United Capital Research I Nigeria I Markets

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1 United Capital Researc I Nigeria I Markets 14t January 2019 Macro Higligts and Outlook Te week to January 11t was dominated by talks around te implementation of te N30,000 minimum wage. Notably, te leadersip of te Nigerian Labour Congress (NLC) treatened to embark on a nationwide protest and sutdown economic activities if te Federal Government (FG) fails to asten te minimum wage implementation process. Accordingly, bot parties met and te FG requested for additional weeks to pass te bill to te National Assembly. Te FG also noted tat te bill would be transmitted to oter agencies for ratification, and subsequently sent to te National Assembly for teir approval, by 23rd of January. However, te National Assembly members are expected to resume on 16t of January, Similarly, te FG constituted a tecnical advisory committee to advise on te implementation of te new national minimum wage, te adjustment of salary increases for tose earning above te minimum wage and sustainable funding options for government. Te report of tis committee is expected by February 9, a week before te February 16t Presidential election. Elsewere, te Central Bank of Nigeria (CBN) released a revised National Financial Inclusion Strategy. Te major goal of te revised Strategy is to reduce te proportion of adult Nigerians tat are financially excluded to 20.0% in te year 2020 from its baseline figure of 46.3% in Additionally, empasis was drastically sifted in favour of mobile money/bank agents in view of te fact tat tis brings financial services closer to te people and provides a platform for offering simple diversified low-cost financial services. Tis week, te NBS is sceduled to release a series of macroeconomics data wit te Dec-18 Inflation report expected to be te major igligt. Nigeria Asset Class Returns (YTD, W-o-W) Equities Bonds FX Oil Price 15.0% 12.4% 10.0% 6.0% 5.0% 0.8% 0.0% 0.0% -0.2% -0.5% -5.0% -2.6% -5.1% -10.0% YtD Return w/w Return Global Equities: S&P 500: +2.5% NASDAQ: +3.5% DJIA: +2.4% Nigerian Equities: NSE Market Cap. (N bn): 11,124.1 NSE Market Cap. ($ mn): 36,246.7 YTD Return (%): -5.1% W-o-W Return (%): -2.6% P/E (x): 8.6x Fixed Income: Overnigt: 22.5% Open Buy-Back: 20.0% Treasury Bills Yield 90 days: 11.12% 180 days: 14.32% 360 days: 17.39% Bonds Yield 3-Year: 14.96% 10-Year: 15.49% Excange Rate (NGN/USD): I & E FX window: W-o-W Cange: -0.4% Sources: 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 - 1 S&P/FMDQ Nigeria Sovereign Bond Index (NGN)

2 United Capital Researc I Nigeria I Markets Global Market Review and Outlook Ease in trade and monetary policy tensions provide succor In te past week, te World Bank publised its 2019 Global Economic Prospects report, titled "Darkening Skies". Te economic-watcdog arped te darkening prospects for te global economy as it lowered its expectation for global growt to 2.9% amid rising downside risks. According to te report, te continued removal of accommodative policies by central banks in Advanced Economies, as well as a possible escalation of simmering trade disputes, are te biggest risk points. Wat s more, te fact tat iger debt levels ave made some economies more vulnerable to rising global interest rates, sifts in investor sentiment, and excange rate fluctuations, are also factors to watc. Broad gains were recorded w/w across major equity indices. In te United States, despite te impasse over funding for Trump s wall and te extension of te partial government sutdown, te unfolding of events tat signaled ease in issues tat ad spooked investors, buoyed sentiments during te week. On te trade front, officials from Cina and te US kicked off negotiations early last week aead of teir Marc deadline, ence, signaling waning tensions. Additionally, minutes from te Fed suggested a less-aggressive Fed stance in 2019 (vs 2018) as tey empasized tat wile te outlook for te economy remains rougly balanced, tey will continue to assess global economic and financial developments in decision making. Tus, te NASDAQ, S&P 500 and DJIA rose 3.5%, 2.5% and 2.4% w/w respectively. 14t January 2019 Bullis sentiments also filtered into European markets amid concerns around a slowdown in key economies in te bloc and ongoing BREXIT conversations. Notably, Industrial production in Germany slowed furter in Nov-18 after falling 1.9% m/ m. Consequently, te Pan European STOXX (+1.6%), UK s FTSE (+1.2%) and France s CAC (+1.0%) trended nortwards w/w. In te week aead, we would be keeping tabs on te upcoming BREXIT parliamentary vote, as well as Germany s 2018 GDP numbers. Equity indices across BRICS classified emerging markets also closed te week on an upbeat note. Notably, te Cinese government continued on its expansionary policies in an attempt to sield te slowing economy. During te week, tax cuts of up to $29.0bn were announced for small companies following te 100bps cut in reserve ratio tat was announced by te PBOC. Elsewere, te Sout African JALSH (+2.8%), Russia s RTSI (+2.3%) and Brazil s IBOV (+1.8%) led te pack, wile Cina s SCHOMP (+1.5%) and India s SENSEX (+0.9%) also closed in positive w/w. Crude prices rose 6.0% w/w after trading above $60/b on tree of five trading days to settle at $60.5/b. Tis is as OPEC+ cuts take off in Jan-19 in a bid to curb oversupply. Te tawing in trade tensions could ave contributed to te uptrend. 2

3 Domestic Financial Markets Review and Outlook Bears extend siege on equities; NSE-ASI down -2.6% w/w United Capital Researc I Nigeria I Markets 14t January 2019 Te bearis teme tat started te year continued on in te second week, as NSEASI sed -2.6% to settle at 29,830.7 points. Te bearis performance was predicated on te consistent losses recorded in te market over te week wic saw te NSE-ASI breac its 30,000 point tresold, outweiging te marginal gains recorded in two of te trading sessions during te week. Top Stock Recommendations for te Week 12M TP So Mkt Price Mcap Up/Down- Div. Sectors (N) (bn'n) (N) (bn'n) Side Rating EPS BVPS P/E P/B DPS Yield RSI DANGCEM % BUY x 3.9x % 45.3 GUARANTY % BUY x 1.9x % 40.8 OKOMUOIL % BUY x 2.7x % 81.7 UNILEVER % BUY x 2.6x % 11.7 ZENITHBANK % BUY x 0.9x % 30.1 Source: United Capital Researc Drilling down to sector performances, te Insurance (-7.0%) sector was te week s biggest loser owing to price declines in NEM (-33.5%) and CUSTODIAN (-13.1%) wile te Oil and Gas (-6.3%), Consumer Goods (-3.6%), and Banking (-0.9) sectors followed, dragged by price losses on SEPLAT (-10.0%) NESTLE (-5.0%) and ETI (-3.4%). On te flip side, te Industrial (+1.0%) sector recorded te igest gain, buoyed by price appreciation in JBERGER (+22.2%). Te Agricultural sector also gained, incing up by a paltry 1bps after a gain in OKOMUOIL (+2.5%) Investors sentiment (as measured by market breadt) improved but remained underwelming at 0.5x (previously 0.4x); 21 stocks advanced w/w wile 39 declined. Looking into te coming week, we reiterate our bearis outlook for te market in Q1-19, amid political uncertainties clouding investors sentiment as election draws nearer. 3

4 United Capital Researc I Nigeria I Markets Money Market: Bulls outweig bears despite constrained system liquidity In te week to 11t January, system liquidity tigtened as te CBN continued its FX intervention across various segments wile successfully mopping up a total N365.0bn, against N375.0bn tat matured during te week. Accordingly, money market rates (Open Buy Back and Overnigt rates) trended iger, averaging 25.0% from 18.5% in te preceding week. On te side, stop rates remained te same; 91-day: 11.9%, 182- day: 13.5%, and 364-day: 15.0%. 14t January 2019 Te secondary treasury bills market was caracterized by a tussle between te bulls (spurred by bargains on attractive offerings) and te bears (stoked by te compressed system liquidity). Cumulatively, te bulls outweiged te bears as average yields trended lower to settle at 13.9% [91-day (down 129bps to 11.1%), 182-day (down 3bps to 13.3%) and 364-day (up 12bps to 17.4%)]. Notably, te CBN released te NTB issuance calendar for Q1-19 wic would see te FG net repay NGN163bn. Looking into te new week, we expect to see yet more OMO auctions as te CBN doubles down on curbing system liquidity in te wake of c. N554.5bn OMO maturity tat is set to it te system. Meanwile, te DMO will be conducting its bi-weekly NTB auction as it looks to rollover N225bn maturing bills. Te tempo of tese events sould guide trading sentiments in te secondary market. Bond Market: An extension of a lull teme A lull-to-bearis teme was observed in te bonds space as average yields on FGN bonds declined marginally by 8bps to settle at 15.3%. Seemingly, attention seemed to be focused on te money market space as investors awaited te release of te FGN bond calendar. We reiterate our expectation for yields to remain elevated in Q1-19 as political risks remain on te orizon, albeit, tis would also depend on te level of aggressiveness by te DMO in offering fiscal paper. 4

5 United Capital Researc I Nigeria I Markets Foreign Excange: Naira appreciates at te NAFEX window In te Foreign excange market, te local currency strengtened against te dollar; up by 11bps and 2bps w/w to close at N364.9/$1 and N306.9/$1 at te NAFEX and official window respectively. However, naira traded sideways at te parallel market, closing at N361/$1. Tis was as te CBN maintained its weekly FX intervention in te wolesale and retail FX market, in a bid to supporting te naira. 14t January 2019 Also, FX reserves accreted marginally by 2bps w/w to c. $43.1bn as at Tursday, maintaining its recent uptrend despite te Apex banks willingness to continue to support te naira even at te expense of te reserves. Meanwile, bencmark Brent price rebounded, trading above $60.0/b for a significant part of te week as OPEC output cut wic kick-started in Jan-19 provided support for prices. Looking aead, we expect te sustained weekly FX intervention by te CBN to continue to support te local unit at N360-N365/1$ in te I & E window. In te meantime, an above $60/b oil is positive for reserves. 5

6 Stock Recommendations for te Week United Capital Researc I Nigeria I Markets 14t January 2019 Banking Sectors 12M TP (N) So (bn'n) Mkt Price (N) Mcap (bn'n) Source: Company filings, NSE, United Capital Researc, UR= Under Review Prices as at Friday 11t January 2019 Up/Down- Side Rating EPS BVPS P/E P/B DPS ACCESS % HOLD x 0.3x % 26.0 FBNH % BUY x 0.4x % 45.8 FCMB % BUY x 0.2x % 46.9 FIDELITYBK % BUY x 0.3x % 45.6 GUARANTY % BUY x 1.9x % 40.8 ZENITHBANK % BUY x 0.9x % 30.1 DIAMONDBNK % BUY (0.7) x 0.2x STANBIC % BUY x 2.2x - 0.0% 46.4 Consumer Goods DANGSUGAR % HOLD x 1.6x % 59.7 INTBREW % HOLD x 7.4x - 0.0% 67.6 NESTLE 1, % BUY x 19.7x % 48.2 UNILEVER % BUY x 2.6x % 11.7 FLOURMILL % HOLD x 0.5x % 56.6 NB % HOLD x 3.7x % 47.7 GUINNESS % HOLD x 1.6x % 10.9 PZ % HOLD x % 66.5 UACN UR NA UR x 0.4x % 44.2 Indutrial Goods DANGCEM % BUY x 3.9x % 45.3 WAPCO % HOLD (6.3) x 0.8x % 25.8 Agric OKOMUOIL % BUY x 2.7x % 81.7 PRESCO % BUY x 0.8x % 75.5 Oil & Gas TOTAL % HOLD x 2.3x % 63.2 SEPLAT % BUY x 0.6x - 0.0% 55.7 MOBIL % HOLD x 2.1x % 67.0 OANDO UR NA UR x 0.3x FO UR NA UR x 2.2x 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.*