Sample Rating Report. Agusto & Co CORPORATE RATING REPORT WEST AFRICAN PORTLAND CEMENT PLC NOTE. Corporate Ratings

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1 RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT 2007 CORPORATE RATING REPORT WEST AFRICAN PORTLAND CEMENT PLC INSIDE THIS REPORT RATING RATIONALE INDUSTRY PROFILE COMPANY PROFILE FINANCIAL CONDITION OUTLOOK 10 FINANCIAL STATEMENTS NOTE WEST AFRICAN PORTLAND CEMENT PLC has been assessed based on the Company s 31 December 2006 financial statement and not on the Group s account. This is due to the insignificant contribution of the subsidiary to the Group The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited. RATINGS WEST AFRICAN PORTLAND CEMENT PLC Rating assigned: Aa- Issue date: AUGUST 2007 Expiry date: JUNE 2008 Previous Rating: NOT APPLICABLE ANALYST: OMOLARA JAIYE-DAUDA 5th Floor, UBA House Marina, Lagos, Nigeria Omolarajaiye-dauda@agusto.com Corporate Ratings COPYRIGHT 2007 AGUSTO & CO. LIMITED

2 RATING: Aa- RATING RATIONALE RATIONALE Page 2 SHAREHOLDING STRUCTURE SIGNIFICANT SHAREHOLDERS Auditors: West African AKINTOLA Portland WILLIAMS Cement Company DELOITTE Plc ("WAPCO Lafarge SA 60% or "the Company ") is a major player in the Nigerian Cement Industry and controls a large market share Odua Group Of Companies 11.34% based on both production and sales. WAPCO's brand, "Elephant" is popular especially in the South Western part of Nigeria. In addition, WAPCO enjoys a strong support from its foreign technical partners Lafarge. Over the years, WAPCO had been faced with many challenges, which adversely affected its financial performance. However, in 2006 the Company s financial condition improved considerably due to recent restructuring of its funding base, upgrade of its manufacturing facilities as well as the introduction of measures to reduce its operating expenses. During the year ended 31 December 2006, WAPCO recorded a significant growth in sales volume due to improvement in capacity utilization. The Company s rating is supported by good profitability, strong cash flow and satisfactory leverage. WAPCO s management is qualified and experienced and staff productivity is good. We have therefore assigned an Aa- rating to the Company. BACKGROUND INFORMATION Authorized Share Capital: N2.3 BILLION Nigerian Public 28.66% CURRENT DIRECTORS High Chief Bayo Akinnola Chairman Mr Anthony Hadley Vice Chairman Mr George Lourandos Mr John Oluwole Adeleke Mr Ashok Kumar Singh Engr Joseph Makoju Chief Olusegun Osunkeye Asiwaju Ademola Awosanya Asiwaju Akintunde Asalu Chief (Dr) Joseph Sanusi Hon. Ademola Ogundeji Mr Mobolaji Balogun Chief Executive Officer Finance Director Industrial Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Paid up Capital: Shareholders Funds: Registered Office: N1.5 BILLION N22.5 BILLION ELEPHANT CEMENT HOUSE ASSIBIFI ROAD ALAUSA IKEJA LAGOS Principal lines of Business: CEMENT MANUFACTURING & MARKETING

3 Page 3 MANAGEMENT TEAM Mr. George Lourandos was appointed as the Managing Director and Chief Executive Officer in January Mr Lourandos holds a degree in Mechanical and Electrical Engineering, from National Technical University of Athens, Greece (NTUA) and M.Sc in Applied Science from the University of Newcastle Upon Tyne, England. Prior to his appointment by the Board, Mr Lourandos held management and directorship positions in different companies including AshakaCem Plc, Heracles Group SA, Halkis Cement Co. SA, Aegean Terminals SA and a member of the Board of Directors of all companies of Holderbank Group in Greece. INDUSTRY PROFILE The cement industry plays a vital role in the develop- The recent pronouncements by the Federal Government ment of any country. In Nigeria, cement is used principally in construction of residential and public buildings, bridges, roads and drainages. It is also used for the rehabilitation of infrastructure. Over the years, the ria are local manufacturers and importers. The local manufacturers include Ashaka Cement Plc, West African Portland Cement Plc, Cement Company of Northern Nigeria Plc, Benue Cement Company Plc, Obajana Cement Company, while key importers include Flour Mills Nigeria Plc, Eastern Bulkcem Company, Dangote Group, Bonny Allied Cement and Atlas Cement Company. The local manufacturers are faced with many challenges which has adversely affected production in the country. These challenges include high cost of production (particularly energy cost), poor infrastructural facilities, obsolete technology, high distribution costs and government policy. Other members of the management team are: Mr John Oluwole Adeleke - Finance Director Mr Ashok Kumar Singh - Industrial Director Mr Edu Okeke - Gen Mgr- Sales & Marketing Ms Viola Bob Manuel - Company Secretary/ Head Corporate Services Mrs Ololade Ogungbenro - Gen Mgr - Human Resources Mr Modupe Kadiri - Manager - Business Dev. & Strategy Mr Sefunmi Adewumi - Manager - Supply Chain on the ban of importation has led to huge capital investments by existing manufacturers and importers. In 2007, Dangote Group commissioned its Obajana Cement plant in Kogi State, while Eastern Bulkcem Com- Nigerian cement industry has witnessed rapid growth pany and Flour Mills Nigeria Plc acquired the old Nigercem and Calabar Cement plant respectively. and changes, which is attributed to improvement in economic activities and population growth. In 2006, The key success factors in this industry include leverage over customers, nearness to limestone deposits, the total demand for cement, estimated at approximately 10 million metric tonnes, represents a 13% regular power supply, efficient management, ability to growth over previous year. source funds at competitive rates, access to technical The two major categories of cement providers in Nige- support and modern and efficient manufacturing plants. We believe that the demand for cement will continue to be on the upsurge and local production will significantly increase if the plans on full production by players are implemented.

4 Page 4 COMPANYPROFILE West African Portland Cement Plc was incorporated on 26 February 1959 and was listed as a Public Limited Liability Company on the Nigerian Stock Exchange in The Company is engaged in the manufacturing, distribution and marketing of cement. WAPCO's flagship is the Elephant brand of cement, which is a leading brand in the market. WAPCO s head office is situated at Elephant Cement House, Ikeja Central Business District, Alausa, Ikeja, Lagos. The Company's cement plants are located in Ewekoro and Shagamu, both in Ogun State. The Ewekoro plant - the first plant was commissioned in 1960, while Shagamu plant was commissioned in In August 2003, the Company replaced the Ewekoro plant, which was a wet process plant, with a dry process pre-calciner plant. The huge capital investments on view, Mr Dele Daada (Human Resources Director) its 2 cement plants resulted to an increase in installed production capacity over time, from an initial 200,000 metric tonnes to 2.41 million metric tonnes. In 2006, WAPCO achieved an average capacity utilization of 80% around the South-Western part of the Country, with 12 distribution outlets. The major competitors of the Company are largely importers, which include Flour Mills Nigeria Plc and Dangote Group, while competitors in other regions are AshakaCem Plc, Cement Company Of Northern Nigeria Plc (CCNN), Obajana Cement Company and Benue Cement Company Plc. The Company sources the bulk of its raw materials (i.e. limestone, red alluvium, clay, iron ore, iron ash and gypsum) locally, while a portion of its gypsum requirement is imported. The major laws governing the Company's operations are Mineral & Mining Act, Companies and Allied Matters Act and Factories Act. As at 31 December 2006, Lafarge S.A was the single largest shareholder with 60% of the Company's equity, which is held under the names of its subsidiaries: AIC UK, AIC Nigeria and Lafarge Nigeria Limited. Lafarge is a global market leader in building materials and is the number two largest cement manufacturer in the world. Other major shareholders of WAPCO include Odua Group of Companies (11.34%) and the Nigerian Public (28.66%). No other individual holds more than 10% of the Company's issued share capital. The Company's Board has 12 members with High Chief Bayo Akinnola, MFR as the Chairman, while Mr George Lourandos is the Managing Director and Chief Executive Officer. During the year under re- resigned from the Board to take up appointment with the Gypsum Division of Lafarge SA, while Mr Ashok Kumar Singh was elevated to the Board. The Board has 3 executive directors and 9 non-executive from the two plants (2005:63.5%). directors. In 2006, WAPCO employed an average of 960 persons. In February 2007, the Company disposed off its wholly owned subsidiary- Portland Electrical Repairs Limited, In 2005, the Company launched a project tagged but retained its 11.36% of Nigerian Foundries Limited, NEW DAWN. The project, which is expected to end a company involved in the fabrication of equipment and in December 2007, focused on reduction of costs tools. WAPCO also has 56% equity interest in Nigerian and optimisation of outputs from the Ewekoro and Krafts Bags Limited, which is currently non operational. The target market of the Company is centered Company to operational excellence and Shagamu plants. The project aims at returning the profitability. Since 2005, WAPCO's financial performance witnessed a positive change due to the various strategies, coupled with the financial restructuring plan embarked by the Company's management. The Company plans to officially change its name to "Lafarge Cement WAPCO Nigeria Plc" by November This is aimed at leveraging on the parent's name (Lafarge) internationally. As at 31 December 2006, the total assets of the Company was =N=48.8 billion. During the same period, WAPCO generated a turnover of =N=39.5 billion, while profit after tax was =N=10.9 billion.

5 Page 5 PROFITABILITY During the year ended 31 December 2006, WAPCO's The Company also generated =N=593 million from nominal sales grew by 49% to =N=39.5 billion other income which includes rental income, interest (2005:=N=26.5 billion). The growth was attributed to income, profit on disposal of assets and miscellaneous increase in volume of goods sold and price. The volume income. The interest paid by WAPCO to service its of cement produced increased from 1.5 million loan accounted for 3% of turnover (=N=1.3 billion). metric tonnes in 2005 to 1.9 million metric tonnes in This is a significant decline from 11% in The decrease in the ratio of interest expenses to sales was as a result of the Company s debt restructuring strategy, which reduced the interest expenses incurred by the Company. The restructuring of the Company s debt, which was finalised in July 2005, involved the consolidation of the local short term loans with 27 banks to medium term loan with only 5 banks, with better terms and condition. The profit before tax (PBT) significantly increased to 2006, reflecting the contribution of the new Ewekoro plant, which accounted for 75% of the increase. Also, cement despatches increased by 34% to 1.98 million metric tonnes in WAPCO s cost of sales declined to 55% of turnover from 60% in This translated to gross margin of =N=17.8 billion (2005:=N=10.6 billion). During the same period, the ratio of operating expenses to sales declined to 13% from 17% in 2006, hence an impressive operating profit of =N=12.9 billion, which doubled =N=12 billion from =N=3.4 billion in 2005 and a loss previous year's figure. The improvement in the cost/ income ratio was due to increase in capacity utilisation, which led to a reduction in factory cost per metric tonne of production, while other operating expenses declined due to cost reduction measures introduced. The major cost driver of the Company is energy (electricity & gas). Operating Profit Margin 40% 30% 20% 10% 0% WAPCO ASHAKA of =N=1.6 billion in The improvement in PBT positively affected the return on average equity (pretax) of 65% in 2006, which is higher than its peer (Ashaka) of 50% in the same period. Return on average equity (pre-tax) 100% 80% 60% 40% 20% 0% -20% % -60% WAPCO ASHAKA Although, WAPCO s profitability has been weak in prior years, it improved significantly in The improvement was as a result of increased capacity utilization and deliberate efforts by the Company to minimize production and operating costs. Furthermore, the restructuring of the Company s debt also had a positive impact on WAPCO s profitability.

6 Page 6 PROFITABILITY During the 6 months period to 30 June 2007, WAPCO's production was adversely affected by shortage in supply of natural gas and electricity, which are major inputs of the Company's production process. Consequently, in this period, its turnover increased slightly by 5% to =N=19.5 billion, while operating profit was =N=6.6 billion (2006:=N=6.4 billion). However, profit before tax grew by 28% to =N=6.8 billion (=N=5.3 billion). Agusto & Co believes that if the trend continues, the Company's turnover for the year ended 31 December 2007 to be about =N=39 billion, while profit before tax is estimated at =N=13.6 billion. In our opinion, WAPCO s profitability is good and the Company s earnings are sustainable in the short to medium term. CASH FLOW During the year ended 31 December 2006, WAPCO generated a positive operating cash flow of =N=15.5 Operating Cash flow/sales billion, which was an increase from =N=7.6 billion in The operating cash flow was adequate to meet returns to providers of finance in form of interest (=N=1.35 billion) and dividend (=N=900 million). In addition, the operating cash flow after payments to providers of finance was sufficient to fund essential capital expenditure of =N=2.2 billion. 45% 40% 35% 30% 25% 20% 15% 10% 5% On a 3 year basis to 2006, the Company generated 0% cumulative operating cash flow of =N=25 billion, which was adequate to fund returns to providers of finance (=N=10 billion) and capital expenditure (=N=5 billion). The capital expenditure of WAPCO includes the recent WAPCO ASHAKA refurbishment of the Shagamu plant and conversion of the raw mill of Ewekoro plant to a cement mill. During the year ended 31 December 2006, the ratio of operating cash flow to sales increased to 39% from 24% in 2005 (Ashakacem:19%). This clearly shows that WAPCO s cash generating capacity has improved. Furthermore, on a 3 year average ( ), the operating cash flow (OCF) as a percentage of returns to providers of finance was 325%, which is above Agusto & Co s benchmark of 200%. WAPCO does not give credit sales except to industrial customers. The Company s cash flow is strong and this has been the trend over the years due to the favourable terms of trade with its customers and suppliers.

7 Page 7 FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL As at 31 December 2006, WAPCO s working assets slightly declined by 6% to =N=8.3 billion. The bulk of the Company s working assets are foreign exchange purchased for imports and stocks, constituting 26% and 61% respectively. The decline in the Company s working assets was as a result of reduction in the level of raw materials. This is attributed to increase in WAPCO s capacity utilization from 63% in 2005 to 80% in During the same period, the spontaneous financing (Non Interest Bearing Liabilities) was =N=15.7 billion, of which advance payments & deposits from customers and other creditors & accruals jointly accounted for 49%. The spontaneous financing was adequate to fund the working assets, which resulted to a financing surplus of =N=7.4 billion. As at 31 December 2006, WAPCO's equity amounted to =N=22.5 billion, an increase of 54% over prior year. The increase in equity was due to retained earnings of =N=7.9 billion recorded in However, the Company's equity of =N=22.5 billion and long term loan of =N=5.4 billion were not adequate to finance the long term assets of =N=32.4 billion, resulting to long term financing need of =N=4.5 billion. This was covered by the financing surplus (excess of Non-Interest Bearing Liabilities over working assets) of=n=7.4 billion. LEVERAGE As at 31 December 2006, WAPCO's total liabilities reduced to =N=26.2 billion (2005:=N=28 billion) and financed 54% of its total assets (2005:66%). The total liabilities is made up of Interest Bearing liabilities (IBL), which accounted for 40% (2005:56%), while Non Interest Bearing Liabilities (NIBL) was 60% (2005:44%). The steady decline in WAPCO's interest bearing liabilities over the last 3 years, was due to the combined strategies employed by the Company, which includes the debt restructuring programme, which was finalised in 2005 and the part payment of the outstanding local loans Working Capital Surplus/Deficency WAPCO ASHAKA The increase in the long term assets of the Company is due to recent significant investments on production plants (Ewekoro and Shagamu). In our opinion, the Company's working capital position improved over the last 3 years. through the proceeds from the rights issue raised in The decline in the Company's interest bearing debt reflected in the ratio of interest expenses to sales which improved to 3.4% in 2006 from 11% in 2005 (2004:21%). This was satisfactory when compared with Agusto & Co's benchmark of 5%. Furthermore, WAPCO's interest cover, which measures the Company's ability to meet its interest obligation significantly improved to 11 times in 2006 from 2.5 times in 2005.

8 LEVERAGE Page 8 OWNERSHIP, MANAGEMENT & STAFF As at 31 December 2006, WAPCO's equity was held by TIBL/EQUITY (LESS REVALUATION) 62,375 Nigerian citizens and organisations, of which Lafarge SA was the largest single shareholder with 1200% 60% of the Company's equity. Lafarge SA is a global 1000% market leader in building materials, operating in over 800% 75 countries. Other major shareholders are Odua 600% Group Of Companies (11.34%) and Nigerian Public 400% (28.66%). 200% The Company's 12 man Board is made up of 9 non- 0% executive directors and 3 executive directors. High Chief Bayo Akinnola is the Chairman of the Board, while Mr George Lourandos is the Managing Director and Chief Executive Officer. In addition, the Total Interest Bearing Liabilities (TIBL) as a percentage of equity improved from 108% in 2005 to 47% in During the financial year ended 31 December 2006, the average number of employees declined to 960 from 1183 in 2005, as a result of rightsizing. However, the disengaged staff were given their terminal benefits and Interest Cover additional compensations which included medical expenses, profit share and bonuses. In addition, WAPCO 14 organized a practical program called Training & Entrepreneurship 12 Technical Scheme for the disengaged 10 staff. A breakdown of WAPCO's employees shows that 8 Management staff accounts for 20%, Supervisors 6 (29%) and Junior staff (51%). 4 2 The Company is organized into 8 major departments- 0 Business Development, Internal Audit & Control, Supply Chain, Marketing & Sales, Finance & Information Technology, Human Resources, Industrial and Corpo- During the period under review, WAPCO's estimated average return on the use of debt was 26%, which was 19% higher than the average cost of debt (after tax). This clearly shows that the Company was able to make use of its interest bearing debt efficiently. In our opinion, WAPCO's leverage is satisfactory. rate Services/Legal with each headed by an executive director or a general manager. The head of each department reports directly to the Chief Executive Officer. WAPCO's management is stable and key managers are qualified and experienced. Some of WAPCO's key managers have worked in the Lafarge group before their appointment in the Company. As at 31 December 2006, WAPCO's staff cost was =N=2.9 billion which includes Salaries & Wages (53%), Pension & Gratuity (23%), Medical &Welfare (5%) and other benefits (17%). The staff costs per employee slightly increased from =N=2.4 million in 2005 to =N=3 million in 2006 (Ashaka's =N=1.4 million). However, WAPCO s net profit per staff improved significantly

9 AGUSTO CO Agusto & Co. Page 9 OWNERSHIP, MANAGEMENT & STAFF from =N=5 million in 2005 to =N=13.4 million in 2006 and is better than Ashaka s =N=6 million. In our opinion, the Company's management are qualified and staff productivity is good. BREAKDOWN OF STAFF (2006) Administration 11% STRENGTHS AND CHALLENGES We believe that the strengths of WAPCO include the following: 1. Strong brand name 2. Good market share 3. Potentials for market growth 4. Strong earnings and profitability 5. Increased capacity utilisation 6. Strong technical support from parent Company- Lafarge S.A 7. Improved technology on production process 8. Strong cash flows 9. Experienced and stable key managers In our opinion, the Company faces the following challenges: 1. Keen competition from new entrants (manufacturers) and existing importers 2. Rising operating costs due to poor infrastructural facilities such as bad roads and poor power supply 3. Shortage of gas due to vandalisation of pipelines on account of Niger Delta crises. Sales & Distribution 22% OUTLOOK Production 67% Prior to 2006, WAPCO had been faced with several challenges such as huge debt portfolio and financial expenses, poor profitability and inadequate working capital, which adversely affected the Company s financial performance. However, in 2006, the Company recorded an impressive financial performance due to the successful implementation of the "New Dawn" project. In 2006, the demand for cement in Nigeria was estimated at 10 million metric tonnes and it is believed that there will be a steady rise in subsequent years, thereby creating a great opportunity for market growth. Also, a recent development in the industry is the pronouncement by the Federal government to ban importation of cement. Some key players who hitherto imported cement have made huge investments in manufacturing plants to commence production e.g Obajana Cement Plant owned by Dangote Group. In view of the recent developments in the industry, WAPCO has set out plans to grow market share and retain its position as the market leader. As a result, the Company plans to complete the refurbishment of the Shagamu plant by 2008 and also, increase the Ewekoro cement grinding capacity. In addition, WAPCO is currently going through an opportunity study, which hopefully will lead to a significant

10 Page 10 OUTLOOK increase in production capacity. Subsequent to the successful implementation of the 3 year programme ( NEW DAWN project), WAPCO plans to launch a new program by 2008, which is expected to focus on new challenges faced by the Company. In addition, the Company also plans to re-brand by officially changing its name to "Lafarge Cement WAPCO Nigeria Plc" by November The re-branding strategy is aimed at leveraging on the parent s name (Lafarge), in order to enjoy the several benefits inherent in the Lafarge brand name especially as it relates to international best practices. Furthermore, WAPCO plans to introduce new marketing strategies in order to achieve the Company s vision of being a market leader in the manufacturing and marketing of cement in South-West Nigeria. The marketing strategies include rationalization of its distributorship in order to have a structured distribution base, increase product base by 2010 and carry out research in order to have a better understanding of the market. We expect the restructuring exercise embarked by WAPCO and the launching of its new program to positively affect its business in terms of earnings and profitability in the short to medium term. In addition, we believe that the growing demand for cement over supply will continue to give WAPCO a favourable term of trade with its customers.

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16 RATING DEFINITION Aaa A company with impeccable financial condition and overwhelming capacity to meet obligations as and when they fall due. Adverse changes in the environment (macro economic, political and regulatory) are unlikely to lead to deterioration in financial condition or an impairment of the ability to meet its obligations as and when they fall due. In our opinion, regulatory and/or shareholder support will be obtained, if required. Typically, a company in this category will score more than 89% on our scoring grid. Aa A company of very good financial condition and strong capacity to meet its obligations as and when they fall due. Adverse changes in the environment (macro economic, political and regulatory) will result in a slight increase the risk attributable to an exposure to this company. However, financial condition and ability to meet obligations as and when they fall due should remain strong. Although regulatory support is not assured, shareholder support will be obtained, if required. Typically, a company in this category will score 80% to 89% on our scoring grid. A A company with good financial condition and strong capacity to meet its obligations. Adverse changes in the environment (macroeconomic, political and regulatory) will result in a medium increase in the risk attributable to an exposure to this company. However, financial condition and ability to meet obligations as and when they fall due should remain largely unchanged. In our opinion, shareholder support should be obtainable, if required. Typically, a company in this category will score 70% to 79% on our scoring grid. Bbb A company with satisfactory financial condition and adequate capacity to meet its obligations as and when they fall due. It may have one major weakness which, if addressed, should not impair its ability to meet obligations as and when due. Adverse changes in the environment (macro economic, political and regulatory) will result in a medium increase in the risk attributable to an exposure to this company. Typically, a company in this category will score 60% to 69% on our scoring grid. Bb Financial condition is satisfactory and ability to meet obligations as and when they fall due exists. May have one or more major weaknesses. Adverse changes in the environment (macro economic, political and regulatory) will increase risk significantly. Typically, a company in this category will score 50% to 59% on our scoring grid. B Financial condition is weak but obligations are still being met as and when they fall due. Has more than one major weakness and may require external support, which, in our opinion, is not assured. Adverse changes in the environment (macro economic, political and regulatory) will increase risk significantly. Typically, a company in this category will score 40% to 49% on our scoring grid. CCC Financial condition is very weak. Net worth is likely to be negative and obligations may already be in default. A company in this category will score less than 40% on our scoring grid. D In default. A ʺ+ʺ (plus) or ʺ ʺ (minus) sign may be assigned to ratings from Aa to C to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the (minus) sign.