United Capital Research I Nigeria I Markets

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1 United Capital Researc I Nigeria I Markets 15t October 2018 Macro Higligts and Outlook During te week to October 12t, 2018, te International Monetary Fund (IMF) and World Bank Group bot eld teir joint annual meeting, igligting te sluggis expansion expected from te big 3 Sub-Saaran African (SSA) economies Nigeria, Sout Africa and Angola as a major drag to te overall growt of te sub-region. Notably, Nigeria s rising debt profile was igligted as te nation s debt/revenue ratio remain elevated. Also, te World Bank unveiled its maiden Human Capital Index report, ranking Nigeria among te seven worst countries amid low investments in its education and ealt sector. In te political space, te race to te 2019 presidential election got an interesting twist as te former President - Olusegun Obasanjo - endorsed te People Democratic Party s (PDP) flagbearer Atiku Abubakar after a reconciliatory meeting in Abeokuta. Meanwile, te coice of a running mate for te PDP candidate dominated conversations in te social media, wit a likely coice of Ex -Anambra State Governor, Peter Obi, making rounds. Te Presidency stepped up its figt against corruption, money laundry and tax evasion, signing a new Executive Order (EO 008), te Voluntary Offsore Assets Regularization Sceme (VOARS), mandating Nigerian taxpayers wo old offsore assets and incomes to, witin a period of 12 monts, voluntarily declare tose assets and pay taxes on tem or face te consequence of doing oterwise. In te week aead; September eadline inflation report, Price watc for various food and crude products, labor force statistics, as well as data on te sectoral distribution of value added tax, among oters, are anticipated to be publised by te NBS. We expect eadline inflation to inc iger to 11.6% for te mont. Nigeria Asset Class Returns (YTD, W-o-W) Equities Bonds FX Oil Price 25.0% 20% 20.0% 15.0% 10.0% 5.0% 0.2% 0.1% 0.4% 0.0% -5.0% -1% -0.1% -4.1% -10.0% -15.0% -20.0% -15.1% YtD Return w/w Return Global Equities: S&P 500: -4.8% NASDAQ: -3.9% DJIA: -4.8% Nigerian Equities: NSE Market Cap. (N bn): 11,849.3 NSE Market Cap. ($ mn): 38,666.4 YTD Return (%): -15.1% W-o-W Return (%): +0.2% P/E (x): 9.3x Fixed Income: Overnigt: 19.8% Open Buy-Back: 19.2% Treasury Bills Yield 90 days: 12.7% 180 days: 13.3% 360 days: 15.2% Bonds Yield 3-Year: 14.4% 10-Year: 15.3% Excange Rate (NGN/USD): I & E FX window: W-o-W Cange: -0.08% Source: Bloomberg, Aboki FX (Parallel market rate), United Capital Researc Equities - NSE All Sare Index; FX - NGN/USD Parallel Market Rate; Oil Price - Brent Crude oil price; Bond - S&P/FMDQ Nigeria Sovereign Bond Index (NGN) 1

2 United Capital Researc I Nigeria I Markets Global Market Review and Outlook Global equities close lower on rising US Treasury Yield Te week started off wit IMF s announcement of a downward revision to its initial global growt forecast for 2018 as trade tensions, sarper tan expected interest rate ikes and te strain on emerging economies were cited as downside risks to global growt, ence te revision from 3.7% from 3.9%. Also, te US bond market velocity (indicated by te recent spike in US bencmark 10-year Treasury yield), spooked markets globally as it underscored te possibility of iger corporate borrowing cost, dampening market sentiments. Consequently, te S&P 500 and DJIA declined 4.8%w/wand 5.1%w/w respectively, wile te tec-laden NASDAQ index sed 3.9%w/w on declines in GOOGLE (-4.5%w/w), wic announced its intention to sut down its social networking platform, Google+, due to a tecnical glitc wic reportedly leaked private information of some users. 15t October 2018 European markets were not left out of te bearis teme, even as te European Commissioner for Economic affairs ammered on te need for Italy to cut down on its state debt. Elsewere, te Japanese Prime Minister inted tat te United Kingdom will be welcomed to te Trans-Pacific Partnersip amid tigt BREXIT negotiations. Consequently, Pan European STOXX (-4.4%), UK s FTSE (-4.2%) and Italy s MIB (-5.2%) all trended soutwards w/w. In Emerging Markets, politics remained at te forefront in Brazil as te first-round election tat took place during te week, ended witout a majority winner. Hence a rerun was sceduled to old later in te mont. Meanwile, Cina continued to ramp up efforts to mitigate te impact of trade tariffs on er economy as te People s Bank of Cina (PBOC) lowered te required reserve ratio for lenders. On anoter note, te Sout African finance minister resigned on graft allegations, wile Pakistan s finance minister announced tat te nation would be borrowing from te IMF for te 13 t time in te country s istory as te country continues to battle wit economic callenges and balance of payment crisis. Overall, Pakistan s KSE100 index slid 4.4%w/w, wile Brazil s IBOV rose 0.7%w/w. Also, Russia s RTSI (-1.5%), Cina s SCHOMP (-7.6%) and Sout Africa s JALSH (-1.9%) all declined w/w. 2

3 Value Traded N'bn United Capital Researc I Nigeria I Markets Domestic Financial Markets Review and Outlook NSE-ASI defies global equity rout; up 0.2%w/w Altoug te domestic bourse saw a mixed teme during te week, te main equity index rose by a marginal 0.2%w/w to close te week at 32,457.0 points. Te market declined on two of five trading days wile market capitalization accreted N26.9bn to N11.8tn. Tus, YTD return recuperated to -15.1%. Activity level was buoyant as average volume traded inced iger by 14.6% to 183.2mn units wile average value traded edged iger by 0.3% to N1.97bn. 15t October 2018 Tree of te six sector indices tracked advanced wile te oter tree declined for te week. Te Banking (+0.8%), Industrial Goods (+0.3%) and Agriculture (+2.7%) sector indices closed te week unscated consequent on bargain unting in FBNH (+2.3%), FIDELITY (+3.9%), ZENITH (+3.0%), CAP (+15.9%) and OKOMUOIL (+9.0%). On te flip side, te Insurance (-1.7%), Oil & Gas (-0.9%) and Consumer Goods (-0.7%) indices weakened w/w as price depreciation in MANSARD (-7.7%), AIICO (-7.2%), FO (-8.4%), ETERNA (-2.4%), HONYFLOUR (-9.9%) NB (-1.9%) and INTBREW (-1.5%) dragged te indices. 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 Nigeria All Sare Index and Market Turnover TOP GAINERS PRICE (N) % CHANGE 140 WEMABANK % 120 CAP % 100 MBENEFIT % NIGERINS % 80 CORNERST % 60 TOP LOSERS PRICE (N) % CHANGE 40 FIRSTALUM % 20 CUTIX % CHAMPION % - HONYFLOUR % Turnover All Sare Index LINKASSURE % Source: NSE, United Capital Source: NSE, United Capital Investors sentiment remained weak, closing te week at (0.9x), previously 0.9x; 29 stocks advanced wile 32 declined w/w. Wit te pervading risk-off sentiment across te globe and te expectation of 9M-18 earnings, we expect a mixed teme tis week. 3

4 United Capital Researc I Nigeria I Markets Money Market: CBN remains dovis in money markets; net-repays N28.0bn At te sort end, markets remained sufficiently liquid as te CBN effectively netrepaid N28.0bn; taking out only N249.1bn (stop rates 6m: 12.5% and 12m: 13.5%) via its weekly OMO auctions, relative to N277.1bn maturities). Subsequently, money market rates were eld down at a weekly average of 11.7% (compared to 10.9% in te preceding week). Meanwile, a coppy teme guided trading sentiment in te T-bill market; liquidity sentiments and profit-taking activities tat were recorded as players repositioned aead of te Tursday OMO auction. 15t October 2018 Overall, yields on bencmark NTB papers inced iger by 23bps on average to close at 13.8%: 91-day (up 11bps to 12.8%), 182-day (down 9bps to 13.3%) and 364-day (up 34bps to 15.2%). In tis coming week, expected maturities sould rise to N494.8 (split between OMO maturities of N347.1bn wic implies a likely OMO auction on Tursday) and NTB maturities of N147.6bn (wit an expected NTB auction on Wednesday as te FGN will look to roll-over all maturing bills). We expect te tempo of tese events to guide trading sentiments troug te week. Bond Market: Players price in expectations of renewed bond supply Te Debt Management Office (DMO) released its bond issuance calendar for Q4-18, wic sowed a c. N66.6bn N156.6bn increase in its planned borrowings for Q4-18 compared to te N203.3bn tat was borrowed in Q3-18. In anoter development, President Muammadu Buari as written te Senate, seeking te approval for te issuance of $2.8bn Eurobond for te partial financing of te 2018 budget deficit. If successfully financed, it would tip te NGN-USD debt mix to 62:38 (from 64:36 in Q1-18), gearing very closely to te FGN s indicated fiscal desire of 60:40 by Neverteless, we igligt tat global rates ave increased since te last Eurobond issuance in February; te Fed as consistently delivered on its promised rate ikes and US bencmark 10-year Treasury yield recently touced a 7-year ig. Tus, we would expect clearing rates at te proposed Eurobond auction to be muc iger tan previous auctions. In te secondary market, trading sentiments were guided by reactions to te released Q4 bond auction calendar as players priced in expectations of renewed bond supply at te next FGN bond auction. Overall, FGN bond yields edged iger marginally by 5bps on average driven by increases in maturities 2021 (+30bps), 2028 (+15bps) and te 2034 (+12bps). Te average yield for FGN Eurobond inced iger to 7.2% from 7.0% wile average yield in corporate Eurobonds eased to 8.8% from 9.1%. 4

5 United Capital Researc I Nigeria I Markets Looking aead, we expect proceedings to be guided by inflation expectations. Overall, furter upticks in yields are probable towards te year-end, amid renewed bond supply, inflationary pressures, relatively weaker growt, te global tigtening in liquidity, rising bond yields and added political risks as we near te February 2019 presidential election. 15t October 2018 Foreign Excange: Naira depreciates across all FX windows In te Foreign excange market, te naira weakened against te US dollar during te week as pressure on naira continued to mount amid foreign capital reversals. Meanwile, te CBN sustained its weekly FX intervention in te wolesale and retail FX market in a bid to support te naira amid growing demand for FX. Tis act furter pressured te nation's FX reserves down to $43.4bn, as on Wednesday. Notably, despite Brent oil trading above $80/b trougout te week, Nigeria s crude oil sales slowed on te back of an overang in unsold cargoes. Overall, parallel market rate settled at N360.0/$1 - down by 14bps, wile rates at te Interbank and Investors & Exporters FX window depreciated marginally by 2bps and 8bps to finis at N306.5/ $1 and N364.1/$1 respectively. Looking aead, we expect te sustained weekly FX intervention by te CBN to continue to put pressure on FX reserves and te local unit. 5

6 Stock Recommendations for te Week Banking Sectors 12M TP (N) So (bn'n) Source: Company filings, NSE, United Capital Researc, UR= Under Review Prices as at Friday 12t October 2018 United Capital Researc I Nigeria I Markets Mkt Price (N) Mcap (bn'n) Up/Down- Side Rating EPS BVPS P/E P/B DPS 15t October 2018 ACCESS % BUY x 0.5x % 19.3 FBNH % BUY x 0.5x % 44.2 FCMB % BUY x 0.2x % 43.1 FIDELITYBK % BUY x 0.3x % 32.6 GUARANTY % BUY x 2.2x % 36.6 ZENITHBANK % BUY x 1.0x % 26.4 DIAMONDBNK % BUY (0.9) x 0.1x STANBIC % HOLD x 2.2x - 0.0% 46.8 Consumer Goods DANGSUGAR % BUY x 1.8x % 29.9 INTBREW % BUY x 7.6x - 0.0% 38.0 NESTLE 1, % HOLD x 24.9x % 43.2 UNILEVER % BUY x 3.2x % 48.9 FLOURMILL % BUY x 0.6x % 29.2 NB % BUY x 4.1x % 33.0 GUINNESS % BUY x 2.0x % 34.9 PZ % BUY x 1.2x % 27.0 UACN UR NA UR x 0.5x % 40.0 Indutrial Goods DANGCEM % BUY x 4.8x % 59.4 WAPCO % SELL (9.0) x 1.4x % 26.6 Agric OKOMUOIL % BUY x 2.8x % 27.1 PRESCO % BUY x 0.7x % 13.0 Oil & Gas TOTAL % BUY x 2.1x % 32.2 SEPLAT % BUY x 0.7x - 0.0% 41.8 MOBIL % HOLD x 2.1x % 52.3 OANDO UR NA UR x 0.3x FO UR NA UR (2.6) x 1.6x Note: TP=Year end Target Price, So= Sare Outstanding, Mcap= Market Capitalization, EPS= Earnings Per Sare, BVPS= Book Value Per Sare, P/E =Price to Earnings Ratio, P/B= Price to Book Value Ratio, DPS=Div idend Per Sare, Div Yield= Div idend Yield, Up/Down-side= potential return, Mkt Price= Current Market Price Div. Yield RSI 6

7 Investment Rating Criteria and Disclosure United Capital Researc adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. Tese generic ratings are defined below; Buy: Based on our valuation and subjective view (if any), te total return upside on te stock s current price is greater tan our estimated cost of equity. Hold: Based on our valuation and subjective view (if any), te total return upside on te stock s current price is less tan te cost of equity, owever, te expected total return on te stock is greater tan or equal to te Standing Deposit Facility rate of te Central Bank of Nigeria (wic is currently MPR 500bps; i.e 10%). We consider tis as te minimum return tat may deserve our olding of a risk asset, like equity. Sell: Based on our valuation and subjective view (if any), te total return upside on te stock s current price is less tan te Standing Deposit Facility rate of te Central Bank of Nigeria (wic is currently MPR 200bps; i.e. 10%). We consider tis as te minimum return tat may deserve our olding of a risk asset, like equity, especially as we consider te average 4.5% total transaction cost for an average retail investor. NR*: Please note tat in addition to our tree rating eads, we indicate stocks tat we do not rate wit NR; meaning Not-Rated. We may not rate a stock due to investment banking relationsips, oter sources of conflict of interests and oter reasons wic may from time to time prevent us from issuing a rating on te sares (or oter instruments) of a company. Please note tat we sometimes give concessional rating on stocks, wic may be informed by tecnical factors and market sentiments. Current Stock Rating Dispersion and Relationsip Conflict of Interest: It is te policy of United Capital Plc and all its subsidiaries/affiliates (tereafter collectively referred to as UCAP ) tat researc analysts may not be involved in activities tat suggest tat tey are representing te interests of UCAP in a way likely to appear to be inconsistent wit providing independent investment researc. In addition, researc analysts reporting lines are structured so as to avoid any conflict of interests. Precisely, researc analysts are not subject to te supervision or control of anyone in UCAP s Investment Banking or Sales and Trading departments. However, suc sales and trading departments may trade, as principal, on te basis of te researc analyst s publised researc. Terefore, te proprietary interests of tose Sales and Trading departments may conflict wit your interests as clients. Overall, te Group protects clients from probable conflicts of interest tat may arise in te course of its business relationsips. Risk Rating Our Risk rating assesses te likeliood 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 tus 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 inerent to te entire market. Tis also includes macroeconomic socks emanating from government actions or inactions, unanticipated policy pronouncements, external socks and socio-political tensions wic may swing market prices significantly away from targets. Unsystematic risk (specific risk, diversifiable risk or residual risk) on te oter and captures company or sector specific uncertainties wic can mostly be reduced by diversification. Tese 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, tecnology and tecnical progress etc. United Capital Researc adopts a 3-tier risk rating for assets under our coverage: Hig, Medium and Low. Te rating scale is ordinal and captures te diverse risks tat we deem applicable te company of focus. Te ratings are defined below; Hig: Hig probability of an imminent systematic risk or/and unsystematic risk Medium: Sligtly ig (but lower compared to Hig ) probability of an imminent systematic risk or/and unsystematic risk Low: Low probability of an imminent systematic risk or/and unsystematic risk Analyst Certification Te researc analysts wo prepared tis report certify as follows: 1. Tat all of te views expressed in tis report articulate te researc analyst(s) independent views/opinions regarding te companies, securities, industries or markets discussed in tis report. 2. Tat te researc analyst(s) compensation or remuneration is in no way connected (eiter directly or indirectly) to te specific recommendations, estimates or opinions expressed in tis report. Oter Disclosures United Capital Plc or any of its affiliates (tereafter collectively referred to as UCAP ) may ave financial or beneficial interest in securities or related investments discussed in tis report, potentially giving rise to a conflict of interest wic could affect te objectivity of tis report. Material interests wic UCAP may ave in companies or securities discussed in tis report are disclosed: UCAP may own sares of te company/subject covered in tis researc report. UCAP does or may seek to do business wit te company/subject of tis researc report UCAP may be or may seek to be a market maker for te company wic is te subject of tis researc report UCAP or any of its officers may be or may seek to be a director in te company(ies) covered in tis researc report UCAP may be likely recipient of financial or oter material benefits from te company/subject of tis researc report Company Dangote Cement Plc Dangote Flour Plc Dangote Sugar Plc Diamond Bank Plc FirstBank Holdings Nigeria Plc Guaranty Trust Bank Plc Guinness Nigeria Plc PZ Nigeria Plc Transnational Corporation of Nigeria Plc United Bank for Africa Plc United Capital Researc I Nigeria I Markets Disclosure g, Disclosure Appendix Disclosure keys a. Te analyst olds personal positions (directly or indirectly) in one or more of te stocks covered in tis report b. Te analyst(s) responsible for tis report (wose name(s) appear(s) on te front page of tis report is a Board member, Officer or Director of te Company or as influence on te company s operating decision directly or troug proxy arrangements c. UCAP is a market maker in te publicly traded equities of te Company d. UCAP as been lead arranger or co-lead arranger over te past 12 monts of any offer of securities of te Company e. UCAP beneficially own 1% or more of te equity securities of te Company f. UCAP olds a major interest in te debt of te Company g. UCAP as received compensation for investment banking activities from te Company witin te last 12 monts. UCAP intends to seek, or anticipates compensation for investment banking services from te Company in te next 6 monts i. Te content of tis researc report as been communicated wit te Company, following wic tis researc report as been materially amended before its distribution j. Te Company is a client of UCAP k. Te Company owns more tan 5% of te issued sare capital of UCAP Disclaimer United Capital Plc Researc (UCR) notes are prepared wit due care and diligence based on publicly available information as well as analysts knowledge and opinion on te markets and companies covered; albeit UCR neiter guarantees its accuracy nor completeness as te sole investment guidance for te readersip. Terefore, neiter United Capital (UCAP) nor any of its associates or subsidiary companies and employees tereof can be eld responsible for any loss suffered from te reliance on tis report as it is not an offer to buy or sell securities erein discussed. Please note tis report is a proprietary work of UCR and sould not be reproduced (in any form) witout te prior written consent of Management. UCAP is registered wit te Securities and Excange Commission and its subsidiary, United Capital Securities Limited is a dealing member of te Nigerian Stock Excange. For enquiries, contact United Capital Plc, 12t Floor, UBA House, 57 Marina, Lagos. United Capital Plc 2016.*