Investment Guide for the Week

August 07, 2015 Investment Guide for the Week Naira resurgent at the parallel market NSEASI records 4.18% return 1

Naira resurgent at the parallel market NSEASI records 4.18% return The Equities market snapped its 8-day losing streak this week, and was resurgent after recording 4 consecutive days of gains before paring on the last trading day of the week. This Week on Week (WoW) return of 4.18% brings the YtD return of the market to -9.28%, as the volume and value of transactions advanced by 74.32% and 22.83% respectively. Leading the advancers for the week were EVANSMED, TRANSCORP, PZ, MAYBAKER and CONTINSURE, with respective gains of 38.89%, 29.13%, 25.26%, 14.50% and 12.05%. Conversely, leading the laggards were NNFM, ACADEMY, PAINTCOM, CONOIL and HONYFLOUR which recorded losses of 14.14%, 13.19%, 13.04%, 9.74% and 9.15% in that order. Earnings releases continued to filter into the market this week, though at a slower pace than in the previous week, with the likes of INTBREW and MAYBAKER releasing results during the week. CUSTODYINS and FLOURMILL declared dividends during the week. CUSTODYINS declared an interim dividend of NGN0.06/share, with closure and payment dates on the 21 st of August and 15 th of September respectively. FLOURMILL declared a FY2015 dividend of NGN2.10/share with closure and payment dates on the 9 th and 14 th of September respectively. Also, 4 companies are due to pay dividends in the coming week. SMURFIT and INTBREW are scheduled to make payments on the 11 th of August, while NNFM and REDSTAREX are listed for the 14 th of August. Chart 1.1: Month-on-Month returns of the NSEASI in 2015 Chart 1.2: Treand of NSEASI vs 14-day RSI 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00% 9.33% 5.45% 4.36% 1.83% January February March April May June August -1.15% -2.49% -14.70% Thousands NSEASI 14-Day RSI 50 45 40 35 30 25 20 15 10 5 0 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 90 80 70 60 50 40 30 20 10 0 Source: NSE, Bloomberg, Meristem research 2

The reason highlighted by most market players in recent times is that the perception that Naira is unfairly valued has dissuaded foreign investors (major players in Nigerian financial markets) from investing. However, recent developments in the FX market this week seems to have increased confidence of a resurgence after the appreciation of the currency against the greenback at the parallel market, with the Naira closing the week at NGN215/USD (vs. NGN240/USD on Thursday the 30 th of July). While recent policies may have resulted in the currency s resurgence, we are not confident about the sustenance of recent gains. Also, we are not confident that instituted policies will materially change perceptions regarding liquidity in the FX market, which is the primary concern of foreign investors. Also, other headwinds remain prevalent, and so we anticipate that this resurgence might be short-lived. In this report, we review events in the economy, laying emphasis on performance of different segments of the financial market, while presenting our expectation for the next week. Fixed Income: Marked volatility witnessed at the parallel market The CBN conducted OMO sales worth NGN59.41bn at the start of the trading week in an attempt to reduce system liquidity, while there was also a Primary Market Auction for Treasury bill (T-bill) worth NGN195.18bn, for the 91, 182 and 364-day instruments with stop rates recorded at 10.00%, 12.9% and 14.71% on the respective instruments. Through the course of the week, most money market instruments witnessed bearish sentiments consistent with reduced market liquidity, as the OBB and OVN rates hiked by 9.03% and 8.89% on average, to settle at 48.33% and 52.83% respectively Average T-bill yields increased steadily throughout the week to settle at 14.74%, while average bond yields also advanced, to close the week at 15.37% (+0.05%). Average NIBOR (Nigerian Inter-bank offered rate) saw a steep rise over the week to settle at 25.39% (+12.12% WtD). Over the week, the Naira had an average value of NGN198.41/USD at the interbank, and closed the week at NGN198.93/USD. Whilst the volatility within the BDC market saw the exchange trading in the range of NGN215/USD to USD230/USD during the week, with a bid-ask spread which at a point widened to c.ngn11 during intra-day trading, we anticipate the value of the Naira will continue to oscillate, extending into next week, as a consequence of the recent policy actions. 3

Agric Sector: LIVESTOCK reverses loss The weak performance recorded by the sector in the last week persisted, with sectoral breadth skewing in favour of decliners (0.50x), as a solitary stock gained against two stocks that pared. LIVESTOCK (5.56%) emerged the only gainer, reversing the gains from the previous week (-8.63%). On the flip side, OKOMUOIL and PRESCO pared by 4.50% and 0.61% in that order, while ELLAHLAKES and FTNCOCOA traded flat. The dourness over the week can be attributed to the lack of news flow specific to the sector. We opine that given the low level prices of most of the counters, bargain hunting might ensue in the coming week. Banking Sector: MERIBANK Index gains 3.45% Owing to the considerable rally of banking stocks seen in the first three trading days of the week, the MERIBANK Index closed 3.45% higher WoW. The index s advancement, in spite of major losses recorded towards the end of the week, were buoyed by sector heavyweights, most notably, ZENITHBANK (5.23%), ETI (5.10%) and GUARANTY (4.83%). Other gainers for the week were STERLNBANK (4.39%), SKYEBANK (3.96%), FIDELITYBK (2.67%) and FBNH (1.45%). Conversely, the underperformers were led by UBN (-5.29%), DIAMONDBNK (-3.16%) and STANBIC (- 2.87%). Diamond Bank, during the week, announced the resignation of the former CFO, Abdulrahman Yinusa, and subsequently announced the appointment of Chiugo Ndubisi as the acting CFO. Mr. Ndubisi is said to have been with the bank for over 20 years, wherein his most recent role was Divisional Head of Financial Management. As a result, we expect the transfer of duties to be seamless, with no negative impact on the entity Diamond Bank. The banking sector remains attractive, in spite of persistent challenges within the economy. While we are not expectant of outstanding corporate releases from the five banks which are yet to release H1:2015 numbers, we advise investors to focus on fundamentally justified stocks with potential for capital appreciation and probable dividend income. Consumer Goods: NSEFBT10 returns 5.84% MtD The NSEFBT10 sector index recorded a positive return of 5.84% this week, to push the YtD return to -14.00%. Six stocks recorded price declines, six traded flat, and eight stocks recorded price appreciations. 4

Position taking activities pushed the market prices of PZ, NB, GUINNESS, UNILEVER and 7UP upwards by 25.26%, 11.57%, 4.72%, 5.00% and 1.32% accordingly. While NASCON (+10.93%), and VITAFOAM (+2.68%) also featured on the gainers list. On the other side, NNFM pared the most, declining by 14.14% to peg the price at NGN13.30. Other decliners for the week included HONYFLOUR (-9.15%), CHAMPION (-6.90%), PREMBREW (-4.91%), CADBURY (-4.99%) and UACN (-2.63%) INTBREW released its Q1:2015 scorecard, which showed a 0.24% YoY increase in revenue, while Earnings-After-Taxes declined by 40.58% in the same period, owing to the YoY increases in cost of sales and administrative expenses of 3.29% and 17.09% accordingly. We opine that the attractive prices at which some of the companies ended the previous week dictated the performance for this week. We advise that investors time the market before entry, whilst also counseling against speculative trading. Healthcare Sector: EVANSMED posts FY2013 Scorecard The sector s performance trajectory continued to mirror the market, as our MERI- HLTH index closed the week marginally up by 0.03% WtD, thus pegging Year to Date return at -0.12%. The sector s breadth (1.00x) signaled an equal number of gainers and losers in the week. EVANSMED and MAYBAKER recorded price appreciation in the week, advancing by 38.9% and 14.5% respectively to peg their prices at NGN0.75 and NGN1.50 accordingly. While NEIMETH and FIDSON shed points in the week, depreciating by 6.6% and 1.5% respectively. All other counters traded flat. MAYBAKER released its H1:2015 scorecard during the week, which showed that the company recorded top-line and bottom-line growths of 10.67% and 118.45% YoY respectively. The company s cost management drive was evident during the period, as Cost-to-Sale and Opex ratios declined by 2.43% and 1.88% respectively, just as finance cost also declined by 58.92% YoY. EVANSMED released its overdue FY2013 performance scorecard, which showed a decline in revenue and earnings-after-taxes of 23.95% and 338% YoY respectively. The sector advanced marginally, alongside the market in the week. Given the low prices at which most stocks are currently trading, we advise discerning investors to take position ahead of a more sustainable recovery. 5

Industrial goods: Investors favour DANGCEM The industrial goods sector closed the week on a positive note, with five stocks recording gains against only two stocks which declined in value. Consequently, the Meri-Industrial index closed 0.09% higher WoW. CUTIX emerged as the highest gainer for the week following a 9.33% appreciation in share price to NGN1.64. DANGCEM, the most capitalized stock on the exchange, and key driver of this week s gains, closed the week at NGN181, having gained 5.85% during the review period. ASHAKACEM, BERGER and WAPCO also made the gainers list, as the stocks appreciated by 4.55%, 1.73% and 0.16% respectively. PAINTCOM and PORTPAINT were the only laggards in the week, after recording declines of 13.04% and 4.80% accordingly. We believe the positive sentiments on DANGCEM was primarily responsible for the gains recorded in the week, as more investors were drawn by the bullish trend in the market, and attractiveness of sector stocks. Nonetheless, we anticipate profittaking might dominate activities in the sector over the coming week. Insurance sector: Rally on insurance stocks, as sector returns 4.45% Measuring the sector s performance by the NSEINS10 index, the insurance sector recorded a WoW growth of 4.45% to peg the YtD return at -6.00%. The sector s performance was driven by the gains recorded on five stocks, including CONTINSURE (12.05%), MANSARD (10.67%), NEM (6.56%), CUSTODYINS (6.25%) and AIICO (3.61%). Custodian and Allied Plc. (CUSTODYINS), in its H1:2015 performance scorecard, showed a YoY growth of 6.97% in Gross Premium Earned (GPE), to NGN10.52bn in the current period up from NGN9.83bn in the corresponding period of 2014. Also, Profit- After-Taxes (PAT) grew by 14.99% YoY to NGN2.62bn, up from NGN2.27bn. Furthermore, in line with the company s payout history, an interim dividend of NGN0.06/share was declared. Law Union and Rock Plc. (LAWUNION) also released results during the week, which showed that the company recorded a 15.25% YoY decline in GPE. However, PAT surged significantly by 300% to NGN434mn in H1:2015, up from NGN108mn in H1:2014. This week s positive outing may be attributed to bargain hunting and speculative trading activities, given the relatively low prices at which most of the sector s stocks were initially trading. Hence, we do not expect the bullish momentum to subsist in the coming week, as we anticipate a level of profit taking on stocks that recorded gains during the week. 6

Oil & Gas Sector: Sector index closes 2.51% higher The sector advanced further in the week, after gaining 2.51% as measured by the NSEOILG5 index. Three counters declined in value, while two stocks advanced. Other counters traded flat. FO and MOBIL were the only advancers in the week, gaining 10.64% and 2.58% WoW to close at NGN208.00 and NGN160.00 respectively. On the flip side, CONOIL led the laggards, shedding 9.74% WoW to settle price at NGN36.87. TOTAL and OANDO also featured on the chart, declining by 7.98% and 1.60% accordingly. We note that the ongoing revitalization of the domestic refineries will help boost the performances of the downstream companies in the mid to long-term, once they start functioning at their maximum capacity, even as the Kaduna Refining and Petrochemicals Company (KRPC) announced that it is expecting to hit c.2million litres of petrol production daily by October 2015. We expect the sector to trade much in line with the overall equities market in the coming week, save for any sector specific news capable of inciting investors activities. Services Sector: Weak earnings releases drag sector performance The services sector, as measured by our MERISER index, ended the week on a negative note, paring by 2.35% WoW to peg the YtD at -7.78%. The sector breadth (0.25x) skewed in favour of decliners, as two (2) stocks advanced, while eight stocks waned in value. ABCTRANS and AIRSERVICE emerged as the only stocks that recorded gains during the week, after the corresponding stocks respectively appreciated by 5.88% and 5.82%. On the flip side, ACADEMY led the pack on the losers chart, as the counter waned by 13.19% to close the week at NGN0.79. The ticker was trailed by REDSTAREX (-6.69%), NAHCO (6.47%), LEARNAFRICA (4.39%), RTBRISCOE (4.23%), TRANSEXPR (1.90%), CAVERTON (0.99%) and IKEJAHOTEL (0.77%) in that order. In spite of the bullish market run during the week, the services sector recorded a loss. While the bearish mood might be connected to the not-too-impressive performance scorecards released by companies in the services sector, we expect speculative and bargain hunting activities to determine the position of the sector in the coming week. 7

Top 10 Outperformers Ticker WTD Return YtD Return Price (NGN) Current valuation metrics and statistics MCap [NGN'bn] P/E -TTM P/BV RoE Dividend Yield EVANSMED 38.89% -67.11% 0.75 0.55 3.58 x 0.14 x 3.90% 0.00% TRANSCORP 29.13% -18.15% 2.66 103.00 34.78 x 4.16 x 11.95% 0.00% PZ 25.26% 45.00% 34.51 137.02 22.10 x 2.99 x 8.33% 0.58% MAYBAKER 14.50% -5.06% 1.50 1.47 nm 0.47 x -3.40% 0.00% CONTINSURE 12.05% -8.82% 0.93 9.65 6.48 x 0.65 x 5.82% 11.83% NB 11.57% -18.33% 135.00 1,070.43 28.93 x 13.09 x 23.34% 2.59% NASCON 10.93% 9.32% 6.80 18.02 -- 3.42 x 7.43% 7.35% MANSARD 10.67% -12.50% 2.80 29.40 12.49 x 1.62 x 3.15% 0.00% FO 10.64% -8.73% 208.00 270.92 48.57 x 5.74 x 11.82% 1.20% CUTIX 9.33% 26.15% 1.64 1.44 5.61 x 1.42 x 17.79% 0.00% Top 10 Underperformers Ticker WTD Return YtD Return Price (NGN) Current valuation metrics and statistics MCap [NGN'bn] P/E -TTM P/BV RoE Dividend Yield NNFM -14.14% -26.32% 13.30 2.37 nm 2.33 x 7.38% 0.00% ACADEMY -13.19% -33.05% 0.79 0.40 14.19 x 1.04 x 7.31% 0.00% PAINTCOM -13.04% -35.06% 1.00 0.79 4.41 x 0.83 x 18.91% 0.00% CONOIL -9.74% -3.25% 36.87 25.59 15.93 x 2.16 x 12.24% 0.00% HONYFLOUR -9.15% -22.54% 2.68 21.25 10.17 x 1.66 x 10.50% 0.00% TOTAL -7.98% 5.26% 150.00 50.93 11.98 x 4.94 x 17.62% 6.00% CHAMPION -6.90% -28.51% 4.99 39.07 nm -1.42 x 7.83% 0.00% REDSTAREX -6.69% 16.75% 4.60 2.71 9.17 x 1.55 x 5.30% 0.00% NEIMETH -6.58% 82.05% 1.42 2.23 nm 0.74 x -0.72% 0.00% NAHCO -6.47% -3.83% 4.77 7.75 8.37 x 1.28 x 6.62% 0.00% 8

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