Industry Overview and Company Profiles

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2 Banking Sector Overview Section 1 Executive Summary Section 2 Industry Overview and Company Profiles Banking Sector Overview Access Bank Plc Diamond Bank Plc Ecobank Transnational Incorporated (ETI) Plc FBN Holdings Plc First City Monument Bank (FCMB) Group Plc Fidelity Bank Plc Guaranty Trust Bank Plc Stanbic IBTC Plc Skye Bank Plc Sterling Bank Plc United Bank of Africa (UBA) Plc Union Bank Plc Unity Bank Plc Wema Bank Plc Zenith Bank Plc Consumer Goods Sector Overview Cadbury Nigeria Plc Dangote Sugar Refinery PLC Flour Mills of Nigeria Plc Guinness Nigeria Plc Nigerian Breweries Plc Nestle Nigeria Plc PZ Cussons Nigeria Plc Unilever Nigeria Plc Conglomerate UAC of Nigeria Plc Industrial Goods Sector Overview Cement Company of Northern Nigeria Plc Dangote Cement Plc Lafarge Africa Plc Equity Market Update Page 2

3 Banking Sector Overview Insurance Sector Overview AIICO Insurance Plc AXA Mansard Insurance Plc Continental Reinsurance Plc Custodian and Allied Insurance Plc Oil and Gas Sector Overview Conoil Plc Forte Oil Plc Mobil Oil Nigeria Plc Oando Plc Total Nigeria Plc Section 3 Appendix Recommendation Summary Section 4 Afrinvest (West Africa) Limited Contacts Disclaimer Equity Market Update Page 3

4 Banking Sector Overview Equity Market Update Page 4

5 Section One Executive Summary Equity Market Update Page 5

6 Executive Summary Banking Sector Overview Executive Summary One key theme that has come up in our analysis and valuation of companies is the tougher operating environment which is consequent on the weak macroeconomic backdrop. Slowing GDP growth has been a major headwind on sales of manufacturing companies and risk assets creation by banks. Elevated inflationary pressures and FX shortages have driven-up costs whilst uncertain direction of fiscal and monetary policy have together worsened the risk landscape and impaired market valuation of assets. We forecast GDP growth to rebound to 3.5% in 2016 (from estimated 3.0% in 2015), largely hinged on expectation of fiscal stimulus and inflationary pressure forecast to hit double digit. FX supply constraint will also remain a challenge in 2016 given the negative sentiments deterring autonomous FX inflow and bearish outlook for oil prices. These mutually reinforcing factors will combine to pressure revenue, earnings and margins across sectors and remain a drag on market sentiments. Revised Valuation Assumptions Our risk free rate assumption is lower at 9.3% due to the easy monetary policy but this is not the true reflection of the risk landscape nor inflation expectation; thus we have raised our equity risk premium and inflation assumptions to 11.4% and 10.1% respectively. Current prices for the purpose of this report are prices as at 12th February, Our Top Picks across Sectors Banking Sector: We have a Buy rating on most of the Banking stocks but our top picks in the sector are GUARANTY, UBA and ZENITH due to their rich ROE, lower Cost Profile and relatively heathier balance sheet which are positive driver of earnings and sentiment. We believe Tier-1 banks will continue to deliver superior earnings performance (relative to Tier-2) and are better equipped to weather the storm in light of the current challenges, we maintain that investors underweight on Tier-2 banks in favour of Tier-1 banks. We believe most of the banking tickers have already been heavily discounted for projected weaker forward earnings to a point that positive earnings surprises in 2016 will have massive positive knock-on impacts on pricing. Our Tier-2 coverage have higher upsides but we advocate selective and cautious positioning with a keen eye on sentiment drivers. Consumer Goods: negative (-12.6%); yet, we believe there are still opportunities in specific stocks in the sector. We are however cautioned by the weak sentiments and recent exit of most foreign portfolio investors from the market. Nonetheless, we believe sector pricing over a long term horizon presents a fantastic opportunity for discerning investors. Our top picks include Nestle, NB, Flourmill and DangSugar given their continuous investment in capacity and expansion, leadership of their respective segments and investor sentiments towards these stocks. In addition, the stocks are so selected given their relative defensiveness as blue chip stocks relative to other stocks within the sector. Industrial Goods: As the struggle for market share continues in the industry and margins contract, we favour companies with strong volumes growth potential and cost leaders with capacity to grow EPS and justify our earnings based valuation multiple. increased exposure to other regions in Africa with strong earnings potential. Hence, our top pick is Dangcem with 25.5% upside to our 12- price cut in Nigeria on forward earnings. The stock has consequently converged towards our value target. We have an Overweight outlook on the sector as we expect it to outperform the benchmark index by 19.0% to 25.0% based on our bullish outlook for DANGCEM and positive outlook for sector dividend. Equity Market Update Page 6

7 Executive Summary Banking Sector Overview Insurance Sector: We expect gross premium growth to stay positive in 2016, albeit modest given constraints in the system. While macroeconomic challenges remain a critical concern, demographic attractiveness and low insurance penetration rate in Nigeria accentuates the compelling growth potential of the sector. We see further merger and acquisition activity (as witnessed in recent years) driving performance in the sector. Meanwhile, tighter regulatory activities which has brought Insurance as well as the recent claims payment guidelines is expected to strengthen recent gains observed in the sector. We have a Buy rating on AIICO and CONTINSURE, an Accumulate on MANSARD and a HOLD on CUSTODYINS. Oil and Gas: Since the fall in global oil prices, investor sentiments towards oil and gas stocks have been largely dampened due to the blue outlook. Following this, downstream Nigerian oil companies suffered immediate massive sell-offs. However, our analysis of the companies within our coverage (downstream) indicates that bottom line declines have been against foreign exchange illiquidity and subsidy delays. Going forward, with technical removal of subsidy through the price modulation template and diversification strategies of some, we expect an improvement in company returns. Against the colossal selloff in OANDO following the release of its FY:2014 results, we believe the stock has bottomed out and our fundamental Equity Market Update Page 7

8 Section Two Industry Overview and Company Profiles Equity Market Update Page 8

9 Banking Sector Overview Banking Sector Overview On a Sticky Wicket Selectively Overweight Tier-1, Underweight Tier-2 Macroeconomic Headwinds Weigh on Sector Performance in 2015 The Banking space has been gravely affected by the macroeconomic challenges and regulatory headwinds that persisted in 2015 and appear to have stretched into These challenges have culminated in four critical themes in the industry in 2015 as highlighted below. 1. Slower growth in industry risk assets which was one of the major drags on earnings performance. Despite the efforts of the Central Bank of Nigeria (CBN) to leave the system awash with liquidity through a reduction of CRR in order to foster credit expansion, the banks have remained reluctant to grow their loan book owing to the prevailing high credit risk in the economy and unavailability of new lending opportunities. Unlike previous two years where reforms in the power sector and increased indigenous participation in the servicing and upstream oil & gas sectors drove a credit boom (average annual loan growth of 23.5% between 2013 and 2014), political uncertainties delayed reforms in 2015 while the bearish oil market cooled oil & gas lending. As at Q3:2015, net loan growth in the industry averaged % across our coverage (from 42.4% recorded in prior period), driven by Tier-1 Banks which grew loans at an average of 3.0% while loans for Tier-2 banks contracted 1.7% on average. We expect aggregate industry net loan growth to pare to 2.0% in FY: 2015 from 27.4% in Higher funding cost in the first 9 months of the year on the back of the tight monetary policy during the period and the Treasury Single Account (TSA) implementation which led to a loss of over N1.0tn deposits in the system. We estimated Cost of Funds (CoF) to increase across both Tiers in FY:2015 and industry average to peak at 4.8% (from 4.2% in FY:2014). Easy monetary policy from Q3:2015 and higher yields on assets for much of the year are expected to buffer the impact of the higher CoF on Tier-1 banks Net Interest Margin (estimated at 6.5% from 6.3% in 2014) although we estimatetier-2 to contract 20bps on average. 3. Weaker quality of risk assets which has led to a pile up of non-performing loans and increased impairment charges. We expect average cost of risk in the industry to rise to 2.4% in FY:2015 from 1.7% in FY:2014. ETI (2.1%) and FBNH (1.8%) have the highest CoR assumptions in our Tier-1 basket while UNITY (6.6%), UNION (4.1%), SKYE (4.0%) and STANBIC (4.0%) have the highest in the Tier-2 category. 4. Elevated Cost to Income (CoI) Ratio: The drive of Tier-2 banks to increase their play in the retail sector seems to have come at the cost of increasing operating costs. Earnings growth in previous years had muted the impact on CoI ratio but the slowdown in operating profits in 2015 has amplified the impact on CoI. We estimated average CoI in the industry to close higher at 66.4% in 2015 from 64.4% in 2014, majorly driven by Tier-2 banks. From the above analysis, it could be seen that the tougher operating environment, whilst being a drag on overall sector performance, seems to have more impacts on the Tier-2 banks while Tier-1 banks have performed relatively better. The Tier -2 banks bore the brunt of the higher industry funding cost and lost market share in the credit market, which pressured their Net Interest Margin, while loan loss provisioning further pared their net income. Tier-1 banks benefited from the higher yields on assets in Q3:2015 to sustain growth in interest income, while the volatility in asset prices was a positive driver of non-interest income (FX and investment securities trading activities driven); albeit higher cost of risk still pressured margins. Analysis of the financial performance of companies within this sector under our coverage as at Q3:2015 (most recent earnings release), showed that industry gross revenue grew by 17.3% Y-o-Y, driven by the 21.0% growth in Tier-1 relative to 10.0% for Tier-2. Against the aforementioned factors that have pressured operating and funding cost, industry PBT growth was weaker at 8.1% Y-o-Y, dragged by a 16.8% contraction in Tier-2 PBT which offset the 15.3% expansion in Tier-1. Equity Market Update Page 9

10 Banking Sector Overview Nevertheless, we expect Q4:2015 earnings to be materially weaker as loan growth guidance by managements as at Q3:2015 has been weak while FX trading activities have been muted following tightening of strings on interbank trading activities in H2:2015. Also, the impairments booked by some Banks that submitted unaudited Q3: 2015 results (e.g. SKYE and FBNH) are poor reflections of the quality of their assets and we expect Cost of Risks to increase at Full Year. Thus, we forecast industry earnings to grow 17.8% Y-o-Y in 2015 (from 15.9% in 2014) and PBT to decline 5.1% Y-o-Y (from 33.1% in FY: 2014). Industry earnings will remain dragged by Tier-2 banks forecast (to record 35.5% Y-o-Y decline in PBT relative to 4.9% growth in Tier-1). Net margins are also expected to trim 3.9% to 12.5% and ROAE by 4.2% to 12.4% in FY:2015 with much of the contractions also coming from Tier-2. Industry Fundamentals in 2016 Gross Loan Growth to Rebound in 2016: We expect gross loan growth to rebound in 2016 from a near flat level in 2015 as the economy rides out of the business cycle slump and government reforms kick in to offer new lending opportunities. Our forecast is within a range of 10.5% with Tier-1 banks (11.6% Y-o-Y) expected to consolidate on their market share. Risk to this assumption is a worsening of the current FX challenges. Industry Cost Profile to Drop; Net Interest Margin Will Hold up on Lower Funding Cost The slowing earnings momentum have increased focus on cost cutting and leverage on technological advancements to improve on banking operations and efficiency. We expect average industry CoI to moderate to 65.0% in 2016 with Tier-2 and high banking liquidity. We forecast average CoF of 4.5% with Tier-2 banks recording the biggest drop (by an average of 40bps). Nevertheless, the lower yields on fixed income assets and high competition for loans in the industry will pressure turnover on assets; thus we expect NIM to remain unchanged at 6.8%in We continue to view weak quality of assets especially exposures to upstream oil & gas, consumer credit, general commerce and manufacturing to be the biggest downside risk to industry profitability in The quaternion sectors account for approximately 57.0% of industry net loans. Oil prices appear to have bottomed out, which could indicate provisioning related to upstream oil & gas will taper but the grim macroeconomic outlook and likely devaluation still poses a risk to loan exposures to other sectors and foreign currency denominated loans (unhedged portion). The tardiness of the CBN in making foreign currency adjustments has given banks enough time to close their open positions and address Dollar exposures; but the outlook on cost of risk remains quite uncertain. Based on our estimation, average cost of risk in the industry will likely peak in 2015 and moderate to 2.0% in 2016 but we still view weak asset quality as a high probability risk. EPS to Rebound if Cost of Risk Moderates We expect industry gross earnings growth to moderate further to 7.4% in 2016 on the back of a drag on interest income from softer loan growth and lending rate. The eventual phasing out of COT will impact on fee income, although this has been partially offset with the recent introduction of current account maintenance fee of up to N1.00 per mille, while we expect banks to also leverage on enhanced mobile and internet banking operations to continue to sustain fee income growth. Despite lower growth forecast for gross earnings, we expect industry margins to improve on lower cost of risk. Equity Market Update Page 10

11 Banking Sector Overview Outlook and Valuation: Selectively Buy the Dip in Tier-1 as Valuation has been Heavily Discounted; Underweight Tier-2 Our overall outlook for the sector remains mixed with forward earnings and book value trading multiples revealing a significant undervaluation of banks although investment risk remains high due to weak asset quality which impacts on capital adequacy, earnings and dividend dragging sentiments towards banking stocks. We believe Tier-1 banks will continue to deliver superior earnings performance (relative to Tier-2) and are better equipped to weather the storm in light of the current challenges, we maintain that investors underweight on Tier-2 banks in favour of Tier-1 banks. We believe most of the banking tickers have already been heavily discounted for projected weaker forward earnings to a point that positive earnings surprises in 2016 will have massive positive knock-on impacts on pricing. Our Tier-2 coverage have higher upsides but we advocate selective and cautious positioning with a keen eye on sentiment drivers. Table 1: Banking Sector Valuation Metrics Source: Company Filings, Afrinvest Research EPS (N) ROE (%) P/E (x) P/BV (x) Dividend Yield (%) E 2016F E 2016F Trailing Forward Trailing Forward Current Expected ACCESS DIAMONDBNK ETI FCMB FIDELITYBK FBNH GUARANTY SKYEBANK STANBIC STERLNBANK UBA UBN UNITY WEMA ZENITHBANK Equity Market Update Page 11

12 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Banking Sector Overview ACCESS BANK PLC Analyst Robert Omotunde Driving Growth through Aggressive Retail Expansion Overview Table 2: Stock Data and Valuation ext 314 banks in Nigeria with its operations diversified across African countries and the United Kingdom. The Bank remains strong in corporate, business and personal banking model ranking as a Tier-1 bank with total assets of N2.4tn as at Q3:2015. The Bank weathered the storm despite the recent macroeconomic challenges that confronted the country coupled with monetary policy uncertainties. Operational and Financial Performance Access recorded an impressive performance as at Q3:2015 following the fantastic growth that was recorded in major income lines. Gross earnings grew markedly by 42.0% (up from N181.4bn in Q3:2014 to N257.6bn), highest in the Tier-1 category with an average of 21.0%. The growth was boosted majorly by remarkable increase in non-interest income which grew by 68.3% as against the growth recorded in interest income which increased by 17.9%. Gross loans & advances also improved by 16.9% (Q3:2015-N1.3tn vs. FY: N1.1tn) buoying the growth in interest income recorded. Interest expense also grew faster (majorly due to increase in aggregate deposits by 9.1%) at 42.5% than interest income thus moderating growth in net interest income to -0.1%. Loan to deposit ratio rose to 76.4% in Q3:2015 from 71.4% in FY:2014 but within the regulatory threshold of 80.0%. Consequently, annualized cost of deposits increased from 4.9% to 6.1% as at Q3:2015 while cost of risk inched to 1.3% from 1.0%. Worryingly, OPEX also surged by 38.1% from N76.9bn in Q3:2014 to N106.2bn in Q3:2015 though cost to income ratio moderated Y-o-Y from 6% in Q3:2014 to 59.6% in Q3: PBT thus grew by 44.6% to N60.4bn in Q3:2015 from N41.7bn in Q3:2014. The Bank recorded an improved valuation from the perspective of RoAE and RoAA increasing to 17.9% and 2.5% in Q3:2015 from 16.5% and 2.2% in FY:2014. We revised our valuation assumptions for Access on gross loan growth & advances, investment yields, cost of equity and beta; ACCESS ACCESS: NL Current Price (N) Target Price (N) 7.66 BUY Upside Potential 86.9% 12-Month High (N) Month Low (N) 3.48 Outstanding Shares (bn) 28.9 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 86.6 Trailing EPS (N) 1.94 Trailing P/E (x) 2.1 Forward P/E (x) 1.8 Table 3: Financial Metrics FY:2014 A FY:2015 E FY:2016 F Gross Earnings (N'Mn) 245, , ,704.5 Net Interest Income (N'Mn) 100, , ,746.7 Pre-tax Income (N'Mn) 52, , ,305.7 Net Income (N'Mn) 42, , ,809.3 Total Assets (N'Mn) 2,104,361 2,297,786 2,587,248 Total Loans (N'Mn) 1,122,900 1,302,564 1,563,077 Shareholder Funds (N'Mn) 273, , ,393 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 4: Access Bank vs NSE ASI and Banking Sector a blend of Dividend Discount Model and Residual Income Model and arrived at our blended target price of N7.66 for Access against the last traded price of N4.10 as at 12/02/2016. Our target price translates to 86.9% upside potential at a forward P/E and P/BV of 1.8x and 0.3x as against the trailing P/E and P/BV of 2.1x and 0.3x respectively ASI Banking ACCESS Equity Market Update Page 12

13 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview DIAMOND BANK PLC Analyst Olawale Olusi Aggressively Expanding Retail Base ext 318 Overview the Tier-2 space with total assets of N1.8tn as at Q3:2015. The Bank continues to focus its operations on the retail market, priding itself customer base expanded 127.5% from 4.8m in Q3:2014 to 10.9m due to aggressive customer acquisition which increased its agent network from 585 to 7,924 in the same period. Operational and Financial Performance -o-y in Q3:2015 as against 14.6% in prior period settling at N156.5bn. Accordingly, Pre Tax and Post-Tax profit tumbled 22.0% and 21.0% worsened by 32.7% increase in impairment loss to N14.7bn. Performance was broadly constrained by decline in loans & advances which dipped 2.0% to N813.4bn relative to N831.0bn in FY:2014. Thus, Cost to Income ratio and Net Income Margin weakened to 66.1% and 6.4% in Q3:2015 relative to 65.6% and 7.2% in Q3:2014 in that order. Also, aggressive acquisition of customers is expected to strengthen deposit base in medium to long term. As at Q3:2015, total assets declined 8.5% to N1.8tn from N1.9tn in FY:2014. Loans & Advances depreciated faster, down 15.3% to N920.3bn in the same period even as investment securities tumbled 24.5% to N377.3bn from N499.7bn in FY:2014. Weaker macroeconomic environment drove cost of risk (COR) higher to 3.2% from 2.7% as Q3:2014 as impairment charges expanded 32.7% while 9 months NPL ratio was reported at 4.7% relative to the 5.0% regulatory benchmark. Deposits weakened 15.0% to N1.3tn in Q3:2015 from N1.5tn in FY:2014. However, Capital Adequacy Ratio settled at18.4%, well above regulatory benchmark of 16.0%. Outlook and Valuation Gross earnings growth for Diamond is projected at 6.1% for FY:2016 while loan growth is expected to remain challenged. On the basis of the foregoing, we reviewed our valuation assumptions for Diamond using a combination of absolute and relative valuation methodology and arrived at a 12-month target price of N3.74. This implies an upside of 122.8% when compared to market price of N1.68 as at 12/02/2016. Thus, we maintain our BUY rating on the stock. Table 5: Stock Data and Valuation DIAMONDBNK DIAMONDB: NL Current Price (N) Target Price (N) 3.74 BUY Upside Potential 122.8% 12-Month High (N) Month Low (N) 1.50 Outstanding Shares (bn) 23.2 Market Cap (N'bn) 38.9 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.1 Trailing EPS (N) 0.92 Trailing P/E (x) 1.8 Forward P/E (x) 0.9 Table 6: Financial Metrics Gross Earnings (N'Mn) 205, , ,90 Net Interest Income (N'Mn) 109, , ,650.5 Pre-tax Income (N'Mn) 28,10 26, ,925 Net Income (N'Mn) 25, , ,951.7 Total Assets (N'Mn) 1,933,123 1,989,039 2,283,472 Total Loans (N'Mn) 1,060,822 1,079,821 1,302,438 Shareholder Funds (N'Mn) 208, , ,968 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 7: Diamond Bank vs NSE ASI and Banking Sector 1.6 ASI BANKING DIAMOND Equity Market Update Page 13

14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Banking Sector Overview ECOBANK TRANSNATIONAL INCORPORATED PLC Impressive Performance amidst Tough Operating Environment Overview the league of Tier-1 banks in Nigeria with total assets of N4.7tn. The London continue to drive its earnings capability though, approximately 43.0% of income is made from its Nigerian operations. Recently, ETI commenced the MoneyGram Outbound Money Transfer Service (MOMTS) a platform that allows customers send money abroad to any recipient who receives in specified currency in the receiving country. This is a move we believe will -interest income. Operational and Financial Performance: ETI maintained a positive performance in its recent 9 months result as it sustained a robust top and bottom line growth. Gross earnings grew impressively by 18.1% (Q3:2015-N411.8bn, Q3:2014 N348.7bn) buoyed by 23.6% (Q3:2015-N256.7bn, Q3:2014 N207.7bn) acceleration in interest income and 10.0% (Q3:2015-N155.1bn, Q3:2014 N141.0bn) growth in other income. Consequent on a 20.5% (Q3:2015-N91.1bn, Q3:2014 N75.6bn) increase in interest expense, Net Interest Income improved by 25.3% Y-o-Y. In line with the pressure recorded on interest expense, cost of funds inched higher to 3.4% in Q3:2015 from 3.3% in FY:2014 despite the marginal 0.2% drop in total deposits. However, impairment charges surged significantly by 48.1% to N34.7bn from N23.4bn, heightening the cost of risk to 2.1% in Q3:2015 from 1.7% in FY:2014. Cost to income ratio however strengthened to 73.5% from 75.0% in Q3:2014 though still higher than the Tier-1 average of 56.3% in the same period. Impressively, PBT grew by 18.3% (Q3:2015-N78.7bn, Q3:2014 N66.5bn) against Tier-1 average growth rate of 18.8%. environment in Nigeria that accounts for 43.0% of operating Analyst Robert Omotunde romotunde@afrinvest.com ext 314 Table 8: Stock Data and Valuation ETI ETI: NL Current Price (N) Target Price (N) BUY Upside Potential 46.0% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 20.0 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.2 Trailing EPS (N) 4.30 Trailing P/E (x) 3.4 Forward P/E (x) 4.8 Table 9: Financial Metrics Gross Earnings (N'Mn) 482, , ,391.9 Net Interest Income (N'Mn) 184,58 198, ,777.5 Pre-tax Income (N'Mn) 86, , ,583.9 Net Income (N'Mn) 64, , ,088.0 Total Assets (N'Mn) 4,501,787 4,402,353 4,718,797 Total Loans (N'Mn) 2,361,597 2,479,677 2,727,644 Shareholder Funds (N'Mn) 455, ,561 66,040 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 10: ETI vs NSE ASI and Banking Sector operational segments comprising Corporate Bank, Domestic Bank and Ecobank Capital are our strong bases for future projection. We employed a blend of Net Asset Valuation, Dividend Discount Model and Residual Income Model in arriving at our target price of N21.54 for ETI. This presents a 46.0% upside potential relative to the close price as at 12/02/2016 implying forward P/E and P/BV of 4.8x and 1.4x as against the trailing P/E and P/BV of 3.4x and 0.5x respectively. We ASI Banking ETI Equity Market Update Page 14

15 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview FBNH HOLDING PLC Analyst Olawale Olusi Reshuffling its Leadership for Efficiency? ext 318 Overview: -1 space given the size of its total assets and deposits of N4.3tn and N3.0tn respectively. The Group recently constituted a new management team, with Mr. Bello Maccido as the pioneer Chairman of FBN Merchant Bank Limited and Mr. U.K Eke (MFR), replacing him as Group Managing Director. Other strategic appointments include, Dr. Adesola Adeduntan, as MD and Mrs. Ibukun Awosika as Chairman of FBN Limited. The Group also recently rebranded all its investment banking, asset management and capital market operations into FBN Quest. Operational and Financial Performance: -o-y to N390.0bn in Q3:2015 (vs. Q3:2014-N333.6bn) as Interest and Non-Interest Income (NII) rose 9.3% and 13.4% Y-o-Y to N300.4bn and N82.5bn respectively. Operating expense rose 4.4% Y-o-Y in Q3:2015 to N169.2bn while impairment charges surged 249.0% from N13.4bn in Q3:2014 to N46.6bn in Q3:2015 as the operating environment deteriorated. Accordingly, cost of risk (CoR) jumped to 3.0% from 0.9%, NPL rose sharply to 4.8% from 2.9% in prior period and cost to income ratio expanded to 65.2% from 61.4%. Consequently, PBT and PAT declined 19.2% and 9.7% respectively. Key pressure points in Q3:2015 included 12.4% Y-o-Y decline in net loans and advances, although investment securities expanded 27.3% Y-o-Y given the increased fund deployment into financial assets. CAR stood at 19.0%. Customer deposits dipped 1.7%, settling at N3.0tn in Q3:2015 while cost of funds rose to 4.0% from 3.2% on heightened competition for deposit across the sector following TSA implementation. Loan to Deposit ratio moderated to 65.8% from 7% Q3:2015. Table 11: Stock Data and Valuation FBNH FBNH: NL Current Price (N) Target Price (N) 3.88 REDUCE Upside Potential 64.6% 12-Month High (N) Month Low (N) 3.28 Outstanding Shares (bn) 32.6 Market Cap (N'bn) Market Cap ($US'Mn) 6-Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) Trailing EPS (N) 2.16 Trailing P/E (x) 1.8 Forward P/E (x) Table 12: Financial Metrics Gross Earnings (N'Mn) 475, , ,839.5 NII (N'Mn) 243, , ,028.8 PBT (N'Mn) 92, , ,053.5 PAT (N'Mn) 82, , ,856.8 Assets (N'Mn) 4,342, ,754, ,279,990.3 Loans (N'Mn) 2,682, ,843, ,213,136.8 Net Assets (N'Mn) 518, , ,910.4 COF (%) 3.3% 5.5% 4.8% CIR (%) 66.4% 64.1% 64.6% COR (%) 3.0% 2.5% 2.5% NIM (%) 6.2% 6.3% 6.4% PAT Margin (%) 17.4% 7.4% 9.5% ROE (%) 16.8% 6.1% 6.6% ROA (%) 2.0% 0.9% % EPS (N) DPS (N) Outlook and Valuation On the basis of 9M performance, we project FY:2015 gross earnings growth at 2% while PAT is expected to tumble to N42.7bn from N82.8bn in prior year due to expansion in loan loss charges. Although we expect improvement in performance in 2016, we believe market sentiment will continue to hurt valuation until corporate releases by the Group suggest otherwise. Accordingly, we have updated our model assumptions to reflect recent realities. Our model puts 12-month target price for FBN Holdings at N3.88 as against previous N9.58. Compared to our benchmark market price of N3.93 as at 12/02/2016, this implies a downside of 1.4%; we place a REDUCE rating on FBNH. EPS Yield (%) 64.6% 33.3% 45.9% Div. Yield (%) 2.5% 1.7% 6.9% Chart 13: FBNH vs NSE ASI and Banking Sector 1.6 ASI BANKING FBNH Equity Market Update Page 15

16 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview FCMB GROUP PLC Analyst Omotola Abimbola High Cost of Risk Dampens Earnings Performance ext 316 Overview: 4 th largest bank in our Tier-2 classification with its Ntn total assets representing 3.9% and 12.9% of industry and Tier-2 total assets respectively. The Group operates a holding company structure with 4 subsidiaries including the commercial banking, investment banking, trusteeship and consumer credits markets. Operational and Financial Performance: earnings grew 2.4% - lower than our 9.6% projection - to N109.3bn while PBT fell 84.7% Y-o-Y to N2.6bn and annualized EPS settled at N0.49 relative to FY:2015 projection of N1.05. The growth in gross earnings was due to the mild 4.1% increase recorded in interest yielding assets (loans and financial assets) which constrained interest income growth by 3.0% Y-o-Y. Interest expense grew faster by 9.3%, resulting in higher cost of funds (5.6% from 5.2% in FY: 2014) and % Y-o-Y decline in Net Interest Income to N48.7bn. Investments and other operating income also weakened by 4.1% to N19.6bn, activities on the back of regulatory and macroeconomic headwinds which pressured earnings performance of its investment banking unit. The significant drop in PBT was driven by impairment charges on the loan book (up 290.7% Y-o-Y to N15.3bn) which resulted into high cost of risk (3.7% vs. 1.7% in FY: 2014) of its commercial banking unit and a higher operating cost (cost to income ratio rose to 71.5% (from 68.5% in Q3:2014). No significant development has been recorded since our last rating review for the Group in February and as such, we retain our estimate for FY: 2015 gross earnings (-1.5%) and PBT (-73.5%) growth to N144.0bn and N6.3bn respectively. Management hinted on active steps being taken to restructure oil & gas exposures, reduce operating cost (by as much as 9.0% or N5.0bn) and recover up to N10.0bn bad loans earlier provisioned. We have seen active steps taken regarding reducing operating cost which was already factored into our valuation. The downstream oil & gas provisioning responsible for 40.0% of impairments charged in 9M: 2015 is still under litigation and we would wait on the outcome before adjusting our 2016 cost of risk forecast. We retain our N2 EPS forecast for FY: 2016 and 12-Month TP of N1.78 implying a P/E and P/BV of 6.3x and 0.2x as against the current price (N0.92). We therefore retain our BUY recommendation Table 14: Stock Data and Valuation FCMB FCMB: NL Current Price (N) Target Price (N) 1.78 BUY Upside Potential 93.8% 12-Month High (N) Month Low (N) 4 Outstanding Shares (bn) 19.8 Market Cap (N'bn) 18.2 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.1 Trailing EPS (N) 0.49 Trailing P/E (x) 1.9 Forward P/E (x) 1.5 Table 15: Financial Metrics Gross Earnings (N'Mn) 146, ,03 144,479.9 Net Interest Income (N'Mn) 72, ,49 68,44 Pre-tax Income (N'Mn) 23, , ,919.5 Net Income (N'Mn) 22, , ,267.3 Total Assets (N'Mn) 1,169, ,156, ,192,933.0 Total Loans (N'Mn) 617, , ,986.0 Shareholder Funds (N'Mn) 160, , ,586.7 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 16: FCMB vs NSE ASI and Banking Sector 1.6 ASI Banking FCMB Equity Market Update Page 16

17 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Banking Sector Overview FIDELITY BANK PLC Analyst Robert Omotunde Focus on Financing SME Businesses Boosts Earnings Resilience ext 314 Overview -2 bank with total assets of Ntn as at Q3:2015 and operates within the corporate, commercial, consumer and investment banking space having metamorphosed into a commercial bank from its original establishment as Fidelity Union Merchant Bank Limited in The Bank in October 2015 listed its N30.0bn 7-year corporate bond on the expanding frontiers in supporting SMEs through its Fidelity SME Forum. Operational and Financial Performance Fidelity recorded a fair performance in its Q3:2015 result growing its gross earnings by 11.0% (up from N96.0bn in Q3:2014 to N106.6bn) on the back of 10.2% (Q3:2015 N84.7bn; Q3:2014 N76.8bn) improvement in interest income and 13.9% (Q3:2015 N21.9bn; Q3:2014 N19.2bn) increase in non-interest income. The increase in interest income was consequent on higher yield on loans and investment securities which settled at 13.3% as at Q3:2015 relative to 11.9% recorded as at FY:2014 as gross loans and advances declined by % (down from N610.4bn in FY: 2014 to N607.0bn). Cost of funds also moderated commendably to 6.4% from 6.8% in FY:2014 against the backdrop of slower rise of 9.8% in interest expense relative to income although aggregate deposits declined by 6.6% (N765.8bn vs. N820.0bn). Cost of risks inched higher to 1.0% from 0.7% in FY:2014 owing to 107.6% surge in impairment charges. Overall, cost to income ratio increased to 71.6% from 72.5% in Q3:2014 as OPEX rose 1% to moderate PBT growth to 3.0% (up to N13.8bn from N13.4bn in Q3:2014). Our estimate for FY:2015 results sees gross earnings settling at N140.5bn (implying a 6.1% growth) while PBT is forecast to decline to N14.0bn (10.0%). Table 17: Stock Data and Valuation FIDELITYBK FIDELITY: NL Current Price (N) Target Price (N) 2.16 BUY Upside Potential 75.3% 12-Month High (N) Month Low (N) 1.13 Outstanding Shares (bn) 29.0 Market Cap (N'bn) 35.6 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 28.2 Trailing EPS (N) 0.49 Trailing P/E (x) 2.5 Forward P/E (x) 3.2 Table 18: Financial Metrics Gross Earnings (N'Mn) 132, ,51 145,337.5 Net Interest Income (N'Mn) 104, , ,069.1 Pre-tax Income (N'Mn) 15, , ,460.1 Net Income (N'Mn) 13, , ,149.1 Total Assets (N'Mn) 1,187, ,260, ,364,121.3 Total Loans (N'Mn) 627, , ,385.1 Shareholder Funds (N'Mn) 173, , ,031.5 Cost of Fund (%) 5.9% 6.7% 6.8% Cost to Income (%) 74.2% 75.2% 71.6% Cost of Risk (%) 0.7% 0.9% 0.9% Net Interest Margin (%) 4.7% 3.6% 3.7% PAT Margin (%) 10.4% 8.7% 11.1% ROE (%) 8.2% 5.3% 4.5% ROA (%) % 1.0% % EPS (N) Our projection for Fidelity is premised on the strategic drive of the Bank towards financing SME businesses amidst the macroeconomic challenges of the country. We expect the Bank to continue to channel its deposits towards creating less risky and high margin retail loans in order to improve its bottom line. With a blend of valuation methodologies (Net Asset Valuation and Dividend Discount Model) we arrived at our model target price of N2.16. Against the close market price of N1.36 as at 12/02/2016, our target price presents a 75.3% upside potential and implies a forward P/E and P/BV of 3.2x and 0.2x as against the trailing P/E and P/BV of 2.5x and 0.2x. On the 12-month period. DPS (N) Earnings Yield (%) 35.0% 3% 41.0% Dividend Yield (%) 13.2% 14.0% 17.0% Chart 19: Fidelity vs NSE ASI and Banking Sector 1.3 ASI Banking FIDELITY Equity Market Update Page 17

18 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview GUARANTY TRUST BANK PLC Riding on Technology in Driving Efficiency Analyst Ayodeji Ebo ext 315 Overview leadership status as the most efficient bank within the Nigerian banking industry. Despite the choppy operating and macroeconomic has buoyed its first class Return on Equity (ROE). In line with MasterCard in November The Bank has leveraged its huge customer base (6.5m people/account) to drive retail deposits for onward lending to the institutional and corporates clients. Operational and Financial Performance: GTBank churned out an impressive Q3:2015 scorecard with a 15.0% and 12.6% Y-o-Y growth in gross earnings and PAT to N229.4bn and N75.2bn respectively in line with our forecast of N227.3bn (0.9% variance) and N79.3bn (5.2% variance). The impressive outing can be attributed to 16.7% and 10.5% Y-o-Y growth in interest income and non-interest income respectively despite 23.3% spike in interest expense and flat growth in net loans & advances. The Bank delivered the highest ROAA (4.4%) and ROAE (27.6%) within the banking industry in Q3:2015 relative to Tier-1 bank averages of 2.6% and to Income ratio (44.0%) remained significantly below Tier-1 Bank average of 61.5% in Q3:2015. We also observed muted growth in net loans and advances traceable to the puzzling operating environment. Table 20: Stock Data and Valuation GUARANTY GUARANTY: NL Current Price (N) Target Price (N) ACCUMULATE Upside Potential 15.8% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 29.4 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 2.6 Trailing EPS (N) 3.64 Trailing P/E (x) 4.6 Forward P/E (x) 4.9 Table 21: Financial Metrics Gross Earnings (N'Mn) 276, , ,117.9 Net Interest Income (N'Mn) 142, , ,29 Pre-tax Income (N'Mn) 116, , ,686.0 Net Income (N'Mn) 98, , ,947.1 Total Assets (N'Mn) 2,355, ,420, ,551,123.2 Total Loans (N'Mn) 1,281, ,307, ,385,424.5 Shareholder Funds (N'Mn) 368, , ,774.8 Cost of Fund (%) Cost to Income (%) Due to the snowballing macroeconomic risks fueled by sliding oil prices, we have revised downwards our estimates. Despite the positive Q3:2015 result, we expect the impact of the hawkish environment to play out more in Q4:2015. Hence, we cut our FY:2015 PAT forecast to N99.8bn from N103.3bn. This is due to the anticipated increase in CoR from annualized 0.7% in Q3:2015 to 1.0% in FY:2015. Growth in net loans is expected to grow at a marginal 2.0% Y-o-Y in FY:2015. Hence, we expect EPS and DPS to settle at N3.39 and N1.68. Despite the significant share price decline, we expect dividend yield to hover around 10.0% in FY:2015. Also, we made a cut on our loans and deposits growth in 2016 from 22.0% and 19.8% to 6.0% and 4.0%. As a result, Y-o-Y growth in gross earnings moderated to 3.4% from 15.7% in GTBank is currently trading at trailing P/E and P/BV of 4.4x and x relative to Tiervaluation methodologies, we arrived at a blended valuation and 12-month target price of N15.43 and N19.17 respectively from our initial TP of N28.59, hence our ACCUMULATE rating. Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 22: GT Bank vs NSE ASI and Banking Sector 1.4 ASI Banking GTBank Equity Market Update Page 18

19 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview STANBIC IBTC HOLDINGS Leveraging on Non-Core Banking Businesses Analyst Akinmuda Simileoluwa ext 317 Overview is a member of the Standard Bank Group and a Tier- 2 bank with investment Banking (CIB), Personal and Business Banking (PBB) and Wealth Management. The Bank commenced a rights issue programme (targeted at raising N20.4bn Tier-1 capital) in June 2015 but was put on hold by SEC (Securities and Exchange Commission) owing to allegations of irregularities in financial reporting leveled by FRCN (Financial Reporting Council of Nigeria). Operational and Financial Performance In Q3:2015, Stanbic sustained 10.0% Y-o-Y growth in gross earnings to N104.4bn (from N94.6bn in Q3:2014) while PBT declined significantly by 48.8% to N15.4bn from N30.0bn recorded in prior period. PAT however declined less proportionately by 46.3% to N13.6bn from N25.3bn owing to lower effective tax rate in Q3:2015 (11.7%) relative to 15.8% in the corresponding period. Improvement in gross earnings was on the back of the 34.7% (up to N62.7bn from N52.3bn) rise in interest income, boosted by higher yields (15.0%) on interest yielding assets (compared to FY:2014 level of 13.3%). Annualized Cost of Funds rose to 4.4% relative to 3.9% in FY:2014 as a result of the 69.1% increase in interest expense despite 6.9% growth in deposits. Cost of Risks also amplified to 3.4% (a significant rise from the % as at FY:2014) as credit impairments grew 521.3% to N12.5bn from N2.0bn in Q3:2014 due to huge exposures to the oil & gas space as well as the public sector due to fiscal challenges confronting the economy. Nevertheless, Stanbic remains profitable as ROAE and ROAA settled at 29.0% and 3.5% higher than Tier-2 averages of 12.7% and 1.4% respectively. Outlook and Valuation: Target Price at N19.41; Revised to Given current economic realities, we revised our valuation assumptions and with a blend of relative valuation, Dividend Discount Model (DDM) and Residual Income Model to arrive at an intrinsic price of N Thus, our 12-month target price is revised to N19.41 from N This implies a forward P/E and P/BV of 6.1x and 3.3x respectively. With current price at N14.00 as at 12/02/2016, the stock presents a 38.9% upside. Hence, we revise our Table 23: Stock Data and Valuation STANBIC STANBIC:NL Current Price (N) Target Price (N) BUY Upside Potential 38.7% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 10.0 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) Trailing EPS (N) 2.03 Trailing P/E (x) 6.9 Forward P/E (x) 4.4 Table 24: Financial Metrics Gross Earnings (N'Mn) 130, , ,332.9 Net Interest Income (N'Mn) 46, , ,729.0 Pre-tax Income (N'Mn) 40, , ,914.9 Net Income (N'Mn) 32, , ,605.2 Total Assets (N'Mn) 944, , ,054,955.5 Total Loans (N'Mn) 413, , ,052.8 Shareholder Funds (N'Mn) 110, , ,899.1 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 25: Stanbic IBTC vs NSE ASI and Banking Sector 1.4 ASI Banking Stanbic Equity Market Update Page 19

20 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview SKYE BANK PLC Capital Raising Uncertainty and Asset Quality Risk Prompt Downgrade Overview: our Tier-2 basket with total assets of N1.3tn, 4.4% of our industry bridge banks Mainstreet Bank - in 2014 strengthened its share of industry assets, deposits and earnings, but new pressure points have emerged in weaker assets quality, overstretched operating and funding cost as well as meeting capital adequacy and liquidity requirements. Operational and Financial Performance The Bank delivered a strong operational performance in Q3: 2015 as gross earnings grew 33.1% Y-o-Y (to N129.2bn) - the second fastest growth in the industry - bolstered by both interest and fees & commissions income. However, operating and funding cost ratios were pressured by higher personnel cost and tight monetary policy in the period. Accordingly, CIR and annualized CoF ratios shot up to 75.1% and 5.2% from 70.3% and 3.9% in Q3:2014 and FY:2014 respectively. Consequently, PBT margin moderated 1.1% Y-o-Y to 11.6% while annualized EPS settled at N5, higher than N0.74 in 2014 and our FY:2015 forecast of N9. Notwithstanding the N6.4bn loan impairments (equivalent to an annualized cost of risk of 2.4%) management guidance of a 4.0% cost of risk. This, in our estimate, implies an additional N22.0bn in impairment charges by FY: 2015, hence we revised our EPS estimate for the Bank. Cheap Valuation but High Investment Risk; Hold We expect the triple threat of higher Cost of Risk, Cost of Funds and Cost to Income Ratio to lead to a 54.2% Y-o-Y decline in FY: 2015 PBT to N4.8bn and moderate EPS to N0.33. We also do not expect dividend-payment to resume until 2017, owing to weak capital adequacy (15.9% in January 2016, slightly below regulatory requirement of 16.0%) which could be further impaired by higher provisioning for loans and an impending devaluation. Our fundamental valuation which is a blend of the Net Asset Value, Dividend Discount and Residual Income models arrived at a fair value of N2.18 for the stock, implying a P/E and P/BV multiples of 6.5x and 0.2x respectively relative to current price translating to trailing P/E and P/BV multiples of 1.4x and 0.1x. Although we see long term value in the Bank, sentiment on it remains dampened by uncertainty regarding capital raising programme and asset quality risk due to exposures to some indigenous oil & gas companies; thus limiting its short to mid-term upside. Hence, we have revised our rating of the stock from a BUY to a HOLD. Analyst Omotola Abimbola oabimbola@afrinvest.com ext 316 Table 26: Stock Data and Valuation SKYEBANK SKYEBANK:NL Current Price (N) Target Price (N) 2.65 HOLD Upside Potential 136.6% 12-Month High (N) Month Low (N) 0.92 Outstanding Shares (bn) 13.2 Market Cap (N'bn) 15.3 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.1 Trailing EPS (N) 5 Trailing P/E (x) 1.8 Forward P/E (x) 0.9 Table 27: Financial Metrics Gross Earnings (N'Mn) 134, , ,605.8 Net Interest Income (N'Mn) 63, , ,565.9 Pre-tax Income (N'Mn) 10, , ,507.2 Net Income (N'Mn) 9, , ,027.0 Total Assets (N'Mn) 1,421, ,314, ,329,995.0 Total Loans (N'Mn) 651, , ,186.6 Shareholder Funds (N'Mn) 131, , ,670.0 Cost of Fund (%) 3.9% 5.4% 5.0% Cost to Income (%) 67.4% 68.5% 67.1% Cost of Risk (%) 2.8% 4.0% 2.3% Net Interest Margin (%) 5.6% 5.6% 5.6% PAT Margin (%) 7.2% 2.7% 10.5% ROE (%) 7.7% 3.3% 12.5% ROA (%) % 0.3% 1.3% EPS (N) DPS (N) Earnings Yield (%) 29.1% 28.7% 111.0% Dividend Yield (%) 0.0% 0.0% 33.3% Chart 28: Skye Bank vs NSE ASI and Banking 1.3 NSE Banking Skye Equity Market Update Page 20

21 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview STERLING BANK PLC Strong Retail Presence; Sufficiently Capitalized Overview full-fledged national commercial banks, has remained focused on retail, commercial and corporate business segments. On the back of its capital raisings in 2013 (N12.1bn through rights issue) and 2014 (N19.1bn through private placement), the Bank is adequately capitalized with a CAR of 19.0% in Q3:2015 relative to 10.0% assigned a first-time rating to Sterling (Local and Foreign Currency Issuer and Deposit s of B2 with stable outlook) to reaffirm the Operational and Financial Performance The Bank recorded a CAGR of 34.0% in gross earnings between 2011 and 2014 despite the competitive operating environment. As at Q3:2015, Sterling recorded a 12.0% Y-o-Y rise in gross earnings to N81.8bn (1% lower than our N92.2bn forecast) and a 6.9% Y-o-Y increase to N7.5bn (4.8% above our N7.2bn projection) in PAT as at Q3:2015. The positive growth was achieved against the backdrop of 11.6% and 13.3% increases in interest and non-interest income in results as observed in the Cost to Income ratio from 75.3% in Q3:2014 to 73.3% in Q3:2015. On the back of the increased risk environment in 2015 and liquidation of state loans, net loans & advances declined 13.0% to N335.1bn in Q3:2015. Further breakdown shows that Sterling increased its exposure to the oil & gas space as a proportion of total loans to 42.1% in Q3:2015 from 34.6% in Q3:2014 despite the falling oil prices as well as delay in subsidy payment in Subsequently, annualized CoR surged to 2.0% in Q3:2015 from 1.9% in FY:2014 while Non-Performing Loans (NPL) ratio increased to 4.9% in Q3:2015 from 3.1% in FY:2014. Retail lending continues to dominate risk assets allocation at 73.5% in Q3:2015. Outlook and Valuation: High Exposure to Oil & Gas Sterling plans to raise additional Tier-2 capital in H1:2016 to take advantage of lending opportunities as the government intends to resuscitate the non-oil sector. The Bank intends to continue the upgrade of its current branches as well as expansion drive to aid its Analysts Ayodeji Ebo Modupeola Sarumi aebo@afrinvest.com msarumi@afrinvest.com Table 29: Stock Data and Valuation ext ext 320 STERLNBANK STERLNBA NL Current Price (N) Target Price (N) 2.02 ACCUMULATE Upside Potential 15.2% 12-Month High (N) Month Low (N) 1.58 Outstanding Shares (bn) 28.8 Market Cap (N'bn) 50.4 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.1 Trailing EPS (N) 0.3 Trailing P/E (x) 5.3 Forward P/E (x) 4.9 Table 30: Financial Metrics Gross Earnings (N'Mn) 103, , ,576.9 Net Interest Income (N'Mn) 43, , ,618.4 Pre-tax Income (N'Mn) 10, , ,38 Net Income (N'Mn) 9, , ,373.0 Total Assets (N'Mn) 824, , ,828.2 Total Loans (N'Mn) 448, , ,880.3 Shareholder Funds (N'Mn) 84, , ,765.3 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) 1.4 EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 31: Sterling Bank vs NSE ASI and Banking Sector ASI Banking Sterling revised our gross earnings and PAT forecasts for FY:2015 from 0.9 N122.9bn and N9.7bn to N113.6bn and N9.5bn respectively due to the challenging Consequently, we estimated a 16.0% and 6.0% Y-o-Y decline in gross loans & advances and deposits in FY:2015. Accordingly, we have revised our 12-month target price to 0.7 N2.02 from N2.72 presenting an 18.6% upside. Hence, we reviewed Equity Market Update Page 21

22 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview UNITED BANK FOR AFRICA PLC Consolidating Positions across African Markets Analyst Olawale Olusi ext 318 Overview one of the largest banks in Nigeria serving retail, commercial and corporate customers in 22 countries - Nigeria, 18 other African countries, the US, the UK and France. The Group operates a network of 605 business offices across Africa and the world, further supported by 1738 ATM channels and 13,452 fully deployed POS. In a bid to stay afloat in a challenging macroeconomic environment, UBA has intensified efforts strengthen operating performance by ramping up its position across its African subsidiaries. As a result, contributions from its African subsidiaries continue to improve consistently from 21.0% in Q3:2013 and 23.1% in Q3:2014 to 24.0% as at Q3:2015. Operational and Financial Performance -o-y from N210.7bn to N247.2bn, below 21.0% Y-o-Y growth recorded in H1:2015, driven by operating efficiency across its African subsidiaries as the group continues to consolidate its position across these markets. Topline growth was bolstered by 17.0% expansion in interest income as well as 15.0% increase in Fees and Commission income. Impairment charges jumped 129.9% as the Group booked a sum of N5.4bn impairment loss in Q3:2015 relative to N2.3bn in the corresponding quarter while total operating expenses rose 11.9%. Cost to income ratio stood at PBT and PAT improved 34.8% and 44.4% to N57.4bn and N48.6bn in Q3:2015 even as net income margin improved 19.6% from 16.0% in the same period. Total assets grew 1.4% from N2.7bn in FY:2014 to N2.8bn largely constrained by a 9.4% decline in total loans, the Bank however maintained its culture of sound risk management with a Cost of Risk (CoR) ratio of 0.7% relative to peer average of 1.0% as at Q3:2015. Total deposits stood at N2.2bn in Q3:2015 rising 0.3% compared to FY:2014 position due to increased competition for deposits. Loan to Deposit ratio stood at 46.6%, Capital Adequacy Ratio (CAR) settled at 20.0%, while NPL ratio increased slightly to 2.1% (from 1.9%) as at Q3:2015. Outlook and Valuation improved performance across its African networks hence we project FY:2016 gross earnings and PAT to increase 2% and 19.8% respectively. Against this backdrop, we reviewed our target price for UBA from previous N8.51 to N4.99. Compared to our cut off price of N2.91 as at 12/02/2016 this presents a 71.4% upside. Hence, we place Table 32: Stock Data and Valuation UBA UBA: NL Current Price (N) Target Price (N) 4.99 BUY Upside Potential 71.42% 12-Month High (N) Month Low (N) 2.48 Outstanding Shares (bn) 33.0 Market Cap (N'bn) 96.0 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.5 Trailing EPS (N) 1.73 Trailing P/E (x) 1.7 Forward P/E (x) 1.3 Table 33: Financial Metrics Gross Earnings (N'Mn) 283, , ,036.3 NII (N'Mn) 106, , ,133.0 PBT (N'Mn) 56, , ,111.9 PAT (N'Mn) 47, , ,704.3 Assets (N'Mn) 2,762, ,076, ,379,111.1 Loans (N'Mn) 1,143, ,303, ,499,221.6 Net Assets (N'Mn) 259, , ,293.6 COF (%) 3.7% 4.1% 4.1% CIR (%) 67.4% 65.2% 61.3% COR (%) % 1.0% 0.7% NIM (%) 4.4% 5.2% 5.1% PAT Margin (%) 16.9% 16.8% 19.7% ROE (%) 19.7% 17.8% 25.9% ROA (%) 1.8% 2.0% 2.4% EPS (N) DPS (N) EPS Yield (%) 49.9% 58.6% 76.8% Div. Yield (%) 3.4% 14.7% 23.1% Chart 34: UBA vs NSE ASI and Banking Sector 1.6 ASI BANKING UBA Equity Market Update Page 22

23 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview UNION BANK PLC Analysts Ayodeji Ebo Ibraheem Babalola Repositioning the Stallion Overview banks in Nigeria has continued to build on its milestone achieved after the recapitalization in Union ranks as a Tier-2 bank with total assets of N1.1tn as at Q3:2015. In October 2015, the Bank launched a fresh identity with its iconic white stallion which represents strength and passion, cantering forward with energy and dynamism. In the same vein, Union rolled out a new banking platform, Oracle Flexcube UBS 12.0, and announced Smarter Banking Centers directed at the technology savvy customers looking for convenient banking service. The Simply, Smarter Bank has sustained the positive momentum to deliver great value to its shareholders. Operational and Financial Performance The Bank delivered positive growth in top and bottom line amidst heightened political risk, hawkish monetary policy stance and cocktails of foreign exchange and fiscal issues. Union recorded a 6.4% and 5.7% Y-o-Y growth in gross earnings and PAT to N84.7bn and N9.3bn in Q3:2015 respectively on the back of 19.3% increase in interest come and other comprehensive income (sale of subsidiaries). However, the significant 50.2% Y-o-Y rise in interest expense dwarfed the growth in net interest income to 4.9% in Q3:2015. Consequently, NIM and CoF settled at 7.4% and 8.2% in Q3:2015 overheads through a robust technology platform, Cost to Income ratio rose to 75.2% in Q3:2015 from 71.5% in the corresponding restructure bad loans are yielding results as seen in the 20.4% decline in impairment charges to N4.5bn in Q3:2015 lowering annualized Improved to N1.61 in Q3:2015 from N1.58 in FY:2014. The Bank was also aggressive in growing its gross loan books with a 13.0% jump from N326.0bn in FY:2014 to N367.0bn in Q3:2015. Outlook and Valuation: Conservative FY:2016; 7.3% downside With the recent drive of the new management to reposition the Bank, we expect Union to sustain its positive growth in top and bottom line. We forecast a mild 1.3% increase in gross earnings in FY:2016 and a 13.9% Y-o-Y growth in PAT due to low FY:2014 base effect. We assumed a 7.0% and 2.0% Y-o-Y growth in loans and deposits respectively given the heightening business risk and implementation of TSA. We have applied a blend of relative (P/E and P/BV) and absolute (NAV Approach & DDM) valuation methodologies to arrive at a 12-month target price of N4.91. Based on the current rating on the Bank implying 7.3% downside. Table 35: Stock Data and Valuation UBN UBN: NL Current Price (N) Target Price (N) 4.91 REDUCE Upside Potential -7.3% 12-Month High (N) Month Low (N) 4.70 Outstanding Shares (bn) 16.9 Market Cap (N'bn) 89.8 Market Cap ($US'Mn) 45 6-Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 28.6 Trailing EPS (N) 1.61 Trailing P/E (x) 3.3 Forward P/E (x) 5.3 Table 36: Financial Metrics Gross Earnings (N'Mn) 119, , ,798.3 Net Interest Income (N'Mn) 51, , ,796.8 Pre-tax Income (N'Mn) 26, , ,977.0 Net Income (N'Mn) 26, , ,562.0 Total Assets (N'Mn) 1,009, ,009, ,009,157.0 Total Loans (N'Mn) 312, , ,797.0 Shareholder Funds (N'Mn) 216, , ,896.0 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 37: Union Bank vs NSE ASI and Banking Sector aebo@afrinvest.com ibabalola@afrinvest.com ext ext 321 ASI Banking UBN Equity Market Update Page 23

24 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Banking Sector Overview UNITY BANK PLC Striving to stay Profitable Analyst Eronmosele Aziba ext 319 Overview The Bank successfully raised Tier-1 capital of N19.2bn in 2014 through a rights issue. Unity also completed a share reconstruction of 1 for 10 in The Bank is classified under the Tier-2 classification of Nigerian banks and has total assets of N440.1bn as at Q3:2015. The strategic location of the Bank in the Northern region of the country afforded the opportunity to establish a presence in that hub of the country, in Operational and Financial Performance: Since Unity returned from a loss position in FY:2014, the Bank has taken measures to stay above waters. The Bank has remained profitable as seen in Q1:2015 and Q2:2015 results with appreciation in both top and bottom line despite the challenging macroeconomic and operating environment. In Q3:2015 however, topline grew by 2.2% Y-o-Y while PAT contracted 15.8% Y-o- CoF currently stands at 5.6% (marginally lower than peer average 5.7%) while CIR increase to 65.3%Q-o-Q (though still below peer average of 72.0%) due to 9.4% growth in interest expense though NIM of 11.3% was the highest across the industry in Q3:2015. Following the macroeconomic challenges which have greatly impacted quality of risk assets of banks, Unity has a CoR of 6.4% which further stresses the need for the Bank to strengthen its risk management framework. Net margin settled at 18.9% (Highest in the Tier-2 space). In terms of Return Unity has performed impressively. ROAE in Q3:2015 settled at 11.0% which was higher than peer average of 8.1% while ROAA stood at 2.1% also above peer average of 1.3% which further supports the profitability of the Banks assets. Table 38: Stock Data and Valuation UNITYBNK UNITYBNK: NL Current Price (N) Target Price (N) 0.97 BUY Upside Potential 43.3% 12-Month High (N) Month Low (N) 0.58 Outstanding Shares (bn) 11.7 Market Cap (N'bn) 7.9 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($Th'Mn) 18.0 Trailing EPS (N) 0.77 Trailing P/E (x) 0.9 Forward P/E (x) Table 39: Financial Metrics Gross Earnings (N'Mn) 77, , ,891.6 Net Interest Income (N'Mn) 45, , ,781.0 Pre-tax Income (N'Mn) 13, , ,721.9 Net Income (N'Mn) 10, , ,765.5 Total Assets (N'Mn) 413, , ,438.1 Total Loans (N'Mn) 235, , ,104.5 Shareholder Funds (N'Mn) 76, , ,024.4 Cost of Fund (%) 5.3% 5.6% 5.5% Cost to Income (%) 52.3% 50.9% 51.8% Cost of Risk (%) 6.4% 6.6% 6.1% Net Interest Margin (%) 12.6% 12.6% 11.9% PAT Margin (%) 13.8% 12.6% 13.3% ROE (%) 14.0% 7.5% 7.1% ROA (%) 2.6% 1.5% 1.7% EPS (N) DPS (N) Outlook and Valuation: TP Revised to N0.97 on Sustained Profitability; BUY We are conservatively optimistic on Unity given events that played out in 2015; a change in management as well as the repositioning of the Bank Headquarters. We estimate EPS for FY:2015 at N0.58 and FY:2016 forecast of N0.71 consequent on the share reconstruction of 1 for 10 implemented in 2015 which also improves the ability to pay dividend in the future. Unity is currently trading at N8 with a trailing P/E of 0.9x and P/BV of 0.1x against peer average of 3.1x and 0.3x. We employed a blend of Relative Valuation and Net Asset Valuation methodology and arrived at a target price of N0.97 which presents an upside potential of 43.3%; hence, we recommend a Earnings Yield (%) 13.5% 122.8% 135.4% Dividend Yield (%) 0.0% 12.3% 13.5% Chart 40: Unity Bank vs NSE ASI and Banking Sector ASI Banking Unity Equity Market Update Page 24

25 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview WEMA BANK PLC National Banking License Underscoring Resilience Analyst Simileoluwa Akinmuda ext 317 Overview: surviving banks, recently obtained its National Banking license (from a regional bank) having met the capitalization requirement, a pursue an aggressive growth strategy as observed in its re-branding efforts which began in Consequently, in maximizing the recently acquired license, the Bank seeks to raise both Tier-1 and Tier-2 capital in Q1:2016. Operational and Financial Performance: In a moderation of the strong performance that characterized 2013 in Q3:2015 from N31.6bn in Q3:2014 while PBT declined 39.5% Y-o-Y to close at N1.5bn. The marginal rise in topline was on the back of the 1.7% growth in interest income to N26.6bn and 8.6% rise in non-interest income to N6.0bn following the improvement recorded in commission and fees. Interest expense rose faster by 9.6% to N13.3bn while net interest income settled at N13.3bn after declining 5.1%. However, amid the harsh operating environment, Wema recorded lower impairment charges to N0.2bn from N0.5bn in prior period (-51.9%). Accordingly, the Bank recorded the lowest Cost of Risks (CoR) of 0.2% in Q3:2015 against industry average of 1.3%. Cost to Income ratio however was the highest in the industry increasing to 90.9% from 84.7% in Q3:2014 against average of 64.1%. Consequently, PAT closed at N1.3bn, a 39.0% fall from N2.1bn in Q3:2014 bringing net margin to 4.0%, second lowest within the Tier- Q3:2015 lowest in the Tier-2 at 7.7% and 1.0% against industry average of 12.7% and 1.4% respectively. Table 41: Stock Data and Valuation WEMABANK WEMABANK:NL Current Price (N) Target Price (N) 1.07 HOLD Upside Potential 7.5% 12-Month High (N) Month Low (N) 0.77 Outstanding Shares (bn) 39.5 Market Cap (N'bn) 39.5 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.2 Trailing EPS (N) 0.04 Trailing P/E (x) 25.6 Forward P/E (x) 45.4 Table 42: Financial Metrics Gross Earnings (N'Mn) 42, , ,58 Net Interest Income (N'Mn) 18, , ,682.2 Pre-tax Income (N'Mn) 3, Net Income (N'Mn) 2, Total Assets (N'Mn) 382, , ,557.7 Total Loans (N'Mn) 152, , ,967.5 Shareholder Funds (N'Mn) , ,292.6 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) As at Q3:2015, the Bank recorded the lowest trailing EPS of N0.04 relative to Tier-2 average of N4 while P/E at 26.4x was an outlier with 2.9x Tier-2 average and P/BV of 0.9x (2 nd highest in industry). Based on our blended valuation techniques Dividend Discount Model (DDM), Residual Income Model and Relative Valuation - we arrived at a revised intrinsic value of N0.93 and a target price of N1.07. Against current price at N1.00 (12/02/2016), the stock presents a 7.5% upside, hence we maintain our HOLD recommendation on Wema. Dividend Yield (%) Chart 43: Wema Bank vs NSE ASI and Banking Sector 1.4 NSE Banking WEMABANK Equity Market Update Page 25

26 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Banking Sector Overview ZENITH BANK PLC Dominate the Corporate and Commercial Segments Analyst Ayodeji Ebo ext 315 Overview: in the high end corporate and commercial business segments in the Nigerian banking space. Zenith has remained resilient despite the copious policies introduced by both the monetary and fiscal authorities that have reduced cheap income avenues and funding. With a robust Risk Management Framework, the Bank maintained one of the lowest Non-Performing Loans (NPLs) in the industry amidst the evident risks in the Nigerian economy. In line with government objective to diversify its revenue base, Zenith has been playing a prominent role in supporting the government to achieve this feat especially in the Agricultural sector. The Bank is rated B+/ Stable/B by S&P, being the highest rating awarded to any Nigerian Operational and Financial Performance: Zenith defied the hawkish operating environment to post an inspiring Q3:2015 result recording a 23.1% (up from N273.7bn in Q3:2014 to N336.6bn) and 16.9% (up from N71.0bn in Q3:2014 to N83.1bn) Y-o-Y growth in gross earnings and PAT respectively. This is broadly in line with our forecast of N358.4bn (-6.0% variance) and N80.48bn (+3.2% variance) for revenue and PAT respectively. The growth was bolstered by impressive 73.0% and 607.0% Y-o-Y growth in trading income and other income (foreign exchange revaluation Cost to Income ratio moderated to 53.0% in Q3:2015 from 62.4% in Q3:2014. As a result, the Bank delivered annualized RoAE and RoAA of 19.8% and 2.9% in Q3:2015 slightly higher than 18.7% and flat at 2.9% in FY: Table 44: Stock Data and Valuation ZENITHBANK ZENITHBA:NL Current Price (N) Target Price (N) BUY Upside Potential 38.1% 12-Month High (N) Month Low (N) 8.83 Outstanding Shares (bn) 31.4 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 2.3 Trailing EPS (N) 3.55 Trailing P/E (x) 3.4 Forward P/E (x) 3.8 Table 45: Financial Metrics Gross Earnings (N'Mn) 403, , ,529.4 Net Interest Income (N'Mn) 206, , ,892.3 Pre-tax Income (N'Mn) 119, ,01 129,131.4 Net Income (N'Mn) 99, , ,579.6 Total Assets (N'Mn) 3,755, ,883, ,090,084.2 Total Loans (N'Mn) 2,264, ,310, ,448,813.1 Shareholder Funds (N'Mn) 552, , ,210.2 Cost of Fund (%) Cost to Income (%) Cost of Risk (%) Net Interest Margin (%) PAT Margin (%) rating Zenith is expected to retain its strong presence within the high end corporate and institutional segments to drive its business notwithstanding the pull-back observed in lending to the retail space. We revised our FY:2015 estimates Gross earnings down to N448.5bn from N477.8bn and PAT from N107.3bn to N100.1bn. As a result, FY: 2015 EPS and DPS are expected to settle at N3.19 and N1.79. We also lowered our FY:2015 loans and deposits growth forecasts to 2.0% and 4.0% and estimated 6.0% and 5.0% loans and deposits growth in FY:2016 respectively. Using our NAV, DDM and RIM methodologies, we arrived at a TP of N16.85 presenting 38.1% upside potential relative to share price of N12.20 as at 12/02/2016. ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 46: Zenith Bank vs NSE ASI and Banking Sector 1.4 ASI Banking Zenith Equity Market Update Page 26

27 Consumer Banking Sector Goods Overview Sector Overview Consumer Goods Overview Industry Outlook: Underweight-Arbitrage on Sentiments The consumer goods sector has been majorly hit by the weakening macroeconomic conditions of Nigeria since H2:2014 from the perspective of weak consumer sentiment, occasioned by declining discretionary spending and restrictive foreign exchange policy which has heightened the cost of input of most consumer goods companies. The impact reflected in the market pricing of the stocks in the sector which are mostly favoured by foreign portfolio investors and local pension fund managers. Analysis of the financial performance of the companies within our coverage as at Q3:2015 showed decline in top line growth (with few exceptions) and massive decline in profitability as elevated cost continued to pressure the earnings of these companies. On the average, the sector grew revenue by 0.5% while PBT and PAT declined by 42.6% and 17.8%, changing the fundamental dynamics of the sector and altering market valuations significantly. The consequence index has also shed 17.0% as at 12/02/2016. Industry Drivers Robust Demographics and Consumer Spending The growth of the consumer goods sector remains driven by the robust demographic structure of Nigeria and the fact that most of the products are necessity goods by nature. In our view, most of the sub-industries, ranging from flour milling, sugar, beverages and personal care, have products that are mostly price inelastic and income elastic with elements of competition. Key players in the sector are currently struggling, given the pressure on consumer spending, which is amplified by the fiscal challenges that have denied public workers their salaries for months and have relieved private sector workers their jobs, due to tough operating environment. Despite the recent challenges, some blue chip companies are still able to weather the storm, churning in impressive numbers due to their internal strategy, rich product portfolio and leadership of their respective markets. NB, Guinness, Nestle, Flourmill and Dangsugar fall in this category having grown their recent topline numbers by 10.3%, 3.3%, 5.2%, 7.9% and 2.1% respectively. Direct, Operating and Finance Costs Pressuring Profitability Ratios The recent FX restrictive policy of the CBN has mainly impacted the sector particularly flour millers and brewers who largely depend on imported agricultural raw materials for their production. In addition to the volatility in international prices of wheat, sugar, barley and cocoa the restriction on FX has elevated cost thus pressuring gross margin. In addition, the high cost of distribution and effective route to market has impacted heavily on operating cost while also translating into lower operating profit. However, more impactful on the numbers is the cost of financing which has constituted a major drag on earnings as most of the companies are levered on debt financing. Average PBT and PAT for the latest quarter declined by 44.2% and 17.7%. Table 47: Most Recent Quarter (MRQ) Financial Performance Sub Sector Tickers MRQ MRFY Food Product Diversified Food Product Personal Care Revenue and Earnings Growth Earnings Margins Du Pont Analysis Revenue Growth PBT Growth PAT Growth Gross Margin EBIT Margin PBT Margin ROE Net Margin Asset Turnover Leverage CADBURY Q3:2015 FY: % -83.3% -82.4% 30.4% -0.3% 0.2% 0.3% 0.1% 2.7 NESTLE Q3:2015 FY: % 3.3% 2.2% 44.5% 23.2% 19.3% 42.8% 16.0% DANGSUGAR Q3:2015 FY: % 1.8% 130.0% 25.7% 21.0% 19.5% 16.7% 12.8% 1.7 FLOURMILL Q3:2016 FY: % 435.2% 476.7% 10.5% 4.7% 7.5% 20.2% 7.2% 0.7 PZ Q2:2016 FY: % -4% -45.9% 27.2% 4.8% 3.8% 1.9% 2.5% UNILEVER Q3:2015 FY: % -92.1% -92.3% 34.8% 5.6% 0.5% 1.9% 0.3% Conglomerate UACN Q3:2015 FY: % -57.8% -79.4% 22.0% 4.8% 5.2% 1.4% 1.8% Breweries GUINNESS Q1:2016 FY: % -73.6% -75.6% 42.8% 6.7% 2.4% 0.7% 1.7% NB FY:2015 FY: % 1.9% -11.4% 48.5% 2% 18.9% 19.6% 11.5% 2.1 Equity Market Update Page 27

28 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview Chart 16: Consumer Goods Coverage Price Movement (Rebased) Chart 17: Consumer Goods Coverage Return Actual and Forecast NSEASI CADBURY DANGSUGAR Consumers Goods NESTLE FLOURMILL 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% -60.0% -70.0% CADBURY NESTLE DANGSUGAR FLOURMILL PZ UNILEVER UACN GUINNESS NB -15.7% -15.0% -45.7% -51.4% -50.4% -57.1% -5.0% -46.6% 30.7% 21.9% 18.1% -32.2% 2014 Return 2015 Return 12M Upside/Downside Sector Outlook and Valuation Our outlook for the sector remains very modest on the back of the prevailing macroeconomic challenges in the country which impact on consumer spending. We are of the view that high direct cost will still hold its grip in 2016 as operating distribution expense is still expected to remain high in light of increased general price level. We revised our valuation assumptions for the stocks in the sector factoring recent changes in economic and financial market fundamentals. Our methodology of valuation is more skewed towards relative valuation given the reflection of market sentiments that it next 12 months will remain likely negative (-12.6) yet we believe there are still opportunities in specific stocks in the sector. We are however cautioned by the weak sentiments and recent exit of most foreign portfolio investors from the market. Nonetheless, we believe the pricing of the sector over a long term horizon presents a fantastic opportunity for discerning investors. Table 48: Consumer Goods Sector Valuation Metrics Source: Company Filings, Afrinvest Research EPS (N) ROE (%) P/E (x) P/BV (x) Dividend Yield (%) E 2016F E 2016F Trailing Forward Trailing Forward Current Expected CADBURY NA NESTLE DANGSUGAR FLOURMILL PZ UNILEVER UACN GUINNESS NB Within the sector, our top picks include Nestle, NB, Flourmill and DangSugar given their continuous investment in capacity and expansion, leadership of their respective segments and investor sentiments towards these stocks. In addition, the stocks are so selected given their relative defensiveness as blue chip stocks as against other stocks within the sector. Equity Market Update Page 28

29 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview CADBURY NIGERIA PLC Restricted Product Portfolio Constraining Growth Analyst Robert Omotunde ext 314 Overview largest beverage and candy companies in Nigeria notable for its flagship products including Bournvita, Butter Mint and Tom-Tom. The Company is a subsidiary of Mondelez International a leading global brand in food drink and beverages ownership stake of 75.0% through Cadbury Schweppes Overseas. Cadbury recently completed its food drinks factory in 2014 and also launched hot chocolate 3 in 1 drink. The Company currently faces stiffer competition and its restricted product portfolio appears to have constituted a drag on its numbers. Operational and Financial Performance Cadbury grew its revenue on a 5-year CAGR of 3.6% ( ) leveraging on its expansive route to market strategy and its leading products in their respective segments. Cost to sales ratio averaged 68.0% in the same period as the Company took advantage of its backward integration structure in cocoa plantation to contain direct cost of production. Operating expense (OPEX) margin however remained modest on a 5-year average of 22.9% (down from 34.7% in 2010 to 22.4% in 2014). Net margin nonetheless assumed an oscillatory trajectory with a high and low of 16.8% and 4.0% in the period but averaged 9.1%. In light of the recent domestic macroeconomic headwinds which have pressured consumer spending performance has been lukewarm. The Company suffered a major decline of 9.6% in revenue in its Q3:2015 result while cost of sales rose marginally by 0.4%, cost to sales ratio thus inched higher to 69.6% from 62.7% in Q3:2014. Despite the decline in revenue, OPEX rose 0.3% implying a high operational leverage. Consequently, profit before tax and profit after tax plummeted by 98.0% apiece resulting in a trailing EPS of N0.14 against FY:2014 EPS of N1 shooting the Outlook and Valuation: SELL We are less bullish on Cadbury in the short to medium term given its limited product portfolio strategy in a dynamic and competitive industry. Our fair estimate of FY:2015 EPS is N0.20. We employed a blend of relative and absolute valuation methodologies to arrive at our target price of N12.26 against market price of N18.08/share as at 12/02/2016. This indicates a downside of 32.2%at a forward P/E and P/BV of 6x and 2.0x relative to the trailing multiples of 129.1x and 3.45x respectively. Thus, we recommend a SELL on Cadbury. Table 49: Stock Data and Valuation CADBURY CADBURY: NL Current Price (N) Target Price (N) SELL Upside Potential -32.2% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 1.9 Market Cap (N'bn) 34.0 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 10.5 Trailing EPS (N) 0.14 Trailing P/E (x) Forward P/E (x) 6 Table 50: Financial Metrics Revenue (N'Mn) 30, , ,991.6 EBITDA (N'Mn) 1, Pre-tax Income (N'Mn) 1, Net Income (N'Mn) 1, Total Assets (N'Mn) 28, , ,705.4 Shareholder Funds (N'Mn) 11, , ,692.2 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 51: Cadbury vs NSE ASI and Consumer Goods Sector ASI Consumer Goods CADBURY Equity Market Update Page 29

30 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview NESTLÉ NIGERIA PLC Strong Brand and Deep Industry Experience Support Prospects Overview: to its objective of being the recognized leader in nutrition, health and wellness and the industry reference for financial performance. The Company has sustained a very strong financial performance over the past decade. Nestlé ranks as a renowned industry leader within the food and beverage segment with its rich product portfolio cutting across foods, beverages, nutrients, bouillon, dairy and water. The Company in 2014 laid the foundation for N4.8bn Nestlé Waters Factory, Abaji in Abuja aimed at solidifying its dominance in the relatively new segment of the business. Nestlé remains steadfast in serving the growing Nigerian population through its innovative and calculated route to market strategy. Operational and Financial Performance: a very strong financial performance through the thick and thin of -2014) grew at a CAGR of 16.0% on the back of strong products that rank as the leader in their respective product segments. In partnership, with local farmers/companies who supply most of the raw materials Overall, PAT growth for Nestlé has been fantastic over the years at a highest in the industry though there has been a moderation in the last 10 years having settled at 56.2% as at Q3:2015 (our FY:2015 estimate is 58.7%) from the high of 92.8 % in 2009 due to increase in equity. We salute the business model of Nestlé which has continued to support the growth drive of the company. Our FY: 2015 revenue and PAT growth are projected at 7.0% and 7.4% respectively despite the challenging macroeconomic conditions of the country. After reviewing our valuation assumptions on revenue & earnings projection, a blend of absolute and relative valuation methodologies resulted in a blended target price of N relative to the market price (N695.00) as at 12/02/2016. This implies a 21.9% upside potential on the current price with forward P/E and P/BV of 23.5x and 13.5x against the trailing pricing of 24.4x and 13.7x Analyst Robert Omotunde romotunde@afrinvest.com ext 314 Table 52: Stock Data and Valuation NESTLE NESTLE: NL Current Price (N) Target Price (N) ACCUMULATE Upside Potential 21.9% 12-Month High (N) Month Low (N) Outstanding Shares (bn) Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.7 Trailing EPS (N) Trailing P/E (x) 25.9 Forward P/E (x) 23.5 Table 53: Financial Metrics Revenue (N'Mn) 143, , ,631.0 EBITDA (N'Mn) 34, ,18 45,879.8 Pre-tax Income (N'Mn) 24, , ,644.0 Net Income (N'Mn) 22, , ,515.2 Total Assets (N'Mn) 106, , ,605.2 Shareholder Funds (N'Mn) 35, , ,418.7 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 54: Nestle vs NSE ASI and Consumer Goods Sector ASI Consumer Goods NESTLE Equity Market Update Page 30

31 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview FLOUR MILLS OF NIGERIA PLC Analyst Robert Omotunde ext 314 Overview: operations in Nigeria as far back as 1962 with its operations mainly into flour milling which accounts for 77.1% of group revenue as at FY: With daily milling capacity of over 8000MT, FLOURMILL ranks as the biggest player in its industry with average capacity include foods (pasta, noodles, wheat meal, semolina), sugar, snacks, vegetable oil, agro-allied (fertilizer, animal feeds), packaging and transport services. In view of recent expansion drive in the different segments of the business, Flourmill embarked on a rights issue programme in 2015 to raise N40.0bn on the basis of 5 new shares for every existing 12 shares (rights price is N27.50 per share) after increasing its authorized share capital from N2.0bn to N2.5bn. The interest charges and augmenting working capital. The Company is currently proposing a merger of at least 5 of its subsidiaries with the parent so as to reduce administrative costs and improve operating efficiency. Operational and Financial Performance: FLOURMILL has remained resilient in the flour milling business over the years despite the stiff competition in the industry. Its retinue of products cutting across its wheat value chain has been a major source production which thins out average gross profit margin to 13.9%. In the last 5 years, Flourmill grew its revenue on a CAGR of 8.4%, growing its business across major segments. Recently, the introduction of sugar and vegetable oil refining has further elevated market. The rising operating cost (5-year average OPEX margin is 8.1%) coupled with high interest burden (interest coverage settled at x in FY:2015 from 4.0x in FY:2011) has constrained profitability over the years as 5-year average net margin sits at 2.8% while PAT growth shrank by 12.5%. Outlook and Valuation: Flourmill is attractive at Current Price FLOURMILL has a robust business model that presents an attractive valuation in our opinion. We employed a blend of absolute and relative valuation on a weight of 70.0% to 30.0% and arrived at a target price of N This implies a 30.7% upside potential relative to the close price as at 12/02/2016 and also implies a forward P/E and P/BV of 4.7x and 0.7x against the trailing valuations of 2.1x and 0.5x. Table 55: Stock Data and Valuation FLOURMILL FLOURMILL: NL Current Price (N) Target Price (N) BUY Upside Potential 30.7% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 2.6 Market Cap (N'bn) 5 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 47.5 Trailing EPS (N) 9.21 Trailing P/E (x) 2.1 Forward P/E (x) 4.7 Table 56: Financial Metrics Revenue (N'Mn) 332, , ,369.5 EBITDA (N'Mn) 27, , ,215.8 Pre-tax Income (N'Mn) 8, , ,089.5 Net Income (N'Mn) 5, , ,340.9 Total Assets (N'Mn) 297, , ,077.2 Shareholder Funds (N'Mn) 83, , ,58 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 57: Flourmills vs NSE ASI and Consumer Goods Sector ASI Consumer Goods FLOURMILL Equity Market Update Page 31

32 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview DANGOTE SUGAR REFINERY PLC Expanding Frontiers and Solidifying Industry Base Analyst Robert Omotunde ext 314 Overview installed capacity of 1.44MMT/pa operated at approximately 54.0% capacity utilization as at FY: The Company has sustained its leadership status in the growing and highly competitive sugar market with its strategic packaging options for industrial and retail Development Plan, DANGSUGAR recently launched into backward integration with its operation of sugar plantation made possible through its acquisition of 95.0% majority stake in Savannah Sugar Company Limited in The Company plans to produce 1.5MMT of sugar annually from its own sugar plantation sites located in key Nigerian markets. Operational and Financial Performance The financial performance of DANGSUGAR, which operated in a near monopoly market from 2000 to 2011, has been facing a major hit rising from competition especially with the entry of Golden Sugar (a business line of FLOURMILL) in As such, from a high revenue of The volatility in international price of sugar, occasioned by supply glut as well as slowing volume sales, has been partly responsible for this. Revenue grew on a 5-year CAGR of 2.9% amidst the competitive terrain of the sugar industry with the industrial demand for sugar accounting for 95.5% of annual sales. Direct cost to sales ratio over the years averaged 8%with some relative stability over the years. The Company remains operationally profitable though operating expense ratio stayed elevated (averaged sustained its stability over the last 5 years at an average of 23.4% with low and high of 18.9% and 22.6%. Our strong investment case for DANGSUGAR is premised on expansion over the next 10 years. However, our 5-year projection is cautioned by the growing competition and the slowing domestic demand prompted by pressure on consumer spending. We adopted a mix of absolute and relative valuation with a 30.0% and 70.0% blend and arrived at a target price of N6.73 relative to the close price as at 12/02/2016. This translates to 18.1% upside potential and as Table 58: Stock Data and Valuation DANGSUGAR DANGSUGAR: NL Current Price (N) Target Price (N) 6.73 ACCUMULATE Upside Potential 18.1% 12-Month High (N) Month Low (N) 5.20 Outstanding Shares (bn) 12.0 Market Cap (N'bn) 68.4 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 45.6 Trailing EPS (N) 0.99 Trailing P/E (x) 5.8 Forward P/E (x) 6.7 Table 59: Financial Metrics Revenue (N'Mn) 94, , ,666.0 EBITDA (N'Mn) 15, , ,634.5 Pre-tax Income (N'Mn) 15, , ,847.3 Net Income (N'Mn) 11, , ,136.1 Total Assets (N'Mn) 92, , ,967.6 Shareholder Funds (N'Mn) 51, , ,821.0 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 60: Dangote Sugar vs NSE ASI and Consumer Goods Sector ASI Consumer Goods DANGSUGAR Equity Market Update Page 32

33 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview UNILEVER NIGERIA PLC Analysts Robert Omotunde Eronmosele Aziba Strong Personal Care Brands Solidify Revenue Growth Potential Overview est Fast Moving Consumer Goods (FMCG) Companies in Nigeria, with notable products cutting across foods (knor being the flagship) and personal care (closerobust product range has resulted in its sustainable growth over the years. The company is a subsidiary of Unilever Overseas Holdings which recently sought to increase its stake in the Nigerian Company to 75.0% through a tender offer. In 2014, the company suffered its first revenue decline in 8 years consequent on a one-off pressure resulting from rationalization of trade inventories in the year. Operational and Financial Performance -year CAGR of 4.6% between 2009 and discretionary spending as well as the solid business model of the company. In terms of OPEX, Unilever has maintained an OPEX margin of 23.8% on the average over the period. Cost to sales ratio averaged 62.4% over the same period while Net Margin averaged 8.8% over the period. In 2014, Unilever booked a contraction in revenue due to challenges emanating from the insecurity issues in Northern Nigeria that affected distribution of products in that region as this accounts for a large share of the total customer base. The general macro-economic conditions in the country have dampened Unilever earnings as seen in the results released during the year. As at Q3:2015, Cost of sales margin rose to 65.2% consequent on the cost while maintaining optimal efficiency, resulted in a 4.2% decline in OPEX. Similarly, Net margin fell to 0.3% consequent on the 92.3% plunge in PAT. Outlook and Valuation: TP Revised to N23.03 on declining Profit; Sell In Q3:2015, trailing EPS fell to N0.19 from N4 in FY:2014, following the 92% dip in topline and bottom line, hence we estimate FY:2015 EPS to settle at N0.24. We estimate FY:2015 revenue to settle around N57.4bn and a projected 5-year revenue CAGR of 4.2%. Unilever currently trades at a P/E and P/BV of 176.2x and 18.4x against a forward P/E of124.4x which signifies the stock is overpriced. We adopted a blend of absolute and relative valuation to arrive at a fair value for Unilever. Against the backdrop of our 5-year company financial forecast and market numbers, valuation shows a blended average price of N23.03 implying a 22.0% downside to current market price of N Table 61: Stock Data and Valuation UNILEVER UNILEVER:NL Current Price (N) Target Price (N) SELL Upside Potential -22.0% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 3.8 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) Trailing EPS (N) 0.19 Trailing P/E (x) Forward P/E (x) Table 62: Financial Metrics Revenue (N'Mn) 55, , ,016.1 EBITDA (N'Mn) 6, , ,334.1 Pre-tax Income (N'Mn) 2, , ,197.5 Net Income (N'Mn) 2, ,494.3 Total Assets (N'Mn) 45, , ,978.1 Shareholder Funds (N'Mn) 7, , ,305.3 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 63: Unilever vs NSE ASI and Consumer Goods Sector romotunde@afrinvest.com eaziba@afrinvest.com ext ext 319 ASI Consumer Goods UNILEVER Equity Market Update Page 33

34 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview PZ CUSSONS PLC Profitability Strained by Forex Challenges Overview within the Personal/Households division of the consumer goods sector with specific focus on personal care, home, food & nutrition, beauty and electrical products. The diversified product portfolio of the Company gives PZ presence in almost every home. Similar to by the overhanging macroeconomic challenges in the country that have weighed heavily on cost of operations. Operational and Financial Performance The Company has grown revenue at a 5-year CAGR of 3.1 %( ). Over this 5-year period, cost of sales ratio averaged 73.6% which is quite high compared to competitors (Unilever 62.4% over the same period). However, OPEX margin settled at 17.7% consequent on the improvement in efficiency that has seen OPEX decline from 13.3% in 2010 to 7.1% in In Q2:2016, topline declined 3.3% while PAT plunged 45.9% to Nbn consequent on the tougher operating environment. In addition, the forex illiquidity issues within the country also hampered production. In terms of operational efficiency, OPEX grew 7.1%in FY:2015 leading OPEX margin to expand to 22.9%. Cost to sales margin moderated to 72.8% in Q2:2016, broadly driven by a lower base effect after the 3.4% decline in cost of sales. Following the above, Net margin contracted to 2.5% from 4.6% in prior period. Outlook and Valuation: TP Revised to N17.66 as Earnings Disappoint; SELL Our outlook on PZ still remains bearish especially as the challenges which weighed heavily on earnings are expected to linger on into the year. Hence, we forecast a marginal growth of 0.1% in revenue to N73.3bn in FY: However, given the tepid growth expected in FY:2016, we project EPS to settle at the FY: 2015 level of N0.74. PZ currently trades at N21.90 with P/E and P/BV of 22.2x and 2.1x respectively. We adopted a blend of Dividend Discount Model and Residual Income Model in order to arrive at a blended fair value of N17.66 and this presents a potential downside of 19.3% hence we Analysts Robert Omotunde Eronmosele Aziba Table 64: Stock Data and Valuation PZ PZ:NL Current Price (N) Target Price (N) SELL Upside Potential -19.3% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 4.0 Market Cap (N'bn) 87.0 Market Cap ($US'Mn) Month Avg. Volume (Mn) 6-Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 74.6 Trailing EPS (N) 0.98 Trailing P/E (x) 22.2 Forward P/E (x) 29.4 Table 65: Financial Metrics Revenue (N'Mn) 73, , ,413.1 EBITDA (N'Mn) 6, , ,793.4 Pre-tax Income (N'Mn) 4, , ,604.2 Net Income (N'Mn) 2, , ,026.7 Total Assets (N'Mn) 67, , ,589.6 Shareholder Funds (N'Mn) 43, , ,038.2 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 66: PZ vs NSE ASI and Consumer Goods Sector romotunde@afrinvest.com eaziba@afrinvest.com ext ext 319 ASI Consumer Goods PZ Equity Market Update Page 34

35 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Consumer Banking Sector Goods Overview Sector Overview GUINNESS NIGERIA PLC Analyst Robert Omotunde Modupeola Sarumi Revenue Declines amidst Lower Consumer Spending ext ext 320 Overview biggest brewer in Nigeria as it controls about 27.5% of the market based on revenue. The Company is a subsidiary of the internationally established Diageo PLC which has 54.0% stake in its equity. Guinness has continued to leverage on the strength of its unparalleled portfolio of beer, non-alcoholic drinks, ready to drink (RTDs) and spirits. The Company recently acquired the right of distribution to its strategy of filling the beverage alcohol portfolio gap and compete across within that segments of the market. Operational and Financial Performance Guinness has sustained a 5.5% revenue growth rate over the last 5 years ( ) although its growth trend has been seesaw, with the most significant dip of 1% in 2014 following a peak of 22.7% in 2010 (amid its auspicious mood - 60 th anniversary of doing business in Nigeria). More pressuring is the average cost to sales ratio over the period which averaged 54.1% with high and low of 56.4% Operating expense (OPEX) margin however moderated on a 5-year average to settle at 1% (down from 21.4% in 2010 to 13.9% in 2015). Varying macroeconomic challenges hampered growth in net margin since 2010, save for the 14.5% growth in 2011, boosted overall average growth ( ) to 1%. Recent domestic headwinds triggered by both fiscal and monetary policy lapses resulted in weaker aggregate demand and compounded issues facing FMCG companies. These, together with higher logistics and it shed 10.9% in Q2:2016. Cost of sales dipped 3.8%, while cost to sales margin rose to 57.1% from 53.4% in Q2:2016. Similarly, OPEX declined 5.0% amid macroeconomic challenges in the country within the quarter under review. Consequently, PBT and PAT dipped significantly by 64.5% and 65.5% respectively resulting in a trailing EPS of 4.4x against FY: 2014 EPS of 6.6x Outlook and Valuation: TP Revised to N as CoE Increases; BUY We are moderately bullish on GUINNESS in the short to medium term Table 67: Stock Data and Valuation GUINNESS GUINNESS:NL Current Price (N) Target Price (N) BUY Upside Potential 26.0% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 1.5 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.2 Trailing EPS (N) 4.43 Trailing P/E (x) 32.1 Forward P/E (x) 15.3 Table 68: Financial Metrics Revenue (N'Mn) 109, , ,570.2 EBITDA (N'Mn) 30, , ,098.6 Pre-tax Income (N'Mn) 11, , ,214.3 Net Income (N'Mn) 9, , ,745.7 Total Assets (N'Mn) 132, , ,547.6 Shareholder Funds (N'Mn) 45, , ,560.0 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 69: Guinness vs NSE ASI and Consumer Goods Sector ASI Consumer Goods GUINNESS employed a blend of relative and absolute valuation methodologies to derive a target price of N against market price of N119.00/ share as at 12/02/2016. This presents an upside of 26.0%at a forward P/E and P/BV of 15.3x and 4.5x relative to the trailing multiples of 32.1x and 4.4x. Thus, we retain our BUY recommendation on Guinness Equity Market Update Page 35

36 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Consumer Banking Sector Goods Overview Sector Overview NIGERIAN BREWERIES PLC Brewery Giant Stays Afloat despite Tougher Operating Environment Overview: within the Breweries sector as it controls about 65.9% of the market share based on turnover. The Company is a subsidiary of Heineken N.V. of the Netherlands, having 54.1% stake in its equity. NB has continued to leverage on some of its strategic acquisition that translated to its broad presence across major geo-political zones within the country. The Company recently invested in rebranding the ed breweries in Also, NB recently raised N17.7bn under its 3- year N100.0 bn Commercial Paper (CP) programme in a bid to lower funding cost while bolstering bottom-line growth. FX volatilities and macroeconomic challenges have hampered disposable purchasing power and this is reflected in the decline in earnings. Operational and Financial Performance: On average, NB has sustained a 10.9% revenue growth rate over the last 5 years ( ) although its growth trend has been generally north - with the most significant dip (-%) in 2014 save for 2011 when it peaked 23.8%. Cost of sales ratio averaged 49.2% in the same period as the Company took advantage of its investment in locally sourced raw materials to curtail direct cost of production. Operating expense (OPEX) margin however has moderated to a 5-year average of 44.73% (down from 54.0% in 2009 to 49.2% in 2013). Net margin has however been oscillatory with a high and low of 17.0% and 14.3% in the period but averaged 15.9% throughout the period. In light of the recent domestic macroeconomic headwinds which have bitten into consumer spending and the stiff comtepid although the Company recorded 10.3% growth in revenue based on its FY: 2015 results. Cost of sales rose 14.5%, while cost to sales ratio grew to 51.3% from 49.1% in FY:2015. While revenue grew moderately, OPEX rose 14.6% implying a niche in operational leverage which if addressed could significantly improve PBT figures. Consequently, PBT and PAT dipped 11.3% and 10.5% respectively resulting in a trailing EPS of N4.25 against FY: 2014 EPS of N5.62 Analyst Robert Omotunde Modupeola Sarumi Table 70: Stock Data and Valuation NB NB:NL Current Price (N) Target Price (N) BUY Upside Potential 34.6% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 7.9 Market Cap (N'bn) Market Cap ($US'Mn) 3, Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 1.3 Trailing EPS (N) 4.80 Trailing P/E (x) 20.2 Forward P/E (x) 29.4 Table 71: Financial Metrics Chart 72: NB vs NSE ASI and Consumer Goods Sector romotunde@afrinvest.com msarumi@afrinvest.com ext ext 320 Revenue (N'Mn) 266, , ,691.1 EBITDA (N'Mn) 66, , ,887.4 Pre-tax Income (N'Mn) 54, , ,538.4 Net Income (N'Mn) 38, , ,722.5 Total Assets (N'Mn) 349, , ,578.3 Shareholder Funds (N'Mn) 171, , ,693.8 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) ASI Consumer Goods NB Outlook and Valuation: TP Revised to N as CoE Increases; BUY We believe beer demand would remain subdued given the lingering macroeconomic issues. Our target price stands at N against market price of N97.40/share as at 12/02/2016 and an upside of 34.6%at a forward P/E and P/BV of 29.4x and 5.6x relative to the trailing multiples of 20.2x and 4.5x. We retain our BUY recommendation Equity Market Update Page 36

37 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Conglomerate Banking Sector Overview UAC OF NIGERIA PLC Industry Largest Conglomerate: Losses in Subsidiaries Drag Profitability Overview Conglomerate Company in Nigeria with a diversified portfolio of products spread across the foods and beverages, real estate, paints and logistics sectors of the economy. The Foods and Beverages sector remains the major contributor to revenue accounting for 69.8% while the Real Estate (UPDC) and Paints divisions accounted for 13.7% and 11.4%respectively. However, the Paints division has been the fastest growing component of the overall portfolio with a 5-Year CAGR of 26.4% ( ). The persistent growth recorded is International partnerships. Operational and Financial Performance UACN had a 5-year CAGR of 8.7% ( ) in turnover which is in growth. Similarly the Group has maintained an average of 72.7% in terms of cost to sales ratio while OPEX margin averaged 12.9% over the 5- managing operating costs despite the challenging environment. Net margin has also remained quite impressive, averaging 11.1% over the same period. As at Q3:2015, topline was down 9.8% to N54.6bn while PAT dipped 79.4% to N1.0bn. We forecast a 13.9% decline in turnover to N73.7bn and this is further buttressed by the general macroeconomic headwinds which have taken a toll on the economic performance. UPDC was the major drag to overall performance as turnover plunged 42.0% following a massive write down on the UPDC Hotel equity investment. Consequently, OPEX margin grew to 18.9% from 13.2% in prior period. Cost of sale margin rose % to 78.0% following a 9.2% decline in cost of sales and a 9.8% fall in turnover while net margin fell to 1.8% from 7.7% in prior period. FY:2015 EPS is expected to close at N0.92 from N3.45 recorded in FY:2014 as losses from subsidiaries dragged performance. Analyst Robert Omotunde Eronmosele Aziba Table 73: Stock Data and Valuation UACN UACN: NL Current Price (N) Target Price (N) romotunde@afrinvest.com eaziba@afrinvest.com ACCUMULATE Upside Potential 1% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 1.92 Market Cap (N'bn) 37.5 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 2 Trailing EPS (N) 3.7 Trailing P/E (x) 5.3 Forward P/E (x) 21.3 Table 74: Financial Metrics ext ext 319 Revenue (N'Mn) 85, , ,547.1 EBITDA (N'Mn) 12, , ,680.5 Pre-tax Income (N'Mn) 14, , ,649.5 Net Income (N'Mn) 10,68 1, ,295.4 Total Assets (N'Mn) 129, , ,852.5 Shareholder Funds (N'Mn) 74, , ,584.4 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 75: UACN vs NSE ASI and Consumer Goods Sector Outlook and Valuation: TP Revised to N21.68 on Tepid Earnings; Hold Our outlook on UACN remains positive given the possible leverage ASI Consumer Goods UACN operation. However, we expect a slowdown in pace of growth though the group will remain profitable. Our EPS forecast for 2015 is N0.92 as we estimate a turnover of N73.7bn and PAT of N1.8bn. We employed a blend of relative and absolute valuation methodologies to arrive at our target price of N21.68 against market price of N19.50/share as at 12/02/2016. This presents an 1% upside 0.4 Equity Market Update Page 37

38 Industrial Banking Sector Goods Overview Sector Overview Industrial Goods Sector Overview When Might is Right Industry Outlook: Overweight Excess Capacity and Slowing Demand Trigger Price War Domestic cement production capacity in Nigeria has nearly tripled in the last 5 years, from 13.9MMTPA in 2011 to 37.7MMTPA in 2014, driven by massive investment in capacity by Dangote Cement Plc (DANGCEM) which added 21.3m MT/ A in the period and 2.5MMTPA added by Lafarge Africa WAPCO (including subsidiaries). Domestic demand has failed to match increasing supply - due to low per-capita consumption, high prices and weak government capital spending - leading to a buildup of excess capacity. Demand grew by 3MMT between 2011 and 2014 to 20MMT, increasing at a CAGR of 5.5% in the period relative to a 39.4% CAGR of supply, with industry utilization dropping to a record low of 52.4% in Most of the excess capacity is skewed towards DANGCEM while WAPCO and CCNN operate above 70.0% and 90.0% utilization respectively. High prices set by the price leader - and improved industry cost structure have largely held up profit margins but slowing demand from 2014 seems to have unsettled the industry balance and triggered a price war. The industry recorded the first annual decline in domestic demand in over a decade in 2014 (to 20.0MMT) from a 2013 peak of 20.1MMT. The price leader in the industry announced a price cut in 2014 but was later reversed in H1:2015 with prices of other brands moving in lockstep manner. Two price cuts have been announced by DANGCEM between Q3:2015 and Q1:2016, bringing sales price per tonne to N26,000 (from a N33,320 in H1:2015) with WAPCO South West Nigeria product selling at a slight discount and Northern operators at a premium. What is the Medium Term Play in Pricing? and the industry should have recorded a positive growth in 2014 and 2015 relative to an actual 4.8% contraction in 2014 and estimated 4.7% dip in The crux remains that slowing real wage growth and macroeconomic headwinds affecting traditional drivers of volume in Nigeria - consumer demand and private investment - have major impacts on demand. The pect expansionary government CAPEX on cement intensive construction activities to offset the slowdown in consumer demand and fuel a rebound in volumes to 20.0MMT in In the medium term, we expect prices to continue to head downwards with projects estimated to add 6.5MMT/pa to domestic capacity in the next 2 years at different stages of completion. The capacity additions will outpace our estimated 4.9MMT increase in demand over the same period, leaving more capacity begging for markets and a scramble for market share. More price cuts may be inevitable in such scenario Themes: Tepid Utilization, Product Differentiation, Market Diversification, Size and Cost Leadership With low levels of utilization and falling prices in Nigeria, market share and cost management are going to matter more to protect margins and boost competitive position. We expect industry utilization in Nigeria to bottom out at 5% in 2015, improve marginally to 2014 levels (52.4%) in 2016 and remain within the mid-50.0% range over the next four years as supply capacity continues to expand. We have estimated additional capacity of 17.5MMTPA over the next four years driven by DANGCEM (9.0MMTPA), WAPCO South West Operation (5.0MMTPA), Ashaka (3.0MMTPA) UNICEM (2.5MMTPA) and CCNN (1.0MMTPA). Our industry cost outlook is mixed but we believe the industry is already behind peak cost with high gas and coal utilization in Nigeria coupled with the bearish outlook for most energy inputs. CCNN remains the only Nigerian operator with a high degree of Low Pour Fuel Oil (LPFO) usage (65.0% in 2014) but that is expected to change with increasing utilization of Biomass fuel and plan to build a coal plant. The effect of lower energy prices will buffer the impact of lower prices of cement in Nigeria on margins but not completely offset it due to the high operational leverage in the industry and relatively lower margins in other regions of operation. Thus, we expect industry EBITDA margin to decline 1.6% in 2015 and 1.1% in 2016 on a weighted average basis. Equity Market Update Page 38

39 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Industrial Banking Sector Goods Overview Sector Overview Chart 76: Industrial Goods Coverage Price Movement (Rebased) Chart 77: Industrial Goods Coverage Return Actual and Forecast 140.0% 130.0% 120.0% All Share Index CCNN WAPCO DANGCEM 30.0% 20.0% Dangote Cement Lafarge CCNN NSE ASI Industrial Index 25.5% 20.2% 14.9% 110.0% 100.0% 90.0% 80.0% 70.0% 60.0% 10.0% 0.0% -10.0% -20.0% -30.0% 1.3% -8.7% -11.6% -10.0% -16.1% -15.0% -17.4% -16.0% -30.0% 2.2% -0.2% -5.6% 2014 Return 2015 Return 12M Upside/Downside As the struggle for market share continues and margins contract, we favour companies with strong volume growth potential and cost leaders with capacity to grow EPS and justify our earnings based valuation multiple. Industry price and weak operating margins, seems more like a drag on EPS growth but positive for cash flow. The Nigerian subsidiaries, Ashaka remains well placed to benefit from the reinvestment in North East and we expect UNICEM to turn in profit in due to constrained capacity and falling prices. Hence, our top pick is Dangcem with 25.5% upside to our 12-Month value in Nigeria on forward earnings. The stock has consequently converged towards our value target. We have an Overweight outlook on the sector as we expect it to outperform the benchmark index by 19.0% to 25.0% based on our bullish outlook for DANGCEM and positive outlook for sector dividend. Table 78: Industrial Goods Sector Valuation Metrics EPS (N) ROE (%) P/E (x) P/BV (x) Dividend Yield (%) E 2016F E 2016F Trailing Forward Trailing Forward Current Expected Dangcem WAPCO CCNN Equity Market Update Page 39

40 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Industrial Banking Sector Goods Overview Sector Overview CEMENT COMPANY OF NORTHERN NIGERIA (CCNN) PLC Pricing War a threat on Market Share and Margins; Hold Analyst Omotola Abimbola oabimbola@afrinvest.com ext 316 Overview industry, with 2.3% sales of our industry coverage universe and 1.3% leverages on having the only cement manufacturing plant in North West Nigeria (located in Sokoto State) to exercise market power. The Company is currently on an expansion drive to triple capacity to1.5mmt/pa by 2017 and attain energy self-sufficiency. Operational and Financial Performance The Company recorded a 6.3% decline in sales to N11.5bn in Q3: 2015 which is most likely due to lower volume as cement prices were high for most parts of the period. Capacity utilization rate dropped to the mid-90% in 2014 due to weaker demand, a long maintenance stop and our estimate points to lower-90% utilization rate in Q3:2015. The Company however improved on cost management as Cost to sales ratio moderated 3.0% Y-o-Y to 6% in Q3: 2015, which we attribute to more efficient energy cost structure achieved by leveraging on alternative energy sources. Thus, despite 2.5% increase in OPEX margin (to 17.8%), operating profit declined only 3.2% (to N2.5bn) whilst operating margin improved to 22.1% from 21.4%. PBT dropped 4.8% to N2.4bn due to higher finance expenses. EPS to trend lower on Lower Sales; Hold We expect capacity utilization rate to stay in the lower-90% in Q4:2015 and 2016 while the stiffer price competition in the industry remains a major headwind on margins for fringe players like CCNN with relatively higher cost ratios. Nevertheless, the likely completion of a capacity expansion programme in 2017 and improvement in energy self-sufficiency (work going on to improve power generation to 16MW from 12MW) would support capacity to defend market share in the medium term and reduce cost pressure. Increasing finance leverage will increase servicing cost but we expect dividend to be maintained as cash flow remains positive. We estimate sales and EPS to decline 7.3% and 5.4% to N14.0bn and N1.44 respectively in 2015 and forecast a 2.2% and 5.6% decline in 2016 to N13.7bn and N1.40 respectively. Our 12-month value target has been revised to N9.58 based on a relative valuation one year forward pricing of 6.8x P/E, implying the stock is fully priced at current price with a 5.1% upside. Key risks to our valuation include more aggressive price competition and delay in capacity expansion. Table 79: Stock Data and Valuation CCNN CCNN NL Current Price (N) Target Price (N) 9.58 HOLD Upside Potential 5.1% 12-Month High (N) Month Low (N) 7.31 Outstanding Shares (bn) 1.3 Market Cap (N'bn) 12.1 Market Cap ($US'Mn) 6 6-Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Th) 8.7 Trailing EPS (N) 1.46 Trailing P/E (x) 6.6 Forward P/E (x) 6.8 Table 80: Financial Metrics Revenue (N'Mn) 15, , ,708.4 EBITDA (N'Mn) 3, ,32 3,237.6 Pre-tax Income (N'Mn) 2, , ,385.3 Net Income (N'Mn) 1, , ,765.1 Total Assets (N'Mn) 15, , ,307.6 Shareholder Funds (N'Mn) 9, , ,047.8 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 81: CCNN vs NSE ASI and Industrial Goods Sector 1.3 ASI Industrial Goods CCNN Equity Market Update Page 40

41 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Industrial Banking Sector Goods Overview Sector Overview DANGOTE CEMENT PLC Expansion Strategy to Drive Price and Earnings Momentum; Buy Overview player in the Nigerian cement manufacturing industry with 77.7% and 61.6% of our coverage universe capacity and sales volume in integrated and grinding plants in 6 countries (13.3MMT/pa by capacity) between 2014 and 2015, boosting capacity to 41.5MMT. DANGCEM is currently organized along three regional business segments comprising of Nigeria, West & Central Africa (WCA) and South & East Africa (SEA). Operational and Financial Performance Sales rose 17.8% Y-o-Y to N365.5bn in Q3: 2015, driven by stronger sales in WCA (up 487.8% Y-o-Y to N28.8bn) and SEA (up N436.4% Y-o-Y to N41.3bn) regions which doused the Impact of a 0.7% drop in Nigerian sales. The stronger sales in SEA and WCA was due to increased sales volumes in new plants across both regions and market share gained in South Africa. Nigerian sales were marginally down on weaker demand which led to a 5.6% dip in volume; partially offset by higher prices in H1:2015. Despite lower energy cost, Cost of sales and OPEX margins rose 2.3% and 2.7% Y-o-Y to 38.0% and 15.5% which we suspect was due to relatively lower cement pricing and capacity build-up in the new regions of operation. Operating profit grew 6.8% Y-o-Y to N173.5bn while lower interest and tax burdens supported a 12.5% Y-o-Y PAT growth to N158.0bn. Higher Sales Volume to douse Impacts of Nigeria Price Cut; Buy Sales volume in Nigeria are expected to trim further in Q4:2015 (FY: 2015 forecast: 12.1MMT) - due to weak consumer spending - and margins to compress on the back of an 18.0% price cut in September. Sales will gain traction in other regions (SEA and WCA) and we estimate FY:2015 revenue to grow 18.4% Y-o-Y. We expect higher sales and operating margins to pare operating profit growth to 12.0%, while lower effective tax rate (due to shift in production to lines in Obajana and Ibese benefiting from pioneer tax status) and higher finance income should buoy EPS by 19.0% Y-o-Y to N11. We expect sales volumes to grow 28.3% to 22.1MMT in 2016 on export drive to West African countries neighbouring Nigeria and higher capacity utilization in WCA and SEA. The full effect of the price cut in Nigeria would limit the upside from higher sales volume and pressure margins, thus revenue is forecast to grow 12.0% Y-o-Y (to N519.4bn) and EPS by 7.4% Y-o-Y to N12.04 in Our valuation multiple factor prices DANGCEM at 15.3x forward P/E and a 12-Month Target Price of N This represents a 25.5% upside Analyst Omotola Abimbola oabimbola@afrinvest.com ext 316 Table 82: Stock Data and Valuation DANGCEM DANGCEM: NL Current Price (N) Target Price (N) BUY Upside Potential 25.5% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 17.0 Market Cap (N'bn) 2,496.4 Market Cap ($US'Mn) 12, Month Avg. Volume (Mn) 6-Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) Trailing EPS (N) Trailing P/E (x) 14.1 Forward P/E (x) 12.2 Table 83: Financial Metrics Revenue (N'Mn) 391, , ,353.9 EBITDA (N'Mn) 223, , ,803.2 Pre-tax Income (N'Mn) 184, , ,609.3 Net Income (N'Mn) 160, , ,168.9 Total Assets (N'Mn) 984, ,116, ,207,799.7 Shareholder Funds (N'Mn) 591, , ,064.0 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 84: Dangote Cement vs NSE ASI and Industrial Goods Sector ASI Industrial Goods DANGCEM Equity Market Update Page 41

42 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Industrial Banking Sector Goods Overview Sector Overview LAFARGE AFRICA PLC Valuation Fully Priced amidst Pricing Headwind; Hold Analyst Omotola Abimbola ext 316 Overview market share by sales volume and 21.0% of our coverage installed capacity in The Company, which is majority owned by Lafarge Holcim, completed an inorganic expansion and restructuring project last year leading to the consolidation of the South Africa and Nigeria business interests of Lafarge Holcim under the Company, with a combined installed processing capacity of 11.5m MMT/A amongst other products. Strong Sales and Pricing in H1:2015 softens impact of Q3 Slowdown -o-q and 6.9% Y-o-Y to N51.4bn, reeling from the impacts of lower sales volume and prices in Nigeria and South Africa. Nigeria sales dropped 5.3% Y-o-Y and 18.5% Q-o-Q while South Africa was weaker by 11.4% Y-o-Y and 4.9% Q-o-Q. Although the 2 major producers in Nigeria reported lower volumes in Q3 attributable to the slow pace of economic activity, WAPCO lost some market share, which we suspect was due to an 18.0% price cut by DANGCEM in September. Despite the weak 3 rd Quarter, YTD sales were still strong, up 5.5% Y-o-Y (to N168.1bn) on the back of the high prices and market share gained in Nigeria in H1:2015. Even as management suggested efficiency in energy cost in Q3:2015 (with high gas and coal energy utilization across its 3 plants in Nigeria), bottom line was pressured by non-recurring items: N2.5bn write-down related to Ashaka security concerns and N1.0bn for repair of Kiln in South Africa. This led to a 4.1% Y-o-Y compression in EBIT margins to 20.3% while PBT fell 11.6% Y-o-Y to N33.7bn. Volumes and Prices to remain Pressured in 2016; Hold Nigeria to continue to gain traction in Q4:2015 and 2016, sales are likely to come in lower in Q4. WAPCO prices have trended further downwards in South West Nigeria (which contributes over 50.0% to sales) to N25,200/tonne (from average N29, /tonne in 2014). We expect demand to be stronger in North East Nigeria (Ashaka) government CAPEX could deliver medium-term dividend but short term outlook for demand remains weak. We expect sales to grow 4.5% in 2015 (to N215.1bn) and EPS to decline 6.5% to N7.30 on lower mark-up in Q4 and higher cost margins. We forecast sales to decline 2.5% while EPS moderates to N6.80 in 2016 on price headwinds although we expect volumes to increase marginally (from Ashaka and RMC). Our relative valuation factor, one-year forward P/E of 12.0x, yielded a 12-Month TP of N This indicates the stock is fully priced with a 2.2% upside, thus, we have placed a Table 85: Stock Data and Valuation WAPCO WAPCO NL Current Price (N) Target Price (N) HOLD Upside Potential 2.2% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 4.6 Market Cap (N'bn) Market Cap ($US'Mn) 1, Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.7 Trailing EPS (N) 7.12 Trailing P/E (x) 1 Forward P/E (x) 11.8 Table 86: Financial Metrics Revenue (N'Mn) 205, , ,757.3 EBITDA (N'Mn) 53, , ,787.9 Pre-tax Income (N'Mn) 41, , ,418.7 Net Income (N'Mn) 34, , ,955.9 Total Assets (N'Mn) 305, , ,611.6 Shareholder Funds (N'Mn) 191, , ,723.3 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 87: WAPCO vs NSE ASI and Industrial Goods Sector ASI Industrial Goods WAPCO Equity Market Update Page 42

43 Insurance Banking Sector Overview Insurance Sector Overview Exploring the Enormous Micro-Insurance Market Industry Outlook: Overweight The Nigerian insurance market is still largely unexplored with less than 1.0% of the adult population with insurance cover as at 2015 relative to comparable markets such as South Africa (16.0%) and Kenya (3.4%) according to a survey carried out by Access to Insurance Initiative (AII). Although regulatory efforts to enhance insurance penetration over the last 5 years has produced notable result, potential for growth in the sector remains staggering. Data from the National Insurance Commission (NAICOM) indicated that insurance portfolio remains overly reliant on corporate and compulsory accounts with non-life policies accounting for 71.0% of gross premium while life policies represent 29.0% of gross premium. Mandatory motor (24.0%) and oil & gas insurance (21.0%) remained the driver in the non-life space. In addition, the Nigerian insurance industry can only boast of a tiny portfolio of voluntary products and coverage. Despite recent introduction of Takaful-Insurance (an insurance policy that incorporates elements of mutuality and ethical finance considerations based on Sharia law), the micro-insurance market remains nearly unexplored. From the regulatory standpoint, the year 2015 witnessed the exit of Mr. Fola Daniel whose tenure as the Commissioner for administration include: Increase in the number of policy holders from 0.5m in 2010 to more than 1.5m as at 2015; Industry gross premium increased from N157.2bn in 2008 to N276.5bn in 2013, thus insurance penetration rate (Gross premium to GDP) improved marginally from 0.5% to 0.7%; being the most recent; Increase in local capacity for oil and gas risks from10.0% to 48.0%; The launching of the Micro Insurance Scheme and the Takaful Insurance. Alhaji Mohammed Kari who was Deputy Commissioner (Technical) at NAICOM succeeded Mr. Fola Daniel. We expect this in -house transition to ensure a continued enforcement of regulatory guidelines as put in place by the erstwhile Commissioner. Notwithstanding an impressive 12.0% (CARG) Gross premium growth was recorded between 2008 and 2013, Insurance Penetration in Nigeria remained very weak, with Gross premium to GDP ratio below 1.0%. Available data from NIACOM indicated that claims ratio improved to 41.9% in 2013 from 24.0% in 2010, an indication of an increased value added to clients over the period. This however remained low when compared to other Sub-Saharan countries - Kenya (59.4%), Uganda (53.5%) and South Africa (61.0%). As against improvement in claims ratio, expense ratio expanded from 24.2% in 2010 to 45.6% in 2013 relative to a range of 20%-35% in comparable markets, thus combined ratio settled at 87.5%. Overall implication of this is that the significant improvement in gross premium results majorly from aggressive mobilization of premium at the expense of risk absorbing capability and efficiency. If unchecked, this could worsen the Unlisted player, Leadway Assurance PLC remained the industry leader with a market share of 10.7%, closely followed by Custodian and Allied Insurance with 9.5%. AXA Mansard (5.8%), AIICO (5.2%), NEM (4.9%) and Sovereign Trust Insurance (4.8%) followed in that order. Our coverage is limited to four of the listed players (Custodian and Allied Insurance PLC, AXA Mansard PLC, AIICO Insurance PLC and Continental Reinsurance PLC). On the basis of Q3:2015 numbers, CUSTODYINS recorded the best performance in the sector across operating metrics. The Insurer posted a net margin of 25.1% relative to peer average of 17.4%, expense ratio was 21.0% compared to 29.9% average for peers, and a combined ratio of 63.1% as against 80.0% peer average. AIICO followed with net margin of 20.4%, expense ratio of 27.7% and combined ratio of 86.8%. Although expectation for better than average performance is Equity Market Update Page 43

44 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Insurance Banking Sector Sector Overview Overview -o-y in 2015), AIICO and CONTINSURE followed closely with Y-o-Y price appreciations of 12.3% and 1% respectively, while Mansard declined 13.5% in the same period. Chart 88: Insurance Coverage Price Movement (Rebased) Chart 89: Insurance Coverage Return Actual and Forecast ASI AIICO Insurance CONTINSURE 40.0% 30.0% 20.0% 10.0% AIICO CONTINSU MANSARD NSE ASI INSURANCE 3% 12.3% 1% 18.7% 16.8% % % -20.0% -30.0% -3.6% -16.1% -20.9% -15.9% -17.4% -5.2% -9.7% 2014 Return 2015 Return 12M Upside/Downside Sector Outlook and Valuation We expect gross premium growth to stay positive in 2016, albeit modest given constraints in the system. While macroeconomic challenges remain a critical concern, demographic attractiveness and low insurance penetration rate in Nigeria accentuates the compelling growth potential of the sector. We see further merger and acquisition activity (as witnessed in recent years) driving performance in the sector. Meanwhile, tighter regulatory activities which has brought Insurance as well as the recent claims payment guidelines is expected to strengthen recent gains observed in the sector. Table 90: Insurance Sector Valuation Metrics EPS (N) ROE (%) P/E (x) P/BV (x) Dividend Yield (%) E 2016F E 2016F Trail- Forward Trailing Forward Current Expected AIICO CUSTODYINS CONTINSURE MANSARD Equity Market Update Page 44

45 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Insurance Banking Sector Overview AIICO INSURANCE PLC Still the Life Insurance Leader Analyst Olawale Olusi ext 318 Overview: pensions management and asset management services in Nigeria with market-leading operations in life assurance and annuity, general insurance and special risks. AIICO maintains a balanced portfolio between life (51.4%of gross premium) and general insurance (48.6%) compared to the industry where the proportion of general insurance to life stands at 70.9% to 29.1% of gross premium. Operational and Financial Performance In 2014, the Group posted an outstanding 42.6% Y-o-Y growth in Gross Premium Written (GPW) from N23.6bn to N33.6bn (vs. 5-Year CAGR of 17.5%). However, Gross Premium Earned (GPE) GPE contracted by 10.2% Y-o-Y from N23.3bn to N20.9bn (vs. 5-Year CAGR of 7.4%) in the same period as unearned premium surged from N286.6m in 2013 to N12.7bn in As at Q3:2015, GPW and GPE declined 7.9% and 7.1%Y-o-Y respectively. Thus, we expect FY:2015 GPW growth to stay modest at 8.0%. Total assets however rose 22.6% while insurance contracts and investment contract liabilities increased 27.3% and 3.6% in that order. Overall outlook for 2016 is expected to remain benign given a soft macroeconomic outlook. Consequently, we project topline at 9.0% for Total expenses expanded 22.3% from N7.1bn in Q3:2014 to N8.6bn in Q3:2015 due to 27.5% and 12.5% jump in claims expense & underwriting expense respectively. Thus, claims & expense ratio swelled to 59.2% and 27.7% from 45.0% and 23.8% respectively increasing combined ratio (claims & expense Ratio) to 86.1% from 68.8%. Overall operating environment in 2016 points toward higher operating expenses, thus we recommend a review current expense lines to moderate combine ratio and improve performance going forward. Outlook and Valuation We expect GPE growth to stay modest for AIICO in 2016 given the overall constraint in the economy and the significance of life policy on underwriting ratios may hurt profitability in On the basis of the above, we review our model assumptions for the Group adopting a blend of absolute and relative valuation models. AIICO does not have a history of consistent dividend payment, hence our estimates placed a lower weighting on dividend discount model. Overall, we arrived at a 12-month target price of N1.08/share for AIICO which implies a 29.6% upside when compared to our cut off price of N3 as at 12/02/2016. Thus, we place a BUY rating on AIICO. Table 91: Stock Data and Valuation AIICO AIICO:NL Current Price (N) Target Price (N) 1.08 BUY Upside Potential 29.6% 12-Month High (N) Month Low (N) 0.71 Outstanding Shares (bn) 6.9 Market Cap (N'bn) 5.8 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 7.0 Trailing EPS (N) 1.12 Trailing P/E (x) 2.5 Forward P/E (x) 3.0 Table 92: Financial Metrics Gross Premium (N'Bn) Underwriting Profit (N'Bn) PBT (N'Bn) PAT (N'Bn) Assets (N'Bn) Insurance Contract (N'Bn) Net Assets (N'Bn) Resinsurance rate (%) Claims Ratio (%) Expense Ratio (%) Combine Ratio Net Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) EPS Yield (%) Div. Yield (%) Chart 93: AIICO vs NSE ASI and Insurance Sector 1.6 ASI Insurance AIICO Equity Market Update Page 45

46 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Insurance Banking Sector Overview AXA MANSARD PLC Analyst Olawale Olusi ext 318 Overview: Mansard Plc became a member of AXA a France based global insurance and asset management group - in This was followwhich holds 77.0% stake in Mansard Insurance Plc. AXA Mansard offers Life and Non-life insurance services. Mansard also offers medical insurance, asset management and pensions administration services through its 3 subsidiaries; AXA Mansard Health Limited, AXA Mansard Investments Limited and AXA Mansard Pensions Limited. Operational and Financial Performance: In line with 5- Premium Written (GPW) expanded 28.0% Y-o-Y to N17.4bn from N13.5bn in Gross Premium Earned (GPE) also grew 19.7%Y-o-Y to N15.0bn from N12.5bn. In Q3:2015, GPE declined 8.0% to N13.5bn (relative to N14.7bn in Q3:2014) due to economic pressures but Net Premium Earned improved 12.0% to N7.3bn in the same period. Net income in 2014 amounted to N2.9bn, up 24.2% from N1.9bn in Net income also expanded 27.6% in Q3:2015 to N1.7bn. Although recent membership into the AXA Group signals possible operational and management efficiency, we are of the view that pressured macroeconomic outlook may constrain performance in 2016, thus we stood at N5bn, up 12.7% Y-o-Y from N44.9bn in prior period. Insurance contract also increased 21.1% Y-o-Y to N13.7bn even as investment contracts jumped 189.3% N13.9bn from N4.8bn within the same period. reinsurance rate increased to 45.9% in Q3:2015 from 39.6% in FY:2014. Also, claims ratio rose to 57.3% in Q3:2015 from 43.4% and 45.4% in Q3:2014 and FY:2014 respectively. Thus, underwriting eased to 17.1% as at Q3:2015 from 17.6% and 22.1% in Q3:2014 and FY:2014 while net margin stood at 1% in Q3:2015 relative to 7.7% and 16.8% in Q2:2014. Outlook and Valuation On the basis of macroeconomic pressures on topline growth and likely constrains to improvement in margins, we do not expect market sentiment on Mansard to change significantly. Accordingly, our FY: 2015 expectation for GPE growth is expected at 8.8%. Using a combination of relative and absolute valuation methodologies, our model puts 12- month target price at N2.43/share. Relative to market price of N2.15./share as at 12/02/2016, this portends a potential Table 94: Stock Data and Valuation MANSARD MANSARD:NL Current Price (N) Target Price (N) 2.43 ACCUMULATE Upside Potential 13.1% 12-Month High (N) Month Low (N) 2.00 Outstanding Shares (bn) 10.5 Market Cap (N'bn) 22.6 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 18.0 Trailing EPS (N) 0.12 Trailing P/E (x) 18.7 Forward P/E (x) 8.6 Table 95: Financial Metrics Gross Premium (N'Bn) Underwriting Profit (N'Bn) PBT (N'Bn) PAT (N'Bn) Assets (N'Bn) Insurance Contract (N'Bn) Net Assets (N'Bn) Resinsurance rate (%) Claims Ratio (%) Expense Ratio (%) Combine Ratio ROE (%) ROA (%) EPS (N) DPS (N) EPS Yield (%) Div. Yield (%) Chart 96: AXA Mansard vs NSE ASI and Insurance Sector ASI Insurance MANSARD Mansard. Equity Market Update Page 46

47 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Insurance Banking Sector Overview CONTINENTAL RE-INSURANCE PLC Analyst Olawale Olusi ext 318 Overview: commenced business as a general reinsurer in 1987 providing life and non-life reinsurance to more than 200 insurance companies in more than 50 countries across Africa. With more than 25 years history in the reinsurance space, the Company prides itself as a torchbearer of the African reinsurance industry. The business is serviced from 4 regional offices across Africa - Lagos, Douala, Abidjan and Tunis covering the Anglophone, Francophone, Central and Northern Regions respectively. Continsure is the larger of the 2 reinsurance outfits in Nigeria with 96.0% share of gross reinsurance premium and 7.0% of the broader industry gross premium. Operational and Financial Performance: Gross Premium Written (GPW) increased 7.4% in 2014 from N15.1bn to N16.2bn. Non-life business contributed 88.9% to GPW in 2014 relative to 86.9% in Nigeria contributed 60.0% of non-life busi- (7.0%) followed in that order. Life business revenue declined 26.0% Y-o-Y in 2014 to pare contribution to 12.8% from 18.6% in Net income tumbled 5% to N0.9bn in 2014 from N1.8bn in 2013 due to 1% surge in total underwriting expenses. In Q3:2015, GPW expanded 26.0% to N15.1bn; Gross Premium Earned (GPE) also rose 25.8%, settling at N14.7bn. Notwithstanding a 25.3% increase in total underwriting expenses, 9 months net income improved 12.7% to N1.5bn in Q3:2015 from N1.4bn in Q3:2014 due to significant inflows from other income and foreign exchange gains. In terms of underwriting ratios, claims ratio reinsurance rate increased slightly to 12.2% in Q3:2015 from 12.1% in 2014, claims & expense ratios also expanded to 49.1% and 41.1% in Q3:2014 from 48.5% and 45.9% in 2014 respectively. Thus, combined ratio settled at 90.1% to shrink underwriting and Net Margins to 9.7% and 11.6% respectively in Q3:2015. Table 97: Stock Data and Valuation CONTINSURE CONTINSU: NL Current Price (N) Target Price (N) 1.43 BUY Upside Potential 43.2% 12-Month High (N) Month Low (N) 0 Outstanding Shares (bn) 10.4 Market Cap (N'bn) 10.4 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 16.0 Trailing EPS (N) 0.15 Trailing P/E (x) 6.7 Forward P/E (x) 5.8 Table 98: Financial Metrics Gross Premium (N'Bn) Underwriting Profit (N'Bn) PBT (N'Bn) PAT (N'Bn) Assets (N'Bn) Insurance Contract (N'Bn) Net Assets (N'Bn) Resinsurance rate (%) Claims Ratio (%) Expense Ratio (%) Combine Ratio ROE (%) ROA (%) EPS (N) DPS (N) EPS Yield (%) Div. Yield (%) Chart 99: Continental Re vs NSE ASI and Insurance Sector Outlook and Valuation We expect the geographical and competitive advantage inherent in ASI Insurance CONTINSURE performance going forward. Despite a soft outlook for the broader sector, we project topline growth at 13.0% in FY:2016. However, net income may be constrained by macroeconomic bottlenecks. Using our combination of relative and absolute valuation models, we project 12-month target price at N1.32/share. This implies a 31.9% upside relative to market price of N1.00/share as at 12/02/2016. Thus, Equity Market Update Page 47

48 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Insurance Banking Sector Overview CUSTODIAN AND ALLIED PLC Ahead by Efficiency Analyst Olawale Olusi ext 318 Overview: is an investment holding company with interest in life and non-life insurance, pension fund administration, trusteeship and property holding ventures. The Group owns 100.0% stake in Custodian and Allied Insurance Ltd, Custodian Life Assurance Ltd and Custodian Trustees Ltd, 76.5% stake in Crusader Sterling Pensions and a 24.4% interest in Leadway Pensure PFA Ltd. Non-life insurance contributes 81.9% to premium income with Oil and Gas Insurance accounting for 55.3% of non-life insurance. Operational and Financial Performance -o-y from N24.6bn in 2013 to N25.2bn in This was broadly driven by premium income which contributed 74.1% to top line as at Investment income followed with 10.0%, others accounted for 15.9%. As at Q3:2015, gross premium rose 10.2% Y-o-Y to N20.4bn despite operating challenges in the system. Operating and management cost also increased by 9.6% but OPEX margin steadied at 79.0% in the same period. Accordingly, Q3:2015 profit improved 19.5% to N3.8bn from N3.2bn even as net margin for period expanded to 18.5% from 17.1% in prior period. In addition, total assets expanded 14.3% to N55.8bn in Q3:2015, while insurance and investment contract liabilities improved 14.3% and 20.1% to N18.1bn and N3.6bn respectively. Given an impressive 9 months result, we expect a better than industry average full year performance for the Group while projecting a 15.0% growth for top-line in A review of the underwriting ratios indicated that as at Q3:2015, better than peer averages of 51.9% and 29.9% respectively. Thus, combined ratio settled at 63.1% well below peer average of 75.5%. Reinsurance cost (12.2%) is also the least amongst peers while underwriting margin stayed well above peer average of 17.4% at 25.1%. Table 100: Stock Data and Valua- CUSTODYINS CUSTODYI: NL Current Price (N) Target Price (N) 4.18 HOLD Upside Potential 4.5% 12-Month High (N) Month Low (N) 3.65 Outstanding Shares (bn) 5.9 Market Cap (N'bn) 23.5 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 41.4 Trailing EPS (N) 2 Trailing P/E (x) 6.5 Forward P/E (x) 4.3 Table 101: Financial Metrics Gross Premium (N'Bn) Underwriting Profit (N'Bn) PBT (N'Bn) PAT (N'Bn) Assets (N'Bn) Insurance Contract (N'Bn) Net Assets (N'Bn) Resinsurance rate (%) Claims Ratio (%) Expense Ratio (%) Combine Ratio ROE (%) ROA (%) EPS (N) DPS (N) EPS Yield (%) Div. Yield (%) Chart 102: Custodian and Allied vs NSE ASI and Insurance Sector Outlook and Valuation On the basis of operating efficiency and performance consistency, CUSTODYINs remains our choice player in the other financial services space and particularly the insurance sector. We project a top line growth of 15.0% for the Group in 2016 while acknowledging the position of the Group as a cost leader in the sector. Using a blend of ASI Insurance CUSTODYINS 12-month target price at N4.2/share. This points to a 4.5% upside potential compared to market price as at 12/02/2016, thus, we place HOLD recommendation on the stock. 0.4 Equity Market Update Page 48

49 Oil Banking and Gas Sector Sector Overview Overview Oil & Gas Sector Overview Delayed Policy Implementation Marred Sector Growth Industry Outlook: Neutral Crises in the global oil & gas space persist as global oil prices remain on the downward slide touching a 13-year low of US$30.0/b in January 2016 relative to 13-year high of US$146.1/b in March 2008 and an average US$77.9/b over the same Total global oil demand increased marginally by 1.7% or 1.5mb/d to 92.9mb/d while supply decreased by 0.34mb/d to 95.2mb/d in The tussle for market share between OPEC producing countries and Shale oil producers intensified in Consequently, the sector experienced significant cut of non-essential operational and capital investment. According to a report by Wood Mackenzie, a total of 68 projects with capital investment valued about US$380.0bn, as well as 27.0bn barrels of oil equivalent (boe) of commercial reserves were postponed in 2015 by the global oil & gas industry on the back of the slump in the price of crude oil. Re-organisation of the NNPC The efforts of the government to restructure the NNPC to ensure efficiency has been yielding positive results. Consequent- 6.8mbpd and projected to increase to over 10.0mbpd in the first quarter of In a bid to ensure seamless distribution of petroleum products, the NNPC intends to expand the market share of its retail business to a substantial level from the current 12.0% by building an NNPC retail fuel station in every Senatorial district in the country in Additionally, the crude-for-products exchange arrangement (crude swap) will be replaced by a Direct-Sale Direct-Purchase (DSDP) in line with global best practices. The New Bride: Price Modulation Approach In a bid to improve transparency in the petroleum sector, the Petroleum Products Pricing Regulatory Authority (PPPRA) introduced a quarterly price adjustment price modulation approach- to reflect import cost variables. This is expected to address corrupt practices and block leakages associated with the current subsidy management regime. The PPPRA product pricing template as at 12/02/2016 showed an expected open market price of N75.48/litre relative to the retail market price of N86.50 /litre in February, translating to a margin of N11.02 for the government which is saved in an escrow account to cushion effect of an eventual oil price rebound (NNPC sells at N86.00/litre so its margin would be below N11.00). Crystal Ball: Cut in Capex to Boost Oil Prices; Speedy Reform Passage Anticipated The outlook on crude oil prices remains bleak in 2016, albeit a marginal rebound is expected at the later half of the year due to expected cuts in capital investment by international oil companies as well as the fall in active drilling rigs in the US and Canada. We expect dialogue between OPEC and non-opec to ensure oil supply is curtailed to halt further slide in oil prices. In the domestic front, we anticipate the speedy passage of reforms across the value chains of the petroleum sector to ensure effectiveness. Also, the eventual deregulation of the downstream sector in 2016 will provide opportunities for new players in the industry which will invariably ease disruptions of Premium Motor Spirit (PMS) supply. We expect a new draft of the Petroleum Industry Bill (PIB) will be presented to the National Assembly for passage, although may be signed into law in parts. Moreover, to minimize interruptions on PMS supply, we expect government to come up with new strategy to safeguard the pipelines. We expect the government to ramp up production capacity of the existing 4 refineries - a total installed daily capacity of 445,000 b/d in which have suffered from poor maintenance and operational failures in the past. Production at full capacity is expected to provide over 50.0% of the total daily estimated consumption of 40.0mlpd, hence reducing dependence on import as well as requirement for foreign exchange. The recent effort to introduce technology to secure the pipelines will minimise vandalisation, hence increase distribution and minimise disruptions in the availability of petroleum products. Subsequently, we expect positive growth in top line of the petroleum marketing companies in Equally, with the price modulation template which has technically eliminated subsidies, we expect a significant drop in finance cost, hence a boost in PAT. Equity Market Update Page 49

50 Dec-14 Jan-15 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan % -16.2% -16.1% -63.4% -89.4% -17.4% -6.2% -5.1% 33.2% 11.8% 33.2% 1.3% 3.2% 1.3% 24.8% 9.7% 7.9% % 73.8% 93.6% 133.1% Oil Banking and Sector Gas Sector Overview Overview Chart 103: Oil & Gas Coverage Price Movement (Rebased) Chart 104: Oil & Gas Coverage Return Actual and Forecast 180.0% All Share Index Conoil Mobil Oil and Gas Index Forte Oil Oando R E T U R N R E T U R N 1 2 M U P S I D E / D O W N S I D E 140.0% 100.0% 60.0% 20.0% CONOIL OANDO TOTAL NSE ASI O&G Index MOBIL FO However, an analysis of major contribution to gross revenue indicates that petroleum products alone contribute above 80.0% to gross revenue of downstream companies. A comparison of average gross margins indicates average gross margin of 14.8% for companies within our coverage is lower than 28.1% of East African oil and gas companies. Our coverage is currently within the downstream sector of the oil & gas space. By market capitalisation, FO ranks as the most capitalised with 54.6% of total industry capitalisation while MOBIL, TOTAL, OANDO and CONOIL followed with 7.7%, 7.3%, 7.3% and 2.2% respectively. Worthy of note is the consistent dividend history of the companies save for Oando. The oil & gas sector outperformed the NSE-ASI in 2015 and 2016 YTD returning -6.2% and % relative to -17.4% and -13.8% for the market. Against Q3:2015 numbers, CONOIL ranked the highest with a 25.7x trailing P/E, a premium among peers, which we link closely to its unwavering stance on dividend payment and a suspected increase in dividend. Relatedly, MOBIL and TOTAL followed with 13.7x and 12.2x trailing P/E as at Q3:2015. Table 105: Oil and Gas Sector Valuation Metrics EPS (N) ROE (%) P/E (x) P/BV (x) Dividend Yield (%) E 2016F E 2016F Trailing Forward Trailing Forward Current Expected CONOIL FORTE OIL MOBIL OANDO* (20.2) (3.5) () (176.7) (58.4) (19.0) (0.4) (1.1) TOTAL Average *Due to its extreme values, OANDO has been removed from the computed average Equity Market Update Page 50

51 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Oil Banking and Gas Sector Sector Overview Overview CONOIL PLC Analyst Ayodeji Ebo Simileoluwa Akinmuda Improved Distribution Channels Boost Earnings ext ext 317 Overview marketing companies in Nigeria disclosed earlier in 2015 of its plan to close the N250.0bn estimated lubricant gap in the domestic economy, by investing N5.0bn in a new lubricant plant. This is expected to improve bottom line as well as grow its industry market share. Equally, the Company announced its orders for 2 aircraft re-fueling bowsers with combined storage capacity of 62,000 litres and ability to refuel at 1,500 litres per minute. Operational and Financial Performance The delay in subsidy payment which reduced importation of products recorded a significant decline of 42.3%in Q3 revenues. As a result, in Q3:2014. Rise in administrative cost in the same period led to a 32.9% increase in OPEX to N7.0bn. Other operating income also surged % due to interest income received on delayed subsidy payments for 2013/2014, however net finance cost dipped 80.0% to N0.3bn in Q3:2015 despite the 86.7% increase in finance cost to N2.8bn. Consequently, PAT shed 16.1% Y-o-Y to Nbn in Q3:2015 traceable to 34.5% decline in distribution expenses (improved procurement process). Debt to Equity ratio remained high at 294.0% in Q3:2015 from 270.5% in Q3:2014. Given the current price modulation technique of the new government which has technically eliminated subsidy, we do not expect any distortion in product importation in 2016 save for forex challenges. As a result, we forecast a 9.4% and 6.4% Y-o-Y growth in turnover and PAT in FY:2016, We also project EPS to improve to N2.19 from estimated N2.06 in FY:2015. We expect Conoil to sustain its consistent dividend payment, albeit estimated N1.09 in FY:2015 (slightly higher than N1.00 paid in FY:2014). Based on our blended valuation methodologies Discounted Cash Flow (DCF), Enterprise Value to Sales (EV to Sales) and Dividend Discount Model (DDM) -, we arrived at an intrinsic value of N26.91 and 12-month target price of N37. Consequently, with a 68.4% upside, we assign a BUY rating on the stock. Table 106: Stock Data and Valua- CONOIL CONOIL:NL Current Price (N) Target Price (N) 37 BUY Upside Potential 68.4% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 0.7 Market Cap (N'bn) 12.7 Market Cap ($US'Mn) Month Avg. Volume (Tn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 4.5 Trailing EPS (N) 7 Trailing P/E (x) 25.7 Forward P/E (x) 8.9 Table 107: Financial Metrics Revenue (N'Mn) 128, ,65 90,415.3 EBITDA (N'Mn) 3, , ,917.0 Pre-tax Income (N'Mn) 1, , ,562.6 Net Income (N'Mn) , ,520.0 Total Assets (N'Mn) 86, , ,049.7 Shareholder Funds (N'Mn) 16, , ,482.4 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 108: Conoil vs NSE ASI and Oil and Gas Sector ASI Oil and Gas CONOIL 1.0 Equity Market Update Page 51

52 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May- Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Oil Banking and Gas Sector Sector Overview Overview FORTE OIL PLC Analyst Ayodeji Ebo Simileoluwa Akinmuda Non-core Revenue Rescued Bottom Line ext ext 317 Overview: integrated energy company set up majorly in the downstream sector in Nigeria and Ghana and has few operations in the midstream sector. Following its acquisition of the Geregu Power Plant through the power privatization initiative of the FGN in 2013, FO signed an US$83.0m contract with Siemens to ramp up the capacity of the 414 megawatts plant to 600 megawatts. Equally, Forte in H2:2015 announced that Mercuria, an energy holding company in South Africa acquired 17.0% stake in the Company to solidify market share and expand operations. Operational and Financial Performance Consequent on the consistent fuel shortages experienced in 2015, FY:2014, to buck a trend of positive revenue growth achieved between 2013 and However, following improved distribution of products as a result of the purchase of 100 trucks in 2014, the N151.7bn in prior period. Subsequently, cost of sales margin improved slightly to 85.3% from 89.2% in FY:2014. Gross profit closed marginally lower (0.5%) to N18.3bn in FY:2015. Against the backdrop of gains in disposal of property, investment income and -operating/ other operating income surged 189.7% Y-o-Y to N4.1bn in FY:2015. Consequently, PAT improved by 29.9% to N5.8bn in FY:2015 from N4.5bn in FY:2014. Outlook and Valuation: Target Price at N185.49; SELL position in coming years. However, Forte faces major risks such as the medium term economic challenges in Ghana and Nigeria, bleak oil prices outlook and naira volatility. In FY:2015, FO declared a N3.45 dividend, implying a % dividend yield. FO is trading at significant premium to its peers at PE of 56.1x. Based on our blend of valuation approaches, we arrived at a 12-month target price of N This implies that the stock has a 45.8% downside relative to its current share price of N Hence, we recommend a SELL on Forte Oil. Table 109: Stock Data and Valua- FO FO:NL Current Price (N) Target Price (N) SELL Downside -45.8% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 1.1 Market Cap (N'bn) Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.3 Trailing EPS (N) Trailing P/E (x) 21.4 Forward P/E (x) 6 Table 110: Financial Metrics Revenue (N'Mn) 170, , ,144.3 EBITDA (N'Mn) 11, , ,005.5 Pre-tax Income (N'Mn) 6, , ,733.1 Net Income (N'Mn) 4, , ,160.4 Total Assets (N'Mn) 139, , ,203.3 Shareholder Funds (N'Mn) 44, , ,130.9 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) 0.9 Chart 111: Forte Oil vs NSE ASI and Oil and Gas Sector 1.8 ASI Oil and Gas FORTE OIL Equity Market Update Page 52

53 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Oil Banking and Gas Sector Sector Overview Overview TOTAL NIGERIA PLC Analyst Ayodeji Ebo Simileoluwa Akinmuda Improvement in Earnings on Low Base Effect ext ext 317 Overview petroleum marketing and distribution companies in Nigeria with broad distribution network of over 500 service stations nationwide and a wide range of top quality energy products and services. The Company intends to increase offerings with the introduction of solar powered stations as well as solar home system across Nigeria. The Company also has plans to exploit the Liquefied Petroleum Gas (LPG) market by opening up more LPG outlets as well as introduction of safe and affordable cylinders with the introduction of new cylinders. Operational and Financial Performance Total recorded 10.4% Y-o-Y decline in revenue to N159.3bn in Q3:2015 from N177.8bn in Q3:2014. Similarly, PAT declined at a faster rate of 19.5% to close the quarter at N2.1bn from N2.6bn in Q3:2014. These negative performances were due to delayed subsidy payments which led to the reduction in the importation of that petroleum products continue to account for major revenue to record 87.9% in Q3:2015, slightly lower than 88.3% in Q3:2014. OPEX grew 8.6% to N16.9bn translating to higher OPEX margin of 1% in Q3:2015 from 8.7% in Q3:2014 attributable to increased staff costs (salaries, welfare and pension) as well as impairments and legal fees incurred. As a result of higher finance income, the Company recorded a net finance income of N0.9bn in Q3:2015 from net finance costs of N1.6bn in prior period. Effective tax rate rose to 46.8% in Q3:2015 from 37.0% in Q3:2014 resulting to a 19.5% ROAA sank to 16.2% and 2.5% in Q3:2015 from 32.0% and 5.1% in FY:2014. Notwithstanding, trailing EPS settled at N11.51 in Q3:2015 marginally lower than N11.71 in FY:2014. Outlook and Valuation: Enlarge Product Offerings to Bolster Earnings The Company has resolved to sustain investment in the downstream downstream sector. Also, government decision to phase out fuel subsidy through price modulation together with a low base effect, we expect revenue and PAT to improve by 4.7% and 26.2% in FY:2016 respectively. Based on our valuation techniques, we arrived at an implied value of N and a 12-month target of N At current price of N as at 12/02/2016, Total has a 17.5% upside, hence, we place an ACCUMULATE rating on the stock. Table 112 Stock Data and Valuation TOTAL TOTAL:NL Current Price (N) Target Price (N) ACCUMULATE Upside Potential 17.5% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 0.3 Market Cap (N'bn) 47.5 Market Cap ($US'Mn) Month Avg. Volume (Tn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 3 Trailing EPS (N) Trailing P/E (x) 12.2 Forward P/E (x) 16.9 Table 113: Financial Metrics Revenue (N'Mn) 240, , ,956.6 EBITDA (N'Mn) 11,41 9, ,426.4 Pre-tax Income (N'Mn) 5, , ,615.3 Net Income (N'Mn) 4, , ,872.8 Total Assets (N'Mn) 95, , ,931.8 Shareholder Funds (N'Mn) 13, , ,305.1 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 114: Total vs NSE ASI and Oil and Gas Sector ASI Oil and Gas TOTAL Equity Market Update Page 53

54 Dec-14 Jan-15 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Oil Banking and Gas Sector Sector Overview Overview MOBIL OIL NIGERIA PLC. Analyst Ayodeji Ebo Simileoluwa Akinmuda Rental Income to Boost Bottom Line ext ext 317 Overview petroleum products marketing firms where foreign investors have controlling interest in Nigeria. Mobil operates a Lube Oil Blending Plant (LOBP) one of the most sophisticated in Africa - with a capacity of 450,000 barrels per annum that produces petroleum jelly, insecticides and lubes. The Company has over the years diversified its revenue base to property business to earn rental income which as at FY:2014 contributed 25.0% to PBT. Operational and Financial Performance In line with industry trend in 2015, Mobil recorded a decline in both revenue and PAT, traceable to reduction in importation of petroleum products due to late payment of fuel subsidy. That said, gross revenue nosedived 25.3% to N45.3bn in Q3:2015. Against the 29.0% decline in Cost of Sales to N37.1bn, cost of sales margin fell to 81.9% from 86.1% recorded in prior period. Consequently, gross profit closed at N8.2bn after shedding 3.0% Y-o-Y. Worthy of note is the 82.3% surge in other income (N3.3bn) in Q3:2015 traceable to income generated from property business. As a result, PAT tumbled 39.1% Y-o-Y to N3.6bn in Q3:2015. Annualised ROAE and ROAA shrank to 25.7% and 7.4% in Q3:2015 from an impressive 55.4% and rose to 28.1% in Q3:2015 relative to 12.6% in Q3:2014. Outlook and Valuation: Property Business to Boost Earnings; We With over 200 outlets across Nigeria, high quality product offering low revenue base and diversified revenue via property business, we anticipate an improvement in FY:2016 estimates. The recent price modulation approach adopted by the Ministry of Petroleum to determine prices of petroleum products has technically eliminated fuel subsidy. As a result, we expect Mobil to increase PMS importation given that the market open price is below the selling price, hence creating allowance for sufficient margin in the interim. Consequently, we forecast a marginal 9.1% increase in revenue and 26.6% rise in PAT. For the absolute valuation approach, we applied the Dividend Discount Model (DDM) and 5-year Free Cash Flow to Equity (FCFE) model while we employed the price to cash flow, price to earnings and EV/EBITDA valuation methodologies for the relative valuation approach. Based on varied weightings, we arrived at our 12-month target price of N146.45, translating to an 8.2% downside, Table 115: Stock Data and Valua- MOBIL MOBIL:NL Current Price (N) Target Price (N) REDUCE Downside -8.2% 12-Month High (N) Month Low (N) Outstanding Shares (bn) 0.4 Market Cap (N'bn) 57.6 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Tn) 79.4 Trailing EPS (N) 12 Trailing P/E (x) Forward P/E (x) Table 116: Financial Metrics Revenue (N'Mn) 79, , ,364.6 EBITDA (N'Mn) 9, , ,517.2 Pre-tax Income (N'Mn) 8, , ,604.4 Net Income (N'Mn) 6, , ,325.9 Total Assets (N'Mn) 49, , ,550.9 Shareholder Funds (N'Mn) 13, , ,699.8 OPEX Ratio (%) Cost of Sales Ratio (%) EBITDA Margin (%) PAT Margin (%) ROE (%) ROA (%) EPS (N) DPS (N) Earnings Yield (%) Dividend Yield (%) Chart 117: Mobil vs NSE ASI and Oil and Gas Sector 1.3 ASI Oil and Gas MOBIL Equity Market Update Page 54

55 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Oil Banking and Gas Sector Sector Overview Overview OANDO PLC. Analyst Ayodeji Ebo Simileoluwa Akinmuda Consolidation Presence in the Upstream Space ext ext 317 Overview: integrated energy solutions provider in Africa which transited to an upstream led firm on the back of the acquisition of ConocoPhillips Nigeria oil assets in July 2015 for US$1.5bn. In June 2015, OANDO also announced its strategic partnership with HV Investments II B.V, a joint venture owned by a fund advised by Helios Investment Partners and the Vitol Group, for a cash consideration of US$276.8m in the upstream space, OANDO intends to buy out the outstanding minority shareholdings in the exploration and production subsidiary. Resources (OER), increasing its shareholding to 100.0% from 93.7%. Operational and Financial Performance announcement of a monumental loss (FY:2014 N179.3bn) in published after 6 months of statutory deadline. After recording an 83.5% growth in topline to N33.0bn in Q1:2015, growth began moderating on a Q-o-Q basis. In Q2:2015, topline grew 8.4% to N60.3bn and also declined 5.5% to N95.8bn by Q3:2015. This decline in Q3:2015 was against the 47.0% growth in Cost of Sales from N37.2bn to N54.7bn, given this significant slump, cost of sales margin settled at 57.1% from 36.7% in Q3:2014. Oando recorded a loss after tax of N47.6bn in Q3:2015 from a PAT of N34.1bn in Q3:2014 on delayed in subsidy payment, forex unavailability and lower oil prices which led to impairment provisioning and high finance cost. Outlook and Valuation: Target Price at N7.74, BUY OANDO has continued to consolidate its activities within the upstream space. We expect increased gas production to douse the impact of lower oil prices in subsequent years. Additionally, the cash downstream space would reduce its hanging debt burden and improve its bottom line. We forecast a 69.9%Y-o-Y decline in turnover in FY:2015 to N129.1bn on account of significant decline in oil prices. Also, we estimate a loss after tax of N31.9bn and N11.1bn in FY:2015 and FY:2016 respectively. We arrived at an intrinsic value of N4.87 and a 12-month target price of N5.85. With an upside potential of 54.7% based on the current price of N3.78, we have placed a BUY rating on the counter. Table 118: Stock Data and Valua- OANDO OANDO:NL Current Price (N) Target Price (N) 5.85 BUY Upside Potential 54.7% 12-Month High (N) Month Low (N) 3.43 Outstanding Shares (bn) 12.0 Market Cap (N'bn) 45.5 Market Cap ($US'Mn) Month Avg. Volume (Mn) Month Avg. Value (N'Mn) Month Avg. Value ($US'Mn) 0.2 Trailing EPS (N) (21.69) Trailing P/E (x) (0.2) Forward P/E (x) (4.1) Table 119: Financial Metrics Revenue (N'Mn) 424, , ,778.8 EBITDA (N'Mn) (112,454.4) 9, ,94 Pre-tax Income (N'Mn) (171,105.6) (33,429.5) (11,583.4) Net Income (N'Mn) (183,675.5) (31,874.5) (11,044.6) Total Assets (N'Mn) 889, , ,156.7 Shareholder Funds (N'Mn) 45, , ,553.3 OPEX Ratio (%) (65.4) (5) (4) Cost of Sales Ratio (%) EBITDA Margin (%) (26.5) PAT Margin (%) (43.3) (24.7) (8.2) ROE (%) (176.7) (58.4) (19.0) ROA (%) (24.9) (3.7) (1.3) EPS (N) (15.26) (2.65) (0.92) DPS (N) Earnings Yield (%) (4.0) (0.7) (0.2) Dividend Yield (%) Chart 120: Oando vs NSE ASI and Oil and Gas Sector 1.4 ASI Oil and Gas OANDO Equity Market Update Page 55

56 Section Three Appendix Equity Market Update Page 56

57 Recommendation Banking Sector Overview Summary Sectors/Stocks Last Price (N) Previous TP (N) Revised TP (N) Upside (%) ACCESS % BUY DIAMONDBNK % BUY ETI % BUY FCMB % BUY FIDELITYBK % BUY FBNH % REDUCE GUARANTY % ACCUMULATE SKYEBANK % HOLD STANBIC % BUY STERLNBANK % ACCUMULATE UBA % BUY UBN % REDUCE UNITY % BUY WEMA % HOLD ZENITHBANK % BUY Consumer Goods CADBURY % SELL DANGSUGAR % ACCUMULATE FLOURMILL % BUY GUINNESS % BUY NB % BUY NESTLE % ACCUMULATE PZ % SELL UNILEVER % SELL Conglomerate UACN n/a % ACCUMULATE Insurance AIICO % BUY MANSARD % ACCUMULATE CONTINSURE % BUY CUSTODYINS % HOLD Industrial Goods DANGCEM % BUY CCNN % HOLD WAPCO n/a % HOLD Oil & Gas OANDO 3.78 n/a % BUY MOBIL % REDUCE FORTE n/a % SELL CONOIL n/a % BUY TOTAL % ACCUMULATE Equity Market Update Page 57

58 Banking Sector Overview Fair Value Estimate Our approach to establishing fair value takes into account a weighted average of price estimates derived from a blend of trading multiples valuation models. However, we attach the most weight to DCF valuation methodology, particularly the well as key price drivers from the firm, Industry and macroeconomic perspectives. Investment s BUY: The expected total return over the next 12 months is 25.0% or more. Investors are advised to take positions at the prevailing market price as at the report date. ACCUMULATE: The expected total return over the next 12 months ranges between 10.0% and 25.0% or the upside potential is above industry average. However, cautious portfolio positioning is advised. HOLD: REDUCE: SELL: Over the next 12 months, investors are advised to remain neutral as the expected total returns may not exceed 10.0% based on the prevailing market price as at the report date. The expected total return of the stock ranges from nil to negative. Aggressive exit or entry may not be appropriate as the stock might fluctuate into a 10.0% decline over a 12-month horizon. Thus, the slim upside potential does not adequately compensate for the inherent risk. The stock trades at a premium to its intrinsic value and is thus expected to lose up to 10.0% or more of its market value. Immediate exit is therefore advised at the prevailing market price as at the report date. banking and financial services firm in Nigeria with a focus on West Africa. The firm is reputed in the Nigerian financial services industry for its brokerage, asset management and investment research services. Afrinvest has built a solid track record executing transactions carefully with a fact based approach, making recommendations tailored to the specific needs of clients and based on its knowledge of the Nigerian market, the business environment, macro-economic environment and within the regulatory environment. DISCLAIMER from various sources that we believe are reliable; however, no, representation is made that it is accurate or complete. While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or fact or for any opinion expressed herein. This document is for information purposes only. It does not constitute any offer or solicitation to any person to enter into any trading transaction. Any investment discussed may not be suitable for all investors. This report is provided solely for the information of clients of Afrinvest who are expected to make their own investment decisions. Afrinvest conducts designated investment business with market counter parties and intermediate customers and this document is directed only at such persons. Other persons should not rely on this document. Afrinvest accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for private circulation only. This report may not be reproduced distributed or published by any recipient for any purpose without prior express consent of Afrinvest. Investments can fluctuate in price and value and the investor might get back less than was originally invested. Past performance is not necessarily a guide to future performance. It may be difficult for the investor to realize an investment. Afrinvest and/or a connected company may have a position in any of the instruments mentioned in this document. Afrinvest and/or a connected company may or may not have in the future a relationship with any of the entities mentioned in this document for which it has received or may receive in the future fees or other compensation. Afrinvest is a member of The Nigerian Stock Exchange and is regulated by the Securities and Exchange Commission to conduct investment business in Nigeria. For further information, please contact: Afrinvest Securities Limited (ASL) 27 Gerrard Road Ikoyi, Lagos Nigeria Tel: ; Fax: ; Equity Market Update Page 58

59 Disclaimer Banking Sector Overview Equity Market Update Page 59