KenolKobil Limited Growth at a Reasonable Price Recommendation: BUY

March 2017 Initiation of Coverage KenolKobil KenolKobil Limited Growth at a Reasonable Price Recommendation: BUY We initiate coverage on the KenolKobil Group (Kenol) with a BUY recommendation based on a fair value of KES 16.20. This presents a potential upside of 26.1% from the current share price of KES 12.85. Kenol s growth trajectory remains intact and we expect the group to grow significantly on the back of stable oil prices, increased margins due to operational efficiency and higher volumes across the region. The group s position as a premier oil marketer across the region remains unchallenged even as competition from smaller players increases. A growing retail network is expected to power volume growth over the medium term. This will likely enhance non-fuel income, diversifying Kenol s income streams and reduce reliance on fuel generated income. Additionally, growth in consumption in the group s core Kenyan market on the back of increased infrastructure development will boost the group s top-line and increase headroom for regional growth. Furthermore, prudent working capital management policies are expected to improve margins and reduce the need for short-term borrowing, ensuring investors a steadily growing dividend pay-out. However, exchange rate volatility and the price of oil remain key risks. In our view, a pay-out ratio of c.25% - 30% will support the stock price as the group continues to expand its bottom line. We project a 12.7% CAGR in sales over the next 3 years, driven by higher volume in the group s niche product segments. Positives Wide market-leading regional presence (Kenya, Uganda, Burundi, Rwanda, Zambia, Ethiopia) Strong economic growth across regional markets expected to boost volumes Increased dividend pay-out on the back of low leverage and growing bottom line Growing non-fuel income stream expected to diversify revenue streams Highly cash generative business model to allow use of organically generated cash to fund expansion without the use of excessive long-term debt Risk Factors Share Statistics Bloomberg Ticker KNOC.KN Reuters Code KENO.NR Fair value (KES) 16.20 Current price (KES) 12.85 Issued shares (M) 1,471.8 52 week low (KES) 9.50 52 week high (KES) 15.70 Market cap (KES M) 20,678.8 Market cap (USD M) 198.8 Financial year end Dec Average Traded Vol 3 month USD 74,113 Free Float (%) 62.1 Price Return Return KENOL NASI NSE 20 3m 0.4% -7.4% -6.2% 6m 21.6% -6.9% -7.6% 12m 32.5% -15.5% -25.0% Price Chart Source: Bloomberg, ApexAfrica Estimates Multiples Table FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F Revenue (KES B) 192.5 109.7 90.2 86.6 103.5 115.9 125.2 131.4 % growth y/y -13.4-43.0-17.8-4.0 19.6 12.0 8.0 5.0 Gross Profit (KES B) 3.3 4.3 5.1 5.8 7.4 8.7 10.6 11.2 % growth y/y -70.0 29.5 20.1 14.0 26.5 17.7 22.4 5.0 EPS (KES) -4.27 0.38 0.74 1.37 1.64 1.86 2.13 2.31 % growth y/y - - 94.7 85.1 19.7 13.7 14.4 8.5 DPS (KES) - 0.10 0.20 0.35 0.45 0.52 0.60 0.65 % growth y/y - - 100.0 75.0 28.6 16.0 14.4 8.5 P/E (x) - 33.3 13.2 10.0 7.8 6.9 6.0 5.8 EV/EBIT - 13.9 8.1 6.2 5.8 4.7 4.2 3.9 Source: Company Filings, ApexAfrica Research Research Analyst Abizer Sharafali, ACCA agulamabbass@apexafrica.com +254 (0)20 7602534/ +254 (0)718 073373 www.apexafrica.com

Growth Drivers Net Sales by Prod. Segment FY16 Net Sales by Prod. Segment FY15 Wide Regional Presence: The group has formidable presence in a broad range of markets across the region (Kenya, Uganda, Rwanda, Ethiopia, Zambia & Burundi ). This expansive network aids Kenol in mitigating country specific risks and allows diversification of income streams, which in turn translates to a defensive top-line. 41% 4% 54% 44% 4% 52% However, political risk and over diversification could result in erosion of competitiveness. For instance the group was recently forced to exit its unprofitable operations in Tanzania and Congo. In FY15, Kenol booked sales of KES 1.9B to Rwanda, making it the largest regional subsidiary by sales. The group operates a broad retail network of 380 outlets (as at FY16), with the bulk of the outlets located in Kenya. Additionally, the company has 12 supply terminals. Going forward, we expect Kenol to add c.30 35 retail stations across the network per year over the medium term. Retail Network as at October 2016 No. of Stations Kenya 192 Uganda 37 Zambia 26 Rwanda 58 Ethiopia 24 Burundi 45 Total 380 Source: Company Filings Broad Product Base: Kenol has operations in a broad range of segments, from aviation fuel and exports to the inland (wholesale) market to lubes and LPG. Kenol is currently (FY16) a market leader in aviation fuel in Kenya. In FY16, the inland (wholesale) fuel market accounted for 54.0% (+2.0% y/ y) of total sales, while aviation, trading and export accounted for 41.0% (-3.0% y/y). The inland segment accounted for 68.0% of the group s gross profit in FY16, up from 66.0% in FY15, while gross profit from its export, aviation and trading segments remained unchanged y/y at 19.0%. Gross margin rose significantly to 7.1% in FY16, from 3.9% in FY13, largely as a consequence of increased focus on high margin product segments. Inland Mkt Export, Trading, Aviation Niche Business Source: Company Filings, ApexAfrica Capital Inlan d Mkt Export, Trading, Aviation Niche Business Strong economic growth in regional markets: Kenol is a direct beneficiary of significant economic growth in its regional markets. Kenya s medium term economic growth is expected to remain at 5.5%, while Uganda and Zambia are anticipated to record 6.5% and 4.0% respectively. Furthermore, the SSA region is expected to register some of the fastest economic growth rates in Africa over the next 5 years. Energy is a key driver of economic growth and we believe consumption of energy will increase significantly over the medium term as transport systems and manufacturing processes evolve to keep pace with rapid economic growth. KenolKobil is prominently positioned across the region to take advantage of the expected increase in fuel consumption. The group has a large retail outlet network and a strong brand name and we expect volumes to grow in line with economic growth in the region. Low leverage points to higher dividends: A key tenet of the group s turnaround strategy (implemented in 2012) was the significant reduction of debt. The group has paid down its foreign currency debt and deleveraged its balance sheet. Longterm borrowings stood at KES 36.3M as at FY16, down from KES 1.5B in FY11. While we expect Kenol to continue utilizing debt to fund working capital, the reduction in long-term debt will help boost the bottom line, translating to higher dividends for shareholders. Additionally, we expect all debt to be denominated in foreign currency (US Dollars) which the company is able to borrow at favourable rates. 2

Stable dividend pay-out: Kenol has maintained a dividend pay-out ratio of c.25% since 2012 and we expect this to increase to 30% over the medium term as the group matures. A level pay-out ratio is a key positive, especially as the bottom line is expected to grow over the medium term(3-yr CAGR 18.8%). Kenol announced a dividend of KES 0.45 (pay-out ratio of 27.4%) in FY16, up from KES 0.10 (pay-out ratio of c.26.3%) in FY13. While the current dividend yield of 3.5% remains below that of major dividend payers on the bourse, in our view, the yield remains justifiable given the growth potential implied in our valuation. Our estimates indicate a steady increase in pay-out ratio to a ceiling of 30% over the medium term. A steady dividend pay-out is also likely to auger well with the group s stock price by attracting yield hunting investors. Highly cash generative business model: Kenol operates a highly cash generative business model, which ensures a healthy cash and liquidity position. The group generated KES 2.5B (-51.5% y/y) from operations in FY16. Furthermore, the business remains highly liquid implied by a current ratio of 1.3x in FY16, up from 0.9x in FY13. Prudent working capital management, which is a key focus of the company, combined with a highly cash generative business model allows the group to fund its operations using organically generated capital and eliminates the need to take up excessive leverage. While the group does utilize short-term borrowings (KES 7.3B as at FY16) to facilitate working capital management, the uptake of debt remains manageable and the group s finance costs remain controlled. Long-term leases allows unburdened expansion: The group s growth strategy is focussed on expanding the retail outlets which in turn will boost volumes. However, the purchase and establishment of a new outlet often involves significant upfront costs. To reduce the burden on the group s balance sheet, Kenol has adopted an asset-light approach for retail outlet network expansion. New stations are on boarded on to the group through the use of long-term leases which significantly reduces pressure on the group s balance sheet. This method ensures fluid cash flow and increases headroom for expansion. Kenol plans on growing its network to 440 outlets by FY18 from the current 380 stations. The use of long-term leases is expected to control cash used in investing activities, which stood at KES 1.3B in FY16. Exit from Tanzania & Congo: The group sold off its underperforming subsidiaries in Tanzania and Congo. Increased competition, unfriendly regulations and a difficult market environment likely motivated the exit from the Tanzanian market. This is expected to boost the bottom line going forward as the loss-making (KES 464.6M as at FY15) Tanzanian unit is removed from the group s books. Furthermore, the Congo operations was fairly small consisting of one storage depot, while Tanzania operated 17 retail stations. Consequently we do not expect a significant decline in volumes in the wake of the exit. Non-fuel income to reduce reliance on petroleum: Filling stations in the region are increasingly becoming a one-stop shop for many and offer services from restaurants to retail shopping outlets. Consequently, we expect non-fuel income to play an important role in the group s revenue mix going forward. The group booked other income of KES 464.4M in FY16, down from KES 830.4M in FY15. This includes rental income, facility fees and other non-fuel income. Kenol has reiterated its commitment to enhance non-fuel income in a bid to diversify its income stream. The group is currently embarking on partnerships with retail and consumer brands to selectively rebuild and upgrade strategic facilities in order to enhance nonfuel income. For instance, two of its major outlets in South-C and South-B in Kenya were refurbished in 2015. In our view, non-fuel income will play a key role going forward, and we expect contribution of other (non-fuel) income to total income to steadily increase from 5.9% in FY16 to c.7.9% in FY19. 3

Risk Factors Exchange Rate Volatility: Kenol s regional operations exposes it to the risk of adverse currency movements in the often highly volatile East African (EA) currencies. Recent global macroeconomic developments across the globe have resulted in a broad weakening of EA currencies. As a result of prudent foreign currency management, Kenol recorded FX gains amounting to KES 2.3M in FY16 compared to KES 232.1M FX losses in FY15. Though astute working capital management and an efficient treasury function will likely contain FX losses over the medium term, the risk of adverse currency movements affecting the group s bottom line remains. Going forward, we expect some weakening of the Kenyan Shilling as we head into an election period and this could directly impact the group s FY17 numbers. 120 100 80 Source: CBK USD/KES 60 7-Feb-11 7-Feb-12 7-Feb-13 7-Feb-14 7-Feb-15 7-Feb-16 7-Feb-17 Oil Prices: Kenol s top line is intimately linked to the price of oil. A substantial increase in the price of oil would force the group to increase working capital which may result in higher finance costs, subsequently impacting bottom line performance. Net working capital increased 21.7% y/y to KES 7.2B in FY16. While the demand for petroleum and related products is largely inelastic, rising fuel prices would pressure the group s volumes and undermine revenue growth. 140 100 60 20 7-Feb-11 7-Feb-12 7-Feb-13 7-Feb-14 7-Feb-15 7-Feb-16 7-Feb-17 Source: Bloomberg Brent Crude (USD) Political instability and macroeconomic shocks: Continued civil unrest in Burundi could pose a risk for the group s operations in the country. While operations have been largely unaffected in the country so far, we cannot discount the possibility of disruption should the political landscape in the country deteriorate. Additionally, political uncertainty surrounding the general elections in Kenya also poses a short-term risk. A characteristic slow-down in the economy ahead of the elections could supress volumes over the election period in Kenol s biggest market. Increased competition: The group s market share has recently come under threat from increased competition. The rise of smaller marketers across the region has resulted in the encroaching of Kenol s market share which dropped 2.9% y/y to 15.5% as at June 2016 in Kenya. Provisions for KPRL yield shift: The group booked a provision charge of KES 600.0M in FY16 to provide for the KPRL yield shift receivable. We expect a further write down of c. KES 300M in FY17 to eliminate the total value of KES 1.1B held in the books. 4

An overview of the Petroleum sector According to the ERC, petroleum serves as the largest source of commercial energy in the country. The petroleum sector is organized into three major sections; upstream, mid-stream and downstream. 20.0% 15.0% 10.0% Market share in Kenya Upstream section involves the process of exploration, development and production of crude oil. Kenya has 4 petroleum exploration basins (Lamu, Anza, Mandera, Tertiary Rift Basins). Oil exploration began in 1956 but the breakthrough was seen in 2012 after the discovery of Ngamia 1 well at Lokichar Basin in Turkana Country. As at December 2015 seventy four wells had been drilled with 12 hydrocarbon discoveries to date, 9 of which are in Turkana County. With the oil exploration being undertaken by Tullow Oil in the Northern part of the country (Turkana), the country plans to start exporting crude oil by June this year whilst still importing refined petroleum products. The import of refined products commenced after the closure of the Mombasa refinery which will be used as a storage facility for the oil produced going forward. Midstream section entails storage, refining and transportation of crude oil into consumable petroleum products. Kenya still remains a net importer of petroleum products with the imported products being transported by pipe-line and road. The Ministry of Energy through the State Department for Petroleum coordinates the importation of oil in conjunction with oil marketing companies (eg Kenol) through the Open Tender System. The Kenya Pipeline Company provides a conduit pipe-line for moving petroleum products as well as providing infrastructure for the storage of the product. Downstream section involves availing the refined products to consumers through supply and distribution. The state body engaged in this section is the National Oil Corporation of Kenya. Being a liberalized sector, it boasts of over 30 oil importing and marketing companies. In terms of overall market share (1Q16), Kenol (13.8%) ranks second behind Total (14.2%) while in terms of petroleum sales market share, it ranks third (15.7%) behind Total (18.5%) and Vivo (17.6%). The oil marketer has in the recent past aimed at increasing its business in the low volumes high margins lubricants sphere from which it has a market share of 7.1%. 5.0% 0.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Total Kenol Kobil Vivo Gulf Hashi Libya Oil Overall market share Market share by Lubricants and LPG Total Vivo Libya Oil Kenol Kobil LPG market share Nock Petro Gapco Petroleum market share Hashi Oryx Hass Nock Gulf Lubricants market share Regulation of the sector Fuel (Super Petrol, Kerosene and Diesel) are highly regulated in the country with the prices determined and regulated by the Energy Regulatory Commission (ERC). Power conferred to the commission are contained in the Energy Act 2006. The objects and functions of the ERC include regulating the importation, exportation, transportation, refining, storage and sale of petroleum and petroleum products. The commission has the power to issue, renew, modify, suspend or revoke licenses and permits for all undertakings and activities in the petroleum sector. The Energy Bill 2015 (which was sent back to parliament for amendments by the President) establishes the Energy Regulatory Authority (ERA) which shall take over the powers and responsibility of the ERC. In addition to the regulations aforementioned, the ERA shall regulate the exploration, extraction, production, processing, transportation, storage exportation, importation and sale of coal bed methane gas and other energy forms. 5

Company Background Kenol is a leading oil marketer with a prominent presence across the region (Kenya, Uganda, Burundi, Rwanda, Zambia, Ethiopia). The group currently operates 380 retail outlets across the region and has a broad product offering including a prominent presence in the inland (wholesale) and aviation fuel segments. Kenol trades in both crude and refined petroleum products which include motor fuels, industrial oils, LPG, aviation fuels, lubricants and various other specialist oils. Kenol also has an African Trading Desk which allows them to procure and sell petroleum products in large quantities to government bodies, large industrial establishments and refineries in Africa and other markets. In 1959, Kenol was incorporated and listed on the NSE in the same year. At this time, it was marketing Kerosene under the brand name SAFI. In 1960, Kenol won a bulk supply contract to the City Council of Nairobi, attracting over 600 shareholders. During this period, Kenol opened its first two service stations. Between 1960-1972, Kenol managed to penetrate other parts of the country partly driven by large scale farming carried out. During the 1980s, Kenol was faced with mounting headwinds and was placed under receivership. The company however turned the tides resuming operation in 1983. During this period of renewed resilience, Kenol commenced importing refined products and crude oil and was put on a permanent refining programme at the refinery. It then expanded into export business, and aviation refuelling in both Moi International Airport and Jomo Kenyatta International Airport in Nairobi. In 1987, Kenol entered into a joint operation with Kobil Petroleum Limited with the staff of the two companies being integrated to avoid duplication of jobs. Depot operations of the two companies were combined in order to make operational savings, benefit from technical advice and achieve delivery efficiency. In the period 1999 2005, the company established Kobil Uganda (1999), Kobil Tanzania (2001), Kobil Petroleum Rwanda SARL & Kobil Zambia (2002) and Kobil Ethiopia (2005). In 2008, Kenol acquired 100% shareholding of Kobil Petroleum Limited, creating the current company KenolKobil. The acquisition was a non-cash transaction through the issue of 45,480,000 Kenol shares as consideration at a price of KES 113.73 per share amounting to KES 5,172,440,000. Maintaining its expansion spree, Kobil acquired 100% of Oil Burundi SA in 2009 and changed the name to Kobil Burundi SA. In the same year, Kenol entered into a joint venture with Engen acquiring the shell & BP operations in Zimbambwe. In 2013, the Group decided to divest from unprofitable operations and non-performing assets. This saw Kenol dispose its shareholding in Kenol Tanzania and KenolKobil Congo SPRL. Top Ten Kenol Shareholders Company Shares in Millions Percentage Wells Petroleum Holdings 302.6 20.6% Petro Holdings 255.2 17.3% Stanbic Nominees 105.6 7.2% Stanchart Nominees 91.6 6.2% Energy Resources Capital 88.2 6.0% SCB A/C Pan African Unit Linked FD 49.4 3.4% Stanbic Nominees 48.1 3.3% Stanchart Nominees 37.2 2.5% Aunali Fidahussein Rajabali and Saijad FidaHussein Rajabali 30.3 2.1% Stanbic Nominees 22.7 1.5% Others 440.9 30.0% Total 1,471.8 100.0% Source: NSE 6

Valuation & Projections In our view, top-line growth will flow downstream to the group s profit relatively unhindered by costs. Our forecasts indicates a 38.7% CAGR of non-fuel income driven by a larger network of retail stations and increased rental income from anchor tenants. While the group s long-term borrowings has declined significantly since the implementation of a turnaround strategy in FY12, we nonetheless expect finance costs to increase (+33.6% 3-year CAGR) mainly due to higher working capital requirements necessitated by higher volume. We expect the group to retain a pay-out ratio of c.27% over the medium term, ensuring a steady return to investors. Kenol possesses a portfolio of high quality assets in the form of a wide retail network and a premium brand. The group s appeal comes from significant potential for growth across the region and product segments. Comparables Net Margin EV/EBITDA Name Country P/E(x) P/B(x) (%) (x) KenolKobil Kenya 7.8 1.9 2.4 5.1 Total Kenya Kenya 1.7 0.2 1.5 2.9 Total Nigeria Nigeria 7.1 4.2 3.5 4.3 Puma Energy Zambia Zambia 6.9 0.9-5.6 Total Petroleum Ghana Ghana 7.2 1.7 1.7 - Ghana Oil Ghana 7.1 1.5-5.7 Caltex Australia 12.3 2.7-7.3 Vivo Energy Mauritius 12.3 4.5-6.7 Afriquia Gaz Morocco 19.5 4.2 - - Mean 9.1 2.2 2.3 5.4 Source: Bloomberg, ApexAfrica Research We value Kenol using relative valuation by applying the P/E and EV/EBITDA multiples of comparable companies. Our valuation, based on conservative and sustainable projections values KenolKobil at a fair value of KES 16.20, reflecting a potential upside of 26.1% from its current trading price of KES 12.85. Comparable mean P/E (x) 9.1 Forward FY17E EPS 1.86 Fair Value (KES) 16.97 Comparable mean EV/EBITDA (x) 5.4 Forward FY17E EBITDA (KES M) 4,666 EV (KES M) 25,194 Less net debt (KES M) 2,505 Equity Value (KES M) 22,689 No. of shares (M) 1,471 Fair Value (KES) 15.42 Weight Fair value P/E method 50% 16.97 EV/EBITDA method 50% 15.42 Blended value (KES) 16.20 7

FY16 Financial Highlights KenolKobil posted a solid 19.8% y/y growth in net profit to KES 2.4B, driven by a 30% y/y growth in volume across the group s business segments. Total sales surged 19.6% y/y on the back of higher volume to KES 103.5B. The group increased dividend pay-out by KES 0.10 (+28.6% y/y) to KES 0.45. Finance costs decline as net borrowings reduce: Finance costs plunged 59.8% y/y to KES 354.7M, even as higher oil prices necessitated an increase in working capital. A larger cash position (+410.0% y/y), mitigated the effects of an increase in short-term borrowings (+57.2% y/y). As part of its turnaround strategy, the group aims to rationalize borrowing to boost the bottom line and protect margins. Solid volume growth boosts top line: The first half of 2016 was characterized by low crude prices, boosting the group s top line. The group added a total of 30 retail outlets to its network in FY16, bringing the number of retail outlets operated by Kenol across the region to 380. 250 200 223 Net Sales (KES B) 193 KES M 30,000 20,000 10,000 6,449 19,129 11,640 24,668 15,633 14,424 12,856 11,694 13,602 9,447 8,234 5,925 7,209 3,900 3,480 150 100 97 102 110 90 87 103-474 2009 2010 2011 2012 2013 2014 2015 2016 Net Working Capital Borrowings 50-2009 2010 2011 2012 2013 2014 2015 2016 Source: Company Filings, ApexAfrica Research Gross margin improves on lower costs of sales growth: Cost of sales grew 19.1% y/y to KES 96.1B; 50bps slower than the 19.6% y/y growth in revenue. Consequently, gross margin improved 40bps y/y to 7.1% in 2017. The growth in margins is attributable to increased focus on high margin products as well as the implementation of strategies to protect margins in an increasingly competitive environment. Consequently, the group registered an impressive 26.5% y/y growth in gross profit to KES 7.4B. Other income down on account of asset sale in FY15: Income generated from non-fuel revenue streams declined 44.1% y/y to KES 464.4M in FY16. The growth of non-fuel income has been a key tenet of the group s turnaround strategy and we expect non-fuel income to increase over the medium term on the back of retail outlet expansion and increased management focus on growth in the segment. Non-fuel income accounted for 5.9% of total income in FY16, down from 12.5% in FY15. Source: Company Filings, ApexAfrica Research Exchange rate gains boost bottom line: The group realized a net forex gain of KES 2.5M, in FY16; a considerable improvement from the FX loss of KES 232.1M realized in FY15. The exchange rate gain was attributable to relative stability of the Kenyan Shilling throughout the year. Nonetheless, the group faced some currency headwinds due to a volatile Zambian Kwacha. Cash generated from operations declines: Cash generated from the group s operations plunged 47.2% y/y to KES 3.1B. While the group currently sits at a healthy cash position (KES 3.9B as at FY16), we note that a decline in cash generated from operations may necessitate the uptake of more debt to fund the group s working capital requirements. This may be exacerbated by rising oil prices and increased currency volatility ahead of the 2017 General Elections in Kenya. Additionally, the group used KES 1.3B in investing activities for the year while generating KES 2.1B from financing activities. Total borrowings jumped 58.0% y/y to KES 7.4B, with the bulk of the increase coming from a jump in short-term borrowings to fund working capital requirements. 8

Bottom line jumps and pay-out ratio maintained: Strong volume growth allowed the group to shrug off the effects of rising oil prices in 2H16, to post a 13.2% y/y increase in EBITDA to KES 4.8B, translating to a 19.8% y/y increase in net profit to KES 2.4B. Shareholder funds climbed 15.3% y/y to KES 9.9B as the group brought a year of record performance to a close. Kenol announced a final dividend of KES 0.30, translating to a total divided of KES 0.45 (+28.6% y/y). The dividend translates to a pay-out ratio of 27.4%, largely unchanged y/y. We expect the group to maintain a pay-out ratio of c.25% 30%, over the medium term. KES M 20,000 15,000 10,000 5,000-21,929 19,942 14,718 14,644 14,865 13,614 13,982 11,209 11,650 9,818 9,865 8,556 7,359 6,446 6,666 7,330 2009 2010 2011 2012 2013 2014 2015 2016 Market Cap Shareholders Funds 1.20 60% 1.00 1.00 0.80 0.60 0.40 40% 0.52 25% 0.33 45% 0.45 26% 27% 26% 27% 0.35 40% 20% 80.0% 60.0% 1.3 1.4 57.0% 1.2 48.0% 69.1% 1.0 67.1% 56.3% 0.9 1.0 1.2 1.3 1.6 1.4 1.2 1.0 0.20-0.20 0.10-2009 2010 2011 2012 2013 2014 2015 2016 DPS (KES) Pay-out Ratio 0% 40.0% 20.0% 0.0% 31.3% 26.1% 4.0% 2009 2010 2011 2012 2013 2014 2015 2016 0.8 0.6 0.4 0.2 - Source: Company Filings, ApexAfrica Research Gearing Ratio Current Ratio Key ratios pointing in the right direction: The group s gross margin rose 40bps y/y to 7.1% due to increased focus on higher margin business segments, while the current ratio increased marginally to 1.3 from 1.2 in FY15. The group s total borrowings as a percentage of shareholder equity rose to 74.7% in FY16, from 54.5% in FY15, largely as a result increased working capital requirements due to higher volume and crude prices. Return on equity (ROE) rose 90bps y/y to 24.5% while the group s interest coverage ratio remained at a healthy 10.7 times FY16 finance cost; alluding towards a higher pay-out for shareholders in the medium term. Source: Company Filings, ApexAfrica Research 9

FY13 FY14 FY15 FY16 FY17F FY18F FY19F 3y CAGR Income Statement KES '000 KES '000 KES '000 KES '000 KES '000 KES '000 KES '000 Sales 109,687,453 90,209,977 86,557,936 103,493,925 115,913,196 125,186,252 131,445,564 12.7% Cost of sales (105,422,286) (85,088,414) (80,720,486) (96,110,370) (107,219,706) (114,545,420) (120,272,691) 11.9% Gross profit 4,265,167 5,121,563 5,837,450 7,383,555 8,693,490 10,640,831 11,172,873 23.0% Other income 1,402,931 851,713 830,391 464,353 608,544 798,062 893,830 38.7% Administrative and operating expenses (3,369,232) (2,543,206) (3,087,135) (3,451,163) (4,636,528) (6,259,313) (6,572,278) 38.0% Impairment provision for KPRL Yield shift receivable - - - (600,000) (200,000) (100,000) Finance costs (1,777,106) (1,501,205) (883,408) (354,690) (558,694) (603,343) (633,535) 33.6% Finance income 43,932 67,792 83,909 92,461 98,009 103,889 110,123 9.1% Profit before income tax 563,918 1,994,716 2,782,421 3,538,256 4,006,109 4,581,493 4,972,460 18.5% Income tax expense (5,499) (571,705) (884,491) (1,125,049) (1,261,924) (1,443,170) (1,566,325) 18.0% Profit for the year from cont. operations 558,419 1,423,011 1,897,930 2,413,207 2,744,185 3,138,322 3,406,135 18.8% Profit/ (loss) from discontinued operations - (331,727) 117,044 - - - EPS (cont & discont. operations) (KES) 0.38 0.74 1.37 1.64 1.86 2.13 2.31 18.8% DPS (KES) 0.10 0.20 0.35 0.45 0.52 0.60 0.65 20.0% Balance Sheet Share capital 73,588 73,588 73,588 73,588 73,588 73,588 73,588 Retained earnings 1,270,811 2,067,743 3,567,610 5,318,524 8,062,709 11,201,031 14,607,166 65.7% Total equity 6,666,294 7,330,496 8,555,639 9,865,151 13,809,772 17,020,931 20,476,558 44.1% Borrowings 522,552 88,388-36,325 38,504.50 40,814.77 43,263.66 9.1% Total non-current liabilities 716,625 285,748 210,797 312,253 280,522 341,203 388,951 11.6% Payables and accrued expenses 5,591,360 5,633,064 3,695,586 6,393,653 6,954,792 7,511,175 7,886,734 11.1% Borrowings 14,854,274 10,409,840 4,662,431 7,330,234 9,273,056 10,014,900 10,515,645 19.8% Total current liabilities 20,738,754 16,298,922 8,610,667 14,024,301 15,948,480 17,206,583 18,055,623 13.5% Total equity & liabilities 28,121,673 23,915,166 17,377,103 24,201,705 30,038,773 34,568,717 38,921,131 26.8% Property, plant and equipment 4,667,999 4,648,477 3,544,414 3,887,525 4,120,777 4,285,608 4,392,748 6.3% Prepaid operating lease rentals 600,648 734,754 887,127 910,704 965,346 1,003,960 1,029,059 6.3% Investment in associate 15,346 12,001 3,197 4,412 4,677 4,957 5,255 9.1% Total non-current assets 8,740,004 8,427,147 6,722,294 6,564,485 9,039,748 11,879,657 15,166,566 52.0% Inventories 6,528,533 4,141,183 3,095,900 5,828,398 5,332,007 5,758,568 6,046,496 1.9% Receivables and prepayments 10,756,595 9,725,617 6,524,544 7,773,875 8,693,490 9,388,969 9,858,417 12.6% Current income tax 321,483 569,755 272,270 148,615 166,574 190,498 206,755 17.9% Cash and cash equivalents 1,775,058 1,051,464 762,095 3,886,332 6,806,955 7,351,025 7,642,897 40.2% Total current assets 19,381,669 15,488,019 10,654,809 17,637,220 20,999,025 22,689,060 23,754,565 16.1% Total assets 28,121,673 23,915,166 17,377,103 24,201,705 30,038,773 34,568,717 38,921,131 26.8% Statement of Cash Flows Cash generated from operations 3,122,960 6,977,501 5,851,688 3,086,964 3,477,396 3,755,588 3,943,367 13.0% Interest received 43,932 69,244 83,909 92,461 98,009 103,889 103,889 6.0% Interest paid (1,671,759) (1,339,503) (651,344) (354,690) (502,824) (543,009) (570,181) 26.8% Net cash generated from operating activities 1,297,340 5,454,957 5,224,416 2,512,141 3,072,580 3,316,468 3,477,075 17.6% Net cash generated/ (used) in investing activities (469,962) (986,616) 668,962 (1,284,222) (1,738,698) (3,129,656) (3,286,139) 60.0% Net cash generated from/ (used in) financing activities (1,246,612) (5,069,666) (6,313,815) 2,124,571 1,945,001 744,155 503,194-51.3% Net decrease in cash and cash equivalents (419,234) (601,325) (420,437) 3,352,490 3,278,884 930,967 694,130-54.5% Cash and cash equivalents at beginning of the year 2,191,005 1,775,058 1,051,464 762,095 3,886,332 6,806,955 7,351,025 Exchange losses/ (gains) on cash and cash equivalents 3,600 (122,272) 131,068 (228,253) (358,261) (386,896) (402,258) 32.8% Cash and cash equivalents at end of the year 1,775,371 1,051,461 762,095 3,886,332 6,806,955 7,351,025 7,642,897 40.2% Company Filings, ApexAfrica Research 10

Key ratios FY13 FY14 FY15 FY16 FY17F FY18F FY19F Gross Margin (%) 3.9 5.7 6.7 7.1 7.5 8.5 8.5 Net Margin (%) 0.5 1.2 2.3 2.3 2.4 2.5 2.6 Issued Shares (M) 1,469 1,475 1,471 1,4772 1,472 1,472 1,472 Market Capitalization (KES M) est 18,883 18,950 18,899 18,908 18,908 18,908 18,908 Enterprise Value (KES M) 32,485 28,396 22,799 22,388 21,413 21,613 21,824 EV/EBIT 13.9 8.1 6.2 5.8 4.7 4.2 3.9 EV/EBITDA 14.1 8.3 6.4 5.1 4.6 4.2 4.0 Book Value per Share 4.5 5.0 5.8 6.7 8.9 10.4 10.6 P/E 33.8 13.2 10.0 7.8 6.9 6.0 5.6 P/B 2.8 2.6 2.2 1.9 1.4 1.2 1.2 Dividend Yield (%) 0.8 1.6 2.7 3.5 4.1 4.7 5.0 Average Share Price (KES) 10.8 9.5 9.3 12.3 Current Ratio (x) 0.9 1.0 1.2 1.3 1.3 1.3 1.3 Return on Assets (ROA %) 2.0 4.6 11.6 10.0 9.1 9.1 8.8 Return on Equity (ROE %) 8.4 14.9 23.6 24.5 21.0 20.4 21.8 Net Debt (KES M) 13,602 9,447 3,900 3,480 2,505 2,705 2,916 Total Debt/ Total Assets 54.7 43.9 26.8 30.4 31.0 29.1 27.1 Total Debt/ Shareholder Equity 230.7 143.2 54.5 74.7 71.4 65.4 67.6 Payout ratio (%) 26.3 20.6 27.1 27.4 28.0 28.0 28.0 Earnings Yield (%) 3.0 7.5 10.0 12.8 14.5 16.6 18.0 Source: Company, ApexAfrica estimates 11

Appendix Investment ratings Buy: A total return is anticipated in excess of the market's long-term historic annual rate (approximately 10%). Total return expectations should be higher for stocks that possess greater risk. Hold: Hold the shares with neither a materially positive total return nor a materially negative total return anticipated. Sell: Stock should be sold as materially negative total return is anticipated. Disclaimer ApexAfrica and its parent company Axys Group seek to do business with companies covered in their research reports. Consequently, a conflict of interest may arise that could affect the objectivity of this report. This document should only be considered a single factor used by investors in making their investment decisions. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. The opinions and information portrayed in this report may change without prior notice to investors. This publication may not be distributed to the public media or quoted or used by the public media without prior and express written consent of ApexAfrica or Axys Group. This document does not constitute an offer, or the solicitation of an offer, for the sale or purchase of any security. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and no responsibility or liability is accepted by Apex Africa or any of its employees as to the accuracy of the information contained and opinions expressed in this report. ApexAfrica Capital Ltd A The Riverfront, 1 st Floor, Prof. David Wasawo Drive, Off Riverside Drive P.O. Box 43676-00100 Nairobi Kenya T: +254-20-2226440 Fax: +254-20-2319092 Cell: +254-723-420204 W : www.apexafrica.com Part of Axys Group W : www.axys-group.com 12