United Capital Research I Nigeria I Markets

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1 United Capital Researc I Nigeria I Markets 8t October 2018 Macro Higligts and Outlook During te week to 5t, Oct-18, te Central Bank of Nigeria (CBN) released te Purcasing Managers Index (PMI) for September indicating te economy expanded at a slower pace as bot te manufacturing and non-manufacturing PMI for te mont dropped to 56.2pts and 56.5pts from 57.1pts and 58.0pts respectively in August. Also, te CBN publised its Credit Condition Survey for Q3-18 indicating te availability of secured credit to ouseolds and corporates increased during te period, tanks to improving economic outlook, canging sector-specific risks, improving liquidity conditions, and canging appetite for risk. In oter news, te National Insurance Commission s (NAICOM) implementation of te proposed Tier-Based Minimum Solvency Capital (TBMSC) model for te Insurance sector wic ougt to ave taken off on October 1, was suspended temporarily pending te expiration of te 30-days pre-action notice sareolders of insurance companies served te commission. In te political space, most political parties conducted teir primary elections for all elective positions for te 2019 general elections, aead of te October 7t deadline earlier stipulated by te Independent National Electoral Commission (INEC). Notably, te Lagos state governorsip primary election of te ruling All Progressives Congress (APC) ended wit te sitting governor losing is second term bid to Mr. Babajide Sanwo-Olu. Tis week, te spate of economic data releases are expected to be lite as only te H1-18 job creation report is anticipated to be publised by te National Bureau of Statistics. Nigeria Asset Class Returns (YTD, W-o-W) Equities Bonds FX Oil Price 30.0% 27% 25.0% 20.0% 15.0% 10.0% 4% 5.0% 0.6% 2.3% 0.0% 0.0% -5.0% -1.2% -1.1% -10.0% -15.0% -20.0% -15.3% YtD Return w/w Return Global Equities: S&P 500: -1.2% NASDAQ: -4.0% DJIA: -0.4% Nigerian Equities: NSE Market Cap. (N bn): 11,822.4 NSE Market Cap. ($ mn): 38,584.7 YTD Return (%): -15.3% W-o-W Return (%): -1.2% P/E (x): 9.3x Fixed Income: Overnigt: 22.5% Open Buy-Back: 20.9% Treasury Bills Yield 90 days: 12.7% 180 days: 13.4% 360 days: 14.8% Bonds Yield 3-Year: 14.7% 10-Year: 15.1% Excange Rate (NGN/USD): I & E FX window: W-o-W Cange: -0.02% 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 - Access Bond Index 1

2 United Capital Researc I Nigeria I Markets Global Market Review and Outlook Global equities close mixed as te US replaces NAFTA wit te USMCA Reports tat te US ad reaced a new trade agreement wit Mexico and Canada (te USMCA) to replace te Nort America Free Trade Agreement (NAFTA) buoyed sentiments earlier in te week, tis was a relief to investors in te wake of trade tensions tat ad been spooking te markets. Elsewere, montly US job reports sowed tat te unemployment rate declined to 3.7% in September, te lowest in te past 48 years. Te job report sowed an increasingly tigtening labor market and a potential pressure on wages. Te 10-year U.S. Treasury yields climb to a seven-year ig as investors perceived te tigtening job markets to reinforce te Fed s pat for raising rates. Hence, major US equity indices reversed gains recorded earlier in te week; te NASDAQ (-4.0%), S&P 500 (-1.2%) and DJIA (-0.4%) diminised w/w respectively. 8t October 2018 Trade negotiation between te EU and UK weiged on European markets even as pressure on Prime Minister May from te conservatives intensifies as te Brexit negotiations entered wat se referred at as te tougest final pase. Elsewere, Tesco bank in te UK was fined 16.4mn over cyber-attack wile concerns on Italy s fiscal deficit lingered. Consequently, UK s FTSE (-2.6%), te European STOXX (-1.8%) and Germany s DAX (-1.1%) declined w/w. In te Emerging markets, Turkey s September inflation soared to c.25%, te igest in almost 15 years as te country struggles wit a currency crisis. Consequently, te Turkis Borsa Istanbul Index slumped 5.1%w/w. India s SENSEX (-5.1%w/w), Russia s RTSI (-2.7%w/ w) and Sout Africa s JALSH (-2.3%) also diminised w/w wile Brazil s IBOV (+3.8%) advanced w/w. 2

3 Value Traded N'bn United Capital Researc I Nigeria I Markets Domestic Financial Markets Review and Outlook Bears dictate proceedings, NSEASI dips 1.2%w/w Last week was profoundly bearis on te domestic bourse as te main equity index recorded declines on all trading days of te oliday-sortened week. Te NSEASI plunged 1.2%w/w to end te week at 32,383.2points wile market capitalization diminised N139.3bn to N11.8tn. Tus, YTD return nosedived to -15.3%. Activity level waned as average value traded contracted 30.9% to N1.96bn wile average volume traded srank 13.6% to 159.8mn units. 8t October 2018 Te bearis teme on te main board pervaded all sector indices, except te Oil & Gas index, wic closed te week unscated, up 1.1%w/w as price appreciation in FO (+10.2%) and OANDO (+4.0%) buoyed te index. Te Insurance (-1.0%) and Agriculture sector (-2.0%) indices led te laggards consequent on w/w declines in LAWUNION (- 15.4%), NIGERINS (-18.9%) and OKOMUOIL (-4.9%). Te Banking (-0.7%), Industrial Goods (-0.4%) and Consumer Goods (-0.3%) indices also trended soutwards w/w owing to profit taking in STANBIC (-7.6%), UBA (-2.4%), UBN (-1.9%), DANGCEM (-2.4%), HONYFLOUR (-2.8%) and NB (-1.9%). 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 CUTIX % 120 FO % 100 JAPAULOIL % AIICO % 80 UACN % 60 TOP LOSERS PRICE (N) % CHANGE 40 NIGERINS % 20 LAWUNION % NEIMETH % UAC-PROP % Turnover All Sare Index ROYALEX % Source: NSE, United Capital Source: NSE, United Capital Investors sentiment waned as market breadt doused to 0.9x (previously 0.7x); 27 stocks advanced wile 31 declined. Wile we expect 9M-18 earnings numbers to start trickling in going forward, a mixed teme is anticipated tis week as investors unt bargains on notable tickers as concerns in te polity persist. 3

4 United Capital Researc I Nigeria I Markets Money Market: Liquidity & pre/post-ntb sentiments guide proceedings in te money market Markets remained sufficiently liquid as OBB and overnigt rates averaged 10.9% (vs. an average of 11.4% in te preceding week). System liquidity was guided by Inflows from OMO maturities (N268.2bn) and outflows from CBN s wolesale SMIS and OMO auction. Meanwile, te CBN floated just one OMO auction on Tursday to mop-up te excess liquidity from maturing OMO bills; te auction was met wit N553bn demanded of te N400bn offered and te CBN ended up selling to all subscribers at an average stop rate of 13.0% (182-day 12.5%, 364-day 13.5%). 8t October 2018 Furtermore, te Apex bank conducted its bi-montly NTB auction, werein it successfully re-financed N133.5bn. Demand was robust wit an average bid-to-cover ratio of 3.3x compared to 2.4x in te previous auction wit te 365-day bill mostly demanded (bid-to-cover ratio of 3.7x). Te auction was carried out at te following stop rates: 91-day (10.9% vs. 11.0% at te last auction), 182-day (12.1% vs. 12.2% at te last auction) and 364-day (13.33% vs % at te last auction). In te secondary T- bills market, liquidity sentiments and sell-offs in anticipation of te Wednesday PMA guided sentiments during te week. Overall, average T-bill yield edged lower by 17bps to close te week at 13.6%. (91-day (down 4bps to 12.7%), 182-day (up 19bps to 13.4%) and te 364-day (down 66bps to 14.8%). In te coming week, inflows from OMO maturities (N227.1bn) is expected to it te system and we expect te CBN to maintain its spate on OMO and FX interventions in te market. We expect te tempo of tese events to guide trading sentiments troug te week. Bond Market: Renewed bond supply to guide sentiments tis week In te bonds space, trading sentiments remained order driven as average bonds yield inced lower by 7bps to end at 14.9%. Looking aead we anticipate te release of te Q4 FGN bond calendar wit expectations of relatively iger levels of planned borrowings considering te 2018 budget deficit. Wat s more, we also anticipate te announcement of te second trance of te FGN Sukuk bond. Overall, furter upticks in yields are probable towards te year-end, tese renewed bond supply, as well as inflationary pressures, relatively weaker growt, as well as te global tigtening in liquidity and added political risks as we near te February 2019 presidential election. 4

5 United Capital Researc I Nigeria I Markets Foreign Excange: Mixed teme across FX windows In te Foreign excange market, naira closed te prior week mixed even as Brent price traded above $80/b trougout te week. Also, in a bid to furter support te naira amid lack of growing demand for FX, te CBN sustained its weekly FX intervention in te wolesale and retail FX market, furter pressuring te nation's FX reserves down to $44.0bn, as at Wednesday. Overall, te naira traded sideways in te parallel market to settle at N360.0/$1, wile rates at te Interbank FX window depreciated marginally by 2bps to close at N306.4/$1. Contrariwise, rates at te Investors & Exporters FX window appreciated marginally by 2bps to finis at N363.8/$1. Looking aead, we expect te sustained weekly FX intervention by te CBN to continue to put pressure on FX reserves as pressure on te local unit persists. 8t October

6 Stock Recommendations for te Week Banking Sectors TP (N) So (bn'n) Source: Company filings, NSE, United Capital Researc, UR= Under Review Prices as at Friday 5t 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 8t 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 0.9x % 26.4 DIAMONDBNK % BUY (0.9) x 0.1x STANBIC % HOLD x 2.1x - 0.0% 46.8 Consumer Goods DANGSUGAR % BUY x 1.7x % 29.9 INTBREW % HOLD x 7.7x - 0.0% 38.0 NESTLE 1, % HOLD x 24.9x % 43.2 UNILEVER % BUY x 3.3x % 48.9 FLOURMILL % BUY x 0.5x % 29.2 NB % BUY x 4.2x % 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 2.5x % 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 1.7x 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.*