The Tipping Point Vetiva

[Type text]
VETIVA
CAPITAL MANAGEMENT LIMITED
2011 Outlook
The Tipping Point
SUMMARY
Global Outlook: Positive but Fragile
We align with the broad projections that emerging and frontier markets would
remain drivers of global growth even as advanced economies focus on debt,
deleveraging and fiscal consolidation (see our report titled Underlying
Assumptions – 2011 Outlook dated January 4, 2011). Notwithstanding the
positives of the emerging markets, it is important to watch out for rising
inflationary threats on the back of increasing commodities and energy prices.
Nigeria – Our Crystal Ball

Political Risks...gradually waning? With voting at the primaries adjudged
as being relatively free and fair, we see it as a pointer to the April general
polls. In our view, this is expected to gradually douse the impact of political
uncertainty in the financial markets. Notwithstanding, we do not utterly
discount the likelihood of other outcomes.
GDP growth to reach 7% in 2011: We allude to government’s projection of

at least 7% growth, though slightly lower than IMF’s forecast of 7.4%. We
expect that the non-oil sector particularly agriculture, retail and wholesale
trade would continue to drive economic growth. However, we believe
consumer expenditure would sluggishly rise in 2011, even as increases in civil
servants’ wages would have minimal impact on aggregate disposable income.
Still, impending inflationary pressures would impact negatively on real
disposable income.
Inflation to remain in double digits in 2011: Inflationary pressures are

prevalent and we believe inflation will remain in double digits in 2011 despite a
contractionary policy stance by the CBN. Pre-Election spending spree,
increasing energy and food prices and the implementation of the deregulation
policy in H2’11, are the most obvious threats to inflation. Following from this,
interest rates are expected to continue to spike upwards even as bond yields
become more attractive.
Exchange rate to remain steady: As revealed by CBN’s renewed stance on

exchange rate stability, the naira would likely remain stable in 2011, within
the N150/US$ (+3/-3%) band as the MPC has taken steps to constrict dollar
demand pressure through the hike in the interest rate environment. More
importantly, oil futures are projected to remain >$90/barrel in 2011. This,
alongside stable oil production volumes supports healthy reserves. We
however, do not discount the possibility of some level of volatility in H1’11
especially as the April elections draw near.
We remain bullish on equities: Notwithstanding, the expected rise in yields

on fixed income securities and the implied preference over other asset classes,
we make a case for equities given the current low valuations of Nigerian
equities. Lending support to this is the fact that investment alternatives are
limited and the fixed income market is shallow. Therefore, we project a base
case return of 18% for NSE ASI, which would largely driven banking (Zenith
Bank, Access Bank and First Bank), Oil and Gas (Oando), and Consumer
stocks (Dangote Flour and Flour Mills).
January 2011 2
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Vetiva Sector Classification, Redefined
We have redefined our Sector classification. This new classification, which is
based on Global Industry Classification Standards differs slightly from the
Nigerian Stock Exchange classification of sectors. It has been done with a view
to allowing us carry out clearer comparison across companies, industries and
sectors in accordance with global best practice. In some cases, we have
combined two or more industries with similar drivers to form a sector, but are
conscious of subtle peculiarities within industries. We now introduce 3 new
sectors. The companies have been reclassified based on the nature of their
principal business.
The Vetiva Consumer Sector comprises manufacturers and distributors of
essential food, beverages and tobacco, producers of non-durable household
goods and personal care products, food and drug retailing companies as well
as hyper markets and super centres. It also include non-essential food and
beverage, automotive and household durable goods, consumer retailing and
restaurants.
The Vetiva Energy Sector comprises companies whose businesses are
dominated by either of the following activities; exploration, production,
marketing, refining, transportation of oil and gas products; companies
engaged in the construction or provision of oil rigs, drilling equipment, and
energy related services are also included in this category
The Vetiva Infrastructure Sector includes companies whose core business
area is closely related to the built environment. These include manufacturers
of building materials such as cement, steel, wires, and companies involved in
road, rail, housing and other types of construction activities.
Vetiva Research Equity Ratings Guide Revisited

After considering a number of factors, including the expected volatility in the
equity market and break-even positions for investors, appropriately factoring
in transaction costs of c.4% (entry and exit costs), we effect changes in our
5-tier rating system. Our new rating bands are as follows:
Buy: ≥+25.00% expected total return – refers to stocks that are highly
undervalued but with strong fundamentals and where potential return in
excess of or equal to 25.00% is expected to be realized between the current
price and analysts’ 12 month target price.
Accumulate: +10.00% to +24.99% expected total return - refers to
stocks that are undervalued but with good fundamentals and where potential
return of between 10.00% and 24.99% is expected to be realized between the
current price and analysts’ 12 month target price.
Neutral: +5.00% to +9.99% range expected total return - refers to
stocks that are correctly valued with little upside or downside where potential
return of between +5.00 to +9.99% is expected to be realized between
Reduce: -5.00% to +4.99% expected total return - refers to stocks that
are overvalued but with good or weakening fundamentals and where potential
return of between -5.00% and +4.99% is expected to be realized between
Sell: <-5.00% expected total return - refers to stocks that are highly
overvalued but with weak fundamentals and where potential return lower than
-5.00% is expected to be realized between current price and analysts’ 12
month target price.
January 2011 3
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Sector Outlook
Banking Sector: Risk gives way, eyes on fundamentals
We are overtly upbeat on 2011 earnings, as the key drags on growth fizzle
out. Aside our modest outlook on loan growth which is expected to enliven
interest income as well as fee and commission books, the steady uptick in the
overall yield environment will provide support for appreciable growth in FY’11
earnings over 2010 levels. Our top calls in the sector are ZENITHBANK,
ACCESS and FIRSTBANK. These three banks have an expected return of 27%,
25% and 17% respectively.
Consumer Sector: Tough year ahead...efficiency, requisite

The global factor of rising commodity prices, and constrained domestic credit
growth will combine to pose challenges for companies within the consumer
sector in 2011. It is worthy to note that these stress points would play
differently for the sub-sectors within the Consumer industry. Importantly, the
ability of consumer companies to improve and sustain production efficiencies
would gird against some of these pressures. In the consumer space, we are
bullish on Dangote Flour and Flour Mills on the basis of our expected return of
29% and 11% respectively.
Energy Sector: Elections to slow reforms

With far reaching reforms in the pipeline in of the oil, gas and power segments
of the Energy industry, electioneering for the April polls seems to be shifting
the focus of the legislators, and also the ability of the executive arm of
government to focus on implementation. We note that for most segments, less
activity on the reforms would be felt pre-election, whilst the Government is
likely to put more focus on the pressing issues in the Energy Industry, post-
elections. Our top shot in the sector remains Oando, based on our estimated
return of 32%.
Infrastructure Sector: Set for mixed realities

Our focus on the building materials sub sector is on the cement producers, as
they dominate the infrastructure sector. The outlook for the cement producers
follows from our overall expectations of slow infrastructure development. In
line with the additional capacities expected to come on stream this year, the
sub sector is set to witness a major boost in cement supply. On consumption,
we expect some improvement in Q1’11 given the onset of the dry season. The
construction sub sector will still be dependent on government capital
expenditure. We expect a reduced level of government contract awards and
mobilization as focus on elections stalls decision making in government
quarters. Notwithstanding the strong fundamentals of the sector, most of the
stocks are stretched at current prices. However, we remain bullish on Lafarge
WAPCO and Julius Berger based on our estimated potential return of 18% and
14%.
Insurance Sector: Searching for value
With the Nigerian economy forecast to grow at 7.0% in 2011, and given rising
income levels and higher risk awareness among the populace, we are
cautiously optimistic about the demand for insurance products. However,
intense competition with rate undercutting, moderate returns from
investments, and adjustments to the new regulatory guidelines is likely to
continue to taper short-term profitability. Our favorite in the Insurance space
remains Custodian and Allied Insurance based on our estimated return of
32.1%
January 2011 4
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Capital Markets: High Expectations Amid Uncertainty

Our expectation is that the equity market will close 2011 18% up, with
the benchmark index ending the year at 29,246.49. In our view, this base
case scenario would be driven by a 30% return by banks, while Petroleum
Marketing and our new Infrastructure (includes building materials and
construction companies) sectors are forecast to return 18% and 9%
respectively. We expect our new Consumer group to return 15%, however,
sub sector forecast puts Food & Beverages at 21%, the Brewers at 12%, while
the Conglomerates will throw in a 6% return. As in 2010, we believe the
Insurance sector would once again lag the broader market with 2011 return
forecast at 5%.
Our Bull case estimate for the equity market performance rises 606
bps above our base case scenario to 24%. Again the banks will lead with
a 40% return, Petroleum Marketing and Consumer sectors will follow with 25%
and 19% respectively. The Infrastructure sector will post 18% return, while
Insurance counters will return 10%.
Our Bear case estimate sees equities returning 10% for the year. This
scenario forecasts banks adding 25%, the Petroleum Marketing and Consumer
sectors posting gains of 10% and 6% respectively, while the Infrastructure
and Insurance sectors will shed 4% and 5% respectively.
Given the expected hyperactivity in local Bond issuances by AMCON and the
federal government early in the year, we expect the bond market to continue
to attract capital flows as bond yields would trend higher in 2011, hence
shaving off, only slightly though, some of the potential investments in equities.
Stronger still, the uncertainty in the Nigerian Political environment might delay
significant investments in the capital markets further into the year as
investors exhibit caution over the outcome of the elections.
January 2011 5
[Type text]
VETIVA
2011 Outlook
The Tipping Point
CONTENTS
Global Outlook ........................................................................................7
Nigeria ...................................................................................................8
2010: Nursing the Wounds ..................................................................8
Spill Overs Into 2011 ............................................................................. 12
2011 Outlook: Our Crystal Ball ................................................................ 15
Capital Markets: High Expectations Amid Uncertainty ................................ 18
Sector Outlook ...................................................................................... 20
Banking Sector: Risk Gives Way, Eyes on Fundamentals ....................... 20
Consumer Sector: Tough Year Ahead, Efficiency, Requisite ..................... 60
Energy Sector: Elections To Slow Reforms .......................................... 106
Infrastructure Sector: Set For Mixed Realities ..................................... 130
Insurance Sector: Searching For Value ............................................... 154
Investment Ratings.............................................................................. 163
Contacts ............................................................................................. 164
Disclosure........................................................................................... 165
January 2011 6
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Global Outlook: Positive But Fragile Recovery

Emerging Market (EM) economies are projected to remain the drivers of global
growth in 2011, sustaining the trend witnessed in 2010, though at a modest
rate this time. We anticipate the growth in the Developed Economies (DE) will
remain a drag on overall growth as the world’s largest economies battle to
resolve their fiscal issues. The United States (US) is likely to adopt fiscal
consolidation in trying to reduce its deficits which may taper growth. In the
euro zone, on the other hand, attention will be on the possibility of the debt
contagion of other countries in the region and the continuing viability of a
single European currency. Potential rise in oil and other global commodity
prices is likely to fuel inflation pressures in the EM region. On the other hand,
narrowing supply slacks and higher inflation expectations support a gradual
rise in inflation in the DE. There is likely to be a gradual push towards global
rebalancing between the world’s surplus and deficit countries. Implementation
of global rebalancing will be challenging in the short-term as it will put
pressure on consumption patterns with adverse effects on economic growth.
GLOBAL INFLATION TREND QUARTERLY GDP FORECAST FOR 2011

7.0
10 Em erging
Advanced 6.5 World
9
Emerging 6.0 Advanced
8
5.5
7
6 5.0
5 4.5
4 4.0
3 3.5
2 3.0
1
2.5
0
2.0
2007 2008 2009 2010 2011F
Q1'11 Q2'11 Q3'11 Q4'11
Source: IMF, Vetiva Research Source: IMF, Vetiva Research
January 2011 7
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Nigeria
2010…Nursing the Wounds

Economy forges on
In line with the projection for overall 2010 growth of 7.85%, real Gross
Domestic Product (GDP) has continued to trend by an estimated 7.23%,
7.69% and 7.86% in Q1, Q2 and Q3, with a projected Q4 growth of 8.29%.
This shows strong growth over 2009 which recorded growth of 4.50%, 7.45%
and 6.96% over the same periods.
Figure 1: QoQ Real GDP Growth (%)

2009 - 2010
Non-Oil GDP has consistently

determined the direction of overall Oil – GDP has continued to
be a drag on overall GDP
GDP.
Source: Vetiva Research, CBN
The growth in the economy continues to be driven by the non-oil sector,

especially agriculture, with support from wholesale and retail trade, and
services. Growth in the Agricultural sector is largely driven by the expansion of
land under cultivation while the whole and retail trade sector has benefitted
from the dearth of the manufacturing sector. The contribution from the oil
sector, on the other hand, has received a boost in recent times, owing to the
improvement and stability of oil production output at an average of 2.2 million
barrels per day (bpd) and strong crude oil prices averaging $80.92/barrel in
2010.
Figure 2: Crude Oil Prices and Domestic Oil Production

2010
January 2011 8
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Currency held steady

During the year, the CBN depended on the reserves to defend the naira and
sustain it within the stated +3/-3% (N150/US$) band. The Nigerian
government has over the years depended on crude oil as its main source of
government revenue and foreign exchange earnings. This has meant that the
The CBN intervened to support the Central Bank’s ability to defend the position of Naira has been largely
currency with the external
dependent on the strength of revenues accruing from crude oil sales; and on
reserves, resulting in its YTD
decline of 23.70%. fluctuations in crude oil prices. Gross external reserves were put at $32.35
billion as at 31 December, 2010 amounting to its 2010 decline of 23.70%. The
Federal Accounts Allocation Committee (FAAC) made about 5 withdrawals from
the Excess Crude Account (ECA) in 2010 including $1 billion as outflow for the
establishment of Sovereign Wealth Fund (SWF) which is expected to replace
the ECA. The reserves came under pressure in the last few months of the year
end due to increased dollar demand from importers and subsequently, in lieu
of the elections. The balance in the ECA closed the year at $300 million.
Figure 3: Foreign reserves (‘$Millions) and Exchange Rates (NGN/US$)

2010
Preparation for 2011 elections…

The early part of 2010 was filled with uncertainties, first about the state of
health of the then President, Umaru Yar’adua. The anxiety eventually doused
Uncertainties characterized the on his death on the 5th of May, and the assumption into office of Goodluck
early part of 2010 until President
Jonathan. Second was the suspense of the President on his intentions to run
Goodluck Jonathan declared his
intentions to run for the office of for office in 2011, with focus on zoning as a major obstacle. The underlying
President, after reorganizing some argument was that it will be the North’s turn in 2011 because Olusegun
key agencies. Obasanjo served two terms (1999-2007) and the Northerner, Yar-Adua, less
than one (2007-2010) before being succeeded by Jonathan (from the
Southern state of Bayelsa in the Niger Delta). After initiating some needed key
reforms, such as the ousting of the erstwhile elections Chairman, Prof. Morris
Iwu, and establishing a road map for the power sector, to set the stage,
Jonathan eventually broke the silence and declared his intentions to run for
office as he gave a speech in Eagle’s Square on September 15, 2010.
January 2011 9
[Type text]
VETIVA
2011 Outlook
The Tipping Point
...Catered for by an expansionary fiscal stance…

Initially, a fiscal stimulus budget of N4.1 trillion in expenditure was proposed
to spur the economy to growth in 2010. The budget was eventually increased
The budget was increased to N5.2
trillion, resulting in a deficit of N1.9 to N5.2 trillion through supplementary budgets and amendments to cater for
trillion, which was financed through additional expenses especially towards the 2011 elections. As at October 2010,
the issuance bonds and only 43% of actual capital spending had been used; the recurrent expenditure
withdrawals from ECA.
on the other hand was on target. Estimated government revenue was N3.2
trillion, resulting in a budget deficit of N1.9 trillion (equivalent to c. 6.1% of
GDP). The deficit gap was largely financed through the issuance of domestic
bonds and withdrawals from the ECA as detailed above.
... which was out of sync with the CBN’s restrictive policy
The apex bank’s resolve to embark on a contractionary policy became

apparent at the Monetary Policy Committee (MPC) meeting of September 21,
The MPC’s use of contractionary 2010 amid potential inflationary pressures all year round. On the back of this,
measures by increasing interest the Monetary Policy Rate (MPR) was upped 25bps to 6.25% and the Standing
rates led to an overnight hike in
Deposit Facility (SDF) rate to 3.25%. As a direct response to this
interbank market rates and NIBOR.
announcement, rates in the interbank market which had remained relatively
low (except for temporary illiquidity spikes) soared, reaching a one-year high
of 13.75% (12 Nov 2010) while NIBOR also peaked at 13.46% on the same
day. In the November MPC meeting, the MPR was left unchanged at 6.25%,
however, the Standing Deposit Facility (SDF) rate was hiked by 100bps to
4.25% in a bid to address inflation expectations.
Supply factors underpin high yields in the Bond market

Tighter monetary conditions and increased issuance of bonds continued to
exert upward pressure on money market and bond yields in the year under
review. Specifically, FGN bond issuances increased significantly, underpinned
Expansionary fiscal policy by the by the expansionary fiscal policy of the Federal Government. From an initially
government led to increase in bond planned bond issue program of about N700 billion, it allotted N1.1 trillion as at
issuance, which resulted in high December, with Banks accounting for c.53% of the total allotment. Discount
bond yields.
Houses and Pension Fund Administrators (PFA) followed closely at 10% and
12% respectively. Interestingly, the government scheduled an auction for
December, which made it the first time a bond issuance will be made in
December of any year.
January 2011 10
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Inflation finished the year at a 13-month low of 11.8%
Inflation eventually began to moderate in November in response to the rate

Inflation declined to 11.8% in hikes by the MPC. In detail, it hit a 13-month low of 11.8% YoY in December
December 2010 as a result of the
2010 after peaking at 15.6% in February while it averaged 13.8%. Whilst we
combined effects of MPC rate hikes
and reweighting of the CPI basket. recognize the pass-through impact of the hike in the MPR and Standing
Deposit Facility Rate (September and November respectively), we are cautious
to say that this declining trend in overall prices was as a result of the base
effect. We recall the CPI basket was re-weighted in August and the largest
component, the Food Index, was revised lower from 64.8% to 50.7%. We
believe this re-basing has had an effect on current trend and expect a
correction going forward.
Figure 4: Inflation (%)

YoY and MoM 2010
January 2011 11
[Type text]
VETIVA
2011 Outlook
The Tipping Point
SPILLOVERS INTO 2011

Elections, Elections, Elections
Six Presidential candidates A host of factors in Nigeria, including reforms across various sectors of the
emerged after the primaries; the economy, remain hinged on the outcome of the April polls. In our January
contest is now pitched between 2011 note, “Underlying Assumptions – 2011 Outlook”, we reviewed the
either PDP and other parties, or political terrain and gave 3 scenarios prior to the conclusion of the Presidential
PDP and a coalition. Primaries. Now that the primaries have come and gone, this is how each party
stands:
Peoples Democratic Party (PDP) – President Goodluck Jonathan

Action Congress (AC) – Mallam Nuhu Ribadu
All Nigeria Peoples Party (ANPP) – Mallam Ibrahim Shekarau
Social Democratic Mega Party (SDNP) – Mr Pat Utomi
Congress of Progressives Change (CPC) – Muhammadu Buhari
National Conscience Party (NCP) – Dele Momodu
We expect the 2011 presidential polls to be keenly contested amongst the top
six candidates. However, we have narrowed our possible scenarios to two:
Scenario 1: PDP vs other parties (Probability: 70%)

Come April, the final face-off is among PDP’s Jonathan, the CPC’s Muhammadu
Buhari, the AC’s Nuhu Ribadu, and candidates from the relatively smaller
parties. Under this scenario, we expect Buhari, ANPP’s Shekarau and Ribadu to
split Northern votes. Jonathan’s chances of winning the elections are bright.
Scenario 2: PDP vs Coalition (Probability: 30%)

An unlikely merger between the CPC and the AC produces one strong
candidate to contest the polls with PDP’s Jonathan. Whoever emerges as the
candidate for the combined parties would wield very strong clout in the North
and South-West. Under this scenario we expect a very tight contest between
the PDP and the combined party. Jonathan’s chances are greatly reduced.
Deregulation in the offing

One of the most contentious issues in the Nigerian economy remains the
question of deregulation of the petroleum sector. Whilst the federal
Post-election, government may
government has adopted a temporary solution to solving the age-long problem
embark on the deregulation of the
downstream sector, as petroleum of petroleum subsidy reimbursements, via the issuance of discountable
subsidy reimbursement is very Sovereign Debt Notes to product importers, the burden, in terms of the high
challenging. cost to the government, remains very challenging. Thus, we anticipate that
the full deregulation of the downstream sector would be broached post-
election, as it is unlikely that the government would aim to deal with the
sensitivities and labour related issues arising from a price-hike, which would
be the immediate effect of the policy implementation pre-elections. Post
deregulation, we expect increased competition in the market place as entry
barriers in the supply and distribution network would be removed.
January 2011 12
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Addressing infrastructural deficiencies, how soon?

Nigeria’s poor state of infrastructure remains a huge drag on its progress in
Continued dilapidation of
global competitiveness. On the Global Competitiveness Index compiled by the
institutions, infrastructure and
education has caused Nigeria’s GCI World Economic Forum, Nigeria has continued to fall in the ranks from 94 of
rank to fall from 99 in 2009 to 127 134 countries in 2008, to 99 of 133 countries in 2009 and 127 of 139
in 2010. countries in 2010. Analyzing the criteria for this ranking reveals that Nigeria
has continued to fall short in institutional reforms, infrastructure development
and improvements in the educational sector. Hence economic development is
getting more constrained thereby pushing the country further down in the
rankings.
Top on Nigeria’s list of short-comings is the poor performance of the energy

Government is set to tackle sector. Manufacturers continue to cite unreliable power as the most binding
unreliable power supply, a major constraint to efficient production, and small scale industries are unable to grow
economic constraint, with the their businesses. Succor, however, came underway when in August 2010, the
Power Sector Roadmap. President, Goodluck Jonathan unveiled the Power sector roadmap aimed at
improving power supply to residential, commercial and industrial consumers.
Whilst it is laudable that the government has set the ball rolling in a quest to
get this reform right, only time will tell the extent to which this reform will be
actualized.
Waiting for the credit taps to open

Since the marked slowdown in credit growth in 2009, credit to the private
sector has continued to witness a sluggish trend. Apt to say the government
has been the beneficiary of credit with a 55.61% growth in 2010, compared to
private sector growth of 12.02%. The dearth of credit has been less of an
As banks are still contending issue for larger and more established corporations. We have seen a lot of
with non-performing loans,
companies approach the capital market for funds to cater for their financing
they prefer to grant credit to
needs. Manufacturing industries, small and mid-tier companies have been at
low risk institutions at the
higher end of the market. the receiving end of the banks’ aversion to credit extension. This has not been
reflective in the growth of the economy, as the major contributor to GDP
(Agriculture) is largely informal and not dependent on credit. It may still be a
long wait for credit taps to start flowing, though in the interim, lending will
continue to tilt towards the low risk, higher end of the market as the banks
contend with non-performing loans.
Dependence on crude oil

As at Q3’10, crude oil revenue accounted for 74.2% of total government
revenues (vs non-crude oil revenue at 25.8%). However, non-oil GDP remain
Nigeria’s undiversified the main driver of growth, contributing 84.8% in Q3’10 compared to Oil GDP
economy continues to rely at 15.2%. The government is preparing Nigeria’s Vision 2020 which focuses on
largely on Crude oil for
diversification of the economy away from oil. Vision 2020 will articulate the
revenue, however non-oil GDP
remains the main driver of government’s goal of placing Nigeria among the top 20 economies in the
economic growth. world. At present the country’s economic structure reflects an undiversified
economy that is highly dependent on a capital-intensive oil sector, with a
traditional agricultural sector accounting for the bulk of employment. Without
well laid down infrastructure to provide support for the manufacturing and
service sectors, it may be increasingly difficult to diversify the revenue base of
the economy.
January 2011 13
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Unemployment remains a key challenge

We align with the The economy has sustained economic growth without creating jobs as
Government’s employment unemployment rose from c.14.9% in 2008 to c.19.7% in 2010 despite
creation strategy as detailed in
the 2011 budget speech. We economic growth >7%. The Government sees this as a key challenge, as
believe the creation of labour- detailed in its 2011 budget proposal and is expected to take decisive actions to
intensive industries will tackle it. We believe the establishment of labour – intensive industries through
immediately impact the creation of public infrastructure projects will immediately impact the level
unemployment.
of employment.
Finances of the sub-nationals
The governments of sub-nationals are likely to meet relatively empty

treasuries when the next administration returns, and the challenge becomes
We anticipate the sub- how they will fund themselves. With the President not needing further favours
nationals will need more funds from the states, it only means they will have to meet expenditure from the
to support their finances and
regular monthly FAAC allocation and Internally Generated Revenue (IGR). The
are likely to approach the
bond market for such capital. capital market would have been the next viable option, but the CBN’s
guidelines on bond participation intended to make states more fiscally
responsible would restrain such participation.
January 2011 14
[Type text]
VETIVA
2011 Outlook
The Tipping Point
2011 OUTLOOK – OUR CRYSTAL BALL

GDP growth to reach 7% in 2011
The main drivers of GDP growth have been the Agricultural, Wholesale and
Retail Trade, and Crude Oil sectors, and we believe that these sectors will
continue to support growth in 2011 with the non-oil sector yet again outpacing
the oil sector. The IMF has a growth forecast of 7.4% whilst the FG in its 2011
budget has a similar projection at 7%. We see output growth at 7% in 2011.
Agriculture: Barring major alterations to weather patterns, we expect

Government incentives, agricultural output to be stable enough to provide a steady boost for the
anticipated good weather and sector and overall output. Also in favour of the sector is the increase in
increase in global food prices global food prices which may encourage farmers to harvest more crops.
is expected to provide a boost Incentives underway to promote the sector include a World Bank $185
to the agricultural sector. million Commercial Agriculture Development Programme (CADP) for states
in Nigeria.
Currently only 5 states are implementing the programme and the World
Bank has further put in place an additional $50 million for states that
achieve a 30% implementation rate in 2011. We are optimistic that all these
factors will boost the productivity and performance of the agricultural sector
in Nigeria.
Crude Oil: Oil production which has been on an upward trajectory in recent
times becomes susceptible to increased volatility even as we approach the
2011 elections. Also, considering the gradual resurgence of attacks on oil
installations in the Niger Delta over the last few months, there are risks to a
stable level of production in the year. In our note, “Underlying Assumptions
– 2011 Outlook”, we provided our views on the outlook of crude oil prices
this year. Though its prognosis tilts favourably to the north, its sustenance in
that trajectory remains hinged on the performance of the global economy
especially the US, Asia and Europe.
The direction of crude oil exports are tilted towards the Americas, Asia and
Sustenance of oil prices Europe with the United States accounting for c.30% of imports. Despite a
remain hinged on the
positive 2011 outlook for the regions, growth remains very fragile and may
performance of the global
economy. be tipped over by the slightest negative developments such as a slowdown
in the Chinese economy and a deepening of the debt crisis in Europe. Crude
oil prices peaked at its 27-Month high on the 17th of January this year,
which feeds in favourably in terms of revenue for the Nigerian economy.
Consumer spending to improve, albeit slightly

From a contraction of c. -9.5% in 2009, we believe real disposable household
will commence a steady positive rise by the time 2010 figures are released.
The growth in income will reflect the fact that wage growth has managed to
keep pace with inflation. In 2010, inflation averaged 12.6%, while we estimate
Implementation of wage wage growth to be around 13.9%. Consumer expenditure is also estimated to
increase will likely improve have increased by c.14% in 2010 which is positive for the retail and trade
consumer spending. sector. Going forward, we expect consumer expenditure to sluggishly rise as
the economy moves from recovery to expansion, and also supported by the
implementation of wage increases for civil servants, medical personnel, and
University lecturers amongst others.
January 2011 15
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Inflation to rise steadily in 2011
The September MPR hike and the November SDF corridor adjustment have
significantly eased YOY inflation. The 12-month inflation rate fell from a peak
of 15.6% in February to 11.8% in December and is likely to continue to fall in
the early months of 2011 as the base effect kicks in. However, we believe
inflationary pressures are prevalent and are likely to increase as we approach
Election spending and
deregulation of the petroleum Q2 of 2011, with election spending spree set to kick in. months of 2011 as it
sector – forerunners of continues to ride on the effect of the CPI re-basing. More importantly, it has
inflationary pressure. become clearer that the causes of inflation are more structural than liquidity
driven. As such, we expect inflation to remain in double digits in 2011 in spite
of interest rate hikes by the Monetary Policy Committee (MPC).
Coupled with this is the recent depreciation of the Naira (declined by 1.1%
against the Dollar December to date) which we expect will push up the cost of
imported goods, thereby putting pressure on headline inflation through the
imported inflation index. As we switch from politics to policy in the second half
of the year, we expect the implementation of the deregulation of the
petroleum sector to take effect with short-term consequences which include
increase in consumer prices.
Exchange rate to remain steady

Crude Oil prices as projected above $90/barrel and stable oil production
volumes lend support to a stable exchange rates regime in 2011. In our
With an allowance for volatility opinion, the naira is likely to remain comfortable within the N150/US$ (+3/-
in Q1’11, the naira is expected
3%) band as the CBN will be in a better position to defend the currency than it
to remain stable through
2011. was in 2010 on the back of a healthy reserves position. However, we do not
discount the possibility of some level of volatility under abnormal conditions as
witnessed in December 2010. For Q1’11, uncertainty around the outcome of
the April elections is likely to put some pressure on the naira with increased
outflows of funds and little inflow.
Infrastructural spending to support economic growth
Fiscal policy should support growth through an ongoing improvement in

infrastructure spending. Notably, the Federal Government in its medium term
budgetary frame-work (based on National Implementation Plan for NV2020)
has a fiscal commitment to sustained spending on capital projects.
Further to this, the 2011 Budget Policy statement published in December

stated the establishment of an Infrastructure roadmap which has identified 50
priority projects that must be executed to enhance economic productivity. The
Infrastructure road map
budget speech stated that provision had been made for some of these projects
expected to improve structural
gaps in the economy. in the 2011 budget whilst depending on private sector financing for the rest.
This is an encouraging first step in the right direction though we note that the
allocation of N1,005 billion to capital expenditure is 26.6% lower than the
N1,370 billion allocation in 2010.
January 2011 16
[Type text]
VETIVA
2011 Outlook
The Tipping Point
We believe the government will depend a lot more on the private sector for
financing. For this purpose, the framework for a Viability Gap Fund (VGF) is
being designed in conjunction with the Infrastructure Concession and
Regulatory Commission (ICRC), and the World Bank to provide grants for
projects which have been identified as suitable for a PPP (Public Private
Partnership) arrangement. In our opinion, we are not likely to see much of
infrastructural activities until the successful conclusion of the April 2011
elections.
Budget Deficit expected to widen away from projection
Government’s fiscal stance in 2011 remains uncertain. One on hand, it alludes

to a fiscal consolidation strategy and projects a deficit of 3.62% from 6.10% in
2010. On the other hand, we have very little information on its plans. The
Though the budget alludes to
Debt Management Office (DMO) is yet to release an issuance calendar for its
a fiscal consolidation strategy,
there is a high probability of debt auctions but auctioned only $60 billion in January, a significantly lower
its upward revision. amount from the monthly averages in 2010. If the budget follows its usual
pattern, we anticipate a high probability of an upward budgetary revision
especially after the elections. This is expected to cause the budget deficit to
widen further in the course of the year. Contrary to 2010, the government in
its 2011 budget cites reducing reliance on domestic borrowings which means
more external borrowings. This implies vulnerability to the volatility and
uncertainty of the external environment with implications for external debt.
January 2011 17
[Type text]
VETIVA
2011 Outlook
The Tipping Point
CAPITAL MARKETS
High Expectations amid Uncertainty
Spirits Rekindled as Gains Return
The year 2010 opened with trades trending up, as investors adapted to the
initial shock of the Banking reforms of late 2009. As the fates of the Banks
took shape, cautious trading resumed in the Banking sector. Riding on this,
News on the operations of and backed by surges in the Building Materials and Food & Beverages sectors,
AMCON and the noteworthy
the All Share Index (ASI) rose through Q1’10 to peak at 28,029.78 (+34.51%)
listing of Dangote Cement Plc
revived interest the Market in April. Thereafter, the firm stance of the Central Bank of Nigeria (CBN)
through Q4’10 to keep the against the use of Bank stocks as collateral, administrative shake-ups in the
market vibrant, enabling it NSE (dismissal of the then DG, Dr. Okereke-Onyiuke and other executives) as
close the year 18.9% well as ripples of the Euro-zone sovereign debt crisis watered down trade
volumes, softening the momentum of the market over the tail-end of Q2’10
and early Q3’10. However, news on the operations of AMCON and the
noteworthy listing of Dangote Cement Plc revived interest the Market through
Q4’10 to keep the market vibrant, enabling it close the year 18.9% up at
24,770.52.
Beyond Satisfactory
Laudable for reversing the losses of the last two years to pitch the Index close
for the year in line with our forecast range of 24,603.33 (+18.06%) to
25,293.15 (+21.37%), 2010 was more remarkable for the positives it held.
Returning confidence in the bourse which saw foreign participation surge 88%
in 2010, and wider trading hours introduced in December led to a 16%
increase in traded volumes, meaning liquidity was improving from recent lows
of 2009. Fresh listings towards the end of the year brought more sectors
(most notably, the Building Materials sector) to the fore of the market,
evening out the spread of Index movement and softening the grip of the banks
on the market. This is expected to overshadow concerns raised by the
potential delisting of Nigerian Bottling Company and urge further foreign
investment in 2011. With the consummation of sizable M&A deals such as the
Dangcem-BCC combination, as well as the announcement of joint ventures like
the UAC-Tiger Brands deal and inklings of more to come, 2010 has set the
stage for further market growth in 2011 as investors anticipate performance-
based appreciation in the stocks of quoted companies.
January 2011 18
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Reforms Underway
Further on, refreshed talks about the Petroleum Industry Bill have placed its
passage behind the elections. On eventual execution, the bill would incite
shake-ups in the sector, with probable emergence of new companies built on
the local content clause even as existing ones flourish. Though the pay-offs
from the reforms fall in the long-term, increased interest in the sector is bound
to influence the stock market positively. In addition, on the slim chance that
the Power sector reforms take shape in 2011, other sectors that are heavy
The proposed upgrade of the energy spenders would enjoy the advantage of lower operating expenditure
trading platform through
via reduction in power costs.
partnership with the American
Express Company (AMEX) Within the stock market, the transformation that began last year is expected
would help the market
to start yielding dividends this year in the form of improved transparency
optimize the recent extension
of trading hours. more internal efficiency, and credible leadership. For one, the proposed
upgrade of the trading platform through partnership with the American
Express Company (AMEX) would help the market optimize the recent
extension of trading hours. This would draw the spotlight to the Nigerian
bourse as economic fog clouds Europe and foreign capital searches for
alternative investment destinations, especially Emerging and Frontier markets.
Optimism Rife, AMCON Breathes New Life

Banking on the gains of the last trading year, a number of factors are bound to
whet investors’ appetite over 2011. While many await the conclusion of the
general elections to get a clearer picture of how events will unfold going
forward, activities that kick-started last year would continue to shape the
market. Now that AMCON is in full swing, the Banks would take centre-stage.
Beyond improvements in the financial standings of affected institutions, the
loan acquisition process is expected to free up funds which can then be
chanelled into the broader economy.
Bond Yields look up
Driven by the incessant sovereign debt issuance in 2010 (an estimated N1.09
trillion), bond yields saw a sharp rise across all maturities. Despite the
We do not see a sharp decline protracted low interest rate environment, investors rode on the fiscal deficit
in yields, particularly as the and increasing debt profile of the government to demand higher returns.
monetary authority stands Though the matching upsurge of fixed income demand on the heels of
poised to tighten the system investors’ flight to safety relatively suppressed the short-end of the yield
curve, the impact was marginal as reflected in the 502bps and 135bps
increase on 3-year and 7-year tenor instruments (relative to the 704bps surge
on 20 year tenor). With due acknowledgment of the growing appetite of banks
to grow their loan books and the consequential impact of such asset allocation
on the yield curve; even as banks are prime players of the bonds market, we
do not see a sharp decline in yields, particularly as the monetary authority
stands poised to tighten the system. It is interesting to note that yields have
marginally retraced steps in the few trading days of the year as supply in the
secondary market eases on expectation of modest reduction in domestic
borrowing going forward, especially as the government tests the global market
with the launch of its debut US$500 million bond.
January 2011 19
[Type text]
VETIVA
2011 Outlook
The Tipping Point
SECTOR OUTLOOK
Banking: Risk gives way, eyes on fundamentals
We are overtly upbeat on 2011 earnings, as the key drags on growth fizzle
out. Aside our modest outlook on loan growth which is expected to enliven
interest income as well as fee and commission books, the steady uptick in
overall yield environment will provide support for appreciable growth in FY’11
earnings over 2010 levels.
Shifting goalpost; 2010 marks the inflexion

2010 can be aptly described as an inflexion year in the Nigerian banking
sector, as reflected in the striking shift in goalposts across all relevant
benchmarks; (1) Dramatic slowdown in credit creation as revealed by the
5.8% growth in overall credit to the private sector, a far cry from the 5-year
(2005 to 2009) CAGR of 58% (2) Increased hedge in “risk-free” liquid assets
with resultant balance sheet liquidity of c.42%; an apparent evidence of
The CBN’s streams of risk extreme risk aversion, particularly when the 25% regulatory requirement is
management reforms, though put into perspective; (3) Focus on capital preservation as against profitability
with inevitable short term
with implication on Return on Average Equity (RoAE); (4) Keen adoption of
pains, have significantly
changed the business models “prudent provisioning” to provide hedge for probable loan loss (5) Cost
of banks efficiency-based competition in contrast to post-consolidation rivalry over
balance sheet size; (6) Improved disclosure and transparency, perhaps still
below international best practices, but far ahead of historic norm; (7) A
ground halt in the rally for deposits as banks sit on highly liquid asset,
suggesting little or no need for fresh funds in the interim.
Apt to say that the foregoing synchronized episodes in the Nigerian banking
system, are not just a fall-out of the H2’09 CBN/NDIC rounds of stress tests
but also of complimentary reforms and zero-tolerance for non-compliance
stance of the apex bank. The CBN’s streams of risk management reforms,
though with inevitable short term pains, have significantly changed the
business models of banks with consensus expectations of sustainable long-
term gains. While we are cautious to say that the apex bank is yet overdone
with strict reforms as it stands poised to consolidate on the modest stability
achieved in the last four quarters, we see the CBN putting up a relative
forbearance culture, especially as it persuades banks to buy-into its salient
objective of easing real sector financing.
Profitability and easing risk to lubricate credit channels

While the conservative stance of banks has augured well for balance sheet
strength and capital preservation, we believe the need for an optimal balance
between profitability and solvency will incite banks’ return to their core
business of credit creation. In addition to our outlook of profitability-propelling
growth in private sector credit, the relative NPL relief on the back of AMCON’s
purchase of eligible toxic assets will lubricate credit channels, as balance
sheets become stronger with wider room for risk absorption. To our mind,
declining default risk gauged by improving cashflows of corporate and
households will serve as further lubricants for credit flows going forward.
January 2011 20
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Notwithstanding our view of banks’ appetite to resume private sector credit

growth, we assert that lenders will, in the near-term, tilt towards the high-end
of the market to minimize credit risk, albeit with matching lower returns.
We assert that lenders will, in Contrary to the post-consolidation experience when banks “knocked on doors”
the near-term, tilt towards the to extend loans, the recent NPL blight and fears of further toxic asset
high-end of the market to formation have largely eroded banks’ enthusiasm to compete over credit
minimize credit risk, albeit growth numbers and loan book size. Banks’ operation over the last six
with matching lower returns quarters have been dominated by balance sheet repairs as reflected in
domineering focus on NPL recovery and restructuring. 2010 saw barely 5.8%
growth in private sector credit; a far cry from the 5-year CAGR track record of
58%.
Given the impact of this unusual aversion to risk assets creation on

profitability, as reflected in the declining industry RoAE (from an attractive
historical average of c.20% to a FY’09 abysmal level of 2.2%), we believe
banks will renew interest in loan creation to engender shareholders value
accretion. Though, Q3’10 earnings scorecards show an encouraging annualised
return on equity of 10.7%, we are cautious to say that the sustainability of
this appreciable RoAE recovery requires increased loan transaction volumes
which is a key driver of interest as well as fees and commissions income.
Growth in private sector credit still down as banks take asylum in “risk-
free” assets (5.8% in 2010 Vs 5-year CAGR of 58.5%)
Source: CBN, Company Financials, Vetiva Research
January 2011 21
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Balance sheets to crawl out of risk asylum

We see managements across our value lenders fine-tuning operational
guidelines and in particular, credit approval procedures in preparation for a re-
launch into the loan market (the highest risk assets on banks’ balance sheets).
In view of this, we assert that the currently high internal liquidity in the
system will somewhat dry up in the near term as banks set new targets for
Asset-Liability Management (ALM), tilted towards the risk asset class.
The flight to safety over the last four quarters overshot banks’ exposure to
“risk-free” instruments as reflected in the currently high balance sheet liquidity
(c.42% Vs. regulatory requirement of 25%) with a preference for government
securities which was largely fuelled by incessant sovereign and sub-national
debt issuance.
In our opinion, this was a short term conservative strategy to preserve capital,
An attempt by the apex bank
given fears of further NPL formation, and we thus look forward to cautious
to narrow banks’ balance
sheet asylum is the regulation portfolio rebalancing. It was also a simultaneous necessity for a few banks
on maximum allowable with Capital Adequacy Ratios (CAR) in the threshold of management guidance
investment in sub-national (most Nigerian banks set 15% internal CAR guidance, 500bps above
debt issuance which is regulatory minimum). An attempt by the apex bank to narrow banks’ balance
expected to marginally incite sheet asylum is the regulation on maximum allowable investment in sub-
banks’ resumption to private
national debt issuance which is expected to marginally incite banks’
sector financing.
resumption to private sector financing.
We believe the relative unattractiveness of the Standing Deposit Facility (SDF)

will further compel banks’ asset reallocation. Our position on near term asset
allocation is supported by the shift in asset allocation between the second and
third quarters of 2010 when banks initiated slight growth in loan books to
propel earnings recovery especially as money market rates remain
unattractive.
Time series of banking sector balance sheet split; lenders take asylum in
“risk-free” investment securities
Source: Company Financials, Vetiva Research
January 2011 22
[Type text]
VETIVA
2011 Outlook
The Tipping Point
NPL woes are behind, asset quality continues to improve

While we look forward to a steady decline in NPL ratios on the back of modest
loan growth outlook, we appreciate NPL level declines as against ratio, as we
believe that this is a better indicator of improving quality of assets rather than
To our mind, asset quality
woes are behind, as we see the effect of loan growth on NPL ratio. To our mind, asset quality woes are
the 2009/10 NPL levels and behind, as we see the 2009/10 NPL levels and ratios as the peak of the cycle,
ratios as the peak of the cycle, with expectation that improving economy-wide liquidity and stability will scale
with expectation that down the default risk in both corporate and consumer loans.
improving economy-wide
liquidity and stability will scale
Our outlook of modest rally in crude oil price and equity market recovery
down the default risk in both
corporate and consumer loans minimises the risks of loan default from these volatile markets which largely
erupted the NPL blight.
More importantly, banks will, in the near term, distance their balance sheets
from volatile sectors, thus reducing the risk of near term NPL formation. With
the new stringent regulations on margin trading and repeal of universal
banking licence, banks’ probable irrational exuberance towards risk assets
creation is curbed. Though the CBN (as indicated in the new prudential
guidelines effective H2’10) plans to gather quarterly data over the next 5
years to guide its regulations on dynamic provisioning which is expected to
replace the general provisions on performing loans, we expect banks to initiate
this provisioning approach of their own volition. Nonetheless, it is noteworthy
that the current coverage ratio (percentage of NPLs that is provisioned for) of
our banking picks is adequate, especially the Tier-1 players with ≈100%
threshold coverage (ex-UBA and FBN).
Sector NPL continues to trend downward while coverage advances; a

reflection of improving asset quality
Asset yields to look-up, albeit slowly

While the market-wide low interest rate environment took its toll on banks’
asset yields in 2010, we expect money market rates to retrace steps post-CBN
guarantee on interbank dealings, which ends H1’11. Our outlook is reinforced
by expectation of interbank and peer money market rates is our expectation of
a gradual hike in monetary policy rates as insulation from probable inflation
threats. The 2010 dramatic plunge in rates across all maturities in money
market instruments with subsequent impact on banks’ asset yield can be
traced to the protracted accommodative policy rate, coupled with the extended
guarantee on interbank transactions and all foreign lines of credit.
January 2011 23
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Recovering money market rates to catalyse a reverse in asset yield
We expect the initiated uptrend in money market rates to rub-off positively on

Overall, we look forward to a overall asset yield of the lenders; nevertheless, we are conservative on returns
slow rebound in interest
on loan books given the increased focus of players on the highly competitive
earning asset yields, with
FY’11 expectation of 11.5% high-end of the market (blue-chip corporate with low default risk) which has
abruptly constrained the loan pricing power of banks. Contrary to conventional
focus of Tier-II banks on consumer financing, the heightened risk has changed
the order of the game, as all players roll-out blueprints to grow their share of
the low risk corporate market and minimize exposure to the high risk (but high
returns) Consumer/SME financing segment. Overall, we look forward to a slow
rebound in interest earning asset yields, with FY’11 expectation of 11.5%. As
against the startling 13.4% average yield on interest earning assets in FY’09,
Nigerian banks saw a depression in asset yield with Q3’10 scorecards revealing
an average yield of 10.6%.
Recovering money market rates to catalyse a reverse in interest earnings

asset yield; we look
Source: CBN, Vetiva Research
January 2011 24
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Money Market rates, on the way up
Source: FMDA, Vetiva Research
Cheap funding gradually winds-up

We see the cheap funding environment gradually winding up as we look
forward to a steady climb in deposit rates; an expectation partly hinged on
CBN’s imminent cautious tightening of the system. More importantly, banks’
Banks’ resumption of loan
resumption of loan growth will spur modest demand for deposit with
growth will spur modest
demand for deposit with expectation of higher pricing as they exhaust their current liquidity gap,
expectation of higher pricing especially as we observe that a considerable portion of most banks’ liquidity is
locked (in relatively illiquid long term sovereign and sub national bonds), with
less near-term flexibility. Relative to Q3’10 level, our projections show that
banks’ average cost of funds will climb 190bps by FY’11; from 5.4% to 7.3%.
Over 2010, the relatively high aversion of banks towards loan creation halted
the rally for deposits, as the lenders sit on huge liquid assets with little or no
need for fresh funds. At the other end of the spectrum, investors’ flight to
safety accelerated the flow of funds to banks in the form of time deposits, thus
suppressing rates to historic lows. Given that an average of 70% of banks’
balance sheets is funded with deposits, the crash in deposit rates thus offers
cheap funding for the lenders, albeit with less investible opportunities given
current market dynamics.
FY’11 cost of funds to climb 190bps, in our opinion.
January 2011 25
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Net Interest Margin to take heat of cost-yield imbalance

Premised on our outlook of a modest surge in funding cost with less
proportionate rebound in asset yield, we see the Net Interest Margin (NII) of
banks taking the heat of this imbalance. Contrary to the cost-yield dynamics in
2010 when plunging funding cost more than proportionately compensated for
declining asset yield, we see a transpose in the matrix going forward as NII
shrinks on the back of narrowing spread between cost of funds and asset
yields. Nonetheless, we expect increased volume and higher asset turnover to
offer adequate cushion for operating income levels and growth.
We see narrowing net interest margins on the way
Cost efficiency: the emerging “game play”

Emerging industry dynamics have changed the order of competition, as cost
efficiency becomes a key competitive metric, in contrast to historic rivalry over
balance sheet size. Both players and the regulators are investing in cost
While operators have
significantly scaled down reduction innovations as this becomes a prime driver of profitability. Prior to
operating cost from an the 2009 tide, the sector’s operating cost-to-income ratio hovered 58%, a
unprecedented level of 94% of reflection of the high level of earnings. While operators have significantly
income in FY’09 to a relatively scaled down operating cost from an unprecedented level of 94% of income in
comfortable ratio of 70.6% in FY’09 to a relatively comfortable ratio of 70.6% in Q3’10, we see further cost
Q3’10, we see further cost
efficiency going forward, as earnings growth resumes. In addition to the
efficiency going forward, as
earnings growth resumes statistical effect of growing earnings on cost-to-income ratio, we are upbeat
that the varying cost control strategies being implemented across the players
will buoy efficiency in the near-to-medium term. Overall, we look forward to
an appreciable 6.9% decline to bring cost-to-income ratios to 63.7% in FY’11.
Lenders to put a hold on cost; 2011F cost-to-income ratio of 63.7%
January 2011 26
[Type text]
VETIVA
2011 Outlook
The Tipping Point
FY’11 top line growth on the heels of increased transaction volumes
The earnings growth story begins

Although banks’ earnings are highly driven by interest and discount income
which commands an average of c.70% of top-lines, the significance of non-
interest income cannot be ruled out. In addition to expected surge in fee and
In addition to expected surge commission (a key non-interest income head) which will be largely driven by
in fee and commission (a key loan growth, we opine increased income from other non-interest income
non-interest income head) windows. Increased volume in foreign exchange deals on the back of
which will be largely driven by
continued openness of the economy and improving systemic liquidity. While
loan growth, we opine
the CBN remains “cautiously committed” to naira stability, we are believers in
increased income from other
non-interest income windows a relatively more volatile 2011 FX environment with more arbitrage
opportunities for banks, especially with the revocation of Class A licence of
Bureaux De Changes (BDCs) which confines all “block FX trades” to the banks.
Without ignoring the fact that divestitures from non-core banking operations
may pose a slight drag on non-interest earnings growth in the near term, we
assert that the net effect of the discontinued operation will be compensated for
by increased asset turnover, particularly that the contribution of these classes
of business to top- and bottom- lines are marginal.
Figure 1: Growth stories from both top- and bottom- lines; a reflection of
low base and loan growth resumption.
January 2011 27
[Type text]
VETIVA
2011 Outlook
The Tipping Point
New licence regime; a focus on core commercial banking

The repeal of universal banking licence is expected to effectively take effect in
H2’11 given the 9-12 months ultimatum handed banks. It is noteworthy that
While the HoldCos will retain First Bank of Nigeria Plc and United Bank for Africa Plc have settled for the
all their current subsidiaries holding company structure which will permit them to carry on with all existing
including offshore businesses subsidiary businesses. We suspect Stanbic-IBTC and FCMB to also opt for this
which simultaneously qualifies
model given the significance of their non-banking operations, although they
them as international banks,
are yet to declare their shareholders’ resolutions. Guaranty Trust Bank, Zenith
the non-HoldCos will divest
from all non-allowable and mid-tiers, Access, Skye, and Diamond have applied for the International
operations banking licences with expectation that the other cleared players (Ecobank,
Sterling and Unity) will pick national banking licences with the exemption of
Wema which has earlier applied to limit its operation to its core region; South-
West. Apt to say that while the HoldCos will retain all their current subsidiaries
including offshore businesses which simultaneously qualifies them as
international banks, the non-HoldCos will divest from all non-allowable
operations which includes Insurance Underwriting, Loss adjusting services,
Asset Management, Broker/Dealer, Issuing House and proprietary Trading.
Minimum
License Category Capital Scope of Operation Remarks
Operate within minimum of six (6) and Wema has filed application to
Regional N15 billion Maximum of twelve (12) contiguous states, operate in the South West
within two (2) geopolitical zones. Key lapse is region
the inability to carry out Settlement functions
National N25 billion Entitle to carry our business in all the states of We see Unity and Sterling Bank
the Federation treading this path
Operate in all states of the Federation and

International N50 billion Offshore countries of its choice subject All other banks
to its compliance with host country regulations
Relying on the foregoing resolutions of our coverage universe, we do not

expect the new nomenclature to affect the performance of the HoldCo players
as they carry on with their current subsidiaries, with possibility of acquiring the
divested businesses from peers. As regards those divesting, we believe it is a
positive development given our view of their earnings split.
We observe the non-allowable operations contributes <10% to their top-lines
and an average of <5% to bottom-lines.
January 2011 28
[Type text]
VETIVA
2011 Outlook
The Tipping Point
AMCON brings succour; progress amid odds

As AMCON (the bad bank) makes progress in its mandate to relieve banks of
their NPL weights, we look forward to further liquidity ease in the economy.
Having swapped the Eligible Banks Assets of 21 banks (All NPL of intervened
lenders and margin-related toxic assets of non-intervened peers) on the last
day of 2010 with its Consideration bonds, we see a sigh of relief in banks’
balance sheets with expectation of improving their operational flexibility going
forward. We bring to fore the obvious fact that the 10.125% annualized yield
on AMCON’s consideration bond (zero-coupon with a 3-year tenor) is a
startling near-term earnings buffer when put into perspective of the zero
return on NPL.
Beyond AMCON’s positive rub-offs on the operations of the banks and the
subsequent impact on their earnings, we believe that other sectors will take
The positive reaction of the
stock market to AMCON’s deal their share of the dividends of this intervention programme. Of particular
as reflected in the rally across significance is our outlook on the real estate market which has been bogged
all banking counters with down by the banking sector cyclone. The price erosion in real estate assets in
ripple effect on other sectors the last six quarters was majorly on the back of banks’ forced-sale of
on the bourse collaterals in respect of the real estate-backed NPLs; an attempt to recover
their capitals. Even though AMCON might continue on foreclosures, we expect
this to be at a gradual pace, thereby relieving pressure on real estate prices.
Notably, the positive reaction of the stock market to AMCON’s deal as

reflected in the rally across all banking counters with ripple effect on other
sectors on the bourse. Of particular significance is the continued rally and
increased liquidity on the shares of the intervened banks which on the average
outperformed the sector and overall market in 2010 with impressive
consolidating returns year-to-date. Nevertheless, we assert that the rally on
this basket is unsustainable as they are speculative. Pending the
consummation of M&A deals amongst this class of lenders, which we believe
will shape their fundamentals; we maintain our value investing strategy. This
however does not suggest an outright aversion to speculative trades as we will
continue to key into indentified opportunities, but with proven technical
strategies.
Equity
NPL (N'bn)* AMCON's Consideration (N'bn)
Bank (N'bn)*
Intercontinental Bank Plc (368.88) 526.21 146.00
Afribank Plc (249.89) 357.10 NA
Union Bank Plc (235.22) 113.56 239.00
Bank PHB Plc (189.45) 346.84 140.00
Finbank Plc (119.61) 157.42 44.00
Oceanic Bank Plc (108.31) 664.77 200.00
Spring Bank Plc (90.65) 130.52 23.00
Wema Bank Plc** (45.84) 70.61 15.20
* Based on Q3'10 positions
**WEMA has successfully recapitalized, meeting the N15bn requirement to operate as a regional bank
January 2011 29
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Key highlights of December 31st, 2010 NPL Purchase
The Book Value of the NPLs is estimated at around N1.95 trillion.
The Consideration Value based on AMCON’s valuation stands at N770.58

billion; Listed equities-backed NPLs - 60% premium over the 60-day average
price of listed equities ending November 15, 2010; Unlisted equities- An
average of book value and comparable multiples. For real estate backed
NPLs – banks’ valuation of collaterals were used with the caveat of review
over 2011 if the valuation of banks is found to be significantly beyond the
fair values which will be determined over the course of the year;
Unperfected NPLs were acquired at 5% of book value.
The Face Value of the consideration bonds grossed N1.04 trillion; an implied
annualised yield of 10.125%.
An estimate of 45% of the NPL is backed by listed equities, 10% non-listed

equities and the remaining 55% are either collateralised by real estate or
unperfected.
What next?
Following the success of the first phase of the NPL purchase, the bad bank
indicated plans to reopen the deal for the purchase of other NPL of banks
which is expected to be around N500 billion. Nevertheless, recapitalising the
intervened banks to zero equity level is top priority. While an estimation of the
amount required to nil off the negative equity of the intervened banks is hazy
due to the dearth of information on a number of them, we believe the bad
bank still needs between N1.5 – N1.8 trillion to meet its objective of equating
the balance sheets of these banks.
Figure 1: Return profile of CBN-intervened banks; AMCON fuels gains
Source: NSE, Vetiva Research
AMCON’s N3 trillion bond, can the market absorb this?

We recall that the issuance of consideration bonds as against regular bonds on
December 31, 2010 was to meet up the timeline, given that a regular bond
issuance requires necessary filings and other bureaucratic due processes which
would have missed the bad bank’s time table. As the market looks forward to
the imminent issuance of the N3 trillion AMCON regular bond, we find it apt to
highlight our view that the bulk of the proposed N3 trillion will be issued via a
non-cash deal, given our gauge of current market liquidity.
January 2011 30
[Type text]
VETIVA
2011 Outlook
The Tipping Point
After all is said - go long banks

With an average base case of 30% upside over the next 12 months, we
believe our banking basket is worth buying, as this suggests an alpha return
when put in the context of the average required return on emerging market
equities. Still, we are inclined to the “most attractives” in our basket. Our
ranking is largely shaped by fundamental return potential, inherent risk in the
banks’ earnings and market sentiments. With due cognisance of the hanging
political risk and probable tail-end of strict industry reforms cum still-weak
resumption in loan creation appetite - key downside risks that may suppress
improving fundamentals and expected overall market rally, we believe our
banking picks are adequately positioned to weather moderate random shocks,
and thus suggest an early long position in our value players. Our banking
universe currently trades at a weighted P/BV of 1.6x, a huge discount to the
Our banking universe currently
trades at a weighted P/BV of 2.1x and 2.2x respective book value multiples of South African (SA) and Asian
1.6x, a huge discount to the peers.
2.1x and 2.2x respective book
Although our banks have a lower 2010 average RoAE of 2.2% (Vs. 17% and
value multiples of South
African (SA) and Asian peers 19% for SA and Asian lenders), we assert that the stage is set for a relatively
”seamless” earnings generation profile, given the cleaner balance sheets,
easing business risk and improving industry-wide prospects, with expectations
of excess returns from our top picks. Aside the fact that 2010 was a recovery
year, the currently high balance sheet liquidity of our value lenders offers wide
room for flexibility and subsequent exploitations of market opportunities.
Further reinforcing our assertion of relative cheapness of our banking counters
to their emerging market peers is the adequate capitalization of Nigerian
banks (average CAR ratios of 20% Vs. 12% emerging market players and
10.5% 2019 BASEL III target). These comfortable measures of our banks’
vulnerability to business risk coupled with the recent systemic cleansing
underpin our belief of the modest solvency of our value pack (leverage ratio
stands at a comfortable level of c.15%).
Figure 1: Nigerian banks remain the cheapest emerging market toasts
Undervalued
Region
January 2011 31
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Figure 1: banking counters back in black, delivering positive returns in 2010
January 2011 32
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A S IC IN F O R M A T IO N
First Bank of Nigeria Plc (FBN)
A ddress Samual A sabia P lace Scale and Scope Economies are “Good Buys”
35 M arina, Lago s. Our fundamental valuation of Nigeria’s largest lender is compelling, trading at
Website www.firstbankplc.co m respective trailing book value multiple of 1.5x (vs. 2.1x African peers). Given
M anagement (Chairman) P rince A jibo la A fo nja the bank’s strong fundamentals and our upbeat outlook on its near term
earnings and asset quality, we are comfortable with our 12-months base case
M D/CEO B isi Onasanya
fair valuation of its equity which stands at N18.11. This estimate of the
Financial Year End December
bank’s share; an equally-weighted blend of Free Cash Flow to Equity and
Exchange Listing Nigerian Sto ck Exchange Excess Returns Models, implies 14.8% upside relative to the current market
Symbo l B lo o mberg: FIRSTB A :NL price. FBN’s equity deserves our “ACCUMULATE” rating.
O WN E R S H IP S T R UC T UR E (%) Investment thesis

Retail Shareho lders 63.8% Size offers further scale efficiency prospects: With its balance sheet
Institutio nal Shareho lders 36.2%
size, age-long brand and diversified financial service offerings, FBN is well
positioned to take advantage of the business opportunities in Nigeria. With
S H A R E S T A T IS T IC S
the bank’s resolve to adopt a holding company structure following CBN’s
Shares in issue (M ) 32,638
repeal of universal banking model, we do not see any downside risk to its
Share P rice (N) 15.89 earnings base and believe it will leverage on its size and scope to explore
M arket Cap. (N'm) 520,576 cost efficiency prospects. The FBN-Sanlam synergetic foray into the
M arket Cap. (USD'm) 3,490 underwriting market is timely given ceding underwriting business from
erstwhile bank subsidiaries and firming noose on insurance policy
Free Flo at (%) 63.80%
regulations, particularly in the high margin oil and gas segment which we
Daily A verage Value Traded (N'000) 302,018
believe is a prime target of FBN-Sanlam. We see a potential to outcompete
Daily A verage Value Traded (USD'000) 2,025 current players.
One of the exemplary risk managers: Despite having the biggest loan
Year high (N) 16.12
portfolio (18% of the system) with relative exposure to higher-risk longer-
Year lo w (N) 13.73 tenor and retail-end of the market compared to Tier-1 peers, FBN’s NPL of
5.8% is one of the lowest in the industry; albeit, we think there is need for
V A LUA T IO N M E T R IC S
a strong hold to avert deterioration.
B o o k Value (N'm) 309,559
Earnings quality, our attraction: While our view of FBN’s current asset-
Trailing P /E (x) 11.95
liability management (ALM) and cost structure suggest a mild FY’11 post-
P /B (x) 1.68 tax earnings growth of 14.5% (FY’11 PAT of N56.7 billion; an implied RoAE
Div. Yield (%) 0.6% of 15.6%), the quality of the earnings outlook gauged by risk asset quality,
ROE (%) 14.0% and FBN’s appreciable disclosure offers an attraction. The bank’s net open
position in the interbank market may post upside earnings surprise as the
Leverage
FIRST BANKRatioVS
(x) BANKING VS NSE ASI PERFORMANCE
7.83 slop e of money market rates becomes steeper. We note that cost
Rebased 04/01/2010
implications of on-going restructuring will be a source of earnings growth
suppression for FBN as we expect FY’11 cost-to-income ratio to hover
61.9%; however, it will pay-off in the near-term
Forecast Summary FY'09A FY'10E FY'11F FY'12F FY'13F

Earnings Per Share (N) 0.11 1.42 1.62 1.98 2.42
Price to Earnings (x) 128.81 11.20 9.84 8.05 6.60
Dividend Per Share (N) 0.10 0.78 0.89 1.09 1.33
Dividend Yield (%) 0.7% 4.9% 5.6% 6.8% 8.3%
Net Assets Per Share (N) 10.59 10.05 10.78 11.67 12.76
Price to Book (x) 1.33 1.59 1.48 1.37 1.25
Source: Company; Vetiva Research
NPL Ratio (%) 8.2% 5.8% 5.5% 5.4% 5.2%
January 2011 33
[Type text]
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (N'Mill) 2007 2008 2009 2010E 2011F 2012F

Gross Earnings 91,163 155,725 196,408 234,790 275,147 316,877
Interest earnings 62,579 100,703 162,041 180,608 211,652 241,891
Interest expense (18,357) (33,787) (65,884) (61,552) (81,083) (92,633)

Net interest income 44,222 66,916 96,157 119,056 130,569 149,259
Non Interest Income 28,584 55,022 34,367 54,182 63,496 74,986
Operating income 72,806 121,938 130,524 173,238 194,064 224,245
Operating expenses (44,931) (68,004) (78,339) (111,525) (121,615) (137,366)
Provision for risk assets (2,021) (6,423) (40,625) (4,160) (6,636) (5,014)
Profit Before Tax 25,854 47,511 11,560 57,553 65,813 81,865
Taxation (5,218) (10,747) (8,396) (11,740) (13,482) (16,319)

Profit After Tax 20,636 36,764 3,164 45,814 52,331 65,545
Balance Sheet (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Cash and balances with CBN 61,844 88,351 70,332 54,960 60,456 92,333
Interbank Placement 264,405 560,879 514,193 549,604 563,344 615,556

Investment Securities 317,971 338,579 395,328 489,647 549,604 646,334
Loans and advances 217,995 466,096 1,078,452 1,199,861 1,383,291 1,553,137
Other Assets 31,664 44,275 66,061 149,892 140,149 123,111
Property and equipment 17,548 30,054 47,980 54,234 56,670 62,697
Total Interest Earning Assets 862,215 1,453,905 2,058,305 2,294,072 2,556,694 2,907,361
Total Assets 911,427 1,528,234 2,172,346 2,498,198 2,753,514 3,093,169
Customer deposits 599,689 700,182 1,512,422 1,698,775 1,841,172 2,062,112

Borrowings and Managed Funds 129,835 247,037 183,697 72,820 72,820 66,789
Other Liabilities 98,276 229,161 166,669 396,128 479,750 565,500

Interest bearing liabilities 729,524 947,219 1,696,119 1,771,595 1,913,992 2,128,901
Total Liabilities 827,800 1,176,380 1,862,788 2,167,722 2,393,742 2,694,402
Ordinary share capital 5,238 9,945 14,504 16,319 16,319 16,319

Reserves 78,389 341,909 295,054 314,157 337,957 367,059
Equity 83,627 351,854 309,558 330,476 354,276 383,378
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 70.8% 26.1% 19.5% 17.2% 15.2%
Operating Income 67.5% 7.0% 32.7% 12.0% 15.6%
Profit Before Tax 83.8% -75.7% 397.9% 14.4% 24.4%
Profit After Tax 78.2% -91.4% 1348.0% 14.2% 25.3%
Profitability (%)
Net Interest Margin 5.8% 5.5% 5.5% 5.4% 5.5%
Return on Average Equity 16.9% 1.0% 14.3% 15.3% 17.8%
Return on Average Assets 3.0% 0.2% 2.0% 2.0% 2.2%
Net Profit Margin 23.6% 1.6% 19.5% 19.0% 20.7%
January 2011 34
[Type text]
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010E 2011F 2012F

Gross Earnings 611 1,044 1,317 1,574 1,845 2,124
Interest earnings 420 675 1,086 1,211 1,419 1,622
Interest expense (123) (226) (442) (413) (544) (621)
Net interest income 296 449 645 798 875 1,001
Other income 192 369 230 363 426 503
Operating income 488 817 875 1,161 1,301 1,503
Operating expenses (301) (456) (525) (748) (815) (921)
Provision for risk assets (14) (43) (272) (28) (44) (34)
Profit Before Tax 173 319 77 386 441 549
Taxation (35) (72) (56) (79) (90) (109)
Profit After Tax 138 246 21 307 351 439
Balance Sheet (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Cash and balances with CBN 415 592 471 368 405 619
Loans and advances 1,461 3,125 7,230 7,230 8,044 9,273
Other Assets 212 297 443 443 1,005 940
Property and equipment 118 201 322 322 364 380
Total Interest Earning Assets 5,780 9,747 13,798 15,379 17,139 19,490
Total Assets 6,110 10,245 14,563 14,697 16,876 19,023
Customer deposits 4,020 4,694 10,139 10,139 11,388 12,343

Other borrowings 870 1,656 1,231 1,231 488 488
Other Liabilities 659 1,536 1,117 1,117 2,656 3,216
Interest bearing liabilities 4,891 6,350 11,370 11,876 12,831 14,272
Total Liabilities 5,549 7,886 12,488 12,488 14,532 16,047
Ordinary share capital 35 67 97 109 109 109

Reserves 526 2,292 1,978 2,106 2,266 2,461
Total Equity 561 2,359 2,075 2,215 2,375 2,570
2008 2009 2010E 2011F 2012F

Efficiency Ratios (%)
Cost of Funds 4.0% 5.0% 3.6% 4.4% 4.6%
Yields on Assets 8.7% 9.2% 8.3% 8.7% 8.9%
Cost to Income Ratio 61.0% 91.1% 66.8% 66.1% 63.5%
Asset Quality, Liquidity & Solvency (%)
NPL Ratio 1.5% 8.2% 5.8% 5.5% 5.4%
Coverage Ratio 134.8% 67.1% 75.0% 75.0% 72.0%
Liquid Asset to Total Asset 64.6% 45.1% 43.8% 42.6% 43.8%
Loan-to-deposit ratio (LTD) 67.9% 75.5% 74.6% 79.1% 79.1%
Capital Adequacy Ratio (CAR) 40.7% 19.8% 18.4% 18.4% 17.9%
Equity-to-Total Asset (Leverage) 23.0% 14.2% 13.2% 12.9% 12.4%
January 2011 35
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A S IC IN F OR M A T IO N Zenith Bank Plc (ZENITH)

A ddress Zenith Heights, P lo t *7, A Focused Player of the Corporate Niche
A jo se A deo gun, V.I, Lago s.
While we think current market pricing is reminiscent of the bank’s relatively
Website www.zenithbank.co m low capital deployment, we note that the conservatism of ZENITH played out
M anagement (Chairman) M acaulay P epple well in the dawn of NPL blight as it stands out with modest asset quality (NPL
M D/CEO Go dwin Emefiele ratio of 6.4%). A further attraction to ZENITH is its requisite hedge against
unforeseen earnings shocks especially with its >100% coverage over NPLs.
Having modelled our near term outlook on ZENITH’s asset allocation, funding
Exchange Listing Nigerian Sto ck Exchange
and implied earnings generation prospects, we arrive at a 2011 target price
Symbo l ZENITHB A : NL of N20.24, an appreciable capital gain potential of 26.5% when put in the
perspective of its current price of N16.00. In expectation of this alpha return,
OWN E R S H IP S T R UC T UR E ( %)
we rate ZENITH a “BUY”.
Retail Shareho lders 37.0%
Institutio nal Shareho lders 63.0% Investment thesis

S H A R E S T A T IS T IC S Crash in money market rates suppresses earnings potentials; we
Shares in issue (M ) 31,398 see a more diversified portfolio going forward: Being a key player of
Share P rice (N) 16.00
short term money market instruments, ZENITH took a large chunk of the
steep decline in rates. TBills and placements (with CBN and other banks)
M arket Cap. (N'm) 520,885
constituted 43% of the bank’s asset as at Q3’10 with barely 17%
M arket Cap. (USD'm) 3,492
contribution to interest income. We estimated an annualized yield of 2.9%
Free Flo at (%) 52.8% on this asset basket as against ZENITH’s 2010E funding cost of 3.1%, thus
Daily A verage Value Traded (N'000) 344,048 translating to a negative explicit return of 20bps.
Daily A verage Value Traded (USD'000)

…Nonetheless, we see a more diversified asset portfolio going
2,306
forward: With an outlook of a slightly bullish risk appetite in the near
Year high (N) 16.70 term, it is apt to say that ZENITH’s further penetration of the loan market
will complement the expected upturn in money market rates to deliver a
Year lo w (N) 15.01
more attractive RoAE of 15% in FY’11F and medium term average of 18%.
V A LUA T IO N M E T R IC S Planned divestiture from non-core banking operations will bode well for
B o o k Value (N'm) 358,248 ZENITH, in our opinion given our view of its earnings split. It’s CAR of 32%
and balance sheet liquidity of 59% offer room for balance sheet flexibility.
Contrary to its peers whose balance sheets are relatively locked, ZENITH’s
P /B (x) 1.40
current ALM offers room for flexibility and will thus engender the bank’s
Div. Yield (%) 2.8% portfolio rebalancing as the risk environment eases.
ROE (%) 11.5% Retail deposit mobilization to buoy earnings growth and margins:
Leverage Ratio (x) 4.96
While ZENITH remains averse to retail lending, given high risk of default,
we observe that the bank is increasingly penetrating this market for cheap
ZENITH BANK VS BANKING VS NSE ASI PERFORMANCE deposit mobilization. We believe this will offer support for margins as it
Rebased 04/01/2010
improves on its capital deployment. We look forward to a FY’11 post-tax
profit of N57.5 billion; a reflection of appreciable loan growth expectation of
10% and improved cost-to-income ratio of 62% as the bank outsource non-
core back-end functions and scales down other operating cost heads.

Dividend Yield (%) 3.3% 4.8% 6.3% 7.2% 8.2%
Source: Company; Vetiva Research Price to Book (x) 1.01 1.40 1.31 1.21 1.12
NPL Ratio (%) 6.0% 6.4% 6.2% 5.6% 5.2%
January 2011 36
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 94,880 208,294 277,300 185,646 231,982 266,529

Taxation (6,897) (4,126) (14,482) (10,989) (14,371) (16,434)

Profit After Tax 18,780 51,992 20,603 43,956 57,482 65,734

Investment Securities 380,213 1,248,233 468,230 716,574 788,232 838,679
Other Assets 28,879 46,288 20,091 35,829 33,500 55,176
Total Interest Earning Assets 907,143 2,246,257 1,635,165 1,839,408 2,049,801 2,278,880
Total Assets 972,822 2,343,487 1,733,875 1,952,665 2,167,638 2,427,754
Customer deposits 634,493 1,185,893 1,173,917 1,271,920 1,379,406 1,522,864


Interest bearing liabilities 656,440 1,198,094 1,224,898 1,284,696 1,392,182 1,533,705
Total Liabilities 856,367 1,418,845 1,336,907 1,415,897 1,569,173 1,774,127

Reserves 109,953 335,976 325,976 342,617 368,484 398,064
Equity 114,586 344,348 338,535 358,316 384,183 413,763
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 119.5% 33.1% -33.1% 25.0% 14.9%
Operating Income 104.0% 21.7% -22.4% 21.7% 14.9%
Profit After Tax 176.9% -60.4% 113.3% 30.8% 14.4%
Profitability (%)
January 2011 37
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Gross Earnings 734 1,137 1,654 1,191 1,363 1,523
Interest earnings 494 782 1,192 821 940 1,050
Net interest income 302 505 792 467 533 587
Other income 240 354 462 370 423 473
Operating income 542 860 1,254 837 956 1,060
Taxation (26) (48) (29) (43) (76) (106)
Profit After Tax 144 274 16 64 177 249

Cash and balances with CBN 871 1,346 457 537 534 570
Other Assets 301 578 605 605 685 628
Total Assets 7,984 11,215 10,379 10,047 11,940 13,268

Other borrowings 450 272 353 353 134 134
Other Liabilities 335 699 423 423 1,027 1,187
Reserves 1,088 1,249 1,180 1,180 1,149 1,229

Total Equity 1,127 1,306 1,252 1,252 1,236 1,316
2008 2009 2010E 2011F 2012F

Cost of Funds 3.5% 4.5% 4.0% 4.2% 4.3%
Yields on Assets 8.9% 12.2% 8.4% 8.6% 8.6%
NPL Ratio 3.5% 8.3% 9.5% 8.5% 8.0%
Coverage Ratio 86.9% 68.7% 60.0% 70.0% 70.0%
January 2011 38
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A S IC IN F O R M A T ION United Bank for Africa Plc (UBA)

A ddress UB A Ho use
Targeting Opportunities Beyond Borders
57 M arina, Lago s, Nigeria
While the current market price of UBA shares (N11.17) translates to a 49%
Website www.ubagro up.co m
premium over its BVPS appears fair when the current challenges of the bank is
M anagement (Chairman) Chief Ferdinand A labraba
put into perspective, we find it apt to say that this market pricing is bearish
M D/CEO P hillips Oduo za relative to the near term fundamentals of the bank. UBA has an attractive
Financial Year End December branch network in key financial hubs (700 branches- highest single-bank
Exchange Listing Nigerian Sto ck Exchange footprint in Nigeria) despite having the lowest equity base among the Tier-1
players. We believe the bank is well positioned to harvest budding bankable
Symbo l UB A : NL
opportunities in the African continent. Our DCF valuation uplifts the shares of
O WN E R S H IP S T R UC T UR E ( %) UBA with a base case 2011 target price of N12.80; an appreciable return upside
Retail Shareho lders 23.00% of 14.8%. Thus, we suggest investors “ACCUMULATE” UBA.
Investment thesis
S H A R E S T A T IS T IC S
Still relatively bogged down by the 2009 NPL shock; All eyes are on
UBA’s Q3’10 annualised RoAE of 6% (Vs. Tier-1 peer average of 16%). We
Share P rice (N) 11.17 believe its 2010 share price erosion of 15%, a gross underperformance when
M arket Cap. (N'm) 301,359 viewed in the context of the banking sector gain of 18.7%, is a reflection of
M arket Cap. (USD'm) 2,020 investors concern over this negative real return on equity. We think the bank’s
FY’11 profitability will still lag peers as UBA contends with a relatively locked
balance sheet on the heels of narrow capital buffer and asset quality issues;
Daily A verage Value Traded (N'000) 7,317,486
albeit UBA’s near term prospect remains compelling on valuation.
Daily A verage Value Traded (USD'000) 49,055 Continued foray into offshore markets may post upside earnings
surprise: Amid the 2009/10 industry lull, UBA, in its pan-African bank vision,
Year high (N) 11.65
continues to penetrate new markets. Its Zambia, Guinea and Mozambique
Year lo w (N) 9.15 shops have kicked-off as Congo and Mali warm up to commence operation,
thus the bank stands set to bring its footprint to 25 strategic markets. The
V A LUA T ION M E T R IC S
spread of UBA should in the long-term post earnings surprises if well
B o o k Value (N'm) 189,763 managed. However we think that over the near to medium term, UBA will
Trailing P /E (x) 32.85 contend with cost challenges, as barely c.30% of the offshore operations bring
P /B (x) 1.52 in positive numbers due to stiff dominance of first movers in those markets.
Div. Yield (%) 0.9%
Relying on UBA’s track record, it takes c.12 fiscal quarters to break-even in
the offshore networks, with cost pressures on the Group.
ROE (%) 4.6%
FY’11 earnings to mirror current balance sheet challenges: Our FY’11
Leverage Ratio (x) 9.24 earnings (top and bottom- lines) forecasts of N203.3 billion and 26.4 billion
are driven by our outlook on UBA’s current operational flexibility, as reflected
UBA VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010 in its current balance sheet. The earnings expectation, which is driven by a
cost-to-income ratio of 88%, translates to a RoAE recovery of 14.8% (with an
average of 21.2% over the next 5-years).

Dividend Yield (%) 0.9% 2.2% 4.8% 6.8% 8.3%
Price to Book (x) 1.37 1.74 1.63 1.49 1.36
NPL Ratio (%) 8.3% 9.5% 8.5% 8.0% 7.8%
January 2011 39
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Gross Earnings 109,512 169,581 246,725 177,663 203,344 227,119

Provision for risk assets + EI (7,863) (11,402) (49,032) (16,950) (7,671) (3,467)
Taxation (3,923) (7,204) (4,262) (6,396) (11,286) (15,785)

Profit After Tax 21,496 40,825 2,375 9,590 26,441 37,090

Other Assets 44,926 86,294 90,255 102,187 93,671 104,912
Total Interest Earning Assets 1,096,369 1,525,122 1,384,984 1,541,559 1,717,178 1,922,106
Total Assets 1,191,042 1,672,991 1,548,281 1,703,109 1,873,420 2,098,230
Customer deposits 905,806 1,333,289 1,245,650 1,345,456 1,480,002 1,657,602


Interest bearing liabilities 972,954 1,373,847 1,298,355 1,365,456 1,500,002 1,677,602
Total Liabilities 1,022,964 1,478,129 1,361,452 1,518,719 1,677,131 1,885,251

Reserves 162,330 186,240 176,051 171,456 183,355 200,046
Equity 168,078 194,862 186,829 184,390 196,289 212,979
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 54.9% 45.5% -28.0% 14.5% 11.7%
Profit After Tax 89.9% -94.2% 303.8% 175.7% 40.3%
Profitability (%)
January 2011 40
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 734 1,137 1,654 1,191 1,363 1,523
Interest earnings 494 782 1,192 821 940 1,050
Other income 240 354 462 370 423 473
Operating income 542 860 1,254 837 956 1,060
Taxation (26) (48) (29) (43) (76) (106)
Profit After Tax 144 274 16 64 177 249

Cash and balances with CBN 871 1,346 457 537 534 570
Other Assets 301 578 605 605 685 628
Total Assets 7,984 11,215 10,379 10,047 11,940 13,268

Other Liabilities 335 699 423 423 1,027 1,187

Reserves 1,088 1,249 1,180 1,180 1,149 1,229
Total Equity 1,127 1,306 1,252 1,252 1,236 1,316
2008 2009 2010E 2011F 2012F

Cost of Funds 3.5% 4.5% 4.0% 4.2% 4.3%
Yields on Assets 8.9% 12.2% 8.4% 8.6% 8.6%
NPL Ratio 3.5% 8.3% 9.5% 8.5% 8.0%
Coverage Ratio 86.9% 68.7% 60.0% 70.0% 70.0%
January 2011 41
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A SIC IN F O R M A T ION Guaranty Trust Bank Plc (GUARANTY)

Address Plot 1669, Oyin Jolayemi Str., A “Defensive Cyclical” Play
Victo ria Island, Lago s.
Aside quantitative fundamentals, we believe GUARANTY’s IFRS reporting which
Website www.gtbank.com
dates back to its GDR listing on the London Stock Exchange (13% of its equity
M anagement (Chairman) Oluwo le Sunday Oduyemi via Nominee Accounts) has been another selling point for the shares as it
M D/CEO Tayo Aderino kun presents strong appeal to foreign fund managers whose perceived holding in the
Financial Year End December bank cannot be downplayed. Revving on investors’ appetite for this paradoxically
“defensive cyclical” feature, GUARANTY is priced at 130% premium to its book
value, (55% premium over Tier-1 peer average). Relying on our base case DCF
Symbo l Blo omberg: GUARANTY:NL valuation, we believe the value of the bank is N20.57/share. Hence the market
Sector Banking has been fair in GUARANTY’s pricing and we are “NEUTRAL” on it as it portends
a rich valuation of barely 5.2% upside.
Co untry Nigeria
O WN ER SH IP S T R UC T UR E (%) Investment thesis

Retail Shareho lders 39.69% Harvesting the dividends of efficiency: Within barely 2 decades of
Institutio nal Shareholders 47.10%
establishment, GUARANTY steadily rode on its efficiency (from cost,
profitability and service delivery perspectives) to gain global investor
Fo reign 13.21%
confidence. We bring back to mind the 2009 cyclone which uplifted GUARANTY
SH A R E ST A T IST IC S
from all key benchmarks; RoAE of 13% (Vs. industry average of 2.2%) and
Shares in issue (M ) 23,317 NPL of 11% (relative to industry average of 12%).
Share Price (N) 19.70 Hands on cost, earnings on the growth ladder: While we are upbeat that
M arket Cap. (N'm) 467,510 FY’10 earnings (which is in the pipeline) will ride on low base to post a c.59%
growth, we assert that this feat will moderate in FY’11. Albeit, guided by our
outlook on GUARANTY’s balance sheet, we look forward to a 12% growth in
Free Flo at (%) 39.69% after-tax earnings (NGN42.2 billion). Apt to say that the bank’s earnings
stability is buoyed by its cost efficiency and modest asset quality. To our mind,
M o nthly Average Value Traded (N'000) 288,511
the bank’s <60% post-provisionings cost to income ratio is helped by its staff
M o nthly Average Value Traded
(USD'000) 1,934 and customer demographics. A large portion of the bank’s staff falls in the
lower end of the list, a reflection of its age and purely organic growth strategy.
Year high (N) 20.50
While the bank’s coverage over NPL reinforces our confidence in its asset and
Year lo w (N) 17.76
earnings quality, we will like to see a downward trend in toxic assets level.
VA LUA T IO N M ET R IC S
No considerable downside from divestiture, in our view: The bank’s
Bo o k Value (N'm) 199,339
proactive weaning and subsequent listing of its underwriting subsidiary;
Trailing P/E (x) 12.96 GTAssure, minimize the impact of CBN’s new license regime as we do not
see significant challenge to the performance of the bank from its resolution
P/B (x) 2.30
to divest non-core banking operations which, on our estimate, currently
Div. Yield (%) 2.3%
contribute 2.4% and 1.8% respectively to top- and bottom- lines. We
ROE (%) 17.8% however think the next challenge for GUARANTY is its lean branch footprint
Leverage Ratio (x) 5.70 which may be a drag on its ability to fully explore its brand prospects

Dividend Yield (%) 2.9% 4.4% 4.9% 5.7% 6.2%
Price to Book (x) 1.55 2.25 2.07 1.89 1.72
NPL Ratio (%) 11.8% 7.6% 7.5% 7.2% 7.0%
January 2011 42
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 48,567 104,120 162,550 155,275 172,500 195,449

Provision for risk assets and EI (253) (4,042) (37,527) (6,993) (6,939) (6,796)
Taxation (2,523) (6,862) (4,276) (9,277) (10,254) (11,866)

Profit After Tax 13,194 28,316 23,687 37,108 41,014 47,466


Other Assets 53,789 68,153 16,288 17,597 19,709 38,761
Total Interest Earning Assets 411,822 854,939 1,003,724 1,102,588 1,237,783 1,447,021
Total Assets 486,491 962,722 1,066,504 1,173,154 1,313,933 1,550,440
Customer deposits 294,546 472,271 698,063 762,550 867,196 1,023,291


Interest bearing liabilities 352,609 535,167 775,881 847,224 950,718 1,056,824
Total Liabilities 436,505 780,688 874,259 964,210 1,086,532 1,301,681

Reserves 45,986 174,572 182,918 197,285 215,742 237,101
Equity 49,986 182,034 192,245 208,944 227,400 248,760
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 114.4% 56.1% -4.5% 11.1% 13.3%
Profit After Tax 114.6% -16.3% 56.7% 10.5% 15.7%
Profitability (%)
January 2011 43
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 326 698 1,090 1,041 1,156 1,310
Interest earnings 215 457 802 733 826 936

Other income 111 241 288 308 330 374
Operating income 237 548 818 796 843 954
Taxation (17) (46) (29) (62) (69) (80)
Profit After Tax 88 190 159 249 275 318

Interbank Placement 637 1,470 1,511 1,809 1,938 1,975
Loans and advances 776 2,807 3,777 3,931 4,642 5,491
Other Assets 361 457 109 118 132 260
Total Assets 3,261 6,454 7,150 7,865 8,808 10,394

Other Liabilities 562 1,646 660 784 910 1,641
Total Interest bearing liabilities 2,364 3,588 5,201 5,680 6,373 7,085

Reserves 308 1,170 1,226 1,323 1,446 1,589
Total Equity 335 1,220 1,289 1,401 1,524 1,668
2008 2009 2010E 2011F 2012F

Cost of Funds 5.0% 6.2% 4.5% 5.2% 5.3%
Yields on Assets 10.8% 12.9% 10.4% 10.5% 10.4%
NPL Ratio 1.8% 11.8% 7.6% 7.5% 7.2%
Coverage Ratio 118.4% 48.9% 75.0% 75.0% 75.0%
January 2011 44
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A SIC IN F OR M A T ION
Stanbic-IBTC Bank Plc (IBTC)
Address I.B.T.C. Place, Walter Carringto n Investment Banking is the Cash Cow
Victoria Island, lago s IBTC which is largely an investment bank, with 76% of gross earnings traceable
Website www.stanbicibtc.com to Wealth Management and Investment banking operations, needs to further
M anagement (Chairman) Atedo N. A. Peterside diversify its business to avert probable regulatory constraint in the near term.
M D/CEO Chris Newso n
Though yet to announce, we think a HoldCo licence is sine non qua non for IBTC.
In line with its conventional ride on positive investors’ sentiments, the equity of
the bank is currently priced at a 137% premium to its book value (an expensive
Exchange Listing Nigerian Stock Exchange
valuation relative to the average P/BV of 1.1x of Nigerian Tier-II lenders). Just
Symbol Bloo mberg: IBTCCB:NL as a review of technical metrics on IBTC suggests that the current price is full,
our DCF valuation is rich, as we arrive at a base case target price of
OWN ER SH IP ST R UC T UR E (%)
N10.02/share for IBTC. This valuation presents a 4.6% downside risk; albeit we
Retail Shareholders 12.00%
are “NEUTRAL” on IBTC given market sentiments.
Institutio nal Shareholders 88.00%
Investment thesis
SH A R E ST A T IST IC S
Penetrating the market faster than we anticipated: With IBTC’s recent
aggressive organic growth, we suspect the bank has rescinded its earlier
Share Price (N) 10.50 interest in acquiring a CBN-intervened bank. In spite of the lull in the industry,
M arket Cap. (N'm) 193,688 over 2010 IBTC added >50 branches to gross up its footprint to 128. In our
M arket Cap. (USD'm) 1,298 opinion, this aggressive move of IBTC to deepen its personal and business
banking segment may not be unconnected with the implied stance of CBN to
direct banks’ focus to core financial intermediation and its strategy of
Daily Average Value Traded (N'000) 27,643
harvesting the attractive spread in the retail market.
Daily Average Value Traded (USD'000) 185.3 Spearheading the loan growth story: While not immune to the heightened
risk in the credit market, as at Q3’10, IBTC has grown its loan book by 33%
Year high (N) 11.38
(relative to FY’09 level), a reflection of its proactive steps to take full
Year low (N) 9.20 advantage of the waiver on the erstwhile regulatory cap on Loan-to-Deposit
(LTD) ratio of 80%. IBTC’s LTD currently stands at 105%. While this
VA LUA T ION M ET R IC S
aggressive appetite for risk is fuelled by the depressed yield on money market
Boo k Value (N'm) 82,984
instruments, and also supported by its high CAR (still 27.8% from 35.0% in
Trailing P/E (x) 21.88 FY’09), the bank takes on the risk of asset quality deterioration.
P/B (x) 2.37 We look forward to FY’11 PAT flight of 55%: In addition to our
Div. Yield (%) 2.9% expectation of earnings rub-off from loan book expansion, we believe the
ROE (%) 10.8% bank will further leverage on its rich investment banking income profile to
post a startling 55% bottom line growth in FY’11, as we look forward to a
Leverage Ratio (x) 4.70 post-tax earnings of N16.9 billion. Our confidence in IBTC earnings outlook
becomes stronger when we consider the recovery in the capital market; a
STANBIC IBTC VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010
core niche of the bank. Our earnings forecast which translates to a RoAE of
18.3% is premised on the bank’s ability to achieve our target CIR of 62%.

Earnings Per Share
(N) 0.43 0.54 0.87 1.02 1.25
Dividend Per Share
(N) 0.30 0.30 0.48 0.56 0.69
Dividend Yield (%) 4.0% 2.9% 4.6% 5.4% 6.6%
Net Assets Per Share
(N) 4.29 4.54 4.93 5.39 5.95
Price to Book (x) 1.74 2.28 2.10 1.92 1.74
NPL Ratio (%) 14.7% 9.3% 8.5% 8.0% 8.0%
Source: Company; Vetiva Research Source: Company Financials, Vetiva Research
January 2011 45
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 28,651 61,240 59,781 52,679 69,069 79,119

Provision for risk assets and EI (2,044) (5,020) (4,858) (1,336) (1,728) (2,434)
Taxation (3,142) (2,632) (2,204) (3,938) (6,325) (7,452)

Profit After Tax 7,850 11,995 8,138 10,127 16,264 19,161


Other Assets 11,762 19,455 27,538 16,109 18,525 21,304
Total Assets 315,107 351,253 341,286 402,717 463,125 532,594



Reserves 66,644 72,003 72,122 75,662 82,981 91,604
Equity 76,019 81,378 81,497 85,037 92,356 100,979
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 113.7% -2.4% -11.9% 31.1% 14.6%
Profit After Tax 52.8% -32.2% 24.4% 60.6% 17.8%
Profitability (%)
January 2011 46
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 192 411 401 353 463 530

Other income 86 136 125 130 170 195

Taxation (21) (18) (15) (26) (42) (50)
Profit After Tax 53 80 55 68 109 128

Interbank Placement 533 748 516 513 621 714
Investment Securities 822 635 614 614 648 683
Loans and advances 533 660 741 741 1,166 1,409
Other Assets 79 130 185 185 108 124
Total Assets 2,112 2,355 2,288 2,300 2,802 3,207
Customer deposits 479 638 1,134 1,134 1,134 1,397

Other Liabilities 940 1,089 266 910 1,003 1,214
Interest bearing liabilities 663 720 1,476 1,220 1,483 1,679

Reserves 447 483 483 507 556 614
Total Equity 510 546 546 570 619 677
2008 2009 2010E 2011F 2012F

Cost of Funds 7.3% 6.0% 3.5% 3.9% 4.0%
Yields on Assets 13.4% 13.6% 10.4% 11.3% 11.2%
NPL Ratio 14.3% 14.7% 9.3% 8.5% 8.0%
Coverage Ratio 66.9% 70.2% 80.0% 80.0% 80.0%
January 2011 47
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Access Bank Plc (ACCESS)

B A S IC IN F OR M A T ION
A ddress P lo t 1665, Oyin Jolayemi Str., A Tenacious Brand Posing Challenge to Market Leaders
Victo ria Island, Lagos. We bring back to mind investors’ acknowledgement of the attractive near term
Website www.accessbankplc.co m
earnings potentials of ACCESS as reinforced by the positive returns of its shares
amid 2009 investors’ aversion to banking counters. Notwithstanding the
M anagement (Chairman) G. Oyebo de
appreciable gains recorded in the last two years, our base case valuation which
M D/CEO A. I. Aig-Imo ukhuede
stands at N12.80/share justifies the gains with an attractive potential return
Financial Year End December outlook of 25.4%, thus informing our “BUY” rating on ACCESS.
Investment thesis
Symbo l Blo o mberg: ACCESS:NL Bridging the gap; ACCESS may join the big-4 Nigerian lenders soon:
OWN E R SH IP ST R UC T UR E ( %) To our mind, ACCESS tenacity to join the Tier-1 players may come to fruition
earlier than anticipated as the bank steadily bridges the gap from loan market
share perspective. Amid fears of heightened credit risk, the bank grew its
Institutio nal (Do mestic) 37.68%
balance sheet and loan book by 18% and 10% correspondingly. We believe
Fo reign 27.06%
ACCESS’ capital buffer as reflected in its CAR of 28% offers adequate leeway
S H A R E ST A T IS T IC S for its convergence with Nigeria’s big-4 lenders. While we are buyers of
Shares in issue (M ) 17,888 efficiency as against bungling rivalry for size, we are confident that ACCESS’
Share Price (N) 10.19
relative hold on costs will buoy well for its organic expansion, especially as we
look forward to cost savings on the heels of a maturing low cost retail arm
M arket Cap. (N'm) 184,070
and imminent scale economies. With its steady organic growth and
penetration of the retail market which we believe will complement a modest
Free Flo at (%) 35.26% brand in the corporate space, ACCESS may post earnings surprise beyond our
Daily A verage Value Traded (N'000)
FY’11 outlook of N22.8 billion.
114,701
Improving asset quality and reporting are laudable: ACCESS’ fruitful
Dailly Average Value Traded (USD'000) 768.9
balance sheet repair is laudable, from a NPL of 19% in FY’09 to 11% as at
Year high (N) 11.10 Q3’10 with expectation that the sale of its margin-related NPLs to AMCON will
further scale down the bank’s toxic assets. More importantly, we have
Year lo w (N) 9.50
relative comfort in the quality of ACCESS’ earnings, given its modest
V A LUA T ION M ET R IC S coverage of +80% over NPLs and improved disclosure. Though the bank will
B oo k Value (N'm) 170,633 maintain a dual reporting till regulatory cut-off date set at January 2012,
Trailing P/E (x) 14.35
ACCESS has implemented full conversion of its system to IFRS.
P /B (x) 1.06 Suppressed margin is an interim phenomenon, correction looms:

Div. Yield (%) 3.9%
Though the bank’s Q3’10 net interest margin contracted by 60 basis points
YoY due to less than proportionate decline in funding cost relative to yield on
ROE (%) 7.4% assets, we see a marginal correction in 2011 ALM as easing risk environment
ACCESS VS BANKING VS NSE ASI PERFORMANCE
Leverage
Rebased Ratio (x)
04/01/2010 4.90 engenders the bank’s balance sheet restructuring. On the heels of our modest
cost-to-income ratio outlook of 62% for ACCESS, we look forward to a FY’11
PAT of N22.8 billion, an implied RoAE of 12.7%.

Earnings Per Share (N) -0.27 0.79 1.27 1.62 2.01
Price to Earnings (x) nm 12.99 8.08 6.35 5.12
Dividend Yield (%) 0.0% 4.2% 6.8% 8.7% 10.7%
Source: Company; Vetiva Research Price to Book (x) 0.74 1.06 1.00 0.93 0.86
NPL Ratio (%) 19.0% 11.0% 9.5% 8.5% 7.5%
January 2011 48
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 27,881 57,999 66,076 101,378 124,699 147,250

Profit Before Tax 8,043 18,846 (2,705) 19,685 30,385 38,635
Taxation (1,960) (2,993) (921) (5,512) (7,596) (9,659)

Profit After Tax 6,083 15,853 (3,626) 14,173 22,789 28,976


Other Assets 8,778 32,405 20,732 24,142 29,970 35,964
Total Interest Earning Assets 310,604 997,823 645,069 783,088 920,804 1,084,340
Total Assets 328,615 1,045,699 693,746 832,495 977,349 1,147,511
Borrowings and Managed Funds 0 14,652 46,349 - - -

Total Liabilities 300,230 873,708 525,400 658,629 814,874 1,001,633

Reserves 24,896 163,733 159,357 164,922 175,177 188,216
Equity 28,385 171,805 167,488 173,866 184,121 197,160
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 108.0% 13.9% 53.4% 23.0% 18.1%
Profit Before Tax 134.3% -114.4% -827.7% 54.4% 27.2%
Profit After Tax 160.6% -122.9% -490.9% 60.8% 27.2%
Profitability (%)
Return on Average Equity 15.8% -2.1% 8.3% 12.7% 15.2%
Return on Average Assets 2.3% -0.4% 1.9% 2.5% 2.7%
Net Profit Margin 27.3% -5.5% 14.0% 18.3% 19.7%
January 2011 49
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 187 389 443 680 836 987
Other income 74 116 124 184 226 256
Profit Before Tax 54 126 (18) 132 204 259
Taxation (13) (20) (6) (37) (51) (65)
Profit After Tax 41 106 (24) 95 153 194

Interbank Placement 857 3,693 625 1,005 1,127 1,264
Investment Securities 298 1,114 673 673 1,060 1,205
Other Assets 59 217 139 139 162 201
Total Assets 2,203 7,010 4,651 4,877 5,759 6,755

Other borrowings 0 98 311 311 - -
Other Liabilities 592 2,922 248 248 565 842

Reserves 167 1,098 1,068 1,068 1,106 1,174
Total Equity 190 1,152 1,123 1,123 1,166 1,234
2008 2009 2010E 2011F 2012F

Cost of Funds 4.5% 2.4% 5.6% 6.4% 6.6%
Yields on Assets 6.2% 5.8% 10.4% 10.7% 10.9%
NPL Ratio 3.7% 19.0% 11.0% 9.5% 8.5%
Coverage Ratio 117.9% 37.1% 65.0% 70.0% 70.0%
January 2011 50
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A S IC IN F O R M A T IO N Skye Bank Plc (SKYE)

A ddress 3, A kin A deso la Str., Retail Bank of the South
Victo ria Island, Lago s.
SKYE’s modest brand in the retail and public sector segments of the southern
Website www.skyebankng.co m part of Nigeria continues to pay-off as it guarantees the bank a steady flow of
M anagement (Chairman) A lhaji M . A . K. Smith cheap funding. Having convinced the market with an annualised Q3’10 RoAE
M D/CEO Kehinde Duro sinmi-Etti recovery of 11.5%, the shares of the bank enjoyed improving investor
confidence, as it delivered a startling 60% returns in 2010. Nevertheless, SKYE
still trades at a P/BV of 1.2x; an attraction when put in the context of its FY’11
B lo o mberg:
PAT growth outlook of 27% and near term average RoAE of 18.4%. Relying on
Symbo l SKYEB A NK:NL our DCF valuation, we advice investors to “ACCUMULATE” SKYE with an
expectation of 16% return over the course of the year based on our base case
O WN E R S H IP S T R UC T UR E (%)
target price of N10.86.
Investment thesis
S H A R E S T A T IS T IC S Resolution of capital challenges to engender SKYE’s operation: Driven

by its resolution to opt for an international banking licence, SKYE raised
additional N11.4 billion in H2’10 via a special placement which was 97%
Share P rice (N) 9.49
subscribed at N7 – N7.1 book building band. The bank thus grosses its equity
M arket Cap. (N'm) 125,458 capital to N106.9 billion. It is apt to say that the fresh capital injection was
M arket Cap. (USD'm) 841 also necessitated by its lean CAR which stood at 101 basis points above
Free Flo at (%) 71.39% management’s guidance of 15% in FY’09.
Daily A verage Value Traded (N'000) 88,479 Eyes on high-end corporate, poised to reduce retail loan exposure:
While trying to recover from the doldrums of the loan loss cyclone with a
Daily A verage Value Traded (USD'000) 593 worrying FY’09 NPL of 19%, the bank turns attention to the high-end of the
Year high (N) 10.17
market with a keen passion to reduce exposure to its conventional high-risk
retail niche which accounted for +80% of historical loan book. While we
Year lo w (N) 8.80 observe SKYE’s eagerness to grow its loan book with corporate credit, we think
the bank’s risk asset creation is largely constrained by its relatively fragile
V A LUA T IO N M E T R IC S
liquidity position; 380bps below new regulatory threshold of 30%. We
B o o k Value (N'm) 106,859
therefore look forward to see another tranche of capital raising.
Margin resilience to sustain attractive earnings growth outlook: Though
P /B (x) 1.17
the current balance sheet position of the bank will put a constraint on 2011
Div. Yield (%) 0.5% operations with impact on earnings potential, we are upbeat on our FY’11 PAT
ROE (%) 10.6% outlook of N13.3 billion (12.5% of RoAE) given SKYE’s margin resilience. Our
outlook on SKYE’s margin performance is informed by its exploitation of cheap
retail and public sector deposits and exposure to the higher margin loan
market. SKYE has exclusive and partial internally generated revenue (IGR)
SKYE BANK VS BANKING VS NSE ASI PERFORMANCE collection in key commercial hubs, including Lagos and Rivers state. We think
Rebased 04/01/2010
the bank can post upside surprise if it clamps down its cost-to-income ratio
beyond our outlook of 73%.

Dividend Yield (%) 0.9% 4.6% 5.8% 7.2% 9.7%
Price to Book (x) 0.72 1.21 1.15 1.07 0.99
Source: Company; Vetiva Research NPL Ratio (%) 15.0% 14.5% 13.5% 13.0% 12.0%
January 2011 51
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Gross Earnings 41,720 78,277 131,521 90,046 96,242 109,621

Provision for risk assets and EI (2,595) (4,113) (34,847) (5,617) (4,505) (4,474)
Profit Before Tax 7,970 21,474 844 13,110 16,628 20,438
Taxation (2,085) (5,456) (968) (2,622) (3,326) (4,088)
Profit After Tax 5,885 16,018 (124) 10,488 13,303 16,350


Other Assets 135,652 148,548 35,523 66,414 74,383 85,541
Total Assets 447,992 790,708 632,511 664,137 743,833 855,408
Borrowings and Managed Funds 27,157 37,744 36,285 - - -


Reserves + Minority Interest 27,819 90,997 84,638 96,829 102,816 110,173
Equity 31,571 96,789 90,430 103,439 109,426 116,783
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 87.6% 68.0% -31.5% 6.9% 13.9%
Profit After Tax 172.2% -100.8% -8557.8% 26.8% 22.9%
Profitability (%)
January 2011 52
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 280 525 882 604 645 735

Other income 83 154 211 117 116 133
Taxation (14) (37) (6) (18) (22) (27)

Profit After Tax 39 107 (1) 70 89 110

Interbank Placement 604 1,455 821 312 399 516
Other Assets 909 996 238 238 445 499
Total Assets 3,003 5,301 4,240 3,745 4,616 5,149

Other Liabilities 819 1,046 373 373 865 1,012

Reserves 186 610 567 567 649 689
Total Equity 212 649 606 606 693 734
2008 2009 2010E 2011F 2012F

Cost of Funds 4.9% 10.1% 6.0% 6.8% 6.8%
Yields on Assets 12.0% 17.0% 13.0% 13.2% 13.2%
NPL Ratio 3.7% 15.0% 14.5% 13.5% 13.0%
Coverage Ratio 102.2% 79.4% 80.0% 85.0% 85.0%
January 2011 53
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A SIC IN F O R M A T IO N Diamond Bank Plc (DIAMOND)

A ddress Plot 1261, Adeola Ho pewell, Retail Lender; Wide Spread Too Inciting to Let Go!
Visctoria Island, Lago s.
While DIAMOND plans to entrench its presence in the high-end corporate
Website www.diamo ndbank.co m
market, its near term blueprints are more focused on growing its share in the
M anagement (Chairman) HRM Igwe N.A.U. Achebe retail space, in our opinion. We believe the bank’s stance is largely influenced by
M D/CEO Emeka Onwuka the relatively attractive wide spread in this niche, especially as it rebalances its
Financial Year End December portfolio of liabilities to scale down funding cost. Interestingly, the shares of
DIAMOND continues to hover its 2008 levels as it closed relatively flat in 2009
and 2010 (respectively -0.8% and +2%). From a valuation perspective, we
Symbo l Bloo mberg: DIAM OND:NL believe DIAMOND which currently trades at a 24% premium to its book value is
Secto r B anking still cheap, given our target price of N10.82. We see an attractive 24% upside to
Country Nigeria
current price and advise you “ACCUMULATE” DIAMOND.
O WN ER SH IP ST R UC T UR E ( %) Investment thesis
Retail Shareho lders 20.00% Cheap funding and sustained high retail lending rates; drivers of
Institutional Shareho lders 80.00% margins: As a complement to its conviction of bankable opportunities in the
retail-end of the loan market, the bank achieved an impressive rebalancing of
S H A R E ST A T IST IC S
its deposit mix, with cheaper funding sources (savings and demand)
constituting 74% of deposit base. Given our expectation of a sustained high
Share Price (N) 8.71 rates on retail loan and DIAMOND’s improving access to cheap funds, we are
M arket Cap. (N'm) 130,277 upbeat on its net interest margin which peaked at 10.3% in Q3’10 and expect
M arket Cap. (USD'm) 873 it to be a core driver for near term profitability.
High NPL mirrors retail lending risk: Despite modest coverage of +80%,
Free Float (%) 20.00%
all eyes are on DIAMOND’s worrying NPL which stood at 16.8% in Q3’10 (vs.
Daily Average Value Traded (N'000) 85,058 mid-tier peer average of 12%). It is imperative to note that the obstinate NPL
Daily Average Value Traded (USD'000)
ratio is also reflective of the 7.9% YoY decline in loans, as this obscures the N9
570.2
billion recovery in toxic assets in the last three quarters. Apt to say that this
Year high (N) 9.27 high percentage of NPL is a mirror of the bank’s sizable exposure to the retail
Year lo w (N) 7.50 end of the credit market which commands >50% of the bank’s loan book.
V A LUA T IO N M E T R IC S FY’11 RoAE still suppressed; albeit, we see swift near term recovery:
B ook Value (N'm) 105,647 Though the bank’s lending appetite may be constrained in the near term as it
rebalances portfolios to shore-up its declining CAR (15.4%, 680bps YoY
decline), we are convinced that the bank’s top and bottom- lines will ride on
P /B (x) 1.19
resilient yield on assets and improving cost structures (declining funding and
Div. Yield (%) 0.0% operating costs) to deliver our FY’11 outlook of N113.8 billion and N12.0 billion
respectively. While this earnings projection translates to a RoAE of 10.6%; a
ROE (%) 6.1%
huge discount to its estimated cost of equity of 17.5%, we believe the market
s hould price-in the expected RoAE recovery post 2011 hurdle (an average of
17.1% over the near term).

Dividend Yield (%) 0.0% 3.3% 6.2% 6.8% 8.1%
Price to Book (x) 1.01 1.19 1.12 1.06 0.99
NPL Ratio (%) 19.7% 16.7% 16.0% 15.0% 14.0%
January 2011 54
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 39,484 60,438 67,736 86,586 98,042 106,577

Profit Before Tax 9,008 16,214 -12,374 11,090 20,587 22,646
Taxation (1,921) (3,393) 4,200 (3,161) (5,867) (6,454)
Profit After Tax 7,087 12,821 (8,174) 7,929 14,720 16,192


Other Assets 29,203 73,234 50,306 44,642 43,494 47,142
Total Assets 320,419 625,670 650,757 637,742 701,516 785,698



Reserves 49,610 110,676 98,855 101,978 108,602 115,888
Equity 54,310 117,256 106,093 109,215 115,839 123,126
2008 2009 2010E 2011F 2012 E

Growth (%)
Gross Earnings 53.1% 12.1% 27.8% 13.2% 8.7%
Operating Income 57.8% -11.7% 56.7% 11.3% 8.1%
Profit Before Tax 80.0% -176.3% -189.6% 85.6% 10.0%
Profit After Tax 80.9% -163.8% -197.0% 85.6% 10.0%
Profitability (%)
January 2011 55
[Type text]
VETIVA
2011 Outlook
The Tipping Point

Gross Earnings 265 405 454 580 657 714
Other income 95 166 111 150 170 165
Taxation (13) (23) 28 (21) (39) (43)
Profit After Tax 48 86 (55) 53 99 109

Interbank Placement 174 920 682 684 705 790
Other Assets 196 491 337 337 299 292
Total Assets 2,148 4,194 4,363 4,047 4,331 4,810

Other Liabilities 170 413 194 194 349 428

Reserves 333 742 663 663 684 728
Total Equity 364 786 711 711 732 777
2008 2009 2010E 2011F 2012F

Cost of Funds 3.6% 5.2% 4.0% 4.8% 4.8%
Yields on Assets 8.9% 9.3% 11.5% 12.4% 12.5%
NPL Ratio 4.4% 19.7% 16.7% 16.0% 15.0%
Coverage Ratio 88.7% 64.5% 85.0% 85.0% 85.0%
January 2011 56
[Type text]
VETIVA
2011 Outlook
The Tipping Point
B A SIC IN F O R M A T ION First City Monumental Bank Plc (FCMB)

Address 17A Tinubu Street, Taking a Deeper Dive into the Low-End of the Market
Lagos. The equity of FCMB still trades at par with its book value (P/BV of 1.0x Vs.
Website www.firstcitygro up.co m average peer pricing of 1.2x). Our valuation uplifts the shares of this bank given
M anagement (Chairman) Dr. Jonathan AD Long
our outlook on its near term fundamentals (better than tier-II peer’s asset
quality and earnings potentials). Though we look forward to a negative excess
GM D/CEO Ladi O. Balogun
return from FCMB in FY’11 (a RoAE of 12.1% Vs. our banking industry cost of
equity of 17.5%), our base case DCF valuation which stands at N9.50 implies a
Exchange Listing Nigerian Stock Exchange justified P/BV of 1.16x. Going by the current price of FCMB (N8.20), an investor
Symbo l FCM B: NL with a 12-month horizon should harvest 15.9% capital gain. We therefore
O WN ER SH IP ST R UC T UR E (%) suggest that value investors “ACCUMULATE” FCMB.
Investment thesis
Deposit and near term profitability outlook buoys appetite for retail
Institutional Shareholders 81.2%
penetration: As part of the strategic repositioning to cushion the impact of
SH A R E ST A T IST IC S intensifying competition in the investment banking space and exploit
opportunities in the low-end of the commercial banking market, FCMB takes a
Shares in issue (M ) 16,271 deeper dive into retail market. Though, the retail banking SBU continues to
Share Price (N) 8.20 post losses as it is yet to reach critical mass, the growth trajectory has been
M arket Cap. (N'm) 133,424 impressive. Also providing succour to the bank is the impressive earnings
profile of Credit Direct Limited; a complementary retail SPV which contributes
M arket Cap. (USD'm) 894
+20% to FCMB’s Q3’10 bottom-line. We are optimistic that this infant segment
will be another cashcow for the bank in the near term.
Daily Average Value Traded (N'000) 51,543
IFC investment to accelerate growth momentum: The finance arm of the
Daily Average Value Traded (USD'000) 346 World Bank; International Finance Corporation (IFC) invested US$70 million
Year high (N) 8.20 (≈N10.5 billion) in FCMB in the last quarter of 2010. The funding; a senior
Year lo w (N) loan of US$50 million and US$20 million convertible debt which is dedicated to
7.50
agribusiness and education sector financing, will accelerate the bank’s foray
VA LUA T IO N M ET R IC S
into the retail market. Though the bank’s appetite to acquire one of the
Boo k Value (N'm) 133,355 rescued banks appears to be waning, we are cautious to say that FCMB may
Trailing P/E (x) 21.58 revisit this inorganic growth path, especially as its deal with IFC includes
P/B (x) 1.00 probable acquisition finance of a distressed bank.
Div. Yield (%) 0.0% Our expected FY’11 EPS of N1.02 justifies FCMB’s cheapness: Our
ROAE (%) 4.6% outlook on the bank’s earnings potential translates to a FY’11 PAT of N16.7
billion (EPS of N1.02 and RoAE of 12.1%). It is imperative to highlight that
this earnings expectation on FCMB is informed by a cost-to-income ratio
(CIR) of 61% and net interest margin (NIM) of 6.52%. Our view of FCMB’s
FCMB VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010 cost efficiency (CIR) is largely informed by its imminent top-line growth of
35.3%. As regards NIM, we believe the improving liability mix of the bank
(low-cost deposits and term loan now account for c.51% of balance sheet
funding) will justify of outlook.
Forecast Summary Dec'09 FY'10E FY'11F FY'12F FY'13F

Dividend Yield (%) 0.0% 3.6% 6.9% 8.4% 9.7%

Price to Book (x) 0.90 1.00 0.95 0.89 0.83
NPL Ratio (%) 14.8% 7.0% 6.5% 6.0% 5.5%
January 2011 57
[Type text]
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (N'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F
Gross Earnings 52,819 71,658 35,206 61,056 82,634 96,782

Provision for risk assets + EI (3,159) (21,846) (5,733) 2,982 (1,323) (953)
Profit Before Tax 20,517 4,774 (479) 11,785 22,209 27,083
Taxation (5,408) (779) - (2,946) (5,552) (6,771)
Profit After Tax 15,109 3,995 (479) 8,838 16,657 20,312
Balance Sheet (N'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F

Other Assets 31,813 11,750 8,913 2,555 8,816 6,759
Total Assets 467,337 515,602 425,916 511,099 587,763 675,928
Customer deposits + Interbank 251,223 321,219 248,356 337,325 387,924 452,872



Reserves 125,516 120,920 120,920 124,897 132,393 141,533
Equity 133,651 129,055 129,055 133,033 140,528 149,669
2009April 2009Dec 2010E 2011F 2012F

Growth (%)
Gross Earnings 35.7% -50.9% 73.4% 35.3% 17.1%
Operating Income 23.3% -63.3% 106.1% 43.5% 17.6%
Profit Before Tax -76.7% -110.0% nm 88.5% 21.9%
Profit After Tax -73.6% -112.0% nm 88.5% 21.9%
Profitability (%)
January 2011 58
[Type text]
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (USD'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F

Gross Earnings 354 480 236 409 554 649
Other income 152 108 44 108 164 192

Provision for risk assets (21) (146) (38) 20 (9) (6)
Taxation (36) (5) - (20) (37) (45)
Profit After Tax 101 27 (3) 59 112 136
Balance Sheet (USD'Mill) 2008 2009April 2009Dec 2010E 2011F 2012F

Interbank Placement 1,306 1,107 375 480 591 680
Other Assets 213 79 60 60 17 59
Total Assets 3,133 3,456 2,855 3,050 3,563 4,058

Other Liabilities 212 182 117 117 102 227

Reserves 841 811 811 837 888 949
Total Equity 896 865 865 892 942 1,003
2009April 2009Dec 2010E 2011F 2012F

Cost of Funds 5.4% 4.8% 6.4% 6.3% 6.3%
Yields on Assets 12.3% 6.5% 10.2% 11.2% 11.4%
NPL Ratio 10.1% 14.8% 7.0% 6.5% 6.0%
Coverage Ratio 80.6% 65.5% 80.0% 85.0% 90.0%
January 2011 59
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Consumer Sector: Tough Year Ahead, Efficiency Requisite

The global factor of rising commodity prices, and constrained domestic credit
growth will combine to pose challenges to companies within the Consumer
sector in 2011. It is worthy to note that these stress points would play
differently for the sub-sectors within the Consumer industry. For example,
whilst producers of essential foods such as sugar and flour can, to some
extent, pass on costs to consumers, manufacturers of personal and household
products, retail chains, and ‘white goods’ suppliers will find it more difficult to
do same. Importantly, the ability of consumer companies to improve and
sustain production efficiencies would gird against some of these pressures.
Given the experience of these companies in the Nigerian market, it is our
belief that they are positioned to weather the difficult road ahead.
Rising Commodity Prices to Pressure Input Costs

Global commodity prices, especially food, are at near-term highs and
consensus estimates are for further increases. Commodity prices, which are
majorly influenced by factors affecting supply and demand, surged in 2010,
largely due to the climate change that evolved into severe weather conditions
Global commodity prices, in the ‘Black Region’ which represents countries such as Russia, Australia,
especially food, which are Ukraine, Kazakhstan and the EU that are the major producers of food
majorly influenced by factors
commodities. Global wheat, sugar and coarse grain inventory are currently
affecting supply and demand,
are at near-term highs and forecast to drop significantly, wiping out nearly all the build-up of the past
consensus estimates are for several years. Falling U.S. corn and EU barley inventory account for 80% of
further increases. the global coarse grains decline. Conversely, 60% of the reduction in wheat
inventory is shared among Russia, Kazakhstan, the EU, and Canada. Sugar’s
estimated surplus production is down from a forecast 6.2 million tons to an
estimated 3 million tons.
Following a warning by the United Nations Food and Agriculture Organization

(UN FAO) of a “food price shock”, futures prices have also surged, stoking
concerns of a food crisis of similar proportions to that seen in 2008. In
November 2010, the UN FAO had stated in their “Food Outlook Global Market
Analysis” report that major food supplies would not sink to 2008 levels in
2010/11.
Floods in Australia, excessively Floods in Australia, excessively hot weather in Latin America and climate
hot weather in Latin America, change-induced bad weather in the Black Region have also contributed to the
climate change-induced bad upward pressure on prices, as outlook for output continues to be reviewed
weather in the Black Region as downwards. The United States Department for Agriculture (USDA) revised
well as political unrest in Cote global outlook for crop harvests after the warning, as supply shocks continue
d’Ivoire have contributed to
to pressure already high prices. For example, wheat prices are expected to
price pressures, as outlook for
output continues to be remain volatile especially in H1’11, while wheat futures have risen 80% since
reviewed downwards. June 2010.
Weather conditions are not expected to abate in the nearest future; as such
there might be periods of sustained increases in food commodity prices. This
anxiety has impacted other food commodity prices such as rice, which should
ordinarily be on the decline due to improving supply and stock conditions.
However there seems to be a bandwagon effect, as all food commodities are
headed north. We review major commodities that are key input for Nigerian
manufacturers.
January 2011 60
[Type text]
VETIVA
2011 Outlook
The Tipping Point
Wheat Prices
The outlook for wheat prices is quite dampened as demand outstrips supply;
although we had earlier stated in our report in the month of August - ‘Wheat
Prices - No Cause for Alarm’ - that the global output far outstrips global
The outlook for wheat prices is
dampened as demand demand/consumption, and this situation held up until September. We also
outstrips supply, exacerbated highlighted a major risk to our analysis being an extension of the ban on
by expectations of tighter wheat exports by Russia.
supplies of high-quality wheat
with a sharp reduction in grain The above stated risks did play out unfortunately and as a result the present
quality in 2011 for Germany,
situation and outlook for wheat prices seems gloomy for the rest of the year as
Canada and Australia.
it appears that there is a shortfall in global supply. This is further exacerbated
by expectations of tighter supplies of high-quality wheat with a sharp
reduction in grain quality in 2011 for Germany, Canada and Australia. For the
two major flourmillers, Flour Mills and Dangote Flour, we expect the above to
impact on margins but the effect will vary for both companies.
SUPPLY FALLS AS DEMAND RISES WHEAT PRICES

2008 – 2010 (DEC)
(July 2009 – December 2010) Dollars per Bushel
690
Production Consumption 10
680 Deficit 9
of
670 22MT
8
660 7
650 6
640 5
630 4
620 3
610 2
2008/09 2009/10 2010/11 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Source: USDA; Vetiva Research Source: Bloomberg; Vetiva Research
We expect soaring wheat We are of the opinion that Flour Mills also has a wealth of experience in this
prices to impact margins for sector given its 50 years existence and would have long ago devised means of
the two major flour millers but dealing with this issue. On the other hand, Dangote Flour maybe relatively
the effect will vary for both more exposed in terms of shocks to its bottom-line. Overall, expectation is
companies. Should the burden that flour millers should have been proactive and hedged prices as far out as
become too heavy, the flour
possible. In any case, we expect flour millers to pass on costs if the burden
millers may pass on costs to
consumers. becomes too heavy.
Sugar Prices
There’s growing anxiety about a shortfall in global prices of sugar premised

majorly on an appreciation of the Brazilian Real. Brazil is the largest producer
and exporter of sugar and an appreciation in its currency portends expensive
exports from Brazil, as more dollars will buy less exports. Brazil accounts for
24% of world production, while Asia accounts for 37%. Production in Asia is
down by 1.4 million tons to 60.3 million.
January 2011 61
[Type text]
VETIVA
2011 Outlook
The Tipping Point
2010/11 production in India is estimated at 25.7 million ton, up one million,

China at 12.7 million tons, down 1.4 million, and Thailand at 6.9 million tons,
down 300,000 tons. Production in the EU-27 is estimated at 14.8 million tons
up 900,000 tons. Exports from Brazil are estimated at 26.9 million tons, down
1.6 million tons from the May forecast. Thailand is estimated to export 4.7
million tons, down 500,000 tons from May, and shipments from Australia are
pegged at 3.8 million tons, up 50,000 tons.
PRODUCTION STILL OUTSTRIPS SUGAR PRICE TREND 2010

CONSUMPTION (July 2009 – December 2010) Cents per Pound
165
2008/09 2009/10 2010/11 45
160
40
155
35
150
30
145
25
140
20
135
15
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
130
Production Consum ption
Source: Bloomberg; Vetiva Research

Source: USDA; Vetiva Research
In 2010, sugar began on a low key, as we saw prices taking a breather from
Even though production levels its northwards run in the previous year. Even though there were periods of
are still in line with spikes earlier in the year, this was not sustained given high supply and
consumption, global
production levels. Consequently, sugar prices continued to plummet from
consumption is rising pushing
up price, further exacerbated record highs. There was a reversal of fortunes in the later part of the year as
by the increasing use of sugar the trend of low sugar prices upturned and prices began a gradual ascent in
cane for alternative source of August, and by November were trading at 30-year highs driven by bad harvest
power/fuel. in major producing areas such as Brazil, India and China.
Even though, sugar production levels are still in line with consumption,
speculations are that the global recovery may spark a rise in consumption
hence creating a deficit in global supply and production of sugar. Global
consumption is rising and prices are moving upwards further exacerbated by
the increasing use of sugar cane for alternative source of power/fuel, e.g.
Ethanol.
Cocoa Prices
The perceived lack of In the cocoa market, the major driving force of the upsurge in prices is the
investment in the sector by perceived lack of investment in the sector by the producers, most of which are
the producers, most of which poor farmers in West Africa. The bulk of cocoa (c.75%) traded in the
are poor farmers in West international market is sourced from West Africa, in which most of the farmers
Africa who account for c.75% are poor and receive little or no assistance from their Governments towards
of world cocoa supply, is a
financing large/industrial scale production of cocoa, hence most remain on a
major driver of prices.
small-medium scale. Nigeria is the 4th largest producer of cocoa in the world
after Ivory Coast, Indonesia and Ghana.
January 2011 62
[Type text]
VETIVA
2011 Outlook
The Tipping Point
We note that the increase in global cocoa prices in 2010 was quite moderate
Our expectations are for cocoa compared to 2009 prices which were at record highs. Our expectations are for
prices to gradually firm up, cocoa prices to gradually firm up, owing to political uncertainty surrounding
owing to political uncertainty
top producer Ivory Coast, amid dwindling production. Production of Cocoa
surrounding top producer
Ivory Coast, amid dwindling from the Ivory Coast has been consistently decreasing and was down by
production. 175,000 tons in 2008/09 crop year. The cocoa harvest in Ivory Coast has
fallen by more than 15% in last five years, a base effect that pushed the
prices to peak levels in 30 years; this mainly due to diseases such as swollen
shoot and black pod.
COCOA PRICES
(December 2008 – December 2010) Dollar per metric ton
3,800.00
3,600.00
3,400.00
3,200.00
3,000.00
2,800.00
2,600.00
2,400.00
2,200.00
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
Source: Vetiva Research
The confectionery companies The confectionery companies such as Nestle and Cadbury are usually not as
such as Nestle and Cadbury sensitive to the volatility in their input prices as the flour millers, so we expect
are usually not as sensitive to the impact on the these companies to be relatively mild. Also, we note that
the volatility in their input
both Cadbury and Nestle have invested in backward integration given Nigeria’s
prices as the flour millers, so
we expect the impact on the position as one of the top producers of cocoa in the world, most of these
these companies to be companies have to the best of their abilities hedged against upsurge in input
relatively mild. prices.
Barley & Sorghum
With EU production at a 10-year low and a Russian ban on grain exports,

contracting world supply of barley may serve to further aggravate already high
prices. Already, 2010/11 estimates from the USDA indicate that consumption
far outstrips production and that harvest yields are dropping (see graph
below).
It is unlikely brewers will pass For sorghum, another mainstay ingredient for the brewers, expectations are
the pressures on to that production would match or slightly outstrip world consumption (according
consumers, in terms of price to the United States Department of Agriculture) so price should remain stable.
hikes in the near term, as they Nigeria is the second largest producer of sorghum in the world and consumes
would seek to consolidate almost all its produce, with Nigerian Breweries’ sorghum plantation initiative
brand loyalty and volumes providing significant headroom for it to manage costs on this front. However,
sales, given persistent
exchange rate shocks are a possible downside risk to this stability, especially
competition from new entrants
in the market. for Guinness which still imports the crop, although our expectations for a
stable exchange rate diminish this threat significantly. At any rate, the
brewers currently import about 25%-35% of their input needs through joint
purchase agreements with their parent companies, so we expect that they
have hedged against these risks.
January 2011 63
[Type text]
VETIVA
2011 Outlook
The Tipping Point
WORLD BARLEY PRODUCTION, CONSUMPTION AND

BARLEY PRICES YIELD
(December 2007 – December 2010) US Dollars per metric ton (2000 – 2010)
160 3
250 Production Consumption Yield
155
2.5
150
200 2
145
140 1.5
150
135
1
130
0.5
100 125
Mar-08
Jun-08
Mar-09
Jun-09
Mar-10
Jun-10
Dec-07
Sep-08
Dec-08
Sep-09
Dec-09
Sep-10
Dec-10
120 0
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
Source: Index Mundi, Vetiva Research
Source: USDA, Vetiva Research
Overall, it is unlikely that if these pressures continue, the brewers will pass
them on to consumers, in terms of price hikes in the near term, as they would
seek to consolidate brand loyalty and volumes sales, given persistent
competition from new entrants in the market. Also, returns from growth in
volume sales on the back of increased marketing spend should provide a
buffer to significant erosion of earnings.
Access to Credit Remains a Source of Worry
Like many manufacturers, Consumer companies have felt the pinch of slower
demand and tighter credit as consumers have reduced discretionary spending.
Also, wholesalers and distributors have faced challenges to funding working
capital positions for pushing products into the market. With growth in credit to
the private sector forecast at c.15% (Vetiva Research estimates) for 2011, an
improvement from 2010 levels (5%), but skewed toward low-risk blue chips,
access to credit would still remain tight for middlemen, thus impacting on their
ability to reach markets.
Credit to Private Sector

LHS - Naira Trillions
12.00 80.0%
Credit Annualized Growth
70.0%
11.00
60.0%
10.00
50.0%
9.00 40.0%
8.00 30.0%
20.0%
7.00
10.0%
6.00
0.0%
5.00 -10.0%
Q1'08
Q2'08
Q3'08
Q4'08
Q1'09
Q2'09
Q3'09
Q4'09
Q1'10
Q2'10
Q3'10
Q4'10
Source: CBN, Vetiva Research
January 2011 64
[Type text]
VETIVA
2011 Outlook
The Tipping Point
For the consumer, our expectation is that as governments implement the

increase in wages of civil servants (who make up the largest portion of formal
sector), disposable income will rise marginally (3% growth in real wages). We
recognize that many state governments have raised concerns about their
ability to sustain this new salary levels, and that the federal government
already pays close to the new minimum wage. Thus, it is unlikely that the
increase, when it happens, would significantly boost overall disposable income.
No Major Surprises on the Policy Front

While external shocks from Over the years, Government policies have remained relatively stable; few
commodity prices are changes that have been made have been to protect the manufacturing
expected to put pressure on companies within the country. We do not envisage radical changes in this
consumer companies, our arena in the course of the year.
preference will be for products Although there’s a probability of a new Government coming to power; if that
that are able to withstand happens, we largely expect policies not to be too distant from the established
economic cycles.
policies of the incumbent.
Efficiency, Distribution and Diversification will Determine Winners
While external shocks from commodity prices are expected to put pressure on
consumer companies, the winners the sector will be companies with relatively
easy access to funding and efficient distribution network. Diversification across
various product ranges can also be a critical success factor. Our preference will
be for products that are able to withstand economic cycles.
January 2011 65
[Type text]
VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION NESTLE NIGERIA PLC

Address 22-24, Industrial Avenue, Thriving on Expansion & Innovation
Ilupeju, Lagos State
We have upgraded our recommendation on Nestle to an ‘ACCUMULATE’
Website www.nestle.c om
based on a revision of our Target Price using the DCF methodology. We
Management (C hairman) C hief Olusegun Osunkeye arrived at a target price of N448.20. Nestle now trades at an upside
MD/C EO Mr. Martin Woolnough potential of 21.6% relative to our target price. Nestle has the highest
Financial Year End December Return on Equity (99.96%) in the Food & Beverage sector as a whole.
Exchange Listing Nigerian Stock Exchange We remain optimistic about the prospects of the company in the next 2
Symbol years based on its expansion and drive towards increasing market share.
Bloomberg: NESTLE:NL
Sector Food & Beverages Investment Thesis

Country Nigeria Reaping the Benefits of Organic Growth: In 2010, Nestle began to
OWNERSHIP STRUCTURE (%) reap some of dividends of its on-going expansion plans. The company had
Nestle CWA Ltd, Ghana 59.1 earlier carried out a feasibility study on its product extension and in the
Nestle S.A. Switzerland 3.2 process discovered new markets, especially in previously untapped
Others 37.7 regions. As a result, Nestle’s 2010 earnings spiked, having completed the
SHARE STATISTICS extension of its Agbara plant with the new products being delivered to the
Shares in issue (M) 660.0
ready and established markets. In the current year, we expect the new
Share Price (N)
plant at Sagamu Ogun state to come on stream; this, in our opinion,
405.00
portends a significant improvement in market share and turnover driven
Market C ap. (N'm) 243,444
majorly by volume growth.
Market C ap. (USD'm) 1632.0
Input Price Volatility Checked: In our opinion, Nestle remains
Free Float (%) 37.70
relatively insulated from the impending food commodity price crisis.
Year high (N) 401.00 Nestle has partnered with some local farmers in ensuring the supply of its
Year low (N) 239.50 input such as Maize, Soya Beans and Cocoa to act as buffer against global
VALUATION METRICS food price volatility. Judging by precedence in 2010 a year in which food
Book Value (N'm) 10,544.0 commodity price skyrocketed, Nestle was largely shielded from the
Trailing P/E (x) 22.9 impact of this external shock due to its investment in backward
P/B (x) 25.4 integration. Furthermore, the company is also in partnership with
Div. Yield (%) 4.4 agricultural research institutes such as University of Agriculture, Abeokuta
(UNAAB) in a bid to sustain quality and output.
ROAE (%) 99.96
Debt/Equity (%) 113.0 Earnings Outlook: Our outlook for Nestle is buoyant given the factors
earlier highlighted; the key point being the coming on stream of the new
NESTLE VS F&B VS NSE ASI PERFORMANCE plant, which is expected to boost turnover significantly. Hence, for FY’11
Rebased 04/01/2010
we expect Turnover growth of 52.0% and After Tax Earnings growth of
2 45.2% (N127.2bn and N18.2bn) and a Forward EPS of N27.58 implying a
Nestle F & B Index NSE ALSI
1.8
Forward PE of 13.4x and Dividend of N19.30.
1.6 Forecast Summary FY'09A FY'10F FY'11F FY'12F FY'13F

1.4 Earnings Per Share (N) 14.81 18.98 27.58 38.90 48.52
1.2
YoY Change (%) 17.43% 28.13% 45.29% 41.05% 24.74%
1
0.8
YoY Change (%) 0.00% 28.54% 19.65% 41.05% 24.74%
0.6
Dividend Yield (%) 3.41% 4.38% 5.24% 7.39% 9.22%
Source: Company; Vetiva Research YoY Change (%) 16.76% 17.91% 11.46% 11.43% 11.65%
Price to Book (x) 23.09 19.58 17.57 15.76 14.12
Source: Company Financials; Vetiva Research
January 2011 66
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 44,027 51,742 68,317 83,688 127,206 165,368
Cost of Sales -27,805 -31,301 -39,957 -45,950 -55,140 -65,066
Gross Profit 16,222 20,442 28,360 37,738 72,066 100,303
Operating Expenses -7,826 -8,538 -12,628 -15,090 -28,790 -36,702

Core Operating Profit 8,396 11,904 15,732 22,648 43,276 63,600
EBITDA 9,624 13,168 17,297 22,832 32,422 44,418
Depreciation & Amortization 1,229 1,265 1,565 1,800 1,890 1,947
EBIT/Operating Profit 8,396 11,904 15,732 21,032 30,532 42,471
Interest Payable & Charges 0 -67 -2,046 -2597.368 -3347.368 -4,097
Profit Before Taxation 8,463 11,862 13,783 18,435 27,184 38,374
Taxation -3021 -3,531 -4,000 -5,899 -8,971 -12,663
Profit After Taxation 5,442 8,332 9,784 12,536 18,214 25,710
BALANCE SHEET (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F
Fixed Assets 10,436 13,817 25,405 33,026 41,283 49,539

Inventories 5,226 6,415 10,698 11,981 14,378 16,103
Debtors 2299 4,304 3,403 4,151 5,064 6,178
Bank and cash balances 2,336 3,643 1,764 3,898 4,873 6,091
Other Receivables and Current Assets 956 979 854 1,158 1,107 4,583
Total Assets 21,252 29,159 44,250 54,214 66,705 82,494
Other Creditors 2,395 3,001 3,123 3,748 4,872 5,847

Creditors & Accruals 1,117 1,831 1,185 1,422 1,777 3,199
Short Term Loan - - 3,000 3,600 4,500 7,650
Amount Due 1766.313 3695.131 5,840 11,176 17,036 20,001
Taxation 2362.998 1,982 4,662 5,594 7,217 10,464
Long-Term Loans - 5,980 11,921 11,921 11,921 11,921
Provision for Gratuity 5598.9 447.7 671.0 671 1,006 1,508
Prior Year Dividend 596 584 1201 1441 2017 3731
Deferred Taxation 1180 2607 2103 2,208 2,500 2,720
Share capital 330 330 330 330 330 330

Share premium 32 32 32 32 32 32
Revaluation Reserves 186 186 186 195 195 195
Retained Earnings 5,687 8,482 9,995 11,875 13,300 14,896
Total Equity 6,237 9,030 10,544 12,432 13,857 15,453
January 2011 67
VETIVA
2011 Outlook
The Tipping Point
2012
INCOME STATEMENT (USD’Mill) 2007 2008 2009 2010 F 2011 F F
Turnover 295 347 458 561 853 1109
Cost of Sales -186 -210 -268 -308 -370 -436
Gross Profit 109 137 190 253 483 672
Operating Expenses -52 -57 -85 -101 -193 -246

Core Operating Profit 56 80 105 152 290 426
EBITDA 65 88 116 153 217 298
Depreciation & Amortization 8 8 10 12 13 13
EBIT/Operating Profit 56 80 105 141 205 285
Interest Payable & Charges 0 0 -14 -17 -22 -27
Profit Before Taxation 57 80 92 124 182 257
Taxation -20 -24 -27 -40 -60 -85
Profit After Taxation 36 56 66 84 122 172
BALANCE SHEET 2007 2008 2009 2010 F 2011 F 2012 F
Fixed Assets 70 93 170 221 277 332

Inventories 35 43 72 80 96 108
Debtors 15 29 23 28 34 41
Bank and cash balances 16 24 12 26 33 41
Other Receivables and Current Assets 6 7 6 8 7 31
Total Assets 142 195 297 363 447 553
Other Creditors 16 20 21 25 33 39
Creditors & Accruals 7 12 8 10 12 21
Short Term Loan - - 20 24 30 51
Taxation 16 13 31 38 48 70
Long-Term Loans - 40 80 80 80 80
Provision for Gratuity 38 3 4 4 7 10
Prior Year Dividend 4 4 8 10 14 25
Deferred Taxation 8 17 14 15 17 18
Total liabilities 101 135 226 280 354 449
Share Capital 2 2 2 2 2 2
Share Premium 0 0 0 0 0 0
Revenue and Capital reserve 1 1 1 1 1 1
Shareholders Fund 38 57 67 80 89 100
Total Equity 38 38 38 38 38 38
January 2011 68
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E

Growth (%)
Turnover growth 17.5% 177.1% 22.5% 52.0% 30.0%
Growth in Core Operating profit 41.8% 32.2% 44.0% 91.1% 47.0%
Growth in EBITDA 36.8% 31.4% 32.0% 42.0% 37.0%
Growth in PBT 40.2% 199.1% 33.7% 47.5% 41.2%
Growth in PAT 53.1% 221.6% 28.1% 45.3% 41.2%
Profitability (%)
Return on Equity 109.1% 100.0% 109.1% 138.6% 175.4%
Return on Assets 33.1% 26.7% 25.5% 30.1% 34.5%
Return on Invested Capital 35.4% 28.4% 31.0% 35.9% 40.7%
Growth rate (g) 0.6% 15.3% 16.4% 41.6% 52.6%
Margins (%)
EBITDA/Sales 25.4% 25.3% 27.3% 25.5% 26.9%
EBIT/Sales 23.0% 23.0% 25.1% 24.0% 25.7%
Gross Profit Margin 39.5% 41.5% 45.1% 56.7% 60.7%
Pretax Income/Sales 22.9% 20.2% 22.0% 21.4% 23.2%
Liquidity Ratios (x)
Quick ratio 0.7 0.1 0.3 0.3 0.2
Cash ratio 0.3 0.1 0.1 0.1 0.1
Current ratio 1.4 1.0 0.8 0.7 0.6
Net interest coverage (x) 176.5 7.7 8.1 9.1 10.4
Days in inventory 45.3 57.2 52.3 41.3 35.5
Days in accounts payable 12.9 6.3 6.2 5.1 7.1
Days in cash 25.7 9.4 17.0 14.0 13.4
Days in receivables 30.4 18.2 18.1 14.5 13.6
Capital Structure
Financial leverage (debt to equity) 66.2% 113.1% 436.1% 460.0% 509.0%
Payout ratio 99.5% 84.7% 85.0% 70.0% 70.0%
Total equity/Total assets 31.0% 23.8% 22.9% 20.8% 18.7%
Retention ratio 0.5% 15.3% 15.0% 30.0% 30.0%
Per Share Data
EPS 12.61 14.81 18.98 27.58 38.90
DPS 12.55 12.55 16.13 19.30 27.23
NAPS 13.67 15.96 18.82 20.98 23.38
Sales/Share 78.34 103.43 126.70 192.59 250.18
January 2011 69
VETIVA
2011 Outlook
The Tipping Point
FLOUR MILLS OF NIGERIA PLC

BASIC INFORMATION
Address 2, Old Dock Road,
Deepening Consumer Focus
Apapa, Lagos State We reiterate our ‘BUY’ rating on ‘Flourmills’ guided by our revised Target
Website www.fmnplc.c om Price of N90.16, which implies an upside potential of 30.7%. We employed
Management (C hairman) G.S. C oumantaros a DCF methodology to arrive at our one year target price. We acknowledge
Vice - C hairman Ahmed A. Joga Flourmills’ diversification further into the consumer space, a strategy which
Financial Year End March would help weather shocks and potential to improve margins.
Exchange Listing Nigerian Stock Exchange Investment Thesis
Bloomberg:
Symbol FLOURMILL:NL Expanding Focus: Flourmills has made clear its intention to expand its
Sector Food & Beverages business/product offering horizon in the FMCG sector, thereby extending
C ountry Nigeria
focus to other flour-based and food-based products, given the increasing
demand for Semolina Pasta, Noodles and Semovita etc. This is largely
OWNERSHIP STRUCTURE (%)
supported by the preference for whole-wheat variants due to increased
Exceisor Shipping C o. Ltd 51.6
health awareness by the general populace. Flourmills is seeking to increase
Others 48.4
capacity in these segments, as well as positioning itself for the export
SHARE STATISTICS
market. Flourmills has embarked on the construction of a sugar refinery of
750,000 MT per annum, which according to the company is expected to
Share Price (N) 82.01 come on board in the second quarter of 2012.
Market C ap. (N'm) 154,117
Diversification, Paying-Off: Although consensus expectation is that
wheat prices will continue to rise in 2011. We posit that the effect will be
less severe on Flourmills. This, in our opinion, is based on its well-
Year high (N) 76.50 diversified portfolio spanning the production and marketing of Flour, Pasta,
Year low (N) 36.20 fertilizer, cement, ports operation e.t.c. We note that input cost constitute
c.80% of total cost and thus weighs on margins significantly, however, flour
VALUATION METRICS
Book Value (N'm)
millers are usually able to successfully transfer a significant portion of these
53,266.0
cost to the consumers. In terms of earnings in 2011, the key driver of
income is expected to be cement. Flourmills increased its stake in its
P/B (x) 2.6
associate cement manufacturer, UNICEM, from 22% to 28%. UNICEM has a
Div. Yield (%) 2.4
2.5 million tons cement plant in calabar.
ROAE (%) 37.4
Earnings Outlook: Our FY’11/12 projection for Sales and Earnings stands
Debt/Equity (%) 70.4
at N237.6 billion (8.0% YoY) and N19.2 billion (9.0% YoY), hence we
FMN VS F&B VS NSE ASI PERFORMANCE
Rebased 04/01/2010 expect a Forward EPS of N10.20, Forward PE of 6.8x and Dividend of
2.4
N2.14. Flourmills has the lowest PE amongst its peers, hence, the most
FMN F & B Index NSE ALSI
2.2 attractive from a relative valuation stand point.
2
Forecast Summary FY'10A FY'11F FY'12F FY'13F FY'14F
1.8
1.6
1.4 YoY Change (%) 17.43% 28.13% 45.29% 41.05% 24.74%

1.2 Price to Earnings (x) 27.34 21.34 14.69 10.41 8.35
1 Dividend Per Share (N) 12.55 16.13 19.30 27.23 33.96
0.8 YoY Change (%) 0.00% 28.54% 19.65% 41.05% 24.74%
0.6 Dividend Yield (%) 3.10% 3.98% 4.77% 6.72% 8.39%
YoY Change (%) 16.76% 17.91% 11.46% 11.43% 11.65%
Price to Book (x) 25.37 21.52 19.30 17.32 15.52

January 2011 70
VETIVA
2011 Outlook
The Tipping Point
Turnover 127,662 180,068 206,613 83,688 127,206 165,368
Cost of Sales -106,745 -156,993 -160,542 -45,950 -55,140 -65,066
Gross Profit 20,917 23,075 46,071 37,738 72,066 100,303
Other operating income 5,080 2,138 1,188 -15,090 -28,790 -36,702
Interest received and similar income 2,939 4,108 22,648 43,276 63,600
Operating Expenses -16,119 -16,236 -26,923
EBITDA 11,894 20,783 34,003 22,832 32,422 44,418
Taxation -3515 -1,579 -7,491 -5,899 -8,971 -12,663
Assets Employed 50,878 70,173 90,424 33,026 41,283 49,539
Inventories 20,306 30,672 31,311 11,981 14,378 16,103
Debtors 5376 5,348 6,355 4,151 5,064 6,178
Other Receivables and Current Assets 13,229 11,493 9,040 1,158 1,107 4,583
Total Assets 109,150 137,520 143,519 54,214 66,705 82,494
Short Term Creditors 52,523 64,949 52,732 3,748 4,872 5,847
Long Term Creditors 21,571 35,181 37,521 1,422 1,777 3,199
Share capital 777 854 854 940 940 854
Share premium 5867 5867 5867 5,867 5,870 5,871
Capital Reserve 4128 4124 4124 4,124 4,124 4,124
Revenue/General Reserve 20320 22505 38171 56,994 74,926 84,382
Non Controlling Interest 3130 3205 3415
Shareholders' Equity 35,058 37,391 53,267 68,760 86,695 96067
January 2011 71
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (USD’Mill) 2008 2009 2010 2011 F 2012 F 2013 F
Turnover 856 1207 1385 561 853 1109
Cost of Sales -716 -1052 -1076 -308 -370 -436
Gross Profit 140 155 309 253 483 672
Operating Expenses 34 14 8 -101 -193 -246
EBITDA 80 139 228 153 217 298
Taxation -24 -11 -50 -40 -60 -85
Fixed Assets 341 470 606 221 277 332
Inventories 136 206 210 80 96 108
Debtors 36 36 43 28 34 41
Total Assets 732 922 962 363 447 553
Other Creditors 352 435 354 25 33 39
Share capital 5 6 6 6 6 6
Share premium 39 39 39 39 39 39
Capital Reserve 28 28 28 28 28 28
Revenue/General Reserve 38 38 38 38 38 38
Non Controlling Interest 38 38 38 38 38 38
Shareholders' Equity 38 38 38 38 38 38
January 2011 72
VETIVA
2011 Outlook
The Tipping Point
2009 2010 2011 F 2012 F 2013 F
Growth (%)
Turnover growth 41% 15% 6% 8% 3%
Growth in EBITDA 40% 62% 15% -27% 59%
Growth in PBT -44% 347% 3% 9% 9%
Growth in PAT -39% 335% 4% 9% 9%
Profitability (%)
Return on Equity 11% 37% 51% 44% 43%

Return on Assets 3% 12% 11% 10% 10%
Return on Net fixed assets 9% 31% 41% 38% 39%
Return on Invested Capital 36% 31% 22% 11% 22%
Growth rate (g) 8% 30% 41% 35% 33%
Margins (%)
EBITDA/Sales 12% 16% 14% 0% 0%

EBIT/Sales 10% 14% 15% 9% 14%
Pretax Income/Sales 3% 12% 11% 12% 12%
Net Profit Margin 2% 8% 8% 8% 9%
Quick ratio 0.40 0.25 0.37 0.28 0.34

Cash ratio 0.31 0.12 0.13 0.14 0.15
Current ratio 1.04 1.01 0.89 0.86 0.83
Days in accounts payable 9 10 10 2 2
Days in cash 40 11 13 14 17
Days in receivables 14 13 20 11 15
Cash Conversion Cycle 67 58 24 31 37
Capital Structure
Financial leverage (debt to equity) 94% 70% 65% 47% 35%
Interest bearing debt/Total assets 26% 26% 26% 21% 16%
Payout ratio 22% 20% 20% 21% 24%
Total equity/Total assets 27% 37% 40% 44% 46%
Retention ratio 78% 80% 80% 79% 76%
Per Share Data

EPS 2.28 9.92 9.36 10.20 11.12
DPS 0.50 2.00 1.87 2.14 2.67
NAPS 21.89 31.18 36.59 46.13 51.12
Sales/Share 105.40 120.94 117.09 126.46 129.82
January 2011 73
VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION DANGOTE FLOUR MILLS PLC

Address 8, Rycroft Road,
Still Attractive, Despite Headwinds
Apapa, Lagos State
Website www.dangote-group.com We revised our Target Price for ‘Dangflour’ to N24.62. Despite likely
Management (Chairman)
pressure on earnings from rising price of wheat on the global scene, our
Alhaji Aliko Dangote
target price still gives a 28% potential upside, hence, our ‘BUY’ rating
MD/C EO Mr. Rohit Chaudhry
on the stock at its current trading price of N19.11.
Investment Thesis
Symbol Bloomberg: DANGFLOUR:NL Expansion on Track: Our optimism on Dangflour in the 2011 financial
Sector Food & Beverages year is generally premised on the company’s efforts at increasing capacity.
Country Nigeria Even though Dangflour is the second largest flour miller in Nigeria with an
OWNERSHIP STRUCTURE (%) installed capacity of c.4500MT per day, Dangflour remains focused on on-
Dangote Industries Ltd 73.0 going expansion plans that would see current installed capacity climb by
Others 27.0
c.2000MT per day. This is in order to meet the growing consumption and
demand for flour and wheat based products in the country. Asides this,
SHARE STATISTICS
Dangflour also recently acquired a fleet of trucks to aid distribution of its
products across the nation as well as in a bid to reduce handling cost.
Market C ap. (N'm) 95,500.0 Growing Wheat Consumption, a Positive: There has been an increase
Market C ap. (USD'm) 640.2 in the flour per capita consumption in Nigeria over the past 7-8 years,
Free Float (%) 27.00 growing at a CAGR of c.7.7%. Nigeria currently has annual wheat
Year high (N) consumption per capita of about 25kg, relative to average global wheat
25.82
Year low (N)
consumption per capita of 67kg, as well as one of the lowest wheat
10.42
consumption rates in the world. Growth in flour consumption can be
VALUATION METRICS
attributed to the growing health consciousness of the Nigerian populace and
Book Value (N'm) 28,469.0
higher demand for wheat bread, semolina and pastries. There has also
Trailing P/E (x) 12.1 been an increase in noodles consumption and Dangflour has positioned to
P/B (x) 2.9 tap into this demand with the launch of its own brand of noodles.
Div. Yield (%) 4.8
Earnings Outlook: Our forecast is that Dangflour’s Turnover growth for
ROAE (%) 21.0
FY’11 is 20.0% while After Tax Earnings will grow by 2.4% (Turnover -
Debt/Equity (%) 0.0
N84.7 billion; PAT - N7.3 billion). Our forecast is mainly tempered by our
outlook on wheat prices which points northwards. We expect a Forward EPS
DANGFLR VS F&B VS NSE ASI PERFORMANCE
Rebased 04/01/2010 of N1.45, Forward PE of 11.6x and Dividend of N1.09.
3
Dangf lour F & B Index NSE ALSI

2
YoY Change (%) 86.05% 24.98% 4.32% -7.32% -25.15%

1.5
1
YoY Change (%) 60.00% 27.41% 6.70% -7.32% -25.15%

0.5
Dividend Yield (%) 4.21% 5.36% 5.72% 5.30% 3.97%
YoY Change (%) 15.59% -0.25% 18.36% 19.83% 20.04%
Price to Book (x) 3.34 3.35 2.83 2.36 1.97

January 2011 74
VETIVA
2011 Outlook
The Tipping Point
Turnover 42,153 47,927 61,388 70,596 84,715 97,423
Cost of Sales -37,417 -38,288 -45,180 -50,602 -68,312 -78,559
Gross Profit 4,736 9,639 16,208 19,995 16,403 18,864
Operating Expenses 1,156 4,456 9,585 13,367 9,975 11,792
Other Income 174 1,012 246 295 1,243 1,305
Interest expense -655 -2,399 -4,437 -3,550 -3,585 -3,765
EBITDA 1,331 5,469 9,831 13,662 11,218 13,097
Depreciation 0 -1,802 -2,604
Profit Before Taxation 676 3,167 5,374 10,112 7,632 9,333
Taxation -114.1 -178 187 -3,034 -382 -2,613
Profit After Taxation 562 2,989 5,561 7,079 7,250 6,719
Assets Employed 27,358 33,051 35,238 33,026 41,283 49,539
Inventories 11,428 9,911 8,246 9,921 12,059 15,027
Debtors 8108 15,876 16,976 18,463 19,630 22,087
Bank and cash balances 1,680 1,648 512 1,070 1,966 1,966
Other Receivables and Current Assets 9,546 8,264 5,045 5,267 2,547 0
Total Assets 109,150 137,520 143,519 54,214 66,705 82,494
Long Term Creditors - - - - - -
Share capital 2500 2500 2500 2,500 2,500 2,500
Share premium 11807 11807 11807 11,807 11,807 11,807
Revaluation Reserves 0 0 0 0
Shareholders' Equity 22,145 24,630 28,469 33,612 40,278 41535
January 2011 75
VETIVA
2011 Outlook
The Tipping Point
Turnover 283 321 412 473 568 653
Cost of Sales -251 -257 -303 -339 -458 -527
Gross Profit 32 65 109 134 110 126
Operating Expenses 8 30 64 90 67 79
Other Income 1 7 2 2 8 9
Interest expense -4 -16 -30 -24 -24 -25
EBITDA 9 37 66 92 75 88
Depreciation
Taxation -1 -1 1 -20 -3 -18
Fixed Assets 183 222 236 221 277 332
Inventories 77 66 55 67 81 101
Debtors 54 106 114 124 132 148
Total Assets 732 922 962 363 447 553
Other Creditors 237 292 296 302 303 306
Creditors & Accruals - - - - - -
Share capital 17 17 17 17 17 17
Share premium 79 79 79 79 79 79
January 2011 76
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E
Growth (%)
Growth in EBITDA 311% -96% 5454% -18% -4%
Growth in PBT 369% 70% 88% -25% -8%
Growth in PAT 432% 86% 27% 2% -5%
Profitability (%)
Return on Equity 12.78% 21% 25% 23% 20%

Return on Assets 4.71% 8% 10% 10% 8%
Growth rate (g) 2% 6% 7% 6% 34%
Margins (%)
EBITDA/Sales 11.41% 16.01% 19% 13% 13%

EBIT/Sales 7.65% 11.77% 19% 13% 13%
Pretax Income/Sales 6.61% 8.75% 14% 9% 10%
Net Profit Margin 6.24% 9.06% 10% 9% 7%
Quick ratio 0.40 0.40 0.43 0.48 0.53

Cash ratio 0.04 0.01 0.02 0.04 0.04
Current ratio 0.82 0.94 1.07 1.23 1.42
Days in inventory 87 49 51 52 56
Days in cash 13 3 6 8 7
Capital Structure
Financial leverage (debt to equity) n/a n/a n/a n/a n/a

Interest bearing debt/Total assets 30% 32% 29% 28% 26%
Payout ratio 84% 72% 72% 75% -75%
Retention ratio 16% 28% 28% 25% 175%
Per Share Data
EPS 0.60 1.11 1.42 1.45 1.34

DPS 0.50 0.80 1.02 1.09 1.01
NAPS 4.93 5.69 5.68 6.72 8.06
Sales/Share 9.59 12.28 14.12 16.94 19.48
January 2011 77
VETIVA
2011 Outlook
The Tipping Point
CADBURY NIGERIA PLC

BASIC INFORMATION
Address Lateef Jakande Road, A Phoenix-like Stance
Ikeja, Lagos State We have reduced our rating on Cadbury to “REDUCE” from Accumulate,
Website www.cadburynigeria.com despite the strong recovery in operations witnessed in 2010. Our revised
Management (Chairman) Dr Uduimo Justus Ituesli Target price of N28.05 presents an upside downside of 1%. Our
MD/CEO Mr. Wallace Garland valuation is based solely on the DCF methodology. The stock was the
Financial Year End December highest gainer in the sector in the 2010 year, appreciating 144%.
Investment thesis
Symbol Bloomberg: CADBURY:NL Re-emergence: Following the refinancing phase of Cadbury in the last
Sector Food & Beverages quarter of 2009, the company has continued on an upward growth
C ountry Nigeria trajectory ever since then. Cadbury has re-strategized and restructured its
OWNERSHIP STRUCTURE (%) operations in the past one year and is therefore poised to take advantage
C adbury Schweppes Oversea Plc 46.3
of the opportunities within the sector. The company has gradually sustained
is market share; the rationalizing of its manufacturing processes has
Nigerians 53.7
enabled Cadbury to actively compete in its sub sector. Furthermore, we
SHARE STATISTICS
note that the company’s streamlining of its product portfolio has enabled it
focus on core competencies, as well as leverage on its competitive
Share Price (N) 28.30 advantage going forward.
Market Cap. (N'm) 88,556.0
Market Cap. (USD'm) 593.7
Increasing consumption of Confectioneries and Beverages: The
increase in demand for products of the Food & Beverage sector such as fast
Free Float (%)
foods, confectioneries, packaged drinks and beverages e.t.c as underpinned
Year high (N) 34.84 by the increasing population, improving standard of living and the gradual
Year low (N) 9.97 increase in disposable income, and changing habits, has aided growth for
VALUATION METRICS quality brands such as Cadbury. This increase further instigated Cadbury to
Book Value (N'm) focus on its more profitable brands (such as, Richoco, Stimorol, Bubba
n/a
bubblegum and Eclairs).
P/B (x) n/a Earnings Outlook: Based on our FY’10 positive estimate of N28.27 billion
Div. Yield (%) n/a and N1.68 billion for top and bottom lines. Our FY’11 projection for Sales
ROAE (%) n/a and Earnings stands at N33.5 billion (16.0% YoY) and N2.5 billion (68.6%
Debt/Equity (%) n/a YoY) respectively, hence, we expect a Forward EPS of N0.81, Forward PE of
31.8x.
CADBURY VS F&B VS NSE ASI PERFORMANCE

Rebased 04/01/2010
3.5
Cadbury F & B Index NSE ALSI
3
2.5
YoY Change (%) n/a 21.10% 68.63% 59.12% 12.22%
2
1.5
1
YoY Change (%) 0.00% 0.00% 0.00% 0.00% 23.44%
0.5
Dividend Yield (%) 0.00% 0.00% 0.00% 1.36% 1.68%
0
YoY Change (%) 0.00% 0.00% 17.82% 16.76% 15.42%
Price to Book (x) 0.00 6.22 5.28 4.52 3.92
January 2011 78
VETIVA
2011 Outlook
The Tipping Point

Turnover 8,042 9,878 11,868 11,200 11,927 12,509
Cost of Sales (5,759) (5,709) (6,704) (6,664) (7,097) (7,380)
Gross Profit 2,283 4,169 5,164 4,536 4,830 5,129
Operating Expense (591) (640) (762) (661) (716) (751)
EBITDA 138 1,611 1,964 1,635 1,729 1,876
Depreciation & Amortization (321) (343) (369) (362) (387) (413)
EBIT/Operating Profit (183) 1,268 1,595 1,273 1,342 1,463
Interest Payable & Charges (387) (537) (346) (127) (127) (127)
Interest received - - - - - -
Taxation (34) (150) (505) (367) (389) (428)
Profit After Taxation 138 1,531 1,812 779 827 909

Non-Current Assets
Fixed Assets 4,017 4,655 4,950 5,452 5,795 6,605
Capital work in progress 439 4 66 - - -
Current Assets
Inventories 3,016 2,424 2,510 2,823 3,006 3,126
Debtors 775 717 1,002 1,066 1,135 1,191
Total Current Assets 4,663 4,137 4,787 5,075 5,595 6,110
TOTAL ASSETS 9,118 8,795 9,803 10,526 11,390 12,715
Current Liabilities
Other Creditors - - - - - -
Short Term Loan 553 1,092 671 1,218 1,218 1,218
Taxation 40 39 210 367 389 428
Total Current Liabilities 5,575 3,631 4,327 4,709 4,947 5,148
Non-current Liabilities
Long-Term Loans - 633 507 380 253 126
Provision for Gratuity 320 360 490 802 1,041 1,727
Deferred Taxation 76 195 262 - - -
Total Non-Current Liabilities 396 1,188 1,259 1,182 1,294 1,853
TOTAL LIABILITIES 5,970 4,819 5,586 5,891 6,241 7,001
Net Assets 3,148 3,976 4,217 4,635 5,149 5,714
January 2011 79
VETIVA
2011 Outlook
The Tipping Point
2012
INCOMESTATEMENT (USD’Mill) 2007 2008 2009 2010 F 2011 F F
Turnover 134 163 172 194 225 265
Cost of Sales -101 -115 -113 -114 -130 -146
Gross Profit 32 48 58 80 95 120
Operating Expenses -16 -5 9 26 29 45
Other Income -13 -14 -19 0 -3 -4

Interest expense 0 0 -6 -12 -1 -1
EBITDA 0 0 0 0 0 0
Depreciation
Profit Before Taxation -32 -19 -16 14 25 40
Taxation 23 1 8 -4 -8 -13
Profit After Taxation -5 -18 -8 10 17 27
2012
BALANCE SHEET 2007 2008 2009 2010 F 2011 F F
Fixed Assets 107 98 96 102 106 109
Inventories 21 24 20 21 22 23
Debtors 17 26 19 19 19 19
Other Receivables and Current
Assets 2 1 0 0 0 1
Total Assets 163 160 169 173 179 185

Creditors & Accruals -20 -25 -24 -23 -23 -23

Share premium 48 48 107 107 107 107
Revenue/General Reserve -82 -101 -61 -51 -33 -15
Minority Interest 0 0 0 0 0 0
January 2011 80
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E
Growth (%)
Growth in EBIT -70% -284% 17% 12% 56%
Growth in PBT -41% -16% 190% 74% 59%
Growth in PAT 279% -55% 221% 69% 59%
Profitability (%)
Return on Equity 184.84% -26% 11% 16% 22%

Return on Assets -11.42% -5% 6% 10% 15%
Return on Net fixed assets -21% -10% 20% 17% 26%
Growth rate (g) 185% -26% 11% 16% 29%
Margins (%)
EBIT/Sales -2.88% 5.03% 13% 13% 17%

Pretax Income/Sales -11.72% -9.30% 7% 11% 15%
Net Profit Margin -11.33% -4.83% 5% 8% 10%
Quick ratio 0.24 0.87 0.88 0.88 0.89

Cash ratio 0.07 0.56 0.57 0.58 0.59
Current ratio 0.40 1.21 1.23 1.24 1.27
Net interest coverage (x) -0.33 0.46 2.25 11.52 11.68
Days in cash 25 72 65 59 52
Capital Structure
Financial leverage (debt to equity) n/a n/a 3% 3% 3%

Interest bearing debt/Total assets n/a n/a 2% 2% 2%
Payout ratio n/a n/a 0% 0% -30%
Total equity/Total assets n/a n/a 55% 63% 71%
Retention ratio n/a n/a 100% 100% 130%
Per Share Data
EPS -2.50 -0.39 0.48 0.81 1.28

DPS 0.00 0.00 0.00 0.00 0.39
NAPS -2.74 4.05 4.55 5.36 6.26
Sales/Share 22.07 8.18 9.24 10.72 12.65
January 2011 81
VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION GLAXOSMITHKLINE CONSUMER NIG. PLC

Address 1, Industrial Avenue,
Ilupeju, Lagos State
Ahead of the Pack
Website www.gsk.com We upgrade our rating on ‘GlaxoSmith’ to a “BUY” from an Accumulate
Management (C hairman) C hief Olusegun Osunkeye based on a positive earnings outlook for 2011. We arrived at a Target Price
MD/C EO Mr. Chidi Okoro of N37.17 which gives an upside potential of 39.2% relative to the current
Financial Year End December market price.
Symbol
Investment thesis
Bloomberg: GLAXOSMITH:NL
Sector Healthcare
Regulatory Cleansing Brighten Prospects: The company has
consistently delivered on value, even though our outlook on its service
C ountry Nigeria
healthcare sector is Neutral, premised on the under developed state of the
industry. . We acknowledge the National Agency for Food and Drug
Setfirst Limited 27.3
Administration and Control (NAFDAC)’s efforts at ridding the
SmithKline Beecham Plc 19.1
pharmaceutical industry of fake and substandard products, but we also note
Others 53.6
that a lot still needs to be done to establish a well-structured healthcare
SHARE STATISTICS
delivery system. GSK has over the years benefitted from the Over-The-
Counter (OTC) market, having carved a niche for itself especially with its
Panadol brand (the leader in the analgesic market). The OTC market is a
very important and large segment given the poor state of healthcare
delivery in Nigeria.
On-going Plant Upgrade and Product Expansion - GSK has embarked
Year high (N) 31.50
on the modernization of its manufacturing process, and expansion of its
Year low (N) 20.85
product portfolio. We are beginning to see the results of product expansion
VALUATION METRICS
with the introduction of Horlicks and Panadol with Optizorb in Q3’10. The
Company has also strengthened the marketing and distribution of its
products to improve consumer awareness and acceptance. GSK’s upgrade
P/B (x) 3.9
of plants is expected to increase efficiency and speed up production
Div. Yield (%) 2.1
process. We expect these initiatives to continually impact favourably on the
ROAE (%) 13.5
company’s sales and profitability profile going forward.
Debt/Equity (%) 0.0
Earnings Outlook: Our FY’11 projection for Sales and Earnings stands at
GSK VS HEALTHCARE VS NSE ASI PERFORMANCE N19.1 billion (18.0% YoY) and N2.2 billion (13.7% YoY), hence we expect a
Rebased 04/01/2010
Forward EPS of N2.26, Forward PE of 11.5x and Dividend of and N1.04. Our
expectation is that GSK will continue to maintain its leadership position in
the consumer healthcare sector and leverage on competitive advantage of
parent R&D support and product innovation.
YoY Change (%) 33.26% 11.74% 13.74% 6.94% 15.20%
YoY Change (%) 25.00% 13.96% 21.67% 9.27% 15.20%
Dividend Yield (%) 2.83% 3.23% 3.92% 4.29% 4.94%
YoY Change (%) 20.76% 19.72% 14.82% 32.00% 8.83%
Price to Book (x) 3.85 3.22 2.80 2.12 1.95
January 2011 82
VETIVA
2011 Outlook
The Tipping Point
Turnover 9,915 12,545 14,952 16,149 19,055 22,485
Cost of Sales -6,042 -7,177 -8,444 -8,537 -9,818 -11,290
Gross Profit 3,874 5,368 6,508 7,611 9,238 11,195
Operating Expenses -2,739 3,581 -3,955 -4,034 -4,800 -5,713
EBIT 1,174 2,738 3,971 3,236 3,947 4,421
Interest Expense -8 -886 -1,500 -480 -24 -28
Core operating profit 1,134 1,786 2,553 3,577 4,437 5,482
Taxation -329.572 -574 -768 -854 -841 -991
Assets Employed 3,516 3,961 4,788 5,644 6,651 7,839
Inventories 2,544 2,539 3,494 2,463 4,065 5,813
Debtors 2147 1,918 1,646 3,452 2,963 4,445
Bank and cash balances 512 1,192 2,149 2,321 3,482 3,830
Total Assets 8,719 9,610 12,078 13,880 17,161 21,927
Long Term Creditors 0 0 0 0 0 0
Share capital 478 478 478 478 478 478
Share premium 51 51 51 51 51 51
Shareholders' Equity 4,602 5,451 6,583 7,881 9,049 13,510
January 2011 83
VETIVA
2011 Outlook
The Tipping Point
Turnover 66 84 100 108 128 151
Cost of Sales -41 -48 -57 -57 -66 -76
Gross Profit 26 36 44 51 62 75
Operating Expenses -18 24 -27 -27 -32 -38
EBIT 8 18 27 22 26 30
Interest Expense 0 -6 -10 -3 0 0
Core operating profit 8 12 17 24 30 37
Taxation -2 -4 -5 -6 -6 -7
2012
BALANCE SHEET 2007 2008 2009 2010 F 2011 F F
Fixed Assets 24 27 32 38 45 53
Inventories 17 17 23 17 27 39
Debtors 14 13 11 23 20 30
Total Assets 58 64 81 93 115 147
Share premium 0 0 0 0 0 0
Revenue/General Reserve 27 33 40 49 57 80
January 2011 84
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E

Growth (%)
Growth in Core Operating profit 57% 43% 40% 24% 24%
Growth in EBIT 96% 30% 17% 13% 12%
Growth in PBT 59% 33% 12% 9% 10%
Growth in PAT 53% 33% 12% 14% 7%
Profitability (%)
Return on Equity 25% 28% 26% 26% 21%
Return on Assets 14% 16% 15% 14% 12%
Growth rate (g) 37% 16% 15% 14% 11%
Margins (%)
EBITDA/Sales 18% 20% 22% 21% 20%
EBIT/Sales 22% 27% 20% 21% 20%
Pretax Income/Sales 15% 17% 17% 16% 15%
Net Profit Margin 10% 11% 12% 11% 10%
Quick ratio 0.94 0.82 1.19 1.28 1.56
Cash ratio 0.36 0.46 0.48 0.69 0.72
Current ratio 1.70 1.58 1.70 2.08 2.66
Days in cash 35 52 52 67 62
Capital Structure
Financial leverage (debt to equity) n/a n/a n/a n/a n/a
Interest bearing debt/Total assets n/a n/a n/a n/a n/a
Payout ratio 45% 42% 43% 46% 47%
Retention ratio 55% 58% 57% 54% 53%
Per Share Data
EPS 1.33 1.78 1.99 2.26 2.42
DPS 0.60 0.75 0.85 1.04 1.14
NAPS 5.70 6.88 8.24 9.46 12.49
Sales/Share 13.11 15.63 16.88 19.92 23.50
January 2011 85
VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Guinness Nigeria Plc
Address 24, Oba Akran Avenue Further growth expected on capacity expansion
Ikeja, Lagos
Given its niche in the stout segment, rapid growth in Harp volumes, and
Website www.guinness-nigeria.com
growing beer consumption in Nigeria, our outlook on Guinness is positive. We
Management (Chairman) Babatunde Savage
expect ongoing capacity expansion to position Guinness to tap into this growth
MD/C EO D.M Hainsworth
story. Following adjustments in our DDM valuation model, our 12 month target
Financial Year End June price now stands at N195.01. However, at its current price of N220.00, the
Exchange Listing Nigerian Stock Exchange stock is trading at a downside of 23.8% to our target value, hence our
Symbol
“REDUCE” rating.
Bloomberg: GUINNESS:NL
Sector Breweries Investment thesis

C ountry Nigeria
Significant market share, but lager competition rife: Although Guinness
OWNERSHIP STRUCTURE (%) controls about 25% of the Nigerian beer market, stiff competition, especially in
DIAGEO 53.8 the larger space, may imply escalating marketing spend. The company has
Others 46.2 seen significant growth in volumes of its Harp and Malta Guinness brands, but
SHARE STATISTICS market share defence is crucial to fend off competition. Importantly, in order
Shares in issue (M) 1,475.0 for Guinness to compete favourably outside of its niche stout market and
consolidate brand loyalty, there must be further innovation in terms of
advertisement, product re-launching and rebranding. Also, on account of the
Market C ap. (N'm) 324,500.0 rise in the price of raw materials such as barley and hops, margins are
Market C ap. (USD'm) 2,175.4 expected to be strained. We note that the quality and brand of the Guinness
Free Float (%) 46.20 Stout would help maintain its market position at an attractive 25%.
Daily Average Value Increased capacity to boost sales, TBA Portfolio Expansion: Coming off
Traded (N'000) 60,947.1 a massive capital expenditure, production capacity is expected to rise to about
Daily Average Value 6 million hectolitres (mhl), as well as increasing packaging capacity, we expect
Traded (USD'000) 408.6
this volume growth to boost sales (current capacity utilization c. 95%). In
Year high (N) 190.56 addition, over the past several years, the Diageo Group has concentrated on
Year low (N) its core competencies in the spirits industry; we judge that the Guinness
124.51
brand, especially in a market such as Nigeria, will play an important long-term
VALUATION METRICS
role in that segment. The importance of beer as a gateway to other alcoholic
beverages such as spirits supports our position that further growth of the
Nigerian beer portfolio would be a keen priority.
P/B (x) 8.6
Earnings Outlook: We project revenue growth of 15.8% to N126.6 billion for
Div. Yield (%) 8.3
FY’11, supported by increasing sales in Harp and Malta Guinness. On
ROAE (%) 50.3
profitability, we forecast PAT to grow at a rate of 30.0% to N17.9 billion.
Debt/Equity (%) 0.0
Implied P/E multiple is 18.6x (on N12.11 2011 EPS) with EV/EBITDA multiple
Guinness vs Breweries vs NSE ASI Performance
Rebased to December 31, 2009 of 10.5x.
1.6
GUINNESS NSE ASI BREWERIES
Forecast Summary FY'09A FY'10A FY'11F FY'12F FY'13F
1.4
YoY Change (%) 14% 1% 30% 21% 15%
1.2
YoY Change (%) 25% 10% 25% 21% 15%
1 Dividend Yield (%) 4.55 4.33 4.68 5.65 6.50
YoY Change (%) -14% 8% 8% 9% 9%
0.8
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Price to Book (x) 7.72 8.22 8.80 8.09 7.40
Source: Company Financial; Vetiva Research
January 2011 86
VETIVA
2011 Outlook
The Tipping Point

Turnover 69,173 89,148 109,367 126,648 145,969 166,979
Cost of Sales -35,611 -46,510 -61,672 -68,770 -78,824 -89,668
Gross Profit 33,562 42,639 47,695 57,878 67,146 77,311

EBITDA 19,993 24,408 24,385 29,931 36,188 41,521
Operating Profit 16,883 20,843 20,331 25,583 30,946 35,567
Other Income 159 227 780 - - -
EBIT 17,042 21,069 21,111 25,583 30,946 35,567
Interest Received 1,730 1,212 254 1525 1953 2380
Interest Payable & Charges -437 -2,026 -1,052 -838 -1199 -1480
Exceptional Item -1,243 -1,263 -325 - - -
Taxation -5,232 -5,451 -6,252 -8,406 -10,144 -11,669

Fixed Assets 36,733 35,898 38,245 48,711 56,142 62,938
Intangible Assets 1,311 1,807 1,382 1,021 659 298
Inventories 12,867 16,848 16,153 20,073 23,135 26,465
Debtors 7,063 9,504 9,537 10,877 11,975 13,056
Total Assets 73,191 73,869 78,397 97,422 112,284 128,446

Bank Overdrafts 3,705 6,897 - 4,656 7,051 8,708
Deferred Tax Liability 7,886 8,094 8,356 10,384 11,968 13,691
Term loan - - 1,299 - - -
Provision for gratuity 4,589 3,108 3,895 4,840 5,578 6,381

Share capital 737 737 737 737 737 737
Share premium 1,546 1,546 1,546 1,546 1,546 1,546
Revaluation Reserves 3,738 3,303 3,296 3,296 3,296 3,296
Revenue Reserve 30,842 25,938 28,620 31,299 34,533 38,252
Total Equity 36,863 31,525 34,199 36,879 40,112 43,832
January 2011 87
VETIVA
2011 Outlook
The Tipping Point

Turnover 464 598 733 849 979 1119
Cost of Sales -239 -312 -413 -461 -528 -601
Gross Profit 225 286 320 388 450 518

EBITDA 134 164 163 201 243 278
Operating Profit 113 140 136 172 207 238
Other Income 1 2 5 - - -
EBIT 114 141 142 172 207 238
Interest Received 12 8 2 10 13 16
Interest Payable & Charges -3 -14 -7 -6 -8 -10
Exceptional Item -8 -8 -2 - - -
Taxation -35 -37 -42 -56 -68 -78

Fixed Assets 246 241 256 327 376 422
Intangible Assets 9 12 9 7 4 2
Inventories 86 113 108 135 155 177
Debtors 47 64 64 73 80 88
Total Assets 491 495 526 653 753 861
Bank Overdrafts 25 46 - 31 47 58
Deferred Tax Liability 53 54 56 70 80 92
Term loan - - 9 - - -
Provision for gratuity 31 21 26 32 37 43
Share Premium 10 10 10 10 10 10
Total Equity 247 211 229 247 269 294
January 2011 88
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 2011 E 2012 E
Market Position
Nigerian Beer market size (mhl) 14.5 15.0 16.6 18.2 19.8
Beer market volume growth 16.0% 3.4% 10.6% 9.5% 8.7%
Population (mn) 147.81 151.87 156.05 160.34 164.75
Beer PCC (litres) 9.8 9.9 10.6 11.3 12.0
Guinness market share 25.0% 26.0% 28.0% 28.2% 28.5%
Guinness volume 3.6 3.9 4.6 5.1 5.6
Price/mhl 19,082.17 22,858.51 23,544.27 24,721.48 25,932.84
Growth (%)
Volume 20.8% 7.6% 19.1% 10.3% 9.9%
Price/mhl -8.1% 19.8% 3.0% 5.0% 4.9%
Turnover growth 11.1% 28.9% 22.7% 15.8% 15.3%
Core Operating profit 18.7% 23.5% -2.5% 25.8% 21.0%
Growth in EBITDA 17.7% 22.1% -0.1% 22.7% 20.9%
Growth in PBT 23.9% 10.5% 0.3% 29.3% 20.7%
Growth in PAT 11.8% 14.2% 1.4% 30.0% 20.7%
Profitability (%)
Gross Margin 48.5% 47.8% 43.6% 45.7% 46.0%
EBITDA Margin 28.9% 27.4% 22.3% 23.6% 24.8%
EBIT Margin 24.6% 23.6% 19.3% 20.2% 21.2%
Pretax Profit Margin 26.5% 22.7% 18.6% 20.7% 21.7%
Per Share Data

Earnings/share 8.0 9.2 9.3 12.1 14.6
Dividend/share 6.0 7.5 8.3 10.3 12.4
Net Asset/share 25.0 21.4 23.2 25.0 27.2
Sales/Share 46.9 60.4 74.2 85.9 99.0
Valuation Multiples
P/E (x) 10.9 18.0 20.5 18.2 15.1
P/B (x) 3.5 7.7 8.2 8.8 8.1
Dividend Yield (%) 6.8% 4.5% 4.3% 4.7% 5.6%
EV/EBITDA (x) 5.9 10.0 11.0 10.5 8.6
January 2011 89
VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Nigerian Breweries Plc

Address 1, Abebe Village Road
A Play on intrinsic value
Iganmu, Lagos
Website www.nbplc.com
Our target value on NB based on our revised DDM valuation is N85.86. NB
Management (C hairman) Chief Kola Jamodu
N.A Vervelde
now trades at an upside potential of 4.7% relative to our target value and we
MD/C EO
Financial Year End December revise our rating on the stock to “REDUCE”. In our opinion, the vast rally in
Exchange Listing Nigerian Stock Exchange price on the back of news of Heineken’s acquisitions, which pushed the price to
Symbol Bloomberg: NB:NL
N91.83, further stretched valuation for NB. However, should we see some
Sector Breweries more pull back in price; we would still play the beer market at these attractive
C ountry Nigeria valuations in order to buy into the underlying growth story.
Heineken N.V. 54.1 Investment thesis
Others 45.9
SHARE STATISTICS
Pressure from input costs, but enhanced local content strategy to
Shares in issue (M) 7,563.0
provide buffer: Following the challenging outing brewers had in 2009,
Share Price (N) 89.85 recovery in volume growth and profitability improved in 2010. However, given
Market C ap. (N'm) 679,535.6 the sensitivity of margins to our valuation, the continued rise in the prices of
Market C ap. (USD'm) 4,555.4 key inputs (barley, aluminum) could weaken our outlook. However, the
Free Float (%) 45.90 continuous drive of the local content (production inputs) initiative is our basis
Daily Average Value Traded for positive margin outlook for NB. We note that any slack in this regard could
(N'000) 159,819.9
Daily Average Value Traded
further enlarge NB’s susceptibility to commodity price volatility, FX risk and
(USD'000) 1,071.4 margin depression.
Year high (N) 82.21
Strong Parent Support to Possibly Fend-off Competition: In our
Year low (N) 53.00
VALUATION METRICS
Breweries Sector Update (Brewing Growth, Malting Value published in October
Book Value (N'm) 40,892.0 2010) we had highlighted the potential source of alpha that exists through the
Trailing P/E (x) 24.5 direct acquisition and repositioning of fringe players. The recent acquisition of
P/B (x) 18.5
five breweries by the Heineken N.V. group weakens the competitive threat
Div. Yield (%) 3.8
from new entrants like SAB Miller because it reduces available acquisition
ROAE (%) 70.8
Debt/Equity (%) 2.9 targets. Given the synergies Heineken could derive from merging its beer
NB vs Breweries vs NSE ASI Performance businesses in Nigeria, its management may explore consolidating NB,
Rebased to December 31, 2009
1.6 Consolidated Breweries and the newly acquired subsidiaries. This scenario
NB NSE ASI BREWERIES
could be a potential game changer for the Nigerian beer market.
1.4 Earnings Outlook: We forecast that NB’s revenue would grow by 17.0% to
N213.55 billion by FY’11. We expect scale and cost reductions to deliver PAT of
N38.2 billion, a 37.0% increase from 2009 figures. Also, we expect EBIT
1.2
margins to increase to 26.4% by 2011 from FY’10E of 26.1%.
1
YoY Change (%) 9% 15% 19% 17% 16%
0.8
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Price to Earnings (x) 16.80 20.71 16.99 14.47 12.45
Source: NSE, Vetiva Research Dividend Per Share (N) 3.69 4.04 4.80 5.64 6.55
YoY Change (%) 9% 9% 19% 17% 16%
Dividend Yield (%) 5.95 4.59 5.59 6.57 7.63
YoY Change (%) 45% 3% 4% 4% 5%
Price to Book (x) 10.07 13.81 12.96 12.41 11.82
January 2011 90
VETIVA
2011 Outlook
The Tipping Point

Turnover 111,748 145,462 164,207 182,508 213,550 248,169
Cost of Sales -52,564 -74,562 -88,734 -94,904 -110,405 -127,559
Gross Profit 59,184 70,900 75,472 87,604 103,144 120,610

EBITDA 32,587 42,543 48,457 54,684 63,962 74,353
Operating Profit 27,876 37,519 41,400 47,258 56,214 66,000
Other Income 249 192 145 159.39 191.26 219.95

EBIT 27,357 36,778 41,662 47,611 56,355 65,985
Net Interest Received 519 741 - - - -
Net Interest Payable - - -263 -353 -141 15
Taxation -8,933 -11,818 -13,490 -15,123 -17,988 -21,120

Fixed Assets 50,195 63,558 69,003 72,453 79,698 87,668
Investment 150 150 150 150 150 150
Inventories 16,157 20,741 22,065 25,551 30,324 35,240
Debtors 7,858 3,930 3,795 4,533 5,417 6,476
Total Assets 90,548 104,413 106,988 117,836 137,586 155,096

Taxation 7,298 9,246 13,462 14,367 17,089 20,064
Dividend 4,170 19,667 4,567 6,106 7,263 8,527
Differed Taxation Liability 11,360 14,110 14,322 17,616 21,316 25,153
Provision for gratuity 6,591 3,298 3,777 3,966 4,164 4,372

Share capital 3,781 3,781 3,781 3,781 3,781 3,781
Share premium 4,568 4,568 4,568 4,568 4,568 4,568
Capital Reserves 7,325 7,240 7,095 7,095 7,095 7,095
General Reserve 27,509 16,639 31,125 32,732 34,643 36,887
Total Equity 43,183 32,228 46,570 48,177 50,088 52,332
January 2011 91
VETIVA
2011 Outlook
The Tipping Point

Turnover 749 975 1101 1223 1432 1664
Cost of Sales -352 -500 -595 -636 -740 -855
Gross Profit 397 475 506 587 691 809

EBITDA 218 285 325 367 429 498
Operating Profit 187 252 278 317 377 442
Other Income 2 1 1 1.07 1.28 1.47
EBIT 183 247 279 319 378 442
Interest Received 3 5 0 0 0 0
Interest Payable & Charges 0 0 -2 -2 -1 0
Taxation -60 -79 -90 -101 -121 -142

Fixed Assets 336 426 463 486 534 588
Investment 1 1 1 1 1 1
Inventories 108 139 148 171 203 236
Debtors 53 26 25 30 36 43
Total Assets 607 700 717 790 922 1,040
Taxation 49 62 90.24 96 115 135
Dividend 28 132 31 41 49 57
Differed Taxation Liability 76.16 94.59 96 118.10 142.90 168.62
Provision for gratuity 44 22 25 27 28 29
Share Capital 25 25 25 25 25 25
Share Premium 31 31 31 31 31 31
Total Equity 289 216 312 323 336 351
January 2011 92
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E
Market Position
Nigerian Beer market size (mhl) 14.5 15.0 16.6 18.2 19.8
Beer market volume growth 16.0% 3.4% 10.6% 9.5% 8.7%
Population (mn) 147.81 151.87 156.05 160.34 164.75
Beer PCC (litres) 9.8 9.9 10.6 11.3 12.0
NB market share 57.0% 60.0% 58.0% 57.8% 57.7%
NB volume 8.3 9.0 9.6 10.5 11.4
Price/mhl 17,599.73 18,245.21 18,975.01 20,337.42 21,777.31
Growth (%)
Volume 18.1% 8.9% 6.9% 9.2% 8.5%
Price/mhl 10.2% 3.7% 4.0% 7.2% 7.1%
Turnover growth 30.2% 12.9% 11.1% 17.0% 16.2%
Core Operating profit 35.0% 13.5% 14.3% 18.4% 17.1%
Growth in EBITDA 30.6% 13.9% 12.9% 17.0% 16.2%
Growth in PBT 34.6% 10.3% 14.2% 18.9% 17.4%
Growth in PAT 35.7% 8.6% 15.1% 18.9% 17.4%
Profitability (%)
Gross Margin 48.7% 46.0% 48.0% 48.3% 48.6%
EBITDA Margin 29.2% 29.5% 30.0% 30.0% 30.0%
EBIT Margin 25.3% 25.4% 26.1% 26.4% 26.6%
Per Share Data

Earnings/share 3.4 3.7 4.2 5.1 5.9
Dividend/share 3.4 3.7 4.0 4.8 5.6
Net Asset/share 4.3 6.2 6.4 6.6 6.9
Sales/Share 19.2 21.7 24.1 28.2 32.8
Valuation Multiples
P/E (x) 10.1 16.8 20.7 17.0 14.5
P/B (x) 8.1 10.1 13.8 13.0 12.4
Dividend Yield (%) 9.9% 6.0% 4.6% 5.6% 6.6%
EV/EBITDA (x) 5.8 9.4 11.9 9.8 8.4
January 2011 93
VETIVA
2011 Outlook
The Tipping Point
PZ Cussons Nigeria plc

BASIC INFORMATION Despite Improved Efficiency, We Are Underweight
45/47, Town Planning
Way
Address We downgrade our rating on PZ to an “SELL” given that the stock is trading
Ilupeju Industrial Estate,
Lagos at an expected downside of 28.1% to our 12 month target price of N26.50,
Website www.pzcussonsng.com
based on the DDM valuation methodology.
Management (C hairman) E.C Edozien
MD/C EO C hristos Giannopoulos
Financial Year End May

Investment Thesis
Symbol
White Goods sales growth expected, but high input costs threaten: As
Bloomberg: PZ:NL
Sector C onglomerates credit and discretionary spending gradually picks up, we expect the most
C ountry Nigeria impact to be on PZ’s high value electrical segment (especially refrigerators and
OWNERSHIP STRUCTURE (%) freezers). The renovation and re-launch of many of the personal and home
PZ C ussons Plc, UK 66.1
care products reflects an attempt at market share re-capture, as many
Others
SHARE STATISTICS 33.9
consumers switched to cheaper, private label alternatives following the
economic downturn of 2009. However, expectations of high input prices in
2011 would continue to weigh on costs. The announcement of a joint venture
Market C ap. (N'm) 106,396.0
agreement with the African subsidiary of Singapore-based Wilmar
International Limited to establish a palm oil refinery as well as an edible oils,
spreads and margarines business is geared toward securing the availability
(N'000) 23,309.6 and quality of oil ingredients, as well as expansion in the food and nutrition
(USD'000) 156.3
category. With this backward integration (palm oil refinery expected in 2013),
Year high (N) 39.00 input cost pressure should ease going forward.
Year low (N) 24.97
VALUATION METRICS Efficiency Gains from Investment: PZ’s margins are expected to further
Book Value (N'm) 38,707.5 improve based on efficiency gains from investments in its manufacturing
operations and supply chain facilities in 2009/10 (“Project Unity”; PZ’s N10
P/B (x) 2.4
Div. Yield (%) 2.9
billion investments spend). We expect efficiency gains from Project Unity to
ROAE (%) 14.3 continue to impact gross profit margin. Our expectation is a 100-150 bps
Debt/Equity (%) 6.1 increase in gross margins over the next two years owing to this investment.
PZ Cussons vs Conglomerates vs NSE ASI Performance
1.6
Earnings Outlook: Our outlook for PZ is dampened by expectations of slack
PZ CUSSONS CONGLOMERATES NSE ASI
demand and high input costs. For FY’11 we expect a 1.4% decline in Turnover,
but PAT growth of 8.4% (N61.7 billion and N5.7 billion respectively) and a
1.4
Forward EPS of N1.81 implying a Forward PE of 18.5x and a Dividend of
N1.09.
1.2
Forecast Summary FY'09A FY'10A FY'11F FY'12F FY'13F

1 Earnings Per Share (N) 1.52 1.67 1.81 2.31 2.70
YoY Change (%) 22% 10% 8% 28% 17%
0.8 Price to Earnings (x) 10.42 17.58 18.52 14.47 12.41

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
YoY Change (%) 10% 26% 27% 28% 17%

Dividend Yield (%) 4.32 2.92 3.24 4.15 4.83
YoY Change (%) 9% 9% 9% 6% 7%
Price to Book (x) 1.41 2.41 2.59 2.42 2.25
January 2011 94
VETIVA
2011 Outlook
The Tipping Point

Turnover 55,239 63,801 62,668 61,777 71,585 84,156
Cost of Sales -49,645 -44,967 -45,381 -43,862 -50,109 -58,909
Gross Profit 16,300 18,833 17,287 17,915 21,475 25,247
S & D Expenses -5,594 -6,991 -6,021 -5,560 -6,443 -7,574
Administrative Expenses -4,169 -4,024 -3,481 -3,707 -3,937 -4,629
Other Operating Income 98 124 309 325 341 358
EBITDA 7,750 9,293 9,661 10,394 12,881 15,068
Depreciation -1,114 -1,351 -1,567 -1,421 -1,444 -1,666
EBIT 6,636 7,942 8,094 8,974 11,437 13,402
Profit before Exceptional Item & Tax 6,223 7,671 7,951 8,894 11,381 13,270
Exceptional Item -243 - - - - -
Taxation -1,600 -2,340 -2,367 -2,846 -3,642 -4,246
Minority Interest -429 -512 -283 -302 -387 -451
Profit Attributable to Members 3,951 4,819 5,302 5,746 7,352 8,572

Fixed Assets 18,143 21,512 24,738 22,615 25,522 30,004
Inventories 21,996 20,632 15,354 17,651 21,787 27,076
Debtors 7,335 6,919 8,507 8,687 9,337 10,977
Assets 64 1,488 38 - - -
Total Assets 50,397 54,896 58,969 55,158 62,248 73,179
Borrowings 1,541 8 - 440 480 467
Trade creditors 739 592 1,522 1,384 1,494 1,464
Other Creditors and accruals 4,147 4,875 5,260 4,413 5,291 6,220
Due to parent company 6,235 7,204 6,303 1,638 3,953 9,325
Taxation 1,451 2,265 2,184 1,931 2,179 2,561
Long Term Liabilities
Deferred Taxation 2,508 2,813 3,369 2,968 3,349 3,937
Minority Interest 1,062 1,574 1,623 1,379 1,556 1,829
Share Capital 1,588 1,588 1,588 1,588 1,588 1,588
Share Premium 6,878 6,878 6,878 6,878 6,878 6,878
Revenue Reserves 16,654 19,585 22,727 25,025 27,966 31,395
Total Equity 32,714 35,565 38,708 41,006 43,947 47,375
January 2011 95
VETIVA
2011 Outlook
The Tipping Point

Turnover 370 428 420 414 480 564
Cost of Sales -333 -301 -304 -294 -336 -395
Gross Profit 109 126 116 120 144 169
S & D Expenses -38 -47 -40 -37 -43 -51
Administrative Expenses -28 -27 -23 -25 -26 -31
EBITDA 52 62 65 70 86 101
Depreciation -7 -9 -11 -10 -10 -11
EBIT 44 53 54 60 77 90
Interest Payable & Charges -3 -2 -1 -1 0 -1
Profit before Exceptional Item & Tax 42 51 53 60 76 89
Exceptional Item -2 0 0 0 0 0
Taxation -11 -16 -16 -19 -24 -28
Profit Attributable to Members 26 32 36 39 49 57

Fixed Assets 122 144 166 152 171 201
Inventories 147 138 103 118 146 182
Debtors 49 46 57 58 63 74
Total Assets 338 368 395 370 417 491
Borrowings 10 0 0 3 3 3
Trade creditors 5 4 10 9 10 10
Other Creditors and accruals 28 33 35 30 35 42
Due to parent company 42 48 42 11 26 63
Taxation 10 15 15 13 15 17
Share Capital 11 11 11 11 11 11
Share Premium 46 46 46 46 46 46
Revenue Reserves 112 131 152 168 187 210
Total Equity 219 238 259 275 295 318
January 2011 96
VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 2011 E 2012 E
Growth (%)
Turnover growth 21.4% 15.5% -1.8% -1.4% 15.9%
Growth in Core Operating Profit 36.9% 19.6% -0.4% 11.1% 28.3%
Growth in EBITDA 27.7% 19.9% 4.0% 7.6% 23.9%
Growth in PBT 11.7% 28.3% 3.7% 11.9% 28.0%
Growth in PAT 12.5% 22.0% 10.0% 8.4% 28.0%
Profitability (%)
Return on Equity 12.5% 14.1% 14.3% 14.4% 17.3%
Return on Assets 8.3% 9.2% 9.3% 10.1% 12.5%
Margins (%)
EBITDA/Sales 11.8% 14.6% 15.4% 16.8% 18.0%
EBIT/Sales 10.1% 12.4% 12.9% 14.5% 16.0%
Liquidity Ratios
Current ratio 2.3 2.2 2.2 3.3 2.7
Inventory Coverage (x) 16.1 29.3 56.8 113.0 204.6
Cash Conversion Cycle 175.0 168.2 139.7 140.4 141.8
Asset Utilization
Inventory Turnover (x) 2.2 2.1 2.5 2.7 2.5
Asset Turnover (x) 1.4 1.2 1.1 1.1 1.2
Fixed Assets Turnover (x) 3.2 3.2 2.7 2.6 3.0
Per Share Data

Earnings/share 1.24 1.52 1.67 1.81 2.31
Dividend/share 0.62 0.68 0.86 1.09 1.39
Net Asset/share 10.30 11.20 12.19 12.91 13.84
Sales/Share 20.8 20.1 19.7 19.4 22.5
Valuation Multiples
P/E (x) 12.7 16.5 18.8 18.5 14.5
P/B (x) 1.5 2.2 2.6 2.6 2.4
Dividend Yield (%) 3.9% 2.7% 2.7% 3.2% 4.1%
EV/EBITDA (x) 6.2 8.4 10.21 9.9 8.3
January 2011 97
VETIVA
2011 Outlook
The Tipping Point
Unilever Plc
BASIC INFORMATION
Overpriced, in our view
Address 1, Billings Way, Oregun
Ikeja, Lagos
We downgrade to a “SELL” rating, given that the stock (at a current share
Website www.unilevernigeria.com price at N30.00) has an expected downside of 26.1% to N22.17, our 12 month
Management (C hairman) Apostle H.I. Alile target price. Our target valuation is based on the DCF and DDM methodology,
MD/C EO T. Boedinger
with Unilever fair value rolled one year forward at its weighted average cost of
capital. It is our belief that the stock’s price is reflective of the premium that
investor’s place on the blue-chip nature of the company, with its constant
Symbol Bloomberg: UNILEVER:NL
dividend payout and good corporate governance.
Sector C onglomerates
C ountry Nigeria Investment Thesis
Unilever Overseas Holdings B.V. 50.0 Market leadership unchallenged across niches: The expected increased,
Odua Group of C ompanies 50.0 albeit slight, growth in consumer spending and credit environment should
SHARE STATISTICS positively impact on Unilever’s efforts, as the company continues its brand
investment in a bid to solidify her strong market presence. Product portfolio
optimization has been on the front burner with continuous product innovation
Market C ap. (N'm) 113,498.9
and retail market penetration. In the detergent market, additional market
share has been captured with the launch of Sunlight and the re-launch of OMO
which are currently gulping advert and promotional spends. In Oral care
(N'000) 53,524.5 market, where Unilever has an estimated market share of 80%, Close Up has
(USD'000)
been performing quite impressively with innovative variants to ward-off
358.8
Year high (N) 31.29 competition.
Year low (N) 19.00
2011 recovery, hinged on cost savings: On the average, Unilever secures
VALUATION METRICS
about 48% of its input needs from import and this dependency has resulted in
Trailing P/E (x) 30.4 the exposure of margin to the combined risk of commodity volatility and FX
P/B (x) 14.4 movement. Savings have been achieved on finance cost which reduced by
Div. Yield (%) 2.4 77% over the past year following the 2009 deleveraging of its US$20 million
ROAE (%) 12.0
loan which infused some FX risk to earnings. Barring additional uptake of more
Debt/Equity (%) 3.8
Unilever vs Conglomerates vs NSE ASI Performance
expensive domestic borrowing, there should be no pressure on margin from
finance cost. Apt to say that our expectation of sustained earnings rebound in
1.8
UNILEVER CONGLOMERATES 2011 is hinged on effective cost management.
1.6 Earnings Outlook: Our FY’11 projection for Sales and Earnings stands at
N53.3 billion (13.0% YoY) and N5.3 billion (25.0% YoY), hence we expect a
1.4 Forward EPS and Forward PE of N1.40 and 21.4x respectively. Our
expectations of a rebound in earnings growth in 2011 is driven by resumption
1.2
in double-digit sales growth, powerful base effect and efficiency gain.
1 Forecast Summary FY'09A FY'10F FY'11F FY'12F FY'13F

0.8
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 YoY Change (%) 57.66% 3.96% 24.54% 13.41% 13.39%
YoY Change (%) 57.48% 4.08% 24.54% 13.41% 13.39%
Dividend Yield (%) 3.84% 4.14% 4.62% 5.24% 5.95%
YoY Change (%) 22.77% 9.97% 11.37% 13.10% 12.79%
Price to Book (x) 12.87 11.28 11.30 9.99 8.86
January 2011 98
VETIVA
2011 Outlook
The Tipping Point

Turnover 33,991 37,377 44,481 47,150 53,280 60,206
Cost of Sales -22,578 -24,361 -27,092 -28,762 -32,501 -36,726
Gross Profit 11,413 13,017 17,389 18,389 20,779 23,480
S & D Expenses -1,484 -1,692 -2,076 -2,829 -2,984 -3,372

EBITDA 3,411 5,243 7,750 7,544 9,271 10,536
Depreciation -858 -770 -689 -951 -1,074 -1,214
EBIT 2,553 4,472 7,061 6,593 8,197 9,322
Exceptional Item - - -563 - - -
Taxation -717 -1,548 -1,567 -2,003 -2,494 -2,829

Fixed Assets 8,641 9,056 9,975 11,316 12,787 14,449
Inventories 5,083 4,632 4,927 4,632 5,002 5,352
Debtors 3,463 4,369 3,495 4,019 4,212 4,414
Assets 1,604 2,729 3,304 3,449 3,533 3,680
Total Assets 20,353 23,493 23,682 25,496 27,718 30,189

Trade creditors 2,365 3,711 2,255 2,030 1,827 1,644
Due to related companies 1,069 1,553 1,928 1,966 2,006 2,046
Bank Overdraft 4,036 2,615 1,500 1,650 1,815 1,997
Taxation 490 1,005 1,769 2,043 2,544 2,886
Deferred Taxation 747 1,290 1,148 1,240 1,339 1,446
Retirement Benefits Obligation 1,833 1,778 1,927 1,965 2,004 2,044

Share Capital 1,892 1,892 1,892 1,892 1,892 1,892
Share Premium 46 46 46 46 46 46
Revenue Reserves 237 237 237 237 237 237
Total Equity 5,031 6,682 8,203 9,021 10,047 11,363
January 2011 99
VETIVA
2011 Outlook
The Tipping Point

Turnover 228 251 298 316 357 404
Cost of Sales -151 -163 -182 -193 -218 -246
Gross Profit 77 87 117 123 139 157
S & D Expenses -10 -11 -14 -19 -20 -23
EBITDA 23 35 52 51 62 71
Depreciation -6 -5 -5 -6 -7 -8
EBIT 17 30 47 44 55 62
Exceptional Item - - -4 - - -
Taxation -5 -10 -11 -13 -17 -19
Profit After Taxation 78 120 412 690 1,333 1,854

Fixed Assets 58 61 67 76 86 97
Inventories 34 31 33 31 34 36
Debtors 23 29 23 27 28 30
Total Assets 136 157 159 171 186 202
Borrowings 16 25 15 14 12 11
Due to parent company 27 18 10 11 12 13
Taxation 3 7 12 14 17 19
Share Capital 13 13 13 13 13 13
Share Premium 0.3 0.3 0.3 0.3 0.3 0.3
Revenue Reserves 1.6 1.6 1.6 1.6 1.6 1.6
Total Equity 34 45 55 60 67 76
January 2011 100

VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E
Growth (%)
Turnover growth 10.0% 19.0% 6.0% 13.0% 13.0%

Growth in EBITDA 53.7% 47.8% -2.7% 22.9% 13.6%
Growth in PBT 105.9% 50.2% 0.6% 24.5% 13.4%
Growth in PAT 141.0% 57.7% 4.0% 24.5% 13.4%
Profitability (%)
Return on Equity 44.3% 55.0% 49.4% 55.6% 56.2%
Return on Assets 11.8% 17.4% 17.3% 19.9% 20.8%
Margins (%)
EBITDA/Sales 14.0% 17.4% 16.0% 17.4% 17.5%
EBIT/Sales 12.0% 15.9% 14.0% 15.4% 15.5%
Liquidity Ratios
Cash Ratio 0.2 0.2 0.2 0.2 0.1

Current ratio 1.1 1.1 1.1 1.0 1.0
Inventory Coverage (x) 13.7 8.4 19.7 20.4 19.3
Asset Utilization
Sales to Cash (x) 13.8 22.5 22.7 24.4 26.3

Asset Turnover (x) 1.6 1.9 1.8 1.9 2.0
Fixed Assets Turnover (x) 0.4 0.4 0.4 0.5 0.5
Per Share Data

Earnings/share 0.69 1.08 1.12 1.40 1.59
Dividend/share 0.68 1.07 1.11 1.39 1.57
Net Asset/share 1.77 2.17 2.38 2.66 3.00
Sales/Share 9.9 11.8 12.5 14.1 15.9
Valuation Multiples
P/E (x) 39.5 25.8 23.9 21.4 18.9
P/B (x) 15.3 12.9 11.3 11.3 10.0
Dividend Yield (%) 2.5% 3.8% 4.1% 4.6% 5.2%
EV/EBITDA (x) 19.5 13.6 13.4 12.2 10.7
January 2011 101

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION UACN Plc

Address UAC House
1-5 Odunlami Street, Diversified Conglomerate, Straining for the Top
Lagos
Website www.uacnplc.com
At current price (N39.00), a 6% upside to our N42.17 one year target price,
Management (C hairman) Udoma Udo Udoma
Larry E. Ettah
we are “NEUTRAL” on UACN. Our valuation is based on the DCF
MD/C EO
Financial Year End December methodology, with the target price rolled forward by the weighted average
Exchange Listing Nigerian Stock Exchange cost of capital.
Symbol Bloomberg: UAC N:NL
Sector C onglometrates
Investment thesis
C ountry Nigeria
Restructuring in the Offing; UACN announced plans to restructure its
Directors' Interest 0.9
businesses, unbundling operating divisions into limited liability companies in
Actis Africa Fund LLP 9.0 order to transform into a holding company by 2012. The first move in this
Others 90.1 direction is the merging of the UAC Foods and UAC Dairies divisions, along
SHARE STATISTICS
with their shares in the wholly-owned subsidiary, Spring Waters Nigeria
Limited, to form UAC Foods Limited. We expect the company to seek viable
opportunities for partnerships to boost its other business lines and laud the
Market C ap. (N'm) 49,942.5
company’s priority of growing the logistics business, boosting the Grand
Cereals and Oil Mills business as well as repositioning the UAC Restaurants
Free Float (%) 90.13 division. We expect growth in the properties arm of the company (UPDC), to
(N'000) 55,692.2
be muted this year as credit to the private sector for mortgages may remain
Daily Average Value Traded slow, boosted slightly by annuity property such as the Golden Tulip Hotel and
(USD'000) 373.3
Year high (N) 58.48
cost savings from cheaper, longer term financing.
Year low (N) 36.16
VALUATION METRICS
Brand Portfolio Expansion on New Joint Venture with Tiger Brands:
Book Value (N'm) 39,527.8 The resultant lower consumer discretionary spending, tighter credit as well as
Trailing P/E (x) 20.2 higher energy costs following the economic downturn significantly affected the
P/B (x) 1.5
dairy products, real estate and restaurant businesses. UACN’s Joint Venture
Div. Yield (%) 3.2
agreement (in principle) with Tiger Brands Limited of South Africa to sell 49%
ROAE (%) 23.8
Debt/Equity (%) 28.8 of the authorized shares of the resulting UAC Foods Limited is expected to
UACN vs Conglomerates vs NSE ASI Performance
provide brand portfolio expansion as well as renewed growth prospects and
efficiencies for the business and its contribution to the UACN Group.
1.8
UACN CONGLOMERATES NSE ASI
Earnings Outlook: With its vibrant agri-business, the inherent potential for
1.6
UPDC in Nigeria’s huge housing deficit, we forecast FY’11 turnover growth of of
19.3% and After Tax Earnings growth of 18.5% (N59.9bn and N4.5bn) and a
1.4
Forward EPS of N2.81 implying a Forward PE of 14.41x and Dividend of N1.98.
1.2

1

0.8 YoY Change (%) -4% -24% 18% 17% 21%
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

YoY Change (%) -35% -9% 42% 17% 21%
Dividend Yield (%) 3.54 3.17 4.24 4.98 6.01
YoY Change (%) -3% -16% 5% 5% 6%
Price to Book (x) 0.83 1.20 1.54 1.47 1.39
January 2011 102

VETIVA
2011 Outlook
The Tipping Point

Turnover 37,155 53,489 56,496 50,234 59,914 72,073
Cost of Sales -27,409 -39,033 -40,754 -36,319 -43,138 -51,893
Gross Profit 9,746 14,456 15,742 13,915 16,776 20,181
S & D Expenses -819 -1,215 -1,436 -1,256 -1,498 -1,802
EBITDA 6,798 11,150 10,683 10,137 11,925 14,017
Depreciation -1,735 -2,045 -2,196 -2,499 -2,636 -2,843
EBIT 5,063 9,105 8,487 7,638 9,289 11,174
Interest Payable & Charges -584 -922 -1,448 -1,001 -1,351 -1,820
Finance Income 408 263 517 276 300 360
Share of profit of associated companies 13 11 12 12 13 15
Profit from disposal of assets 1,105 324 508 559 615 677
Taxation -1,450 -2,005 -1,899 -1,721 -2,039 -2,393
Minority Interest -954 -2,605 -2,158 -1,959 -2,321 -2,724
Profit Attributable to Members 3,601 4,171 4,019 3,804 4,506 5,288

Fixed Assets 22,260 27,272 30,131 31,520 33,552 36,692
Investment Properties 32,255 27,861 24,206 25,610 31,155 34,071
Long term investments 2,123 2,074 2,204 2,265 2,157 2,228
Properties under construction - 15,275 14,511 15,760 19,172 20,967
Stocks & work in progress 7,528 9,621 10,245 10,835 13,181 14,284
Debtors & Prepayments 9,520 9,045 7,105 8,865 10,784 11,794
Cash & bank balances 5,233 4,092 5,531 3,544 9,759 10,974
Total Assets 79,120 95,406 94,067 98,498 119,827 131,043
Trade creditors 4,519 11,979 7,689 8,865 10,784 11,794
Bank loans/overdrafts 6,250 9,521 12,857 12,625 26,027 31,838
Taxation 1,875 2,404 2,565 2,462 2,996 3,276
Dividends Payable 1,362 1,283 1,616 1,674 2,037 2,228
Deferred Taxation 1,078 3,042 2,450 2,462 2,996 3,276
Creditors(due after one year) 18,392 6,879 6,933 7,612 7,765 7,185
Provision for liabilities and charges 1,487 1,941 2,243 2,364 2,876 3,145
Share Capital 640 640 640 800 800 800
Share Premium 4,255 4,255 4,255 4,255 4,255 4,255
Capital Reserve 1,984 1,984 1,984 1,984 1,984 1,984
Revaluation reserve 13,946 21,234 18,503 18,503 18,503 18,503
Other reserve 127 142 148 127 127 127
Retained Profit 8,736 10,503 11,956 13,858 15,660 17,776
Total Equity 29,688 38,760 37,487 39,528 41,330 43,445
January 2011 103

VETIVA
2011 Outlook
The Tipping Point

Turnover 249 359 379 337 402 483
Cost of Sales -184 -262 -273 -243 -289 -348
Gross Profit 65 97 106 93 112 135
S & D Expenses -5 -8 -10 -8 -10 -12
EBITDA 46 75 72 68 80 94
Depreciation -12 -14 -15 -17 -18 -19
EBIT 34 61 57 51 62 75
Finance Income 3 2 3 2 2 2
Share of profit of associated companies 0.1 0.1 0.1 0.1 0.1 0.1
Profit from disposal of assets 7 2 3 4 4 5
Taxation -10 -13 -13 -12 -14 -16
Profit Attributable to Members 24 28 27 25 30 35

Intangible Assets 1.3 1.1 0.9 0.7 0.4 0.2
Fixed Assets 149 183 202 211 225 246
Investment Properties 216 187 162 172 209 228
Long term investments 14 14 15 15 14 15
Properties under construction 0 102 97 106 129 141
Stocks & work in progress 50 64 69 73 88 96
Debtors & Prepayments 64 61 48 59 72 79
Cash & bank balances 35 27 37 24 65 74
Total Assets 530 640 631 660 803 878
Bank loans/overdrafts 42 64 86 85 174 213
Taxation 13 16 17 17 20 22
Dividends Payable 9 9 11 11 14 15
Creditors(due after one year) 123 46 46 51 52 48
Provision for liabilities and charges 10 13 15 16 19 21
Share Premium 29 29 29 29 29 29
Revaluation reserve 93 142 124 124 124 124
Other reserve 0.9 1.0 1.0 0.9 0.9 0.9
Retained Profit 59 70 80 93 105 119
Total Equity 199 260 251 265 277 291
January 2011 104

VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E
Growth (%)
Turnover growth 44.0% 5.6% -11.1% 19.3% 20.3%

Growth in EBITDA 64.0% -4.2% -5.1% 17.6% 17.5%
Growth in PBT 46.2% -8.0% -7.3% 18.5% 17.4%
Growth in PAT 48.8% -8.8% -6.7% 18.5% 17.4%
Profitability (%)

EBITDA Margin 20.8% 18.9% 20.2% 19.9% 19.4%
EBIT Margin 17.0% 15.0% 15.2% 15.5% 15.5%
Current ratio 0.6 0.6 0.6 0.6 0.6

Inventory Coverage 9.9 5.9 7.6 6.9 6.1
Asset Utilization (x)

Asset Turnover (x) 0.6 0.6 0.5 0.5 0.6
Fixed Assets Turnover 0.5 0.5 0.6 0.6 0.5
Per Share Data
Earnings/share 3.3 3.1 2.4 2.8 3.3

Dividend/share 2.0 1.3 1.2 1.7 2.0
Net Asset/share 30.3 29.3 24.7 25.8 27.1
Sales/Share 41.8 44.1 31.4 37.4 45.0
Valuation Multiples
P/E (x) 10.9 11.7 15.8 14.1 12.0

P/B (x) 1.2 1.3 1.5 1.5 1.5
Dividend Yield (%) 5.6 3.5 3.2 4.2 5.0
EV/EBITDA (x) 5.2 5.7 7.6 6.7 6.0
January 2011 105

VETIVA
2011 Outlook
The Tipping Point
The Energy Sector: Elections to slow reforms
With far reaching reforms in the pipeline in the oil, gas and power segments of
the Energy industry, electioneering for the April polls seems to be shifting the
focus of the legislators, and also the ability of the executive arm of government
to focus on implementation. We note that for most segments, less activity on
the reforms would be felt pre-election, whilst the Government is likely to put
more focus on the pressing issues in the Energy Industry, post-elections.
The Power Sector – Implementing the Roadmap

Tariff hike imminent
We expect the major review of the Multi Year Tariff Order (MYTO) to be
completed during the course of the year as part of the Federal government
plans to revamp the Power Sector. Notably, a new Board for the Nigerian
Electricity Regulatory Commission (NERC), was recently inaugurated, and would
Implementing the power sector
roadmap in 2011, we expect the be responsible for the completion of the major tariff review. The review which
retail tariff structure to be comes ahead of its initial 2013 schedule is expected to fully reflect the
increased by as much as 100% necessary costs in the generation, transmission and distribution segments, so
as to guarantee the financial viability of the potential private investments in the
Nigerian Power Sector. With interests burgeoning in the sector, partly fuelled by
the incumbent President’s initiation of an implementation roadmap for the
previously stalled Power Sector Reforms, we believe that the tariff review would
be completed by the April 2011 timeline posited by the NERC Board, whilst
actual implementation should follow within the year. We expect the retail tariff
structure to be increased by as much as 100%, as the current tariffs are far
below what is obtainable in other African countries and cost reflective estimates
by the Presidential Task Force on Power (PFTP).
Relative Electricity Tariffs in other African Countries…

Naira/kwh
50 51.00
44.36
40
38.22
30
27.82
26.61 22.00
24.77 24.51
23.33
20
16.85
15.48
10 13.05
7.00
Source: UPDEA; Power Sector Roadmap, NERC MYTO
*Rates incurred by the consumer, whilst the government paid a subsidy of N3.64
**Based on an analysis by the Presidential Task Force on Power (PTFP)
January 2011 106

VETIVA
2011 Outlook
The Tipping Point
Slightly behind schedule, but consistency should impact success level
Though some of the key milestones of the Roadmap, such as the target
generation level for December 2010 and April 2011, the conclusion of the MYTO
review, and the approval of the Expression of Interests (EOI’s) for power
Despite delay in achieving key
milestones, we believe progress generating companies, were initially scheduled for end January 2011, we
will be made in the course of year. believe that the reform process is still much on track. More progress would be
This will be well supported of the made in the course of the year, which we anticipate would lead to the
incumbent president returns to completion of key milestones such as the privatisation and concessioning of the
power after the April elections generation companies, while divesting interests in the distribution companies.
However, we hold that political factors, such as a possible change in the
incumbent Federal Government post-elections, would likely slow down the
implementation of the Roadmap.
Upstream Oil Sector – Waiting on the Elections

Amidst the expected rise in oil prices, revenues from the upstream segment are
Reforms, when completed would expected to improve the government’s fiscal positioning, especially as
re-organise the players and the production volumes have experienced some form of stability, on the back of
operational framework in the early successes of the Amnesty Program. However, we note that some
industry considerable risks still abound, as some disruptions in the last two to three
months point to a gradual re-surgence of some militant groups, which if re-
current through the year could lead to intermittent shut-ins in some assets,
culminating in a less than expected production. More importantly, we judge
that activities in the upstream space would largely be dependent on the April
elections and its outcomes. Notably, the segment is facing far reaching reforms,
which when concluded would re-organise players and the operational
frameworks in the industry.
Passage of the Petroleum Industry Bill (PIB)
We expect that progress on the all encompassing reform bill for the Oil and Gas
industry would stall in the first half of the year, as members of both legislative
chambers shift focus from their primary legislative duties to the April elections,
and in most cases, their personalised re-election bids. Also, slight changes in
Passage of the PIB will likely stall
till H2’11 the post-election legislature might also increase the time span to passage, as
some key proponents who have been involved in the Bill’s procession in the
National Assembly are likely not to return to the legislative chambers. Notably,
the Chairman, Senate Committee on Petroleum Resources (Upstream), Senator
Lee Maeba, who has been in the forefront of the Bill’s procession and
amendments in the upper chamber, recently lost his primaries re-election bid
under the Peoples Democratic Party (PDP). Given the foregoing, we expect
significant national discourse on the legislation to really resume in the second
half of the year, where pressing clauses which are currently in contention would
again take centre stage. Such contentious issues include the increased oil take
of the Federal Government through higher royalties and taxes, revised fiscal
framework for offshore projects, amendment on a 10% equity stake for the
communities etc. We note also that the initial bill, as proposed by the Oil and
Gas Sector Reform Implementation Committee, has gone through a series of
amendments, taking in some concerns of the stakeholders.
January 2011 107

VETIVA
2011 Outlook
The Tipping Point
Proposed Oil Licensing Rounds
Whilst the Minister of Petroleum had repeatedly, in the last year, expressed
optimism about the licensing round for new oil blocks and a marginal field bid
program, both rounds failed to take place in 2010. We anticipate that the
Government would again broach the idea of holding the rounds this year.
However, due to current stalemate with the passage of the Petroleum Industry
Bill (PIB) and the April elections, we believe that if such an oil bid round holds it
would be in the second half of the year, post-elections.
Firstly, we judge that a pre-election round would not generate the required
The Next oil licensing rounds are confidence from the participating Oil and Gas companies, who can recall the
likely to held post – elections and litigations and license withdrawals that trailed the 2007 licensing rounds.
passage of the PIB Moreover, the multi-national oil companies would be more comfortable with
knowing the contents of the final version or reforming legislation (PIB), to
guarantee that they have a fair idea of the contractual terms for which they are
bidding.
Gas – Pushing through with new pricing

In a bid to encourage supply of natural gas by the producing International Oil
Companies (IOC’s), the Federal Government created a pricing framework which
increased the cost of natural gas to power plants from $0.20/mmbtu to
$1/mmbtu from December 2010, with transitional increases to $2/mmbtu by
2011 ushers in a new pricing 2013. Subsequently, these increments would be guided by the country’s
regime for natural gas inflation and capped at export parity. In addition, it also revised the framework
for pricing natural gas being sold to the manufacturing firms, such that a
segmented relationship exist between the Producer and Wholesaler/Local
Distribution Company(LDC), and the LDC and manufacturing companies (end
user). While pricing between the Wholesaler and LDC is still indexed to Low
Pour Fuel Oil (LPFO, a cap of $3/MCF has now been introduced. For the LDC
and the manufacturers, the sales price would be based on a mutual agreement
between the parties. A transition arrangement was also introduced between the
gas producers and the LDC, which caps the pricing thus: 2012 - $2/mcf; 2013 -
$2.50 and beyond 2013 - $3 (adjusted for inflation).
Gas supply to power should witness a boost
With the new gas pricing initiative, the traditional complain of inadequate gas
supply to the power plants should subside, as the pricing framework can
With the new gas pricing support the gas production initiatives from the Oil Companies. Also, the
initiative, the traditional complain
implementation of robust commercial agreements between the power plants
of inadequate gas supply to the
power plants should subside, as and the oil companies, as well as a partial risk guarantee by the World Bank,
the pricing framework can support should increase the confidence level in gas suppliers that they would receive
the gas production initiatives from payments for their supplies, especially from the government controlled power
the Oil Companies. plants, which have had a history of defaulting in payments. The impact of this
revisions have started feeding through, as reflected by the delivery of 50mscf
of gas to the Nigerian Gas Company from Pan Ocean’s Ogharefe plant from
November 2010, following an agreement between Panocean/NNPC JV and the
Egbin Power Plant for the supply of 65mscf/day in June 2010 for a ten year
period.
January 2011 108

VETIVA
2011 Outlook
The Tipping Point
Gas price to be stable for manufacturers
The pricing framework would also reduce the volatility previously witnessed by
manufacturers in periods of high oil prices, when the reflective price of Low
Pour Fuel Oil (LPFO) is upwardly driven. Consequently, the cap of $2/mcf up
until 2012 would ensure that natural gas prices to manufacturers stays stable
around its current prices. This should provide a hedge for most manufacturers
in the current year, when oil prices are trending higher.
Downstream Marketing
NNPC to play a more active role in the mix
The retail subsidiary of the Nigerian National Petroleum Corporation, NNPC

We expect the retail subsidiary of
the NNPC to play a more Retail Limited is positioned to play more actively in the distribution of refined
conspicuous role in the petroleum products through its acquired retail outlets. From under 200 retail
distribution of petroleum products outlets, the company embarked on a massive acquisition of existing retail
outlets which saw its retail outlets under the Company’s control surge to over
500 outlets in 2010.This includes 12 floating stations, 37 mega stations and
469 affiliate stations. The retail expansion is part of the NNPC’s strategy to
increase its control of product distribution by gradually ramping up market
share, thereby curbing the influence presently wielded by the major marketers.
Market Share Adjustments for Retailers

Percent
Major Marketers Independents NNPC Retail

4% 5% 6% 7% 10%
29% 30% 28%

32% 30%
67% 65% 66%

61% 60%
2007 2008 2009 2010E 2011F

Source: NNPC Annual Reports; Vetiva Research estimates
Landing costs of petroleum products...another astronomic rise!
As the global economy experiences a fragile recovery with positive impacts on

the crude oil prices, costs of refined petroleum products which feed from crude
prices are set for another major hike. Consequently, the cost of importing these
We expect the costs of refined
products into Nigeria would again reach high levels, with similar impacts on the
petroleum products to incease
following the trajectory of the high Federal Governments subsidy exposures.
crude oil prices
January 2011 109

VETIVA
2011 Outlook
The Tipping Point
Though the major product importer into the country, the NNPC, had given
guidance of two ‘crude for refined products swap deals’ in December 2010,
which should cater for half of the country’s import requirements, there are no
clear indications how it would be priced. Consequently, as oil prices inch up
during the year, we expect the hikes to reflect in the prices of unregulated
products like Aviation Turbine Kerosene (ATK), Automotive Gas Oil (AGO) and
Low Pour Fuel Oil (LPFO), while the impact on regulated products like Premium
Motor Spirit (PMS) would be borne by the government, unless a policy shift is
effected.
Deregulation debate likely to be broached post-election
Concerns on the Federal Governments execution of the deregulation policy is

likely to wait till after the election. We believe that the interim funding through
the Excess Crude Account would subsist, as the incumbent President who is a
Concerns on the Federal
candidate in the Presidential elections is unlikely to attempt the policy shift pre-
Governments execution of the
deregulation policy is likely to wait election, as the immediate impact would be public outcry, which would greatly
till after the election. impact his, chances at the polls. However, a calmer post election environment
might lead the government to rejuvenate its plans to implement the
deregulation policy. We note that the recurrent requirement to fund these
subsidies from the publicly monitored Excess Crude Account would likely
heighten calls for the implementation of the deregulation policy from different
quarters in the year.
Reflective price hike if deregulation happens now…

Naira/Litre
Current Retail Price Expected Market Price

150
138.34
129.37
120
99%
90 176%
65.00
60 50.00
30
-
Premium Motor Spirit (PMS) House Hold Kerosene (HHK)
Source: PPPRA; Vetiva Research

*Expected market price is based on the PPPRA template on the 18th of January, 2011
Still import dependent
Dependence on imported refined petroleum products is going to subsist in

2011, as the moribund government refineries are unable to meet domestic
requirements. However, some headway would be gotten on potential refineries,
if and when the deregulation policy is passed in the course of the year. We note
also that an extra 12,000 bpd is expected from the possible commencement of
the Amakpe Refinery (due in March), though policy and product pricing issues
might delay lifting of petroleum products from the refinery.
January 2011 110

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION
Oando Plc
Address 2, Ajose Adeogun Street
Victoria Island, Lagos, Nigeria
An Outlet to Ride the Opportunities in the Energy Space
Website www.oandoplc.com At our slightly revised DCF valuation for the energy conglomerate, we obtain a
Management J A Tinubu (Group Chief Executive) target range of N95.79 – N105.28. This indicates a midpoint of N100.38,
O Boyo (D/Group Chief Executive) which underpins an upside potential of 32% relative to the stock’s current
Financial Year End December price. We note also that our valuation on its high margin Exploration &
Exchange Listing
Primary Listing: Nigerian Stock Production Business is based on a conservative $80/bbl crude oil price and
Exchange
moderated growth rates in oil production volumes, peaking at 9,080 bpd in
Secondary Listing: Johannesburg
Stock Exchange 2015. We judge that near term acquisitions of producing assets through
Symbol Bloomberg: OANDO:NL
various outlets and the inflow of funds from its marketing subsidiary (OML)
divestment has the potential of increasing our valuation range by >20%. Thus,
Sector Petroleum Marketing
we maintain a “BUY” rating.
Country Nigeria
OWNERSHIP STRUCTURE Investment Thesis
Shareholders % Ownership The upstream and midstream upside. Oando has invested extensively in
Ocean & Oil Invstmnts 24.67 the upstream and midstream segments of the energy value chain. This gives
Others 75.33 the company interests in 11 upstream assets and ownership of an extensive
SHARE STATISTICS gas pipeline infrastructure in Lagos and the South East, with plans to extend
coverage to other states in the South West. Our base estimates on Oando’s
Shares in issue (Mn) 1,810.17
business segments proffer a >20% PBT CAGR to 2015, in both Exploration &
Production and Gas & Power Divisions, while the Energy Services Division has
Market Cap. (N'm) 135,762.75
an intrinsic potential PBT CAGR of >50%.
Free Float (%) 75.33 Industry reforms should provide added advantage. Favourable
Daily Average Value Traded (N'000) 147,238.56 conclusion of the ongoing reforms in Nigeria’s Oil and Gas sector, which would
Daily Average Value Traded (USD'000) 987.05
result in the passage of the much debated Petroleum Industry Bill (PIB),
Year High (N) 128.50
should increase, geometrically, the company’s potential. As an indigenous
player, the legislation, would allow more upstream acquisitions, international
Year Low (N) 53.00
partnerships’ and favourable fiscal terms.
VALUATION METRICS
Earnings Outlook; We anticipate a 15% YoY growth in the Group’s aggregate
revenues to N432.3 billion for FY’11, while we forecast that PAT would grow
P/E (x) 12.78
more aggressively, by c.31% to N13.9 billion. Fuelled by increased
Price/Book (x) 1.57
contributions from its Exploration & Production Division, improved margins in
Div. Yield (%) 3.19%
its Gas & Power and Energy Services Divisions, we believe that aggregate EBIT
ROE (%) 20.56
and PBT margins would improve to 7.6% and 5.2% in FY’11, from our
Debt/Equity (%) 303.31 estimates of 7.3% and 4.7% respectively in FY’10.
OANDO vs PM INDEX VS NSE ASI
Forecast
1.50
Summary FY'09A FY'10F* FY'11F FY'12F FY'13F FY'14F
OANDO PLC PMIndex NSE ASI
EPS (N) 11.16 5.87 7.67 9.60 11.34 12.87
1.30 YoY Change (%) 21.00 -47.37 30.58 25.26 18.09 13.50
P/E (x) 8.43 13.45 10.30 8.22 6.96 6.14
1.10 DPS (N) 3.00 1.46 1.91 2.39 2.82 3.20
YoY Change (%) -50.00 -51.32 30.58 25.26 18.09 13.50
0.90 Div. Yield (%) 3.19 1.85 2.41 3.02 3.57 4.05
NAPS (N) 58.91 47.69 53.51 60.81 69.42 79.20
0.70 YoY Change (%) 18.77 -19.05 12.21 13.63 14.17 14.08
P/B (x) 1.60 1.66 1.48 1.30 1.14 1.00
0.50 Source: Company Financials, Vetiva Research
4-Jan 4-Apr 3-Jul 1-Oct 30-Dec *The Company’s FY’10 outstanding shares includes additional shares from its scrip and right issues,
Source: NSE; Vetiva Research
effectively doubling in its issued shares with obvious effects on its’Per Share’ metrics
January 2011 111

VETIVA
2011 Outlook
The Tipping Point
Income Statement (N' Mill) 2007 2008 2009 2010F 2011F 2012F
Turnover 185,892 339,420 336,860 376,984 432,291 485,625
Cost of Sales -164,443 -295,714 -301,283 -326,092 -373,931 -420,066
Gross Profit 21,449 43,706 35,577 50,893 58,359 65,559
Other Operating Income 2,471 1,816 11,713 2,945 2,724 3,066
EBITDA 8,720 22,655 27,538 33,097 39,306 45,759
Interest Payable & Similar charges -1,297 -10,668 -11,826 -13,600 -14,960 -16,007
Interest received 871 4,549 3,571 3,928 4,321 4,753
Taxation -1,333 -2,399 -3,415 -7,085 -8,506 -10,209
PAT 5,480 8,343 10,097 10,628 13,878 17,383
Balance Sheet (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 33,070 89,903 131,713 144,884 166,617 191,610
Intangible Assets 29,714 22,351 23,970 26,367 29,003 30,454
Long term receivable 11,138 14,545 18,783 18,783 18,783 18,783
Deferred Tax Asset - 1,044 1,944 1,944 1,944 1,944
Total Non-Current Assets 73,932 127,845 176,411 191,980 216,350 242,792
Inventories 24,730 16,069 9,693 19,387 21,325 23,458
Debtors & Prepayments 46,813 93,703 96,743 87,069 82,715 78,580
Loan receivable - 1,180 6,923 - - -
Total Assets 162,684 287,778 315,531 319,433 335,387 356,133
Share capital 377 452 453 905 905 905

Share premium account 29,878 29,717 29,735 50,401 50,401 50,401
Shareholders' Equity 47,229 44,728 52,312 84,799 95,155 108,127
January 2011 112

VETIVA
2011 Outlook
The Tipping Point
Income Statement ($' Million) 2007 2008 2009 2010F 2011F 2012F
Turnover 1,246 2,275 2,258 2,527 2,898 3,256
Cost of Sales -1,102 -1,982 -2,020 -2,186 -2,507 -2,816
Gross Profit 144 293 239 341 391 439
EBITDA 58 152 185 222 263 307
Interest Payable & Similar charges -9 -72 -79 -91 -100 -107
Interest received 6 30 24 26 29 32
Taxation -9 -16 -23 -47 -57 -68
PAT 37 56 68 71 93 117
Balance Sheet (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 222 603 883 971 1,117 1,285
Long term receivable 75 98 126 126 126 126
Deferred Tax Asset - 7 13 13 13 13
Total Non-Current Assets 496 857 1,183 1,287 1,450 1,628
Inventories 166 108 65 130 143 157
Loan receivable - 8 46 - - -
Total Current Assets 595 1,072 933 854 798 760
Total Assets 1,091 1,929 2,115 2,141 2,248 2,387
Total Current Liabilities 639 1,283 1,517 904 882 869
Total Liabilities 773 1,628 1,758 1,563 1,599 1,650
Share premium account 200 199 199 338 338 338
Retained Earnings 42 49 100 153 223 309
January 2011 113

VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010F 2011F 2012F

Growth
Turnover Growth 82.6% -0.8% 11.9% 14.7% 12.3%
Growth in Core Operating profit 65.9% -21.7% 5.0% 5.0% 5.0%
Growth in EBITDA 159.8% 21.6% 20.2% 18.8% 16.4%
Growth in PBT 57.7% 25.8% 31.1% 26.4% 23.3%
Growth in PAT 52.2% 21.0% 5.3% 30.6% 25.3%
Profitability
Return on Equity 18.1% 20.6% 15.2% 15.2% 16.8%
Return on Assets 3.7% 3.3% 3.3% 4.2% 5.0%
Return On Total Capital 4.8% 4.5% 4.8% 5.8% 6.6%
Operating ROE 36.5% 44.3% 39.2% 36.1% 37.5%
Operating ROA 7.5% 7.2% 8.6% 10.1% 11.2%
Margins
Gross Profit 12.9% 10.6% 13.5% 13.5% 13.5%
EBITDA/Sales 6.7% 8.2% 8.8% 9.1% 9.4%
EBIT/Sales 5.0% 6.5% 7.3% 7.6% 8.0%
Exceptional Item 0.0% 0.0% 0.0% 0.0% 0.0%
Asset Utiisation
Sales to Cash (x) 6.9 13.1 18.0 28.8 43.0
Asset turnover (x) 1.2 1.1 1.2 1.3 1.4
Fixed Assets (x) 3.8 2.6 2.6 2.6 2.5
Liquidity Ratios
Cash ratio (x) 0.3 0.1 0.2 0.1 0.1
Current ratio (x) 0.8 0.6 0.9 0.9 0.9
Acid Test (x) 0.8 0.6 0.8 0.7 0.7
Interest Coverage (x) 1.6 1.8 2.0 2.2 2.4
Days in inventory (x) 17.3 10.5 18.8 18.0 17.6
Days in accounts payable (x) 55.8 98.7 82.1 64.4 51.6
Days in receivables (x) 100.8 104.8 84.3 69.8 59.1
Capital Structure
Interest bearing debt/Total assets 0.6 0.5 0.4 0.5 0.5
Debt to Total Capital 0.8 0.8 0.6 0.6 0.6
Debt to Equity 4.1 3.0 1.6 1.6 1.5
Payout ratio 0.7 0.3 0.2 0.2 0.2
Total equity/Total assets 0.2 0.2 0.3 0.3 0.3
Retention ratio 0.3 0.7 0.8 0.8 0.8
Financial Leverage 6.4 5.9 3.7 3.5 3.2
Per Share Data
EPS 9.22 11.16 5.87 7.67 9.60
DPS 6.00 3.00 1.46 1.91 2.39
NAPS 49.60 58.91 47.69 53.51 60.81
Sales/Share 375.10 372.19 208.26 238.81 268.28
EBITDA/Share 25.04 30.43 18.28 21.71 25.28
January 2011 114

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Mobil Oil Nigeria Plc

Address 1, Mobil Road Hedging Downstream Risks With Real Estate
Apapa Lagos, Nigeria
We revise our “Neutral” rating on Mobil Oil Nigeria Plc to “ACCUMULATE”,
Website www.exxonmobil.com premised on depreciation in the company’s share price. Our DCF based
valuation methodology for the company indicates a target price range of
Management O A Onakoya ( C hairman/MD)
N170.45 – N177.93. Thus, our midpoint of N174.09 supports a 23% upside to
Fiscal Year End December
the stock’s current market price.
Exchange Listing Primary Listing: Nigerian
Stock Exchange Investment Thesis
Streamlined for efficiency; Coming off a manpower rationalization in 2008,
Symbol Bloomberg: MOBIL:NL
with resultant labour cost reduction in 2009, Mobil is positioned for efficiency
Sector Petroleum Marketing going forward. The company is increasing investments in technology driven
Country Nigeria processes, to boost efficiency in the low margin downstream business, while
OWNERSHIP STRUCTURE expanding capacity in the higher margin lube segments. However, we expect a
marginal contraction in FY’11 margins, as higher fixed operating costs
Shareholders % Ownership outpaces revenue growth.
Mobil Oil C orp. U.S.A 60.00 Real estate as succour for downstream business; Mobil currently has the
Others 40.00 highest profitability margins in the downstream marketing space, as it earns
SHARE STATISTICS
an attractive rent from its prime real estate in the Lekki area of Lagos. In a bid
to improve its earnings stream from the real estate asset, the company
Shares in issue (Mn) 300.50
invested about N1.1 billion and N1.2 billion in 2008 and 2009 respectively in
Share Price (N) 141.00 modernising the asset, as part of a program which was to be completed in
Market Cap. (N'm) 42,369.94 2010. The property is occupied by its sister company – Mobil Producing Nigeria
Unlimited. Recurrent proceeds from rental income would continue to impact
positively on the company’s bottom line.
Daily Average Value Traded (N'000) 13,294.04 Stable dividend payout. Mobil has maintained a consistent historical
dividend payout, satisfying the needs of investors who are in search of
sizeable dividend income. It has a 5 year average payout of 90%, informing
Year Low (N) 93.00
our assumption of an 85% payout over our forecast period. Thus, we
VALUATION METRICS
anticipate a yet-to-be declared FY’10 DPS of N10.78 (D/Yield: 7.7%), whilst
projecting FY’11 DPS of N10.99 (D/Yield: 8.0%).
P/E (x) 10.31 Earnings Outlook. We expect revenues to be somewhat flat in 2011,
Price/Book (x) 8.46 projected at N62.2 billion, YoY growth of 5%. Similarly, we expect PAT to
Div. Yield (%) 4.96% record a 2% YoY growth to N3.9 billion. Though remaining relatively high in its
ROE (%) 81.04 sector, we expect PBT and PAT margins to slow from 9.2% and 6.4% in FY’10
Debt/Equity (%) 50.69 to 8.9% and 6.3% respectively in FY’11.
MOBIL VS PM INDEX VS NSE ASI Forecast Summary FY'09A FY'10F FY'11F FY'12F FY'13F
EPS (N) 9.46 12.68 12.93 14.34 17.22
2.20
MOBIL PMIndex NSE ASI YoY Change (%) 65.34 34.11 1.95 10.87 20.12
2.00
P/E (x) 10.45 11.12 10.90 9.84 8.19
1.80
DPS (N) 7.00 10.78 10.99 12.19 14.64
1.60
YoY Change (%) 40.00 54.01 1.95 10.87 20.12
1.40
Div. Yield (%) 7.09 7.65 7.79 8.64 10.38
1.20
NAPS (N) 13.90 15.80 17.74 19.89 22.47
1.00 YoY Change (%) 47.23 13.69 12.27 12.12 12.99
0.80 P/B (x) 7.11 8.92 7.95 7.09 6.27
0.60
4-Jan 4-Apr 3-Jul 1-Oct 30-Dec
Sources: Company Financials, Vetiva Research
January 2011 115

VETIVA
2011 Outlook
The Tipping Point
Income Statement (N' Million) 2007 2008 2009 2010F 2011F 2012F
Turnover 54,542 66,741 62,032 59,241 62,203 67,179

Cost of Sales -48019 -59334 -54300 -50947 -53494 -57774
Gross Profit 6523 7407 7732 8294 8708 9405
EBITDA 3230 4214 4987 6236 6682 7355
Interest Payable & Similar charges -274 -404 -526 -578 -619 -650
Share of Profit of Associated Companies 262 -97 219 439 110 121
Profit on Ordinary Activities 2654 3182 4066 5445 5551 6154
Exceptional Item -889 -638 0 0 0 0
Taxation -634 -825 -1224 -1633 -1665 -1846
PAT 1,131 1,719 2,842 3,811 3,886 4,308
Balance Sheet (N'Million) 2007 2008 2009 2010F 2011F 2012F

Non-Current Assets
Fixed Assets 8,698 10,092 11,669 12,486 13,360 14,295
Stocks 3,264 3,899 4,378 4,816 5,298 5,828
Debtors 4,673 4,374 4,687 5,155 5,671 6,238
Deferred Tax Asset 35 499 426 448 470 494
Cash and short term deposits 133 60 22 257 16 113
Total Assets 18,561 19,915 22,070 24,114 25,835 28,053

Total Assets Less Current Liabilities 5,075 7,029 9,512 8,980 10,258 11,322
Non-Current liabilities
Deferred Tax Liability 1,276 1,206 1,297 1,297 1,297 1,297
Deferred Revenue - 2,221 4,253 2,552 3,190 3,541
Provision for Liabilities and Charges 1,550 766 -215 383 440 506
Total Non-Current Liabilities 2,826 4,192 5,335 4,232 4,927 5,344
Share capital 120 150 150 150 150 150

Share premium account 14 14 14 14 14 14
Reserves 2,114 2,672 4,012 4,584 5,166 5,813
Shareholders' Fund 2,248 2,837 4,177 4,748 5,331 5,977
Total Equity & liabilities 18,561 19,915 22,070 24,114 25,835 28,053
2008 2009 2010F 2011F 2012F 2012F

Growth
Turnover Growth 7.3% 22.4% -7.1% -4.5% 5.0% 8.0%
Growth in Core Operating profit -2.3% 86.1% 13.4% 33.8% 5.0% 12.5%
Growth in EBITDA -0.4% 30.5% 18.3% 25.0% 7.2% 10.1%
Growth in PBT -30.4% 44.1% 59.9% 33.9% 1.9% 10.9%
Growth in PAT -34.1% 51.9% 65.4% 34.1% 1.9% 10.9%
January 2011 116
VETIVA
2011 Outlook
The Tipping Point
Profitability
Return on Equity 44.5% 67.6% 81.0% 85.4% 77.1% 76.2%
Return on Assets 6.3% 8.9% 13.5% 16.5% 15.6% 16.0%
Return On Total Capital 28.2% 34.4% 44.7% 56.0% 53.4% 57.0%
Operating ROE 104.9% 144.8% 124.7% 125.1% 120.2% 118.2%
Operating ROA 14.8% 19.1% 20.8% 24.2% 24.3% 24.8%
Margins
Gross Profit 12.0% 11.1% 12.5% 14.0% 14.0% 14.0%
EBITDA/Sales 5.9% 6.3% 8.0% 10.5% 10.7% 10.9%
EBIT/Sales 4.9% 5.5% 7.0% 9.4% 9.7% 9.9%
Exceptional Item -1.6% -1.0% 0.0% 0.0% 0.0% 0.0%
Pretax Income/Sales 3.2% 3.8% 6.6% 9.2% 8.9% 9.2%
Net Profit Margin 2.1% 2.6% 4.6% 6.4% 6.2% 6.4%
Asset Utiisation
Sales to Cash (x) 410.2 1,113.1 2,845.6 230.3 3,837.8 594.6
Inventory Turnover (x) 16.7 17.1 14.2 12.3 11.7 11.5
Asset turnover (x) 2.9 3.4 2.8 2.5 2.4 2.4
Fixed Assets (x) 6.3 6.6 5.3 4.7 4.7 4.7
Liquidity Ratios
Cash ratio (x) 0.0 0.0 0.0 0.0 0.0 0.0
Current ratio (x) 0.6 0.7 0.8 0.7 0.7 0.8
Acid Test (x) 0.4 0.4 0.4 0.4 0.4 0.4
Interest Coverage (x) 9.7 9.1 8.3 9.7 9.8 10.3
Days in inventory (x) 24.8 24.0 29.4 34.5 36.1 36.8
Days in accounts payable (x) 60.3 35.7 53.6 68.5 70.5 69.8
Days in receivables (x) 31.3 23.9 27.6 31.8 33.3 33.9
Cash Conversion Cycle -4.2 12.2 3.4 -2.2 -1.0 0.9
Capital Structure
Interest bearing debt/Total assets 0.1 0.2 0.1 0.1 0.1 0.1
Debt to Total Capital 0.4 0.6 0.3 0.4 0.3 0.2
Payout ratio 1.0 0.9 0.7 0.9 0.9 0.9
Total equity/Total assets 0.1 0.1 0.2 0.2 0.2 0.2
Retention ratio 0.0 0.1 0.3 0.2 0.2 0.2
Financial Leverage 8.26 7.02 5.28 5.08 4.85 4.69
Per Share Data
EPS 4.71 5.72 9.46 12.68 12.93 14.34
DPS 4.70 5.00 7.00 10.78 10.99 12.19
NAPS 9.35 9.44 13.90 15.80 17.74 19.89
Sales/Share 226.88 222.10 206.43 197.14 207.00 223.56
EBITDA/Share 13.44 14.02 16.60 20.75 22.24 24.48
January 2011 117

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Total Nigeria Plc
A ddress 4, Afribank Street Good Market Position...But Overpriced

Victoria Island, Lagos, Nigeria
Whilst Total’s business size, consistent market share retention and efficiency
We bsite www.ng.total.com attract us to the stock, we believe the counter is fully valued. From our DCF
M a nageme nt D Thiolo n (M anaging Director)
based valuation methodology, we obtain a target price range of N189.96 –
N197.32. This indicates a midpoint of N193.38, which highlights an expected
F is cal Yea r End December
downside potential of 17% (relative to its current market price), thus
Exc hange Listing
Nigerian Sto ck Exchange compelling our “SELL” rating. However, we note that a depreciation in the
Sym bo l B loomberg: TOTA L:NL company’s share price in the near to medium term would result in a revision of
our rating , as we believe its fundamentals, relative to peers, remain strong
Sec to r Petroleum M arketing
and look to partake in its desirable dividend payouts for our stable income
C o untry Nigeria portfolios.
OWNERSHIP STRUCTURE
Investment Thesis
Sha reho lde rs % Owners hip
Parent Company Support. Total benefits immensely from the relationship
Total Societe Anonyme 45.24
with its parent company in France, Total Societe Anonyme, which controls a
Elf A quitane S.A. 16.48 62% interest in the Nigerian downstream business. This ensures stable
Enifor Limited 8.12 product supplies from its affiliate company, Total AMO Paris, France. Also,
Others 30.16 leveraging on the respected Total brand, the company currently controls the
SHARE STATISTICS highest market share in the higher margin lubricant and specialties segment.
Due to Total’s growth in this space, the marketing of lubricants and specialties
Shares in issue (M n) 339.52
accounted for 10.4% of its revenue in FY’09, relative to 8.7% in FY’08, whilst
Share Price (N) 234.00 Gross Profit contribution from the segment increased to 27.5% in FY’09 from
M arket Cap. (N'm) 79,448.11 21.5% in FY’08. We expect FY’10 numbers in the segment to also come in
M arket Cap. (USD'm) 532.60 strong.
A Play on Dividends. Total has consistently maintained a high dividend
Daily Average Value Traded (N'000) 13,294.04
payout, averaging 98% for the five years ending FY’09. Whilst c.30% of this
payout is effected after the release of its Quarter 3 results, the balance of
c.70% is paid out on release of audited financials.
Year Low (N) 142.50
VALUATION METRICS Earnings Outlook. We expect revenues to record a 13% YoY growth to
N185.6 billion for FY’11, while we anticipate that its PAT would moderate by
Boo k Value (N'm) 8,367.00
17% YoY to N4.4 billion. We recall that the FY’10 earnings were boosted by an
P/E (x) 15.16
Price/Book (x) 9.50

exceptional income from the sale of an asset. Consequently, we expect PBT
and PAT margins to slow from 4.7% and 3.2% in FY’10 to 3.4% and 2.4%
ROE (%) 55.69
respectively in FY’11, whilst its DPS drops c.17% to N12.63 (Div. Yield –
5.4%).
TOTAL VS PM INDEX VS NSE ASI
2.00
TOTAL PMIndex ASI EPS (N) 11.69 15.50 12.89 15.82 18.03
1.80
YoY Change (%) -9.68 32.60 -16.81 22.74 13.98
1.60 P/E (x) 12.75 15.10 18.15 14.79 12.98
1.40
DPS (N) 11.68 15.19 12.63 15.51 17.67
YoY Change (%) -9.67 30.03 -16.81 22.74 13.98
1.20
Div. Yield (%) 7.84 6.49 5.40 6.63 7.55
1.00
NAPS (N) 20.57 20.88 21.13 21.45 21.81
0.80
YoY Change (%) -3.94 1.51 1.24 1.50 1.68
0.60 P/B (x) 7.24 11.21 11.07 10.91 10.73
January 2011 118

VETIVA
2011 Outlook
The Tipping Point
Turnover 137,340 177,412 178,570 164,285 185,642 207,919
Cost of Sales (120,410) (158,265) (156,571) (140,463) (159,652) (178,810)
Gross Profit 16,930 19,147 22,000 23,821 25,990 29,109
Other Operating Income 671 1,157 644 709 780 858
EBITDA 5,664 7,529 7,825 7,946 8,208 9,850
Interest Payable (77) (269) (516) (362) (416) (478)
Profit on Ordinary Activities 4,829 6,508 6,163 6,338 6,437 7,900
Exceptional Item - - - 1,400 - -
Taxation -1,573 -2,115 -2,195 -2,476 -2,060 -2,528
PAT 3,255 4,393 3,968 5,262 4,377 5,372

Non-Current Assets
Fixed Assets 9,944 11,237 12,648 13,912 15,304 16,834
Current Assets
Inventory 9,245 9,539 11,290 12,419 11,177 12,854
Debtors and prepayments 12,860 16,904 18,881 18,503 19,428 21,371
Due from related companies 197 311 408 469 539 620
FX purchased for imports 44 27 3,781 3,781 3,781 3,781
Bank balances, deposits and cash 5,837 2,005 512 1,746 4,261 2,924
Total Assets 39,672 41,771 49,701 53,191 57,025 61,111
Share Capital 170 170 170 170 170 170

Capital reserve 263 263 263 263 263 263
General reserve 5906 6836 6550 6655 6742 6850
Shareholder's Fund 6,339 7,269 6,983 7,088 7,176 7,283
January 2011 119

VETIVA
2011 Outlook
The Tipping Point
Turnover 921 1,189 1,197 1,101 1,244 1,394
Cost of Sales (807) (1,061) (1,050) (942) (1,070) (1,199)
Gross Profit 113 128 147 160 174 195
EBITDA 38 50 52 53 55 66
Interest Payable (1) (2) (3) (2) (3) (3)
Profit on Ordinary Activities 32 44 41 42 43 53
Exceptional Item - - - 9 - -
Taxation -11 -14 -15 -17 -14 -17
PAT 22 29 27 35 29 36
Balance Sheet ($'Million) 2007 2008 2009 2010F 2011F 2012F

Non-Current Assets
Fixed Assets 67 75 85 93 103 113
Total Non-Current Assets 77 87 99 109 120 131
Current Assets
Inventory 62 64 76 83 75 86
Debtors and prepayments 86 113 127 124 130 143
Due from related companies 1 2 3 3 4 4
FX purchased for imports 0 0 25 25 25 25
Bank balances, deposits and cash 39 13 3 12 29 20
Total Current Assets 189 193 234 247 263 279
Total Assets 266 280 333 357 382 410
Total Current Liabilities 204 212 264 286 312 338
Capital reserve 2 2 2 2 2 2
General reserve 40 46 44 45 45 46
Shareholder's Fund 42 49 47 48 48 49
January 2011 120

VETIVA
2011 Outlook
The Tipping Point
2007 2008 2009 2010F 2011F 2012F

Growth
Turnover Growth 8.5% 29.2% 0.7% -8.0% 13.0% 12.0%
Growth in Core Operating profit 31.4% 27.6% 12.7% 0.8% 2.6% 21.1%
Growth in EBITDA 37.9% 32.9% 3.9% 1.5% 3.3% 20.0%
Growth in PBT 48.6% 34.8% -5.3% 25.5% -16.8% 22.7%
Growth in PAT 29.4% 34.9% -9.7% 32.6% -16.8% 22.7%
Profitability
Return on Equity 53.8% 64.6% 55.7% 74.8% 61.4% 74.3%
Return on Assets 9.9% 10.8% 8.7% 10.2% 7.9% 9.1%
Operating ROE 76.6% 94.6% 91.9% 92.9% 93.4% 112.7%
Operating ROA 14.1% 15.8% 14.3% 12.7% 12.1% 13.8%
Margins
Gross Profit 9.6% 8.0% 11.5% 12.9% 9.0% 9.0%
EBITDA/Sales 2.9% 3.2% 4.7% 6.7% 5.6% 5.6%
EBIT/Sales 2.0% 2.6% 3.9% 5.0% 4.2% 4.2%
Exceptional Item 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Asset Utiisation
Sales to Cash (x) 24 88 349 94 44 71
Inventory Turnover (x) 15 19 16 13 17 16
Asset turnover (x) 3 4 4 3 3 3
Fixed Assets (x) 14 16 14 12 12 12
Liquidity Ratios
Cash ratio (x) 0.2 0.1 0.0 0.0 0.1 0.1
Current ratio (x) 0.9 0.9 0.9 0.9 0.8 0.8
Acid Test (x) 0.6 0.6 0.6 0.6 0.6 0.6
Cash Conversion Cycle 12.3 9.6 15.9 13.3 5.6 6.6
Capital Structure
Debt to Equity 0.3 0.2 0.6 0.7 0.8 0.8
Payout ratio 1.0 1.0 1.0 1.0 1.0 1.0
Retention ratio 0.0 0.0 0.0 0.0 0.0 0.0
Per Share Data
EPS 9.59 12.94 11.69 15.50 12.89 15.82
DPS 9.50 12.93 11.68 15.19 12.63 15.51
NAPS 18.67 21.41 20.57 20.88 21.13 21.45
Sales/Share 404.51 522.53 525.95 483.87 546.77 612.39
January 2011 121

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION MRS Oil Nigeria Plc

Address 8, Macarthy Street Recovering Lost Market Share
Onikan, Lagos, Nigeria
Our DCF valuation methodology for the MRS Oil indicates a target price range
Website www.mrsoilnigplc.com of N86.02 – N89.44. This indicates a midpoint of N87.68, which underpins an
Management L V Tanoe (Managing Director) upside potential of 32% relative to the stock’s current price. Thus, we
maintain an “BUY” rating.
Fiscal Year End December
Exchange Listing Nigerian Stock Exchange Investment Thesis

Symbol Bloomberg: CHEVRON:NL Leveraging on New Core Investor; MRS is gradually regaining market
share, which was eroded during the transition period of the divestment
Sector Petroleum Marketing
process. Apart from receiving products from its primary supplier, the
Country Nigeria
Petroleum Products Marketing Company (PPMC), the company also sources
OWNERSHIP STRUCTURE refined products through the extensive trading network of its parent company
Shareholders % Ownership – MRS Holdings Limited. The company is currently growing awareness on its
brand, as the divestment process also entailed a change in the Texaco
C orlay Global S.A. 60.00
branded stations and lubricant products to the MRS brand and product range.
ZSLA/C FOZ 7.58
Strategic Expansions across the Retail Space; MRS is expanding its retail
Others 32.42
network, though with preference for the Retailer Owned Retailer Operated
SHARE STATISTICS
(RORO), which comes with little or no capital expenditure requirement. Whilst
Shares in issue (Mn) 253.99 the company had initially disclosed its target expansion of 150 retail outlets
Share Price (N) 66.56 per year, we believe that its expansion would be somewhat moderated due to
Market C ap. (N'm) 16,905.49 relative competition in the downstream space.
Market C ap. (USD'm) 113.33 Dividend income still expected. Though the new Management is yet to
Free Float (%) 32.42 come up with a specific dividend policy, we expect that it would maintain the
Daily Average Value Traded (N'000) 1,897.98 30% payout effected in FY’09 in FY’10, and increase it to 40% in FY’11. Thus,
we expect a DPS of N2.63 in FY’11, translating to a dividend yield of 4.0%.
Year High (N) 91.35
Year Low (N) 69.79
Earnings Outlook. We expect revenues to increase marginally; rising 2% YoY
VALUATION METRICS to N78.4 billion by FY’11. However, we expect its PAT to drop by c.7% to N1.7
billion. Whilst we expect gross margins in FY’11 to remain stable at 9%, we
P/E (x) 16.04 anticipate that PAT margin would slow from an estimate of 2.3% for FY’10 to
Price/Book (x) 4.27 2.3% in FY’11.
ROE (%) 43.06 Forecast Summary FY'09A FY'10F FY'11F FY'12F FY'13F
EPS (N) 4.14 6.45 5.77 4.58 5.07
YoY Change (%) n/a 55.82 -10.51 -20.60 10.71
P/E (x) 38.65 10.32 11.54 14.53 13.12
DPS (N) 1.25 2.12 2.63 4.17 5.10
YoY Change (%) n/a 69.41 24.29 58.50 22.37

Div. Yield (%) 0.78 3.18 3.95 6.27 7.67
NAPS (N) 11.68 16.62 20.57 24.74 29.84
YoY Change (%) 54.87 42.31 23.76 20.28 20.64
P/B (x) 13.69 4.01 3.24 2.69 2.23
S
January 2011 122

VETIVA
2011 Outlook
The Tipping Point

Turnover 72,628 48,688 74,603 76,841 78,378 84,648
Cost of Sales (64,940) (44,419) (68,973) (69,925) (71,324) (76,607)
Gross Profit 7,688 4,269 5,630 6,916 7,054 8,042
Selling and Distribution Costs (1,720) (1,231) (916) (1,026) (1,129) (1,242)
Administrative Expenses (1,386) (1,439) (1,143) (1,223) (1,296) (1,374)
Other Operating Expenses (1,371) (1,435) (1,363) (1,444) (1,531) (1,608)
Other Income 181 151 77 31 34 37
EBITDA 3,392 314 2,285 3,253 3,132 3,855
EBIT/Operating Profit 2,744 (389) 1,688 2,596 2,409 3,061
PBT 2,995 (306) 1,721 2,637 2,458 3,116
Taxation (1,036) 80 (670) (844) (786) (997)
PAT 1,959 -225 1,051 1,793 1,671 2,119

Non-Current Assets
Property, plant and equipment 3,838 3,422 3,036 3,340 3,740 3,927
Prepayments (non-current) 149 140 147 162 178 196
Current Assets
Stock 3,244 2,146 4,845 4,360 5,450 4,905
Receivables & Prepayments 7,518 5,566 7,306 8,037 7,233 6,148
Cash & Cash Equivalents 6,188 57 1,274 1,754 1,119 3,426
TOTAL ASSETS 20,937 11,330 16,608 17,653 17,721 18,603

Total Non-Current Liabilities 1,367 1,275 773 773 773 773
Net Assets 4,045 1,915 2,966 4,221 5,224 6,283
Capital and Reserves

Share capital 127 127 127 127 127 127
Shareholder's Fund 4,045 1,915 2,966 4,221 5,224 6,283
January 2011 123

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT ($'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 487 326 500 515 525 567
Cost of Sales (435) (298) (462) (469) (478) (514)
Gross Profit 52 29 38 46 47 54
Selling and Distribution Costs (12) (8) (6) (7) (8) (8)
Administrative Expenses (9) (10) (8) (8) (9) (9)
Other Operating Expenses (9) (10) (9) (10) (10) (11)
Other Income 1 1 1 0 0 0
EBITDA 23 2 15 22 21 26
EBIT/Operating Profit 18 (3) 11 17 16 21
PBT 20 (2) 12 18 16 21
Taxation (7) 1 (4) (6) (5) (7)
PAT 13 (2) 7 12 11 14
BALANCE SHEET ($'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Non-Current Assets
Property, plant and equipment 26 23 20 22 25 26
Prepayments (non-current) 1 1 1 1 1 1
Current Assets
Stock 22 14 32 29 37 33
Receivables & Prepayments 50 37 49 54 48 41
Cash & Cash Equivalents 41 0 9 12 8 23
TOTAL ASSETS 140 76 111 118 119 125

Total Non-Current Liabilities 9 9 5 5 5 5
Net Assets 27 13 20 28 35 42

Shareholder's Fund 27 13 20 28 35 42
January 2011 124

VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 F 2011 F 2012 F

Growth (%)
Turnover Growth -33.0% 53.2% 3.0% 2.0% 8.0%
Growth in Core Operating profit -94.9% 1253.1% 45.9% -3.9% 23.3%
Growth in EBITDA -90.7% 627.7% 42.4% -3.7% 23.1%
Growth in PBT n/a n/a 53.2% -6.8% 26.8%
Growth in PAT n/a n/a 70.6% -6.8% 26.8%
Profitability (%)
Return on Equity -7.6% 43.1% 49.9% 35.4% 36.8%
Return on Assets -1.4% 7.5% 10.5% 9.4% 11.7%
Return On Total Capital -7.6% 43.1% 49.9% 35.4% 36.8%
Operating ROE -13.0% 69.2% 72.3% 51.0% 53.2%
Operating ROA -2.4% 12.1% 15.2% 13.6% 16.9%
Margins (%)
Gross Profit 8.8% 7.5% 9.0% 9.0% 9.5%
EBITDA/Sales 0.6% 3.1% 4.2% 4.0% 4.6%
EBIT/Sales -0.8% 2.3% 3.4% 3.1% 3.6%
Exceptional Item 0.0% 0.0% 0.0% 0.0% 0.0%
Pretax Income/Sales -0.6% 2.3% 3.4% 3.1% 3.7%
Net Profit Margin -0.5% 1.4% 2.3% 2.1% 2.5%
ASSET UTILIZATION 2008 2009 2010F 2011F 2012F

Sales to Cash (x) 858.9 58.5 43.8 70.0 24.7
Asset turnover (x) 4.3 4.5 4.4 4.4 4.6
Fixed Assets (x) 14.2 24.6 23.0 21.0 21.6

Cash ratio (x) 0.0 0.1 0.1 0.1 0.3
Current ratio (x) 1.0 1.0 1.1 1.2 1.3
Acid Test (x) 0.7 0.7 0.8 0.7 0.8
Days in inventory (x) 16.1 23.7 20.7 25.4 21.2
Days in accounts payable (x) 59.7 61.0 58.1 52.4 47.5
Days in receivables (x) 41.7 35.7 38.2 33.7 26.5
Cash Conversion Cycle -1.9 -1.6 0.8 6.7 0.1
Capital Structure
Payout ratio 0.0% 30.2% 30.0% 40.0% 50.0%
Total equity/Total assets 16.9% 17.9% 23.9% 29.5% 33.8%
Retention ratio 100.0% 69.8% 70.0% 60.0% 50.0%
Financial Leverage 5.9 5.6 4.2 3.4 3.0
Per Share Data

EPS -0.89 4.14 7.06 6.58 8.34
DPS 0.00 1.25 2.12 2.63 4.17
NAPS 7.54 11.68 16.62 20.57 24.74
Sales/Share 191.69 293.73 302.54 308.59 333.28
EBITDA 1.24 9.00 12.81 12.33 15.18
January 2011 125

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Conoil Plc

Address Bull Plaza Increased Investments to Improve Performance
38/39 Marina, Lagos.
We maintain our “BUY” rating on Conoil Plc, at its current market price. Using
Website www.conoilplc.com
the DCF valuation methodology, we obtain a target price range of N49.37 –
Management John Basikaran (Managing Director)
N52.09. This indicates a midpoint of N50.72, which underpins an upside
potential of 26%.
Exchange Listing Primary Listing: Nigerian
Stock Exchange Investment Thesis
Symbol Bloomberg:CONOIL:NL
On an expansionary thrust; Conoil has embarked on an expansion of its
Sector Petroleum Marketing current retail distribution capacity through a combination of an upgrade of
Country Nigeria existing outlets, acquisition of additional outlets, as well a constructing a full-
OWNERSHIP STRUCTURE fledged service range mega stations. The company is also investing in the
Shareholders % Ownership
expansion of its storage capacity, through the upgrade of current depot
facilities in Apapa, Warri and Kaduna, and the construction of new storage
Conpetro Limited 74.40
tanks in Apapa, Port-Harcourt and Calabar to complement the current storage
Others 25.60
capacities in the locations. This storage expansion is expected to save
SHARE STATISTICS
transportation costs. The company is also expanding into Togo and Ghana.
Shares in issue (Mn) 693.95 These initiatives should improve the company’s near term top line
Share Price (N) 40.14 performance, amidst challenges in the wider industry.
Strengthening its hold on the aviation business; In addition to onshore
and offshore retail expansion projects, Conoil is investing in infrastructure to
Free Float (%) 25.60 support Aviation Fuel sale. The company has historically maintained a sizeable
Daily Average Value Traded (N'000) 4,675.89 market share in the distribution of Aviation Fuel, accounting for c.9% of the
volume distributed in FY’09. Conoil has procured new bowsers to boost the
Year High (N) 56.14
speed of its service delivery to airlines. It has also put up new and re-activated
Year Low (N) 27.63
VALUATION METRICS
a number of aviation fuel stations at different locations to meet up the
increasing demand of its customers.
P/E (x) 12.50 Earnings Outlook; We anticipate a 12% YoY growth in aggregate revenues to
Price/Book (x) 1.83 N432.3 billion for FY’11, supported primarily by its recent expansionary
efforts. Similarly, we expect PAT to come in at N98.11 billion, 15% ahead of
ROE (%) 18.20
our FY’10 estimates. Whilst we expect PBT margins to slow from 3.98% in
FY’10 to 3.95% in FY’11, we anticipate moderate improvements in its PAT
margin to 2.5% in FY’11 from 2.3% in FY’10, due to a drop in our effective tax
CONOIL VS PM INDEX VS NSE ASI rate assumption from 36% to 34%.
2.20
CONOIL PMIndex ASI
2.00
1.80
EPS (N) 3.33 3.21 3.68 4.24 5.48
1.60
1.40 YoY Change (%) 27.18% -3.63 14.72 15.12 29.11
1.20
P/E (x) 23.53 12.50 10.90 9.46 7.33
DPS (N) 1.50 1.61 1.84 2.12 2.74
1.00
YoY Change (%) 50.00 7.04 14.72 15.12 29.11
0.80
Div. Yield (%) 1.91 4.00 4.59 5.28 6.82
0.60
NAPS (N) 19.47 21.08 22.92 25.04 27.78
YoY Change (%) 13.59 8.25 8.74 9.25 10.93
P/B (x) 4.03 1.90 1.75 1.60 1.45
January 2011 126

VETIVA
2011 Outlook
The Tipping Point
Turnover 86,848 124,214 101,853 87,594 98,105 112,821

Cost of Sales -74,992 -111,223 -89,022 -74,893 -84,370 -98,154
Gross Profit 11,855 12,990 12,831 12,701 13,735 14,667
Other Operating Income 372 230 1,406 281 309 340
EBITDA 7,029 7,598 8,019 7,385 8,167 8,836
Interest Payable -1,611 -2,631 -2,513 -2,010 -2,211 -2,322
PBT 3,759 3,282 3,785 3,482 3,874 4,328
Taxation -1,166 -1,461 -1,473 -1,254 -1,317 -1,385
PAT 2,593 1,821 2,312 2,228 2,557 2,943

Fixed Assets 8,991 8,222 8,139 8,953 9,848 10,833
Stocks 7476 6516 4095 4464 4821 5303

Cash and bank balances 952 14592 10572 9373 9097 8865
Total Assets 39,380 56,796 39,774 41,624 44,861 48,416
Current Liabilities
Total Assets Less Current Liabilities 15,129 13,811 15,774 17,015 18,207 19,701
Deferred taxation 1,292 1,110 1,436 1,436 1,436 1,436
Retirement benefit obligation 1,078 - - - - -
Provision 377 385 403 423 444 466
Staff Retirement benefits 402 424 424 424 424 424
Share capital 347 347 347 347 347 347
Share premium account 3,825 3,825 3,825 3,825 3,825 3,825
General reserve 5,238 5,151 6,769 7,884 9,162 10,633
Revaluation Reserve 2,570 2,570 2,570 2,570 2,570 2,570
Shareholders' Fund 11,980 11,893 13,511 14,625 15,904 17,375
January 2011 127

VETIVA
2011 Outlook
The Tipping Point
Turnover 582 833 683 587 658 756

Cost of Sales -503 -746 -597 -502 -566 -658
Gross Profit 79 87 86 85 92 98
EBITDA 47 51 54 50 55 59
Interest Payable -11 -18 -17 -13 -15 -16
PBT 25 22 25 23 26 29
Taxation -8 -10 -10 -8 -9 -9
PAT 17 12 16 15 17 20
Balance Sheet ($'Million) 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 60 55 55 60 66 73
Stocks 50 44 27 30 32 36
Cash and bank balances 6 98 71 63 61 59
Total Assets 264 381 267 279 301 325
Current Liabilities
Net Current Assets/(Liabilities) 41 37 51 54 56 59
Total Assets Less Current Liabilities 101 93 106 114 122 132
Deferred taxation 9 7 10 10 10 10
Retirement benefit obligation 7 - - - - -
Provision 3 3 3 3 3 3
Staff Retirement benefits 3 3 3 3 3 3
Total Liabiities 205 314 191 196 210 224
General reserve 35 35 45 53 61 71
Revaluation Reserve 17 17 17 17 17 17
Shareholders' Fund 80 80 91 98 107 116
January 2011 128

VETIVA
2011 Outlook
The Tipping Point
2007 2008 2009 2010F 2011F 2012F

Growth
Turnover Growth -4.1% 43.0% -18.0% -14.0% 12.0% 15.0%
Growth in Core Operating profit 8.4% 10.7% -10.3% 7.4% 10.6% 8.1%
Growth in EBITDA 5.6% 8.1% 5.5% -7.9% 10.6% 8.2%
Growth in PBT -8.6% -12.7% 15.3% -8.0% 11.2% 11.7%
Growth in PAT -7.7% -29.8% 27.0% -3.6% 14.7% 15.1%
PROFITABILITY
Return on Equity 22.3% 15.3% 18.2% 15.8% 16.7% 17.7%
Return on Assets 7.1% 3.8% 4.8% 5.5% 5.9% 6.3%
Operating ROE 46.1% 49.5% 49.6% 39.0% 39.9% 40.0%
Operating ROA 14.7% 12.3% 13.0% 13.5% 14.1% 14.3%
MARGINS
Gross Profit 13.7% 10.5% 12.6% 14.5% 14.0% 13.0%
EBITDA/Sales 8.1% 6.1% 7.9% 8.4% 8.3% 7.8%
EBIT/Sales 6.2% 4.8% 6.2% 6.3% 6.2% 5.9%
ASSET UTILIZATION
Sales to Cash (x) 91.2 8.5 9.6 9.3 10.8 12.7
Inventory Turnover (x) 11.6 19.1 24.9 19.6 20.4 21.3
Asset turnover (x) 2.2 2.2 2.6 2.1 2.2 2.3
Fixed Assets (x) 9.7 15.1 12.5 9.8 10.0 10.4
LIQUIDITY RATIOS
Cash ratio (x) 0.0 0.3 0.4 0.4 0.3 0.3
Current ratio (x) 1.3 1.1 1.3 1.3 1.3 1.3
Acid Test (x) 0.9 1.0 1.1 1.1 1.1 1.1
Cash Conversion Cycle 117.3 96.6 55.9 71.8 72.4 70.7
CAPITAL STRUCTURE
Debt to Equity 1.2 2.9 0.7 0.6 0.5 0.5
Payout ratio 0.7 0.4 0.5 0.5 0.5 0.5
Retention ratio 0.3 0.6 0.5 0.5 0.5 0.5
PER SHARE DATA
EPS 3.74 2.62 3.33 3.21 3.68 4.24
DPS 2.75 1.00 1.50 1.61 1.84 2.12
NAPS 17.26 17.14 19.47 21.08 22.92 25.04
Sales/Share 125.15 178.99 146.77 126.22 141.37 162.58
EBITDA 10.13 10.95 11.56 10.64 11.77 12.73
January 2011 129

VETIVA
2011 Outlook
The Tipping Point
Infrastructure Sector: Set for Mixed Realties

Governments’ CAPEX – main driver of development
Federal Government: Typical of most Sub-Saharan African economies, 2011,
being an election year, holds mixed possibilities for infrastructural development
Pre-elections federal government in Nigeria. As, government remains the biggest spender on physical
infrastructure spend would be infrastructure, we expect new infrastructure spend to be at low levels for the
considerably minimal first half of 2011 given our view of increased spending towards electioneering .
In the second half of the year, we may begin to see a steady rise in
infrastructure spend as the new government settles in. Despite this
expectation, we note that capital expenditure received lesser priority in the
proposed 2011 budget, representing only 23.8% of total budget, as compared
to recurrent expenditure which stood at 58.7% (see table below). More
worrisome is the historically low level of capital budget implementation; an
estimated average of 50% over the last 5 years.
State Governments: For the states which would be holding gubernatorial

elections in 2011, the expectations on infrastructure development is largely
similar to federal government’s as pre-elections spend and uncertainty
We expect to see continuing regarding the policies of the new government would typically shift focus away
activity in infrastructure from capital expenditure. Notwithstanding, we still see project developments in
development amongst few states
the few states that will not hold elections this year. For instance, Edo state is
that would not hold gubernatorial
elections in April currently in the process of issuing a N25 billion 7-year tenor bond; c.45% of
which is aimed a financing infrastructural projects. With a deepening of the
sub-national debt market, we expect more states, especially the ones, with
new governors to embark on infrastructure bond issuance in the course of the
year.
Prospects in the longer term
Sub-national governments - more pivotal to development: With Nigeria’s

infrastructure development receiving more emphasis in recent times, we
Sub-national governments are believe the potential for infrastructural development in Nigeria would be more
pivotal to infrastructure realisable through sub-national governments (state and local governments).
development as they account for a 2009 data from the CBN shows that state and local governments accounted for
larger portion of aggregate 52% of aggregate expenditure, implying that public spend is largely overweight
expenditure
on sub-national expenditure. On a broader note, governments’ expenses (sub-
nationals and federal) have historically been significantly skewed towards
recurrent expenditure. We note however that state governments appear to
focus more on capital projects as CAPEX account for 46.2% of total states
government expenditure (vs 33% for federal and local governments
respectively). It is apparent therefore that sub-national governments, especially
states, would be essential to sustainable infrastructure development in longer
term.
January 2011 130

VETIVA
2011 Outlook
The Tipping Point
Governments aggregate expenditure and percentage composition of recurrent

expenditure in total expenditure (2009)
Sources: CBN 2009 annual report, Vetiva Research
Financing gaps – still a major hurdle: Governments’ heavy reliance on

crude oil revenue (approximately constitute 60% of governments aggregate
To fast-track the development of
revenue) poses major constraint on infrastructure financing. Following from our
physical infrastructure, Sub-
national governments need to opinion that sub-national governments would be more pivotal to infrastructure
devise other means of funding development, it is expedient that sub-national governments need to devise
beyond federal allocations ways to access alternative financing sources. To our mind, the successful
issuance of the US$500 million debut Euro bond will further unlock global
development funds for Nigeria. Apart from federal allocations and borrowing,
we believe that Private Public Partnerships (PPP) may be be a veritable source
of infrastructural development in the country. The Lekki Concession Company;
a PPP arrangement of Lagos state which financed the 33km Lekki expressway is
a good case in view. With FAAC allocations used mainly for recurrent spend and
internally generated revenue constituting a minimal portion of total revenue of
most states, the available options for infrastructure financing are Public Private
Partnerships and debt.
Building Materials
Minimal growth anticipated as elections pre-occupies key consumers
Our focus on the building materials sector is on the cement producers given
The cement sector is set to
witness major boost in supply their dominance in the sector. The outlook for the cement producers follows
though minimal consumption from our overall expectations of slow infrastructure development in the near
growth is expected term. In line with the additional capacities (13.2 million tonnes per annum)
expected to come from Dangote Cement and Lafarge WAPCO this year, the
sector is set to witness a major boost in cement supply. Therefore, the
dynamics of cement supply would even change further as imports become quite
negligible.
January 2011 131

VETIVA
2011 Outlook
The Tipping Point
On cement consumption, we expect some improvement in Q1’11 given the

onset of the dry season. This should accelerate cement consumption as the
weather becomes more conducive for concrete projects). However, we still do
not anticipate strong demand given our overall anticipation of a general slow-
down down in infrastructure spend, particularly as private sector credit growth
remains relatively weak.
Better credit flows may post demand upsides than we think

Given positive expectations on the
banking sector reforms and With the speed of AMCON’s activities, we note that the banking sector may be
AMCON activities, we hope to see faster positioned to resume strong lending to the real sector, than our
major improvement in lending to expectation of 15% growth in private sector credit. Post elections, we believe
the real sector post elections the certainty in the political scene in terms of policy continuation and
governance, coupled with a much stronger banking sector balance sheet,
should result in a gradual boost in cement demand. Based on latest Q3’10
results of the cement producers, we estimate a decline of 11% in cement
consumption relative to 2009 level. Thus, our estimated 2010 cement
consumption stands at 13.3 million tonnes.
In line with our anticipation of an improved credit environment and a modest
Thus we believe cement demand boost in cement demand post elections, our forecast for 2011 cement
would rally on the bank of credit consumption stands at 17.7 million tonnes (33% growth over our 2010
accessibility in the real sector estimate). On the back of our assumption of capacity utilisation (inclusive of
the expected capacities additions from Dangote Cement and WAPCO), we
estimate that cement production for 2011 would be around 17.2 million tonnes,
implying a marginal importation need of 0.5 million tonnes.
Further into 2012, we expect to see stronger demand and purchasing power
especially if the on-going power sector reforms are assiduously implemented.
Nevertheless, we anticipate that cement production would out-pace
consumption in the short term and exports to neighbouring African countries
might only be possible during this period.
Cement Consumption, Production and Imports in million tonnes
Sources: Industry sources, Vetiva Research Estimates
January 2011 132

VETIVA
2011 Outlook
The Tipping Point
Construction
Although private sector participation in infrastructure development is growing,

Despite growing involvement of
the private sector, players in the the construction sector still depends heavily on government capital
construction industry still depend expenditure. Typical of the seasonal pattern in the industry, we expect major
more on access to government activities in the first quarter of the year, partly because of the dry season and
contracts the roll-over of 2010 budget into the Q1’11. However, we would not likely see
major increase in new contracts after this period, given the expected shift of
focus to elections.
Post-elections, we do not foresee major boost in construction contracts from

Whist acknowledging that government. The lower allocation to CAPEX in the proposed 2011 budget attest
supplementary budgets may still to this; though we do not rule out the possibility of increased allocation to
be passed, the 2011 budget draft CAPEX in subsequent supplementary budgets. Whilst noting the increasing
supports lesser capital number of players in the construction industry, we believe Julius Berger would
expenditure; this fuels our still continue to dominate the sector given its unique advantage of having more
expectation minute growth in experience and the implied economies of scale. Among the new entrants, we
construction after election
note that China State Construction Engineering Corp. which was contracted
(projects summing up $23.8 billion) around mid 2010 to build three refineries
and a petrochemical plant in Nigeria, can potentially become a major contender
for market dominance with Julius Berger in the longer term, especially as
government seeks financing through Public Private Partnerships for
infrastructural project.
January 2011 133

VETIVA
2011 Outlook
The Tipping Point
Dangote Cement Plc

BASIC INFORMATION
Alfred Rewane The titan of Nigeria’s cement industry
Address C lose, Ikoyi
Following adjustments in our DCF valuation model, our one year target price
Lagos State
www.dangote- range for Dangote Cement now stands at N133.20 – N148.70 with a midpoint
Website cement.com of N139.35 obtained from a 20%/80% weighted EV/EBITDA and DCF target
Management C hairman Aliko Dangote
prices of N121.23 and N143.89 respectively. Thus, at its current price of
MD/C EO Daljeet Ghai N130.08 , the stock is trading at an expected upside potential of 5.4% to
Financial Year End target price of N139.35, hence we downgrade our rating of DangCem to
“NEUTRAL” from “Accumulate”.
Symbol Bloomberg: Dangcem:NL Investment thesis
Sector Building Materials
Dominant Market Share: Through its 5 million tonnes Obajana Plant, 3
C ountry Nigeria million tonnes Gboko (BCC) Plant and 6 million tonnes import terminals in
OWNERSHIP STRUCTURE (%) Lagos, Port/Harcourt and Onne, Dangote Cement controls close to 60% of the
DIL 95.5 Nigerian cement market and it’s unarguably the giant of the industry.
Others 4.5 Dangote Cement’s Obajana plant is the biggest cement plant in Nigeria and
SHARE STATISTICS the second largest in Africa. As stated by Dangote Cement’s management, an
Shares in issue (M) 15,494 additional 6 million tonnes cement plant in Ibese, which is billed to be
Share Price (N) 132.51 completed by Q1’11 and Obajana’s 3rd and 4th lines, also billed to be
Market C ap. (N'Mn) 2,053,110 completed by H1’11, would push Dangote Cement’s market share to c.70% of
Market C ap. (USD'Mn) 13,764 the market, giving the company a relatively monopolistic advantage based on
accretion of huge benefit of economies of scale.
Free
Daily Float (%) Value Traded
Average 4.5
(N'Mn) 779.5 Modern and highly energy efficient plants: Dangote Cement Plants use
Daily Average Value Traded the most modern technology in cement production as its rotary kilns employ
(USD'Mn) 52.3
the pre-calciner dry process for converting raw meals into clinker. The Plants
Year high (N) 135 are perhaps the most efficient in Nigeria as Pre-calciner dry kilns have the
least energy consumption level of about 4.03GJ/tonne of clinker produced, and
Year low (N) 120 are among the most energy efficient globally. We see this as a key advantage
given the incessant stoppage of production usually encountered by local
VALUATION METRICS
cement manufacturers as a result of energy problems. Other strong
investment cases for Dangote Cement include the proximity of its plants etc.
Strong Earnings Outlook: We project that Dangote Cement’s revenue would
P/B (x) 13.0
grow by 66.1% and 31.5% to N346 billion and N455 billion by FY’11 and FY’12
Div. Yield (%) 1.5
respectively. On profitability, we forecast that EBITDA margins would steadily
ROAE (%) 53.3
rise to 63.6% and 66.1% by FY’11 and FY’12 from our estimate of 57.8% at
FY’10. Also, we expect EBIT margins to increase to 59.2% and 62.2% by FY’11
DANGCEM VS BM VS NSE ASI PERFORMANCE and FY’12 from FY’10 estimate of 51.3%.
Rebased 26/10/2010
1.05
Forecast Summary FY'09* FY'10F FY'11F FY'12F FY'13F
Dangcem BMIndex ASI
EPS (N) 3.97 6.64 12.83 17.85 20.65
1.00 YoY Change (%) 76.4 67.3 93.2 39.1 15.7
P/E (x) 31.9 19.9 10.3 7.4 6.4
0.95 DPS (N) 2 4.98 9.32 12.96 14.99
YoY Change (%) 0 149 87.1 39.1 15.7
0.90 Div. Yield (%) 1.6 3.8 7.1 9.8 11.3
NAPS (N) 10.2 12.23 15.74 20.61 25.42
0.85 YoY Change (%) 117 19.9 28.7 30.9 23.3
Oct-10 Nov-10 Dec-10
P/B (x) 27 10.8 8.4 6.4 5.2
Sources: NSE, Vetiva Research
January 2011 134

VETIVA
2011 Outlook
The Tipping Point

Turnover 34,596 61,906 189,621 208,500 346,332 455,590
Cost of Sales (8,183) (14,054) (94,345) (82,463) (111,757) (116,792)
Gross Profit 26,413 47,852 95,276 126,037 234,575 338,798
Operating Expenses (4,992) (9,470) (17,422) (5,421) (15,931) (37,814)
EBITDA 21,420 38,382 77,853 120,616 218,643 300,984
Depreciation & Amortization (5,462) (5,982) (11,527) (13,577) (15,308) (17,586)
Interest Payable & Charges (6,137) (8,647) (6,043) (993) (456) (1,176)
Taxation (630) (8,665) (2,384) (3,181) (4,058) (5,644)

Fixed Assets 130,519 135,622 186,393 215,788 277,546 289,659
Investments - - 99 99 99 99
Inventories 2,790 5,043 13,374 11,690 15,842 16,556
Debtors 876 2,924 6,826 7,505 12,467 16,400
Total Assets 168,481 236,720 316,339 392,511 604,574 769,016
Other Creditors 9,833 17,205 65,349 71,855 119,356 157,009
Short Term Loan 20,823 78,339 18,061 10,644 7,724 79,886
Taxation 631 1,336 4,347 5,285 7,812 9,846
Long-Term Loans 77,211 56,890 49,620 102,120 70,745 38,735
Provision for Gratuity 34 67 981 2,169 3,602 4,738
Prior Year Dividend - - - - 137,745 139,742
Deferred Taxation - 7,959 9,475 9,475 9,475 9,475
Share Capital 500 500 500 7,747 7,747 7,747
Share Premium 42,430 42,430 42,430 42,430 42,430 42,430
Revenue and Capital reserve 15,141 29,582 113,752 125,342 119,482 233,184
Shareholders Fund 58,071 72,512 157,668 175,519 169,659 283,361
Minority Interest - - 6,122 6,945 8,535 10,748
Total Equity 58,071 72,512 163,790 189,497 178,194 319,351
January 2011 135

VETIVA
2011 Outlook
The Tipping Point

Turnover 294 497 1,287 1,345 2,234 2,939
Cost of Sales (70) (113) (641) (532) (721) (753)

Gross Profit 225 384 647 813 1,513 2,186
Operating Expenses (42) (76) (118) (35) (103) (244)
Core Operating Profit 182 308 529 778 1,411 1,942
EBITDA 182 308 529 778 1,411 1,942
EBIT/Operating Profit 136 260 450 691 1,312 1,828
Profit Before Taxation 84 191 409 684 1,309 1,821
Taxation (5) (70) (16) (21) (26) (36)
Profit After Taxation 99 144 417 664 1,283 1,784

Fixed Assets 1,110 1,089 1,265 1,392 1,791 1,869
Investments 0 0 1 1 1 1
Inventories 24 40 91 75 102 107

Debtors 7 23 46 48 80 106
Bank and cash balances 53 42 73 314 761 1,346
Other Receivables and Current Assets 238 706 672 702 1,166 1,533
Total Assets 1,433 1,901 2,148 3,337 5,141 6,539
Other Creditors 84 138 444 611 1,015 1,335
Short Term Loan 177 629 123 91 66 679
Taxation 5 11 30 45 66 84
Long-Term Loans 657 457 337 868 602 329
Prior Year Dividend 0 0 0 0 1,171 1,188
Total Liabilities 939 1,319 1,036 1,726 3,068 3,823
Share Premium 361 341 288 361 361 361
Revenue and Capital reserve 129 238 772 1,066 1,016 1,983
Shareholders Fund 494 582 1,070 1,492 1,443 2,409
Total Equity 494 582 1,112 1,611 1,515 2,715
January 2011 136

VETIVA
2011 Outlook
The Tipping Point
2008 2009 2010 E 2011 E 2012 E

Growth (%)
Turnover growth 78.9% 206.3% 10.0% 66.1% 31.5%
Growth in EBITDA 79.2% 102.8% 54.9% 81.3% 37.7%
Growth in PBT 117.3% 139.5% 66.3% 91.3% 39.1%
Growth in PAT 54.5% 241.8% 67.6% 93.3% 39.1%
Profitability (%)
EBITDA Margin 62.0% 41.1% 57.8% 63.1% 66.1%
EBIT Margin 52.3% 35.0% 51.3% 58.7% 62.2%
Quick ratio 1.06 0.97 1.26 1.85 2.23
Cash ratio 0.19 0.05 0.12 0.55 0.85
Current ratio 1.14 1.02 1.40 1.98 2.35
Activity Ratios (x)
Sales to cash 11.76 17.67 4.28 2.94 2.18
Sales to inventory 22.19 37.60 15.59 29.63 28.76
Sales to total assets 0.26 0.60 0.53 0.57 0.59
Sales to total fixed assets 0.46 1.02 0.97 1.25 1.57
Production Data
Capacity(million tonnes) 8.00 8.00 8.00 19.00 20.00
Production (million tonnes) 3.19 5.00 6.18 11.58 16.10
Average Utilization 39.9% 62.5% 77.3% 60.9% 80.5%
Import terminal capacity 6.00 6.00 6.00 6.00 6.00
Import terminal utilisation 53.0% 42.9% 36.0% 34.7% 31.2%
Revenue/tonne (N'000) 25.00 25.35 25.35 25.35 25.20
Per Share Data
Earnings/share 35.92 122.78 6.64 12.83 17.85
Dividend/share1 0.00 2.00 4.98 9.32 12.96
Net Asset/share 116.114 145.02 12.23 15.74 20.61
Sales/Share 123.81 379.24 13.46 22.35 29.40
Valuation Multiples
P/E (x) 3.35 31.9 19.9 10.3 7.4
P/B (x) 1.04 27.0 10.8 8.4 6.4
Dividend Yield (%) 0.0% 1.6 3.8 7.1 9.8
EV/EBITDA (x) 53.35 26.30 16.98 9.29 6.80
January 2011 137

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Lafarge WAPCO plc
Address Elephant C ement House, Unrelenting in defending market position

Ikeja, Lagos State
We maintain our “ACCUMULATE” rating on Lafarge WAPCO given that the
Website www.lafargewapco.com
stock is trading at an expected upside of 19% to N51.62 – the midpoint of our
Management (C hairman) Olusegun Osunkeye
one year target price range N48.77 – N54.45 for the stock. Our target price is
MD/C EO S.A AbdelKader
based on a one year target DCF and EV/EBITDA fair values weighted more
towards the DCF methodology.
Symbol Bloomberg: WAPC O:NL Investment thesis
Sector Building Materials Robust Revenue Upside: Lafarge WAPCO’s on-going expansion to 4.2 million
C ountry Nigeria tonnes annual capacity implies a potential c.100% revenue upside from its
OWNERSHIP STRUCTURE (%) current levels assuming that prices remain constant. Using a more realistic
Lafarge (foreign) 60 assumption that price would perhaps moderate slightly downwards, to make
Odua Group of C ompanies 10 its cement competitive in comparison to Dangote Cement (as Lafarge WAPCO’s
Nigerian Public 30 per tonne cement price is currently higher than Dangote Cement’s); we still
SHARE STATISTICS
foresee at least 70% – 80% upside on its current revenue. Whilst noting that
the timeline for Lafarge WAPCO to achieve this revenue growth is based on the
speed of ramping up capacity utilisation at the new plant, we estimate that its
Market C ap. (N'Mn) 130,269.4
revenue wo uld more than double (110% growth relative to 2009 level) by
Market C ap. (USD'M) 873.30
2014.
Daily Average Value Traded Strong Parent Support: Also, being the biggest Nigerian subsidiary of the
(N'000) 52,951
Lafarge Group is an added advantage given the leadership position of the
(USD'000) 354 group in the global building materials industry and the resultant gains in terms
of product research, innovation and quality from which Lafarge WAPCO has
Year high (N) 46.17
been benefitting. We believe Lafarge’s product innovation would particularly be
Year low (N) 29.55 a key area in which Lafarge WAPCO can be competitively positioned against
VALUATION METRICS Dangote Cement in Lagos and south west market. Lafarge Group recently
Book Value (N'Bn) 50.3
patented a new cement brand (Sensium® technological cements) which is
100% dust free and has started testing the product in the South-East France
P/B (x) 2.6
market.
Div. Yield (%) 0.2 Earnings Outlook: We forecast that Lafarge WAPCO’s revenue would grow
ROAE (%) 11.3 by 61% to N68.8 billion by 2011 from our FY’10 estimate of N42.8 billion; this
Debt/Equity (%) 56.7 would stem from ramping up of the new 2.2 million tonnes plant. At this point,
WAPCO VS BM VS NSE ASI PERFORMANCE we anticipate an average capacity utilisation rate of 60%. On profitability, we
Rebased 31/12/2009
project that EBITDA margins would rise to c.33% by FY’11 from 21% at FY’09.
1.8 Also, we expect EBIT margins to increase to 26.3% by 2011 from 18% as at
WAPCO BMIndex ASI
FY’09 and FY’10E of 25.9%.
1.5 Forecast Summary FY'09 FY'10F FY'11F FY'12F FY'13F

EPS (N) 1.68 2.37 4.1 5.05 5.78
YoY Change (%) -55.1 40.6 73.1 23.1 14.6
1.2 P/E (x) 25.8 18.3 10.6 8.6 7.5
DPS (N) 0.1 0.24 0.5 2.02 2.31
YoY Change (%) -83.3 136.8 111.1 303.6 14.6
0.9 Div. Yield (%) 0.2 0.5 1.2 4.7 5.3
Dec-09 Apr-10 Aug-10 Dec-10

NAPS (N) 14.56 16.69 19.15 22.18 25.65
YoY Change (%) 8.1 14.6 14.7 15.8 15.6
P/B (x) 3.0 2.6 2.3 2.0 1.7
January 2011 138

VETIVA
2011 Outlook
The Tipping Point

Turnover 38,665 43,274 45,590 42,864 68,817 74,200
Cost of Sales (21,945) (25,026) (30,513) (22,847) (35,785) (37,100)
Gross Profit 16,720 18,247 15,077 20,017 33,032 37,100
Distr. & Admin. Expenses (4,843) (4,542) (5,224) (4,865) (10,323) (11,130)
EBITDA 11,877 13,705 9,853 15,152 22,710 25,970
Interest Payable & Charges (831) (228) - - - (3,168)
Taxation (1,358) (1,781) (4,182) (3,999) (5,789) (2,885)

Non-Current Assets
Total fixed Assets 33,356 43,121 69,681 87,301 93,115 95,674
Long Term Investments 60 60 60 60 60 60
Current Assets
Inventories 8,572 10,083 12,517 9,372 14,680 15,220
Debtors - 166 185 174 280 302
Total Assets 50,596 61,769 87,163 101,494 117,894 119,638
Current Liabilities
Other Creditors 1,461 1,422 1,056 1,341 2,152 2,321
Short Term Loan 4,713 7,113 - - 8,632 15,519
Taxation 1,842 1,212 1,044 - - -
Long-Term Loans - - 24,793 24,793 24,793 9,274
Provision for Gratuity 1,748 1,758 2,801 717 3,661 3,680
Deferred Taxation 294 1,455 5,183 2,072 4,225 4,001
January 2011 139

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012F

Turnover 329 347 310 286 444 479
Cost of Sales (187) (201) (207) (152) (231) (239)
Gross Profit 142 147 102 133 213 239
Distr. & Admni Expenses (41) (36) (35) (32) (67) (72)
EBITDA 101 110 67 101 147 168
Interest Payable & Charges (7) (2) - - - (20)
Taxation (12) (14) (28) (27) (37) (19)
BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 E 2011 F 2012F

Non-Current Assets
Total Fixed Assets 284 346 473 582 621 638
Long Term Investments 0.5 0.5 0.4 0.4 0.4 0.4
Current Assets - - -
Inventories 73 81 85 64 100 103
Debtors - 1 1 1 2 2
Total Assets 430 496 592 678 789 801
Current Liabilities
Short Term Loan 40 57 - - 56 100
Taxation 16 10 7 - - -
Long-Term Loans - - 168 165 160 60
Total Liabilities 151 171 295 246 390 342
Net Assets 279 325 297 431 371 430
January 2011 140

VETIVA
2011 Outlook
The Tipping Point
2007 2008 2009 2010 E 2011 E 2012 E

Growth (%)
Turnover growth -2.5% 11.9% 5.4% -6.0% 60.5% 7.8%
Growth in EBITDA -15.2% 15.4% -28.1% 53.8% 49.9% 14.4%
Growth in PBT -1.6% 9.5% -29.9% 24.0% 62.9% -0.3%
Growth in PAT 4.7% 0.7% -55.1% 40.6% 73.1% 23.1%
Profitability (%)
Return on Average Equity 38.7% 30.7% 12.0% 15.2% 22.9% 24.4%
Return on Average Assets 22.6% 20.0% 6.8% 7.5% 11.2% 12.8%
EBITDA Margin 30.7% 31.7% 21.6% 35.4% 33.0% 35.0%
EBIT Margin 27.2% 28.0% 18.2% 25.9% 26.3% 28.6%
Pretax Profit Margin 30.0% 30.0% 20.0% 26.0% 26.0% 24.0%
Quick ratio 0.6 0.4 0.2 0.6 0.3 0.4
Cash ratio 0.3 0.3 0.3 0.1 0.3 0.2
Current ratio 1.1 1.0 1.6 0.6 0.9 0.7
Days in inventory 113.3 136.0 135.2 174.9 122.7 147.1
Days in accounts payable 110.3 110.6 93.8 153.4 110.7 170.7
Days in receivables 0.2 0.7 1.4 1.5 1.2 1.4
Activity Ratios (x)
Sales to cash 9.2 7.2 12.6 14.9 9.8 13.7
Sales to inventory 4.6 3.8 3.5 4.9 2.9 4.5
Sales to total assets 0.8 0.7 0.5 0.4 0.6 0.6
Sales to total fixed assets 1.2 1.0 0.7 0.5 0.7 0.8
Production Data
Capacity(million tonnes) 2.0 2.0 2.0 2.0 4.2 4.2
Production (million tonnes) 1.7 1.7 1.6 1.5 2.5 2.8
Average Utilization (%) 85.0 84.0 80.0 76.0 60.0 67.0
Revenue/tonne (N'000) 22.7 25.8 28.5 28.2 27.5 26.5
Per Share Data (N)
Earnings/share 3.72 3.75 1.68 2.37 4.10 5.05
Dividend/share 1.20 0.60 0.10 0.24 0.50 2.02
Net Asset/share 10.93 13.48 14.56 16.69 19.15 22.18
Sales/Share 12.88 14.42 15.19 14.28 22.93 24.72
Valuation Multiples
P/E (x) 10.2 10.1 25.8 18.3 10.6 8.6
P/B (x) 3.5 2.8 2.6 2.3 2.0 1.7
Dividend Yield (%) 3.2% 1.6% 0.2 0.5 1.2 4.7
EV/EBITDA (x) 9.7 11.4 3.0 2.6 2.3 2.0
January 2011 141

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION AshakaCem Plc

Ashaka Works,
Address Ashaka Gombe State Positive Outlook...But Rich Valuation
Website n/a
We downgrade our recommendation on Ashaka to a “SELL” (previous:
Management (Chairman) E.E Ikwue
“Reduce”) given that the stock (at a current share price at N29.49) now has
MD/CEO M.M Daggash
an expected downside of 15% to N25.13, the mid-point of our target price
range N24.20 – N26.19. Our target valuation is based on the DCF and
Exc hange Listing Nigerian Stoc k Exchange
EV/EBITDA methodology.
Bloomberg Ticker AshakaCem:NL
Investment thesis
Sec tor Building Materials
Country Nigeria
Rising costs savings: The most compelling attraction to Ashaka Cement, in
our view, is its potential to sustain long term efficiency and profitability despite
Lafarge (foreign) 50.2
its relatively low scale of production. According to management’s insights, the
company can achieve 60% -70% savings in energy costs, when full
Others 49.8
substitution of LPFO with coal is achieved. Nonetheless, we have discounted
SHARE STATISTICS
management’s expectation and assumed only a 55% savings in energy costs.
Shares in issue (M) 2,240
Share Price (N)
Whilst noting that Ashaka will not likely meet its projection oncoal utilisation
29.49
Market Cap. (N'm)
level in 2010, (management achieved only coal utilisation rate as at half year
66,057.6
relative to a 60% projection), we still maintain long term optimism on its
operating efficiency, though we have adjusted our expectation to reflect a long
Free Float (%) 49.8
time frame for the company to reach peak (c.100%) coal utilisation.
Daily Average Value Traded (N'000) 38,136.90
Therefore, we project that EBITDA margins would increase to 35% by FY’12
and 42% by FY’15 (from 9% at FY’09). Similarly, we forecast an EBIT margin
Year high (N) 28.5 of 32% by FY’12 and 40% by FY’15, (from 5.9% at FY’09)
Year low (N)

Zero Debt Status: According to insights from Ashaka’s management, the coal
11.39
mine project completed by the company last year was purely financed by
VALUATION METRICS
internally generated cash-flows and funding from the parent company. The
Book Value (N'Bn) 15.9 debt free status of the company implies that it can make significant savings
Trailing P/E (x) 39.9 from zero interest expense and boost bottom-line earnings. This, coupled with
P/B (x) 4.2
the expected rise in profitability from achieving higher operating efficiency,
Div. Yield (%) 0
enhances the potential return, in form of dividend payments, to its
ROAE (%) 12
shareholders.
Debt/Equity (%) 0 Earnings Outlook: We forecast that Ashaka’s revenue would grow by 15.6%
to N21.0 billion by FY’11. Consistent with our expectations on Ashaka’s
ASHAKACEM VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009
operating efficiency; we project that EBITDA margins would rise to 35.8% by
2.5
FY’11 from 8.9% at FY’09 and FY’10E of 24.6%. Also, we expect EBIT margins
Ashaka BMIndex ASI
to increase to 31% by 2011 from 5.9% as at FY’09 and FY’10E of 19.3%.
Forecast Summary FY'09 FY'10F FY'11F FY'12F FY'13F

2.0
EPS (N) 0.47 1.13 1.95 2.66 3.28
YoY Change (%) -63 140.4 72.6 36.4 23.3
P/E (x) 62.7 26.1 15.1 11.1 9.0
1.5
DPS (N) 0 0.5 0.87 1.19 1.46
YoY Change (%) -100 n/a 74 36.8 22.7
Div. Yield (%) 0 1.7 2.9 4 4.9
1.0
Dec-09 Apr-10 Aug-10 Dec-10 NAPS (N) 6.6 6.49 7.58 9.05 10.9
Sources: NSE, Vetiva Research YoY Change (%) 3.1 -1.7 16.8 19.4 20.4
P/B (x) 4.5 4.5 3.9 3.3 2.7
January 2011 142

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (N'Mill) 2006 2007 2008 2009 F 2010 F 2011 F 2012 F
Turnover 16,772 16,473 21,378 17,194 18,189 21,025 23,358
Cost of Sales (8,794) (10,868) (14,039) (11,771) (11,846) (10,132) (9,792)
Gross Profit 7,978 5,605 7,339 5,423 6,343 10,893 13,566
Selling and distri. Expenses (2,408) (1,486) (1,437) (432) (771) (1,472) (1,635)
Core Operating Profit 5,570 4,120 5,902 4,991 5,572 9,421 11,931
EBITDA 5,948 4,452 2,697 3,785 1,533 4,481 7,529
Depreciation & Amortization (436) (514) (519) (526) (966) (1,008) (1,054)
EBIT/Operating Profit 4,016 2,183 3,265 1,007 3,515 6,521 8,774
Interest Payable & Charges - - - - - - -
Profit Before Taxation 4,952 2,513 3,430 1,324 3,515 6,521 8,774
Taxation (1,574) (1,361) (911) (1,422) (984) (2,152) (2,808)
Profit After Taxation 3,378 1,153 2,519 943 2,531 4,369 5,966
Dividends 1,087 1,106 597 - 1,126 1,944 2,655
Retained Earnings 2,291 47 1,922 943 1,405 2,425 3,311
BALANCE SHEET (N'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012 F
Non-Current Assets
Fixed Assets 2,685 3,811 5,686 5,218 19,478 19,522 19,635
Work in Progress 5,333 8,891 10,901 13,849 2,981 3,030 3,031
Current Assets
Inventories 4,931 4,220 4,706 4,707 5,017 4,292 4,148
Debtors 1,674 386 139 88 100 115 128
Bank and cash balances 3,798 2,137 1,636 850 508 5,062 9,085
Other Receivables and Current Assets - 2,785 1,958 908 1,200 1,388 1,542
Total Current Assets 10,403 9,528 8,440 6,552 6,826 10,856 14,902
Total Assets 18,421 22,230 25,027 25,618 29,285 33,408 37,568
Current Liabilities
Creditors & Accruals 887 1,151 1,921 2,296 1,099 1,986 2,206
Other Creditors 3,341 6,164 7,269 5,967 4,892 5,655 6,283
Short Term Loan - 968 - - - - -
Taxation 1,661 1,687 928 1,385 984 2,152 2,808
Total Current Liabilities 5,890 9,971 10,117 9,648 6,976 9,792 11,296
Long-Term Loans - - - - - - -
Provision for Gratuity 408 836 982 1,648 2,862 1,994 1,610
Deferred Taxation 526 710 1,144 1,181 1,920 1,621 1,349
Total Non-Current Liabilities 934 1,546 2,125 2,829 4,783 3,615 2,959
Total Liabilities 6,824 11,518 12,242 12,477 11,758 13,407 14,255
Net Assets 11,598 10,713 12,785 13,142 14,085 15,489 17,914
January 2011 143

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (USD'Mill) 2007 2008 2009 F 2010 F 2011 F 2012 F

Turnover 140 172 117 121 136 151
Cost of Sales (92) (113) (80) (79) (65) (63)
Gross Profit 48 59 37 42 70 88
Selling and distri. Expenses (13) (12) (3) (5) (9) (11)
EBITDA 38 22 26 10 29 49
Interest Payable & Charges - - - - - -
Taxation (12) (7) (10) (7) (14) (18)
Dividends 9 5 - 8 13 17
BALANCE SHEET (USD'Mill) 2007 2008 2009 F 2010 F 2011 F 2012 F

Non-Current Assets
Fixed Assets 32 46 35 130 126 127
Work in Progress 76 88 94 20 20 20
Current Assets
Inventories 36 38 32 33 28 27
Debtors 3 1 1 1 1 1
Total Assets 189 201 174 195 216 242
Current Liabilities - -
Short Term Loan 8 - - - - -
Taxation 14 7 9 7 14 18
Long-Term Loans - - - - - -
Net Assets 98 98 85 78 86 92
January 2011 144

VETIVA
2011 Outlook
The Tipping Point
Financial Ratios – Actual and Forecasts

2007 2008 2009 2010F 2011F 2012F
Growth
Turnover growth 29.8% -19.6% 5.8% 15.6% 11.1% 12.8%
Growth in EBITDA -39.4% 40.3% -59.5% 192.3% 68.0% 30.5%
Growth in PBT -49.2% 36.5% -61.4% 165.4% 85.5% 34.6%
Growth in PAT -65.9% 118.6% -62.6% 168.4% 72.6% 36.6%
Profitability
EBITDA Margin 16.4% 17.7% 8.9% 24.6% 35.8% 42.1%
EBIT Margin 13.3% 15.3% 5.9% 19.3% 31.0% 37.6%
Quick ratio 0.5 0.4 0.2 0.3 0.7 1.0
Cash ratio 0.2 0.2 0.1 0.1 0.5 0.8
Current ratio 1.0 0.8 0.7 1.0 1.1 1.3
Activity Ratios (x)
Sales to cash 7.7 13.1 20.2 35.8 4.2 2.6
Production data
Utilization (%) 79.7 101.1 76.5 83.9 97.0 73.3
Revenue/tonne ('000) 24.3 24.9 26.5 25.5 25.5 25.5
Per Share Data
Earnings/share 0.58 1.27 0.47 1.13 1.95 2.66
Dividend/share 0.10 0.30 0.00 0.50 0.87 1.19
Net Asset/share 5.39 6.43 6.60 6.49 7.58 9.05
Sales/Share 8.27 10.74 8.64 8.12 9.39 10.43
Valuation Multiples
P/E (x) 49.0 22.4 62.7 26.1 15.1 11.1
P/B (x) 5.3 4.4 4.5 4.5 3.9 3.3
Dividend Yield (%) 0.03 1.1 0.0 1.7 2.9 4
EV/EBITDA (x) 23.5 16.8 41.4 14.2 8.4 6.5
January 2011 145

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION
CCNN Plc
Address Kilometre 10, Kalambaina Road,
Operational Uncertainties Dampen Earnings Outlook
Sokoto State, Nigeria
Website www.sokotocement.com We maintain a “SELL” rating on CCNN, given that the stock (at a current share
Management price at N14.52) has an expected downside of 55% to N8.05 the midpoint of
(C hairman) Abdulsamad Rabiu
our target price range N7.60 – N9.30 Our target valuation is based on the DCF
Managing Director Alf Karlsen
and EV/EBITDA methodology.
Primary Listing: Nigerian Stock Investment thesis
Exchange Listing Exchange
Symbol Bloomberg: C C NN:NL Present capacity inadequate to sustain market share: CCNN is the
Sector Building Materials last of the cement producers to announce definitive plans around its
C ountry Nigeria expansion. While there have been indications from management that the
OWNERSHIP STRUCTURE (%) company may expand capacity to 1.4 million tonnes, timelines and funding for
BUA Group 51 the expansion are still unclear. Compounded by its obsolete state, CCNN’s
Nasdal Bap Limited 11.6 500,000 tonnes plant is grossly inadequate to position the company
Kebbi, Sokoto, Kaduna, others 15 competitively in the industry. We highlight that CCNN has one of the highest
Other Nigerians 15 cement prices in the industry, evidently as a result of its higher energy costs,
Ferrostal A.G 0.1 relatively obsolete technology and small production capacity. Due to supply
Dantata Invst. & Sec. 7.1 deficit which has historically plagued the Nigerian cement industry and CCNN’s
SHARE STATISTICS relative isolation in North-West Nigeria, revenue growth has been somewhat
Shares in issue (M) 1,256 sustained through price increases. We recall in 2009 that the company
Share Price (N) 14.52 increased its cement price (per tonne) by c.12% and has consistently hiked
prices YoY since 2006. In-fact in FY’09 earnings, c.60% of revenue growth
Market C ap. (N'Mn) 18,073.80 came from the 12% increase in price. However, in our view, CCNN is unlikely
to continue to enjoy such revenue growth from price increases as it has
historically done.
Free Float (%) 15
Daily Average Value Increasing cost exert additional pressure on top-line: CCNN is still
Traded (N'000) 17,249.30
Daily Average Value
having challenges getting around its increasing energy costs to remain
Traded (USD'000) 115.6 efficient and adequately profitable. In its FY’09 accounts, management had
Year high (N) 25.9 stated the huge increase in energy costs (c.40%) arising from transportation
Year low (N) 12.7
expenses incurred in moving imported LPFO from the south to its plant
VALUATION METRICS (located in Sokoto, North-West Nigeria).
Book Value (N'm) 4,465.00 Earnings Outlook: We forecast that revenue would grow by 6.5% to N11.9
Trailing P/E (x) 19.6 billion by 2011 from our FY’10E of N11.2 billion. We believe EBITDA margins
P/B(x) 3.9 would remain relatively flat at 14.5% based on our FY’10 and FY’11 estimates.
Div. Yield (%) 6.3 Also, we project that EBIT margins would remain flat at 11.3% in FY’10 and
ROAE (%) 44.2 FY’11.
Debt/Equity (%) 12
CCNN VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009 EPS (N) 1.44 0.62 0.66 0.72 0.88
2.1
CCNN BMIndex ASI
YoY Change (%) 18.0 -56.9 6.5 9.1 21.8
P/E (x) 10.08 23.42 22.00 20.17 16.56
1.8
DPS (N) 0.90 0.23 0.25 0.27 0.33
YoY Change (%) 0.0 -74.4 8.7 8.0 22.9
1.5
Div. Yield (%) 6.2 1.6 1.7 1.9 2.3
NAPS (N) 3.36 3.74 4.15 4.6 5.15
1.2
YoY Change (%) 5.0 11.3 11.0 10.8 11.9
0.9 P/B (x) 4.3 3.9 S 3.5 3.2 2.8

January 2011 Sources: NSE, Vetiva Research
146
VETIVA
2011 Outlook
The Tipping Point

Turnover 8,042 9,878 11,868 11,200 11,927 12,509
Cost of Sales (5,759) (5,709) (6,704) (6,664) (7,097) (7,380)
Gross Profit 2,283 4,169 5,164 4,536 4,830 5,129
EBITDA 138 1,611 1,964 1,635 1,729 1,876
EBIT/Operating Profit (183) 1,268 1,595 1,273 1,342 1,463
Taxation (34) (150) (505) (367) (389) (428)
Profit After Taxation 138 1,531 1,812 779 827 909

Non-Current Assets
Fixed Assets 4,017 4,655 4,950 5,452 5,795 6,605
Current Assets
Inventories 3,016 2,424 2,510 2,823 3,006 3,126
Debtors 775 717 1,002 1,066 1,135 1,191
Total Assets 9,118 8,795 9,803 10,526 11,390 12,715
Current Liabilities
Other Creditors - - - - - -
Short Term Loan 553 1,092 671 1,218 1,218 1,218
Taxation 40 39 210 367 389 428
Long-Term Loans - 633 507 380 253 126
Provision for Gratuity 320 360 490 802 1,041 1,727
Total Non-Current Liabilities 396 1,188 1,259 1,182 1,294 1,853
Net Assets 3,148 3,976 4,217 4,635 5,149 5,714
January 2011 147

VETIVA
2011 Outlook
The Tipping Point

Turnover 68 79 81 75 77 81
Cost of Sales (49) (46) (46) (44) (46) (48)
Gross Profit 19 33 35 30 31 33
EBITDA 1 13 13 11 11 12
EBIT/Operating Profit (2) 10 11 8 9 9
Taxation (0) (1) (3) (2) (3) (3)
BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Non-Current Assets
Fixed Assets 34 37 34 36 37 43
Current Assets
Inventories 26 19 17 19 19 20
Debtors 7 6 7 7 7 8
Total Assets 78 71 67 70 73 82
Current Liabilities
Other Creditors - -
Short Term Loan 5 9 5 8 8 8
Taxation 0 0 1 2 3 3
Long-Term Loans - 5 3 3 2 1
Net Assets 27 32 29 31 33 37
January 2011 148

VETIVA
2011 Outlook
The Tipping Point
2007 2008 2009 2010F 2011F 2012F

Growth (%)
Turnover growth 26.2% 22.8% 20.1% -5.6% 6.5% 4.9%
Growth in EBITDA 1066.6% 21.9% -16.7% 5.8% 8.5% 16.6%
Growth in PBT 878.3% 37.8% -50.5% 6.1% 9.9% 21.2%
Growth in PAT 1012.4% 18.3% -57.0% 6.1% 9.9% 21.2%
Profitability (%)
EBITDA Margin 1.7% 16.3% 16.5% 14.6% 14.5% 15.0%
EBIT Margin -2.3% 12.8% 13.4% 11.4% 11.3% 11.7%
Quick ratio 0.30 0.47 0.53 0.48 0.52 0.58
Cash ratio 0.05 0.11 0.14 0.09 0.13 0.19
Current ratio 0.84 1.14 1.11 1.08 1.13 1.19
Activity Ratios (x)
Sales to cash 28.29 24.71 18.95 25.05 17.89 12.92
Production Data
Average Utilization 68.5% 76.0% 81.6% 77.0% 82.0% 86.0%
Revenue/tonne (N'000) 23.48 25.99 29.09 29.09 29.09 29.09
Per Share Data
Earnings/share 0.12 1.22 1.44 0.62 0.66 0.72
Dividend/share 0.10 0.90 0.90 0.23 0.25 0.27
Net Asset/share 2.51 3.17 3.36 3.74 4.15 4.60
Sales/Share 6.40 7.86 9.45 8.92 9.50 9.96
Valuation Multiples
P/E (x) 118.90 11.48 10.08 23.42 22.00 20.17
P/B (x) 5.59 4.42 4.3 3.9 3.5 3.2
Dividend Yield (%) 0.7 6.4 6.2 1.6 1.7 1.9
EV/EBITDA (x) 127.38 10.92 8.96 10.75 10.17 9.37
January 2011 149

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION Julius Berger Plc

Address Utako District
Strong fundamentals in the construction industry
Berger Junction, Abuja
We maintain an “ACCUMULATE” Rating on Julius Berger, given that the stock
Website www.julius-berger.com
(at a current share price at N54.00) has an expected upside of 14.4% to
Management (Chairman) AVM (Dr.) Nura Imam (Rtd) N61.80, the midpoint of our target price range N57.40 – N66.20. Our target
MD/CEO Engr. W. Goetsch valuation is based on the DCF methodology, with Julius Berger fair value rolled
Financial Year End December one year forward at its weighted average cost of capital.
Exchange Listing Primary Listing: Nigerian Stock Exchange
Investment thesis
Bloomberg Ticker Bloomberg: JBERGER:NL
Sector Construction
Strong earnings prospect...Julius Berger remains the strongest listed
Country Nigeria
construction firm; its history of proven job quality in the Nigerian construction
space is largely unrivaled. In view of the rising emphasis on physical
Bilfinger 49.9
infrastructural development in Nigeria, we believe it is necessary for investors
Lagos State Govt. 10.1 to have some exposure to such infrastructure-linked equities like Julius Berger
Benue State Govt. 5.3 in a bid to benefit directly from the expected boom in the longer term. The
Others 34.8 renewed interest in the power sector also offers Julius Berger some growth
SHARE STATISTICS opportunities; we believe the company would participate actively in the
Shares in issue (M) 1,200 construction works in the power sector due to its dominant market share in
Share Price (N) 54.00 FG’s construction contracts
...though reputational risk calls for caution: Julius Berger, towards the tail
Market Cap. (USD'M ) 418.2
end of Q3’10 agreed to a plea bargain over its alleged involvement in the $180
Free Float (%) 34.8 million bribery scandal between Halliburton and the Federal Government of
Daily Average Value Nigeria. The company was consequently required to pay $29.5 million fine (c.
Traded (N'000) 23,099.90
Daily Average Value N4.425 billion), payable in two instalments. We had noted (in our previous
Traded (USD'000) 154.8 earnings update on Julius Berger) the impact of Julius Berger’s rising
Year high (N)
reputational risk on its earnings profile. Though the company is given the
61.88
opportunity to pay the legal fine in the Halliburton case in two instalments, we
Year low (N) 25.79 believe the liability would have some major impact on FY’10 and FY’11 net -
VALUATION METRICS earnings and more importantly cash flows, especially because of the
Book Value (N'Mn) 6,972 characteristically low profit margins of the business.
Earnings Outlook: We forecast that Julius Berger’s revenue would grow by
P/B (x) 9.3
15.0% to N184.3.0 billion by FY’11 from our FY’10E of N160.3 billion. On
Div. Yield (%) 4.7
profitability we anticipate that EBITDA margins would somewhat be steady at
ROAE (%) 45.6
14.4% by FY’11, having declined from 15.4% to 14.4% (our estimate for
Debt/Equity (%) 0
FY’10). Also, we expect EBIT margins to decline 3.6% from our FY’10E of
JBERGER VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009
5.7% and FY’09 figure of 3.6%.
2.5
JBerger Const. Index ASI
EPS (N) 2.70 2.80 2.90 4.00 5.02
1.9 YoY Change (%) 28.6 3.7 3.6 37.9 25.5
P/E (x) 9.55 19.3 18.6 13.5 10.8
DPS (N) 2.40 2.40 2.50 3.40 4.28
1.3
YoY Change (%) 33.3 0.0 4.2 36.0 25.8
Div. Yield (%) 9.3 4.4 4.6 6.3 7.9
NAPS (N) 6.50 6.90 7.40 8.00 8.70
0.6
Dec-09 Apr-10 Aug-10 Dec-10 YoY Change (%) 18.2 6.2 7.2 8.1 8.7
Sources: NSE, Vetiva Research P/B (x) 4.0 7.8 7.3 6.8 6.2
January 2011 150

VETIVA
2011 Outlook
The Tipping Point

Turnover 79,074 114,029 150,358 160,282 184,324 221,189
Cost of Sales (66,243) (96,786) (123,102) (131,431) (151,146) (181,375)
Gross Profit 12,831 17,243 27,256 28,851 33,178 39,814
Distr. & Admni Expenses (4,435) (5,610) (6,437) (5,802) (6,673) (8,007)
EBITDA 8,748 12,736 23,169 23,048 26,506 31,807
Interest Payable & Charges - (573) (747) (1,983) (1,464) -
Taxation (1,384) (2,733) (6,144) (3,843) (1,659) (2,283)

Non-Current Assets
Fixed Assets 24,000 28,574 48,689 60,574 72,416 85,700
Long Term Investments 5,684 - 2,000 2,000 2,000 2,000
Current Assets
Inventories 9,901 12,146 15,222 17,463 20,083 24,100
Debtors 30,873 45,171 47,083 58,754 67,567 81,081
Bank and cash balances 3,947 22,844 9,047 - 8,924 -
Total Assets 183,608 246,894 271,443 312,821 346,403 380,260
Current Liabilities
Other Creditors 74,640 114,530 119,880 146,691 168,695 202,434
Short Term Loan 118 4,290 8,094 10,458 50,240 35,692
Taxation 1,389 2,184 3,954 3,843 1,659 2,283
Long-Term Loans - - 3,569 1,740 - -
Provision for Gratuity 3,975 4,582 6,304 8,066 11,317 14,727
Net Assets 4,117 5,635 6,644 7,829 8,327 8,846
January 2011 151

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 672 916 1,021 1,034 1,189 1,427
Cost of Sales (563) (777) (836) (848) (975) (1,170)
Gross Profit 109 138 185 186 214 257
Distr. & Admni Expenses (38) (45) (44) (37) (43) (52)
EBITDA 74 102 157 149 171 205
Interest Payable & Charges - (5) (5) (13) (9) -
Taxation (12) (22) (42) (25) (11) (15)
BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Non-Current Assets
Fixed Assets 204 229 331 391 467 553

Long Term Investments 48 - 14 13 13 13
Current Assets - - - - - -
Inventories 84 98 103 113 130 155
Debtors 263 363 320 379 436 523
Bank and cash balances 34 183 61 - 58 -
Total Assets 1,561 1,982 1,843 2,018 2,235 2,453
Current Liabilities
Other Creditors 635 920 814 946 1,088 1,306
Short Term Loan 1 34 55 67 324 230
Taxation 12 18 27 25 11 15
Total Current Liabilities 664 1,014 923 1,064 1,452 1,586
Long-Term Loans - - 24 11 - -
Net Assets 35 45 45 51 54 57
Source: Annual Report, Vetiva Research
January 2011 152

VETIVA
2011 Outlook
The Tipping Point
2007 2008 2009 2010 E 2011 E 2012 E
Growth
Turnover growth 39.0 44.2 31.9 6.6 15.0 20.0
EBITDA Growth 13.1 45.6 81.9 -0.5 15.0 20.0
PBT Growth 182.8 66.2 80.2 -23.5 -28.2 37.6
PAT Growth 6008.9 41.8 31.6 2.5.0 4.3 37.6
Profitability
Return on Average Equity 36.3 40.9 45.6 41.9 41.1 52.7
Return on Average Assets 2.0 2.2% 2.3 2.0 1.6 1.9
EBITDA Margin 11.1 11.2% 15.4 14.4 14.4 14.4
EBIT Margin 3.6 4.0% 5.1 6.8 5.7 3.6
PBT Margin 4.0 4.6% 6.3 4.5 2.8 3.2
PAT Margin 2.2 2.2 2.2 2.1 1.9 2.2

Per Share Data
Earnings Per Share 1.47 2.09 2.75 2.82 2.94 4.04
Dividend Per Share 1.25 1.75 2.40 2.40 2.51 3.45
Net Assets Per Share 4.70 5.54 6.52 6.94 7.37 7.97
Sales Per Share 65.89 95.02 125.30 133.57 153.60 184.32
Valuation Multiples
P/E (x) 36.7 25.8 19.6 9.55 19.3 18.6
P/B (x) 11.5 11.8 4.0 7.8 7.3 6.8
Dividend Yield (%) 10.9 9.2 9.3 4.4 4.6 6.3
EV/EBITDA (x) 2.5 3.4 4.7 4.7 4.9 6.8
January 2011 153

VETIVA
2011 Outlook
The Tipping Point
Insurance Sector: Searching for Value
With the Nigerian economy forecast to grow at 7.0% in 2011, and given rising
We are cautiously optimistic about income levels and higher risk awareness among the populace, we are
the demand for insurance cautiously optimistic about the demand for insurance products. However,
products in 2011
intense competition with rate – undercutting, moderate returns from
investments, and adjustments to the new regulatory guidelines is likely to
continue to taper short-term profitability.
What shaped performance in 2010?

While we await the FY’10 results of the Insurance companies, their performance
up till Q3’10 gives some indication of what to expect. We forecast a c. 28%
growth in industry Gross Premiums and a modest c. 2% rise in industry After-
Tax Profits. As explained in our company updates (Custodian and Allied,
GTAssur), we expect two major lines to adversely impair the profitability of
We expect Investment Income Insurance companies: Investment Income and Provision for bad debts.
and Provision for bad debts to
impair the profitability of Most local institutional investors (insurance companies inclusive), were
Insurance companies in 2010 overweight fixed income and underweight equities. We note that yields in the
bond market witnessed an upward trend across most maturities, leading to a
slide in prices and mark-to-market losses. Equities on the other hand recorded
a gain of 18.9% in 2010.
Regulations became more stringent in 2010 with efforts by the regulator,

NAICOM, to stamp out unethical practices and improve the Industry’s
credibility. One of the key issues in the Sector relates to the menace of
premiums owed to Insurance companies by Brokers, who as earlier indicated,
remain the major conduit of Insurance policy/product sales, especially to
corporates. We expect the FY’10 results to reflect the impact of the new
provisioning guidelines which mandate the treatment of outstanding premiums
as follows:
• Under 90 days: No provision

• 91-180 days: 50% provision
• Above 180 days: 100% provision
Given the aforementioned, we anticipate bottom-line profitability will be

strained in FY’10.
What will shape performance in 2011 and beyond?
Better Enforcement of Mandatory Insurance Policies
A major factor which has limited the Nigerian Insurance Market from reaching
We expect the better enforcement
full potential has been the lax enforcement of insurance policies and laws in
of the six mandatory insurance
Nigeria. In Nigeria, between 1987 and 2004, 16 insurance products were
policies in 2011 to provide a boost
to industry gross premiums directly or indirectly made compulsory, of which six are very prominent and
capable of generating about 58% of the insurance premium income. However
these products have remained largely undeveloped and unenforced.
January 2011 154

VETIVA
2011 Outlook
The Tipping Point
In this regard the National Insurance Commission (NAICOM) launched the “The
Nigeria Insurance Market Development and Restructuring Initiatives (MDRI)" in
a bid to ensure the enforcement of the compulsory insurance products starting
September 2009. Recently, the regulator embarked on an aggressive
awareness campaign to educate and enlighten the populace on the benefits of
purchasing insurance products.
This was part of the steps undertaken to tackle low public awareness thereby
deepening insurance penetration (0.73% of 2009 GDP). Though it is still
difficult to measure the effect of the public awareness in monetary terms, we
are optimistic that it will gradually begin to impact patronage of insurance
products.
Oil and Gas Insurance
We see oil and gas insurance as an engine of growth in the near to medium
term, given the increased focus in that segment by insurance companies and
the gap needed to meet the government’s target of 70% local content. A key
step taken to actualize this target is the enactment of the Nigerian Oil and Gas
“Local capacity” to underwrite Content Development Act 2010 (“The Act”). The Act aims at increasing, and in
risks is defined as the aggregate
certain cases gives exclusivity to Indigenous participation and use of local
capacity of all Nigeria registered
insurers and reinsurers resources in the Oil & Gas Industry and this has opened opportunities for
support industries like insurance. Issues around the capacity of insurance
companies to underwrite such huge risks have been cleared with local capacity
defined as “the aggregate capacity of all Nigeria registered insurers and
reinsurers”. Local capacity shall be fully exhausted prior to any application for
approval to reinsure any Nigeria Oil & Gas risk overseas. We believe YoY growth
in this segment will begin to ramp this year thereby impacting the performance
of insurance companies.
Gradual expansion of the retail space
The Nigerian insurance industry has historically been dominated by the broker
channel, through which a bulk of total premium income is sourced, especially in
the corporate space thus making insurance brokers indispensible. However, in
We anticipate a gradual opening recent times other channels such as bancassurance, direct marketing and direct
up of the retail market for sales channels, are gaining importance as a channel to reach out to other
insurance in 2011 growth areas such as the retail space. This effort has already started paying off
for some companies and we believe it is one which could spur heavy growth in
the industry. We believe the time is ripe to explore micro-insurance as it has
the potential of reaching a large segment of Nigeria’s underserved market. This
requires a cautious and well thought after business model, as micro-insurance
has a higher risk exposure compared to conventional insurance and it is more
susceptible to volatile cash flows from the low-income market. Micro insurance
could be offered in different areas, including health risks like illness, injury,
death, property damages and agricultural risks.
January 2011 155

VETIVA
2011 Outlook
The Tipping Point
Despite these opportunities, challenges remain prevalent

Premiums rates will remain under pressure due to intense competition
on the more profitable lines such as Motor insurance, Oil & Gas
insurance and Life Insurance
Falling premium income without a corresponding reduction in claims is
likely to drive down profits
Reliance on investment portfolios to generate sufficient income and
gains for net profits would subject them to the volatility of the financial
markets
Shortage of trained insurance professionals and technicians at all levels
Dependence on overseas reinsurers is likely to continue until the
industry is properly consolidated. This may require raising more capital.
The Catalysts
To strategically position the insurance industry to benefit from these

opportunities, we believe there should be a catalyst to spark competitiveness in
the industry. This, in our opinion, should be consolidation through M& A
activities and recapitalisation.
Recapitalisation
Despite a largely successful round of recapitalisation, culminated in 2007, we
believe most insurers remain under capitalised to take optimal advantage of the
opportunities in the Nigerian environment and beyond while maintaining a
healthily diversified portfolio of risks. In this regard, the Nigerian Insurance
Commission (NAICOM) issued guidelines for Insurance companies wishing to
underwrite oil and gas insurance, increasing capital requirement to N7 billion
We believe there will be a need
for lead underwriters and N6 billion for other underwriters. Nonetheless, less
for industry consolidation in 2011
through M&A’s or Recapitalization than half of the insurers in the country have capitalization in excess of N5
billion.
Mergers and Acquisitions
We believe conditions are apt for Insurers to start taking serious steps towards
embarking on non-regulatory induced mergers and acquisitions. We believe
mergers will further strengthen companies both capital and technical wise and
put them on a better footing to underwrite big ticket risks and compete
favourably locally and across the continent. Also, size will allow more viable
competition than the present rate cutting and indiscriminate rivalry among so
many players offering relatively undifferentiated products.
January 2011 156

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION
Custodian and Allied Insurance Plc (CAI)
Address 14B, Keffi Street
S.W. Ikoyi, Lagos Value Remains Intact

Website www.custodianinsurance.com
CAI has continued to blaze the trail amongst most insurers, surpassing the
Management (C hairman) C hief Michael Ade Ojo bottom-line performance of most of its peers; a trend we believe will be
MD/C EO Mr Wole Oshin
sustained owing to its traditionally strong performance and competitive edge.
Exchange Listing Nigerian Stock Exchange The company has consistently outperformed the Insurance index recording
Symbol Bloomberg: CUSTODYINS:NL YTD return of 10.1% against the Insurance index’s -27.9%. The stock is
Sector Insurance currently trading at an upside potential of 27.8% to N4.09, the mid-point of
our fair value range of N3.92-N4.29 our 12 month target price. We maintain a
C hief M Ade Ojo 17.56
Mr Oshin 13.53
“BUY” rating on CAI Plc.
Mr 'Toni Ogunbor 9.09
Others 59.82 Investment thesis

SHARE STATISTICS
Shares in issue (M) 5101
Strong premium growth: This growth is to be driven largely by CAI’s motor
Share Price (N) 3.2 andenergy Insurance portfolios. We note that Motor has historically been the
Market Cap. (N'm) 16323.2 largest contributor to Gross Premiums (2009: 24%, 2008: 29%);
however,CAI’s improving competence in energy underwriting is increasingly
Free Float (%) 53.7 contributing to top line numbers 38% in 2009, up from 16% in 2008. CAI
Daily Average Value Traded clinched the mandate as the lead underwriter for the Nigerian National
(N'Mn)Average Value Traded
Daily 11.6
(USD'Mn) 0.1 Petroleum Corporation – Consolidated Insurance Policy (NNPC CIP) account in
Year high (N) 3.2 2010 and this further ratifies their competence in the oil & gas space. We
Year low (N) 3.15 believe the company is well positioned to benefit from the Nigeria Oil and Gas
VALUATION METRICS
Content Development act given its experience and competence (financial and
technical), in underwriting oil and gas transactions.
P/B (x) 1.35
Div. Yield (%) 5.31
Possible inclusion to business line: In recent years, life insurance business
ROAE (%) 16.93 in Nigeria has recorded significant mileage, aided by better compliance with
mandatory Insurance policies. In this regard, we refer to the Statutory Group
Life Policy-this policy has supported the strong YoY growth of Gross Premiums
in the life insurance seg ment. CAI is evaluating plans to re-access this fast
growing Insurance class (5year CAGR: 26%), and may consider an M&A in the
CUSTODYINS VS INSURANCE INDEX VS NSE ASI PERFORMANCE
(Rebased 31/12/2009) medium-long term to achieve this objective.
Custodyins Insurance Index ASI
1.4 Strong Earnings Outlook: We project that CAI’s Gross Premiums would grow
1.3
by 31.1% and 25.9% to N10.6 billion and N13.3 billion by FY’11 and FY’12
respectively. On profitability, we forecast that PAT would rise by 16.9% and
1.2
23.4% to N2.6 billion and N3.1 billion by FY’11 and FY’12.
1.1
1
Forecast
Summary FY'09A FY'10F FY'11F FY'12F FY'13F
0.9
EPS (N) 0.37 0.44 0.45 0.56 0.65
0.8
YoY Change (%) 12.1 18.9 2.27 24.4 16.1

0.7
P/E (x) 8.65 7.27 7.11 5.71 4.92
DPS (N) 0.17 0.18 0.21 0.26 0.30
YoY Change (%) -5.6 5.8 16.9 23.4 16.3
Div Yield (%) 5.31 5.62 6.57 8.11 9.43
NAPS(N) 2.17 2.37 2.82 3.24 3.70
YoY Change (%) 16.0 9.2 19.1 14.8 14.3
P/B (x) 1.47 1.35 1.13 0.99 0.86

January 2011 157
VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 2,715 4,102 5,277 8,086 10,432 13,457
Premium Earned 2,069 2,830 3,596 5,145 6,667 8,359
Commissions Earned 91 110 103 162 209 269
Investment and Other Income 662 1,302 1,345 1,080 1,392 1,795
Claims Incurred -565 -847 -1,021 -1,379 -1,765 -2,188
Management Expenses -535 -650 -791 -1,214 -1,736 -2,483
Underwriting expenses -515 -726 -752 -872 -959 -1,103
Other expenses -152 -169 -461 -573 -677 -916
Taxation -139 -290 -132 -394 -492 -586
BALANCE SHEET (N'Mill) 2007 2008 2009 2010F 2011F 2012F
Assets
Cash at bank and in hand 132 240 595 714 857 1,028
Short-term deposits 1,671 7,363 8,173 9,808 11,769 14,123
Due from Insurance Companies, Agents and
Debtors 870 1,186 1,491 1,670 1,870 2,094
Other Assets 2,565 2,587 3,351 3,750 4,453 5,320
Fixed Assets 427 566 550 605 665 732
TOTAL ASSETS 5,665 11,942 14,160 16,546 19,614 23,297
Liabilities
Current Liabilities 349 566 451 677 1,015 1,523
Insurance Funds 687 1,177 2,240 3,248 4,060 5,075
Other Liabilities 0 1,170 234 234 0 0
TOTAL LIABILITIES 1,100 2,995 3,016 4,268 5,211 6,768
Net Assets 4,565 8,947 11,144 12,278 14,402 16,529
January 2011 158

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT ($'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 18.10 27.35 35.18 53.91 69.55 89.71
Premium Earned 13.79 18.87 23.97 34.30 44.45 55.73
Commissions Earned 0.61 0.73 0.69 1.08 1.39 1.79
Investment and Other Income 4.41 8.68 8.97 7.20 9.28 11.97
Claims Incurred -3.77 -5.65 -6.81 -9.19 -11.77 -14.59
Management Expenses -3.57 -4.33 -5.27 -8.09 -11.57 -16.55
Underwriting expenses -3.43 -4.84 -5.01 -5.81 -6.39 -7.35
Other expenses -1.01 -1.13 -3.07 -3.82 -4.51 -6.11
Profit Before Taxation 7.04 12.33 13.46 15.67 20.87 24.89
Taxation -0.93 -1.93 -0.88 -2.63 -3.28 -3.91
Profit After Taxation 6.13 10.39 12.58 13.21 17.59 20.98
BALANCE SHEET ($'Mill) 2007 2008 2009 2010F 2011F 2012F
Assets
Cash at bank and in hand 0.88 1.60 3.97 4.76 5.71 6.85
Short-term deposits 11.14 49.09 54.49 65.39 78.46 94.15
Due from Insurance Companies, Agents and
Debtors 5.80 7.91 9.94 11.13 12.47 13.96
Other Assets 17.10 17.25 22.34 25.00 29.69 35.47
Fixed Assets 2.85 3.77 3.67 4.03 4.43 4.88
TOTAL ASSETS 37.77 79.61 94.40 110.31 130.76 155.31
Liabilities 0.00
Current Liabilities 2.33 3.77 3.01 4.51 6.77 10.15
Insurance Funds 4.58 7.85 14.93 21.65 27.07 33.83
Deferred Taxation 0.43 0.55 0.61 0.73 0.91 1.13
Other Liabilities 0.00 7.80 1.56 1.56 0.00 0.00
TOTAL LIABILITIES 7.33 19.97 20.11 28.45 34.74 45.12
Net Assets 30.43 59.65 74.29 81.85 96.01 110.19
January 2011 159

VETIVA
2011 Outlook
The Tipping Point
BASIC INFORMATION GTAssur plc

Address Santa C lara court
Plot 1412, Ahmadu Bello Emerging Retail Insurance Leader
Way, Victoria Island, Lagos
Website www.gtaplc.com
GTAssur has gradually stamped its authority as an emerging retail insurance
Management (C hairman) Mr Victor Osibodu leader, supported by its bancassurance model. The stock is valued based on
MD/C EO Mrs Yetunde Ilori
the excess return methodology thus obtaining a fair value range N1.73- N1.91.
Exchange Listing Nigerian Stock Exchange This indicates a midpoint of N1.82, which gives a “zero” return (relative to its
Symbol Bloomberg: GTAssure:NL current market price), thus compelling our “REDUCE” rating. However, we
Sector Insurance
note that a decline in the company’s share price in the near to medium term
Guaranty Trust Bank 67.68 would result in a revision of our rating, as we believe its strong fundamentals,
Africinvest Limited 5.38 relative to peers.
Others 26.94
SHARE STATISTICS Investment thesis

Shares in issue (M) 10,000
Share Price (N) 1.82 Retail distribution supports premiums from the Non-Life segment:
Market C ap. (N'm) 18,200 GTAssur’s direct distribution strategy through the bancassurance and agency
platforms, which is primarily aimed at encouraging retail participation, has
Daily Average Value begun yielding positive results. We note that its motor insurance portfolio
Traded (N'Mn) 8.8
Daily Average Value which drives retail sales growth, witnessed a 51.2% YoY increase in premium
Traded (USD'Mn) 0.1 income to N1.3 billion in 2009 and contributed 28.9% to GPI. As at H1’10,
Year high (N) 1.82
Year low (N)
retail sales contributed about 25% to topline numbers, a climb from 18% as at
1.52
VALUATION METRICS FY’09. We note there are concerns around GTBank’s divesture especially with
Book Value (N'm) 12,851.00 the deployment of the bancassurance model, however, we do not expect any
Trailing P/E (x) 31
major alteration in the company’s strategy, especially relating to retail sales
P/B (x) 1.44
Div. Yield (%) 4.84 penetration. We believe the divestiture presents GTAssur with an opportunity
ROAE (%) 6.82 to expand its business relationship with other players in the banking industry.
Good Management Team: GTAssur has a highly skilled management team,
as well as top of the range expertise in its investment management activities
GTASSURE VS INSURANCE VS NSE ASI PERFORMANCE
(Rebased 31/12/2009) that has delivered strong investment income over the years. The company has
also developed a wide bouquet of products and services that cover both
GTAssure InsurIndex ASI
1.6 corporate and individual insurance products.
Strong Balance Sheet: GTAssur is well capitalized with an equity base of
1.4 about N16.9 billion (Solvency Margin at FY’09 – 434%), well above the
regulatory requirement. This enables the company underwrite relatively large-
1.2 sized risks and play in key sectors such as the oil and maritime.
Earnings Outlook: We project that GTAssur’s Gross Premiums would grow by
1
30.4% and 23.7% to N9.2 billion and N11.3 billion by FY’11 and FY’12
respectively. On profitability, we forecast that PAT would rise to N1.3 billion
0.8
and N1.7 billion by FY’11 and FY’12.

Dec-09 Apr-10 Aug-10 Dec-10 EPS (N) 0.05 0.09 0.13 0.17 0.22
YoY Change (%) -0.8 0.7 0.5 0.3 0.2
P/E (x) 35.25 20.90 13.84 10.49 8.27
DPS (N) 0.09 0.07 0.11 0.14 0.17
YoY Change (%) -40.0 -22.6 50.9 32.0 25.3
Div Yield (%) 4.95 3.83 5.78 7.63 9.56
NAPS(N) 1.26 1.29 1.35 1.46 1.54
YoY Change (%) -10.5 1.8 5.3 8.0 5.1
P/B (x) 1.47 1.42 1.34 1.24 1.18
January 2011 160

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT (N'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 2,061.7 3,117.8 4,537.0 7,013.0 9,146.8 11,311.8
Premium Earned 1,170.1 1,682.7 2,372.0 3,927.3 5,213.7 6,674.0
Investment and Other Income 1,312.5 126.7 1,402.2 700.0 1,400.0 1,722.0
Claims Incurred (362.7) (585.3) (947.6) (1,182.0) (1,737.9) (2,149.2)
Management Expenses (887.0) (1,088.7) (1,184.3) (1,706.0) (2,149.6) (2,708.5)
Underwriting expenses 210.7 350.5 520.3 556.0 914.7 1,131.2
Other expenses (41.0) (96.5) (103.5) (216.7) (282.6) (349.5)
Profit Before Taxation 1,100.5 2,001.3 1,312.2 1,145.9 1,729.8 2,282.5
Taxation (279.2) (125.3) (796.0) (275.0) (415.1) (547.8)
Profit After Taxation 821.2 1,876.0 516.2 870.9 1,314.6 1,734.7
BALANCE SHEET (N'Mill) 2007 2008 2009 2010F 2011F 2012F
Assets
Short-term deposits 5,338.5 10,465.4 8,657.0 10,861.2 13,544.9 16,891.9
Due from Insurance Companies, Agents
and Debtors 988.0 2,618.4 2,010.2 2,650.0 3,492.7 4,603.4
Other Assets 797.0 2,261.0 5,134.0 3,750.0 4,687.5 5,859.4
Fixed Assets 664.3 794.9 910.0 605.0 724.0 866.4
TOTAL ASSETS 7,976.1 16,490.0 17,170.7 18,159.0 22,833.3 28,724.9
Liabilities
Current Liabilities 424.7 2,195.6 673.5 677.0 846.9 1,059.5
Insurance Funds 555.3 932.4 1,595.0 2,437.0 3,723.5 4,758.3
Other Liabilities 647.0 1,023.0 2,086.0 2,806.0 3,774.1 4,698.7
TOTAL LIABILITIES 1,677.1 4,181.0 4,546.1 6,032.6 8,434.5 10,628.1
Net Assets 6,298.7 12,309.6 12,625.0 12,901.0 13,534.0 14,621.0
January 2011 161

VETIVA
2011 Outlook
The Tipping Point
INCOME STATEMENT ($'Mill) 2007 2008 2009 2010F 2011F 2012F

Gross Premiums 13.7 20.8 30.3 46.8 61.0 75.4
Premium Earned 7.8 11.2 15.8 26.2 34.8 44.5
Investment and Other Income 8.8 0.8 9.4 4.7 9.3 11.5
Claims Incurred (2.4) (3.9) (6.3) (7.9) (11.6) (14.3)
Management Expenses (5.9) (7.3) (7.9) (11.4) (14.3) (18.1)
Underwriting expenses 1.4 2.3 3.5 3.7 6.1 7.5
Other expenses (0.30) (0.60) (0.70) (1.40) (1.90) (2.30)
Profit Before Taxation 7.30 13.30 8.80 7.60 11.50 15.20
Taxation (1.90) (0.80) (5.30) (1.80) (2.80) (3.70)
Profit After Taxation 5.5 12.5 3.4 5.8 8.8 11.6
BALANCE SHEET ($'Mill) 2007 2008 2009 2010F 2011F 2012F
Assets
Short-term deposits 35.6 69.8 57.7 72.4 90.3 112.6
Due from Insurance Companies, Agents and Debtors 6.6 17.5 13.4 17.7 23.3 30.7
Other Assets 5.3 15.1 34.2 25.0 31.3 39.1
Fixed Assets 4.4 5.3 6.1 4.0 4.8 5.8
TOTAL ASSETS 53.2 109.9 114.5 121.1 152.2 191.5
Liabilities
Current Liabilities 2.8 14.6 4.5 4.5 5.7 7.1
Insurance Funds 3.7 6.2 10.6 16.3 24.8 31.7
Other Liabilities 4.3 6.8 13.9 18.7 25.2 31.3
TOTAL LIABILITIES 11.2 27.9 30.3 40.2 56.2 70.9
Net Assets 42.0 82.1 84.2 86.0 90.2 97.5
January 2011 162

VETIVA
2011 Outlook
The Tipping Point
INVESTMENT RATINGS
Vetiva uses a 5-tier ratings system for stocks under coverage: Buy,
Accumulate, Neutral, Reduce and Sell.
Buy ≥ +25.00% expected absolute price performance
Accumulate +10.00% to +24.99% expected absolute price performance
Neutral +5.00/+9.99% range expected absolute price performance
Reduce -5.00% to +4.99% expected absolute price performance
Sell < -5.00% expected absolute price performance
Definition of Ratings
Buy rating refers to stocks that are highly undervalued but with strong
fundamentals and where potential return in excess of or equal to 25.00% is
expected to be realized between the current price and analysts’ target price.
Accumulate rating refers to stocks that are undervalued but with good
fundamentals and where potential return of between 10.00% and 24.99% is
expected to be realized between the current price and analysts’ target price.
Neutral rating refers to stocks that are correctly valued with little upside or
downside where potential return of between +5.00 and+9.99% is expected to
be realized between current price and analysts’ target price.
Reduce rating refers to stocks that are overvalued but with good or weakening
fundamentals and where potential return of between -5% and -+4.99% is
expected to be realized between current price and analysts’ target price.
Sell rating refers to stocks that are highly overvalued but with weak
fundamentals and where potential return in excess less than -5% is expected
to be realized between current price and analysts’ target price.
January 2011 163

CONTACTS
Vetiva Research Email
Pabina Yinkere Head, Research p.yinkere@vetiva.com
Adedayo Idowu Analyst, Economic Research, a.idowu@vetiva.com

Insurance
Adedoyin Adelakun Analyst, Consumer (Food & a.adelakun@vetiva.com

Beverages)
Abiola Rasaq Analyst, Banking a.rasaq@vetiva.com
Tosin Oluwakiyesi Analyst, Infrastructure t.oluwakiyesi@vetiva.com
Olamidun Laniyan Analyst, Consumer (Breweries, o.laniyan@vetiva.com

Conglomerates)
Vetiva Wealth Management
Damilola Ajayi Head, Wealth Management d.ajayi@vetiva.com
sales @ Vetiva sales@vetiva.com
For further details, kindly contact
Vetiva Capital Management Limited

Plot 266B Kofo Abayomi Street
Victoria Island
Lagos, Nigeria
Tel: +234-1-4617521-3
Fax: +234-1-4617524
Email: research@vetiva.com
info@vetiva.com
VETIVA
2011 Outlook
The Tipping Point
DISCLOSURES SECTION
Analyst Certification
The research analysts who prepared this report certify as follows:

1. That all of the views expressed in this report articulate the research analyst(s)
independent views/opinions regarding the companies, securities, industries or markets
discussed in this report.
2. That the research analyst(s) compensation or remuneration is in no way connected
(either directly or indirectly) to the specific recommendations, estimates or opinions
expressed in this report.
Other Disclosures
Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may have
financial or beneficial interest in securities or related investments discussed in this report,
potentially giving rise to a conflict of interest which could affect the objectivity of this
report. Material interests which Vetiva may have in companies or securities discussed in this
report are herein disclosed:
Vetiva may own shares of the company/subject covered in this research report.
Vetiva does or may seek to do business with the company/subject of this research
report
Vetiva may be or may seek to be a market maker for the company which is the subject
of this research report
Vetiva or any of its officers may be or may seek to be a director in the company which
is the subject of this research report
Vetiva may be likely recipient of financial or other material benefits from the
company/subject of this research report.
Disclaimer
This research report is based on public information which the research analyst(s) consider
credible and reliable. Facts and views presented in this material have not been reviewed by,
and may not reflect information known to, professionals in other business areas of Vetiva,
including the investment banking team, as Vetiva has established information barriers
between its Research team and certain business groups. Whilst reasonable care has been
taken in preparing this document, no responsibility or liability is accepted either by Vetiva,
its officers or any of its employees for any error of fact or opinion expressed herein. No
reliance should be placed on the accuracy, fairness or completeness of the information
contained in this report as it has not been verified by the research analyst(s) involved or
the companies whose securities have been referred to except as otherwise disclosed.
Neither Vetiva nor any of its officers or employees including the research analyst (s)
warrant or represent the accuracy or completeness of information set out in this report. Any
ratings, forecasts, estimates and opinions set forth in this report constitute the analyst(s)
position as at the date of this report and may not necessarily be so after the report date as
they are subject to change without notice. It is also instructive to note that a company’s
past performance is not necessarily indicative of its future performance as estimates are
based on assumptions that may or may not be realized.
The value, price or income from investments mentioned in this report may fall as well as
rise due to economic conditions, industry cycles, market indices, operational or financial
conditions of companies or other factors. Thus, Vetiva and its officers and employees shall
not accept liability for any loss arising from the use of this report or its contents in making
investment decisions or recommendations. This report provides general information only. It
is not intended to provide personal investment advice and does not take into account the
specific investment objectives, financial situation and the particular needs of any specific
person. Investments discussed in this report may not be suitable for all investors and the
reader(s) should independently determine their suitability and evaluate the investment risks
associated with such investments. All investors are solely responsible for their investment
decisions. Any decision to purchase or subscribe for securities in any offering must be based
solely on existing public information on such security or the information in the prospectus
or other offering document issued in connection with such offering, and not on this report.
January 2011 165

VETIVA
2011 Outlook
The Tipping Point
Vetiva, through business units other than Vetiva Research, may have issued and may in the
future issue trading ideas or recommendations that are inconsistent with, and reach
different conclusions from, the information presented in this report.
Such ideas or recommendations reflect the different time frames, assumptions, views and
analytical methods of the persons who prepared them, and Vetiva is under no obligation to
ensure that such other trading ideas or recommendations are brought to the attention of
any recipient of this report. To the extent this report discusses any legal proceeding or
issue, it has not been prepared as nor is it intended to express any legal conclusion, opinion
or advice. Information relating to the tax status of companies whose securities are
discussed in this report is not intended to provide tax advice or to be used by anyone to
provide tax advice. By accepting this research report, you agree to be bound by the
foregoing limitations. Vetiva Capital Management Limited is registered with the Securities &
Exchange Commission to conduct Financial Advisory, Fund/Portfolio Management, and
Trusteeship business in Nigeria. This document is for information purposes only and for
private circulation. No portion of this document may be reprinted, sold or redistributed
without the written consent of Vetiva Capital Management Limited. Vetiva research report is
disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities/instruments is

available on request.
© 2011 Vetiva Capital Management Limited. All rights reserved.
January 2011 166

The Tipping Point Vetiva

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Tipping Point Vetiva

Uploaded by

Copyright:

Available Formats

[Type text]

The Tipping Point

Nigeria – Our Crystal Ball

GDP growth to reach 7% in 2011: We allude to government’s projection of

Inflation to remain in double digits in 2011: Inflationary pressures are

Exchange rate to remain steady: As revealed by CBN’s renewed stance on

We remain bullish on equities: Notwithstanding, the expected rise in yields

The Tipping Point

Vetiva Research Equity Ratings Guide Revisited

The Tipping Point

Consumer Sector: Tough year ahead...efficiency, requisite

Energy Sector: Elections to slow reforms

Infrastructure Sector: Set for mixed realities

The Tipping Point

Capital Markets: High Expectations Amid Uncertainty

The Tipping Point

Global Outlook ........................................................................................7

2010: Nursing the Wounds ..................................................................8

Spill Overs Into 2011 ............................................................................. 12

2011 Outlook: Our Crystal Ball ................................................................ 15

Capital Markets: High Expectations Amid Uncertainty ................................ 18

Sector Outlook ...................................................................................... 20

Banking Sector: Risk Gives Way, Eyes on Fundamentals ....................... 20

Consumer Sector: Tough Year Ahead, Efficiency, Requisite ..................... 60

Energy Sector: Elections To Slow Reforms .......................................... 106

Infrastructure Sector: Set For Mixed Realities ..................................... 130

Insurance Sector: Searching For Value ............................................... 154

Investment Ratings.............................................................................. 163

Contacts ............................................................................................. 164

The Tipping Point

Global Outlook: Positive But Fragile Recovery

GLOBAL INFLATION TREND QUARTERLY GDP FORECAST FOR 2011

Source: IMF, Vetiva Research Source: IMF, Vetiva Research

The Tipping Point

2010…Nursing the Wounds

Figure 1: QoQ Real GDP Growth (%)

Non-Oil GDP has consistently

Source: Vetiva Research, CBN

The growth in the economy continues to be driven by the non-oil sector,

Figure 2: Crude Oil Prices and Domestic Oil Production

Source: Vetiva Research, CBN

The Tipping Point

Currency held steady

Figure 3: Foreign reserves (‘$Millions) and Exchange Rates (NGN/US$)

Source: Vetiva Research, CBN

Preparation for 2011 elections…

The Tipping Point

...Catered for by an expansionary fiscal stance…

The apex bank’s resolve to embark on a contractionary policy became

Supply factors underpin high yields in the Bond market

The Tipping Point

Inflation finished the year at a 13-month low of 11.8%

Inflation eventually began to moderate in November in response to the rate

Figure 4: Inflation (%)

Source: Vetiva Research, CBN

The Tipping Point

SPILLOVERS INTO 2011

Peoples Democratic Party (PDP) – President Goodluck Jonathan

Scenario 1: PDP vs other parties (Probability: 70%)

Scenario 2: PDP vs Coalition (Probability: 30%)

Deregulation in the offing

The Tipping Point