Strategic Positioning for Long Term Value

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1 Jan-13 Mar-13 May- 13 Jul-13 Sep-13 Nov-13 Company Report Strategic Positioning for Long Term Value Positive business outlook: Over the next 18 months, Red Star Express Plc (REDSTAREX) would be undergoing a planned expansion, to meet growing business demand as Nigeria s leading courier and logistics service provider. At its last annual general meeting (for the March 2013 financial year end), the company announced plans for the construction of warehouses along the Lagos - Ibadan expressway, as well as acquisition of new haulage trucks and operational hubs in Abuja and Port-Harcourt. In addition, the company plans to invest in new ICT equipments to meet contemporary standards. Already, Red Star Express has acquired and cleared 5 acres of land along Lagos-Ibadan expressway for the construction of the warehouses, whilst also proposing to raise its authorised share capital by N200 million ($1.2 million), in order to raise funds for the projects from the capital market. At completion of these projects, we expect a strong boost to the company s revenue. In addition, the company's 3 subsidiaries (Red Star Freight Limited, Red Star Logistics Limited and Red Star Support Services Limited), are well positioned in the logistics business value chain, thus supporting RedStar's underlying courier business. Emerging Ecommerce offers longer term growth potential: In recent times, Ecommerce has taken a new shape in Nigeria with the emergence and increasing popularity of local online retail stores like jumia.com, konga.com and dealdey.com. As internet penetration and customer awareness increases, volume of online trades would significantly increase, thereby giving rise to more business opportunities for courier and logistic service providers. In Turkey for instance, the textile and clothing industry already relies heavily on international Courier, Express and Parcel (CEP) services. Thus, with the retail e- commerce industry still at a nascent stage in Nigeria, growth opportunities certainly abound for courier service providers that would utilise the first-mover advantage, through partnerships with these online retail stores. An example of such is the recent partnership between Walmart and UPS, to test same day delivery and the various delivery arrangements between Amazon and UPS, FedEx and USPS in the US. Consistent dividend track record: Since its listing in 2007 on the Nigerian Stock Exchange, Red Star Express has maintained a consistent dividend payment history. With its average dividend yield at 6.5% (based on listing price of N4.68) for the last five years, the stock is a good investment for investors seeking stable income stream. Valuation: Using the Enterprise Value Discounted Cashflow Model, we arrive at a one year target price of N4.70, which presents a 7% upside to REDSTAR's current share price of N4.40. Thus, we initiate coverage on the stock with a HOLD rating. REDSTAREX is trading at a 6.7x forward P/E versus our estimated market forward P/E of 14.2x. Stock Data Bloomberg Ticker: Analyst Tosin Ojo* Tosin.Ojo@cardinal-stone.com HOLD TP: N4.70 REDSTARE:NL Market Price (N) 4.40 Shares Outs (Mn) 590 Market cap (N Mn) 2,594 Price Performance REDSTAREX NSE 12-month (%) month (%) (2.0) 3.6 YTD (%) (0.5) (7.6) Key Ratios 2013A 2014E 2015F EBITDA Margin 10.2% 10.5% 10.4% EBIT Margin 10.0% 10.4% 10.3% PAT Margin 5.8% 6.3% 6.0% ROAA 10.2% 12.2% 11.5% ROAE 17.9% 21.7% 20.8% Valuation 2013A 2014E 2015F P/E (x) P/BV (x) Div. Yield (%) 7.3% 8.9% 9.5% YTD Price Performance (rebased) ASI REDSTAREX Contact Information sales@cardinal-stone.com Phone number: research@cardinal-stone.com Phone number: March 2014 Source: NSE 1

2 Corporate Profile Red Star began business operations in Nigeria on October 12, The company is a licensee of the Federal Express Corporation (FedEx) in Nigeria, is ISO 9001:2008 Certified, and became listed on the Nigerian Stock Exchange on November 14, The company is a wholly owned Nigerian courier service provider, and has three subsidiaries which are: Red Star Freight Limited, Red Star Logistics Limited and Red Star Support Services Limited. Business Overview Red Star Express mainly engages in the provision of courier service, mail room management services to companies in various sectors, freight services, logistics, ware-housing and general haulage. Courier service is the business cash-cow, contributing two-thirds of the company s revenue as at FY 13. However, the three other businesses (Logistics, Freight and Support services) are growing at a faster pace (average 50% growth over the last 3 yeas) than the courier business. As the foremost local courier sevice provider, Red Star Express boasts of international partnerships with FedEx which gives the company access to one of the world s largest air express transportation fleet. Red Star Express has 170 offices in Nigeria and delivers to an additional 1,500 communities. The company boasts of over 1,127 staff strength; 450 vehicle fleet and over 165 express centres across Nigeria. RedStar largely serves corporate clientele and has about 25% share of the total market serviced by the "big four" courier providers (TNT, DHL, UPS and REDSTAR-FEDEX). Red Star Revenue by Business Segment ( ) 6,000 4,500 3, , Courier Logistics Freight Support Services Sources: Annual Reports, CardinalStone Research 2

3 Investment rationale Strong growth potential from business expansion. Red Star would be undergoing a major expansion over the next months, to meet growing business demand as Nigeria s leading courier and logistics service provider. At its recent annual general meeting (for the 2013 March financial year end), the company announced plans for the construction of warehouses along the Lagos - Ibadan expressway, as well as acquisition of new haulage trucks and operational hubs in Abuja and Port-Harcourt. In addition, the company plans to invest in new ICT equipments in a bid to meet contemporary standards. Already, Red Star Express has acquired and cleared 5 acres of land along Lagos-Ibadan express way for the construction of the warehouses, whilst also proposing to raise its authorised share capital by N200 million leading to the creation of 400 million new shares, in order to raise funds for the projects through the capital market. At completion of these projects, we expect a strong boost to the company s revenue. Diversification across the logistics value chain: With its 3 subsidiaries (Red Star Freight Limited, Red Star Logistics Limited and Red Star Support Services Limited) the company is well positioned in the logistics business value chain, thereby supporting its underlying courier business. Whilst the parent company (courier business) accounts for about 66% of revenue as of FY 13, we consider the other business lines (given their faster rate of growth 15% on average vs 0.5% growth in courier revenue), as the potential growth spot for the company. Though freight services is the least contributor to overall revenue (at 3.6% as of FY 13), the business has significant growth potentials, especially across West Africa, given the anticipated development of the Dakar-Lagos Highway, which at completion would promote intra-regional trade. Also, with the evolution of new businesses in Lagos State, given its teeming population in excess of 15 million people, and the proposed development of a new megacity like the Eko Atlantic City, the potential for Red Star Logistics and Support Services businesses are enormous. Emerging Opportunities from E-commerce: In recent times, Ecommerce has taken a new shape in Nigeria with the emergence and increasing popularity of local online retail stores like jumia.com, konga.com and dealdey.com. As internet penetration and customer awareness increases, volume of online trades would significantly increase, thereby giving rise to more business opportunities for courier and logistic service providers. In Turkey for instance, the textile and clothing industry already relies heavily on international Courier, Express and Parcel (CEP) services. Thus, with the retail e-commerce industry still at a nascent stage in Nigeria, growth opportunities certainly abound for courier service providers that would utilise the first-mover advantage, through partnerships with these online retail stores. 3

4 An example of such is the recent partnership between Walmart and UPS, to test same day delivery and the various delivery arrangements between Amazon and UPS, FedEx and USPS in the US. Strong franchise and brand name: Red Star Express is the licensee of Federal Express Corporation (FedEx), through FedEx Express Global Participants (GSPs) in Nigeria. FedEx is world s third largest courier company with 10 million average daily volume of shipments, operating in over 220 countries. Hence, Red Star Express handles inbound and outbound services for FedEx Expess in Nigeria. Being a licensee of FedEx exposes the company to global practice and standards, which inadvertently gives the company a solid footing, amidst local peers given the fragmented nature of Logisics industry in Nigeria. Consistent dividend track record: Since its listing in 2007 on the Nigerian Stock Exchange, Red Star Express has maintained a consistent dividend payment history. With its average dividend yield at 6.5% (based on listing price of N4.68) for the last five years, the stock is good investment for investors seeking stable income stream. Global Express Courier Industry Trends and dynamics: According to Oxford Economic Forecasting (the report the impact of the express delivery industry on the global economy published in 2009), the global express courier industry is one of the world s growth sectors and plays a crucial role in international trade. A survey of different businesses carried out globally also show that the express courier industry help companies maximise efficiency of operations and minimise inventory costs. From its origination in the 1960s to meet companies need of time-specific guaranteed delivery that couldn t be met by state postal service and freight forwarders, the express courier industry has evolved into delivery of specialist items like hightech products. Thus, express courier services are typically used for low weight high value items. The OECD estimates that goods transported by air account for 3% by weight of good traded globally but 40% by value. Express delivery services are mainly used by high-tech and knowledge based sectors; in addition to these, the pharmaceutical, IT and financial services sectors are also major clients of the express courier industry. As of 2008, the size (using net revenue) of the global courier industry is about $175 billion, rising at an average annualised rate of 4% from $130 billion a decade ago. The industry created about 1.25 million jobs and supported a total of 2.75 million jobs. The industry is dominated by the top four global players UPS, DHL, FedEx and TNT which are also referred to as the integrators. The term integrator refers to the ability of these companies to offer door-to-door time-definite integrated services, with the company managing control over all aspects of the distribution process through a tracking service. 4

5 Company Report Despite the slow-down witnessed by the major global express courier service providers in 2011, a consequence of the global economic slow-down and protracted Euro-Zone debt crisis, the express delivery market still remained the fastest growing sector of the overall logistics industry. Given increasing globalisation and integration of World economies, the express courier industry has become even more important in enhancing the competitiveness of companies. Global Trade (import and exports in USD Millions) Av. CAGR: 8.2% World Import (US Millions) World Export (US 'Million) Sources: UNCTAD, CardinalStone Research Developed countries dominate, emerging economies also coming to the fore: Advanced economies still hold sway in the global express market with the United States leading. Of the $180 billion generated in annual revenue in the global express industry in 2012, about $80 billion was made within the United States from about 7,500 companies. Whilst Europe is the second biggest express delivery/courier market in the world, Asia and Latin America have been identified as regions with biggest growth potential due to the increased contribution of these regions to International trade volume and their rapidly emerging middle class. However, slow growth in developed market is gradually limiting the growth opportunities for the global express courier industry. According to PWC s Transport and Logistics 2030 report, demographics and natural resource wealth is setting the path for new trade corridors between Asia and Africa as well as Asia and South America. With this development, trade volume is bound to shift to emerging markets, raising their positioning in every facet of the global logistics industry. 5

6 Company Report Emerging Economies Trade (import and exports in USD Millions) Av. CAGR: 9.5% Emerging Economies Exports Emerging Economies Imports Sources: UNCTAD, CardinalStone Research Sub-Saharan Africa Trade (import and exports in USD Millions) Av. CAGR: 9.7% SSA Exports SSA Imports Sources: UNCTAD, CardinalStone Research 6

7 Nigeria: From a macroeconomic standpoint... Nigeria is Africa s most populous country the 2 nd largest economy and it accounts for about 60% of West Africa s GDP respectively. The country is often considered the gateway to West Africa, especially to the landlocked West African countries like Niger, Chad etc. Over the years, commerce has been a thriving industry in Nigeria, as years of under-investment in the manufacturing sector has left Nigeria significantly import dependent. Wholesale and Retail trade is the third largest contributor to Nigeria s GDP, even as the sector has steadily grown over the years despite various infrastructure bottlenecks. Percentage Distribution of the Gross Domestic Product (at current prices) Others, 14.69% Wholesale & retail trade 15.2% Wholesale & retail trade as % of GDP Agriculture Crude Petroleum and Natural gas, 32.72% Agriculture 37.4% Crude Petroleum and Natural gas Others Sources: UNCTAD, CardinalStone Research Nigeria foreign trade (imports and exports N'million) Exports Imports Sources: NBS, CardinalStone Research 7

8 Thus, with Nigeria s strong and rising trade volume, robust wholesale and retail sector, and its growing population, there are immense opportunities for logistics and courier business in Nigeria, as the afore-mentioned are core drivers of the industry. Industry Landscape Competitive environment and industry players: The courier and logistics industry in Nigeria is broad and highly fragmented. The proliferation of courier service providers in Nigeria is partly due to the inefficiences of the government owned courier NIPOST, which arguably is Nigeria s biggest courier service provider. According to NIPOST courier regulatory department (NIPOSTCRD), there are 237 licensed courier service providers in Nigeria, which comprise mainly of local courier companies. The department is responsible for the registration and licensing of courier operators, setting standards in courier service and monitoring of operations. The major international courier service operators in Nigeria are UPS, DHL, IAS/TNT and FedEx/RedStar. In addtion to the traditional courier service providers, the industry on a broad basis, also includes logistics, freight and maritime/cargo shipping service providers. Of the 237 courier providers in Nigeria, there are only 4 with either international affilications or that are direct subsidiaries of international courier service providers. Thus, average service quality in the industry is still behind international best practice, leaving the regulatory body with the enormous task of standardising the industry. Despite the huge fragmentation of the industry, the potentials of the courier business in Nigeria is still evolving, given Nigeria s strong economic growth prospects, large population and vast land area. Also, the huge volume of domestic trade portends strong opportunities for the courier and shipping business in Nigeria. According to Red Star Express CEO at a presentation made to the Nigerian Shippers Council, the size of the courier industry in Nigeria is estimated at N12 billion. Whilst the industry is dominated by the global players aforementioned, we have also seen some emerging wholly indigenous corporates come into the market and wax stronger. These emerging local players which include IFEX, ABEX, Tranex, Tradeways and Courier Masters, have negligible international operations due to lack of capacity. However, we have seen the emerging local courier operators continually gain foothold in domestic market given their considerable national network. Challenges: Infrastructure deficit, still a key obstacle Bad road infrastructure in Nigeria remains a key problem facing courier and logistics providers in the country. Others are inconsistent government policies in form of multiple taxation, conflicts of interest from government agencies as regulators and operators, duplicity of functions, poor import and export information on rights, obligations, privileges etc. We consider poor transportation infrastructure as the most significant challange facing logistics provider, which must be addressed if further business opportunities would be unlocked in the industry. 8

9 In the World Bank s Logistics Performance Index (LPI) report 2012 Connecting to Compete which compares the trade logistics profile of 155 countries, Nigeria ranks 121. The key logistics indices compared in the report are; the efficiency of the clearance process (speed, simplicity and predictability of formalities) by customs; the quality of trade and transport related infrastructure (ports, railroads, roads, information technology); the ease of arranging competitively priced shipments; the competence and quality of logistics service (transport operators, customs brokers; the ability to track and trace consignments/shipments and the frequency with which shipments reach the consignee within the scheduled or expected delivery time. According to the report, infrastructure stands out as the key driver of LPI progress, with the modest convergence since 2007 explained by a perceived improvement in the infrastructure of low and middle income countries. In Africa, Morrocco showed the strongest improvement, moving to 50 th position in 2012 from 113 th position in 2007, whilst South Africa still maintains its lead on the Africa continent as the best ranked African country (at 23 rd position). Other African countries that ranked better than Nigeria include Tanzania, Namibia and Togo. Opportunities Increased trade volume from development of free trade zones: The business opportunities for the overall logistics industry and indeed the CEP (Courier, Express and Parcel) segment of the industry are enormous, given Nigeria s emerging economy. A key area expected to bring new growth opportunities through increase in trade volume is the development of free trade zones. Whilst the concept of free trade zones has not been fully experimented in Nigeria, one of such (TINAPA) was established some years back. The Lagos State government has also established the Lekki Free Trade Zone, which is expected to be the largest in Africa, at completion of all adjoining infrastructure. Changing consumer behaviour, internet penetration and e-banking: Also, changing consumer awareness and behaviour would increasingly throw up more opportunities for the CEP segment of the logistics industry in Nigeria. Already, we have seen increase in the number of online retail stores which use the courier service for delivery to the customers. As internet pentration increases, road infrastructure improves, and electronic/mobile banking gains more traction, more Nigerians would prefer to shop online. Regional integration and new trade routes: Furthermore, the development of regional transport corridors, would boost trade along West Africa, thereby opening up more business opportunities for courier and logistics service providers. 9

10 For instance, according to Frost and Sullivan's May 2013 presentation - Transport Logistics Infrastructure in Sub-Saharan Africa - the Dakar-Lagos and the Algiers - Lagos (Trans-Sahara) highways were estimated to be 85% complete each. These highways on completion, would be a major link between Northern Nigerian and West African countries, thus facilitating regional integration, trade flow and better logistics. Business outlook and financial analysis We expect the RedStar's proposed expansion over the next 12 to 18 months (construction of new warehouses, and acquisition of operational hubs in the North-Central (Abuja) and South-South (Port-Harcourt) Regions), to boost topline performance in the next 3 to 5 years. Thus, for FY'14 we project revenue would grow by 19%, higher that 5.3% revenue growth recorded by the company in FY'13. As of the latest nine months results for the period ended 31st December 2013 (Q3'14), Red Star reported a 22% growth in revenue. Given the higher run-rate already seen in Q3, we consider our 19% revenue growth estimate for FY'14 reasonable. Over the next 3 years, we forecast average growth of 17%, following which we expect a slow-down to around 10%. Following from the surge seen in cost of sales for FY'13 which was on the back of the increase in fuel price in 2012, we expect some stability in direct operational costs in FY'14 and project cost of sales as a percentage of sales would stay around 69% level seen in FY'13. Hence, we forecast that gross profit margin would largely remain stable, inching up only marginally to 31% in FY'14 from 29.9% in FY'13. We have seen administrative expenses slow-down considerably since 2009, rising 13% YoY in FY'13 from as high as 27% in FY'09. Nonetheless, we project administrative expenses as percentage of sales would stay around 20.5% by FY'14 (as compared with 20.7% for FY'13), thus implying an 18% YoY growth. Over the next three years, we project that gross profit and EBITDA margins would average 30.7% and 10.2% respectively. Overall, we expect relatively stronger bottom-line run-rate in FY'14, trickling down from operating profit, which we have projected will grow by 15% in FY'14 (a recovery from the 14% decline reported in FY'13). Thus, we expect after tax earnings to rise by c.30% to N396 million by FY'14. Valuation Using the EVDCF valuation method, we arrive a one year TP of N4.70 for REDSTAREX. Our DCF covers a five year forecast period, with an estimated CAGR of 15% in revenue over the period. See below for WACC assumptions and DCF table; 10

11 WACC assumptions RFR (1year exponential average of 10 year bond) 12.73% After Tax Cost of Debt (Kd) 10.08% Cost of Equity (Ke) 22.19% Stock Beta (3Y daily adj.) 0.70 Debt/Equity 6.85% LT Growth Rate 3.00% WACC 21.41% Valuation methodology: Enterprise Value Discounted Cash flow Model (N Mn) 2014E 2015E 2016E 2017E 2018E EBIT ,046 1,148 Tax charge (262) (278) (346) (418) (459) NOPAT Less: Capex (189) (141) (127) (152) (168) Add: Depreciation /- Decrease/Increase in OpWC (581) (171) (290) (337) (190) Operating FCF (314) Discount factor Present Value of OpFCF (292) Terminal Value Operating FCF 3,919 Discount factor Present Value of OpFCF 2,046 EV 2,406 Less: Net debt 0 Minorities 0 Equity Value (Market cap) 2,406 Price/Share (N) 4.08 One year TP (rolled forward at Ke) (N)

12 Financial Statements and Key Ratios Income Statement (N'Mn) F 2015F 2016F Revenue 4,140 4,208 5,030 5,294 6,300 7,056 8,467 Cost of Sales (2,604) (2,592) (3,423) (3,657) (4,347) (4,868) (5,757) Gross Profit 1,536 1,616 1,606 1,636 1,953 2,187 2,709 Administrative expenses (937) (1,060) (967) (1,094) (1,291) (1,453) (1,837) EBITDA Depreciation (164) (202) (51) (55) (64) (74) (82) Other Income EBIT Net interest (expense)/income (23) (32) Profit Before Taxes Income Taxes (293) (78) (313) (240) (264) (280) (334) Profit After Taxes Statement Of Financial Position (N'Mn) F 2015F 2015F Assets Stocks Trade Debtors 1,133 1,204 1,351 1,281 1,933 2,165 2,598 Other Debtors and Prepayments Short Term Deposits Cash & Bank Balances Fixed Assets ,019 1,064 Intangible Assets Long Term Prepayments Long Term Investments Other Assets Goodwill Total Assets 2,723 2,770 2,916 3,038 3,461 3,827 4,427 Liabilities Bank Overdraft Trade Creditors Other Creditors ,044 Taxation Deferred taxation Term loans Gratuity provisions Total Liabilities 1,439 1,330 1,244 1,316 1,533 1,715 2,067 Capital and Reserves Share Capital Share Premium Reserves ,081 1,130 1,337 1,520 1,769 Shareholders' funds 1,284 1,440 1,672 1,721 1,928 2,111 2,360 Total liabilities and equity 2,723 2,770 2,916 3,038 3,461 3,827 4,427 Key Ratios F 2015F 2015F Profitability Return on Average Equity 14.1% 24.5% 19.6% 17.9% 21.7% 20.8% 22.4% Return on Average Assets 7.1% 12.1% 10.7% 10.2% 12.2% 11.5% 12.1% EBITDA Margin 14.5% 13.2% 12.7% 10.2% 10.5% 10.4% 10.3% EBIT Margin 11.3% 9.7% 12.2% 10.0% 10.4% 10.3% 10.2% Pretax Profit Margin 11.4% 9.8% 12.3% 10.3% 10.5% 9.9% 9.9% Net Profit Margin 4.4% 7.9% 6.1% 5.8% 6.3% 6.0% 5.9% Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) 6.8% 6.8% 6.8% 7.3% 8.9% 9.5% 11.3% EV/EBITDA (x) Sources: Company Financials, CardinalStone Research 12

13 Financial Statements and Key Ratios Income Statement ($'Mn) F 2015F 2016F Revenue Cost of Sales (18) (17) (22) (23) (27) (29) (34) Gross Profit Administrative expenses (6) (7) (6) (7) (8) (9) (11) EBITDA Depreciation (1) (1) (0) (0) (0) (0) (0) Other Income EBIT Net interest (expense)/income (0) (0) Profit Before Taxes Income Taxes (2) (1) (2) (2) (2) (2) (2) Profit After Taxes Statement Of Financial Position ($'Mn) F 2015F 2016F Assets Stocks Trade Debtors Other Debtors and Prepayments Short Term Deposits Cash & Bank Balances Fixed Assets Intangible Assets Long Term Prepayments Long Term Investments Deferred Taxation Goodwill Total Assets Liabilities Bank Overdraft Trade Creditors Other Creditors Taxation Deferred taxation Term loans Gratuity provisions Total Liabilities Capital and Reserves Share Capital Share Premium Reserves Shareholders' funds Total liabilities and equity Key Ratios F 2015F 2015F Profitability Return on Average Equity 14.1% 24.5% 19.6% 17.9% 21.7% 20.8% 22.4% Return on Average Assets 7.1% 12.1% 10.7% 10.2% 12.2% 11.5% 12.1% EBITDA Margin 14.5% 13.2% 12.7% 10.2% 10.5% 10.4% 10.3% EBIT Margin 11.3% 9.7% 12.2% 10.0% 10.4% 10.3% 10.2% Pretax Profit Margin 11.4% 9.8% 12.3% 10.3% 10.5% 9.9% 9.9% Net Profit Margin 4.4% 7.9% 6.1% 5.8% 6.3% 6.0% 5.9% Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) 6.8% 6.8% 6.8% 7.3% 8.9% 9.5% 11.3% EV/EBITDA (x) Sources: Company Financials, CardinalStone Research 13

14 Disclosure Analyst Certification The research analyst(s) denoted by an * on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analysts denoted by an * on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report accurately articulate the research analyst(s) independent views/opinions, based on public information regarding the companies, securities, industries or markets discussed in this report. (2) 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. Analysts Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking and Asset Management. Investment Ratings CardinalStone employs a 3-step rating system for equities under coverage: Buy, Accumulate, Neutral, Reduce, and Sell. Buy % expected share price performance Hold +0.00% to % expected share price performance Sell < +0.00% expected share price performance A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least % between the current price and the analyst s target price. An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +5.00% and %, A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than -5.00% is expected, between the current price and analyst s target price. CardinalStone s Research distribution of ratings/investment banking relationships as of January 17, 2013 Rating Buy Sell Hold % of total recommendations 24% 45% 30% % with investment banking relationships 38% 0% 20% Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any security recommended herein. You can contact the analyst named on the front of this note for further details. Frequency of Next Update: An update of our view on the company (ies) would be provided when next there are substantial developments/financial news on the company. Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as CardinalStone ) that research analysts may not be involved in activities that suggest that they are representing the interests of Cardinal Stone 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. For example, research analysts are not subject to the supervision or control of anyone in CardinalStone 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. 14

15 Company Disclosure: CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests which CardinalStone has with companies or in securities discussed in this report are disclosed hereunder: Company Disclosure Red Star Express a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company c. CardinalStone is a market maker in the publicly traded equities of the Company d. CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of the Company e. CardinalStone beneficially own 1% or more of the equity securities of the Company f. CardinalStone holds a major interest in the debt of the Company g. CardinalStone has received compensation for investment banking activities from the Company within the last 12 months h. CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the next 3 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 CardinalStone k. The Company owns more than 5% of the issued share capital of CardinalStone l. CardinalStone has other financial or other material interest in the Company Important Regional Disclosures The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies) within the past 12 months. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any Non-U.S. analyst contributors: The Non-U.S. research analysts (denoted by an * in the report) are not registered/qualified as research analysts with FINRA; and therefore, may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an *) is a Non-U.S. Analyst and is currently employed by Cardinal Stone. Legal Entities Legal entity disclosures: CardinalStone Partners Limited is authorized and regulated by the Securities and Exchange Commission (SEC) to conduct investment business in Nigeria. 15