,683 7,910 876 7,176

19,057 9,492 919 7,319

23,853

31,142

32,777

34,644

36,787

Net Current Assets/(Liabilities)

14,848

10,759

4,623

2,034

3,617

5,397

Total Assets Less Liabilities

31,639

36,863

31,525

33,039

39,847

47,689

Long term liabilities Deferred Tax Liability Term loan Provision for gratuity Total

6,647 3,500 3,455 13,602

7,886

8,094

8,903

9,794

10,773

4,589 12,476

3,108 11,202

3,326 12,229

3,558 13,352

3,808 14,581

Capital and Reserves Share capital Share premium Bonus Issue Reserve Revaluation Reserves Revenue Reserve Shareholders' Equity

737 1,546 3,751 25,605 31,639

737 1,546 3,738 30,842 36,863

737 1,546

3,303 25,938 31,525

3,237 27,518 33,039

3,172 34,389 39,847

Total Liabilities & Equity

71,809

73,191

73,869

78,046

RATIOS

16,548 5,021

2008

2007

36,733 1,311 534 38,579

Less Current Liabilities Creditors & Accruals Taxation Dividend Payable Bank Overdrafts Current portion of Term loan Total current liabilities

2007

INCOME STATEMENT ($'Mill) Turnover Cost of Sales Gross Profit Distribution & Admin Expenses Advertising & Promotion Expenses

485

494

499

527

593

669

112 34 34 179

104 27 5 25 161

121 37 5 47 210

124 45 6 48 221

126 53 6 48 234

129 64 6 49 248

Net Current Assets/(Liabilities)

100

Total Assets Less Liabilities

214

249

213

223

269

322

55 21 76

60 22 83

73 26 98

5 10 22 186 223

21 232 269

5 10 21 286 322

527

593

669

Long term liabilities Deferred Tax Liability Term loan Provision for gratuity Total

45 24 23 92

31 84

24 90

3,109 42,297 47,689

25 208 249

87,844

99,057

Total Liabilities & Equity

485

494

499

LIQUIDITY RATIOS Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables

2007 1.1 0.8 1.6 9.2 75 97 129 39

2008 0.9 0.6 1.5 39.0 68 95 80 34

2009 0.5 0.2 1.1 10.4 69 75 24 37

2010F 0.5 0.2 1.1 7.4 66 67 21 39

2011F 0.5 0.2 1.1 10.1 61 59 18 39

2012F 0.6 0.2 1.1 10.8 57 52 16 40

2007 2008 10.1% 5.1% 44.5% 56.0% 44.1% 50.4% 37.4%

2009 21.9% 9.3% 65.4% 42.7% 18.3%

2010F 21.3% 9.0% 75.0% 42.3% 25.0%

2011F 18.0% 8.2% 75.0% 45.4% 25.0%

2011F 15.3% 7.4% 75.0% 48.1% 25.0%

2009 9.18 7.50 21.37 60.44

2010F 7.90 5.93 22.40 68.90

2011F 11.19 8.39 27.02 79.93

2011F 13.99 10.49 32.33 92.72

2008

2009

2010 F

2011 F

2012 F

2008 11.1% 18.7% -2.2% 23.9% 11.8%

2009 28.9% 23.5% 51.4% 10.5% 14.2%

2010F 14.0% -11.5% -11.0% -11.4% -13.9%

2011F 16.0% 26.2% 26.4% 31.4% 41.6%

2012F 16.0% 24.8% 27.7% 25.0% 25.0%

PROFITABILITY Return on Equity Return on Assets Return on Net fixed assets Return on Invested Capital Growth rate (g)

2007 40.3% 16.1% 35.6% 30.2% 15.1%

2008 34.6% 16.4% 35.5% 29.4%

2009 39.6% 18.4% 37.3% 31.4% 7.3%

2010F 36.1% 15.3% 30.2% 25.7% 9.0%

2011F 45.3% 19.9% 37.2% 26.4% 11.3%

2012F 47.1% 22.1% 40.4% 28.2% 11.8%

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2007 18.4% 22.8% 23.8% 17.0%

2008 20.1% 24.6% 26.5% 17.1%

2009 19.6% 23.6% 22.7% 15.2%

2010F 14.5% 18.5% 17.7% 11.5%

2011F 16.2% 20.1% 20.0% 14.0%

2012F 17.8% 21.7% 21.6% 15.1%

2007 3.47 4.85 0.82 0.48

2008 3.73 5.41 0.86 0.53

2009 8.52 6.00 0.94 0.40

2010F 17.46 5.79 1.17 0.41

2011F 20.25 6.20 1.23 0.40

2012F 23.48 6.64 1.26 0.40

‘Ahead of the Curve’

Total Assets Less Current Liabilities Creditors & Accruals Taxation Dividend Payable Bank Overdrafts Current portion of Term loan Total current liabilities

5 10 22 175 213

2007 16.1% 16.4% 16.4% 29.4% 42.6%

2011 F 2012 F

5 10 25 173 214

2007

154

2009 2010 F

Capital and Reserves Share capital Share premium Bonus Issue Reserve Revaluation Reserves Revenue Reserve Shareholders' Equity

GROWTH RATES Turnover growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT

ASSET UTILIZATION Sales to cash (x) Sales to inventory (x) Sales to total assets (x) Fixed Assets (%)

BALANCE SHEET ($'Mill) Non Current Assets Fixed Assets Intangible Assets Debtors and Prepayments

2011 F 2012 F

CAPITAL STRUCTURE Financial leverage (debt to equity) Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio PER SHARE DATA EPS DPS NAPS Sales/Share

2007 7.19 4.50 21.45 42.22

5 10 -

2008 8.04 12.80 24.99 46.90

5 10 -

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Nigerian Breweries Plc - Company Overview BASIC INFORMATION Address

1 Abebe Village Road Iganmu, Lagos, Nigeria

Website

www.nbplc.com

Management

Chief K. B. Jamobu (Chairman) Mr M. J. Herkemij (MD/CEO)

Fiscal Year End Exchange Listing

December Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: NB:NL

Sector

Breweries

Country

Nigeria

Nigerian Breweries was incorporated in 1964 and remains the largest Brewer in the country, controlling 60% market share of alcoholic drinks in the Country. The Brewer is a subsidiary of Heineken, Europe's largest brewery with products in over 170 countries. The company has five brewery plants currently operating in Lagos, Ibadan, Kaduna, Ama (Enugu) and Aba. Nigeria. Some of its leading brands in Nigeria include Star Lager Beer, Gulder Lager Beer, Maltina, Amstel Malta and Fayrouz.

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Heineken NV

54.10

Others

45.90

SHARES IN ISSUE Date Dec-09

Shares Outstanding 7,562,562,340

DIVIDENDS AND BONUS ISSUES

Type

Year

Final

FY'09

N1.30

Interim/Final

FY'08

N3.40

Interim/Final

FY'07

N2.50

Final

FY'06

N1.04

SIZE AND VALUE TRADED Market Capitalization

N 'Mn

400,967.06

$ 'Mn

2,707.41

Average Volume Traded ('09) Units

2,372,175

Nigerian Breweries stands out on account of its strong market presence. Its long standing presence in the Nigerian market has seen it evolve into a responsive brewer with a deep understanding of the Nigerian consumer. We believe the brewer presents a commendable and sustainable business model with its strategically located breweries and distribution centres across the country. Over the past two financial years prior to 2009, NB experienced a boost in performance with 29.5% (2007) and 30.2% (2008) growth in revenues while profits came in 73.8% and 35.7 % higher respectively. The current year has however been challenging in terms of both top and bottom line. YoY revenue growth have trended downwards, falling from 24.7% as at Q1’09 to 12.23% as at Q3’09. Due to effects of the slowdown in the economy, exacerbated by liquidity constraints in July and August, volume growth in the third quarter fell by mid single digits, YoY. Consumption volumes took a hit as a result of reducing purchasing power among consumers while the banking crisis affected credit lines of major suppliers and their ability to move products effectively to the market. Social unrest in the south-east region of the country also affected volumes in the typically heavy demand region. NB’s profitability margins reduced QoQ to 26.56% (PAT) and 17.94% (PBT) down from 29.79% and 20.83% respectively in Q2’09. In the year under review, NB returned 30% in capital gains and paid a dividend of N3.40 for the 2008 financial year (dividend yield – 6.4% based on the year’s closing price). The stock closed the year trading at a P/E of 13.67x, slightly lower than Guinness’ 14.98x. Our fair value range for Nigerian Breweries is N52.82 to N57.73 and we place a Neutral rating on the stock.

Forecast Summary Earnings Per Share (N)

FY'08A

FY'09F

FY'10F

FY'11

FY'12F

FY'13F

4.80

6.16

7.79

9.66

19.07% 28.22%

26.48%

24.08%

3.40

4.03

35.74%

18.62%

15.59

13.15

11.04

8.61

6.81

5.49

3.40

4.03

4.80

6.16

7.79

9.66

113.74%

18.67%

19.07% 28.22%

26.48%

24.08%

6.41%

7.61%

9.06% 11.61%

14.69%

18.22%

4.26

4.40

5.44

5.48

5.57

5.97

YoY Change (%)

-25.37%

3.26%

23.67%

0.73%

1.68%

7.15%

Price to Book (x)

12.44

12.05

9.74

9.67

9.51

8.88

YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

155

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Investment Summary At current price, we are Neutral on Nigerian Breweries but remain positive on the prospects of the business and the industry long term. Deepening market penetration…

Biggest player supported by strongest brands...

Strong earnings helped by total cost management …

NB’s revenues in the past five years, between 2003 and 2008, have expanded at a CAGR of 23.3%, as consumption in Nigeria (the second largest beer consuming nation in Africa) has strengthened in recent times on the back of a growing income levels and an expanding middle class with an active social life style, successful product launches and promotions and steady price increases, which have been met by a receptive consumer base. Nigerian Breweries controls c.60% of the beer market in the country and has most of its products in the premium/medium priced segment, which has continued to witness an expanded consumer base. The Company’s dominates the lager market with its Star brand supported by Heineken and Gulder, while Guinness’ harp brand has hardly been able to break the Company’s dominance on the lager market which is more than 4 times the stout market controlled by the Guinness Stout and Guinness Extra Smooth brands. To challenge Guinness in the stout market, NB has repackaged and rebranded its Legend Extra Stout aiming to appeal to the mainstream market in between Guinness’ premium brands and the economy brands like Consolidated Breweries’ Turbo king. Nigerian Breweries has also recorded strong earnings growth in recent times as PBT has grown at a CAGR of 35.92% over the period FY’03FY’08 with EBIT Margin increasing from 19.60% in 2004 to 25.28% in 2008. Apart from steady revenue growth (as a result of increasing beer consumption and prices), earnings growth has largely due to concerted efforts by the Company in its cost management process in line with the Heineken group’s Total Cost Management (TCM) programme. Measures implemented to achieve this include:

156

‘Ahead of the Curve’

Enhanced management of fixed costs by increased efficiency, largely ensuring that earnings quality improved remarkably over time. Fixed expenses as a proportion of revenues is projected to fall to below 30% in 2009 from as high as 41% in 2005. Improved capacity utilization (the Company currently operates at about 90%-95% of its capacity), yielding a reduction in the burden of the fixed depreciation charge on operating income. Efficiency in operations which have served to improve production quality as well as reduce production losses.

To meet the anticipated growth in demand, Nigerian Breweries has embarked on sustained capacity expansion over the last few. There has also been significant investment in production development, packaging and promotion. Between 2006 and 2008 the Company spent about 220 million Euros (N50 billion) on capacity expansion, with the Company investing about N10 billion in the acquisition and development of an automated malting plant in Aba, the largest in Africa with 30,000t capacity.

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Expansion to meet potential demand…

Local content gains…

expected

provide

PROFITABILITY RATIOS

In FY08, the brewer added two new production lines to its Ibadan brewery, one for Star cans and the second for its soft drink brand Fayrouz. A depot to serve the strategic Abuja area in also in progress.

In 2008, NB also commissioned a new brewhouse in Kaduna, lager production line in Aba and recently commissioned 500,000 hectolitres brew house in Lagos, with an additional 500,000 hectolitres expected on stream in 2010. The company expects total production capacity to reach 10mhl in 2010.

As regards production development and packaging, in 2009, the Company added Calcium into the Maltina drink formulation, launched a new Legend bottle and brand identity for Star, reformulated its Amstel Malta drink, upgraded the label of its Gulder brand and introduced can packaging for Matina and Faryouz.

The Company has continued to increase local content into its production process in line with its policy of minimum 60% local content. Besides reducing volatility to foreign exchange, the local policy content initiative, we believe, is aimed at giving the Company more reliability and control in the supply chain and production processes and less exposure to externalities. In this regard, NB has engaged in Sorghum supply chain developments, with about 10,000 farmers on board as at 2008. Additionally, the Company uses Glassforce Ltd Nigeria as its exclusive bottle producer, Lotus Plastics Ltd for its crates, Avon Crowncaps & Containers plc for corks and has ties to a Local can manufacturer under construction.

Peer Metrics

(Percent)

30% EBIT Margin

PBT Margin

PAT Margin

Current Price (N)

25%

Trailing EPS (N)

20%

P/E (x) DPS (N)*

Guinness

53.02

127.50

3.88

8.51

13.67

14.98

3.40

7.50

6.41%

5.88%

15%

Dividend Yield 10%

0% 2007

2008

2009F

2010F

Source: Company Financials

Payout Ratio

97.71%

65.00%

ROE (Average)

68.16%

39.60%

ROA (Average)

26.37%

18.42%

Outstanding Shares(mn)

7562.56

1474.93

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

157

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

Outlook

We expect Nigerian Breweries to experience challenges with growth in the near term as consumption is expected to remain pressured due to liquidity constraints and dampened spending power following the banking crisis in August. 2010 is also going to be challenging, albeit better than 2009. (Our 2009 full year expectations are N171.4 billion and N30.51 billion for Turnover and PAT respectively, indicating growth of 17.80% and 18.72% respectively, much weaker than 30.17% and 35.68% growth in 2008 Top and bottom line respectively). Our mild optimism is premised on recovery expectations of some sort in the latter part in the year. We expect 2010 Revenues and PAT to increase 19.01% and 20.23% to N203.91 billion and N37.95 billion in 2010. We expect Turnover and PAT to reach N349.422 billion and N73.07 billion respectively by 2013, indicative of a 4-yr CAGR of 19.50% and 24.64%.

Challenges remain power inconsistency and costs, competition and exchange rate risks.

2010 though slow should be relatively better than 2009 …

Power, competition and currency pose downside risks …

At present, Nigerian Breweries uses gas and diesel to supply its power needs. Considering the relatively few suppliers, the price of gas seems vulnerable to upward price increases going forward. Also insurgency has continued to affect gas supply as gas pipelines have been vandalised frequently in the past leading to shortages which affect production. Also diesel costs could likely trend upwards, on effects of the increase in PMS (petrol) its substitute. Competition is also likely to increase in the industry following SAB Miller’s entry into the market. Unlike the other small players who have posed little or no competition to Nigerian Breweries or Guinness in recent times, SAB Miller comes into the Nigerian Market with the same advantages which had made Guinness and Nigerian Breweries market leaders- financial strength, strong brand and strong technical alliances. Although SAB Miller’s focus is on the lower segment of the market for now, there is the possibility that target market will converge in future. Although Nigerian Breweries has a policy of minimum 60% local content, the company still sources a substantial amount of inputs including grains and packaging materials from abroad which subjects its income to currency fluctuations. Between November 2008 and Dec 2009, the Naira depreciated from N118/USD to N148/USD. Although NB generates a portion of its revenues abroad, the amount stands at less than 0.5% of Revenues, leaving the company still net exposed. We however, expect the Company’s internal efficiency measures to continue to offset losses from other areas and hence keep margins high.

158

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BREWERIES

INCOME STATEMENT (N'Mill)

2007

2008

2009

2010 F

2011 F

2012 F

62,265 (34,144) 28,121 (8,545) (5,349)

69,173 (35,611) 33,562 (10,515) (6,164)

89,148 (46,510) 42,639 (14,000) (7,796)

101,629 (57,929) 43,700 (16,261) (8,994)

117,890 (65,429) 52,461 (18,862) (10,315)

136,752 (73,846) 62,906 (21,880) (11,966)

Core operating profit/ Other income EBIT Interest (Paid) & Similar charges Interest Received

14,227

16,883 159 17,042 (437) 1,730

20,843 227 21,069 (2,026) 1,212

18,446 306 18,752 (2,541) 1,728

23,283 413 23,696 (2,358) 2,240

29,060 558 29,617 (2,735) 2,598

EBITDA Depreciation & Amortisation

11,464 2,764 14,800

13,932 3,110

17,504 3,565

14,696 4,056

19,083 4,613

14,800 (4,193) 10,607

18,336 (1,243) 17,093 (5,232) 11,861

20,255 (1,263) 18,992 (5,451) 13,541

17,939 (1,286) 16,653 (4,996) 11,657

Dividends NOPAT Retained Earnings

(4,720) 10,034 5,887

(6,637) 11,810 5,224

(8,850) 15,619 4,692

(8,743) 13,756 2,914

(12,379) 16,623 4,126

(15,477) 20,773 5,159

BALANCE SHEET (N'Mill) Non Current Assets Fixed Assets Intangible Assets Debtors and Prepayments

30,125

Turnover Cost of Sales Gross Profit Distribution & Admin Expenses Advertising & Promotion Expenses

PBT and Ex. income Exceptional Income Profit before taxation Taxation Profit after taxation

14,227 (1,540) 2,197

2007

2008

2009 2010 F

420 (231) 190 (58) (36)

467 (240) 227 (71) (42)

602 (314) 288 (95) (53)

686 (391) 295 (110) (61)

796 (442) 354 (127) (70)

923 (499) 425 (148) (81)

Core operating profit/ Other income EBIT Interest (Paid) & Similar charges Interest Received

96 96 (10) 15

114 1 115 (3) 12

141 2 142 (14) 8

125 2 127 (17) 12

157 3 160 (16) 15

196 4 200 (18) 18

24,370 5,247

EBITDA Depreciation & Amortisation

94 21

118 24

99 27

129 31

165 35

23,578

29,481

23,578 (7,074) 16,505

29,481 (8,844) 20,636

PBT and Ex. income Exceptional Income Profit before taxation Taxation Profit after taxation

77 19 100 100 (28) 72

124 (8) 115 (35) 80

137 (9) 128 (37) 91

121 (9) 112 (34) 79

159 159 (48) 111

199 199 (60) 139

Dividends NOPAT Retained Earnings

(32) 68 40

(45) 80 35

(60) 105 32

(59) 93 20

(84) 112 28

(105) 140 35

2007

2008

203 2 205

248 9 4 260

242 12 3 257

279 13 292

321 14 335

369 15 384

Current Assets Stocks Debtors & Prepayments Deposits for imports Cash and bank balances

86 45 0 149

87 44 1 102

114 61 27 39

123 73 39

133 86 39

145 101 39

Total Assets

485

494

499

527

593

669

Less Current Liabilities Creditors & Accruals Taxation Dividend Payable Bank Overdrafts Current portion of Term loan Total current liabilities

112 34 34 179

104 27 5 25 161

121 37 5 47 210

124 45 6 48 221

126 53 6 48 234

129 64 6 49 248

Net Current Assets/(Liabilities)

100

Total Assets Less Liabilities

214

249

213

223

269

322

45 24 23 92

53 31 84

5 10 25 173 214

5 10 25 208 249

5 10 22 175 213

485

494

499

2007 1.1 0.8 1.6 9.2 75 97 129 39

2008 0.9 0.6 1.5 39.0 68 95 80 34

2009 0.5 0.2 1.1 10.4 69 75 24 37

2010F 0.5 0.2 1.1 7.4 66 67 21 39

2011F 0.5 0.2 1.1 10.1 61 59 18 39

2012F 0.6 0.2 1.1 10.8 57 52 16 40

2007 44.5% 44.1% 55.5%

2008 10.1% 5.1% 56.0% 50.4% 44.0%

2009 21.9% 9.3% 65.4% 42.7% 34.6%

2010F 21.3% 9.0% 75.0% 42.3% 25.0%

2011F 18.0% 8.2% 75.0% 45.4% 25.0%

2011F 15.3% 7.4% 75.0% 48.1% 25.0%

2007 7.19 3.20 21.45 42.22

2008 8.04 4.50 24.99 46.90

2009 9.18 6.00 21.37 60.44

2010F 7.90 5.93 22.40 68.90

2011F 11.19 8.39 27.02 79.93

2011F 13.99 10.49 32.33 92.72

2010 F

2011 F

268 30,393

35,898 1,807 399 38,104

41,283 1,951 43,234

47,475 2,107 49,583

54,596 2,276 56,872

Current Assets Stocks Debtors & Prepayments Deposits for imports Cash and bank balances

12,721 6,662 26 22,007

12,867 6,529 108 15,108

16,848 9,105 3,991 5,821

18,246 10,744

19,760 12,678

21,401 14,960

5,822

5,823

5,824

Total Assets

71,809

73,191

73,869

78,046

87,844

99,057

5,000 26,568

Net Current Assets/(Liabilities)

14,848

Total Assets Less Liabilities

2012F

BALANCE SHEET ($'Mill) Non Current Assets Fixed Assets Intangible Assets Debtors and Prepayments

15,369 3,981 798 3,705

17,958 5,493 794 6,897

18,317 6,591 834 7,035

18,683 7,910 876 7,176

19,057 9,492 919 7,319

23,853

31,142

32,777

34,644

36,787

10,759

4,623

2,034

3,617

5,397

31,639

36,863

31,525

33,039

39,847

47,689

Long term liabilities Deferred Tax Liability Term loan Provision for gratuity Total

6,647 3,500 3,455 13,602

7,886

8,094

8,903

9,794

10,773

4,589 12,476

3,108 11,202

3,326 12,229

3,558 13,352

3,808 14,581

Capital and Reserves Share capital Share premium Bonus Issue Reserve Revaluation Reserves Revenue Reserve Shareholders' Equity

737 1,546 3,751 25,605 31,639

737 1,546 3,738 30,842 36,863

737 1,546

3,303 25,938 31,525

3,237 27,518 33,039

3,172 34,389 39,847

3,109 42,297 47,689

Capital and Reserves Share capital Share premium Bonus Issue Reserve Revaluation Reserves Revenue Reserve Shareholders' Equity

Total Liabilities & Equity

71,809

73,191

73,869

78,046

87,844

99,057

Total Liabilities & Equity

LIQUIDITY RATIOS Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables

RATIOS

16,548 5,021

2009

2007

36,733 1,311 534 38,579

Less Current Liabilities Creditors & Accruals Taxation Dividend Payable Bank Overdrafts Current portion of Term loan Total current liabilities

2008

INCOME STATEMENT ($'Mill) Turnover Cost of Sales Gross Profit Distribution & Admin Expenses Advertising & Promotion Expenses

2007

2008

2009

2010 F

2011 F

2012 F

GROWTH RATES Turnover growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT

2007 16.1% 16.4% 16.4% 29.4% 42.6%

2008 11.1% 18.7% -2.2% 23.9% 11.8%

2009 28.9% 23.5% 51.4% 10.5% 14.2%

2010F 14.0% -11.5% -11.0% -11.4% -13.9%

2011F 16.0% 26.2% 26.4% 31.4% 41.6%

2012F 16.0% 24.8% 27.7% 25.0% 25.0%

PROFITABILITY Return on Equity Return on Assets Return on Net fixed assets Return on Invested Capital Growth rate (g)

2007 40.3% 16.1% 35.6% 30.2% 22.4%

2008 34.6% 16.4% 35.5% 29.4% 15.3%

2009 39.6% 18.4% 37.3% 31.4% 13.7%

2010F 36.1% 15.3% 30.2% 25.7% 9.0%

2011F 45.3% 19.9% 37.2% 26.4% 11.3%

2012F 47.1% 22.1% 40.4% 28.2% 11.8%

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2007 18.4% 22.8% 23.8% 17.0%

2008 20.1% 24.6% 26.5% 17.1%

2009 19.6% 23.6% 22.7% 15.2%

2010F 14.5% 18.5% 17.7% 11.5%

2011F 16.2% 20.1% 20.0% 14.0%

2012F 17.8% 21.7% 21.6% 15.1%

2007 3.47 4.85 0.82 0.48

2008 3.73 5.41 0.86 0.53

2009 8.52 6.00 0.94 0.40

2010F 17.46 5.79 1.17 0.41

2011F 20.25 6.20 1.23 0.40

2012F 23.48 6.64 1.26 0.40

ASSET UTILIZATION Sales to cash (x) Sales to inventory (x) Sales to total assets (x) Fixed Assets (%)

Long term liabilities Deferred Tax Liability Term loan Provision for gratuity Total

CAPITAL STRUCTURE Financial leverage (debt to equity) Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio PER SHARE DATA EPS DPS NAPS Sales/Share

2009 2010 F

55 21 76

2011 F 2012 F

60 22 83

24 90

73 26 98

5 10 22 186 223

5 10 21 232 269

5 10 21 286 322

527

593

669

‘Ahead of the Curve’

159

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

THE CONGLOMERATES SECTOR Flight to safety The Conglomerates Sector was the second best performing sector in the market last year, bowing only to the Building Materials Sector in terms of share price performance. The Vetiva Conglomerates Index returned 29% in 2009, outperforming the NSE ALSI by 63%. Among the major sectors in the market (Banking, Breweries, Building Materials, Conglomerates, Construction, Food & Beverages, Insurance and Petroleum Marketing), the Conglomerates Sector was the least volatile during the year as measured by standard deviation of daily returns, living up to its “safe haven” status in spite of the heavy volatility experienced in the market.

NIGERIAN CONGLOMERATES SECTOR VS NSE ALSI (2009) 1.40

Rebased: 31/12/08 =1

+29% YTD

1.20

1.00

0.80

-34% YTD

NSE ALSI

0.60 Jan-09

Mar-09

May-09

CONGLOMERATES Jul-09

Sep-09

Nov-09

Source: NSE; Vetiva Research

Surviving the Storm Last year was characterized by a general slowdown in business and consumption from which the Conglomerates were not spared. With the Nigerian naira weakening against the US Dollar and tightening liquidity in the financial system following strengthened regulation in the Banking Sector, strong results that characterized 2008, took a slight slide in the first half of the year before dipping further in H2, when the effects of the negatives really hit the Nigerian consumer. Putting their performance in context, the conglomerates showed stronger resilience than the average Nigerian business by leveraging on their financial strength, effective distribution channels , diversified product portfolio, effective cost cutting initiatives, introduction of high utility/moderate cost products and high advertising/ brand promotion. Below, we examine each of these factors and how they have helped the Conglomerates survive the challenging year. Financial strength providing buffer Armed with strong cash generating businesses and relatively easy access to credit, the Conglomerates have been able to support production without necessarily incurring higher costs of funding even during the height of the reforms in the Banking Sector. The conglomerates have been also able to extend credit to their major distributors in the face of the liquidity crunch even as those of other businesses suffered shortages, consequently affecting business sales.

160

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

Leveraging on effective distribution Access to markets has been a major differentiating factor for the Conglomerates in Nigeria. While other businesses were restricted to the major markets in the Western and Eastern parts of the country where spending power dipped significantly during the year, effective distribution networks have enabled the Conglomerates explore other markets and meet their needs with little additional costs. Over the years, the Conglomerates have made substantial investments in distribution, penetrating all the major market segments in the country. In line with this, a major part of the first phase of "Project Unity", the £39 million investment programme by PZ Cussons in Nigeria included the establishment of a world class National distribution centre and upgrade of supply chain facilities to reduce total finished goods levels and enable a quicker and more efficient replenishment of its 26 depots. Unilever has also continued to make significant investments in its supply chain. Diversified business/product portfolio The unique feature of the Conglomerates business has been the diversity of their business across sectors and price/value ranges. This has conferred on many of them a natural hedge against specific challenges associated with any particular business line. Typically, at the core of the major listed conglomerates’ portfolio are high cash flow businesses with heavy demand and wide consumer appeal like the food business in the case of UAC and AG Leventis, household products in the case of Unilever and PZ Cussons; while diversifying with more cyclical higher margin businesses like logistics and real estate etc (UACN) and high value electrical goods (PZ Cussons). While higher value businesses/products like real estate and electrical goods have suffered on the back of cutback in consumer spending, retailfocused, low cost food and home/personal care products have remained relatively stable. Restructuring and cost cutting initiatives With their wide product range and income sources, Conglomerates have found it relatively easier to let go of ailing brands and businesses, while not jeopardizing the health of the entire business unlike single product/business line companies. In line with this, Unilever within the last two years removed low-margin brands like Key, Rin, Vim and the Blue brand bakery business. These closures have been accompanied by the reintroduction of value add brands like Lux beauty Soap, re-launched in four variants geared at the retail market. Also recently, Unilever, put up its 52-year old, soap-making factory in Aba for N2 billion, focusing its production in more efficient plants in Oregun, Lagos and Agbara, Ogun State. Introduction of high utility/moderate cost products As part of major strategies for survival, the conglomerates have introduced low end, “value for money” retail products to serve to keep demand in the face of lower spending power. Among recent products have included Sunlight 2-in-1 detergent launched by Unilever in October, in several sizes from as low 30 grams, ‘Blue Band Spread for Bread’ a cheaper, specialized form of the regular blue band Original that can also be used for cooking and baking which had also been launched in Uganda. AG Leventis has also expanded its presence in the low-end ready to eat snacks market, introducing a cheap brand of croissant in addition to its “Meatie” sausage roll which serves as key competition for UAC’s Gala. Also PZ has continued to promote its 50% owned Nutrition business, a joint venture with Glanbia Plc, called Nutricima Ltd.

‘Ahead of the Curve’

161

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

The company produces milk brands like Nunu, Olympic and Coast as well as Yol, a new powdered yoghurt drink. Strategies for the future and outlook For the first half of the year, we expect cost reduction, manufacturing efficiency and innovation/promotion of retail end low-cost products, to remain the focus for the Conglomerates, as they struggle to remain competitive in the face of reduced spending power. Increased deregulation and opening up of the Nigerian Market will likely continue to pose competition to the local brand names. While the current price and local production of crude oil relative to the budget benchmarks augur well for the foreign reserves and by extension, the stability of the Naira, a turnaround in the situation could pose more weakness in the Naira and thus increase input costs for the Conglomerates, costs which consumers will not be able to take on in current circumstances. That said, an expected recovery in lending and consumption later in the year should see a strong rise in sales, profit margins and investments in high value end products. Before then though, capital investments are expected to continue at a moderate pace.

The final phase of PZ’s £39m investment in Nigeria (Project Unity), which involves the installation of new soap and detergent manufacturing equipment, is on schedule for completion by August 2010. Apart from additional manufacturing efficiency, this should provide additional capacity for the future. PZ Cusson’s joint venture- Nutricima, opened a state of the art Ultra High Temperature (UHT) facility- the first of its kind in Nigeria, and will manufacture UHT milk and other long life drinks under the current brand names. UHT milk has seen large success in much of Europe, where across the continent as a whole, 7 out of 10 Europeans drink it regularly. In a hot country like Spain, UHT is preferred due to high costs of refrigerated transportation and "inefficient cool cabinets. It is expected that considering the tropical nature of the Nigerian climate alongside epileptic power supply currently witnessed by the Nigerian populace, a recurrence of this nature of demand may not be out of place, yielding improved business for PZ Cussons.

162

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

Company Overview BASIC INFORMATION 45/47, Town Planning Way

Address

Ilupeju, Lagos, Nigeria Website

www.pzcussons.com

Management

Prof. E. C. Edozien (Chaiman) P Varelas (Managing Director)

Fiscal Year End

May

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: PZC:NL

Sector

Conglomerates

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

PZ Cussons Plc

65.30

Nigerians

34.70

SHARES IN ISSUE Date Dec-09

Shares Outstanding 3,176,381,636

DIVIDENDS AND BONUS ISSUES

PZ Cussons Nigeria Plc is the largest subsidiary of PZ Cussons worldwide and has enjoyed tremendous business success in Nigeria for over a century. The company was incorporated under the name of PBNicholas & Company Limited in 1948 and became a public company in 1972. It was also listed on the Nigerian Stock Exchange in the same year. The company manufactures and markets a wide range of consumer products and home appliances which are leading brands throughout the country. Its products include soap, detergent, pharmaceuticals, Medicaments, Nutrition products, haircare products, baby care products, skin care products, perfumes, household appliances and consumer electronics. The Company owns a 74.99% stake in a Joint Venture with Haier Limited, a world class manufacturer of Haier Thermocool, and a 50% stake (with Glambia) in Nutricima, which engages in the manufacture of nutritional beverages. During the year, PZ Cussons (the group) increased its interest in PZ Cussons Nigeria Plc increasing its stake first from 61% to 64% with an additional £5.2 million and then from and then from further from 64% to 65.3% in Q1’10 in Q2’10 at a cost of £3.4 million.

Key Review Highlights

Type

Year

Final

FY'09

N0.68

Final

FY'08

N0.62

Final

FY'07

N0.71

SIZE AND VALUE TRADED Market Capitalization

N 'Mn

79,410

$ 'Mn

536

Average Volume Traded (Units

873,405

PZ has continued to witness strong growth in the Nigerian market with Turnover growing at a CAGR of 24% between 2004 and 2009 and PAT growing at a CAGR of 21% within the same period. The Company has continued to be one of the dominant players in personal care and home care segments of the Nigerian Market. In addition through joint ventures and strategic business units, the company has been able to fuel growth through the sales of Thermocool, fuel powered generators and nutritional beverages. One of the PZ’s key strengths in Nigeria continues to be its supply chain and distribution operations. During the year, as part of the first phase of "Project Unity", the £39 million investment programme by PZ Cussons in Nigeria included the establishment of a world class National distribution centre and upgrade of supply chain facilities to reduce total finished goods levels and enable a quicker and more efficient replenishment of its 26 depots. In line project Unity, the Company has also completed the relocation and upgrade of personal care manufacturing operations from the Ilupeju site to the Ikorodu site, installation of new soap finishing and packing equipment at the factory in Aba. Our fair value range for PZ Cussons is N21.90 to N26.92 and we place a Neutral rating on the stock. Forecast Summary

FY'09A

FY'10F

FY'11F

FY'13F

FY'14F

Earnings Per Share (N)

1.51 21.42% 16.55 0.68 9.68% 1.85% 11.20 8.74% 3.28

1.70 12.32% 14.74 0.75 10.87% 2.05% 12.23 9.20% 3.00

1.97 2.32 2.59 15.94% 17.95% 11.54% 12.71 10.78 9.66 0.87 1.03 1.15 15.94% 17.95% 11.54% 2.38% 2.81% 3.13% 13.39 14.42 15.60 9.46% 7.75% 8.13% 2.75 2.55 2.36

3.04 17.36% 8.23 1.35 17.36% 3.67% 16.84 7.96% 2.18

YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'12

Source: Company Financials; Vetiva Research

161

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163

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

Investment Summary

Despite the strong growth witnessed by PZ Cussons, over the last five years, economic challenges and liquidity constraints affected results in Q1’10.There was reduced +14.65% growth in Turnover to N19.00 billion (forecast: N19.11 billion), while After Tax Earnings declined slightly -3.87% to N0.55 billion (forecast: N0.60 billion). Although the Company’s Turnover fell within the ambit of our expectation, After Tax Profits came in weaker than we had anticipated.

The vulnerability of PZ Cussons business to imported raw materials in the face of increasing costs is highlighted by the slight decline in operating performance witnessed YoY. Q1’10 was challenging for the Company’s operations, owing largely to increased raw material costs for significant aspects of its detergent production and electronics businesses (imported production inputs and Naira depreciation). In view of the highly competitive nature of the Sector, incidence of such cost increases could not be fully borne by consumers.

Furthermore, the electronics business recorded a slight decline in demand as a result of pressured liquidity. Consumer financing products from the banks had previously inspired growth in white goods (refrigerators, washing machines e.t.c) consumption; however, such demand has slowed in recent months, owing to the economic slowdown, Banking Sector clean-up and tight liquidity within the Nigerian economy.

The Company’s Profitability Margins were set back slightly, 4.48% (PBT) and 2.86% (PAT), from 4.68% and 3.42% respectively as at Q1 August 2008.

Performance has been strong on the back of efficiency measures …

PROFITABILITY RATIOS (Percent)

12%

EBIT Margin

PBT Margin

Peer Metrics

PAT Margin

Current Price (N)

10%

0% 2008

2009

2010E

2010F

Source: Company Financials

PZ CUSSONS

36.75

18.50

25.00

5.14

1.26

1.68

P/E (x)

7.15

14.68

14.88

Dividend Yield

UNILEVER

Trailing EPS (N)

DPS (N)*

UACN

2.00

0.68

5.44%

3.68%

2.72%

Payout Ratio

61.10%

99.00%

45.25%

ROE (Average)

19.19%

43.93%

13.98%

ROA (Average)

7.79%

11.74%

9.07%

1284.62

3783.30

3176.38

Outstanding Shares(mn)

Source: Company Financials; Vetiva Research

Outlook

164

‘Ahead of the Curve’

Our FY’10 forecast for Turnover and PAT stands at N94.98 billion and N5.38 billion respectively and estimate EPS and DPS for FY’10 at N1.70 and N0.75 respectively.

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

In the near term, Personal Care, Home Care categories and the Nutrition business are expected to perform well. Nutricima, recently opened a state of the art Ultra High Temperature (UHT) facility- the first of its kind for Nigeria, and will manufacture UHT milk and other long life drinks under the current brand names.

White goods are by nature of their pricing, luxury goods and considering the decline in disposable income and discretionary spending in recent times, customers may find it challenging to muster the cash outlay required to make such purchases without credit financing. Thus, the electrical and heavy appliance businesses are expected to witness challenges pending a revival in economic fortunes and spending.

Going forward, we expect Turnover to grow at a CAGR of 17% to N180.3 billion by 2014 on the back of steady growth in the homecare, personal care as well as nutritional segment. We expect PZ to leverage on its comparative advantages in distribution to strengthen growth, by entering more alliances with existing and prospective market participants with distribution needs. We expect PZ Cussons to be able to maintain EBIT margins between 9% and 10% over the next five years as we expect growth in new high margin businesses to offset declines in aging ones. Our projections are that PAT attributable to members will grow at a CAGR of 15% to reach N9.65 billion by 2014.

PZ SHARE PRICE Vs. VOLUME TRADED 50

52 week high:N25.5 52 week low:N11 Average Price:N18.75 Avg Vol Traded (‘000): 873 Beta:0.68

Share Price (Naira)

40 30 20 10 0 20000 Volume Traded (‘0,000) 15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

165

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Selling and Distribution Expenses Administrative Expenses Core Operating Profit Other Operating income EBITDA Depreciation EBIT Interest Payable & Similar charges Profit from operations Profit from Sale of Assets Profit before exct. item and tax Exceptional items Profit before taxation Taxation Profit after taxation Profit attributable to members Proposed dividend Retained Profit

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Current Assets Stocks Debtors Deposit for letters of credit Due from group company Bank deposits, cash at bank and in ha

TOTAL ASSETS Creditors: Amount falling due within 1 yr Borrowings Trade creditors Other Creditors and accruals Due to parent company Dividends payable Taxation Net Current Assets

Total Assets Less Curr. Liab Creditors(due after one year) Deferred taxation Minority Interest

Net Assets Capital and Reserves Share capital Share premium Revaluation reserve Revenue reserves Shareholders funds'

RATIOS

2007

2008

2009

2010 F

2011 F

2012 F

54,217 (40,301) 13,916 (4,798) (3,494) 5,624 447 6,070 (848) 5,222 (115) 5,107 5,107 248 5,356 (1,532) 3,824 (311) 3,512 (1,804) 1,708

65,945 (49,645) 16,300 (5,594) (4,169) 6,537 98 7,593 (957) 6,636 (413) 6,223 657 6,880 (900) 5,980 (1,600) 4,380 (429) 3,951 (1,271) 2,680

80,974 (60,731) 20,244 (6,964) (5,263) 8,016 103 9,334 (1,215) 8,119 (433) 7,686 7,686 7,686 (2,383) 5,304 (530) 4,773 (2,160) 2,613

94,980 (71,710) 23,270 (8,073) (6,174) 9,023 108 10,556 (1,425) 9,131 (455) 8,676 8,676 8,676 (2,690) 5,987 (599) 5,388 (2,748) 2,640

112,076 (84,618) 27,459 (9,751) (7,285) 10,423 114 12,218 (1,681) 10,537 (478) 10,059 10,059 10,059 (3,118) 6,941 (694) 6,247 (3,186) 3,061

131,690 (99,426) 32,264 (11,457) (8,560) 12,247 119 14,342 (1,975) 12,366 (501) 11,865 11,865 11,865 (3,678) 8,187 (819) 7,368 (3,758) 3,610

2007 16,366

2008 18,143

2009 21,511

2010 F

2011 F

2012 F

23,447

25,557

27,857

22,202 5,446 857 416 28,921

21,996 7,335 64 2,860 32,254

20,631 9,947 2,804 33,382

22,694 11,936 2,804 37,435

24,964 13,846 2,944 41,754

27,460 15,092 3,062 45,614

45,287

50,397

54,893

60,881

67,311

73,472

1,434 788 2,983 4,264 764 1,613 11,846 17,075

1,541 739 4,147 6,235 1,451 14,113 18,141

1,849 747 4,976 5,862 1,509 14,942 18,440

2,126 754 5,797 7,124 1,569 17,370 20,065

2,381 762 6,667 8,406 1,632 19,847 21,907

2,607 769 7,467 9,877 1,697 22,417 23,197

33,441

36,285

39,951

43,512

47,464

51,054

2009

2010 F

2011 F

2012 F

445 (335) 110 (38) (28) 44 1 51 (6) 45 (3) 42 4 46 (6) 40 (11) 30 (3) 27 (9) 18

547 (410) 137 (47) (36) 54 1 63 (8) 55 (3) 52 52 52 (16) 36 (4) 32 (15) 18

641 (484) 157 (55) (42) 61 1 71 (10) 62 (3) 59 59 59 (18) 40 (4) 36 (19) 18

757 (571) 185 (66) (49) 70 1 82 (11) 71 (3) 68 68 68 (21) 47 (5) 42 (22) 21

889 (671) 218 (77) (58) 83 1 97 (13) 84 (3) 80 80 80 (25) 55 (6) 50 (25) 24

BALANCE SHEET ($'Mill) Non-Current Assets Fixed Assets

2007

2008

2009

2010 F

2011 F

2012 F

111

123

145

158

173

188

150 37 6 3 195

149 50 0 19 218

139 67 19 225

153 81 19 253

169 93 20 282

185 102 21 308

306

340

371

411

454

496

10 5 20 29 5 11 80 115

10 5 28 42 10 95 122

12 5 34 40 10 101 125

14 5 39 48

16 5 45 57

11 117 135

11 134 148

18 5 50 67 11 151 157

226

245

270

294

320

345

14 5 19

17 7 24

20 9 30

21 10 32

22 11 33

23 12 35

Current Assets Stocks Debtors Deposit for letters of credit Due from group company Bank deposits, cash at bank and in hand

TOTAL ASSETS Creditors: Amount falling due within 1 yr Borrowings Trade creditors Other Creditors and accruals Due to parent company Dividends payable Taxation Net Current Assets

Total Assets Less Curr. Liab Creditors(due after one year) Deferred taxation Minority Interest

3,010 1,368 4,378

3,161 1,505 4,666

3,287 1,655 4,943

3,419 1,821 5,240

30,567

32,714

35,573

38,846

42,521

45,815

Net Assets

206

221

240

262

287

309

1,588 6,878 8,770 28,578 45,815

Capital and Reserves Share capital Share premium Revaluation reserve Revenue reserves Shareholders funds'

9 46 52 100 206

11 46 51 112 221

11 46 53 130 240

11 46 57 148 262

11 46 61 169 287

11 46 59 193 309

LIQUIDITY RATIOS Cash ratio Current ratio Interest coverage (x) Days in inventory Days in accounts payable Days in receivables Cash Conversion Cycle

2007 0.0 2.4 45.5 201.1 7 37 231

2008 0.2 2.3 16.1 161.7 5 41 197

2009 0.2 2.2 18.7 124.0 4 45 164

2010 F 0.2 2.2 20.1 115.5 4 46 158

2011 F 0.1 2.1 22.1 107.7 3 45 149

2012 F 0.1 2.0 24.7 100.8 3 42 140

1,271 6,878 7,638 14,781 30,567

1,588 6,878 7,594 16,654 32,714

1,588 6,878 7,815 19,267 35,548

1,588 6,878 8,472 21,907 38,846

1,588 6,878 9,087 24,968 42,521

2007

2008

2009

2010 F

2011 F

2012 F

2008 21.6% 16.3% 25.1% 11.7% 14.5%

2009 22.8% 22.6% 22.9% 28.5% 21.1%

2010 F 17.3% 12.6% 13.1% 12.9% 12.9%

2011 F 18.0% 15.5% 15.7% 15.9% 15.9%

2012 F 17.5% 17.5% 17.4% 18.0% 18.0%

PROFITABILITY Return on Equity Return on Assets

2007 11.8% 8.1%

2008 12.5% 8.3%

2009 14.0% 9.1%

2010 F 14.5% 9.3%

2011 F 15.4% 9.7%

2012 F 16.7% 10.5%

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2007 11.2% 9.6% 9.9% 6.5%

2008 11.5% 10.1% 9.1% 6.0%

2009 11.5% 10.0% 9.5% 5.9%

2010 F 11.1% 9.6% 9.1% 5.7%

2011 F 10.9% 9.4% 9.0% 5.6%

2012 F 10.9% 9.4% 9.0% 5.6%

2007 130.3 2.4 1.2 0.4

2008 23.1 3.0 1.3 0.3

2009 28.9 3.9 1.5 0.3

2010 F 33.9 4.2 1.6 0.3

2011 F 38.1 4.5 1.7 0.3

2012 F 43.0 4.8 1.8 0.3

2008

366 (272) 94 (32) (24) 38 3 41 (6) 35 (1) 34 34 2 36 (10) 26 (2) 24 (12) 12

2,508 1,062 3,570

2007 28.4% 5.8% 12.3% 11.5% 7.1%

166

2007

2,078 796 2,874

GROWTH RATES Turnover growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT

ASSET UTILIZATION Sales to cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets Turnover (x)

INCOME STATEMENT ($'Mill) Turnover Cost of Sales Gross Profit Selling and Distribution Expenses Administrative Expenses Core Operating Profit Other Operating income EBITDA Depreciation EBIT Interest Payable & Similar charges Profit from operations Profit from Sale of Assets Profit before exct. item and tax Exceptional items Profit before taxation Taxation Profit after taxation Minority Interest Profit attributable to members Proposed dividend Retained Profit

‘Ahead of the Curve’

CAPITAL STRUCTURE Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio PER SHARE DATA EPS DPS NAPS Sales/Share EBITDA

2007

2008

2009

2010 F

2011 F

2012 F

51.4% 67.5% 48.6%

32.2% 64.9% 67.8%

45.3% 64.8% 54.7%

51.0% 63.8% 49.0%

51.0% 63.2% 49.0%

51.0% 62.4% 49.0%

2007 1.38 0.71 12.03 21.34 2.39

2008 1.24 0.40 10.30 20.76 2.39

2009 1.50 0.68 11.19 25.49 2.94

2010 F 1.70 0.87 12.23 29.90 3.32

2011 F 1.97 1.00 13.39 35.28 3.85

2012 F 2.32 1.18 14.42 41.46 4.52

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

UAC of Nigeria Plc - Company Overview BASIC INFORMATION Address

1/5 Odulami Street Lagos Island, Lagos, Nigeria

Website

www.uacnplc.com

Management

Senator Udo Udoma (Chairman) Mr Larry Ettah (MD/CEO)

Fiscal Year End

DECEMBER

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: UACN:NL

Sector

Conglomerates

Country

Nigeria

UAC of Nigeria Plc (“UACN”) remains one of the oldest and most diversified conglomerates in the country, having been in operation in the country since 1879. The company is primarily food focused with other businesses operations spanning real estate, logistics and automobile sales and servicing. Core Companies in the group’s food focused business portfolio include UAC Foods, UAC restaurants, UAC Dairies and UAC franchising while other businesses include UACN property development company Plc (real estate), CAP plc (paints), UAC Registrars, GM Nigeria (Automobiles), Opticom Leasing Company Limited (Leasing), Grand cereals and Oil Mills Limited ( GCOML) etc. The Company is currently rated “Aa” by Agusto & Co, a top rating agency in the country.

SHARES IN ISSUE Date Dec-09

Shares Outstanding 1,284,624,258

Key Review Highlights

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'08

N2.00

Final

FY'07

N1.70

Final

FY'06

N1.00

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

47,210

$ 'Mn

319

Units

1,591,247

In the last two years, UACN has recorded strong double-digit growth, with sales increasing 30.81% and 43.96% in 2007 and 2008 respectively. This has been accompanied by a lift in margins, as EBIT increased to 13.63% and 17.02% in 2007 and 2008, from an average of 10% in the four years prior to then. A major initiative that influenced the Company’s improvement in performance was the restructuring of the group’s food business which traditionally accounted for 80% of sales (c.62% after the consolidation of UPDC- the real estate arm). The restructuring lead to the creation of UAC Foods, UAC restaurants, UAC Dairies and UAC franchising. Unlike the last two years, the 2009 financial year has been challenging for UACN on the back of a slowdown in the Nigerian economy which has affected Government spending, consumption and credit. Growth in topline trended downwards in 2009 (32.74% in Q1, 21.84% in Q2 and 6.71% in Q3 at the height of the Banking reforms). Bottom-line suffered a decline in Q3’09. Q3’09 PAT fell 4.05% YoY, the first YoY dip since 2004. In 2009, UACN returned 6% in capital gains, and paid a dividend of N2.00 for the 2008 financial year (dividend yield – 5.4% based on the year’s closing price). The stock closed the year trading at a P/E of 7.15x, the lowest among peers- Unilever (14.98x) and PZ Cussons (14.88x). At a price/book of 1.20x, the Company is attractively priced on a relative basis compared to peers. Our fair value range for UACN is N42.50 to N48.51 and we place a Neutral rating on the stock. Forecast Summary

FY'08A

FY'09F

Earnings Per Share (N)

5.30 88.56% 10.00 2.00 17.65% 5.44% 37.30 38.24% 0.99

5.13 -3.24% 10.34 1.93 -3.46% 5.25% 39.25 5.25% 0.94

YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'10F

FY'11

FY'12F

FY'13F

5.27 5.95 2.66% 13.07% 10.07 8.90 1.98 2.24 2.66% 13.07% 5.39% 6.10% 40.23 42.76 2.48% 6.29% 0.91 0.86

6.71 12.70% 7.90 2.53 12.70% 6.87% 45.88 7.31% 0.80

7.48 11.53% 7.08 2.82 11.53% 7.67% 49.29 7.42% 0.75

Source: Company Financials; Vetiva Research

165

‘Ahead of the Curve’

167

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

Investment Summary

Performance lulled by economic slowdown but business prospects still strong…

UACN Plc third quarter results for the period ended 30th September 2009 showed +6.71% growth in Turnover to N41.98 billion, while After Tax Earnings recorded a marginal decline of 4.05% to N4.88 billion, both relative to Q3’08.

The Company’s Turnover and PAT fell within the ambit of our expectations of Turnover N43.88 and After Tax Profits N4.83 billion.

Profitability Margins showed some resilience, declining marginally to 15.71% (PBT) and 11.63% (PAT), from 15.83% and 11.81% respectively in Q2 ’June 2009; relative to Q3’08, the margins declined from 17.74% (PBT) and 12.94% (PAT).

It is our expectation that, adjusting for a traditionally stronger fourth quarter on the back of the festive period, FY’09 Turnover and PAT will be N60.95 billion and N6.57 billion respectively, translating to an expected EPS of N5.13 (down from N5.30 at FY December 2008).

We expect 2009 dividend total of N1.93 (payout of 60%) in line with payout in recent years

Although recent results have shown weakening performance, partly due to its real estate business which has suffered in the face of weakened demand; we believe UACN still has strong growth prospects evidenced by the performance of its businesses overtime and their growth prospects.

PROFITABILITY RATIOS

Peer Metrics

(Percent)

18%

EBIT Margin

PBT Margin

PAT Margin

Current Price (N)

16%

UACN

UNILEVER

PZ CUSSONS

36.75

18.50

25.00

14%

Trailing EPS (N)

5.14

1.26

1.68

12%

P/E (x)

7.15

14.68

14.88

10%

DPS (N)*

2.00

0.68

Dividend Yield

5.44%

3.68%

2.72%

Payout Ratio

61.10%

99.00%

45.25%

ROE (Average)

19.19%

43.93%

13.98%

ROA (Average)

7.79%

11.74%

9.07%

1284.62

3783.30

3176.38

6% 4%

2007

2008

2009E

2010F

Outstanding Shares(mn)

Source: Company Financials

Source: Company Financials; Vetiva Research

Outlook

Relative valuation gap compared to peers should narrow …

168

‘Ahead of the Curve’

We are “Overweight” in UACN and believe the business trades substantially below its intrinsic value. Although its peers (Unilever and PZ Cussons) have traditionally traded at higher P/E levels, we see a narrowing of the premium going forward as UACN’s performance recovers and results match that of peers.

We expect UACN to experience a slight recovery from the expected YoY dip in earnings at FY’09. Firstly, we expect stronger performance from the real estate business (UPDC) in 2010 compared to an 2009 expected marginal 0.05% growth in Turnover combined with a 50% YoY dip in PAT (in line with the Company’s guidance).

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

We forecast the UPDC, which accounted for 25% of Revenues and 40% of PBT in 2008, to grow top and bottom line by 11% and 7% respectively. We also expect the food business (which accounted for 62% of Turnover in 2008) to record strong double digit growth of 18% (much lower than 28% growth in 2008) which support our expectations of 13.5% growth in top line for the group in 2010. We expect PBT Margin for the food business to be 8% as costs pressures are still expected weigh down profits. Overall, while we expect only a slight 3% growth in bottom line in 2010.

Longer term, we are more positive. We forecast UAC’s sales to grow at a CAGR of 12.37% from 2009-2013 while PAT is expected to grow at a CAGR of 9.90% within the same time frame. We expect that by 2013, UACN’s sales will reach N97.19 billion while we forecast PAT to reach N9.58 billion.

PAT to remain under pressure in 2010 but stronger recovery expected afterwards …

UACN SHARE PRICE Vs. VOLUME TRADED 100

52 week high:N41.96 52 week low:N22.46 Average Price:N34.27 Avg Vol Traded (‘000): 1,591 Beta:0.86

Share Price (Naira)

80 60 40 20 0 20000 Volume Traded (‘0,000) 15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

169

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Selling and Distribution Expenses Administrative Expenses Core Operating Profit Other income EBITDA Depreciation EBIT Interest Payable & Similar charges Profit from operations Finance Income Share of profit of associated coys Profit from disposal of assets Profit before excpt. items and tax Exceptional items PBT,min. interest & ext items Taxation Profit after taxation Extraordinary Items Minority Interest Profit attributable to members Proposed dividend Retained Profit

BALANCE SHEET (N'Mill) Non-Current Assets Intangible assets Fixed Assets Investment Properties Long term investments Current Assets Stocks Debtors Cash & bank balances Prepayments

TOTAL ASSETS Current Liabilities Trade Creditors Bank loans/ overdrafts Taxation Other Creditors and accruals Dividends unclaimed

2006

2007

2008

2009 F

2010 F

2011 F

28,403 (21,272) 7,131 (699) (2,080) 4,352 199 4,551 (1,803) 2,748 (550) 2,198 222 639 1,169 4,228 (334) 3,894 (1,074) 2,820 866 (482) 3,204 (1,285) 1,920

37,155 (27,409) 9,746 (819) (4,782) 4,145 918 6,798 (1,735) 5,063 (584) 4,480 408 13 1,105 6,005 6,005 (1,450) 4,555 (954) 3,601 (2,177) 1,424

53,489 (39,033) 14,456 (1,215) (4,645) 8,596 507 11,142 (2,040) 9,103 (922) 8,181 263 11 324 8,779 8,779 (1,989) 6,789 (2,597) 4,192 (2,561) 1,631

60,950 (44,798) 16,152 (1,737) (6,095) 8,320 608 11,976 (3,048) 8,928 (1,036) 7,892 305 11 324 8,532 8,532 (1,962) 6,569 (2,516) 4,053 (2,472) 1,581

69,178 (51,538) 17,640 (1,972) (6,572) 9,097 730 13,286 (3,459) 9,827 (1,176) 8,651 380 12 324 9,367 9,367 (2,623) 6,744 (2,583) 4,161 (2,538) 1,623

77,826 (57,980) 19,846 (2,218) (7,393) 10,234 876 15,002 (3,891) 11,110 (1,323) 9,787 467 13 324 10,591 10,591 (2,965) 7,625 (2,920) 4,705 (2,870) 1,835

2006

2007

2008

2009 F

2010 F

2011 F

234 10,515 4,579 15,327

201 22,260 32,255 2,123 56,839

167 27,259 43,136 2,189 72,750

144 28,622 40,979 2,189 71,933

121 29,767 43,028 2,233 75,148

101 30,957 45,179 2,233 78,471

3,471 2,999 5,016 871 12,356

7,528 9,520 5,233 22,281

9,621 9,044 3,792 22,456

10,775 9,496 4,057 24,328

12,068 9,971 4,301 26,339

13,516 10,469 4,473 28,458

27,684

79,120

95,207

96,261

101,487

106,929

INCOME STATEMENT ($'Mill)

2006

2007

2008

2009 F

2010 F

2011 F

Turnover Cost of Sales Gross Profit Selling and Distribution Expenses Administrative Expenses Core Operating Profit Other income EBITDA Depreciation EBIT Interest Payable & Similar charges Profit from operations Finance Income Share of profit of associated coys Profit from disposal of assets Profit before excpt. items and tax Exceptional items

192 (144) 48 (5) (14) 29 1 31 (12) 19 (4) 15 1 4 8 29 (2) 26 (7) 19 6 (3) 22 (9) 13

251 (185) 66 (6) (32) 28 6 46 (12) 34 (4) 30 3 0 7 41 41 (10) 31 (6) 24 (15) 10

361 (264) 98 (8) (31) 58 3 75 (14) 61 (6) 55 2 0 2 59 59 (13) 46 (18) 28 (17) 11

412 (302) 109 (12) (41) 56 4 81 (21) 60 (7) 53 2 0 2 58 58 (13) 44 (17) 27 (17) 11

467 (348) 119 (13) (44) 61 5 90 (23) 66 (8) 58 3 0 2 63 63 (18) 46 (17) 28 (17) 11

525 (391) 134 (15) (50) 69 6 101 (26) 75 (9) 66 3 0 2 72 72 (20) 51 (20) 32 (19) 12

2006

2007

2008

2009 F

2010 F

2011 F

2 71 31 103

1 150 218 14 384

1 184 291 15 491

1 193 277 15 486

1 201 291 15 507

1 209 305 15 530

23 20 34 6 83 187

51 64 35

65 61 26 152 643

73 64 27 164 650

81 67 29

91 71 30

178 685

192 722

77 71 16 87 9 259 (95) 391

81 78 21 88 9 276 (98) 409

85 78 24 88 9 284 (92) 438

PBT,min. interest & ext items Taxation Profit after taxation Extraordinary Items Minority Interest Profit attributable to members Proposed dividend Retained Profit

BALANCE SHEET ($'Mill) Non-Current Assets Intangible assets Fixed Assets Investment Properties Long term investments Current Assets Stocks Debtors Cash & bank balances Prepayments

TOTAL ASSETS Current Liabilities Trade Creditors Bank loans/ overdrafts Taxation Other Creditors and accruals Dividends unclaimed

Net Current Assets

1,693 1,134 1,048 3,083 836 7,794 4,563

4,519 6,250 1,875 9,608 1,362 23,615 (1,333)

11,952 9,506 2,387 12,815 1,283 37,944 (15,488)

11,355 10,456 2,355 12,918 1,294 38,377 (14,049)

11,922 11,502 3,147 12,995 1,304 40,871 (14,531)

12,518 11,594 3,558 13,060 1,314 42,045 (13,587)

Total Assets Less Curr. Liabilities

19,890

55,506

57,263

57,884

60,616

64,883

Total Assets Less Curr. Liabilities

675 612 1,200 2,487

1,078 18,392 1,487 20,957

682 6,879 1,941 9,502

737 4,813 2,068 7,617

803 4,161 4,139 9,103

883 4,277 4,966 10,127

Deferred taxation Creditors(due after one year) Provision for liabilities and charges

Net Assets

17,403

34,549

47,760

50,267

51,514

54,756

Net Assets

Capital and Reserves Share capital Share premium Capital Reserve Other reserve Proposed dividend Retained Profit Revaluation reserve Shareholders funds' Minority Interest

642 4,238 1,984 127 1,285 7,823 16,099 1,303

640 4,255 1,984 127 8,736 13,946 29,688 4,861

640 4,255 1,984 127 10,460 23,594 41,060 6,700

640 4,255 1,984 127 12,041 24,182 43,230 7,037

640 4,255 1,984 127 13,664 23,632 44,302 7,212

640 4,255 1,984 127 15,499 24,585 47,090 7,666

Capital and Reserves Share capital Share premium Capital Reserve Other reserve Proposed dividend Retained Profit Revaluation reserve Shareholders funds' Minority Interest

Total Liabilities & Equity

27,684

79,120

95,207

96,261

101,487

106,929

Deferred taxation Creditors(due after one year) Provision for liabilities and charges

RATIOS

2006

2007

2008

2009 F

2010 F

2011 F

GROWTH RATES Turnover growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT

2006 4.7% 8.7% 9.3% 42.9% 55.9%

2007 30.8% -4.8% 49.4% 54.2% 61.5%

2008 44.0% 107.4% 63.9% 46.2% 49.1%

2009F 13.9% -3.2% 7.5% -2.8% -3.2%

2010F 13.5% 9.3% 10.9% 9.8% 2.7%

2011F 12.5% 12.5% 12.9% 13.1% 13.1%

PROFITABILITY Return on Equity Return on Assets

2006 21.2% 11.8%

2007 15.7% 6.7%

2008 19.2% 7.8%

2009F 15.6% 6.9%

2010F 15.4% 6.8%

2011F 16.7% 7.3%

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2006 16.0% 9.7% 13.7% 11.3%

2007 18.3% 13.6% 16.2% 12.3%

2008 20.8% 17.0% 16.4% 12.7%

2009F 19.6% 14.6% 14.0% 10.8%

2010F 19.2% 14.2% 13.5% 9.7%

2011F 19.3% 14.3% 13.6% 9.8%

2006 5.7 8.2 1.0 0.4

2007 7.1 4.9 0.5 0.3

2008 14.1 5.6 0.6 0.3

2009F 15.0 5.7 0.6 0.3

2010F 16.1 5.7 0.7 0.3

2011F 17.4 5.8 0.7 0.3

ASSET UTILIZATION Sales to cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets (x)

170

‘Ahead of the Curve’

Net Current Assets

11 8 7 21 6 53 31 134

31 42 13 65 9 159 (9) 375

81 64 16 87 9 256 (105) 387

7 124 10 142 233

5 46 13 64 322

5 32 14 51 339

5 28 28 61

6 29 34 68

348

370

Total Liabilities & Equity

109 9 187

4 29 13 1 59 94 200 33 534

4 29 13 1 71 159 277 45 643

4 29 13 1 81 163 292 48 650

4 29 13 1 92 160 299 49 685

4 29 13 1 105 166 318 52 722

LIQUIDITY RATIOS Cash ratio Current ratio Interest coverage (x) Days in inventory Days in accounts payable Days in receivables Cash Conversion Cycle

2006 0.6 1.6 5.0 59.6 29 39 69

2007 0.2 0.9 8.7 100.2 60 94 134

2008 0.1 0.6 9.9 90.0 112 62 40

2009F 0.1 0.6 8.6 87.8 93 57 52

2010F 0.1 0.6 8.4 85.5 84 53 54

2011F 0.1 0.7 8.4 85.1 79 49 55

2006 4.1% 40.1% 58.2% 59.9%

2007 7.9% 60.5% 37.5% 39.5%

2008 10.0% 61.1% 43.1% 38.9%

2009F 10.9% 61.0% 44.9% 39.0%

2010F 11.3% 61.0% 43.7% 39.0%

2011F 10.8% 61.0% 44.0% 39.0%

2006 2.49 1.00 13.55 22.11 3.54

2007 2.81 1.70 26.98 29.01 5.31

2008 5.30 2.00 37.30 41.77 8.70

2009F 5.13 1.93 39.25 47.60 9.35

2010F 5.27 1.98 40.23 54.02 10.38

2011F 5.95 2.24 42.76 60.77 11.71

CAPITAL STRUCTURE Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio PER SHARE DATA EPS DPS NAPS Sales/Share EBITDA

5 4 8 17

150 534

118

4 29 13 1 9 53

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

Unilever Nigeria Plc - Company Overview BASIC INFORMATION Address

1, Billings Way, Oregun Ikeja, Lagos, Nigeria

Website

www.unilever.com

Management

Dr. Alile (Chairman) Mr. T. A. Boedinger (MD/CEO)

Fiscal Year End Exchange Listing

DECEMBER Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: UNILEVER:NL

Sector

Conglomerates

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Foreign

50.04

Nigerians

49.96

Unilever Nigeria Plc was incorporated as Lever Brothers (West Africa) Ltd in 1923 and changed its name to Unilever Nigeria Plc in 2001. The company which started solely as a soap manufacturer has diversified into the manufacturing and marketing of foods, non-soapy detergents and personal care products. Among the Company’s top barnds include Blue band Margarine, Close up toothpaste, Knorr, Lipton, Omo detergent, Pears, Royco and Vaseline. The Company’s plants are located in Oregun, Lagos State and Agbara, Ogun State. Unilever is owned 50.04% by Unilever Overseas holdings BV and 49.96% by other minority shareholders.

Key Review Highlights

SHARES IN ISSUE Date

Shares Outstanding

Dec-09 DIVIDENDS AND BONUS ISSUES Type

3,783,296,248

Year

Final

FY'08

N0.68

Final

FY'07

Final

FY'06

Scrip issue

FY'06

1 for 4

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09) Average Value Traded ('09)

N 'Mn

69,991

$ 'Mn

473

Units

1,165,575

N '000

67,159

$ '000

453

Unilever is one of the few companies that have fared favourably despite the downturn in the economy and liquidity crisis. Q3’09 results showed YoY Turnover and PAT growth of 17% and 128% respectively on the back of a more profitable brand portfolio mix, better management of bought-in materials and conversion costs as distribution costs and administrative expenses also declined. Unilever’s success in recent times has come as a result of brand concentration initiated in 2007, as the company eliminated nonstrategic, low margin, commodity like brands namely Key, Rin, Vim and the professional bakery market for margarine from its portfolio. Thus the Company has been able to focus on fewer, higher yielding brands. One of the reasons for Unilever’s success has been its ability to adapt to its products to fit the pocket of the Nigerian consumer who has been left with less disposable income. The Company has done this by creating affordable, small pack sizes for most of its products combining this with innovation (e.g. the launch of new variants of lux beauty soap), improved distribution platform and social marketing campaigns like the Close Up campaign to encourage brushing twice a day. In 2009, Unilever was one of the best performing stocks in the market, returning 78% in capital gains, and paid a dividend of N0.68 for the 2008 financial year (dividend yield – 3.7% based on the year’s closing price). The stock closed the year trading at a P/E of 14.68x, close to that of its fellow multinational, PZ Cussons (14.88x), as both stocks have traditionally shown upward divergence from average market P/E levels. Our fair value range for Unilever is N16.98 – N19.23 and we place a Neutral rating on the stock. Forecast Summary

Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'08A

FY'09F

FY'10F

FY'12F

FY'13F

0.68 138.76% 27.21 0.68 N/A 3.68% 1.77 32.81% 10.48

1.34 97.30% 13.79 1.14 67.70% 6.16% 1.97 11.62% 9.38

1.48 1.63 1.78 10.51% 9.63% 9.61% 12.48 11.38 10.38 1.26 1.38 1.51 10.51% 9.63% 9.61% 6.81% 7.47% 8.19% 2.21 2.56 2.91 11.97% 15.99% 13.76% 8.38 7.23 6.35

FY'11

1.94 8.87% 9.54 1.65 8.87% 8.91% 3.28 12.69% 5.64

Source: Company Financials; Vetiva Research

169

‘Ahead of the Curve’

171

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

Investment Summary

Performance has been strong on the back of efficiency measures …

In Q3’09 the Company’s recorded a YoY Turnover growth of (+16.58%), an improvement from a 10.23% growth recorded in Q2’09. We witnessed the Company grow its After Tax profits more than two times over, from N2.43 billion in Q3’08 to N5.48 billion in Q3’09 (+125.81%). QoQ, Before and After Tax Margins showed some improvement, from 16.57% (PBT) and 11.81% (PAT) to 16.80% and 11.86% respectively.

A YoY comparison of the company’s profitability margins reveals an improvement, as Before and After Tax Margins both appreciated from 8.86% (PBT) and 6.06% (PAT) in Q3’08 to 16.80% (PBT) and 11.86% (PAT) respectively in Q3’09.

Isolating Q3’09 results, Turnover during the 3 month period (June to September) grew 30% to N11.48 billion from N8.81, increasing faster than operating costs which rose 9%. Operating profit margin stood at 15%.

We forecast FY’10 Turnover and PAT to be N43.73 billion and N5.07 billion respectively, indicative of a 17% and 97% YoY growth in Turnover and PAT respectively. Our earnings expectation translates to an EPS of N1.34 while we expect a dividend of N1.14.

PROFITABILITY RATIOS

Peer Metrics

(Percent)

20%

EBIT Margin

PBT Margin

Current Price (N)

PAT Margin

18% 16%

Trailing EPS (N)

14%

P/E (x)

PZ CUSSONS

UACN

UNILEVER

25.00

36.75

18.50

1.68

5.14

1.26

14.88

7.15

14.68

12%

DPS (N)*

10%

0.68

2.00

0.68

2.72%

5.44%

3.68%

Dividend Yield

Payout Ratio

45.25%

61.10%

99.00%

ROE (Average)

13.98%

19.19%

43.93%

4% 2%

ROA (Average)

0% 2007

2008

2009E

2010F

Outstanding Shares(mn)

Source: Company Financials

9.07%

7.79%

11.74%

3176.38

1284.62

3783.30

Source: Company Financials; Vetiva Research

Outlook

Strong growth expected by competition poses threats and should put pressure on Margins …

172

‘Ahead of the Curve’

We believe Unilever will sustain strong performance in the 2010. Our expectations are that Topline will grow 16% YoY in 2010 to N50.73 billion, in line with expected sales growth for 2009. Going forward we expect sales growth to moderate to 13% by 2013 as we anticipate competition to challenge strong growth.

In response, we expect Unilever to continue to build on recent innovation and promotion of its value-for-money campaign. Cost cutting strategies are expected to continue to affect results positively albeit at a slower rate. However we don’t see EBIT Margins pushing higher than our forecast 18% in 2009 and expect it to trend downwards to 15% by 2013 as advertising costs and cost of sales inch upwards. That said, we expect 2010 PAT to be N5.61 billion and grow to N7.34 billion by 2013.

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

UNILEVER SHARE PRICE Vs. VOLUME TRADED 40

52 week high:N20.17 52 week low:N5.62 Average Price:N12.33 Avg Vol Traded (‘000): 1,165 Beta:1.01

Share Price (Naira)

0 15000 Volume Traded (‘0000) 10000

5000

0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

173

2009 Review | 2010 Outlook SECTORAL REVIEW CONGLOMERATES

INCOME STATEMENT (N'Mill)

2006

2007

2008

2009 F

2010 F

2011 F

Turnover Cost of Sales Gross Profit Selling and Distribution Expenses Administrative Expenses Core Operating Profit Other Operating income EBITDA Depreciation EBIT Interest Payable & Similar charges Profit from operations Finance Income

25,554 (18,422) 7,132 (1,405) (5,302) 425

33,991 (22,578) 11,413 (1,484) (5,659) 4,270

37,377 (24,361) 13,017 (1,692) (6,082) 5,243

43,732 (26,676) 17,055 (1,968) (6,560) 8,528

50,729 (31,350) 19,378 (2,283) (7,609) 9,486

56,816 (35,112) 21,704 (2,557) (8,750) 10,397

425 (789) (364) (1,012) (1,375) 44

4,270 (858) 3,411 (646) 2,765 106

5,243 (770) 4,472 (445) 4,028 117

8,528 (855) 7,672 (656) 7,017 235

9,486 (949) 8,537 (761) 7,776 237

Profit before taxation Taxation Profit after taxation Extraordinary Items PAT and extra items Proposed dividend Profit of the year retained

(1,331) 746 (585) (243) (828) (828)

2,872 (717) 1,297 (219) 1,077 (946) 132

4,145 (1,548) 2,597 2,573 (2,547) 26

7,251 (2,175) 5,076 5,076 (4,314) 761

8,013 (2,404) 5,609 5,609 (4,768) 841

BALANCE SHEET (N'Mill) Non-Current Assets Property, plant and equipment Current Assets Inventories Trade receivables Other receivables and prepayments Receivables from related companies Cash and bank balances TOTAL ASSETS Current Liabilities Trade payables Amount due to related companies Other payables and accrued expenses Unclaimed dividends Current income tax Bank overdraft Net Current Assets Total Assets Less Curr. Liabilities Non-current liabilities Deferred income tax Retirement benefits obligation

Net Assets

Capital and Reserves Share capital Share premium Revaluation reserves Retained earnings Shareholders funds' Total Liabilities & Equity

RATIOS

2006 7,772

2007 8,641

2008 9,056

INCOME STATEMENT ($'Mill)

2006

2007

2008

2009 F

2010 F

2011 F

173 (124) 48 (9) (36) 3

230 (152) 77 (10) (38) 29

252 (164) 88 (11) (41) 35

295 (180) 115 (13) (44) 58

343 (212) 131 (15) (51) 64

384 (237) 147 (17) (59) 70

10,397 (1,054) 9,344 (852) 8,491 239

3 (5) (2) (7) (9) 0

29 (6) 23 (4) 19 1

35 (5) 30 (3) 27 1

58 (6) 52 (4) 47 2

64 (6) 58 (5) 53 2

70 (7) 63 (6) 57 2

8,730 (2,619) 6,111 6,111 (5,194) 917

Profit before taxation Taxation Profit after taxation Extraordinary Items PAT and extra items Proposed dividend Profit of the year retained

(9) 5 (4) (2) (6) (6)

19 (5) 9 (1) 7 (6) 1

28 (10) 18 17 (17) 0

49 (15) 34 34 (29) 5

54 (16) 38 38 (32) 6

59 (18) 41 41 (35) 6

BALANCE SHEET ($'Mill) Non-Current Assets Property, plant and equipment

2006

2007

2008

2009 F

2010 F

2011 F

2009 F

2010 F

2011 F

10,025

11,098

12,285

5,332 2,748 1,011 101 1,657

5,083 3,463 797 807 1,562

4,632 4,369 1,206 1,522 2,706

5,559 5,243 1,312 1,218 2,842

5,225 6,030 1,522 1,096 2,984

5,643 6,319 1,704 1,206 3,133

18,622

20,353

23,493

26,199

27,954

30,291

1,365 2,070 2,647 512 1 5,516 (1,261)

2,365 1,069 4,271 511 490 4,036 (1,029)

3,711 1,553 4,353 506 1,005 2,615 694

3,340 1,646 4,716 491 2,219 2,877 886

3,006 1,744 5,032 476 2,452 3,164 982

2,705 1,814 5,452 462 2,671 3,481 1,420

6,512

7,612

9,750

10,911

12,080

13,705

Total Assets Less Curr. Liabilities

13 0 2 12

13 0 2 19

13 0 2 30

13 0 2 36

13 0 2 41

13 0 5 47

Shareholders funds'

2010 F

2011 F

2010F 16.0% 11.2% 11.2% 10.5% 10.5%

2011F 12.0% 9.6% 9.6% 8.9% 8.9%

2006 -17.4% -3.8%

2007 24.0% 5.5%

2008 43.9% 11.7%

2009F 71.8% 20.4%

2010F 71.0% 20.7%

2011F 67.8% 21.0%

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2006 1.7% -1.4% -5.2% -3.2%

2007 12.6% 10.0% 8.4% 3.2%

2008 14.0% 12.0% 11.1% 6.9%

2009F 19.5% 17.5% 16.6% 11.6%

2010F 18.7% 16.8% 15.8% 11.1%

2011F 18.3% 16.4% 15.4% 10.8%

ASSET UTILIZATION Sales to cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets Turnover(x)

2006 15.4 3.5 1.4 0.4

2007 21.8 4.3 1.7 0.4

2008 13.8 5.0 1.6 0.4

2009F 15.4 5.2 1.7 0.4

2010F 17.0 5.8 1.8 0.4

2011F 18.1 6.5 1.9 0.4

Net Assets

Capital and Reserves Share capital Share premium Revaluation reserves Retained earnings

2009F 17.0% 62.7% 62.7% 74.9% 97.3%

174

12 15 27

1,892 46 714 7,026

2009 F

‘Ahead of the Curve’

205

11 14 25

1,892 46 304 6,110

2008

189

10 13 23

1,892 46 252 5,268

2008 10.0% 22.8% 22.8% 44.3% 138.8%

177

9 12 21

1,892 46 237 4,507

2007

159

5 12 17

1,892 46 237 2,856

2007 33.0% 904.4% 904.4% -315.7% -230.1%

137

4 13 17

1,892 46 237 1,779

9,677

126

9,677

30,291

38 43 12 8 21

8,351

35 41 10 7 20

7,458

27,954

38 35 9 8 19

6,682

7,458

31 30 8 10 18

5,031

26,199

34 23 5 5 11

Non-current liabilities Deferred income tax Retirement benefits obligation

3,953

6,682

36 19 7 1 11

18 12 37 3 18 24 10

1,766 2,263 4,028

23,493

20 12 34 3 17 21 7

1,635 2,095 3,730

5,031

23 11 32 3 15 19 6

1,514 1,940 3,454

20,353

25 10 29 3 7 18 5

1,290 1,778 3,068

3,953

16 7 29 3 3 27 (7)

747 1,833 2,581

18,622

9 14 18 3 0 37 (9)

614 1,945 2,558

2006 -23.5% -90.1% -90.1% -146.4% -137.6%

PROFITABILITY Return on Equity Return on Assets

TOTAL ASSETS Current Liabilities Trade payables Amount due to related companies Other payables and accrued expenses Unclaimed dividends Current income tax Bank overdraft Net Current Assets

2006

GROWTH RATES Turnover growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT

Current Assets Inventories Trade receivables Other receivables and prepayments Receivables from related companies Cash and bank balances

Total Liabilities & Equity

126

137

159

177

189

205

LIQUIDITY RATIOS Cash ratio Current ratio Interest coverage (x) Days in inventory Days in accounts payable Days in receivables Cash Conversion Cycle

2006 0.1 0.9 -0.4 105.6 27 39 118

2007 0.1 0.9 5.3 82.2 38 37 81

2008 0.2 1.1 10.1 69.4 56 43 56

2009F 0.2 1.1 11.7 76.1 46 44 74

2010F 0.2 1.1 11.2 60.8 35 43 69

2011F 0.2 1.1 11.0 58.7 28 41 71

2006 0.0% 21.2% 100.0%

2007 87.8% 24.7% 12.2%

2008 99.0% 28.4% 1.0%

2009F 85.0% 28.5% 15.0%

2010F 85.0% 29.9% 15.0%

2011F 85.0% 31.9% 15.0%

2006 -0.22 0.00 1.04 6.75 0.11

2007 0.28 0.25 1.33 8.98 1.13

2008 0.68 0.67 1.77 9.88 1.39

2009F 1.34 1.14 1.97 11.56 2.25

2010F 1.48 1.26 2.21 13.41 2.51

2011F 1.62 1.37 2.56 15.02 2.75

CAPITAL STRUCTURE Payout ratio Total equity/Total assets Retention ratio PER SHARE DATA EPS DPS NAPS Sales/Share EBITDA

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

THE FOOD AND BEVERAGES SECTOR Brief Overview The Nigerian Food and Beverages Sector is the most prominent segment of the Fast Moving Consumer Goods industry, comprising mainly of manufacturing companies with a wide range of diversified products. The nature of the products (mostly necessity products) of the sector renders its demand relatively inelastic. Although, compared to its foreign counterparts, the Food and Beverages Sector as a whole is still grossly underdeveloped, in context of product quality & development as well as technology. However, it also indicates there is immense potential inherent in the sector given the opportunities presented for investment, growth and development in the sector. This has been the motivation behind the recent regulations and policies of the Nigerian Government aimed at creating conducive environment for foreign investment in the sector and for the development of the manufacturing and indigenous companies within the country. Majority of these companies have taken the bait and have gone ahead to take full advantage of these opportunities arising by expanding their activities and range of product offering within and outside (export) the country in order to increase their revenues. Financial Performance in 2009... The sector was host to increased activities in the 2009 financial year; this was on account of the uncertainty surrounding the financial services stocks. We saw the manufacturing sector come to fore, as most of the stocks performed better than the financial services. In our Half Year Review report titled “Revived Spirits”, we expressed optimism for the sector largely on the back of the defensiveness of its products. Even though, some of these companies (Flour Mills, NBC etc.) had come under the weight of the numerous challenges in 2008, most of these companies also staged an instantaneous rebound in the same year, faring better than most of the other sectors.

F & B SECTOR TOP FIVE REVENUE (Sept ‘09) (Naira Billions) 90 N82 (0.91%)

Revenue

Earnings

80 70

N65 (15%) N59 (-8%)

N50 (32%)

N47 (35%)

50 40 30 20 N12 (-36%)

N5 (97%)

N7 (32%)

N7 (307%)

N2.3 (135%)

0 FMN

NBC

DSR

NESTLE

DFLR

Source: Company Financials

173

‘Ahead of the Curve’

175

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Share Price Performance in 2009... In the first and beginning of second quarter of 2009, the share prices (which had been resilient in 2008) of companies within the Food and Beverages Sector followed the general downward spiral of stocks. However, the Food & Beverage share prices began its ascent in the second quarter staging an impressive rebound in the last quarter of the year as shown in the figure below. Cadbury is the only stock that posted negative returns in the last quarter to date (Q4TD) amongst the eight shown below:

MARKET RETURNS IN THE F & B SECTOR (Percent %) 120% Year To Date (YTD)

Half Year To Date (HYTD)

Last Q To Date (Q4TD)

100% 80% 60% 40% 20% 0% FMN

NESTLE

NNFM

DANGFLR

NBC

NASCON

7-UP

CADBURY

-20% -40% -60% -80% Source: Company Financials

The reaction of investors during this period can be adduced to the unrest in the financial services sector, which began as a result of the CBN unveiling inappropriate practices via its audit of the banks. Thus, investors dumped Banking stocks and fled to stocks in the manufacturing sector, especially taking solace in the blue chips and the non-financial services sector, as we had earlier iterated. Innovation, Advertising and Expansion In the 2009 financial year, we saw a lot of innovation, diversification and expansion from these companies, further reinforcing their stability in troubled times. In our opinion, the implementation of new market strategies and policies to fit the evolving economic landscape, emphasizes their flexibility and ability to survive in tough terrains. Most of these companies introduced innovative product packages (e.g. NBC and 7-Up); the flour millers entered into one of the most profitable business segments, Noodles Production (e.g. Dangote Flour and Flour Mills); while Nascon introduced smaller packages of salt, targeting the retail market, as its major focus prior to now was the industrial market.

176

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2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

In the course of the year, companies (especially in the packaged drinks sub sector) had to increasingly cater to the on-the-go and retail market in a bid to increase sales. This involved taking advantage of the warm weather and traffic congestion in the cities to market their products, by convincing consumers to purchase their products in traffic jams. Thus, we saw an increasing number of packaged drinks in Poly Ethelene Terephate (PET) bottles and cans. We also experienced price wars and intense competition between rivals such as ‘Chivita’, ‘Dansa’ and ‘Five Alive’ Brands, with the companies keeping tabs on the innovations brought to the fore by their competitors, to help them implement the same. We saw the fruit juice market move from large packs to small and medium sized packages. For example, NBC introduced its ‘Five Alive’ juice brand in small sized packs, which due to their lower prices, helped the company penetrate the retail market. The cost of packaging in Nigeria has greatly reduced with the advent of Tetra Pak (a world renowned packaging company). Hence, companies do not have to import their packaging materials at exorbitant rates. Input Cost Sequel to the exorbitant rise in the price of wheat on the international market in 2008, profitability margins were severely impacted during the period. However, as we had anticipated, the period of record highs was immediately followed by record lows in 2009. Hence, the flour milling companies witnessed a substantial reduction in wheat cost, which is their major raw material. This led to an increase in profitability for companies (Flour Mills of Nigeria Plc, Northern Nigeria Flour Mills Plc and Dangote Flour Mills Plc), as prices of flour and associated products did not decline in the same proportion as input prices. However, we also note the energy challenges experienced during the year, which increased the cost profile of these companies. We expect wheat prices to remain at these lows, following reports of expected bumper harvests in 2010.

HISTORICAL AVERAGE WHEAT PRICES (2005 – 2009) Dollars Per Bushel 12

Wheat Prices at Peak (March 2008) = $10.50 per bushel

Wheat Price as at November 2009 = $4.79 per bushel

Source: United States Dept of Agriculture

175

‘Ahead of the Curve’

177

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

In contrast to wheat prices, global sugar prices commenced an ascent in the second quarter of 2009, attaining record highs during the period under review. The rise in raw sugar price is not unconnected with the impact of climate change on raw sugar producing nations such as Brazil and India, the two largest exporters of raw sugar, coupled with the increased usage of sugar in bio-fuel production. This upsurge resulted in increased cost, and the inability to successfully transfer the incidence to consumers, impacted margins negatively. In our opinion, sugar prices are yet to peak. We expect it to attain its peak in 2010, after which we may see a deluge of supply in sugar, following the same trend as wheat.

HISTORICAL PRICE MOVEMENT OF RAW SUGAR Cent per Pound 45.0

The trend line sugar price commencing its ascent in 2008 and is still upward bound.

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0

Raw Sugar1

Raw Sugar2

1990

2002

0.0 1960 1966 1972 1978 1984 N.B: Raw Sugar 1 - Prices as at May of each year Raw Sugar 2 - Prices as at October of each year

1996

2008

Source: United States Dept of Agric; Vetiva Research

SECTOR OUTLOOK Our outlook for 2010 is optimistic, in light of the Federal Government’s 6.01% GDP growth estimate for the year (our estimate is 5.90%). The expectation is that economic fundamentals in 2010 will be much better than 2009, which we believe will positively impact the Food and Beverages Sector. The movement in some of the factors that drive the industry, such as interest rates and population growth, in our expectation, will be more favourable than the previous year. This is further buoyed by the World Bank’s Economic Outlook Report (January Update) which stated that recovery in emerging markets will be ahead of developed nations. On the back of these, we reiterate our upbeat outlook for the sector. In 2009, we saw the positive benefits of expansions; thus, we expect such activities to continue in 2010, which would enable the companies take advantage of the potential within the sector.

178

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Dangote Flour Mills Plc - Company Overview BASIC INFORMATION Address

8, Rycroft Road Apapa, Lagos, Nigeria

Website

www.dangotegroup.com

Management

Alhaji Aliko Dangote (Chairman) Mr Micheal Zetzsche (MD/CEO)

Fiscal Year End

DECEMBER

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Sector

FOOD & BEVERAGE

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Dangote Industries Limited

70.00

FREE FLOAT

30.00

Key Review Highlights

SHARES IN ISSUE Date

Dangote Flour Mills Plc commenced operations in 1999 as a division of Dangote Industries Limited (DIL). However, following a strategic decision by DIL to unbundle its operations, Dangote Flour Mills Plc was incorporated in 2006, with DIL controlling 70% of the company’s shares. The Company embarked on an Initial Public Offering (Offer for Sale) of its shares at N15 per share in 2007 and was listed on the Nigerian Stock Exchange on the 4th of February, 2008. Dangote Flour Mills Plc ranks second in terms of installed capacity and market share in Nigeria, and is in the business of flour milling, processing and marketing of branded flour. The Company started with an initial installed capacity of 500MT at its Lagos-Apapa Mill, and opened in quick succession, its Kano (1500MT per day), Calabar (1000MT per day) and Ilorin (500MT per day) plants, which are strategically located in the Northern, Southern and Western Zones of the country to facilitate distribution.

Shares Outstanding

Dec-09

5,000,000,000

Dangote Flour Mills Plc has four business segments; Flour Milling, Pasta, Agro-Sack and Noodles (which was recently introduced this year).

181,200

The Company imports its principal raw material, wheat (the Hard Red Winter Wheat variety) from United States of America, who is regarded as the producer of best quality wheat in the world.

The Company had an initial installed capacity of 500MT, which was subsequently increased to 4,000MT per day in 2007. It has two major subsidiaries; Dangote Pasta and Dangote Agro sacks.

Dangote Pasta produces spaghetti, bread flour, semolina, wheat offals and noodles (most recent addition); while Dangote Agro sacks produces Polypropylene bags.

Dangote Flour’s Share price has been upward bound since the release of its results and is currently trading at N9.93, its NAPS of N5.04 gives us a Price to Book ratio of 1.77x (Sector Average – 1.91x). Our Fair Value Price Range for the Company is between N13.57 - N15.52 and we are ‘Overweight’ at current market price.

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09) Average Value Traded ('09)

N 'Mn $ 'Mn

1,223

Units

2,024,348

N '000 $ '000

453

D IV ID E N D S A N D B O N US IS S UE S T ype

Year

Final

FY'08

Final

FY'07

Final

FY'06

0.20

Forecast Summary Earnings Per Share (N)

FY'06A

FY'07A

FY'08A

FY'09F

FY'10F FY'11F

0.24

0.11

0.60

1.84

1.63

n/a

-53%

432%

208%

-12%

41.26

88.41

16.61

5.39

6.11

5.99

Dividend Per Share (N)

n/a

0.20

0.49

0.54

0.55

YoY Change (%)

n/a

144%

9.80%

2.00%

Dividend Yield (%) Net Assets Per Share (N)

n/a

2.01%

4.92%

5.40%

5.51%

6.76

4.54

5.04

5.60

6.97

8.08

YoY Change (%) Price to Earnings (x)

YoY Change (%) Price to Book (x)

-0.78% -32.80% 10.96% 1.47

2.19

1.97

1.66

11.07% 24.38% 16.04% 1.77

1.43

1.23

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

179

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Overweight recommendation is based on the company’s outstanding performance in Q3’09 and our optimistic outlook for the stock. Dangote Flour launched its noodles brand…

In the course of 2009, Dangote Flour Mills Plc launched its brand of noodles in the market. It introduced three new variants of noodles, which are: Easy Cook, Snacks and Cup noodles, thereby introducing it into the on-the-go market.

Dangote Flour posted the best results in the Food and Beverages Sector in 2009, which we largely adduce to the lower prices of wheat, the increased utilization of capacity of its flour milling plants, expansion of its pasta and agro sacks operations, as well as cost savings from power and its milling technology.

Furthermore, the company scaled up its production plants, with the introduction of state-of-the-art plants and machinery, thereby speeding up its production process and improving cost management.

Dangflour has a competitive advantage on account of the strategic location of its four milling plants in different geographical regions (North - Kano, South - Lagos, East- Calabar and West - Ilorin), servicing the entire nation and covering markets that were though profitable, inaccessible due to distance.

In Q3’09, the Company’s profitability margins improved significantly to 17.65% and 15.23%, from 6.13% and 5.05% respectively as at Q3’08.

It also posted YoY Turnover growth of 34.77% to N46.95 billion, while Profit After Tax (PAT) increased significantly by 307.71% YoY to N7.15 billion.

The company had the most impressive result in 2009…

Scaled up operation of its production plants...

Competitive advantage on account of the strategic location of its plants...

Q3’09 PAT stands at N7.15 billion…

Growth rates of 34.77% and 307.71% in Sales and Earnings...

PROFITABILITY RATIOS

Peer Metrics

(Percent) 14%

RoA

Operating RoA

Current Price (N)

RoE

DFLR

NBC

Nestle

Nascon

FMN

9.93

21.42

239.50

4.35

36.00

12%

Trailing EPS (N)

1.68

1.02

15.23

0.60

3.68

10%

P/E (x)

5.91

21.00

15.73

7.25

9.78

DPS (N)

Dividend Yield

1.20

n/a

12.55

0.40

0.50

5.10%

n/a

5.24%

9.20%

1.39%

Payout Ratio

50.27%

n/a

99.49%

81.67%

21.95%

ROE (Average)

12.78%

0.07%

109.15%

35.26%

11.77%

ROA (Average)

4.71%

0.03%

33.05%

19.12%

3.16%

Outstanding Shares(mn)

5,000

1,309

2,649

1,708

2% 0% 2006

2007

2008 Source: Company Financials

180

‘Ahead of the Curve’

661

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

We are confident on the improvement in the profitability profile of the company in 2010. Its recent capacity expansions and the introduction of new equipment for its Noodles segment (the Company now has dedicated equipments for its business segments – Flour, Pasta and Noodles), has led to a reduction in pressure on its milling equipment. We believe this expansion (technology based) and increase in production will reduce cost per unit and positively impact the company’s sales. The company plans to increase capacity utilization rates in subsequent years, further increasing production volumes. The Dangote Group has a record of being one of the foremost companies in the various business segments in which it operates. It has established this trend in the flour milling, pasta, noodles and agro sacks sectors, aggressively penetrating the markets in the few years since its entry.

We expect FY’09 Turnover and After Tax Profits of N54.63 billion and N9.22 billion respectively, which translates to a Forward Earnings Per Share of N1.84 and Dividend Per Share of N0.49.

DANGOTE FLOUR PRICE Vs. VOLUME TRADED 50

52 week high:N14.58 52 week low:N4.38 Average Price:N8.09 Avg Vol Traded (‘000): 2.024 Beta:1.50

Share Price (Naira)

40 30 20 10 0 25000 Volume Traded (‘00) 20000 15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

181

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mn)

Turnover C ost of Sales Gross Profit Distribution & Administrative Expenses C ore operating profit

2006

Interest Expense & Similar charges

2008

2009F

2010F

2011F

35,673

42,153

47,927

54,637

61,193

68,230

(32,012)

(37,417)

(38,288)

(39,662)

(44,818)

(50,645)

INCOME STATEMENT ($'Mn)

Turnover C ost of Sales

285

324

369

413

461

(259)

(268)

(303)

(342)

101

111

119

14,975

16,375

17,586

Gross Profit

11,037

12,043

12,821

Distribution & Administrative Expenses

1,409

1,156

4,456

244

246

268

174

1,110

11,281

12,289

13,089

1,437

1,331

5,566

11,281

12,289

13,089

EBIT

(1,574)

Interest Expense & Similar charges

(5) 5

722

676

3,167

11,601

13,289

14,663

Profit from operations

Profit before taxation

722

676

3,167

10,961

11,290

11,516

Profit before taxation

Taxation

(1,742)

(3,161)

(3,224)

Taxation

PAT

722

562

Dividends 722

525

2006

2007

(178) 2,989

9,219

8,129

8,291

PAT

1,000

2,443

2,682

2,736

Dividends

1,841

6,776

5,446

5,555

Retained Earnings

2009F

2010F

2011F

2008

Assets Employed

(15)

(24)

(35)

(4)

(16)

(2)

(7)

Other income

Profit from operations

(114)

(999)

BALANCE SHEET ($'Mn)

2011F

(253)

9,639

(320)

2010F

241

(5,183)

C ore operating profit

2009F

(216)

4,736

(2,399)

Fixed Assets

2008

(3,580)

(655)

BALANCE SHEET (N'Mn)

2007

3,661

(715)

Retained Earnings

2006

(2,252)

Other income

EBIT

2007

5 5

(21)

(22)

(1)

2006

(12)

(1)

88 (11)

2007

2008

185

223

2009F

2010F

2011F

Assets Employed 13,366

27,358

33,051

38,614

42,476

46,723

Stocks

4,289

11,428

9,911

10,965

12,640

14,778

Stocks

100

Debtors & Prepayments

6,167

8,108

15,876

16,976

18,463

19,630

Debtors & Prepayments

107

115

125

133 13

C urrent Assets

Fixed Assets

261

287

315

C urrent Assets

C ash and bank balances

359

1,680

1,648

512

1,070

1,966

C ash and bank balances

9,045

9,546

8,264

5,045

5,267

2,547

Total

19,860

30,762

35,699

41,428

48,077

55,793

Total Assets

33,226

58,119

68,750

72,112

79,916

85,645

Due within one year

12,941

35,398

43,538

44,109

45,085

45,228

n/a

576

n/a

1,500

2,500

12,007

11,807

Due from related company

Total Assets

134

208

241

280

325

377

Due After one year

C apital and Reserves Share capital Share premium Revaluation Reserves Revenue Reserve Shareholders' fund

RATIOS

Due within one year

239

294

298

304

305

Due After one year

n/a

Share capital

Share premium

Revaluation Reserves

C apital and Reserves

2,703 5,078

7,679

10,046

13,693

20,539

26,094

Revenue Reserve

21,288

22,145

24,630

28,000

34,846

40,401

Shareholders' fund

2006

2007

2008

2009F

2010F

2011F

2006

Turnover growth Growth in C ore Operating profit

2007

2008

2009F

2010F

2011F

18%

14%

12%

-14%

-18%

285%

148%

80 -

139

176

144

150

166

189

235

273

2006

2007

2008

2009F

2010F

2011F

12%

21%

20%

19%

10%

11%

20%

27%

26%

Pretax Income/Sales

20%

18%

17%

Net Profit Margin

17%

13%

12%

MARGINS EBIT/Sales

GROWTH RATES

Gross Profit Margin

Growth in PBT

-227%

-6%

369%

246%

PER SHARE DATA

2006

2007

2008

2009F

2010F

2011F

Growth in PAT

-227%

-22%

432%

208%

-12%

EPS

0.24

0.11

0.60

1.84

1.63

1.66

DPS

0.00

0.20

0.49

0.54

0.55

NAPS

6.76

4.54

5.04

5.60

6.97

8.08

11.89

8.43

9.59

10.93

12.24

13.65

PROFITABILITY

2006

2007

2008

2009F

2010F

2011F

Sales/Share Return on Equity

13%

35%

26%

22%

Return on Assets

13%

11%

10%

Return on Invested C apital

11%

18%

15%

Growth rate (g)

26%

17%

15%

182

‘Ahead of the Curve’

Shares Outstanding (millions)

3,000

5,000

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Flour Mills of Nigeria Plc - Company Overview BASIC INFORMATION Address

Apapa Mills 2, Old Dock Road, Apapa Lagos, Nigeria.

Website Management Fiscal Year End

www.fmnplc.com E.A. Ukpabi (MD/CEO) March

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: FLOURMIL:NL

Sector Country

Nigeria

Flour Mills of Nigeria Plc was incorporated in 1960 as a flour milling company and thereafter diversified into other goods and operations and has become one of the largest conglomerates in the country and a market leader. Flour Mills dominates the sectors in which it operates especially in the Food and Beverages Sector. The Company’s activities span flour milling, pasta manufacturing, port operations, cement trade & manufacturing, fertilizer blending, bags & other packaging materials manufacturing and agricultural business. FMN has been listed on the Nigerian Stock Exchange since 1978, and has over eight (8) subsidiaries both wholly and partially owned.

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Excelsior Shipping Company Ltd

51.59

Others

48.41

Free Float (%)

48.41

Key Review Highlights

Flour Mills of Nigeria Plc is one of the leading conglomerates in Nigeria with a well diversified product portfolio. It has the largest market share in terms of volumes (out of the 23 flour millers within the Nigerian flour milling industry), and this has increased steadily over the years.

Flour Mills in its Q3’08/9 scorecard announced an Exchange Loss of N6.66 billion adduced to unfavourable exchange rate movements on a Dollar-Denominated Usance Facility. The management of the Company further disclosed that it has repaid the loan, thus hedging against subsequent exchange losses on additional depreciation of the Naira.

The Company disclosed its plans to acquire controlling stakes in another Flour Milling Company (Eagle Flour Mils) located in Ibadan, in a bid to enhance its market share in that region.

Flour Mills’ share price stands at N36.00 and is currently trading at a NAPS of N20.01, which gives us a Price to Book ratio of 1.80x (Sector Average – 1.91x). Our Fair Value price range for the Company is between N45.84 - N53.80 and we are ‘Overweight’ at current market price.

SHARES IN ISSUE Date Dec-09

Shares Outstanding 1,708,410,000

SIZE AND VALUE TRADED Market Capitalization

N 'Mn $ 'Mn

Average Volume Traded ('09)

Units

61,503 415 1,131,001

DIVIDENDS AND BONUS ISSUES Type Final Final Final

Year FY'08 FY'07 FY'06

N1.00 N0.90 N0.85

Forecast Summary

FY'07A

FY'08A

FY'09A

FY'10F

FY'11F FY'12F

Earnings Per Share (N)

4.81

4.10

2.28

4.92

5.36

5.84

YoY Change (%)

20%

-15%

-44%

116%

Price to Earnings (x)

7.48

8.79

15.80

7.32

6.72

6.16

Dividend Per Share (N)

0.90

1.00

0.50

0.98

1.18

1.11

YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

11%

-50%

2.50%

2.78%

1.39%

2.73%

3.28%

3.08%

14.88

20.56

20.01

24.93

30.29

36.13

106.94% 38.19%

-2.66%

2.42

1.75

1.80

97% 19.90% -5.86%

24.58% 21.50% 19.29% 1.44

1.19

1.00

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

183

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Overweight recommendation is based on the company’s outstanding performance in Q2’09/10 and our optimistic outlook on the stock.

The Company gained the approval of its shareholders to acquire the controlling stake (51%) in Eagle Flourmills, an 850MT per day capacity milling plant located in Ibadan. The acquisition is being made to further boost its market share within the industry. Eagle Flourmills is a member of the Chagoury Group.

In the course of the year, United Cement Company of Nigeria (UNICEM), a joint venture made up of the Lafarge Group (28%), Holcim Limited (28%), Dangote Cement (22%) and Flour Mills (22%), commissioned its greenfield cement plant at Mfamosing in Cross River State, with a capacity of 2.5MT p.a. Hence, we look forward to potential income contributions from UNICEM in the 2010 financial year.

The Company had earlier disclosed its intention to enter the instant noodles business, and it lived up to expectation by introducing its own brand of instant noodles (Golden Noodles) to the market during the course of the year.

Flour Mills’ most recent result, Q2’09/10 for the period ended September 2009, showed growth in Turnover and Earnings of 0.91% (N81.60 billion) and 96.54% (N4.89 billion) respectively.

The Company’s profitability margins improved to 8.55% (PBT) and 5.99% (PAT), from 4.39% and 3.07% respectively as at Q2’08/9. QoQ, profitability margins increased from 8.16% (PBT) and 5.71% (PAT) respectively.

Acquires controlling stakes in Eagle Flourmills…

The company commissioned cement plant at Mfamosing…

its

Introduced its brand of noodles into the market...

Q2’10 Earnings billion...

stood

N4.89

Profitability margins improved …

Peer Metrics

7-Up

DFLR

NBC

FMN

Nestle

29.40

9.93

21.42

36.00

239.50

Trailing EPS (N)

3.09

1.68

1.02

3.68

15.23

P/E (x)

9.51

5.91

21.00

9.78

15.73

70%

DPS (N)

1.50

0.20

n/a

0.50

12.55

60%

Dividend Yield

5.10%

2.01%

n/a

1.39%

5.24%

Payout Ratio

50.27%

33.46%

n/a

21.95%

99.49%

ROE (Average)

20.11%

12.90%

0.07%

20%

ROA (Average)

5.48%

4.71%

0.03%

3.16%

10%

Outstanding Shares(mn)

5,000

1,309

1,708

Current Pric e (N)

PROFITABILITY RATIOS (Percent) 90% RoA

Operating RoA

RoE

80%

50% 40% 30%

0% 2007

2008

2009 Source: Company Financials

184

‘Ahead of the Curve’

512

11.77% 109.15% 33.05% 661

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

The Company’s commendable performance in 2009 was primarily due to its focus on cost management and the fall in wheat prices. Going forward however, we believe that Flour Mills will need to channel efforts towards increasing sales and volume quite significantly, in the most cost efficient mode.

In our opinion, though Flour Mills appears to be performing satisfactorily presently, recent activity within the industry suggests a strengthening of competition. Dangote Flour Mills is proving a formidable rival and has been expanding rapidly over the last year, as well as gaining market share (although, mainly in regions where Flour Mills products are yet to penetrate). In light of this, we believe the Company’s recent investment in the upgrading of its milling equipment shows proactiveness, and we expect that Flour Mills will continue to take the necessary steps to sustain and secure its leadership position.

We expect Q3’09/10 Turnover and After Tax Profits of N124.19 billion and N6.90 billion respectively, which translates to a Forward EPS of N4.92 and Dividend Per Share of N0.98.

FLOUR MILLS SHARE PRICE Vs. VOLUME TRADED 150

52 week high:N39.80 52 week low:N11.00 Average Price:N23.22 Avg Vol Traded (‘000): 1127.5 Beta: 0.99

Share Price (Naira)

100

50 20000

Volume Traded (‘000)

15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

185

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mill) Incom e

2008

2009

2010F

Turnover C ost of Sales Gross Profit other income

105,669 127,662 (86,158) ##### 19,510 20,917 2,755 5,080

180,068 (156,993) 23,075 2,138

193,573 (154,858) 38,715 7,703

EXPENSES: Distribution Administration Depreciation Interest Expense & Similar charges Amortisation of goodwill Total expenses Profit before tax less other income

(1,622) (5,497) (2,970) (2,203) (182) (12,474) 9,792

(2,235) (6,789) (4,033) (3,063) n/a (16,119) 4,798

(1,367) (6,002) (4,748) (4,118) (16,236) 9,779

(1,470) (10,070) (5,104) (4,036) (20,680) 18,035

(1,573) (10,775) (5,461) (4,318) (22,127) 19,297

(1,683) (11,529) (5,844) (4,621) (23,676) 20,648

Profit before taxation Taxation Profit after taxation Minority interest in earnings of subsi PAT after minority interests

9,792 (2,317) 7,474 (1) 7,474

9,878 (3,515) 6,363 (23) 6,340

5,470 (1,579) 3,892 (76) 3,815

12,002 (3,600) 8,401 (23)

13,082 (3,925) 9,157 (23)

Dividends Retained Earnings

(1,398) 6,076

(1,553) 4,810

(854)

(1,680) 6,721

(2,015)

3,038

2007

2008

2009

BALANCE SHEET (N'Mn) Assets Employed Fixed Assets Investments Deferred charge Goodwill on acquisition Long term loans receivable C urrent Assets Stocks Trade debtors Amount due from related companies Debtors & Prepayments Deposits for foreign currencies Bank deposits, balances and C ash Total C urrent Assets Total Assets C urrent Liabilities (Due within one y Liabilities (Due after more than one yr) Total Liabilities Shareholder's Funds

2007

2011F

2012F

2007

2008

2009

713 -582 132 19

862 -721 141 34

1216 -1060 156 14

1307 -1046 261 52

1399 -1119 280 56

1496 -1197 299 60

Distribution Administration Depreciation Interest Expense & Similar charges Amortisation of goodwill Total expenses Profit before tax less other income

-11 -37 -20 -15 -1 -84 66

-15 -46 -27 -21 n/a -109 32

-9 -41 -32 -28 0 -110 66

-10 -68 -34 -27 0 -140 122

-11 -73 -37 -29 0 -149 130

-11 -78 -39 -31 0 -160 139

14,259 (4,278) 9,981 (23)

Profit before taxation Taxation PAT Minority interest in earnings of subsidiarie PAT after minority interests

66 -16 50 0 50

67 -24 43 0 43

37 -11 26 -1 26

81 -24 57 0 0

88 -26 62 0 0

96 -29 67 0 0

7,143

(1,896) 8,085

Dividends Retained Earnings

-9 41

-10 32

-6 21

-11 45

-14 48

-13 55

2010F

2011F

2012F

BALANCE SHEET ($'Mn) Assets Employed

2007

2008

2009

207,123 221,622 (165,699) (177,297) 41,425 44,324 8,243 8,820

47,831 405 511 902 20,524

60,281 480 641 1,718 13,615

69,022 516 257 2,370 15,657

74,145 489 663 3,271 15,793

Fixed Assets Investments Deferred charge Goodwill on acquisition Long term loans receivable

230 3 2 3 59

261 3 4 6 70

323 3 3 6 139

407 3 4 12 92

466 3 2 16 106

501 3 4 22 107

17,987 4,473 1,369 3,461

20,306 5,376 7,982

30,672 5,348 4,463 7,030

9,222 8,671 11,304

13,451 8,656 11,013

14,753 6,828 9,499

9,004

11,795

6,873

C urrent Assets Stocks Trade debtors Amount due from related companies Debtors & Prepayments

121 30 9 23

137 36 54 35

207 36 30 47

62 59 76 61

91 58 74 80

100 46 64 46

4,849 32,140 76,142

19,361

33,456

34,275

58,272 109,150

19,835 67,347 137,520

23,802 72,735 159,750

78,554 186,452

84,838 218,632

Deposits for foreign currencies Bank deposits, balances and C ash Total current assets Total Assets

0 33 217 514

0 131 393 737

0 134 455 929

0 161 491 1079

0 226 530 1259

0 231 573 1476

34,296 18,879 53,176 23,103

52,523 21,571 74,094 31,928

64,949 35,181 88,434 34,186

70,145 49,605 103,259 42,588

75,756 69,943

81,817 98,620

122,447 51,746

147,651 61,728

C urrent Liabilities (Due within one yr) Liabilities (Due after more than one yr) Total Liabilities Shareholder's Funds

232 127 359 156

355 146 500 216

439 238 597 231

474 335 697 288

512 472 827 349

552 666 997 417

5,247

2007

2008

2009

2010F

2011F

2012F

2007

2008

2009

2010F

2011F

2012F

22% 65% 55% 60%

21% -21% 1% -15%

70% 75% -44% -39%

8% 31% 119% 116%

7% 7% 9% 9%

2007

2008

2009

2010F

2011F

2012F

38% 12% 25% 34% 31%

23% 7% 18% 25% 17%

12% 3% 9% 36% 9%

22% 6% 16% 36% 18%

35% 5% 27% 31% 28%

32% 5% 27% 26% 26%

MARGINS

2007

2008

2009

2010F

2011F

2012F

EBIT/Sales Pretax Income/Sales Net Profit Margin

14.0% 9.3% 7.1%

10.1% 7.7% 5.0%

10.1% 3.0% 2.2%

15.4% 6.2% 4.3%

11.4% 6.3% 4.4%

14.0% 6.4% 4.5%

Return on Equity Return on Assets Return on Net fixed assets Return on Invested C apital Growth rate (g)

186

2010F 2011F 2012F

38,603 415 663 902 10,295

GROWTH RATES

PROFITABILITY

Turnover C ost of Sales Gross Profit Other income

2010F 2011F 2012F

34,003 499 257 478 8,766

RATIOS

Turnover growth Growth in EBITDA Growth in PBT Growth in PAT

COMMON SIZE INCOME ST ($Mill) Incom e

â&#x20AC;&#x2DC;Ahead of the Curveâ&#x20AC;&#x2122;

SOLVENCY

2007

2008

2009

Debt-to-equity Debt-to-capital Debt-to-assets Financial leverage Interest coverage

56.9% 36.3% 17.3% 1.41 6.70

44.8% 30.9% 13.1% 1.64 4.23

45.5% 31.3% 11.3% 1.90 4.41

PER SHARE DATA

2007

2008

2009

EPS DPS NAPS Sales/Share Shares Outstanding (millions)

4.81 0.90 14.88 68.04 1,553

4.10 1.00 20.56 82.20 1,553

2.28 0.50 20.01 105.40 1,708

2010F 2011F 2012F 38.5% 27.8% 6.9% 3.21 2.23

31.2% 23.8% 9.1% 2.16 2.18

42.4% 29.8% 13.5% 1.51 5.84

2010F 2011F 2012F 4.92 0.98 24.93 113.31 1,708

5.36 1.18 30.29 121.24 1,708

5.84 1.11 36.13 129.73 1,708

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

National Salt Company of Nigeria Plc - Company Overview BASIC INFORMATION Address

Salt City, Ijoko, Otta P.O. Box 39 Ogun State

Website Management

n/a M.S. Ladan Baki (Managing Director)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: NASCON:NL

Sector

Food/Beverages and Tobacco

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Dangote Industries Limited

62.19

Others

37.81

Free Float (%)

37.81

National Salt Company Nigeria Plc (NASCON) commenced business in 1973 as a Federal Government of Nigeria (FGN) owned Company, in partnership with an Australian Company. It became a public Company and was subsequently listed on the Nigerian Stock Exchange in 1991, following a divestment by the FGN. The Company is involved in refining and packaging of table, industrial and agricultural salts. The business proved unprofitable, recording losses year after year for a period of about 12 years. However, after a cycle of consistent losses, a reverse acquisition (2.1 billion shares at N5.00 per share) by Dangote Salt Limited (a member of Dangote Industries Limited ‘DIL’) commenced in 2006/7, and subsequently a return of the Company into profitability. In 2007, having come under new management and with the onset of profitability, the Company embarked on a special sale in which the major stakeholder (DIL) sold about 400 million shares (c.25% of its holdings) to the public.

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

2,649,438,378

Key Review Highlights

Presently, NASCON is the largest indigenous producer of high density edible salt, chemical salt and animal feed salts in Nigeria. It has a 60% market share, followed by other fringe players like Union Dicon Salt and Royal Salt. Edible/industrial salt (iodized and fortified with vitamins) has the largest percentage contribution to the Company’s turnover, followed closely by raw salt and tomato paste.

NASCON has an existing management and technical service agreement entered into in January 2007 with DIL for which it pays 2% of net revenue from sales for each month to DIL.

In 2009, the Company posted a remarkable performance, on the back of its aggressive market penetration (volume growth) strategy and stringent cost management measures employed.

The Company currently has a NAPS of N1.65, which gives us a Price to Book ratio of 2.64x (Sector Average – 1.91x). Our Fair Value price range for the Company is between N6.59 - N7.56 and we are ‘Neutral’ at current market price.

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

11,525

$ 'Mn

Units

1,171,320.13

D IV ID E N D S A N D B O N US IS S UE S T ype

Year

Final

FY'08

N0.40

B o nus Issue

FY'08

1fo r 5

Final

FY'07

N0.40

Final

FY'06

Forecast Summary Earnings Per Share (N) YoY Change (%)

FY'06A

FY'07A

FY'08A

FY'09F

-0.19

0.57

0.49

0.67

FY'10F FY'11F 0.61

0.66

n/a

-406%

-14%

37%

-9%

6.47

Price to Earnings (x)

n/a

7.62

8.88

7.10

6.58

Dividend Per Share (N)

n/a n/a

0.40 n/a

0.40 0.00%

0.47 0.40 17.74% -15.48%

0.43 8.00%

Dividend Yield (%) n/a 9.20% Net Assets Per Share (N) -4.05 1.57 YoY Change (%) -22.52% -138.82% Price to Book (x) -1.07 2.77

9.20%

10.83%

9.88%

1.65 4.91% 2.64

2.13 29.17% 2.04

YoY Change (%)

9.15%

2.10 2.05 -1.60% -2.11% 2.07 2.12

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

187

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Neutral recommendation is based on the company’s performance in Q3’09 and our optimistic outlook on the stock.

The company maintained improved profitability…

The company leveraged economies of scale…

In spite of the operational challenges that pervaded the real sector in 2008/9 financial year (i.e. increases in prices of raw material, rising cost of funds and the depreciation of the naira) which took its toll on most of the companies within the industry, the Company’s ability to maintain and improve its earnings is quite laudable.

In addition, the Company was able to leverage on its economies of scale, being the largest player in the industry (by capacity and volume produced), thereby giving it a competitive advantage against other players in the same sub sector.

The Company is a major importer of its inputs which makes it quite vulnerable to external shocks. However, its performance shows is ability to hedge against the attendant risks in the real sector, which is further supported by the significant increase in profitability margins in the year.

The Company is located at Ijoko in Ogun State, and it sources its raw materials (imported crude salt) at the Apapa Port in Lagos, thus necessitating the transportation of crude salt over several kilometres to its production site.

In Nascon’s most recent result, Q3’09 for the period ended September 2009/10, which showed growth in Turnover and Earnings of 14.07% (N6.50 billion) and 26.23% (N1.36 billion) respectively.

The Company’s profitability margins improved to 30.81% (PBT) and 20.94% (PAT), from 23.64% and 18.92% respectively as at Q3’08. Quarter on Quarter, profitability margins increased from 26.31% (PBT) and 17.84% (PAT) respectively.

and

its

A major importer of inputs making it vulnerable to external shocks...

Nascon state...

located

Ijoko,

Ogun

Q3’09 showed growth of 14.04% and 26.23% …

Profitability margins improved...

PROFITABILITY RATIOS

Peer Metrics

(Percent) 60%

RoA

Operating RoA

RoE

50%

40%

Nascon

DSR

NBC

FMN

Nestle

Current Price (N)

4.35

15.10

21.42

36.00

239.50

Trailing EPS (N)

0.60

1.27

1.02

3.68

15.23

P/E (x)

7.25

11.89

21.00

9.78

15.73

DPS (N)

0.40

1.20

n/a

0.50

12.55

9.20%

7.95%

n/a

1.39%

5.24%

n/a 21.95%

99.49%

30%

Dividend Yield 20%

Payout Ratio

81.67% 65.84%

10%

ROE (Average)

35.26% 80.91% 0.07% 11.77% 109.15%

ROA (Average)

19.12% 40.39% 0.03%

0% 2007

2008 Source: Company Financials

Outstanding Shares(mn)

2,649

12,000

1,309

3.16% 1,708

33.05% 661

Source: Company Financials; Vetiva Research

188

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

Since the re-emergence of NASCON, the Company has shown immense growth and stability, especially in terms of market share, we expect this to continue going forward. We are of the opinion that the Company has implemented varying strategies that have ensured growth, despite the influx of imported and substandard salt within the country.

Premised mainly on the supply-demand deficit within the country, we expect NASCON to gradually gain dominance in Nigeria and neighbouring markets. We believe immense potential exists in this sector, especially as Government’s efforts are directed towards promoting the development of indigenous companies. Also, the company’s ability to remain stable in a period of volatile interest and exchange rates is commendable, and further reinforces its resilience. We are optimistic about the performance of NASCON going forward and believe the Company will continue as a steady performer in the near to medium term.

We expect FY’09 Turnover and After Tax Profits of N9.07 billion and N1.78 billion respectively, which translates to a Forward EPS of N0.67 and DPS of N0.47.

NASCON SHARE PRICE Vs. VOLUME TRADED 7

52 week high:N6.49 52 week low:N2.82 Average Price:N4.27 Avg Vol Traded (‘000): 1,171 Beta:1.06

Share Price (Naira)

6 5 4 3 2 20000

Volume Traded (‘000)

15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

189

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mn)

2007

2008

2009F

2010F

2011F

Incom e

INCOME STATEMENT ($'Mn)

2007

2008

2009F

2010F

2011F

42.22

53.26

61.25

71.05

82.42

(26)

(37)

(34)

(37)

(41)

16.39

16.55

27.25

34.22

41.06

Incom e

Turnover C ost of Sales Gross Profit Distribution & Administrative Expense Management Fees C ore operating profit

6,253

7,888

9,071

10,523

12,206

Turnover

(3,825)

(5,438)

(5,035)

(5,454)

(6,125)

C ost of Sales

2,428

2,450

4,036

5,068

6,081

(692) -

EBIT

(64)

(70)

(233)

(238)

1,736

1,611

3,739

4,760

5,772

295

Other income Depreciation & Amortisation

(840)

1,905

3,772

4,790

5,803

Interest Expense & Similar charges

Distribution & Administrative Expenses Management Fees C ore operating profit Other income

(5)

(6)

(0)

0.00

-1.57

-1.61

11.72

10.87

25.24

32.14

38.98

0.15

1.99

0.22

0.20

0.21

11.88

12.86

25.47

32.34

39.18

Depreciation & Amortisation

1,759

Exceptional Items

Gross Profit

(0)

Profit from operations

1,752

1,897

3,762

4,775

5,789

Profit from operations

11.83

12.81

25.40

32.24

39.09

Profit before taxation

1,752

1,897

2,547

2,254

2,434

Profit before taxation

11.83

12.81

17.19

15.22

16.43

(3)

(4)

(5)

(4)

(5)

8.51

8.76

12.04

10.96

11.83

Earnings after Extraordinary Items

8.51

Dividends

5.96

7.16

8.43

7.12

7.69

NOPAT

8.55

Taxation

(6)

EBIT Exceptional Items

(492)

Profit After Taxation

(8)

(599)

1,260

1,298

1,260

883

1,060

(10)

(764) 1,783

(15)

(631) 1,623

(14)

(681) 1,752

Extraordinary Items Earnings after Extraordinary Items Dividends

Taxation Profit After Taxation Extraordinary Items

1,248

1,055

1,139

NOPAT

1,266

Retained Earnings

2,143

2,357

3,030

2,677

2,892

BALANCE SHEET (N'Mn)

2,804

2007

2008

2009F

2010F

2011F

Assets Employed Fixed Assets

Interest Expense & Similar charges

Retained Earnings

BALANCE SHEET ($'Mn)

18.93

14.47

15.92

20.46

18.08

19.52

2007

2008

2009F

2010F

2011F

9.56

13.08

13.35

13.61

10.97

Assets Employed 1,417

1,938

1,977

2,016

1,625

1,888

1,622

1,179

1,368

1,587

short term investment

12.75

10.95

7.96

9.24

10.71

473

728

1,258

1,421

Stocks

3.20

4.92

8.49

9.59

1,192

1,221

1,541

1,402

Trade Debtors

8.05

8.24

10.41

9.47

395

109

905

921

Debtors & Prepayments

2.67

0.74

6.11

6.22

430

541

684

Amount Due Holding company

0.00

2.90

3.65

4.62

C ash and bank balances

4.89

0.28

4.19

3.04

9.42

47.93

49.37

50.85

C urrent Assets

Fixed Assets

C urrent Assets

short term investment Stocks Trade Debtors Debtors & Prepayments Amount Due Holding company C ash and bank balances

724

Total C urrent Assets

620

450

1,395

7,099

7,312

7,531

Total C urrent Assets Total Assets

41.11

50.53

61.28

62.98

64.74

C reditors Due within one year

15.55

21.05

23.15

25.47

28.01

8.94

1.01

Total Assets

6,088

7,484

9,075

9,328

9,588

C reditors Due within one year

2,303

3,117

3,429

3,772

4,149

C apital and Reserves Share capital

C apital and Reserves 1,104

1,325

Share premium

434

C apital Reserves

149

Debenture Loan

1,325

149

1,325 149

1,325

149

Revenue Reserve

1,746

1,941

4,971

7,648

10,540

Shareholders' Equity

3,472

3,888

6,445

9,123

12,014

RATIOS

2007

2008

2009F

2010F

2011F

GROWTH RATES

Share capital

7.45

8.94

Share premium

2.93

C apital Reserves

1.01

Revenue Reserve

0.26

11.79

13.10

33.57

51.64

71.17

Shareholders' Equity

MARGINS

2007

2008

2009F

2010F

2011F

EBIT/Sales

28%

24%

42%

46%

48%

Pretax Income/Sales

28%

24%

23%

21%

20%

Net Profit Margin

20%

16%

20%

15%

14%

2011F

2007

2008

2009F

2010F

2011F

46433%

26%

15%

16%

Growth in C ore Operating profit

321%

-7%

132%

27%

21%

Growth in EBITDA

349%

98%

27%

21%

ASSET UTILIZATION

2007

2008

2009F

2010F

Growth in PBT

-11837%

10%

Sales to cash (x)

17.25

7.45

9.00

19.67

Growth in PAT

-8539%

37%

-9%

Sales to inventory (x)

26.04

13.13

9.14

7.86

8.59

Sales to total assets (x)

0.00

0.92

0.95

0.99

1.11

Fixed Assets (%)

0.23

0.25

0.22

0.19

0.13

Turnover growth

PROFITABILITY Return on Equity Return on Assets

2007

2008

2009F

2010F

2011F

36%

35%

21%

17%

21%

19%

22%

18%

19%

171%

77%

91%

81%

96%

Return on Invested C apital

25%

41%

55%

68%

Growth rate (g)

11%

10%

Return on Net fixed assets

190

‘Ahead of the Curve’

27.12

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Nestle Nigeria Plc - Company Overview BASIC INFORMATION Address

22/24 Industrial Avenue, Ilupeju, Lagos

Website

www.oandoplc.com

Management

O Osunkeye( Chairman) K P Wachsmuth ( MD/CEO)

Fiscal Year End

31st December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: NESTLE:NL

Sector

Food/Beverages/Tobacco

Country

Nigeria

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

Nestlé Nigeria Plc is part of the world renowned Nestle Group known for trustworthy nutrition, health and wellness products. Nestle Nigeria Plc began operations in Nigeria in 1961 and is presently a leading food manufacturing and marketing company. Nestle Nigeria Plc was listed on the Nigerian Stock Exchange on April 20, 1979. Nestle S.A of Switzerland and Nestle CWA Limited of Ghana are the major shareholders of the company. The strategic priorities of the company are focused on delivering shareholder value through the achievement of sustainable efficiency and profitable long term growth.

% Ownership

Nestle CWA Limited, Ghana

59.13

Others

40.87

Free Float (%)

40.87

Nestlé manufactures an array of quality brands namely: Nutrend, Cerelac, Golden Morn, Milo, Maggi Cube, Nestlé Pure Life; markets coffee Nescafe Classic, Nescafe 3-in-1 and dairy product Nido e.t.c. The Company has a policy of long term sustainable business practices, as over 75% of its raw materials are sourced locally through farmers and suppliers.

Nestle has in recent years, been a clear market leader enjoying a near-monopoly market, given the troubled state of its major listed competitor (Cadbury). However, we acknowledge renewed competition from Cadbury, as it seems to be staging a comeback and from FrieslandCampina Wamco Nigeria Plc, an unquoted dairy company.

During the 2008 financial year, the Company secured two intercompany loan facilities of US$54 million and US$40 million from the Nestle Treasury Center, Middle East & Africa Limited. Both loans have tenures of 7 years each, commencing from March and December 2008 respectively. Considering these exposures, the Company is exposed to interest and exchange rate risks, though this is currently mitigated by a 2-year moratorium on the loans which expire in 2010.

The Company has a NAPS of N13.67, which gives us a Price to Book ratio of 17.52x (Sector Average – 1.91x). Our Fair Value price range for the Company is between N222.32 - N241.12 and we are ‘Neutral’ at current market price.

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

660,546,875

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

158,201

$ 'Mn

1,068

Units

179,663

DIVIDENDS AND BONUS ISSUES Type Final Final Scrip Issue Final

Year FY'08 FY'07 FY'07 FY'06

N12.55 N8.99 1 for 4 N10.00

Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'06A

FY'07A FY'08A FY'09F FY'10F

10.71 8.24 12.61 16% -23% 53% 22.36 29.07 18.99 10.00 8.99 12.55 -10.10% 39.60% 4.18% 3.75% 5.24% 12.04 9.44 13.67 66.91% -21.55% 44.80% 19.90 25.37 17.52 Source: Company

FY'11F

13.27 14.62 16.96 5% 10% 16% 18.05 16.38 14.12 12.61 14.04 15.78 0.45% 11.36% 12.38% 5.26% 5.86% 6.59% 14.90 16.24 17.71 9.00% 9.00% 9.00% 16.07 14.74 13.53 Financials; Vetiva Research

‘Ahead of the Curve’

191

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Neutral recommendation is based on the company’s outstanding performance in Q3’09 and our outlook on the stock. The company maintained improved profitability…

The company leveraged economies of scale…

and

In 2009, management disclosed that Nestle was in the process of constructing a new production plant in Sagamu, Ogun State, which we believe is one of the reasons for securing the new loans.

The Company’s performance improved in 2009, largely on account of the rapid growth of more profitable product categories and markets, operational efficiencies, and the benefits of rationalizing underperforming product lines.

Although we are currently Neutral on the stock because of its high trading price, we recommend an “Accumulate” in the medium to long term. This is based on the Company’s proven business model, its resilience, and display of thorough understanding of its operating markets.

In the course of the year, the Company launched Maggi Mix’py, a new addition to its product base, further reinforcing the Company’s commitment to expanding its portfolio range and thus increasing its market share.

Nestle’s most recent result (Q3’09 ended September 2009/10) showed growth in Turnover and Earnings of 32.23% (N49.89 billion) and 31.45% (N7.22 billion) respectively.

However, the Company’s profitability margins declined to 20.12% (PBT) and 14.47% (PAT), from 21.46% and 14.56% % respectively as at Q3’08. QoQ, profitability margins increased from 19.98% (PBT) and 13.25% (PAT) respectively.

its

A major importer of inputs making it vulnerable to external shocks...

Nascon state...

located

Ijoko,

Ogun

Q3’09 showed growth of 14.04% and 26.23% …

Profitability margins improved...

PROFITABILITY RATIOS

Peer Metrics

(Percent) 160%

RoA

Operating RoA

RoE

Current Price (N)

Nestle

DSR

NBC

Nascon

FMN

239.50

15.10

15.23

1.27

21.42

4.35

36.00

1.02

0.60

3.68

140%

Trailing EPS (N)

120%

P/E (x)

15.73

11.89

21.00

7.25

9.78

100%

DPS (N)

12.55

1.20

n/a

0.40

0.50

80%

Dividend Yield

60%

Payout Ratio

40% 20%

7.95%

n/a

9.20%

1.39%

65.84%

n/a

81.67%

21.95%

ROE (Average)

109.15%

75.67%

0.07%

35.26%

11.77%

ROA (Average)

33.05%

40.39%

0.03%

19.12%

3.16%

12,000

1,309

2,649

1,708

Outstanding Shares(mn)

0% 2006

2007

2008 Source: Company Financials

192

5.24% 99.49%

‘Ahead of the Curve’

661

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

Our prognosis is that Nestle will sustain growth of its top and bottom line figures, based on plans to increase production capacity, its strong brand presence and market dominance, especially in light of its biggest competitor’s (Cadbury) continued struggle with operational restructuring challenges. We note however, that Cadbury’s seems to be staging a comeback, following a board restructuring in 2009 and liquidity boost provided by its rights issue during the year.

However, we believe Nestle will need to actively institute strategies to match competition, as well as rein in costs, in order to significantly improve its thinning profitability margins, in light of increased competition. However, we are still confident in the prospects of the Company; we believe that competition is strongest in its beverage business segment, a challenge which can be addressed through the right strategies.

We expect FY’09 Turnover and After Tax Profits of N62.61 billion and N13.27 billion respectively, which translates to a Forward EPS of N0.67 and Total Dividend Per Share of N12.61.

NESTLE SHARE PRICE Vs. VOLUME TRADED 500

52 week high:N247.72 52 week low:N104.50 Average Price:N180.53 Avg Vol Traded (‘000): 179.66 Beta: 0.62

Share Price (Naira)

400 300 200 100 3500 3000

Volume Traded (‘000)

2500 2000 1500 1000 500 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

193

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mn)

2006

2007

2008

2009F

2010F

2011F

Incom e

INCOME STATEMENT ($'Mn)

2006

2007

2008

259

297

349

2009F 423

2010F 490

2011F 569

(160)

(188)

(211)

(275)

(319)

(370) 199

Incom e

Turnover Cost of Sales

38,423

44,027

51,742

62,608

72,625

84,246

(23,717)

(27,805)

(31,301)

(40,695)

(47,207)

(54,760)

Turnover Cost of Sales

Gross Profit

14,705

16,222

20,442

21,913

25,419

29,486

Gross Profit

110

138

148

172

Distribution & Administrative Expenses

(4,637)

(7,826)

(6,059)

(6,887)

(7,989)

(9,267)

Distribution & Administrative Expenses

(31)

(53)

(41)

(47)

(54)

(63)

Management Fees

(2,247)

(2,479)

(2,500)

Management Fees

(15)

(17)

Core operating profit

7,821

8,396

11,904

12,526

14,930

17,719

Core operating profit

101

120

EBIT

8013.0

8395.6

11903.6

12,526

14,930

17,719

EBIT

101

120

Depreciation & Amortisation Interest Income Profit from operations Profit before taxation Taxation PAT Dividends Retained Earnings

Depreciation & Amortisation 185.3

67.6

1,131

1,712

8197.9

8463.3

11862.2

12,522

13,799

16,007

Profit from operations

Interest Income

8,198

8,463

11,862

12,522

13,799

16,007

Profit before taxation

(2,538)

(3,021)

(3,531)

(3,756)

(4,140)

(4,802)

Taxation

5,660

5,442

8,332

8,765

9,659

11,205

PAT

(5,284)

(5,416)

(8,289)

(8,327)

(9,273)

(10,420)

376

BALANCE SHEET (N'Mn)

2006

2007

2008

438

2009F

386

2010F

784

2011F

Assets Employed

Dividends Retained Earnings

BALANCE SHEET ($'Mn)

108 108

(17)

(20)

(24)

(25)

(28)

(36)

(37)

(56)

(63)

(70)

(32)

2006

2007

2008

2009F

2010F

2011F

120

156

203

Assets Employed

Fixed Assets

7,336

10,436

13,817

17824

23172

30123

Current Assets

Fixed Assets Current Assets

Stocks

5,705

5,226

6,415

7,249

8,119

9,093

Stocks

Debtors & Prepayments

1,523

2,299

4,304

5,251

6,406

7,815

Debtors & Prepayments

53 2

Amount Due from related companies Foreign currencies purchased for imports Cash and bank balances Short Term Deposits Total Assets Due w ithin one year

284

123

298

129

313

Amount Due from related companies

198

672

856

786

1,002

920

Foreign currencies purchased for imports

2,226

2,336

3,643

2,920

4,554

3,650

18,908

21,252

29,159

35,160

42,588

51,869

Total Assets

128

143

197

237

288

350

7,325

8,237

11,094

13,423

16,242

19,653

Due w ithin one year

110

133

Due After one year

Net Assets

Share capital

Share premium

Revaluation Reserves

1,900

Short Term Deposits

Due After one year

5,223

6,779

9,035

3,164

3,789

4,507

Net Assets

6,360

6,237

9,030

11,327

9,864

10,648

Capital and Reserves Share capital Share premium Revaluation Reserves

Cash and bank balances

Capital and Reserves 264

330

189

186

195

Retained Earnings

5,875

5,687

8,482

8,920

9,307

10,091

Retained Earnings

Shareholders' Equity

6,360

6,237

9,030

11,327

9,864

10,648

Shareholders' Equity

MARGINS

2006

2007

2008

2009F

2010F

2011F

EBIT/Sales

-2914%

28%

24%

42%

46%

48%

Pretax Income/Sales

-111%

28%

24%

23%

21%

20%

Net Profit Margin

-111%

20%

16%

20%

15%

14%

2011F

RATIOS

2006

GROWTH RATES

2006

Turnover grow th

12%

2007 2007 15%

2008 2008 18%

2009F 2009F

2010F 2010F

2011F 2011F

21%

16%

Grow th in Core Operating profit

42%

ASSET UTILIZATION

2006

2007

2008

2009F

2010F

Grow th in PBT

40%

10%

16%

Sales to cash (x)

21.94

17.25

7.45

9.00

19.67

27.12

Grow th in PAT

-4%

53%

10%

16%

Sales to inventory (x)

3.93

26.04

13.13

9.14

7.86

8.59

Sales to total assets (x)

0.14

0.00

0.92

0.95

0.99

1.11

Fixed Assets (%)

4.44

0.23

0.25

0.22

0.19

0.13

PROFITABILITY

2006

2007

2008

2009F

Return on Equity

140%

2010F

2011F

86%

109%

86%

91%

109%

Return on Assets

32%

27%

33%

27%

25%

24%

Return on Invested Capital

36%

30%

35%

28%

29%

27%

Grow th rate (g) MARGINS

2006

2007

2008

2009F

2010F

2011F

EBIT/Sales

21%

19%

23%

20%

21%

Gross Profit Margin

38%

37%

40%

35%

Pretax Income/Sales

21%

19%

23%

20%

19%

Net Profit Margin

15%

12%

16%

14%

13%

194

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Seven Up Bottling Company Plc - Company Overview BASIC INFORMATION Address

247 Moshood Abiola Way Ijora, Lagos, Nigeria

Website

www.sevenup.org

Management

Fayasal El-Khalil (Chairman) Malcom Jay Gibssons (MD/CEO)

Fiscal Year End

MARCH

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: 7UP:NL

Sector

FOOD/BEVERAGES

Country

Nigeria

Seven-Up Bottling Company was incorporated as a Private Limited Liability Company on the 25th June, 1959 under the name 7-Up Limited. On 16th May 1960, the name was changed to Seven-Up Bottling Company Limited and in 1978 it became a Public Company. The Seven-Up Bottling Company Plc is one of the largest independent manufacturer and distributor of the well-known and widely consumed brands of soft drinks in Nigeria. In the early 1990’s Pepsi International took over 7-Up International, as a result the company was able to introduce and add the Pepsi brand to Nigeria. The company has its Headquarters in Beirut and operational bases in three African countries; Nigeria, Tanzania and Ghana.

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

In 2009, Seven-Up showed some susceptibility to the challenges prevalent in the real sector at that time, which had a thereby, negative impact on its profitability profile in Q1’09.

Furthermore, the company was faced with increased raw material/input costs, such as (sugar, corks and caps), but was unable to successfully transfer the full incidence to its consumers.

In a bid to shore up market share, Seven-Up introduced its own premium bottled drinking water brand, “Aquafina”, during the course of the year. This was met with positive consumer reaction, given the fast growing demand for bottled water as a result of scarcity of potable drinking water.

As at H2’09, the Company’s performance had improved notably; despite the challenges faced, profitability increased marginally. SevenUp surpassed our forecast, premised mainly on its highly leveraged position and the adverse macro-economic conditions.

The stock price of Seven-Up is N29.40, and trades at a NAPS of N15.58, giving a Price to Book ratio of 1.89x (Sector Average – 1.91x). Our Fair Value price range for Seven-Up is between N31.87 N38.18 and we are ‘Neutral’ at current price.

% Ownership

Affelka

72.24

Others

27.76

FREE FLOAT

27.76

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

512,472,290

SIZE AND VALUE TRADED

Market Capitalization

N 'Mn $ 'Mn

Average Volume Traded ('09)

Units

1,507 10 62,631

DIVIDENDS AND BONUS ISSUES

Type

Year

Final

FY'08

N1.50

Final Scrip Issue Final

FY'07 FY'07 FY'06

N1.30 N1.25

Forecast Summary

FY'07A

FY'08A

FY'09A

FY'10F

FY'11F FY'12F

Earnings Per Share (N)

2.38

3.14

2.98

3.40

4.01

4.74

YoY Change (%)

16%

32%

-5%

14%

18%

12.36

9.37

9.85

8.64

7.33

6.21

1.30

1.50

1.56

1.44

1.70

4.00% 15.39%

0.00%

4.29%

4.42% 5.10% 5.10% 12.26 14.09 15.58 -0.78% 14.99% 10.53%

5.32% 16.56 6.31%

Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

2.40

-7.65% 18.00% 4.91% 17.55 5.99%

5.80% 18.54 5.61%

2.09 1.89 1.78 1.68 1.59 Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

195

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Neutral recommendation is based on its fair performance and our cautiously positive outlook on the stock.

The Company has the highest Debt to Equity Ratio of 0.94x and lowest Interest Coverage Ratio of 2.16x in its Sector, further indicating high proximity to its debt threshold as at FY’08. Thus, it has been grappling with increased interest expenses following the spike in interest rates, increased input costs and unfavourable exchange rate movements (this affected its foreign currency denominated loans). According to Management, these loans are now Naira-denominated.

Although Seven-Up endeavoured to increase its market share, the Company has lagged its peers in advertisement and investments in distribution.

The Company has been faced with increased input cost, a result of higher currency exchange rates. This is further exacerbated by the spike in sugar prices in the international market, coming on the heels of the loss of arable lands in Brazil and India (the two largest producers of sugar) due to floods and mudslides.

In our opinion, the Company’s strategy to segment its various products, such that availability differs across states, may not be most optimal in terms of increasing market share.

Its most recent results (Q2’09 ended September 2009), shows YoY Turnover growth of 17.35%, while Profit After Tax (PAT) increased by a marginal 6.63% YoY to N854 million.

The Company’s profitability margins declined marginally to 5.62% (PBT) and 4.78% (PAT), down from 6.44% and 5.26% respectively as at FY’08/9.

Highest Debt to Equity and lowest Interest Coverage ratio in the sector…

Seven-Up remains a laggard relative to peers…

Increased input cost resulting from exchange rates volatility...

Market segmentation strategy not the most optimal option...

Q2’09 PAT stands at N854 million…

Peer Metrics

PROFITABILITY RATIOS (Percent) 25% ROAA

Operating ROA

Current Price (N)

ROAE

20%

15%

0% 2007

2008

2009 Source: Company Financials

DSR

NBC

FMN

Nestle

29.40

15.10

21.42

36.00

239.50

Trailing EPS (N)

3.09

1.27

1.02

3.68

15.23

P/E (x)

9.51

11.89

21.00

9.78

15.73

DPS (N)

1.50

1.20

n/a

0.50

12.55

5.10%

7.95%

n/a

1.39%

5.24%

n/a

21.95%

99.49%

Dividend Yield

10%

7-Up

Payout Ratio

50.27%

65.84%

ROE (Average)

19.48%

80.91%

ROA (Average)

5.71%

40.39%

0.03%

3.88%

512

12,000

1,309

1,708

Outstanding Shares(mn)

0.07% 13.19% 109.15% 33.05% 661

Source: Company Financials; Vetiva Research

196

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

We have expressed our concerns about Seven-Up’s less than optimal distribution system, its high debt profile and increased input costs. These factors may negatively impact the company’s performance in 2010, especially if specific strategies to tackle these challenges are not employed.

The carbonated/packaged drinks subsector is characterized by intense competition, aggressive advertisement and huge investment in distribution networks. However, as Seven-Up remains a laggard in this regard, the Company’s ability to increase market penetration is limited. With its peers being more aggressive in this regard, this may imply an incursion into Seven-Up’s existing market share, if it does not improve on its current strategies.

Consequently, we expect FY’10 Turnover and After Tax Profits of N37.65 billion and N1.74 billion respectively, which translates to a Forward EPS of N3.40 and DPS of N1.56.

7UP SHARE PRICE Vs. VOLUME TRADED 100

52 week high:N40.97 52 week low:N27 Average Price:N34.50 Avg Vol Traded (‘000): 62 Beta:0.52

Share Price (Naira)

80 60 40 20 0 10000 Volume Traded (‘00) 8000 6000 4000 2000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

197

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mill)

2007

2008

2009

2010F

2011F

2012F

Income

INCOME STATEMENT ($'Mill)

2007

2008

2009

2010F

2011F

2012F

Income

Turnover

27,309

30,572

34,864

(16,293)

(18,059)

(20,632)

Gross Profit

11,016

12,513

Distribution & Administrative Exp

(8,359)

(9,247)

2,656

3,267

4,111

4,432

5,085

5,821

2,675

3,283

C ost of Sales

C ore operating profit Other income

EBIT Interest Expense & Similar charg

(714)

(803)

14,232 (10,121)

37,653

41,418

14,958

16,454

4,138

4,471

5,114

5,851

(1,915)

(1,981)

(2,175)

(2,384)

1,961

2,481

2,223

2,490

2,939

Profit before taxation

1,961

2,481

2,223

2,490

2,938

(741)

PAT

1,219

Dividends Retained Earnings

BALANCE SHEET (N'Mn)

(872) 1,609

(666)

(769)

553

839

2007

2008

18,099

(10,526) (11,368) (12,278)

Profit from operations

Taxation

45,560

(22,695) (24,965) (27,461)

(694) 1,529 769 2,298

2009

(747) 1,743 (802) 941

2010F

(881) 2,057 (740)

C ost of Sales Gross Profit Distribution & Administrative Ex C ore operating profit

184

206

235

254

280

308

(110)

(122)

(139)

(153)

(169)

(185)

101

111

122

(56)

(62)

(68)

(71)

(77)

(83)

Other income

EBIT

Interest Expense & Similar cha

(5)

3,467

Profit from operations

3,467

Profit before taxation Taxation

(1,040) 2,427 (874)

(13)

(15)

(16)

(5)

(6)

(5)

(6)

(7)

(5)

PAT

Dividends

1,316

1,553

Retained Earnings

2011F

2012F

BALANCE SHEET ($'Mn)

Assets Employed Fixed Assets

Turnover

(4)

(5)

2007

2008

5 16

2009

2010F

2011F

(6) 10

2012F

Assets Employed 11,240

14,240

18,592

20,637

22,907

25,427

Stocks

4,211

4,091

4,996

5,596

5,931

6,287

Stocks

Debtors & Prepayments

2,936

4,385

7,023

5,262

6,051

6,959

Debtors & Prepayments

C ash and bank balances

3,260

1,264

1,267

1,264

1,267

1,270

C ash and bank balances

Total

10,407

9,740

13,286

15,943

19,131

22,958

Total

Total Assets

21,647

23,980

31,878

36,580

42,039

48,385

Total Assets

C urrent Assets

Fixed Assets

126

139

155

172

108

129

155

146

162

215

247

284

327

C urrent Assets

Due within one year

7,824

6,752

11,618

13,360

15,364

17,669

Due within one year

104

119

Due After one year

7,543

10,007

12,278

14,734

17,681

21,217

Due After one year

119

143

Net Assets

6,280

7,223

7,984

8,747

9,255

9,760

Net Assets

Share capital

256

Share premium

299

C apital and Reserves

Revaluation Reserves

C apital and Reserves Share capital Share premium

2 -

304

Revenue Reserve

5,720

6,663

7,424

8,224

9,044

9,844

Revenue Reserve

Shareholder's Fund

6,280

7,223

7,984

8,486

8,994

9,499

Shareholder's Fund

2010F

2011F

2012F

RATIOS

2007

GROWTH RATES

Turnover growth Growth in C ore Operating profit

2007

2008

2009

2010F

2011F

2012F

2008

2009

2010F

2011F

2012F

0.71

0.81

1.11

0.53

0.35

0.22

Debt-to-capital

0.42

0.45

0.48

0.35

0.26

0.18

Debt-to-assets

0.21

0.24

0.23

0.14

0.10

0.06

12%

14%

10%

Financial leverage

3.42

3.38

3.67

3.88

3.76

3.56

23%

26%

15%

14%

Interest coverage

3.74

4.09

2.16

2.26

2.35

2.45

2012F

15%

26%

-10%

12%

18%

32%

-5%

14%

18%

PROFITABILITY

2007

2008

2009

2010F

2011F

2012F

Return on Equity

21%

24%

20%

19%

Return on Assets

13%

10%

13%

Return on Invested C apital

18%

12%

Growth rate (g)

10%

12%

10%

11%

13%

12%

MARGINS

2007

2008

2009

2010F

2011F

2012F

EBIT/Sales

10%

11%

12%

13%

Gross Profit Margin

40%

41%

40%

Pretax Income/Sales

Net Profit Margin

SOLVENCY

24%

Growth in PAT

198

2007

Debt-to-equity

-20%

Growth in PBT

Return on Net fixed assets

Revaluation Reserves

‘Ahead of the Curve’

PER SHARE DATA

2007

2008

2009

2010F

2011F

EPS

2.38

3.14

2.98

3.40

4.01

4.74

DPS

1.30

1.50

1.56

1.44

1.70

NAPS

12.26

14.09

15.58

16.56

17.55

18.54

Sales/Share

53.29

59.66

68.03

73.47

80.82

88.90

512

Shares Outstanding (millions)

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Nigerian Bottling Company Plc - Company Overview BASIC INFORMATION Address

3rd Floor, Iddo House Iddo, Ebute Metta, Lagos.

Website

www.nigerianbottlingcompanyplc.com

Management

O Apata( Chairman) R Ebelt ( MD)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: NBC:NL

Sector

Food/Beverages/Tobacco

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Molino Soft Drinks S.A.

55.81

CCBC Services Limited

10.62

Others

33.57

Free Float (%)

33.57

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

Nigerian Bottling Company Plc is the leader in the Nigerian bottling and packaged drinks industry. From a small family owned operation at inception, the Company has grown to become a dominant bottler of alcohol-free beverages in Nigeria, responsible for the manufacture and sale of a number of Coca-Cola brands. The Nigerian Bottling Company Plc (NBC) was incorporated in November 1951 as a subsidiary of the A.G. Leventis Group, with the franchise to bottle and sell Coca-Cola products in Nigeria. Production began in 1953 at a bottling facility in Ebute-Metta, Lagos; and over time, NBC has grown to be the largest bottler of nonalcoholic beverages in the country, with about 1.8 billion bottles sold per year. Over the years, production capacity has grown and it presently has over 13 bottling facilities and over 80 distribution warehouses located across the country.

Key Review Highlights

1,308,730,000

Nigerian Bottling Company Plc’s business is the production, bottling and distribution of ready-to-drink alcohol-free beverage in Nigeria; including the Coca-Cola brand, as the Company has the franchise for bottling Coca-Cola soft drinks in Nigeria. The Company was granted the Schweppes franchise by the Coca-Cola company in 2001.

NBC is a part of the Coca-Cola Hellenic Bottling company (CCHBC), one of the Coca-Cola Company’s largest anchor bottlers worldwide. CCHBC operates in 28 countries, serving 540 million consumers and selling over 1.3 billion unit cases of beverage annually.

NBC has a technical and management service agreement with CCBC Services Ltd., Dublin, and in this regard, pays 2% of its net sales.

The company is currently trading at a NAPS of N16.75 gives us a Price to Book ratio of 1.28x (Sector Average – 1.91x). Our Fair Value price range for the Company is between N21.47 - N23.50 and we are ‘Neutral’ at current market price.

SIZE AND VALUE TRADED Market Capitalization

N 'Mn $ 'Mn

Average Volume Traded ('09)

Units

28,033 189 152,738

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'08

Final Final

FY'07 FY'06

N0.75 -

Forecast Summary FY'06A FY'07A FY'08A FY'09F FY'10F FY'11F Earnings Per Share (N) 0.80 2.42 0.01 1.98 1.98 2.05 YoY Change (%) -55% 202% n/a n/a 0.24% 3.14% Price to Earnings (x) 26.66 8.84 n/a 10.82 10.79 10.47 Dividend Per Share (N) n/a 0.75 n/a 0.59 0.64 0.65 YoY Change (%) n/a n/a n/a n/a 6.92% 3.14% Dividend Yield (%) n/a 3.50% n/a 2.77% 2.96% 3.06% Net Assets Per Share (N) 15.35 17.46 16.75 18.25 19.90 21.69 YoY Change (%) 97.77% 13.76% -4.10% 9.00% 9.00% 9.00% Price to Book (x) 1.40 1.23 1.28 1.17 1.08 0.99 Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

199

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Neutral recommendation is based on the company’s performance in Q3’09 and our outlook on the stock. The company was negatively impacted in 2009 …

In 2009, the Company’s performance was negatively impacted by the fire incident in its Benin plant, which led to the outsourcing of production of its ‘Five Alive’ and ‘Eva’ brands. This coupled with the increased energy costs resulting from an epileptic supply of Gas, led to reliance on more expensive sources of energy.

Re-construction and the upgrade of its Benin plant has been completed…

According to the Company, as at Q3’09, the re-construction & upgrading of its equipment at the Benin plant had been completed, leading to a significant reduction in costs associated with the outsourcing.

Total claims in connection with the incident were N3.16 billion...

In our opinion, the weight of these additional costs was efficiently managed. The Company retained its market leadership and continued striving to grow its market share.

Furthermore, total claims in connection with the incident was N3.16 billion, out of which NBC has received payment of N2.00 billion, with the balance of N1.16 billion still outstanding.

NBC introduced new variants of “Five Alive’ …

During the year, NBC not only introduced new variants of ‘Five Alive’ into the market, it also improved the packaging of ‘Five Alive’ and ‘Coke’.

NBC’s most recent result (Q3’09 ended September 2009) showed growth in Turnover and Earnings of 14.64% (N64.74 billion) and 135.22% (N2.29 billion) respectively.

However, the Company’s profitability margins YoY declined to 4.25% (PBT) and 3.54% (PAT) from 2.36% and 1.72% % respectively as at Q3’08. Quarter on Quarter, PBT margin declined from 5.26%, while PAT margin increased from 3.48%.

The weight of additional costs was efficiently managed...

Q3’09 earnings stand at N2.29...

The company’s profitability margins decline to 4.25% and 3.45%…

PROFITABILITY RATIOS

Peer Metrics

(Percent) 40%

Current Price (N) RoA

Operating RoA

NBC

Nestle

Nascon

DSR

FMN

21.42

239.50

4.35

15.10

36.00

1.02

15.23

0.60

1.27

3.68

RoE

35%

Trailing EPS (N)

30%

P/E (x)

21.00

15.73

7.25

11.89

9.78

25%

DPS (N)

n/a

12.55

0.40

1.20

0.50

20%

Dividend Yield

n/a

5.24%

9.20%

7.95%

1.39%

15%

Payout Ratio

10%

ROE (Average)

ROA (Average)

0.03%

Outstanding Shares(mn)

1,309

2006

2007

2008 Source: Company Financials

200

‘Ahead of the Curve’

n/a

99.49% 81.67% 65.84% 21.95%

0.07% 109.15% 35.26% 80.91% 11.77% 33.05% 19.12% 40.39% 661

2,649

12,000

3.16% 1,708

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

Our prognosis is that NBC will sustain its performance and profitability in 2010. However, we express concerns about the Company’s haulage costs, i.e. costs associated with transportation of its ‘Five Alive’ and ‘Eva’ Brands. A significant share of the market for these products is in Lagos, and having witnessed notable growth in recent years, the associated transport costs (from their manufacturing plants) have also become quite significant. We opine that the location of the Benin factory does not make for an optimal distribution and transportation structure, due to the high cost of transportation being incurred. However, we believe the firm will be able to sustain its earnings in the next period (FY’09), and this assumption is based largely on the buoyant festive sales and expected payment of the balance of insurance claims for which the company had made provisions in the prior year.

Over the years, NBC has invested in the upgrade and replacement of its equipments and infrastructure in order to increase operational efficiency, as well as sustain the growth of the business. On the back of this, we expect FY’09 Turnover and After Tax Earnings of N85.68 billion and N2.60 billion respectively, which translates to a Forward EPS of N1.98 and Total Dividend Per Share of N0.59.

NBC SHARE PRICE Vs. VOLUME TRADED 60

Share Price (Naira)

52 week high:N36.93 52 week low:N18.05 Average Price:N23.49 Avg Vol Traded (‘000): 152.74 Beta:0.74

50 40 30 20 10 3500 3000

Volume Traded (‘000)

2500 2000 1500 1000 500 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

201

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mn)

2006

2007

2008

2009F

2010F

2011F

Incom e

INCOME STATEMENT ($'Mn)

2006

2007

2008

2009F 2010F 2011F

Incom e

Turnover

59,675

Cost of Sales

68,529

80,080

86,486

93,405

(41,964) (47,314) (58,303) (67,049) (75,095)

Gross Profit

17,711

Distribution & Administrative Exp Core operating profit Other income EBIT Interest Expense & Similar charges Profit from operations

21,215

21,777

19,438

18,311

(15,337) (16,684) (19,314) (17,184) (17,872) 2,373

4,532

2,463

2,415

4,608

2,532

(633) 1,782

(421) 4,187

(369) 2,163

2,253

439

100,878

Turnover

(82,604)

Cost of Sales

18,274 (18,765) (492)

Gross Profit

403

463

541

584

631

681

(283)

(319)

(394)

(453)

(507)

(558)

120

143

147

131

124

123

(104)

(113)

(130)

(116)

(121)

(127)

EBIT

Interest Expense & Similar charges

(4)

(3)

(2)

(1)

(4)

(3)

Profit from operations

Distribution & Administrative Expenses Core operating profit Other income

2,295 (144) 2,151

2,372 (633) 1,739

2,099 (421) 1,678

15 -

3 -

(3) 14

Share of profit associated with coy

151

160

278

283

151

160

Profit before taxation

328

4,347

2,441

4,782

4,973

5,271

Taxation

437

(1,175)

(1,339)

(1,392)

(1,476)

Taxation

(8)

(2)

(9)

Profit after taxation

766

3,172

3,795

3,580

3,795

Profit after taxation

1,033

1,146

1,214

Dividends

2,410

2,435

2,581

Retained Earnings

2009F

2010F

2011F

Dividends

(260) 2,182

982

Retained Earnings BALANCE SHEET (N'Mn)

1,043 2006

4,148 2007

10 2008

Assets Employed Fixed Assets

Share of profit associated with company

Profit before taxation

BALANCE SHEET ($'Mn)

7 7

(10) 26

2006

2007

2008

2009F 2010F 2011F

225

230

256

Stocks

Debtors & Prepayments

Assets Employed 33,381

34,045

37,980

44,437

51,991

60,829

10,148

11,012

9,225

8,051

10,528

11,258

1,539

1,551

2,702

5,461

4,483

5,213

Current Assets

Fixed Assets

300

351

411

Current Assets

Stocks Debtors & Prepayments Deposits for imports

230

711

1,328

1,028

958

897

Deposits for imports

1,223

770

782

806

830

855

Cash and bank balances

Total

13,140

14,043

14,036

15,382

16,800

18,281

Total

104

113

123

Total Assets

46,521

48,088

52,016

59,819

68,791

79,110

Total Assets

314

325

351

404

464

534

Due within one year

19,648

16,994

23,479

27,470

32,140

37,604

Due within one year

133

115

159

185

217

254

Due After one year

(6,784)

(8,241)

(6,622)

6,932

7,248

7,567

Due After one year

(46)

(56)

(45)

Cash and bank balances

Capital and Reserves Share capital Share premium

Capital and Reserves 654

654

3,938

Share capital Share premium

Revenue Reserve

15,455

18,214

17,268

19,296

21,446

23,789

Revenue Reserve

104

123

117

130

145

161

Shareholders' Equity

20,089

22,853

21,913

23,888

26,038

28,381

Shareholders' Equity

136

154

148

161

176

192

RATIOS

2006

GROWTH RATES Turnover growth

2006

2007 2007

2008 2008

2009F 2009F

2010F 2010F

2011F 2011F

MARGINS

2006

2007

2008

EBIT/Sales

Pretax Income/Sales

Net Profit Margin

30%

31%

27%

22%

20%

17%

2006

2007

2008

15%

17%

Growth in Core Operating profit

-29%

91%

-46%

-41%

-60%

-227%

Growth in PBT

-91%

1224%

-44%

669%

ASSET UTILIZATION

Growth in PAT

-55%

202%

-100%

n/a

52%

Sales to cash (x)

PROFITABILITY

2006

2007

2008

2009F

2010F

2011F

Return on Equity

15%

11%

10%

Return on Assets

Return on Invested Capital

10%

-2%

Growth rate (g)

19%

n/a

11%

14%

13%

202

‘Ahead of the Curve’

Gross Profit Margin

2009F 2010F 2011F -1%

2009F 2010F 2011F

103

213

112

Sales to inventory (x)

116 9

Sales to total assets (x)

Fixed Assets (%)

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Dangote Sugar Refinery Plc - Company Overview BASIC INFORMATION Address

42/44 Warehouse Road Apapa, Lagos, Nigeria

Website

www.dangote-group.com

Management

Alhaji Aliko Dangote (Chairman)

Fiscal Year End

DECEMBER

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: DANGSUGAR:NL

Sector

FOOD & BEVERGAES

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Dangote Industries Limi

70.00

FREE FLOAT

30.00

SHARES IN ISSUE Date

The Company imports and refines raw sugar, which is processed using an indigenous technology. This is further processed and fortified with Vitamin A, then packaged as Vitamin A fortified sugar. The Company also engages in the production and packaging of unfortified sugar.

In the 2009 financial year, the Company’s Turnover and After Tax Earnings were severely impacted by the rising price of raw sugar. However, prior to 2009, Dangote Sugar had been steadily delivering value to its stakeholders, in terms of both capital appreciation and its consistent dividend payment policy.

Dangote Sugar has an installed annual sugar refining capacity of 1.44million metric tonnes in Nigeria (where it has operated for 7years), and is constructing an additional refinery with an annual capacity of 1.1 metric tonnes in Apapa, Lagos. The additional refinery would increase DSR’s total sugar refining capacity to 2.5million metric tonnes per annum.

The Company currently has a NAPS of N3.07. which translates to a Price to Book ratio of 1.66x (Sector Average – 1.91x). Our Fair Value price range for the Company is between N16.55 – N18.83 and we are ‘Neutral’ at current market price.

12,000,000,000

SIZE AND VALUE TRADED

Average Volume Traded ('09)

Key Review Highlights

Shares Outstanding

Dec-09

Market Capitalization

Dangote Sugar Refinery Plc commenced business in 2000 as the sugar division of Dangote Industries Limited (DIL). It initially entered into the sugar business in 1978 through the importation and trading of white sugar. The sugar division was later spun–off as Dangote Sugar Refinery Plc, and full operations commenced in 2006. Same year, the company embarked on a public offer. As the second largest sugar refinery in the world, with Ion Exchange Raising (IER) technology and an efficient power supply system, DSR controls over 70% of the domestic sugar sales market, with imported sugar as its main competitor. DSR Plc formally launched its entry into neighbouring West African countries with the successful export of 1500 MT sugar to Ghana in December 2007.

N 'Mn

1,812

$ 'Mn

Units

4,870,145

DIVIDENDS AND BONUS ISSUES

Type

Year

Final

FY'08

N1.20

Scrip Issue Final Final

FY'07 FY'07 FY'06

N1.70 N1.15

Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'06A

FY'07A

1.67 77% 9.07 1.15 n/a 7.62% 2.80 80.40% 5.40

2.15 1.82 1.42 1.61 1.66 29% -15% -22% 13% 3% 7.03 8.28 10.64 9.39 9.12 1.70 1.20 0.89 1.13 1.17 47.83% -29.41% -26.11% 26.88% 3.70% 11.26% 7.95% 5.87% 7.45% 7.73% 2.60 2.72 3.14 3.16 3.17 -7.07% 4.62% 15.28% 0.69% 0.31% 5.81 5.55 4.82 4.78 4.77 Source: Company Financials; Vetiva Research

FY'08A

FY'09F

FY'10F FY'11F

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203

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Investment Summary Our Neutral recommendation is based on the company’s performance in Q3’09 and our outlook on the stock. The insistent rise of its major input sugar …

The Company’s major production input, sugar, currently trades at record highs in the global market (DSR imports raw sugar from Brazil). In 2009, raw sugar price commenced an ascent to record highs and has shown little or no signs of relenting. As mentioned previously, the increase (c.100%) in the global price of sugar could be largely adduced to climate changes in sugar producing nations and increased competition for the use of sugar as bio-fuel.

Dangote Sugar is currently the largest refiner of sugar in Africa. According to the Company, the on-going expansion of an additional 1.1 million MT will make it the largest refinery in the world in terms of installed capacity.

The Company’s strategic focus has been to increase market expansion and penetration in Nigeria and other sub-Saharan African countries. It commenced exportation of sugar to other African countries in 2007, and is presently in the process of building a refinery in Algeria (where sugar consumption is twice as much as Nigeria’s).

Q3’09 earnings stands at N11.89...

DSR’s most recent result (Q3’09 ended September 2009) showed negative growth in Turnover and Earnings of 7.64% (N59.44 billion) and 35.89% (N11.89 billion) respectively.

The company’s profitability margins decline to 26.68% and 20.11%…

The Company’s profitability margins declined to 26.68% (PBT) and 20.11% (PAT), down from 38.44% and 28.83% respectively as at Q3’08.

Raw sugar prices commenced ascent to record highs…

Dangote sugar is currently the largest refiner of sugar...

The company’s focus has been to increase market penetration...

PROFITABILITY RATIOS (Percent)

Peer Metrics

DSR

NBC

Nestle

Nascon

FMN

15.10

21.42

1.27

1.02

239.50

4.35

36.00

15.23

0.60

3.68

11.89 1.20

21.00

15.73

7.25

9.78

n/a

12.55

0.40

0.50

7.95%

n/a

5.24%

9.20%

1.39%

n/a

90% RoA

Operating RoA

Current Price (N)

RoE

80% 70%

Trailing EPS (N)

60%

P/E (x)

50%

DPS (N)

40%

Dividend Yield

30% 20% 10% 0% 2006

2007

2008 Source: Company Financials

Payout Ratio

65.84%

99.49%

81.67% 21.95%

ROE (Average)

80.91%

0.07% 109.15%

35.26% 11.77%

ROA (Average)

40.39%

0.03%

19.12%

3.16%

Outstanding Shares(mn)

12,000

1,309

2,649

1,708

33.05% 661

Source: Company Financials; Vetiva Research

204

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

Outlook 2010

We believe sugar prices will drop in line with previously observed trends after a peak. Our prognosis is that sugar prices will start declining when the crop cycle (sugar is a perennial crop) comes to an end, which is in the 3rd/4th quarter of 2010. We believe this would give ample time for other countries and farmers around the world with good arable land to cultivate and harvest sugar for export, thereby forcing prices lower. However, the descent in prices might actually be slower than expected, especially in consideration of the lackadaisical disposition of the two largest producers (Brazil and India) in tackling the problem and returning to full sugar production capacity.

We remain cautious about DSR’s ability to manage its input costs, and believe it should take appropriate steps aimed at mitigating against raw material cost increases in periods of sugar supply shortage in the future. DSR has not disclosed clear plans towards combating these challenges. We are however, aware of Dangote Industries Limited (DIL) acquisition and expansion of Savannah Sugar Company Limited, which is an integrated sugar refinery powered by bio-fuels from molasses sited in Numan, Adamawa State. Despite the soaring prices of sugar, we remain positive about the prospects of the Company, its ability to hold its own and post improved earnings going forward.

We expect FY’09 Turnover and After Tax Profits of N71.78 billion and N17.02 billion respectively, which translates to a Forward EPS of N1.42 and Total DPS of N0.89.

DANGOTE SUGAR SHARE PRICE Vs. VOLUME TRADED 50

52 week high:N24.2 52 week low:N9.6 Average Price:N15.61 Avg Vol Traded (‘000): 4,870 Beta:1.18

Share Price (Naira)

40 30 20 10 0 25000 Volume Traded (‘00) 20000 15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

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205

2009 Review | 2010 Outlook SECTORAL REVIEW FOOD AND BEVERAGES

INCOME STATEMENT (N'Mn) Turnover

2006

2007

2008

80,649

Gross Profit

20,144

32,465

30,881

30,155

30,456

31,370

Distribution & Administrative Expenses

(3,091)

(3,208)

(3,588)

(2,872)

(2,901)

(2,988)

Core operating profit

17,053

29,258

27,294

27,283

27,556

28,382

Core operating profit

499

1,405

2,877

546

551

568

17,552

30,663

30,170

27,829

28,107

28,950

546

551

568

Interest Expense & Similar charges

(895)

(49,790) (54,027) (59,430)

74,691

INCOME STATEMENT ($'Mn)

(48,184)

EBIT

72,515

2011F

83,768

Other income

71,797

2010F

(63,624)

Cost of Sales

80,671

2009F

(65,373)

Turnover

2006

2007

2008

2009F

2010F

2011F

566

545

485

490

504

(430)

(325)

(336)

(365)

(401)

(441)

Gross Profit

136

219

209

204

206

212

Distribution & Administrative Expenses

(21)

(22)

(24)

(19)

(20)

115

198

184

186

192

119

207

204

188

190

195

Cost of Sales

Other income EBIT Interest Expense & Similar charges

(6)

Profit from operations

16,657

30,661

30,151

28,374

28,658

29,518

Profit from operations

112

207

204

192

194

199

Profit before taxation

16,657

30,661

30,151

27,283

27,556

28,382

Profit before taxation

112

207

204

184

186

192

(9,182)

(8,280)

(8,185)

(8,267)

(8,515)

Taxation

(62)

(56)

(55)

(56)

(57)

21,871

19,098

19,289

19,868

PAT

112

145

148

129

130

134

Taxation

PAT

16,657

21,479

Dividends

11,500

(17,000)

Retained Earnings

5,157

BALANCE SHEET (N'Mn)

2006

4,479 2007

(14,400) (11,936) (13,500) 7,471 2008

(14,000)

7,162

5,789

5,868

2009F

2010F

2011F

Assets Employed

Dividends

(115)

(97)

(81)

(91)

(95)

Retained Earnings

BALANCE SHEET ($'Mn)

2006

2007

2008

2009F

2010F

2011F

Assets Employed

Fixed Assets

14,268

14,036

14,630

14,922

15,221

15,525

Stocks

3,378

4,098

9,257

11,247

11,975

14,258

Debtors & Prepayments

9,839

12,003

14,438

17,562

15,247

18,111

Current Assets

Fixed Assets

101

103

105

Stocks

Debtors & Prepayments

119

103

122

Current Assets

Cash and bank balances

7,637

19,987

19,847

25,619

28,294

24,257

Cash and bank balances

135

134

173

191

164

Total

24,733

36,088

43,542

51,380

52,407

53,455

Total

167

244

294

347

354

361

Total Assets

39,001

50,124

58,172

66,302

67,628

68,981

Total Assets

263

338

393

448

457

466

Due w ithin one year

10,811

21,818

24,249

26,674

27,741

29,406

Due w ithin one year

147

164

180

187

199

2,350

1,295

2,000

1,569

Due After one year

(1)

n/a

5,000

6,000

Share capital

Due After one year

(211)

Capital and Reserves Share capital

Capital and Reserves 5,000

Deposit 4 Shares

Share premium 6,321

6,321

General Reserve

Share premium

16,657

14,636

20,307

31,627

32,479

38,347

Revenue Reserve

112

137

Shareholders' Equity

27,978

25,956

#REF!

37,628

37,887

38,006

Shareholders' fund

189

175

MARGINS

2006

2007

2008

2009F

2010F

2011F

EBIT/Sales

12%

21%

20%

19%

10%

11%

20%

27%

26%

Pretax Income/Sales

20%

18%

17%

Net Profit Margin

17%

13%

12%

RATIOS

2006

GROWTH RATES

2006

2007 2007

2008 2008

2009F 2009F

2010F 2010F

2011F 2011F

Revaluation Reserves

Gross Profit Margin

#REF!

214

219

259

254

256

257

Turnover grow th

43%

-4%

-11%

Grow th in Core Operating profit

47%

72%

-7%

Grow th in PBT

78%

84%

-2%

-10%

PER SHARE DATA

2006

2007

2008

2009F

2010F

2011F

Grow th in PAT

78%

29%

-13%

EPS

1.67

2.15

1.82

1.42

1.61

1.66

DPS

1.15

1.70

1.20

0.89

1.13

1.17

NAPS

2.80

2.60

2.72

3.14

3.16

3.17

Sales/Share

8.38

8.06

6.72

5.98

6.04

6.22

PROFITABILITY

2006

2007

2008

2009F

2010F

2011F

ROAE

64%

80%

75%

52%

54%

48%

ROAA

40%

48%

40%

27%

28%

Return on Invested Capital

65%

91%

58%

53%

18%

Grow th rate (g)

20%

17%

26%

20%

16%

14%

MARGINS

2006

2007

2008

2009F

2010F

2011F

EBIT/Sales

21%

38%

37%

39%

Gross Profit Margin

24%

40%

38%

42%

Pretax Income/Sales

20%

38%

37%

38%

Net Profit Margin

20%

27%

206

‘Ahead of the Curve’

Shares Outstanding (millions)

10,000

12,000

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

THE HEALTH CARE SECTOR Brief Overview The Healthcare Sector has gained prominence in the last few years. Relative to what currently obtains, Healthcare provision in the country was rather abysmal, as the environment allowed substandard healthcare delivery to thrive. Nigeria was a dumping ground for drugs that did not meet regulatory standards in other countries, expired drugs and lots more. However, Government and its regulatory body, National Agency for Food and Drug Administration and Control (NAFDAC), embarked on a sector reform aimed at eradicating counterfeit, expired and substandard drugs in the market. This was achieved by reducing the amount of drugs imported into the country, as well as regulating the pharmacies scattered around the country, which are usually the vendors for these. This was a major milestone in the development of the Nigerian Healthcare Sector, especially for companies which had been struggling to survive as a result of competition with cheaper substandard drugs in the market. The Federal Government instituted the National Healthcare Insurance Scheme (NHIS) in March 2002, but the scheme did not take off until July 2005. Under the scheme, Health Management Organizations (HMOs) were set up to deal directly with the healthcare providers (hospitals and clinics that provide the actual service). So far, this scheme has successfully captured a good portion of the formal sector, as Government made it mandatory for all registered companies with over ten employees to register their staff under the provisions of the Scheme. This helped reduce the incidence of self-medication (aka drug abuse) within the country, which was rampart due to the fact that consumers have to make a deposit at the point of treatment. Hence, it was cheaper for consumers to self medicate, which also increased the likelihood of purchasing substandard drugs. In recent times, consumers would rather use their Health Insurance, as it requires no deposit. This scheme has also benefitted the Healthcare companies, as they can channel their efforts to Healthcare Providers and HMOs, thereby stifling the counterfeit and substandard drugs market. The Industry Players There are ten (10) listed companies in the sector, while only six are active players. These companies are: GlaxoSmithKline Consumer Nigeria Plc, Fidson Healthcare Plc, May & Baker Nigeria Plc, Morison Industries Plc, Neimeth International Pharmaceuticals Plc and Union Diagnostic & Clinical Services Plc. GlaxoSmithKline is the largest player by turnover (N12.55 billion as at FY’08). Last reported FY turnover for its competitors is as follows; Maybaker, N5.24 billion; Fidson, N5.01 billion; Neimeth, N1.87 billion; Union Diagnostic (quoted in 2008), N3.27 billion; and Morison, N369 million. In 2009, the performance of only two players were noteworthy, based on their ability to buck the industry trend of thinning margins, thereby posting impressive results in a year that was filled with great unrest. Thus, based on profitability margins, GlaxoSmithkline Consumer Nigeria Plc topped the list, as it had the strongest profitability margins (21% PBT; 18% PAT) in its most recent result, Q3’09. This was followed by Fidson Healthcare Plc, with profitability margins of 13.12% (PBT) and 9.44% (PAT), as indicated by its Q1’09 results.

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207

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

However, Morison Industries Plc and Union Diagnostic & Clinical Services Plc both released their FY’08 results in 2009 and posted strong performances. While Morison showed margins of 5.46% (PBT) and 3.91% (PAT), Union Diagnostic’s PAT Margin declined to 36%, while its PBT Margin increased to 69% (we note that Union Diagnostic had the strongest profitability margins and is a stock to watch, in our opinion). Performance in 2009 The Nigerian Healthcare Sector has proved as resilient as its foreign counterparts in the 2009 financial year. Over the years, majority of the companies within the sector had been relegated to the background due to their poor performance. In recent times however, few of the firms with sound business models and effective strategies took advantage of emerging opportunities within the sector, thus helping them deliver superior results. In our Half Year Report “Inflexion Point”, we had iterated efforts of the Government towards development of the Healthcare Sector, which had lagged other sectors in the economy. Continued efforts in this regard contributed to the positive performance of some of the companies in 2009. Defensive Nature Coming to the Fore In light of the strong financial performances posted in 2009, Nigerian healthcare companies can be said to have proved their resilience in tough times. In spite of the harsh economic environment, higher input costs, exchange rate volatility and increased inaccessibility to credit/capital, these companies were able to post even better results, right in the midst of the storm. In our opinion, this highlights the commitment of companies herein to deliver value and improve their profitability profile. Companies such as GSK, Fidson, Morison and Union Diagnostic posted good results; May & Baker’s earnings declined, while others posted losses. Diversification A majority of companies in the Sector have diversified into the Consumer Goods segment, in order to improve sales and profitability margins. We saw some of the products of these companies compete directly with those of established FMCG companies. This we had stated in our Half Year Review report, as we believed it provided an earnings buffer during the challenging period. Given the harsh environment, companies were able to implement strategies to shore up earnings, and the diversification into consumer goods has started contributing significantly to the Turnover of these firms. SECTOR OUTLOOK We have a very optimistic outlook on the Nigerian Healthcare Sector, given the observed trends on the international scene. The global Healthcare Sector has shown resilience through the economic meltdown and we expect similar performance from Nigerian players. This is on the back of the defensiveness of the Sector’s products and the commitment of the Government to develop and regulate activities within the Sector. Therefore, in 2010, we expect increased rivalry amongst the players, as they increasingly harness opportunities available with the system. We expect an increase in capacity expansion and utilization, as well as increased investment in Research & Development to boost the manufacture of indigenous drugs. This will to a reduction in royalties paid to multinationals or affiliate companies outside the country, which would inadvertently result in an increase in profitability margins for the companies and sector at large.

208

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

GlaxoSmithkline Consumer Nigeria Plc - Company Overview BASIC INFORMATION Address

1, Industrial Avenue Ilupeju, Lagos

Website

www.oandoplc.com

Management

O Osunkeye( Chairman) S Goel (Managing Director)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: GSK:NL

Sector

Healthcare

Country

Nigeria

GlaxoSmithKline Consumer Nigeria Plc (“GSK”) is a leading manufacturer, marketer and distributor of a range of consumer healthcare and pharmaceutical products. The Company’s products can be categorized into two business segments which are; Consumer Healthcare (Oral Care, Overthe-Counter Medicine and Nutritional Healthcare) and Pharmaceuticals (Prescription and Vaccines). The Company has a 100% interest in Winster Pharmaceuticals Limited, which is engaged in the importation and distribution of pharmaceutical products.

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Setfirst Limited

Smithkline Beecham

Others

Free Float (%)

GlaxoSmithKline Consumer Nigeria Plc has been able to sustain its remarkable financial performance, supported by its successful market penetration – an indication of its leadership position in the Health Care sector. It had earlier intensified its marketing & distribution strategy, as well as the expansion of its consumer and pharmaceutical products range.

It produces a wide range of Consumer Healthcare and Pharmaceutical products e.g. Macleans, Andrews Liver Salt, Ribena, Amoxil and other international brands. GSK has a general license and technical service agreement with Beecham Group Plc.

The Company recently embarked on an aggressive advertising campaign which included several promos to create awareness for its new products, as well as increase penetration of existing products.

GSK has an optimal distribution network with a wholly owned subsidiary, Winster Pharmaceuticals Limited, which is solely responsible for the distribution and marketing of Over-the-Counter (OTC) pharmaceutical products.

The Company has a NAPS of N5.70, which translates to a Price to Book ratio of 3.93x (Sector Average – 2.22x). Our Fair Value price range for the Company is between N27.83 – N32.19 and we are ‘Accumulate’ at current market price.

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

956,701,192

SIZE AND VALUE TRADED Market Capitalization

N 'Mn $ 'Mn

Average Volume Traded ('09) Units

21,430 145 251,155

DIVIDENDS AND BONUS ISSUES Type Final Final Final

Year FY'08 FY'07 FY'06

N0.45 N0.45 N0.60

Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'06A FY'07A FY'08A 1.13 11% 19.80 0.45 0.24% 2.01% 4.38 20.19% 5.11

FY'09F

FY'10F FY'11F

0.87 1.33 2.05 2.31 2.59 -23% 53% 53% 13% 12% 25.61 16.78 10.95 9.69 8.65 0.45 0.60 0.90 1.04 1.19 0.00% 33.33% 50.06% 15.57% 14.49% 2.01% 2.68% 4.02% 4.65% 5.32% 4.81 5.70 6.78 8.14 9.36 9.75% 18.46% 19.05% 20.00% 15.00% 4.66 3.93 3.30 2.75 2.39 Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

209

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE Investment Summary Our Accumulate recommendation is based on the company’s outstanding performance in Q3’09 and our outlook on the stock. GSK is a market leader amongst the listed companies …

GSK is a market leader amongst the listed Companies in the Healthcare Sector. Its performance in the period under review shows the resilience of the Company’s business model to the prevalent economic challenges within the real sector.

GSK has the largest market share in terms of revenue, controlling over 45% of the market, with revenue of N12.6 billion, compared to May and Baker’s 19% (N5.4 billion) as at FY’08.

Furthermore, the Company seems to have bucked the trend of declining profitability margins prevalent within the sector, attributed largely to the huge costs associated with production and distribution..

During the course of the year, GSK introduced additional Ribena variants such as “Ribena Pear” and “Ribena Peach”, and intensified marketing of its Consumer Healthcare products, the company’s strongest business segment.

GSK’s most recent result (Q3’09 ended September 2009) shows growth in Turnover and Earnings of 28.56% (N7.75 billion) and 55.72% (N1.22 billion) respectively.

The Company’s profitability margins improved to 21.01% (PBT) and 14.50% (PAT), up from 17.44% and 12.04% respectively as at Q3’08.

GSK has the largest market share in terms of revenue…

The Company seems to have bucked the trend...

The Company introduced new variants of Ribena...

Q3’09 earnings billion...

stand

N7.75

The company’s profitability margins improved to 21.01% (PBT) and 14.50% (PAT)…

PROFITABILITY RATIOS

Peer Metrics

(Percent)

GSK

Fidson

22.40

1.78

M&B Neimeth

NGC

30% RoA

Operating RoA

RoE

Current Price (N) Trailing EPS (N)

25%

P/E (x) 20%

DPS (N) Dividend Yield

15%

3.86

1.50

15.04

1.89

0.26

0.57

0.05

0.12

11.85

6.85

6.77

30.00

125.33

0.60

0.20

0.40

n/a

2.68%

11.24% 10.36%

n/a

44.95%

89.00% 66.98%

n/a

ROE (Average)

25.41%

10.55% 15.58% -31.97% 10.72%

ROA (Average)

13.93%

Payout Ratio 10%

Outstanding Shares(mn)

957

6.96% 1,500

8.21% -10.46% 700

1,926

6.96% 154

0% 2006

2007

2008 Source: Company Financials

210

‘Ahead of the Curve’

Source: Company Financials; Vetiva Research

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

Outlook 2010

Our outlook for the Company is strong, as we remain confident about its prospects and business model. In our opinion, management has shown competence by taking the necessary precautions to insulate the Company from external shocks prevalent in the Nigerian Economy. GSK’s results were the best in the Healthcare and wider FMCG Sector in 2009 in terms of profitability margins. We are optimistic about the company and confident in its ability to maintain and hopefully surpass this performance in the near to medium.

We expect FY’09 Turnover and After Tax Profits of N11.37 billion and N1.65 billion respectively, which translates to a Forward Earnings Per Share of N2.05 and Total Dividend Per Share of N0.90.

GSK SHARE PRICE Vs. VOLUME TRADED 50

Share Price (Naira)

52 week high:N25.25 52 week low:N9.78 Average Price:N18.12 Avg Vol Traded (‘000): 251.16 Beta:0.72

40 30 20 10 3500 3000

Volume Traded (‘000)

2500 2000 1500 1000 500 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

211

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

INCOME STATEMENT (N'Mn) Incom e

2006

2007

2008

2009F

2010F

2011F

Turnover 10,390 C ost of Sales (6,237) Gross Profit 4,153 Distribution & Administrative Expen (2,297) Management Fees/ Integration cost C ore operating profit 1,856

9,915 (6,042) 3,874 (2,739)

17,764 (8,254) 6,800 (3,127)

20,961 19,743 (9,492) (10,916) 8,272 10,046 (3,722) (4,429)

1,134

15,054 (7,177) 5,368 (2,628) (953) 1,786

3,673

4,550

5,617

INCOME STATEMENT ($'Mn) Incom e Turnover C ost of Sales Gross Profit Distribution & Administrative Expenses Management Fees/ Integration cost C ore operating profit

2006

2007

70 -42 28 -16

67 -41 26 -18

13 0 13 -2 0 10

2008 2009F 2010F 2011F 120 -56 46 -21

142 -64 56 -25

133 -74 68 -30

102 -48 36 -18 -6 12

0 8

0 13

0 19

0 22

0 24

0 8

0 12

-1 18

0 22

0 24

Other income EBIT Depreciation & Amortisation Interest Expense & Similar charges Profit from operations

35 1,891 (326) (43) 1,522

40 1,174

66 1,852

35 2,819

37 3,185

38 3,599

(8) 1,166

(1) 1,851

(100) 2,719

(1) 3,184

(24) 3,575

Other income EBIT Depreciation & Amortisation Interest Expense & Similar charges Profit from operations

Profit before taxation Taxation Profit After Taxation

1,522 (440) 1,082

1,166 (330) 837

1,851 (574) 1,277

2,719 (761) 1,958

3,072 (860) 2,212

3,441 (964) 2,478

Profit before taxation Taxation Profit After Taxation

10 -3 7

8 -2 6

12 -4 9

18 -5 13

21 -6 15

23 -7 17

Dividends NOPAT Retained Earnings

(431) 1,125 651.8

(431) 845 406.4

(574) 1,278 703.1

2,058 2,819

995 2,325 3,208

2,636 3,617

Dividends NOPAT Retained Earnings

-3 8 4

-3 6 3

-4 9 5

6 14 19

7 16 22

8 18 24

861

1,140

BALANCE SHEET (N'Mn) Assets Employed

2006

2007

2008

2009F

2010F

2011F

Fixed Assets

3,114

3,516

3,961

4,668

5,502

6,485

C urrent Assets Stocks Debtors & Prepayments C ash and bank balances Total C urrent Asset Total Assets

3,201 2,491 64 5,755 8,869

2,544 2,147 512 5,203 8,719

2,539 1,918 1,192 5,649 9,610

5,661 4,227 770 10,658 15,326

6,680 4,988 908 12,576 18,078

7,882 5,886 1,072 14,840 21,324

C reditors Due within one year

3,986

3,332

3,322

3,488

3,662

3,845

(213.9) (476)

(258.4) (527)

(310.6) (527)

Due After One year: Defered taxation Provision for liabilities & charges

(780)

(715)

(800)

C apital and Reserves Share capital Share premium Reserve for bonus shares Revaluation Reserves General Reserve Shareholders' Equity

478 51.4

478 51.40

478 51.4

24.7 3,208 4,193

24.7 4,047 4,602

24.7 4,897 5,451

25.00 5,935 8271

25.0 7,233 11416

25.0 8,401 15096

RATIOS

2006

2007

2008

2009F

2010F

2011F

GROWTH RATES Turnover growth Growth in C ore Operating profit Growth in EBIT Growth in PBT Growth in PAT

PROFITABILITY Return on Equity Return on Assets Return on Net fixed assets Return on Invested C apital Retrun on C apital Employed Growth rate (g)

212

2006

2007

2008

2009F

2010F

2011F

21% 32% 31% 8% 11%

-5% -39% -38% -23% -23%

27% 57% 58% 59% 53%

19% 99% 13% 13% 18%

15% 11% 13% 13% 13%

15% 11% 13% 12% 12%

2006

2007

2008

2009F

2010F

2011F

28% 13% 37% 9% 37% 17%

19% 10% 25% 7% 26% 9%

25% 14% 34% 9% 34% 14%

33% 16% 45% 13% 32% 13%

31% 13% 44% 8% 30% 11%

30% 13% 41% 8% 30% 9%

‘Ahead of the Curve’

2006

2007

Fixed Assets

BALANCE SHEET ($'Mn) Assets Employed

C urrent Assets Stocks Debtors & Prepayments C ash and bank balances Total C urrent Asset Total Assets

22 17 0 39 60

17 14 3 35 59

17 13 8 38 65

38 29 5 72 103

45 34 6 85 122

53 40 7 100 144

C reditors Due within one year

Defered taxation Provision for liabilities & charges

-1 -3

-2 -4

-5 0

3 0.3 0.0 0.2 22 28

3 0.3 0.0 0.2 27 31

3 0.3 0.0 0.2 33 37

3 0.3 0.0 0.2 40 56

3 0.3 0.0 0.2 49 77

3 0.3 0.0 0.2 57 102

C apital and Reserves Share capital Share premium Reserve for bonus shares Revaluation Reserves General Reserve Shareholder's Equity

2008 2009F 2010F 2011F

MARGINS

2006

2007

EBIT/Sales

18%

12%

16%

15%

18%

Pretax Income/Sales Net Profit Margin

15% 10%

12% 8%

15% 10%

14% 10%

13% 10%

2006

2007

1.13 0.45 4.38 10.86 957

0.87 0.45 4.81 10.36 957

PER SHARE DATA EPS DPS NAPS Sales/Share Shares Outstanding (millions)

2008 2009F 2010F 2011F

2008 2009F 2010F 2011F 1.33 0.60 5.70 13.11 957

2.05 0.90 6.78 15.74 957

2.31 1.04 8.14 18.57 957

2.59 1.19 9.36 21.91 957

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

Fidson Healthcare Plc - Company Overview BASIC INFORMATION Address 6, Ilupeju By-Pass Ilupeju, Lagos Website www.fidson.com Management F Ohiwerei (Chairman) F Ayebae (Chief Executive) Fiscal Year End June Exchange Listing Symbol Sector Country

Primary Listing: Nigerian Stock Exchange Bloomberg: FIDSON:NL Healthcare Nigeria

Fidson Healthcare Plc was incorporated as a private limited liability company in 1995 and commenced business activities same year. Its principal activity is the manufacture and distribution of pharmaceutical products in line with WHO standards. The Company embarked on a private placement in an effort to finance its growth and diversification plans. It was quoted on the Nigerian Stock Exchange on the 4th of June 2008. Mr Fidelis Ayebae owns about 37% of the Company’s shares, while the remaining 63% is held by other Directors and the Nigerian public.

Key Review Highlights OWNERSHIP AND FREE FLOAT Shareholders Mr. Fidelis Ayebae Others

% Ownership 36.9 63.1

Free Float (%) SHARES IN ISSUE Date Dec-09

Fidson Healthcare Plc’s diversification strategy has been targeted primarily at the Fast Moving Consumer Goods (FMCG) segment. In light of this, the Company commenced production of hygiene products, such as diapers and paper products.

Fidson is the third largest player in the Nigerian Healthcare Sector, following GSK and May & Baker by Turnover. Over the years, the Company has been consistent in delivering value and sustaining its profitability profile.

The Company has an ultra modern factory at Sango-Ota in Ogun State, and is currently in the process of building a bigger and more sophisticated manufacturing facility in the same State.

Fidson’s most recent results showed Turnover and After Tax Earnings growth of 14.07% and 17.08% respectively Yoy, with significantly improved profitability margins also.

The Company has a NAPS of N3.48, which translates to a Price to Book ratio of 0.51x (Sector Average – 2.22x). Our Fair Value price range for the Company is between N2.19 – N2.40, and we place a ‘Neutral’ rating on the stock at current market price.

63.1

Shares Outstanding 1,500,000,000

SIZE AND VALUE TRADED Market Capitalization

N 'Mn

2,670

$ 'Mn

Average Volume Traded ('09) Units

432,794

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'08

N0.20

Final

FY'07

N2.27

Forecast Summary FY'06A FY'07A FY'08A Earnings Per Share (N) 2.08 2.83 0.22 YoY Change (%) 51% 36% -92% Price to Earnings (x) 0.86 0.63 7.92 Dividend Per Share (N) n/a 2.27 0.20 YoY Change (%) n/a n/a -91.19% Dividend Yield (%) n/a 127.53% 11.24% Net Assets Per Share (N) 6.83 11.87 3.48 YoY Change (%) 20.19% 73.80% -70.67% Price to Book (x) 0.26 0.15 0.51

FY'09F FY'10F FY'11F 0.31 0.36 0.40 40% 13% 12% 5.66 5.00 4.47 0.22 0.25 0.28 10.16% 13.00% 12.00% 12.38% 13.99% 15.67% 4.13 5.45 6.93 18.50% 32.00% 27.24% 0.43 0.33 0.26

Source: Company Financials; Vetiva Research

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213

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

Investment Summary Our ‘Neutral’ recommendation is based on the Company’s performance in Q1’09 and our outlook on the stock.

We note that prior to listing, Fidson had a consistent dividend payout policy. Last financial year (2008/9), it paid a dividend of 22 kobo, which translates to a Dividend Yield of 12.36%.

The Company has plans to raise additional capital to the tune of N2 billion during the 2009/10 financial year. However, this is still subject to shareholders’ approval.

Fidson’s most recent results (Q1’09/10), showed Turnover and PAT of N1.71 billion and N161.57 million respectively.

On a YoY basis, the Company grew Turnover and PAT by 14.07% and 17.08% respectively. Its Trailing EPS inched up to N0.30 from N0.29 as at FY’08/9.

The Company’s profitability margins improved to 13.12% (PBT) and 9.44% (PAT), up from 12.20% and 9.20% respectively as at Q1’08/9. On a QoQ basis, profit margins increased from 12.41% (PBT) and 8.55% (PAT).

Fidson has a history of consistent dividend payout…

The Company is poised to additional capital ofN2 billion...

raise

On a YoY basis Turnover and PAT grew by 14.07% and 17.08%...

Profitability margins improved 13.12% (PBT) and 9.44% (PAT)...

Peer Metrics

Fidson

GSK

Current Price (N)

1.78

22.40

3.86

1.50

15.04

Trailing EPS (N)

0.30

1.89

0.57

0.05

0.12

P/E (x)

5.93

11.85

6.77

30.00

125.33

DPS (N)

0.22

0.60

0.40

n/a

12.36%

2.68%

10.36%

n/a

Dividend Yield

M&B Neimeth

NGC

Payout Ratio

89.00%

44.95%

66.98%

n/a

ROE (Average)

10.55%

25.41%

15.58% -31.97%

10.72%

ROA (Average)

6.96%

13.93%

8.21% -10.46%

6.96%

Outstanding Shares(mn)

1,500

957

700

1,926

154

Source: Company Financials; Vetiva Research PROFITABILITY RATIOS (Percent) 50% ROA

Operating RoA

RoE

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2007

2008

2009 Source: Company Financials

214

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

Outlook 2010

We are optimistic about the Company’s prospects, especially with respect to its ability to consistently deliver profits. The Company has plans to construct a new and larger factory, which we believe will help it increase efficiency and further penetrate the market. Furthermore, the defensive nature of its products, well diversified portfolio in the consumer goods segment, and affiliation with foreign companies (for which Fidson markets and promotes their products in Nigeria) would help grow the Company’s top line.

We expect FY’09/10 Turnover and After Tax Profits of N5.77 billion and N507 million respectively, which translates to a Forward EPS of N0.34 and Total DPS of N0.24.

FIDSON SHARE PRICE Vs. VOLUME TRADED 5

52 week high:N3.60 52 week low:N1.27 Average Price:N2.23 Avg Vol Traded (‘000): 432.79

Share Price (Naira)

4 3 2 1 -1 3500 3000

Volume Traded (‘000)

2500 2000 1500 1000 500 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

215

2009 Review | 2010 Outlook SECTORAL REVIEW HEALTHCARE

INCOME STATEMENT (N'Mn) Incom e Turnover C ost of Sales

2007

2008

3,307

4,504

(1,666) (2,019)

Gross Profit

1,642

Administrative Expenses Financial C harges C ore operating profit

2,485

(1,024) (1,812)

2009

2011F

2012F

5,019

5,772

6,638

7,633

(2,274)

(2,670)

(3,070)

(3,530)

2,745

3,102

3,568

4,103

(2,037)

(2,501)

(2,976)

(3,542)

(118)

(170)

(191)

500

503

517

Other Operating income

2010F

717

729

106

EBIT

623

697

814

718

790

Profit before taxation

505

Taxation

INCOME STATEMENT ($'Mn) Incom e Turnover C ost of Sales

(20)

(24)

(82)

Financial C harges

(1)

725

C ore operating profit

1 896

Profit before taxation

Taxation

505

189

429

507

568

618

Profit after taxation

300

330

355

397

433

Dividends

BALANCE SHEET (N'Mn)

2007

2008

2009

2010F

2011F

461

2012F

Assets Employed Fixed Assets

369

1,051

(1) 5

Other Operating income

Profit after taxation

509

EBIT

Dividends

965

52 (24)

883

521

45 (21)

(17)

(265)

862

39 (18)

789

620

34 (15)

(14)

(221)

759

30 (14) 17

704

360

22 (11)

(12)

(197)

489

2012F

623

2011F

(7)

(194)

874

2009 2010F

Gross Profit

526

NOPAT

2008

Distribution & Administrative Expenses

(337)

Retained Earnings

2007

(1)

(2)

0 -

-1

NOPAT

Retained Earnings

2007

2008

2009 2010F

2011F

2012F

3.96

5.88

BALANCE SHEET ($'Mn) Assets Employed

586

870

1132

1613

1366

1157

C urrent Assets

Fixed Assets

7.64

10.89

9.22

7.81

C urrent Assets

Stocks

504

778

1,756

1,795

2,065

2,374

Stocks

3.40

5.25

11.86

12.12

13.94

16.03

1,185

2,737

1,639

1,876

2,157

2,481

Debtors & Prepayments

8.00

18.48

11.07

12.66

14.56

16.75

Due from related company

542

287

152

175

201

Due from related company

0.29

3.66

1.93

1.03

1.18

1.36

C ash at bank and in hand

290

C ash and bank balances

0.30

1.96

0.00

Total C urrent Asset

1,776

4,346

3,681

3,823

4,396

5,056

Total C urrent Asset

11.99

29.35

24.86

25.81

29.68

34.14

Total Assets

2,724

6,963

4,813

5,436

5,762

6,213

Total Assets

18.39

47.02

32.50

36.70

38.91

41.95

C reditors Due within one year

1,169

1,750

1,914

2,106

2,232

2,366

C reditors Due within one year

7.89

11.81

12.93

14.22

15.07

15.98

128

248

172

176

180

186

C reditors due after one year

0.86

1.67

1.16

1.19

1.21

1.26

Share capital

750

Share capital

0.60

5.06

Share premium

2,973

Share premium

0.55

20.07

Debtors & Prepayments

C reditors due after one year

C apital and Reserves

Revaluation Reserves

C apital and Reserves

Revaluation Reserves

0.18

0.17

0.18

General Reserve

1,229

1,217

1,896

2,670

3,542

2,813

General Reserve

8.30

8.21

12.81

18.03

23.92

18.99

Shareholders' Equity

1,427

4,966

5,095

5,299

5,511

5,731

Shareholders' Equity

9.64

33.53

34.40

35.78

37.21

38.70

RATIOS

2007

2008

2009

2010F

2011F

2012F

2009 2010F

GROWTH RATES

2007

2008

2009

2010F

2011F

2012F

Turnover growth

50%

36%

12%

15%

Growth in C ore Operating profit

35%

30%

14%

-1%

MARGINS

2007

2008

2011F

2012F

EBIT/Sales

19%

15%

16%

17%

15%

13%

Pretax Income/Sales

15%

12%

13%

12%

Net Profit Margin

15%

2009 2010F

2011F

2012F

Growth in EBIT

36%

25%

13%

50%

ASSET UTILIZATION

2007

2008

Growth in PBT

36%

25%

13%

12%

EPS

2.8

0.1

0.29

0.34

0.38

0.41

Growth in PAT

36%

-63%

149%

18%

12%

DPS

2.3

0.2

0.22

0.24

0.26

0.29

8.0

3.3

3.40

3.53

3.67

3.82

2007

2008

2009

2010F

2011F

2012F

18.5

3.0

3.35

3.85

4.43

5.09

Return on Equity

43%

Return on Assets

24%

11%

10%

Return on Net fixed assets

98%

26%

47%

42%

41%

Return on Invested C apital

13%

15%

Growth rate (g)

46%

15%

Return on C apital Employed

33%

10%

11%

NAPS

PROFITABILITY

216

‘Ahead of the Curve’

Sales/Share

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

THE PETROLEUM MARKETING SECTOR The Petroleum Marketing Sector during the Second half of the year was troubled by the usual challenges, which in its customary manner continued to affect and distort private businesses and increase expenditure levels. Fuelled by strengthening prices of crude oil in the international market, in the wake of increasing global demand, the ripple effect on subsidy payments by the Government again increased concerns on the long term policy focus for the downstream oil sector. Though the Presidential Steering Committee on the Global Economic Crisis had made a number of recommendations in the first half of the year, with leanings towards a full deregulation of the Sector, the challenge of actual implementation, given the inherent structural deficiencies remained a setback. Deregulation Delayed Attempts at implementing the full deregulation policy by the speculated deadline the Federal Government had set were for the umpteenth time delayed. Stakeholders in the Sector had alleged that the Government had presented a November 1 2009 deadline, during a meeting with the labour unions, as the commencement date for the policy, a position which the Government functionaries vehemently dissociated from, in the wake of the deadline. There were also conjectures that the policy would take effect from the 1st of January, 2010, which precipitated hoarding activities by marketers as well as a cautious approach to product importation. Given the country’s weighty dependence on imported refined petroleum products, the implementation of the policy at current import expected prices provided by the Petroleum Products Pricing Regulatory Agency (PPPRA) is likely to cause a 67% mark-up in the price of Premium Motor Spirit while the cost of House Hold Kerosene would likely inch up 109%, using the PPPRA template.

RETAIL PRICE/SUBSIDY SPLIT Regulated Price

43.82

65.00

Expected Subsidy

40.27% 64.48

56.32%

50.00

43.68%

59.73%

Premium Motor Spirit

Household Kerosene Source: PPPRA; Vetiva Research

Notes: 1. Prices are based on the PPPRA Template as at 19th of January, 2009 2. Expected Open Market Prices: PMS - N108.82

‘Ahead of the Curve’

217

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

However, the Government has on a number of occasions re-iterated its resolve to actually embark on the deregulation exercise, though with no definite implementation time lines. Whilst we note that the Governments primary interest is to reduce the sizeable funds expended on subsidy payments, it acknowledges that a total dependence on importation would have a far reaching negative impact on product pricing. Through the Nigerian National Petroleum Corporation (NNPC), the Government is also making concerted efforts to acquire retail outlets in a bid to play a dominant role in downstream distribution. According to the Company’s Management, it had acquired 178 retail outlets by December 2009. Petroleum Industry Bill The passage of the legislation which is based on the report of the Oil and Gas Sector Reform implementation Committee led by the Minister of Petroleum Resources, Dr Rilwanu Lukman, is expected to completely overhaul the Petroleum Industry, as it is in its current state. Though, some industry observers had expected its passage into law during the review period, we note that it has gone through a second reading on both chambers of the National Assembly, albeit with some arising controversies relating to a duplication/alteration on the original provisions. The Bill’s provisions encapsulate all segments of the Petroleum Industry, stipulating the guidelines for operations in each segment. It also establishes new and transforms existing institutions to cater for the different functions within the Industry. For the downstream segment these include: The Petroleum Products Regulatory Authority (PPRA). Also referred to as ‘The Authority’ it shall act as the commercial regulator of the sector, with responsibilities including the regulation of refining, bulk storage and transportation activities, setting benchmark prices using a self determined methodology. The Inspectorate. To serve as the technical regulator of the entire industry, it is empowered to grant technical licenses for the design, procurement, construction and operation of refineries, process and petrochemical plants. National Transport Logistics Company (NTLC). To take over the gas pipelines, product pipelines and depots formerly owned by the Nigerian Gas Company (NGC) and the Petroleum Products Marketing Company (PPMC). The Company shall be wholly owned by the State, while the segments of the product pipeline and depots shall be licences to Facility Management Companies. Similarly, the gas pipeline system shall be licensed out to a Gas Facility Management Company. The Bill also proposes a new structure for upstream operations, which would improve Government’s revenue, while the role of the NNPC would be revamped to deal with its current inefficiencies. This entails the creation of a replacement formation for the current Joint Ventures to be referred to as Incorporated Joint Ventures (IJV’s), which would be registered as a Limited Liability Company. The IJV’s would be owned in the same proportion as the JV’s, with a National Oil Company (NOC) holding the interests of the Federal Government. We note that the International Oil Companies (IOC’s), who hold significant investments in the upstream segment of the Oil and Gas Sector, have expressed concerns on some of its provisions including the renewal, relinquishment and revocation of licenses; multiple taxation system, increased royalties etc.

218

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Local Refineries - Still Underperforming Supply of petroleum products from the nation’s four refineries still remains a key source of concern for the Sector. Whilst the Kaduna Refinery’s operations was stalled in the first quarter because of a Turn Around Maintenance (TAM) which cost about $20 million (approx. N3 billion), production from the refinery was disrupted in the latter half of the year due to disruptions to its feedstock supplies. Similarly, the production of refined petroleum products from Warri Refinery, which obtains feedstock through the same pipeline, has also been stopped.

REFINERY CAPACITY UTILISATION RATES Percent

KRPC

30%

21%

PHRC

WRPC

Production in both the Warri and Kaduna Refineries were stopped due to the unavailability of feedstock from May 2009

13%

12%

12% 11%

0% Q2'09

Jul'09

0% Aug'09

0% Sept'09

0% Oct'09

Source: NNPC Monthly Reports

The Chanomi Creek pipeline which supplies both refineries was vandalized by militants in May, 2009. However, due to the availability of unprocessed feedstock, production was maintained in both refineries till July. Referred to as System 2c, it supplies feedstock from the oil fields of Chevron in Escravos to the Warri Refinery and also imported heavy crude to the Kaduna Refinery. We note that the same pipeline was also ruptured in February 2006 and was only fully repaired by February 2008, exactly two years after. The Federal Government had hinted in November 2009 that repairs on the ruptured pipeline would be completed by December 2009; a position which it later communicated was not feasible, following the discovery of 42 new breached points, during pressure tests conducted by the contractors, prior to delivery. Consequently, the absence of feedstock in both refineries for most of the second half of the year exerted pressure on the Nigerian National Petroleum Corporation and product distributors to source the refined products via importation.

‘Ahead of the Curve’

219

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

REFINERY CRUDE RECEIPTS (2009) Metric Tonnes (‘000)

603

384

Supplies of feedstock during this period was solely restricted to the Port Harcourt Refinery, due to the vandalization of the Chanomi Creek Pipeline

376

301 223

200

118

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug

Sept

Oct

Source: NNPC Monthly Reports

Product Scarcity Fuelled by the inherent problems in the Sector, the review period (especially in November and December) was characterized with intermittent product scarcity. This led to the return of long fuel queues at retail outlets, with motorists effectively paying a premium on the regulated price. The scarcity was caused initially by the inability of the product importers (excluding the Nigerian National Petroleum Corporation) to obtain product importation licenses from the Department of Petroleum Resources (DPR). Thus, the NNPC which was previously responsible for c.47% of imported products was now responsible for all the products consumed in the country, in a period when two of the nation’s refineries were not operational. Subsequently, the DPR granted licenses to 15 importers. However, challenges relating to the speculative take off of the deregulation policy, delayed payments of subsidies from the Petroleum Support Fund (PSF), unavailable financing arrangements from the banks amidst the uncertainty, stalled the product import process. Players Performance Due to the challenges faced by players in the Sector, their financial performances in the year were pressured lower, as their cost structures tended higher. Most marketers were somewhat affected by the devaluation of the Naira and the congestion of the Ports necessitating increased demurrage on imported products in the first quarter. Similarly, their significant dependence on imported products following the dismal performance of the refineries affected their profitability margins. Consequently, they YoY performances for most players reflected a drop in their profit numbers. However, Oando and Chevron bucked the trend as they reported increases in their After Tax Profits. Whilst, Oando’s performance was bolstered by earnings from it upstream subsidiaries, Chevron’s reflected a recovery from the dismal performance in the last financial year, when its operations were hampered by staff and haulers industrial actions.

220

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Sector Outlook The terrain for players in the Petroleum Marketing Sector remains quite uncertain, as a number of directional policies are still being envisaged by stakeholders in the Sector. Of primary importance is the proposed deregulation of the downstream oil sector. Whilst the Federal Government has persistently hinted on its plans to reduce its expenditures on subsidy payments, we believe the policy would most likely not be implemented in the first quarter of the year, as the structure on which the policy would run remains in question. We consider that for effectiveness it would ensure that the nation’s four refineries are operational and running at a near optimal capacity, before implementation commences. However, we believe that importation by marketers for the first quarter would remain low, as bank financing would continue to pose challenges amidst an illiquid and risk averse operating environment. With correlated effects on their distribution volume, we expect that activity levels by most players would be relatively lower on a YoY basis. We expect that a clear-cut direction on the deregulation policy should be apparent by the second quarter. Consequently, we expect improvement in distribution levels and possible margin improvements if the deregulation policy is followed through.

‘Ahead of the Curve’

221

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Oando Plc - Company Overview BASIC INFORMATION 2, Ajose Adeogun Street

Address

Victoria Island, Lagos, Nigeria Website

www.oandoplc.com

Management

J A Tinubu (Group Chief Executive) O Boyo (D/Group Chief Executive)

Fiscal Year End Exchange Listing

December Primary Listing: Nigerian Stock Exchange Secondary Listing: Johannesburg Stock Exchange

Symbol

Bloomberg: OANDO:NL

Sector

Petroleum Marketing

Country

Nigeria

Oando’s commenced operations in 1956 as a petroleum marketing company in Nigeria under ESSO West Africa Incorporated. It has over the years re-engineered its strategies and transformed from being just a core local downstream oil marketing concern to becoming a leading integrated Energy Group with business tentacles spanning not just petroleum marketing but also, Exploration and Production of crude oil, International oil trading operations, Gas and Power solutions and Oil Services support.

Key Review Highlights

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Ocean & Oil Invstmnts

32.72

Others

67.28

Free Float (%)

67.28

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

905,084,628

DIVIDENDS AND BONUS ISSUES Type

Year

Final

FY'08

N6.00

Final

FY'07

N6.00

Scrip Issue

FY'07

1 for 5

Final

FY'06

N4.00

SIZE AND VALUE TRADED N 'Mn

85,069

$ 'Mn

574

Average Volume Traded ('09) Units

754,998

Market Capitalization

Average Value Traded ('09)

N '000

67,159

$ '000

453

Though listed in the Petroleum Marketing Sector of the Nigerian Stock Exchange, Oando Plc’s business lines extend to other service offerings within the Energy Value Chain which include Exploration & Production, Downstream Gas Distribution, Power, Energy Services etc. Its Energy Services Division during the course of the H2’09 acquired two additional rigs from Shell Petroleum Development Company, thereby increasing its rig fleet to five while its currently operational rig assets stands at three. These new acquisitions, in addition to its Agip contract for two operational rigs were the key business drivers for the Division within the review period and are expected to bolster the Divisions profitability. In addition to securing international alliances with major gas players like Gazprom during the review period, Oando Gas & Power was selected to participate as a Strategic Partner to the Ghana National Petroleum Corporation in a natural gas project with an estimated cost of about $1 billion. Whilst, this project is expected to impact on the Division in the Medium Term, we anticipate Near Term Divisional improvements from the East Horizon Gas Company when its 124km pipeline to the UNICEM factory is completed. Its quest to continually improve the Groups performance through an upstream diversification strategy was strengthened during the review period. It secured interests in Equator Exploration, which entitles it to the Company’s held interest in four exploration licences. Based on its suspended price (N93.99), the Company trades attractively at a Price to Book ratio of 1.77x (Sector Average – 8.28x), while its Price to Sales ratio stands at of 0.25x (Sector Average – 0.43x). Our Fair Value Price Range for Oando is between N109.26 N121.12 post-Rights and we are ‘Overweight’ at its current price. Forecast Summary

Earnings Per Share (N) YoY Change (%)

FY'08A

FY'09F

FY'10F

FY'11F

FY'12F

FY'13F

9.22

9.99

12.09

15.27

18.63

21.50 15.42%

46.12%

8.30%

21.02%

26.37%

21.97%

Price to Earnings (x)

8.65

9.41

7.78

6.15

5.05

4.37

Dividend Per Share (N)

6.00

7.45

9.06

11.45

13.96

16.12

YoY Change (%)

0.00%

24.20%

21.57%

26.37%

21.97%

15.42%

Dividend Yield (%) Net Assets Per Share (N)

7.52%

7.93%

9.64%

12.18%

14.86%

17.15%

49.60

56.05

62.56

66.38

71.03

76.40

YoY Change (%)

-21.13%

13.00%

11.63%

6.10%

7.01%

7.56%

Price to Book (x)

1.61

1.68

1.50

1.42

1.32

1.23

Source: Company Financials; Vetiva Research *The Company's Outstanding Shares increased in FY'09 following its scrip issue of 1 for 5; while our forecast assumes a 100% subscription from its Rights Issue

222

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Investment Summary Our Overweight recommendation is premised on its impressive historical performance and our favourable outlook.

The Company’s diversification strategy has started reflecting on its income streams. Effective 2008, two operational assets of its Exploration & Production Division (OML 125 and OML 134), which were acquired in the same year began contributing a material portion of its Profit numbers from crude oil sales. It is also well positioned to increase value from this Upstream Segment of the Nigerian Oil Industry, as it holds interests in a number of licences, which are currently in their exploration phases. Notably, two of these assets (OML 56 and OML 90) are expected to hit production in 2010.

Given present expectations that Oil prices would hover around current levels in the near future, profit margins from crude oil sales are likely to be >25%.

It downstream marketing business distributes products through over 500 retail outlets and accounts for c.16% of petroleum products distributed within the country. Also, it distributes products through its marketing subsidiaries in neighbouring West African countries (Ghana, Togo and the Republic of Benin). The Group’s Supply and Trading Division for a significant portion of products imported into the country.

Though margins for its Marketing and Supply & Trading Divisions have been pressured lower by delayed re-imbursements from the Petroleum Support Fund and its increasing financing cost, we note that the Division still accounts for the largest individual contribution to the Group’s profitability

Its most recent results (Q3’09) released on the 23rd of November, 2009 indicate YoY Turnover growth of 7.25%, while Profit After Tax (PAT) increased 19.36% YoY to N6.64 billion. More importantly, the Company recorded impressive QoQ growth rates of 107.72% and 74.19% respectively. However, we note that the Group’s profits include Exceptional Income earned on debt factoring.

Operational upstream assets reflect diversification strategy…

Impressive E & P current oil prices…

margins

given

Downstream business accounts for c.16% of petroleum products distribution…

Q3’09 PAT stands at N6.64 billion…

QUARTERLY CONTRIBUTIONS TO TURNOVER AND PAT N’Billions PROFIT AFTER TAX

TURNOVER

Q1'09 77.53

1.82 2.83

Q2'09

177.78 87.50 1.99

Q3'09

Source: Company Financials, Vetiva Research

‘Ahead of the Curve’

223

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Invested over $200 million in its Rigs strategy…

Three rigs have operational contracts…

Favourably positioned given the Local Content Policy…

Owns a 100km gas pipeline network in Lagos

Q3’09 Trailing EPS stands at N10.41…

PROFITABILITY RATIOS

Peer Metrics

(Percent) 20% ROAE 6%

As part of plans to invest $500 million in its Energy Services Division, Oando has invested over $200 million in the acquisition and refurbishment of five swamp rigs, more recently the acquisition of two rigs from Shell Petroleum Development Company for an estimated $43.5 million. We note that the Rigs Product Service Line is strategic to the Divisions profitability, and is expected to account for a significant portion of its Earnings in the future. Three rigs in the Division are currently operational. While one of the Shell acquisitions was acquired with an existing contract, two previously acquired rigs were deployed to Nigerian Agip Oil Company in June 2009, under a two year $150 million contract. Earnings from these rigs were first reflected in the Group’s Q3’09 performance, as the Company received one-off fees for mobilization of the contracted rigs. Given its ‘Indigenous Status’, it is well positioned to benefit from the Local Content Policy Initiative of the Federal Government, especially with regards to participation in the upstream sector of the Oil Industry, which exclusively was within the purview of foreign companies, due to the dearth of local expertise and capital. With a pipeline network of about 100km within the Lagos Area through its subsidiary – Gaslink Nigeria Limited, and an anticipated completion of a 124km stretch between Akwa-Ibom State and UNICEM’s factory in Cross Rivers State through another subsidiary – East Horizon Gas Company, the Oando Group is a leading distributor of natural gas. Its pipeline in Lagos supplies gas to about 90 industrial customers. Based on its Q3’09 results, the Company’s Trailing EPS increased to N10.41 from N9.37 in Q2’09, while it trades at a PE multiple of 9.03x, relative to a Sector Average of 12.50x.

ROAA

ROTC

18.08%

15.26% 13.05%

Oando

Total

Mobil

Conoil

Current Price (N)

93.99

33.51

151.60

98.80

29.08

Trailing EPS (N)

10.41

5.32

11.22

4.16

2.62

P/E (x)

9.03

6.30

13.51

23.75

11.10

DPS (N)*

6.00

5.20

12.93

5.00

1.00

Dividend Yield

8% 6.00% 4.80%

4.30%

3.53%

4.80% 3.70%

0% 2006

2007

2008

6.38%

15.52%

8.53%

5.06%

3.44%

Payout Ratio

65.00%

97.71%

99.00%

87.41%

38.11%

ROE (Average)

18.08%

17.81%

64.52%

44.51%

15.26%

ROA (Average)

3.71%

9.77%

12.40%

6.29%

3.79%

Outstanding Shares(mn)

905.08

958.89

339.52

300.50

693.95

Source: Company Financials

Source: Company Financials; Vetiva Research *Based on FY'08 dividend payouts

224

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Outlook 2010

The implementation or non-implementation of the Government’s deregulation policy of the downstream marketing sub-sector would have far reaching effects on the Company in 2010, as a sizeable portion of its Income and Profits is still tied to the marketing of downstream products. Though margins for its Product trading and marketing businesses would still remain low due to competition from other suppliers and marketer, we expect it to be relatively higher than current levels which have been bogged down by delayed subsidy payments and increased financing costs. For the Exploration & Production Division, we anticipate an impressive improvement in its profit numbers buoyed by higher average oil prices and increased output as OML 90 and OML 56 (where the Company controls a 45% and 30% interests respectively) is expected to hit production. Increased income from the soon to be completed 124km pipeline of the East Horizon Gas Company would fuel growth in the Gas & Power Division, while the Energy Services Division profitability would be spearheaded by its Rigs Product Service Line.

Consequently, we expect FY’10 Turnover and After Tax Profits of N500.65 billion and N16.64 billion respectively, which translates to a Forward Earnings Per Share of N12.09 and Dividend Per Share of N9.06.

OANDO SHARE PRICE Vs. VOLUME TRADED 150

52 week high:N99.00 52 week low:N54.20 Average Price:N83.42 Avg Vol Traded (‘000): 754.67 Beta:0.83

Share Price (Naira)

100

50 20000

Volume Traded (‘000)

15000 10000 5000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

225

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

2006

2007

2008

2009 F

2010 F

2011 F

2006

2007

2008

2009 F

2010 F

2011 F

Turnover Cost of Sales Gross Profit Selling and Marketing Costs Administrative Expenses Core Operating Profit Other operating income

209,079 (192,402) 16,677 (5,394) (5,824) 5,459 1,306

185,892 (164,443) 21,449 (5,722) (9,477) 6,249 2,471

339,420 (295,714) 43,706 (7,144) (15,724) 20,838 1,816

436,330 (397,060) 39,270 (9,599) (21,954) 26,915 2,543

500,645 (440,568) 60,077 (11,014) (20,026) 35,897 2,670

571,339 (497,064) 74,274 (12,569) (22,854) 42,304 2,537

Turnover Cost of Sales Gross Profit Selling and Marketing Costs Administrative Expenses Core Operating Profit Other operating income

1,412 (1,299) 113 (36) (39) 37 9

1,255 (1,110) 145 (39) (64) 42 17

2,292 (1,997) 295 (48) (106) 141 12

2,946 (2,681) 265 (65) (148) 182 17

3,380 (2,975) 406 (74) (135) 242 18

3,858 (3,356) 502 (85) (154) 286 17

EBITDA Depreciation & Amortization

6,765 (1,286)

8,720 (1,481)

22,655 (5,793)

24,372 (6,000)

33,227 (6,600)

39,767 (7,260)

EBITDA Depreciation & Amortization

46 (9)

59 (10)

153 (39)

165 (41)

224 (45)

269 (49)

18,372

26,627

32,507

EBIT/Operating Profit

114

124

180

219

(7,231) 910

(7,999) 819

(8,834) 901

Interest Payable & Similar charges Interest received

(9) 6

(72) 31

(49) 6

(54) 6

(60) 6

INCOME STATEMENT (N'Mill)

INCOME STATEMENT ($'Mill)

5,479

7,239

16,862

(2,141) 456

(1,297) 871

(10,668) 4,549

Profit on ordinary activities

3,794

6,814

10,743

12,051

19,446

24,574

Profit on ordinary activities

131

166

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

3,794 (719) 3,075 2,289 436

6,814 (1,333) 5,480 4,524 725

10,743 (2,399) 8,343 6,254 2,085

12,051 (3,013) 9,038 6,745 2,248

19,446 (4,862) 14,585 10,884 3,628

24,574 (6,143) 18,430 13,753 4,584

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

26 (5) 21 15 3

46 (9) 37 31 5

73 (16) 56 42 14

81 (20) 61 46 15

131 (33) 98 73 24

166 (41) 124 93 31

2006

2007

2008

2009F

2010F

2011F

2007

2008

2009F

2010F

2011F

607 151 0 98 7 863

759 166 0 118 4 1,046

873 183 0 141 1,197

1,004 201 0 156 1,360

EBIT/Operating Profit Interest Payable & Similar charges Interest received

Balance Sheet (N'Million) Non-Current Assets Fixed Assets Intangible Assets Investment in associates Long term investments Long term receivable Deferred Tax Asset Total Non-Current Assets

14,396 14,515 10 4,612 33,533

33,070 29,714 10 11,138 73,932

89,903 22,351 2 14,545 1,044 127,845

112,379 24,586 2 17,454 522 154,942

129,236 27,044 2 20,944 177,226

148,621 29,749 2 23,039 201,411

Current Assets Inventories Debtors & Prepayments Loan receivable Bank and cash balances Total Current Assets

15,159 36,140 7,605 58,904

24,730 46,813 17,209 88,752

16,069 93,703 1,180 48,982 159,933

19,283 46,851 590 12,256 78,979

23,139 28,111 35,840 87,090

25,453 22,489 38,800 86,742

92,437

162,684

287,778

233,922

264,317

288,153

TOTAL ASSETS

Balance Sheet ($'Million)

0 31 226

223 201 0 75 499

Current Assets Inventories Debtors & Prepayments Loan receivable Bank and cash balances Total Current Assets

102 244 51 398

167 316 116 599

108 633 8 331 1,080

130 316 4 83 533

156 190 242 588

172 152 262 586

TOTAL ASSETS

624

1,098

1,943

1,579

1,785

1,946

159 0 6 270 436

280 0 9 355 644

305 0 3 23 961 1,292

244 0 1 29 634 909

298 0 38 699 1,035

352 0 50 730 1,131

(38)

(45)

23,600 2 929 40,054 64,585

41,410 2 1,308 52,635 95,354

45,243 1 437 3,355 142,347 191,384

36,194 2 219 4,362 93,875 134,651

44,157 2 5,671 103,490 153,320

52,105 3 7,372 108,092 167,572

Current Liabilities Creditors & Accruals Dividend payable Deferred Tax Tax payable Borrowings Total Current Liabilities

Net Current Assets/(Liabilities)

(5,681)

(6,602)

(31,451)

(55,672)

(66,229)

(80,830)

Net Current Assets/(Liabilities)

1,551 706 687 138 372 3,455

17,730 727 889 142 425 19,914

41,861 934 7,483 1,237 51,515

39,768 1,075 5,986 283 1,422 48,535

27,838 1,236 4,789 1,636 35,498

33,405 1,359 3,831 1,881 40,477

TOTAL LIABILITIES

68,040

115,268

242,899

183,186

188,818

208,049

Net Assets

24,396

47,416

44,879

50,736

75,499

80,104

603 50,846 10,653 17,851 79,953 151 80,104

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 286 377 Share premium account 15,980 29,878 Revaluation Reserves 2,424 10,653 3,853 6,321 Retained Earnings 22,544 47,229 Minority Interest 1,853 187 Shareholder's Fund 24,396 47,416

452 29,717 7,215 7,343 44,728 151 44,879

453 29,878 10,653 9,602 50,585 151 50,736

603 50,846 10,653 13,246 75,348 151 75,499

GROWTH RATES Turnover Growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT

2006 14.4% -1.3% 25.9% 44.7% 73.4%

2007 -11.1% 62.7% 28.9% 79.6% 78.2%

2008 82.6% 65.9% 159.8% 57.7% 52.2%

2009F 28.6% 39.6% 7.6% 12.2% 8.3%

2010F 14.7% -8.8% 36.3% 61.4% 61.4%

2011F 14.1% 14.1% 19.7% 26.4% 26.4%

PROFITABILITY Return on Equity Return on Assets Return On Total Capital Operating ROE Operating ROA

2006 13.1% 3.5% 4.8% 23.3% 6.3%

2007 15.3% 4.3% 6.0% 20.2% 5.7%

2008 18.1% 3.7% 4.8% 36.5% 7.5%

2009F 18.9% 3.5% 4.4% 38.4% 7.0%

2010F 23.1% 5.9% 7.5% 42.2% 10.7%

2011F 23.7% 6.7% 8.6% 41.8% 11.8%

MARGINS Gross Profit EBITDA/Sales EBIT/Sales Exceptional Item Pretax Income/Sales Net Profit Margin

2006 8.0% 3.2% 2.6% 0.0% 1.8% 1.5%

2007 11.5% 4.7% 3.9% 0.0% 3.7% 2.9%

2008 12.9% 6.7% 5.0% 0.0% 3.2% 2.5%

2009F 9.0% 5.6% 4.2% 0.0% 2.8% 2.1%

2010F 12.0% 6.6% 5.3% 0.0% 3.9% 2.9%

2011F 13.0% 7.0% 5.7% 0.0% 4.3% 3.2%

ASSET UTILIZATION Sales to Cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets (x)

2006 27.5 13.8 2.3 14.5

2007 10.8 7.5 1.1 5.6

2008 6.9 21.1 1.2 3.8

2009F 35.6 22.6 1.9 3.9

2010F 14.0 21.6 1.9 3.9

2011F 14.7 22.4 2.0 3.8

226

‘Ahead of the Curve’

2006

Non-Current Assets Fixed Assets Intangible Assets Investment in associates Long term investments Long term receivable Deferred Tax Asset Total Non-Current Assets

Current Liabilities Creditors & Accruals Dividend payable Deferred Tax Tax payable Borrowings Total Current Liabilities

Non-Current liabilities Borrowings Other non-current liabilities Deferred taxation Retirement benefit obligation Provision Total Non-Current Liabilities

(14) 3

97 98 -

Non-Current liabilities Borrowings Other non-current liabilities Deferred taxation Retirement benefit obligation Provision Total Non-Current Liabilities

(212)

(376)

(447)

(546)

10 5 5 1 3 23

120 5 6 1 3 134

283 6 51 8 348

269 7 40 2 10 328

188 8 32 11 240

226 9 26 13 273

TOTAL LIABILITIES

459

778

1,640

1,237

1,275

1,405

Net Assets

165

320

303

343

510

541

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 2 3 Share premium account 108 202 Revaluation Reserves 16 72 26 43 Retained Earnings 152 319 Minority Interest 13 1 Shareholder's Fund 165 320

3 201 49 50 302 1 303

3 202 72 65 342 1 343

4 343 72 89 509 1 510

4 343 72 121 540 1 541

LIQUIDITY RATIOS Cash ratio (x) Current ratio (x) Acid Test (x) Interest Coverage (x) Days in inventory (x) Days in accounts payable (x) Days in receivables (x) Cash Conversion Cycle CAPITAL STRUCTURE Interest bearing debt/Total assets Debt to Total Capital Debt to Equity Payout ratio Total equity/Total assets Retention ratio Financial Leverage PER SHARE DATA EPS DPS NAPS Sales/Share EBITDA

2006 0.1 0.9 0.7 2.6 26.5 44.8 63.1 44.8

2007 0.2 0.9 0.7 5.6 48.6 91.9 91.9 48.6

2008 0.3 0.8 0.8 1.6 17.3 55.8 100.8 62.2

2009F 0.1 0.6 0.4 2.5 16.1 33.3 39.2 22.1

2010F 0.2 0.6 0.4 3.3 16.9 36.6 20.5 0.8

2011F 0.2 0.5 0.4 3.7 16.3 38.3 14.4 -7.6

2006 45.0% 63.0% 170.5% 84.0% 26.4% 16.0% 3.8

2007 43.3% 59.7% 148.4% 95.2% 29.1% 4.8% 3.4

2008 64.0% 80.4% 410.5% 65.1% 15.6% 34.9% 6.4

2009F 57.1% 72.5% 263.4% 75.0% 21.7% 25.0% 4.6

2010F 49.7% 63.5% 173.9% 75.0% 28.6% 25.0% 3.5

2011F 49.1% 63.9% 176.6% 75.0% 27.8% 25.0% 3.6

2006 4.76 4.00 42.63 365.33 11.82

2007 6.31 6.00 62.88 246.52 11.56

2008 9.22 6.00 49.60 375.10 25.04

2009F 9.99 7.49 56.06 482.09 26.93

2010F 12.09 9.06 62.56 414.86 27.53

2011F 15.27 11.45 66.38 473.44 32.95

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

African Petroleum Plc - Company Overview BASIC INFORMATION Address

AP House, 54/56 Broad Street 54/56 Broad Street, Lagos.

Website

www.applcng.com

Management

F Otedola (Chairman/CEO) T Falasinnu (COO)

Fiscal Year End

December

Exchange Listing

Nigerian Stock Exchange

Symbol

Bloomberg: APET:NL

Sector

Petroleum Marketing

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Asset Mgt Nominees Ltd

11.69

Zenon Petroleum & Gas Ltd

25.06

ZSL A/c FOZ

12.63

Others

50.62

Free Float (%)

50.62

African Petroleum Plc (“AP or the Company”) was formerly known as British Petroleum Nigeria Limited was formally incorporated in Nigeria in 1964. The name change was effected in 1978, when the Company was listed on the floor of the Nigerian Stock Exchange. The Company is involved in the marketing of refined petroleum products which include Premium Motor Spirit (PMS), Automotive Gas Oil (Diesel), Dual Purpose Kerosene (DPK), Fuel Oils and Jet A-1 fuel. It also manufactures and distributes a wide range of lubricants which are mainly BP branded grades.

Key Review Highlights

Shares from its 2008 hybrid offering were listed on the Exchange in Q3’09, following months of litigation with some of its underwriters, who were yet to meet up with their underwriting commitments. Out of the 246.293 million shares listed, we note that 170.098 million shares (37% of its Offer size) which were earlier published in its allotment notice, qualified for its FY’08 dividend payout.

During the course of the year, the Company gained significant market share in the distribution of refined petroleum products. From 14.44% in 2008 (2007: 10.22%), data from the Nigerian National Petroleum Corporation indicates a 17.2% market share as at Q2’09.

Its Specialties Division during the course of the year launched a new fibre synthetic transparent composite cylinder into the Nigerian Liquefied Petroleum Gas (LPG) market. The composite cylinders come in two sizes (12.5kg and 6kg) and are 30% lighter than the regular steel cylinders.

In addition to existing Liquefied Petroleum Gas (LPG) filling plants in Lagos, Kano and Port-Harcourt, the Company actualised its previously disclosed plan to introduce mobile filling plants. The Company acquired two mobile filling plants to be utilised in Port-Harcourt and Kano.

It introduced a new grade of its BP brand of lubricant products - Visco 5000.

Based on its current market price (N33.51), the Company trades at a Price to Book ratio of 4.62x (Sector Average – 5.53x), while its Price to Sales ratio stands at of 0.20x (Sector Average – 0.28x). Our Fair Value Price Range for African Petroleum is between N73.74 - N83.39 and we are ‘Overweight’ at its current price.

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

1,035,081,778

DIVIDENDS AND BONUS ISSUES Type Final Final Final

Year FY'08 FY'07 FY'06

N5.20 N7.00 N1.00

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

34,685

$ 'Mn

234

Units

316,893

Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'08A

FY'09F

FY'10F

FY'11 FY'12F

FY'13F

5.32

6.20

7.13

8.20

8.87

10.02

-26.71%

16.46%

15.00%

8.19%

13.00%

55.24

5.41

4.70

4.09

3.78

3.34

5.20

5.58

6.41

7.38

7.98

9.02

-25.71%

7.27%

15.00%

8.19%

13.00%

1.77%

16.65%

19.14%

22.01% 23.82%

26.91%

7.26

64.94

65.66

66.48

67.36

68.37

-22.39% 794.39%

1.10%

1.25%

1.33%

1.49%

0.51

0.50

0.49

40.49

0.52

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

227

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Investment Summary Our Overweight recommendation is premised on its impressive historical performance and our favourable outlook.

Its unutilised offer proceeds, which was only made available in H2’09 would be available to finance a number of its highlighted expansion projects in 2010. These include its upstream diversification, construction of new mega stations, refurbishment of existing stations, construction of Premium Motor Spirit (PMS) storage facilities in Port Harcourt and Apapa.

The Company has expanded its distribution capacity by 650% within the last three years, following the takeover of its new Management. The capacity expansion was achieved mainly by increasing the individual capacities in a large number of its retail outlets from 10,000 litres to about 45,000 litres.

Expected consolidation of its LPG strategy, as new filling plants are to be established in Benin, Ibadan and Abuja.

Relatively lower dependence on debt financing, following payments of delayed subsidies as well increased working capital from its hybrid offer proceeds.

Its last released results (FY’08) released on the 1st of July, 2009 show YoY Turnover growth of 58.63%, while Profit After Tax (PAT) dipped 10.90% on the back of its increased interest cost. We note that interest expenses accounted for 43% of the Company’s Operating Profit. On the back of this result, the Company’s Trailing EPS declined to N5.32 from N8.27 in Q3’08 (using its dividend qualifying shares), while it trades at a PE multiple of 6.30x, relative to a Sector Average of 12.50x.

Offer proceeds to fund expansion…

Expanded 650%…

distribution

capacity

Increased working capital from hybrid offer…

FY’08 Trailing EPS stands at N5.32…

PROFITABILITY RATIOS (Percent) 20% ROAE 16%

ROAA

ROTC

18.08%

15.26% 13.05%

12%

8% 6.00% 4.80%

4.30%

3.53%

4.80% 3.70%

0% 2006

2007

2008 Source: Company Financials

228

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Peer Metrics

Oando

Total

Mobil

Conoil

Chevron

Current Price (N)

93.99

33.51

149.00

98.80

27.63

69.79

Trailing EPS (N)

10.41

5.32

11.22

4.16

2.62

6.89

9.03

6.30

13.28

23.75

10.55

10.13

P/E (x) DPS (N)*

6.00

5.20

12.93

5.00

1.00

6.38%

15.52%

8.68%

5.06%

3.62%

n/a

Payout Ratio

65.00%

97.71%

99.00%

87.41%

38.11%

n/a

ROE (Average)*

18.08%

17.81%

64.52%

44.51%

15.26%

ROA (Average)*

3.71%

9.77%

12.40%

6.29%

3.79%

Outstanding Shares(mn)

905.08

958.89

339.52

300.50

693.95

253.99

Dividend Yield

Source: Company Financials; Vetiva Research *Based on FY'08 financials

Outlook 2010

Premised on its increased distribution market share in 2009, we believe the Company would remain a major player in the Sector in the 2010 financial year. We anticipate that like other players the actual implementation of the eagerly anticipated deregulation policy would reduce its product importation exposure to the delayed Government subsidies. However, current uncertainties about the policy create a specific risk to the Company’s ability to access bank financing for its product importation.

We expect FY’10 Turnover and After Tax Profits of N215.03 billion and N7.38 billion respectively, which translates to a Forward Earnings Per Share of N7.13 and Dividend Per Share of N6.41.

AP SHARE PRICE Vs. VOLUME TRADED 300

52 week high:N293.98 52 week low:N30.00 Average Price:N91.21 Avg Vol Traded (‘000): 316.90 Beta:-1.90

Share Price (Naira)

250 200 150 100 50 0 14000 12000

Volume Traded (‘000)

10000 8000 6000 4000 2000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

229

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

INCOME STATEMENT (N'Mill)

2006 81,934

Turnover Cost of Sales

2007 102,499

2008

2009 F

2010 F

2011 F

162,596

186,985

215,033

247,287

(135,584)

(155,906)

(179,354)

(206,328)

INCOME STATEMENT ($'Mill) Turnover

2006

2007

553

692

2008

(482)

(578)

(915)

114

182

210

241

1,098

2009 F

2010 F

1,263

1,452

2011 F 1,670

(1,053)

(1,211)

(1,393)

(71,339)

(85,542)

Gross Profit

10,596

16,957

27,012

31,079

35,678

Selling and Marketing Costs

(1,457)

(3,111)

(6,854)

(8,088)

(9,301)

(10,696)

Selling and Marketing Costs

(10)

(21)

(46)

(55)

(63)

Administrative Expenses

(4,333)

(5,048)

(7,420)

(8,533)

(9,728)

(11,089)

Administrative Expenses

(29)

(34)

(50)

(58)

(66)

(75)

4,805

8,798

12,738

14,459

16,650

19,174

112

129

109

362

876

613

705

811

4,914

9,160

13,613

13,845

15,945

18,363

EBITDA

108

124

(1,131)

(1,323)

(1,548)

Depreciation & Amortization

(5)

(6)

(7)

(8)

(9)

(10)

12,647

12,715

14,622

16,816

EBIT/Operating Profit

114

(4,516)

(5,193)

Interest Payable & Similar charges

(13)

(16)

(37)

(27)

(30)

10,107

11,623

Core Operating Profit Other operating income EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Similar charges Profit on ordinary activities Exceptional Items Profit Before Taxation Taxation

(705)

Dividends Retained Earnings BALANCE SHEET (N'Mill)

(966)

4,210

8,331

(1,982)

(2,427)

(5,499)

(3,927)

2,227

5,904

7,148

8,788

210

1,173

2,438

Cost of Sales Gross Profit

Core Operating Profit Other operating income

Profit on ordinary activities Exceptional Items

48 -

59 -

68 -

277 (72)

(35) 78 -

7,077

7,148

8,788

10,107

11,623

Profit Before Taxation

(1,350)

(2,045)

(2,373)

(2,729)

(3,138)

Taxation

(2)

(9)

(14)

(16)

(18)

(21)

2,162

5,728

5,103

6,415

7,378

8,484

Profit After Taxation

789

5,522

4,986

5,774

6,640

7,636

Dividends

1,373

206

117

642

738

848

Retained Earnings

2007

2008

2009 F

2010 F

2011 F

BALANCE SHEET ($'Mill) Fixed Assets

(276)

Profit After Taxation

(829)

40,959

2006

2007

2008

2009 F

2010 F

6 2011 F

Non-Current Assets

Non-Current Assets Fixed Assets

8,760

120

144

173

298

112

134

330

318

310

158

412

539

573

617

10,555

11,347

12,198

13,113

100

Finance Leased Assets

1,972

173

150

173

198

Long term investments

10,732

9,858

10,696

11,573

12,457

13,411

Total Non-Current Assets

Long term investments Total Non-Current Assets

9,587

Finance Leased Assets

89 1

Current Assets

Current Assets Stocks

5,834

5,920

11,842

17,762

21,315

25,578

Stocks

Debtors

9,753

12,790

44,119

13,236

16,545

19,854

Debtors

1,900

4,657

5,000

48,860

47,023

45,899

Bank and cash balances

Total Current Assets

17,487

23,388

60,964

79,865

84,892

91,345

Total Current Assets

118 -

TOTAL ASSETS

28,219

33,245

71,660

91,437

97,350

104,756

TOTAL ASSETS

191

224

484

617

657

707

113

104

Intercompany receivables Bank and cash balances

Intercompany receivables

Current Liabilities

Current Liabilities 16,778

16,089

53,484

10,697

12,836

15,403

109

361

Trade creditors

3,111

3,311

2,251

3,377

4,727

6,146

Trade creditors

Other Creditors

3,114

3,939

5,726

6,872

8,246

9,895

Other Creditors

408

1,459

1,461

1,534

1,610

1,691

Taxation

Total Current Liabilities

23,412

24,798

62,922

22,479

27,420

33,135

Total Current Liabilities

158

167

425

152

185

224

Net Current Assets/(Liabilities)

(5,925)

(1,411)

(1,959)

57,386

57,472

58,210

Net Current Assets/(Liabilities)

(40)

(10)

(13)

387

388

393

Bank loans and overdrafts

Taxation

Deferred Taxation

233

1,986

134

120

598

718

1,435

366

933

1,422

1,138

1,251

1,377

Gratuity provision

2,352

1,067

1,774

1,736

1,969

2,812

Total Non-Current Liabilities

TOTAL LIABILITIES Net Assets

25,764

25,865

64,697

24,215

29,389

35,947

TOTAL LIABILITIES

2,455

7,380

6,963

67,223

67,961

68,809

Net Assets

Share premium account General reserve

394

518

4,750

19,321

78,816

(22,010)

(17,085)

(17,502)

(16,861)

(16,123)

(15,274)

67,223

67,961

68,809

2,455

Shareholder's Fund

GROWTH RATES

10 9

174

175

437

164

198

243

454

459

465

Capital and Reserves attributable to equity holders

Revaluation reserve

Capital and Reserves

Capital and Reserves Share Capital

Term loans Provision for Liabilities:

Provision for Liabilities: Total Non-Current Liabilities

Creditors: Amount falling due after 1 yr

Gratuity provision

Non-Current liabilities

Term loans

Bank loans and overdrafts

7,380

6,963

2006

2007

2008

2009F

2010F

Share Capital Revaluation reserve Share premium account General reserve

LIQUIDITY RATIOS

130

532

(149)

(115)

(118)

(114)

(109)

(103)

Shareholder's fund

2011F

3 32

2006

459 2010F

25.1%

58.6%

15.0%

Cash ratio

83.1%

44.8%

13.5%

15.2%

Current ratio

0.7

0.9

1.0

3.6

3.1

2.8

Growth in EBITDA

N/A

86.4%

48.6%

1.7%

15.2%

Acid Test

0.5

0.7

0.8

2.8

2.3

2.0

Growth in PBT

N/A

190.3%

1.0%

23.0%

15.0%

Interest Coverage (x)

2.1

3.4

2.3

3.2

Days in inventory

29.8

25.3

31.9

41.6

43.4

45.2

Growth in PAT

N/A

165.0%

-10.9%

25.7%

15.0%

Days in accounts payable

15.9

14.1

6.1

7.9

9.6

10.9

Days in receivables

43.4

45.5

99.0

25.8

28.1

29.3

PROFITABILITY

2006

2007

2008

2009F

2010F

2011F

Cash conversion cycle

57.4

56.7

124.9

59.5

61.8

63.7

Return on Equity

39.3%

29.1%

17.8%

4.3%

2.7%

3.1%

2006

2007

2008

2009F

2010F

2011F

9.1%

Return On Total Capital

18.6%

9.7%

7.9%

7.8%

8.4%

Interest bearing debt/Total assets

3.4%

6.4%

3.0%

2.3%

2.5%

40.5%

30.0%

24.9%

5.9%

3.7%

4.2%

Operating ROA

9.4%

19.2%

13.6%

10.8%

10.7%

11.5%

MARGINS

2006

2007

2008

2009F

2010F

2011F

Retention ratio

Operating ROE

Debt to Total Capital Debt to Equity Payout ratio Total equity/Total assets

Gross Profit

12.9%

16.5%

16.6%

EBITDA/Sales

6.0%

8.9%

8.4%

7.4%

EBIT/Sales

5.1%

8.1%

7.8%

66.5%

48.8%

74.8%

2.2

12.4%

1.7

465 2011F

N/A

Return on Assets

0.1

454 2009F

91.6%

CAPITAL STRUCTURE

0.2

47 2008

Growth in Core Operating profit

Turnover growth

0.1

50 2007

13.9%

1.4

16.1%

88.4%

68.7%

88.5%

14.4%

16.6%

19.7%

764.2%

219.8%

769.9%

16.8%

19.9%

24.5%

36.5%

96.4%

97.7%

90.0%

8.7%

22.2%

9.7%

73.5%

69.8%

65.7%

63.5%

3.6%

2.3%

10.0%

Financial Leverage

11.49

4.50

10.29

1.36

1.43

1.52

PER SHARE DATA

2006

2007

2008

2009F

2010F

2011F

6.8%

EPS

2.74

7.26

5.32

Pretax Income/Sales

3.0%

6.9%

4.4%

4.7%

DPS

1.00

7.00

5.20

5.58

6.41

7.38

Net Profit Margin

2.6%

5.6%

3.1%

3.4%

NAPS

3.11

9.36

7.26

64.94

65.66

66.48

103.87

129.94

169.57

180.65

207.74

238.91

ASSET UTILIZATION

6.23

11.61

14.20

13.38

15.40

17.74

Sales/Share

2006

2007

2008

2009F

2010F

2011F

Sales to cash (x)

43.1

22.0

32.5

3.8

4.6

5.4

Inventory Turnover (x)

14.0

17.3

13.7

10.5

10.1

9.7

Asset turnover (x)

2.9

3.1

2.3

2.0

2.2

2.4

Fixed Assets (x)

9.4

10.7

15.4

16.5

17.6

18.9

230

‘Ahead of the Curve’

EBITDA

6.20

7.13

8.20

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Total Nigeria Plc - Company Overview BASIC INFORMATION Address

4, Afribank Street Victoria Island, Lagos, Nigeria

Website

www.ng.total.com

Management

D Thiolon (Managing Director)

Fiscal Year End

December

Exchange Listing

Nigerian Stock Exchange

Symbol

Bloomberg: TOTAL:NL

Sector

Petroleum Marketing

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Total Societe Anonyme

45.24

Elf Aquitane S.A. Enifor Limited Others

16.48 8.12 30.16

Free Float (%)

30.16

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

339,521,837

Key Review Highlights

DIVIDENDS AND BONUS ISSUES Type Final Final Final

Year FY'08 FY'07 FY'06

Total Nigeria Plc began its Nigerian operations as a private limited liability company known as Compagnie Francais Des Petrolieres in 1956. The Company was however listed on the Nigerian Stock Exchange in 1979, following its conversion to a public limited company in 1978. Following the merger between Total Nigeria Plc and Elf Oil Nigeria Ltd in 2001, the Company’s name was changed to TotalFinaElf Nigeria Plc, which was later reverted to Total Nigeria Plc in 2003. The Company is a subsidiary of Total S.A. France. The Company is engaged in the marketing and distribution of petroleum products, liquefied petroleum gas, lubricants and chemicals. The Company has over 500 retail outlets through which it distributes its products and also possesses three lubricant blending plants located at Koko in Delta State, Kaduna and Apapa. Its bulk storage facilities are located at Apapa, Ibafon, Kano, Kaduna and Bukuru. The Company also owns ten LPG bottling plants around the country with a coastal storage in Apapa, Lagos.

N12.94 N9.50 N7.40

Increased its budgeted capital expenditure by 32% to N3.7 billion (2007: N2.8 billion) to fund expansion and refurbishment of its retail outlets. The Company launched a program of re-inventing its outlets during the year.

Despite current challenges in the distribution of refined petroleum products, the Company has maintained a sizeable market share. It inched up from the 2nd position it occupied at the end of 2008 to the 1st position by June 2009. It accounted for 17.24% and 17.80% of product distribution volumes in Q1’09 and Q2’09 respectively.

Based on its current market price (N149.00), the Company trades at a Price to Book ratio of 8.51x (Sector Average – 5.23x), while its Price to Sales ratio stands at of 0.29x (Sector Average – 0.28x). Our Fair Value Price Range for Total is between N122.45 - N131.17 and we are ‘Neutral’ at its current price.

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

50,589

$ 'Mn

342

Units

42,129

Forecast Summary Earnings Per Share (N) YoY Change (%)

FY'08A

FY'09F

FY'10F

FY'11

FY'12F

FY'13F

12.94

12.20

14.47

16.21

17.83

19.07

34.95%

-5.70%

18.59%

12.00%

10.00%

7.00%

Price to Earnings (x)

15.74

12.21

10.30

9.19

8.36

7.81

Dividend Per Share (N)

12.93

11.59

13.75

15.40

16.94

18.12

36.11% -10.35%

18.59%

12.00%

10.00%

7.00%

9.23%

10.33%

11.37%

12.16%

YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

6.35%

7.78%

21.41

22.02

22.74

23.55

24.44

25.40

YoY Change (%)

14.67%

2.85%

3.29%

3.56%

3.78%

3.90%

Price to Book (x)

9.51

6.77

6.55

6.33

6.10

5.87

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

231

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Investment Summary Our Overweight recommendation is premised on its impressive historical performance and our favourable outlook. Largest distribution market share…

It currently has the largest market share in the distribution of refined petroleum products.

99% dividend payout policy…

The Company has a rewarding dividend payout policy. In the last three years, it has maintained a 99% payout policy.

Its Q3’09 results released on the 23rd of November, 2009 indicate YoY Turnover dip of 1.56%, while Profit After Tax (PAT) dropped 16.78% YoY to N2.29 billion. The Company attributed the relative drop in profitability to the dip in margins of Premium Motor Spirit (PMS or Petrol), due to costs incurred while importing as against sourcing the products from the local refineries.

Based on its Q3’09 results, the Company’s Trailing EPS decreased to N11.22 from N11.63 in Q2’09, while it trades at a PE multiple of 13.28x, relative to a Sector Average of 12.50x.

Q3’09 PAT stands at N2.29 billion…

Q3’09 Trailing EPS stands at N10.41

QUARTERLY CONTRIBUTIONS TO TURNOVER AND PAT N’Billions

…

PROFIT AFTER TAX

TURNOVER

H1'09 45.99

1.15 85.09

1.77

Q3'09

Source: Company Financials, Vetiva Research

232

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Peer Metrics

Oando

Total

Mobil

Conoil

Chevron

Current Price (N)

93.99

33.51

149.00

98.80

27.63

69.79

Trailing EPS (N)

10.41

5.32

11.22

4.16

2.62

6.89

9.03

6.30

13.28

23.75

10.55

10.13

PROFITABILITY RATIOS (Percent) 72% ROAE 60%

ROTC

53.80%

50.90%

48%

ROAA

43.90%

64.60%

52.10%

DPS (N)*

41.60%

6.00

5.20

12.93

5.00

1.00

6.38%

15.52%

8.68%

5.06%

3.62%

Payout Ratio

65.00%

97.71%

99.00%

87.41%

38.11%

ROE (Average)*

18.08%

17.81%

64.52%

44.51%

15.26%

Dividend Yield

36% 24% 12%

P/E (x)

9.10%

9.90%

2007

n/a n/a -

10.80%

0% 2006

ROA (Average)*

3.71%

9.77%

12.40%

6.29%

3.79%

Outstanding Shares(mn)

905.08

958.89

339.52

300.50

693.95

253.99

2008

Source: Company Financials; Vetiva Research

-12%

*Based on FY'08 financials Source: Company Financials

Outlook 2010

Increased investment in its retail infrastructure in the preceding financial year should aid boost its distributive capacity in 2010. Also, we expect its profitability margins to improve, if the Government follows through with the deregulation policy.

We expect FY’10 Turnover and After Tax Profits of N200.69 billion and N4.91 billion respectively, which translates to a Forward Earnings Per Share of N14.47 and Dividend Per Share of N13.75.

TOTAL SHARE PRICE Vs. VOLUME TRADED 250

52 week high:N203.69 52 week low:N112.01 Average Price:N150.06 Avg Vol Traded (‘00): 419.62 Beta:0.51

Share Price (Naira)

200

150

100 8000 7000 6000 5000 4000 3000 2000 1000 0

Volume Traded (‘00)

Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

233

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit

2006

2007

2008

2009 F

2010 F

2011 F

126,574

137,340

177,412

179,186

200,688

224,771

(111,784)

(120,410)

(158,265)

(156,370)

(175,386)

(196,478)

14,790

16,930

19,147

22,816

25,303

28,293

INCOME STATEMENT ($'Mill)

2006

2007

2009 F

2010 F

855

927

1,198

1,210

1,355

1,518

(755)

(813)

(1,069)

(1,056)

(1,184)

(1,327)

100

114

Turnover Cost of Sales Gross Profit

2008

129

154

171

2011 F

191

Selling and Marketing Costs

(27)

(28)

(34)

(39)

(44)

(50)

Administrative Expenses

(47)

(53)

(52)

(58)

(64)

(71)

Selling and Marketing Costs

(4,063)

(4,093)

(5,032)

(5,711)

(6,482)

(7,357)

Administrative Expenses

(6,927)

(7,844)

(7,743)

(8,594)

(9,540)

(10,589)

3,799

4,993

6,372

8,511

9,281

10,346

309

671

1,157

868

954

1,050

4,108

5,664

7,529

9,378

10,235

11,396

EBITDA

(1,029)

(1,095)

(1,259)

(1,385)

(1,524)

Depreciation & Amortization

(6)

(7)

(9)

4,635

6,434

8,119

8,850

9,872

EBIT/Operating Profit

(1,615)

(1,130)

(1,187)

Interest Payable & Similar charges

(1)

(2)

(8)

Core Operating Profit Other operating income EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Similar charges Interest Receivable Profit on ordinary activities Exceptional Items Profit Before Taxation

(834) 3,275 (165)

(77)

(269)

139

271

344

412

495

594

3,249

4,829

6,508

6,092

7,225

8,092

3,249

4,829

6,508

6,092

7,225

8,092

Core Operating Profit Other operating income

Interest Receivable Profit on ordinary activities Exceptional Items

Profit Before Taxation

(11)

(10)

(1,573)

(2,115)

(1,950)

(2,312)

(2,589)

Taxation

(5)

(11)

(14)

(13)

(16)

(17)

Profit After Taxation

2,517

3,255

4,393

4,143

4,913

5,502

Profit After Taxation

Dividends

2,512

3,225

4,390

3,936

4,667

5,227

207

246

275

Dividends Retained Earnings

17 0

22 0

30 0

27 1

32 2

35 2

Taxation

(732)

Retained Earnings

BALANCE SHEET (N'Mill)

2006

2007

2008

2009 F

2010 F

2011 F

BALANCE SHEET ($'Mill)

12,361

13,597

14,956

Fixed Assets

Non-Current Assets Fixed Assets Finance Leased Assets Long Term Prepayments Total Non-Current Assets

2006

2007

2008

2009 F

2010 F

2011 F

Non-Current Assets

8,783 -

9,944

11,237

107

218

306

397

477

1,658

1,437

1,529

1,606

1,686

1,771

10,441

11,488

12,985

14,272

15,680

59 -

101

Long Term Prepayments

17,204

Total Non-Current Assets

106

116

Inventory

101

114

110

126

Current Assets

Finance Leased Assets

Current Assets

Inventory

6,912

9,245

9,539

12,401

13,641

15,005

Debtors and prepayments

7,437

12,860

16,904

13,523

16,227

18,662

197

311

358

411

473

Due from related companies

Foreign currencies (For imports)

252

1,253

5,837

2,005

4,155

4,167

4,475

Total Current Assets

15,855

28,184

28,786

30,491

34,507

38,681

TOTAL ASSETS

26,296

39,672

41,771

44,763

50,187

55,885

Bank balances, deposits and cash

Current Liabilities Trade creditors

10,973

20,462

16,370

19,644

23,573

998

6,988

7,687

8,455

1,492

2,054

212

317

476

714

5,009

1,757

1,933

2,126

2,339

Due to related companies Other Creditors and accruals Taxation

Foreign currencies (For imports)

Bank balances, deposits and cash

Total Current Assets

107

190

194

206

233

261

TOTAL ASSETS

178

268

282

302

339

377

111

138

159

Current Liabilities

Bank overdraft Lease and Short term loans

Debtors and prepayments Due from related companies

4,280

16,452

5,491

5,985

6,285

6,599

6,929

Trade creditors Bank overdraft

Lease and Short term loans Due to related companies

Other Creditors and accruals

111

133

10 29

1,124

1,481

2,220

2,442

2,687

2,955

Total Current Liabilities

17,880

30,487

31,635

34,335

39,218

44,965

Total Current Liabilities

121

206

214

232

265

304

Net Current Assets/(Liabilities)

(2,024)

(2,303)

(2,849)

(3,844)

(4,711)

(6,284)

Net Current Assets/(Liabilities)

(14)

(16)

(19)

(26)

(32)

(42)

139

225

233

252

287

323

Non-Current liabilities Deferred Taxation

Taxation

Non-Current liabilities

1,302

1,591

1,772

1,967

2,164

1,731

Provision for retirement benefits

1,349

1,255

1,094

985

1,083

1,192

Provision for retirement benefits

Total Non-Current Liabilities

2,651

2,846

2,867

2,952

3,247

2,923

Total Non-Current Liabilities

20,530

33,333

34,502

37,287

42,466

47,888

5,766

6,339

7,269

7,476

7,722

7,997

Provisions:

Deferred Taxation Provisions:

TOTAL LIABILITIES Net Assets Capital and Reserves

Capital and Reserves attributable to equity holders 170

Capital Reserve

Shareholder's Fund

GROWTH RATES

Net Assets Capital and Reserves

Share Capital General Reserve

TOTAL LIABILITIES

170

Capital and Reserves attributable to equity holders Share Capital 1 1 Capital Reserve

263

5,333

5,906

6,836

7,043

7,289

7,564

5,766

2006

6,339

7,269

2007

2008

8.5%

29.2%

7,476

7,722

7,997

General Reserve

2010F

2011F

LIQUIDITY RATIOS

1.0%

12.0%

2006

43 2007

54 2011F

0.1

12.0%

Cash ratio

-22.3%

31.4%

27.6%

33.6%

9.0%

11.5%

Current ratio

0.9

37.9%

32.9%

24.6%

9.1%

11.3%

Acid Test

0.5

0.6

0.5

Growth in PBT

-37.9%

48.6%

34.8%

-6.4%

18.6%

12.0%

Interest Coverage (x)

19.9

60.2

23.9

5.0

7.8

8.3

Days in inventory

22.6

28.0

22.0

28.9

28.4

27.9

Growth in PAT

-30.4%

29.4%

34.9%

-5.7%

18.6%

12.0%

Days in accounts payable

35.8

49.9

47.2

38.2

40.9

43.8

Days in receivables

21.4

34.2

34.8

27.5

29.5

30.3

8.2

12.3

9.6

18.3

17.0

14.4

2008

2009F

2010F

2011F

PROFITABILITY

2006

2007

2008

2009F

2010F

2011F

50.9%

53.8%

64.6%

56.2%

64.7%

70.0%

Cash conversion cycle

9.1%

9.9%

10.8%

10.4%

CAPITAL STRUCTURE

Return On Total Capital

43.9%

41.6%

52.1%

35.6%

32.0%

33.3%

Interest bearing debt/Total assets

Operating ROE

66.2%

76.6%

94.6%

110.1%

116.5%

125.6%

Operating ROA

Return on Assets

9.6%

10.3%

5.2%

2.9%

16.3%

20.7%

24.5%

14.3%

49.4%

51.4%

53.4%

Debt to Equity

26.1%

32.4%

16.6%

97.7%

105.7%

114.7%

Payout ratio

99.8%

99.1%

99.9%

95.0%

Total equity/Total assets

21.9%

16.0%

17.4%

16.7%

15.4%

14.3%

0.2%

0.9%

0.1%

5.0%

4.56

6.26

5.75

5.99

6.50

6.99

2006

2007

2008

2009F

2010F

2011F 16.21

11.9%

14.1%

15.8%

18.8%

18.6%

2006

2007

2008

2009F

2010F

2011F

Retention ratio

Gross Profit

11.7%

12.3%

10.8%

12.7%

12.6%

Financial Leverage

EBITDA/Sales

3.2%

4.1%

4.2%

5.2%

5.1%

EBIT/Sales

2.6%

3.4%

3.6%

4.5%

4.4%

PER SHARE DATA

Pretax Income/Sales

2.6%

3.5%

3.7%

3.4%

3.6%

EPS

Net Profit Margin

2.0%

2.4%

2.5%

2.3%

2.4%

DPS NAPS

2006

Sales to cash (x)

101.0

23.5

88.5

43.1

48.2

50.2

18.3

14.9

18.6

14.4

14.7

15.0

4.8

3.5

4.2

4.0

14.4

13.8

15.8

14.5

14.8

15.0

Inventory Turnover (x) Asset turnover (x) Fixed Assets (x)

234

‘Ahead of the Curve’

2007

2008

2009F

2010F

2011F

2007

5.7%

Debt to Total Capital

MARGINS

ASSET UTILIZATION

2006

0.1

52 2010F

-23.6%

Return on Equity

0.1

50 2009F

Growth in EBITDA

-0.1%

0.2

49 2008

Growth in Core Operating profit

Turnover growth

0.1

2 40

Shareholder's Fund

2009F

2 36

Sales/Share EBITDA

7.41

16.4%

9.59

12.94

12.20

14.47

7.40

9.50

12.93

11.59

13.75

16.98

18.67

21.41

22.02

22.74

23.55

372.80

404.51

522.53

527.76

591.09

662.02

12.10

16.68

22.17

27.62

30.15

33.56

15.40

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Chevron Oil Nigeria- Company Overview BASIC INFORMATION Address

8, Macarthy Street Onikan, Lagos, Nigeria

Website

www.chevron.com

Management

L V Tanoe ( Managing Director)

Fiscal Year End

December

Exchange Listing

Nigerian Stock Exchange

Symbol

Bloomberg: CHEVRON:NL

Sector

Petroleum Marketing

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Corlay Global S.A.

ZSLA/CFOZ Others

7.58 32.42

Free Float (%)

32.42

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

The Company which was formerly known as Texaco Nigeria Plc began operations in Nigeria in 1913. Chevron Oil Nigeria Plc (Chevron) was initially incorporated as a private limited liability company in 1969 and was listed on the Nigerian Stock Exchange in 1978. Chevron currently has a 103,000 barrel storage terminal facility and a lube blending plant, which are both located in the Apapa area of Lagos State. The blending plant has a capacity of producing 250,000 barrels per year. The Company also owns a 74,000 barrel base oil storage facility, a 5 million kilogram per year grease plant, a 3 million litre aviation facility at the Ikeja International Airport and a 700,000 litre facility at Kano. The Company is involved in the marketing and distribution of refined petroleum products, blending of lubricants, and manufacturing of greases and petroleum jelly.

Key Review Highlights

253,988,672

After an earlier divestment agreement disclosure in 2008, Chevron Africa Holdings Limited, a subsidiary of Chevron Corporation effectively sold Chevron Nigeria Holdings Limited, which holds a 60% stake in Chevron Oil Nigeria Plc to Corlay Global S.A, a Panamian Company, jointly owned by MRS Holdings Limited and Petroci Holdings.

Following the change in ownership structure of the Company, some adjustments were made to its Board and Management. While the Chief Executive Officer of the MRS Group, Alhaji Sayyu Idris Dantata, sits as Chairman, the Managing Director of MRS Oil and Gas Co. Limited, Mr Louis Vonan Tanoe has been seconded to Chevron Oil Nigeria Plc as Managing Director.

The Company’s new Management has formally secured the approval to change its current name to MRS Oil Nigeria Plc, reflecting naming structure of the new majority stakeholders. This formed part of the resolutions submitted for passage by its Management at its last Annual General Meeting, held in September 2009. The new name is effective from the 2nd of December, 2009. We expect changes would soon be made to its name on the floor of the Exchange.

Based on its current market price (N69.79), the Company trades at a Price to Book ratio of 6.78x (Sector Average – 5.23x), while its Price to Sales ratio stands at of 0.36x (Sector Average – 0.28x). Our Fair Value Price Range for Chevron is between N82.80 - N89.95 and we are ‘Overweight’ at its current price.

DIVIDENDS AND BONUS ISSUES Type Final Final Final

Year FY'08 FY'07 FY'06

N7.50 N5.12

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

17,725

$ 'Mn

120

Units

15,137

Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x)

FY'08A

FY'09F

FY'10F

FY'11

FY'12F

FY'13F

-0.89

7.23

7.88

8.81

9.84

11.12

-111.51%

914.82%

8.95%

11.81%

11.71%

13.00%

-180.17

9.65

8.86

7.92

7.09

6.28

0.00

7.01

7.64

8.54

9.55

10.79

-100.00%

100.00%

8.95%

11.81%

11.71%

13.00%

0.00%

10.05%

10.95%

12.24%

13.68%

15.46%

7.54

7.76

7.99

8.26

8.55

8.89

YoY Change (%)

-52.66%

2.88%

3.05%

3.31%

3.58%

3.90%

Price to Book (x)

21.21

9.00

8.73

8.45

8.16

7.85

Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

235

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Investment Summary Our Overweight recommendation is on the back of its notable quarterly performances in the 2009 financial year, as well as a renewed optimism in the Company’s new Management.

Available data from the Nigerian National Petroleum Corporation shows an increase in the Company’s distribution market share from 4.47% for the 2008 financial year to 5.90% as at Q2’09. However, we note the Company faced operational problems for about five months in 2008, spurred by industrial actions by its staff and haulers.

The Company is poised to benefit from product supply stability, as its parent company (MRS Oil) is a leading independent importer of petroleum products into the country.

Its most recent results (Q3’09) released on the 16th of November, 2009 indicate YoY Turnover growth of 49.90%, while Profit After Tax (PAT) increased 316.94% YoY to N1.32 billion. However, the impressive growth rate was influenced by the dismal performance of the Company in the corresponding quarter of the preceding year.

Based on its Q3’09 results, the Company’s Annualised EPS increased to N6.89 from N5.53 in Q2’09, while it trades at a PE multiple of 10.13x, relative to a Sector Average of 12.50x.

Market share stood at 5.90% as at Q2’09…

Q3’09 PAT stands at N1.32 billion…

Q3’09 Annualised EPS stands at N6.89…

QUARTERLY CONTRIBUTIONS TO TURNOVER AND PAT TURNOVER (N’Billions)

PROFIT AFTER TAX (N’Millions) Q1'09 162.40

13.89 16.62 609.96

Q2'09 539.64

23.83

Q3'09

Source: Company Financials, Vetiva Research

236

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

Peer Metrics

Oando

Total

Mobil

Conoil

Chevron

Current Price (N)

93.99

33.51

149.00

98.80

27.63

69.79

Trailing EPS (N)

10.41

5.32

11.22

4.16

2.62

6.89

9.03

6.30

13.28

23.75

10.55

10.13

PROFITABILITY RATIOS (Percent) 52.70%

54%

52.70%

ROAE 45%

40.40%

ROAA 36% ROTC 27%

8.30%

10.30% -1.40%

0% 2006 -9%

DPS (N)*

6.00

5.20

12.93

5.00

1.00

6.38%

15.52%

8.68%

5.06%

3.62%

n/a

Payout Ratio

65.00%

97.71%

99.00%

87.41%

38.11%

n/a

ROE (Average)*

18.08%

17.81%

64.52%

44.51%

15.26%

ROA (Average)*

3.71%

9.77%

12.40%

6.29%

3.79%

Outstanding Shares(mn)

905.08

958.89

339.52

300.50

693.95

253.99

Dividend Yield

18% 9%

P/E (x)

2007

2008 -7.60%

-7.60%

Source: Company Financials; Vetiva Research

-18%

Source: Company Financials

*Based on FY'08 financials

Outlook 2010

Like other downstream players, the Company’s activities would be heavily influenced by the policy direction of the Government. We expect moderate growth in its distribution and improved profitability margins, if the deregulation policy is implemented. Also, we might see a slight alteration to its financing structure. Like other indigenous players, it might introduce some short term financing facilities into its mix, thus incurring interest charges. However, if a third party supplier arrangement is maintained with its new parent company, the interest rate risk associated with delayed subsidy payments would be effectively mitigated, albeit at the cost of relatively lower margins.

We expect FY’10 Turnover and After Tax Profits of N81.75 billion and N2.0 billion respectively, which translates to a Forward Earnings Per Share of N7.88 and Dividend Per Share of N7.64.

CHEVRON SHARE PRICE Vs. VOLUME TRADED 200

52 week high:N160.00 52 week low:N66.47 Average Price:N88.32 Avg Vol Traded (‘00): 151.37 Beta:0.54

Share Price (Naira)

150

100

50 2500

Volume Traded (‘00)

2000 1500 1000 500 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

‘Ahead of the Curve’

237

2009 Review | 2010 Outlook SECTORAL REVIEW PETROLEUM MARKETING

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Selling and Marketing Costs Administrative Expenses Other Operating Expenses Core Operating Profit Other operating income EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Receivable Profit Before Taxation Taxation

2006

Dividends

2008

2009 F

2010 F

2011 F

65,914

72,628

48,688

71,084

81,747

94,009

(60,119)

(64,940)

(44,419)

(63,129)

(73,157)

(84,649)

INCOME STATEMENT ($'Mill) Turnover Cost of Sales

(1,896)

(678)

(1,386)

(1,439)

(1,526)

(1,617)

(1,714)

Administrative Expenses

(1,551)

(1,371)

(1,435)

(1,521)

(1,613)

(1,709)

Other Operating Expenses

2,234

3,211

163

3,185

3,465

3,851

201

181

151

181

199

219

2,435

3,392

314

3,366

3,664

4,070

2,744

109

251

1,852

2,995 (1,036)

1,313

1,959

(1,300)

(1,905)

(389) 83 (306) 80 (225) -

Retained Earnings

BALANCE SHEET (N'Mill)

2006

2007

2008

(935)

2,593

2,814

3,135

108

129

155

2,701 (864)

2,943 (942)

3,290 (1,053)

1,837

2,001

2,237

(1,782)

(1,941)

(2,170)

552

635

(494)

(572)

(10)

(1,723)

1,743

480 (426)

(9)

(1,231)

(850)

329 (300)

(9)

(1,720)

(773)

490

(12)

(1,332)

2009 F

2010 F

2011 F

(438)

(5)

9,360

2010 F

445

(9)

8,590

2009 F

(406)

Selling and Marketing Costs

7,956

(703)

2008

(2,085)

4,269

(648)

2007

7,688

(692)

2006

Gross Profit

5,796

(540)

Profit After Taxation

2007

(10)

Core Operating Profit Other operating income EBITDA

(8)

(12)

(13)

(14)

(10)

(11)

(12)

(10)

(11)

(12)

Depreciation & Amortization

(5)

(4)

(5)

(6)

EBIT/Operating Profit

(3)

Interest Receivable

Profit Before Taxation

Taxation

(4)

Profit After Taxation Dividends

1 (2)

(7)

(9)

(13)

1 (2) -

Retained Earnings

BALANCE SHEET ($'Mill)

2006

2007

(6)

(7)

(12)

(13)

(15)

0 2008

2009 F

2010 F

0 2011 F

Non-Current Assets

Non-Current Assets Fixed Assets

3,951

Fixed Assets

3,838

3,422

3,250

3,575

3,933

149

140

154

169

186

3,951

3,987

3,561

3,404

3,745

4,119

Total Non-Current Assets

Stocks

3,291

3,244

2,146

2,790

3,348

4,018

Stocks

Receivables and prepayments

5,148

7,518

5,566

1,670

2,338

1,987

Receivables and prepayments

Cash and cash equivalents

114

116

141

Prepayments: Non-current Total Non-Current Assets

Prepayments: Non-current

Current Assets

Cash and cash equivalents

4,786

6,188

6,796

5,159

4,412

Total Current Assets

13,225

16,949

7,769

11,256

10,845

10,417

Total Current Assets

TOTAL ASSETS

17,176

20,937

11,330

14,660

14,589

14,536

TOTAL ASSETS

12,027

14,624

7,969

11,157

10,934

10,715

Current Liabilities

Current Liabilities Payables and accrued expenses Current income tax Total Current Liabilities Net Current Assets/(Liabilities)

681

899

171

188

207

227

12,708

15,524

8,140

11,345

11,140

10,942

517

1,425

(371)

(89)

(296)

(525)

Payables and accrued expenses

Current income tax Total Current Liabilities Net Current Assets/(Liabilities)

105

(3)

(1)

(2)

(4)

Non-Current liabilities

Non-Current liabilities Deferred Taxation

257

367

116

127

140

154

Deferred Taxation

Retirement benefits obligation

824

1,000

1,160

1,218

1,279

1,343

Retirement benefits obligation

1,082

1,367

1,275

1,345

1,419

1,497

Total Non-Current Liabilities

13,790

16,891

9,415

12,690

12,559

12,439

TOTAL LIABILITIES

114

3,386

4,045

1,915

1,970

2,030

2,097

Net Assets

Total Non-Current Liabilities TOTAL LIABILITIES Net Assets

Capital and Reserves

Capital and Reserves Share capital Retained Earnings

127

1,959

2,013

1,788

1,843

1,903

1,970

Proposed dividends

1,300

1,905

Shareholder's Fund

3,386

4,045

1,915

1,970

2,030

2,097

GROWTH RATES

2006

Turnover growth Growth in Core Operating profit Growth in EBITDA

2007

2008

Share capital Retained Earnings

Shareholder's Fund

2009F

2010F

2011F

LIQUIDITY RATIOS

26.9%

10.2%

-33.0%

46.0%

15.0%

Cash ratio

0.4

0.0

0.6

0.5

0.4

7.5%

43.7%

-94.9%

1852.1%

8.8%

11.2%

Current ratio

1.0

1.1

1.0

Acid Test

10.1%

39.3%

-90.7%

972.2%

8.8%

11.1%

Growth in PBT

4.1%

61.7%

-110.2%

-983.5%

8.9%

11.8%

Growth in PAT

25.5%

49.3%

-111.5%

-914.8%

8.9%

11.8%

PROFITABILITY

2006

2007

2008

2009F

2010F

2011F

Return on Equity

40.4%

52.7%

-7.6%

94.6%

100.1%

108.4%

Interest Coverage (x) Days in inventory Days in accounts payable

2006

0.8

2007

0.9

2008

0.7

2009F

0.7

2010F

0.7

2011F

0.6

n/a

18.2

16.3

16.1

14.3

14.9

15.6

73.5

59.7

28.5

37.8

41.7

8.6

10.4

7.7

Cash conversion cycle

-19.9

-19.4

-1.9

-34.4

-23.4

-18.3

CAPITAL STRUCTURE

2011F

Days in receivables

Return on Assets

1 13

66.6

57.3

48.8

41.6

8.3%

10.3%

-1.4%

14.1%

13.7%

15.4%

2006

2007

2008

2009F

2010F

Return On Total Capital

40.4%

52.7%

-7.6%

94.6%

100.1%

108.4%

Interest bearing debt/Total assets

n/a

Operating ROE

53.6%

73.9%

-13.0%

133.5%

140.7%

151.9%

Debt to Total Capital

n/a

Debt to Equity

n/a

Payout ratio

99.1%

97.2%

0.0%

97.0%

Total equity/Total assets

19.7%

19.3%

16.9%

13.4%

13.9%

14.4%

0.9%

2.8%

100.0%

3.0%

5.07

5.18

5.92

7.44

7.19

6.93

2006

2007

2008

2009F

2010F

2011F 8.81

Operating ROA

11.1%

14.4%

-2.4%

20.0%

19.2%

21.5%

MARGINS

2006

2007

2008

2009F

2010F

2011F

Gross Profit

8.8%

10.6%

8.8%

11.2%

10.5%

10.0%

EBITDA/Sales

3.7%

4.7%

0.6%

4.7%

4.5%

4.3%

EBIT/Sales

2.6%

3.8%

-0.8%

3.6%

3.4%

3.3%

PER SHARE DATA

Retention ratio Financial Leverage

Pretax Income/Sales

2.8%

4.1%

-0.6%

3.8%

3.6%

3.5%

EPS

5.17

7.71

-0.89

7.23

7.88

Net Profit Margin

2.0%

2.7%

-0.5%

2.6%

2.4%

DPS

5.12

7.50

0.00

7.01

7.64

NAPS

2006

2007

2008

2009F

2010F

2011F

Sales to cash (x)

ASSET UTILIZATION

13.8

11.7

858.9

10.5

15.8

21.3

Inventory Turnover (x)

20.0

22.4

22.7

25.5

24.4

23.4

Asset turnover (x) Fixed Assets (x)

238

3.8

3.5

4.3

4.8

5.6

6.5

16.7

18.9

14.2

21.9

22.9

23.9

‘Ahead of the Curve’

Sales/Share EBITDA

8.54

13.33

15.93

7.54

7.76

7.99

8.26

259.52

285.95

191.69

279.87

321.85

370.13

9.59

13.36

1.24

13.25

14.42

16.03

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

THE BUILDING MATERIALS SECTOR A snapshot of our half year write-up: In our 2009 half year report, we discussed issues which cut across: the supply-deficit challenge facing the Sector, capacity building, cement pricing, infrastructure challenge and the sector’s performance on the Nigerian Stock Exchange (NSE). The write-up culminated with an outlook for the Sector. Overview of this segment: Our objective is to run through the key events which, directly or indirectly, affected the performance of the Sector in 2009, with a bias for the last 6 months of the year. Our concluding segment, ‘Outlook’, focuses on our expectation for the Cement Sector in 2010, though we note the inclusion of longer term expectations in certain instances. Rising demand in the face of dwindling economic fortunes: One notable observation is the rise in production volumes of cement companies, despite the apparent credit crunch, both within and outside the Nigerian economy. Given the fact that Government spending constitutes above 60% of cement consumption, the observation did not come as a surprise. It goes without saying, that the growth in cement consumption has slowed when compared to the recent past. We estimate it grew by 9.50% in 2009, which compares with the most recent 4-yr average of 12.60% and the growth in 2008 of 23.00%. Supply-demand gap closing: The last 6 months of 2009 saw larger production volumes when compared to the previous corresponding period, given the commissioning of UNICEM’s 2.5 million metric tonnes per annum (mtpa) plant in May 2009, though we note that the plant is still operating at low utilization levels. Additionally, the gradual ramping up of Benue Cement Company’s two plants to about 50% utilization rate, Cement Company of Northern Nigeria’s higher production volumes, Obajana Cement Plant’s gradual ramping up to full utilization, amongst others, also lend credence to the fact that production volumes in the Sector rose relative to previous levels. We however, note that no new plant was commissioned in the last 6 months of the year. Infrastructure still a menace: In our view, the most pertinent issue facing the Sector is infrastructure. The decrepit state of infrastructure remains a thorn in the flesh of manufacturers. Specifically, the two key infrastructural challenges facing cement producers are: the sporadic supply of power and the lack of an efficient rail system. We also note that the energy-intensive nature of the Sector amidst unreliable supply of various fuel types has exacerbated the woes of cement producers. Pricing: The average price of a 50kg bag of cement in 2009 was N1,800. Though it attained a peak of N2,200 in the 1st quarter, it ended the year within the N1,600 – N1,700 range. More incentives: In the month of October 2009, the Federal Government rolled out a number of incentives. We note that previous incentives were aimed at attracting investment funds to the Sector. In spite of the high cost profile of the Nigerian business environment, the Sector has continued to post above average after tax margins in the 25-30% range.

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Best performing sector and stock: The Building Materials Sector closed the year as the best performer on the NSE, judging by our Vetiva Building Materials Sector Index, which posted a YTD return of 69.34%. In addition to being the best performing Sector in 2009, two listed cement companies, Benue Cement Company Plc and Cement Company of Northern Nigeria Plc secured the first and second positions in terms of capital appreciation, posting YTD returns of 128% and 123% respectively. Demand In spite of the challenging operating environment, which has mainly been a product of the international and domestic credit drought, there are indications that cement consumption grew, though marginally by approximately 9%, from 13 million mtpa in 2008 to 14 million mtpa in 2009. In the light of past growth figures, the movement may seem unimpressive, but when dimensioned properly in light of challenges in 2009, we are of the opinion that the growth level was more than satisfactory. Production Volumes Our gut feeling is that local production contributed more to total supply of cement in Nigeria, as indicative figures are yet to be released by the Ministry of Finance. Our thinking is premised on the following: x

A good number of importers were faced with the challenge of revalidating their import licenses, which expired at the end of 2008. The turnover figures of 2 out of the 4 listed producers showed growth in excess of the average inflation rate in 2009.

However, we note that only a single plant was added to the total number of cement plants in the country in 2009. The plant which belongs to United Cement Company, has the capacity to produce 2.5 Million mtpa. Owing to the time it takes a new plant to ramp up to capacity, we were not expectant that the contribution of this plant to total cement production in the Country would be significant in 2009. The two relatively new plants of Benue Cement Company, which were commissioned in 2008, contributed more in absolute terms to Nigeria’s total cement production volume in 2009, when compared to 2008. This is indicated by an increase in the BCC’s utilization rate from 30% in 2008 to approximately 50% in 2009, according to the Company’s forecast figures. We however, note that the Company’s performance would have been better had it not been for the irregular supply of Low Pour Fuel Oil (LPFO), which disrupted production. Pricing: The price of cement remained high in 2009, given the unresolved supply shortfall in the sector. Government’s target price of N1,000 per 50kg bag was not achieved, despite attempts to increase supply via the issuance of import licenses. We also note that despite the lifting of the ban in 2008, many firms were unsuccessful at revalidating their licenses in 2009, and this may have contributed to the shortage in supply of cement, which supported the high price.

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Infrastructure: This remains a challenge and (herein, we refer to infrastructure as Power and Rail). We are of the view that the development of infrastructure would impact the Cement Sector positively. We also note the scarcity/inadequate supply of the various fuel types as a challenge facing the Sector. Power Sector: Prior to 2009, the Federal Government had assured Nigerians that it would deliver 6,000 MW of power by the end of the year. Even if the target was met, it wouldn’t have had a significant impact on the Sector. This is because cement plants are typically designed to operate with an uninterrupted supply of power. This view is also premised on the fact that 6,000 MW is far below the estimated demand for power in the country (between 10,000-20,000 MW), which would thus continue to see power rationing and shortages. We however see it as a step in the right direction. We note that unless the Power sector can build up capacity that adequately exceeds consumption level in the country, the Cement Sector would continue to rely on alternative sources of energy to power its plants. The Rail Sector: In our HY’09 report, we mentioned the various plans of the Federal Government that were targeted at resuscitating the moribund industry. We also mentioned that the Federal Executive Council approved N114 billion ($76.250 million) for the purchase of 25 C25 EMPD dieselpowered locomotives for the Nigeria Railways Corporation in preparation for its concessioning in June 2010. The Federal Government has reportedly sought the services of reputable consultants to assist in the concessioning of the railway sector through public private partnership. These are strong indications that the Federal Government intends to implement its plans regarding the reformation of the rail network. Our view is that the development of the rail sector has positive but long term ramifications for the Cement Sector. Energy: The energy intensive nature of the Cement Sector leaves it vulnerable to the vagaries of the Energy Sector. The sector relies on energy to heat up both its kilns and to power its captive generators. The various types of fuel used by cement producers include Gas, Low Pour Fuel Oil, Coal, Diesel and Bio fuels. We note that about 40-50% of total cost of producing cement is attributable to energy. The two main challenges faced by energy intensive sectors in Nigeria are disruptions in energy supply and volatility in energy pricing. With the aim of portraying a clearer picture as to a reason behind the Cement Sector’s performance, we have written briefly on the various energy types with supply and pricing in 2009 as our key focus.

‘Ahead of the Curve’

241

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Gas: Producers refer to this energy type as one of the cheapest. But due to poor pipeline infrastructure in the country, many manufacturers find it challenging to utilize this resource. The first half of 2009 witnessed disruptions in the supply of Gas, attributable to militant activities. This of course affected cement production at Lafarge Cement WAPCO Nigeria Plc. The second half of 2009 saw some improvement in gas supply as Federal Government’s Amnesty Programme gradually arrested the militancy activities in the Niger-Delta. Gas production volumes rose significantly in the second half of 2009 when compared to the first half of 2009. In terms of pricing, Cement producers and other manufacturers who fall into the Commercial Sector pricing strategy, purchased gas at a 30% discount to the least priced fuel alternative, Low Pour Fuel Oil (LPFO). The Nigerian Gas Company initially adjusted gas prices by over 200% from N21.05 to N67.63 per cubic unit, which was later, reversed to N24.21 following protests by the Manufacturing Association of Nigeria (MAN). MAN eventually agreed in November 2009 to pay N40 per cubic feet of gas to resolve the lingering crisis between industrialists and Gaslink Company, a subsidiary of Oando Plc. This new price represents a 65% increase in the cost of gas to end users. This implies that the cost of production for cement companies that utilize gas would increase going forward. Low Pour Fuel Oil: Owing to the weak pipeline infrastructure, many manufacturers have had to resort to the use of LPFO to power their plants. Cement companies like Benue Cement Company Plc, AshakaCem Plc, Obajana Cement Plc, either partly or fully, depend on the LPFO. The price and the supply of this energy type are sensitive to their operations. Noticeably in 2009, the supply of LPFO was majorly import dependent due to the non-functional state of the Nigeria’s refineries. Although at some point in time, some of the refineries were said to be in operation, their output level was scarcely sufficient to meet domestic demand. Despite the fact that the product was allowable for importation, transportation and other logistics made it challenging for some of the cement manufacturers to secure sufficient supply of LPFO, as some witnessed plant down times due its unavailability. We note the relative cheapness of the locally produced LPFO when compared to its imported counterpart, but its inadequacy makes this advantage inconsequential. The price per litre of locally produced LPFO was N48 as at year end 2009 while that of imported cement was N88, for the same period. Coal: We acknowledge the large deposits of coal in Nigeria, however its weak exploration has rendered it a weak fuel substitute. To buttress this point, production of coal which stood at a peak of 1 million tonnes in 1959 declined to about 8,000 tonnes in 2005 mainly due to the transition to oil. Also part of Federal Government’s recently approved incentives to the Cement Sector is the approval of tax deductible incentives on investments in system conversion to coal. We view this incentive is targeted at encouraging cement producers to invest in the exploration of coal for cement production.

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

More incentives were rolled out: We note that one key appeal of the Cement Sector to investors has been the spate of incentives by the Federal Government. Of all the incentives, we are of the view that the conferring of the Pioneer status on Cement producers, who have successfully embarked on Greenfield projects, has been the most effective. In spite of Nigeria’s challenging economic climate, some Cement Producers have been able to post margins as high as 50% and deliver return to investors in excess of 100%. We are of the view that this impressive past performance has been mainly as a result of the “Pioneer status” incentive. We note that the Federal Government has been so supportive and unrelenting as regards achieving its goal of ensuring that the sector is self sufficient in the production of cement. This was again seen in October 2009, when it rolled out a number of incentives to bolster local production of cement. Also noted alongside the incentive is the revised date in which the ban on the importation of cement would take effect-2013. The announced measures and incentives are as follows: 1. 2.

Removal of restrictions on the importation of gypsum Placement of a 5% import duty ceiling on gypsum until local production on a commercial basis can be achieved 3. The duration for obtaining exploratory and mining licenses has reduced to 18 and 6 months respectively 4. The imposition of a N500 per ton levy on imported cement 5. The reinstatement of tariff incentives for imported spare parts and machineries for the production of cement for 2-3 years. The duty free period is to cover the plant building phase and the first two years of commencement of production. 6. The approval of tax deductible incentives on investments in system conversion to coal 7. The approval of concessional pricing and special allocation of LPFO to the sector 8. Delinking the price of gas for cement production from the price of LPFO 9. The removal of import duty on LPFO during periods of acute domestic shortages of cement 10. Approval to classify cement companies in the same manner as fertilizer companies with regards to gas pricing 11. The examination of key cost drivers in the cement production in conjunction with producers with the objective of articulating a sustainable price for cement. We are of the view that the above incentives would impact the sector as follows: 1.

Removal of restrictions on the importation of gypsum: The importation of gypsum has been a controversial issue between cement manufacturers and the Government. The manufacturers have had a preference for imported gypsum over the local gypsum due to the high level of impurity in the local gypsum as well as the inadequate local supply of the gypsum in the country.

‘Ahead of the Curve’

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

There have been back and forth discussions on the issue and the Federal Government has argued that investments in the mining of local gypsum to commercial levels would impact positively on the sector as well as the economy. We believe that this measure would serve to prevent disruptions in the production flow of cement producers attributable to unavailability of gypsum.

244

‘Ahead of the Curve’

Placement of a 5% import duty ceiling on gypsum until local production on a commercial basis can be achieved: As at 2001, the duty rate on the importation of gypsum was as high as 65%. This of course served as a constraint on the importation of gypsum, and consequently on its supply, given local producers’ inclination for imported gypsum.

The reduction of the duration for obtaining exploratory and mining licenses to 18 and 6 months respectively: The previously arduous process of securing a license has had the effect of dissuading prospective investors. We view the reduction in the time that it takes to secure a license as a positive, especially in reducing the barrier of entry into the sector. This in turn as the potential impact of increasing investments in the sector and consequently, the supply of cement.

The imposition of a N500 per ton levy on imported cement: This measure is targeted at discouraging the importation of cement as this would make it more challenging for importers to compete with local producers.

The reinstatement of tariff incentives for imported spare parts and machineries for the production of cement for 2-3 years: The duty free period is to cover the plant building phase and the first two years of commencement of production. Given the demandsupply gap in the sector, we view this measure would have the impact of reducing the cost of constructing a cement plant, thus encouraging investments in the sector.

The approval of tax deductible incentives on investments in system conversion to coal: It has been argued that coal may be may equally be as cheap as gas for the production of cement. This may have considered the fact that coal’s by product, ash, is also a raw material for the production cement. We believe that this measure is targeted at encouraging the exploration of coal, which is underutilized and in large quantities in some parts of Nigeria.

The approval of concessional pricing and special allocation of LPFO to the sector: LPFO is a key fuel type for the production of cement. Cement plants like Benue Cement Company, Cement Company of Northern Nigeria and AshakaCem Plc utilize LPFO.

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Given the inadequate domestic supply of LPFO, cement producers like other manufacturers depend on imported LPFO, which has witnessed significant volatility in its pricing. So we expect this measure to stem this challenge. 8.

Delinking the price of gas for cement production from the price of LPFO: Typically, an increase in the price of LPFO leads to an automatic increase in the price of gas by a predetermined formula even when the key drivers of gas pricing remain unchanged. We are of the view that this measure, which is restricted to the Cement Sector, would improve the stability of gas pricing.

The removal of import duty on LPFO during periods of acute domestic shortages of cement: As mentioned above, a large proportion of the LPFO consumed in the Country is imported due to the non-functional state of her refineries. Some producers depend strictly on imported LPFO and thus, the removal of import duty should translate in a lower purchase cost of LPFO. This should consequently result in a lower cost of production during such periods.

10. Approval to classify cement companies in the same manner as fertilizer companies with regards to gas pricing: As noted in our previous report, energy cost accounts for about 40-50% of total cost of producing cement. Thus, a favorable “gas price” regime for the Cement Sector would significantly impact on the bottom line figures of players and consequently, the sector’s profitability. 11. The examination of key cost drivers in the cement production in conjunction with producers with the objective of articulating a sustainable price for cement: The key cost driver in the Cement Sector is Energy cost and can be distilled into power and “kiln fuel” costs. We believe the latter can be managed but we have doubts that any measure can be put in place in the short run to manage power cost. Another related cost is transportation cost, which sometimes can be as high as 1/3 of the factory production cost.

‘Ahead of the Curve’

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Best performing sector and Equity: Despite the Nigerian Equities Market’s poor outing in 2009 of –33.58%, our building materials index indicated a rise of 69.34%. We note the flight to safety bias displayed by investors, following the uncertainty with the Banking Sector, was initially responsible for this performance. We however are of the opinion that the Cement Sector’s remarkable performance on the exchange was bolstered by the stellar growth in the top and bottom line figures of two of its four listed companies. These companies ended the year as the top 2 best performing companies on the Nigerian Stock Exchange. They are Benue Cement Company Plc and Cement Company of Northern Nigeria Plc, gaining 128% and 123% respectively in 2009.

SECTORAL RETURNS (2009) Banking Food and Beverages Building Materials Petroleum Insurance Conglomerates Breweries -100%

-50%

50%

100%

Source: Company Financials, Vetiva Research

Top 5 Best Performing Stocks in 2009 C/N Sector

Company

Price gain (%)

Cement

BCC

128

Cement

CCNN

123

Conglomerate PZ Cussons

Conglomerate UNILEVER

Health

GSK

112

Source: NSE;Vetiva Research

246

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Outlook In forming our 2010 outlook for the Cement Sector, we critically dimensioned the key determinants of the Sector’s performance as follows: Demand: Given the strongly positive relationship between Cement consumption and the performance of an economy, we view the prevailing economic recovery both within and outside Nigeria as indicative of strong growth in cement consumption in 2010. 2009 saw oil prices rise from as low as $33 to a high of $80. Although we note that it presently trades within the $75-$80 region. Given Nigeria’s revenue dependency on the Oil sector amidst a favourable outlook for oil prices, we believe Government’s ability to execute more infrastructure project would improve. We expect improved Government spending to water down to the private sector and consequently lead to increased activities in the Construction Sector. these should serve to drive cement consumption upwards. Supply: There are no indications that any new plant would come on stream in 2010 given players’ stated timelines for their respective expansion programmes. Hence, we do not expect an increase in the total cement production capacity in Nigeria in 2010. However, we expect production volumes to rise significantly due to low levels of plant utilization within the sector. We attribute the low utilization levels to two reasons: x x

Infrastructure challenges Ramping up period of a new plant

Of the above reasons, we can only vouch that any rise in production volumes would be partly attributable to the latter. This is because the infrastructure challenge, which includes power, transportation and energy are external factors that are beyond the control of cement producers. The three cement plants that we are looking at to drive the increase in production volumes in 2010 are Benue Cement Company Plc, United Cement Company and Obajana Cement Plant. The utilization rates of these plants in 2009 were 50%, below 30% and 65% respectively. Their low utilization rates are mainly as a result of the fact that these plants were recently commissioned. BCC’s two plants (3.0 Million mtpa) were both commissioned in 2008; UNICEM’s 2.5 Million mtpa plant was commission in 2009 and finally OCP’s 4.7 Million mtpa came on stream in 2007. Infrastructure: Given the fact that the Sector’s performance is also sensitive to the state of infrastructure amidst the challenges faced by the Government in proffering a solution to the country’s decrepit state of infrastructure, we do not see the infrastructure sector positively influencing the performance of the sector in 2010. Government’s Incentives: As noted above the sector has continued to post above average margins despite the infrastructure challenge in the country. We opine that Government incentives have been the main performance driver of the Sector. We note the recently approved incentives to further spur activities in the sector as enumerated above. While we note that some of these approved incentives are in effect, Government’s weak ability to see initiatives through may render others ineffective. We opine that any further improvement in the sector’s performance in 2010 would most likely be as a result of Government’s ability to execute the recently approved incentives.

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Benue Cement Company Plc - Company Overview BASIC INFORMATION Km 72 Makurdi-Gboko Road

Address

IkejaTse-Kucha - Mbayion, Nigeria Alhaji Aliko Dangote (Chairman)

Management

Mr G. Gasper Fenelon (Vice Chairman) Fiscal Year End

Dec ember

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Sector

BUILDING MATERIALS

Country

Nigeria

Benue Cement Company was incorporated in 1975 by the Government of Benue State. It is the second largest cement manufacturer in Nigeria with a capacity of 2.8 million mtpa. The Company was listed on the Nigerian Stock Exchange in 1991, and in 2000, Dangote Group acquired a majority stake of 65.69%. The Company’s product brand name, ‘Lion Portland Cement’ is now referred to as ‘Dangote Cement’.

Key Review Highlights

BCC is well positioned to serve the lower northǦeast region of Nigeria or the middle belt from its current location in Gboko, Benue State.

The Company’s latest results showed Turnover of N27.22 Billion and a Profit After Tax of N12.96 Billion.

These results were for the third quarter of 2009, which were however, not as strong as its Q2’09 results. Q3 contributions to Turnover and PAT were N7.62 billion and N3.29 billion respectively, relative to Q2 contributions of N10.28 billion and N4.32 billion respectively.

The Company’s Q3 expectation had been premised on the construction of a 75,000 litre tank farm for LPFO storage, as well as the signing of agreements with a number of haulage companies to minimize interruptions to supply at its plants. The fuel tanks have the capacity to support 100 days of production.

Volumes produced up to the third quarter were significantly below expectations, despite being approximately an 88% increase from the previous year’s value. On the average, capacity utilization rate hovered around the 54% level due to shortages of fuel. Despite this, margins exceeded expectations quarter on quarter, due to improved cost efficiency, coupled with the tax-exemption that the Company has been granted as a result of plant expansion.

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Dangote Industries Limited

65.96

Aliko Dangote

8.08

Other Nigerian

25.96

SHARES IN ISSUE Date

Shares Outstanding

Dec -09

3,915,527,344

SIZE AND VALUE TRADED N 'Mn

1,684

$ 'Mn

Average Volume Traded ('09)

Units

1,029,331

Average Value Traded ('09)

N '000

67,159

$ '000

453

Market Capitalization

D IVID EN D S A N D B O N US ISSUES T ype

Year

Final

FY'08

Scrip Issue

FY'08

1for 4

Final

FY'07

Final

FY'06

Forecast Summary Earnings Per Share (N) YoY Change (%) Pric e to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Pric e to Book (x)

FY'08A

FY'09F

1.33

4.09

195.56% 207.20%

FY'10F

FY'11

FY'12F

6.54

5.83

4.86

60.00% -10.75% -16.67%

32.71

10.65

6.65

7.46

8.95

0.00

2.00

2.50

3.00

N/A

25.00%

20.00%

0.00%

3.45%

4.60%

5.75%

6.90%

4.40

11.48

15.30

19.26

22.01

28.00% 160.91%

33.28%

25.88%

14.28%

2.82

2.24

1.96

9.79

3.75

Source: Company Financials; Vetiva Research

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2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

In addition to the capacity expansion, BCC focused on improving efficiency through cost management, enhanced employee productivity and streamlined logistics. The Company has leveraged on its position as a member of the Dangote Group. For example, BCC has significantly increased throughput at its plants, with the use of logistic services provided by its parent company, which had acquired 1,500 trucks for the distribution of cement.

We maintain a Neutral rating on Benue Cement Company Plc, due to the successful completion of its expansion program and the attendant impact of the program on its performance metrics, valuation and fair value range.

Our Fair Value range for BCC is between N50.36 – N55.51, and we recommend a “Hold” at current price.

BCC SHARE PRICE Vs. VOLUME TRADED 150

52 week high:N49.49 52 week low:N15.01 Average Price:N32.93 Avg Vol Traded (‘000): 1,029 Beta:0.74

Share Price (Naira)

125 100 75 50 25 0 10000

Volume Traded (‘000)

8000 6000 4000 2000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

Outlook 2010 x

x x

We expect BCC’s top and bottom line figures to increase considerably in 2010, premised on an improved utilization rate in 2010. However, we believe that if the shortfall in LPFO supply, which marred its previous performance, continues in 2010, we may not see the expected improvement in production volumes. We expect the Company to declare a final dividend of N1.00, which would imply a total dividend of N2.00 for its FY’09 results. We expect a part liquidation of loans obtained from its parent company, but note that interest expense may still remain significant. We expect the Company to continue leveraging on the its parent company, DIL, in accessing other markets that were previously challenging to penetrate.

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INCOME STATEMENT (N'Mill) Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

2006

2007

2008 2009 F 2010 F

6,029 5,473 16,453 3,070 2,711 8,252 2,959 2,762 8,201 (1,042) (1,112) (2,394) 1,917 1,650 5,807 2 273 144

2011 F

INCOME STATEMENT ($'Mill) 2006

2007 2008 2009 F 2010 F 2011 F

40,000 20,062 19,938 (3,384) 16,554 -

64,000 31,703 32,297 (6,501) 25,796 -

68,000 33,684 34,316 (6,907) 27,408 -

Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

41 21 20 (7) 13 0

37 18 19 (8) 11 2

111 56 55 (16) 39 1

270 135 135 (23) 112 -

432 214 218 (44) 174 -

459 227 232 (47) 185 -

EBITDA Depreciation & Amortization

2,185 269

1,956 306

5,233 500

17,054 1,000

26,100 1,100

27,700 1,390

EBITDA Depreciation & Amortization

15 2

13 2

35 3

115 7

176 7

187 9

EBIT/Operating Profit

1,917

1,650

4,733

16,554

25,600

27,408

EBIT/Operating Profit

112

173

185

Interest Payable & charges Interest received

(1)

Interest Payable & charges Interest received

(138)

1,218

1,200

Profit on ordinary activities

3,861

1,937

4,733

15,354

25,600

27,200

Profit on ordinary activities

104

173

184

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

3,861 (756) 3,105 3,105

1,937 (618) 1,319 1,319

4,733 589 5,322 4,144

15,354 15,354 3,916 11,438

25,600 25,600 5,874 19,726

27,200 (4,352) 22,848 7,832 15,016

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

26 (5) 21

13 (4) 9

32 4 36 28

104 104 26 77

173 173 40 133

184 (29) 154 53 101

2009 F 2010 F

2011 F

25,223 50 25,273

33,458 50 33,508

41,950 50 42,000

41,950 41,950

56,950 56,950

66,950 66,950

BALANCE SHEET ($'Mill) 2006 Non-Current Assets Fixed Assets 170 Long term investments 0 Total Non-Current Assets 171

3,303

2,173

3,000

8,811

14,327

16,077

Current Assets Total Current Assets

TOTAL ASSETS

29,160

36,811

44,173

44,950

59,915

75,431

Current Liabilities Total Current Liabilities

14,946

26,612

29,684

19,761

15,000

15,500

(11,643)

(24,439)

(26,684)

(10,950)

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Long term investments Total Non-Current Assets

2006

Current Assets Total Current Assets

Net Current Assets Non-Current liabilities Total Non-Current Liabilities

5,809

341

2008

(673)

283 0 284

283 283

385 385

452 452

109

TOTAL ASSETS

197

249

298

304

405

509

Current Liabilities Total Current Liabilities

101

180

200

133

101

105

577

Net Current Assets

(79)

(165)

(180)

Non-Current liabilities Total Non-Current Liabilities

(74)

(5)

140

182

200

133

101

105

29,684

19,761

15,000

15,500

1,238 5,574 2,535 (1,146)

1,398 5,574 2,535 173

1,566 5,400 2,535 4,317

1,566 5,574 2,535 15,755

1,566 5,574 2,535 35,481

1,566 5,574 2,534 50,497

Capital and Reserves Share capital Share premium account Revaluation Reserves Retained Earnings

8 38 17 (8)

9 38 17 1

11 36 17 29

11 38 17 106

11 38 17 240

11 38 17 341

8,200

9,680

13,818

25,430

45,156

60,171

Minority Interest Shareholder's fund

172

305

406

2009F 3.92 2.00 6.43 2.8% 10.21 3,916

20,755

RATIOS

2006

2007

2008

PERFORMANCE Turnover growth Growth in C ore Operating profit EBITDA Margin EBIT Margin PAT Margin

2006 51% 33% 36% 32% 52%

2007 -9% -7% 36% 30% 24%

2008 201% 197% 32% 29% 25%

2009F 143% 143% 43% 41% 38%

2010F 60% 62% 41% 40% 40%

2011F 6% 6% 41% 40% 34%

PROFITABILITY Return on Equity (AVG) Return on Equity (END) Return On Asset (AVG) Return On Asset (END)

2006 37% N/A 4.2% 15.7%

2007 15% 15.8% 1.0% 4.5%

2008 35% 43.1% 2.6% 11.3%

2009F 2010F 79% 73% 111.7% 101.6% 8.6% 12.2% 34.8% 57.0%

2011F 43% 50.9% 8.4% 38.1%

2008 2009 F 2010 F 2011 F

226 0 226

26,953

TOTAL LIABILITIES

250

2007

TOTAL LIABILITIES

Capital and Reserves Share capital Share premium account Revaluation Reserves Retained Earnings Minority Interest Shareholder's fund

2007

‘Ahead of the Curve’

2009 F 2010 F

2011 F

SHARE METRIC EPS DPS NAPS EBITDA Sale per Share Shares Outstanding

CAPACITY C apacity Production Utilization Price/Tonnes (N) C ost/Tonnes (N) EBITDA/Tonnes

2006 1.25 3.38 1.8% 2.44 2,475

2007 0.47 3.45 3.7% 1.97 2,784

2008 1.32 4.39 3.2% 5.25 3,132

2006 0.9 0.3 35% 19,140 9,748 6,938

2007 0.45 0.4 89% 13,683 6,778 4,889

2008 3.0 0.7 22% 25,312 12,696 8,051

2010F 6.54 2.50 11.47 3.9% 16.34 3,916

2011F 5.83 3.00 15.37 4.3% 17.36 3,916

2009F 2010F 3.0 3.0 1.5 2.1 50% 70% 26,667 27,500 13,375 15,097 11,369 12,429

2011F 3.0 2.8 93% 24,286 12,030 9,893

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Cement Company of Northern Nigeria - Company Overview BASIC INFORMATION Address

Km 10, Kalambaina Road Sokoto State, Nigeria

Management

Engr. Ibrahim A. Gobir (Chairma Mr Alf Karlsen (MD/CEO)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Sector

Cement Manufacturing

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership 51.41

Scancem International ANS of Norway Kebbi State Government

Cement Company of Northern Nigeria Plc (CCNN), was incorporated in 1962 with an installed production capacity of 0.5 Million mtpa. It was initially owned by the Government, but ownership has changed hand 3 times since incorporation. Currently, BUA International has a majority stake in the Company. In 2008, CCNN began an overhaul of its plants to reduce down time and consequently increase volumes and efficiencies. Currently, management has plans to increase the production capacity at the plants by 0.75 million tonnes per annum to 1.25 million tonnes per annum, in order to benefit from the growing demand in the Nigerian cement market. However, these plans are yet to be announced formally.

5.66

Sokoto State Government

2.92

Kaduna State Government

2.78

Kano State Investment & Properties

1.57

Jigaw a State Government

1.04

Katsina State Investment & Dev. Co.

1.04

Ferrostal A. G.

Key Review Highlights

0.10

Nasdal Bap Nigerian Limited

11.63

Dantata Investment & securities Co.

7.08

FREE FLOAT

15.00

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

SIZE AND VALUE TRADED Market Capitalization

1,256,677,766

N 'Mn

1,566

$ 'Mn

Average Volume Traded ('09)

Units

517,349

Average Value Traded ('09)

N '000

67,159

$ '000

453

D IV ID E N D S A N D B O N US IS S UE S

T ype

Year

Final

FY'08

Scrip Issue

FY'08

1fo r 4

Final

FY'07

Final

FY'06

CCNN released its Q2’09 results on the 2nd of September, 2009, showing strong YoY growth of 50% and 91% in Turnover and Pre-tax profits respectively. The Company’s actual performance in Q2’09 significantly surpassed its own Turnover and PAT forecasts of N3.12 Billion (Actual–N6.59 Billion) and N460 Million (Actual-N1.17 Billion) respectively. According to the Company, the impressive performance could be attributed to the stable functioning of its 500,000 MT plant in the period under review. The improvement in performance could also be attributed to the change in the Company’s energy input for its power generator, from diesel to LPFO fuel. Though the Petroleum Products Pipeline Marketing Company’s (PPPMC) Ex-Depot Price of LPFO doubled in 2009 from N25.40 to N44.70, it still represents a cheaper alternative to diesel, which sold well above N100 per litre. Furthermore, diesel fuel burns faster, resulting in an increased fuel consumption rate for the power plant. In addition to the release of these results, CCNN also declared an interim dividend of N0.80 per share. This equated to 86% of net profits, making CCNN the highest dividend payer in its industry.

Forecast Summary Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'08A

FY'09F

FY'10F

FY'11

1.22

1.70

1.84

1.91

1.98

275%

-26%

59%

38%

-13%

8.00

10.82

6.79

4.92

5.67

0.80

1.00

1.20

1.40

N/A

FY'12F

0.01% 25.00% 20.00% 16.67%

2.85%

2.31%

3.01%

1.82%

1.71%

3.30

4.35

5.73

7.55

9.94

31.47% 31.68% 31.69% 31.73% 31.66% 3.78

2.86

2.17

1.65

1.25

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

251

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

We place an “Overweight” rating on the Company and derived a Fair Value range of N19.83 – N21.31. We recommend a “BUY” at the current market price.

CCNN SHARE PRICE Vs. VOLUME TRADED 150

52 week high:N14.98 52 week low:N5.39 Average Price:N9.29 Avg Vol Traded (‘000): 517 Beta:0.70

Share Price (Naira)

125 100 75 50 25 0 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Volume Traded (‘000)

Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

Outlook 2010 x

x x

252

‘Ahead of the Curve’

We expect further improvements in its CCNN’s top and bottom line figures, attributable to its recently concluded restructuring program. Following its declaration to increase the proportion of biomass in its fuel, we expect cost to further decline. We expect the recent acquisition of CCNN’s majority stake (51%) by Bua Group and by effect, the new management team, to inject new initiatives that would positively impact the Company’s financial performance going forward. Some of the initiatives we expect include the expansion of its production capacity, given the supply shortfall in the Sector. Though we note aggressive expansion plans by other players, we are of the view that the segmentation of the Sector, due to lack of an efficient transport system, would preserve the cost advantage CCNN has in the North-West region of the Country. We expect that the Company would benefit from its parent company, in terms of relatively cheap finance and its established distribution network in the south.

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

INCOME STATEMENT (N'Mill) Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

2006

2007

6,374 8,042 (4,615) (5,759) 1,759 2,283 (1,980) (2,466) (221) (183)

2008 9,878

EBITDA Depreciation & Amortization

(381) (161)

EBIT/Operating Profit

(221)

(183)

Interest Payable & C harges Other Income

(313) 523

(387) 742

(183) -

2009 F 2010 F

2011 F

INCOME STATEMENT ($'Mill)

12,000 13,000 (6,316) (6,842) 5,684 6,158 (3,600) (3,900) 2,084 2,258

14,300 (7,244) 7,056 (4,290) 2,766

Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

2,385 (301)

2,559 (301)

3,063 (297)

EBITDA Depreciation & Amortization

2,084

2,258

2,766

EBIT/Operating Profit

2006 43 (31) 12 (13) (1) (3) (1)

2007 2008 2009 F 2010 F 2011 F 54 (39) 15 (17) (1) -

81 (43) 38 (24) 14 -

88 (46) 42 (26) 15 -

97 (49) 48 (29) 19 -

(1)

16 (2)

17 (2)

21 (2)

(1)

(1) -

Interest Payable & C harges Other Income

(2) 4

(3) 5

15 -

19 -

Profit on ordinary activities

(10)

172

1,683

2,084

2,258

2,766

Profit on ordinary activities

(0)

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

(10) (25) (35) (35)

172 (34) 138 100 38

1,683 (150) 1,533

2,084 (200) 1,884 1,256 628

2,258 (300) 1,958 1,507 451

2,766 (600) 2,166 1,884 282

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

(0) (0) (0)

1 (0) 1 1 0

11 (1) 10

14 (1) 13 8 4

15 (2) 13 10 3

19 (4) 15 13 2

2009 F

2010 F

2011 F

2006

2007

422

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Capital Work in Progress

2008

2,753 1,389

4,017 439

4,008 1,555

4,015 589

3,960 1,467

Current Assets Stocks Goods in Transit Debtors Bank and cash balances Total Current Assets

2,463 418 743 299 3,923

3,016 588 775 284 4,663

3,500 360 1,110 398 7,350

3,298 420 1,200 239 7,963

3,001 512 1,115 423 8,759

BALANCE SHEET ($'Mill) Non-Current Assets Fixed Assets

873 183

1,004 201

0 31 226

0 75 499

0 98 7 863

0 118 4 1,046

0 141 1,197

0 156 1,360

51 398

116 599

331 1,080

83 533

99 445

119 443

624

1,098

1,943

1,579

1,642

1,803

159 0

280 0

305 0

244 0

298 0

352 0

(38)

(45)

(212)

(376)

(590)

(689)

283 6 51 8 348

269 7 40 2 10 328

188 8 32 11 240

226 9 26 13 273

459 778 1,640 1,237 165 320 303 343 Capital and Reserves Capital and Reserves attributable to equity holders Share capital Share premium account 2 3 3 3 Revaluation Reserves 108 202 201 202 Retained Earnings 16 72 49 72 Minority Interest 26 43 50 65 Shareholder's fund 165 320 303 343

1,275 367

1,405 398

3 202 72 89 367

3 202 72 120 398

MARGINS Gross Profit EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2006 27.6% -6.0% -3.5% -0.2% -0.5%

2007 28.4% -2.3% -2.3% 2.1% 1.7%

2008

2009F 47.4% 19.9% 17.4% 17.4% 15.7%

2010F 47.4% 19.7% 17.4% 17.4% 15.1%

2011F 49.3% 21.4% 19.3% 19.3% 15.1%

SHARE METRIC EPS DPS NAPS EBITDA Sale per Share Shares Outstanding

2006 0.0 0.0 1.4 -0.3 5.9 1083.3

2007 2008 0.1 0.1 2.5 -0.1 6.4 1256.0 1256.0

2009F 1.5 1.0 2.2 1.9 9.6 1256.0

2010F 1.6 1.2 2.5 2.0 10.4 1256.0

2011F 1.7 1.5 2.8 2.4 11.4 1256.0

2009F 0.5 0.5 0.90 26,667 14,035 5,299

2010F 0.5 0.5 0.96 27,083 14,255 5,331

2011F 0.5 0.5 0.96 26,700 14,583 6,381

Current Assets Inventories Debtors Debtors & Prepayments Bank and cash balances Total Current Assets

12,913

12,567

14,186

917 5,210 29 6,156

553 4,981 39 5,573

934 5,111 58 6,103

978 5,489 63 6,530

965 5,921 69 6,955

Current Liabilities C reditors & Accruals Other C reditors Provisions Total Current Liabilities

Net Current Assets

1,910

3,545

2,729

1,534

2,050

Net Current Assets

76 280 10 366

76 320 396

80 360 440

81 400 0 481

84 420 504

1,544

3,150

6,370

5,556

6,727

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 542 628 542 C apital Account 2,458 3,836 2,458 General Reserve (1,455) (1,316) 3,371 Bond Issue Reserve 3 Minority Interest Shareholder's fund 1,544 3,151 6,370

542 2,458 2,339 -

542 2,458 3,586 -

5,339

6,586

2007

2008

2009 F

2010 F

2011 F

GROWTH RATES Turnover growth Growth in C ore Operating p Growth in EBITDA Growth in PBT Growth in PAT

2006 8% N/A N/A N/A N/A

2007 26% 30% N/A N/A N/A

2008

2009F 21% 37% 220% 24% 23%

2010F 8% 8% 7% 8% 4%

2011F 10% 15% 20% 23% 11%

PROFITABILITY Return on Equity (AVG) Return on Equity (END) Return On Asset (AVG) Return On Asset (END)

2006 -2% -2% -0.1% -0.6%

2007 6% 9% 0.4% 1.7%

2008

2009F 39% 45% 3.8% 16.3%

2010F 31% 36% 3.4% 15.2%

2011F 26% 30% 3.5% 17.2%

2008 2009 F 2010 F 2011 F 759 166

9,118

2006

2007

607 151

8,066

RATIOS

2006

223 201

TOTAL ASSETS

TOTAL LIABILITIES Net Assets

(0)

97 98

Current Liabilities Bank Overdraft C reditors & Acc. C harges Taxation Total Current Liabilities

Non-Current liabilities Deferred Taxation End of Services Benefits Loan Total Non-Current Liabilities

TOTAL ASSETS

Non-Current liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities

10 5 5 1 3 23

120 5 6 1 3 134

TOTAL LIABILITIES Net Assets

CAPACITY C apacity (Mn) Production (Mn) Utilization Price/Tonnes (N) C ost/Tonnes (N) EBITDA/Tonnes

2006 0.5 0.3 0.60 21,248 15,384 (1,272)

2007 0.5 0.3 0.58 27,731 19,859 (631)

2008

‘Ahead of the Curve’

253

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

Lafarge Cement WAPCO Plc -Company Overview BASIC INFORMATION Address

Elephant Cement House Ikeja, Lagos, Nigeria

Website

www.lafaragewapco.com,

Management

Chief Osunkeye - OON (Chairman) George Lourandos Esq. (MD/CEO)

Fiscal Year End

December

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: WAPCO:NL

Sector

BUILDING MATERIALS

Country

Nigeria

Lafarge Cement WAPCO Nigeria Plc commenced operations in 1960 in Ogun State, as the West African Portland Cement Plc (WAPCO). The Company began cement production with an initial capacity of 200,000 tonnes per annum, which has grown to a volume of 2 million mtpa today. Lafarge Cement WAPCO is presently the only local cement manufacturer in the Lagos/southwest region, which is the leading regional market.

Key Review Highlights

The Company in its latest earnings release for Q3’09, recorded a 9.88% YoY increase in Turnover, while PAT declined by 21.16%.

According to management, the challenging business environment made it difficult for the firm to reach optimal performance levels.

Shortfalls in power supply led to low utilization levels, as Lafarge Wapco Cement plants rely on natural gas to power operations. Supply was erratic for the better part of 2009; however, the Niger-Delta Amnesty Programme, as well as mitigation strategies implemented by management, such as adapting its Sagamu plant to run on both natural gas and LPFO, is expected to result in improved utilization levels in the final quarter of the year.

Another contributory factor to reduced performance has been the reliance on imported clinker, which is purchased at a significantly higher cost than the local alternative.

As mentioned previously, the Company has embarked on a major expansion project to increase capacity by 2.2 million mtpa. A significant aspect of the project is the construction of a 90MW power station. The new plant will be able to operate on LPFO, natural gas or coal. This will provide security against disruptions in the supply of gas and electricity that negatively impacted the Company in previous years.

The expansion is expected to cost 354 million Euros (N64 billion) in its entirety. This is financed by a combination of debt, 225 million Euros (approximately N41.15 billion), and internally generated cash flows of 129 million Euros (approximately N22.87 billion).

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Foreign

60.00

Nigerian

40.00

FREE FLOAT

30.00

SHARES IN ISSUE Date

Shares Outstanding

Dec-09

3,001,600,001

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09) Average Value Traded ('09)

N 'Mn

9,005

$ 'Mn

Units

1,410,136

N '000

67,159

$ '000

453

D IV ID E N D S A N D B O N US IS S UE S T ype

Year

Final

FY'08

N0.60

Scrip Issue

FY'08

Final

FY'07

N1.20

Final

FY'06

N1.00

Forecast Summary Earnings Per Share (N) YoY Change (%) Pric e to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

FY'08A

FY'09F

FY'10F

FY'11

FY'12F

3.75

2.77

4.42

6.09

5.29

-65.78%

39.28%

8.33%

3.85%

3.70%

8.25

5.92

5.47

5.27

5.08

0.45

1.00

1.20

1.40

1.60

-62.50% 122.22%

20.00%

16.67%

14.29% 4.52%

1.94%

2.58%

3.23%

3.87%

13.44

15.21

17.53

20.43

25.48

YoY Change (%)

22.96%

13.17%

15.25%

16.54%

24.72%

Pric e to Book (x)

7.47

6.35

3.82

2.95

2.61

Source: Company Financials; Vetiva Research

254

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

However, due to the reinstatement of tariff incentives for imported spare parts and machineries for the production of cement for 2-3 years, it is expected that this measure would reduce the total cost of the expansion.

Management has put measures in place to cushion the impact of the expansion on the Company’s cash flow. Some of these measures include human capital development, sales growth, production scale accretion, cash flow improvement and cash management strategies. According to management, the plant should become operational between the first and second quarters of 2011.

The Company is currently benefiting from capital allowance, which resulted from the construction of its Ewekoro plant in 2003. This reduced its Q1’09 effective Corporate Tax to 15%, relative to the statutory rate of 32%.

Our Fair Value price range for Lafarge WAPCO is between N43.52 – N47.33. We maintain our “Overweight” rating on the Company and recommend a “BUY” at its current market price.

WAPCO SHARE PRICE Vs. VOLUME TRADED 150

52 week high:N35.4 52 week low:N11.89 Average Price:N24.19 Avg Vol Traded (‘000): 1,410 Beta:1.00

Share Price (Naira)

125 100 75 50 25 0 1500

Volume Traded (‘0000)

1000

500

0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

Outlook 2010 x

Production volumes in 2010 may rise considerably, given the positive impact that Government’s Amnesty Programme seem to be having on the supply of hydrocarbons, as militant activity has reduced drastically in the Niger-Delta region (we highlight renewed upsurge of this in 2010). We also expect improved supply of gas to reduce production cost, as we attribute the recent rise in cost to the purchase of imported clinker, which would no longer be needed, as this will now be manufactured in-house.

‘Ahead of the Curve’

255

2009 Review | 2010 Outlook SECTORAL REVIEW BUILDING MATERIALS

INCOME STATEMENT (N'Mill) Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit

2006 39,518 (21,694) 17,824 (4,951) 12,873 593

2007

2008

38,665 43,274 (23,323) (26,607) 15,342 16,667 (4,843) (4,542) 10,499 12,125 1,076

2009 F

2010 F

46,666 50,119 (32,012) (32,578) 14,654 17,541 (4,898) (5,261) 9,756 12,280

2011 F 60,140 (37,888) 22,252 (6,312) 15,940

INCOME STATEMENT ($'Mill)

2006

2007

2008

Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

267 (146) 120 (33) 87 4

261 (157) 104 (33) 71 7

292 (180) 113 (31) 82

2009 F 2010 F 2011 F 315 (216) 99 (33) 66

338 (220) 118 (36) 83

406 (256) 150 (43) 108

102 (11)

87 (9)

93 (11)

77 (11)

71 (12)

95 (12)

EBITDA Depreciation & Amortization

15,046 (1,580)

12,953 (1,378)

13,705 (1,580)

11,356 (1,600)

10,562 (1,718)

14,140 (1,800)

EBITDA Depreciation & Amortization

EBIT/Operating Profit

13,466

11,575

12,125

9,756

12,280

15,940

EBIT/Operating Profit

Interest Payable & C harges Interest received

(1,347)

Interest Payable & C harges Interest received

(9)

(6) 6

(2) 5

(5) 3

(3) 2

Profit on ordinary activities

12,119

15,740

Profit on ordinary activities

106

15,740 (2,044) 13,696 3,602 10,094

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

82 (8) 74 20 54

79 (9) 70 24 45

85 (12) 73 12 61

64 (8) 56 16 40

82 (11) 71 20 51

106 (14) 92 24 68

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

12,119 (1,173) 10,946 3,002 7,944

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Current Assets Inventories Debtors Debtors & Prepayments Bank and cash balances Working Progress Due from Related C ompanies Deposit for Import

(831) 921 11,665 11,665 (1,358) 10,307 3,602 6,705

2006 32,361

2007 33,356

(228) 760 12,657 12,657 (1,781) 10,876 1,801 9,075

2008 43,121

(800) 500 9,456 9,456 (1,136) 8,320 2,402 5,918

(500) 300 12,080 12,080 (1,598) 10,482 3,001 7,481

2009 F

2010 F

44,500

46,589

Current Assets Inventories Debtors Debtors & Prepayments Bank and cash balances Working Progress Due from Related C ompanies Deposit for Import

2007

219

225

291

300

315

720

68 1 11 40

81 1 13 132 236 1 5

119 1 13 47 1 6

Total Current Assets

16,329

17,179

18,586

61,403

69,508

27,616

TOTAL ASSETS

48,754

50,596

61,768

105,964

116,157

134,266

Current Liabilities C reditors & Accruals Other C reditors Provisions Amount due to related C ompanies Short Term Loan Dividend Payable Taxation Total Current Liabilities

1,341 6,215 1,396 419 5,124 4 1,897 16,397

1,377 6,355 968 493 4,713 1 1,842 15,748

2,207 6,146 680 741 7,113 1 1,212 18,099

2,400 6,000 1,200 899 1 1,400 11,900

2,700 6,134 1,200 1,000 1 1,500 12,535

3,240 9,000 2,000 1,500 1 3,000 18,741

1,431

487

49,503

56,973

8,876

5,413 1,211 187 6,810

1,748 294 2,042

1,758 1,454 3,212

42,000 1,800 1,554 45,354

42,000 1,933 1,654 45,587

42,000 2,320 1,754 46,074

Non-Current liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities

23,207 25,547

17,790 32,806

21,312 40,456

57,254 48,709

58,123 58,035

64,815 69,451

TOTAL LIABILITIES Net Assets

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 1,501 1,501 1,501 Share premium account 9,489 9,489 9,489 Revaluation Reserves 3 3 3 Retained Earnings 14,554 21,813 29,352 Minority Interest Shareholder's fund 25,547 32,806 40,345

4,546 9,489 3 34,671

4,546 9,489 3 43,997

4,546 9,489 3 55,412

48,709

58,035

69,451

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 10 10 10 Share premium account 64 64 64 Revaluation Reserves 0 0 0 Retained Earnings 98 147 198 Minority Interest Shareholder's fund 172 222 272

RATIOS

2006

2007

2008

2009 F

2010 F

2011 F

PERFORMANCE Turnover growth Growth in C ore Operating profit EBITDA Margin EBIT Margin PAT Margin

2006 49% 37% 38% 34% 28%

2007 -2% 8% 34% 30% 29%

2008 12% 14% 32% 28% 26%

2009F 8% 20% 24% 21% 18%

2010F 7% 2% 28% 25% 23%

2011F 20% 16% 16% 24% 24%

PROFITABILITY Return on Equity (AVG) Return on Equity (END) Return On Asset (AVG) Return On Asset (END)

2006 55% 24% 24% 26%

2007 38% 23% 23% 23%

TOTAL LIABILITIES Net Assets

256

‘Ahead of the Curve’

2008 30% 20% 20% 22%

2009F 19% 10% 10% 13%

2010F 23% 10% 10% 11%

2011F 26% 11% 11% 13%

Total Current Assets TOTAL ASSETS Current Liabilities C reditors & Accruals Other C reditors Provisions Amount due to related C ompa Short Term Loan Dividend Payable Taxation Total Current Liabilities Net Current Assets

SHARE METRIC EPS DPS NAPS EBITDA Sale per Share Shares Outstanding

CAPACITY C apacity Production Utilization Price/Tonnes C ost/Tonnes EBITDA/Tonnes

34 5 54 2 15

2008 2009 F 2010 F

(3) 2

2006

10,083 166 1,621 5,974 90 652

Non-Current liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities

17,687 179 1,880 6,911 124 835

BALANCE SHEET ($'Mill) Non-Current Assets Fixed Assets

8,572 1,783 4,220 26 2,579

(68)

12,012 187 1,900 19,610 35,000 104 696

2011 F 106,589

5,028 732 8,049 327 2,194

Net Current Assets/(Liabilities)

11,441 156 1,700 37,363 10,000 96 648

(500) 300

108

2011 F

0 17

1 4

77 1 11 252 68 1 4

110 329

116 342

125 417

415 715

469 784

186 907

9 42 9 3 35 0 13 111 (0)

9 43 7 3 32 0 12 106 10

15 42 5 5 48 0 8 122 3

16 41 8 6 0 9 80 334

18 41 8 7

22 61 14 10

385

0 20 127 60

37 8 1 46 157 172

284 12 10 306 387 329

284 13 11 308 392 392

284 16 12 311 438 469

31 64 0 234

31 64 0 297

31 64 0 374

329

392

469

12 28 -

12 2 14

12 10 22

120 222

144 273

0 10 85

2006 3.65 1.00 8.51 13.17 3.71 3,002

2007 3.72 1.20 10.93 12.88 3.24 3,002

2008 3.71 0.60 13.44 14.42 3.42 3,002

2009F 2.77 0.80 15.21 15.55 3.78 3,002

2010F 3.82 1.00 17.54 16.70 4.66 3,002

2011F 4.90 1.20 20.43 20.04 5.91 3,002

2006 2.0 2.0 0.99 19,958 10,956 7,505

2007 2.0 1.7 0.86 22,480 13,560 7,531

2008 2.0 1.6 0.80 27,046 16,629 8,566

2009F 2.0 1.7 0.85 27,451 18,830 6,680

2010F 2.0 1.7 0.85 29,482 19,163 8,235

2011F 4.2 2.3 0.55 26,148 16,473 7,713

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

THE CONSTRUCTION SECTOR As stated in our HY’09 report, the Construction Sector comprises an infrastructure segment and a real estate segment. We wrote about both sectors in broader terms, pointing to the fact that they both suffer from supply deficit. The indicative estimates of the supply deficit in the infrastructure and housing sectors were put at $510 billion (N81.60 trillion) and $262 billion (N42 trillion). This raises the question of how far have the 3 tiers of Government and the private sector gone in bridging these gaps. Business Monitor international revised their growth forecast for the Nigerian Construction Sector upwards from -14.5% to -10.8%. This revision was premised on the rising price of oil, which rose considerably in 2009 and this also partly influenced the formation of its flat outlook for the Nigerian construction sector in 2010. The performance of the 2009 budget was a key assumption in forming our H2’09 outlook for the Nigerian Construction Sector as documented in our H1’09 report. We assumed that the performance of the 2009 budget was going to surpass the average historical performance of recent budgets of below 50%. However, based on figures from the MDAs, actual expenditure fell significantly short of projections at below 50%. Thus, indicating the inability of these Government institutions to fully execute their mandates. The 2010 budgets indicates a 73.50% increase in planned expenditure on capital projects from N789.74 billion in 2009 to N1.37 trillion in 2010. 90% of this amount is targeted at 5 critical priority sector, of which infrastructure is inclusive. Lagos State Government plans to spend N429.596 billion. N307.027 billion represents the total revenue projection of the Government which comprises of internally generated revenue (IGR) estimate of N204 billion, dedicated revenue estimate of N20.027 billion, federal transfer projection of N78 billion and extra-ordinary revenue estimate of N5 billion. Capital expenditure is estimated at N250.778 billion as against the recurrent expenditure estimated at N178.818 billion. The support of the private sector remains key, in the face of inadequate public sector funding. We note increasing private sector investment in the infrastructure. Lekki Concession Company is a good example of a PublicPrivate Partnership that is making significant contributions to the development of infrastructure in Lagos state. The Company has almost completed the first phase of the expansion of the Lekki peninsular express way. With more initiatives like this, the time to closing the infrastructure gap would shorten. Government’s awareness campaign for both local and foreign investment in infrastructure seem to be yielding dividend as foreign investors have started indicating interests. The Brazilian Ambassador to Nigeria indicated Brazil’s interest in the Nigerian Infrastructure sector in a meeting with the management of Infrastructure Concession Regulatory Commission. We view this development positively, given the fact that Brazil is well ahead of Nigeria in Public-Private Partnerships. The director-general, Mansur Ahmed, estimated the amount needed to expand infrastructure services by 2020 at $100 billion, which he admitted can only be achieved with private sector support.

‘Ahead of the Curve’

257

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

Real Estate/Housing Segment The real estate sector also faced challenges in 2009, which was mostly fuelled by the Banking Sector crisis. The lull heightened at the tail end of the year. It became more apparent that the sector was under intense financial pressure following the release of a list by the Federal Mortgage Bank of Nigeria containing the names of debtors. This was amidst falling real estate values, which resulted in a considerable decline in the value of some of the assets used as collateral to secure these loans. We have stated that the public lacks the required funding to provide the required housing to close the housing gap. Hence, as stated in our previous write ups on the housing sector, the private sector’s support is paramount to the development of the housing sector. The Nigerian Federal Housing Authority (FHA) announced in October 2009 its plans to adopt a public private partnership (PPP) approach for housing delivery. It is actively seeking foreign companies who are interested to invest in real estate development in Nigeria. It plans to use this approach to provide new housing development schemes in states inclusive of Calabar, Lokoja, Lagos, Bayelsa, Kaduna, Katsina, and some other locations. This announcement seem to be yielding fruits as a group of Korean investors visited the Minister of works and housing to indicate their interests in investing in the housing sector in the last month of 2009. The schemes are targeted at the middle and low income earners. FHA plans to co-opt the Federal Mortgage Bank of Nigeria and multilateral organisations for funding purposes and also to enable its target recipients spread their repayment over a period of time.

Outlook According to the Nigerian Institution of Estate Surveyors and Valuers (NIESV), the Nigerian real estate sector is expected to rise in 2010. We highlighted, in our half year report 2009, that the Nigerian Mortgage Sector is highly undercapitalized to underwrite the quantum of mortgage loans that is required to provide the needed financial support for the construction of the estimated number of houses needed to bridge the deficit. We believe efforts are being made in this regard as the Federal Mortgage Bank of Nigeria is making moves to shore up its capital base following negotiations with the United States HSBC Bank to source $1.5 billion; about N231 billion from international capital market through Euro medium to long term issuance facility for housing development. Although we note that this is amount is insignificant when compared to the value of the housing gap, it is a step in the right direction. Our outlook for the Nigerian Construction Sector in 2010 is relatively bullish when compared to 2009, premised on signals of an economic recovery, which in turn should lead to increased construction activities.

258

‘Ahead of the Curve’

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

Julius Berger Nigeria Plc - Company Overview

BASIC INFORMATION Address

Utako District

Julius Berger Nigeria Plc commenced operations in 1970 as Julius Berger Ltd but changed its name in 1991 when it was listed on the Nigerian Stock Exchange (NSE).

Abuja Nigeria Website

www.julious-berger.com

Management

Brig. Gen. M. O. Johnson (Rtd) (Chairman) Dipl.-lng. Dr Wittmann (Vice Chairman)

Fiscal Year End Exchange Listing

DECEMBER Primary Listing: Nigerian Stock Exchange

Symbol

Bloomberg: JBERGER:NL

Sector

Construction

Country

Nigeria

OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Bilfinger Berger AG

49.87

Lagos State Government

9.98

Plateau state Government Nasarawa State Governmen

4.61 0.01

Benue State Government

The Company is managed by a team of Nigerian and German experts. It possesses the capability to plan, design, construct and maintain a variety of civil engineering and building projects. The firm independently operates its own quarries, mixing plants, repair and recondition workshops as well as a large land and water transport fleet. It has main operational bases in the Northern, Western and Eastern regions in Nigeria.

Key Review Highlights x

5.27

Other Nigerians

30.26

FREE FLOAT

30.26

SHARES IN ISSUE Date Dec-09

Shares Outstanding 1,200,000,000

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

3,095

$ 'Mn

Units

531,429

D IVID EN D S A N D B ON US IS SUES T ype

Year

Final

FY'08

Scrip Issue

FY'07

Final

FY'07

N1.25

Final

FY'06

N0.90

DIVIDENDS Type

Year

Naira

Final

FY'08

Final

FY'07

1.25

Final

FY'06

0.90

Julius Berger Plc (Julius Berger) latest earnings results for FY’08, recorded a Turnover of N114.02 Billion with Profits After Tax of N2.50 Billion. A combination of factors contributed to this perfomance which exceeded our forecast expactations. They included an increase in the number of contracts awarded to the company during the review period and an improvement in its execution speed and efficiency, considering that the Company adopts the percentage of completion method for recognizing revenue and income. Although the sector is characterized by numerous fringe players, Julius Berger has historically been the Government’s favourite in the execution of infrastructure projects and we expect this competitive advantage to continue to exist in the foreseeable future. The Lagos State Government awarded the expansion of the LagosBadagry express way into a 10-lane highway and the construction of the Lekki-Ikoyi Bridge to Julius Berger. The company was reportedly paid a mobilization fee of N450 billion in May 2009, to commence operations on the Lagos-Badagry expressway project. In August 2009. The Company paid a dividend per share of N1.75, which represented approximately 84% of its earnings, however this was a reduction from the N5.00 dividend per share paid out in the previous financial year. We place a “Reduce” rating on the Company. Using the sensitivity analysis to vary the discount factor and growth Rate, we derived a fair value range of N32.07 – N32.91 for Julius Berger. Forecast Summary

Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%)

FY'07A

FY'08A

FY'09F

FY'10

5.90

2.00

2.50

2.70

FY'11F 2.80

59.46% -66.10%

25.00%

8.00%

3.70%

4.37

12.90

10.32

9.55

9.21

5.00

1.75

2.00

2.20

2.30

150.00% -65.00%

14.29%

10.00%

4.55%

7.75%

8.53%

8.92%

Dividend Yield (%) Net Assets Per Share (N)

19.39%

6.79%

18.70

5.50

6.30

9.20

10.00

YoY Change (%)

36.50% -70.59%

14.55%

46.03%

8.70%

4.09

2.80

2.58

Price to Book (x)

1.38

4.69

Source: Company Financials; Vetiva Research

‘Ahead of the Curve’

259

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

JBERGER SHARE PRICE Vs. VOLUME TRADED 100

52 week high:N55.6 52 week low:N18.87 Average Price:N30.58 Avg Vol Traded (‘000): 531 Beta:6.60

Share Price (Naira)

80 60 40 20 0 2500 Volume Traded (‘000) 2000 1500 1000 500 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

Outlook 2010 x

260

‘Ahead of the Curve’

We expect construction work to remain relatively bullish in the 1st quarter of 2010, given Government’s decision to carry over the 2009 budget into 2010, so as to prevent the stalling of uncompleted projects. We expect the Company to continue to leverage on its longstanding relationship with the Federal Government and other State Governments. Given the considerable growth in capital expenditure allocation in 2010 and the fact that Julius Berger executes a large proportion of Government project, we may see this impact on its top line positively this year.

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

INCOME STATEMENT (N'Mill) Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & C harges Other Income

2006

2007

56,868 78,378 (47,874) (65,866) 8,994 12,512 (6,933) (9,721) 2,061 2,791 144 341 8,931 (5,636)

2009 F

2010 F

2011 F

112,475 123,723 (95,686) (105,255) 16,789 18,468 (12,668) (13,935) 4,121 4,532 1,049 1,000

2008

132,383 (112,623) 19,760 (14,911) 4,850 1,000

141,650 (120,506) 21,143 (15,954) 5,189 500

10,276 (5,595)

12,856 (6,922)

13,096 (6,800)

13,114 (6,500)

13,453 (6,500)

3,295

4,681

5,934

6,296

6,614

6,953

(1,090)

(1,549)

(764)

INCOME STATEMENT ($'Mill)

2006

2007

2008 2009 F 2010 F 2011 F

Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

384 (323) 61 (47) 14 1

529 (445) 84 (66) 19 2

759 (646) 113 (86) 28 7

835 (711) 125 (94) 31 7

894 (760) 133 (101) 33 7

956 (814) 143 (108) 35 3

60 (38)

69 (38)

87 (47)

88 (46)

89 (44)

91 (44)

32 (10) -

EBITDA Depreciation & Amortization EBIT/Operating Profit

Interest Payable & C harges Other Income

(7) -

40 -

(5) -

47 -

(5)

(5) -

2,205

3,132

5,170

5,532

5,850

6,189

Profit

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

2,205 (1,086) 1,119 600 519

3,132 (1,368) 1,764 1,500 264

5,170 (2,718) 2,452 2,100 352

5,532 (2,490) 3,043 2,400 643

5,850 (2,632) 3,217 2,600 617

6,189 (2,785) 3,404 2,800 604

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

15 (7) 8 4 4

21 (9) 12 10 2

35 (18) 17 14 2

37 (17) 21 16 4

39 (18) 22 18 4

42 (19) 23 19 4

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Investments Federal Government Bond

2009 F

2010 F

2011 F

2007

23,825 192 5,684

28,381 192 -

35,233 192 -

37,699 192 -

40,338 192 -

BALANCE SHEET ($'Mill) Non-Current Assets Fixed Assets Capital Work in Progress Long Term Asset

2006

19,932 0.5 26,728

Current Assets Stocks C ontract Debtors Amount due to Subsidiaries Sundry debtors & Prepayment Bank & C ash balance

9,305 19,645 9,368 3,947

9,662 30,593 17 14,049 3,690

11,831 44,730 553 29,586 22,683

18,880 67,095 500 20,142 4,924

20,201 60,000 500 21,552 5,268

21,615 57,000 500 23,061 5,637

Current Assets Stocks C ontract Debtors Amount due to Subsidiaries Sundry debtors & Prepayment Bank & C ash balance

135 0 180 63 133 63 27

161 1 38 65 207 0 95 25

192 1 80 302 4 200 153

238 1 127 453 3 136 33

255 1 136 405 3 146 36

272 1 146 385 3 156 38

Total Current Assets

42,264

58,011

109,383

111,540

107,521

107,813

Total Current Assets

TOTAL ASSETS

88,924

87,711

137,956

146,965

145,412

148,343

TOTAL ASSETS

(6,500) (500) (4,000) (2,490) (119,000) (132,490)

(7,000) (500) (4,500) (2,567) (121,000) (135,567)

285 600 (49) (26) (62) (7) (398) (543) (259) (6) (22)

392 592 (12) (1) (1) (9) (499) (522) (130) (6) 38 (27)

739 932 (36) (2) (29) (15) (770) (851) (112) (6) 44 (31)

753 992 (41) (3) (37) (15) (817) (913) (135) (6) 39 (34)

726 982 (44) (3) (27) (17) (804) (895) 135 (6) 44 (37)

728 1,002 (47) (3) (30) (17) (817) (915) 135 (6) 52 (28)

Profit on ordinary

2006

2007

Current Liabilities C reditors due within a year Amount due to related parties Bank loan Overdraft Taxation Other C reditors Total Current Liabilities

(7,324) (1,801) (3,896) (102) (9,152) (118) (1,086) (1,372) (58,947) (73,909) (80,406) (77,302)

Net Current Assets/(Liabiliti

(38,364) (19,292)

Non-Current liabilities Deferred Taxation Provision for Liabilities and C har Staff retirement benefits

(858) (3,321)

(858) 5,611 (3,939)

2008

(5,293) (6,000) (265) (500) (4,290) (5,500) (2,169) (2,260) (113,965) (120,987) (125,981) (135,247) (16,597)

(20,000)

(858) 6,564 (4,554)

(867) 5,842 (5,009)

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 150 150 600 Revaluation Reserves 425 425 425 General Reserve 3,541 5,035 6,551 Shareholder's fund

4,117

5,610

Current Liabilities Trade C reditors Other C reditors and Accruals Bank Overdraft Dividend Payable Taxation Total Current Liabilities

20,000

Net Current Assets/(Liabilitie

(867) 6,547 (5,508)

(876) 7,688 (4,212)

Non-Current liabilities Term Loan Staff Retirement benefit Total Non-Current Liabilities

600 425 7,257

600 425 8,415

600 425 7

9,000

9,933

10,809

RATIOS

2006

2007

2008

2009 F

2010 F

2011 F

GROWTH RATES Turnover growth Growth in C ore Operating profit Growth in EBITDA Growth in PBT Growth in PAT

2006 43% 232% 59% 98% 79%

2007 38% 35% 7% -387% 58%

2008 44% 48% 32% 65% 39%

2009F 10% 10% 3% 7% 24%

2010F 7% 7% 0% 6% 6%

2011F 7% 7% 3% 6% 6%

PROFITABILITY Return on Equity Return on Asset Return On Net Fixed Asset Return on Invested C apital

2006 31% 2% 6.7% 1.2%

2007 31% 2% 9.1% 2.0%

2008 40% 2% 9.8% 2.0%

2009F 43% 3% 10.3% 2.0%

2010F 41% 2% 9.7% 2.2%

2011F 38% 2% 9.0% 2.2%

2008 2009 F 2010 F 2011 F

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 1 1 4 Revaluation Reserves 3 3 3 Share Premium 24 34 44 General Reserve Shareholder's fund 28 38 -

4 3 49

4 3 57

4 3 0 -

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin

2006 13.8% 3.9% 3.9% 2.0%

2007 10.7% 4.0% 4.0% 2.3%

2008 9.8% 4.6% 4.6% 2.2%

2009F 9.2% 4.5% 4.5% 2.5%

2010F 8.6% 4.4% 4.4% 2.4%

2011F 8.3% 4.4% 4.4% 2.4%

SHARE METRIC EPS DPS NAPS Sale per Share Shares Outstanding

2006 3.7 2.0 13.7 7.0 300.0

2007 5.9 5.0 18.7 18.9 300.0

2008 2.0 1.8 -5.8 5.5 1200.0

2009F 2.5 2.0 8.3 6.3 1200.0

2010F 2.7 2.2 9.2 6.9 1200.0

2011F 2.8 2.3 10.0 7.9 1200.0

‘Ahead of the Curve’

261

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

Costain West Africa Plc - Company Overview BASIC INFORMATION

Costain (West Africa) Plc was incorporated in 1948 initially as a private limited company in Nigeria. It assumed ownership of the various projects that previously been under the purview of John Holt and Company (Liverpool) Limited’s building department. Costain (West Africa) Plc went public on the 13th of March, 1974. Its shares were quoted on the Nigerian Stock Exchange (NSE) subsequently.

174 Fola Williams Avenue

Address

Ebute-Metta, Lagos, Nigeria Website

www.constainwa.com

Management

Dr. M. H. Konguna (Chairman) Mr. Orikolade (Vice Chairman)

Fiscal Year End

MARCH

Exchange Listing

Primary Listing: Nigerian Stock Exchange

Sector

Construction

Country Nigeria OWNERSHIP AND FREE FLOAT Shareholders

% Ownership

Shoreline Energy Int. Ltd.

51.05

Others

48.95

Free Float

48.95

The company is primarily involved in construction and classifies its business under the Civil segment (infrastructure – ports, roads e.t.c), Commercial segment (private projects) and Residential (construction of housing estates). However, a large proportion of its turnover comes from the commercial segment (about 80%). The company has also ventured into the furniture business.

SHARES IN ISSUE Dec-09

Key Review Highlights

1,084,382,980

SIZE AND VALUE TRADED Market Capitalization

Average Volume Traded ('09)

N 'Mn

4,121

$ 'Mn

Units 558,302

D IVID EN D S A N D B ON US ISSUES T ype

Yea r

Final

FY'08

Scrip Issue

FY'08

Final

FY'07

Final

FY'06

Costain’s latest reports recorded a Turnover of N4.3 Billion and a Profit after Tax N287.86million. These results were for the released its Q3‘08/09 results. The leap in its Q3’08/09 Turnover from its Q2’08/09 Turnover of N591 Million may not be unconnected to its ongoing expansion/business diversification program. PBT Margin stands at 7.00% down from 8.90%, while PAT margin stands at 6.70% down from 8.30% for Q3’08/09 relative to Q3’07/08 As with most businesses in the country, the Company’s profitability has been adversely affected by the rising cost of doing business, competition, and insufficient data to track activities amongst others. Following its capital raising exercise in December 2007, the Company raised N9.01 billion and is still deploying the funds in the acquisition of strategic businesses, working capital, the purchase of plant, transport & equipment and its furniture and joinery division. The challenges in winning Government contracts (mostly for road construction), which is partly due to tight competition and Government lobbying, has caused the company to focus its resources on improving its competence in the delivery of specialized jobs which include the construction of dams, seaports, air-ports etc. Forecast Summary

Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

FY'07A

FY'08A

FY'09F

FY'10

FY'11F

0.70

2.20

-0.50

0.90

0.80

N/A 214.29% -122.73% -280.00% -11.11% 5.43

1.73

-7.60

4.22

0.00

0.20

4.75 0.30

N/A

50.00% 7.89%

N/A

5.26%

-7.80

-5.80

8.30

9.20

10.00

-7.14% -25.64%

N/A

10.84%

8.70%

0.46

0.41

0.38

-0.49

-0.66

Source: Company Financials; Vetiva Research

262

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2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

Costain’s Q3’08/9 results show a relatively low tax expense of N15 million, which represents an effective tax rate of 5% as against the statutory rate of 32%. The lower rate is mainly as result of the Tax Relief granted to the company due to the string of prior losses. According to management, the tax relief is expected to come to an end with its 2010 fiscal year. We place a “Neutral” rating on the stock, and recommend a “HOLD”, in light of the Company’s less than expected financial performance. Additionally, we expect the Company to record impressive results on the back of strong growth prospects for the construction sector, Government’s focus on infrastructure development and growing private sector interest in the infrastructure segment.

COSTAIN SHARE PRICE Vs. VOLUME TRADED 50

52 week high:N11.47 52 week low:N3.28 Average Price:N6.08 Avg Vol Traded (‘000): 558 Beta:1.03

Share Price (Naira)

40 30 20 10 0 4000 Volume Traded (‘000) 3000 2000 1000 0 Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Source: Nigerian Stock Exchange

Outlook 2010 x

We expect construction work to remain relatively bullish in the 1st quarter of 2010, given Government’s decision to carry over the 2009 budget into the new year, in order to prevent the stalling of uncompleted projects.

‘Ahead of the Curve’

263

2009 Review | 2010 Outlook SECTORAL REVIEW CONSTRUCTION SECTOR

INCOME STATEMENT (N'Mill)

2006

2007

2008

2009 F

2010 F

2011 F

Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income

1,112 (1,998) (886) (474) 214

3,016 (2,309) 708 (454) 15

3,814 (2,289) 1,525 (1,047) 139

5,000 (4,000) 1,000 (1,350) -

9,508 (5,707) 3,801 (2,567) -

11,410 (6,848) 4,562 (3,081) -

EBITDA Depreciation & Amortization

(1,039) (107)

468 (199)

792 (175)

(39) (311)

1,735 (501)

2,182 (701)

EBIT/Operating Profit

(1,146)

1,234

1,481

Interest Payable & C harges Other Income

(133)

268

617

(350)

(154)

(237)

(230)

Profit on ordinary

(1,279)

114

380

(580)

1,004

1,251

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

(1,279) (1,279)

114 (6) 108

380 (27) 353

(580) 41 (539)

1,004 (71) 933

1,251 (375) 876

(1,279)

108

353

(539)

933

876

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Capital Work in Progress Long Term Asset Current Assets Stocks Work in Progress Trade Debtors Other Debtors & Prepayment Amount due from Associated C o Bank & C ash balance Total Current Assets TOTAL ASSETS

2006 1,061 3 1,063

2007 1,109 458 1,567

2008 1,747 1,747

2009 F 3,100 3,100

2010 F 5,000 5,000

7,000 7,000

101 616 50 396 228

108 989 27 1,155 703

3,000 2,500 1,000 1,000 2,000

3,000 2,000 1,000 1,000 1,500

3,000 2,000 500 500 1,200

1,003

1,392

2,982

9,500

8,500

7,200

2,959

4,728

12,600

13,500

2006

2007

8 (13) (6) (3) 1 -

20 (16) 5 (3) 0 -

26 (15) 10 (7) 1 -

34 (27) 7 (9) -

64 (39) 26 (17) -

77 (46) 31 (21) -

(7) (1)

3 (1)

5 (1)

(0) (2)

12 (3)

15 (5)

10 (2) -

Turnover C ost of Sales Gross Profit Operating Expense C ore Operating Profit Other operating income EBITDA Depreciation & Amortization

(8)

EBIT/Operating Profit

Interest Payable & C harges Other Income

Net Current Assets/(Liabilit

(1)

313 1,884 364 6 6 2,573

583 1,700 2,017 3 19 4,321

1,000 2,000 6 27 3,033

1,000 2,000 6 33 3,039

800 2,000 6 36 2,842

(1,400)

(1,084)

(1,293)

7,359

6,412

5,303

1,151 117 1,267

1,145 241 1,386

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 80 80 80 Revaluation Reserves 1,291 1,291 1,248 Share Premium 44 44 44 General Reserve (2,765) (2,657) (2,304) Shareholder's fund (1,350) (1,242) (932) RATIOS

2006

2007

2008

1,200 259 1,459

1,200 279 1,479

9,000

9,933

2009 F

2010 F

1,200 294 1,494

10,809

2006 -44% 165% 173% 171% 171%

2007 171% -123% -145% -109% -108%

2008 26% 130% 69% 233% 228%

2009F 31% -157% -105% -252% -252%

2010F 90% -453% -4505% -273% -273%

2011F 20% 20% 26% 25% -6%

PROFITABILITY Return on Equity Return on Asset Return OnNet Fixed Asset Return on Invested C apital

2006 171% -56% -0.1% -0.6%

2007 -8% 4% 0.4% 1.7%

2008 -33% 9%

2009F -13% -6% 3.8% 16.3%

2010F 10% 7% 3.4% 15.2%

2011F 8% 6% 3.5% 17.2%

‘Ahead of the Curve’

(2)

(2) -

Profit

(9)

(4)

Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

(9)

1 (0) 1

3 (0) 2

(4) 0 (4)

7 (0) 6

8 (3) 6

(9) -

(9)

(4)

BALANCE SHEET ($'Mill) Non-Current Assets Fixed Assets Capital Work in Progress Long Term Asset

2006 7 0 7

Current Assets Stocks Work in Progress Trade Debtors Other Debtors & Prepayment Amount due from Associated C ompany Bank & C ash balance

1 2 0 3 1 -

Total Current Assets

7 14 -

Current Liabilities Trade C reditors Other C reditors and Accruals Bank Overdraft Dividend Payable Taxation Total Current Liabilities

2 12 3 0 0 17 (9) -

Non-Current liabilities Term Loan Staff Retirement benefit Total Non-Current Liabilities

6 1 7

2007

2008 2009 F 2010 F 2011 F

7 3 11 1 4 0 3 2 9 20 2 13 2 0 0 17 (7) 8 1 9

12 -

21 -

21 20 17 7 7 14 -

20 -

85 -

4 11 14 0 0 29 -

7 14 -

0 0 20 -

0 0 21 -

50 -

8 2 9

Capital and Reserves Capital and Reserves attributable to equity holders Share capital 1 1 Revaluation Reserves 9 9 Share Premium 0 0 General Reserve (19) (18) Shareholder's fund (9) (8)

(9) -

7 14

43 -

8 2 10

20 14 3 3 8 -

57 -

47 -

20 14 7 7 10

47 -

34 -

1 7 0 8 5 -

34 -

8 2 10

49 96 5 14 0 0 19 36 8 2 10

1 8 0 (16) (6)

2011 F

GROWTH RATES Turnover growth Growth in C ore Operating profit Growth in EBITDA Growth in PBT Growth in PAT

264

(2)

14,200

331 1,755 396 6 8 2,496

825 188 1,013

(2)

(1)

Net Current Assets/(Liabilities) Non-Current liabilities Term Loan Staff Retirement benefit Total Non-Current Liabilities

TOTAL ASSETS Current Liabilities Trade C reditors Other C reditors and Accruals Bank Overdraft Dividend Payable Taxation Total Current Liabilities

2008 2009 F 2010 F 2011 F

2011 F

123 236 51 454 138

2,067

INCOME STATEMENT ($'Mill)

MARGINS EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin SHARE METRIC EPS DPS NAPS Sale per Share Shares Outstanding

CAPITAL STRUCTURE Financial leverage (debt to equity) Interest bearing debt/Total assets Debt/ Total C apital Total equity/Total assets

2006 -93.4% -103.1% -115.1% -115.1%

2007 15.5% 8.9% 3.8% 3.6%

2008 20.8% 16.2% 10.0% 9.3%

2009F -0.8% -7.0% -11.6% -10.8%

2010F 18.2% 13.0% 10.6% 9.8%

2011F 19.1% 13.0% 11.0% 7.7%

2006 -8.0 0.0 -8.4 7.0 159.9

2007 0.7 0.0 -7.8 18.9 159.9

2008 2.2 0.0 -5.8 23.8 160.0

2009F -0.5 0.1 8.3 4.6 1084.4

2010F 0.9 0.2 9.2 8.8 1084.4

2011F 0.8 0.3 10.0 10.5 1084.4

2006 260% 38% -38% 62.5%

2007 309% 38% -48% 40.6%

2008 612% 24% 539% 19.5%

2009F 49% 9% 12% 66.7%

2010F 45% 8% 0.10 68.7%

2011F 40% 7% 0.09 71.4%

2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

Recommendation Guide Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell. Buy/Overweight +20% expected absolute price performance Accumulate +10% to +20% expected absolute price performance Neutral/Hold +/-10% range expected absolute price performance Reduce -10% to -20% expected absolute price performance Sell/Underweight -20% expected absolute price performance

Definition of Ratings Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 20% is expected to be realized between the current price and analysts’ target price. Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential return of between 10% and 20% is expected to be realized between the current price and analysts’ target price. Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential return of between +/- 10% is expected to be realized between current price and analysts’ target price. Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between 10% and -20% is expected to be realized between current price and analysts’ target price. Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where potential return in excess of or equal to -20% is expected to be realized between current price and analysts’ target price.

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265

2009 Review | 2010 Outlook ECONOMIC AND FINANCIAL REPORT

Disclosures Section Analyst Certification All of the views expressed in this report articulate the research analyst(s) opinions/views regarding the companies, securities, industries or markets discussed in this report. The analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.

Other Disclosures A reference to a particular investment or security in this report should not be deemed an investment proposition nor should it be interpreted as a recommendation to buy, sell or hold such an instrument. It is noteworthy to mention that Vetiva Capital Management Limited does and seeks to do business with companies covered in its research reports. Consequently, a conflict of interest may arise that could affect the objectivity of this report.

Disclaimer Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the information contained in this report as it has not been verified by the research analyst(s) involved or the companies whose securities have been referred to except as otherwise disclosed. Any ratings, forecasts, estimates and opinions set forth in this document constitute the analyst(s) position as at the date of the report and may not necessarily be so after the report date as they are subject to change without notice. It is also instructive to note that a Company’s past performance is not necessarily indicative of its future performance as estimates are based on assumptions that may or may not be realized. The value, price or income from investments mentioned in this report may fall as well as rise due to economic conditions, industry cycles, market indices, operational or financial conditions of companies or other factors. Thus, Vetiva Capital Management Limited and its employees shall not accept liability for any loss arising from the use of this document or its contents in making investment decisions or recommendations. All investors are solely responsible for their investment decisions. Any investments discussed may not be suitable for all investors and the reader(s) should independently determine their suitability and evaluate the investment risks associated with such investments. Vetiva Capital Management Limited is a Dealing Member of the Nigerian Stock Exchange and is registered with the Securities & Exchange Commission to conduct Financial Advisory, Fund/Portfolio Management, Brokerage & Dealing and Trusteeship business in Nigeria. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of Vetiva Capital Management Limited. Vetiva Research is disseminated and available primarily electronically, and, in some cases, in printed form.

266

‘Ahead of the Curve’

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