Nigeria Outlook 2020: A Different Playing Field · Nigeria Outlook 2020: A Different Playing Field 3 Executive Summary Global Economy in 2020: A potential recovery in sight? Away

Nigeria Outlook 2020: A Different Playing Field

3 www.unitedcapitalplcgroup.com

Executive Summary

Global Economy in 2020: A potential recovery in sight?

Away from a synchronized growth story in 2018, global growth reverted to a synchronized

slowdown in 2019, as growth in major Advanced Economies (AE) and Emerging Markets

(EM) decelerated. In 2020, the IMF forecasts global growth to be stronger, driven largely

by recoveries in the EM countries. By our estimates, better trade terms between the US

and China, as well as an accommodative monetary policy stance by global central

banks, supports improvement in the global growth outlook.

On trade, we expect a mild improvement, on the assumption that President Trump may

be willing to fast-track negotiations with China as well as other bilateral trade agreements

to score political point ahead of his 2nd term bid. Additionally, the prospect of a no-deal

BREXIT seemed out of the way as the UK parliament voted to back the Prime Minister’s

deal. According to PM Boris Johnson, who won a resounding victory at the Dec-19 polls,

the deal “paves the way for an ambitious free trade deal with the EU”. In all, our outlook

for the trade remains mildly positive. However, the potential for further escalation, which

could slow the pace of recovery remains significant.

Elsewhere, global monetary policy is expected to remain accommodative in 2020 amid

concerns around the fragility of global growth. However, the pace of easing will

moderate as monetary authorities around the world wait to see the impact of their recent

policy actions.

On global crude oil prices, we see reasons to believe that prices will hover around $60.0/b

-$65.0/b, supported by recent output cut by Saudi Arabia and OPEC. However, slower

growth in key demand markets (China & India) is a cause for concern.

Sub-Saharan Africa: AfCFTA, the real deal?

The economic performance in the Sub-Saharan Africa (SSA) region was soft in 2019, no

thanks to faltering momentum in key markets such as Nigeria, South Africa and Angola.

However, the countries with the fastest GDP growth were Rwanda, Ivory Coast, Benin,

Ghana, Tanzania and Kenya.

Elsewhere, the Africa Continental Free Trade Agreement (AfCFTA) aimed at expanding

intra-African trades, gained further ground in 2019. Notably, 54 of the 55 African Union

(AU) member states (Eritrea being the only exception) signed the deal while 28, including

Egypt, Ghana, Kenya, and South Africa, ratified the deal in 2019. Trading under the

AfCFTA framework is slated to start in July 2020, even though regional developments in H2

-19 suggests that many African countries are unprepared to implement the commitments

of the deal. The re-emergence of xenophobic attacks in South Africa (Services), and the

closure of all land borders by the Nigerian government (Goods), just three months after

celebrating its signing of the AfCFTA, buttress this position. Relatedly, the 8 - member



francophone West African countries dropped the CFA franc late in Dec-19 and voted to

adopt the ECO in 2020.

Looking ahead, the World Bank forecasts growth in the region to improve from 2.6% in

2019 to 3.1% in 2020, driven by stronger growth among non-resource intensive countries

and modest expansion in resource-intensive countries. For us, slow recoveries in the larger

economies will continue to constrain the pace of growth in the region amid long-delayed

reforms.

Nigeria: …in need of a coordinated and coherent policy framework

Momentum in the Nigerian economy remained soft in 2019 despite increased clarity in

the political space after the 2019 general elections. In 2020, the outlook for the Nigerian

economy hangs on a framework of a well-intended but slightly uncoordinated policy

outline. Notably, the recent amendment of the Deep Offshore and Inland Basin

Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews of the Tax

Acts via the finance bill, will support the implementation of the 2020 Budget and beyond

in the face of sharp rising debt profile. Again, the unprecedented early passage of the

2020 budget by the senate in Dec-19, to return the economy to a January to December

budget cycle, effective 1st of Jan-20, is a positive development. Also, a lower yield

environment, triggered by the CBN’s recent mix of heterodox policy actions, will not only

ease the cost of rolling over government borrowings but also stimulate domestic private

sector investment.

On the back of the above, GDP growth is expected to sustain a gradual uptick in 2020,

anticipated to expand above 2.3%, faster than 2019 but below 3.0%. Also, inflationary

pressure will persist due to supply shortages and the shutdown of the border, given the

direct impact on food prices. Again, increased money supply by the CBN may keep the

core inflation sub-index elevated due to pressure on FX. In all, we expect the headline

inflation rate to average 11.9% in 2020, higher than 11.4% in 2019, in the absence of further

structural changes that may trigger a fresh uptick in m/m inflation. While the benchmark

interest rate (MPR) may be kept unchanged or reduced marginally, we imagine that the

CBN will sustain its recent framework of heterodox policy mix until conditions necessitate

policy normalization. Hence, interest rates in the fixed income market may remain low,

especially in H1-2020.

On the exchange rate and capital flows, we expect the CBN to continue to support the

naira at N360-N365/$1 levels, by selling OMO bills to Foreign Portfolio Investors (FPIs) as a

strategy to preserve the reserves at decent levels. At the current run rate, this can be

sustained for another 7 to 9 months, all things being equal. Nevertheless, we

acknowledge the growing concern about an impending devaluation of the naira. In our

opinion, while a currency devaluation is unlikely in the immediate-term, there is a

possibility for the harmonization of the official rate from N305.5/$1 to something very close



to the I&E window rate of N360.0/$1, in the medium term. Hence, the adjustment may not

really affect the market rate by more than a spread of 2% to 5% to the official rate.

Overall, our outlook for the naira is stable in the near term with a potential harmonization

in the medium - to - long term.

On capital flows, no significant change is expected in the current dynamics. More

specifically, the CBN is likely to sustain its OMO sale to FPIs in support of the reserves. This

may keep FPIs interest dominant in money market funds at the expense of equity flows.

Notably, we expect an upsurge in Loans & Other Claims to continue, given the low

interest rate environment in the international debt market. However, Foreign Direct

Investment (FDI) flow may remain broadly muted.

Naira Assets: A different playing field

Notably, a quick sequence of monetary policy actions, particularly those relating to sales

of CBN’s OMO bills announced since Jul-19, changed the dynamics in the Nigerian

financial market in H2-19. While the currency market remained broadly stable, supported

largely by the CBN’s sustained FX intervention, the equities market tumbled 14.6%y/y. Also,

the average yield in the fixed income market moderated from 14.5% in Dec-18 to 9.7% in

Dec-19

2020 is a different playing field for capital market players. The fixed income market will be

a corporate/ private issuer market due to the buoyant level liquidity and the low yield

environment. Yields on FGN T-bills are projected to stay in the mid-to-high single-digit

levels and Bonds yields at low double-digit levels, especially in H1-20. Hence, interest in

riskier assets (mostly corporate papers) will increase. The rate on OMO bills (solely for FPIs

and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its

set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in

Q1-20 while preserving the stock of reserves above the $30.0bn threshold. Overall, we

expect the sovereign yield curve to remain normal in H1-20. However, this may reverse to

a hump-shaped curve from Q3-20.

For equities, the continued auction of high yield OMO bills to FPIs may keep foreign

interest in local equity market tepid amid fears of a naira devaluation and confidence

deficit in the economy. Again, FPIs are likely to continue their flight to safety by swapping/

selling equities for low-risk OMO bills. Yet, our outlook for stocks in 2020 is anchored on

developments in the domestic and global economy with monetary policy as the biggest

factor to watch. From all indications, the only justification for an uptick in the equities

market is the lower yield environment, supported by increased local currency liquidity.

However, this will not be enough to trigger a major rally in the absence of the demand

from FPIs. Overall, our base case scenario, sees equities market return at +5.3% in 2020,

driven by local demand for high-quality dividend-paying stocks and increased system

liquidity.



Analysts

Wale Olusi

[email protected]

Yinka Ademuwagun

[email protected]

Oluwabusola Jeje

[email protected]

Oluwashina Akinremi

[email protected]

Ayobami Omole

[email protected]

Oluwatoyin Fajemiyo

[email protected]

Team

[email protected]

+234-1-280-8125

United Capital Plc

Securities Trading:

[email protected]

+234-1-280-7443

Investment Banking

[email protected]

+234-1-280-7583

Asset Management:

[email protected]

+234-1-277-7511

Trusteeship:

[email protected]

+234-1-280-7275



Table of Content

Global Economy ······································································································· 8

Navigating the world’s new economic milieu ··················································································· 9

United States: Entering a period of lower growth? ········································································· 12

Euro Area: At the mercy of fiscal reforms? ···················································································· 13

United Kingdom: Year 2020 - Get Brexit done! ··············································································· 14

Emerging Markets: A potential recovery in sight? ············································································ 14

Oil Prices: A long way from $100/b levels ························································································ 16

Sub-Saharan Africa ································································································· 19

Macro Overview: An unsynchronized growth story ·········································································· 20

AfCFTA: SSA’s biggest win in 2019! ································································································· 22

External Debt: Sustainable? ·········································································································· 23

Eurobond Market: SSA sovereign bonds rally ··················································································· 24

Foreign Exchange: UEMOA adopts Eco, drops CFA franc ································································ 25

Equity Market: Lack of reform to spook investors ············································································· 27

Domestic Macro and Policies ··················································································· 30

Domestic Macroeconomic Overview: In need of a coordinated and coherent policy framework ······· 31

Fiscal policy: Nigeria’s Strategic Revenue Growth Initiative ······························································ 32

Monetary Policy: CBN’s Balance sheet unwinding and monetary policy unorthodoxy ························· 38

Domestic Output and Price Level: Will revenue reforms spur faster growth? ······································· 39

Inflation rate: Higher wage bill, any impact on price? ······································································ 42

Interest rate: Lower for longer? ······································································································ 43

External Sector: Foreign exchange rate and reserves - Will the CBN harmonize Forex windows ············· 43

Funds flow: Flowing to assets with the best return ············································································ 45

Financial Markets ··································································································· 47

Fixed Income: Easy monetary policy takes the lead in 2019 ······························································ 48

Equities: Lower fixed income yields… higher stock prices? ································································ 55

Sectors ··················································································································· 62

Agricultural Sector ······················································································································· 63

Banking Sector ··························································································································· 67

Consumer Goods Sector ············································································································· 73

Cement Sector ··························································································································· 77

Oil & Gas Sector ························································································································· 81

Companies ············································································································· 88

Disclosure Appendix ······························································································· 103

Global

Economy



Global Economy

Navigating the world’s new economic milieu

Away from a synchronized growth story in 2018, economic themes in the global space

such as rising trade protectionism, political discord, inter-regional conflicts and reactive

policy responses, gave birth to the world’s new economic milieu - “uncertainty”. As a

result, global economic growth in 2019 tilted towards a synchronized slowdown, as growth

in some major Advanced Economies (AEs) and Emerging Markets (EMs) decelerated.

Manufacturing and trade sectors were the most impaired by general policy uncertainty,

as global manufacturing PMI remained in the contractionary region and growth in world

merchandise trade for H1-19 stood at 0.6% y/y, its weakest level in recent years.

According to the IMF, global growth for 2019 is projected to slow to 3.0%y/y amid slower

growth in AEs and key EM economies.

In 2020, the IMF forecasts global growth to be stronger at 3.4% y/y, driven by recoveries

across EMs, which are projected at 4.6% y/y. On the other hand, AEs are expected to

slow to 1.7% y/y. No doubt, the IMF’s forecast is a sweeter tale than 2019. Though, it

remains below the 5-year and 20-year average of 3.41% and 3.8% respectively, indicating

a gap from long-term potential. Bearing the above in mind, the global economy is stuck

between two possibilities; the first is that of an unsynchronized rebound, to be driven by

easy monetary policy, improved trade relations, a more supportive fiscal policy and

recovery in emerging market economies. The second possibility remains a broad-based

weaker growth if the factors above fail to materialize. In summary, as activities in the new

year begin to unfold, we examine some of the global economic themes that will

determine the pace of world growth below.

41

44

47

50

53

56

Jan

-19

Feb

-19

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun-1

9

Jul-1

9

Aug

-19

Sep

-19

Oc

t-19

No

v-1

9

Global growth remains weakTrend of Manufacturing PMI

U.S. Germany U.K. ASEANEM Eurozone Global Turning point

Rising trade

protectionism, political

discord, inter-regional

conflict and reactive

policy responses, gave

rise to economic

uncertainties in 2019

Global Economy

Source: IHS Markit, Bloomberg, United Capital Research

2019 Growth Trends across economiesPosition based on Q2-19 and Q3-19 (y/y) figures

Global

Growth

Cycle

Brazil

Italy

Japan

South

Korea

Russia

Mexico

Turkey

Australia

CanadaChina

Germany

Eurozone

France

U.K.

IndiaU.S.

Argentina

Figure 1 Figure 2

Source: Bloomberg, United Capital Research



Trade

Following the history of China’s trade practices with the U.S., one thing remains very clear;

the full settlement of the trade dispute is nowhere in sight in 2020. In 2019, the global

economy witnessed multiple escalation of tariffs on an estimated $470.0bn worth of

goods and abrupt fallouts in agreements. What can be considered as a win for the U.S. in

the trade war was the 22.4% YTD decrease in monthly international trade deficit (as at

Oct-19), a major victory for President Donald Trump. On the flip side, financial markets

witnessed renewed volatility, evident by the significant drop in global yields, downturn in

global production sectors and weakened investment spending.

However, towards the end of 2019, what could be termed a ‘last minute miracle’

occurred, as negotiations relating to the fundamental issues - market access, forced

technology transfer and intellectual property (IP) theft – witnessed some progress. The two

economic powerhouses settled on a phase one agreement in Dec-19, canceling the

planned tariff hike which was set to take effect in the last month of the year. Reported

details of the agreement included China’s promise to purchase at least $200.0bn of U.S.

outputs over the next two years, the U.S. to slash its 1st of Sept-19 tariffs on $120.0bn of

Chinese goods by half to 7.5%, China to implement more reforms to curb intellectual

property theft, forced technology transfers and both sides agreeing to refrain from

intentionally manipulating their currencies. As such, the two parties are set to formally sign

the deal in Jan-20, with President Trump indicating that negotiations for a phase-2 trade

deal will start immediately. While a permanent solution to the trade dispute remains in the

long-term, the kick-off of phase-1 deal will reduce the global volatilities in 2020. Also, the

addition of a roll back of some tariffs in the deal will relieve pressures on the two

economies, as their growth is slowing considerably.

Another interesting factor to watch, is the race towards the 2020 U.S. election. In a bid to

win, coupled with the scrutiny emanating from the impeachment inquiry, we could see a

more ‘receptive’ President Trump, willing to fast-track phase two negotiations and score a

huge card for the U.S. economy. However, previous indications have shown it is difficult to

predict the stance of the President. If the odds are increasingly in the Democrats’ favour,

Trade tensions between

U.S and China

dominated activities in

the global economy

U.S. and China to

formally sign a Phase 1

deal in Jan-20

Global Economy

Jan

-18

Feb

-18

Ma

r-18

Ap

r-18

Ma

y-1

8

Jun-1

8

Jul-1

8

Aug

-18

Sep

-18

Oc

t-18

No

v-1

8

De

c-1

8

Jan

-19

Feb

-19

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun-1

9

Jul-1

9

Aug

-19

Sep

-19

Oc

t-19

No

v-1

9

De

c-1

9

US Tariffs on Chinese Goods China Tariffs on U.S. Goods

Tradewar TimelineAverage Tariff rate (%)So far,

U.S. has imposed tariffs on over

$360bn worth of Chinese imports

China has imposed tariffs on over

$110bn worth of U.S. imports

If 15th of Dec-

19 tariffs had

kicked in

8.0

3.1

3.2

8.3

3.8

7.2

14.4

8.2

18.2

12.0

16.5 20.7

17.621.8

21.0

25.1

23.8

Figure 3

Source: Reuters, Peterson Institute for International Economics, United Capital Research



we could see a less erratic approach to trade dealings, with China willing to hold off and

negotiate with a new head of state.

Elsewhere, the European Union (E.U.) and Japan remain will remain cautious going into

2020, as the decision on auto-tariffs by the U.S. hangs in the balance. In all, our outlook

for trade remains mildly positive as we do not expect a positive headway or damaging

escalation. However, we do not rule out the possibility of a further escalation (given the

erratic nature of President Trump), which could slow the pace of recovery and send the

global economy on another dark path.

Monetary Policy

In contrast to the widespread tightening of monetary policy observed in 2018, the tone of

global central banks struck a dovish chord in 2019. In the face of weaker growth and

lower inflation rates compared to targets, the need to provide support was apparent. As

such, monetary policy became broadly accommodative in 2019, with extensive

measures to increase money supply added to the policy mix.

Diving deeper into the actions of policy authorities, for the first time since the global

financial crisis, the U.S. Federal Reserve (the Fed) delivered three rate cuts in 2019, with

the Federal Funds rate at 1.50% - 1.75%. Also, the apex bank started a ‘mini’ quantitative

easing program, purchasing short term bills till Q2-20. Reviewing the communique of its

Oct-19 meeting, it seems the Fed will adopt a wait and see approach in 2020, assessing

the impact of its extensive policy measures on inflation and investment. However,

wherever the trade war goes, the Fed goes with it. As such, more ‘insurance’ cuts might

be needed to sustain the current expansion of the U.S. economy.

Discarding its proposed rate-hike at the start of 2019, the European Central Bank (ECB)

also turned 180° in its decision making, slashing its deposit rate deeper into the negative

region, resuming quantitative easing and long-term refinancing operations. With the exit

of Mario Draghi and entry of Christine Lagarde, as ECB president, the outlook for policy

...our outlook for trade

remains mildly positive

Global Economy

0.0

0.5

1.0

1.5

2.0

2.5

Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19

Growth dilemma: Inflation below targets

Trend of CPI y/y in Major Economies

U.S. E.U.U.K. JapanInflation Target (%)

Figure 5 Figure 4

Sources: Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research



decisions is still expansionary, as the growth of the Euro Area will remain under pressure.

Also, fresh signals from the Bank of England (BOE) and the Bank of Japan (BOJ) - both

banks held rates all through 2019 - suggest possible rate cuts in 2020. This is because of the

surprise division among BOE policy members as at its Nov-19’s meeting and BOJ’s

guidance that it will ease policy stance, should the economy lose momentum. Finally, in

order to sustain the slowing growth recorded in China, marred by trade uncertainty and

domestic challenges, the People’s Bank of China is expected to continue easing,

following its efforts in reducing rates across key policy variables to spur credit growth and

business activity. In summary, for 2020, we expect the current monetary policy stance to

remain accommodative, however, at a lower magnitude than the previous year.

Accordingly, the direction of funds flow will favour high yielding EMs with stable socio-

political outlook. By implication, this will imply that the US dollar may weaken against other

currencies amid net outflow of funds.

Geopolitics

Lastly, geopolitical disputes and intra-country conflicts will remain in the limelight, as

uncertainty over BREXIT proceedings, Tehran-Riyadh relations and the alarming spree of

street protests as well as civil unrest across the world, remain detrimental to global growth.

With the conservative party’s victory at the U.K. general elections, all roads lead to an

eventual BREXIT in 2020. Elsewhere, tensions between Saudi Arabia and Iran will continue

to shake up sentiments in the Middle East, with oil prices and production caught in the

middle. Although its occurrence is slated towards the end of the year, the buildup to the

U.S. elections is also an outcome to watch.

United States

Entering a period of lower growth?

Contrary to the booming state observed in 2018, the growth trend in the U.S. economy is

losing steam. Clearly, the effect of 2017’s tax cuts is evaporating. While growth in Q1-19

was impressive, driven by the country’s greatest weapon -the American Consumer, Q3-19

annualized GDP slowed to 2.1%, with a surprise lull in personal consumption expenditures.

Labour market conditions continued to improve, albeit at a slower rate, with average jobs

added in 2019 at 167,000 (down 26% y/y) and unemployment rate at its lowest since 1969.

Accordingly, below target inflation and low unemployment rates, remained a quandary

for policy makers. On the business side, the prolonged trade spat crippled growth in

investment, as corporates assessed negative impacts on global supply chains. As a result,

trends in manufacturing and industrial activities flashed worrisome signs, evident by the

continuous contraction in new export orders and industrial production growth at a multi-

year low of -0.14%. Putting all the information together, it is apparent that the U.S. is

entering a period of lower growth.

The outlook for

global monetary

policy remains

accommodative

Global Economy

Geopolitics will

remain a concern in

2020 with Brexit, the

middle east crisis

and civil unrest

around the world as

pointer



With a forward view to 2020, the IMF expects growth to moderate to 2.1% y/y, a 0.3%

decrease from 2019’s forecast. In a bid to sustain the positive growth trajectory, we

expect fiscal policy to do some weight lifting, as the recently signed 2-year budget deal,

which sees an increase of $320.0bn in government spending and a suspension of the

$22.0tn debt ceiling through mid-2021, should contribute to growth. Also, while the

incoming elections are in Nov-20, its imminent result is a significant pointer to future policy

directions beyond 2020. Furthermore, we expect clarity in H2-20, as to which of the major

contenders is likely to sit in the oval office, and implications for fiscal policy.

In terms of monetary policy, as noted above, we expect the FOMC to act as appropriate

in sustaining the economic expansion, in addition to making information driven decisions.

Also, with the positive developments in the trade war, and the race to the elections, the

FOMC will remain on the sidelines. However, with possible adverse developments on the

trade war front and its impact on business investment, the Fed might take on more

‘insurance’ cuts.

Euro Area

At the mercy of fiscal reforms

The economic performance of the Euro Area remained tepid, recording a Q3-19 growth

of 1.2% y/y in real GDP. This was expected, given the incessant decline in manufacturing

PMI, political uncertainty and weaker exports, underscored by the trade war ‘hullabaloo’.

Germany, the region’s economic engine recorded its weakest industrial production since

the financial crisis, as auto manufacturers struggled with severe disruption from the recent

emission standards. However, a surprise rebound in its Q3-19 GDP, subdued the fear of a

recession. Additionally, growth in the region continued to falter across member countries,

with quarterly growth hovering around 1.0% levels for France.

In 2020, a few factors point to a persistent albeit feeble momentum in growth of the Euro

Area. The imminent threat of U.S. tariffs on automobiles, recent tariffs on its aircraft industry

and restructuring across car production to meet up with emission standards remain sour

patches for the enervated manufacturing sector, causing potential supply challenges.

Fiscal policy inactions could further elevate pressures, with Germany’s government

sticking to its stringent balanced budget policy in the face of slowing growth, and Italy’s

2020 budget assumptions being a challenge to EU fiscal rules.

Given the above, a ray of light is arising from the continued monetary policy support, with

the ECB decisions likely to soothe the ailing growth. However, fiscal reforms remain a

critical success factor, as monetary policy is limited. Accordingly, the IMF forecasts a

pickup of growth in 2020 to 1.4%, a 0.2% increase in its 2019 forecasted value.

The US growth is hinged

on the sustainability of

fiscal policies

Global Economy

In 2020, a few factors

point to a persistent

albeit feeble

momentum in growth

of the Euro Area

...ECB decisions likely

to soothe the ailing

growth



United Kingdom

Year 2020 - Get Brexit done!

Judging by the decelerating growth in the U.K., which was 1.0% y/y in Q3-19, the

economy took a hit, as negative sentiments emanating from its seemingly inextricable

divorce from the E.U weighed on growth. As such, growth in business investment

remained subdued, with its manufacturing sector following the contractionary trend

observed across the globe. With political uncertainty driving most of its enfeebled growth,

2020 seems a bit clearer, following the outcome of the Dec-19 general elections.

The Conservative party, which Prime Minister Boris Johnson belongs to, won a sweeping

victory at the polls, amassing a majority of 365 out of 650 seats. As such, the deadlock in

parliament was resolved, PM Johnson’s deal was passed and the U.K. is likely leaving the

E.U. earlier than the 31st Jan-20 deadline.

Elsewhere, inflation continued to trend lower, reaching 1.5% y/y in Oct-19, below the

BOE’s 2.0% target point. Consequentially, inflation expectations, coupled with potential

outcomes of BREXIT, could spark a change in the Bank of England’s current ‘wait and see’

approach.

Emerging Markets

A potential recovery in sight?

In 2019, Emerging Markets (EMs) danced to the tune of external headwinds and

idiosyncratic shocks, as the global trade environment walked on eggshells, with

commodity exporters being heavily affected. However, in 2020, two key trends are

positive for EMs. First, the easing cycle across global central banks will create significant

interests in EM assets, building up capital inflows. Secondly, EM central banks have more

room to ease policies, spurring economic activity. As a result, we could see mild recovery

from 2019’s level. Accordingly, the IMF projects the classification’s growth to come in

higher at 4.6% for 2020, up from 3.9% projected for 2019.

Global Economy

The BREXIT timeline in 2020

Jan 1st - 15th Jan 15th - 31st Early June Late June Dec 31st

• Withdrawal Agreement

(WA) expected to be passed

• European Parliament

expected to ratify WA

• U.K. expected to exit the EU

• U.K. and E.U. to convene at a

high-level conference to take stock of

progress on negotiations

• Deadline for requesting

extension of transition period as

provided for in WA

• End of transition period (unless

extended)

Sources: The Economic Standard, Bloomberg, United Capital Research

Figure 6

PM Johnson’s deal

was passed in Dec-19

and the U.K. is likely

leaving the E.U. earlier

than the 31st Jan-20

deadline

EMs danced to the

tune of external

headwinds and

idiosyncratic shocks in

2019



Looking at the constituent economies in the BRICS classification, the Brazilian economy is

currently on the path of acceleration, as output growth in Q2-19 expanded by 1.0% y/y,

augmented by higher fixed investment and industrial production. Following cries of a

huge fiscal boost, the Senate passed the final amendments to the long-awaited pension

reform, a big win for the Jair Bolsonaro-led administration. Notably, according to

widespread reports, the changes in the pension reform are estimated to result in $195.0bn

worth of savings over the next 10 years, which will ease pressures on public deficit, shore

up public finances and create headroom for fiscal policy redirection. Also, the current

stance of monetary policy is expected to further strengthen growth, as 2019 witnessed a

150bps shed in policy rate. Nevertheless, signals from policy members indicate a less

aggressive approach in 2020. With the above in mind, the economic outlook for the South

American giant is auspicious, with the IMF and OECD forecasts showing a 2.0% and 1.7%

growth in 2020 respectively, an increase from their 2019 forecast.

In the same vein, the Russian economy resumed an uptrend in Q3-19 (1.7% y/y), due to

improved fiscal spending and stronger exports which subdued the effect of the VAT hike

in Q1-19. The recovery is expected to be maintained, following the implementation of

national development plans. Also, given the declining rate of inflation, currently below

the Central Bank’s target of 4.0% (3.8% as at Oct-19), we see a further decrease in policy

rate, with the monetary authority maintaining its neutral range of 6%-7%. As such, growth

is expected to improve to 1.9% y/y in 2020, according to the IMF. However, downside risks

remain on the horizon, due to oil price instability and possible further production cuts by

the OPEC+.

India was displaced as the fastest-growing economy among the G-20 countries, as

growth went on a downward spiral, from 6.6% y/y in Q4-18, to 5.8% y/y in Q1-19, 5.0% y/y

in Q2-19 and finally 4.5% in Q3-19, its lowest level in six years. As a result, International

rating agency, Moody’s, downgraded the economy’s outlook from stable to negative.

The effects of the previous structural reforms have clearly diminished, as consumer

demand – the main engine of growth, has weakened. In 2020, favourable policies should

spur increased domestic demand while the recently enacted corporate tax cuts should

encourage private investment. However, concerns surrounding limitations of fiscal policy

remains an elephant in the room, as the country is nearing its fiscal deficit target of 3.3%.

Meanwhile, monetary policy remains a strong growth propellant, with room to cut rates

further to sustain the nation’s expanding growth. In all, broad expectations for economic

performance in 2020 are skewed towards an above 6% growth GDP, with the Reserve

Bank of India projecting a 6.1% y/y growth, below IMF’s forecast of 7.0% y/y.

Finally, in China, policy measures are tilting towards mitigating the extent of the

economy’s slowdown. From its Q3-19 growth figure of 6.0% y/y, the lowest in 27 years, the

negative pressure from U.S.’s imposed tariffs (which has seen an increase in average tariff

rate to 21.0% in Nov-19 from 12.% in Jan-19) and domestic risks - such as its aging

Global Economy

The IMF projects EMs

growth to come in

higher at 4.6% in 2020,

relative to 3.9% for 2019

In China, the recently

signed phase-1 trade

deal with the U.S.

could contribute to

investments and

improve export



population and swine fever epidemic - are clearly dampening investment and output

growth. On the plus side, the recently signed phase one trade deal could ignite

investment going forward and improve exports, with the U.S. set to reduce some existing

tariffs. Although growth is expected to slow 5.8% y/y in 2020, efforts by the People’s Bank

of China (PBOC) in reducing rates across key policy variables could also palliate the

slowdown, spurring credit growth and business activity.

Oil Prices

A long way from $100/b levels

Amid OPEC+ production cuts and swings in U.S. crude inventories, oil prices responded

more to new factors affecting supply and demand. In H1-19, Brent crude oil prices

averaged $66.2/b, broadly supported by the extension of OPEC output cuts in Jan-19.

However, its performance deteriorated in H2-19, as the global economy was caught in

the web of escalating tariffs and the synchronized slowdown. As such, average prices in

H2-19 slowed to $62.2/b.

As widely anticipated, the OPEC+, in its Dec-19 meeting, agreed to deepen production

cuts by 500,000b/d, to be sustained till March-20. Interestingly, Saudi Arabia voluntarily

decided to take an additional 400,000b/d off its new quota. This bought total production

cuts to 1.7mb/d. As such, oil prices rallied in Dec-19. Also, Saudi Aramco, the largest state

owned oil company, concluded its Initial Public Offering (IPO) on the Riyadh Stock

Exchange, hitting the $2.0tn market capitalization, two days after its debut.

Looking into 2020, we see reasons to believe that oil prices will hover around $60-$65/b,

with a greater probability lying in the mid-value of the band. On the demand side,

decelerating growth in key demand markets (China & India), fueled by the increased

trade tensions remain a key cause for concern. As a result, in its Nov-19 Monthly Oil Market

Report, OPEC revised its outlook for growth in global oil demand downward, from initial

estimates of 1.14mb/d to 1.08mb/d.

Global Economy

Brent crude oil price

averaged $63.7/b in

2019

20

40

60

80

100

120

140

-2

-1

0

1

2

3

Q1-0

8

Q2-0

9

Q3-1

0

Q4-1

1

Q1-1

3

Q2-1

4

Q3-1

5

Q4-1

6

Q1-1

8

Q2-1

9

World oil balance and oil price

World Oil Balance Brent Price

mb/d US$/bbl

25

35

45

55

65

75

85

No

v-1

8

De

c-1

8

Jan

-19

Feb

-19

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun-1

9

Jul-1

9

Aug

-19

Sep

-19

Oc

t-19

No

v-1

9

Oil Price amid OPEC Production CutsOne year Trend in Brent Crude Oil Price

Cuts extended

to March 2020OPEC cuts

by 1.2m/d

Attack on

Saudi Arabia's

facilities

Figure 7 Figure 8

Sources: IEA, Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research

Saudi Arabia

voluntarily decided to

take an additional

400,000b/d off its new

quota



Analyzing supply dynamics, the positive effects emanating from deepened OPEC+

production cuts which remain in place till Mar-20, and possibly an extension after the

stipulated date provides room for oil prices to rise even further in H1-20. Following Saudi

Aramco’s IPO, we could see OPEC’s de-facto leader, Saudi Arabia, push for compliance

to established cuts, in maintaining the company’s attractive valuation. Also, tensions in

the Middle East serve as short term positive shocks to our oil forecast, as unforeseen supply

disruptions may resurge. The above notwithstanding, downside risks remain. As further

production cuts weaken OPEC’s market share, should price climb to attractive levels, we

could see renewed production from U.S. shale entities, fueling a supply glut. Also, with

regulations increasingly in support of lower emissions and cleaner energy (such as the

new International Marine Organization (IMO) rules set to kick off in Jan-20), aimed at

reducing Sulphur content for shipping vessels, global demand for oil might follow a

decelerating trend, going forward. In all, the EIA forecasts Brent price to average $61.0/b

in 2020, down from a 2019 average of $64/b.

Global Economy

Tensions in the Middle

East serve as short term

positive shocks to our

oil forecast as

unforeseen supply

disruptions may

resurge

Sub-Saharan

Africa



Sub-Saharan Africa

Macro Overview: An unsynchronized growth story

The economic performance in the Sub-Saharan Africa (SSA) region remained broadly

divergent in 2019, as most economies within the region tracked the performance of their

key export commodities. Notably, per capita GDP growth for the region remained

relatively flat, with no gain expected in 2019. Specifically, the economic fortune of crude

oil dependent nations and OPEC members like Nigeria, Angola, Gabon and Republic of

the Congo, were not too far apart as economic growth among these countries remained

unimpressive amid supply constraints from OPEC, despite mild improvements in average

crude oil prices. Meanwhile, the narrative is dis-similar for the non-oil exporters. In South

Africa, deterioration in power condition across the country hampered overall activities

and affected mining output negatively.

Thanks to growth in agricultural exports, Rwanda, Ivory Coast, Benin, Ghana, Tanzania

and Kenya remained fastest growing economies in Nigeria. Though no official GDP report

was published by Ethiopia (one of the SSA’s highflyers) in 2019, we expect the persistent

foreign exchange shortages and rising civil unrest to have weighed on economic

activities within the country. Also, two devastating cyclones —Idai and Kenneth— which

hit the Southern and Eastern Africa regions in March and April 2019, severely affected

economic activities within the region. This was as it disrupted the functioning of major

ports, and added pressure to inflation, fiscal balances, as well as trade balance in the

Comoros, Malawi, Zimbabwe, and in particular, Mozambique. In all, global commodity

price swings, extreme weather events and domestic policy uncertainties clouded the

broader economic growth.

Some countries continued to deal with security challenges. Notably, IMF report showed

that military and security spending doubled in the Sahel region (especially in Burkina Faso,

Mali, and Niger), representing c. 4.0% of GDP and absorbing 20.0% of fiscal revenues.

Rwanda, Ivory Coast,

Benin, Tanzania and

Kenya remained the

fastest growing in

Africa.

Sub-Saharan Africa

-5.0%

0.0%

5.0%

10.0%

15.0%

Rw

an

da

Ivo

ry C

oa

st*

Be

nin

*

Tan

zan

ia*

Se

yc

he

lles*

Nig

er*

Ca

pe

Ve

rde

*

Bu

rkin

a F

aso

*

Gh

an

a

Ke

ny

a*

Se

ne

ga

l*

Gu

ine

a B

issa

u*

Tog

o*

Ma

li*

Ca

me

roo

n*

Ma

uritiu

s

Bo

tsw

an

a

Ug

an

da

Nig

eria

Mo

zam

biq

ue

So

uth

Afr

ica

An

go

la*

Na

mib

ia

Nigeria, South Africa and Angola, still a drag on the overall region

Annual real GDP growth (y/y)

Q3-19 Q3-18

Figure 9

Sources: Bloomberg, United Capital Research

N.B: *Q2-19 and Q2-18 numbers



Also, eight countries within the region (Nigeria, South Africa, Senegal, Malawi, Botswana,

Mozambique, Benin and Comoros) held their presidential elections, with all countries

remarkably re-electing their incumbents for another tenure in office. Save for sporadic

cases of violence during the Mozambican, Nigerian, Malawian and Comorian

presidential polls, elections were generally peaceful across the board. Meanwhile, results

were widely contested by opposition parties in at least four of the eight countries, adding

to uncertainty within those economies.

Output Growth Outlook: Overall momentum to remain soft

Looking ahead, the World Bank published a forecast for growth in the region to rise from

2.6% in 2019 to 3.1% in 2020. This assumption relies on stronger growth among non-

resource intensive countries offsetting a modest expansion among resource intensive

countries. In our opinion, we expect slow recoveries in the larger economies to continue

to constrain the strength of the regional growth amid long-delayed reforms. Among the

regional giants, we expect growth in South Africa to remain weak, as cases of load

shedding or blackouts continue to impair industrial growth. Also, we expect growth to

remain tepid in Nigeria and Angola as both economies remain exposed to the vagaries

of the oil market. The situation is however worst for Angola, as the country continue to

struggle to diversify its economy from oil. Election uncertainties may dampen fresh foreign

investment in seven countries (Ghana, Ivory Coast, Burkina Faso, Burundi, Seychelles,

Tanzania, and Togo) scheduled to hold Presidential elections in 2020.

Nonetheless, we expect growth in the smaller economies to continue to support the

region’s growth. Specifically, we project that economic activity in Rwanda will remain

supported by export growth (resulting from the Made in Rwanda policy) and continued

public investments. Also, we opine that the recent removal of interest rate caps, which

have constrained credit supply in Kenya for years, should spur new lending to private

sector and impact overall growth positively. Additionally, we expect the completion of

the debt restructuring exercise by Mozambique in Oct-19 - that had dragged on since it

defaulted on $727.0mn of Eurobonds in early 2017 - to pave the way for the government

to raise the funding it needs for its portion of multi-billion-dollar gas projects and boost the

economy of the country.

Sub-Saharan Africa

...elections were

generally peaceful

across the board

The World Bank

published a forecast for

growth in the region to

rise from 2.6% in 2019

to 3.1% in 2020.



Africa Continental Free Trade Area (AfCFTA)

SSA’s biggest win in 2019!

Elsewhere, the AfCFTA, aimed at expanding intra-African trades, gained further ground in

2019. This was as the agreement entered into force in May-19, a month after the requisite

22 states deposited their instrument of ratification with the Chairperson of the African

Union (AU) Commission. Notably, 54 of the 55 AU member states (Eritrea being the only

exception) signed the deal while 28, including major economies such as Egypt, Ghana,

Kenya and South Africa ratified the deal in 2019. This marked a critical milestone in the

Pan-African trade journey.

Though trading under the AfCFTA framework is not slated to start until July 2020, regional

developments in H2-19 suggests that many African countries are unprepared to

implement their commitments by then. This was buttressed by the re-emergence of

xenophobic attacks in South Africa (Services), and the closure of all land borders by the

Nigerian government (Goods), just three months after celebrating its signing of the

AfCFTA. Also, the government of Kenya closed a border with neighbouring Somalia

indefinitely (due to insecurity concerns) with cross-border trade banned in the process. In

East Africa, Eritrea who continue to remain on the sidelines of the AfCFTA deal, shut all

border crossings with neighbouring Ethiopia (that had been reopened only for months)

without any prior notice, for the major part of 2019.

Outlook: The real deal?

Looking ahead, we doubt the overall success of the AfCFTA amid a perceived lack of

political will to resolve trade conflicts through dialogue before unilateral trade restriction.

For instance, we expect Nigeria to have explored dialogue before unilaterally shutting

down its land borders – hurting neighbouring economies. Also, we expect the

neighbouring economies to stay true to the rule of origin commitment in the ECOWAS

protocol. Accordingly, we believe without a willingness by countries to take commitments

made under the AfCFTA seriously and match their words with concrete deeds, the AfCFTA

Sub-Saharan Africa

Figure 10


AfCFTA which is aimed

at expanding intra-

African trades, gained

much ground in 2019

If the AfCFTA is to

succeed, African states

must embrace more

liberal trans-national

trade policies.



risks not being the game changer it could be. Also, if the AfCFTA is to succeed, African

states – especially South Africa, Nigeria and Egypt – must embrace more liberal trans-

national trade policies. This will require sustained efforts from governments, the private

sector and civil society, to digest and disseminate information about the potential of the

AfCFTA to generate jobs, improve infrastructure and boost economic growth.

External Debt: Sustainable?

Over 2019, the fiscal narratives across the region remained broadly similar, as fiscal deficit

widened, owing to shortfalls in actual revenue generation amid rising expenditures. Thus,

to cater for the rising recurrent spending and spur economic activities, public debt levels

stayed elevated in 2019. More countries continued to tap into the international debt

capital market without necessarily neglecting funds from traditional concessional sources.

Notably, Benin was the “new kid on the block” as the West African country issued its

debut sovereign Eurobond in H1-19 while the DRC received its first IMF lending since 2012,

in H2-19.

In our view, the borrowing spree is expected to pick up in 2020 as we anticipate a wider

fiscal deficit – spurred by continued rise in overall expenditures during the period.

Specifically, we expect the implementation of an upward review of national minimum

wage to add further pressure on Nigeria and Ghana’s government financing needs.

However, we note that the increased magnitude of market-based lending has a higher

risk content, as captured by greater vulnerability to commodity prices, global interest

rates, and currency movements. Accordingly, policies and reforms that build resilience to

these risks and use foreign capital to raise medium-term potential growth are needed.

Sub-Saharan Africa

Sources: World Bank, United Capital Research

56 61 62 70 73 77 81 94 99

107 117 120 135 146 155 175201 21143 54 73

76 85 9296

122 135

8391

104119

128 128135

142148

1921

2222

20 1919

2122

4948

6065

62 6561

7068

2010 2011 2012 2013 2014 2015 2016 2017 2018

SSA bond stock has grown by more than 2.0x, over 2010-2018

SSA external debt status ($'bn)

Concessional -Official Creditor Non-concessional - Official Creditor

Bonds -Private Creditors Commercial Banks and other Private Creditors

Use of IMF credit Short-term external debt

Figure 11

Benin was the “new kid

on the block” as it

issued its debut

sovereign Eurobond



Eurobond Market: SSA Sovereign Bonds rally

The overall narrative at the Eurobond market shifted from only issuances to repayments in

2019 as South Africa ($1.7bn) and Kenya ($750.0mn) both repaid their Eurobonds that

matured in May-19 and Jun-19 respectively. Surprisingly, despite a more accommodative

monetary policy environment in the developed market, primary market issuance by SSA

countries failed to touch 2018 levels. This was as the number of new issuances dropped to

seven issues (South Africa, Angola, Ghana, Benin, Kenya, Ivory Coast, and Mozambique)

from eight in 2018. Also, the total value of new issuances decline by 11.5% y/y to $16.5bn.

Elsewhere, secondary market performance rebounded from 2018 lows, as average yield

on all the outstanding notes (except for Zambia) trended lower. In H1-19 alone, average

yield fell 150bps from around 7.8% at the start of 2019. The bullish performance was

spurred by the growing accommodative stance across the developed market which

spurred foreign investors interest in African Eurobond. Senegal (-2.3%), Cameroon, Ivory

Coast and Nigeria were the best performers YTD. Other the hand, Zambia was the worst

Sub-Saharan Africa

52 5251

47

41

35

3029

28

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sustainability of the rising debt stock remains a key concern

Reserves to external debt stocks (%)

Figure 11

Source: World Bank, United Capital Research

5.0

0.0

3.0 3.0

2.1

0.0

1.9

0.90.6

0.0

2.0

5.4

3.5

2.0 2.0 2.01.7

0.0 0.0 0.02

So

uth

Afr

ica

Nig

eria

An

go

la

Gh

an

a

Ke

ny

a

Se

ne

ga

l

Ivo

ry C

oa

st

Mo

zam

biq

ue

Be

nin

Se

yc

he

lles

$16.5bn worth of Eurobond was issued across SSA in 2019

Eurobond issuance in SSA by country ($'bn)

2019 2018

Figure 13


Zambia was the worst

performer for the year,

fuelled by the

increased default risk

and credit rating

downgrades

The overall narrative at

the Eurobond market

shifted from only

issuances to

repayments



performer for the year, and this was fueled by the heightened risk of default, after credit

rating downgrades by the three global credit rating agencies.

With an outlook for easier monetary policy conditions in advanced economies (especially

in the U.S) the outlook for SSA’s sovereign Eurobonds is likely to remain bullish in 2020.

However, domestic macroeconomic volatilities might cap the strength of the bullish

interest. Additionally, we believe the growing track record of consistent coupon

payments and capital repayments will send a positive signal to investors while the need to

raise capital to fund rising fiscal deficit might spur another round of Eurobond issuances.

Notably, an unexpected monetary policy tightening at a time when countries need to

rollover large amounts of bonds could force a sharp adjustment in domestic spending,

with attendant adverse consequences on growth.

Foreign Exchange: UEMOA adopts Eco, drops CFA franc

Analysis of SSA region’s foreign exchange condition showed that the performance was

broadly negative in 2019. Over the review period, only South Africa and Kenya recorded

a currency appreciation against the US dollar, thanks to a rise in Foreign Portfolio

Investment (FPI) inflows as well as trade resolution between the US and China towards the

later part of the year. Meanwhile, a continued intervention by the Central Bank of Nigeria

kept naira largely stable through 2019. Notably, the South African rand emerged as the

region’s best performing currency in 2019, shrugging off a raft of negatives including a

stagnant economy, the risk of a credit-rating downgrade to junk, and a failing state-

owned electricity and aviation company. Elsewhere, the Angolan kwanza was the

region’s worst performing currency as the Central Bank continued to pursue its controlled

adjustment of the exchange rate since abandoning the peg to the USD in Jan-18. In

Ghana, the cedi struggled to recover the losses recorded in H1-19, which was stimulated

by a surprise 100bps rate cut by the Bank of Ghana in Jan-19 that spurred FPI outflows

during the early part of the year. Additionally, weak Q3-19 GDP growth further added

pressure on the cedi. The West African CFA franc also depreciated against the dollar in

2019, as uncertainty around the adoption of the Eco currency clouded the year.

Sub-Saharan Africa


9.2%

8.3% 8.3%7.8%

7.5% 7.2% 7.0% 5.3%

6.0%

7.5%

6.2%6.9%

5.4%

6.3%

4.7%

2.2%

4.7%

9.0%

Angola Nigeria Ghana Ivory

Coast

Kenya Senegal Tanzania South

Africa

Zambia

Save for Zambia, yields on SSA Eurobond decline across the board

Average yield in Dec-18 vs Dec-19

31/12/2018 31/12/2019

Figure 14

South African rand

emerged as the

region’s best

performing currency in

2019



Notably, late in Dec-19, West African Economic and Monetary Union (also known by its

French acronym, UEMOA) adopted the Eco as its official currency ahead of the Jun-20

timeline set by ECOWAS. This was as they cut some of their financial ties with France that

had underpinned the region’s previous common currency, CFA franc. Specifically, under

the new deal, the Eco will remain pegged to the euro but the African countries in the

bloc would not have to keep 50.0% of their reserves in the French Treasury and there will

no longer be a French representative on the UEMOA board. However, the changes will

only affect the West African form of the currency as the Central African counterpart -

Economic and Monetary Union of Central Africa (CEMAC), continues to adopt CFA franc

as their official currency.

Our overall outlook for currencies within the region is weak. In Nigeria, we expect the

Apex bank to continue to use non-conventional policies to support the naira. In the

Central African CFA franc zone, given that the currencies are pegged to the euro by a

fixed exchange rate, we could see further weakening in the CFA franc amid faltering

growth in the Eurozone. In the WAEMU region, while no definite date has been set for the

circulation of the new eco currency, we expect the currency to come under immediate

pressure once implemented amid uncertainty that continues to trail the complete

adoption by other ECOWAS members. Similarly, we expect the Ghanaian cedi (GHS),

South African rand (ZAR) and Kenyan shilling (KES) to weaken (the degree of weakening

will vary per country) relative to the USD, due to a probable increase in FX demand to

meet import needs, poor growth dynamics in South Africa, and continued political

uncertainty in Ghana.

Currency outlook

across the region

remains weak

Sub-Saharan Africa


2.4%0.4% 0.0%

-2.1%

-14.0%

-36.0%

South Africa Kenya Nigeria W/A CFA franc Ghana Angola

Rand defies economic challenges, emerge as SSA's best performing

currency in 2019

YTD performace against the US$

Figure 15

UEMOA adopted the

Eco as its official

currency ahead of the

Jun-20 timeline set by

ECOWAS



Equity Market: Lack of reform to spook investors

Over 2019, equities in global, emerging and frontier markets bucked the 2018 bearish

trend as most indices ended in the green territory on the back of the global easing

narratives. However, most equities in the SSA region underperformed their EM and FM

peers as FPIs piled into high yielding emerging market debt instruments. Of the six

exchanges under our watch, only the South African and Kenyan exchange closed 2019 in

the positive territory. The performance in Kenya was buoyed by its strong economic

growth in H1-19 and the possibility for the removal of interest rate caps that have

constrained banking sector earnings, in H2-19. Meanwhile, for South Africa, it was a tale of

two halves as the continued re-assurance by the President to commit to reforms,

provided investors with some fundamental justifications for buying South African equities

in H1-19 but the continued drag to commit to those reforms spurred some capital

reversals in H2-19. On the other hand, the benchmark indices in Ghana, Nigeria, BRVM

bloc and Mauritius all closed 2019 in the negative territory, largely due to risk-off

sentiments by foreign investors and the lack of pro-market reforms.

Looking ahead, we believe the outlook for Emerging and Frontier Market equities will

remain positive through 2020 on the back of the expectation for a more dovish global

monetary policy. Specifically, for SSA, we expect interest in equities to remain

fundamentally driven as the heavy-weight market movers – FPI – continue to look for bold

economic reforms as fundamental reason for buying equities. Thus, in absence of any

new reforms in 2020, we expect sentiments to remain weak.

Emerging and Frontier

Market equities to

thrive well come 2020

Sub-Saharan Africa


18.5%15.8%

13.2%

8.2%

-1.9%

-7.5%-9.7%

-14.6%

Kenya EmergingMarket

FrontierMarket

South Africa Mauritius BRVM Ghana Nigeria

Only Kenya and South Africa close 2019 in the green territory

YTD equity market performance (local)

Figure 15

...most equities in the

SSA region

underperformed their

EM and FM peers

...we believe the

outlook for Emerging

and Frontier Market

equities will remain

positive through 2020



Px_Last CHG_PCT_1DCHG_PCT_WTDCHG_PCT_YTDPE_RatioBEST_DIV_YLDPx_to_book_ratio

Macroeconomics | Equities | Fixed Income | Currencies | CommoditiesPx_Last CHG_PCT_1D CHG_PCT_WTDCHG_PCT_YTD PE_Ratio EQY_DVD_YLD_12MPx_to_book_ratio

Equities Ticker Level Mcap ($'bn) YTD (local) P/E P/B Div. Yield

ICXCOMP IndexBRVM ICXCOMP 159.2 8.2 -7.5% 8.0 1.4 6.8%

EGX100 IndexEgypt EGX100 1,398.1 32.9 -19.1% 13.9 1.8 4.3%

GGSECI IndexGhana GGSECI 2,257.2 8.0 -9.7% 15.2 1.6 0.7%

NSEASI IndexKenya NSEASI 166.4 24.5 18.5% 12.5 1.9 5.9%

SEMDEX IndexMauritius SEMDEX 2,177.1 6.7 -1.9% 17.4 0.9 3.1%

MOSENEW IndexMorocco MOSENEW 12,171.9 65.4 7.1% 21.1 2.7 3.6%

NGSEINDX IndexNigeria NGSEINDX 26,842.1 35.5 -14.6% 7.1 1.3 6.1%

JALSH IndexSouth Africa JALSH 57,084.1 1,054.1 8.2% 15.8 1.8 4.1%

TUSISE IndexTunisia TUSISE 7,122.1 7.2 -2.1% 19.6 2.4 2.1%

ZHIALLSH IndexZimbabwe ZHIALLSH 230.1 1.6 57.3% na na 0.2%

MXWO IndexGlobal Market MXWO 2,353.3 50,450.8 24.9% 20.6 2.6 2.4%

MXFM IndexFrontier Market MXFM 584.1 341.8 13.2% 10.5 1.9 3.9%

MXEF IndexEmerging Market MXEF 1,118.4 18,422.0 15.8% 15.4 1.7 2.6%

Eurobonds Amt Out ($'bn) Average YTM WTD YTD

Angola 8.0 7.4% -0.4% -1.6%

Egypt 27.6 5.5% -0.3% -1.8%

Ghana 11.0 6.7% -0.1% -1.6%

Iv ory Coast 6.6 5.3% -0.4% -2.5%

Kenya 9.7 6.2% 0.0% -1.3%

Morocco 3.4 3.1% 0.0% -1.6%

Nigeria 11.2 6.2% 0.0% -2.1%

Senegal 2.9 4.5% -0.1% -2.6%

GHS BGN CurncySouth Africa 23.4 4.4% 0.0% -0.9%

Tunisia 3.0 6.8% 0.0% -1.5%

Currencies (vs. USD) Spot Rate WTD MTD YTD 6M Forward 12M Forward

AOA BGN CurncyAngola AOA: Kwanza 482.2 0.0% 1.2% -36.0% na na

EGP CurncyEgypt EGP:Pound 16.0 0.0% 0.5% 11.7% 16.6 17.4

GHS BGN CurncyGhana GHS:Cedi 5.7 0.0% -1.9% -14.0% 6.2 6.8

KES BGN CurncyKenya KES: Shilling 101.4 -0.1% 1.2% 0.4% na na

MUR BGN CurncyMauritius MUR: Rupee 36.3 0.6% 1.4% -5.6% na na

MAD BGN CurncyMorocco MAD: Dirham 9.6 0.4% 1.1% -0.1% 9.5 9.6

NGN BGN CurncyNigeria NGN: Naira 362.6 -0.2% -0.5% 0.0% 377.7 396.7

ZAR BGN CurncySouth Africa ZAR: Rand 14.0 0.1% 4.7% 2.4% 14.4 14.7

TND BGN CurncyTunisia TND: Dinar 2.8 0.3% 2.4% 7.7% na na

XOF BGN CurncyWAMU CFA: Franc 585.2 0.5% 1.7% -2.1% na na5

Commodities Spot Rate WTD MTD YTD 52 Week High 52 Week Low 12M Forward

CO1 ComdtyBrent Crude USD/bbl. 66.2 -2.8% 6.2% 23.2% 75.6 52.5

GC1 COMB ComdtyGold USD/ t oz 1,523.2 0.6% 3.9% 18.9% 1,559.8 1,266.0

HG1 COMB ComdtyCopper USD/lb. 279.8 -1.4% 5.9% 6.3% 299.6 246.8

CCH0 ComdtyCocoa USD/MT 2,540.0 1.7% -1.1% 2.8% 2,694.0 2,188.0

Macro & Fixed Income 10Yr Bnd Yld Inflation Real Return Policy Rate *GDP ($'b) **GDP Growth Reserves ($'b)

Angola 8.8% 1.5% 7.2% 18.0% 105.8 2.5% 17.6

Egypt 16.0% 3.6% 12.4% 14.3% 250.9 5.3% 45.4

Ghana 19.0% 8.2% 10.8% 16.0% 65.6 5.6% 6.6

Kenya 12.3% 5.8% 6.5% 8.5% 87.9 5.1% 9.4

Mauritius 4.4% 0.3% 4.1% 3.4% 14.2 2.9% 7.3

Morocco 2.9% 0.4% 2.5% 2.1% 117.9 2.1% 25.3

Nigeria 11.6% 11.9% -0.3% 13.5% 397.3 2.3% 38.6

South Africa 9.0% 3.6% 5.4% 6.5% 368.3 0.1% 54.9

Tanzania 14.5% 3.6% 10.9% 12.0% 58.0 7.7% 4.7

Tunisia 9.8% 6.3% 3.5% 7.8% 39.9 1.0% 7.1

Performance Summary

December 31, 2019

Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19

Movements in Global Indices vs Africa

MSCI World S&P 500

FTSE 100 MSCI Africa

Sources: Bloomberg, United Capital Research *GDP ($’b): Annual GDP by World Bank

** GDP Growth: Latest Quarterly y/y GDP Growth

Domestic

Macro and

Policies



Domestic Macroeconomic Overview

…in need of a coordinated and coherent policy framework

Momentum in the Nigerian economy remained at a snail’s pace in 2019 despite

increased clarity in the political space. While issues surrounding the 2019 general election

subdued economic activities in Q1-2019, investment and business decisions were hushed

by policy uncertainty and incoherent policy pronouncements in the remaining part of the

year. As such, output growth remained at the recovery phase, projected at 2.24% for FY-

2019. Though the headline inflation rate moderated significantly, consumption spending

remained weak. Also, actual government revenue continued to underperform budget

estimates (at N2.0trn vs N2.9trn), thus constraining spending. As such, fiscal deficit

remained elevated, keeping cost of capital high and necessitating direct central bank

financing of the government. Monetary policy stance was largely unconventional as the

Central Bank of Nigeria (CBN) opted to focus on domestic liquidity management via

increased OMO sales, exclusion of non-banking institutions to force down rates while

compelling Deposit Money Banks (DMBs) to lend to the real sector.

In the external sector, Nigeria reluctantly signed the African Continental Free Trade

Agreement (AfCFTA) but trade relations with bordering economies became tense in Aug-

19 as the Nigerian authorities ordered the closure of all land borders to check smuggling,

boost revenue from trade and protect local production. Additionally, investment flows

remained broadly in favour of foreign portfolio investment (FPIs), dominated by carry

traders looking to exchange cheap liabilities in the advanced market for the CBN’s short

term bills (OMO), while foreign direct investment (FDIs) remained on the sidelines. In the oil

market, Brent prices averaged $63.7/b for the year amid escalation of trade war

between the US and China. This pressured funds flow and prompted the CBN to create a

special window for FPIs, offering them higher OMO rate (compared to equivalent FGN’s T-

Bills rate) to support the position of the external reserves. Yet, Nigeria’s dollar reserves

suffered a +$5.0bn diminution in H2-19 on the back of the apex bank’s intervention in the

currency market to keep exchange rate relatively stable.

In 2020, the outlook for the Nigerian economy hangs on a framework of poorly

coordinated and incoherent policy outlines. Evidently, a quick sequence of monetary

and trade policy actions, particularly those relating to sales of CBN bills and complete

closure of land borders, announced since Aug-19, is seemingly changing the dynamics in

the financial market. As such, we align with the position of the IMF in its Article IV on

Nigeria in Oct-19, that the country must implement a coherent and coordinated set of

policies to urgently reduce vulnerabilities and hasten output growth over the medium

term. To achieve this, the IMF recommends maintaining a tight monetary policy stance

through more conventional tools as well as an ambitious revenue-based fiscal

consolidation in the face of increasing CBN financing of government expenditure.

Government revenue

continued to

underperform budget

estimates

The Nigerian economy

hangs on a framework

of poorly coordinated

and incoherent policies

Domestic Macro Overview



Fiscal Policy

Nigeria’s Strategic Revenue Growth Initiative

In response to rising recurrent spending, fiscal deficit and weaker oil revenue, Nigeria’s

Minister of Finance, Budget, and National planning, Mrs. Zainab Ahmed, launched the

Strategic Revenue Growth Initiative (SRGI) in 2019. According to the Minister, the

implementation of the SRGI is targeted at rapidly boosting government revenue across

the oil and non-oil sectors in the face of sharp rising debt profile. By the Debt

Management Office’s (DMO) account, national debt stock as at H1-2019 stood at

N25.7tn (up 15.9%y/y), of which FGN’ outstanding debt settled at N20.4tn (up 14.8%y/y).

What is more worrisome is that debt service to revenue continues to rise, at 54% as at Jun-

19, implying that the FG spent N54.0 out of every N100.0 revenue on debt servicing.

Clearly, the above provides an insight into the need for the fiscal authorities to be more

aggressive at mobilizing revenue. As such, this has resulted in several announcements

lately, some of which includes; proposed increase in VAT from 5.0% to 7.5%, possible return

of toll gates on federal roads, duty on imported personal items with a value of N50,000,

excise duty on Alcohol & Carbonated drinks, proposed tax on luxury goods, amendment

of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC)

agreements and the revision of NNPC stake in JVs to 40.0% among others. Looking at the

actual revenue performance of the FGN as of H1-19 versus the budgeted revenue for

2019, only 29.1% of the projected revenue has been achieved. Shockingly, the minister of

finance noted that it is impossible to meet 80.0% revenue performance by year-end.

To buttress the point above, a review of the CBN’s balance sheet indicated that FGN’s

deposits with the apex bank entered a negative balance in Q3-19, the first time since

2009, settling at c.N2.0bn as at Mar-19, after dipping by 441% since January 2018. In the

face of revenue pressures, recurrent spending continues to spike due to rising wage bill

and cost of borrowing. Notably, the FGN and the Nigerian Labour Congress (NLC)

reached an agreement to peg minimum wage in the country at N30,000/month as well

The fiscal authorities

are to drive aggressive

mobilization of

revenue.


Debt servicing to

revenue is alarmingly

high


Figure 16



as adjust the salaries of civil servants across Grade Levels (GL 7-17) by an average of

18.0% in Oct-19, effective from Apr-19.

To gain further insight into the fiscal policy outlook of the Nigerian government, a review

of the 2020 budget showed that total expenditure of the federal government will increase

to N10.59tn in 2020, larger than the 2019 budget. Also, a whopping sum of N4.9tn (or

47.6%) is budgeted for non-debt recurrent spending alone. Particularly, salaries, pensions

and other overheads such as insurance will account for 74.0% of non-debt recurrent

spending, with the wage bill of the FGN projected to hit N2.9tn following the new

minimum wage agreement. Capital expenditure (excluding the statutory spending of

N0.56tn) is estimated at N2.5tn (vs. N2.7tn for 2019) above planned borrowing of N2.18tn

but well below debt service cost of N2.7tn. As such, it is worthy of note that debt servicing

cost is already crowding out capital expenditure. Yet, the need for massive investment in

human and physical resources such as education, health care, roads, power, and port

facilities, is a must for Nigeria to achieve its desired level of economic development.


Total expenditure will

increase in 2020 to

N10.59tn

Figure 17




Reflecting on the realities above, revenue estimates in the 2020 budget, though largely

optimistic, was accompanied by a finance bill that proposes sweeping modifications to

tax laws in Nigeria. According to budget estimates, Nigeria hopes to mobilize a record

revenue size of N8.15tn, on the assumption that oil revenue will contribute only N2.6tn

(32.2%) while non-oil tax revenue will account for N1.8tn (22.0%). The bulk of the 2020

revenue is expected to come in via other sources (expected to account for N3.7tn or

45.1%) which includes signature bonuses from concessions, surpluses of Government-

Owned Enterprises (GOEs), independent revenues, recoveries and grants.

The above notwithstanding, the FGN is leaving no stone unturned in its effort to boost oil

and non-oil revenue. On oil revenue, Nigeria has made two significant changes that will

affect its oil revenue profile in 2020. On tax revenue, the fiscal authority has pushed a

finance bill to the National Assembly alongside the budget, to review fiscal rules around

taxes in Nigeria to further shore-up government revenue.


Source: FMF, Budget Speech, United Capital Research

The finance bill

proposes sweeping

modifications to tax

laws in Nigeria

Source: FMF, 2020 Budget Speech, United Capital Research

Figure 18

Figure 19

NON-OIL TAX REVENUE

✓ CIT: N0.8 trn (58%)

✓ CUSTOMS N0. 3 trn(22%)

✓ VAT: N0.23 trn 16%)

✓ FED LEVIES: N0.06 trn(4%)

BUDGETED FEDERAL

GOVERNMENT REVENUE

✓ OIL PRICE : $57/B

✓ OIL PROD.: 2.18MB/D

✓ FX RATE : N305/$1

OIL AND GAS REVENUE

N 8.2 trillion(vs. N7.6tn in 2019)

N2.64 Trillion N1.81 Trillion

OTHERS REVENUE

✓ SIGN BONUS/

✓ RENEWAL N0.9 trn

✓ GOES: N0.85 trn

✓ INDEPENDENT : N0.6 trn

✓ RECOVERIES: N0.24 trn

✓ STAMP DUTY: N0.2 trn

✓ GRANT & FX DIFF N0.16 trn

N3.7 Trillion

INCLUDING

NASS N125BN

JUDICIARIES N110BN

UBEC N111.8BN

NDDC N80.9BN

BHCPF N44.5BN

NEDC N37.8BN

(FOR COMPLETIONS OF

MOST ON-GOING

PROJECTS,

EXCLUDING CAPEX

PORTION OF STATUTORY

TRANSFER OF N318.1BN)

CAPITAL

EXPENDITURE

TOTAL BORROWINGS

SOURCE FROM

DOMESTIC MKT N0.8TRN

FOREIGN MKT N0.8TRN

MULTI/BILATERAL N0.3TRN

PRIVATIZATION N0.13TRN

N2.1 Trillion N0.556 Trillion

(UP 14.4% VS. 2019

ESTIMATE , 24% OF THE

BUDGET)

N2.45 Trillion

(PROGRAM SEEKS TO LIFT

MANY FROM POVERTY &

CREATE OPPORTUNITY FOR

PEOPLE TO FEND FOR

THEMSELVES)

SOCIAL INVESTMENT

PROGRAM

N0.03 Trillion

N2.18 Trillion

(COMPRISING OF OIL AND

NON-OIL REVENUES,

INDEPENDENT REVENUES AND

OTHERS )

BUDGETED FEDERAL

GOVERNMENT REVENUE

N8.2 Trillion

N10.5TRILLION

STATUTORY

TRANSFERS

DEBT

SERVICE

(74% SALARIES & PENSIONS INCLUDING

MIN WAGE INCREASE, OTHERS ARE OVERHEADS

SUCH AS INSURANCE ETC,

RECURRENT

EXPENDITURE

N4.88 Trillion



Some changes to oil production contracts

To reduce the burden of cash calls on Joint Venture (JV) Agreements between the NNPC

and IOCs, President Buhari ordered the NNPC to reduce its stake in JVs to 40.0% following

his victory at the 2019 general election. The NNPC currently holds a majority stake of 55%

to 60% in JVs, hence the proposed reductions are estimated at 15% to 20%. As such, this

will create a one-time windfall for the implementation of the budget. According to the

minister of Budget, farm downs were expected to happen in 2019 but whether the stakes

were offered outside the current partners are unclear.

Secondly, Nigeria also passed the amended Deep Offshore and Inland Basin Production

Sharing Contract (DOIBPSC) 1993 Act. While the Act was initially created to encourage

investment in Nigeria’s offshore assets, by providing lower royalties, taxes and allowances,

the amended bill target shoring up Nigeria's oil earnings, especially with respect to the

implementation of the 2020 budget. Notably, for royalty payable on a field basis, the

amended bill reviewed royalties for Inland Basin downwards from 10.0% to 7.5%. However,

in contrast to the initial bill which assigned a variable rate, depending on the depth

(12.0% for areas from 201–500 meters water depth, 8.0% for 501-800 meters, 4.0% for 801-

1000 meters and 0.0% for below 1000 meters) of the off-shore explorations, the amended

bill assigns a fixed rate of 10.0% on all oil fields below 200 meters. Additionally, to capture

market volatilities, the new bill introduced a specific price reflective royalty, such that at

prices ranges between $20/b - $60/b, $60 - $100/b, $101 to $149/b and above $150,

royalty charge will vary from 2.5%, 4.0%, 8.0% and 10.0% respectively.

It is worthy to note that the Attorney General of the Federation and Minister of Justice,

Abubakar Malami, has been making a case for the recovery of over $62.0bn from the

IOCs as arrears of revenues that should have accrued to Nigeria over the years that oil

sold above $20/b, in accordance to the provision of the 1993 Act, which allows for a

review of royalty rate when crude oil prices exceeded $20.0/b. Overall, the amended bill

is expected to increase oil revenue going forward. This may however increase the

operating cost of the players within the PSC contract, discourage new investments, and

further delay Final Investment Decisions on pending offshore projects, 11 of which are yet

to commence production.

…the amended bill

assigns a fixed rate of

10.0% on all oil fields

below 200 meters


NNPC to reduce its

stake in JVs from 55%-

60% to 40%

JVs with NNPC

Sources: NNPC, Fitch solution, United Capital Research

Figure 20

Companies Stakes Region

Shell Petroleum Development Company of Nigeria NNPC (55%) Shell (30%), Elf (10%), Agip (5%) Onshore Swamp

Chevron Nigeria NNPC (60%), Chevron (40%) Warri, Niger River, Shallow Water

Mobile Producing Nigeria Unlimited NNPC (60%), Mobil (40%) Akwa Ibom

Nigeria Agip Oil Company NNPC (60%), Agip (20%), Philip (20%) Onshore

Elf Petroleum Nigeria Limited NNPC (60%), Elf (40%) On and offshore

Texaco Overseas Petroleum Company of Nigeria Unlimited NNPC (60%), Texaco (20%), Chevron (20%) Offshore



Sweeping changes proposed by the finance bill

The finance bill is designed with the objective to reform domestic tax laws, promote fiscal

equity, incentivize investments in infrastructure & capital markets, support small businesses

and raise revenues for the Government. To achieve these objectives, key changes were

made to Nigerian tax laws which include; the Companies Income Tax (CIT), Value Added

Tax (VAT), Petroleum Profits Tax (PPT), Personal Income Tax (PIT), Capital Gains Tax (CGT),

Customs and Excise Tariff Etc. (Consolidation) and the Stamp Duties Acts.

To optimize tax revenue on CIT, some of the changes proposed include:

1. Expansion of the basis for taxing Non-Resident Companies (NRCs) with significant

economic presence in Nigeria by including digital/electronic services and services

rendered outside Nigeria to a Nigerian beneficiary;

2. Introduction of a 2.0% and 1.0% bonus on early payment by medium-sized (with

revenue of N25.0bn to N100.0bn) and large (revenue above N100.0bn) companies

respectively, where CIT liability is paid 90 days before the due date of filing;

3. Exemption of small companies (with revenue <N25.0m) from minimum tax payment;

4. Repealed min tax exemption granted to companies with 25.0% imported equity;

5. Interest on foreign loans from related parties should not exceed 30.0% of EBITDA in

any given tax year and interest expense not fully utilized can be carried forward for a

maximum of 5 years;

6. To eliminate the risk of double taxation, dividends paid out of retained earnings

already taxed under CIT Act, PPT Act, and CGT Act, exempted profits/income,

franked investment income, and rental income received by Real Estate Investment

Companies for distribution to their shareholders, are all exempted.

On Value Added Taxes, the finance bill proposes to:

1. Increase in the VAT rate from 5.0% to 7.5% and expand the definition of goods to

include intangible products (properties and assets but excluding land);

2. Exempted small companies from VAT registration and filing obligation;

3. Introduced "place of supply" rules for goods and services rendered by NRCs and

imposed an obligation on Nigerian customer of an NRC to self-account for the VAT;

4. Added basic food items (cereals, cooking oils, culinary herbs, fish, flour & starch, fruits,

live or raw meat & poultry, milk, nuts, pulses, roots, salt, vegetables, and water), locally

manufactured sanitary towels, tuition (primary, secondary and tertiary education)

and services rendered by Microfinance Banks, to the exemption list.

Some of the changes to Other Tax laws are:

1. Deletion of tax relief for children and dependent relatives in the PIT Act

2. Deletion of exemption for dividends paid out of petroleum profit in the PPT Act

3. Goods imported into Nigeria to incentivize local product now subject to Customs &

The finance bill aims to

promote fiscal equity,

incentivize investments

in infrastructure &

capital markets,

support SMEs and raise

government revenues




Excise Tariff

4. Increased the maximum amount exempted from tax due to compensation of loss of

office to N10.0m

From all indications, the Nigerian government is clear in its determination to review its tax

laws to optimize revenue. As such, the finance bill captures items that will increase both

the tax rate (as in the case of VAT) and the base while promoting equity. We think this is

laudable, considering that the review of the tax laws as proposed by the finance bill is

unprecedented. If successfully passed into law, the bill will bolster revenue from VAT which

is currently less than 1% of GDP. Non-oil revenue as a ratio of non- oil GDP should also

improve.

Clamping down on informal cross border trades

Concerned about the negative effect of informal cross border trade, the FGN ordered a

complete shutdown of land borders in between Nigeria and its neighbours, most notably

Republic of Benin and Niger. The decision halted legal and illegal trade flows through

land borders, leaving air and seaports as the only available option for external trade in

goods. While this devastated economic momentum in the Republic of Benin, built around

entrepôt trade, trade flows by road with not too distant neighbours like Ghana and

landlocked Republic of Niger were also affected. The reasons behind the decision

according to government officials included: checkmating the smuggling of staple food

and subsidized petrol products; preventing illegitimate movement of weapons and drugs

into the country; protecting local producers from unfair competition from cheaper but

illegally imported substitutes; and ending significant custom/trade revenue loss. While

negotiations are on-going, the Nigerian government noted that the border may remain

closed till 31st of January 2020 to ensure that the strategic initiatives behind the decision

are achieved while getting the assurance of neighbouring countries to firm up their end

of the bargain.

Undoubtedly, same way cheaper staple food is fueling smuggling into Nigeria from the

neighbouring hubs, petrol price differences create the incentive to smuggle petrol out of

Nigeria. For instance, while official importation of rice in Nigeria crashed to record low in

2018 compared to the level in 2015, importation of rice in the Republic of Benin increased

dramatically over the same period. To curb the problem of subsidized petrol being

smuggled out of Nigeria, all petrol stations within 20km around the borders were also shut

down. Consequently, the NNPC reported that a total of 6mn liters of fuel is saved daily

following the action.

Certainly, local producers of staple food are one of the biggest winners, as they can push

more volumes. Nonetheless, consumers will suffer relatively higher prices amid supply

shortages. Fiscal authorities will also benefit, judging by increased custom revenue and

huge amount of savings on subsidy payment. In 2020, the outcome of the on-going

negotiation between the Nigerian authorities and its neighbours will affect government


Border closure has

helped Nigeria cut

down illegal petrol

consumption &

smuggling

Local producers of

staple food are the

biggest benefactors of

the border closure



revenue positively, due to lower oil subsidy and higher custom revenue. However, this

keep food prices relatively elevated, until local production is enough to meet demand.

Monetary policy

CBN’s Balance sheet unwinding and monetary policy unorthodoxy

From 2015 to Q3-19, monetary policy was mostly tight, judging by aggressive sales of

Open Market Operations (OMO) bills which totaled N13.0tn as at Aug-19, the CBN

commenced the process of unwinding its balance sheet in Q3-19. Rather than go the

route of conventional policy tools, the apex bank announced the exclusion of local

corporates and individuals from participation, both at the primary and secondary OMO

markets from Oct-19. Of the N13.0tn OMO bill outstanding as of Aug-19, c.25.0% are in

the hands of the local corporates and individuals. Technically, by not rolling over some

maturing bills, the CBN flooded the system with liquidity, thus crashing market interest rates

to single digit. Meanwhile, OMO sales to FPIs are maintained at a relatively competitive

rate as a strategy to preserve the external reserves and keep the exchange rate stable.

As of Aug-19, FPIs hold about 50.0% of OMO bills.

To spur credit to the real sector, the CBN had earlier ordered banks to maintain a loan to

deposit ratio of 60%, later reviewed to 65.0%, to compel the banks to expand credit or risk

being penalized, given a moderate improvement in the credit quality. Notably, a

whopping sum of N499.0bn was debited from 12 erring banks for failure to meet the initial

60.0% minimum LDR requirement. With stricter rules around credit growth, banks are

forced to either reduce their fixed term deposit rates to moderate deposit growth or

revise their lending rates lower to aggressively grow credit or simultaneously pursue both in

a bid to hit the CBN LDR target.

With huge OMO maturity in Q4-19, lower money market rates and weaker appetite for

deposits on the part of the banks, a massive influx of naira liquidity spurred interest in the

local equity market which had hitherto been bearish. Clearly, there are concerns around

inflationary pressure and the implication for real interest rate as market rates collapsed to


Source: Trade Map, United Capital Research

Figure 21 Figure 22

CBN compels banks to

maintain a Loan-to -

Deposit ratio of 65.0%

to expand credit



single digits. However, huge system liquidity appears to be having the upper hand so far.

A total of N7.7tn worth of OMO bills are expected to mature between Jan-20 and Aug-20.

According to the IMF, managing vulnerabilities arising from large amounts of maturing

CBN bills, including those held by FPIs, requires stopping direct interventions by the apex

banks, the introduction of longer-term government instruments to mop up excess liquidity

and moving towards a uniform market-determined exchange rate. Should the CBN

decide to sustain its decision to unwind its balance sheet, the outlook for interest rates is

certainly southwards.

Domestic Output and Price Level

Will revenue reforms and CBN’s balance sheet unwinding spur faster growth?

Unsurprisingly, the momentum in the Nigerian economy remained tepid in 2019. GDP

growth continued at a slower pace compared to population, printing a 2.3% growth as at

Q3-19 relative to the population growth of c.2.7%. Notably, GDP growth was weaker in Q1

-19 and Q2-19 compared to the Q4-18 as electioneering and political activities

moderated economic momentum in H1-19. Evidently, impediments to growth in the

economy continued to be linked to poor investment confidence, tougher operating

environment and weaker consumer wallets, which constrained investment and corporate

output growth in the absence of fiscal stimulus.

In terms of sector performance, oil GDP spiked in 2019, thanks to the 0.2mb/d addition

from the Egina oil field which began production in Jan-19 and less disruption in the Niger-

Delta region. On the other hand, activities in the non-oil sector continued to falter. Non-oil

GDP growth was at the mercy of the Agriculture, Trade, and Manufacturing sectors –

accounting for c.50.0% of the GDP, which printed underwhelming outcomes in 2019,

amid poor crop yield, attributable to continued incidence of banditry and insecurity in


Source: CBN, United Capital Research

Figure 23

A total of N7.7tn worth

of OMO bills are

expected to mature

between Jan-20 and

Aug-20

Overall momentum in

the Nigerian economy

remained tepid in 2019

...electioneering and

political activities

moderated economic

momentum in H1-19



the middle belt and northern regions of the country. Notably, Trade – c.15.2% of the

overall GDP, recorded a second consecutive contraction in Q3-19, traceable to difficult

operating environment, constrained consumer wallets, partial closure of land borders and

poor economic stimulus. Overall, of the nineteen activity sectors making up the GDP, five

posted negative growth numbers in Q3-19, four sectors printed slower y/y growth while

ten witnessed faster growth compared to Q2-19.

Certainly, efforts to reform government finances via the finance bill and the recent

amendment of the DOIPSC Act must be commended alongside the CBN’s resolve to

boost private sector credit. However, GDP growth is expected to maintain a gradual

uptick in 2020 due to several factors. First, the absence of a well-coordinated and

coherent strategic policy framework that can hasten output growth is worrisome. Instead,

current policy efforts are seemingly disjointed and occasionally conflicting in our opinion.

For instance, a handshake between fiscal and monetary policy seems to be missing in

terms of policy objective. While the CBN is looking to aggressively drive real sector lending

and accelerate GDP growth, fiscal policy efforts such as increased taxes, border closure

and wage increment, are likely to hurt aggregate demand, thereby muting output

growth. Again, President Buhari’s broad policy objective is to lift a 100million people out of

poverty over the next 10 years. To achieve this, recent reform effort is focused on

incentivizing SMEs, boosting local production and the retail sector. However, recent

increase in food prices, due to supply shortages and the shutdown of the border may

stoke inflationary pressures within the country.

Using the expenditure approach at measuring GDP, we argue that the net impact of

recent government policy action may not hasten output growth significantly. For context,

higher fiscal spending on wages for civil servants and increased consumption taxes (via

VAT, POS charges, excise duties and possibly toll gates) on c.200 million Nigerians, may

have conflicting impact on consumption (C) which account for c.60.0% of GDP. Give or

take, consumption growth may be weak. Again, at 5.6% of GDP, the multiplier effect of

higher government spending (G) may not be enough to bolster GDP, with 25.0%

expended on debt servicing relative to 21.0% on capital spending. For investment (16.0%

of GDP), while gross domestic local investments (Id) may be supported by the CBN’s


Source: NBS, United Capital Research

6.2%6.5%

6.2%5.9%

4.0%

2.4%2.8%

2.1%

-0.7%

-1.5%

-2.3%

-1.7%

-0.9%

0.7%1.2%

2.1% 2.0%1.5%

1.8%

2.4%2.0% 2.1% 2.3% 2.4%

2.2%2.4%

Q1

-14

Q2

-14

Q3

-14

Q4

-14

Q1

-15

Q2

-15

Q3

-15

Q4

-15

Q1

-16

Q2

-16

Q3

-16

Q4

-16

Q1

-17

Q2

-17

Q3

-17

Q4

-17

Q1

-18

Q2

-18

Q3

-18

Q4

-18

Q1

-19

Q2

-19

Q3

-19

Q4

-19

FY

-19e

202

0f

Nigeria is stuck in the recovery phase of economic cycle

Quarterly GDP growth rate viz. 3-m onth m oving average

Boom

Contraction Recession

Slowing recovery

Figure 24

…we argue that the net

impact of recent

government policy

action may not hasten

output growth

significantly

...current policy efforts

are seemingly

disjointed and

occasionally

conflicting in our

opinion



recent effort to drive credit growth and lower interest rates, Foreign Direct Investment

(FDI) growth is unlikely to improve drastically in the absence of policy clarity and

deliberate policy actions to pull investors. Even so, gross domestic investment may remain

challenged by hostile operating environments relating to port congestion, high cost of

capital, poor transport network and huge cost of haulages and logistics. Hence,

investment growth may stay muted. Finally, Net Export (Xn), accounting for 19.4% of GDP,

is unlikely to expand significantly given that total export, which is crude oil & gas product-

led, may remain stable due to OPEC output cap and border closure. However, import

may shrink if negotiation between the Nigerian Authorities and its neighbours countries

result in a tighter control around the land borders even as the CBN continues to add more

to the list of items excluded from FX sales.

Overall, our view is that while the CBN’s recent unorthodox monetary policy will keep cost

of capital low by compelling banks to lend, faster GDP growth is unlikely in the near term.

Given the ongoing necessary but conflicting fiscal policy actions (e.g. the recent move to

increase taxes & trade restrictions) may hurt consumption and net export. Also, subsisting

concerns around policy unpredictability which have been one of the biggest

impediments to FDI flows and investment generally, as well as the reluctance to

implement reforms that will spur private sector growth is worrisome. Finally, the time span

required to fix power and other critical infrastructure that will ease the cost of doing

business and other structural impediments is a factor that may subdue growth in the

interim. Overall, our GDP growth forecast is pegged at 2.3% in 2020, slightly higher than

our 2.2% projection for 2019.



Overall, our GDP

growth forecast is

pegged at 2.3% in

2020, slightly higher

than our 2.2%

projection for 2019

FDI growth is unlikely to

improve drastically in

the absence of policy

clarity and deliberate

policy actions to pull

investors

Figure 25 Figure 26

Nigeria GDP composition by expenditure approach Figure 27




Inflation rate

Higher wage bill, any impact on price?

From 12.8% in Dec-18, the headline inflation rate moderated to a 43-month low of 11.02%

y/y in Aug-19 on the back of tighter monetary policy. However, the scenario was different

from September and the rest of Q4-19 as the headline rate bucked the southward trend,

spiking to 11.85%y/y in Nov -19 following a complete shutdown of land border to check

activities of smugglers which had kept local price of staple food relatively low. In contrast

to our expectation that m/m inflation rate was likely to moderate in H2-19 as observed

over the last 5years, due to seasonality, an unexpected shutdown of the border pressured

food prices northwards. For context, the price of a bag of 50kg rice surged from

c.N16,000/50kg bag in June 2019 to c.N28,000/50kg bag following a clampdown on

smuggling activities at the border. Additionally, expansionary monetary policy in Q4-19 as

well as increased demand associated with year-end festivities further pressured prices. As

such, headline inflation averaged 11.4% in 2019 compared to 12.2% in 2018.

In 2020, the CBN is likely the sustain its OMO sale to FPIs, a decision that may continue to

keep FPI interest dominant in money market funds. In the absence of low yield on money

market bills sold to FPIs, foreign interest in local equity market may remain tepid amid

fears of a naira devaluation and confidence deficit in the economy. Notably, we expect

upsurge in loans and other claims to continue given the low interest rate environment in

the international debt market. However, FDI flow may remain broadly muted.

We expect headline inflation rate to climb northwards in the first-half of the 2020 even if

m/m inflation moderates from 1.0% to 0.8%. The structural issues that may sway outlook for

inflation northwards include the tighter conditions around the land border as an outcome

of the trade talks between the Nigeria and its neighbouring counterparts. Again, the

implementation of cost-reflective electricity tariff in Q1-20 as well as monetary expansion

by the CBN during the period may keep prices elevated. As such, we estimate headline

inflation to peak at 12.16% in H1-20 and potentially moderate to an average of 11.06% in

H2-20. This is however, in the absence of further structural changes that may trigger fresh


Headline inflation

averaged 11.4% in

2019 compared to

12.2% in 2018


Figure 28

We estimate headline

inflation to peak at

12.16% in H1-20 and

potentially moderate to

an average of 11.06%

in H2-20.



Source: CBN, FMDQ, United Capital Research

uptick in m/m inflation. In all, we expect headline inflation rate to average 11.9% in 2020.

Interest Rate

Lower for longer?

As noted above, monetary policy in 2020 is expected to be broadly expansionary, amid

efforts by the CBN to boost credit to private sector, hasten GDP growth and reduce cost

of debt servicing. Although the monetary policy committee held all policy rates

unchanged at the last meeting in 2019, the committee favoured the position of the apex

bank to restrict local corporates and individuals from participation in the periodic OMO

auction or trade OMO bills in the secondary market. With huge OMO maturities expected

to hit the system for most of H1-20, we expect massive system liquidity to keep interest

rates in the Nigerian economy at record lows. While MPR as well as other policy variables

may be kept at their current levels, market rates on government Treasury bills should stay

at single digit levels in H1-20. Also, Bank lending rates will trend southward amid increased

efforts by the banks to expand their loan book in a bid to bolster interest income. Yields

on bonds across maturities will also moderate and stabilize around 10.5%-11.5% in H1-20 as

demand for higher yielding medium to long term instruments increases.

External Sector

Foreign exchange rate and reserves: Will the CBN harmonize Forex windows?

Currency market conditions were relatively stable in 2019 as the Apex Bank stayed

committed to defending the naira via frequent wholesale and retail FX intervention. This

buoyed liquidity and kept the local currency relatively stable compared to widespread

pressure on currencies among peers within Sub-Saharan Africa. Despite jitters of a rout

during the general election in Q1-19, the local unit firmed against the greenback amid a

sustained uptrend in oil prices, which bolstered Nigeria’s external reserves to $45.0bn

during the period. Notably, while the external reserves improved 4.5% in H1-19, driven by

stronger than expected uptick in oil prices and increased FPI inflow, Nigeria’s dollar

reserves tumbled 8.5% in H2-19, pressured by weaker oil prices and a reduction in net


…we expect massive

system liquidity to keep

interest rates in the

Nigerian economy at

record lows, especially

in H1-20

3.8%

7.8%

11.8%

15.8%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

CBN's recent regulation on OMO sale triggered a sharp drop in borrowing rate

Nigeria Fixed Income Market Yield Curve

Dec-19 (OMO) Jun-19 Dec-18 Dec-19 (NTB/Bond)

Figure 29



portfolio inflows. Accordingly, while the naira depreciated 0.1% y/y to N364.5/$, parallel

market rates appreciated by 0.1%y/y to N360.5/$ and remained flat at N307.0/$ at the

official window.

The above notwithstanding, concerns around the stability of the naira and the likelihood

of a near term adjustment remained the biggest issues on the mind of investors interested

in Nigeria. Our interaction with many investors revealed that there are three key concerns

about the outlook of the naira. The first relates to the multiple exchange rates regime

where the official rate trades at a wide margin to the I&E rate, alongside 2 to 3 other

windows with rates trading at marginal spreads. The second concern relates to the

possible harmonization of rates across all windows or a collapse to the I&E rate (which is

considered the market rate) as a strategy to boost government naira revenue and

support allocations to States. The final concern is tied to the complexity and transparency

of the current exchange rate regime as well as the need for simplification and more

clarity. Again, while the list of 41 items excluded from FX sales was proposed to be a

temporary fix, the CBN has continued to add more items to the list.

With the above in mind, our view remains that the apex bank will maintain the status quo

for now, so long as the unorthodox methodology of selling OMO bills to FPIs as a strategy

to preserve the reserves is working. We note that while the biggest argument for the CBN

to devalue the naira remains pressure on oil revenue, recent fiscal policy efforts aimed at

boosting revenue may keep a devaluation off the table. As such, we maintain that the

CBN is unlikely to take a major adjustment in the currency for now. Nevertheless, a

medium-term adjustment of the current policy framework by the CBN remains imminent.

Even so, we insist that this will mostly affect the official segment of the market where the

local unit is fixed at a huge discount to market rate. Hence, what we are likely to see in

the medium to long term will be the harmonization of the official rate from N305.5/$1 to

N360.0$1, to rebalance FGN’s revenue/expenditure profile in the face of dwindling

revenue while the I&E window rate is maintained at current level or allowed to weaken by

2% to 5%. Overall our outlook for the naira is stable in the near term with a potential


Naira remained

relatively stable across

the FX segments in

2019

…we maintain that the

CBN is unlikely to take

a major adjustment in

the currency for now

Figure 30 Figure 31

Source: CBN, FMDQ, United Capital Research



harmonization in the medium to long term.

Funds Flow: Flowing to assets with the best return

A review of foreign capital inflow into Nigeria since 2013 suggests that the bias of foreign

capital into Nigeria has historically tilted in favour of portfolio investments (FPIs). However,

this has shifted from interest in equities between 2013 and 2017 (with 2016 as an

exception) to low risk but high yielding money market instruments from 2018 to 2019. On a

quarter-by-quarter basis, NBS’s data shows that Interest in equities accounted for more

than 50.0% of capital importation into Nigeria between 2013 and 2015, fell to 11% in 2016

and rebounded to 40.0% in Q2-17. However, the bias of foreign capital flow to favour

money market bills was driven by the apex bank’s aggressive liquidity management

strategy via OMO sales to not just the deposit money banks, but also to FPIs, to stabilize

the exchange rate and preserve the reserves. Notably, foreign capital flow into Nigeria hit

a record high in Q1-19, as a total $8.5bn came into Nigeria with portfolio flow into money

market bills accounting for 70% or $5.9bn while interest in equities fell to record low of

8.0%.

For other components of capital inflow into Nigeria, data suggests that while the

contribution and quantum of Foreign Direct Investments (FDIs) continued to wane from

2014 to Q3-19, down from an average of $515.0mn per quarter in 2014 and 2015 to less

than $250.0mn since 2016, capital flows in form of loans and other claims continue to rise.



Figure 32

...foreign interest in

local equity market

might remain tepid

amid fears of a naira

devaluation

Financial

Markets



Financial Markets Review and Outlook

Easy monetary policy takes the lead in 2019

The year 2019 was not short of interesting themes for the Nigerian fixed income market, as

the cocktail of easy monetary policy in the global market and CBN’s unorthodox

monetary policies kept system liquidity buoyant as well as guided fixed income rates

lower.

Carry traders dominate Nigeria’s money market in H1-19

The renewed fears of a global growth slowdown helped set the tone for easier monetary

policy decisions across the globe in 2019. These actions suppressed yields on fixed income

assets globally and spurred foreign investors’ appetite for the high-yielding emerging and

frontier market debts. Notably, with a stable outlook for FX in 2019 coupled with slowing

inflation rate and attractively high interest rate (above 14.0% level), Nigeria became an

investment destination for most carry traders in Q1-19. Accordingly, despite the election

uncertainties that characterized Q1-19, the total value of foreign portfolio capital

imported into Nigeria spiked (up 412.4% q/q to $7.1bn) during the quarter and was

concentrated in fixed income investments (90.8% of total FPI inflow). Also, demand for

FGN and CBN bills outweighed supply. Thus, average yield on treasury bills and bonds

which closed 2018 at 15.37% and 15.31%, moderated to 13.55% and 14.07% respectively

as at the end of Mar-19.

Additionally, a 50bps rate cut in Mar-19 – the first rate cut in more than 3 years – by the

Nigerian Monetary Policy Committee (MPC), predicated a further moderation in the yield

environment in Q2-19 and mildly weakened the investment case for carry traders. Hence,

FPI inflows into the debt market declined by 41.5%q/q to $3.8bn in Q2-19. Also, average

treasury bill and bond yields further declined to 12.13% and 13.92% respectively, at the

end of H1-19.

The total value of

foreign portfolio capital

imported into Nigeria

surged in Q1-19

Financial Markets

The MPC eased policy

rate to 13.5% in Q2-19,

first time in 3 years

3.8%

7.8%

11.8%

15.8%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Naira yield curve elongates as two Interest rates emerged in 2019

Nigeria Sovereign Yield Curve

Dec-19 (OMO) Jun-19 Dec-18 Dec-19 (NTB/Bond)

Figure 33

Source: FMDQ, United Capital Research

System liquidity was

buoyant in 2019



CBN - The swing player in H2-19

In Q3-19, offshore appetite for naira debt weakened as pressure on inflation and FX rate

resurfaced during the period. Accordingly, average T-bill and Bond yields tracked higher

by 185bps and 25bps q/q to end Q3-19 at 13.28% and 14.15% respectively. However,

yields resumed a downtrend in Q4-19, following a series of unexpected policy changes

from the Apex bank aimed at lowering government’s borrowing cost and supporting

credit growth. Notably, the exclusion of non-bank local corporates and individuals from

participating at the CBN’s OMO market in Oct-19, heralded a rotation of excess funds

from large-sized OMO market (47.6% of local debt market) into the small-sized NTB (8.8%

of local debt market) and bonds market (38.6% of local debt market). Also, this led to the

separation of OMO bills from T-Bills. Consequently, OMO bill yields and T-bill yields, which

once tracked each other, parted and the spread widened to 7.3% as average T-bills stop

rate and yield closed the year at 4.8% and 4.9% respectively, while average OMO stop

rate and yield settled at 12.1% and 13.2% respectively. Average bond yield also fell from

14.2% level as at Q3-19 to 10.8% as at Dec-19 ending. In all, the extra yield foreign

investors get when buying Nigeria’s local fixed income instrument rather than their home

country’s treasuries, narrowed in H2-19 and made the investment case for carry trade less

compelling.

Primary Market: Issuers take advantage of low interest rate environment

Elsewhere, in the primary market segment, the FG successfully rolled over all maturing

Nigerian Treasury Bills (T-bill) during the period, worth N3.0tn at an average stop rate of

11.08% (vs. 11.99% in 2018). However, the Apex bank mopped up only N15.1tn (via OMO

sales) of the c. N15.9tn OMO maturities that hit the system during the year. Also, the OMO

stop rates came in marginally lower at 12.80% (vs 12.88% in 2018).

Yields declined in Q4-

19 due to unexpected

policy changes from

the Apex bank

Financial Markets


5.0%

9.0%

13.0%

17.0%

1Y 3Y 5Y 7Y 10Y

Yie

ld S

pre

ad

Investment case for carry trade weakened in 2019, especially in Q4-19

Spread between Nigeria's treasury yields and developed market yields

U.S: Dec-19 U.K: Dec-19 E.U: Dec-19 JAPAN: Dec-19

U.S: Dec-18 U.K: Dec-18 E.U: Dec-18 JAPAN: Dec-18

Figure 34

The FG successfully

rolled over all maturing

T-bills at the primary

market in 2019



Source: DMO, United Capital Research

In the bond space, the FGN was able to raise a total of N1.7tn at an average marginal

rate of 14.1%, a 15bps decline from 2018 levels. Notably, the Debt Management Office

(DMO) during its Apr-19 bond auction elongated the Nigeria’s yield curve by 10 years, as

it successfully issued its debut 30-year bond. Also, the FGN took advantage of the low

interest rate environment in Q4-19 to front-load its bond issuance at an average stop rate

of 13.0%. Similarly, the low yield environment spurred corporate issuances during the

period as we saw further activities at the commercial paper and corporate bond space.

Eurobond Market Activities: A weak appetite for dollar borrowing

Despite the low global interest rate environment, the FG stayed off the Eurobond market

in 2019, prioritizing loans from concessional sources and borrowing from the CBN. At the

secondary market segment, average yield on Nigerian sovereign Eurobonds declined,

down 210bps y/y to 6.4%, as foreign investors sought alpha in Emerging Market (EM)

assets. Similarly, interest in corporate Eurobonds was positive as average yield declined by

249bps y/y to 7.5%. However, an economic outlook downgrade from Stable to Negative

by Fitch and Moody’s (two renowned global credit rating agencies) dampened investors’

Low yield environment

further led to increased

issuances at the

Commercial paper and

corporate bond space

in Q4-19

Financial Markets


-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5D

ec

-16

Fe

b-1

7

Ap

r-17

Ju

n-1

7

Au

g-1

7

Oc

t-1

7

De

c-1

7

Fe

b-1

8

Ap

r-18

Ju

n-1

8

Au

g-1

8

Oc

t-1

8

De

c-1

8

Fe

b-1

9

Ap

r-19

Ju

n-1

9

Au

g-1

9

Oc

t-1

9

De

c-1

9

Trill

ion

s

CBN unwinds its Balance Sheet in H2-19

Monthly net OMO flows (N)

Net OMO inflows/(outflows) 5-year Average

Figure 35

10%

11%

12%

13%

14%

15%

16%

10

60

110

160

210

260

310

Ja

n-2

0

Fe

b-2

0

Ma

r-20

Ap

r-20

Ma

y-2

0

Ju

n-2

0

Ju

l-2

0

Au

g-2

0

Se

p-2

0

Oc

t-2

0

No

v-2

0

De

c-2

0

Billio

ns

FGN front-loads bond issuance in Q4-19

Monthly bond issuance result in 2019

Allotment Offer Marginal Rates

Figure 36



appetite for Nigerian Eurobond later in the year.

Elsewhere, we observed a weak appetite for dollar borrowing by corporates in 2019. This

was as Zenith bank ($500.0mn) and the defunct Diamond bank ($200.0mn) successfully

repaid their maturing dollar notes while Access bank ($400.0mn), Ecobank Nigeria

($250.0mn) and First bank ($450.0mn) successfully recalled their 2021 notes during the

period. Also, Zenith bank repurchased 78.5% of its only outstanding Eurobond worth

$500.0mn. Thus, the outstanding value of Nigeria’s corporate Eurobonds shrank to c.

$1.5bn in 2019 from US$3.5bn as at Dec-18.

2020 Outlook

Caught between domestic and global policies

For us, 2020 is a corporate issuer market, driven by buoyant system liquidity and a low

yield environment in H1-20. With tighter liquidity going into H2-20, we expect yields to

witness a gradual uptick from Q3-19. Accordingly, we project yield on FGN T-bills to stay in

the mid-to-high single digit levels in H1-19 and Bonds yields at low double-digit levels.

Yet, 2020 will be a play of demand side-factors (global and domestic monetary policy

actions) and supply-side factors (domestic financing needs and CBN mop up decisions).

Demand Side Factors

Global Monetary Policy: The fundamental backbone

2020 promises to be an interesting year as there are plenty unknowns to look at in the

developed market. For instance, US presidential elections, new ECB leadership, a likely

Brexit, oil price performance as well as trade agreement between US and China, are key

factors to watch in 2020. Yet, like 2019, we expect the tone of global central banks and

the action of their monetary policy committees to majorly set the pace of global demand

for EM debts, in 2020.

Financial Markets

Appetite for both

sovereign and

corporate Eurobond

issuance was weak in

2019

For us, 2020 is a

corporate issuer

market, driven by a low

yield environment in H1

-20.

Eurobond Issuer Rating/Agency Issue Date Maturity Date Value ($’mn) Coupon

Yield

(31/Dec/2019

)

Yield

(31/Dec/2018

)

Status

Federal Governememt of Nigeria BB-/Fitch; BB-/S&P 28-Jan-11 28-Jan-21 500.0 6.8% 3.4% 6.2% Outstanding

Federal Governememt of Nigeria B1/Moody's; B/S&P; B+/Fitch 27-Jun-17 27-Jun-22 300.0 5.6% 4.0% 6.7% Outstanding

Federal Governememt of Nigeria BB-/Fitch; BB-/S&P 12-Jul-13 12-Jul-23 500.0 6.4% 4.3% 7.5% Outstanding

Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 21-Nov-18 21-Nov-25 1118.4 7.6% 5.5% 7.6% Outstanding


Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 23-Feb-18 23-Feb-30 1250.0 7.1% 6.9% 8.8% Outstanding

Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 21-Nov-18 21-Jan-31 1000.0 8.7% 7.4% 9.1% Outstanding




Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 21-Nov-18 21-Jan-49 750.0 9.2% 8.2% 9.2% Outstanding

Corporate Eurobond

ZENITH BANK PLC B+/Fitch; BB-/S&P 22-Apr-14 22-Apr-19 500.0 6.3% na 7.2% Matured

DIAMOND BANK PLC B/Fitch; B/S&P 21-May-14 21-May-19 200.0 8.8% na 20.3% Matured

ACCESS BANK PLC II B-/Fitch; B/S&P 24-Jun-14 24-Jun-21 400.0 9.3% na 10.2% Recalled

FIRST BANK LTD B-/Fitch; B/S&P 23-Jul-14 23-Jul-21 450.0 8.0% na 9.2% Recalled

ECOBANK NIG. LTD B-/S&P 14-Aug-14 14-Aug-21 250.0 8.8% na 9.7% Recalled

ACCESS BANK PLC III B/Fitch; B/S&P 19-Oct-16 19-Oct-21 300.0 10.5% 3.9% 8.0% Outstanding

ZENITH BANK PLC II B/S&P; B+/Fitch 30-May-17 30-May-22 500.0 7.4% 4.2% 7.7% Repurchased 78.5%

UBA PLC B/S&P; B/Fitch 08-Jun-17 08-Jun-22 500.0 7.8% 5.1% 8.1% Outstanding

SEPLAT PETROLEUM DEV CO B-/S&P; B-/Fitch 21-Mar-18 01-Apr-23 350.0 9.3% 7.3% 9.5% Outstanding


Three corporates recalled their Eurobond in 2019 Figure 38



Accordingly, given our expectation for global monetary policy easing to continue in 2020

(but at a slower pace compared to 2019), we see moderated inflows into EM/FM assets.

However, in Nigeria, we believe expected macroeconomic uncertainty in 2020,

especially in H1-20, will continue to scare the FPIs off equity investment. Meanwhile, the

allure of double-digit OMO rate and the resolve of the CBN to keep naira stable, should

tilt foreign interest towards the money market – specifically to CBN bills.

Domestic Monetary Policy: At the mercy of FX stability?

Evidently, the expected dovish bias by the developed market central banks will create

more room for an accommodative CBN in 2020, especially as it aims to boost overall

economic growth. However, higher inflation rate and exchange rate volatilities are

downside risk for a more accommodative monetary policy in 2020. As such, we expect a

more cautious CBN, as it tries to strike a balance between stimulating economic growth

and maintaining price, as well as FX stability. To this end, we expect the Apex bank to

keep average interest rate on its 1-year OMO bill at an attractive level, while using other

non-conventional methods to spur growth. This is in a bid to continue to lure FPIs and

preserve FX reserves.

Supply Side Factors

Fiscal Policy: Will government ramp up borrowings?

The 2020 budget which was approved in Dec-19, projects a N1.9tn borrowing- split

equally between domestic and foreign sources. However, based on the analysis in the

macro section of this report and if historical trends are anything to go by, revenue

mobilization is expected to continue to underperform budgeted estimate. Hence, overall

fiscal deficit will widen in 2020. Looking at the above narratives, it is evident that the FG is

likely to pace up both domestic and foreign borrowings to fill up the expected revenue

gap. Also, based on reports from the Ministry of Finance in Dec-19, Nigeria is likely to return

to the international debt capital market, early 2020. If successful, we expect this to

Financial Markets

Early 2020, Nigeria may

return to the Eurobond

market

2.12.3

0.70.9

0.6 0.50.2

0.4

1.2

1.6

0.50.7

Ja

n-2

0

Fe

b-2

0

Ma

r-20

Ap

r-20

Ma

y-2

0

Ju

n-2

0

Ju

l-2

0

Au

g-2

0

Se

p-2

0

Oc

t-2

0

No

v-2

0

De

c-2

0

Bulk of 2020 OMO inflows are tilted towards Q1-20

OMO Maturity in 2020 (N'tn)

OMO Maturity in 2020 Average OMO maturity - 2020

Average OMO maturity - 2019

Figure 37


In 2020, there are

plenty unknowns to

look at in the

developed market



improve FGN’s bargaining power at the local debt market and exert less pressure on the

domestic yield curve.

CBN: All eyes on me!

Like 2019, we believe the CBN and its decision on liquidity management will remain

critical to the direction of interest rate in 2020. While the impact of the OMO restriction is

expected to continue in 2020, we expect the trend of net OMO inflows to be sustained till

Q1-20, due to the low size OMO maturity lined up from Q2-20. Accordingly, we expect

money market rates to remain at sub-5% level in Q1-20. However, as the impact of net

inflows of funds from maturing OMO bills begins to wane in Q2-20, we expect the

bargaining power of the CBN to weaken. Thus, money market rates should begin to

reflect the risks in the environment. Again, we do not rule out the ability of the CBN to use

its discretionary power to keep rates lower throughout the period.

Fixed income strategy for 2020: Active Portfolio Management

Aside from the development in the global monetary policy space and credit ratings

decision by global credit rating agencies, we believe that the major economic metric

that investors will be watching, especially the Eurobond investors, will be oil price and

production data, as fortunes of the country remain dependent on oil. However, given the

volatile nature of the oil market, a below $57.0/b price of global crude oil during 2020 is

likely to be trailed by sell-offs.

We expect the yield curve to remain normalized or upward sloping, as fundamental

factors highlighted above keep yields at the short end of the curve low. Meanwhile,

average yield is expected to further reduce by c. 30-50bps in H1-20, as the CBN intensifies

its effort to reduce interest rates, drive real sector investment and promote economic

growth by encouraging private sector borrowings. Consequently, high-yielding

corporates issuances, expected to flood the market in Q1-20, will be the sweetest play for

investors in 2020.

Financial Markets

The yield curve is

expected to remain

normal , while dropping

by c.30-50bps in H1-20

Source: United Capital Research

Possible Triggers of Yield Movement in 2020 Figure 39

We expect the trend of

net OMO inflows to be

sustained till Q1-20,



Financial Markets

Figure 40

Source: FMDQ, NBS, United Capital Research

Heatmap of Nigeria’s Sovereign real yield



Financial Markets

Figure 37

Equities Market Review & Outlook

Lower fixed income yields… higher stock prices?

In 2019, the investment case for Nigerian equities included; the cheap market valuation,

a post-election repricing of naira assets as well as an anticipated renewed inflow of

foreign capital into Nigerian equities market. Contrary to the above, while equities market

performance in the rest of the world closed broadly positive, investors continued to snub

Nigerian equities. Cheap market valuation was ignored for less risky and more attractive

yield on short-dated money market bills. As such, the Nigerian stock market benchmark

under-performed its global peers in 2019. Still, the performance was shaped by sequence

of events ranging from developments in the macroeconomic policy environment to

heavy listings and series of corporate actions and primary markets activities.

In terms of corporate actions, the Nigerian market was treated to a cocktail of mergers,

acquisitions, divestments, heavyweight listings, IPO and several delistings. Notably, the

year started with the completion of the scheme of merger between the defunct

Diamond Bank Plc and Access Bank Plc in Mar-19 and eventual delisting of the DIAMOND

shares. Also, Olam International, a global food and agribusiness company, acquired

Dangote Flour Mills at N24/share and took the company private. Similarly, SEPLAT is set to

acquire Eland Oil & Gas at £382mn. Ellah Lakes Plc, a fish farming business, also

consummated a take-over deal with Telluria Ltd., via the issuance of 1.88bn units of

ordinary shares.

After months of speculations, MTN Nigeria Communication Plc (MTNN), Nigeria’s biggest

telco, set the market on fire in May-19, listing a total of 20.4bn units of ordinary shares

worth N1.8tn to become the 2nd largest entity on the Nigerian bourse. The listing brought a

temporary reprieve to market sentiment, as massive demand for the ticker, which was

listed at N90.0/share drove the market price to a high of N150.0/share.

Unsurprisingly, the MTN’s listing was followed by Airtel Africa Plc announcement of its

Financial Markets

The NSE benchmark

index under-performed

its global peers in 2019

Nigerian Equities underperform Global Peers Figure 41

2019 witnessed a good

number of M&As,

divestments,

heavyweight listings,

IPO and delistings


Equities Index Mcap ($'b) YTD Rtn P/E (x) P/B (x) Div. Yield

Egypt 13,961.6 47.8 7.1% 11.2 1.8 2.5%

Ghana 2,257.2 3.9 -9.7% 15.2 1.6 0.7%

Kenya 166.4 24.5 18.5% 11.7 1.9 5.9%

Nigeria 26,842.1 31.6 -14.6% 7.1 1.3 6.1%

South Africa 57,084.1 441.2 8.2% 16.0 1.8 4.0%

MSCI BRIC 340.0 8.4 19.8% 14.9 1.9 2.1%

UK FTSE 7,542.4 1.6 12.1% 18.3 1.8 0.2%

S & P 500 3,230.8 28,115.8 28.9% 21.8 3.7 1.8%

Global Market 2,358.5 87,167.7 25.2% 20.8 2.6 2.3%

Frontier Market 586.0 342.1 13.5% 10.6 1.9 3.8%

Emerging Market 1,114.7 18,605.7 15.4% 15.6 1.7 2.6%



global IPO of ordinary shares worth $780m (or N270.0bn), to be listed on the floor of the

London Stock Exchange (LSE) and the Nigerian bourse.

The market also witnessed a series of corporate actions, with the most notable being the

divestment of Forte Oil Plc’s (now Ardova plc) downstream segment to Prudent Energy,

through Ignite Investments and Commodities Limited during the year. Also, Lafarge Africa

Plc (WAPCO) divested from its South African operation to its parent company Lafarge

Holcim Group in a bid to resolve its protracted challenges around financing. The

company issued a Rights offering worth N7.4bn to execute the divestment. Similarly,

UACN announced the unbundling of its real estate business, UPDC. Additionally, the

company issued a Rights offer worth N15.96bn to recapitalize UPDC.

The above notwithstanding, sentiment for equities worsened amid concerns in the

macroeconomic environment. Notably, delayed announcement of ministers after the

2019 election, concern around the outlook of the local currency and the predominance

of double-digit yield on both the fixed income markets, skewed interest of both domestic

and foreign investors in favour of money market investment at the expense of equities.

This continued even after the CBN opted to crash rates on T-bills via the exclusion

domestic corporate and non-bank entities from participation in the OMO market in Q4-

19.

A breakdown of the performance of the Nigerian bourse by sector indicated that all sub-

indices closed negative, as at 24th Dec-19. The Agric sector printed the largest loss of

26.4%. The Consumer Goods sector followed with -20.8% decline. The Oil & Gas as well as

the industrial good sector indexes fell 13.1% apiece. Finally, the Banking and Insurance

sector indices were the best of the worst, depreciating 10.6% and 0.1% respectively.

Financial Markets

0.4

0.7

1.0

1.3

Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19

All indicies on the Exchange trended southwards in 2019

Relative price movement of the NSE against Key sectors

NSE-ASI Banking Consumer goods

Oil and Gas Insurance Industrial goods

Figure 42

FO, WAPCO and UACN

all implemented large

ticket corporate

actions in 2019

All sector sub-indices

declined in 2019,

mirroring the NSE-ASI

Source: NSE, Bloomberg, United Capital Research



Financial Markets

Outlook: What is the investment case for 2020?

From a glorious performance in 2017 to a sustained downward spiral in 2018 and 2019,

one of the toughest questions from our clients in 2019 was whether the equities market has

fallen out of grace? And rightfully so, increasing stability in the polity following the

conclusion of general election and the gradual uptick in the broader macroeconomy

was theoretically expected to sway sentiment for equities northwards.

However, facts are changing due to the policy environment in the domestic financial

market, with clear implications for the local bourse. Accordingly, the biggest questions

begging for answers going into 2020 include:

1. Has the negative trend bottomed out?

Certainly, the biggest concern for equity market investors is the potential of a further

depreciation, given that the factors responsible for the weaker appetite in 2018 and 2019

may persist in 2020. As such, a clear understanding of the sweet spot between the bottom

and a rebound becomes important for discerning investors. Technically analyzing the

performance of the NSEASI over the last decade, we observed that the probability of a

rebound seems more likely than a further downturn.

Looking closely, while the lowest level of the index over the last 10 years can be traced to

20,000pts in 2011, we strongly believe realistic support level or the bottom can be pegged

at 22,465pts index levels in 2016. An aftermath of plunging oil prices which hit a record low

of c.$27.0/b in Jan-16, elevated currency crisis and poor policy responses. On the other

hand, the index peaked at 45,000 index point in 2018, following changes in the policy

framework at the time. At the Dec-19 year-end of the index level (26,842.1 points), we

think the potential downtrend is pegged at -16.3% in 2020. By the same token, the

potential upside comes to a whopping 67.6% if policy framework adjusts in favour of

demand for equities. While technical analysis highlights the possible frontiers of the market

The biggest concern for

equity market investors

is the potential for a

further depreciation

...potential downtrend

is pegged at -16.3% in

2020.

Figure 43

Source: NSE, United Capital Research



returns, we are more inclined to fundamental analysis and developments in the operating

environment which often tell a more insightful story about how the market perform. This

leads to the second question.

2. Is market valuation and the macro environment supportive?

A clear implication of continued absence of appetite for equities for two straight years

(2018 and 2019) is that market valuation continues to dip to new lows. As of Dec-19, the

spread between the market P/E ratio of the Nigerian bourse (at 7.1x vs. 9.0x in 2018)

continue to widen compared to its 5-year average of 12.2x. Comparatively, the Nigerian

market now trades at a deeper discount to EM(14.3x) and FM(12.2x) peers, despite the

two major listing in 2019.

Thus, we are tempted to insist that from a valuation point of view, Nigerian equities are

increasingly attractive for patient discerning investors willing to hold their position for a

medium to long-term return. However, for attractive market valuation to trigger a rally, the

macro picture must look good to spur domestic and foreign investment.

In 2020, our expectation is that GDP growth will remain modest amid policy changes in

the fiscal and monetary policy space. For context, a low interest rate environment, driven

by the decision of the apex bank to boost money supply, will bolster investment, increase

output, ease funding cost, and support profitability. On the demand side, increased wage

bill as well as tighter border control is expected to support demand and corporate

turnover. However, pressure on disposable income as well as a segmented money market

which favors FPIs, distorts the expectation. In all, the macroeconomic picture seems to be

improving but not compelling enough for the return of the FPIs.

3. Would the market continue to ignore fundamentals?

Aside valuation, another trend observed in the market over the last two years is the

continued inversion of the historical positive correlation between the equities market and

fundamental variables such as the EPS and the earnings yield. Notably, while the 5-year

historical average correlation between the market index and trailing EPS stood at +39.7%

prior to 2018, the relation has remained inverted over the last two years.

Financial Markets

12.2

1.5

7.1

1.30

5

10

15

P/E P/B

Nigerian equities are currently trading

below their 5-year averagesNigerian equity current vs. 5-year historic

valuat ion

5-year average valuation Current valuation

Figure 44

19.5

12.014.3

12.2

20.6

7.1

15.4

10.6

-3.00

2.00

7.00

12.00

17.00

22.00

World Nigeria EM FM

ASI is trading at the sharpest discount to

the worldNigerian equity valuation vs. world

5-year average valuation Current valuation

Figure 45


The macro outlook must

be attractive to spur

domestic and foreign

portfolio investment



Put differently, market EPS has surged 44.8% since 2018 and the Nigerian benchmark

equity index has tumbled 30.3% over the same period. Understandably, uncertainty

around the expectation of the 2019 general election may have been responsible for the

aberration observed in the 12 months till Jun-19. However, the sustained anomaly in the

post-election period appears to be more complicated, with the lack of FPIs push being

the biggest factor. In 2020, whether FPIs will be back to the equity market will be one of

the most watched trends. For us, the major drag to FPI demand for equity in 2020 is the

existence of the CBN window which allows FPIs to access the OMO bills at a double-digit

rate. While we align with the belief that the current framework is unsustainable, we see

the likelihood of this being sustained till mid-2020 or beyond. While increased demand

from the exempted locals may support demand for equities, the hack for the market

remains the complete reduction of OMO rate for all market participants rather than

segmenting the market.

CBN’s unorthodox policy stance, liquidity and the equities market

Putting everything together, the macro policy framework expected to shape the

performance of the market in 2020 comes down to the elephant in the room, CBN’s

unorthodox monetary policy. More specifically, the apex bank’s decision to keep the

system awash with liquidity and lower the yield environment but create a preferential

window for FPIs, is by far the most significant event to watch. In theory, a lower yield

environment implies that investors will look towards riskier assets in search for higher

returns. Clearly, stocks as well as other riskier non-sovereign papers such as sub-national

bonds, commercial papers, corporate bonds, structured notes and syndicated loans, will

become more attractive. More so, increase in money supply, a feedback effect of the

CBN’s resolve not to roll-over OMO bills held by non-bank domestic corporate and

individual is positive trigger for equity market performance. To put this in perspective,

about N10.0trn worth of OMO Bills is anticipated to mature before the end of 2020, with

close to N2.25trn held by the excluded market participants. Thus, the question is, will a

significant portion of this amount filter into the equities market?

Financial Markets

In 2020, whether FPIs

will be back to the

equity market will be

one of the most

watched trends

In theory, a lower yield

environment implies

that demand for riskier

assets increases amid

appetite for higher

returns


Figure 46



In economic theory, the nature of the relationship between money supply and stock

prices is highly debated. However, several studies established that unexpected changes

in money supply and stock returns are mostly positively related, but the degree to which

their relationship can be measured is dependent on other economic variables operating

within the system. In the case of a frontier market like Nigeria, the role of foreign portfolio

capital and the fact that a special window is created to attract FPI flows to OMO bills as a

strategy to preserve the dollar reserves, complicates this relationship. If history is anything

to go by, demand from FPIs remains the most significant driver of equities in Nigeria, with

the performance of the market significantly positively correlated with FPI flow to equities.

On the contrary, domestic money supply does not indicate any clear relationship with

market index, implying that expected increase in domestic system liquidity may not have

a significant impact on market return in 2020. In sum, while increased domestic currency

liquidity may support demand for equities, especially from local asset managers, the

absence of deep pocket FPIs in the Nigerian market in 2020 may keep return tepid.

Our Projection for 2020

We base our equities market return projection for 2020 on developments in the global

economy, domestic policy reforms, overall monetary policy stance and corporate

fundamentals. Our Base case scenario sees equities market return at 5.3%, driven by low

rate environment and increased system liquidity in 2020. Notably, this scenario assumes

that the CBN will sustain its unorthodox policy stance, particularly in relation to OMO sales

to FPIs. However, the index may further depreciate, if developments in the

macroeconomic environment deteriorate. Thus, our bear case scenario estimates a 16.3%

decline in the market. Finally, we do not rule out the possibility of rebound, if development

in the economy improves considerably, as such, our Bull case scenario projects a 23.6%

upside for the Nigerian bourse.

Financial Markets

Studies have

established that

unexpected changes

in money supply and

stock returns are mostly

positively related,

subject to other

variables within the

Our Base case

projection is that

equities will rebound

5.3% in 2020

Equities market outlook scenario analysis

Performance

Drivers Weight 2019 Bear Base Bull

Improv ed Global Economy 15%#REF!

Moderate Policy Reforms 25%

Muted Monetary Policy 40%

Bad Corporate Earnings 20%

All Share Index 100% 26,842.07 22,465.00 28,265.98 33,181.90

YTD Return -14.6% -16.3% 5.3% 23.6%

2020 Scenerio

Key

Source: United Capital Research

Figure 47

https://play.google.com/store/apps/details?id=com.ng.investnow.android

Sectors



Agricultural Sector

Will stricter border control buoy growth?

The Agriculture sector remained at the center of the Nigerian government’s diversification

and economic growth plan in 2019. To buttress this point, the new Minister of State for

Agriculture and Rural Development, Mustapha Baba Shehuri, stated clearly that farmers

will soon be buying equipment at 50% discount, a strategic plan to boost productivity.

More so, the CBN noted it disbursed c. N817.0bn in 2019 from various agricultural

intervention schemes such as the Agriculture Credit Guarantee Scheme, Commercial

Agriculture Credit Scheme and Anchor Borrowers Program, to support growth in the

sector.

Overall, Agriculture sector output growth remained positive in 2019. Specifically, the

sector grew by 3.2% in Q1-19 as farmers ramped up crop production (+3.3%) to meet 2019

election campaign demands, and livestock production (0.9%) ahead of 2019 Easter

celebration. However, the re-occurrence of insecurity in the northern and middle belt

states coupled with seasonal boom and bursts of the planting season dragged growth in

Q2-19 as crop production sub-sector, which accounted for over 85.0% of the sector,

slowed to 1.9% (previously: 3.3%). The agriculture sector rebounded in Q3-19 (+2.28%) from

the slow growth seen in Q2-19 as border closure boosted the sector performance.

Border Closure: A relief for Nigerian farmers?

As an attempt to check the smuggling of food and related commodities (rice, chicken,

fish, and vegetable oil) into Nigeria, the Federal Government (FG) ordered the partial

closure of land border with Republic of Benin in Aug-19, and later extended the blockade

to all other land borders until a trade agreement is reached with neighbouring countries.

Interestingly, the closure of the border left an imprint on the Nigerian economy, as food

inflation rate which had moderated from 13.5% in Jan-19 to 13.4% in Jul-19, rose to 14.5%

The Agricultural sector

remained at the center

of the Nigerian

government’s

diversification and

economic growth plan

in 2019

Sectors


...border closure

boosted the sector

performance in Q3-19

Figure 48



in Nov-19 amid supply shortages. Staple food items such as rice, chicken, and other frozen

dietary items were the hardest hit, judging by the sharp jump in the prices of these items

across the country. While this has kept the economies of countries such as the republic of

Benin on the edge, local farmers and manufacturers in Nigeria are the biggest winners.

Certainly, they will benefit from the windfall emanating from price hike so long as supply

shortfall remained unmet. Over a medium to long term period, increased investment will

create a leeway for prices to normalize.

Much ado about a bag of Rice?

As a fall-out of the border closure, development in the Nigerian rice market made

headlines in 2019. Rightfully so; rice is the third-most consumed staple food (behind Maize

and cassava) in Nigeria according to Ricepedia. Hence, rice has become a strategic

commodity for food security in the country. Nevertheless, USDA data noted that domestic

supply deficit from 2007-2018 average 43.5%. More specifically, deficit in 2018 stood at a

high of 45.2% as annual consumption came in at 6.8mn tonnes relative to domestic

production of 3.7mn tonnes. Logically, protracted supply shortfall in the domestic market

necessitated massive importation over the period. Notably, restriction on the importation

of rice from 2015 by the current administration resulted in a 115% surge in price between

2014-2018 amid large scale smuggling across all the porous border towns.

In 2019, the FG beamed its searchlight on the activities of smugglers or informal cross-

border traders who have historically frustrated the growth of local producers. According

to FG, the need to spur local production is one of the strategic reasons behind the border

closure even though local consumers continue to show preference for the imported

substitute. Riding on the massive opportunity in the Nigerian rice industry, the operators in

the Nigerian rice industry continue to ramp-up production capacity. However, growth has

remained muted by competition from international market, majorly due to smuggling. As

such, despite being the largest producer of rice in West Africa and 2nd in Africa as at

Food inflation rate rose

from 13.4% in Jul-19 to

14.5% in Nov-19 amid

supply shortages

Sectors

Source: USDA,United Capital Research

172 178

290

350370

2014 2015 2016 2017 2018

Price of rice increased by 115% in 5 years

Average Price of rice (N/kg)

Average price of rice per kg

Figure 49

The restriction on the

importation of rice from

2015 by the current

administration resulted

in a 115% surge in price

between 2014-2018



2018, domestic production remained well below demand.

Oil Palm Sector Overview: Will border closure support sector players performance?

According to the World Bank, Nigeria is the largest consumer of palm oil in Africa given its

huge population. In 2018, Nigeria consumed c. 3.0mn metric tons (MT) of fats and oils,

with palm oil accounting for 44.7% (1.3mn MT). In the same period, production stood at

1.02mn MT, resulting to a supply shortfall of 0.32mn MT. Thus, indicating opportunities for

local production expansions. In a bid to increase local production, the federal

government through the CBN included palm oil as part of the prohibited goods in Nigeria

and disbursed about N30.0bn to oil palm farmers in other to enhance production.

The above notwithstanding, the performance of key players in the palm oil sector

remained underwhelming in 2019 as the activities of smugglers of more competitive

substitutes continued to hurt revenue. OKOMUOIL and PRESCO both printed weaker

revenue numbers, reporting -6.8% and -5.2% declines in turnover which came in at

N15.4bn and N15.4bn respectively. Profit After Tax (PAT) also followed, declining by 43.2%

and 30.9% to N4.1bn and N3.6bn respectively. Notably, as a fallout of the border closure,

the Q3-19 standalone financial performance of the two players came in stronger relative

to what was observed in the first six months of the year. OKOMUOIL showed significant

improvement across key lines in the Q3-19 stand-alone earnings– Revenue (+86.3%), PBT

(+83.8%), and PAT (+21.8%) surged compared Q3-18 stand-alone. PRESCO on the other

hand, saw a revenue growth of 5.0% while inefficient cost management eroded the

bottom-line as PBT and PAT return a negative of 48.0% and 51.0% respectively. In all, we

expect stricter control around the border in 2020 to continue to support the sector

players performance.

Activities of smugglers

constrained PRESCO

and OKOMUOIL

performance for the

major part of 2019

Sectors

Source: KPMG, USDA, United Capital Research

Key Player Location Milling Model

Curr.

Capacity

(MT/Annual)

Stallion Group Lagos,Kano Milling 430,000

Dangote Jigawa Integrated 240,000

Stine Rice Anambra Milling Only 141,000

Labana Kebbi Integrated 96,000

Mkap Nigeria Benue Milling Only 44,880

Tara Agro Enugu Milling Only 42,000

Olam Nasarawa Integrated 36,000

Ebony Agro Ebonyi Milling Only 30,000

Wicklow Group Kwara Milling Only 16,250

1

3

5

7

9

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

(000‘0

00 t

on

ne

s)

Rice consumption continues to outweigh supply

Rice Production & Consumption in Nigeria ('mn tonnes)

Production Consumption

Figure 50



Outlook

An Auspicious Year Ahead?

Looking into 2020, we expect the Agricultural sector to remain one of the centerpieces of

the current administrations economic policy. As the issues around insecurity continue to

abate across the northeast to middle belt region of the country, we expect growth in the

Nigerian Agriculture sector to further improve, estimated to be sustained above 3.0% on

the back of border closure and policy intervention by government.

Specifically, we expect investment in the sector to increase as operators mobilize finance

required to ramp up production in a bid to close the supply shortfalls created by the

closure of the border. No doubt, investment will track supply shortages in staple food such

as Rice, Frozen Food, Palm Oil as well as other hitherto imported food items affected by

the recent border crisis. For instance, the future of Nigerian local rice industry is looking

bright, given that two of the biggest players (Stallion Group and Dangote) in the space

are planning massive capacity expansion, estimated to be 3.7x their current capacity.

This will be supported by the recent announcement by the CBN to make funds available

to rice farmers to reduce production cost. In the past sub-national governments have

shown intention to support the sector via partnerships (as in the case of Lagos-Kebbi LAKE

rice) direct investment and other initiatives, we imagine that the sector will witness

increased interest from international investors from Brazil, Russia, and the Netherlands,

judging by recent headlines.

For the key players in the palm oil sector (OKOMUOIL and PRESCO), we see a potential for

upside in sales volume, especially from the domestic segment on the back of rising global

crude palm oil prices and likely demand surge resulting from border closure in H1-20.

However, H2-20 may be a bit competitive if the implementation of Africa Free Trade

Continental Agreement (AfCFTA) grant access to other players within the agriculture

space on the continent to the Nigerian market.

Nigeria Agric sector is

set to improve in 2020

as a result of the border

closure and

government

interventions

Sectors



Banking Sector Review and Outlook

Ready to open the tap?

Dynamics in the Nigerian Banking space continued to change in 2019 amid changes in

the monetary policy environment. As the impact of oil price plunge between 2014 and

2016 fizzles out, asset quality appears to be improving. However, appetite for loan growth

remained weak. While banks were beginning to get comfortable with massive

deployment of funds to government securities, a series of unconventional monetary

policy actions deployed by the apex bank to compel banks to lend to the private sector,

resulted in an uptick in loan book from Q3-19. Meanwhile, overall weakness in loan

growth, as well as sharp moderation in the yield environment continued to constrain the

growth of Gross Earnings. In the competitive landscape, Access Bank took the lead in

terms of balance sheet size, following its consolidation with the defunct Diamond Bank

Plc. This is coming after the industry witnessed the regulatory takeover of Skye Bank plc by

the CBN in 2018. The sector also witnessed the licencing of new operators as the CBN

approved licences for two commercial and one non-interest bank, viz.: Titan Trust Bank

Limited, Globus Bank Limited and Taj Bank Limited.

In 2020, stricter regulation on credit expansion to the real sector, further consolidation in

the sector, regulatory recapitalization and stiffer competition among operators, are top

factors to watch in the Nigerian banking landscape.

Financial Performance: Revenue, Efficiency Ratios, and Profitability

The performance of Nigerian Banks in 9M-19 remained broadly positive but was pressured

by the weak macroeconomic environment. Save for UBA, ACCESS and FIDELITY which

reported double-digit revenue growth, Gross Earnings (GE) was muted across the sector

as of 9M-19. GUARANTY was the hardest hit, reporting a 3.3% y/y decline in GE, followed

by FBNH with a 0.4% decline. Evidently, muted growth in loan book alongside a

moderation in the yield environment weakened y/y growth in GE across the sector to

9.2% on average. As a result Interest Income reduced amid unrelenting deployment of

funds to financial securities at the expense of loans. Meanwhile, Non-Interest Income

grew 8.6% y/y on average, attributable to stronger contribution from E-Business income.

Notably, ZENITH reported a whopping N35.3bn in E-Business income in 9M-19, followed by

UBA and FBNH. Aside E-Business income, trading income also surged in 2019 amid

increased activities in the fixed income and currency market space.

Nevertheless, Nigerian Banks reported impressive after-tax profit during the period amid

increased writebacks. Save for STANBIC which reported a 7.0% y/y decline in PAT, all other

operators within our coverage recorded positive PBT & PAT growth in 9M-19. Aside lower

impairment booking which supported bottom-line numbers, average Cost to Income

Ratio (CIR) for the banks within our coverage settled at 60.1% as of 9M-19, suggesting that

Muted loan growth was

a major factor that

dragged Gross

Earnings growth in 2019

Sectors

UBA, ACCESS and

FIDELITY recorded

double digit revenue

growth in 2019



efficiency improved across the sector. Also, Net Interest Margin (NIM) averaged 7.1%

relative to Cost of Funds (COF) which settled at 4.4% on the average as at 9M-19.

Assets Quality, Liquidity and Capital Adequacy

Total banking sector asset was N35.1tn as at the end of 2018, still quite low compared to

Nigeria's GDP of N127.8tn ($416.16bn). This implies that the banking sector depth (Banking

Sector Assets/GDP) stood at 27.5% of GDP. Nonetheless, asset quality continued to

improve as industry NPL ratio moderated to 6.8% in Q3-19 from 9.30% in Q2-19. Notably,

FBNH’s NPL ratio moderated to 14.5% in Q2-19, further down to 12.6% in Q3-19 and is on

track to single digit from a whopping 25.9% in Dec-18. FBNH’s NPL ratio moderated to

14.5% in Q2-19, further down to 12.6% in Q3-19 and is on track to a single digit from a

whopping 25.9% in Dec-18.

The total banking

sector asset remained

considerably low when

compared to Nigeria’s

GDP

Sectors

9M-19 financial summary of select Nigerian banks Figure 51

Source: Company Report, United Capital Research

9Month 2019 Financials Access FBNH UBA ZENITH GTBANK Fidelity STANBIC FCMB

Gross Earnings 513,656 439,854 428,219 491,268 326,034 161,054 176,157 135,799

GE growth 9M- 19 36.9% -0.4% 14.2% 3.5% -3.3% 15.9% 4.4% 2.2%

Interest Income 405,025 327,469 297,903 321,938 224,188 135,116 91,038 101,802

Interest Expense (194,807) (116,031) (138,989) (107,311) (51,250) (76,870) (32,366) (45,570)

Net Interest Income 210,218 211,438 158,914 214,627 172,937 58,246 58,672 56,231

Impairment Loss (10,611) (28,460) (6,663) (18,259) (2,762) 4,843 90 (7,852)

Non-Interest Income 108,630 98,769 107,080 156,756 99,964 22,168 81,939 33,997

Non- interest income growth 7.8% 6.0% 5.5% 21.8% 2.8% 38.6% 2.5% -16.5%

Operating Expenses (194,248) (221,735) (161,621) (176,941) (99,599) (57,411) (71,593) (63,194)

Profit/Loss Before Tax 103,104 60,029 98,233 176,183 170,652 23,003 69,108 12,803

Taxation (12,364) (8,193) (16,605) (25,460) (23,662) (1,542) (13,556) (2,012)

Profit/Loss After Tax 90,740 51,836 81,628 150,723 146,990 21,461 55,552 10,791

Annualized PAT 120,986 69,115 108,837 200,964 195,986 28,615 74,069 14,388

Cash and Balances with Banks 625,542 697,446 1,242,260 913,830 627,224 418,295 453,358 149,254

Net Loans & Advances to customers 2,937,803 2,585,204 1,985,213 2,728,223 1,378,002 1,214,550 542,453 638,065

Investment Securities 760,590 1,503,182 1,396,175 491,984 741,208 246,631 468,293 270,512

Total Assets 6,606,271 4,519,332 3,540,393 3,951,829 2,552,188 1,116,416 1,002,492 954,078

Deposits from customers 4,931,102 5,734,484 4,960,895 5,978,444 3,519,427 1,970,621 1,832,942 1,516,115

Net Assets 614,841 604,927 555,528 871,901 636,752 221,728 292,210 187,964

Ratios

Cost to Income Ratio 63.1% 71.5% 60.8% 47.6% 37.8% 73.7% 50.9% 75.4%

Gross Loan to total Deposits 59.6% 57.2% 56.1% 69.0% 54.0% 108.8% 54.1% 73.9%

Trailing 12M ROAE 22.2% 18.3% 18.6% 23.7% 31.2% 12.8% 26.4% 7.8%

Net Margin 17.7% 11.8% 19.1% 30.7% 45.1% 13.3% 31.5% 7.9%

Other Ratios

NIM 6.8% 7.3% 6.1% 8.7% 9.4% 6.0% 4.6% 7.5%

COF 5.2% 3.6% 4.4% 3.0% 2.0% 6.7% 3.5% 5.5%

ROA 1.8% 1.5% 3.1% 5.1% 7.7% 2.6% 7.4% 1.0%

CAR 20.3% 15.1% 27.8% 23.8% 23.6% 16.4% 21.2% 17.6%

Loan to Funding Ratio 67.4% 54.2% 62.7% 55.8% 54.0% 68.4% 62.9% 73.9%

NPL Ratio 6.3% 12.6% 5.7% 5.0% 5.6% 4.8% 2.7% 3.5%

COR 0.7% 1.9% 0.5% 1.2% 0.2% 0.0% 0.0% 1.1%



Evidently, Tier-2 banks remained very aggressive in terms of loan growth, with an average

Loan to Deposit Ratio (LDR) ratio of 76.6% in 9M-19 compared to Tier-1 Banks which were

broadly conservative with an average LDR ratio of 59.2%. Frustrated at the refusal of the

banks, especially the Tier-1 banks, to lend, the CBN revised its guideline on LDR in Jul-19 to

a minimum of 60.0% (then revised to 65.0% in Oct-19) to compel the banks to lend to the

private sector. According to the CBN, the new LDR rule has resulted in a 7.3% (N1.13tn)

growth in credit to the private sector as the banks move to meet the CBN’s target or risk

being debited at zero interest rate.

While Capital Adequacy Ratio (CAR) among banks within our coverage remained well

ahead of a minimum threshold, many Nigerian banks opted to recall their dollar liabilities

in the face of growing dollar liquidity. For context, Eurobond redemption by Nigerian

Banks totalled $700.0bn in 2019. Notably, ZENITH ($500.0m) and DIAMOND ($200.0mn)

issuances both matured in Q1-19, taking out $700.0mn from the corporate Eurobond

capitalization. However, ACCESS 2021 ($400.0mn), FBNH 2021 ($450.0mn), ECOBANK

($250.0mn) and ZENITH ($300.0bn) were all recalled in 2019. This shrank the value of

outstanding banking sector Eurobond to $1.3tn.

Regulatory Environment

A sequence of regulatory changes which affected the banks was the biggest driver of

activities in the sector in 2019. After launching the Real Sector Support Facility in 2018, the

apex bank is clearly forceful in its approach at driving real sector lending in 2019. To signal

the direction of policy, the Monetary Policy Committee (the MPC) voted for a rate cut

from 14.0% to 13.5% in Mar-19, and then, the CBN liquidity mop-ups became less

aggressive with OBB and ON rates moderating to 11.4% in Q2-19 compared to 16.7% in

Q1. In its meeting in May-19, the MPC recommended the restriction of banks participation

in the debt market, followed by an administrative adjustment of the minimum LDR for

Banks to 60% (and subsequently, 65.0% with speculations of further increase to 70.0%), with

a penalty of risking 50.0% of liquid assets to a further increase in Cash Reserve Ratio (CRR)

at zero interest rate. A follow-up regulation further restricted Bank deposits at the SDF

Tier-2 banks remained

very aggressive in

terms of loan growth

reporting a higher LDR

compared to Tier-1

banks

Sectors

A sequence of

regulatory changes

which affected the

banks was the biggest

driver of activities in the

sector in 2019

Source: CBN, NBS, United Capital Research

Figure 52



window to N2.0bn from N7.5bn. According to the CBN, this regulation is necessary to

rebalance credit distribution in the country, which currently favours the Oil & Gas (28.0%),

Manufacturing (15.8%) and the Public (8.30%) sectors, at the expense of the more

strategic sectors such as Agriculture (4.1%), SMEs (2.3%) and Trade & General Commerce

(6.8%) sectors.

Sector Outlook

Loan growth and asset quality: A modest growth story

While appetite for loan growth had been muted in the past due to tighter operating

environment, recent regulatory pronouncements compel the banks to do more. In 2020,

we expect banks to be more aggressive at growing their loan books. When considered in

the context of the banks that were penalized in Sept-19, the 65.0% regulatory LDR

guideline has more implication for the Tier-1 banks as well as many of the international

banks. They are more liquid and better capitalized but broadly less aggressive compared

to their smaller counterparts whose LDR currently run ahead of the regulatory minimum.

Accordingly, we expect a more aggressive lending drive by the larger Banks in 2020.

Again, this implies that fixed term deposit rates will be low as the banks move to optimize

deposit growth to meet the required LDR. To aggressively grow their loan books, we

expect the banks to strengthen their risk management framework to support credit

origination.

Beyond regulation, the CBN’s expansionary stance which is expected to keep the yield

environment low, will also propel banks to seek out outlets for funds, especially in riskier

assets to optimise earnings yield. Notably, observed improvement in industry NPL, which

moderated to a four-year low of 6.7% in Q3-19, gives an impression that default rate is

moderating. Hence, bank should be more willing to expand their loan books. The above

notwithstanding, we do not expect loan growth to revert to the 2012-2015 levels, given

that banks will be more cautious in their credit origination and deployment going forward.

...the 65% regulatory

LDR has more

implication for the Tier-

1 and most of the

international banks

Sectors

Figure 53

Source: CBN, NBS, United Capital Research



Interest Income: Lower yield and harsh macro may hush growth

In 2020, interest income may stay pressured for 3 reasons. First, lower yield environment,

driven by CBN’s OMO regulation as well as increased demand for T-bills and bonds by

local investors, will hurt asset yield on financial instrument. Secondly, despite regulation on

minimum LDR and SDF (an attempt to bolster credit specifically to Retail, SMEs and Agric

sectors), loan growth is unlikely to spike. This is mainly because expansion of loans to these

sectors, which together account for c.15.0% of industry credit distribution, may not

significantly drive up asset yield. To plug the pressure on interest income growth, credit

deployment to more important sectors such as oil & gas, power and manufacturing must

be de-risked or replaced by new outlets. Lastly, business environment in Nigeria remains

harsh, keeping credit origination soft. As such, yield on risk assets may not jump as desired.

Non-interest income growth: CBN tightens grip on easy channels

In the past year, E-Business and trading income drove Non-Interest Income (NII). In 2020, E-

Business income, the fastest growing component of revenue, will come under pressure

due to a last minute review of guideline for transaction charges issued by the CBN in Dec-

19. The new guideline slashes all charges by banks across payment and transaction

channels. While we view this as a further attempt to compel banks to lend to the private

sector and support overall economic growth, the impact is expected to hurt NII badly in

2020. According to the new guideline, electronic transfers (previously N50 flat) will attract

graduated or progressive charges from Jan-20 (N10.0: for transfers below N5,000, N25 for

N5,001 to N50,000 and N50 for transfer above N50,000). ATM withdrawal charge is slashed

to a maximum of N35 after third withdrawal within the same month (previously: N65).

Finally, debit card maintenance fees linked to current account will attract zero charge

while a maximum of N50/quarter will be charged on cards linked to savings accounts

(previously: N50/month). Overall, driving NII growth in 2020 will be down to the game of

volume. Give or take, product innovation, building on recent efforts to drive convenient

banking via channels such as USSD, Chat Bots, and further digitization of transaction

services will come in more handy for the banks.

Capital: Is another industry consolidation in view?

Following his reappointment, Governor Emefiele, in his plan for the second term in office,

hinted his intention to recapitalize the banks. This brings back the memory of the 2004

banking sector recapitalization wherein the banking sector minimum capital base was

revised up from N2.0bn to N25.0bn. In our view, the most rational basis for newly planned

recapitalization to is the weaker value of the naira against the dollar, at N100.0/$ in

2004 vs. N305.0/$ currently. Clearly, this suggests that the current minimum capital base

for banks in dollar terms is down from c. $250.0mn in 2004 to c. $82.0mn today. For the

CBN to restore the capital base to c.$250.0mn, the dollar equivalent in 2004, the bank will

be required to have a minimum capital base of c. N75.0bn ($250.0mn at N306.0/$). In our

opinion, most of the Tier-1 banks and a few Tier-2 banks, will be in a good position to

E-business income will

come under severe

pressure in 2020 due to

the recent reduction in

transaction charges by

the CBN

Sectors

Interest income growth

is likely to stay muted

in 2020

To recapitalize banks to

c.$250.0mn equivalent

in 2004, a minimum

capital base of

c.N75.0bn ($250.0mn at

N306.0/$), will be

required



withstand a recapitalization exercise if targeted at merely reflecting the

current exchange rate environment. However, some of the Tier-2 banks, unlisted and

newly licensed players may have to merge to meet a new capital requirement.

Evolving trends: Payment Services Banks, Digital Banks and Pay-Day Loans

In 2020, we expect the evolution of Payment Service Banks (PSBs) to further shape the

banking sector landscape in Nigeria. MTNN was awarded a PSB license – super agent

license through its subsidiary – Y’ello Digital Financial Services Limited. The telco is

expected to leverage its customer base to deliver financial services to rural areas in

Nigeria in a plan to include the financially excluded. The increasing evolution of

momentum in the digital banking space is also expected to gain more impetus, with

operators such as Kuda bank luring young Nigerians with stress-free banking. Pay-Day

Loan (PDL) service providers are also worth a mention, with many of them flooding the

market with numerous collateral-free credit to individuals. With tighter regulation by the

apex bank for deposit money banks to expand credit to the consumer space, the large

banks are becoming increasingly innovative in their product offerings to actively incubate

parallel start-up type lending platforms to compete with these evolving operators. While

the evolution of these Pay Day Loan operators will continue in 2020, it is important to note

that these innovations will continue to rely largely on the existing traditional banking

infrastructure.

Pay-Day Loan (PDL)

service providers are

increasingly gaining

momentum

Sectors



Consumer Goods Industry

Food and beverage output struggles to outperform the broader economy

In 2019, overall economic performance in the consumer goods space was a tale of two

halves, as momentum waned in H1-19 before picking up in H2-19. Specifically, the

consumer goods sector output, measured by Food, Beverage and Tobacco GDP,

underperformed growth in the broader economy in Q1-19 and Q2-19, up 1.8% y/y and

1.2% y/y compared to 2.1% y/y and 1.9% y/y growth for the aggregate economy during

the respective periods. Meanwhile, the sector growth in Q3-19 outpaced broad

economic growth, thanks to closure of land borders which reduced competition from

smuggled goods.

The narrative was similar for the listed players on the stock exchange as performance was

underwhelming in H1-19 before improving mildly in Q3-19. The weaker H1-19 performance

was spurred by the unforeseen election postponement and uncertainties that clouded

Q1-19 performance, growing infrastructural deficits that drove up Operating Expenses

(OPEX) as well as rising competition from cheaper unlisted brands and smuggled goods.

Meanwhile, the improvement in the traffic situation at Apapa and the closure of land

border which helped to restrain competition from smuggled goods, boded well for the

sector players in Q3-19. Also, the introduction of smaller product units at lower retail prices

to better capture the growing value segment supported the overall sector performance

in 2019.

FMCGs

Operating environment remains challenging

9M-19 earnings of consumer goods players under our coverage were divergent. Despite

weak consumer wallet, NESTLE performance remained strong (Revenue: +4.0%y/y to

N211.3bn, PBT: +17.6%y/y to N56.6bn), thanks to the firm’s cost-cutting strategy and

In 2019, overall

economic

performance in the

consumer goods space

was a tale of two

halves

Sectors


Figure 54

NESTLE’s performance

remained strong with a

PBT of 17.6%y/y to

N56.6bn



product innovations - as it launched Milo Ready-To-Drink (RTD) and new Maggi Signature

brand - during the period. For UACN (Revenue: +12.6%y/y to N60.5bn, PBT: +30.7%y/y to

N6.6bn), topline growth was supported by higher revenue from its Animal Feeds segments

while bottom-lines were supported by the marked reduction in finance expenses that

trailed the firm’s debt repayment . Elsewhere, performance of the other sector players

remained underwhelming, largely dragged by poor H1-19 outcomes. This was as the

gridlock at the Apapa Port, activities of smugglers, increased competition, weak

consumer wallet, rising OPEX and elastic product portfolio weighed heavily on H1-19

numbers while the improvement in some of these variables (smuggling and Apapa

gridlock) in Q3-19, lessened the overall pressure as at 9M-19.

According to the latest results, while FLOURMIL (Revenue: +0.4%y/y to N270.7bn, PBT:

+4.0% to N8.6bn) recorded marginal growth in both its top and bottom-line numbers,

DANGSUGAR (Revenue: +0.6%y/y to N117.4bn, PBT: -12.4% to N23.0bn) performance was

mixed as rising operating cost pressured the bottom-line numbers. Also, PZ continues to

struggle as Revenue dipped further by 0.5%y/y to N15.8bn and Loss-before-Tax worsened

from N0.2bn in 9M-18 to N1.1bn in 9M-19. More surprising, UNILEVER underperformed as

Revenue and PBT dipped 28.6% and 94.9% y/y to N51.6bn and N0.6bn respectively. This

was largely weighed by the poor outcome in Q3-19 wherein Revenue slumped 62.9% y/y

which according to management was linked to tighter credit terms with key distributors in

a bid to minimize non-performing receivables. Notably, DANGFLOUR was voluntarily

delisted from the Exchange following its acquisition by Crown Flour Mills Ltd. during the

year.

Brewers

A challenging competitive landscape

Unsurprisingly, the performance of brewers in 9M-19 was driven by developments in the

competitive landscape. The intense competition, especially from INTBREW, created no

room for other players to increase prices and pass on the impact of the graduated excise

duty to consumers, which grew further in Jun-19. This was as INTBREW continued to ramp

up capacity at its new plant in Sagamu to flood the market with its regional and

international premium beer brands, Trophy lager and Budweiser, while undercutting

competitors market share. Thus, INTBREW recorded a strong Revenue growth of 16.7% y/y

to N97.3bn while NB and GUINNESS saw their Revenue declined by 1.0% in 9M-19 and

4.3% in Q1-20 respectively.

Notably, NB was able to wrestle back some market share from INTBREW in Q2-19 and Q3-

19 as they embarked on a massive advertisement campaign around Heineken, Star, and

Maltina brands. Also, the rollout of Tiger brand late in Q3-19 also supported NB’s topline

growth. However, GUINNESS suffered the most as it continued to lose beer market share

to the other two players while focusing on growing its high yielding Spirit segments.

...Apapa Port gridlock,

increased activities of

smugglers, among

other factors

contributed to the low

performance of

consumer goods

players in H1-19

Sectors

The intense

competition, especially

from INTBREW, hindered

other sector players

from increasing prices

in 2019



Commodity Market

Food and Beverage: A tale of two halves

Commodity prices strengthened in H1-19 as supply shortfalls outweighed the slowing

global demand. Notably, the cool-off in the trade spat between the world’s two largest

economies over the period also provided some demand impetus. In H2-19, slower global

economic activities and reduced price volatilities dragged the overall commodity market

performance in FY-19. To buttress the above, energy prices which had trended

northwards in H1-19 (up 0.6%), on account of the varying impact of OPEC output accord

and geopolitical tensions, moderated in H2-19 (down 3.0% as at Oct-19) amid slowing

demand. Also, non-energy commodity prices which rebounded in H1-19 (up 2.2%) from its

2018 lows, trended southwards in H2-19 (down 2.6% as at Oct-19) as production

expectations were revised upward and global stocks of key commodities touched

multiyear highs.

Sector outlook

Outlook remains soft

Our overall outlook for the consumer goods sector is not overly positive due to myriads of

macro bottlenecks that ranges from inadequate infrastructure, strained consumer wallet

and stiffer competitions. Pressure on volume growth and transport cost is likely to persist as

the nation-wide logistics issues are unlikely to go away soon. However, the recent

improvements in the traffic situation at the Apapa port, if sustained, is positive for Food

manufacturers in the axis as well as others who depend on the importation of their ware

(e.g. PZ, BUA, FLOURMIL and DANGFLOUR). Also, all local market participants are

expected to see further pressure on input cost as electricity tariffs are expected to be

reviewed higher and the likelihood of petroleum sector deregulation, also adds to the

worries.

Raw material cost pressures, especially imported raw materials, are expected to be

muted in 2020. According to the World Bank’s commodity outlook, Agricultural prices are

expected to stabilize in 2020 following a projected fall in 2019, on reduced crop plantings.

The major downside risk remains the potential escalation of the trade war between US

and some of its key trade partners, which may affect global demand negatively and

pressure prices higher.

Notably, the possible gains from the full implementation of the new minimum wage are

likely to be erased by the proposed upward revision of Value-Added-Tax from the current

5.0% to 7.5% in 2020. Similarly, we note that the recent government drive to shore up tax

revenue will further add pressure on sector players top and bottom-line performance.

Amid all the above-highlighted downside risk, we believe much of the growth we are

likely to see in 2020 will be driven by higher prices (inflationary), rather than higher

consumer demand. Meanwhile, tighter border control, if properly implemented in 2020 is

The World Bank

forecast Agricultural

prices to increase by

1.7% in 2020

Sectors

The overall outlook for

consumer goods sector

is not too positive



positive for the overall sector players topline growth as this will help reduce competition

from smuggled goods.

In all, our best picks in the sector remain NESTLE buttressed by their solid balance sheet

position, product innovations and brand durability. Also, we are positive on FLOURMIL and

DANGSUGAR, as our short-term expectation is dampened by the feedback effect of the

Apapa gridlock which we expect to improve in 2020. For the brewers, we believe

competitive landscape will remain challenging. This is as we see further pressure on NB’s

numbers going forward. We expect INTBREW to continue to report positive revenue,

however, pressure on cost lines remain a concern. GUINNESS’ performance may be

supported by its growing Spirit line, but this may not be enough to boost bottom-line

growth. Additionally, as the drum roll of naira devaluation continues to roil on, players with

large FCY loan exposures, such as PZ, will remain disadvantaged.

...players with large

FCY loan exposures,

such as PZ, will remain

disadvantaged

Sectors



Cement Sector

Macro Overview: Can the Future be cemented?

The cement sector in Nigeria has grown from a net importer to a net exporter. With a

whopping 69.0% of Nigeria’s 195,000km road network still unpaved, increasing calls for

alternative to road as a means of transportation, especially rail, in major cities in the

country and a housing deficit of c.17.0million, the headroom for growth is clearly

compelling in the Nigerian cement sector. To bridge the infrastructural gap in Nigeria, the

National Integrated Infrastructure Master Plan (NIIMP) estimated that a huge sum $3.0tn

would be required over a period of 30 years. Another estimate suggested that Nigeria

requires an annual investment of $15.0bn (or N4.6tn) - 45.0% of the 2020 of budget - for 15

years to adequately develop its infrastructure nationwide. The above notwithstanding,

the installed capacity of operators in the sector continued to expand, thanks to

government polices such as tax relief programs and a ban on importation of cement

which continues to encourage capacity expansion among local players.

In terms of performance, the growth in the Nigerian cement sector mirrored the gradual

uptick observed in the broader economy. Specifically, the Cement and Construction

sector GDP expanded 6.8% and 2.4% y/y in Q3-19 from 1.6% and 0.7% y/y in Q2-19

respectively. This was aided by the disbursement of fund for CAPEX by the Federal

Government (FG) during the third quarter.

Demand Drivers: Between FGN capex spend and rising private sector consumption

According to CemNet, Nigeria's aggregate cement consumption rose by an average of

2.8% between 2009-2018 to c. 20.7mmt. Meanwhile, the average growth rate of

consumption in the last 4 years ending 2018 declined by 0.04% due to economic

slowdown and government revenue challenges that characterized the period.

Nigeria requires an

annual investment of

$15.0bn (or N4.6tn) for

15 years to adequately

bridge its infrastructural

deficits

Sectors

Source: NBS, ICRC, United Capital Research

Figure 55 Figure 56

Economic slowdown

and government

revenue downturn led

to a decrease in the

average growth rate of

cement consumption in

the last 4 years



In 2019, pressure on consumer wallet which had a knock-on effect on private investment

in housing as well as public sector spending on infrastructure dragged demand for

cement in H1-19. However, H2-19 saw a mild improvement judging by the Q3 -19

standalone sales volumes of the key players in the cement industry.

Nevertheless, demand from the public sector remains one of the strongest drivers of

cement consumption in Nigeria. While the execution of capital expenditure continued to

underperform the budgeted figure, government spending on road and rail transport has

been sustained lately. Over the last 8 years, the FG spent an average of N0.9tn or $2.0bn

per annum on infrastructure. According to the National Planning Commission (NPC), the

bulk of the spending is concentrated in ICT (28%), transport (23%), and energy (19%). Over

the next 4 years, Nigeria hopes to invest heavily in several projects. According to

President Buhari, some of the projects Nigerians should expect to come upstream from

2020 include: 47 road projects scheduled for completion in 2020/21, substantial work on

the Second Niger Bridge; and completion of 13 housing estates. Additionally, President

Buhari is seeking senate approval for c.$30.0bn loan in order to close the infrastructural

gap in the country. Accordingly, a moderate implementation of the 2020 budget to

complete ongoing projects may buoy public sector demand for cement in 2020.

Sectoral Performance: Smiling amid tough time

Cement players within our coverage had a challenging year based on their 9M-19

financials. Broadly, tougher operating environment, increased competition and a flurry of

corporate actions shaped the performance of operators in the industry. Lafarge Africa

(WAPCO), the second largest player in the sector by capacity reported a 30.4% y/y

decline in Revenue in 9M-19 while after tax profit surged by 298.5% y/y to N20.6bn,

following the divestment of its loss-making South African business.

Similarly, Cement Company of Northern Nigeria Plc (CCNN), reported a 117.2% y/y surge

in Revenue on the completion of its consolidation with Kalambaina cement, while PBT

and PAT followed with a 104.0% and 118.5% y/y upsurge to close at N11.7bn and N8.8bn

respectively. Notably, the management hinted about its plan of reducing cost of

Public sector demand

has contributed to a

rise in cement

consumption in Nigeria

Sectors

Source: MTEF, Budget Office, United Capital Research

Figure 57

A flurry of corporate

actions shaped the

performance of

cement players in 2019



transportation and energy going forward in order to boost bottom line. Also, plans are in

place to implement another merger with OBU cement by Jan-20

Lastly, Dangote Cement (DANGCEM), the biggest player in the space, printed a marginal

decline in its 9M-19 Revenue which settled at N679.8bn for the period. This was largely due

to poor performance in its home market, Nigeria, which accounted for about 70.0% of

group revenues. The PAT also followed, declining 2.5% y/y to N154.4bn during the period.

Outlook

Still a growth story

As noted above, the Nigerian cement industry remains a growth story into the medium to

long term amid a huge deficit in the infrastructure space across the continent. For

context, cement consumption per capita in Nigeria stands at 150kg compared to global

average of 561kg. In 2020, we expect to see improvements in the 2019 figure on the back

of the renewed commitment of the federal government to invest heavily in transport

(including road, rail and ports) and housing infrastructure. For instance, the N2.5tn

approved for 2020 capital expenditure is 47.1% higher than the actual average capex

spent in the last eight years. (2012-2019). Additionally, increased system liquidity driven by

the central bank’s recent expansionary monetary stance, may bolster increased real

estate and construction activities, which should support demand for cement.

On Competitive landscape, we expect the stiff competition among the players in the

sector to be sustained. This will include a possible increase in installed capacity (as hinted

by the 3 key players) which would bring the battlefield for market share to a game of

volumes with the use of price war. We expect the fundamentals in the Nigerian and

regional demographic environment to continue to fuel revenue growth for the players in

the cement sector. Also, increased investment in transportation and distribution channel

as well as cheaper energy sources should trickle into margin improvement with a knock-

DANGCEM, the biggest

cement player,

reported a marginal

decline in its 9M-19

revenue

Sectors

Government

commitment to

transport and housing

infrastructure will

improve demand for

cement in 2020

1500

800

500 450 400 400310 304 300 290

210 150

No

rth

Asi

a

Mid

dle

Ea

st

No

rth

Afr

ica

Ea

ste

rn

Eu

rop

e

Ce

ntr

al

Eu

rop

e

So

uth

Asi

a

We

ste

rn

Eu

rop

e

No

rth

Am

eric

a

Ce

ntr

al

Am

eric

a

So

uth

Am

eric

a

Ind

ian

Su

b

Co

ntin

en

t

Nig

eria

Per capita cement consumption (kg)

Growth potential still massive for Nigeria

Source: CemNet, United Capital Research

Figure 58



on effect on bottom lines. Additionally, the implementation of Africa Trade Continental

Agreement (AFCTA) in 2020 is positive for players in the cement market as it avails them

opportunity to tap into the continent’s market with ease.

More specifically, following the series of corporate action observed across the sector,

especially WAPCO and CCNN, we expect market valuation to improve on the listed

tickers. Notably, the current valuations of the player in the Nigerian cement space signify

opportunities for investors to key in given that average PE at 12.0x relative to the Middle

East and Africa peers PE of 26.4x. Overall, our top picks in the sector remains DANGCEM;

with an upside of 42.0% and a 12M TP of N199.0.

In 2020, stiff

competition among the

players in the sector is

expected to deepen

Sectors



Oil & Gas Industry

Trapped between two opposing forces

2019 came with a mixed narrative for the Nigerian oil & gas sector, across notable

metrics, as developments in the domestic and global space, fueled a different

performance in crude oil production and prices. On the positive side, an increase in

production propelled the sector out of a recession in Q2-19 (+7.2% y/y growth), with Q3-19

numbers at 6.5% y/y. Consequently, its contribution to GDP improved marginally to 9.8% of

total GDP, up from 9.0% in Q2-19. On the negative side, oil prices were caught in the web

of lower demand, trade war jitters and weakened OPEC influence, as Brent crude

dropped by -13.4% y/y, to average $63.7/b in 2019. As a result, Oil GDP in nominal terms

declined by 11.4% y/y as at 9M-19, as the effect of lower prices outweighed larger

production. Government revenue was also caught in the cross fire, as actual oil revenue

came in lower at N900.4bn in H1-19, compared to prorated budget figure of N1.5tn,

adding about 44.1% of total retained revenues to the government’s coffers. This was as oil

production for the period averaged 2.01mb/d, compared to the budgeted benchmark

of 2.3mb/d in 2019.

Elsewhere, in terms of financial flows, lower prices coupled with regulatory uncertainty

and lack of clarity in fiscal terms - an age-long issue - weakened the influx of foreign

investments into the oil & gas sector, as capital imported declined by 27.3% y/y as at 9M-

19, to about $85.9mn. In the same vein, the proportion of banking sector credit directed

to the total oil & gas industry, as at Q3-19, fell to about 28.0% of total loan book (31.0% in

Q3-18). Finally, Nigeria’s position as an exporter of crude oil (80.1% of exports as at H1-19)

and an importer of petroleum products (15.8% of imports as at H1-19) remained a

conundrum, as the NNPC continued its Direct Sale, Direct Purchase program, amid the

continued underutilization of existing refineries and loss of foreign exchange from crude oil

swapped.

Crude oil production

expansion propelled

the Oil & Gas sector out

of recession in Q2-19

(+7.2% y/y growth)

Sectors

Figure 59

Sources: NBS, Bloomberg, United Capital Research

Banking sector credit to

oil & gas industry fell to

28.0% (vs. 31.0% in Q3-

18) of total loan book

as at Q3-19



Upstream Sub-sector

Finally a reform! – Not just the one we hoped

Similar to previous years, upstream production activities was impaired by the occurrences

of pipeline vandalism and oil theft, amid ceasefire with Niger Delta militants. Nevertheless,

production ramped up significantly in 2019, reinforced by new output from Total’s Egina

Offshore facility (0.2mb/d) and lower cases of supply disruptions (y/y decline).

Accordingly, average crude oil production peaked 2.04mb/d in Q3-19, by NBS estimates.

Notably, this was the highest level of production since Q1-16. Also, rig activity witnessed

remarkable improvements, touching a 4-year high, as total rig count reached 18 in Oct-

19 .

In terms of regulation, while progress on the Petroleum Industry Governance Bill (PIGB) has

been slow, President Buhari signed the amended Deep Offshore and Inland Basin

Production Sharing Contract (DOIBPSC) Act into law. Key highlights in the amended bill

are the decrease of royalty rate for inland basin production from 10.0% to 7.5% and the

creation of a two-tier royalty structure for deep offshore production. The first tier, a price-

based royalty, addresses changes across different price ranges, such as a 2.5% royalty on

crude prices between $20.0/b - $60.0/b and a 4.0% on prices between $60.0/b - $100.0/b.

Average crude oil

production peaked at

2.04mb/d in Q3-19

Sectors

Figure 61 Figure 60

Sources: NBS, United Capital Research Sources: NBS, United Capital Research

Sources: Baker Hughes, Bloomberg, United Capital Research Sources: NBS, OPEC, United Capital Research

Figure 62 Figure 63



The other tier maintains a 10.0% royalty on any water depth in excess of 201m, differing

from the graduated scale previously in place. While the new legislation is not expected to

be applied retrospectively, a key clause in the previous contract mandated a review of

the revenue sharing formula, when the price of crude oil exceeded $20/b. Although

previous administrations failed to revisit the contract and enforce the change in revenue

sharing, International Oil Companies (IOCs) could not claim negligence. As such, dry

bones have risen, with Nigeria seeking $62.0bn in arrears from IOCs.

No doubt, the amended DOIBPSC Act is set to add revenue to the government’s purse,

especially towards the funding of the 2020 budget, however this might severely affect

investments, especially by IOCs. For context, over 80.0% of all ‘producing’ deep offshore

fields, under the production sharing contract, are below 1,000 meters water depth.

Therefore, companies previously paying 0.0% royalty under the 1993 Act, are subjected to

pay 14.0%, going forward, given that crude oil prices have averaged $62.4/b in Q4-19.

This comes at a time when major foreign oil producers are gradually divesting their interest

in Nigeria’s oil & gas sector.

Outlook

Old problems to remain

Looking ahead, the newly signed DOIBPSC Act could have a negative effect on

investments, as IOCs move to countries with better fiscal terms or channel resources

towards American shale production. However, new licensing rounds are set to kick off in

2020, with the government planning to sell offshore and onshore blocks, in a bid to meet

the desired 3.0mb/d output target in 2023. As such, we could see increased domestic

presence in existing and new assets, which is positive for local content development,

while investments by IOCs might remain on the sidelines.

Drilling down to other idiosyncratic risks, the sub-sector remains plagued by vast

operational challenges ranging from inadequate pipeline facilities, oil theft, vandalism,

and sabotage. Also, the high cost of crude oil production, which is estimated at over

$20.0/b, remains a sour patch in boosting investment and gaining a competitive edge

over other exploration destinations. However, the Ministry of Petroleum has reiterated its

current efforts to drive costs to a low point of $10-$15/b, required to keep the sector

globally competitive.

In terms of pricing, the increased OPEC+ production cuts will provide a floor for oil prices.

Although, the elephant in the room remains a potential supply glut, with shale producers

willing to fill the output gap and non-compliant members, such as Nigeria, producing in

excess of their caps. As such, prices might not rise to rosy levels, limiting revenue and

profits for upstream players.

The amended DOIBPSC

Act is set to increase

FG’s revenue in 2020

Sectors

New licensing rounds

are set to kick off in

2020



Downstream Sub-sector

Still marred by government regulation

For the most part of 2019, the operational dynamics of the downstream sector remained

the same – surviving in a fixed petrol or Premium Motor Spirit (PMS) price regime - amid

changes in market reality. Clearly, the underlying assumptions of the 2016 PPPRA

template drastically changed, as the actual landing cost and market price were N151.0/

litre and N170.4/litre (as at 4th Dec-19), a huge disparity from the estimated retail price

band of N135.0/litre to N145.0/litre. Judging by the above, the NNPC remained the only

importer of PMS, bearing the losses, with cumulative under-recovery for 2019 as at July

amounting to N383.3bn.

Clearly, the current regulated price of N145/litre creates an incentive for oil marketers to

smuggle subsidized fuel to neighbouring countries. However, with the closure of the

border and the ban of PMS sales across all fueling station within 20km of the border,

revenue from those illegal sources have been blocked. According to the President,

domestic fuel consumption in Nigeria dropped by 30.0%, since the closure of the land

borders. Also, importation of PMS dropped to 1.5bn litres in Sept-19, its 2nd lowest point in

2019.

Outlook

Decreasing drumbeats of a deregulation

In spite of the huge margin between the fixed price of PMS and the expected open

market price, the potential for deregulation in 2020 is looking less likely. This is buttressed

by the recent drive of the government to boost non-oil revenue and curb unnecessary

expenditures, with deregulation being the last card on deck. Most importantly, fiscal

buffers, which could limit the impact of a deregulation on consumer wallets, are lacking.

Elsewhere, we doubt the completion of the 650,000b/d crude oil refinery – being built by

Dangote Group – in 2020. While we await its final takeoff, with commercial operations

Domestic fuel

consumption in Nigeria

dropped by 30.0%

since the border

closure

Sectors

Sources: PPPRA, United Capital Research

The pegged price of PMS vs current market reality Figure 64



expected in 2022, the Direct Sale - Direct Purchase program remains in place to supply

products to the Nigerian market. Additionally, about 10 modular refineries are reported to

be at advanced stages of development, which could also add capacity to the existing

underperforming refineries. Finally, in a bid to survive, many downstream players will

continue to expand their product portfolio, into other by-products, to offset the effect of

capped PMS prices on margins.

The Gas sector

Structural challenges mask potential for investments

Data from the NNPC showed that between Jan-19 to Jul-19, the daily average natural

gas production marginally increased by 1.9% y/y to 8,032.7 mmscfd, as finalized

investments in gas production slowed during the period. Dissecting the segments of gas

supplied, the bulk was skewed towards exports (43.0%), compared to a meagre 15.4% to

domestic sources. This was expected, as inadequate gas pipeline infrastructure continued

to disrupt supply chains, with gas players left to bear the high cost of transporting gas as

Liquified Natural Gas (LNG). Also, the liquidity issues in the power sector, coupled with

pegged Domestic Supply Obligation (DSO) prices gave reasons to limit exposure to the

domestic market.

The last component, non-commercialization uses (reinjection and gas flaring), accounted

for 41.7%. Diving deeper into non-commercialization sources, sustained levels of gas

flaring (8.8%) continued to be a cause for concern, as the ultimate goal of eliminating

routine gas flaring or reducing it to 2.0% by 2020, through the Nigerian Gas Flare

Commercialization Programme, remain unachieved. To further understand the issue, using

a DSO price of $2.5/’000scf, the cumulative total gas flared as at Jul-19 was 1,658.9bcf,

translating to $4.1bn – completely lost in the air.

As 2020 unwraps, similar to what we identified in our H1-19 report, a number of recent

developments have come to fore, slowly unlocking the hidden potential in the operations

of gas production. Seplat has identified these opportunities, with its investment of $700mn

Inadequate gas

pipeline infrastructure

continues to disrupt the

gas supply chain

Sectors

Sources: NNPC, United Capital Research Sources: NNPC, United Capital Research

Figure 66 Figure 65



in the Assa North-Ohaji South project, a gas hub targeting a production of 300 mmscfd by

April-20. In terms of refining, the long awaited Nigeria LNG Train 7 project’s Final

Investment Decision (FID), was achieved late in Dec-19. Additionally, the agreement

between Siemens and the Federal Government on the electrification roadmap, has the

potential to create massive domestic demand for natural gas, as it is a core component

in the power value chain. However, gas transportation remains a key obstacle, owing to

lack of state-of-the-art pipelines and huge expenses associated with transporting through

liquified natural gas. Fully aware of this deficiency, Nigeria signed a Pipeline Cooperation

Agreement (PCA) with Morocco, hoping to ease difficulties in transportation, and create

access to a broader market.

Sectors

…12 years after, NNPC,

Shell, Total, and other

multinationals make

FID for Nigeria’s LNG

Train 7 project to raise

gas output

https://investnow.ng/

Companies



Companies

Source: Bloomberg, United Capital

Okomu Oil Palm Plc: BUY Bloomberg: OKOMUOIL NL, Reuters: OKOMUOIL.LG, NSE: OKOMUOIL

The re-occurrence of smuggling of cheaper palm oil into the country and falling CPO prices in the early part of the year

played out in the financial performance of Okomu oil for 2019. The revenue for 9M-19 decline y/y by 6.8%. However, the

financial performance of Okomu oil for the third quarter standalone rebounded, buoyed by the closure of the border and

rising global CPO prices. Looking into 2020, we see a potential for further upside in sales volume, especially in the

domestic market on the back stricter border policy. Also, our expectation of a rise in global CPO prices and favourable

government policies toward the sector is positive for the performance of the players therein. Overall, our view for

OKOMUOIL remains positive, as it continues to leverage on it strong local brand and favourable government policies

toward the sector. We place a BUY rating on the stock, which provides an upside of 52.9% to our 12M-TP of N85.0/share.

Source: Company Financials, United Capital Research Source: Bloomberg, United Capital

Presco Plc: BUY Bloomberg: PRESCO NL, Reuters: PRESCO.LG, NSE: PRESCO

PRESCO remained the only fully integrated oil palm company in Nigeria; with oil palm plantations, palm oil mills, a palm

kernel crushing plant, and a vegetable oil refining plant. The 9M-19 earnings was unimpressive, as revenue declined by

5.2% y/y to N15.4bn with PAT following suit, down by 30.9% to N3.6bn. On a standalone basis , Q3-19 performance

showed a revenue growth of 5.0% y/y, supported by border closure which took effect from Aug-19. However, increased in

cost of sales (28.4%) and selling and distribution (13.7%) eroded the bottom-line as PBT and PAT declined 48.0% and 51%

respectively. In 2020, we expect the firm investment in its plantation coupled with border closure and favourable

government polices toward the sector to support revenue growth for the company. Hence, we rate the stock a BUY with a

12M-TP of N57/share.

Value Traded*: 6M Average daily value traded


Source: Company Financials, United Capital Research

0.4

0.6

0.8

1.0

1.2

Nov-18 Feb-19 May-19 Aug-19 Nov-19

Relative Price Movement: OKOMUOIL

OKOMUOIL NSE ASI

Figure 67

0.4

0.6

0.8

1.0

1.2

1.4

Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19

Relative Price Movement: PRESCO

PRESCO NSE ASI

Figure 68

Key Stats FY-17 FY-18 FY-19f FY-20f

EPS (N) 14.1 12.3 10.2 10.7

DPS (N) 2.4 2.1 1.4 1.5

BVPS (N) 25.9 31.6 22.1 23.8

Dividend Payout 17.3% 16.9% 14.0% 14.0%

Dividend Yield 4.5% 3.8% 2.6% 2.7%

P/E (x) 3.9 4.4 5.4 5.1

P/BV (x) 2.1 1.7 2.5 2.3

ROAE 53.5% 36.0% 26.5% 32.5%

ROAA 41.6% 28.4% 20.5% 24.4%

Key Stats FY-17 FY-18 FY-19e FY-20f

EPS (N) 5.7 4.3 7.7 9.3

DPS (N) 2 2 3.6 4.3

BVPS (N) 21.9 24.2 25.8 27.2

Dividend Payout 35.1% 46.5% 46.8% 46.2%

Dividend Yield 4.9% 2.3% 6.4% 7.6%

P/E (x) 1.6 6.2 5.6 6.1

P/BV (x) 0.5 1.2 2.5 1.2

ROAE 15.5% 16.5% 32.3% 29.2%

ROAA 8.9% 8.2% 12.2% 10.1%

Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float

55.6 85.0 52.9% 1.0 172.8 53.0 7,652,072 94.6%


47.5 57.0 20.0% 1.0 154.7 47.5 2,020,589 39.9%



Companies


Access Bank Plc: BUY Bloomberg: ACCESS NL, Reuters: ACCESS.LG, NSE: ACCESS


10.0 12.2 22.0% 35.5 1,157.8 355.5 223,545,900 95.7%

With the completion of its merger with the defunct Diamond Bank Plc in Apr-19, ACCESS is now Nigeria’s largest bank by total asset. 9M-19

Gross Earnings surged 36.9% y/y to N513.6bn, buoyed by Interest Income which increased 47.6% y/y to N405.0bn.Notably, Non-Interest

Income also grew 7.8% y/y to N108.0bn. Overall, gradual improvement in Cost to Income ratio to 63.1%, supported profitability as PBT and

PAT jumped 46.7% and 44.2% y/y to N103.0bn and N90.7bn respectively. ROE increased to 22.2% (previously: 16.9%) while net margin also

improved marginally to 17.7% (previously: 16.8%). Loans jumped 37.5% in 9M-19 to N2.9tn. Looking ahead, the Bank has indicated its

intention to expand its footprint in Africa via the acquisition of Transnational Bank Ltd in Kenya. This may further dilute EPS but strengthen its

foothold across the continent. Lower yield in Nigeria may slow Interest Income growth despite expected expansion in loan book.

Notably, our EPS forecast is estimated to slow to N3.0 due to pressure on Interest Income and regulatory constraints. P/E & P/B ratios stand

at 2.5x & 0.6x compared to 4.6x & 0.7x for peers. As such, we place a BUY rating on ACCESS.

Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded

0.6

0.8

1

1.2

1.4

Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19

Relative Price Movement: ACCESS

NGSEINDX NGSEB10 ACCESS NL

Figure 69 Key Stats FY17 FY18 FY19e FY20f

EPS (N) 2.1 3.3 3.3 3.0

DPS (N) 0.7 0.5 0.5 0.4

BVPS (N) 17.4 16.7 17.1 17.6

Dividend Payout 31.3% 15.2% 15.0% 15.0%

Dividend Yield 6.2% 7.4% 5.0% 3.6%

P/E (x) 5.0 2.1 3.0 4.1

P/BV (x) 0.6 0.4 0.6 0.7

ROAE 18.5% 15.7% 22.4% 18.7%

ROAA 1.6% 2.1% 2.0% 1.5%

Source: Bloomberg, United Capital Source: Company Financials, United Capital Research

FBN Holding Plc: BUY Bloomberg: FBNH NL, Reuters: FBNH. LG, NSE: FBNH

Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float

6.2 7.4 19.5% 35.9 719.1 220.8 93,397,670 97.5%

FBNH’s Gross Earnings (GE) growth was tepid as at 9M-19, down 0.4%y/y to N439.9bn. Notably, Interest Income fell 3.0%y/y to N327.5bn

amid hesitant loan growth and poor yields on interest-bearing assets. However, PBT and PAT continued to rebound, up 16.9%y/y and

15.3%y/y to N60.0bn and N51.8bn respectively. We are bullish on FBNH following the full write-off of the Atlantic Energy Loan. This should

support FY-19 profitability margins as well as ROE. As such, earnings and dividend yield outlook is more positive. While pressure on Interest

Income growth is a concern for banks in 2020, FBNH must check rising OPEX which may worsen Cost to Income ratio to sustain

improvement in margins. Overall, we expect expansion of loan book and the stability of Non-Interest Income to support performance in

2020. FBNH trades at a discount to peers with PB & PE ratios of 0.4x and 3.9x compared to peer (Tier-1) average 0.7x and 4.6x

respectively. Accordingly, we place a BUY rating on FBNH in 2020.


0.5

0.7

0.9

1.1


Relative Price Movement: FBNH

NGSEINDX NGSEB10 FBNH NL


EPS (N) 1.1 1.7 2.7 2.4

DPS (N) 0.3 0.3 0.4 0.4

BVPS (N) 19.0 20.1 22.5 25.6

Dividend Payout 22% 16% 15% 15%

Dividend Yield 2.8% 16.8% 13.3% 12.1%

P/E (x) 7.9 4.8 2.3 2.2

P/BV (x) 2.2 2.5 3.6 4.8

ROAE 17.7% 9.8% 16.8% 13.3%

ROAA 1.0% 1.1% 1.7% 1.5%



Companies

Source: Bloomberg, United Capital Source: Company Financials, United Capital

Guaranty Trust Bank Plc: BUY Bloomberg: GUARANTY NL, Reuters: GUARANT.LG, NSE: GUAR-


29.7 41.7 40.5% 29.4 2,847.3 874.1 650,510,300 99.8%


We retain our BUY rating on GUARANTY on the basis of the sustained operational and cost management efficiency. As observed in its 9M-

19 earnings, we expect GUARANTY to sustain its solid Net Interest Margin (NIM) and Cost of Funds (COF) positioning by FY-19 and in 2020

due its huge Current and Savings Account (CASA) deposit base. Also, PAT will continue to be supported by the bank’s outstanding CIR

ratio which ensured a net margin of 45% as of 9M-19 earnings. In terms of market valuation, we observe that market pricing is weighed by

the overall bearish sentiment for equities despite GUARANTY’s solid company fundamental. Despite regulatory constraints we expect EPS

to increase to N6.2 and N6.5 in 2019 and 2020 respectively due to stable Non-Interest Income growth and efficient cost management.

Dividend yield is expected to remain attractive, estimated at 9% and 5.8%in 2020 respectively .

0.6

0.8

1

1.2


RelativePrice Movement: GUARANTY

NGSEINDX NGSEB10 GUARANTY NL


EPS (N) 5.8 6.3 6.1 5.5

DPS (N) 2.7 2.8 2.7 2.4

BVPS (N) 21.2 19.6 19.9 20.1

Dividend Payout 47.0% 44.0% 44.0% 44.0%

Dividend Yield 6.6% 8.0% 9.0% 5.8%

P/E (x) 7.0 5.5 4.8 7.5

P/BV (x) 1.9 1.8 1.5 2.1

ROAE 30.2% 30.8% 30.9% 24.7%

ROAA 5.3% 5.6% 5.3% 4.7%

Sources: Bloomberg, United Capital

FCMB Group Plc: HOLD Bloomberg: FCMB NL, Reuters: FCMB.LG, NSE: FCMB


1.85 1.87 1.1% 19.8 119.3 36.6 14,920,940 83.7%

The 9M-19 result of the tier-2 bank was underwhelming as PAT declined by 4.8% despite a 2.2% growth in Gross Earnings. This is on the

back of an 8.0% increase in Interest Expense and an 11.0% increase in operating expenses. In terms of asset quality, NPL moderated from

5.1% in the previous year to 3.5% in Q3-19 on the back of write off of NPL related to commerce and oil & gas industries. Also, Cost of Risk

improved from 1.6% to 1.1% on the back of higher recovery. Loan growth (1.5%) failed to match deposit growth (5.1%), pushing Loan to

deposit ratio down from 79.6% to 73.9%. Nevertheless, the LDR still remains well above the regulatory required minimum. We expect that

profit will continue to grow moderately as the bank works to reduce cost of funds significantly and expand the asset under management

of the Asset and Wealth Management business. FCMB possesses a P/BV ratio of 0.2x, low when compared to peers whose P/BV averaged

0.7x. We recommend a HOLD on to the stock as our target price (N1.87) is a 4% upside to the current price.

Sources: Company Financials, United Capital Research Value Traded*: 6M Average daily value traded

0.6

0.8

1

1.2

1.4

1.6


Relative Price Movement: FCMB

NGSEINDX NGSEB10 FCMB NL


EPS (N) 0.4 0.8 1.0 1.1

DPS (N) 0.1 0.1 0.2 0.2

BVPS (N) 9.4 9.3 10.2 11.3

Dividend Payout 23.6% 13.8% 24.8% 20.0%

Dividend Yield 6.8% 7.2% 10.4% 11.2%

P/E (x) 3.5 2.6 1.8 1.7

P/BV (x) 0.2 0.2 0.2 0.2

ROAE 6.0% 8.0% 10.0% 10.2%

ROAA 0.7% 1.1% 1.3% 1.5%



Companies


Fidelity Bank Plc: BUY Bloomberg: FIDELITY NL, Reuters: FIDELITY.LG, NSE: FIDELITY

Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float

2.1 2.5 22.0% 29.0 193.5 59.4 12,680,220 98.7%

Fidelity bank 9M-19 results showed a 15.9% increase in Gross Earnings. PBT and PAT also grew by 14.7% and 20.2% respectively. The GE

growth was driven by both interest income and non-interest income. Non-Interest Income growth impressive as we observed a 43.0%

growth in digital income. In its core business, we observed a loan growth of 26.4% as loan to funding ratio expanded from 64.2% to

68.4% which is well above the 60% and subsequent 65% benchmark introduced by the CBN in June and September respectively. The

bank’s asset quality position improved as the Cost of Risk was down to 0.0% and NPL ratio reduced from 5.7% to 4.8% to meet CBN’s

benchmark. Although liquidity ratio and Capital adequacy ratio reduced to 32.6% and 16.4% respectively, it remains above the respec-

tive regulatory minimum. We remain optimistic about the stock. and we recommend a BUY as our target price is a 17% upside from cur-

rent price.


0.6

0.8

1

1.2

1.4


Relative Price Movement: FIDELITY

NGSEINDX NGSEB10 FIDELITY NL


EPS (N) 0.61 0.79 1.27 1.34

DPS (N) 0.11 0.11 0.19 0.20

BVPS (N) 6.95 6.71 7.99 9.33

Dividend Payout 17.9% 13.9% 15.0% 15.0%

Dividend Yield 4.5% 5.4% 9.1% 8.3%

P/E (x) 4.0 2.6 1.6 1.8

P/BV (x) 0.35 0.30 0.26 0.26

ROAE 10.8% 10.5% 17.1% 15.4%

ROAA 1.3% 1.5% 2.0% 1.9%

Stanbic IBTC Plc: HOLD Bloomberg: STANBIC NL, Reuters: IBTC.LG, NSE: STANBIC

9M-19 results showed a 7.0%y/y and a 1.8%y/y decrease in PAT and PBT respectively despite a 4.4%y/y growth in Gross Earnings

(GE). Non-interest income and net interest income grew by 2.5% and 0.4% respectively. We observed a slight decrease in asset yield to

12.3% from 12.7% in the previous year, attributed to competitive asset pricing and the general decline in the yield environment. Also, cost

of funds declined by 30bps to 3.5% as the bank deliberately sought to replace expensive liabilities with cheaper and stable ones. There

was a recorded 24% loan book growth and Loan to funding ratio of 62.9% which was well above the CBN’s requirement for Sept-19. We

expect to see growth in loan book due to the various CBN tactics to boost lending to the real sector. Further supported by impressive asset

quality as NPL ratios reduced to 2.7% from 3.9% and Cost of Risk stands at -0.2%. Our target price (N43.8) implies a 21.6% upside from the

current market price of N36.1. Hence, we place a HOLD rating on the ticker.

Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital

Price Target Price Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float

41.0 43.8 6.8% 10.5 1,402.9 430.7 48,723,080 38.0%


0.6

0.8

1

1.2


Relative Price Movement: STANBIC

NGSEINDX NGSEB10 STANBIC NL


EPS (N) 4.81 7.27 5.97 6.47

DPS (N) 0.50 1.50 1.23 1.33

BVPS (N) 18.1 23.0 29.0 35.4

Dividend Payout 10.4% 20.6% 20.6% 20.6%

Dividend Yield 1.2% 3.1% 3.4% 2.7%

P/E (x) 8.6 6.6 6.1 7.6

P/BV (x) 2.3 2.1 1.3 1.4

ROAE 33.0% 37.7% 23.9% 20.8%

ROAA 4.0% 4.9% 3.5% 3.5%



Companies


Zenith Bank Plc: BUY Bloomberg: ZENITHBA NL, Reuters: ZENITHB. LG , NSE: ZENITHBANK


18.6 26.7 43.5% 31.4 1,902.2 584.0 542,935,600 88.3%

Our views on ZENITH remain positive, buoyed by efficient Cost-to-Operating Revenue profile and stable margins. Although Interest Income

is unlikely to improve by FY-19, stronger Non-Interest Income growth, cheaper funding cost and stable Cost to Income ratio (CIR) are

expected to keep profitability attractive. For context, PAT is expected to close the year around N200.0bn, again in 2019. Also, low Cost of

Risk (CoR) at 1.2% and NPL ratio of 4.95%, buttress our position as this implies that asset quality will remain stable. In 2020, regulation

constraints may compel the bank to further expand credit. Also, with an efficient cost management structure, we expect the bank to

sustain its position as one of the most profitable banks in the market. Finally, at current price, dividend yield is estimated at 15% while

Annualized ROE remains well above industry average. The bank trades at a P/B ratio of 0.7x less than 1.4x for GUARANTY implying that

the ticker remains fairly underpriced at N18.7. Overall, we maintain a BUY rating on the basis of its operational efficiency, earnings

stability, dividend consistency and attractive market valuation.


0.6

0.8

1

1.2


Relative Price Movement: ZENITH

NGSEINDX NGSEB10 ZENITHBA NL


EPS (N) 5.4 6.2 5.7 5.5

DPS (N) 2.7 2.5 2.3 2.2

BVPS (N) 26.2 26.0 28.8 29.9

Dividend Payout 49.8% 40.6% 40.6% 40.6%

Dividend Yield 10.5% 10.8% 12.7% 8.3%

P/E (x) 4.7 3.7 3.2 4.9

P/BV (x) 1.0 0.9 0.6 0.9

ROAE 22.3% 23.6% 21.0% 18.7%

ROAA 3.3% 3.3% 3.0% 2.7%




Guinness Nigeria Plc: SELL Bloomberg: GUINNESS NL, Reuters:GUINNESS.LG, NSE: GUINNESS

Price TP Upside/Downside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float

30.1 28.2 -6.2% 2.2 214.4 65.8 25,827,260.0 49.8%

GUINNESS’ most recent Q1-19/20 result reflected the negative impact of rising competition and elevated cost of excise duties on its top-

line numbers as Revenue declined by 4.3%y/y to N26.9bn. Notably, export revenues declined (-75.2% y/y to N692.5mn) as primary export

of Malta Guinness to Guinness Ghana was cut-off because Guinness Ghana now owns its own canning line. Meanwhile, the moderate

decline in Cost of Sales and OPEX, down 0.2% and 3.4% y/y respectively failed to reflect on the company's bottom-line numbers. This was

as Finance cost skyrocketed by 117.0%y/y to N1.3bn. Accordingly, the company reported a loss of N370.4mn in Q1-20 compared to a

profit of N835.7m in Q1 2019. Looking ahead, we expect the competition in the brewery space, coming largely from INTBREW, to intensify

and impact negatively on GUINNESS’ top-line. Also, we expect cost pressures to return in 2020 amid our outlook for a rise in the company’

key inputs. On a balance of these factors, we estimate 12M TP at N22.8/share, translating to 12.0% downside. We rate GUINNESS a SELL.


0.3

0.5

0.7

0.9

1.1

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Relative Price Movement: GUINNESS

GUINNESS NSEASI FMCGs

Figure 76 Key Stats FY-17 FY-18 FY-19f FY-20f

EPS (N) 1.3 3.3 2.5 2.9

DPS (N) 0.6 1.8 1.5 1.6

BVPS (N) 28.5 43.0 40.7 42.0

Dividend Payout 50.1% 55.7% 60.7% 55.0%

Dividend Yield 0.8% 2.6% 5.1% 5.7%

P/E (x) 61.5 21.8 12.0 9.7

P/BV (x) 2.8 1.7 0.7 0.7

ROAE 4.5% 10.3% 6.2% 7.1%

ROAA 1.4% 4.5% 3.5% 4.1%


International Breweries Plc: BUY Bloomberg: INTBREW NL, Reuters:INTBREW.LG, NSE: INTBREW


9.5 11.3 18.9% 8.6 266.0 81.7 4,196,121.0 97.5%

Over 9M-19, INTBREW rapidly grew Revenue, up 16.7%y/y to N97.3bn, as overall volume expansion outweighed the impact of rising excise

duties. The volume expansion was on the back of its larger operating capacity and expansion in Sagamu plant. However, the positive

topline performance failed to trickle down to the bottom-line numbers. This was due to the company’s cost inefficiencies as post merger

cost synergy is yet to materialize. Also, the additional debt raised to ramp up capacity in Sagamu and its attributable interest expense,

further worsen the bottom-line position. Against this backdrop, Loss before and after Tax worsened, from N9.2bn and N7.1bn in 9M-18 to

N24.1bn and N16.4bn, respectively. Looking ahead, we expect the balance sheet restructuring carried out in Dec-19 to impact the

company’s bottom-line positively in 2020. Also, we expect a stronger Revenue growth in FY-20, especially if the company join its other two

competitors (NB and GUINNESS) in increasing retail prices of beer. On a balance of all the above factors, we rate the stock a BUY as we

expect EPS to settle at -N0.5 by FY-20 and improvement compared to an expected -N1.2 in FY-19.


0.3

0.5

0.7

0.9

1.1


Relative Price Movement: INTBREW

INTBREW NSEASI FMCGs

Figure 77 Key Stats 9M-17 FY-18 FY-19e FY-20f

EPS (N) 0.2 -0.4 -1.2 -0.5

DPS (N) 0.0 0.0 0.0 0.0

BVPS (N) 4.6 4.1 3.1 4.9

Dividend Payout 0.0% 0.0% 0.0% 0.0%

Dividend Yield 0.0% 0.0% 0.0% 0.0%

P/E (x) 335.8 nm nm nm

P/BV (x) 11.9 13.6 18.1 11.4

ROAE 3.6% -11.0% -39.4% -9.5%

ROAA 0.6% -1.2% -0.6% 0.6%




Nestle Nigeria Plc: BUY Bloomberg: NESTLE NL, Reuters: NESTLE.LG, NSE: NESTLE


1,469.9 1,643.1 11.8% 0.8 3,795.2 1,165.1 241,783,400.0 33.8%


0.6

0.8

1.0

1.2


Relative Price Movement: NESTLE

NESTLE NSEASI FMCGs

Figure 79

NESTLE submitted an impressive 9M-19 result as it recorded growth in both top-line and bottom-line numbers. Revenue was up by 4.0%y/y

to N211.3bn while Pre-and-post tax profit was up by 17.6%y/y and 11.2%y/y to N56.6bn and N36.8bn respectively. This was as all the cost

items, save for Marketing & Distribution cost, declined across the board. Notably, we observed significant uptick in Trade and other

Receivables (+32.8% y/y) during the period which implies Revenue growth has been buoyed by extension of favourable credit terms to

key trade partners amid rising competition, and we struggle to see the sustainability of this strategy. In 2020, our outlook for NESTLE is

stable amid gradual improvements in the overall economy. Revenue and Profit margins are also expected to be stable due to further

improvements in volumes as demand remains stable. Meanwhile, we expect Marketing and Distribution spend to continue to pressure

operating margin due to a largely competitive operating environment. In all, NESTLE is rated a BUY.

Source: Company Financials, United Capital


EPS (N) 42.5 54.3 59.4 60.3

DPS (N) 27.7 54.2 53.4 54.2

BVPS (N) 56.6 63.4 69.5 75.8

Dividend Payout 65.0% 99.9% 89.9% 89.9%

Dividend Yield 1.8% 3.8% 3.3% 3.3%

P/E (x) 36.6 26.4 27.7 27.3

P/BV (x) 27.5 22.6 23.6 21.7

ROAE 89.0% 90.4% 89.4% 83.0%

ROAA 22.97% 26.49% 27.69% 82.96%


Nigerian Breweries Plc: HOLD Bloomberg: NB NL, Reuters:NB.LG, NSE: NB


59.0 59.5 0.8% 8.0 1,536.9 471.8 196,640,400.0 46.8%

NB’s top-line was hugely affected by the elevated excise duty payment in 2019. As at 9M-19, NB’s Gross Revenue rose by 1.9% y/y to

N259.9bn. However, a 43.2% y/y rise in Excise Duty expense drag Net Revenue lower by 1.0% to N235.7bn. Meanwhile, Cost of Sales

decreased marginally by 2.7%y/y while Operating Expenses and Finance Cost grew 6.1% and 48.6% y/y respectively. The higher OPEX

was mainly due to increased Advertising and Distribution cost (+11.9%y/y) in a bid to recover lost market share from INTBREW. Also, the

higher Finance cost was driven by higher Interest-Bearing Liabilities (up 70.9% y/y to N72.8bn) due to the Jun-19 commercial paper

issuances done by the company to finance working capital. Overall, PBT and PAT fell by 23.4%y/y and 17.0%y/y to N17.2bn and N12.3bn

respectively and net margin deteriorated by 1.0% to 5.2%. In 2020, we expect NB to finally pass on the elevated excise duty to consumers

amid the expected implementation of the new national minimum wage. This should impact the topline numbers positively and trickle

down to the bottom-line numbers. Against this background, we review our 12M TP to N59.5 and place a HOLD rating on the brewer.

Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded

0.5

0.7

0.9

1.1


Relative Price Movement: NB

NB NSEASI FMCGs

Figure 78 Key Stats FY-17 FY-18 FY-19e FY-20f

EPS (N) 4.1 2.4 2.1 3.6

DPS (N) 4.1 2.4 2.1 3.6

BVPS (N) 22.3 20.9 20.9 22.1

Dividend Payout 100.0% 100.0% 100.0% 100.0%

Dividend Yield 4.0% 2.8% 4.0% 6.8%

P/E (x) 24.9 35.2 24.9 14.7

P/BV (x) 4.6 4.1 2.5 2.4

ROAE 19.2% 11.3% 10.0% 16.5%

ROAA 8.8% 5.0% 4.2% 6.9%



Sources: Bloomberg, United Capital

Flour Mills of Nigeria Plc: HOLD Bloomberg: FLOURMIL NL, Reuters:FLOURMI.LG, NSE:FLOURMILL

FLOURMIL’s performance improved in the 6-months to Sep-19. This was as Group Revenue grew mildly by 0.4% to N270.8bn while Post-Tax

rose faster by 16.4% y/y to N5.9bn. Notably, the Group Revenue recovery was supported by topline growth in Sugar (+15.1%) and Agro-

allied segments (+5.1%) while the highly weighted Food segment (-2.0%) as well as Support Services segment, lagged. Meanwhile, the

growth in Revenue was eroded by higher Cost of Sales (+0.6%) and OPEX (+7.3%y/y). Thanks to lower, Net Finance Cost (-25.2%) and Tax

Expense (-15.5%) PBT and PAT rose 4.0%y/y and 16.4%y/y to N8.6bn and N5.9bn respectively. Going forward, while gains from strategic re

-arrangement lie in the medium to long term, we think near term pressure from competition and operating environment will continue to

weigh. Overall, we maintain our TP at N21.5/share with a HOLD recommendation.

Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital

Dangote Sugar Refinery Plc: HOLD Bloomberg: DANGSUGA NL, Reuters: DANGSUGA.LG, NSE: DANGSUGAR

Price Target Price Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float

19.7 21.5 9.1% 4.1 236.1 80.8 25,647,950.0 99.6%


13.3 18.6 36.8% 12.0 531.6 163.2 17,189,760.0 26.8%

DANGSUGAR’s performance improved slightly in 9M-19 as reduction in the influx of smuggled sugar amid the closure of land borders

drove volume growth in Q3-19. Accordingly, Revenue grew mildly by 0.6% y/y to N117.4bn. However, operational challenges remained

during the year, eroding gains from the Revenue growth. Cost of Sales (+1.5%) rose faster than growth in Revenue and Gross Profit

declined by 2.2%y/y. The rising cost pressure emanated from higher raw sugar price as well as freight costs due to the Apapa wharf

gridlock. Consequently, bottom-line remained under the water, as PBT and PAT declined 12.4%y/y and 12.0%y/y to N23.0bn and N14.7bn

respectively. Looking ahead, we expect the restructuring around the Nigerian border to bode well for the company’s volume growth in FY

-19 and FY-20E. However, cost pressures are expected to persist as Apapa gridlock continue to drive freight cost higher. Adjusting our

model for the above assumptions, resulted in an uptick in TP to N18.6 (from N11.0) which implies a HOLD recommendation.

Sources: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded


0.5

0.7

0.9

1.1


Relative Price Movement: FLOURMILL

FLOURMILL NSEASI FMCGs

Figure 80

0.5

0.7

0.9

1.1


Relative Price Movement: DANGSUGAR

DANGSUGAR NSEASI FMCGs

Figure 81


EPS (N) 3.4 3.3 1.0 2.5

DPS (N) 1.0 1.0 1.2 0.8

BVPS (N) 39.1 36.7 36.5 38.3

Dividend Payout 29.7% 30.1% 123.0% 30.0%

Dividend Yield 3.4% 4.3% 6.2% 3.5%

P/E 8.6 7.0 20.0 8.5

P/BV 0.7 0.6 0.5 0.6

ROAE 8.9% 10.8% 2.7% 6.8%

ROAA 2.1% 3.1% 1.0% 2.6%


EPS (N) 3.3 1.8 1.6 2.0

DPS (N) 1.1 0.7 0.6 0.7

BVPS (N) 7.7 8.2 9.7 10.4

Dividend Payout 33.2% 37.4% 35.3% 36.4%

Dividend Yield 5.5% 4.5% 4.2% 4.1%

P/E (x) 6.0 8.3 8.5 8.9

P/BV (x) 2.6 1.8 1.4 1.7

ROAE 50.1% 22.9% 18.2% 19.5%

ROAA 21.7% 11.9% 10.6% 11.8%




PZ Cussions Nigeria Plc: HOLD Bloomberg: PZ NL, Reuters: PZ.LG, NSE: PZ


5.7 5.8 2.7% 4.0 73.1 22.4 2,452,972.0 27.1%

PZ continue to struggle with competition in 2019 as Gross Income and PAT declined sharply by 30.1% and 40.0% y/y in FY-18/19 (ending

May) to N17.1bn and N1.2bn respectively. Also, earnings scorecard for Q1-19/20 (ending August) showed operational challenges remain

a drag on the company’s performance. This was as Cost of Sales spiked by 15.2% y/y while Revenue declined marginally by 0.5% y/y.

Thus, dragging Gross Income lower by 40.1%y/y to N2.7bn. Management explained that this contraction was caused by exceptionally

high port charges/demurrage incurred during the quarter. Accordingly, the situation at the Apapa port – a major route for PZ’s raw mate-

rial import is another source of pressure to be watched in FY-19/20. Over FY-19/20, we expect operational challenges to intensify as an

upward review of the minimum wage is likely to be counter-balanced by the upward review in VAT and other levies/tax. Also, the likely

increase in electricity tariffs by 2020 will further add pressures on PZ’s operational cost while concerns around FX devaluation by 2020

adds to the uncertainty. Factoring all of the above, we place a HOLD rating on the ticker as operating fundamentals continue to falter.


0.3

0.5

0.7

0.9

1.1

1.3


Relative Price Movement: PZ

PZ NSEASI FMCGs

Figure 82

Unilever Nigeria Plc: BUY Bloomberg: Unilever NL, Reuters: Unileve.LG, NSE: Unilever


22.0 27.7 25.9% 5.7 411.7 126.4 9,658,865.0 32.1%

Value Traded*: 12M Average daily value traded Source: Bloomberg, United Capital Source: Company Financials, United Capital

UNILEVER’s 9M-19 Revenue slumped by 28.6%y/y to N51.6bn, following an underwhelming Q3-19 wherein Revenue dipped sharply by

62.9%y/y to N9.0bn. The Q3-19 slump was its weakest performance for as far back as we can track. Our findings indicated that the steep

Revenue decline in Q3-19 may be partly due to the tighter credit terms with key distributors in a bid to minimize non-performing receiva-

bles. A 33.7% q/q decline in Trade Receivables supports this findings. In all, PBT and PAT dipped 94.9% and 94.3% respectively. Clearly, we

expect FY-19 performance to grossly underperform even as we anticipate a better Q4-19 performance. However, we expect FY-20 perfor-

mance to come in stronger, buoyed largely by the low base effect of FY-19. Gradual improvement in consumption spending is also ex-

pected to support volume growth, although cost pressure may persist. In all, we place a BUY rating on UNILEVER.

0.4

0.6

0.8

1.0

1.2

1.4


Relative Price Movement: UNILEVER

UNILEVER NSEASI FMCGs


EPS (N) 1.8 1.8 1.8 1.8

DPS (N) 0.5 1.5 0.9 1.3

BVPS (N) 18.1 14.5 30.2 29.1

Dividend Payout 28.1% 84.9% 50.0% 70.0%

Dividend Yield 1.2% 4.1% 3.2% 4.6%

P/E (x) 23.0 20.9 15.8 15.2

P/BV (x) 2.3 2.6 0.9 1.0

ROAE 17.0% 12.8% 5.6% 6.4%

ROAA 6.2% 7.3% 3.6% 3.8%

Key Stats FY-17 FY-18 FY-19E FY-20f

EPS (N) 0.9 0.5 0.3 0.3

DPS (N) 0.5 0.2 0.2 0.1

BVPS (N) 11.4 11.4 11.5 10.2

Dividend Payout 53.9% 30.9% 51.5% 47.3%

Dividend Yield 3.4% 2.4% 1.2% 2.8%

P/E 22.2 24.9 18.5 20.9

P/BV 1.8 1.1 0.5 0.6

ROAE 8.3% 4.3% 2.5% 2.6%

ROAA 4.5% 2.2% 1.4% 1.4%



Dangote Cement Plc: BUY Bloomberg: DANGCEM.NL, Reuters: DANGCEM.LG, NSE: DANGCEM

DANGCEM performance saw a marginal decline in revenue (-0.8%) to N679.8bn as at 9M-19. This was fueled by faltering growth

in its major market, Nigeria, which accounted for about 70.0% of group revenues. The above notwithstanding, the cement giant

saw an improvement in volume sold (+1.1%) driven by volume sold in Nigeria which was up by 0.6% y/y. Notably, countries like

Tanzania and Sierra Leone saw an increase of 106% and 108% respectively in volume sales to support the group volume growth.

PAT followed suit, declining 2.5% y/y to N154.4bn,. Judging by historical, we believe that the ticker is currently underpriced couple

with our expectation of improved growth in volume sales in 2020 and absence of one-off spike in cost as seen in advertisement

and promotion cost in 9M-19. Hence we retain a BUY rating with a TP of N199 and 40.1% upside.

Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded Sources: Company Financials, United Capital Research

Lafarge Africa Plc: HOLD Bloomberg: WAPCO.NL, Reuters:WAPCO.LG, NSE: WAPCO

Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded Sources: Company Financials, United Capital Research

Following the selloff of the loss making South African operation, Lafarge Africa plc (WAPCO) reverted to profitability 2019

financial results. Though 9M-19 declined by 30.0% y/y to N234.3bn owing to the south African divestiture, Profit after tax

(PAT) reverts to profitability, to N20.6bn. Further analysis revealed that long term borrowings reduced by 78.4% to N65.3bn,

thanks to the proceed from the divestiture which off set the contentious foreign debt that has being a bone in the neck of

the bottom line. The reduction in borrowings fueled the massive reduction in leverage (using: debt/equity), to 18.7%

(previously: 224.1%). In 2020, we want to pay close attention to how the company will perform post divestment coupled

with the stiff competition among the players in the sector as our model suggest a mild improvement . Overall, we remain

cautiously optimistic on the stock and retain our HOLD recommendation.

Companies


EPS (N) 12 22.9 14.5 12.8

DPS (N) 10.5 11 12.3 10.2

BVPS (N) 45.9 57.9 55.5 81.1

Dividend Payout 87.6% 48.0% 84.8% 79.7%

Dividend Yield 4.6 8.3 6.5 5.1

P/E (x) 19.2x 8.4x 17.6x 6.4x

P/BV (x) 5.0x 3.3x 4.0x 2.5x

ROAE 26.1% 44.2% 22.9% 20.8%

ROAA 12.3% 10.1% 11.1% 13.3%


EPS (N) -6.2 -1.6 0.3 0.8

DPS (N) 1.5 NA 0.1 0.3

BVPS (N) 28.2 33.4 13.9 14.5

Dividend Payout nm nm 39.4% 40.0%

Dividend Yield 3.0% na 0.9% 2.3%

P/E (x) nm Nm 42.3x 17.4x

P/BV (x) 1.6 x 1.1x 2.2x 2.2x

ROAE -17.0% -6.0% 0.3% 0.1%

ROAA -6.4% -1.6% 0.9% 2.4%

0.6

0.7

0.8

0.9

1.0

1.1


Relative Price Movemnet: DANGCEM

DANGCEM Industrial Goods Index NSE ASI


142 199 40.1% 17.0 7,881.9 2,419.8 393,992,200.0 14.7%


15.3 16.6 8.5% 16.1 802.8 246.4 67,274,940.0 90.4%

Figure 84

0.6

0.8

1.0

1.2

1.4


Relative Price Movement: WAPCO

WAPCO Industrial Goods Index NSE ASI

Figure 85



Companies

CCNN: BUY Bloomberg: CCNN NL, Reuters: CCNN.LG, NSE: CCNN

CCNN’s Revenue surged 117.2% y/y to N42.5bn in 9M-19, operating profit also grew 105.1% y/y to N11.8bn. Additionally, PBT

and PAT spiked 104.0% and 118.5% respectively. The above were on the back of the its merger with Kalambaina Cement.

Looking ahead, CCNN has announced intention to merge its operations with BUA’s Obu Cement ltd, the consolidation will

result in the delisting of CCNN and the surviving entity will be listed on the NSE as Obu Cement. In all, the consolidation will

increase the installed capacity to 11.0MMT from the current 8.0MMT and position the company as the second largest cement

producer in Nigeria. Accordingly, we expect the consolidation with Obu cement to have massive impact on the company’s

topline in FY-20E, as seen in the merger with Kalambaina. We place a BUY rating on the stock, which provides an upside of

49% to our 12M-TP of N28/share.

Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded

0.6

0.8

1.0

1.2

1.4

1.6


Relative Price Movement: CCNN

CCNN Industrial Goods Index NSE ASI


EPS (N) 12 22.9 14.5 12.8

DPS (N) 10.5 11 12.3 10.2

BVPS (N) 45.9 57.9 55.5 81.1

Dividend Payout 87.6% 48.0% 84.8% 79.7%

Dividend Yield 4.6% 8.3% 6.5% 5.1%

P/E (x) 19.2x 8.4x 17.6x 6.4x

P/BV (x) 5.0x 3.3x 4.0x 2.5x

ROAE 26.1% 44.2% 22.9% 20.8%

ROAA 12.3% 10.1% 11.1% 13.3%


18.1 28.0 54.7% 13.1 777.4 237.9 11,213,180.0 3.0%



Companies


Seplat Petroleum Dev. Com. Plc: BUY Bloomberg: SEPLAT NL, Reuters: SEPLAT.LG, NSE: SEPLAT


657.8 838.1 27.4% 0.6 1,260.8 387.1 15,891,140.0 50.6%

SEPLAT’s 9M-19 Revenue declined by 12.6 y/y to N151.9bn, due to lower crude oil sales (-26.5%y/y), despite a 35.9%y/y increase in total

gas revenue. Notably, the increase in total gas sales was buoyed by a one-off recognition of gas tolling receivables. Also, lower realized

prices across its two segments (oil & gas), coupled with lower working interest production at 47,163 boepd (-6.2%y/y), affected revenue.

However, PAT surged by 102.5% to N56.6bn, driven by efficient cost management, reduced leverage and tax credit on gas operations.

Looking ahead, SEPLAT has secured a £382.0mn takeover bid of Eland Oil & Gas Plc. By our estimates, the acquisition will boost SEPLAT’s

2020 working interest production to 70,876 boepd, mainly from its liquids production. We believe this offers significant potential for cost

synergy and operational efficiency. Also, Eland’s low leverage and similar export route is a plus for the enlarged entity. Overall, we

maintain a BUY rating on the stock, with a 12M TP of N838.1.

0.6

0.7

0.8

0.9

1.0

1.1

1.2


Relative Price Movement: SEPLAT

NSE-ASI OIL & GAS Index SEPLAT



EPS (N) 169.5 89.7 183.8 196.7

DPS (N) 0.0 36.0 36.8 39.3

BVPS (N) 960.4 979.4 1318.8 1476.2

Dividend Payout 0.0% 40.1% 20.0% 20.0%

Dividend Yield 0.0% 6.7% 4.4% 4.7%

P/E (x) 3.7 6.0 4.6 4.3

P/BV (x) 0.7 0.5 0.6 0.6

ROAE 17.6% 9.2% 13.9% 13.3%

ROAA 10.1% 5.9% 10.5% 10.9%


11 (MOBIL) Plc : BUY Bloomberg: MOBIL NL, Reuters: MOBIL.LG, NSE: MOBIL


147.9 219.4 48.3% 0.4 173.7 53.4 4,719,342.0 100.0%

11 Plc (MOBIL) recorded an impressive N141.5bn in Revenue for 9M-19, with its 5-yr CAGR at 25.4%, evident by its constant aggressive

revenue drive. For the period under review, Revenue grew by 13.2%y/y, riding on increased sales across all product segments. Its major

drivers recorded double digit growth (Fuels: +11.8%y/y, Lubes: 14.9%y/y). We also saw sustained momentum in sales of its new product

line, LPG, by a whopping 59.2%q/q to N967.2mn, likely to touch N1.0bn by FY-19. Elsewhere, benefits from MOBIL’s property business

weakened on the back of lower rental income, as Other Income declined 7.6%y/y. Thus, lower OPEX (-1.1%y/y) was unable to support

profitability. In all, with lower realized income from investment property and marginal Net Finance costs (N133.4mn), Profit before Tax fell

by 19.3%y/y to N9.4bn, with 9M-19 EPS at N17.6 (-19.4%y/y). In spite of the current tepid dynamics of the downstream segment, we are

comfortable with MOBIL’s business operations. In the near term, we might see continued growth in sales, with LPG volumes likely to gain

traction. Additionally, incomes from investment properties could continue to downplay volatilities associated with petroleum products

marketing, and shoring up profitability. Overall, we maintain a BUY rating on the stock with a 12M TP of N219.4.


0.6

0.7

0.8

0.9

1.0

1.1

1.2


Relative Price Movement: MOBIL

NSE-ASI OIL & GAS Index MOBIL


EPS (N) 20.8 25.9 29.4 33.7

DPS (N) 8.0 8.3 10.0 11.5

BVPS (N) 75.9 93.4 89.5 96.6

Dividend Payout 38.4% 31.9% 34.0% 34.0%

Dividend Yield 4.1% 4.5% 4.6% 5.2%

P/E (x) 9.3 7.1 7.5 6.5

P/BV (x) 2.6 2.0 2.5 2.3

ROAE 30.8% 30.6% 32.1% 36.2%

ROAA 11.0% 12.8% 13.4% 13.3%



Companies

For 9M-19, TOTAL recorded a 2.2% y/y drop in its Revenue to N221.8bn, as declines in its General (-15.2%y/y) and Aviation (-2.8%y/y)

segments, which account for 30.0% of Revenue, outweighed a modest increase in its Network (+2.5%y/y) segment (70.0% of total

Revenue). Constrained by the consequences of operating in a market with capped PMS prices, Cost of Sales remained sticky (+0.4%y/y),

resulting in a 19.0% decline in Gross profit. Elsewhere, the combination of higher OPEX (Admin expenses up 22.7%y/y) and the overkill of

short term borrowing (110.0% surge in Net Finance costs) was a burning hole in TOTAL’s pocket. With little financial buffer from Other

Income (-29.9%y/y), TOTAL reported a first-time Loss before Tax of N117.omn, a huge drop from its N7.7bn profit position in 9M-18.

Accordingly, 9M-19 Loss per share (LPS), was N0.6. Overall, we note that the current unfavourable business environment being operated

in, by downstream companies, coupled with the company’s peculiar issues, being inefficient management of short-term borrowing costs,

will weigh on 2020’s performance. Additionally, its negative cash balance signals the need to refinance short term borrowings, majorly

from the banks or at the currently low rates in the debt capital market to boost profitability. With the drumbeats of a deregulation watering

down, we expect the company to continue to drive growth in Lubricant sales and petroleum products with unregulated prices.

Nevertheless, we remain cautiously optimistic on the stock, with a HOLD rating on a 12M TP of N139.6.

Total Nigeria Plc: HOLD Bloomberg: TOTAL NL, Reuters: TOTAL.LG, NSE: TOTAL


110.9 139.6 25.9% 0.3 122.6 37.7 3,698,049.0 38.0%

Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded Source: Bloomberg, United Capital

0.3

0.5

0.7

0.9

1.1

1.3


Relative Price Movement: TOTAL

NSE-ASI OIL & GAS Index TOTAL


EPS (N) 23.6 23.4 -0.4 2.6

DPS (N) 17.0 17.0 0 1.6

BVPS (N) 83.1 90.5 65.4 100.8

Dividend Payout (%) 72.0% 72.5% 0.0% 61.2%

Dividend Yield (%) 7.4% 8.5% 0.0% 1.1%

P/E (x) 9.7 8.5 nm 54.3

P/BV (x) 2.8 2.2 2.1 1.4

ROAE 31.0% 27.0% -0.5% 3.1%

ROAA 6.5% 6.6% -0.1% 0.6%

https://investnow.ng/

Disclosure

Appendix



Investment Rating Criteria and Disclosure

United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;

Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR

of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor

around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).

Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.

NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking

relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.

Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in

activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition,

research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s

Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published

research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable

conflicts of interest that may arise in the course of its business relationships.

Risk Rating

Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in

significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk.

Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from

government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets.

Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.

These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest,

government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.

United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem

applicable the company of focus. The ratings are defined below;

High: High probability of an imminent systematic risk or/and unsystematic risk

Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk

Low: Low probability of an imminent systematic risk or/and unsystematic risk

Analyst Certification

The research analysts who prepared this report certify as follows:

1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this

report.

2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in

this report.

Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,

potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report

are disclosed:

• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report

Disclosure keys

a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report

b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence

on the company’s operating decision directly or through proxy arrangements

c. UCAP is a market maker in the publicly traded equities of the Company

d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company

e. UCAP beneficially own 1% or more of the equity securities of the Company

f. UCAP holds a major interest in the debt of the Company

g. UCAP has received compensation for investment banking activities from the Company within the last 12 months

h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months

i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution

j. The Company is a client of UCAP

k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer

United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets

and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)

nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell

securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is

registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact

United Capital Plc, 12th Floor, UBA House, 57 Marina, Lagos. ©United Capital Plc 2018.*

Disclosure Appendix

Company Disclosure

Dangote Cement Plc a,h

Fidelity Bank Plc h

Flour Mills of Nigeria Plc h

Forte Oil Plc g

International Breweries Plc a,h

Nigerian Breweries Plc h

PZ Nigeria Plc h

Stanbic IBTC Plc g

Total Nigeria Plc h

UAC of Nigeria Plc h

Zenith Nigeria Plc a

Documents

Nigeria Outlook 2020: A Different Playing Field · Nigeria Outlook 2020: A Different Playing Field 3 Executive Summary Global Economy in 2020: A potential recovery in sight? Away