Clear Picture; Dim Outlook · 2019. 10. 15. · July 2016 Nigeria Half Year 2016 Outlook. Clear Picture; Dim Outlook 2 Cordros is a foremost financial markets player having been licensed

July 2016

Clear Picture; Dim Outlook. Nigeria Half Year 2016 Outlook

July 2016

Nigeria Half Year 2016 Outlook. Clear Picture; Dim Outlook

2

Cordros is a foremost financial markets player having been licensed by

the Securities and Exchange Commission (SEC) and the Nigerian Stock

Exchange (NSE). Cordros has impeccable professional expertise and

experience in securities trading, asset management and investment

banking; not the least, market and economic research. Particularly,

Cordros Research provides adroit in-depth analysis of the financial

markets and economic developments to enhance investors’ minimum

risk-high return investment decisions. This clearly underpins the

publication of this Economic Review and Outlook. Essentially, this

publication depicts the salient market analysis and economic

developments, subsequently revealing the possible economic trends

and consequences. So, readers will benefit much from the intuitive

analysis of the Nigerian financial markets vis-à-vis the inherent

economic activities.

It is an open secret that 2015 experienced economic trauma

characterized by low oil prices, ceaseless impact of a weak currency on

aggregate demand, and the subsequent economic uncertainties

resulting from the change of government that subsequently heralded

new policies, reforms and business environment. Accordingly, it would

be rational and perspicacious for us to conduct an economic prognosis

that is based on precautious outlook for the economic and financial

markets environment in the year 2016. Typically, our prognoses for the

year are shaped by various uncertainties surrounding the domestic fiscal

and monetary policy stance, in addition to the dubieties in the global

financial markets.

Generally, we had expected that the Buhari’s Administration would

deliver on its numerous promises as evident in the initial momentum to

tackle corruption head-on. However, we were more careful by aligning

our expectations with the reality of economics. Considering, the

generally anticipated bearish trends of oil prices, it would appear that

there was little or no respite for government large budgetary

requirements. Correspondingly, the envisaged variances and

disharmony between the monetary and fiscal policy stance, volatile

security environment, and slowing global growth -- heralding potential

downturn in global financial markets -- collectively informed our bleak

Preface.

July 2016


3

perspective of the economy, thereby prompting the report: A Dim

Reflection in January.

Going back to the future, the government’s policy direction and roadmap

appears defined, albeit reluctantly; clearly driven by biting economic

realities. In particular, focus has been sorely shifted from a populist

stance to align with the dictates of current truth. Here, we refer to the (1)

electricity tariff hike; (2) liberalization of the downstream oil and gas

sector; and (3) adoption of a flexible exchange rate regime; with VAT

increase still on the card.

It is fair to mention that both the monetary and fiscal authorities have

improved efforts at creating a more defined path for the domestic

economy. Nonetheless, this report examines the prospects of the

Nigerian macroeconomic and financial markets environments under the

current challenges and opportunities. Clearly, most of the concerns

expressed in our 2016 Outlook report written in January have come to

the fore, accompanied by fresh threats,: (1) depressed crude production

due to increasing pipeline attacks; (2) up-trending inflation in the face of

weak aggregate demand; (3) rising unemployment; and (4) tardy fiscal

stimulus. Conclusively, identifying and scrutinizing this basket of

transparent risks have given no other view than a paradoxical matrix:

Clear Picture; Dim Outlook.

Consultant

Dr. Oluwatobi Oyefeso, PhD

July 2016


Contents.

4

PREFACE 2

OVERVIEW 5

GLOBAL ECONOMIC ENVIRONMENT 8

Feeble and More Fragile Growth 8

NIGERIA 17

Security - The Threat of Terrorism: Boko Haram Out; Avengers In 18

Growth - Unresolved Headwinds; Sombre Prospects 24

Fiscal Policy - A Clouded Arena 34

Monetary Policy - H2’16: Higher Rates and Higher Degree of Certainty 51

Exchange Rate - Confrontation With Realities 54

Inflation - Rising Inflation: A Fresh Can of Worms 57

CAPITAL MARKET 61

Equities - First Half Rally Restores Confidence in Domestic Investors… 62

Fixed Income - Only One direction 71

SECTORS 76

Financial Services - H2’16: A Storm is Brewing… 77

Consumer Goods - Stay Calm; Don’t Be Deceived By What you See 92

Cement - Caution! Looming Concerns 103

CONTACT DETAILS 110

DISCLOSURES 111

July 2016


Overview.

5

GLOBAL - Feeble and More Fragile Growth

The available data indicates that the global macroeconomic conditions

remain fragile thus far in 2016. Specifically, economic activities in the

developed economies, excluding a few large members, have been

largely subdued while several large emerging markets and developing

economies have not shown any sign of recovery from their economic

challenges of 2015.

NIGERIA

Security – The Threat of Terrorism: Boko Haram Out, Avengers In

Although, the Buhari’s administration listed improving security as one of

the priorities of its administration and appears to have gained strong

opposition against Boko Haram, rising violence among the Fulani

herdsmen and farmers in local communities, the resurgence of militants

in the Niger Delta, as well as, the demand for the restoration of Biafra by

the Igbo secessionist groups provide a warning that security threats are

spreading to more parts of the country.

Growth – Unresolved Headwinds; Sombre Prospects

In March, we had revised our growth projection for the year to 2.5%

(from 3.8%) following the slower-than-expected start to the year.

Recovery in economic activity is likely to be modest over the second

half, but with significant downside risks. Consequently, we have revised

our growth estimate for 2016 to a more modest 0.08%.

Fiscal Policy – A Clouded Arena

Nigeria’s fiscal policy space over the first half of 2016 significantly fell

short of expectations with the delayed signing of the 2016 budget into

law, and the condition is being exacerbated by the ongoing sabotage of

crude oil facilities resulting in a colossal oil revenue loss.

Monetary Policy – H2’16: Higher Rates and Higher Degree of

Certainty

We project a 300bps interest rate hike over the second-half of the year

from 12% to 15% as inflationary pressures curtail the CBN’s

Christian Orajekwe

[email protected]

Alieza Jo-Madugu

[email protected]

Peter Moses

[email protected]

July 2016


6

expansionary ambitions. In as much as we expect a modest

improvement in economic activity in H2’16 following the passage of the

2016 budget and reduced structural bottlenecks like the petroleum

scarcity, our inflation forecast remains high and depicts our expectation

of further monetary policy tightening.

Exchange Rate – Confrontation with Realties

Important to mention that the CBN has struggled to adjust to the new

economic realities resulting from the collapse in crude oil prices. These

struggles have been especially highlighted with regards to exchange

rate strategy, which has been characterized by various policy

somersaults.

Rising Inflation – A Fresh Can of Worms

Nigeria’s inflation rate maintained an uptrend throughout the first half of

the year, hitting multi-year highs with seemingly high volatility in each of

the months. We estimate the CPI to average 18.2% in H2-2016, bringing

our inflation outlook for the year to a less conservative 15.7%.

Equities – First Half Rally Restores Confidence in Domestic

Investors…

Sentiments were mixed in the Nigerian equities market over H1, with the

bulls dominating overall, and leading the benchmark index to a 3.34%

gain. The rally on the domestic bourse was largely driven by the

expectation and eventual announcement of government economic

policies and decisions. Our view going into the second half is that the

positive market environment witnessed in the first half do not point to a

more sustainable recovery for equities.

Fixed Income – Only one direction

The rising inflation expectation and recent exchange rate

pronouncements posit an increased likelihood for further yield expansion

in H2’16. A threat to our forecast is the possibility for lower than

expected bond supply to fill the hole from plummeting fiscal revenues.

July 2016


7

NOTES.

July 2016


GLOBAL ECONOMIC ENVIRONMENT.

The available data

indicates that the global

macroeconomic

conditions remain fragile

thus far in 2016

8

Feeble and More Fragile Growth

The available data indicates that the global macroeconomic conditions

remain fragile thus far in 2016. Specifically, economic activities in the

developed economies, excluding a few large members, have been largely

subdued while several large emerging markets and developing

economies have not shown any sign of recovery from their economic

challenges of 2015. The obtainable GDP data reveals that the growth

rates in the major advanced economies over the first quarter have

improved on average, but without substantial upturn on the previous year.

In the emerging markets, output growth remained negative in Russia and

Brazil respectively whilst growth contracted in China relative to the

previous year, albeit stronger than expected. For South Africa, the GDP

data was not available as at the writing time, however; the growth was

expected to have fallen during the first quarter of the year.

Globally, the recent surveys indicated weak manufacturing activities, with

marginal improvement in factory output from Asia, Europe and America.

Notably, the weak economic activities in these regions might be

compounded by the pressure on the business confidence, speculations

around the potential path of the interest rates in the US, as well as, the

uncertainty resulting from the British exit from the European Union.

Following from the above, the International Monetary Fund (IMF), in its

July 2016 update on global economy, adjusted baseline projection for

global growth in 2016 to 3.1%, a 30-basis point (bps) downward revision

relative to the projection it made in January. Based on the latest

projections, growth in advanced economies is expected to decline to

1.8% in 2016 (vs. 2.1% forecast in January) and climb by 10bps (vs. 30-

bps expansion estimated at the beginning of the year) in the emerging

markets and developing economies. Less surprisingly, the monetary

policy responses to the challenges faced by Central Banks differed

across regions. In the advanced and a few emerging market economies

including India, Indonesia and China, the salient concern about tamer

growth reinforced the need for the appropriate and conducive monetary

policies. Whilst, in many emerging and developing economies, Central

Banks have mostly tightened their monetary policies in response to

currency depreciation and associated rising inflationary pressures.

Following from the above,

the IMF in its July 2016

update on global

economy, adjusted

baseline projection for

global growth downward

by 30-bps to 3.1% in 2016

July 2016


9

The Fed was poised to

increase interest rate for

the first time this year in

June until the result of the

UK referendum struck.

Advanced Economies: Modest Euro Area Growth, Stabilising US

and Stagnating Japan

Growth in the U.S fell to 0.8% annual rate in three months ended March

2016 compared to 1.4% in the last quarter of 2015, amidst dwindling

consumer spending, a strong dollar that undermined exports and the

continued underinvestment in the energy sector wherein crude oil price

contracted to an historic low in February. Prior to May ending, both the

modest start to the year and concerns about the external environment,

outweighed continued improvement in employment conditions and the

housing market in the Federal Reserve’s (Fed) decision over tightening

monetary policy further (since increasing rates in December 2015).

However, with emerging data depicting a sustained improvement in

retail sales, consumer spending, services sector growth and

employment, and subsequently signaling a strong recovery in the

second quarter, the Fed was poised to increase interest rate for the first

time this year in June until the result of the UK referendum struck.

Overall, the IMF forecasts growth in the economy to level decline by 20-

bps to 2.2% in 2016.

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Fig 1: IMF 2016 Growth Forecasts (%) Fig 2: Q1-2016 Actual Real Growth Rate (%)

Source: IMF July 2016 WEO, Cordros Research

July 2016


10

The Euro Area is

expected to grow in 2016

by 1.6%, albeit a slightly

lower rate than 2015, but

10-bps higher than the

projection made in

January

The Euro Area is expected to grow in 2016 by 1.6%, albeit a slightly

lower rate than 2015, but 10-bps higher than the projection made in

January. The slower growth projection follows a more cautious view than

previously held about top member countries like Germany, Italy and

Spain; despite stable performances in the first quarter. In Germany, the

first quarter 2016 GDP grew by 0.7% q/q, compared to 0.3% q/q in the

fourth quarter 2015. The preliminary data also showed that Italy’s GDP

rose by 0.3% q/q as against the 0.1% q/q in Q4-2015, whilst France

recorded 0.5% q/q growth unlike the 0.2% q/q in Q4-2015 in the first

quarter of the same period.

In March, a subdued growth and inflation outlook for the region, amidst

the global growth concerns and consequent bearishness of the equity

markets; actually precipitated the large expansion of the stimulus

measures by the European Central Bank (ECB) (see table below).

Subsequently in June, the ECB upgraded its growth forecast for the year

to 1.6%, following the growth downgrade of 30bps to 1.4% in March, and

upgraded inflation by 10bps to 0.2%; in acknowledgment of the recovery

that accompanied the subdued momentum in January. However, the

inflation value at -0.1% in May, remained below the target of 0.1% in

2016; whilst the deteriorating conditions in the manufacturing sector did

not show improvement. Appropriately, the ECB has pledged continued

support for the region and the extent of its intervention should have a

strong weight on how recovery progresses.

Monetary policy decisions Before March Taken in March

Interest rate on refinancing operations 0.05% 0.00%

Interest rate on marginal lending facility 0.25% 0.30%

Interest rate on deposit facility -0.40% -0.30%

Monthly purchases under the APP* €60 billion €80 billion

Issuer and issue share limits for securities purchases 50% 30%

Investment-grade euro-denominated bonds** Nil Beginning end of Q2

Longer-term refinancing operations (TLTRO II) Nil Beginning June

Fig 3: ECB Monetary Decisions in March 2016 Committee Meeting

Source: ECB, Cordros Research

*Asset Purchase Programme

** Issued by non-bank corporations established in the euro area

July 2016


11

In Japan, the economy expanded at a bigger than expected annualized

1.7% in the first quarter, supported by increases in government and

consumer spending. The Bank of Japan (BoJ) responded swiftly to the

early signals of concern in global developments -- arising from the

decline in oil and commodities prices, weakness in emerging markets

and volatility in global financial markets -- having the capacity to slow

down recovery in the economy and constrain the achievement of its 2%

inflation target. In addition to adding negative interest rate, the BOJ,

whilst maintaining its ¥80 trillion JGBs purchases, also included real

estate investment trusts (¥90 billion) and increased the purchase of

exchange traded funds from ¥3 trillion to ¥3.3 trillion in its quantitative

and qualitative easing (QQE) programme. Generally, the operating

conditions in the manufacturing sector were broadly weak in most of the

first half whilst exports continued to slack due to slow recovery

overseas. This, in addition to the pressure on private consumption, rising

oil prices rising and renewed possibility of sales tax hike could hinder

positive economic activities. Added to the shocking result of the UK

referendum, the IMF cut its 2016 growth projection for the economy by

70-bps to 0.3% representing the same forecast for 2015.

Emerging Economies: Struggling China, Positive India and

Contracting Brazil

Growth in China was strong at 6.7% y/y in the first quarter, resulting from

increase in the bank lending and stimulus measures that spurred

domestic consumption demand. Industrial production and fixed assets

investment also recorded strong growth during the period. On stimulus

measures, new bank lending between January and April stood at 5.2

trillion Yuan as against 4.7 trillion in the same period of 2015, whilst

banks’ reserve requirement ratio was lowered by 50bps to 16.5%. Also,

reflecting the resilient consumption demand is the consumer price

inflation which has progressed from 1.6% in December to 2.3% in April.

Further, external conditions were favourable in view of the exports rising

in the three of the four months of the data availability. Conversely,

manufacturing activity remained weak amidst the continued rising of

household and corporate debts. The IMF projects slow growth at 6.6%

this year, as against the 6.9% in 2015; notwithstanding, higher than the

6.3% January projection.

The Bank of Japan (BoJ)

responded swiftly to the

early signals of concern in

global developments

Growth in China was

strong at 6.7% y/y in the

first quarter, resulting from

increase in the bank

lending and stimulus

measures that spurred

domestic consumption

demand

July 2016


12

India continues to experience economic recovery as evidenced in the

average growth at 7.6% in the 2015/16 fiscal year, compared to 7.3% in

2014/15. The growth rate benefited from lower commodities prices,

disinflation, stimulating monetary policy and the quality public capital

expenditure that collectively spurred consumption and demand in the

agriculture and manufacturing sectors. Considering the encouragement

from subdued inflation and the fiscal consolidation at the central

government, the Reserve Bank shifted monetary policy towards

accommodation in January 2015 and continued to ensure sustainable

liquidity in the financial system. In addition to other forms of liquidity

management (including the open market operation (OMO) purchases

and variable rate repos), the policy repo rate was reduced by 100bps

between April 2015 at 7.5% and April 2016 at 6.5%. Notwithstanding the

above gains, activity in the agriculture sector was pressured by

unfavourable weather condition whilst the manufacturing and industrial

activities were constrained by subdued domestic investment demand

and weak rural consumption as well as the continued deterioration in the

external demand resulting from the increasing pressure on global

growth.


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India continues to

experience economic

recovery as evidenced in

the average growth at

7.6% in the 2015/16 fiscal

year, compared to 7.3% in

2014/15

July 2016


13

The economy of Brazil is

still stuck in recession,

and prospects continue to

worsen

Recent developments over Q1-2016/17 indicate that (1) an upturn in the

international commodities prices, (2) stick food and fuel prices, as well

as, (3) an upturn in the household and corporate inflation expectations;

could exert upward pressure on the 5% inflation target and tighten the

scope for accommodative monetary policy. Additionally, the continued

consumption weakness in the manufacturing sector could hinder growth.

Less surprisingly, therefore, the IMF has forecast a slightly lower growth

of 7.4% over 2016/17, which is dependent on the continued growth in

private consumption and a recovery in private investment.

The economy of Brazil is still stuck in recession, and prospects continue

to worsen. Having contracted by 3.8% in 2015 fiscal year, a negative

start to 2016 (first quarter GDP of -5.4%), amid persistently dwindling

private consumption and fixed capital investment, slow recovery in the

external environment, and constrained government spending portray a

gloomy outlook. The IMF forecasts GDP to contract by 3.3% in 2016,

wherein growing political uncertainty has increased the risk of

government’s inability to formulate and execute much needed reform

policies. Inflation rose to record high of 9.62% in May, shrinking the

prospect of a reduction in the country’s relatively (to peers) high interest

benchmark Selic rate of 14.25%. The 2016 budget deficit of R$174

billion (before interest payments), amounting to about 2.7% of the GDP

(vs. 1.88% in 2015), signals to prolonging fiscal deterioration. Though

the interim government’s pledge of business-friendly policies -- including

the prospects of tax increase, reduction of public expenditure and

implementation of pension reforms -- may have raised some optimism in

recent weeks, this should be temporary, given the elevated uncertainty

in the political space.

Sub-Saharan Africa: Shadow of Its Old-Self

Economic activity in Sub-Saharan Africa weakened considerably in

2015. The IMF estimated growth in the region to have contracted to a

15-year low of 3.4% in 2015, contrasted with 5% in 2014. Growth is

expected to further slow down to 1.6% in 2016, especially as low crude

oil and other commodities prices, severe draught (with consequent low

output in the agro-based member countries), and the protracted impact

of Ebola outbreak continue to constrain the fortunes of the region once

tagged ‘The World’s Next Big Thing’. Tightening external financing

conditions, domestic fiscal constraints due to rising debt levels and the

prominence of insurgent activities and civil unrests add to the risks

facing the region’s growth prospects.

Economic activity in Sub-Saharan Africa weakened considerably in 2015 and growth is expected to further slow down to 1.6% in 2016

July 2016


14

The analysis of the region’s economies indicates that growth in oil-

exporting countries is seen dropping from 2.6% in 2015 to 2.2% in 2016,

reflecting challenging macroeconomic conditions faced by major

exporters like Nigeria, Angola and Equatorial Guinea. Specifically,

Nigeria’s -0.4% GDP growth in the first quarter faces increasing risk of

recession from the hard-biting effects of a significant crude oil and power

supply shortfalls, weak aggregate demand, forex controls, weak

domestic food output, and an uncertain policy environment. Despite the

gradual rebound of oil price, April 6 2016 witnessed Angola’s filing for

assistance from the IMF as oil earnings that accounted for 75% of the

fiscal revenues dwindled further. Having fallen 180bps to 3% in 2015,

the IMF expects the country’s GDP growth to decline further to 2.5% in

2016.

On the other hand, growth in oil importing countries is projected to

weaken by 40bps to 4% this year, as weakness in larger member

countries like South Africa, Ethiopia and DRC neutralizes the improving

conditions in Côte d’Ivoire, Kenya, and Senegal. Growth in South Africa

decelerated 20bps in 2015 and particular indices like electricity and


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The analysis of the SSA economies indicates that growth is seen dropping 40-bps each in both oil-exporting and importing countries

July 2016


15

water supply constraints, weak manufacturing PMI and rising

unemployment paint a downturn picture of the economy. Massive

drought and food insecurity caused by the 2015 El-Nino and the recent

violent flash floods have worsened Ethiopia’s prosperous economic

outlook. Growth is expected to contract by a massive 570bps to 4.5% in

2016. In early May, the government of DR Congo revised 2016 growth

projection 240bps lower to 6.6% (vs. IMF’s 4.9% and 7.7% recorded in

2015), proposed 22% slash of 2016 budget and acknowledged the need

for international financial support, as revenues face pressure from the

suspension of some mining activities, the closure of some mining

businesses and a decline in the amount of exports.

Elsewhere, the economies of Côte d’Ivoire, Kenya and Senegal are

expected to remain resilient, supported by the strong government

infrastructure expenditure, robust private consumption as well as (in

Kenya) favourable climate (for agriculture) condition and recovery in

tourism.

In some countries, deteriorating economic momentum, the pass-through

of exchange rate depreciation and the adverse impact of drought on

food supply have exerted pressure on inflation and forced central banks

to raise policy rates. The National Bank of Angola (300bps to 14%),

Central Bank of Lesotho (75bps to 7%) and South African Reserve Bank

(75bps to 7%) have each raised interest rates twice since January. In

Nigeria, the CBN increased policy rate by 100bps to 12% in March.

Meanwhile in Kenya (inflation down by about 300bps) and Morocco (sub

15 inflation), the Central Banks eased interest rates by 100bps and

25bps respectively in an attempt to boost growth.

In some SSA countries,

exchange rate induced

inflationary pressures

have forced central banks

to raise policy rates

July 2016


16

Source: Trading Economics, Cordros Research

Fig 8: SSA Countries: Interest Rate Fig 9: % Change in Exchange Rate (vs. USD)

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July 2016


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NIGERIA.

July 2016


Security.

The threats of terrorism in

Nigeria have accelerated

sharply in the past five to

eight years

18

The Threat of Terrorism: Boko Haram Out, Avengers In

The threats of terrorism in Nigeria have accelerated sharply in the past

five to eight years when civilians and members of the armed forces have

come under ferocious attacks, particularly, related to the militant Islamist

Movement called the Boko Haram. Since 2011, and more pronouncedly

between 2013 and 2016, the number and severity of attacks has

increased dramatically, with most of the violence occurring in the North-

Eastern region. According to the IMF (in reference to the Global

Terrorism Database), Nigeria (1) accounts for one-third of the victims of

terrorist attacks in all SSA since 1989, and for almost 70% of the people

killed since 2011; and (2) in 2014, accounted for 23% of all victims of

terrorism in the world and ranked third in the world after Iraq and

Afghanistan.

Although, the Buhari’s administration listed improving security as one of

the priorities of its administration and appears to have gained strong

opposition against Boko Haram, rising violence among the Fulani

herdsmen and farmers in local communities, the resurgence of militants

in the Niger Delta, as well as, the demand for the restoration of Biafra by

the Igbo secessionist groups provide a warning that security threats are

spreading to more parts of the country. Whilst the macroeconomic

impact of each of these security threats to Nigeria remains high, concern

is that the security forces lack the capacity to surmount multiple

outbreaks across the regions. For instance, the activities of the Boko

Haram have resulted in the displacement of people and businesses in

the North East and grounded economic activities, with enormous cost to

the government in terms of tax revenues. In addition, the attacks on

oil/gas pipelines in the Delta region has significantly affected oil output

while the adverse impact of the conflict between Fulani and local

community farmers remains substantial on food security.

Status Report: Boko Haram

Since President Buhari assumed office, Nigeria’s security services have

been massively deployed to the North East, and neighbouring countries

are collaborating with it in resisting Boko Haram. The group, declared

“technically defeated” in December 2015, has been dislodged from all of

its previously occupied territories, the number and frequency of attacks

The attacks on oil/gas

pipelines in the Delta

region has significantly

affected oil output

July 2016


19

has fallen remarkably, and approach has reduced to the use of suicide

bombings to attack softer targets.

Considering the growing momentum of global terrorism and the

increasing alliance and sophistication of networking among global

terrorist groups, we are of the view that the battle against Boko Haram is

not decisive yet. Despite the pressure on government revenue, the

economic and social losses associated with the activities of the group

demands unrelenting constructive military approach beyond those

currently being offered.

Status Report: Niger Delta Avengers

Prior to this year, Nigeria had enjoyed peace in the Niger Delta area

following a ceasefire deal with militant groups in the region under the

2009 Presidential Amnesty Initiative. The amnesty programme provided

for the ex-militants to undergo different vocational and academic training

programmes within and outside Nigeria with the payment of monthly

stipends.

Fig 10: Boko Haram Activity Tracker

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Monthly Deaths Monthly Attacks

Source: CoFA, Cordros Research

The economic and social

losses associated with the

activities of Boko Haram

demands unrelenting

constructive military

approach

July 2016


20

Between 2011 and 2015, the presidential amnesty budget allocation

averaged about N65 billion annually. However, in the 2016-2018 MTEF

released in December 2015, allocation to the programme was drastically

reduced to N20 billion in 2016 and there were no provisions for

subsequent years. Given that the perceived marginalization of the region

was always the key driver of agitations in the past, it is difficult to delink

the boost the resurgence of the new group received with the provisions

of the budget.

The Niger Delta Avengers (NDA) first struck in late January 2016 and

their attacks on oil/gas production facilities have since been sporadic.

Their demands include greater share of oil revenues, amnesty

payments, clean-up and the compensation for spills in the region. Since

February when pipeline attacks gained momentum, Nigeria’s oil output

fell consistently every month, reaching over a decade low of 1.42mbpd

in May, according to OPEC. The Nigerian Petroleum Development

Company (NPDC) estimated loss attributed to the activities of the

militants at N60 billion between February and April 2016. According to

the minister of power, all the 23 (out of 26 national power plants) gas-

fired power plants in the country have lost significant utility (generation

dropped from 5,000MW peak early in the year to about 2,000MW in

May) due to gas shortages arising from the serial attacks on gas

pipelines by the militants.

Fig 11: Nigeria’s Crude Oil production and Rig Count

Source: OPEC, Cordros Research

0

5

10

15

20

25

30

35

40

45

-

500

1,000

1,500

2,000

2,500

Ja

n-1

2

Ap

r-1

2

Ju

l-1

2

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-1

3

Oct-

13

Ja

n-1

4

Ap

r-1

4

Ju

l-1

4

Oct-

14

Ja

n-1

5

Ap

r-1

5

Ju

l-1

5

Oct-

15

Ja

n-1

6

Ap

r-1

6

Production Rig count

The NPDC estimated loss attributed to the activities of the NDA at N60 billion between February and April 2016

It is difficult to delink the boost the resurgence of the new group received with the provisions of the budget

July 2016


21

It would be inconclusive to view the actions of the NDA as solely

motivated by economic and environmental grievances, without factoring

political underpinning. A particular school of thought once posited that

the President Buhari’s anti-corruption campaign sealing the ceaseless

hand-out leakages to a group of individuals or groups in the region,

might have been the fundamental cause of the recent attacks.

In all, considering the sensitive nature of the Delta -- the complexity of

the creek-filled terrain and the humanitarian side to the militants’

demands -- a military solution could be a risky choice for Buhari. As

such, the government’s response (which has softened from threat to

dialogue) to the group and latest news that the group has embraced

dialogue is welcome. However, to strike a lasting peace deal, both

parties must go to equity with clean hands.

Fig 12: Niger Delta Avengers Activity Tracker

Company Date Declares force majeure on: Cause Loss

Shell

13-Feb-16 Major pipeline operated by Shell (SPDC) Niger Delta Militants 130,000bpd

21-Feb-16 Forcados liftings Spill on subsea crude export pipeline

10-May-16 Bonny Light exports A leak 180,000bpd

2-Jun-16 SPDC forcados 48 Export line Niger Delta Militants

9-Jun-16 Attack on the Nembe Creek Trunk Line Niger Delta Militants 75,000bpd

Mobil 13-May-16 Qua Iboe crude oil grade BFO-QUA A drilling rig damaged crude pipeline

14-Jul-16 Qua Iboe crude oil

NNPC 15-Feb-16 Forcados Terminal (declared by Shell ) Vandalisation of 48- inch Forcados

26-May-16 NNPC Gas and Crude trunk line close to Warri Niger Delta Militants

16-Jun-16 Pipeline in Oruk Anam LGA Niger Delta Avengers

Agip (Eni) 2-Feb-16 Attack on Brass community pipelines Niger Delta militants 16,000bpd

19-Feb-16 Ogoinbiri and Clough creeks to Tebidaba Niger Delta Avengers Team 6 4,200bpd

21-May-16 Nembe 1, 2 and 3 Brass to Bonny Trunk Line Niger Delta Avengers

3-Jun-16 Obi Obi Brass Trunk line Niger Delta Avengers

6-Jun-16 Brass crude oil pipleines in Bayelsa Niger Delta Avengers 65,000bpd

Chevron 5-May-16 Well D25 in Abiteye Niger Delta Avengers Team 7

5-May-16 Chevron valve platform, Okan Offshore facility Niger Delta Avengers 35,000bpd

25-May-16 Escravos tank farm Main Electricity Feed pipeline Niger Delta Avengers

31-May-16 Bibi oil wells, RMP 23 and RMP 24 Niger Delta Avengers

NPDC 15-Jun-16 NPDC oil facility in Delta state Niger Delta Avengers

4-Jul-16 NPDC oil facility at Batan community Niger Delta Avengers

Source: Companies’ Websites, The Press, Cordros Research

It would be inconclusive to view the actions of the NDA as solely motivated by economic and environmental grievances, without factoring political underpinning.

July 2016


22

Status Report: Fulani Herdsmen

Whilst the clash between Fulani herdsmen and local farming

communities has lasted for many years, there has been an escalation of

confrontation in recent times. Thus far in 2016, the nomadic cattle

grazers have been responsible for some deadly invasions, at capacities

comparable to those of Boko Haram. The sophistication of their

weapons, timing, strategy and the numberless of attacks and displaced

persons, as well as, the geographical spread are of unimaginable

historical record.

Notably, it is not entirely clear why the clashes have escalated in recent

months, however, historical records point to disagreement over right of

access to grazing areas, and the initiators (of the clashes) in most cases

are difficult to ascertain. The claim by the Police that the recent attacks

were carried out by non-Nigerian herdsmen linked to the neighbouring

African insurgent groups would require thorough investigation and

dependable confirmation. Important to mention that this category of

security threat is less economic-destructive and easier to curtail, at

Fig 13: Fulani Herdsmen Activity Tracker

Date Attacks Death Toll

4-Jan Udeni Ruwa and Okpaya 10

24-Jan Girei LGA (Adamawa State) 1

21-Feb Majahukwu and Zandukwu in Wukari 5

26-Feb Agatu 300

28-Feb Abbi, Uzo-Awani LGA ( Enugu) 2

Feb-16 Tom-Anyiin, Tom-Ataan, Mbaya and Tombu in the Buruku LGA 10

27-Feb Ibi and Wukari 9

28-Feb Okoloko village in Agatu 5

1-Mar Agatu 50

26-Mar Agena Village ( Benue State) 23

3-Apr Ogba, Egbema, Ndoni LGA (Rivers State) 16

10-Apr Dori and Mesuma 15

11-Apr Gashaka local government (Taraba State) 44

23-Apr Gashaka local government (Taraba State) 13

25-Apr Enugu 40

20-May Oke Ako in Ikole local government council of Ekiti State 2

20-Jun Ilewo-Orile community in Ogun State 3

Source: The Press, Cordros Research

Thus far in 2016, the

nomadic cattle grazers

have been responsible for

some deadly invasions, at

capacities comparable to

those of Boko Haram

Notably, it is not entirely

clear why the clashes

have escalated in recent

months

July 2016


23

least, in the interim relative to the Boko Haram and the Niger Delta

Avengers (NDA). However, the government’s inability to institute a

sustainable strategy to avoid reoccurring clashes potentially risks the

country with the continued and magnified threat of the Boko Haram.

July 2016


24

Growth.

Unresolved Headwinds; Sombre Prospects

In June 2016, the World Bank published its semi-annual Global

Economic Prospects report and reduced its 2016 growth forecast for

Nigeria from an estimate of 4.6% in January to 0.8%. In March, we had

revised our growth projection for the year to 2.5% (from 3.8%) following

the slower-than-expected start to the year. However, following the

contraction in the first quarter (against our modest growth expectation),

with some of the systemic and structural challenges that led to the

contraction still largely unresolved (e.g. decline in crude oil production,

forex scarcity, drop in electricity supply and distribution, insecurity inter

alia), we further noted that the risk of the economy closing the first half in

recession is high. Recovery in economic activity is likely to be modest

over the second half, but with significant downside risks. Consequently,

we have revised our growth estimate for 2016 to a more modest 0.08%.

In what was a disappointing start to the year, data released by the

National Bureau of Statistics (NBS), in May, revealed that the economy,

in the first three months of this year, contracted by 0.36% y/y (first

negative growth since Q2-2004); a dismal economic performance which

was driven by hitherto unabated systemic and structural challenges; viz

(1) reduced government spending, owing to the delayed budget

passage and fiscal tightening measures; (2) falling disposable personal

income, following unpaid salaries of civil servants, pay cuts, and record

high inflation rates; (3) lingering fuel scarcity; (4) low credit to private

sector (over rising NPLs) which impeded employment and productivity ;

(5) fall in crude oil production due to upsurge in pipeline vandalism and

theft; (6) forex scarcity occasioned by weak oil revenues (due to

depressed oil prices) and capital controls; (7) significant drop in

electricity supply and distribution (despite a 40% hike in tariff) owing to

gas pipeline attacks; and (8) insecurity concerns, incited by the Boko

Haram attacks and herdsmen-farmers clashes, in some parts of the

country.

Recovery in economic

activity is likely to be

modest over the second

half, but with significant

downside risks.

Consequently, we have

revised our growth

estimate for 2016 to a

more modest 0.08%

July 2016


25

Checking up on this negative growth, additional data from the Bureau

indicated -- following increased reports of retrenchment, particularly in

the private sector -- that unemployment had leaped from 10.4% in Q4-

2015 to 12.1% in the first three months of the year. Further corroborating

the slowdown in the economy, sharp declines in both import (-7.8%) and

export (-34.6%) trade saw the country recording -- in the first quarter of

the year -- its first negative trade balance (N184.1 billion) in seven years.

Lackluster Growth in both Oil and Non-Oil Sectors

According to the NBS growth figure, the oil sector shrank by 1.89%,

sliding back into recession as lower average crude oil prices combined

with domestic production challenges to hurt output. Oil production stood

at 2.11mbpd in the first three months of 2016 which was 0.05mbpd

lower than the 2.16mbpd produced in the last quarter of 2015. Clearly,

oil production during the period suffered major setback resulting from

different causal factors. One, the pipeline attacks and vandalisms that

resulted in the force majeure imposed on shipments of Forcados with

400kbpd capacity beginning February. Two, the tepid capital

investments in the sector bothering on postponement of Royal Dutch

Shell final investment decision on the US$12 billion Bonga South-West

project in deep-water Nigeria and the suspension of Shoreline Group’s

plans to issue $500 million Eurobonds intended for the acquisition of oil

and gas assets across Africa. Three, the lingering executive-legislature

Fig 14: Real GDP Growth Rate

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

q1

-11

q2

-11

q3

-11

q4

-11

q1

-12

q2

-12

q3

-12

q4

-12

q1

-13

q2

-13

q3

-13

q4

-13

q1

-14

q2

-14

q3

-14

q4

-14

q1

-15

q2

-15

q3

-15

q4

-15

q1

-16

Source: NBS, Cordros Research

The oil sector contracted

by 1.89% as lower

average crude oil prices

combined with domestic

production challenges to

hurt output

July 2016


26

bickering over pushing through reforms -- like the Petroleum Industry Bill

(PIB) -- in the sector. On average, the price of Bonny Light crude was

$33.37/bbl in the first three months of the year as against $54.54/bbl in

Q1-2015. This consequently resulted to continuous revenue fall (oil

accounts for 70% of government revenue and 91% of foreign earnings in

Nigeria), as reflected in (1) persistently declining monthly federation

allocation (which was down by 33% y/y in the first quarter) and (2)

dwindling foreign reserves, which stood at US$27.86 billion in Q1-2016

compared with US$29.79 billion in the corresponding quarter of 2015.

During the same period, the non-oil sector recorded its first contraction

since Q2-2004. Aside the impasse on government spending, the

performance of this sector mirrors a largely uncertain policy environment

especially in the foreign exchange market, thereby affecting business

and investment decisions. In addition, systemic issues such as

incessant fuel supply shortages, significant drop in electricity power

supply, and the rampaging activities of herdsmen increasing insecurity

apprehensions in some parts of the country also deepened disruptions

in the non-oil sector over the first three months of the year. Particularly,

we note the negative growth of -7% and -0.18% recorded in the

Manufacturing (11% of GDP) and Services (41% of GDP) sub-sectors.

Fig 15:Oil Sector GDP Growth Rate Fig 16: Non-Oil Sector GDP Growth Rate

-18.0%

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

q1

-11

q3

-11

q1

-12

q3

-12

q1

-13

q3

-13

q1

-14

q3

-14

q1

-15

q3

-15

q1

-16

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

q1

-11

q3

-11

q1

-12

q3-1

2

q1

-13

q3

-13

q1

-14

q3-1

4

q1

-15

q3

-15

q1

-16


The non-oil sector

recorded its first

contraction since Q2-

2004 owing to

heightened structural

and systemic

headwinds

July 2016


27

Oil Sector GDP Outlook Downbeat on Domestic Crisis

Oil prices had rebounded during end H1-2016 to average $50/bbl in

June on supply outages (US$/49.68bbl at the time of writing) and hit a

year-to-date high of $52.51/bbl during the same month. However, it is

more difficult to expect the current rebound to be sustained under the

current environment of supply imbalances (OPEC failed to reach crude

production freeze agreement); thus, dousing expectations of expansive

capital investments in the sector, in the near term. Adding to lower price

expectations is the heightened production challenge in the country, with

the rampaging activities of the new militant group, the Niger Delta

Avengers (NDA), which have disrupted output from Shell, Chevron,

ExxonMobil and Agip pipelines. Note that four of the nation's five largest

export streams have been totally suspended -- Forcados, Qua Iboe,

Bonny Light and Brass River are under force majeure. Further

confirming this, the Minister of State for Petroleum Resources, Dr Ibe

Kachikwu, recently disclosed that the nation’s oil production had

slumped by 40% to 1.4mbpd, in what brews fresh concerns vis-à-vis the

effective implementation of the 2016 budget (with a benchmark crude

production of 2.2mbpd). Heightening this array of challenges is a recent

report that refineries from India and the United States are backing away

from buying Nigerian oil amid elevated uncertainty about deliveries. It

suffices to say that we remain bearish on our outlook for the oil sector.

Fig 17: Oil Production (mbpd) and Prices ($/bbl)

Source: NBS, OPEC, Cordros Research

2.29 2.11

2.26 2.16 2.24 2.21 2.12 2.19 2.18

2.05 2.17 2.16 2.11

1.53

0

20

40

60

80

100

120

140

0

0.5

1

1.5

2

2.5

Q1

-13

Q2

-13

Q3

-13

Q4

-13

Q1

-14

Q2

-14

Q3

-14

Q4

-14

Q1

-15

Q2

-15

Q3

-15

Q4

-15

Q1

-16

Q2

-16

Oil production (mbpd) Oil prices ($/bbl)

Bonny Light Crude Price ($/bbl)

Nigeria’s oil production

slumped by 40% to

1.4mbpd, owing to Niger

Delta Avengers

rampaging activities

July 2016


28

However, the recent deal to restore pipeline protection contracts to ex-

militants and a 2-week ceasefire order by President Buhari in the Niger

Delta region to open dialogue window with militant groups; are potential

drivers to help improve oil production which has been scuttled by

pipeline attacks from agitators in the region.

Weak Potentials in Major Non-Oil Sub-sectors Subdues Positive

Expectations

Revisiting our outlook on the non-oil sector clearly posits that the risk

matrix in the macroeconomic environment appears elevated. Despite the

final passage of the 2016 budget (the impact of which would most likely

be delayed till Q4-2016), we maintain a dim outlook of the major non-oil

sector components. On the agricultural sector, growth may remain

threatened on the back of security challenges out of the Boko Haram

attacks that now appear to be subsiding; and the farmers-herdsmen

clashes across the country that persistently leads to below-average

farming activities. In the same perspective, yield may further be

depressed if the CBN newly introduced flexible interbank FX policy fails

to address current episode of dollar scarcity, as access to basic farming

inputs, such as seedlings, fertilizers, pesticides and other equipments

will be constrained. Similarly, we envisage that the demand for

agribusiness financing will suffer a sizeable shortfall, as credit to private

sector remains tepid. These, coupled with the Nigerian Meteorological

Agency’s (NiMet) forward guidance -- in its 2016 Seasonal Rainfall

Prediction (SRP) -- to late on-set, early cessation, and lower-than-

normal rainfall in the country; have heightened the risk factor to farm

production.

The prospect of recovery in the manufacturing sector is modest, with the

following manufacturers’ lingering and largely unabated challenges.

One, the difficulty in accessing forex for basic operations. For example,

PZ Cussons UK recently warned its shareholders that it will take a one-

off hit of £17m due to the forex challenge faced by its Nigerian

subsidiary, whilst UAC of Nigeria Plc lamented that the apex bank’s

unclear forex policy is holding back the Group’s business decisions.

Two, the significant drop in electricity power generation and supply. The

total number of functional gas-fired power generating turbines across the

country dropped from 50 in April to about 30 in May; and consequently

led to the repeated occurrence of less than 200mw generation during

the same period, and in turn, triggered a N2 billion daily loss in the

sector. Three, the sluggish recovery of aggregate

We maintain a dim

outlook of the non-oil

sector as the prospect of

recovery in key sub-

sectors remains slim

July 2016


29

demand amid massive retrenchment in the banking industry. For

information, three banks have reportedly disengaged 1,415 workers;

even as salaries remain unpaid by most states governments.

However, the CBN’s recent move of introducing a flexible interbank

forex market signals a positive development in the foreign exchange

market. Expectantly, the forex market new regime is to address the

challenges of FX supply shortages by increasing the flow of foreign

portfolio and direct investments, diaspora remittances, and export

proceeds.

Adding to the positives is the proposed financial aid by the FGN to state

governments, which is expected to salvage government financials at the

state level.

The power sector appears positively positioned for development, with

the recent disbursement of N55.45 billion (among 3 DisCos, 14 GenCos

and 6 GasCos) by the CBN -- and a fresh N93 billion dangling under the

Nigerian Electricity Market Stabilization Facility (NEMSF) -- in

continuation of its intervention in this sector. We equally acknowledge

the recent move by the FG to open fresh dialogue with the Niger Delta

Avengers as a way of resolving the current crisis and pipeline attacks (in

the region) which has crippled power generation.

CBN’s Nigeria PMI Stuck below 50 throughout H1-2016

Incidentally, corroborating the challenge in the domestic economic

landscape throughout H1-2016, the CBN’s monthly Purchasing

Managers’ Index (PMI) report revealed that both manufacturing and non-

manufacturing PMIs were stuck below 50 throughout the review period;

closed the first half of the year at all-time lows of 41.9 and 42.3

respectively, and averaged 45.0 and 44.6 (vs. 50.5 and 51.5 in H1-2015)

during the 6-month period. The sluggish PMI, beyond doubt, reflected

the fact that economic activities continually declined with no signs of

materially picking up within the first half of the year. Equally, the

persistent decline in economic activities points to a fundamental

readjustment of growth expectations for the year (e.g the IMF -- in its

2016 Article IV Consultation with Nigeria -- had earlier revised its 2016

growth estimate for the country down to 2.3%, from 4.1% projected at

the beginning of the year).

The new flexible FX

regime is expected to

address the challenges

of FX supply shortages

Nigeria’s sluggish PMI

reflected declining

economic activities

July 2016


30

Fig 18: Quarterly Manufacturing and Non-Manufacturing PMI

Source: CBN, Cordros Research

38

40

42

44

46

48

50

52

54

q1-15 q2-15 q3-15 q4-15 q1-16 q2-16

Manufacturing Non-manufacturing

Manufacturing PMI

Closing H1 at a nadir of 41.9, manufacturing PMI broadly mirrored the

challenges faced by manufacturers throughout the first half of the year,

stemming from (1) heightened difficulties in accessing forex for basic

operations; (2) persistent fuel scarcity from January through May as

evidenced by long vehicular queues at fuel stations clogging up major

cities like Lagos and Abuja; and (3) the significant drop in electricity

power generation and supply.

Notably, the constrained fiscal impulse due to the tardy passage of the

2016 appropriation bill and the MPC’s technical flip-flop to monetary

policy tightening cycle, combined with fading prospect of a major

improvement in the macro environment which elevated conservatism

among commercial lenders to depress manufacturing activities. These

consequently resulted to (1) DMBs cutting loan growth projections for

2016 financial year due to rising non-performing loans; and (2) foreign

banks pruning credit lines to Nigerian banks due to the lingering forex

challenges in the country.

Manufacturers remained

challenged throughout

H1 amid fuel scarcity,

forex crisis and erratic

power supply

July 2016


31

Fig 19: Manufacturing PMI


40

42

44

46

48

50

52

54

56

58

Ja

n-1

5

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Ju

n-1

5

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

On access to the USD to fund the import of raw materials and other input

requirements, we particularly note the feedback from our enquiries with

the leading FMCG companies on the Nigerian Stock Exchange. The

feedback posited a general view that USD supply from the CBN was

below 50% of their operational requirements prior to the switch to a

flexible foreign exchange regime. The Manufacturers Association of

Nigeria (MAN) reported that more than 70% of the manufacturing sector

was severely affected by the acute shortage of the greenback under the

former forex regime and that the situation has not improved since the

introduction of the new policy. For instance, on the backdrop of forex

supply challenges and the impact on manufacturers, we refer to reports

by (1) Clover which is a beverage producing company that announced the

management decision to suspend the future investments in Nigeria; and

(2) Reuters alleged plans by BUA Group, one of Nigeria’s largest sugar

refiners by installed capacity; to temporarily shut down its sugar refining

operation. In addition, (1) PZ Cussons recently warned shareholders that

it will take a one-off hit of £17m due to the forex shortage in the country;

(2) UAC of Nigeria also lamented that the apex bank’s unclear forex

policy is holding back business decisions; and (3) Vitafoam Nigeria Plc.

officially emphasized that the difficulties in accessing forex (under the

new FX regime) is hurting production.

USD supply from the

CBN was below 50% of

manufacturers’

operational requirements

July 2016


32

On power, it was reported that the total supply through the national grid

had reduced to 1075MW by end-June from nearly 5000MW at the

beginning of the year as a result of heightened vandalization of gas

pipelines by militants in the Niger Delta region. The adverse impact of

gas supply shortage has been quite significant for manufacturers,

ranging from lost production days, to margins shrinkage due to

increased substitution of expensive (and yet insufficiently available)

LPFO.

Non-Manufacturing PMI

Non-manufacturing PMI closed the reviewed period at an all-time low of

42.3, which indicated deterioration in the non-manufacturing sector of

the economy. All the major sub-indices in this category declined for the

most part of the 6-month period. Principally, we note that the service

sector was hit by the CBN’s pegged exchange rate and capital controls.

We refer to the challenges faced by the aviation sector (Iberia and

United Airlines exited the Nigerian market due to reasons connected

with low patronage and millions of dollars trapped in the country),

wherein not fewer than 2,000 workers are at the brim of losing their jobs.

Similarly, the telecoms industry suffered; considering the recent outcry

of the Association of Licensed Telecommunications Operators in Nigeria

(ALTON) that the forex scarcity was having adverse effect on network

service and also reducing their subscribers' base. A new report by the

industry's regulator, the Nigerian Communications Commission (NCC),

showed that the telecoms subscribers' base in the country has been

declining in the last few months.

Fig 20: Non-Manufacturing PMI

40

42

44

46

48

50

52

54

56

58

Jan

-15

Feb-1

5

Ma

r-1

5

Apr-

15

May-…

Jun

-15

Jul-15

Aug-1

5

Sep-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb-1

6

Ma

r-1

6

Apr-

16

May-…

Jun

-16


The service sector and

telecoms industry were

hit by the apex bank’s

pegged exchange rate

and capital controls

July 2016


33

Dampened Expectations; No Respite for Business Environment

In the meantime, (1) bureaucratic bottleneck -- which is a conventional

phenomenon in this clime -- in the implementation of the 2016

Appropriation Bill; (2) higher fuel price; (3) epileptic power supply; and

(4) a technical devaluation of the Naira heralding tight liquidity, and

reports confirming that most bidders only receive 5-8 percent of their

total bid; are all collective risk factors that will further impact business

decisions adversely. Likewise, we note VAT increase that featured as

one of the issues discussed in the National Economic Council retreat

held in March. Certainly, if implemented, the VAT increase has the

capacity to further weaken business sentiment and dampen the

business environment.

Tardy fiscal impulse,

higher fuel price,

unstable power supply

and liquidity crunch

portend additional risks

for the business

environment

July 2016


Fiscal Policy.

Nigeria’s fiscal policy space over the first half of 2016 significantly fell short of expectations with the delayed signing of the 2016 budget

34

A Clouded Arena

Nigeria’s fiscal policy space over the first half of 2016 significantly fell

short of expectations with the delayed signing of the 2016 budget into

law, and the condition is being exacerbated by the ongoing sabotage of

crude oil facilities resulting in a colossal oil revenue loss. Most

importantly, the breakdown of the first quarter nominal GDP shows year-

on-year moderation across virtually every segment of the non-oil

economy that represents the expected all-encompassing source of the

year’s budget revenue, adding to the shrinking prospect of government’s

revenue profile. Therefore, it is not surprising that government’s fiscal

accounts remain significantly pressured (see figure below) and that both

business and consumer expectations are at low levels (see figure

below).

0

200

400

600

800

1000

1200

1400

q1

10

q3

10

q1

11

q3

11

q1

12

q3

-12

q1

13

q3

13

q1

14

q3

14

q1

15

q3

15

q1 1

6

-30

-20

-10

0

10

20

30

40

50

60

70

q2

09

q4

09

q2

10

q4

10

q2

11

q4

11

q2

12

q4

12

q2

13

q4

13

q2

14

q4

14

q2

15

q4

15

q2

-16

Business Next Quarter

Consumer Next Quarter

Fig 21: FGN Retained Revenue (N’bn) Fig 22: Business and Consumer Expectation


July 2016


35

All together, the initial momentum that graced the announcement of this

year’s spending plan has moderated due to time and funding constraints

discussed below, and it is increasingly likely that policy makers would

have to make at least one of the following tough choices along the line –

(1) accommodate bigger than budgeted deficit and expand borrowing;

(2) defer some (critical) expenditures; or (3) demand more from the

citizens -- such as in the case of fuel subsidy removal, the floating of the

local currency, and the implementation of stamp duty charges.

Things Fall Apart: Padded, Missing, Found, Controversial and

Passed Budget

The 2016 budget was delivered by the Presidency to the National

Assembly (NASS) on December 22, 2015. In January 2016 during the

budget defence session in the NASS, concerns emerged that the budget

was riddled with repetitions of items and inflated allocations to the

Presidency and other subheads. Subsequent news that the document

had been declared missing by the Senate was the result of an alleged

attempt by the executives to “smuggle-in” some changes into the

document. In the same month, the presidency allegedly informed the

Senate about the amendments to the bill, and subsequently in February,

ordered an immediate investigation of all the allegations surrounding the

inflated budget that eventually resulted in the sack of the Director

General (DG) of the Budget Office and other twenty-six top civil

servants. The first delay factor!

Following the above, the NASS carefully scrutinized the budget to

discover some lapses which it insisted were within its powers to amend

after an altercation with the Executive. In late March, the budget was

passed by the Senate, with the breakdown (of headline items) available

to the public showing the marginal variations from the version submitted

in December of the previous year. Following an emergency meeting in

early April by the Federal Executive Council (including comments from

all ministers) to critically review the bill, report emerged later in the

month by the presidency faulting the removal/inclusion of some projects

in the budget by the NASS. The full detail of the budget was demanded

and the drag lingered. The second delay factor!

Finally, on May 05, President Mohammadu Buhari assented to the 2016

Appropriation Bill to be an Act as highlighted below, and paving way for

the full implementation.

All together, the initial momentum that graced the announcement of this year’s spending plan has moderated due to time and funding constraints

The 2016 budget was

delivered to the NASS on

December 22, 2015 and

was signed into law on

May 05, 2016

July 2016


36

Budget Strategic Implementation Plan: hopeful …

Consequent on the presidential assent on the budget, the Ministry of

Budget Office and National Planning unveiled a strategic implementation

plan detailing six key short term macroeconomic and sectoral policies for

the 2016 fiscal year viz: (1) Policy Environment, National Security and

Governance; (2) Economic Diversification; (3) Priority Critical

Infrastructure; (4) Oil and Gas Reforms; (5) Ease of Doing Business; and

(6) Social Investment.

A total of 34 priority actions have been identified for implementation

under the above six thematic areas during 2016. Below is the highlight

of the policy areas and their corresponding (selected) action plans:

HIGHLIGHTS (N’ bn) 2016 2015 % Change

Total Revenue 3,856 3,452 12%

Oil Revenue 813 1,638 -50%

Non-Oil Revenue 1,537 1,215 27%

Independent Revenue & others 1,581 600 164%

Aggregate Expenditure 6,061 4,493 35%

Recurrent Non-Debt 2,646 2,593 2%

Special Intervention Program 300

Capital Expenditure 1,588 557 185%

Capex % of total expenditure 31% 12% 1900bps

Debt Service 1,475 954 55%

Budget Deficit 2,205 1,041 112%

GDP 89,050* 94,145 -5.4%

Deficit-to-GDP 2% 1% (111bps)

Fig 23: The Signed 2016 Budget

Source: BoF, Cordros Research

*Q1-2016 GDP annualized

Consequent on the

presidential assent on the

budget, the Ministry of

Budget Office and National

Planning unveiled a strategic

implementation plan

July 2016


37

Fig 24: Strategic Implementation Plan

SECTOR SELECTED ACTION PLANS

1. Policy,

Governance &

Security

2. Diversify the

Economy

3. Power, Rail,

Roads and

Housing

4. Oil & Gas

Reforms

5. Ease of Doing

Business

6. Social

Investment

1. Achieve an Appropriate Foreign Exchange Regime

2. Increase low interest lending to the Real Sector

3. Maintain Capital Spending in the Budget at a minimum of 30%.

1. Implement Measures to Achieve Self-Sufficiency &Become Net Exporters of a certain agric.

Items: rice-2018, tomato paste-2016, wheat-2019. Increase local production of maize, soya,

poultry& livestock, so as to achieve self-sufficiency: deadlines to be announced in due course

2. Adopt & Implement a Roadmap to Stimulate Investment into the Solid Minerals sector & Plug

Revenue Leakages in the Sector

3. Optimize the 7,000MW installed power capacity & ensure associated infrastructure to Fuel,

Transmit & Distribute this capacity is operational and effective. Complete the privatization of

NIPP plants & improve the management and performance of TCN

4. Ensure Tariff includes all costs of transmission, generation & gas at the new price, as well as

Disco costs required to operate, maintain &upgrade distribution networks

5. Resolve all Issues on Gas Pricing, Tariff, & Payment Assurance. Conclude Roadmap on Gas

Development

6. Complete the Kaduna-Abuja & Ajaokuta-Warri Rail Lines scheduled for 2016

7. Undertake the Rehabilitation & Construction of 31 major Projects to restore degrade sections

of the Federal Highways & Improving Connectivity

8. Complete the Rehabilitation of 4 Airports

9. Undertake the construction of 3552 Mixed housing Units as Pilot scheme in the 36 States

10. Adopt & Execute a Comprehensive National Oil &Gas Master-Plan (NOGM) as the roadmap

for the Petroleum Industry’s Development, Diversification, Privatization & Governance.

Adopt & Execute a Roadmap of Gas Development & Flare Elimination

11. Set a 3-year Deadline to be Self-Sufficient in Refined Petroleum Products & become a Net

Exporter

12. Work with the National Assembly on the passage of a Revised Petroleum Industry Bill (PIB)

13. Move 20 places up the Ease of Doing Business Rankings

14. Implement Social Intervention Programme and specific Health / Education projects included

in 2016 Budget

15. Health Sector Interventions

July 2016


38

… but what about the implementation?

As robust as the 2016 budget appears on paper, and as appealing as

the strategic implementation plan seems, we are less optimistic about

the positive impact on the economy for the rest of this year considering

the following two major constraints: time and funding.

Time

We share similar view with the MPC that “the initial monetary injection

approved by the Federal Government may not impact the economy soon

(we propose for the rest of the year), as the processes involved in MDAs

finalizing procurement contracts before the disbursement of funds may

further delay the much needed financial stimulus to restart growth”. Our

findings from the Bureau of Public Procurement (BPP) show that it takes

about three months on average to complete the procurement process in

the public sector, in line with the Public Procurement Act 2007. While

noting that the Ministries Department and Agencies (MDAs) had been

instructed (as at June) to commence engagement with the BPP in a bid

to fast track the process, we do not anticipate substantial disbursements,

especially for the new projects; until the end of the third quarter.

Source: BPP, Cordros Research

The initial monetary

injection approved by the

Federal Government may

not impact the economy

soon

Fig 25: Procurement Cycle in the Public Sector

ADVERTIS

EMENT =

3-4

WEEKS

OPEN BID

= 2

WEEKS

EVALUATI

ON = 1-2

WEEKS

EXAMINA

TION = 2-2

WEEKS

July 2016


39

Funding

The FGN retained revenue of N3.86 trillion that accounts for 64% of the

gross budget expenditure was unchanged in the signed budget. This is

despite the fact that the assumptions driving the projection were made

under a more optimistic view of the economy than have been the case

year-to-date. The government plans to generate the sum through the oil,

oil-related and non-oil revenues, including the independent revenue

sources. It is suffice to note that all these sources have come under

intense pressure over the course of the year, making the attainment of

the target revenue somehow cumbersome. Based on the CBN’s

provisional data, FGN retained revenue was down 51% y/y and 48%

below the proportionate budget level as at the first quarter. While we

expect inflows in the second quarter to be as weak as in the first quarter,

we are of the view that the budget may not positively impact on the FG’s

income status significantly over the second half of the year.

Oil revenue: The gross oil revenue as at Q1-2016 was 45% lower y/y

and 25% below the equivalent budget provision. The y/y decline came

from the significant shortfall in receipt from all constituents like the crude

and gas sales that stood at -70% y/y, petroleum profit tax and royalties

at -45%; and others at -26% y/y. Compared to the budget however, an

86% decline in receipt from crude oil and gas sales (accounting for 69%

of oil/related revenues) more than offset the outperformance of other

sources. Overall, weak oil revenues over the first quarter broadly mirror

production shortages on the back of militants sabotaging oil-producing

facilities in the Niger Delta region.

The prospect of a major rebound in oil revenues in the second half is

minimal. While the benchmark oil price is easily attainable this year as

per our original view from the beginning of the year, ironically,

production shortfall will undermine the revenue due from this source

considering the revenues already lost in the first half and the difficulty

associated with ending the militant activities in the oil-producing regions.

Based on the CBN’s

provisional data, FGN

retained revenue was

down 51% y/y and 48%

below the proportionate

budget level as at the first

quarter

The gross oil revenue as

at Q1-2016 was 45%

lower y/y and 25% below

the equivalent budget

provision

July 2016


40

We are very conversant with the several logical economic commentaries

on how the government spending can be boosted through the Naira

devaluation. However, we have a strong reservation that such gain may

be partly offset by a proportionate to the Naira devaluation, of the

increase in the quantity of Naira necessary to fund the USD indexed

capital and recurrent expenditure obligations and borrowings.

Particularly, in this episode of growing pressure on oil revenue that

accounts for over 80% of the USD receivables; the pass through gain

from NGN devaluation may have been largely dampened. We are also

of the view that the delayed adjustment of the exchange rate has

somewhat tightened the scope for any meaningful income accretion

from this source over 2016.

Non-oil Revenue: Gross non-oil revenue as at Q1-2016 was 29% lower

y/y and 58% below the proportionate budget provision. Compared to Q1-

2015, revenues from customs and other sources offset the marginal

increases in VAT and corporate tax revenues. Against the budget

however, all components of the non-oil revenue were significantly lower.


Fig 26: Oil Revenue (N’bn)

-

500

1,000

1,500

2,000

2,500

3,000

q1

10

q

2 1

0

q3

10

q

4 1

0

q1

11

q

2 1

1

q3

11

q4 1

1

q1

12

q

2-1

2

q3

-12

q

4-1

2

q1

13

q

2 1

3

q3

13

q4 1

3

q1

14

q

2-1

4

q3

-14

q

4-1

4

q1

-15

q

2-1

5

q3

-15

q

4-1

5

q1

-16

Gross non-oil revenue as

at Q1-2016 was 29%

lower y/y and 58% below

the proportionate budget

provision.

July 2016


41

The prospect of recovery is weak. Firstly, with the rising unemployment

and inflation, consumption expenditure and by extension the VAT

revenue may remain benign. Secondly, corporate earnings of the quoted

companies on the Nigerian Stock Exchange (NSE) were broadly

subdued in the first quarter and are expected to remain so for the rest of

the year. Implicitly, this will continue to constraint corporate tax

revenues. Thirdly, the expected gain to customs and excise revenues

from the introduction of a flexible interbank foreign exchange should be

outweighed by the fact that importers will remain less motivated about

importing in an economy where aggregate demand is weakening yet

import duty; that is usually affected by the movement in the exchange

rate, is rising.

Independent Revenue: The FGN has budgeted N1.51 trillion as

earnings from the Independent Revenue source in 2016. This revenue

target is expected to be met through the full implementation of the

Treasury Single Account (TSA) and the remittance of operating

surpluses by MDAs, as required by the Fiscal Responsibility Act. We

had stated in January that the amount, representing 25% of 2016 gross

expenditure budget and about 40% of the total FGN retained revenue,

was unprecedented and constituted a risk to the budget. As at


Fig 27: Non-oil Revenue (N’bn)

-

500

1,000

1,500

2,000

2,500

3,000

q1

10

q2

10

q3

10

q4

10

q1

11

q2

11

q3

11

q4

11

q1

12

q2

-12

q

3-1

2

q4

-12

q

1 1

3

q2

13

q3

13

q4

13

q1

14

q2

-14

q

3-1

4

q4

-14

q

1-1

5

q2

-15

q

3-1

5

q4

-15

q

1-1

6

Against the budget, all

components of the non-oil

revenue were significantly

lower in Q1-2016

July 2016


42

Q1-2016, independent revenue based on CBN’s provisional data was

N40 billion, 21% below last year’s Q1 realized and 89% below

proportionate budget provision.

Recoveries: Provisions were made in the Medium Term Expenditure

Framework (MTEF) to part-finance the budget deficit with N386.1 billion

expected from recoveries of misappropriated funds. Meanwhile on 4

June 2016, the FG published an interim report of recoveries of

misappropriated funds and assets for the period from 29 May 2015

through 25 May 2016 indicating the total cash recoveries standing at

N116.4 billion. The recoveries are reportedly in a ‘Special Account’, and

available for spending on infrastructures ‘at the appropriate time’. Even

at that, the amount recovered and available for spending is in deficit of

budget provision and may be subjected to (lengthy) administrative and

legislative bureaucracy before disbursements. Although there are

indications that more recoveries are underway, we note that the

momentum with which the investigations began in 2015 appears to have

moderated in recent months and that cash recoveries, where successful,

may not exceed the budget benchmark.

Tough Choice for Policy Makers

The actualization of the 2016 spending budget faces significant risk from

the intense pressure on government revenues. Based on CBN’s

provisional data on revenue and expenditure for the first quarter, we

estimate an annualised deficit of N3 trillion as against the budgeted N2.2

trillion, despite expenditure being 19% below budget. Under this less

optimistic revenue outlook, it is highly likely that the fiscal authorities will

make at least, one of the following stringent choices. One,

accommodating bigger than budgeted deficit and expand borrowing.

Two, deferring some, particularly, the critical expenditures. Three,

demanding more from the citizens.

Accommodate bigger than budgeted deficit and expand borrowing:

At the current revenue run-rate, budget deficit would amount to N4.04

trillion should the government decide to borrow and speed up

expenditure to budget levels. Deficit under this scenario would amount

to about 6% of the GDP and double the limit permissible under the

Fiscal Responsibility Act 2007. However, if the government opts for this

choice, borrowing will have to increase to N3.65 trillion which is well

ahead of the N1.84 trillion budgeted. Importantly, this forecast is

premised on the assumption that recoveries target is attained

appropriately.

In Q1-2016, independent

revenue based on CBN’s

provisional data was 21%

below last year’s Q1

realized and 89% below

2016 proportionate budget

provision

The actualization of the

2016 spending budget

faces significant risk from

the intense pressure on

government revenues

July 2016


43

Defer some (critical) expenditures: The below budget expenditure in

the first quarter can be attributed to either (1) pressure on revenue flows

or (2) cautionary spending before the signing of the budget into law. In

this scenario, we envisage that the financing hole in the budget would

pressure the government to cut-back on commitments, while retaining

debt issuance at the planned level. Here, we estimate that a 50% fall in

the retained revenue will result in 32% reduction in expenditure, except

recoveries remarkably exceed expectation. Alike, capital expenditure,

especially of the new projects, will be affected more in this scenario of a

cut-back on spending. While acknowledging the capacity of the newly

inaugurated Efficiency Unit to enhance the quality of spending, we

envisage the result of the programme impacting less on the recurrent

expenditure in the first year. In evidence, a breakdown of expenditure in

the first quarter shows that capital expenditure (Capex) was 44% below

the proportionate budget level, while the non-debt recurrent expenditure

was 35% more than budgeted.

Demand more from citizens: Over the last six months, the imposition

of stamp duty on bank customers has bolstered the government’s

revenue, whilst savings have been made through the quasi-deregulation

of the downstream petroleum sector. In fact, a saving of N1.4 trillion is

expected annually from the latter. Therefore, this scenario projects that

in the event that revenue from the sources identified in the budget fails

to improve, the fiscal authorities, in addition to implementing scenario 2,

could attempt to prop up revenue through some possible, but difficult

means like the VAT increase to 10%, broad elimination of tax incentives

and waivers, including on bonds and treasury bills; and finally, the

increment of surcharge on imports.

The Victory of Economics: Electricity Tariff Hike, Petrol Price Hike,

Flexible Foreign Exchange …

The campaign that won president Buhari the 2015 election was

predominantly people-oriented. As such, the stretched battle between

this administration’s populist views and the principle of rational

economics was broadly anticipated. Notably, before May this year,

Buhari’s socialist tendencies had prevailed over the following two

economically sensitive issues namely, the deregulation of the

downstream petroleum sector and the liberalization of the foreign

exchange market. It is noteworthy that the prolonged inaction on these

economic issues had had incalculable adverse consequence on the

economy and the citizenry.

(Capex) in Q1-2016 was

44% below the

proportionate budget level,

while the non-debt

recurrent expenditure was

35% more than budgeted.

The stretched battle

between this

administration’s populist

views and the principle of

rational economics was

broadly anticipated

July 2016


44

While reiterating that the decisions to liberalize the downstream

petroleum sector and float the local currency eventually are both

business-friendly, for us, the associated risk is that they could be taken

for a reluctant submission to the pressure of economic reality rather than

a shift in the populist ideology of the current administration. Indeed, both

decisions have raised expectation for the next line of policy actions

which should serve to stress test the economic rationality of Buhari’s

government going forward.

… What Next?

The 2016-2018 MTEF retained the VAT rate at 5%. We recall that VAT

revenue projection in 2015 budget assumed a VAT rate of 10% that was

never implemented. The argument for or against VAT increase in

Nigeria is complex and sensitive, particularly in this current economic

downturn. The case for an increase is supported by the dire need to

meet the economic stabilization objectives of the government, more so,

considering that Nigeria’s VAT rate is uncompetitive relative to African

peers (see table below).

Fig 28: Standard VAT Rate

0%

5%

10%

15%

20%

25%

Nig

eri

a

Eg

yp

t

Lib

eri

a

So

uth

Afr

ica

Eth

op

ia

Ga

mb

ia

Gh

an

a

Sie

rra

Le

on

e

Ke

nya

Tu

nis

ia

Ca

me

roo

n

Mo

rro

co

Source: Trading Economics, Cordros Research

The argument for or

against VAT increase in

Nigeria is complex and

sensitive, particularly in

this current economic

downturn

July 2016


45

On the other hand, the fact that VAT is poorly administered, even at the

current rate, clearly punctures the plausibility of justification argument for

an increase. Also, in addition to the 5% VAT charged by the tax

administration at the federal level, some States are also levying 5% sales

tax on goods and services. At the NEC retreat held in March, adjusting

the VAT rate higher was one of the many measures considered

necessary to raise non-oil revenues to ensure fiscal sustainability. Indeed,

in April following the visit to Nigeria, the IMF recommended raising the

standard VAT rate to 7.5% as a priority to provide a strong revenue base.

The position of the FG following the meeting with IMF’s representatives to

Nigeria was that whilst acknowledging the need to increase the VAT rate

over the “medium term”, a sufficient increase in revenue effort can result

immediately from strengthening collection efficiency, with a focus on

broadening the base, improving compliance, closing loopholes, and

reducing tax exemptions”. Though concerns over the social

consequences of raising VAT rate could prevail over the economics,

considering the experience with the liberalization of the downstream

petroleum sector and floating of the currency, “medium term” might just be

the second half of this year.

The State of States’ Finances

The Nigerian State governments have made headlines in the last 18

months, especially for unpleasant reasons. The long term stability of the

States has come under significant threat from the crash witnessed in

revenue from crude oil, from which about 70% (up until Q3-2014) of the

gross federally-collectible revenue accrued. The situation has been

worsened by lower-than-expected income flows from the non-oil sources

(as discussed in the sections above) in the aftermath of a prolonged

downturn in the economy. Data from the Federal Ministry of Finance

(FMF) reveals that States’ allocation from the federation account dropped

from about N2.9 trillion in 2013 to N1.7 trillion in 2015 (lowest since 2007).

Several of the States lack sustainable frameworks for internal revenue

generation and are heavily reliant on revenue inflows from the federation

account. The National Bureau of Statistics (NBS) data reveal that the

IGRs of States have dropped over the last two years from N760 billion

gross in 2013 to N683 billion gross in 2015. This is understandable for

two salient reasons. Firstly, the fall in revenue allocation from the

federation account and the slowdown in overall economy have adversely

affected the productive activities within the States. Secondly, the

motivation of revenue collection agencies have been impacted negatively

by the arrears of unpaid salaries.

Indeed, in April following

the visit to Nigeria, the

IMF recommended raising

the standard VAT rate to

7.5% as a priority to

provide a strong revenue

base

Several of the States lack

sustainable frameworks

for internal revenue

generation and are heavily

reliant on revenue inflows

from the federation

account

July 2016


46

The decline in revenue is expected to intensify over 2016. FAAC

allocation to States for the first quarter of this year was at a record low

level, and about 45% below the 10-year average. In our view, States’

IGR projections for 2016 (see table below) are largely unrealistic (about

90% higher on average, vs. 2015), thus suggesting high risk of budget

under-implementation or bigger-than-budgeted deficits.

Source: MoF, NBS, Cordros Research

Fig 29: Federal Allocation to States (N’trn) Fig 30: States’ Internally Generated Revenue (N’bn)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20

07

20

08

20

09

20

10

20

11

2012

20

13

20

14

20

15

0

100

200

300

400

500

600

700

800

900

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

0%

100%

200%

300%

400%

500%

600%

700%

800%

LA

GO

S

NIG

ER

CR

OS

S R

IVE

R

AN

AM

BR

A

AD

AM

AW

A

DE

LT

A

BA

UC

HI

PL

AT

EA

U

NA

SA

RA

WA

IBO

M

JIG

AW

A

EK

ITI

IMO

OG

UN

KA

DU

NA

KA

TS

INA

KW

AR

A

BO

RN

O

Fig 31: States 2016 IGR Growth Projection

Source: Budget Office,

Cordros Research

States’ IGR projections for

2016 (see table below)

are largely unrealistic

(about 90% higher on

average, vs. 2015)

July 2016


47

Worst still, the need to block leakages and cut down the cost of

governance has not been prominently prioritized at the State level. For

instance, the rate of implementation of some of the fiscal reform

measures currently being undertaken at the federal level (e.g. biometric

capture of all civil servants, the establishment of an Efficiency Unit within

each state, implementation of Continuous Audit, improvement in

Independently Generated Revenue (IGR) and measures to achieve

sustainable debt management) remains significantly low among States.

Such reform measures are usually limited by either some personal

interests or lack of political will-power or both. The culpable States are

faced with more difficult economic situations.

Despite the bloated IGR projections, the 2016 budgets of a large

number of States may result in unproductive deficits. In our view, in

addition to suggesting significantly low scope for capex funding (as is

usually the practice), it also signals that there is no end in sight. Difficulty

accessing funds from both the capital markets (owing to low investor

appetite for sub-national bonds) and commercial banks (due to aching

interest rates) further darkens States’ ability to bridge deficit gaps.

However, on the positive, States are likely to benefit from the

devaluation of the Naira given (1) the transmission to higher monthly

distributable revenue from FAAC, amid (2) their relatively modest USD-

linked expenditures (especially where expenditure on capital projects is

expected to remain subdued). This gain, however, could be partially

offset by higher debt service for States with significant exposure to USD

borrowings.

Federal Government Support: Quantitative …

The fiscal imbalance faced by the States’ Governments, particularly the

constraint on the ability to meet salary obligations, has reinforced the

need for FG intervention. In the current administration, SGs have

received financial support from the FG, who in turn, has seized the

opportunity, vis-à-vis additional support, to demand the enforcement of

fiscal prudence and public expenditure transparency.

In July 2015, the FG approved the restructuring of N575 billion loans

owed to commercial banks by 23 States into 20-year FGN bonds.

Consequently, the Debt Management Office (DMO) estimated that the

States’ monthly debt service dropped by between 55% and 97% as a

result. Also in 2015, States shared US$150 million out the NLNG

Worst still, the need to

block leakages and cut

down the cost of

governance has not been

prominently prioritized at

the State level

However, on the positive,

States are likely to benefit

from the devaluation of the

Naira

July 2016


48

dividend distributed among the three tiers of government and were

granted N300 billion soft loans by the CBN to defray backlog of unpaid

salaries.

In addition, the deductions for loans being made from the monthly

allocation of all the States was stopped in March this year, according to

the finance minister. The deferral amounted to a total of N10.9 billion,

and further deferrals, as stated by the minister, will be subject to the

agreement of a Fiscal Restructuring Plan (FRP) to be prepared by each

State.

Further on the fiscal relief, June witnessed the FG’s announcement that

it had secured a N90 billion conditional loan from the private sector

through the issuance of bonds for SGs. As reported, the facility has the

following features. One, it will be given for a one-year period at 9%

interest rate. Two, N50bn to be released in the first three months.

Three, N40bn to be released over a nine-month period. Four, it will be

available to States that meets the 22 eligibility conditions in the Fiscal

Sustainability Plan (FSP). Five, it will not be disbursed when the

monthly FAAC payout exceeds N500 billion. It is noteworthy that

information on the bond has been quite scanty.

Meanwhile, we are not surprised by the act of the FG borrowing on

behalf of States, for obvious reasons. First, private lenders have lost

confidence in the wherewithal of the States to meet prompt and timely

loan obligations as evident in the considerable fall of their credit ratings.

Second, the cost of borrowing through the FG is lesser.

… and qualitative initiatives

This year’s National Executive Council (NEC) meetings (a bi-monthly

meeting between the FG, its cabinet members and State governors)

have been emphatic on the implementation of fiscal reforms at both the

federal and sub-national levels.

At the NEC retreat held in March, the Council identified eight thematic

areas (see below) that signposted the economic policy direction of the

present administration to reverse the downturn in the economy.

Proposals were made on the going-concern status of the States.

This year’s National

Executive Council (NEC)

meetings

have been emphatic on

the implementation of

fiscal reforms at both the

federal and sub-national

levels

Deductions for loans

being made from the

monthly allocation of all

the States was stopped in

March this year, according

to the finance minister

July 2016


49

Fig 32: Strategic Implementation Plan

THEMATIC AREA SELECTED ACTION PALNS

1. Fiscal Structure

2. Agriculture

3. Solid Minerals

4. Investment,

Industrializatio

n and Enabling

Monetary

policies

5. Infrastructure

and Services

6. Investing in our

people

7. Revenue

Generation and

Fiscal Stability

8. Survival of

States and

Beyond

1. Expand compliance on VAT, adopting a gradual plan for rate increase

2. Increase expenditure through borrowing, which should be invested in infrastructure

3. Maintain a minimum level of capital expenditure of 30% in the budget

4. The FG to re-position Bank of Agriculture to enhance its capacity to finance agriculture

5. Funding for Agricultural sector is considered critical and sources of intervention funding from the

CBN should be considered

6. A single digit interest rate for agricultural loans should be considered while duties and taxes for

Agricultural products and equipment should be waived

7. National targets for self-sufficiency should be set for identified crops, which should be monitored.

Tomato paste - 2016, Rice - 2018, Wheat – 2019

8. FG to engage with States on the roadmap and agree any amendment that may be required by 30th

June 2016

9. Initiate relevant legislative changes that maybe necessitated by the agreed roadmap by 31stJuly

2016

10. Conclude the revalidation/recertification of all mining leases by 30th September 2016

11. Federal Government and States to set deadlines to achieve self-sufficiency in Bitumen/Asphalt and

tiles (to discourage/stop importation)

12. Present an incentive scheme for States taking actions towards improvement of the investment

climate in their States including grants by 30th September 2016

13. States to set up one-stop shop for investors where they do not currently exist to attract investment

and improve on IGR Safeguard competitive market economy

14. The Central Bank of Nigeria should carry the States along in some of their reforms in areas of SMEs

and Agricultural funding initiatives

15. Develop financing model for infrastructure projects

16. Federal and State Governments to work collaboratively to ensure sustainability of the school

feeding and other social protection programmes

17. State Government support for artisan training, scoping and support for existing artisan cultures,

use of existing training facilities

18. FIRS and SIRS need to invest in relevant technology to support efforts to improve tax collection

19. State Government are encouraged to rationalise number of Ministers, Commissioners and

Permanent Secretaries

20. All state governments are encouraged to establish efficiency units to review/enhance the quality of

expenditure as well as plug revenue leakages

21. Strengthen States Peer Review Mechanism under auspices of the Governors Forum and the

National Economic Council (NEC) to promote sharing of good practices between the Federal and

States Governments

July 2016


50

The FSP was unveiled at the NEC meeting in May, and highlighted

accountability and transparency, increase in public revenue,

rationalization of public expenditure, improvement in public financial

management, and sustainable debt management as the fiscal

responsibility reforms which States must implement to ensure their long

term viability and enhance their eligibility for financial support from the

FG.

July 2016


Monetary Policy.

We project a 300bps

interest rate hike over

the second-half of the

year from 12% to 15%

as inflationary pressures

curtail the CBN’s

expansionary ambitions

51

H2’16: Higher Rates and Higher Degree of Certainty

The last Monetary Policy Committee (MPC) meeting ended in impasse

after the Committee was confronted with a conundrum of how to

proceed with the balance of risk tilted towards weak growth and rising

inflation. Consequently, the monetary policy rate (MPR) was left

unchanged. We expect this to be short-lived, and project a 300bps

interest rate hike over the second-half of the year from 12% to 15% as

inflationary pressures curtail the CBN’s expansionary ambitions.

Inasmuch as we expect a modest improvement in economic activity in

H2’16 following the passage of the 2016 budget and reduced structural

bottlenecks like the petroleum scarcity, our inflation forecast remains

high and depicts our expectation of further monetary policy tightening.

We believe the current episode wherein price increases are dictated by

structural factors like higher utility and transportation costs; and forex

pass-through is far from being over, and will likely continue to feed into

consumer prices. Nonetheless, the risk is that the structural drivers raise

a credibility issue about the efficacy of tightening to control inflation, and

pretending to be able to control what it cannot influence directly to a

sufficient degree is hardly in the interests of the CBN.

Fig 33: MPR vs Worsening macros (Inflation, Unemployment, GDP)


-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

q1'15 q2'15 q3'15 q4'15 q1'16

Inflation Unemployment GDP MPR

July 2016


52

Further than its price stability function, this credibility issue complicates a

secondary concern of the prospect for a prolonged period of negative

real interest rates. Currently, May’s inflation figure of 15.6% sits

comfortably atop the current benchmark interest rate of 12%. With

further rises in inflation as expected, the gap between the MPR and

inflation are set widen further, a situation which the CBN views as

unsuitable because of the disruptions to the financial system from

negative real interest rates perspective. A primary concern in this

regard is that savers are afflicted with negative real returns. For

instance, fixed income investors (e.g. Pension Fund Administrators) are

adversely impacted when inflation outstrips yields on fixed income

securities and creates a situation of negative real returns.

Aside from inflation, another precursor for further tightening is the

planned release of a new exchange rate framework which is meant to

enable a more flexible rate determination regime. The new framework

will benefit both from higher nominal interest and positive real interest

rate environment in its bid to attract for foreign portfolio investors willing

provide the necessary liquidity to spur the new framework. Similarly, the

new exchange rate framework could prompt further tightening is on the

prospect for liquidity mop-up exercise ahead of its planned

implementation. Expectantly, the exercise will aim at reducing the

amount of funds available for speculation under the new flexible

exchange rate framework. Subsequently, this mop-up should percolate

through the economy partly by pushing up the money market rates and

yields on the fixed income securities thereby, supporting the need for the

benchmark rate increase and not leaving the inflation rate to act in

isolation.

H1-16 Review: A Tangled Web

The tension between rising inflation, rising unemployment and waning

economic growth posed a challenge for the monetary authorities during

the first half. The decision to reassess which challenge to prioritize

created another layer of uncertainty in the Nigerian economic

environment. Also, besides switching between easing and tightening,

the absence of a concrete exchange rate stance or comprehensive

exchange rate framework continued to aggravate the CBN’s challenges.

For most (or since the start) of the year, despite acknowledging the need

to revisit it exchange rate framework, the CBN failed to announce any

substantial reforms.

Aside from inflation,

another precursor for

further tightening is the

planned release of a

new exchange rate

framework which is

meant to enable a more

flexible rate

determination regime

Besides switching between easing and tightening, the absence of a concrete exchange rate stance or comprehensive exchange rate framework continued to aggravate the CBN’s challenges

July 2016


53

In our 2016 outlook, we outlined a paradigm shift by monetary

authorities by viewing Nigeria in a ‘crisis mode’ and thus prioritizing the

prevention of the negative output gap over exchange rate and price

stability. Accordingly, the monetary authorities resumed the year

maintaining status quo for all benchmark rates. In fact, during the

January meeting, the MPC considered more easing measures like

removing the floor on the benchmark corridor which is our posited policy

stance for the MPC in the 2016 outlook. The decision to “lean against

the wind” by maintaining an accommodative stance in the face of

mounting exchange rate pressure, rather than hike like most of it

emerging and frontier market peers, positioned the CBN among growth

activist central bankers.

However, the CBN was forced to revaluate its ability to serve as catalyst

for growth with low transmission effect of the improved system liquidity

resulting from the relaxed and accommodative monetary policy. With the

economy in dire straits, most banks did not view the additional liquidity

as an incentive to increase lending. Thus, the CBN’s aim to help reduce

unemployment by targeting lending to highly elastic employment

generating sectors appeared moot.

More importantly, the CBN like the majority of the markets analysts

including Cordros underestimated both the impact of its exchange rate

policy (or lack thereof) on inflation as well as the impact of structural

reforms implemented by the Federal Government in the Power

downstream petroleum sectors. The rapid acceleration in headline

inflation raised the CBN’s concern about the potential harm the negative

real interest rates could cause the economy. On the other hand, the

fallout of the release of negative economic growth Q1’16 caused the

MPC to pause its concerns of accelerating inflation on the economy with

fresh concerns that hiking rates would be detrimental to economic

growth.

The rapid acceleration in

headline inflation raised

the CBN’s concern about

the potential harm the

negative real interest

rates could cause the

economy

July 2016


Exchange Rate.

The exercise has not

been costless. Firstly, it

has led to foreign

currency reserve

depletion, or at the very

least, reduced the

nation’s accretion

capabilities

54

Confrontation With Realities

Important to mention that the CBN has struggled to adjust to the new

economic realities resulting from the collapse in crude oil prices. These

struggles have been especially highlighted with regards to exchange

rate strategy, which has been characterized by various policy

somersaults. The exercise has not been costless. Firstly, it has led to

foreign currency reserve depletion, or at the very least, reduced the

nation’s accretion capabilities. Furthermore, it deteriorated the

investment climate in the country, with capital controls partially

responsible for Nigeria’s removal from two global bond indices and a

potential elimination from a global equity index provider. As a

consequence of the latter, capital importation shrunk to its lowest levels

– in Q1-2016 -- since the CBN/NBS began collecting the data.

Fig 34: Year-to-date Change


-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Crude Oil production Crude Oil Price External Reserves

July 2016


55

Fig 35: What does Flexible Look Like?

What does Flexible Look Like?

The CBN responded to the above highlighted challenges when at its May’s MPC meeting, the CBN governor guided for a

market driven exchange rate mechanism as a replacement for the peg of N197/$-N199/$ at that time. Also, he

mentioned that the bank would retain a small window for critical transactions, which we assumed would be at a

subsidized rate.

Subsequently, the CBN officially announced the introduction of a Flexible Exchange Rate System in the interbank market

on June 14, 2016. The announcement stated that:

1. Market shall operate as a single market structure via the interbank market and authorized dealers.

2. Purely an exchange rate market managed via Thompson Reuters platform.

3. CBN will participate via periodic intervention.

4. CBN will introduce primary dealers that deal with CBN on a two way quote basis.

5. Primary dealers to deal with other players in the interbank market.

6. There shall no pre-determined spreads on forex transactions and all forex purchases are transferable.

7. 41 items shall remain inadmissible in the forex market for forex transactions.

8. The CBN will offer long term forex futures.

9. Sale of forex forwards for end users must be trade-backed.

10. Introduce non deliverable OTC forex settled trades to help moderate volatility

11. The OTC settled forex feature shall be on non-standardized amounts.

12. Proceeds of forex shall be purchased by authorized dealers at the daily interbank rates.

Particularly, the introduction of forex risk management derivatives products was appealing to the markets. Specifically,

futures and forwards derivatives were introduced majorly to provide a window for the market participants to hedge their

potential exchange rate volatility. Expectedly, these derivatives contracts should address ‘front-loading’ which has been

part of the fundamental pressure on the Naira currency.

How Much Does a Dollar Cost?

The naira currently trades at about N280 at the interbank market,

implying a 40% YTD depreciation which doubles our initial forecast of

20% adjustment by Q2’16. Our previous assessment of 20% by H1’16

was based on the prolonged period of low crude oil prices and its

attendant impact on foreign reserve accretion which was used to

conduct the CBN’s demand management strategy. Although, the crude

oil prices rose by 33.3% in H1’16, Nigeria’s production levels were

disrupted by the heightened militant activities. Thus, the country’s

primary foreign exchange earner remains suppressed. The introduction

of the flexible exchange rate framework aims to provide an environment

for autonomous foreign exchange inflows. However, the market is still in

its infancy and its ability to attract those flows will only come after

investor confidence in the system and the overall economy improves.

July 2016


56

Despite the 40% YTD adjustment, we believe there is accommodation

for further upward adjustment in the nominal exchange rate. This is

evidenced by the huge disparity between the official rate at N280/$ and

parallel market rate at N350/$ respectively. Further, since February

2015, similar crude oil producing countries e.g. Angola and Kazakhstan

have seen their currencies depreciate by 57% and 83% respectively

against the dollar versus the 40% experienced by Nigeria.

Consequently, given the difficult realties remain unchanged; we expect

official rates to converge with current parallel market rates by the end of

the year.

Fig36: One Year Rebased Naira and Peer Currencies Vs. Dollar

Source: Bloomberg, CBN, Cordros Research

0

0.5

1

1.5

2

2.5

Fe

b-1

5

Ma

r-1

5

Apr-

15

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

Ju

l-1

6

NGN KZT AOA

Since February 2015,

similar crude oil

producing countries e.g.

Angola and Kazakhstan

have seen their

currencies depreciate by

57% and 83%

respectively against the

dollar versus the 40%

July 2016


57

Inflation.

Rising Inflation: A Fresh Can of Worms

Nigeria’s inflation rate maintained an uptrend throughout the first half of

the year, hitting multi-year highs with seemingly high volatility in each of

the months. The rate started the year at 9.6%, rose by 690bps to hit

16.5% in June, averaged 13.3% within the six months period, and

dwarfed our expectation of 9.1% in H1. Clearly, the sustained rise in the

headline index was driven primarily by lingering structural challenges

impacting domestic prices of goods and services as accentuated by (1)

rising petroleum and transport costs (owing to protracted fuel supply

shortages); (2) continued impact of high electricity tariff (40% hike)

nationwide; (3) exchange rate pass through effect from a weaker Naira

resulting from continued dollar scarcity. We observe that the drag factors

including the moderation of prices of imported agricultural commodities,

slow recovery of aggregate demand, lower domestic food prices from

increased production and distribution that informed our H1-2016

estimate were overstated. In particular, structural headwinds created

cost-push effect which overshadowed soft aggregate demand amid

rising prices of imported agricultural commodities occasioned by a

weaker Naira.

Fig 37: Headline Inflation and Components Fig 38: Parallel Market Rate (N/$) and Imported

Food Inflation (RHS)

Source: NBS, AbokiFX, Cordros Research

0%

4%

8%

12%

16%

20%

Ja

n-1

2

Ju

n-1

2

No

v-1

2

Ap

r-1

3

Se

p-1

3

Fe

b-1

4

Ju

l-1

4

De

c-1

4

Ma

y-1

5

Oct-

15

Mar-

16

Headline Inflation

Core Inflation

Food Inflation

0%

5%

10%

15%

20%

25%

0

100

200

300

400

500

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

Imported Food Inflation

Parallel Market Rate

Inflation maintained an

uptrend throughout H1

and hit multi-year highs

amid elevated volatility

Structural headwinds

overshadowed soft

aggregate demand to

create cost-push effect

on the general price

level

July 2016


58

Cloud on the Horizon as Structural Headwinds Remain Unabated

A closer scrutiny of the H1-2016 inflation drivers outlined above makes it

difficult to expect a significant dissipation over the next six months, as

the monetary authority, alone, appears handicapped of policy response

to address a structurally-driven increase in general price level.

The fuel shortage which marked Q1-2016 and continued till the first half

of Q2-2016 may not be the last episode this year considering its

underlying factor, forex scarcity which remains on the horizon as

dwindling crude oil production has taken a worse dimension. The

Minister of State for Petroleum Resources, Dr Ibe Kachikwu, recently

disclosed that the nation’s oil production had slumped by 40% to

1.4mbpd considering the increased pipeline attacks by the Niger Delta

Avengers’ militant group, thereby impeding further USD inflows. In

addition, the recent emergence of price instability in the domestic

Liquefied Petroleum Gas (LPG) market witnessing cooking gas price

rise by 45%, a 22% diesel price hike, a 9% kerosene price increase from

N155 to N169 per litre, and a sustained pass through of the 40%

electricity tariff hike (albeit with a tendency for reversal) despite erratic

supply are all highly likely to combine with the continued impact of fuel

subsidy removal to maintain the upward price trend in the transport and

utilities segments.

Fig 39: PMS Price (N/litre) and Housing Water, Electricity, Gas & Other

Fuels (HEGOF)


0%

5%

10%

15%

20%

25%

30%

0

40

80

120

160

200

Ja

n-1

5

Fe

b-1

5

Mar-

15

Ap

r-1

5

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

PMS Price HEGOF (RHS)

Rising energy prices

speak to further increase

in transport and utilities

costs

July 2016


59

On food production, lingering security challenges in the country and

community-level conflicts between pastoralists and farmers in some

parts of the country remain a herculean risk to food production with an

accompanying multiplier effect on inflation in this category. Particularly,

the herdsmen-farmers’ clashes have restricted herd movements and

productivity as most pastoralists avoid these areas while others have

lost cattle. As well, (1) improving access to trade routes following

substantial reduction in the conflict level in the Lake Chad region has led

to a phenomenal cereal demand from neighbouring countries as

reported in the FEWSNET’s April Food Security Outlook Update; (2) the

Nigerian Meteorological Agency’s (NiMet) forward guidance -- in its

2016 Seasonal Rainfall Prediction (SRP) -- to late on-set, early

cessation, and lower-than-normal rainfall in the country; and (3) delay in

fiscal spending to boost agricultural production and distribution; add to

the risk matrix facing agricultural activities in the country, and by

extension, increased prices of agricultural products. Again, potential

yield loss in agricultural products over the lean season between July and

September, according to a FEWSNET report, further threatens food

adequacy. The security challenges in the country (particularly in the

Northern region), if totally curtailed, however, could help deliver a strong

harvest in the last quarter of the year; consequently subduing the impact

of the lean season.

On exchange rate, the CBN was trapped between shifting grounds and

defending its stance on a devaluation of the naira. After a long period of

waiting, which followed the May MPC forward guidance on the CBN

adopting a flexible exchange rate policy, the apex bank eventually

floated the local unit allowing for a “purely” market-determined rate (with

the hope of the naira settling at N250/$1). While it is permissible, in

theory, to expect the increase in exchange rate to translate to higher

prices, we are more cautious and sense that this theoretical impact has

been overestimated. Given the downward sticky nature of prices and the

fact that most imported goods had already been priced at the parallel

market rate (more so, producers and sellers of items without import

content had also taken undue advantage of the forex volatility to mark-

up margins), the possibility of a significant change in price is slim.

Lingering security

challenges cast doubts

on adequate food

production

Producers and sellers of

items without import

content took undue

advantage of forex

volatility to mark-up

margins

July 2016


60

On the other hand, the new FX regime, if pursued to the letter, in our

view, could result to about 80-90% depreciation of the naira to N358-

N378 against the greenback (USD) -- we refer to the experience of the

Kazakh tenge (KZT) which was floated in August 2015 and had

depreciated against the USD by 90% in a six-month period -- and

consequently resulting into higher energy (power and fuel) prices (the

PPPRA had arrived at a PMS price of N135 -N145/litre following the

FGN’s removal of fuel subsidy by assuming an exchange rate of

N285/$1 in its PMS pricing template).

Juxtaposing the above, we estimate the CPI to average 18.2% in H2-

2016, bringing our inflation outlook for the year to a less conservative

15.7%.

Notably, the possible approval by the Federal Government of Labour’s

recent agitation for a new minimum wage of N56,000 clearly portends

additional risk to our estimate. Speaking to further pressure is VAT

increase, which featured prominently among revenue generation options

for the government through H1. That the government of the day might

not be able to fully implement the 2016 budget under the current

environment of low revenue is a fact! This unarguably widens the

possibility of the FG further reluctantly yielding to biting reality of a

slowing economy (as discussed under Fiscal Policy), and suggests

potential VAT increase on the horizon. This, in our view, if pushed to the

fore, could push prices higher.

Fig 40: Official and Parallel Market Exchange Rates (N/$)

Source: Bloomberg, AbikiFX, Cordros Research

0

100

200

300

400

De

c-1

5

Ja

n-1

6

Ja

n-1

6

Fe

b-1

6

Fe

b-1

6

Ma

r-1

6

Ma

r-1

6

Ma

r-1

6

Ap

r-1

6

Apr-

16

Ma

y-1

6

Ma

y-1

6

Ju

n-1

6

Ju

n-1

6

Official Rate Parallel Market Rate

The new FX regime

could result to about 80-

90% depreciation of the

naira against the

greenback

We estimate the CPI to

average 18.2% and

15.7% in H2 and

FY’2016 respectively

July 2016


61

CAPITAL MARKET.

July 2016


62

Equities.

First Half Rally Restores Confidence in Domestic Investors…

Sentiments were mixed in the Nigerian equities market over H1, with the

bulls dominating overall, and leading the benchmark index to a 3.34%

gain. The rally on the domestic bourse was largely driven by the

expectation and eventual announcement of government economic

policies and decisions. The announcements as in the analysis below,

spurred the locals into front-loading stocks, despite continued

deterioration in the broader macroeconomic conditions and corporate

performances. Interestingly, it is worth noting the ‘fairy tale’

performance of the market losing more than 20% of its value as at mid-

January that also coincided with the turmoil in the global equity markets

prior to the eventual rebound.

Fig 41: NSE ASI Fig 42: NSE Sectoral Performance (H1-2016)

Source: Bloomberg, NSE, Cordros Research

15000

20000

25000

30000

35000

40000

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

No

v-1

5

Ja

n-1

6

Ma

r-1

6

May-1

6

-12%

-8%

-4%

0%

4%

8%

12%

16%

Ba

nkin

g

Oil

& G

as

Insu

ran

ce

Co

nsu

mer

Go

od

s

Ind

ustr

ial G

oo

ds

Government economic

policies and decisions

drove the nation’s

bourse to a positive

close

July 2016


63

Largely, there was price rebound across 40 counters while 66 slashed

weight. Save for the Banking (+11.29%) index, all other NSE sectoral

indices depreciated – with the Oil & Gas (-9.13%) index being hit the

most, followed by the Insurance (-1.80%), Consumer Goods (-1.33%)

and Industrial Goods (-0.92%) indices.

Following the huge loss of 16.5% in January, the ASI closed positive in

February and March on the backdrop of a mix of bargain hunting and

earnings releases. Notably, domestic investors’ appetite swayed along

with the expectation and eventual release of various FY’2015 earnings

results and dividends -- most of which were better-than-expected in spite

of a challenging business environment. In particular, DANGCEM’s fairly

strong FY’2015 earnings result buoyed investor confidence and further

enthused risk appetite ahead of subsequent releases. On the other

hand, sell-offs in the early part of the year more than dampened stocks’

prices and created opportunity for bargain hunting.

In the second quarter, investors shrugged off disappointing economic

data releases and focused on both global developments and policy

All sector indices closed

H1 in red, with the

exception of the Banking

index.

Fig 43: Top 10 Performing Stocks Fig 44: Bottom 10 Performing Stocks

Source: NSE, Cordros Research

-60%

-50%

-40%

-30%

-20%

-10%

0%

VIT

AF

OA

M

MR

S

UA

C-P

RO

P

GL

AX

OS

MIT

H

SK

YE

BA

NK

IKE

JA

HO

TE

L

UN

HO

ME

S

CA

VE

RT

ON

FO

PO

RT

PA

INT

0%

60%

120%

180%

240%

300%

360%

TIG

ER

BR

AN

DS

ET

RA

NZ

AC

T

UC

AP

AG

LE

VE

NT

SE

PL

AT

NE

M

UN

ION

DIC

ON

UB

A

NE

IME

TH

ET

ER

NA

Better-than-expected

FY’2015 earnings

enthused appetite in the

first half of the year

July 2016


64

announcements and implementation in the domestic economy. On the

global scene, we refer to easing concern about China’s economy, the

more accommodative monetary policy measures taken by major central

banks, and the gradual recovery of commodities prices following the rout

in the first quarter. Locally, we refer to the (1) MSCI’s decision to place

Nigerian securities under a “special treatment” rather than being

excluded from its Frontier Markets index; (2) signing of the 2016 budget

by President Buhari; (3) liberalization of the downstream oil sector

(which saw PMS price capped at a band of N135-N145/litre) guiding to a

potential devaluation of the naira; and (4) MPC’s decision (and eventual

implementation) to introduce a flexible interbank forex market to address

the nation’s worsening foreign exchange challenges.

Suffice to mention that it was no surprise to see the market cheered to a

stellar gain of 17.0% in Q2-2016 -- recording its highest H1 monthly gain

(+10.4%) in May -- as the combined effect of the positives highlighted

above overshadowed panic selling (during the last week of H1-2016)

which was driven by concerns about (1) Fitch’s downgrade of Nigeria's

Long-term foreign currency Issuer Default Rating (IDR) to 'B+' from 'BB-'

and Long-term local currency IDR to 'BB-' from 'BB'; and (2) Brexit

victory.

However, it is worth noting the foreign investors’ continued scanty

activities triggered by uncertainty about the nation’s FX policy and the

apex bank’s capital controls. Available data from the NSE revealed that

Foreign Portfolio Investment (FPI) accounted for 40.43% (N189.45

billion) of total transactions on the nation’s bourse in the first five months

of the year, compared with 57.04% (N519.34 billion) during the same

period the previous year; with a net outflow of N31.79 billion (vs. N33.88

last year). Further substantiating this, the NBS, in its Q1-2016 Capital

Importation update, reported that portfolio flows into Nigeria’s equities

significantly slumped by 74.54% q/q and 82.3% y/y during the first three

months of the year.

Investors shrugged off

disappointing economic

data releases, in Q2, to

bet on global

developments and

domestic policy changes

Brexit victory and Fitch’s

downgrade of Nigeria

triggered panic selling in

the last week of H1

Foreign investors kept

their distance due to

uncertainty about the

nation’s FX policy and

the CBN’s capital

controls

July 2016


65

NSE Index: Review Season

In June, the NSE announced the expected review of the NSE 30 and the

six (NSE Consumer Goods, NSE Banking, NSE Insurance, NSE

Industrial, NSE Oil & Gas and the NSE Lotus Islamic) sectoral indices of

the Exchange; with the composition of the reviewed indices taking effect

on July 1 and witnessing the entry/re-entry as well as exit of some major

companies. According to the Exchange, the likely new entrants into the

NSE 30 Index are UACN Plc, Presco Plc, Cadbury Nigeria Plc, FCMB

Group Plc and Transcorp Hotels Plc while GlaxoSmithKline Consumer

Plc, Sterling Bank Plc, Fidelity Bank Plc, Diamond Bank Plc and

Transcorp Plc might exit the category.

For the NSE Consumer Goods Index, the likely additional firms are

Northern Nigeria Flour Mills Plc, DN Tyre & Rubber Plc, Union Dicon Plc

and Premier Breweries Plc. On the other hand, Vitafoam Nigeria Plc,

Tiger Branded Consumer Goods Plc, Honeywell Flour Mills Plc and

NASCON Allied Industries Plc are likely to leave the group. Skye Bank

Plc and Unity Bank Plc are expected to join the NSE Banking Index, as

Wema and Fidelity were marked to withdraw from the group.

Fig 45: Foreign Portfolio Investment and Fig 46: Foreign and Domestic Inflows (N’bn)

Domestic Portfolio Investment


0%

10%

20%

30%

40%

50%

60%

70%

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Foreign Domestic

0

5

10

15

20

25

30

35

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Inflow Outflow

The NSE, in June,

announced the review of

the NSE 30 and the six

sectoral indices of the

Exchange

July 2016


66

While Linkage Assurance Plc, Cornerstone Insurance Plc, Standard

Alliance Insurance Plc, Universal Insurance Company Plc and Equity

Assurance Plc would likely cease to be part of the NSE Insurance Index,

new entrants such as Consolidated Hallmark Insurance Plc, Law Union

& Rock Insurance Plc, International Energy Insurance Plc, UNIC

Insurance Plc and Sovereign Trust Insurance Plc are expected to be

added to the index.

However, the likely new admissions into the NSE Industrial Index are

Greif Nigeria Plc and DN Meyer Plc, while Avon Crowncaps &

Containers Plc, Paints & Coatings Manufacturers Plc were penciled to

bow out. For the NSE Oil & Gas, new absorption would likely bring

Japaul Oil & Maritime Services Plc and DN Meyer Plc on board, while

MRS Oil Nigeria Plc and Conoil Plc might be yanked off. Total Nigeria

Plc and Forte Oil Plc might be welcome to the NSE Lotus Islamic Index,

while were feared to discontinue the clique.

Fig 47: NSE Review Activity Tracker


NSE IINDEX NEW ENTRANTS EXIT

NSE 30 UAN PLC, Pesco PLC, Cadbury Nigeria PLC,

FCMB Group PLC, Transcorp Hotels PLC

GlaxoSmithKline Consumer PLC, Sterling Bank

Plc , Fidelity Bank Plc, Diamond Bank Plc,

Transcorp Plc

NSE Consumer Northern Nigeria Flour Mills Plc, DN Tyre &

Rubber Plc, Union Dicon Plc, Premier Breweries

Plc

Vitafoam Nigeria Plc, Tiger Branded Consumer

Goods Plc, Honeywell Flour Mills Plc, NASCON

Allied Industries Plc

NSE Banking Skye Bank Plc, Unity Bank Plc Wema, Fidelity

NSE Insurance Consolidated Hallmark Insurance Plc, Law Union

& Rock Insurance Plc, International Energy

Insurance Plc, UNIC Insurance Plc and

Sovereign Trust Insurance Plc

Linkage Assurance Plc, Cornerstone Insurance

Plc, Standard Alliance Insurance Plc, Universal

Insurance Company Plc, Equity Assurance Plc

NSE Industrial Greif Nigeria Plc, DN Meyer Plc Avon Crowncaps & Containers Plc, Paints &

Coatings Manufacturers Plc

NSE Oil & Gas Japaul Oil & Maritime Services Plc, DN Meyer

Plc

MRS Oil Nigeria Plc, Conoil Plc

NSE Lotus Islamic Total Nigeria Plc, Forte Oil Lafarge Africa Plc, Chemical & Allied Products

Plc

July 2016


67

… But there is a Darker Side to the Fairy Tale

Negative growth, rising unemployment, weak consumer and business

confidence, disappointing corporate earnings, growing security threat,

rising fixed income yields, and a somewhat unstable political

environment do not provide an idyllic setting for a positive equities

market. Clearly, that was exactly what happened to Nigeria’s All Share

Index over the first half after investors (the locals especially) showed

their sensitivity to both the prospect of policy changes and the eventual

policy changes announced between May (10.4% gain) and June (7%

gain). Asides policy changes, the recovery in the price of crude oil from

a multi-year low level (US$27.9/bbl) at the beginning of the year (despite

significant crash in domestic output) to a high of US$52.5/bbl in June

also added flame to investors risk appetite.

Having the above in mind, our view going into the second half is that the

positive market environment witnessed in the first half do not point to a

more sustainable recovery for equities. A sustained rally might prove

elusive in the absence of growth-sustaining drivers such as material

improvement in the domestic economic performance indicators and the

flow of foreign portfolio investments.

On the global front, it is important to acknowledge the upturn for

emerging and frontier markets assets following Britain’s vote to exit the

European Union (EU). The risk to global growth recovery brought about

by Brexit has ramped up the urgency for advanced economies and

major emerging market central banks to ease monetary policy, thus

potentially alleviating pressure (such as through interest rate hikes in the

U.S and concerns about the health of China’s economy) on EM and DM

assets.

While the above rhetoric implies potential positive for Nigerian equities

stemming from Brexit, it is important to note its capacity to heighten

global risk-aversion, more so, from the more economically fragile

commodity exporting developing economies such as Nigeria where

capital flow protection has increased in recent years. To buttress the

latter, the NSE data on foreign portfolio investor (FPI) activities shows

that the net outflow of funds from the domestic bourse (which began in

2014 for the first time since the global financial crisis) continued into

2016 (based on January to May data) while the CBN’s data on capital

importation shows that inflows into equities (which has been on a down

On the global front, it is

important to acknowledge

the upturn for emerging

and frontier markets

assets following Britain’s

vote to exit the European

Union (EU)

Our view going into the

second half is that the

positive market

environment witnessed in

the first half do not point to

a more sustainable

recovery for equities

July 2016


68

trend since Q3-2014) for the first quarter of this year was at record low

level. This aversion might persist in the absence of a strong rebound in

the price of crude oil, and most importantly, sustainable signs of

improvement in the overall domestic economic performance.

Although, the CBN may have responded to the agitations of the FPIs

with its decision to lift restrictions on the local currency, early signs since

the kick-off date show that the programme has had no immediate impact

on FPI activities in equities. FPI consensus is that the Naira is not

sufficiently devalued at N282-285/US$. Overlaying this on reports from

the grapevine that the liquidity of the local currency exchange rate is still

(indirectly) largely under the control of the apex bank (judging by the

relative stability of the NGN) risks Nigeria from being eliminated from the

MSCI Frontier Market Index at the next index review in September and

further dampens expectations of expansionary foreign investment flows

into Nigeria’s risky assets in the near term.

At the domestic level, our theme on fiscal policy paints a less optimistic

picture of government finances (both at the central and state levels), and

together with time constraint, cast strong doubt on the capacity of

budgetary spending to have a reflationary impact on the economy in the

second half. In addition, confidence in the government has dropped

quite significantly from the level seen post 2015 election and with little or

no expectation of momentous policy initiatives or announcements to

cheer the locals, H2-2016 might just be the opposite of the first half.

Still on the domestic front, there is the risk of equities suffering from the

investors’ flight-to-safety syndrome should the current tension in the

polity escalates. At the federal level, the ongoing legal brawl between

the Presidency and leadership of the Senate raises dark dusts over

policy and reform expectations, for example, on the Petroleum Industry

Bill. Similarly, tensions ranging including and not limited to election

petitions, mass protests over unpaid civil servants salaries, rising

number of the politically-motivated killings and corruption allegations;

remain active across the States.

On valuation, we note that following the rally witnessed over the last

months of the first half, equities have shed some of the attractions they

possessed at the beginning of the year. Paradoxically, about 40% of the

actively traded equities closed H1 above their opening values in the

“fairy tale” rally. The magnitude of the rally in stocks prices will be well

appreciated in the context of the recovery from the more than 20% loss

Still on the domestic front,

there is the risk of equities

suffering from the

investors’ flight-to-safety

syndrome should the

current tension in the

polity escalates

Early signs since the kick-

off date show that the

flexible exchange rate

programme has had no

immediate impact on FPI

activities in equities

July 2016


69

recorded mid-January. Even so, corporate results have been largely

unimpressive judging from first quarter filings and we maintain our view

that 2016 is a year where investors will be held back (from investing in

equities) by stagnated to declining earnings.

Also, considering the scope for higher-than-budgeted FG domestic

borrowing and a hike in the benchmark interest rate, the pathway of

fixed income yields might be to the upside. This adds to the opportunity

cost of investing in equities, particularly for the local pension funds

whose equities share of total industry AUM has dropped steadily from

about 19% in 2011 to c.9% as at Q1-2016.

Across the sectors we cover, consumer goods companies face double-

edged risk of weak aggregate demand and rising operating cost. This

year, energy price hikes and the spate of job losses in the private sector

have combined with the continued pass through impact of exchange rate

depreciation to tighten consumer spending power at a time the FG has

delayed spending from the budget and about 70% of the SGs have

salary arrears of between 5-8 months. On costs, companies face

pressure from higher energy price (as gas supply shortage resulted in

increased substitution of expensive LPFO), depreciation of the NGN and

increased import duty (e.g. DANGSUGAR and the flour millers). For

some (e.g. NESTLE), we expect foreign exchange loss to be declared

on their USD loan books.

Whilst cement companies appear poised for a good year from volume

perspective, we do not see this materializing into quality earnings,

considering risk to margins dilution from relatively lower selling prices

and higher input costs -- energy (owing to increased substitution of

LPFO for scarce gas) and raw materials (e.g. gypsum, owing to the

depreciation of the NGN). For WAPCO having a huge portion of USD in

its debt mix (59% vs. 41%), the depreciation of the NGN should

materialize into foreign exchange losses that will likely cut a significant

portion of the company’s 2016 earnings.

For the upstream oil and gas operators, continued soft output prices and

the vulnerability of shipments to losses from militants attacks speaks to

negative earnings outlook. In addition, earnings stand to be adversely

impacted by significant unrealized forex losses on USD denominated

borrowings resulting from the +40% devaluation of the Naira. On the

positive however, the devaluation of the Naira translates to higher

earnings and should partly relieve the concerns highlighted above.

The pathway of fixed

income yields might be to

the upside, adding to the

opportunity cost of

investing in equities

For the upstream oil and

gas operators, continued

soft output prices and the

vulnerability of shipments

to losses from militants

attacks speaks to negative

earnings outlook

Whilst cement companies

appear poised for a good

year from volume

perspective, we do not

see this materializing into

quality earnings

Consumer goods

companies face double-

edged risk of weak

aggregate demand and

rising operating cost

July 2016


70

the ailing macroeconomic environment in Nigeria, hence a dour outlook.

Asset quality still remains a concern in weak macro environment, as well

as the effective 40% YTD devaluation especially in the commercial,

trading and manufacturing segments.

Banks have significant exposure to the struggling crude oil sector as well

the ailing macroeconomic environment in Nigeria, hence a dour outlook.

Asset quality still remains a concern in weak macro environment, as well

as the effective 40% YTD devaluation especially in the commercial,

trading and manufacturing segments.

Banks have significant

exposure to the struggling

crude oil sector as well the

ailing macroeconomic

environment in Nigeria,

hence a dour outlook

July 2016


Fixed Income.

In H1’16, the fixed

income market was

dominated by inflation

fears (as the headline

index expanded by more

than 600bps)

71

Only One Direction

The rising inflation expectation and recent exchange rate

pronouncements posit an increased likelihood for further yield expansion

in H2’16. A threat to our forecast is the possibility for lower than

expected bond supply to fill the hole from plummeting fiscal revenues. In

H1’16, the fixed income market was dominated by inflation fears (as the

headline index expanded by more than 600bps). Less surprisingly, it

pushed the yields higher after forcing the monetary authorities to reverse

course from their short-lived attempt at easing. While we expect a

similar inflation and monetary policy dynamic over the second half,

especially in light of the decision to float the currency, it will be crucial to

monitor developments on the fiscal front. Revenues to finance the

expansionary budget have been pressured and are expected to

continue to remain pressured in the near term, at least, three months. In

previous administrations, this would translate to an increased amount of

FGN borrowing via the domestic bond market. Last year, FG borrowed

N900 billion as opposed to its target borrowing of N570 billion.

However, the incumbent Minister of Finance has signaled rigidity around

the fiscal deficit and would rather ration expenditure than expand

borrowing; especially the domestic debt component. Indeed, a

resounding preference has been shown for the cheaper external debt.

Key Factors

Inflation: Expectedly, the inflation that hiked yields higher in H1’16 has

attracted the most attention. Expectations are for inflation to continue to

rise in the second half of the year, owing to the structural driven nature

of its movement. The base effect of increases in electricity tariffs,

petroleum prices, and transportation costs are likely to continue till year

end. This, compounded with increased potential for currency volatility

following the commencement of free floating exchange mechanism,

guides the investor sentiment for continued rise in the inflation rate.

Presently, the domestic fixed income investors are experiencing

negative real returns on investments. This negative differential is likely to

expand considering the potential of higher inflation and the sustainability

challenge of such inflation hike. Consequently, and similar to H1’16, we

expect investors demanding for higher yields to compensate for

inflationary losses.

Expectations are for

inflation to continue to

rise in the second half of

the year, owing to the

structural driven nature

of its movement

July 2016


72

Monetary Policy: While the structural nature of the upward price

movement overtly diminishes liquidity’s contribution to inflationary

pressure, we do not believe the CBN will use this as an out; similar to

the past, to avert a commiserate hike in the benchmark rate, considering

the recent introduction of its new forex policy. The new forex guidelines

imply the Naira is fully floating and there is free capital mobility.

Pertinently, the Orthodox economics, precisely, the Mundell-Fleming

Theory posits that in a high capital mobility economy, a mix of restrictive

and expansionary economic policy should translate to an appreciation of

the domestic currency. Consequently, we believe the new market driven

approach by the CBN is indicative that there will be monetary policy

tightening in the coming months.

Fiscal Policy: In H1’16, the FG borrowed about N529 billion (excluding

non-competitive allotments) of the N900 billion domestic debt portion it

plans to use for financing its ‘expansionary’ budget. Given the FG’s

stance on the fiscal deficit, we do not expect lower revenues will

translate to an increased borrowing, at least domestically; following the

new Debt Management Strategy. Consequently, we expect that this will

reflect in slightly lower issuances in the second half.

Source: CBN, NBS, Cordros Research

Fig 48: MPR vs Inflation

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Jan-1

1

Apr-

11

Jul-11

Oct-

11

Jan-1

2

Apr-

12

Jul-12

Oct-

12

Jan-1

3

Apr-

13

Jul-13

Oct-

13

Jan-1

4

Apr-

14

Jul-14

Oct-

14

Jan-1

5

Apr-

15

Jul-15

Oct-

15

Jan-1

6

Apr-

16

MPR Inflation

Orthodox economics, precisely, the Mundell-Fleming Theory posits that in a high capital mobility economy, a mix of restrictive and expansionary economic policy should translate to an appreciation of the domestic currency Given the FG’s stance on the fiscal deficit, we do not expect lower revenues will translate to an increased borrowing

July 2016


73

Previously, we had expected increased issuances over the second half

of the year given the N581 billion maturing into system in August that we

envisage may result in an improved system liquidity and nosedive the

yields, depending on the CBN’s pace of mopping up activities. August.

As a result, depending on the pace of CBN mop up activities, we may

see improved system liquidity which may push yields lower

Other Factors: The new exchange rate policy, the US rate hike and

possible reintroduction into Bond Indices inclusion: The introduction of

restrictions on the trading and movement of the Naira in November 2014

following the reducing forex liquidity and rising volatility resulting from

the crash crude oil price. Clearly, the forex illiquidity and volatility

precipitated the exit of the foreign investors from the Nigerian Market.

Nigeria was delisted from two global bond indices which are the JP

Morgan’s Emerging Market Global and the Barclay Bond Index

respectively. The recent decision by the CBN to loosen those restrictions

was perceived as the first right step in bringing back those portfolio

flows, which constituted about 105 of the markets. However, in view of

the continued blurry of the crude oil price and the possibility for more of

the US rate hikes in H2’16, the yield on Nigeria’s debt will have to be

competitive to attract inflows.


Fig 49: FGN Bond Maturity Profile (N’bn)

0

200

400

600

800

1000

1200

In view of the continued

blurry of the crude oil

price and the possibility

for more of the US rate

hikes in H2’16, the yield

on Nigeria’s debt will

have to be competitive to

attract inflows

July 2016


74

Further, it takes one-year long review to be admitted into the global bond

indices mentioned above. For that reason, the benchmark portfolio

inflows will not be making a re-entrance in the short-term.

Fig 50: Interbank System Liquidity


-400,000.00

-200,000.00

0.00

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

1,200,000.00

1,400,000.00

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

System Liquidity

in June 2015 the FG released a new debt management strategy. The preferred debt management strategy based on current

economic realities would require:

•An increase in external financing with a view to rebalancing the public debt portfolio towards a long-term

external financing and for reducing debt service cost while lengthening the maturity profile. However, achieving a

significant debt servicing cost requires the Government’s access to relatively cost-effective long-term external

financing that maximizes the available funds from the concessional and semi-concessional sources with due

consideration for the readily available funds in a given period prior to accessing other external sources.

•Extensive lengthening of the maturity profile of the domestic debt portfolio by reducing the issuance of the new

short-dated debt instruments or/and refinancing the maturing NTBs with external facilities. Although the impact

on cost of the introduction of new debt instruments into the domestic debt market is expected to be relatively

small, the impact on maturity profile of total domestic debt could be significant, hence reducing the risk of

bunching, roll-over risk, and the associated debt servicing costs.

The main guidelines and targets of the preferred Debt Management Strategy, 2016-2019, are:

•Debt Portfolio Composition: Targeting an optimal debt composition of 60:40 for domestic and external debt,

respectively, as against the 84:16 as at end-2015 and a domestic debt mix of 75:25 for long and short-term debts,

respectively, (currently at 69:31 as at end-2015)

•Funding Sources: Maximisation of available funding envelopes from concessional and semi-concessional external

sources,

•Interest Rate and Refinancing Risks: Keeping the share of debt maturing within 1 year, as a percentage of Total

Debt Portfolio at not more than 20%, relative to 29.15% as at end-2015. Targeting an Average Time-to-Maturity

(ATM) for the Total Debt Portfolio at a minimum of 10 years, as against 7.15 years as at end-2015.

Fig 51: FG’s New Debt Management Strategy

July 2016


75

H1’16 Review:

Unlike last year, wherein yields overcame pressure from political and

economic risks to post positive return for H1’15, this year witnessed

yields succumbing to the inflationary pressure and posting a negative

return for H1’16.

The ‘dovish’ economic comments from the January’s MPC meeting

helped drove yields lower after an initial bearish start to the year which

resulted from the uncertainty surrounding the 2016 budget. However,

rising inflation forced a policy reversal to a tightening regime in March

and the subsequent appropriate yield levels yields.

In April 2015, Moody’s Rating Agency (ratings agency) downgraded the

Nigeria's sovereign issuer rating to B1 from Ba3; and assigned a stable

outlook citing the following reasons. One, the (1) increased external

vulnerability brought about by the prospect of lower-for-longer oil prices.

Two, the execution risk in the transition to a less oil-dependent federal

budget, and the implications for the government's balance sheet should

it not achieve its aims. Three, an elevated interest burden over the next

two years while the government grows its non-oil tax receipts. The move

added to negative sentiment in the bond market.

There was a short bullish spurt following the May MPC’s pronouncement

after the committee surprised investors by opting not to hike rates

following a further spike in inflation in April. However, the rally was short-

lived as the release of May inflation number of a new six-year high,

stoked bearish sentiments once again.

There was a short bullish

spurt following the May

MPC’s pronouncement

after the committee

surprised investors by

opting not to hike rates

following a further spike

in inflation in April.

However, the rally was

short-lived

July 2016


76

SECTORS.

July 2016


Financial Services.

Given the increased

emphasis on bank

regulation following the

2008-09 Nigerian

banking crisis, Nigerian

banks were thought to

be less vulnerable to

systemic shocks

77

H2’16: A Storm is Brewing…

The Central Bank of Nigeria’s recent (July 4, 2016) decision to replace

the board and management of SKYEBANK, after the bank breached

some key regulatory ratios (NPL, CAR, and Liquidity), sparked fears of

the worst i.e. a 2008-09 style banking crisis where the CBN took over

eight DMB’s.

The Nigerian banking operating landscape has been fraught with wave

upon wave of operational headwinds (heightened regulatory charges,

worsening macros, etc.) effectively since 2013 and there’s been a weary

feeling that 2016 is a tipping point. In our 2016 outlook report, we stated

that banks are expected to remain resilient but not insulated (especially

our coverage universe which are ‘tier-1’ institutions exclusively) in the

face of a challenging 2016. To a large extent, we still believe that,

nonetheless, SKYEBANK is a Systemically Important Bank (SIB), hence

the concerns of a broader distress in the financial system, despite the

CBN’s assurances.

Given the increased emphasis on bank regulation following the 2008-09

Nigerian banking crisis, Nigerian banks were thought to be less

vulnerable to systemic shocks. An understated element with regards to

SKYEBANK’s situation is the impact of corporate governance. We

believe as the year unfolds, it would become revealing that banks with

weak corporate governance structures would be found out.

H2’16 Brings Liquidity (FCY and LCY), Asset Quality, Margin

Concerns etc.

Nigeria is Africa’s largest but chronically vulnerable economy due to its

commodity linked fortunes. The slump in crude oil prices, the country’s

major export, has caused anemic GDP growth, a significantly weaker

naira and scarcity of foreign currency. Coupled with an uncertain policy

response, and external factors, these are, to varying degrees, taking a

toll on the banks' risk profiles. Nigerian Banks have significant exposure

to the struggling crude oil sector as well the ailing macroeconomic

environment. The CBN governor had guided for low interest rates in a

bid to drive economic growth, and the loose monetary conditions proved

beneficial for banks, with interest expense dropping significantly across

board in Q4’15 and Q1’16.

July 2016


78

However, a rapid acceleration of inflation in Q1’16 led the apex bank to

hike rates in March, and resume the tightening cycle. Thus, with inflation

expected to maintain its upward trend in H2’16, there’s an expectation

for father (or further?) tightening. Another driver for higher interest rates

in the coming months is the potential for further deprecation of the Naira.

A Naira devaluation would lead to further pressure on LCY liquidity,

especially if there’s increased access to Dollars.

With monetary conditions set to tighten further, this should translate to

higher cost of funds and pressure net interest margins. We mentioned

that we expect credit growth to be constrained over 2016, given

Nigeria’s economic downturn and pro cyclical nature of bank lending.

Loan growth for Q1’16 was largely in line with our expectation. We

maintain our outlook and expect loan growth to remain tepid in H2’16

with macro conditions not showing any significant signs of improvement.

However, given that a significant portion of banks loans are Dollar

denominated, we expect the 40% Naira devaluation and further

depreciation in H2’16 to artificially boost loan growth numbers of 2016.

What will Devaluation Bring

Last year, the erstwhile CEO of FBN (the bank subsidiary of FBNH)

argued that the ongoing forex illiquidity was hurting the banking system,

despite CBN’s assertions to the contrary. A year later, the CBN finally

relented and ‘removed’ the fixed peg on the Naira and re-introduced

two-way quote to the interbank market in order to allow market-driven

exchange rate determination. The new exchange rate framework,

introduced on June 20, 2016, resulted in the Naira depreciating by 40%

to N280/$ in the first week and has depreciated further to N295 since

then. Given that Nigerian banks have significant exposure to foreign

currency assets and liabilities, we analyze the impact of devaluation on

profitability and regulatory ratios.

Profitability: The weakening of the Naira should be positive for

banks’ profits, given that most Nigerian banks have positive net

foreign currency exposure. The last time the Naira was devalued

(20%) in February 2015, banks under our coverage benefitted

from revaluation gains which pushed profits up by N2-N7 billion.

The exception was ACCESS which had recorded an FX

revaluation loss of N8 billion. However, the bank still recorded

significant improvement in foreign exchange income from

N3.1bn in Q1’14 to N15.2bn Q1’15, driven by gains on fair value

valuation of the derivative instruments.

With monetary

conditions set to tighten

further, this should

translate to higher cost

of funds and pressure

net interest margins

The CBN finally relented

and ‘removed’ the fixed

peg on the Naira and re-

introduced two-way

quote to the interbank

market in order to allow

market-driven exchange

rate determination

The weakening of the

Naira should be positive

for banks’ profits, given

that most Nigerian banks

have positive net foreign

currency exposure

July 2016


79

We expect similar increases in H1’16 and FY’16 following June’s

40% adjustment and further upward adjustment in H2’16. Once

again, ACCESS has a net negative foreign currency exposure,

however, the bank still has considerable (N76 billion) derivative

exposures as at Q1’16 which should once more translate to a

significant increase in foreign exchange income.

Capital Adequacy: According to Fitch Rating, Nigerian banks

are “sufficiently capitalized” to absorb June’s 40% effective

devaluation. We share that sentiment. The negative impact of a

Naira devaluation stems from its impact on Risk Weighted

Assets (RWA), which should expand, given the significant

amount of foreign currency assets in the banking system.

However, the capital erosion from increased RWAs should be

muted by (1) improvements in tier 1 capital (as banks benefit

from increased retained earnings as a result of the positive

impact of devaluation on profitability) and (2) a couple of our

coverage banks (ACCESS and FBNH) use foreign currency tier-

2 capital (capped at 33.3% of CAR), which also benefit from the

devaluation. Both GUARANTY and ZENITHBANK have

Eurobonds which would qualify as tier 2 capital.

Source: Company Accounts, Cordros Research

Fig52: Impact of NGN Devaluation (N’mn)

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY'15- Net Foreign Exchange Income (Mn'N)

Impact of 30% Devaluation on PBT in FY'16 (Mn'N)

Capital erosion from

increased RWAs should

be muted by

improvements in tier 1

capital (as banks benefit

from increased retained

earnings as a result of

the positive impact of

devaluation on

profitability)

July 2016


80

Asset Quality: A forecast for improved profitability has a key

caveat – whether the trend in asset quality improves or worsens

as the year progresses. Banks with significant foreign currency

loans may have to increase loan loss coverage on those

facilities following the Naira devaluation. Foreign currency NPL’s

constituted less than 5% of NPLs of most banks under our

coverage with the exception of FBNH (21%). The most

vulnerable sectors to FX depreciation are manufacturing and

trading. However, due to the foreign currency scarcity, a number

borrowers had to service their debt at the more prohibitive

parallel market rate (N350/$). Following the introduction of the

new exchange rate framework, dollar liquidity in the system has

improved slightly.

Liquidity: Both Naira and Dollar liquidity could be negatively

impacted by the Naira devaluation. For instance, following the

June devaluation, interbank money market rates spiked

especially after the CBN opened the market by selling US$ 4

billion (US$500 million and US$3.5 billion in spot and forward

markets respectively). The increased volume of FX sales at a

higher exchange rate has significantly reduced system liquidity

and caused interbank lending rates to spike by as much as

2000bps. Meanwhile, banks have significant amount of Dollar

liabilities maturing in H2’16 (about US$ 690 million in our

universe, with ZENITHBANK accounting for 87% of that

amount). The concern is that Dollar facilities (loans) may begin

to underperform and make it difficult for banks to service their

Dollar obligations. However, Nigerian banks have been able to

secure dollar financing with relative ease from multilateral

agencies this year (e.g UBA and GUARANTY).

Net Interest Margins to Soften Amidst Firmer Funding Costs

The onset of Nigeria’s economic downturn brought about increased

variability in the interest rate environment as the CBN vacillated between

tightening and loosening cycles. Whilst we believe risks are tilted

towards firmer rates in H2’16, there’s always the possibility that

monetary authorities attention may be swayed by worsening economic

growth and consequently recommence a loosening cycle. The last

loosening cycle which lasted between Q3’15 and Q1’16 saw cost of

funds on our coverage banks drop by 130bps on average. The drop in

cost of funds contributed to 90bps y/y improvements in NIMs during that

period.

Following the June

devaluation, interbank

money market rates

spiked especially after

the CBN opened the

market by selling US$ 4

billion (US$500 million

and US$3.5 billion in

spot and forward

markets respectively).

The last loosening cycle

which lasted between

Q3’15 and Q1’16 saw

cost of funds on our

coverage banks drop by

130bps on average.

July 2016


81

For H2’16, we see a combination of (1) high inflation rate of +16% and

(2) the reduction in system liquidity due to Naira devaluation; as key

drivers for interest rates remaining at current levels or moving higher.

For most of the banks under our coverage, we expect the higher interest

rate environment will translate to pressure on NIM. The impact of

interest rates on funding costs should prevail over asset yield in a similar

manner as Q1’16. However, GUARANTY is likely to be an exception,

due to the bank’s aversion to expensive funding, and cautious stance on

lending (the loosening cycle actually worsened GUARANTY’S NIM).

Thus, the impact of tightening on asset yields on investment securities

are expected to outweigh funding costs, in H2’16.

.


Fig 53: Cost of Funds

.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

q1'16 q1'15

ACCESS FBNH GUARANTY

UBA ZENITHBANK AVERAGE

For most of the banks

under our coverage, we

expect the higher

interest rate environment

will translate to pressure

on NIM

July 2016


82

Credit Growth Hindered by Poor Macro, Asset Quality Concerns

We maintain our position for subdued loan growth in 2016. We stated

that a combination of economic induced business failure (given Nigeria’s

current economic downturn) and current capital requirements would

stifle credit growth. Banks are pro cyclical (increase lending in economic

booms and vice versa). Economic downturns raise asset quality

concerns, which in turn increases the credit risk component of RWA,

and therefore creates a hostile environment for credit expansion, for fear

of breaching capital adequacy requirements. In January, we argued that

the CBN efforts at advocating increased lending would be dismissed by

the bank because of the dynamic pro-cyclical nature of banks; and to a

large extent, we were right, as total loan & advances to customers

(private) fell by 1.5% in Q1’16 (+1% for our portfolio banks).

We think that rather than cutting benchmark rates i.e. CRR and MPR

(the CBN abandoned the lower rate approach citing lack of bank

participation), a more effective catalyst for credit growth would be a

reduction in the CAR requirement. The Bank of England recently cut

counter cyclical buffers by 50-bps (from 0.50% to 0.00%) in a bid to

increase lending to counteract the impact of the Brexit victory on the

British economy. The move is expected to reduce regulatory capital

buffers (countercyclical buffers-CCB’s) by £5.7 billion and increase

lending capacity by £150 billion.

The CBN recently decided to delay the implementation of 16% minimum

CAR for SIBs vs. the current requirement of 15% (we had stated, in

January, that it would be postponed for another year). A lower CAR

would give banks more room to take more risks and should translate to

increased credit growth. For example, a one percent reduction in CAR

could create a N100 billion headroom for risk asset creation.

We however note the increased level of risk associated with this

approach, but unless the CBN employs creative measures to serve as

catalyst for loan growth, we maintain our outlook for loan growth to

remain constrained in FY’16. However, noting the impact of devaluation

on loans growth -- with banks having about 40% of their loan book in

FCY -- the weaker Naira should translate to an artificial increase in loan

book.

For most of the banks

under our coverage, we

expect the higher

interest rate environment

will translate to pressure

on NIM

We think that rather than

cutting benchmark rates, a

more effective catalyst for

credit growth would be a

reduction in the CAR

requirement.

July 2016


83

Asset Quality Concerns Remain as Oil & Gas Risks Rebalances etc.

Following a rough 2015 for the Nigerian economy, where GDP growth

slowed by over c.400-bps, there was notable decline in asset quality in

the Nigerian banking industry. In fact, the industry NPL ratio increased

by 190-bps to 4.9% in December 2015 from 3.0% in the previous year.

In Q1’16, economic growth plunged into negative territory, amidst low

crude oil prices and production levels, worsening forex scarcity, and

overall, reduced economic activity. However, asset quality for our

coverage banks in Q1’16 remained within acceptable levels (with the

exception of FBNH). Among our portfolio banks, cost of risk fell across

board to 0.87% from 1.78% in FY’15. Although there was an uptick in

NPLs to 5.4% over the period, there has been speculation that the level

of NPLs in the industry is above 10%. We examine some particular

areas of concern.

Upstream Oil & Gas Risk Rebalances: Early on in 2016, our

biggest credit concern was banks’ exposure to the upstream Oil

& Gas sector following collapse in crude oil prices. According to

the CBN, about 8.8% of total private sector loans as at FY’15

were to the Upstream Oil & Gas and Oil services industry with

total exposure to Oil & Gas (including downstream and refining)

at 26.2%.


Fig 54: Regulatory Capital Mix

0%

20%

40%

60%

80%

100%

120%

Access FBNH Guaranty UBA Zenith

Tier 1 Tier 2

Among our portfolio

banks, cost of risk fell

across board to 0.87% in

Q1’16, from 1.78% in

FY’15.

July 2016


84

Majority of the upstream loans are concentrated in the larger

banks where they constituted about 11.6% of their credit

exposure vs. 8.8% for the industry. However, crude oil prices

rallied to trade at US$50 and around the US$40-US$50

breakeven price for most of these transactions. The

improvement in crude oil price, combined with banks reducing

their exposure by 10.6% between FY’15 and Q1’16, should

ordinarily be enough to douse most concerns; but after all, “this

is Africa.”

Nigeria is actually one of the key catalysts for the upswing in oil

price. Resumption in hostile militant activities in the Niger Delta

plummeted Nigeria’s oil production to historic lows. Incessant

pipeline attacks by a group of militants called the Niger Delta

Avengers saw Nigeria’s four major exporting terminals (Qua

Iboe, Forcados, Bonny Light and Bonga) shut for prolonged

periods. The two largest terminals (Qua Iboe: 337,000bpd and

Forcados: 248,700bpd) are currently shut. The Forcados

terminal has been shut since February (about four months) due

to ongoing repairs on the Trans Forcados Pipeline system.

Source: CBN, NBS, Cordros Research

Fig 55: Oil & Gas Exposure 2016 First Quarter

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

AC

CE

SS

FB

NH

GU

AR

AN

TY

UB

A

ZE

NIT

HB

AN

K

Majority of the upstream

loans are concentrated in

the larger banks where

they constituted about

11.6% of their credit

exposure vs. 8.8% for the

industry

July 2016


85

These pipelines are operated by the International Oil Companies

(IOCs) but are crucial for domestic “indigenous to export their

crude oil output (most have or are developing alternative routes).

Nevertheless, two independent operators, SEPLAT Petroleum

Development Company Plc and Eland Oil, have reported a drop

in production citing the Trans Forcados Pipeline shut-in as a

major driver. In April, SEPLAT reported production was “down

5% year-on-year and reflective of the shut-in and suspension of

oil exports at the Forcados terminal from mid-February

onwards.” In July, Eland reported “average first half production

up to the point of Forcados shutdown in February of 4,230 bpd

gross based on production days (H1 2015: 2,190 bpd) with

38,200 bpd of crude oil lifted in the period (H1 2015: 163,100

bpd).”

Public Sector, Real Sector, and Power Sector: Given the

fiscal constraints facing state governments, we expect exposure

to public sector employees (stemming from delayed salary

payments) to drive impairment charges in the retail segment of

loans. It is important to note the likely FG support combined with

the Naira devaluation (which is expected to improve the fiscal

position of struggling state governments via increased

“distributable revenues” from crude oil sales) should mean that

most public sector NPLs should be remediated in the near term.

Whilst the Naira devaluation is expected to improve the public

sector asset quality, it is likely to put a strain on real sector

exposures. Exposures to manufacturing and trade are typically

put under strain from tighter margins and shrinking consumer

wallets following currency depreciations. However, “this is

Africa”, where devaluation may actually translate to an

appreciation (at least in real terms). This is because owing to FX

scarcity and restrictions at the interbank market (N197/$), a

significant portion of Dollar purchases were made at the parallel

market (N320/$-N350/$). Thus, the CBN’s decision to lift

restrictions at the interbank market (which allowed a de facto

40% devaluation of the Naira to N280/$) may actually translate

to cheaper Dollar costs. However, this is all dependent on

improved Dollar liquidity -- which has not been significantly

impacted by the CBN’s decision -- at the interbank segment of

the FX market.

Whilst the Naira

devaluation is expected to

improve the public sector

asset quality, it is likely to

put a strain on real sector

exposures

Given the fiscal

constraints facing state

governments, we expect

exposure to public sector

employees to drive

impairment charges in the

retail segment of loans

July 2016


86

The improved Dollar liquidity should also be beneficial to power

sector operators. However, the beleaguered sector is still

confronted with other operational difficulties which put some

operator’s viability in question. Firstly, the heightened pipeline

attacks have also affected gas distribution to power companies

and led to massive reduction in power generation this year.

Another element to the operational travails of Nigeria’s power

operators is the implementation (or lack thereof) of cost reflective

pricing.

A court ruling, in July, instructed power firms to revert a tariff hike

that was implemented in February. We believe the combination

of low power generation, no-cost reflective pricing, and a

depreciating local currency may portend additional danger for

operators in the power sector (especially distribution

companies). Among our coverage banks, UBA had the highest

exposure to the sector (10% of total loans), and we believe the

likelihood of increased impairment in its power portfolio is strong.

Counting the Costs of Corruption: “Money laundering: We’ll soon go

after bank MDs - Magu, EFCC chair.” That was a headline on June 25,

2016 suggesting that the raft of EFCC visits to commercial banks in

H1’16 may not be over. In two weeks, span between late May and mid

June, the EFCC invited several higher ranking banking officials for

investigations and discussions. The Managing Director of Fidelity Bank

(a tier 2 lender) was held for over a week in connection with US$115

million bribery scandal, prompting the bank to appoint an interim MD

ahead of its Annual General Meeting. The EFCC followed this with visits

to ACCESS, STERLNBANK, and FBNH and had discussions with key

management. Would you also like to include the EFCC, Ekiti and

ZENITHBANK issues?

The anti-corruption drive has been the hallmark of the Buhari led

administration which inaugurated last year with a mandate for change. It

has been a long held belief among Nigerian stake holders that banks

have created an enabling environment for corrupt public officials. So far,

these investigations have not led to any indictment on the Banking

system. However, with the EFCC searchlight still on, it would not be

surprising to see the anti-corruption drive claim its first major scalp in

H2’16.

The beleaguered power

sector is still confronted

with other operational

difficulties which put some

operator’s viability in

question

In two weeks, span

between late May and mid

June, the EFCC invited

several higher ranking

banking officials for

investigations and

discussions

July 2016


Access Bank Plc.

87

Testing its Mettle

Major positives for the bank include (1) its aggressive

posture: In the past three years, ACCESS

consistently met and surpassed its management loan

(10%) and deposit (15%) growth targets, despite

major headwinds confronting the operating

environment. Last year, the bank also successfully

raised tier-1 capital (N42 billion via Rights Issue)

which has given it reasonable breathing space with

regards to CAR (19.6% as at Q1’16) and (2) strong

asset quality: ACCESS has a relatively low exposure

(10%) to the high risks sectors we indentified

(upstream and power) and has a high coverage ratio

of 214% in Q1’16 (ranked 1st in our universe).

However, high operating costs (62% vs. 60%

guidance) and funding costs (ranked 5th in our

universe) serve as drags on earnings. Another area of

concern is the bank’s non-interest income (down 19%

in Q1’16), which compensated for weak efficiency and

served as the catalyst behind the significant rise in

ROAE (+390bps y/y to 20.5%) in FY15.

We revise our EPS and ROAE forecast upwards to

N1.99 (previous N1.95) and 15.0% (previous 14.59%).

We expect net interest income growth to decelerate

from Q1’16 (+47%) as net interest margin contracts

following a shift to tighter monetary environment. We

expect ACCESS’ cost of funds, which fell to a

multiyear low of 3.7%, to inch up by as much as +200-

bps (to 5.7%). While the bank has touted its growing

retail business, PBB (personal and business banking)

deposits have remained at around 32% of total

deposits since FY’14.

Cost of risk was adjusted slightly higher to 1.4% (1.3%

previously). ACCESS expanded net loans and

customer deposits by 7% and 5% in Q1’16 alone.

Consequently, we have revised our loan and deposit

forecast to 13.9% and 19.4% respectively.

Company Data

NSE Code ACCESS

Bloomberg Code ACCESS:NL

Reuters Code ACCESS.LG

Sector FINANCIAL SERVICES

Market Cap. (N'bn) 159.10

Free Float (%) 83.076

BUY Target Price (N) 8.10

Current Price (N) 5.22

Implied Return (%) 55.17

Price movement (ACCESS vs. Benchmark Indices)

0

0.2

0.4

0.6

0.8

1

1.2

Jun

-15

Ju

l-15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

Jul-

16

ASI NSEBNK ACCESS

Profit & Loss (N'bn) 2015a 2016e 2017e

Net interest income 105.38 128.95 147.30

Impairment charges (14.22) (22.33) (11.53)

Non interest income 129.45 116.14 109.35

Opex (145.57) (153.51) (166.55)

PBT 75.04 69.24 78.58

Blanace Sheet (N'bn) 2015a 2016e 2017e

Net Loans 1,365.83 1,555.59 1,689.54

Customer Deposits 1,683.24 2,008.95 2,274.06

Shareholders Funds 363.90 404.62 443.42

July 2016


FBN Holdings Plc.

88

Now the Boat’s been Rocked

Adesola Kazeem Adeduntan, the new managing

director of FBN Limited (the commercial banking arm

of FBN Holdings) has been tasked with turning around

the fortunes of Nigeria’s largest bank (by deposits).

The stock price plunged 52.3% between 2013 and

2015 over growing corporate governance and asset

quality concerns. Those concerns finally materialized

when the bank reported an 82% drop in PAT in FY’15

following a surge in NPLs and impairment charges in

Q4’15. Since then, Adeduntan, has instituted a

strategic review of the bank’s risk management

framework, and pledged reduce operating costs

(ranked 4th for CIR as at Q1’16).

Despite these assurances, we are still undersold on

the bank’s prospects due to (1) Asset Quality: FBNH

still has significant upstream Oil & Gas exposures

(16.86% of total loans). Renewed militant activity may

have disrupted plans for remediation of Atlantic

Energy Drilling Concept (AEDC) facility. In addition,

the bank’s coverage ratio of 37.4% raises red flags as

it is significantly behind it peer average (156%) and (2)

Capital Buffers: FBN reported a CAR of 17.2% for

Q1’16 (ranked 5th in our universe) and is most

susceptible to the impact of Naira depreciation.

We revise our EPS and ROAE forecast upwards to

N1.25 (previous N0.39) and 7.5%% (previous 2.62%).

Our forecast incorporates outlook for increasing cost

pressures and reduced gross earnings. For FY’16, we

estimate a 13% decrease in gross earnings,

principally driven by a lower interest income. We

expect interest income to drop by 16% y/y, driven

majorly by a reduction in net loans (-7.6% y/y), given

the bank’s caution on risk asset creation. Interest

expense is also expected to fall moderately (-5% y/y),

following thinning Naira liquidity in the interbank

system, and customer dropping deposits (-7.9% y/y).

Company Data

NSE Code FBNH

Bloomberg Code FBNH:NL

Reuters Code FBNH.LG




HOLD Target Price (N) 4.00


Implied Return (%) 17.3-

0

0.2

0.4

0.6

0.8

1

1.2

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

Jul-

16

ASI NSEBNK FBNH





Opex (223.60) (207.60) (201.44)

PBT 21.51 51.25 82.88


Net Loans 1,817.27 1,679.55 1,775.59



Price movement (FBNH vs. Benchmark Indices)

July 2016


Guaranty Trust Bank Plc.

89

Steady Ship Muddy Waters

GUARANTY’s major highlight is its operational model

which prioritizes efficiency over scale. In terms of cost

efficiency, the bank is light years ahead of its peers.

This market defining efficiency, alongside prudential

approach to asset quality provisioning, has made

GUARANTY an industry preference. In addition, like

most of its tier peers, the bank is adequately

capitalized (CAR of 20.25% as at Q1’16, tier 1 ratio

17.9%). Going into H2’16, where we expect a margin

crunch following tight monetary condition, we believe

the impact will be either benign or beneficial for

GUARANTY. In Q1’16, due to its aversion to

expensive funding, and cautious stance on lending,

the loosening cycle actually worsened GUARANTY’S

NIM. Thus, the impact of tightening on asset yields on

investment securities are expected to outweigh

funding costs in H2’16.

The bank’s major drawback is the exposure to the Oil

& Gas sector (19% as FY’15) which is significantly

larger than its peer average. AITEO, one the of the

upstream production companies that GUARANTY is

exposed to, has suffered production disruptions

following pipeline attacks by militants.

PBT growth forecast was increased slightly to 2.5%

y/y (from1.2%y/y previously) to account for the

positive surprise (especially in operating expense).

Given the reduction in loan book (0.7%) in Q1’16, we

revised our loan growth forecast lower for the period

(down to 6% from 11% previously). Our revised loan

growth forecast would translate to marginal growth in

interest income of 2.8% for 2016FY. On the other

hand, deposit growth exceeded our previous estimate,

thus we have revised our deposit growth forecast to

15% (from10% previously). We also expect non

interest to be boosted by increased foreign exchange

income (revaluation gains and forex trading income).

Company Data

NSE Code GUARANTY

Bloomberg Code GUARANTY:NL

Reuters Code GUARANTY.LG







Price movement (GT Bank vs. Benchmark Indices)

0

0.2

0.4

0.6

0.8

1

1.2

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

Jul-

16

ASI NSEBNK

GUARANTY





Opex (223.60) (207.60) (201.44)

PBT 120.70 123.75 132.71


Net Loans 1,371.93 1,441.84 1,609.04



July 2016


United Bank for Africa Plc.

90

More than Holding its Own

UBA’s key positive is its strong asset quality. UBA has

consistently reported NPLs that are better than peer

average (LTM average NPL of 1.7% ranks joint 1st

with ACCESS). Furthermore, the bank has begun an

aggressive recovery drive which recorded some

success in both Q4’15 and Q1’16. Management

attributes its superior asset quality at least in part to

the clearance of bad assets in 2012. Another positive

for the bank is its strong capital buffers. As at Q1’16,

UBA reported a CAR of 20.0% and ranked 3rd in our

universe, but was still substantially above the 15%

mandatory requirement.

On the other hand, the bank’s notable drawbacks

include weak NIM and high CIR, both which LTM

average of 6.4% and 64.33% ranked 5th in our

universe. Another point of concern is that while the

bank has consistently shown strong asset quality, its

exposure to the power sector (highest in our universe)

may lead to higher impairments in H2’16. The bank’s

major drawback is the exposure to the Oil & Gas

sector (19% as FY’15) which is significantly larger

than its peer average.

We maintain our view for a challenging 2016 for UBA,

and slightly lower EPS and ROAE estimates to N1.40

and 15.0%, from N1.41 and 15.40% respectively,

previously. Net interest margin weakened in Q1’16,

as funding cost picked up. UBA’s customer deposit

dropped 5% in Q1’16, as loose monetary condition

allowed the bank to shed a significant portion of its

more expensive placement deposits. However, since

then, liquidity conditions have tightened due to the

impact of tightening measures by the CBN and the

impact of the Naira devaluation. Consequently, we

believe the bank will become less selective in taking

deposits and the more expensive funding cost should

translate to lower Net Interest income.

Company Data

NSE Code UBA

Bloomberg Code UBA:NL

Reuters Code UBA.LG







Price movement (UBA vs. Benchmark Indices)

0

0.2

0.4

0.6

0.8

1

1.2

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

Jul-

16

ASI NSEBNK

ZENITHBANK

Profit & loss (N'bn) 2015a 2016e 2017e


Impairment charges

(5.05) (12.10) (12.02)


Opex (136.74) (138.39) (161.34)

PBT 68.45 59.54 74.39


Net Loans 1,097.13 1,175.87 1,336.37



July 2016


Zenith Bank Plc.

91

Stream of Confidence

ZENITHBANK remains well positioned in the Nigerian

banking industry. The bank is operationally efficient

(ranks 2th for LTM average CIR at 55%) and its

cautious risk-taking approach has translated to strong

asset quality (NPLs of 2.2%) which is backed by

prudent loan loss provisioning (coverage ratio greater

100%). The bank has also developed scale which

makes it adequately positioned to capture market

share in the high margin retail segment. The retail

business has recorded significant growth in the past

year. In addition, the bank is well capitalized with a

CAR of 21.29%, with one of the highest portions of tier

1 equity (the bank has an US$450 million Eurobond

that is not included in the tier 2 component of

regulatory capital).

However, ZENITHBANK’s exposure to critical sectors

(upstream, power, and public sector) points to likely

increase in impairment charges in H2’16. One of the

bank’s clients, Erin Energy, an independent oil and

gas exploration and production company, recently

disclosed (April 4, 2016) that (1) it received permission

from the bank to waive funding requirements on its

Debt Service Reserve Account (DSRA) until

December 31, 2016, and that (2) it was also granted a

90 day extension on principal payments previously

scheduled for March 31, 2016. We believe such

restructuring arrangements are reflective of the

prevailing stress in the Oil& gas sector.

We expect net interest income to improve by 13%

(versus 8% previously) as (1) we lowered our 2016FY

cost of funds forecast down to 3.8%, from 4.0%,

following the impressive Q1’16 performance of 3.0%

(versus management guidance of 4.3%); whilst (2)

retaining asset yield projection at 11.0%, and lowering

loan growth forecast to 5% (from 8% previously), after

a 3% q/q decline.

Company Data

NSE Code ZENITHBANK

Bloomberg Code ZENITHBA:NL

Reuters Code ZENITHBA.LG







Price movement (ZENITH vs. Benchmark Indices)

0

0.2

0.4

0.6

0.8

1

1.2

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

Jul-

16

ASI NSEBNK

ZENITHBANK





Opex (167.88) (180.87) (201.78)

PBT 125.62 126.91 154.07


Net Loans 1,989.31 2,080.52 2,349.30



July 2016


Consumer Goods.

The revenue and profit

after tax of our universe of

consumer companies

grew by 17% y/y and 35%

y/y respectively in the first

quarter

92

Stay Calm; Don’t Be Deceived By What you See

The revenue and profit after tax of our universe of consumer companies

(excluding HONEYFLOUR, FLOURMILL and GUINNESS) grew by 17%

y/y and 35% y/y respectively in the first quarter. For most of the

companies, we had expected slightly higher earnings relative to 2015.

Note that the latest results broadly exceeded consensus (including

Cordros’), but given that the macroeconomic environment has

deteriorated even further, we are quite mindful of how the strong start

influences our earnings expectations going forward.

Specifically driving our increased reservation on the sector is that some

of the expected tailwinds (e.g FG’s proposed stimulus spending and

lower interest rate) that drove positive investors outlook at the beginning

of the year looking less likely, while new headwinds (hike in energy price

and accelerated forex pass through) have emerged.

Overall, compared to estimates in January, we added a few basis points

to only CADBURY, DANGSUGAR and UNILEVER’s 2016 earnings

growth projections after they more than impressed with first quarter

results.

NB surprised with a N2 billion unrealized exchange loss in the first

quarter which raised suspicion around forex strains in the company’s

operation. Consequently, providing for higher forex loss and tighter

gross margin (following the forex development) in our model, we have

revised NB’s earnings lower from both previous estimate and end 2015

level.

NESTLE also impressed, but we have revised earnings lower as the

+40% depreciation in the value of the NGN is expected to cascade into a

major forex loss on the company’s dollar-denominated borrowings.

The limited supply of the USD (even after floatation), potentially forcing

major import-dependent producers, such as the flour millers back to

sourcing forex from (higher priced) alternative sources points to negative

outlook for margins in that space.

Difficulty sourcing forex and the challenge faced by PZ’s premium white

goods division has had significant adverse impact on the company’s

Given that the macroeconomic environment has deteriorated even further, we are quite mindful of how the strong start influences our earnings expectations going forward

July 2016


93

earnings and we have adjusted estimates accordingly, given a dour

outlook on both fronts.

Continued Fragility in the Macro

We had noted in January the possibility that the FG’s robust spending

plan would not result in a strong rebound in aggregate demand over

2016. While factors – (1) expected continued decline in the finances

(and hence the income of civil servants) of State governments; (2) bleak

outlook for private sector job growth; (3) continued pass through impact

of weak currency; and (4) hike in electricity tariff – driving our pessimism

have come to the fore, and will likely remain drags on earnings in H2,

more pressure has emerged from (1) the hike in petrol pump price and

(2) the delayed signing of the budget into law.

Dour Outlook for Margins

From the depreciation of the currency value, to higher energy costs and

import duty, the pressure on the input costs of consumer companies has

increased over the last six months. Yet from our findings, most

producers continued to absorb the added costs, although a few have

succeeded with slight price adjustments. Overall, the increasing

pressure that the average Nigerian’s consumption propensity faces,

offers consumer companies little scope to fully pass-on extra costs, and

this, speaks to flattish to lower margins on the horizon.

Earnings growth will remain volume driven, especially in the lower

margin categories, and for our universe, we see prospect from (1) the

2016 and 2017 PAT (N'bn) NEW OLD Change

CADBURY 1.60 0.79 103.0%

DANGSUGAR 13.63 11.89 14.6%

*FLOURMILL (1.18) 2.62 -145.2%

*HONYFLOUR 0.32 1.82 -82.3%

NB 34.29 42.51 -19.3%

NESTLE 20.12 25.67 -21.6%

*PZ 2.59 4.30 -39.77%

UNILEVER 1.74 0.33 428.8%

Source: Cordros Research Estimate

*2016/2017

Fig 50: Post Tax profit Forecast

We had noted in January the possibility that the FG’s robust spending plan would not result in a strong rebound in aggregate demand over 2016

From our findings, most

producers continued to

absorb the added costs,

although a few have

succeeded with slight

price adjustments

July 2016


94

increasing access to markets in the North and neighbouring countries

following the decimation of Boko Haram insurgents; (2) the introduction

of new products and enhanced RTM campaigns; and (3) the significantly

reduced activities of fringe players given the intensified difficulty

sourcing forex for imports.

Soft Commodities Prices Good, But Not Helpful Enough

Continued broad-based decline in agricultural commodities prices has in

our view, somewhat shielded the margins of consumer companies from

depicting material deterioration in the ongoing episode of mounting forex

pressure on input costs. Gross margin contraction, on average, was just

85bps in Q1-2016 and 16bps in 2015FY based on results filed by

companies with December accounting year end (Q1 included

HONEYFLOUR’s Q4-15/16 result). Across our universe, agricultural

input prices have remained soft thus far in 2016 and outlook reflects

lower prices, hinged on adequate supplies, lower energy costs, rising

demand for biofuels and greater engagement in farm support policies,

according to the World Bank. From palm oil (UNILEVER, PZ and the

flour millers) to soybeans (FLOURMILL), barley (NB), maize

(FLOURMILL, NESTLE and NB), sorghum (NB), US HRW wheat

(FLOURMILL and HONYFLOUR), fertilizers (FLOURMILL) etc, prices

fell y/y and q/q in the first quarter. For cocoa (NESTLE and CADBURY)

and sugar (DANGSUGAR and food beverage companies), prices were

unchanged from Q1-2015 levels but lower compared to Q4-2015.

Investment and Capital Raise

There were two announcements on capex and one on capital raise by

our coverage names over the review period.

On capex, NESTLE commissioned its N5.7 billion new water factory in

Abaji, Abuja. The factory (NESTLE’s third in Nigeria) occupies 14.13

hectares of land and was financed through a facility secured from the

Bank of Industry (BoI). The management of the company (in April) also

hinted on plans for a N15 billion production line expansion for its plants

in Ogun State, to be executed in two phases -- N6 billion in 2016 and N9

billion in the year 2017.

In addition, Flour Mills of Nigeria Plc’s Sunti Golden Sugar Estate in

Niger State commenced was commissioned this in April. The

investment, estimated to have cost N45 billion (including N26 billion

intervention fund from the CBN), is in furtherance of the Group’s

Across our universe,

agricultural input prices

have remained soft thus

far in 2016 and outlook

reflects lower prices

There were two

announcements on capex

and one on capital raise

by our coverage names

over the review period

July 2016


95

backward integration programme in its mainstay food and agro-allied

operations. The plan, according to management, is to cultivate

sugarcane, crush it and produce the raw sugar for refining at the Lagos

refinery. Management targets 100,000MT/yr (representing 13% of

existing refining capacity) of raw sugar to be produced from Sunti. Also

expected along the value chain is the generation of 10 megawatts of

electricity, animal feeds and fertilizer from the sugar cane residue.

In terms of capital raise, DANGSUGAR provided hints on plan to raise

N100 billion through a hybrid offer to further its backward integration

programme (BIP). Although there have been no follow comments since

it hinted on the plan in April, management had guided to execution in the

third quarter and proposed an 80:20 debt/equity (via Rights Issue) mix.

Universe Valuation Not Attractive

One of the concerns we highlighted in January for consumer goods

stocks was that their share prices were less attractive, compared to

banks and cement producers. We still maintain this concern. The

2016/17 average PE of our universe is 22.2x, compared to Bloomberg’s

EMEA average of 19.5x. Reflecting our concerns for instance is that

despite worst earnings, the shares of GUINNESS (-9%), HONYFLOUR

(-13%) and PZ (-11%) only fell marginally over H1 and were well above

consensus fair value at the time of writing. The shares of NESTLE (-

1.2%) and UNILEVER (-24%), also above consensus, are equally not

reflective of modest earnings expectations.

Based on closing prices used in this report, only CADBURY and

FLOURMILL’s shares trade at buoyant discounts to their target prices.

We are underweight NESTLE, UNILEVER, PZ HONYFLOUR and NB

and NEUTRAL DANGSUGAR.

In terms of capital raise,

DANGSUGAR provided

hints on plan to raise

N100 billion through a

hybrid offer

We are underweight

NESTLE, UNILEVER, PZ

HONYFLOUR and NB

and NEUTRAL

DANGSUGAR

July 2016


Cadbury Nigeria Plc.

96

Repositioning for Better Days

Since reaching the peak of its post-recovery

performance in 2013 (+74% PAT vs. 2012),

CADBURY’s numbers have come under intense

pressure in the last two years. Post tax earnings

declined by 55% on average between 2014 and 2015,

primarily on weak revenue, following (1) the

Company’s loss of market share (beverages) to

competition, which coincided with (2) weakness in

Nigeria’s overall consumer space and difficulty

penetrating its large Northern market faced with

intense insecurity.

To address competitive pressure, management has in

the last one year (1) improved the route-to-market for

its products; (2) rebranded the flagship products; and

most importantly (3) introduced new brands to the

market. Externally, the reduction of insurgents

activities in the North and the difficulty fringe importers

face accessing the USD for imports come as added

advantage to CADBURY.

CADBURY has performed quite impressively with cost

containment. Cost of sales have been flattish over the

last five years, supported by (1) the internalization of

raw materials sourcing process and (2) and the switch

from the use of expensive LPFO to gas across its

factories and administrative offices.

Despite positive sales outlook and cost containment

initiatives, the prospect for material expansion in

margins is dim, given the difficulty increasing prices.

More so, cost per unit of item produced is likely to rise

slightly in this episode of rapidly rising inflation which

is driven by macroeconomic and structural

deficiencies. We forecast earnings to grow sharply

(38.5%) in 2016 on expected improvement in sales,

but most importantly, due to the base effect of a very

poor 2015. Growth estimate beyond 2016 is modest

(6% average in 2017-2018), as we await improvement

in the macroeconomic environment.

Company Data

NSE Code CADBURY

Bloomberg Code CADBURY:NL

Reuters Code CADBURY.LG

Sector CONSUMER GOODS






Price movement (CADBURY vs. Benchmark Indices)

Income Statement (N'm) 2015a 2016e 2017e

Revenue 27.83 29.36 30.97

Cost of sales -18.89 19.79 21.20

Gross profit 8.93 9.57 9.77

Opex -7.53 7.63 8.07

Other income/(exp) 0.02 0.04 0.05

Finance income 0.16 0.18 0.19

Finance cost 0.00 0.00 0.00

Profit before tax 1.58 2.16 1.94

Taxation -0.42 0.56 0.50

Profit after tax 1.15 1.60 1.43

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Ju

n-1

5

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb-1

6

Mar-

16

Apr-

16

May-1

6

Jun

-16

NSEASI CONSUMERS

CADBURY

July 2016


Dangote Sugar Refinery Plc.

97

A Switch in Time …

DANGSUGAR’s margin is faced with pressure from two

broad cost inflators: (1) the devaluation of the Naira and

(2) increased substitution of expensive LPFO in the fuel

mix following gas supply shortage. Devaluation impacts a

broad range of costs (given USD equivalence of about

90% of total operating cost), from (1) the Naira price of

imports; (2) gas supply contracts; and (3) import duty.

Sadly, the prices of raw sugar have barely changed

compared to same period of 2015 and are likely to remain

unchanged in the medium term, according to World Bank

estimates.

At the end of January, the management of DANGSUGAR

announced 60% price increment from end 2015 level to

N8,000/50kg bag, sighting the proposed increase in raw

sugar import tariff concession from 10% to 20% and other

increasing operating costs. We thought the move was

prompt, even though the y/y price increase trailed the

movement in cost per tonne (see below). Management

subsequently guided to cost reflective pricing going

forward. Should the claim that the price increase in

January did not consider the devaluation of the Naira, we

would expect another increment over the third quarter.

Note that DANGCEM, DANGSUGAR’s sister company,

increased the price of its 50kg bag of cement twice during

the first half of this year.

Sales volume growth has been impressive at 46% y/y

and 23% y/y respectively in Q4-2015 and Q1-2016.

Management claimed to have seen strong demand also

in the second quarter, although there is risk to production

being affected by gas supply shortage at the Apapa

factory. Both y/y increases in average refined sugar price

(20%) and volume (23%) during the first quarter offset per

tonne increase in cost (23% y/y), with PAT rising 40.6%

y/y.

For 2016, we look for revenue and PAT growth of 39%

and 18% respectively. Our estimate assumed N160,000

selling price per tonne, 60% capacity utilization and cost

per tonne of N132,000, versus N126,100, 54% and

N98,891 respectively in 2015.

Company Data

NSE Code DANGSUGAR

Bloomberg Code DANGSUGAR:NL

Reuters Code DANGSUG.LG






Implied Return (%) -5.56

Price movement (DANGSUGAR vs. Benchmark Indices)

Income Statement (N'bn) 2015a 2016e 2017e

Turnover 101.06 140.87 142.40

Cost of Sales -80.33 -114.16 -122.02

Gross profit 20.73 26.71 20.38

Opex -6.21 -7.75 -7.91

Investment income 0.01 0.09 0.22

Other income 1.33 1.51 1.67

Interest expenses -0.66 -0.51 -0.44


Tax expense (5.01) (6.41) (4.45)


0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Apr-

16

Ma

y-1

6

Jun

-16

NSEASI CONSUMERS

DANGSUGAR

July 2016


Flour Mills of Nigeria Plc.

98

Dour Earnings Outlook; But Price is Cheap

FLOURMILL’s earnings contracted consistently

between 2012 and 2014, and grew in 2015 on the

backdrop of profit realized from the divestment of a

long held investment. Save for income from the

divestment, the Company would have reported a loss

after tax of N6.4 billion.

The primary drivers of the stress on FLOURMILL’s

earnings are (1) the dominance of low margin

products in the group’s product portfolio; (2) foreign

exchange losses booked from NGN devaluation; and

(3) the escalation of finance charges.

2016 is not any different. The N19 billion PAT

recorded as at nine months ended December was

boosted by the final leg of the income from the

divestment mentioned above. Once again, excluding

this one-off item, bottom-line should have been in

negative of about N4.7 billion. For 2016, we forecast

loss before tax of N3.3 billion excluding the gain from

divestment.

For 2017, earnings face risk from higher raw materials

and energy input costs (from the recent floating of the

NGN) and still elevated finance charges. We forecast

loss after tax of N1.2 billion. On the positive,

FLOURMILL has shown fairly good traction with sales

(9% average growth in five years). As at nine months

2015/16, revenue has grown by c.8% and could reach

12% in 2017, given the (1) price increment recently

effected across some SKUs and (2) the introduction of

new products. Risk, however, is that report from our

market search shows that a number of FLOURMILL’s

products have been scarce for months.

Company Data

NSE Code FLOURMILL

Bloomberg Code FLOURMILL:NL

Reuters Code FLOURMIL.LG







Price movement (FLOURMILL vs. Benchmark Indices)


Revenue 308.76 340.67 382.98

Cost of sales -273.39 -303.42 -344.93

Gross profit 35.37 37.26 38.05

Opex -24.47 -17.03 -26.81

Other income -0.69 -4.13 2.30

Investment income 2.30 1.51 1.47

Finance costs -18.70 -20.91 -16.75

Net profit 8.46 20.68 -1.18

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Jun

-15

Jul-

15

Aug

-15

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Apr-

16

May-1

6

Jun

-16

NSEASI CONSUMERS

FLOURMILL

July 2016


Nigerian Breweries Plc.

99

Taking a Bite from Forex

The theme of the Nigerian beer market, over that last

three years, has been of consumers trading down to

cheaper economy brands in response to weakening

purchasing power. Although Nigerian Breweries Plc

(NB) has performed resiliently (given its rich portfolio

of products), it is not completely insulated. Revenue

growth has been quite modest and margins flattish

due to negative brand mix. Earnings have

consequently come under pressure, with PAT growing

0.4% average between 2012 and 2015 (vs. c.20%

between 2008 and 2011).

NB reported Q1-2016 result that beat consensus

expectation. Revenue grew in low double-digit (10.9%

y/y), while pre (3.9% y/y) and post tax (3.5% y/y)

profits grew in low single-digits, each. Worthy of

acknowledgment is the fact that a close competitor

(Guinness Nigeria Plc) posted operational loss during

the same three months period.

Notwithstanding the strong start to the year, we look

for 2016 revenue growth of 5% and c.10% decline in

post tax profit (previously +5%). On revenue, we do

think the macro environment is strong enough to

sustain the base-effect driven growth seen in the first

quarter. On the profit line, primary headwinds are (1)

the adverse impact of forex and energy driven cost

inflation on margins and (2) significant unrealized

forex loss following the floating of the Naira.

We note the ongoing speculation of prospective

merger between NB and Champion Breweries Plc

(CBP), both principally owned by Heineken N.V. While

this should further enlarge NB’s print in the thriving

value segment, we would like to note (1) that the

recent merger with Consolidated Breweries plc has

yet to materially affect NB’s numbers positively; (2)

that CBP accounts for less than 1% of the brewery

market; and (3) the dilutive impact of the merger on

NB’s EPS.

Company Data

NSE Code NB

Bloomberg Code NB:NL

Reuters Code NB.LG


Market Cap. (N'bn) 1,086.29


SELL Target Price (N) 112.29



Price movement (NB vs. Benchmark Indices)


Revenue 266.37 321.64 337.89

Cost of sales -130.79 -173.14 -185.32

Gross profit 135.58 148.51 152.56

Opex -70.44 -88.17 -92.46


Net finance cost -5.40 -11.50 -3.92


Tax -18.94 -15.18 -17.45


0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jun

-15

Jul-

15

Aug

-15

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

NSEASI CONSUMERS NB

July 2016


Nestle Nigeria Plc.

100

Resilient But not Insulated

NESTLE has shown more resilience to the wave of

pressure that has hit our consumer universe over the

last three years. Whilst acknowledging that earnings

growth is expected to remain weaker than it was prior

to 2013, we are convinced that NESTLE has more

than demonstrated a good understanding of the

Nigerian consumer, and its numbers will be quick to

restore to historic level in the event that the macro

environment improves.

The Company’s results over the last two quarters were

in line with the latest strings of impressive numbers

reported by our consumer components. PAT grew

21% y/y in Q4-2015 and 126% y/y in Q1-2016. In

addition to sales growth, earnings (especially in Q1-

2016) were boosted by a marked reduction in finance

charges.

Despite the strong start to the year, we maintain a

modest view of revenue (+8% in 2016) as we expect

the base-effect driven growth during the first quarter to

evaporate in subsequent quarters. Particularly,

NESTLE reported average 13% y/y revenue growth

between June and December 2016 which we expect

will be difficult to replicate this year.

Meanwhile earnings forecast (previously +16%) has

been impacted by the recent depreciation of the NGN

against the USD following that floating of the former.

We note that the 40% depreciation of the NGN could

materialize to significant unrealized forex loss (about

N9.7 billion) on NESTLE’s USD borrowings. This, we

have modeled to drag 2016 earnings lower (by 15%

y/y) compared to 2015.

The attractiveness of NESTLE’s share has weakened

since the stock’s prices rallied alongside the broader

market in the last two months. The share price has

rallied by 38% since it hit a trough of N615.26/shares

in April. We expect a downward correction in the event

that the speculation driving up stocks prices moderate.

Company Data

NSE Code NESTLE

Bloomberg Code NESTLE:NL

Reuters Code NESTLE.LG







Price movement (NESTLE vs. Benchmark Indices)

Income Statement (N‘bn) 2015a 2016e 2017e

Turnover 151.27 163.37 176.44

Cost of sales -83.93 -91.41 -100.57

Gross profit 67.35 71.97 75.87

Gross opex -33.60 -36.02 -38.91

EBIT 33.75 35.94 36.96

Interest income 0.44 1.49 1.46

Interest exp -4.87 -11.30 -1.50

PBT 29.32 26.13 36.92

Tax -5.59 -6.01 -9.23


0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

NSEASI CONSUMERS

NESTLE

July 2016


PZ Cussons Nigeria Plc.

101

Caught in the Web

Following PZ’s nine months (ended February 2016)

result, with a recovery in Q4 unlikely, we have cut 2016

EPS lower to N0.71 (previously N0.97), representing an

expected 38.4% decline from end-2015FY level. In

addition, we have reduced 2017-2019 earnings from

initial estimates, on the back of (1) material revisions to

revenue growth forecast -- primarily and (2) persistent

forex-induced cost pressure on the business, resulting

to lower margins, especially in the white goods division

which accounts for about 20% of gross margin.

PZ Cussons Group UK -- the parent company of PZ

Cussons Nigeria Plc (PZ) – in a trading statement

issued early April hinted on the increasingly difficult

trading conditions it faces in its main market Nigeria,

wherein a lack of availability of the U.S Dollar at the

official exchange rate is resulting in the majority of

purchases passing through (the parallel market,

according to management of PZ Nigeria) at a premium

of 50-70%. The Group stated that though the resultant

cost impact is being managed through changes to

relative pricing, the persistent pressure on consumer

disposable income remains a major challenge.

PZ faces the risk of revenue growth being continually

thwarted (0.5% average growth in the last three years

and down 4.2% in 9M-16) by difficulty adjusting prices

and surpassing volumes. Consumer demand remains

subdued by (1) rising cost-push inflation (including

pressure on essentials such as energy, transport and

utilities); (2) growing unemployment; (3) extreme

competition; and (4) weakening discretionary spending,

as uncertainty in the macro environment persists.

On costs, the significant dependence on imports (about

80%), amidst (1) the devaluation of the Naira, and yet

(2) insufficient liquidity of the greenback since the

floating, suggests that there appears no near term

respite to the forex induced pressure.

Company Data

NSE Code PZ

Bloomberg Code PZ:NL

Reuters Code PZ.LG







Price movement (PZ vs. Benchmark Indices)


Revenue 73.13 70.79 72.91

Cost of sales -52.67 -52.38 -54.68

Gross profit 20.45 18.40 18.23

Operating expenses -13.80 -14.51 -15.31


Net finance (cost)/income -0.22 -0.42 0.36


Tax -1.99 -0.94 -0.86


0.00

0.20

0.40

0.60

0.80

1.00

1.20

Ju

n-1

5

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Ja

n-1

6

Feb

-16

Ma

r-16

Apr-

16

May-1

6

Ju

n-1

6

NSEASI CONSUMERS PZ

July 2016


Unilever Nigeria Plc.

102

Awakening Must Show Traction

UNILEVER ranks as one of the worst hit consumer

names in our universe. The Company’s earnings have

recorded negative growth over the last three years

following on weak revenue growth and fast rising

interest expenses.

That said, performance has improved over the last two

quarters. Revenue and PAT grew 13% y/y and 76%

y/y in Q1-2016, having grown by 36% y/y and 78% y/y

in the final quarter of 2015. On revenue, management

attributed the recovery to (1) both innovation and the

activation of local campaign for HPC products and (2)

the resilience of the Foods division. Besides revenue

growth, higher margins and relatively lower finance

charges (-33% y/y in Q1-2016) have made the biggest

impact on earnings in recent quarters. Outstanding

debt was lower by 42% y/y in the first quarter and if

sustained, will have far reaching impact on earnings

via lower finance charges (we estimate 34% decline

vs. 2015).

We forecast PAT to grow 46% to N1.7 billion in 2016.

Note that this is lower than the Q1 annualized figure,

as we expect growth to moderate in subsequent

quarters considering the subsisting pressure in the

Nigerian consumer environment. Given the significant

exposure of its operation to USD, we think UNILEVER

will face difficulty passing extra costs from the latest

+40% NGN depreciation to consumers. Hence

margins (which improved in Q3 and Q4 2015) could

come under pressure over H2-2016.

Despite the latest positive results, UNILEVER’s shares

have lost the most (-24% YtD) in our consumer

coverage. We have long held the view that the

Company’s share price is not reflective of both its

weakening earnings and the low prospect of recovery

to historic level. This view has not changed.

Company Data

NSE Code UNILEVER

Bloomberg Code UNILEVER:NL

Reuters Code UNILEVER.LG







Price movement (UNILEVER vs. Benchmark Indices)


Revenue 59.22 61.16 64.52

Cost of sales -38.17 -39.75 -42.07

Gross profit 21.05 21.41 22.45

Opex -16.49 -17.12 -18.07

Other income/expense 0.08 0.01 0.01

Finance income 0.30 0.34 0.35

Finance costs -3.17 -2.11 -2.10


Tax expense -0.58 -0.78 -0.82


0.00

0.20

0.40

0.60

0.80

1.00

1.20

Jun

-15

Jul-

15

Aug

-15

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Apr-

16

May-1

6

Jun

-16

NSEASI CONSUMERS

UNILEVER

July 2016


Cement.

103

Caution! Looming Concerns

The Nigerian cement market witnessed good volume growth in the first

quarter. We estimate total sales volume during the period to be about

27% more than the quantity dispatched in the same period of 2015.

Demand, we understand, remains largely driven by the private sector,

with public sector consumption (on infrastructures) constrained by both

the delayed signing of the federal government’s 2016 budget and

continued cash crunch across States. Lower prices and the conversion

of monies meant to purchase U.S Dollars to building activity following

persistent forex liquidity in the country are believed to have had the

biggest impact on private sector demand for cement.

The volume growth, however, was uneven. DANGCEM and ASHAKA

respectively grew volumes by 45% y/y and 11% y/y while Lafarge Africa

Plc (LAFARGE) and CCNN posted 5% y/y and 6% y/y volume

contractions, respectively. Sold out situations in LAFARGE’s South-West

(S/W) and South-East (S/E) plants helped DANGCEM ramp up market

share during the period while ASHAKA benefited from improved

economic activities in the North-East, relative to Q1-2015 which was

hacked by the threat of insecurity amid elections uncertainty.

That said, all the producers (ex DANGCEM’s offshore operations) in the

industry experienced declines in EBITDA and PAT. This was driven by

(1) relatively lower prices; (2) volume contraction (LAFARGE and

CCNN); and (3) cost pressure from the forex pass through and less

favourable energy mix; all of which impacted margins adversely. In

June, the FG floated the local currency, resulting to +40% devaluation

against the USD and added to pressure (including forex losses on USD

loans) on earnings. For 2016FY, we look for Nigerian cement revenue,

EBITDA and PAT declining on account of the aforementioned

headwinds which we do not expect to subside over the second half.

Drilling down to offshore subsidiaries, LAFARGE’s South Africa

operation reported 4% y/y revenue contraction and a loss after tax of

N1.1 billion. DANGCEM’s Pan African revenue surged by 149.6% y/y on

account of additional volume from the plants that were on-boarded

between third and fourth quarters last year. Compared to Q3 and Q4

We estimate total sales

volume in Q1-2016 to be

about 27% more than the

quantity dispatched in the

same period of 2015

That said, all the

producers (ex

DANGCEM’s offshore

operations) in the industry

experienced declines in

EBITDA and PAT

July 2016


104

2015 however, Q1-2016 revenue actually grew by only 1.3% and 3.14%

respectively. The surge in volume, and a materially lower net finance

charges guarded DANGCEM’s non- Nigerian operation to post tax profit

of N3.8 billion, against a loss of N14.1 billion in Q1-2015.

Volume to Shrink in the Second Half

Our investigations reveal that demand for cement remained strong in the

second quarter, and was driven by the same drivers as in the first

quarter highlighted above. However, shipment was still one-sided, with

DANGCEM reportedly seeing almost 40% growth while LAFARGE and

CCNN’s production may have been affected by significant shortage of

gas and LPFO supply experienced during most of the period.

Over H2 however, it is difficult to see how the insufficiency of forex

supply in the economy will continue to support investment in house

building and upgrading. The narrow possibility of the economy

recovering from its worst performance in a decade, more so, with the

funding and implementation of governments’ budgets faced with

significant downside risks, raises dark shadows over demand for cement

going foward. Overall, given the strong growth in the first half, we have

revised 2016 consolidated volume growth in Nigeria to 11% (previously

6%), viz DANGCEM (+21%), LAFARGE (-5%), ASHAKA (10%) and

CCNN (-2%).

Energy Constraint

The spate of attacks by militants on gas supply pipelines across the

country has impacted negatively on evacuation to gas-fired power

facilities of cement companies. Gas utilization at LAFARGE’s S/W and

S/E plants dropped from the mid 90s in 2015 to the 80s in the first

quarter this year. Likewise, utilization at DANGCEM’s Obajana and

Ibese facilities fell from 89% and 85% average in 2015 to 72% and 34%

respectively as at end of the first quarter.

Feedback from managements is that gas utilization dropped even further

in the second quarter, wherein pipeline vandalism was much rampant. In

June, DANGCEM guided to utilization in the 20s and 50s at Ibese and

Obajana respectively while for LAFARGE, we estimate utilization to be

between 40-60% average across the S/W and S/E. As such, both

companies have had to operate with much higher level of coal and

LPFO which are more expensive compared to gas.

Feedback from

managements is that gas

utilization dropped even

further in the second

quarter

Over H2 however, it is difficult to see how the insufficiency of forex supply in the economy will continue to support investment in house building and upgrading

July 2016


105

While the federal government’s proposed dialogue with militants in the

Niger Delta offers respite in terms of gas supply outlook, downside risk

stems from the (1) FG’s possible reluctance to agree to huge monetary

and non monetary demands from the militants and (2) possibility of the

actions of the militants being motivated by political drive. Our findings

revealed that as at July, almost all the gas processing and supply plants

operated by the international oil companies (IOCs) were in shut down

mode due to uncertainty over the activities of the militants. The only

surviving producer -- NNPC/NPDC Utorogun plant in the South-South --

had also come under severe threat from the militants in recent weeks.

Pricing

Cement producers adjusted the prices of their products twice over H1

while attempting to offset growing pressures from high energy cost and

currency volatility on margins. In early April, DANGCEM increased the

ex-factory price of its 42.5 grade cement by 7.5% to N28,600 per tonne.

LAFARGE followed suit, increasing prices by about the same margin. In

May, an increase also initiated by DANGCEM pushed prices up by

about 3% across the industry.

Over H2, the risk to margins and profitability from rising cost (linked to

energy price and weak currency) is expected to elevate. As such, whilst

acknowledging the likely moderation of demand during the period, we

would think that producers would rather retain prices at current levels or

initiate marginal increases, than make downward adjustments.

Devaluation

The operating costs and USD borrowings of our cement universe are

exposed to movement in the Naira exchange rate. For DANGCEM and

LAFARGE, exchange rate also impacts on non-loan assets and liabilities

held in FCY.

On cost, we estimate that exposure to USD ranges between 10% to

30% across the industry while the proportion of DANGCEM and

LAFARGE’s USD loans to their total borrowings is estimated at 8% and

66% respectively. For total cost, we see upside pressure emanating

from the +40% depreciation of the NGN as gas supply contracts,

gypsum, coal and spare-parts which are linked to forex become more

expensive in Naira terms. For borrowings, we expect the devaluation to

cascade to material unrealized forex loss for LAFARGE.

Cement producers

adjusted the prices of their

products twice over H1

while attempting to offset

growing cost pressures

The operating costs and

USD borrowings of our

cement universe are

exposed to movement in

the Naira exchange rate

The FG’s proposed

dialogue with militants

offers respite in terms of

gas supply outlook, but

there are downside risks

July 2016


106

Given the dour outlook for volume growth and price increase, we expect

the NGN devaluation to have serious negative impact on 2016 earnings,

especially for LAFARGE. The devaluation should amount to significant

revaluation gain on DANGCEM’s FCY non-loan assets.

Investment/Capacity

Nigeria’s cement industry capacity remained at end 2015 40.65MT/yr

installed capacity, as there has been no addition so far this year.

Meanwhile in February, DANGCEM signed a US$2 billion loan MoU with

Sinoma and China’s Industrial Commercial Bank to finance and build the

next phase of the Group’s expansion, including 6MT/yr greenfield plants

each in Okpella, Edo State and Itori, Ogun State, Nigeria. Upon

completion, the Group’s installed capacity in Nigeria is expected to

reach 41.25MT/yr by 2018.

Work progressed at LAFARGE’s 2.5MT/yr Mfamosing plant, with

management guiding to delivery in the third quarter of this year. We

suspect that momentum at ASHAKA’s proposed 1.5MT/yr capacity plant

may be slowed down by both growing debt obligation within the

LAFARGE Group and elevated Naira obligation following the

devaluation, amid pressure on cash flow.

Overall, we expect Nigeria’s cement industry capacity to reach

43.15MT/yr this year and rise to 55.15MT/yr by 2018. Offshore,

DANGCEM’s 3MT/yr plant in Tanzania began commercial sales in late

Q1-2016 while management hinted on plans to commission a 1.5MT/yr

capacity plant in Congo in the second half. As at the end of the first half,

DANGCEM’s commercially viable Pan Africa cement capacity was

10.6MT/yr and could close 2016 at 13.6MT/yr.

Overall, we expect

Nigeria’s cement industry

capacity to reach

43.15MT/yr this year

We expect the NGN devaluation to have serious negative impact on 2016 earnings, especially for LAFARGE

July 2016


Cement Company of Northern Nigeria Plc.

107

Expand or Be Absorbed!

We have initiated a material cut to CCNN’s TP to N3.77 (previously

N9.47). Key drivers are (1) lower utilization expectation on (a) less

optimistic demand outlook and (b) the aging condition of the

existing plant; (2) cost inflation following the devaluation of the

Naira; and (3) subdued price outlook. For 2016, CCNN’s dismal

performance in the first quarter (-62% y/y PAT) already gave an

insight on what to expect. We do not expect a recovery; hence, we

look for revenue and PAT declining by 5% and 59% respectively

against 2015.

In January this year, acting on hazy guidance from management,

we excluded from our model, additional inputs from the 1MTs

capacity plant which had been proposed for a 2018 completion.

We noted that the 3MT/yr capacity plant (Edo Cement, CCNN’s

sister company) commissioned in Edo State by the parent

company (BUA Group) last year have raised the suspicion that the

Group might have pushed aside plans to add to CCNN’s capacity

in the near term. Cementing our view, the MD/CEO of BUA Group

hinted on expansion plans to establish 1.5MT/yr cement capacity

plants each in two East Africa countries (details still scanty).

The primary risk for the North-West focused player going forward is

in its maxed out capacity which is now faced with forex induced

operating cost inflation, inefficient energy, and low head-room for

price increase. These, point to potentially weaker EBITDA.

Management stated recently that it is exploring alternative and

cheaper sources of energy (preferably coal) that would substitute

for the primary usage of LPFO. In the absence of additional

capacity, success on this front would appear as the next bright spot

in earnings.

BUA Group is one of the largest unlisted conglomerates in Nigeria,

with a stake in a wide range of business sectors such as sugar

refinery, cement, real estate, oil mills and terminals. Commenting in

different articles written this year, we noted the MD/CEO’s

particular reference to the strong internal financial strength of the

Group and its capacity to attract oversea funding, including for new

cement projects. Matching the reference to the Group’s financial

strength with the possibility of CCNN perpetually playing second

fiddle (to Edo Cement and the planned East Africa projects) in the

Group’s cement business, point to a potential delisting of CCNN

from the Nigerian Stock Exchange by way of a merger with Edo

Cement and registering the emerging entity as a private company -

- BUA Cement. In the alternative, we anticipate the (1) Dangote

Industries Limited and Benue Cement Plc type of merger or (2)

Lafarge Africa Plc recent type of business consolidation.

Company Data

NSE Code CCNN

Bloomberg Code CCNN:NL

Reuters Code CCNN.LG

Sector INDUSTRIAL GOODS






Price movement (CCNN vs. Benchmark Indices)


Revenue 13.04 12.35 13.86

Cost of sales -9.08 -9.51 -10.53


Operating expenses -2.14 -1.53 -1.75


EBIT 1.89 0.84 1.05

Finance charges -0.46 -0.12 -0.12


Tax -0.35 -0.23 -0.30


0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jun

-15

Jul-

15

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

May-1

6

Jun

-16

NSEASI INDUSTRIALS

CCNN

July 2016


Dangote Cement Plc.

108

Pressure in “Naija”

Despite a 22.5% y/y revenue growth in the first quarter,

DANGCEM’s EBITDA was flattish while PAT declined by 23%

y/y. This is because both EBITDA (-7.5% y/y) and post tax

profit (-40.7% y/y) declined in Nigeria, the Group’s stronghold.

In Nigeria, (1) weak revenue growth (owing to relatively lower

prices); (2) sharp increase in operating expenses; and (3)

significantly lower net finance income; combined to dampen

earnings. The Pan African operation outperformed relative to

the first quarter of last year, the key drivers being (1) bigger

volume shipment (on the back of new capacities) and (2)

significantly lower net finance costs.

For 2016, we look for consolidated revenue and EBITDA

growth of 32% and 16% respectively. This is driven primarily

by contribution from the Pan African operation which is poised

for strong volume growth (from new capacities) and currency

translation gains following the devaluation of the Naira. In

Nigeria, it is unlikely that volume growth would sustain the run

rate experienced over the first half, given the dour

macroeconomic outlook. Combined with soft selling prices and

rising operating cost (linked to energy price and the

devaluation of the local unit) point to declines in EBITDA and -

- combined with higher effective tax rate – PAT. Unlike

LAFARGE, DANGCEM’s exposure to forex loss on USD loans

is minimal, given relatively smaller FCY debt balance. That

said, the NGN devaluation is likely to result in net foreign

exchange loss on the Group’s FCY denominated balances.

DANGCEM’s management increased price twice in Nigeria

over the first half while attempting to offset growing pressures

from high energy cost and currency volatility on margins. We

noted earlier that despite a less optimistic demand outlook, we

expect management to either retain prices at end H1-2016

level or initiate a marginal increase in order to cushion

persistent cost pressure.

Excluding gains from additional volumes (Tanzania and

Congo) and currency translation, the Pan African operation

would not have been able to outdo the performances posted in

the last two quarters of 2015. Besides lingering economic

downturn which has impacted demand for cement, some of

the offshore markets are faced with intense competition (which

combines with slowing demand to dampen prices) and

exchange rate challenges.

Company Data

NSE Code DANGCEM

Bloomberg Code DANGCEM:NL

Reuters Code DANGCEM.LG


Market Cap. (N'bn) 3,195.10

Free Float (%) 8.04




Price movement (DANGCEM vs. Benchmark Indices)


Revenue 491.73 631.12 627.49

Cost of sales -201.81 -302.94 -283.39

Gross profit 289.92 328.19 344.10

Opex -86.05 -108.79 -108.91


Operating profit 207.82 223.93 239.77

Finance income 34.82 58.55 -11.10

Finance costs -54.35 -72.36 -43.35


Income tax expense -6.97 -13.00 -11.83

Profit after tax 181.32 197.12 173.48

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Jun-1

5

Jul-15

Aug-1

5

Sep-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan-1

6

Feb-1

6

Mar-

16

Apr-

16

May-1

6

Jun-1

6

NSEASI INDUSTRIAL

DANGCEM

July 2016


Lafarge Africa Plc.

109

Too Many Worries

LAFARGE commenced 2016 on a wrong footing, and a

change in policy direction by Nigeria’s central bank (CBN)

compounded the troubles. Operationally, sales volume

declined from the Group’s West and Southern Nigeria plants

(accounting for about 82% of Group cement capacity) over

H1-2016 on account of gas supply shortages. In addition,

the usage of expensive LPFO has increased (at the two

plants) in the absence of sufficient gas supply, and

combined with relatively weaker selling prices, have resulted

in lower revenue and EBITDA YtD.

Externally, the floating of the domestic currency (resulting in

+40% devaluation) by the CBN furthered the pressure on

LAFARGE’s operating costs and bloated the Naira balance

of Dollar borrowings. Note that prior to the devaluation, the

balance of Dollar loans had increased by US$200 million (to

US$562 million) on the take-over of the additional 50% of

UNICEM in May.

We reiterate our less optimistic outlook for cement demand

as a concern for both LAFARGE and the industry. Further

out, with north of 20% of the Group’s total operating cost

linked to the USD, together with the possibility of longer

usage of expensive LPFO in major plants (given the

unabating pipeline attacks by militants), we see the gradual

recovery in selling prices (as we envisaged) almost futile in

mitigating a considerable EBITDA contraction in 2016 (we

estimate -49%).

LAFARGE’s management stated in a press release that its

results are expected to be affected by a N28 billion

unrealized forex loss resulting from the Naira devaluation.

That aside, the addition of US$200 million sighted above,

together with the devaluation, raised total Naira debt balance

to N237.12 billion by our estimate, from end 2015 N148.3

billion. Overlaying this on the Group’s largely stable average

interest rate produces more than 70% increase in finance

charges compared to 2015. We forecast 2016 loss after tax

of N27 billion.

While maintaining a less optimistic view of South Africa from

operational perspective, we note the potential gain to Group

income from a stronger ZAR/NGN.

Company Data

NSE Code WAPCO

Bloomberg Code WAPCO:NL

Reuters Code WAPCO.LG







Price movement (LAFARGE vs. Benchmark Indices)


Turnover 228.2 245.0 260.3

Cost of sales (154.4) (196.0) (187.4)


Gross opex (22.8) (31.9) (34.1)

Other income/(exp) (1.4) (2.5) (1.5)

Operating profit 49.6 (14.7) 38.3

Interest income 2.6 2.0 2.1

Interest expenses (11.2) (19.4) (17.3)

Profit before tax 29.3 (32.1) 23.0

Taxation (2.3) 4.8 (3.5)

Profit for the year 27.0 (27.3) 19.6

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Feb

-16

Mar-

16

Apr-

16

Ma

y-1

6

Jun

-16

NSEASI INDUSTRIAL

WAPCO

July 2016


Contact Details.

110

CORDROS CAPITAL LIMITED

70, Norman Williams Street

Ikoyi

Lagos

Tel: +234-1-270284-7

Fax: +234-1-4627324

Corporate Website

www.cordros.com

Bloomberg

COOS<GO>

Securities Trading

[email protected]

[email protected]

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Corporate Finance/Advisory

[email protected]

Asset Management

[email protected]

July 2016


Disclosures.

111

Analyst’s Certification and Disclaimer

The research analyst(s) whose name(s) appear(s) on the cover of this report certifies (y) that:

(1) all of the views expressed in this report accurately reflect his or her personal views about any and

all of the subject securities or issuers;

(2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related

to the specific recommendations or views expressed by the research analyst(s) in this report; and

(3) all analysis made by the analyst(s) were in good faith and the views expressed reflect their opinion,

without undue influence or any intervention.

Important Disclosure

This document has been issued and approved by Cordros Capital (Cordros) and is based on information from various

sources that we believe are reliable. However, no representation is made that it is accurate or complete. While

reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or fact or

for any opinion expressed herein. This document is for information purposes only. It does not constitute any offer or

solicitation to any person to enter into any trading transaction.

Investments discussed in this report may not be suitable for all investors. This report is provided solely for the

information of Cordros clients who are then expected to make their own investment decisions. Cordros conducts

designated investment business with market counter parties and customers and this document is directed only to such

persons. Cordros accepts no liability whatsoever for any direct or consequential loss arising from any use of this report

or its contents. This report is for private circulation only and may not be reproduced, distributed or published by any

recipient for any purpose without prior express consent of Cordros. Users of this report should bear in mind that

investments can fluctuate in price and value. Past performance is not necessarily a guide to future performance.

Cordros and/or a connected company may or may not have a relationship with any of the entities mentioned in this

document for which it has received or may receive in the future fees or other compensation. Cordros is regulated by the

Securities and Exchange Commission to conduct investment business in Nigeria.

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