United Capital Research I Nigeria I Markets

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1 United Capital Researc I Nigeria I Markets 28t January 2019 Macro Higligts and Outlook Earlier in te week, te IMF, in te update of its World Economic Outlook report titled A Weakening Global Expansion, trimmed down its projection of Nigeria s GDP to 2.0% from 2.3% projected in Oct-18. Tis revision was predicated on perceived slower growt for te country in 2019 amid relatively softer oil prices. Furtermore, te IMF noted tat oil revenue largely remains Nigeria s major source of revenue, making te economy largely exposed to te vagaries of te oil market. Te IMF in its outlook, projected average crude oil prices below $60 per barrel in 2019 as against te Nigeria budget bencmark of $60 per barrel for Te IMF also advised tat certain precautionary measures sould be taken by emerging economies to prevent te adverse effect of external socks tat slowed teir growts in Elsewere, all members of te Monetary Policy Committee voted for te retention of te MPR at 14%; CRR at 22.5%; Liquidity Ratio at 30%; and te Asymmetric Window around te MPR at +200/-500bps. Te decision made was in tandem wit Analysts projections as rising global and domestic risks tat dragged economic activities in te previous year still cloud te orizon for According to te MPC, te continued impact of uncertainties in te global space (suc as te US-Cina trade war, te inconclusive Brexit situation in te UK, and te current inflationary pressures, indicated by te nortward trend in inflation rate to 11.4% in Dec-18), induced te decision for retaining te MPR. Also, at te latter end of te week, tere were some public press releases indicating tat te CBN is likely to introduce touger capital requirements for banks going forward tis year, wit te aim of reducing te pressure of rising Non-Performing Loans in te lenders book. Tis week is relatively quiet in terms of data releases, but we expect more political events to unfold as we draw near to election day. Nigeria Asset Class Returns (YTD, W-o-W) Equities Bonds FX Oil Price 15.0% 13.7% 10.0% Global Equities: S&P 500: -1.1% NASDAQ: -1.2% DJIA: -0.6% Nigerian Equities: NSE Market Cap. (N bn): 11, NSE Market Cap. ($ mn): 38, YTD Return (%): 0.0% W-o-W Return (%): 1.4% P/E (x): 9.0x Fixed Income: Overnigt: 13.0% Open Buy-Back: 12.08% Treasury Bills Yield 90 days: 12.91% 180 days: 14.20% 360 days: 17.16% Bonds Yield 3-Year: 15.08% 10-Year: 15.17% Excange Rate (NGN/USD): I & E FX window: W-o-W Cange: -0.6% 5.0% 0.0% -5.0% 0.0% 1.4% 0% -0.1% -0.3% -0.6% YtD Return w/w Return -2.4% 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 Ecoes of slowdown from Davos ripples across global equities During te week to end 25t January 2019, te IMF revised its forecasts for 2019 and beyond, reiterating concerns surrounding a slowdown in te global economy. Specifically, te global growt forecast for 2019 and 2020 was marked down to 3.5% and 3.6% respectively, wit trade tensions and tigter financial conditions igligted as risk points. 28t January 2019 In te US market, investors continued to digest te influx of Q4 earnings amid continued government sutdown and erratic reports on te progress of trade talks. Consequently, te S&P 500(-1.1%), DJIA (-0.6%) and NASDAQ (-1.2%) indices trended soutwards w/w. In Europe, te ECB maintained status quo on policy rates as Dragi arped on te possibility of a furter slowdown in te bloc s economy due to uncertainties relating to geopolitics, protectionism, emerging markets vulnerabilities, and financial market volatility. Tis as softened te possibility of an aggressive tigtening by te ECB as previously indicated. Overall, te UK s FTSE sed 2.0% w/w wile France s CAC (+1.0%), Germany s DAX (+0.9%) and te Pan-European STOXX (+0.4%) stood resilient. Across Emerging Markets, only te Indian SENSEX (-1.0%) index dipped w/w wile Brazil s IBOV (+1.6%), Russia s RTSI (+0.9%), Sout Africa s JALSH (+0.3%) and Cina s SCHOMP (+0.2%) all trended nortwards. In Venezuela, opposition leader, Juan Guaido, declared imself te interim president wit te backing of te US government among oters. Accordingly, te incumbent government as ordered te deportation of US diplomats. Neverteless, crude prices sed 2.4%w/w but stayed above te $60/b tresold. Reports of a slowdown in te global economy raised concerns on te outlook for demand growt, as well as a spike in US crude oil inventory data, wic dampened sentiments. 2

3 United Capital Researc I Nigeria I Markets Domestic Financial Markets Review and Outlook Persistent bullis trend in NSEASI erases YTD loss For te second consecutive week, te domestic bourse sustained a bullis close, after recording gains in four out of te five trading sessions in te week, underpinning a +1.4%w/w increase in te NSE-ASI to close at 31,426.6 points wile YTD return massively improved to 0.0%. Notably, te +1.4% gain recorded in te last trading day of te week, massively contributed to te bullis close recorded w/w. 28t January 2019 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 4.3x % 45.3 GUARANTY % BUY x 1.9x % 40.8 NB % BUY x 3.8x % 47.7 UNILEVER % BUY x 2.5x % 11.7 ZENITHBANK % BUY x 0.9x % 30.1 Source: United Capital Researc Drilling down to sector performances, te Banking (+7.1%) sector drove gains for te week, on te backdrop of buying interests in GUARANTY (+7.9%) and ZENITH (+7.0%). Te Insurance (+2.0%) sector also gained w/w, buoyed by price appreciation in LINKASSURE (+12.5%) and AIICO (+12.7). On te flip side, te Consumer Goods (-0.4%), Oil and Gas (-1.3%) and Industrial Goods (-2.0%) sectors were te week s laggards, dragged by price declines in SEPLAT (-6.3%) DANGCEM (-0.5%) and NB (-1.4%). Investors sentiment remained upbeat as market breadt closed te week at 1.8x; 39 stocks advanced w/w against 22 decliners. Tis week, we expect te outcome of te US Fed meeting olding on Wednesday, as well as reactions to political events tat ave recently materialized, to guide market performance. 3

4 United Capital Researc I Nigeria I Markets Money Market: Players react positively to MPC decision to maintain status quo In te week to 25t January, te CBN continued its FX intervention across various segments and maintained OMO mop-ups. Notably, te Apex bank conducted OMO auctions on all 5 trading days of te week, successfully mopping up a total N786.5bn against N381.5bn tat matured. Accordingly, money market rates (OBB and Overnigt rates) stayed elevated, averaging 17.0%. On te side, stop rates at te primary OMO auction remained uncanged; 91-day: 11.9%, 182-day: 13.5%, and 364- day: 15.0%. 28t January 2019 In te secondary treasury bills market, sentiments were bullis as players reacted positively to te MPC s decision to keep key policy rates uncanged. Consequently, average Treasury bills yield moderated by 43bps to settle at 14.4%. More specifically, te 27-day bill closed 182bps lower to end at 12.1%; te 91-day bill closed 105bps iger to end at 12.9%; te 182-day bill and 364-day bill closed 7bps and 3bps lower to finis at 14.2% and 17.2% respectively. We expect te CBN to continue to mop-up excess liquidity as FAAC allocations, as well as PMA and OMO maturities it te system. Additionally, te Debt Management Office (DMO) will be conducting its bi-weekly Treasury bills PMA auction, were its plans on rolling over all maturing T-bills, totaling N254.6bn. Overall, we believe te CBN s mopup actions will continue to fuel sell side activities, wile gradually improving institutional interests will provide support for buy-side players. Bond Market: Release of Q1-19 bond auction calendar leads te unt for bargains In te bonds space, te DMO publised its long-awaited bond auction calendar for Q1-19. According to te calendar, te Federal Government (FG) plans to raise an average of N400.0bn (range: N360bn-N440bn) in Q1-19. Te news provided some reprieve for some players as tey unted for quick gains. Consequently, average FGN bonds yields trended soutwards to close at 15.2% (vs. 15.3% in te preceding week). Similarly, te average yield for FGN Eurobond edged lower by 8bps to 7.26% wile average yield in corporate Eurobonds decreased to 9.2% from 9.4%. Early tis week, we expect te market to remain sligtly bearis, as market players position for renewed supply of bonds at te fortcoming January bond auction, were te FG is offering to raise N50.0bn eac across its 5-year, 7-year, and 10-year bills. Overall, we expect te tempo of tis event to drive te direction of average bond yields in te secondary market, later in te week. 4

5 United Capital Researc I Nigeria I Markets Foreign Excange: NGN/USD rate depreciates at te parallel market In te Foreign excange market, te naira depreciated against te greenback at te parallel market by 0.6% to settle at N362.5/$. However, a marginal appreciation was seen at te official and NAFEX windows; 2bps and 0.1% respectively, wic culminated to N306.8/$1 and N362.5/ $1. Notably, te CBN governor inted on increasing te number of items on te CBN's foreign excange restriction list to t January 2019 In te coming week, despite te pressure tat may ensue from te run-up to te elections, we expect te CBN to maintain its resolve to defend te naira troug its interventions at te NAFEX window. Hence, we expect te naira to trade witin te band of N360-N365/$ at te NAFEX window as oil trades at a modest level above $60/b range. 5

6 Stock Recommendations for te Week United Capital Researc I Nigeria I Markets 28t 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 25t January 2019 Up/Down- Side Rating EPS BVPS P/E P/B DPS ACCESS % HOLD x 0.4x % 26.0 FBNH % BUY x 0.4x % 45.8 FCMB % BUY x 0.2x % 46.9 FIDELITYBK % BUY x 0.4x % 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 1.7x % 59.7 INTBREW % HOLD x 7.2x - 0.0% 67.6 NESTLE 1, % BUY x 20.4x % 48.2 UNILEVER % BUY x 2.5x % 11.7 FLOURMILL % HOLD x 0.5x % 56.6 NB % BUY x 3.8x % 47.7 GUINNESS % HOLD x 1.8x % 10.9 PZ % HOLD x % 66.5 UACN UR NA UR x 0.4x % 44.2 Indutrial Goods DANGCEM % BUY x 4.3x % 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 2.4x % 63.2 SEPLAT % BUY x 0.6x - 0.0% 55.7 MOBIL % HOLD x 2.0x % 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.*