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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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 current price and analysts’ 12 month target price. 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 current price and analysts’ 12 month target price. 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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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, postelections. 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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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.

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VETIVA
CAPITAL MANAGEMENT LIMITED

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

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CAPITAL MANAGEMENT LIMITED

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
10 Advanced 9 Emerging 8 7 6 5 4 3 2 1 0 2007 2008 2009 2010 2011F

QUARTERLY GDP FORECAST FOR 2011
7.0 Em erging 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Q1'11 Q2'11 Q3'11 Q4'11 Source: IMF, Vetiva Research World Advanced

Source: IMF, Vetiva Research

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CAPITAL MANAGEMENT LIMITED

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 GDP.

Oil – GDP has continued to be a drag on overall 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

Source: Vetiva Research, CBN

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CAPITAL MANAGEMENT LIMITED

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 currency with the external reserves, resulting in its YTD decline of 23.70%.

Central Bank’s ability to defend the position of Naira has been largely dependent on the strength of revenues accruing from crude oil sales; and on 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

Source: Vetiva Research, CBN

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 early part of 2010 until President Goodluck Jonathan declared his intentions to run for the office of President, after reorganizing some key agencies. on his death on the 5th of May, and the assumption into office of Goodluck Jonathan. Second was the suspense of the President on his intentions to run for office in 2011, with focus on zoning as a major obstacle. The underlying argument was that it will be the North’s turn in 2011 because Olusegun 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

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CAPITAL MANAGEMENT LIMITED

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 to N5.2 trillion through supplementary budgets and amendments to cater for additional expenses especially towards the 2011 elections. As at October 2010, only 43% of actual capital spending had been used; the recurrent expenditure 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.

The budget was increased to N5.2 trillion, resulting in a deficit of N1.9 trillion, which was financed through the issuance bonds and withdrawals from ECA.

... 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 measures by increasing interest rates led to an overnight hike in interbank market rates and NIBOR. 2010 amid potential inflationary pressures all year round. On the back of this, the Monetary Policy Rate (MPR) was upped 25bps to 6.25% and the Standing Deposit Facility (SDF) rate to 3.25%. As a direct response to this 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 government led to increase in bond issuance, which resulted in high bond yields. by the expansionary fiscal policy of the Federal Government. From an initially planned bond issue program of about N700 billion, it allotted N1.1 trillion as at December, with Banks accounting for c.53% of the total allotment. Discount 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.

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CAPITAL MANAGEMENT LIMITED

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 December 2010 as a result of the combined effects of MPC rate hikes and reweighting of the CPI basket.

hikes by the MPC. In detail, it hit a 13-month low of 11.8% YoY in December 2010 after peaking at 15.6% in February while it averaged 13.8%. Whilst we 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

Source: Vetiva Research, CBN

January 2011

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

SPILLOVERS INTO 2011
Elections, Elections, Elections
Six Presidential candidates emerged after the primaries; the contest is now pitched between either PDP and other parties, or PDP and a coalition. A host of factors in Nigeria, including reforms across various sectors of the economy, remain hinged on the outcome of the April polls. In our January 2011 note, “Underlying Assumptions – 2011 Outlook”, we reviewed the political terrain and gave 3 scenarios prior to the conclusion of the Presidential 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 government has adopted a temporary solution to solving the age-long problem of petroleum subsidy reimbursements, via the issuance of discountable Sovereign Debt Notes to product importers, the burden, in terms of the high cost to the government, remains very challenging. Thus, we anticipate that the full deregulation of the downstream sector would be broached postelection, 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.

Post-election, government may embark on the deregulation of the downstream sector, as petroleum subsidy reimbursement is very challenging.

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Addressing infrastructural deficiencies, how soon?

Continued dilapidation of institutions, infrastructure and education has caused Nigeria’s GCI rank to fall from 99 in 2009 to 127 in 2010.

Nigeria’s poor state of infrastructure remains a huge drag on its progress in global competitiveness. On the Global Competitiveness Index compiled by the World Economic Forum, Nigeria has continued to fall in the ranks from 94 of 134 countries in 2008, to 99 of 133 countries in 2009 and 127 of 139 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 sector. Manufacturers continue to cite unreliable power as the most binding constraint to efficient production, and small scale industries are unable to grow their businesses. Succor, however, came underway when in August 2010, the 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.

Government is set to tackle unreliable power supply, a major economic constraint, with the Power Sector Roadmap.

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 issue for larger and more established corporations. We have seen a lot of companies approach the capital market for funds to cater for their financing needs. Manufacturing industries, small and mid-tier companies have been at 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.

As banks are still contending with non-performing loans, they prefer to grant credit to low risk institutions at the higher end of the market.

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 the main driver of growth, contributing 84.8% in Q3’10 compared to Oil GDP at 15.2%. The government is preparing Nigeria’s Vision 2020 which focuses on diversification of the economy away from oil. Vision 2020 will articulate the government’s goal of placing Nigeria among the top 20 economies in the 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.

Nigeria’s undiversified economy continues to rely largely on Crude oil for revenue, however non-oil GDP remains the main driver of economic growth.

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
Unemployment remains a key challenge

We align with the Government’s employment creation strategy as detailed in the 2011 budget speech. We believe the creation of labourintensive industries will immediately impact unemployment.

The economy has sustained economic growth without creating jobs as unemployment rose from c.14.9% in 2008 to c.19.7% in 2010 despite economic growth >7%. The Government sees this as a key challenge, as detailed in its 2011 budget proposal and is expected to take decisive actions to tackle it. We believe the establishment of labour – intensive industries through the creation of public infrastructure projects will immediately impact the level 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 subnationals will need more funds to support their finances and are likely to approach the bond market for such capital.

how they will fund themselves. With the President not needing further favours from the states, it only means they will have to meet expenditure from the regular monthly FAAC allocation and Internally Generated Revenue (IGR). The 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.

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CAPITAL MANAGEMENT LIMITED

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 agricultural output to be stable enough to provide a steady boost for the sector and overall output. Also in favour of the sector is the increase in global food prices which may encourage farmers to harvest more crops. Incentives underway to promote the sector include a World Bank $185 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. Sustenance of oil prices remain hinged on the performance of the global economy. The direction of crude oil exports are tilted towards the Americas, Asia and Europe with the United States accounting for c.30% of imports. Despite a positive 2011 outlook for the regions, growth remains very fragile and may 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.

Government incentives, anticipated good weather and increase in global food prices is expected to provide a boost to the agricultural sector.

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 wage growth to be around 13.9%. Consumer expenditure is also estimated to have increased by c.14% in 2010 which is positive for the retail and trade 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.

Implementation of wage increase will likely improve consumer spending.

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CAPITAL MANAGEMENT LIMITED

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 Q2 of 2011, with election spending spree set to kick in. months of 2011 as it continues to ride on the effect of the CPI re-basing. More importantly, it has 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.

Election spending and deregulation of the petroleum sector – forerunners of inflationary pressure.

Exchange rate to remain steady
Crude Oil prices as projected above $90/barrel and stable oil production volumes lend support to a stable exchange rates regime in 2011. In our With an allowance for volatility in Q1’11, the naira is expected to remain stable through 2011. opinion, the naira is likely to remain comfortable within the N150/US$ (+3/3%) band as the CBN will be in a better position to defend the currency than it 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 Infrastructure road map expected to improve structural gaps in the economy. priority projects that must be executed to enhance economic productivity. The budget speech stated that provision had been made for some of these projects 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

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CAPITAL MANAGEMENT LIMITED

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 Though the budget alludes to a fiscal consolidation strategy, there is a high probability of its upward revision. 2010. On the other hand, we have very little information on its plans. The Debt Management Office (DMO) is yet to release an issuance calendar for its debt auctions but auctioned only $60 billion in January, a significantly lower 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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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, and backed by surges in the Building Materials and Food & Beverages sectors, the All Share Index (ASI) rose through Q1’10 to peak at 28,029.78 (+34.51%) in April. Thereafter, the firm stance of the Central Bank of Nigeria (CBN) against the use of Bank stocks as collateral, administrative shake-ups in the NSE (dismissal of the then DG, Dr. Okereke-Onyiuke and other executives) as 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.

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%

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 performancebased appreciation in the stocks of quoted companies.

January 2011

18

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 energy spenders would enjoy the advantage of lower operating expenditure via reduction in power costs. Within the stock market, the transformation that began last year is expected to start yielding dividends this year in the form of improved transparency 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.

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.

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 protracted low interest rate environment, investors rode on the fiscal deficit and increasing debt profile of the government to demand higher returns. Though the matching upsurge of fixed income demand on the heels of 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.

We do not see a sharp decline in yields, particularly as the monetary authority stands poised to tighten the system

January 2011

19

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 extreme risk aversion, particularly when the 25% regulatory requirement is put into perspective; (3) Focus on capital preservation as against profitability with implication on Return on Average Equity (RoAE); (4) Keen adoption of “prudent provisioning” to provide hedge for probable loan loss (5) Cost 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 longterm 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.

The CBN’s streams of risk management reforms, though with inevitable short term pains, have significantly changed the business models of banks

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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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. Contrary to the post-consolidation experience when banks “knocked on doors” to extend loans, the recent NPL blight and fears of further toxic asset formation have largely eroded banks’ enthusiasm to compete over credit growth numbers and loan book size. Banks’ operation over the last six 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 “riskfree” assets (5.8% in 2010 Vs 5-year CAGR of 58.5%)

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

Source: CBN, Company Financials, Vetiva Research

January 2011

21

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 relaunch 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.

An attempt by the apex bank to narrow banks’ balance sheet asylum is the regulation on maximum allowable investment in sub-national debt issuance which is expected to marginally incite banks’ resumption to private sector financing.

In our opinion, this was a short term conservative strategy to preserve capital, given fears of further NPL formation, and we thus look forward to cautious portfolio rebalancing. It was also a simultaneous necessity for a few banks with Capital Adequacy Ratios (CAR) in the threshold of management guidance (most Nigerian banks set 15% internal CAR guidance, 500bps above regulatory minimum). An attempt by the apex bank to narrow banks’ balance sheet asylum is the regulation on maximum allowable investment in subnational debt issuance which is expected to marginally incite banks’ 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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 the effect of loan growth on NPL ratio. To our mind, asset quality woes are behind, as we see the 2009/10 NPL levels and ratios as the peak of the cycle, with expectation that improving economy-wide liquidity and stability will scale down the default risk in both corporate and consumer loans. Our outlook of modest rally in crude oil price and equity market recovery 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

To our mind, asset quality woes are behind, as we see the 2009/10 NPL levels and ratios as the peak of the cycle, with expectation that improving economy-wide liquidity and stability will scale down the default risk in both corporate and consumer loans

Source: Company Financials, Vetiva Research

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

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VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

Recovering money market rates to catalyse a reverse in asset yield

Source: Company Financials, Vetiva Research

Overall, we look forward to a slow rebound in interest earning asset yields, with FY’11 expectation of 11.5%

We expect the initiated uptrend in money market rates to rub-off positively on overall asset yield of the lenders; nevertheless, we are conservative on returns on loan books given the increased focus of players on the highly competitive 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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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’ resumption of loan growth will spur modest demand for deposit with expectation of higher pricing as they exhaust their current liquidity gap, 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.

Banks’ resumption of loan growth will spur modest demand for deposit with expectation of higher pricing

Source: Company Financials, Vetiva Research

January 2011

25

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VETIVA
CAPITAL MANAGEMENT LIMITED

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

Source: Company Financials, Vetiva Research

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 reduction innovations as this becomes a prime driver of profitability. Prior to the 2009 tide, the sector’s operating cost-to-income ratio hovered 58%, a reflection of the high level of earnings. While operators have significantly scaled down operating cost from an unprecedented level of 94% of income in FY’09 to a relatively comfortable ratio of 70.6% in Q3’10, we see further cost efficiency going forward, as earnings growth resumes. In addition to the 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%

While operators have significantly scaled down operating cost from an unprecedented level of 94% of income in FY’09 to a relatively comfortable ratio of 70.6% in Q3’10, we see further cost efficiency going forward, as earnings growth resumes

Source: Company Financials, Vetiva Research

January 2011

26

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VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

FY’11 top line growth on the heels of increased transaction volumes

Source: Company Financials, Vetiva Research

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 noninterest income cannot be ruled out. In addition to expected surge in fee and commission (a key non-interest income head) which will be largely driven by loan growth, we opine increased income from other non-interest income windows. Increased volume in foreign exchange deals on the back of continued openness of the economy and improving systemic liquidity. While the CBN remains “cautiously committed” to naira stability, we are believers in 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.

In addition to expected surge in fee and commission (a key non-interest income head) which will be largely driven by loan growth, we opine increased income from other non-interest income windows

Figure 1: Growth stories from both top- and bottom- lines; a reflection of low base and loan growth resumption.

Source: Company Financials, Vetiva Research

January 2011

27

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 First Bank of Nigeria Plc and United Bank for Africa Plc have settled for the holding company structure which will permit them to carry on with all existing subsidiary businesses. We suspect Stanbic-IBTC and FCMB to also opt for this model given the significance of their non-banking operations, although they are yet to declare their shareholders’ resolutions. Guaranty Trust Bank, Zenith and mid-tiers, Access, Skye, and Diamond have applied for the International 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; SouthWest. 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.

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

License Category

Minimum Capital

Scope of Operation

Remarks

Regional

N15 billion

Wema has filed application to Operate within minimum of six (6) and operate in the South West Maximum of twelve (12) contiguous states, within two (2) geopolitical zones. Key lapse is region the inability to carry out Settlement functions 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 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.

National

N25 billion

International

N50 billion

January 2011

28

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 their share of the dividends of this intervention programme. Of particular significance is our outlook on the real estate market which has been bogged down by the banking sector cyclone. The price erosion in real estate assets in the last six quarters was majorly on the back of banks’ forced-sale of 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 (N'bn)* (368.88) (249.89) (235.22) (189.45) (119.61) (108.31) (90.65) (45.84)

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

Bank Intercontinental Bank Plc Afribank Plc Union Bank Plc Bank PHB Plc Finbank Plc Oceanic Bank Plc Spring Bank Plc Wema Bank Plc**
* Based on Q3'10 positions

NPL (N'bn)* 526.21 357.10 113.56 346.84 157.42 664.77 130.52 70.61

AMCON's Consideration (N'bn) 146.00 NA 239.00 140.00 44.00 200.00 23.00 15.20

**WEMA has successfully recapitalized, meeting the N15bn requirement to operate as a regional bank

January 2011

29

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VETIVA
CAPITAL MANAGEMENT LIMITED

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

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VETIVA
CAPITAL MANAGEMENT LIMITED

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 2.1x and 2.2x respective book value multiples of South African (SA) and Asian peers. Although our banks have a lower 2010 average RoAE of 2.2% (Vs. 17% and 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

Our banking universe currently trades at a weighted P/BV of 1.6x, a huge discount to the 2.1x and 2.2x respective book value multiples of South African (SA) and Asian peers

Undervalued Region

Source: NSE, Vetiva Research

January 2011

31

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VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

Figure 1: banking counters back in black, delivering positive returns in 2010

Source: NSE, Vetiva Research

January 2011

32

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VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point First Bank of Nigeria Plc (FBN)

B A S IC IN F O R M A T IO N A ddress Samual A sabia P lace 35 M arina, Lago s. Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l O WN E R S H IP S T R UC T UR E (%) Retail Shareho lders Institutio nal Shareho lders S H A R E S T A T IS T IC S Shares in issue (M ) Share P rice (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily A verage Value Traded (N'000) Daily A verage Value Traded (USD'000) Year high (N) Year lo w (N) V A LUA T IO N M E T R IC S B o o k Value (N'm) Trailing P /E (x) P /B (x) Div. Yield (%) ROE (%) 309,559 1 .95 1 1 .68 0.6% 1 4.0% 32,638 1 5.89 520,576 3,490 63.80% 302,01 8 2,025 1 2 6.1 1 3.73 63.8% 36.2% www.firstbankplc.co m P rince A jibo la A fo nja B isi Onasanya December Nigerian Sto ck Exchange B lo o mberg: FIRSTB A :NL

Scale and Scope Economies are “Good Buys”
Our fundamental valuation of Nigeria’s largest lender is compelling, trading at respective trailing book value multiple of 1.5x (vs. 2.1x African peers). Given 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 fair valuation of its equity which stands at N18.11. This estimate of the bank’s share; an equally-weighted blend of Free Cash Flow to Equity and Excess Returns Models, implies 14.8% upside relative to the current market price. FBN’s equity deserves our “ACCUMULATE” rating.

Investment thesis
Size offers further scale efficiency prospects: With its balance sheet size, age-long brand and diversified financial service offerings, FBN is well positioned to take advantage of the business opportunities in Nigeria. With the bank’s resolve to adopt a holding company structure following CBN’s repeal of universal banking model, we do not see any downside risk to its earnings base and believe it will leverage on its size and scope to explore cost efficiency prospects. The FBN-Sanlam synergetic foray into the underwriting market is timely given ceding underwriting business from erstwhile bank subsidiaries and firming noose on insurance policy regulations, particularly in the high margin oil and gas segment which we believe is a prime target of FBN-Sanlam. We see a potential to outcompete current players. One of the exemplary risk managers: Despite having the biggest loan portfolio (18% of the system) with relative exposure to higher-risk longertenor 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 a strong hold to avert deterioration. Earnings quality, our attraction: While our view of FBN’s current assetliability management (ALM) and cost structure suggest a mild FY’11 posttax earnings growth of 14.5% (FY’11 PAT of N56.7 billion; an implied RoAE of 15.6%), the quality of the earnings outlook gauged by risk asset quality, 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 slop e of money market rates becomes steeper. We note that cost 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

Leverage Ratio (x) 7.83 FIRST BANK VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010

Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x)
Source: Company; Vetiva Research

FY'09A 0.11 128.81 0.10 0.7% 10.59 1.33 8.2%

FY'10E 1.42 11.20 0.78 4.9% 10.05 1.59 5.8%

FY'11F 1.62 9.84 0.89 5.6% 10.78 1.48 5.5%

FY'12F 1.98 8.05 1.09 6.8% 11.67 1.37 5.4%

FY'13F 2.42 6.60 1.33 8.3% 12.76 1.25 5.2%

NPL Ratio (%)

Source: Company Financials, Vetiva Research

January 2011

33

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2007
91,163 62,579 (18,357) 44,222 28,584 72,806 (44,931) (2,021) 25,854 (5,218) 20,636 2007 61,844 264,405 317,971 217,995 31,664 17,548 862,215 911,427 599,689 129,835 98,276 729,524 827,800

2008
155,725 100,703 (33,787) 66,916 55,022 121,938 (68,004) (6,423) 47,511 (10,747) 36,764 2008 88,351 560,879 338,579 466,096 44,275 30,054 1,453,905 1,528,234 700,182 247,037 229,161 947,219 1,176,380

2009
196,408 162,041 (65,884) 96,157 34,367 130,524 (78,339) (40,625) 11,560 (8,396) 3,164 2009 70,332 514,193 395,328 1,078,452 66,061 47,980 2,058,305 2,172,346 1,512,422 183,697 166,669 1,696,119 1,862,788

2010E
234,790 180,608 (61,552) 119,056 54,182 173,238 (111,525) (4,160) 57,553 (11,740) 45,814 2010 F 54,960 549,604 489,647 1,199,861 149,892 54,234 2,294,072 2,498,198 1,698,775 72,820 396,128 1,771,595 2,167,722

2011F
275,147 211,652 (81,083) 130,569 63,496 194,064 (121,615) (6,636) 65,813 (13,482) 52,331 2011 F 60,456 563,344 549,604 1,383,291 140,149 56,670 2,556,694 2,753,514 1,841,172 72,820 479,750 1,913,992 2,393,742

2012F
316,877 241,891 (92,633) 149,259 74,986 224,245 (137,366) (5,014) 81,865 (16,319) 65,545 2012 F 92,333 615,556 646,334 1,553,137 123,111 62,697 2,907,361 3,093,169 2,062,112 66,789 565,500 2,128,901 2,694,402

Ordinary share capital Reserves Equity

5,238 78,389 83,627

9,945 341,909 351,854 2008

14,504 295,054 309,558 2009 26.1% 7.0% -75.7% -91.4% 5.5% 1.0% 0.2% 1.6%

16,319 314,157 330,476 2010E 19.5% 32.7% 397.9% 1348.0% 5.5% 14.3% 2.0% 19.5%

16,319 337,957 354,276 2011F 17.2% 12.0% 14.4% 14.2% 5.4% 15.3% 2.0% 19.0%

16,319 367,059 383,378 2012 E 15.2% 15.6% 24.4% 25.3% 5.5% 17.8% 2.2% 20.7%

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 5.8% 16.9% 3.0% 23.6% 70.8% 67.5% 83.8% 78.2%

January 2011

34

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2007
611 420 (123) 296 192 488 (301) (14) 173 (35) 138 2007 415 1,773 2,132 1,461 212 118 5,780 6,110 4,020 870 659 4,891 5,549 35 526 561

2008
1,044 675 (226) 449 369 817 (456) (43) 319 (72) 246 2008 592 3,760 2,270 3,125 297 201 9,747 10,245 4,694 1,656 1,536 6,350 7,886 67 2,292 2,359 2008

2009
1,317 1,086 (442) 645 230 875 (525) (272) 77 (56) 21 2009 471 3,447 2,650 7,230 443 322 13,798 14,563 10,139 1,231 1,117 11,370 12,488 97 1,978 2,075 2009

2010E
1,574 1,211 (413) 798 363 1,161 (748) (28) 386 (79) 307 2010 F 368 3,684 2,650 7,230 443 322 15,379 14,697 10,139 1,231 1,117 11,876 12,488 109 2,106 2,215 2010E

2011F
1,845 1,419 (544) 875 426 1,301 (815) (44) 441 (90) 351 2011 F 405 3,777 3,282 8,044 1,005 364 17,139 16,876 11,388 488 2,656 12,831 14,532 109 2,266 2,375 2011F

2012F
2,124 1,622 (621) 1,001 503 1,503 (921) (34) 549 (109) 439 2012 F 619 4,127 3,684 9,273 940 380 19,490 19,023 12,343 488 3,216 14,272 16,047 109 2,461 2,570 2012F

Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 1.5% 134.8% 64.6% 67.9% 40.7% 23.0% 8.2% 67.1% 45.1% 75.5% 19.8% 14.2% 5.8% 75.0% 43.8% 74.6% 18.4% 13.2% 4.0% 8.7% 61.0% 5.0% 9.2% 91.1% 3.6% 8.3% 66.8% 4.4% 8.7% 66.1% 4.6% 8.9% 63.5%

5.5%
75.0% 42.6% 79.1% 18.4% 12.9%

5.4%
72.0% 43.8% 79.1% 17.9% 12.4%

January 2011

35

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Zenith Bank Plc (ZENITH)

B A S IC IN F OR M A T IO N A ddress Zenith Heights, P lo t *7, A jo se A deo gun, V.I, Lago s. Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l OWN E R S H IP S T R UC T UR E ( %) Retail Shareho lders Institutio nal Shareho lders S H A R E S T A T IS T IC S Shares in issue (M ) Share P rice (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily A verage Value Traded (N'000) Daily A verage Value Traded (USD'000) Year high (N) Year lo w (N) V A LUA T IO N M E T R IC S B o o k Value (N'm) Trailing P /E (x) P /B (x) Div. Yield (%) ROE (%) Leverage Ratio (x) 358,248 1 2 2.1 1 .40 2.8% 1 .5% 1 4.96 31 ,398 1 6.00 520,885 3,492 52.8% 344,048 2,306 1 6.70 1 5.01 37.0% 63.0% www.zenithbank.co m M acaulay P epple Go dwin Emefiele December Nigerian Sto ck Exchange ZENITHB A : NL

A Focused Player of the Corporate Niche
While we think current market pricing is reminiscent of the bank’s relatively low capital deployment, we note that the conservatism of ZENITH played out well in the dawn of NPL blight as it stands out with modest asset quality (NPL 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 and implied earnings generation prospects, we arrive at a 2011 target price 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, we rate ZENITH a “BUY”. Investment thesis Crash in money market rates suppresses earnings potentials; we see a more diversified portfolio going forward: Being a key player of short term money market instruments, ZENITH took a large chunk of the steep decline in rates. TBills and placements (with CBN and other banks) constituted 43% of the bank’s asset as at Q3’10 with barely 17% contribution to interest income. We estimated an annualized yield of 2.9% on this asset basket as against ZENITH’s 2010E funding cost of 3.1%, thus translating to a negative explicit return of 20bps. …Nonetheless, we see a more diversified asset portfolio going forward: With an outlook of a slightly bullish risk appetite in the near 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 more attractive RoAE of 15% in FY’11F and medium term average of 18%. Planned divestiture from non-core banking operations will bode well for 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 current ALM offers room for flexibility and will thus engender the bank’s portfolio rebalancing as the risk environment eases. Retail deposit mobilization to buoy earnings growth and margins: While ZENITH remains averse to retail lending, given high risk of default, we observe that the bank is increasingly penetrating this market for cheap deposit mobilization. We believe this will offer support for margins as it 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 noncore back-end functions and scales down other operating cost heads.
Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) FY'09A 0.82 16.58 0.45 3.3% 13.48 1.01 6.0% FY'10E 1.40 11.43 0.77 4.8% 11.41 1.40 6.4% FY'11F 1.83 8.74 1.01 6.3% 12.24 1.31 6.2% FY'12F 2.09 7.64 1.15 7.2% 13.18 1.21 5.6% FY'13F 2.40 6.67 1.32 8.2% 14.26 1.12 5.2%

ZENITH BANK VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010

Source: Company; Vetiva Research

Price to Book (x) NPL Ratio (%)

January 2011

36

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2007
94,880 63,625 (19,039) 44,586 31,255 75,841 (48,333) (1,832) 25,676 (6,897) 18,780 2007 111,055 127,764 380,213 288,112 28,879 36,799 907,143 972,822 634,493 21,948 199,927 656,440 856,367

2008
208,294 142,390 (53,598) 88,792 65,904 154,696 (92,250) (6,327) 56,119 (4,126) 51,992 2008 239,562 312,624 1,248,233 445,837 46,288 50,943 2,246,257 2,343,487 1,185,893 12,201 220,752 1,198,094 1,418,845

2009
277,300 193,545 (83,957) 109,588 78,650 188,238 (113,288) (39,865) 35,085 (14,482) 20,603 2009 126,779 341,830 468,230 698,326 20,091 78,619 1,635,165 1,733,875 1,173,917 50,981 112,009 1,224,898 1,336,907

2010E
185,646 126,290 (39,561) 86,729 59,356 146,085 (87,819) (3,321) 54,945 (10,989) 43,956 2010 F 80,615 331,416 716,574 710,804 35,829 77,428 1,839,408 1,952,665 1,271,920 12,776 131,201 1,284,696 1,415,897

2011F
231,982 158,892 (54,227) 104,665 73,090 177,755 (102,605) (3,297) 71,853 (14,371) 57,482 2011 F 98,529 394,116 788,232 768,924 33,500 84,337 2,049,801 2,167,638 1,379,406 12,776 176,991 1,392,182 1,569,173

2012F
266,529 183,813 (62,208) 121,605 82,716 204,321 (117,299) (4,855) 82,167 (16,434) 65,734 2012 F 132,423 419,339 838,679 888,439 55,176 93,698 2,278,880 2,427,754 1,522,864 10,841 240,422 1,533,705 1,774,127

Ordinary share capital Reserves Equity

4,633 109,953 114,586

8,372 335,976 344,348 2008

12,559 325,976 338,535 2009

15,699 342,617 358,316 2010E

15,699 368,484 384,183 2011F

15,699 398,064 413,763 2012 E

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 5.6% 22.7% 3.1% 25.0% 5.6% 6.0% 1.0% 7.4% 5.0% 12.6% 2.4% 23.7% 5.4% 15.5% 2.8% 24.8% 5.6% 16.5% 2.9% 24.7% 119.5% 104.0% 118.6% 176.9% 33.1% 21.7% -37.5% -60.4% -33.1% -22.4% 56.6% 113.3% 25.0% 21.7% 30.8% 30.8% 14.9% 14.9% 14.4% 14.4%

January 2011

37

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities

2007
734 494 (192) 302 240 542 (319) (53) 170 (26) 144 2007 871 2,952 1,379 2,148 301 333 7,350 7,984 6,072 450 335 6,522 6,858

2008
1,137 782 (277) 505 354 860 (461) (76) 322 (48) 274 2008 1,346 3,850 2,027 3,001 578 413 10,224 11,215 8,938 272 699 9,210 9,909

2009
1,654 1,192 (400) 792 462 1,254 (881) (329) 44 (29) 16 2009 457 3,152 1,609 4,067 605 490 9,285 10,379 8,351 353 423 8,704 9,127

2010E
1,191 821 (354) 467 370 837 (616) (114) 107 (43) 64 2010 F 537 2,740 1,609 4,067 605 490 10,334 10,047 8,351 353 423 9,154 9,127

2011F
1,363 940 (407) 533 423 956 (652) (51) 253 (76) 177 2011 F 534 3,265 2,626 4,432 685 398 11,512 11,940 9,020 134 1,027 10,056 10,181

2012F
1,523 1,050 (463) 587 473 1,060 (682) (23) 354 (106) 249 2012 F 570 3,938 2,763 4,949 628 419 12,885 13,268 9,922 134 1,187 11,246 11,243

Ordinary share capital Reserves Total Equity

39 1,088 1,127

58 1,249 1,306 2008

72 1,180 1,252 2009 4.5% 12.2% 96.5% 8.3% 68.7% 50.3% 48.3% 21.5% 12.1%

72 1,180 1,252 2010E 4.0% 8.4% 87.2% 9.5% 60.0% 51.7% 56.8% 16.7% 10.8%

87 1,149 1,236 2011F 4.2% 8.6% 73.5% 8.5% 70.0% 52.3% 58.9% 16.7% 10.5%

87 1,229 1,316 2012F 4.3% 8.6% 66.6% 8.0% 70.0% 52.1% 60.0% 16.1% 10.2%

Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 3.5% 86.9% 64.4% 51.0% 24.3% 11.6% 3.5% 8.9% 62.5%

January 2011

38

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point United Bank for Africa Plc (UBA)

B A S IC IN F O R M A T ION A ddress UB A Ho use 57 M arina, Lago s, Nigeria Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l O WN E R S H IP S T R UC T UR E ( %) Retail Shareho lders Institutio nal Shareho lders S H A R E S T A T IS T IC S Shares in issue (M ) Share P rice (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily A verage Value Traded (N'000) Daily A verage Value Traded (USD'000) Year high (N) Year lo w (N) V A LUA T ION M E T R IC S B o o k Value (N'm) Trailing P /E (x) P /B (x) Div. Yield (%) ROE (%) Leverage Ratio (x) 1 89,763 32.85 1 .52 0.9% 4.6% 9.24 25,868 1 .1 17 301 ,359 2,020 23.00% 7,31 7,486 49,055 1 .65 1 9.1 5 23.00% 77.00% www.ubagro up.co m Chief Ferdinand A labraba P hillips Oduo za December Nigerian Sto ck Exchange UB A : NL

Targeting Opportunities Beyond Borders
While the current market price of UBA shares (N11.17) translates to a 49% premium over its BVPS appears fair when the current challenges of the bank is put into perspective, we find it apt to say that this market pricing is bearish relative to the near term fundamentals of the bank. UBA has an attractive branch network in key financial hubs (700 branches- highest single-bank 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 opportunities in the African continent. Our DCF valuation uplifts the shares of UBA with a base case 2011 target price of N12.80; an appreciable return upside of 14.8%. Thus, we suggest investors “ACCUMULATE” UBA. Investment thesis 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 believe its 2010 share price erosion of 15%, a gross underperformance when viewed in the context of the banking sector gain of 18.7%, is a reflection of 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; albeit UBA’s near term prospect remains compelling on valuation. Continued foray into offshore markets may post upside earnings surprise: Amid the 2009/10 industry lull, UBA, in its pan-African bank vision, continues to penetrate new markets. Its Zambia, Guinea and Mozambique 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 spread of UBA should in the long-term post earnings surprises if well managed. However we think that over the near to medium term, UBA will contend with cost challenges, as barely c.30% of the offshore operations bring in positive numbers due to stiff dominance of first movers in those markets. 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. FY’11 earnings to mirror current balance sheet challenges: Our FY’11 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 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).

UBA VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010

Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x)
Source: Company; Vetiva Research

FY'09A 0.11 98.03 0.10 0.9% 7.90 1.37 8.3%

FY'10E 0.37 31.42 0.26 2.2% 6.69 1.74 9.5%

FY'11F 1.02 11.40 0.56 4.8% 7.15 1.63 8.5%

FY'12F 1.43 8.13 0.79 6.8% 7.80 1.49 8.0%

FY'13F 1.76 6.63 0.97 8.3% 8.59 1.36 7.8%

NPL Ratio (%)

Source: Company Financials, Vetiva Research

January 2011

39

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets + EI Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2007
109,512 73,724 (28,649) 45,075 35,788 80,863 (47,581) (7,863) 25,419 (3,923) 21,496 2007 129,897 440,418 205,648 320,406 44,926 49,747 1,096,369 1,191,042 905,806 67,148 50,010 972,954 1,022,964

2008
169,581 116,704 (41,354) 75,350 52,877 128,227 (68,796) (11,402) 48,029 (7,204) 40,825 2008 200,820 574,295 302,389 447,618 86,294 61,575 1,525,122 1,672,991 1,333,289 40,558 104,282 1,373,847 1,478,129

2009
246,725 177,848 (59,659) 118,189 68,877 187,066 (131,397) (49,032) 6,637 (4,262) 2,375 2009 68,225 470,195 239,948 606,616 90,255 73,042 1,384,984 1,548,281 1,245,650 52,705 63,097 1,298,355 1,361,452

2010E
177,663 122,526 (52,875) 69,652 55,137 124,788 (91,852) (16,950) 15,986 (6,396) 9,590 2010 F 80,046 408,746 391,715 661,051 102,187 59,364 1,541,559 1,703,109 1,345,456 20,000 153,263 1,365,456 1,518,719

2011F
203,344 140,237 (60,747) 79,490 63,107 142,596 (97,198) (7,671) 37,727 (11,286) 26,441 2011 F 79,620 487,089 412,152 738,316 93,671 62,571 1,717,178 1,873,420 1,480,002 20,000 177,129 1,500,002 1,677,131

2012F
227,119 156,633 (69,027) 87,606 70,485 158,091 (101,749) (3,467) 52,875 (15,785) 37,090 2012 F 84,978 587,505 419,646 829,977 104,912 71,213 1,922,106 2,098,230 1,657,602 20,000 207,649 1,677,602 1,885,251

Ordinary share capital Reserves Equity

5,748 162,330 168,078

8,622 186,240 194,862 2008

10,778 176,051 186,829 2009

12,934 171,456 184,390 2010E

12,934 183,355 196,289 2011F

12,934 200,046 212,979 2012 E

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 5.7% 22.5% 2.9% 24.1% 8.1% 1.2% 0.1% 1.0% 4.8% 5.2% 0.6% 5.4% 4.9% 13.9% 1.5% 13.0% 4.8% 18.1% 1.9% 16.3% 54.9% 58.6% 88.9% 89.9% 45.5% 45.9% -86.2% -94.2% -28.0% -33.3% 140.9% 303.8% 14.5% 14.3% 136.0% 175.7% 11.7% 10.9% 40.2% 40.3%

January 2011

40

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2007
734 494 (192) 302 240 542 (319) (53) 170 (26) 144 2007 871 2,952 1,379 2,148 301 333 7,350 7,984 6,072 450 335 6,522 6,858 39 1,088 1,127

2008
1,137 782 (277) 505 354 860 (461) (76) 322 (48) 274 2008 1,346 3,850 2,027 3,001 578 413 10,224 11,215 8,938 272 699 9,210 9,909 58 1,249 1,306 2008

2009
1,654 1,192 (400) 792 462 1,254 (881) (329) 44 (29) 16 2009 457 3,152 1,609 4,067 605 490 9,285 10,379 8,351 353 423 8,704 9,127 72 1,180 1,252 2009

2010E
1,191 821 (354) 467 370 837 (616) (114) 107 (43) 64 2010 F 537 2,740 1,609 4,067 605 490 10,334 10,047 8,351 353 423 9,154 9,127 72 1,180 1,252 2010E

2011F
1,363 940 (407) 533 423 956 (652) (51) 253 (76) 177 2011 F 534 3,265 2,626 4,432 685 398 11,512 11,940 9,020 134 1,027 10,056 10,181 87 1,149 1,236 2011F

2012F
1,523 1,050 (463) 587 473 1,060 (682) (23) 354 (106) 249 2012 F 570 3,938 2,763 4,949 628 419 12,885 13,268 9,922 134 1,187 11,246 11,243 87 1,229 1,316 2012F

Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 3.5% 86.9% 64.4% 51.0% 24.3% 11.6% 8.3% 68.7% 50.3% 48.3% 21.5% 12.1% 9.5% 60.0% 51.7% 56.8% 16.7% 10.8% 8.5% 70.0% 52.3% 58.9% 16.7% 10.5% 8.0% 70.0% 52.1% 60.0% 16.1% 10.2% 3.5% 8.9% 62.5% 4.5% 12.2% 96.5% 4.0% 8.4% 87.2% 4.2% 8.6% 73.5% 4.3% 8.6% 66.6%

January 2011

41

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Guaranty Trust Bank Plc (GUARANTY)

B A SIC IN F O R M A T ION Address Plot 1669, Oyin Jolayemi Str., Victo ria Island, Lago s. Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l Sector Co untry O WN ER SH IP S T R UC T UR E (%) Retail Shareho lders Institutio nal Shareholders Fo reign SH A R E ST A T IST IC S Shares in issue (M ) Share Price (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) M o nthly Average Value Traded (N'000) M o nthly Average Value Traded (USD'000) Year high (N) Year lo w (N) VA LUA T IO N M ET R IC S Bo o k Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROE (%) Leverage Ratio (x) 199,339 12.96 2.30 2.3% 17.8% 5.70 23,317 19.70 467,510 3,134 39.69% 288,511 1,934 20.50 17.76 39.69% 47.10% 13.21% www.gtbank.com Oluwo le Sunday Oduyemi Tayo Aderino kun December Nigerian Sto ck Exchange Blo omberg: GUARANTY:NL Banking Nigeria

A “Defensive Cyclical” Play
Aside quantitative fundamentals, we believe GUARANTY’s IFRS reporting which dates back to its GDR listing on the London Stock Exchange (13% of its equity via Nominee Accounts) has been another selling point for the shares as it presents strong appeal to foreign fund managers whose perceived holding in the 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 valuation, we believe the value of the bank is N20.57/share. Hence the market has been fair in GUARANTY’s pricing and we are “NEUTRAL” on it as it portends a rich valuation of barely 5.2% upside. Investment thesis Harvesting the dividends of efficiency: Within barely 2 decades of establishment, GUARANTY steadily rode on its efficiency (from cost, profitability and service delivery perspectives) to gain global investor confidence. We bring back to mind the 2009 cyclone which uplifted GUARANTY from all key benchmarks; RoAE of 13% (Vs. industry average of 2.2%) and NPL of 11% (relative to industry average of 12%). Hands on cost, earnings on the growth ladder: While we are upbeat that 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 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, the bank’s <60% post-provisionings cost to income ratio is helped by its staff 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. While the bank’s coverage over NPL reinforces our confidence in its asset and earnings quality, we will like to see a downward trend in toxic assets level. No considerable downside from divestiture, in our view: The bank’s proactive weaning and subsequent listing of its underwriting subsidiary; 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 to divest non-core banking operations which, on our estimate, currently contribute 2.4% and 1.8% respectively to top- and bottom- lines. We however think the next challenge for GUARANTY is its lean branch footprint which may be a drag on its ability to fully explore its brand prospects

Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x) NPL Ratio (%)

FY'09A 1.27 12.21 0.45 2.9% 10.03 1.55 11.8%

FY'10E 1.59 12.38 0.88 4.4% 8.74 2.25 7.6%

FY'11F 1.76 11.20 0.97 4.9% 9.53 2.07 7.5%

FY'12F 2.04 9.68 1.12 5.7% 10.45 1.89 7.2%

FY'13F 2.24 8.80 1.23 6.2% 11.46 1.72 7.0%

Source: Company Financials, Vetiva Research

January 2011

42

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets and EI Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2007
48,567 32,016 (13,272) 18,744 16,551 35,295 (19,325) (253) 15,716 (2,523) 13,194 2007 32,381 95,000 168,694 115,746 53,789 20,880 411,822 486,491 294,546 58,063 83,896 352,609 436,505

2008
104,120 68,205 (22,363) 45,842 35,915 81,757 (42,538) (4,042) 35,177 (6,862) 28,316 2008 63,082 219,260 153,818 418,779 68,153 39,630 854,939 962,722 472,271 62,897 245,521 535,167 780,688

2009
162,550 119,568 (40,540) 79,027 42,983 122,010 (56,520) (37,527) 27,963 (4,276) 23,687 2009 35,890 225,330 179,016 563,488 16,288 46,491 1,003,724 1,066,504 698,063 77,818 98,378 775,881 874,259

2010E
155,275 109,349 (36,520) 72,829 45,926 118,755 (65,377) (6,993) 46,385 (9,277) 37,108 2010 F 29,329 269,825 217,034 586,400 17,597 52,969 1,102,588 1,173,154 762,550 84,674 116,986 847,224 964,210

2011F
172,500 123,214 (46,746) 76,467 49,286 125,753 (67,546) (6,939) 51,268 (10,254) 41,014 2011 F 39,418 289,065 216,799 692,501 19,709 56,441 1,237,783 1,313,933 867,196 83,523 135,814 950,718 1,086,532

2012F
195,449 139,607 (53,200) 86,407 55,843 142,249 (76,122) (6,796) 59,332 (11,866) 47,466 2012 F 54,265 294,584 279,079 819,092 38,761 64,659 1,447,021 1,550,440 1,023,291 33,533 244,857 1,056,824 1,301,681

Ordinary share capital Reserves Equity

4,000 45,986 49,986

7,462 174,572 182,034 2008

9,327 182,918 192,245 2009 56.1% 49.2% -20.5% -16.3% 8.5% 12.7% 2.3% 14.6%

11,659 197,285 208,944 2010E -4.5% -2.7% 65.9% 56.7% 6.9% 18.5% 3.3% 23.9%

11,659 215,742 227,400 2011F 11.1% 5.9% 10.5% 10.5% 6.5% 18.8% 3.3% 23.8%

11,659 237,101 248,760 2012 E 13.3% 13.1% 15.7% 15.7% 6.4% 19.9% 3.3% 24.3%

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 7.2% 24.4% 3.9% 27.2% 114.4% 131.6% 123.8% 114.6%

January 2011

43

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Total Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2007
326 215 (89) 126 111 237 (130) (2) 105 (17) 88 2007 217 637 1,131 776 361 140 2,761 3,261 1,975 389 562 2,364 2,926 27 308 335

2008
698 457 (150) 307 241 548 (285) (27) 236 (46) 190 2008 423 1,470 1,031 2,807 457 266 5,731 6,454 3,166 422 1,646 3,588 5,234 50 1,170 1,220 2008

2009
1,090 802 (272) 530 288 818 (379) (252) 187 (29) 159 2009 241 1,511 1,200 3,777 109 312 6,729 7,150 4,680 522 660 5,201 5,861 63 1,226 1,289 2009

2010E
1,041 733 (245) 488 308 796 (438) (47) 311 (62) 249 2010 F 197 1,809 1,455 3,931 118 355 7,391 7,865 5,112 568 784 5,680 6,464 78 1,323 1,401 2010E

2011F
1,156 826 (313) 513 330 843 (453) (47) 344 (69) 275 2011 F 264 1,938 1,453 4,642 132 378 8,298 8,808 5,813 560 910 6,373 7,284 78 1,446 1,524 2011F

2012F
1,310 936 (357) 579 374 954 (510) (46) 398 (80) 318 2012 F 364 1,975 1,871 5,491 260 433 9,700 10,394 6,860 225 1,641 7,085 8,726 78 1,589 1,668 2012F

Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 1.8% 118.4% 45.3% 90.6% 28.1% 18.9% 11.8% 48.9% 41.3% 85.7% 25.6% 18.0% 7.6% 75.0% 44.0% 82.4% 25.7% 17.8% 7.5% 75.0% 41.5% 85.5% 24.3% 17.3% 7.2% 75.0% 40.5% 85.5% 22.5% 16.0% 5.0% 10.8% 57.0% 6.2% 12.9% 77.1% 4.5% 10.4% 60.9% 5.2% 10.5% 59.2% 5.3% 10.4% 58.3%

January 2011

44

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Stanbic-IBTC Bank Plc (IBTC)

B A SIC IN F OR M A T ION Address I.B.T.C. Place, Walter Carringto n Victoria Island, lago s Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbol OWN ER SH IP ST R UC T UR E (%) Retail Shareholders Institutio nal Shareholders SH A R E ST A T IST IC S Shares in issue (M ) Share Price (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VA LUA T ION M ET R IC S Boo k Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROE (%) Leverage Ratio (x) 82,984 21.88 2.37 2.9% 1 0.8% 4.70 18,750 10.50 193,688 1,298 12.00% 27,643 185.3 1 1.38 9.20 12.00% 88.00% www.stanbicibtc.com Atedo N. A. Peterside Chris Newso n December Nigerian Stock Exchange Bloo mberg: IBTCCB:NL

Investment Banking is the Cash Cow
IBTC which is largely an investment bank, with 76% of gross earnings traceable to Wealth Management and Investment banking operations, needs to further diversify its business to avert probable regulatory constraint in the near term. 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 valuation relative to the average P/BV of 1.1x of Nigerian Tier-II lenders). Just 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 N10.02/share for IBTC. This valuation presents a 4.6% downside risk; albeit we are “NEUTRAL” on IBTC given market sentiments. Investment thesis Penetrating the market faster than we anticipated: With IBTC’s recent aggressive organic growth, we suspect the bank has rescinded its earlier interest in acquiring a CBN-intervened bank. In spite of the lull in the industry, over 2010 IBTC added >50 branches to gross up its footprint to 128. In our 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 harvesting the attractive spread in the retail market. 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% (relative to FY’09 level), a reflection of its proactive steps to take full 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 aggressive appetite for risk is fuelled by the depressed yield on money market instruments, and also supported by its high CAR (still 27.8% from 35.0% in FY’09), the bank takes on the risk of asset quality deterioration. We look forward to FY’11 PAT flight of 55%: In addition to our expectation of earnings rub-off from loan book expansion, we believe the 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 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 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%.
Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x) NPL Ratio (%) FY'09A 0.43 17.21 0.30 4.0% 4.29 1.74 14.7% FY'10E 0.54 19.13 0.30 2.9% 4.54 2.28 9.3% FY'11F 0.87 11.91 0.48 4.6% 4.93 2.10 8.5% FY'12F 1.02 10.11 0.56 5.4% 5.39 1.92 8.0% FY'13F 1.25 8.27 0.69 6.6% 5.95 1.74 8.0%

STANBIC IBTC VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010

Source: Company; Vetiva Research

Source: Company Financials, Vetiva Research

January 2011

45

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets and EI Profit Before Tax Taxation Profit After Tax

2007
28,651 15,772 (6,171) 9,601 12,879 22,480 (9,444) (2,044) 10,992 (3,142) 7,850

2008
61,240 40,973 (18,611) 22,362 20,267 42,629 (22,982) (5,020) 14,627 (2,632) 11,995

2009
59,781 40,920 (15,813) 25,107 18,716 43,823 (28,623) (4,858) 10,342 (2,204) 8,138

2010E
52,679 33,341 (7,238) 26,103 19,338 45,441 (30,040) (1,336) 14,066 (3,938) 10,127

2011F
69,069 43,715 (8,465) 35,249 25,354 60,604 (36,286) (1,728) 22,589 (6,325) 16,264

2012F
79,119 50,075 (10,377) 39,698 29,044 68,742 (39,695) (2,434) 26,613 (7,452) 19,161

Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2007 13,038 79,579 122,603 79,465 11,762 8,662 294,684 315,107 71,391 27,533 140,164 98,924 239,088

2008 11,587 111,592 94,788 98,398 19,455 15,433 316,365 351,253 95,240 12,201 162,434 107,441 269,875

2009 7,772 76,954 91,636 110,508 27,538 26,878 286,870 341,286 169,200 50,981 39,608 220,181 259,789

2010 F 10,068 76,516 96,652 173,894 16,109 29,479 357,130 402,717 169,141 12,776 135,763 181,918 317,680

2011 F 9,263 92,625 101,888 210,111 18,525 30,714 413,886 463,125 208,406 12,776 149,587 221,182 370,769

2012 F 10,652 106,519 106,519 253,213 21,304 34,388 476,902 532,594 239,667 10,841 181,107 250,509 431,615

Ordinary share capital Reserves Equity

9,375 66,644 76,019

9,375 72,003 81,378

9,375 72,122 81,497

9,375 75,662 85,037

9,375 82,981 92,356

9,375 91,604 100,979

2008 Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 7.3% 15.2% 3.6% 19.6% 113.7% 89.6% 33.1% 52.8%

2009

2010E

2011F

2012 E

-2.4% 2.8% -29.3% -32.2%

-11.9% 3.7% 36.0% 24.4%

31.1% 33.4% 60.6% 60.6%

14.6% 13.4% 17.8% 17.8%

8.3% 10.0% 2.4% 13.6%

8.1% 12.2% 2.7% 19.2%

9.1% 18.3% 3.8% 23.5%

8.9% 19.8% 3.8% 24.2%

January 2011

46

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2007
192 106 (41) 64 86 151 (63) (14) 74 (21) 53 2007 87 533 822 533 79 58 1,975 2,112 479 185 940 663 1,603 63 447 510

2008
411 275 (125) 150 136 286 (154) (34) 98 (18) 80 2008 78 748 635 660 130 103 2,121 2,355 638 82 1,089 720 1,809 63 483 546 2008

2009
401 274 (106) 168 125 294 (192) (33) 69 (15) 55 2009 52 516 614 741 185 180 1,923 2,288 1,134 342 266 1,476 1,742 63 483 546 2009

2010E
353 224 (49) 175 130 305 (201) (9) 94 (26) 68 2010 F 67 513 614 741 185 180 2,394 2,300 1,134 86 910 1,220 2,130 63 507 570 2010E

2011F
463 293 (57) 236 170 406 (243) (12) 151 (42) 109 2011 F 62 621 648 1,166 108 198 2,775 2,802 1,134 86 1,003 1,483 2,222 63 556 619 2011F

2012F
530 336 (70) 266 195 461 (266) (16) 178 (50) 128 2012 F 71 714 683 1,409 124 206 3,197 3,207 1,397 73 1,214 1,679 2,684 63 614 677 2012F

Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 14.3% 66.9% 62.1% 114.2% 32.9% 23.2% 14.7% 70.2% 51.7% 83.1% 35.0% 23.9% 9.3% 80.0% 45.5% 112.2% 33.7% 21.1% 8.5% 80.0% 44.0% 109.2% 31.0% 19.9% 8.0% 80.0% 42.0% 114.0% 28.6% 19.0% 7.3% 13.4% 65.7% 6.0% 13.6% 76.4% 3.5% 10.4% 69.0% 3.9% 11.3% 62.7% 4.0% 11.2% 61.3%

January 2011

47

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

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 1 665, Oyin Jolayemi Str., Victo ria Island, Lagos. Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l OWN E R SH IP ST R UC T UR E ( %) Retail Shareho lders Institutio nal (Do mestic) Fo reign S H A R E ST A T IS T IC S Shares in issue (M ) Share Price (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily A verage Value Traded (N'000) Dailly Average Value Traded (USD'000) Year high (N) Year lo w (N) V A LUA T ION M ET R IC S B oo k Value (N'm) Trailing P/E (x) P /B (x) Div. Yield (%) ROE (%)
Rebased 04/01/2010 Leverage Ratio (x)

A Tenacious Brand Posing Challenge to Market Leaders
We bring back to mind investors’ acknowledgement of the attractive near term earnings potentials of ACCESS as reinforced by the positive returns of its shares amid 2009 investors’ aversion to banking counters. Notwithstanding the appreciable gains recorded in the last two years, our base case valuation which stands at N12.80/share justifies the gains with an attractive potential return outlook of 25.4%, thus informing our “BUY” rating on ACCESS. Investment thesis Bridging the gap; ACCESS may join the big-4 Nigerian lenders soon: 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 balance sheet and loan book by 18% and 10% correspondingly. We believe ACCESS’ capital buffer as reflected in its CAR of 28% offers adequate leeway for its convergence with Nigeria’s big-4 lenders. While we are buyers of efficiency as against bungling rivalry for size, we are confident that ACCESS’ 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 and imminent scale economies. With its steady organic growth and penetration of the retail market which we believe will complement a modest brand in the corporate space, ACCESS may post earnings surprise beyond our FY’11 outlook of N22.8 billion. Improving asset quality and reporting are laudable: ACCESS’ fruitful balance sheet repair is laudable, from a NPL of 19% in FY’09 to 11% as at 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 relative comfort in the quality of ACCESS’ earnings, given its modest coverage of +80% over NPLs and improved disclosure. Though the bank will maintain a dual reporting till regulatory cut-off date set at January 2012, ACCESS has implemented full conversion of its system to IFRS. Suppressed margin is an interim phenomenon, correction looms: 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 assets, we see a marginal correction in 2011 ALM as easing risk environment 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%.
Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) FY'09A -0.27 nm 0.00 0.0% 10.30 0.74 19.0% FY'10E 0.79 12.99 0.44 4.2% 9.72 1.06 11.0% FY'11F 1.27 8.08 0.70 6.8% 10.29 1.00 9.5% FY'12F 1.62 6.35 0.89 8.7% 11.02 0.93 8.5% FY'13F 2.01 5.12 1.11 10.7% 11.93 0.86 7.5%

www.accessbankplc.co m G. Oyebo de A. I. Aig-Imo ukhuede December Nigerian Sto ck Exchange Blo o mberg: ACCESS:NL

35.26% 37.68% 27.06%

1 7,888 1 9 0.1 1 84,070 1 ,234 35.26% 1 4,701 1 768.9 1 .1 10 9.50

1 70,633 1 4.35 1 .06 3.9% 7.4% 4.90

ACCESS VS BANKING VS NSE ASI PERFORMANCE

Source: Company; Vetiva Research

Price to Book (x) NPL Ratio (%)

January 2011

48

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2007
27,881 16,894 (4,952) 11,942 10,988 22,930 (13,111) (1,775) 8,043 (1,960) 6,083 2007 30,636 127,797 44,421 107,751 8,778 9,233 310,604 328,615 211,851 0 88,379 211,851 300,230

2008
57,999 40,677 (14,646) 26,031 17,323 43,353 (20,610) (3,897) 18,846 (2,993) 15,853 2008 34,949 550,888 166,150 245,836 32,405 15,471 997,823 1,045,699 423,149 14,652 435,907 437,801 873,708

2009
66,076 47,563 (11,337) 36,226 18,513 54,739 (35,914) (21,530) (2,705) (921) (3,626) 2009 64,593 93,177 100,389 386,910 20,732 27,945 645,069 693,746 442,072 46,349 36,979 488,421 525,400

2010E
101,378 73,998 (29,672) 44,326 27,379 71,706 (43,794) (8,226) 19,685 (5,512) 14,173 2010 F 41,625 149,849 158,174 433,440 24,142 25,265 783,088 832,495 574,422 84,208 574,422 658,629

2011F
124,699 91,021 (40,439) 50,582 33,678 84,260 (49,039) (4,836) 30,385 (7,596) 22,789 2011 F 49,950 168,164 179,819 522,871 29,970 26,576 920,804 977,349 689,306 125,568 689,306 814,874

2012F
147,250 109,074 (49,648) 59,426 38,176 97,602 (55,104) (3,863) 38,635 (9,659) 28,976 2012 F 59,940 188,477 203,795 632,128 35,964 27,208 1,084,340 1,147,511 815,179 186,454 815,179 1,001,633

Ordinary share capital Reserves Equity

3,489 24,896 28,385

8,071 163,733 171,805 2008

8,131 159,357 167,488 2009

8,944 164,922 173,866 2010E

8,944 175,177 184,121 2011F

8,944 188,216 197,160 2012 E

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 4.0% 15.8% 2.3% 27.3% 4.4% -2.1% -0.4% -5.5% 6.2% 8.3% 1.9% 14.0% 5.9% 12.7% 2.5% 18.3% 5.9% 15.2% 2.7% 19.7% 108.0% 89.1% 134.3% 160.6% 13.9% 26.3% -114.4% -122.9% 53.4% 31.0% -827.7% -490.9% 23.0% 17.5% 54.4% 60.8% 18.1% 15.8% 27.2% 27.2%

January 2011

49

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax

2007
187 113 (33) 80 74 154 (88) (12) 54 (13) 41

2008
389 273 (98) 175 116 291 (138) (26) 126 (20) 106

2009
443 319 (76) 243 124 367 (241) (144) (18) (6) (24)

2010E
680 496 (199) 297 184 481 (294) (55) 132 (37) 95

2011F
836 610 (271) 339 226 565 (329) (32) 204 (51) 153

2012F
987 731 (333) 398 256 654 (369) (26) 259 (65) 194

Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2007 205 857 298 722 59 62 2,082 2,203 1,420 0 592 1,420 2,013 23 167 190

2008 234 3,693 1,114 1,648 217 104 6,689 7,010 2,837 98 2,922 2,935 5,857 54 1,098 1,152

2009 433 625 673 2,594 139 187 4,324 4,651 2,964 311 248 3,274 3,522 55 1,068 1,123

2010 F 279 1,005 673 2,594 139 187 5,250 4,877 2,964 311 248 3,851 3,522 55 1,068 1,123

2011 F 335 1,127 1,060 2,906 162 169 6,173 5,759 3,851 565 4,621 4,415 60 1,106 1,166

2012 F 402 1,264 1,205 3,505 201 178 7,269 6,755 4,621 842 5,465 5,463 60 1,174 1,234

2008 Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 3.7% 117.9% 71.9% 60.8% 40.8% 16.4% 4.5% 6.2% 56.5%

2009

2010E

2011F

2012F

2.4% 5.8% 104.9%

5.6% 10.4% 72.5%

6.4% 10.7% 63.9%

6.6% 10.9% 60.4%

19.0% 37.1% 37.2% 95.2% 36.4% 24.1%

11.0% 65.0% 42.0% 82.1% 32.6% 20.9%

9.5% 70.0% 40.7% 82.1% 28.9% 18.8%

8.5% 70.0% 39.4% 83.3% 25.9% 17.2%

January 2011

50

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Skye Bank Plc (SKYE)

B A S IC IN F O R M A T IO N A ddress 3, A kin A deso la Str., Victo ria Island, Lago s. Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l O WN E R S H IP S T R UC T UR E (%) Retail Shareho lders Institutio nal Shareho lders S H A R E S T A T IS T IC S Shares in issue (M ) Share P rice (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily A verage Value Traded (N'000) Daily A verage Value Traded (USD'000) Year high (N) Year lo w (N) V A LUA T IO N M E T R IC S B o o k Value (N'm) Trailing P /E (x) P /B (x) Div. Yield (%) ROE (%) Leverage Ratio (x) 1 06,859 1 .03 1 17 .1 0.5% 1 0.6% 6.42 1 3,220 9.49 1 25,458 841 71 .39% 88,479 593 1 7 0.1 8.80 71 .39% 28.61 % www.skyebankng.co m A lhaji M . A . K. Smith Kehinde Duro sinmi-Etti December Nigerian Sto ck Exchange B lo o mberg: SKYEB A NK:NL

Retail Bank of the South
SKYE’s modest brand in the retail and public sector segments of the southern part of Nigeria continues to pay-off as it guarantees the bank a steady flow of cheap funding. Having convinced the market with an annualised Q3’10 RoAE 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 PAT growth outlook of 27% and near term average RoAE of 18.4%. Relying on 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 target price of N10.86. Investment thesis 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% subscribed at N7 – N7.1 book building band. The bank thus grosses its equity capital to N106.9 billion. It is apt to say that the fresh capital injection was also necessitated by its lean CAR which stood at 101 basis points above management’s guidance of 15% in FY’09. 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 worrying FY’09 NPL of 19%, the bank turns attention to the high-end of the 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 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 liquidity position; 380bps below new regulatory threshold of 30%. We therefore look forward to see another tranche of capital raising. Margin resilience to sustain attractive earnings growth outlook: Though the current balance sheet position of the bank will put a constraint on 2011 operations with impact on earnings potential, we are upbeat on our FY’11 PAT 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) collection in key commercial hubs, including Lagos and Rivers state. We think the bank can post upside surprise if it clamps down its cost-to-income ratio beyond our outlook of 73%.

SKYE BANK VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010

Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x)
Source: Company; Vetiva Research

FY'09A 0.00 nm 0.05 0.9% 7.60 0.72 15.0%

FY'10E 0.79 11.96 0.44 4.6% 7.82 1.21 14.5%

FY'11F 1.01 9.43 0.55 5.8% 8.28 1.15 13.5%

FY'12F 1.24 7.67 0.68 7.2% 8.83 1.07 13.0%

FY'13F 1.67 5.68 0.92 9.7% 9.59 0.99 12.0%

NPL Ratio (%)

Source: Company Financials, Vetiva Research

January 2011

51

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
41,720 29,324 (10,531) 18,793 12,396 31,189 (20,624) (2,595) 7,970 (2,085) 5,885 2007 17,823 90,160 83,121 108,459 135,652 12,777 299,563 447,992 267,095 27,157 122,169 294,252 416,421

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets and EI Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2008
78,277 55,319 (20,544) 34,775 22,958 57,733 (32,146) (4,113) 21,474 (5,456) 16,018 2008 40,255 217,016 119,630 244,731 148,548 20,528 621,632 790,708 500,212 37,744 155,963 537,956 693,919

2009
131,521 99,974 (51,946) 48,028 31,547 79,575 (43,884) (34,847) 844 (968) (124) 2009 31,144 122,444 84,072 316,664 35,523 42,664 554,324 632,511 450,187 36,285 55,609 486,472 542,081

2010E
90,046 72,618 (27,545) 45,073 17,428 62,501 (43,775) (5,617) 13,110 (2,622) 10,488 2010 F 33,207 46,490 128,842 352,440 66,414 36,744 560,979 664,137 431,689 129,008 431,689 560,697

2011F
96,242 78,887 (31,116) 47,771 17,355 65,126 (43,993) (4,505) 16,628 (3,326) 13,303 2011 F 44,630 59,507 140,584 388,194 74,383 36,535 632,915 743,833 483,491 150,916 483,491 634,407

2012F
109,621 89,854 (35,634) 54,220 19,768 73,987 (49,075) (4,474) 20,438 (4,088) 16,350 2012 F 51,324 76,987 164,238 436,860 85,541 40,458 729,409 855,408 564,569 174,055 564,569 738,625

Ordinary share capital Reserves + Minority Interest Equity

3,752 27,819 31,571

5,792 90,997 96,789 2008

5,792 84,638 90,430 2009

6,610 96,829 103,439 2010E

6,610 102,816 109,426 2011F

6,610 110,173 116,783 2012 E

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 7.5% 25.0% 2.6% 20.5% 8.2% -0.1% 0.0% -0.1% 8.1% 10.8% 1.6% 11.6% 8.0% 12.5% 1.9% 13.8% 8.0% 14.5% 2.0% 14.9% 87.6% 85.1% 169.4% 172.2% 68.0% 37.8% -96.1% -100.8% -31.5% -21.5% 1453.3% -8557.8% 6.9% 4.2% 26.8% 26.8% 13.9% 13.6% 22.9% 22.9%

January 2011

52

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
280 197 (71) 126 83 209 (138) (17) 53 (14) 39 2007 119 604 557 727 909 86 2,008 3,003 1,791 182 819 1,973 2,792 25 186 212

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2008
525 371 (138) 233 154 387 (215) (28) 144 (37) 107 2008 270 1,455 802 1,641 996 138 4,167 5,301 3,353 253 1,046 3,606 4,652 39 610 649 2008

2009
882 670 (348) 322 211 533 (294) (234) 6 (6) (1) 2009 209 821 564 2,123 238 286 3,716 4,240 3,018 243 373 3,261 3,634 39 567 606 2009

2010E
604 487 (185) 302 117 419 (293) (38) 88 (18) 70 2010 F 223 312 564 2,123 238 286 3,761 3,745 3,018 243 373 2,894 3,634 39 567 606 2010E

2011F
645 529 (209) 320 116 437 (295) (30) 111 (22) 89 2011 F 299 399 864 2,363 445 246 4,243 4,616 2,894 0 865 3,241 3,759 44 649 693 2011F

2012F
735 602 (239) 363 133 496 (329) (30) 137 (27) 110 2012 F 344 516 942 2,602 499 245 4,890 5,149 3,241 0 1,012 3,785 4,253 44 689 734 2012F

Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 3.7% 102.2% 47.7% 23.1% 18.8% 12.2% 15.0% 79.4% 37.6% 56.5% 19.3% 14.3% 14.5% 80.0% 31.4% 86.3% 21.1% 15.6% 13.5% 85.0% 32.9% 83.3% 20.2% 14.7% 13.0% 85.0% 34.2% 78.4% 18.9% 13.7% 4.9% 12.0% 62.8% 10.1% 17.0% 98.9% 6.0% 13.0% 79.0% 6.8% 13.2% 74.5% 6.8% 13.2% 72.4%

January 2011

53

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Diamond Bank Plc (DIAMOND)

B A SIC IN F O R M A T IO N A ddress Plot 1 , Adeola Ho pewell, 261 Visctoria Island, Lago s. Website M anagement (Chairman) M D/CEO Financial Year End Exchange Listing Symbo l Secto r Country O WN ER SH IP ST R UC T UR E ( %) Retail Shareho lders Institutional Shareho lders S H A R E ST A T IST IC S Shares in issue (M ) Share Price (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year lo w (N) V A LUA T IO N M E T R IC S B ook Value (N'm) Trailing P/E (x) P /B (x) Div. Yield (%) ROE (%) Leverage Ratio (x) 105,647 1 9.36 19 .1 0.0% 6.1% 5.84 1 4,475 8.71 1 30,277 873 20.00% 85,058 570.2 9.27 7.50 20.00% 80.00% www.diamo ndbank.co m HRM Igwe N.A.U. Achebe Emeka Onwuka December Nigerian Stock Exchange Bloo mberg: DIAM OND:NL B anking Nigeria

Retail Lender; Wide Spread Too Inciting to Let Go!
While DIAMOND plans to entrench its presence in the high-end corporate market, its near term blueprints are more focused on growing its share in the retail space, in our opinion. We believe the bank’s stance is largely influenced by the relatively attractive wide spread in this niche, especially as it rebalances its 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 believe DIAMOND which currently trades at a 24% premium to its book value is still cheap, given our target price of N10.82. We see an attractive 24% upside to current price and advise you “ACCUMULATE” DIAMOND. Investment thesis Cheap funding and sustained high retail lending rates; drivers of 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 its deposit mix, with cheaper funding sources (savings and demand) constituting 74% of deposit base. Given our expectation of a sustained high rates on retail loan and DIAMOND’s improving access to cheap funds, we are upbeat on its net interest margin which peaked at 10.3% in Q3’10 and expect it to be a core driver for near term profitability. High NPL mirrors retail lending risk: Despite modest coverage of +80%, all eyes are on DIAMOND’s worrying NPL which stood at 16.8% in Q3’10 (vs. mid-tier peer average of 12%). It is imperative to note that the obstinate NPL ratio is also reflective of the 7.9% YoY decline in loans, as this obscures the N9 billion recovery in toxic assets in the last three quarters. Apt to say that this high percentage of NPL is a mirror of the bank’s sizable exposure to the retail end of the credit market which commands >50% of the bank’s loan book. FY’11 RoAE still suppressed; albeit, we see swift near term recovery: 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 resilient yield on assets and improving cost structures (declining funding and 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 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).

Forecast Summary Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x) NPL Ratio (%)

FY'09A -0.56 nm 0.00 0.0% 7.30 1.01 19.7%

FY'10E 0.55 16.43 0.30 3.3% 7.54 1.19 16.7%

FY'11F 1.02 8.85 0.56 6.2% 8.00 1.12 16.0%

FY'12F 1.12 8.05 0.62 6.8% 8.51 1.06 15.0%

FY'13F 1.32 6.80 0.73 8.1% 9.10 0.99 14.0%

Source: Company Financials, Vetiva Research

January 2011

54

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
39,484 25,335 (9,025) 16,310 14,149 30,459 (19,211) (2,240) 9,008 (1,921) 7,087 2007 80,659 26,029 67,366 100,931 29,203 16,231 274,986 320,419 232,967 7,821 25,322 240,788 266,109

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2008
60,438 35,725 (12,379) 23,346 24,713 48,059 (26,966) (4,879) 16,214 (3,393) 12,821 2008 62,864 137,205 84,394 240,449 73,234 27,523 524,912 625,670 428,239 18,623 61,552 446,862 508,414

2009
67,736 50,746 (24,896) 25,850 16,608 42,458 (30,087) (24,745) -12,374 4,200 (8,174) 2009 70,429 101,664 88,305 302,487 50,306 37,567 562,884 650,757 482,056 33,710 28,897 515,767 544,664

2010E
86,586 64,137 (20,041) 44,096 22,448 66,545 (44,761) (10,694) 11,090 (3,161) 7,929 2010 F 22,959 102,039 119,258 309,116 44,642 39,728 553,372 637,742 452,797 23,708 52,022 476,505 528,527

2011F
98,042 72,624 (23,959) 48,665 25,418 74,083 (49,331) (4,165) 20,587 (5,867) 14,720 2011 F 28,061 105,227 133,288 348,606 43,494 42,840 615,182 701,516 498,076 23,708 63,892 521,785 585,677

2012F
106,577 81,983 (26,480) 55,503 24,595 80,097 (52,562) (4,889) 22,646 (6,454) 16,192 2012 F 31,428 117,855 137,497 404,833 47,142 46,944 691,613 785,698 557,846 23,708 81,019 581,554 662,573

Ordinary share capital Reserves Equity

4,700 49,610 54,310

6,580 110,676 117,256 2008

7,238 98,855 106,093 2009

7,238 101,978 109,215 2010E

7,238 108,602 115,839 2011F

7,238 115,888 123,126 2012 E

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 5.8% 14.9% 2.7% 21.2% 4.8% -7.3% -1.3% -12.1% 7.9% 7.4% 1.2% 9.2% 8.3% 13.1% 2.2% 15.0% 8.5% 13.6% 2.2% 15.2% 53.1% 57.8% 80.0% 80.9% 12.1% -11.7% -176.3% -163.8% 27.8% 56.7% -189.6% -197.0% 13.2% 11.3% 85.6% 85.6% 8.7% 8.1% 10.0% 10.0%

January 2011

55

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
265 170 (61) 109 95 204 (129) (15) 60 (13) 48

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax

2008
405 239 (83) 157 166 322 (181) (33) 109 (23) 86

2009
454 340 (167) 173 111 285 (202) (166) (83) 28 (55)

2010E
580 430 (134) 296 150 446 (300) (72) 74 (21) 53

2011F
657 487 (161) 326 170 497 (331) (28) 138 (39) 99

2012F
714 550 (178) 372 165 537 (352) (33) 152 (43) 109

Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2007 541 174 452 677 196 109 1,843 2,148 1,562 52 170 1,614 1,784 32 333 364

2008 421 920 566 1,612 491 185 3,519 4,194 2,871 125 413 2,996 3,408 44 742 786

2009 472 682 592 2,028 337 252 3,773 4,363 3,232 226 194 3,458 3,651 49 663 711

2010 F 154 684 592 2,028 337 252 3,710 4,047 3,232 226 194 3,194 3,651 49 663 711

2011 F 188 705 799 2,072 299 266 4,124 4,331 3,035 159 349 3,498 3,543 49 684 732

2012 F 211 790 894 2,337 292 287 4,636 4,810 3,339 159 428 3,899 3,926 49 728 777

2008 Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 4.4% 88.7% 45.5% 58.5% 28.0% 18.7% 3.6% 8.9% 66.3%

2009

2010E

2011F

2012F

5.2% 9.3% 129.1%

4.0% 11.5% 83.3%

4.8% 12.4% 72.2%

4.8% 12.5% 71.7%

19.7% 64.5% 40.0% 71.9% 20.9% 16.3%

16.7% 85.0% 38.3% 80.3% 24.5% 17.1%

16.0% 85.0% 38.0% 81.8% 23.5% 16.5%

15.0% 85.0% 36.5% 84.0% 22.0% 15.7%

January 2011

56

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point First City Monumental Bank Plc (FCMB)

B A SIC IN F O R M A T ION Address 17A Tinubu Street, Lagos. Website M anagement (Chairman) GM D/CEO Financial Year End Exchange Listing Symbo l O WN ER SH IP ST R UC T UR E (%) Retail Shareho lders Institutional Shareholders SH A R E ST A T IST IC S Shares in issue (M ) Share Price (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Flo at (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year lo w (N) VA LUA T IO N M ET R IC S Boo k Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Leverage Ratio (x) 133,355 21.58 1.00 0.0% 4.6% 3.84 16,271 8.20 1 33,424 894 18.8% 51,543 346 8.20 7.50 18.8% 81.2% www.firstcitygro up.co m Dr. Jonathan AD Long Ladi O. Balogun December Nigerian Stock Exchange FCM B: NL

Taking a Deeper Dive into the Low-End of the Market
The equity of FCMB still trades at par with its book value (P/BV of 1.0x Vs. average peer pricing of 1.2x). Our valuation uplifts the shares of this bank given 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 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 justified P/BV of 1.16x. Going by the current price of FCMB (N8.20), an investor with a 12-month horizon should harvest 15.9% capital gain. We therefore suggest that value investors “ACCUMULATE” FCMB. Investment thesis Deposit and near term profitability outlook buoys appetite for retail penetration: As part of the strategic repositioning to cushion the impact of intensifying competition in the investment banking space and exploit opportunities in the low-end of the commercial banking market, FCMB takes a deeper dive into retail market. Though, the retail banking SBU continues to post losses as it is yet to reach critical mass, the growth trajectory has been impressive. Also providing succour to the bank is the impressive earnings profile of Credit Direct Limited; a complementary retail SPV which contributes +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. IFC investment to accelerate growth momentum: The finance arm of the World Bank; International Finance Corporation (IFC) invested US$70 million (≈N10.5 billion) in FCMB in the last quarter of 2010. The funding; a senior loan of US$50 million and US$20 million convertible debt which is dedicated to agribusiness and education sector financing, will accelerate the bank’s foray into the retail market. Though the bank’s appetite to acquire one of the rescued banks appears to be waning, we are cautious to say that FCMB may revisit this inorganic growth path, especially as its deal with IFC includes probable acquisition finance of a distressed bank. Our expected FY’11 EPS of N1.02 justifies FCMB’s cheapness: Our 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 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 Earnings Per Share (N) Price to Earnings (x) Dividend Per Share (N) Dividend Yield (%) Net Assets Per Share (N) Price to Book (x) NPL Ratio (%) Dec'09 -0.03 nm 0.00 0.0% 7.93 0.90 14.8% FY'10E 0.54 15.10 0.30 3.6% 8.18 1.00 7.0% FY'11F 1.02 8.01 0.56 6.9% 8.64 0.95 6.5% FY'12F 1.25 6.57 0.69 8.4% 9.20 0.89 6.0% FY'13F 1.45 5.66 0.80 9.7% 9.85 0.83 5.5%

FCMB VS BANKING VS NSE ASI PERFORMANCE
Rebased 04/01/2010

Source: Company; Vetiva Research

Source: Company Financials, Vetiva Research

January 2011

57

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
52,819 30,195 (9,242) 20,954 22,624 43,577 (19,900) (3,159) 20,517 (5,408) 15,109 2008 8,473 194,748 29,038 186,634 31,813 16,630 418,894 467,337 251,223 50,770 31,693 301,993 333,686

INCOME STATEMENT (N'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Non Interest Income Operating income Operating expenses Provision for risk assets + EI Profit Before Tax Taxation Profit After Tax Balance Sheet (N'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits + Interbank Borrowings and Managed Funds Other Liabilities Interest bearing liabilities Total Liabilities

2009April
71,658 55,566 (17,941) 37,625 16,092 53,717 (27,097) (21,846) 4,774 (779) 3,995 2009April 7,169 165,146 39,433 271,103 11,750 21,001 482,851 515,602 321,219 38,200 27,127 359,419 386,546

2009Dec
35,206 28,633 (15,483) 13,150 6,573 19,723 (14,469) (5,733) (479) (479) 2009Dec 12,045 55,945 48,301 278,675 8,913 22,036 394,966 425,916 248,356 31,046 17,459 279,402 296,860

2010E
61,056 44,894 (20,415) 24,479 16,162 40,641 (31,838) 2,982 11,785 (2,946) 8,838 2010E 25,555 71,554 66,443 321,761 2,555 23,230 485,313 511,099 337,325 25,517 15,224 362,842 378,066

2011F
82,634 58,193 (24,296) 33,897 24,441 58,338 (34,806) (1,323) 22,209 (5,552) 16,657 2011F 29,388 88,165 70,532 365,757 8,816 25,106 553,841 587,763 387,924 25,517 33,795 413,440 447,235

2012F
96,782 68,157 (28,167) 39,990 28,626 68,616 (40,580) (953) 27,083 (6,771) 20,312 2012F 33,796 101,389 94,630 412,074 6,759 27,279 641,890 675,928 452,872 25,517 47,871 478,388 526,259

Ordinary share capital Reserves Equity

8,136 125,516 133,651

8,136 120,920 129,055 2009April

8,136 120,920 129,055 2009Dec

8,136 124,897 133,033 2010E

8,136 132,393 140,528 2011F

8,136 141,533 149,669 2012F

Growth (%) Gross Earnings Operating Income Profit Before Tax Profit After Tax Profitability (%) Net Interest Margin Return on Average Equity Return on Average Assets Net Profit Margin 8.3% 3.0% 0.8% 5.6% 3.0% -0.4% -0.1% -1.4% 5.6% 6.7% 1.9% 14.5% 6.5% 12.2% 3.0% 20.2% 6.7% 14.0% 3.2% 21.0% 35.7% 23.3% -76.7% -73.6% -50.9% -63.3% -110.0% -112.0% 73.4% 106.1% nm nm 35.3% 43.5% 88.5% 88.5% 17.1% 17.6% 21.9% 21.9%

January 2011

58

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
354 202 (62) 140 152 292 (133) (21) 138 (36) 101

INCOME STATEMENT (USD'Mill)
Gross Earnings Interest earnings Interest expense Net interest income Other income Operating income Operating expenses Provision for risk assets Profit Before Tax Taxation Profit After Tax

2009April
480 373 (120) 252 108 360 (182) (146) 32 (5) 27

2009Dec
236 192 (104) 88 44 132 (97) (38) (3) (3)

2010E
409 301 (137) 164 108 272 (213) 20 79 (20) 59

2011F
554 390 (163) 227 164 391 (233) (9) 149 (37) 112

2012F
649 457 (189) 268 192 460 (272) (6) 182 (45) 136

Balance Sheet (USD'Mill) Cash and balances with CBN Interbank Placement Investment Securities Loans and advances Other Assets Property and equipment Total Interest Earning Assets Total Assets Customer deposits Other borrowings Other Liabilities Interest bearing liabilities Total Liabilities Ordinary share capital Reserves Total Equity

2008 57 1,306 195 1,251 213 111 2,808 3,133 1,684 340 212 2,024 2,237 55 841 896

2009April 48 1,107 264 1,817 79 141 3,237 3,456 2,153 256 182 2,409 2,591 55 811 865

2009Dec 81 375 324 1,868 60 148 2,648 2,855 1,665 208 117 1,873 1,990 55 811 865

2010E 171 480 324 1,868 60 148 3,253 3,050 1,665 208 117 2,432 1,990 55 837 892

2011F 197 591 445 2,157 17 156 3,713 3,563 2,261 171 102 2,772 2,534 55 888 942

2012F 227 680 473 2,452 59 168 4,303 4,058 2,601 171 227 3,207 2,998 55 949 1,003

2009April Efficiency Ratios (%) Cost of Funds Yields on Assets Cost to Income Ratio Asset Quality, Liquidity & Solvency (%) NPL Ratio Coverage Ratio Liquid Asset to Total Asset Loan-to-deposit ratio (LTD) Capital Adequacy Ratio (CAR) Equity-to-Total Asset (Leverage) 10.1% 80.6% 41.1% 91.9% 36.9% 25.0% 5.4% 12.3% 91.1%

2009Dec

2010E

2011F

2012F

4.8% 6.5% 102.4%

6.4% 10.2% 71.0%

6.3% 11.2% 61.9%

6.3% 11.4% 60.5%

14.8% 65.5% 27.3% 124.2% 34.2% 30.3%

7.0% 80.0% 32.0% 103.3% 33.6% 26.0%

6.5% 85.0% 32.0% 101.5% 30.8% 23.9%

6.0% 90.0% 34.0% 97.4% 28.9% 22.1%

January 2011

59

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

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 in the ‘Black Region’ which represents countries such as Russia, Australia, Ukraine, Kazakhstan and the EU that are the major producers of food commodities. Global wheat, sugar and coarse grain inventory are currently forecast to drop significantly, wiping out nearly all the build-up of the past several years. Falling U.S. corn and EU barley inventory account for 80% of 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 hot weather in Latin America, climate change-induced bad weather in the Black Region as well as political unrest in Cote d’Ivoire have contributed to price pressures, as outlook for output continues to be reviewed downwards. Floods in Australia, excessively hot weather in Latin America and climate change-induced bad weather in the Black Region have also contributed to the upward pressure on prices, as outlook for output continues to be reviewed downwards. The United States Department for Agriculture (USDA) revised global outlook for crop harvests after the warning, as supply shocks continue to pressure already high prices. For example, wheat prices are expected to remain volatile especially in H1’11, while wheat futures have risen 80% since 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.

Global commodity prices, especially food, which are majorly influenced by factors affecting supply and demand, are at near-term highs and consensus estimates are for further increases.

January 2011

60

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

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 demand/consumption, and this situation held up until September. We also highlighted a major risk to our analysis being an extension of the ban on wheat exports by Russia. The above stated risks did play out unfortunately and as a result the present situation and outlook for wheat prices seems gloomy for the rest of the year as 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.

The outlook for wheat prices is dampened as demand outstrips supply, exacerbated by expectations of tighter supplies of high-quality wheat with a sharp reduction in grain quality in 2011 for Germany, Canada and Australia.

SUPPLY FALLS AS DEMAND RISES
2008 – 2010 (DEC)
690 Production 680 Consumption

WHEAT PRICES
(July 2009 – December 2010) Dollars per Bushel
10

670

Deficit of 22MT

9 8 7 6 5 4 3 2

660

650

640

630

620

610 2008/09 2009/10 2010/11 Source: USDA; Vetiva Research

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Source: Bloomberg; Vetiva Research

We expect soaring wheat prices to impact margins for the two major flour millers but the effect will vary for both companies. Should the burden become too heavy, the flour millers may pass on costs to consumers.

We are of the opinion that Flour Mills also has a wealth of experience in this sector given its 50 years existence and would have long ago devised means of dealing with this issue. On the other hand, Dangote Flour maybe relatively more exposed in terms of shocks to its bottom-line. Overall, expectation is that flour millers should have been proactive and hedged prices as far out as possible. In any case, we expect flour millers to pass on costs if the burden 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
CAPITAL MANAGEMENT LIMITED

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 CONSUMPTION
165 2008/09 160 2009/10 2010/11

SUGAR PRICE TREND 2010
(July 2009 – December 2010) Cents per Pound
45

40

155

35

150

30

145 25 140 20 135 15 130
Production Consum ption

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Source: USDA; Vetiva Research

Source: Bloomberg; Vetiva Research

Even though production levels are still in line with consumption, global consumption is rising pushing up price, further exacerbated by the increasing use of sugar cane for alternative source of power/fuel.

In 2010, sugar began on a low key, as we saw prices taking a breather from its northwards run in the previous year. Even though there were periods of spikes earlier in the year, this was not sustained given high supply and production levels. Consequently, sugar prices continued to plummet from record highs. There was a reversal of fortunes in the later part of the year as the trend of low sugar prices upturned and prices began a gradual ascent in August, and by November were trading at 30-year highs driven by bad harvest 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 investment in the sector by the producers, most of which are poor farmers in West Africa who account for c.75% of world cocoa supply, is a major driver of prices.

In the cocoa market, the major driving force of the upsurge in prices is the perceived lack of investment in the sector by the producers, most of which are poor farmers in West Africa. The bulk of cocoa (c.75%) traded in the international market is sourced from West Africa, in which most of the farmers are poor and receive little or no assistance from their Governments towards financing large/industrial scale production of cocoa, hence most remain on a 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
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
We note that the increase in global cocoa prices in 2010 was quite moderate compared to 2009 prices which were at record highs. Our expectations are for cocoa prices to gradually firm up, owing to political uncertainty surrounding top producer Ivory Coast, amid dwindling production. Production of Cocoa from the Ivory Coast has been consistently decreasing and was down by 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.

Our expectations are for cocoa prices to gradually firm up, owing to political uncertainty surrounding top producer Ivory Coast, amid dwindling production.

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 such as Nestle and Cadbury are usually not as sensitive to the volatility in their input prices as the flour millers, so we expect the impact on the these companies to be relatively mild.

The confectionery companies such as Nestle and Cadbury are usually not as sensitive to the volatility in their input prices as the flour millers, so we expect the impact on the these companies to be relatively mild. Also, we note that both Cadbury and Nestle have invested in backward integration given Nigeria’s position as one of the top producers of cocoa in the world, most of these companies have to the best of their abilities hedged against upsurge in input 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 the pressures 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.

For sorghum, another mainstay ingredient for the brewers, expectations are that production would match or slightly outstrip world consumption (according to the United States Department of Agriculture) so price should remain stable. Nigeria is the second largest producer of sorghum in the world and consumes almost all its produce, with Nigerian Breweries’ sorghum plantation initiative providing significant headroom for it to manage costs on this front. However, exchange rate shocks are a possible downside risk to this stability, especially 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
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
WORLD BARLEY PRODUCTION, CONSUMPTION AND YIELD
(2000 – 2010)
160 Production Consumption Yield 3

BARLEY PRICES
(December 2007 – December 2010) US Dollars per metric ton
250

155 2.5 150

200
145

2

140

1.5

150

135 1 130 0.5

100

125

Mar-08

Jun-08

Mar-09

Jun-09

Mar-10

Dec-07

Sep-08

Dec-08

Sep-09

Dec-09

Jun-10

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

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 Credit 11.00 Annualized Growth

80.0% 70.0% 60.0%

10.00 50.0% 9.00 40.0% 30.0% 20.0% 7.00 10.0% 6.00 0.0% -10.0%

8.00

5.00

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

Q3'10

Source: CBN, Vetiva Research

January 2011

Q4'10

2010/11

64

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

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 Over the years, Government policies have remained relatively stable; few changes that have been made have been to protect the manufacturing companies within the country. We do not envisage radical changes in this arena in the course of the year. Although there’s a probability of a new Government coming to power; if that happens, we largely expect policies not to be too distant from the established 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.

While external shocks from commodity prices are expected to put pressure on consumer companies, our preference will be for products that are able to withstand economic cycles.

January 2011

65

[Type text]

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point NESTLE NIGERIA PLC

BASIC INFORMATION Address 22-24, Industrial Avenue, Ilupeju, Lagos State Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector Country OWNERSHIP STRUCTURE (%) Nestle CWA Ltd, Ghana Nestle S.A. Switzerland Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%) 10,544.0 22.9 25.4 4.4 99.96 113.0 660.0 405.00 243,444 1632.0 37.70 401.00 239.50 59.1 3.2 37.7
www.nestle.c om

Thriving on Expansion & Innovation
We have upgraded our recommendation on Nestle to an ‘ACCUMULATE’ based on a revision of our Target Price using the DCF methodology. We arrived at a target price of N448.20. Nestle now trades at an upside potential of 21.6% relative to our target price. Nestle has the highest Return on Equity (99.96%) in the Food & Beverage sector as a whole. We remain optimistic about the prospects of the company in the next 2 years based on its expansion and drive towards increasing market share.

C hief Olusegun Osunkeye Mr. Martin Woolnough December Nigerian Stock Exchange Bloomberg: NESTLE:NL Food & Beverages Nigeria

Investment Thesis
Reaping the Benefits of Organic Growth: In 2010, Nestle began to reap some of dividends of its on-going expansion plans. The company had earlier carried out a feasibility study on its product extension and in the process discovered new markets, especially in previously untapped regions. As a result, Nestle’s 2010 earnings spiked, having completed the extension of its Agbara plant with the new products being delivered to the ready and established markets. In the current year, we expect the new plant at Sagamu Ogun state to come on stream; this, in our opinion, portends a significant improvement in market share and turnover driven majorly by volume growth. Input Price Volatility Checked: In our opinion, Nestle remains relatively insulated from the impending food commodity price crisis. Nestle has partnered with some local farmers in ensuring the supply of its input such as Maize, Soya Beans and Cocoa to act as buffer against global food price volatility. Judging by precedence in 2010 a year in which food commodity price skyrocketed, Nestle was largely shielded from the impact of this external shock due to its investment in backward integration. Furthermore, the company is also in partnership with agricultural research institutes such as University of Agriculture, Abeokuta (UNAAB) in a bid to sustain quality and output. Earnings Outlook: Our outlook for Nestle is buoyant given the factors earlier highlighted; the key point being the coming on stream of the new plant, which is expected to boost turnover significantly. Hence, for FY’11 we expect Turnover growth of 52.0% and After Tax Earnings growth of 45.2% (N127.2bn and N18.2bn) and a Forward EPS of N27.58 implying a Forward PE of 13.4x and Dividend of N19.30. Forecast Summary
Earnings Per Share (N) YoY Change (%) Price to Earnings (x)

NESTLE VS F&B VS NSE ASI PERFORMANCE
Rebased 04/01/2010
2 Nestle 1.8 F & B Index NSE ALSI

1.6

FY'09A
14.81 17.43% 24.88 12.55 0.00% 3.41% 15.96 16.76% 23.09

FY'10F
18.98 28.13% 19.42 16.13 28.54% 4.38% 18.82 17.91% 19.58

FY'11F
27.58 45.29% 13.37 19.30 19.65% 5.24% 20.98 11.46% 17.57

FY'12F
38.90 41.05% 9.48 27.23 41.05% 7.39% 23.38 11.43% 15.76

FY'13F
48.52 24.74% 7.60 33.96 24.74% 9.22% 26.10 11.65% 14.12

1.4

1.2

1

Dividend Per Share (N)
0.8

YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)
Source: Company; Vetiva Research

0.6

YoY Change (%) Price to Book (x)

Source: Company Financials; Vetiva Research

January 2011

66

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
44,027 -27,805 16,222 -7,826 8,396 9,624 1,229 8,396 0 8,463 -3021 5,442

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

2008
51,742 -31,301 20,442 -8,538 11,904 13,168 1,265 11,904 -67 11,862 -3,531 8,332

2009
68,317 -39,957 28,360 -12,628 15,732 17,297 1,565 15,732 -2,046 13,783 -4,000 9,784

2010 F
83,688 -45,950 37,738 -15,090 22,648 22,832 1,800 21,032 -2597.368 18,435 -5,899 12,536

2011 F
127,206 -55,140 72,066 -28,790 43,276 32,422 1,890 30,532 -3347.368 27,184 -8,971 18,214

2012 F
165,368 -65,066 100,303 -36,702 63,600 44,418 1,947 42,471 -4,097 38,374 -12,663 25,710

BALANCE SHEET (N'Mill) Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Other Creditors Creditors & Accruals Short Term Loan Amount Due Taxation Long-Term Loans Provision for Gratuity Prior Year Dividend Deferred Taxation Total Liabilities Share capital Share premium Revaluation Reserves Retained Earnings Total Equity

2007 10,436 5,226 2299 2,336 956 21,252 2,395 1,117 1766.313 2362.998 5598.9 596 1180 15,016 330 32 186 5,687 6,237

2008 13,817 6,415 4,304 3,643 979 29,159 3,001 1,831 3695.131 1,982 5,980 447.7 584 2607 20,128 330 32 186 8,482 9,030

2009 25,405 10,698 3,403 1,764 854 44,250 3,123 1,185 3,000 5,840 4,662 11,921 671.0 1201 2103 33,706 330 32 186 9,995 10,544

2010 F 33,026 11,981 4,151 3,898 1,158 54,214 3,748 1,422 3,600 11,176 5,594 11,921 671 1441 2,208 41,782 330 32 195 11,875 12,432

2011 F 41,283 14,378 5,064 4,873 1,107 66,705 4,872 1,777 4,500 17,036 7,217 11,921 1,006 2017 2,500 52,848 330 32 195 13,300 13,857

2012 F 49,539 16,103 6,178 6,091 4,583 82,494 5,847 3,199 7,650 20,001 10,464 11,921 1,508 3731 2,720 67,041 330 32 195 14,896 15,453

January 2011

67

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2012 F
1109 -436 672 -246 426 298 13 285 -27 257 -85 172

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

2007
295 -186 109 -52 56 65 8 56 0 57 -20 36

2008
347 -210 137 -57 80 88 8 80 0 80 -24 56

2009
458 -268 190 -85 105 116 10 105 -14 92 -27 66

2010 F
561 -308 253 -101 152 153 12 141 -17 124 -40 84

2011 F
853 -370 483 -193 290 217 13 205 -22 182 -60 122

BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Other Creditors Creditors & Accruals Short Term Loan

2007 70 35 15 16 6 142 16 7 -

2008 93 43 29 24 7 195 20 12 -

2009 170 72 23 12 6 297 21 8 20

2010 F 221 80 28 26 8 363 25 10 24

2011 F 277 96 34 33 7 447 33 12 30

2012 F 332 108 41 41 31 553 39 21 51

Taxation Long-Term Loans Provision for Gratuity Prior Year Dividend Deferred Taxation Total liabilities Share Capital Share Premium Revenue and Capital reserve Shareholders Fund Total Equity

16 38 4 8 101 2 0 1 38 38

13 40 3 4 17 135 2 0 1 57 38

31 80 4 8 14 226 2 0 1 67 38

38 80 4 10 15 280 2 0 1 80 38

48 80 7 14 17 354 2 0 1 89 38

70 80 10 25 18 449 2 0 1 100 38

January 2011

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

Growth (%) Turnover growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Return on Invested Capital Growth rate (g) Margins (%) EBITDA/Sales EBIT/Sales Gross Profit Margin Pretax Income/Sales Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables Capital Structure Financial leverage (debt to equity) Payout ratio Total equity/Total assets Retention ratio Per Share Data EPS DPS NAPS Sales/Share 12.61 12.55 13.67 78.34 14.81 12.55 15.96 103.43 18.98 16.13 18.82 126.70 27.58 19.30 20.98 192.59 38.90 27.23 23.38 250.18 66.2% 99.5% 31.0% 0.5% 113.1% 84.7% 23.8% 15.3% 436.1% 85.0% 22.9% 15.0% 460.0% 70.0% 20.8% 30.0% 509.0% 70.0% 18.7% 30.0% 0.7 0.3 1.4 176.5 45.3 12.9 25.7 30.4 0.1 0.1 1.0 7.7 57.2 6.3 9.4 18.2 0.3 0.1 0.8 8.1 52.3 6.2 17.0 18.1 0.3 0.1 0.7 9.1 41.3 5.1 14.0 14.5 0.2 0.1 0.6 10.4 35.5 7.1 13.4 13.6 25.4% 23.0% 39.5% 22.9% 16.1% 25.3% 23.0% 41.5% 20.2% 14.3% 27.3% 25.1% 45.1% 22.0% 15.0% 25.5% 24.0% 56.7% 21.4% 14.3% 26.9% 25.7% 60.7% 23.2% 15.5% 109.1% 33.1% 35.4% 0.6% 100.0% 26.7% 28.4% 15.3% 109.1% 25.5% 31.0% 16.4% 138.6% 30.1% 35.9% 41.6% 175.4% 34.5% 40.7% 52.6% 17.5% 41.8% 36.8% 40.2% 53.1% 177.1% 32.2% 31.4% 199.1% 221.6% 22.5% 44.0% 32.0% 33.7% 28.1% 52.0% 91.1% 42.0% 47.5% 45.3% 30.0% 47.0% 37.0% 41.2% 41.2%

January 2011

69

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point FLOUR MILLS OF NIGERIA PLC

BASIC INFORMATION Address 2, Old Dock Road, Apapa, Lagos State Website Management (C hairman) Vice - C hairman Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) Exceisor Shipping C o. Ltd Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
FMN VS F&B VS NSE ASI PERFORMANCE
Rebased 04/01/2010
2.4 2.2 2 1.8 1.6 1.4 1.2 1 0.8 0.6 FMN F & B Index NSE ALSI

Deepening Consumer Focus
We reiterate our ‘BUY’ rating on ‘Flourmills’ guided by our revised Target Price of N90.16, which implies an upside potential of 30.7%. We employed a DCF methodology to arrive at our one year target price. We acknowledge Flourmills’ diversification further into the consumer space, a strategy which would help weather shocks and potential to improve margins.

www.fmnplc.c om

G.S. C oumantaros Ahmed A. Joga March Nigerian Stock Exchange Bloomberg: FLOURMILL:NL Food & Beverages Nigeria

Investment Thesis
Expanding Focus: Flourmills has made clear its intention to expand its business/product offering horizon in the FMCG sector, thereby extending focus to other flour-based and food-based products, given the increasing demand for Semolina Pasta, Noodles and Semovita etc. This is largely supported by the preference for whole-wheat variants due to increased health awareness by the general populace. Flourmills is seeking to increase capacity in these segments, as well as positioning itself for the export 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 come on board in the second quarter of 2012. 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 welldiversified portfolio spanning the production and marketing of Flour, Pasta, 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 millers are usually able to successfully transfer a significant portion of these 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 associate cement manufacturer, UNICEM, from 22% to 28%. UNICEM has a 2.5 million tons cement plant in calabar. Earnings Outlook: Our FY’11/12 projection for Sales and Earnings stands at N237.6 billion (8.0% YoY) and N19.2 billion (9.0% YoY), hence we expect a Forward EPS of N10.20, Forward PE of 6.8x and Dividend of N2.14. Flourmills has the lowest PE amongst its peers, hence, the most attractive from a relative valuation stand point. Forecast Summary
Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N)

51.6 48.4

1879.0 82.01 154,117 1033.2 48.41 76.50 36.20

53,266.0 8.6 2.6 2.4 37.4 70.4

FY'10A
14.81 17.43% 27.34 12.55 0.00% 3.10% 15.96 16.76% 25.37

FY'11F
18.98 28.13% 21.34 16.13 28.54% 3.98% 18.82 17.91% 21.52

FY'12F
27.58 45.29% 14.69 19.30 19.65% 4.77% 20.98 11.46% 19.30

FY'13F
38.90 41.05% 10.41 27.23 41.05% 6.72% 23.38 11.43% 17.32

FY'14F
48.52 24.74% 8.35 33.96 24.74% 8.39% 26.10 11.65% 15.52

Source: Company; Vetiva Research

YoY Change (%) Price to Book (x)

Source: Company Financials; Vetiva Research

January 2011

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
127,662 -106,745 20,917 5,080

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Other operating income Interest received and similar income Operating Expenses EBITDA EBIT/Operating Profit Profit Before Taxation Taxation Profit After Taxation

2009
180,068 -156,993 23,075 2,138 2,939

2010
206,613 -160,542 46,071 1,188 4,108 -26,923 34,003 29,478 24,439 -7,491 16,948

2011 F
83,688 -45,950 37,738 -15,090 22,648

2012 F
127,206 -55,140 72,066 -28,790 43,276

2013 F
165,368 -65,066 100,303 -36,702 63,600

-16,119 11,894 12,941 9,878 -3515 6,363

-16,236 20,783 18,173 5,470 -1,579 3,892

22,832 21,032 18,435 -5,899 12,536

32,422 30,532 27,184 -8,971 18,214

44,418 42,471 38,374 -12,663 25,710

BALANCE SHEET (N'Mill) Assets Employed Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Short Term Creditors Long Term Creditors Total Liabilities Share capital Share premium Capital Reserve Revaluation Reserves Revenue/General Reserve Non Controlling Interest Shareholders' Equity

2007 50,878 20,306 5376 19,361 13,229 109,150 52,523 21,571 74,094 777 5867 4128 836 20320 3130 35,058

2008 70,173 30,672 5,348 19,835 11,493 137,520 64,949 35,181 100,130 854 5867 4124 836 22505 3205 37,391

2009 90,424 31,311 6,355 6,389 9,040 143,519 52,732 37,521 90,253 854 5867 4124 836 38171 3415 53,267

2010 F 33,026 11,981 4,151 3,898 1,158 54,214 3,748 1,422 41,782 940 5,867 4,124 836 56,994

2011 F 41,283 14,378 5,064 4,873 1,107 66,705 4,872 1,777 52,848 940 5,870 4,124 836 74,926

2012 F 49,539 16,103 6,178 6,091 4,583 82,494 5,847 3,199 67,041 854 5,871 4,124 836 84,382

68,760

86,695

96067

January 2011

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit

2008
856 -716 140 34 0

2009
1207 -1052 155 14 20

2010
1385 -1076 309 8 28

2011 F
561 -308 253 -101 152

2012 F
853 -370 483 -193 290

2013 F
1109 -436 672 -246 426

EBITDA EBIT/Operating Profit Profit Before Taxation Taxation Profit After Taxation

80 87 66 -24 43

139 122 37 -11 26

228 198 164 -50 114

153 141 124 -40 84

217 205 182 -60 122

298 285 257 -85 172

BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Other Creditors Creditors & Accruals Total liabilities Share capital Share premium Capital Reserve Revaluation Reserves Revenue/General Reserve Non Controlling Interest Shareholders' Equity

2008
341 136 36 130 89 732 352 145 497 5 39 28 6 38 38 38

2009
470 206 36 133 77 922 435 236 671 6 39 28 6 38 38 38

2010
606 210 43 43 61 962 354 252 605 6 39 28 6 38 38 38

2011 F
221 80 28 26 8 363 25 10 280 6 39 28 6 38 38 38

2012 F
277 96 34 33 7 447 33 12 354 6 39 28 6 38 38 38

2013 F
332 108 41 41 31 553 39 21 449 6 39 28 6 38 38 38

January 2011

72

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2009 2010 2011 F 2012 F 2013 F

Growth (%) Turnover growth Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Return on Net fixed assets Return on Invested Capital Growth rate (g) Margins (%) EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables Cash Conversion Cycle Capital Structure Financial leverage (debt to equity) Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio Per Share Data EPS DPS NAPS Sales/Share 2.28 0.50 21.89 105.40 9.92 2.00 31.18 120.94 9.36 1.87 36.59 117.09 10.20 2.14 46.13 126.46 11.12 2.67 51.12 129.82 94% 26% 22% 27% 78% 70% 26% 20% 37% 80% 65% 26% 20% 40% 80% 47% 21% 21% 44% 79% 35% 16% 24% 46% 76% 0.40 0.31 1.04 1.14 62.17 9 40 14 67 0.25 0.12 1.01 1.15 55.31 10 11 13 58 0.37 0.13 0.89 0.92 14.36 10 13 20 24 0.28 0.14 0.86 0.88 22.66 2 14 11 31 0.34 0.15 0.83 0.92 24.92 2 17 15 37 12% 10% 3% 2% 16% 14% 12% 8% 14% 15% 11% 8% 0% 9% 12% 8% 0% 14% 12% 9% 11% 3% 9% 36% 8% 37% 12% 31% 31% 30% 51% 11% 41% 22% 41% 44% 10% 38% 11% 35% 43% 10% 39% 22% 33% 41% 40% -44% -39% 15% 62% 347% 335% 6% 15% 3% 4% 8% -27% 9% 9% 3% 59% 9% 9%

January 2011

73

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point DANGOTE FLOUR MILLS PLC

BASIC INFORMATION Address 8, Rycroft Road, Apapa, Lagos State Website Management (Chairman) MD/C EO Financial Year End Exchange Listing Symbol Sector Country OWNERSHIP STRUCTURE (%) Dangote Industries Ltd Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
DANGFLR VS F&B VS NSE ASI PERFORMANCE
Rebased 04/01/2010
3 Dangf lour 2.5 F & B Index NSE ALSI

Still Attractive, Despite Headwinds
We revised our Target Price for ‘Dangflour’ to N24.62. Despite likely pressure on earnings from rising price of wheat on the global scene, our target price still gives a 28% potential upside, hence, our ‘BUY’ rating on the stock at its current trading price of N19.11.

www.dangote-group.com
Alhaji Aliko Dangote Mr. Rohit Chaudhry December Nigerian Stock Exchange Bloomberg: DANGFLOUR:NL Food & Beverages Nigeria

Investment Thesis
Expansion on Track: Our optimism on Dangflour in the 2011 financial year is generally premised on the company’s efforts at increasing capacity. Even though Dangflour is the second largest flour miller in Nigeria with an installed capacity of c.4500MT per day, Dangflour remains focused on ongoing expansion plans that would see current installed capacity climb by 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, 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. Growing Wheat Consumption, a Positive: There has been an increase in the flour per capita consumption in Nigeria over the past 7-8 years, growing at a CAGR of c.7.7%. Nigeria currently has annual wheat consumption per capita of about 25kg, relative to average global wheat consumption per capita of 67kg, as well as one of the lowest wheat consumption rates in the world. Growth in flour consumption can be attributed to the growing health consciousness of the Nigerian populace and higher demand for wheat bread, semolina and pastries. There has also been an increase in noodles consumption and Dangflour has positioned to tap into this demand with the launch of its own brand of noodles. Earnings Outlook: Our forecast is that Dangflour’s Turnover growth for FY’11 is 20.0% while After Tax Earnings will grow by 2.4% (Turnover 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 of N1.45, Forward PE of 11.6x and Dividend of N1.09. Forecast Summary
Earnings Per Share (N)

73.0 27.0

5000.0 19.10 95,500.0 640.2 27.00 25.82 10.42

28,469.0 12.1 2.9 4.8 21.0 0.0

FY'09A
1.11 86.05% 17.09 0.80 60.00% 4.21% 5.69 15.59% 3.34

FY'10F
1.39 24.98% 13.68 1.02 27.41% 5.36% 5.68 -0.25% 3.35

FY'11F
1.45 4.32% 13.11 1.09 6.70% 5.72% 6.72 18.36% 2.83

FY'12F
1.34 -7.32% 14.15 1.01 -7.32% 5.30% 8.06 19.83% 2.36

FY'13F
1.01 -25.15% 18.90 0.75 -25.15% 3.97% 9.67 20.04% 1.97

2

YoY Change (%)
1.5

Price to Earnings (x) Dividend Per Share (N) YoY Change (%)

1

0.5

Dividend Yield (%) Net Assets Per Share (N)
Source: Company; Vetiva Research

YoY Change (%) Price to Book (x)

Source: Company Financials; Vetiva Research

January 2011

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
42,153 -37,417 4,736 1,156 174 -655 1,331 0 1,331 676 -114.1 562

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Other Income Interest expense EBITDA Depreciation EBIT/Operating Profit Profit Before Taxation Taxation Profit After Taxation

2009
47,927 -38,288 9,639 4,456 1,012 -2,399 5,469 -1,802 3,667 3,167 -178 2,989

2010
61,388 -45,180 16,208 9,585 246 -4,437 9,831 -2,604 7,227 5,374 187 5,561

2011 F
70,596 -50,602 19,995 13,367 295 -3,550 13,662

2012 F
84,715 -68,312 16,403 9,975 1,243 -3,585 11,218

2013 F
97,423 -78,559 18,864 11,792 1,305 -3,765 13,097

13,662 10,112 -3,034 7,079

11,218 7,632 -382 7,250

13,097 9,333 -2,613 6,719

BALANCE SHEET (N'Mill) Assets Employed Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Short Term Creditors Long Term Creditors Total Liabilities Share capital Share premium Revaluation Reserves Revenue/General Reserve Shareholders' Equity

2007 27,358 11,428 8108 1,680 9,546 109,150 35,398 35,398 2500 11807

2008 33,051 9,911 15,876 1,648 8,264 137,520 43,538 43,538 2500 11807

2009 35,238 8,246 16,976 512 5,045 143,519 44,109 44,109 2500 11807 0

2010 F 33,026 9,921 18,463 1,070 5,267 54,214 45,085 45,085 2,500 11,807 0 19,306 33,612

2011 F 41,283 12,059 19,630 1,966 2,547 66,705 45,228 45,228 2,500 11,807 0 25,972 40,278

2012 F 49,539 15,027 22,087 1,966 0 82,494 45,704 45,704 2,500 11,807 0 27,229 41535

7679 22,145

10046 24,630

8478 28,469

January 2011

75

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Other Income Interest expense EBITDA Depreciation EBIT/Operating Profit Profit Before Taxation Taxation Profit After Taxation

2007 283 -251 32 8 1 -4 9

2008 321 -257 65 30 7 -16 37

2009 412 -303 109 64 2 -30 66

2010 F 473 -339 134 90 2 -24 92

2011 F 568 -458 110 67 8 -24 75

2012 F 653 -527 126 79 9 -25 88

9 5 -1 4

25 21 -1 20

48 36 1 37

92 68 -20 47

75 51 -3 49

88 63 -18 45

BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Other Creditors Creditors & Accruals Total liabilities Share capital Share premium Capital Reserve Revaluation Reserves Shareholders' Equity

2008
183 77 54 11 64 732 237 237 17 79 0 51 38

2009
222 66 106 11 55 922 292 292 17 79 0 67 38

2010
236 55 114 3 34 962 296 296 17 79 0 57 38

2011 F
221 67 124 7 35 363 302 302 17 79 0 129 38

2012 F
277 81 132 13 17 447 303 303 17 79 0 174 38

2013 F
332 101 148 13 0 553 306 306 17 79 0 183 39

January 2011

76

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Growth (%) Turnover growth Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Return on Net fixed assets Return on Invested Capital Growth rate (g) Margins (%) EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables Capital Structure Financial leverage (debt to equity) Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio Per Share Data EPS DPS NAPS Sales/Share 0.60 0.50 4.93 9.59 1.11 0.80 5.69 12.28 1.42 1.02 5.68 14.12 1.45 1.09 6.72 16.94 1.34 1.01 8.06 19.48 n/a 30% 84% 36% 16% n/a 32% 72% 43% 28% n/a 29% 72% 39% 28% n/a 28% 75% 43% 25% n/a 26% -75% 47% 175% 0.40 0.04 0.82 1.53 87 141 13 121 0.40 0.01 0.94 1.63 49 110 3 101 0.43 0.02 1.07 3.85 51 96 6 95 0.48 0.04 1.23 3.13 52 80 8 85 0.53 0.04 1.42 3.48 56 70 7 83 11.41% 7.65% 6.61% 6.24% 16.01% 11.77% 8.75% 9.06% 19% 19% 14% 10% 13% 13% 9% 9% 13% 13% 10% 7% 12.78% 4.71% 10% 7% 2% 21% 8% 16% 16% 6% 25% 10% 19% 20% 7% 23% 10% 18% 19% 6% 20% 8% 16% 16% 34% 14% 311% 369% 432% 28% -96% 70% 86% 15% 5454% 88% 27% 20% -18% -25% 2% 38% -4% -8% -5%

January 2011

77

VETIVA
CAPITAL MANAGEMENT LIMITED

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 Management (Chairman) MD/CEO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) C adbury Schweppes Oversea Plc Nigerians SHARE STATISTICS Shares in issue (M) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%) 3129.2 28.30 88,556.0 46.3 53.7 www.cadburynigeria.com despite the strong recovery in operations witnessed in 2010. Our revised Dr Uduimo Justus Ituesli Target price of N28.05 presents an upside downside of 1%. Our Mr. Wallace Garland valuation is based solely on the DCF methodology. The stock was the December highest gainer in the sector in the 2010 year, appreciating 144%. Nigerian Stock Exchange

Investment thesis
company has continued on an upward growth trajectory ever since then. Cadbury has re-strategized and restructured its operations in the past one year and is therefore poised to take advantage of the opportunities within the sector. The company has gradually sustained is market share; the rationalizing of its manufacturing processes has enabled Cadbury to actively compete in its sub sector. Furthermore, we note that the company’s streamlining of its product portfolio has enabled it focus on core competencies, as well as leverage on its competitive advantage going forward.

Bloomberg: CADBURY:NL Re-emergence: Following the refinancing phase of Cadbury in the last Food & Beverages quarter of 2009, the Nigeria

Increasing consumption of Confectioneries and Beverages: The increase in demand for products of the Food & Beverage sector such as fast foods, confectioneries, packaged drinks and beverages e.t.c as underpinned 34.84 by the increasing population, improving standard of living and the gradual 9.97 increase in disposable income, and changing habits, has aided growth for quality brands such as Cadbury. This increase further instigated Cadbury to focus on its more profitable brands (such as, Richoco, Stimorol, Bubba n/a bubblegum and Eclairs).
593.7 52.3 n/a Earnings Outlook: Based on our FY’10 positive estimate of N28.27 billion n/a and N1.68 billion for top and bottom lines. Our FY’11 projection for Sales n/a and Earnings stands at N33.5 billion (16.0% YoY) and N2.5 billion (68.6% 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 3 F & B Index NSE ALSI

Forecast Summary
Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%)

FY'09A
-0.39 n/a 15.11 0.00 0.00% 0.00% 0.00 0.00% 0.00

FY'10F
0.48 21.10% 59.16 0.00 0.00% 0.00% 4.55 0.00% 6.22

FY'11F
0.81 68.63% 35.08 0.00 0.00% 0.00% 5.36 17.82% 5.28

FY'12F
1.28 59.12% 22.05 0.39 0.00% 1.36% 6.26 16.76% 4.52

FY'13F
1.44 12.22% 19.65 0.48 23.44% 1.68% 7.23 15.42% 3.92

2.5

2

1.5

1

0.5

0

Source: Company; Vetiva Research

Price to Book (x)

Source: Company Financials; Vetiva Research

January 2011

78

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Operating Expense Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Interest received Profit Before Taxation Taxation Profit After Taxation

2007 8,042 (5,759) 2,283 (591) 1,692 138 (321) (183) (387) 172 (34) 138

2008 9,878 (5,709) 4,169 (640) 3,530 1,611 (343) 1,268 (537) 1,681 (150) 1,531

2009 11,868 (6,704) 5,164 (762) 4,402 1,964 (369) 1,595 (346) 2,317 (505) 1,812

2010 F 11,200 (6,664) 4,536 (661) 3,875 1,635 (362) 1,273 (127) 1,146 (367) 779

2011 F 11,927 (7,097) 4,830 (716) 4,115 1,729 (387) 1,342 (127) 1,216 (389) 827

2012 F 12,509 (7,380) 5,129 (751) 4,378 1,876 (413) 1,463 (127) 1,337 (428) 909

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Capital work in progress Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets TOTAL ASSETS Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities TOTAL LIABILITIES Net Assets

2007 4,017 439 3,016 775 284 588 4,663 9,118 4,982 553 40 5,575 320 76 396 5,970 3,148

2008 4,655 4 2,424 717 400 597 4,137 8,795 2,500 1,092 39 3,631 633 360 195 1,188 4,819 3,976

2009 4,950 66 2,510 1,002 626 649 4,787 9,803 3,447 671 210 4,327 507 490 262 1,259 5,586 4,217

2010 F 5,452 2,823 1,066 447 739 5,075 10,526 3,124 1,218 367 4,709 380 802 1,182 5,891 4,635

2011 F 5,795 3,006 1,135 667 787 5,595 11,390 3,340 1,218 389 4,947 253 1,041 1,294 6,241 5,149

2012 F 6,605 3,126 1,191 968 826 6,110 12,715 3,503 1,218 428 5,148 126 1,727 1,853 7,001 5,714

January 2011

79

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2012 F 265 -146 120 45 -4 -1 0

INCOMESTATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Other Income Interest expense EBITDA Depreciation EBIT/Operating Profit Profit Before Taxation Taxation Profit After Taxation

2007 134 -101 32 -16 -13 0 0

2008 163 -115 48 -5 -14 0 0

2009 172 -113 58 9 -19 -6 0

2010 F 194 -114 80 26 0 -12 0

2011 F 225 -130 95 29 -3 -1 0

0 -32 23 -5

0 -19 1 -18

0 -16 8 -8

0 14 -4 10

0 25 -8 17

0 40 -13 27 2012 F 109 23 19 38 1 185 63 -23 306 10 107 28 -15 0 39

BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Assets Total Assets Other Creditors Creditors & Accruals Total liabilities Share capital Share premium Revaluation Reserves Revenue/General Reserve Minority Interest Shareholders' Equity Current

2007 107 21 17 16 2 163 142 -20 237 4 48 30 -82 0 38

2008 98 24 26 11 1 160 155 -25 292 4 48 29 -101 0 38

2009 96 20 19 34 0 169 60 -24 296 10 107 28 -61 0 38

2010 F 102 21 19 35 0 173 61 -23 302 10 107 28 -51 0 38

2011 F 106 22 19 36 0 179 62 -23 303 10 107 28 -33 0 38

January 2011

80

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Growth (%) Turnover growth Growth in EBIT Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Return on Net fixed assets Return on Invested Capital Growth rate (g) Margins (%) EBIT/Sales Pretax Income/Sales Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables Capital Structure Financial leverage (debt to equity) Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio Per Share Data EPS DPS NAPS Sales/Share -2.50 0.00 -2.74 22.07 -0.39 0.00 4.05 8.18 0.48 0.00 4.55 9.24 0.81 0.00 5.36 10.72 1.28 0.39 6.26 12.65 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 3% 2% 0% 55% 100% 3% 2% 0% 63% 100% 3% 2% -30% 71% 130% 0.24 0.07 0.40 -0.33 54 82 25 58 0.87 0.56 1.21 0.46 43 77 72 40 0.88 0.57 1.23 2.25 40 69 65 36 0.88 0.58 1.24 11.52 36 60 59 31 0.89 0.59 1.27 11.68 31 51 52 25 -2.88% -11.72% -11.33% 5.03% -9.30% -4.83% 13% 7% 5% 13% 11% 8% 17% 15% 10% 184.84% -11.42% -21% 0% 185% -26% -5% -10% 0% -26% 11% 6% 20% 0% 11% 16% 10% 17% 0% 16% 22% 15% 26% 7% 29% 22% -70% -41% 279% 5% -284% -16% -55% 13% 17% 190% 221% 16% 12% 74% 69% 18% 56% 59% 59%

January 2011

81

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2011 Outlook
The Tipping Point GLAXOSMITHKLINE CONSUMER NIG. PLC

BASIC INFORMATION Address 1, Industrial Avenue, Ilupeju, Lagos State Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) Setfirst Limited SmithKline Beecham Plc Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%) 7,259.0 14.7 3.9 2.1 13.5 0.0 957.0 26.50 27,744.0 186.0 53.58 31.50 20.85 27.3 19.1 53.6 www.gsk.com C hief Olusegun Osunkeye Mr. Chidi Okoro December Nigerian Stock Exchange

Ahead of the Pack
We upgrade our rating on ‘GlaxoSmith’ to a “BUY” from an Accumulate based on a positive earnings outlook for 2011. We arrived at a Target Price of N37.17 which gives an upside potential of 39.2% relative to the current market price.

Investment thesis
Bloomberg: GLAXOSMITH:NL Healthcare Nigeria

Regulatory Cleansing Brighten Prospects: The company has consistently delivered on value, even though our outlook on its service healthcare sector is Neutral, premised on the under developed state of the industry. . We acknowledge the National Agency for Food and Drug Administration and Control (NAFDAC)’s efforts at ridding the pharmaceutical industry of fake and substandard products, but we also note that a lot still needs to be done to establish a well-structured healthcare delivery system. GSK has over the years benefitted from the Over-TheCounter (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 on the modernization of its manufacturing process, and expansion of its product portfolio. We are beginning to see the results of product expansion 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 of plants is expected to increase efficiency and speed up production process. We expect these initiatives to continually impact favourably on the company’s sales and profitability profile going forward. Earnings Outlook: Our FY’11 projection for Sales and Earnings stands at N19.1 billion (18.0% YoY) and N2.2 billion (13.7% YoY), hence we expect a 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. Forecast Summary
Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%)

GSK VS HEALTHCARE VS NSE ASI PERFORMANCE
Rebased 04/01/2010

FY'09A
1.78 33.26% 14.90 0.75 25.00% 2.83% 6.88 20.76% 3.85

FY'10F
1.99 11.74% 13.33 0.85 13.96% 3.23% 8.24 19.72% 3.22

FY'11F
2.26 13.74% 11.72 1.04 21.67% 3.92% 9.46 14.82% 2.80

FY'12F
2.42 6.94% 10.96 1.14 9.27% 4.29% 12.49 32.00% 2.12

FY'13F
2.79 15.20% 9.51 1.31 15.20% 4.94% 13.59 8.83% 1.95

Source: Company; Vetiva Research

Net Assets Per Share (N) YoY Change (%) Price to Book (x)

Source: Company Financials; Vetiva Research

January 2011

82

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2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Operating Expenses EBIT Interest Expense Core operating profit

2007
9,915 -6,042 3,874 -2,739 1,174 -8 1,134

2008
12,545 -7,177 5,368 3,581 2,738 -886 1,786

2009
14,952 -8,444 6,508 -3,955 3,971 -1,500 2,553

2010 F
16,149 -8,537 7,611 -4,034 3,236 -480 3,577

2011 F
19,055 -9,818 9,238 -4,800 3,947 -24 4,437

2012 F
22,485 -11,290 11,195 -5,713 4,421 -28 5,482

Profit Before Taxation Taxation Profit After Taxation

1,166 -329.572 837

1,851 -574 1,277

2,470 -768 1,702

2,756 -854 1,902

3,004 -841 2,163

3,304 -991 2,313

BALANCE SHEET (N'Mill) Assets Employed Inventories Debtors Bank and cash balances Total Assets Short Term Creditors Long Term Creditors Total Liabilities Share capital Share premium Revaluation Reserves Revenue/General Reserve Shareholders' Equity

2007 3,516 2,544 2147 512 8,719 3,332 0 3,332 478 51 25 4047 4,602

2008 3,961 2,539 1,918 1,192 9,610 3,322 0 3,322 478 51 25 4897 5,451

2009 4,788 3,494 1,646 2,149 12,078 4,626 0 4,626 478 51 25 6029 6,583

2010 F 5,644 2,463 3,452 2,321 13,880 4,857 0 4,857 478 51 25 7,327 7,881

2011 F 6,651 4,065 2,963 3,482 17,161 5,052 0 5,052 478 51 25 8,495 9,049

2012 F 7,839 5,813 4,445 3,830 21,927 5,304 0 5,304 478 51 25 11,895 13,510

January 2011

83

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses EBIT Interest Expense Core operating profit

2007 66 -41 26 -18 8 0 8

2008 84 -48 36 24 18 -6 12

2009 100 -57 44 -27 27 -10 17

2010 F 108 -57 51 -27 22 -3 24

2011 F 128 -66 62 -32 26 0 30

2012 F 151 -76 75 -38 30 0 37

Profit Before Taxation Taxation Profit After Taxation

8 -2 6

12 -4 9

17 -5 11

18 -6 13

20 -6 14

22 -7 16

BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Total Assets Other Creditors Creditors & Accruals Total liabilities Share capital Share premium Revaluation Reserves Revenue/General Reserve Shareholders' Equity

2007 24 17 14 3 58 22 0 22 3 0 0 27 31

2008 27 17 13 8 64 22 0 22 3 0 0 33 37

2009 32 23 11 14 81 31 0 31 3 0 0 40 44

2010 F 38 17 23 16 93 33 0 33 3 0 0 49 53

2011 F 45 27 20 23 115 34 0 34 3 0 0 57 61

2012 F 53 39 30 26 147 36 0 36 3 0 0 80 91

January 2011

84

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Growth (%) Turnover growth Growth in Core Operating profit Growth in EBIT Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Return on Net fixed assets Return on Invested Capital Growth rate (g) Margins (%) EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Net interest coverage (x) Days in inventory Days in accounts payable Days in cash Days in receivables Capital Structure Financial leverage (debt to equity) Interest bearing debt/Total assets Payout ratio Total equity/Total assets Retention ratio Per Share Data EPS DPS NAPS Sales/Share 1.33 0.60 5.70 13.11 1.78 0.75 6.88 15.63 1.99 0.85 8.24 16.88 2.26 1.04 9.46 19.92 2.42 1.14 12.49 23.50 n/a n/a 45% 57% 55% n/a n/a 42% 55% 58% n/a n/a 43% 57% 57% n/a n/a 46% 53% 54% n/a n/a 47% 62% 53% 0.94 0.36 1.70 3.09 74 97 35 56 0.82 0.46 1.58 2.65 85 113 52 40 1.19 0.48 1.70 6.74 56 110 52 78 1.28 0.69 2.08 164.45 78 97 67 57 1.56 0.72 2.66 157.88 94 86 62 72 18% 22% 15% 10% 20% 27% 17% 11% 22% 20% 17% 12% 21% 21% 16% 11% 20% 20% 15% 10% 25% 14% 34% 15% 37% 28% 16% 39% 32% 16% 26% 15% 36% 16% 15% 26% 14% 35% 17% 14% 21% 12% 32% 19% 11% 27% 57% 96% 59% 53% 19% 43% 30% 33% 33% 8% 40% 17% 12% 12% 18% 24% 13% 9% 14% 18% 24% 12% 10% 7%

January 2011

85

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Guinness Nigeria Plc

BASIC INFORMATION Address Website Management (Chairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) DIAGEO Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
Guinness vs Breweries vs NSE ASI Performance
Rebased to December 31, 2009 1.6 GUINNESS NSE ASI BREWERIES

24, Oba Akran Avenue Ikeja, Lagos www.guinness-nigeria.com Babatunde Savage D.M Hainsworth June Nigerian Stock Exchange Bloomberg: GUINNESS:NL Breweries Nigeria

Further growth expected on capacity expansion
Given its niche in the stout segment, rapid growth in Harp volumes, and growing beer consumption in Nigeria, our outlook on Guinness is positive. We expect ongoing capacity expansion to position Guinness to tap into this growth story. Following adjustments in our DDM valuation model, our 12 month target price now stands at N195.01. However, at its current price of N220.00, the stock is trading at a downside of 23.8% to our target value, hence our “REDUCE” rating.

Investment thesis
Significant market share, but lager competition rife: Although Guinness controls about 25% of the Nigerian beer market, stiff competition, especially in the larger space, may imply escalating marketing spend. The company has seen significant growth in volumes of its Harp and Malta Guinness brands, but market share defence is crucial to fend off competition. Importantly, in order 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 rise in the price of raw materials such as barley and hops, margins are expected to be strained. We note that the quality and brand of the Guinness Stout would help maintain its market position at an attractive 25%. Increased capacity to boost sales, TBA Portfolio Expansion: Coming off a massive capital expenditure, production capacity is expected to rise to about 6 million hectolitres (mhl), as well as increasing packaging capacity, we expect this volume growth to boost sales (current capacity utilization c. 95%). In addition, over the past several years, the Diageo Group has concentrated on its core competencies in the spirits industry; we judge that the Guinness brand, especially in a market such as Nigeria, will play an important long-term 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.

53.8 46.2

1,475.0 220.00 324,500.0 2,175.4 46.20 60,947.1 408.6 190.56 124.51

34,199.0 20.5 8.6 8.3

Earnings Outlook: We project revenue growth of 15.8% to N126.6 billion for FY’11, supported by increasing sales in Harp and Malta Guinness. On 50.3 profitability, we forecast PAT to grow at a rate of 30.0% to N17.9 billion. 0.0 Implied P/E multiple is 18.6x (on N12.11 2011 EPS) with EV/EBITDA multiple of 10.5x. Forecast Summary
Earnings Per Share (N) YoY Change (%) Price to Earnings (x)

FY'09A
9.18 14% 17.97 7.50 25% 4.55 21.37 -14% 7.72

FY'10A
9.31 1% 20.46 8.25 10% 4.33 23.19 8% 8.22

FY'11F
12.11 30% 18.60 10.29 25% 4.68 25.00 8% 8.80

FY'12F
14.61 21% 15.41 12.42 21% 5.65 27.20 9% 8.09

FY'13F
16.81 15% 13.40 14.29 15% 6.50 29.72 9% 7.40

1.4

1.2

Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%)
Mar-10 Jun-10 Sep-10 Dec-10

1

0.8 Dec-09

Price to Book (x)

Source: Company Financial; Vetiva Research
Source: NSE, Vetiva Research

January 2011

86

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
69,173 -35,611 33,562 -16,678 16,883 19,993 3,110 16,883 159 17,042 1,730 -437 -1,243 17,093 -5,232 11,861

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization Operating Profit Other Income EBIT Interest Received Interest Payable & Charges Exceptional Item Profit Before Taxation Taxation Profit After Taxation

2009
89,148 -46,510 42,639 -21,796 20,843 24,408 3,565 20,843 227 21,069 1,212 -2,026 -1,263 18,992 -5,451 13,541

2010
109,367 -61,672 47,695 -27,364 20,331 24,385 4,053 20,331 780 21,111 254 -1,052 -325 19,989 -6,252 13,736

2011 F
126,648 -68,770 57,878 -32,295 25,583 29,931 4,348 25,583 25,583 1525 -838 26,269 -8,406 17,863

2012 F
145,969 -78,824 67,146 -36,200 30,946 36,188 5,243 30,946 30,946 1953 -1199 31,700 -10,144 21,556

2013 F
166,979 -89,668 77,311 -41,745 35,567 41,521 5,954 35,567 35,567 2380 -1480 36,466 -11,669 24,797

BALANCE SHEET (N'Mill) Fixed Assets Intangible Assets Inventories Debtors Bank and cash balances Total Assets Creditors & Accruals Bank Overdrafts Deferred Tax Liability Term loan Provision for gratuity Total Liabilities Share capital Share premium Revaluation Reserves Revenue Reserve Total Equity

2008 36,733 1,311 12,867 7,063 15,216 73,191 20,148 3,705 7,886 4,589 36,328 737 1,546 3,738 30,842 36,863

2009 35,898 1,807 16,848 9,504 9,812 73,869 24,244 6,897 8,094 3,108 42,344 737 1,546 3,303 25,938 31,525

2010 38,245 1,382 16,153 9,537 13,081 78,397 30,648 8,356 1,299 3,895 44,198 737 1,546 3,296 28,620 34,199

2011 F 48,711 1,021 20,073 10,877 16,741 97,422 37,599 4,656 10,384 4,840 57,479 737 1,546 3,296 31,299 36,879

2012 F 56,142 659 23,135 11,975 20,373 112,284 42,773 7,051 11,968 5,578 67,371 737 1,546 3,296 34,533 40,112

2013 F 62,938 298 26,465 13,056 25,688 128,446 48,288 8,708 13,691 6,381 77,067 737 1,546 3,296 38,252 43,832

January 2011

87

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
464 -239 225 -112 113 134 21 113 1 114 12 -3 -8 115 -35 80

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization Operating Profit Other Income EBIT Interest Received Interest Payable & Charges Exceptional Item Profit Before Taxation Taxation Profit After Taxation

2009
598 -312 286 -146 140 164 24 140 2 141 8 -14 -8 127 -37 91

2010
733 -413 320 -183 136 163 27 136 5 142 2 -7 -2 134 -42 92

2011 F
849 -461 388 -216 172 201 29 172 172 10 -6 176 -56 120

2012 F
979 -528 450 -243 207 243 35 207 207 13 -8 213 -68 145

2013 F
1119 -601 518 -280 238 278 40 238 238 16 -10 244 -78 166

BALANCE SHEET Fixed Assets Intangible Assets Inventories Debtors Bank and cash balances Total Assets Creditors & Accruals Bank Overdrafts Deferred Tax Liability Term loan Provision for gratuity Total liabilities Share Capital Share Premium Revenue and Capital reserve Shareholders Fund Total Equity

2008 246 9 86 47 102 491 135 25 53 31 244 5 10 25 207 247

2009 241 12 113 64 66 495 163 46 54 21 284 5 10 22 174 211

2010 256 9 108 64 88 526 205 56 9 26 296 5 10 22 192 229

2011 F 327 7 135 73 112 653 252 31 70 32 385 5 10 22 210 247

2012 F 376 4 155 80 137 753 287 47 80 37 452 5 10 22 231 269

2013 F 422 2 177 88 172 861 324 58 92 43 517 5 10 22 256 294

January 2011

88

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

2008 Market Position Nigerian Beer market size (mhl) Beer market volume growth Population (mn) Beer PCC (litres) Guinness market share Guinness volume Price/mhl Growth (%) Volume Price/mhl Turnover growth Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Average Equity Return on Average Assets Gross Margin EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 10.9 3.5 6.8% 5.9 8.0 6.0 25.0 46.9 34.6% 16.4% 48.5% 28.9% 24.6% 26.5% 17.1% 20.8% -8.1% 11.1% 18.7% 17.7% 23.9% 11.8% 14.5 16.0% 147.81 9.8 25.0% 3.6 19,082.17

2009

2010

2011 E

2012 E

15.0 3.4% 151.87 9.9 26.0% 3.9 22,858.51

16.6 10.6% 156.05 10.6 28.0% 4.6 23,544.27

18.2 9.5% 160.34 11.3 28.2% 5.1 24,721.48

19.8 8.7% 164.75 12.0 28.5% 5.6 25,932.84

7.6% 19.8% 28.9% 23.5% 22.1% 10.5% 14.2%

19.1% 3.0% 22.7% -2.5% -0.1% 0.3% 1.4%

10.3% 5.0% 15.8% 25.8% 22.7% 29.3% 30.0%

9.9% 4.9% 15.3% 21.0% 20.9% 20.7% 20.7%

39.6% 18.4% 47.8% 27.4% 23.6% 22.7% 15.2%

41.8% 18.0% 43.6% 22.3% 19.3% 18.6% 12.6%

50.3% 20.3% 45.7% 23.6% 20.2% 20.7% 14.1%

56.0% 20.6% 46.0% 24.8% 21.2% 21.7% 14.8%

9.2 7.5 21.4 60.4

9.3 8.3 23.2 74.2

12.1 10.3 25.0 85.9

14.6 12.4 27.2 99.0

18.0 7.7 4.5% 10.0

20.5 8.2 4.3% 11.0

18.2 8.8 4.7% 10.5

15.1 8.1 5.6% 8.6

January 2011

89

VETIVA
CAPITAL MANAGEMENT LIMITED
BASIC INFORMATION Address 1, Abebe Village Road Iganmu, Lagos Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) Heineken N.V. Others
SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
NB vs Breweries vs NSE ASI Performance
Rebased to December 31, 2009 1.6 NB NSE ASI BREWERIES

2011 Outlook
The Tipping Point Nigerian Breweries Plc A Play on intrinsic value
Our target value on NB based on our revised DDM valuation is N85.86. NB now trades at an upside potential of 4.7% relative to our target value and we revise our rating on the stock to “REDUCE”. In our opinion, the vast rally in price on the back of news of Heineken’s acquisitions, which pushed the price to N91.83, further stretched valuation for NB. However, should we see some more pull back in price; we would still play the beer market at these attractive valuations in order to buy into the underlying growth story.

www.nbplc.com Chief Kola Jamodu N.A Vervelde December Nigerian Stock Exchange Bloomberg: NB:NL Breweries Nigeria

54.1 45.9

Investment thesis
Pressure from input costs, but enhanced local content strategy to provide buffer: Following the challenging outing brewers had in 2009, recovery in volume growth and profitability improved in 2010. However, given the sensitivity of margins to our valuation, the continued rise in the prices of key inputs (barley, aluminum) could weaken our outlook. However, the continuous drive of the local content (production inputs) initiative is our basis for positive margin outlook for NB. We note that any slack in this regard could further enlarge NB’s susceptibility to commodity price volatility, FX risk and margin depression. Strong Parent Support to Possibly Fend-off Competition: In our Breweries Sector Update (Brewing Growth, Malting Value published in October 2010) we had highlighted the potential source of alpha that exists through the direct acquisition and repositioning of fringe players. The recent acquisition of five breweries by the Heineken N.V. group weakens the competitive threat from new entrants like SAB Miller because it reduces available acquisition targets. Given the synergies Heineken could derive from merging its beer businesses in Nigeria, its management may explore consolidating NB, Consolidated Breweries and the newly acquired subsidiaries. This scenario could be a potential game changer for the Nigerian beer market. 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 margins to increase to 26.4% by 2011 from FY’10E of 26.1%. Forecast Summary
Earnings Per Share (N) YoY Change (%)

7,563.0 89.85 679,535.6 4,555.4 45.90 159,819.9 1,071.4 82.21 53.00

40,892.0 24.5 18.5 3.8 70.8 2.9

1.4

1.2

1

FY'09A
3.69 9% 16.80 3.69 9% 5.95 6.16 45% 10.07

FY'10F
4.25 15% 20.71 4.04 9% 4.59 6.37 3% 13.81

FY'11F
5.05 19% 16.99 4.80 19% 5.59 6.62 4% 12.96

FY'12F
5.93 17% 14.47 5.64 17% 6.57 6.92 4% 12.41

FY'13F
6.90 16% 12.45 6.55 16% 7.63 7.26 5% 11.82

0.8 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

Source: NSE, Vetiva Research

Source: Company Financial; Vetiva Research

January 2011

90

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization Operating Profit Other Income EBIT Net Interest Received Net Interest Payable Profit Before Taxation Taxation Profit After Taxation

2007
111,748 -52,564 59,184 -32,077 27,108 32,587 5,230 27,876 249 27,357 519 27,876 -8,933 18,943

2008
145,462 -74,562 70,900 -34,314 36,586 42,543 5,765 37,519 192 36,778 741 37,519 -11,818 25,701

2009
164,207 -88,734 75,472 -33,955 41,517 48,457 6,795 41,400 145 41,662 -263 41,400 -13,490 27,910

2010 F
182,508 -94,904 87,604 -40,152 47,452 54,684 7,073 47,258 159.39 47,611 -353 47,258 -15,123 32,136

2011 F
213,550 -110,405 103,144 -46,981 56,164 63,962 7,608 56,214 191.26 56,355 -141 56,214 -17,988 38,225

2012 F
248,169 -127,559 120,610 -54,845 65,765 74,353 8,368 66,000 219.95 65,985 15 66,000 -21,120 44,880

BALANCE SHEET (N'Mill) Fixed Assets Investment Inventories Debtors Bank and cash balances Total Assets Creditors & Accruals Taxation Dividend Differed Taxation Liability Provision for gratuity Total Liabilities Share capital Share premium Capital Reserves General Reserve Total Equity

2007 50,195 150 16,157 7,858 16,189 90,548 17,946 7,298 4,170 11,360 6,591 47,365 3,781 4,568 7,325 27,509 43,183

2008 63,558 150 20,741 3,930 16,034 104,413 25,863 9,246 19,667 14,110 3,298 72,183 3,781 4,568 7,240 16,639 32,228

2009 69,003 150 22,065 3,795 11,975 106,988 24,290 13,462 4,567 14,322 3,777 60,418 3,781 4,568 7,095 31,125 46,570

2010 F 72,453 150 25,551 4,533 15,148 117,836 32,851 14,367 6,106 17,616 3,966 74,906 3,781 4,568 7,095 32,732 48,177

2011 F 79,698 150 30,324 5,417 21,996 137,586 38,439 17,089 7,263 21,316 4,164 88,271 3,781 4,568 7,095 34,643 50,088

2012 F 87,668 150 35,240 6,476 25,561 155,096 44,670 20,064 8,527 25,153 4,372 102,786 3,781 4,568 7,095 36,887 52,332

January 2011

91

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
749 -352 397 -215 182 218 35 187 2 183 3 0 187 -60 127

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization Operating Profit Other Income EBIT Interest Received Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

2008
975 -500 475 -230 245 285 39 252 1 247 5 0 252 -79 172

2009
1101 -595 506 -228 278 325 46 278 1 279 0 -2 278 -90 187

2010 F
1223 -636 587 -269 318 367 47 317 1.07 319 0 -2 317 -101 215

2011 F
1432 -740 691 -315 377 429 51 377 1.28 378 0 -1 377 -121 256

2012 F
1664 -855 809 -368 441 498 56 442 1.47 442 0 0 442 -142 301

BALANCE SHEET Fixed Assets Investment Inventories Debtors Bank and cash balances Total Assets Creditors & Accruals Taxation Dividend Differed Taxation Liability Provision for gratuity Total liabilities Share Capital Share Premium Revenue and Capital reserve Shareholders Fund Total Equity

2007 336 1 108 53 109 607 120 49 28 76.16 44 318 25 31 49 184 289

2008 426 1 139 26 107 700 173 62 132 94.59 22 484 25 31 49 112 216

2009 463 1 148 25 80 717 163 90.24 31 96 25 405 25 31 48 209 312

2010 F 486 1 171 30 102 790 220 96 41 118.10 27 502 25 31 48 219 323

2011 F 534 1 203 36 147 922 258 115 49 142.90 28 592 25 31 48 232 336

2012 F 588 1 236 43 171 1,040 299 135 57 168.62 29 689 25 31 48 247 351

January 2011

92

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Market Position Nigerian Beer market size (mhl) Beer market volume growth Population (mn) Beer PCC (litres) NB market share NB volume Price/mhl Growth (%) Volume Price/mhl Turnover growth Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Average Equity Return on Average Assets Gross Margin EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 10.1 8.1 9.9% 5.8 16.8 10.1 6.0% 9.4 20.7 13.8 4.6% 11.9 17.0 13.0 5.6% 9.8 14.5 12.4 6.6% 8.4 3.4 3.4 4.3 19.2 3.7 3.7 6.2 21.7 4.2 4.0 6.4 24.1 5.1 4.8 6.6 28.2 5.9 5.6 6.9 32.8 68.2% 26.4% 48.7% 29.2% 25.3% 25.8% 17.7% 70.8% 26.4% 46.0% 29.5% 25.4% 25.2% 17.0% 67.8% 28.6% 48.0% 30.0% 26.1% 25.9% 17.6% 77.8% 29.9% 48.3% 30.0% 26.4% 26.3% 17.9% 87.6% 30.7% 48.6% 30.0% 26.6% 26.6% 18.1% 18.1% 10.2% 30.2% 35.0% 30.6% 34.6% 35.7% 8.9% 3.7% 12.9% 13.5% 13.9% 10.3% 8.6% 6.9% 4.0% 11.1% 14.3% 12.9% 14.2% 15.1% 9.2% 7.2% 17.0% 18.4% 17.0% 18.9% 18.9% 8.5% 7.1% 16.2% 17.1% 16.2% 17.4% 17.4% 14.5 16.0% 147.81 9.8 57.0% 8.3 17,599.73 15.0 3.4% 151.87 9.9 60.0% 9.0 18,245.21 16.6 10.6% 156.05 10.6 58.0% 9.6 18,975.01 18.2 9.5% 160.34 11.3 57.8% 10.5 20,337.42 19.8 8.7% 164.75 12.0 57.7% 11.4 21,777.31

January 2011

93

VETIVA
CAPITAL MANAGEMENT LIMITED
BASIC INFORMATION Address 45/47, Town Planning Way Ilupeju Industrial Estate, Lagos www.pzcussonsng.com E.C Edozien C hristos Giannopoulos May Nigerian Stock Exchange Bloomberg: PZ:NL C onglomerates Nigeria

2011 Outlook
The Tipping Point PZ Cussons Nigeria plc Despite Improved Efficiency, We Are Underweight
We downgrade our rating on PZ to an “SELL” given that the stock is trading at an expected downside of 28.1% to our 12 month target price of N26.50, based on the DDM valuation methodology.

Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) PZ C ussons Plc, UK Others STATISTICS SHARE
Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)

Investment Thesis
White Goods sales growth expected, but high input costs threaten: As credit and discretionary spending gradually picks up, we expect the most impact to be on PZ’s high value electrical segment (especially refrigerators and freezers). The renovation and re-launch of many of the personal and home care products reflects an attempt at market share re-capture, as many 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 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 and quality of oil ingredients, as well as expansion in the food and nutrition category. With this backward integration (palm oil refinery expected in 2013), input cost pressure should ease going forward. Efficiency Gains from Investment: PZ’s margins are expected to further improve based on efficiency gains from investments in its manufacturing operations and supply chain facilities in 2009/10 (“Project Unity”; PZ’s N10 billion investments spend). We expect efficiency gains from Project Unity to continue to impact gross profit margin. Our expectation is a 100-150 bps increase in gross margins over the next two years owing to this investment. Earnings Outlook: Our outlook for PZ is dampened by expectations of slack 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 Forward EPS of N1.81 implying a Forward PE of 18.5x and a Dividend of N1.09. Forecast Summary FY'09A
1.52 22% 10.42 0.68 10% 4.32 10.30 9% 1.41

66.1 33.9
3,176.0 33.50 106,396.0 713.3 33.92 23,309.6 156.3 39.00 24.97

38,707.5 18.6 2.4 2.9 14.3 6.1

PZ Cussons vs Conglomerates vs NSE ASI Performance
Rebased to December 31, 2009 1.6 PZ CUSSONS CONGLOMERATES NSE ASI

1.4

1.2

FY'10A
1.67 10% 17.58 0.86 26% 2.92 11.20 9% 2.41

FY'11F
1.81 8% 18.52 1.09 27% 3.24 12.19 9% 2.59

FY'12F
2.31 28% 14.47 1.39 28% 4.15 12.91 6% 2.42

FY'13F
2.70 17% 12.41 1.62 17% 4.83 13.84 7% 2.25

1

Earnings Per Share (N) YoY Change (%)

0.8 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Price to Earnings (x)
Source: NSE, Vetiva Research

Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

Source: Company Financial; Vetiva Research

January 2011

94

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
55,239 -49,645 16,300 -5,594 -4,169 6,537 98 7,750 -1,114 6,636 -413 6,223 -243 5,980 -1,600 4,380 -429 3,951 2008 18,143 21,996 7,335 2,860

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit S & D Expenses Administrative Expenses Core Operating Profit Other Operating Income EBITDA Depreciation EBIT Interest Payable & Charges Profit before Exceptional Item & Tax Exceptional Item Profit Before Taxation Taxation Profit After Taxation Minority Interest Profit Attributable to Members BALANCE SHEET (N'Mill) Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Assets Total Assets Borrowings Trade creditors Other Creditors and accruals Due to parent company Taxation Long Term Liabilities Deferred Taxation Minority Interest Total Liabilities Share Capital Share Premium Revenue Reserves Revaluation Reserves Total Equity Current

2009
63,801 -44,967 18,833 -6,991 -4,024 7,818 124 9,293 -1,351 7,942 -271 7,671 7,671 -2,340 5,331 -512 4,819 2009 21,512 20,632 6,919 4,346 1,488 54,896 8 592 4,875 7,204 2,265 2,813 1,574 19,331 1,588 6,878 19,585 7,514 35,565

2010
62,668 -45,381 17,287 -6,021 -3,481 7,785 309 9,661 -1,567 8,094 -142 7,951 7,951 -2,367 5,585 -283 5,302 2010 24,738 15,354 8,507 10,333 38 58,969 1,522 5,260 6,303 2,184 3,369 1,623 20,261 1,588 6,878 22,727 7,514 38,708

2011 F
61,777 -43,862 17,915 -5,560 -3,707 8,649 325 10,394 -1,421 8,974 -79 8,894 8,894 -2,846 6,048 -302 5,746 2011 F 22,615 17,651 8,687 6,205 55,158 440 1,384 4,413 1,638 1,931 2,968 1,379 14,152 1,588 6,878 25,025 7,514 41,006

2012 F
71,585 -50,109 21,475 -6,443 -3,937 11,096 341 12,881 -1,444 11,437 -56 11,381 11,381 -3,642 7,739 -387 7,352 2012 F 25,522 21,787 9,337 5,602 62,248 480 1,494 5,291 3,953 2,179 3,349 1,556 18,301 1,588 6,878 27,966 7,514 43,947

2013 F
84,156 -58,909 25,247 -7,574 -4,629 13,044 358 15,068 -1,666 13,402 -133 13,270 13,270 -4,246 9,023 -451 8,572 2013 F 30,004 27,076 10,977 5,123 73,179 467 1,464 6,220 9,325 2,561 3,937 1,829 25,804 1,588 6,878 31,395 7,514 47,375

64 50,397 1,541 739 4,147 6,235 1,451 2,508 1,062 17,683 1,588 6,878 16,654 7,594 32,714

January 2011

95

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008
370 -333 109 -38 -28 44 1 52 -7 44 -3 42 -2 40 -11 29 -3 26 2008 122 147 49 19 0 338 10 5 28 42 10 17 7 119 11 46 112 51 219

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit S & D Expenses Administrative Expenses Core Operating Profit Other Operating Income EBITDA Depreciation EBIT Interest Payable & Charges Profit before Exceptional Item & Tax Exceptional Item Profit Before Taxation Taxation Profit After Taxation Minority Interest Profit Attributable to Members BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Borrowings Trade creditors Other Creditors and accruals Due to parent company Taxation Long Term Liabilities Deferred Taxation Minority Interest Total liabilities Share Capital Share Premium Revenue Reserves Revaluation Reserves Total Equity

2009
428 -301 126 -47 -27 52 1 62 -9 53 -2 51 0 51 -16 36 -3 32 2009 144 138 46 29 10 368 0 4 33 48 15 19 11 130 11 46 131 50 238

2010
420 -304 116 -40 -23 52 2 65 -11 54 -1 53 0 53 -16 37 -2 36 2010 166 103 57 69 0 395 0 10 35 42 15 23 11 136 11 46 152 50 259

2011 F
414 -294 120 -37 -25 58 2 70 -10 60 -1 60 0 60 -19 41 -2 39 2011 F 152 118 58 42 0 370 3 9 30 11 13 20 9 95 11 46 168 50 275

2012 F
480 -336 144 -43 -26 74 2 86 -10 77 0 76 0 76 -24 52 -3 49 2012 F 171 146 63 38 0 417 3 10 35 26 15 22 10 123 11 46 187 50 295

2013 F
564 -395 169 -51 -31 87 2 101 -11 90 -1 89 0 89 -28 60 -3 57 2013 F 201 182 74 34 0 491 3 10 42 63 17 26 12 173 11 46 210 50 318

January 2011

96

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Growth (%) Turnover growth Growth in Core Operating Profit Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Margins (%) EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin Liquidity Ratios Current ratio Inventory Coverage (x) Days in inventory Days in accounts payable Days in receivables Cash Conversion Cycle Asset Utilization Inventory Turnover (x) Asset Turnover (x) Fixed Assets Turnover (x) Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 12.7 1.5 3.9% 6.2 16.5 2.2 2.7% 8.4 18.8 2.6 2.7% 10.21 18.5 2.6 3.2% 9.9 14.5 2.4 4.1% 8.3 1.24 0.62 10.30 20.8 1.52 0.68 11.20 20.1 1.67 0.86 12.19 19.7 1.81 1.09 12.91 19.4 2.31 1.39 13.84 22.5 2.2 1.4 3.2 2.1 1.2 3.2 2.5 1.1 2.7 2.7 1.1 2.6 2.5 1.2 3.0 2.3 16.1 162.5 35.9 48.5 175.0 2.2 29.3 173.0 44.4 39.6 168.2 2.2 56.8 144.7 54.5 49.5 139.7 3.3 113.0 137.3 48.2 51.3 140.4 2.7 204.6 143.6 49.4 47.6 141.8 11.8% 10.1% 9.1% 6.0% 14.6% 12.4% 12.0% 7.6% 15.4% 12.9% 12.7% 8.5% 16.8% 14.5% 14.4% 9.3% 18.0% 16.0% 15.9% 10.3% 12.5% 8.3% 14.1% 9.2% 14.3% 9.3% 14.4% 10.1% 17.3% 12.5% 21.4% 36.9% 27.7% 11.7% 12.5% 15.5% 19.6% 19.9% 28.3% 22.0% -1.8% -0.4% 4.0% 3.7% 10.0% -1.4% 11.1% 7.6% 11.9% 8.4% 15.9% 28.3% 23.9% 28.0% 28.0%

January 2011

97

VETIVA
CAPITAL MANAGEMENT LIMITED
BASIC INFORMATION Address Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) Unilever Overseas Holdings B.V. Odua Group of C ompanies 50.0 50.0 1, Billings Way, Oregun Ikeja, Lagos www.unilevernigeria.com Apostle H.I. Alile T. Boedinger December Nigerian Stock Exchange Bloomberg: UNILEVER:NL C onglomerates Nigeria

2011 Outlook
The Tipping Point Unilever Plc Overpriced, in our view
We downgrade to a “SELL” rating, given that the stock (at a current share price at N30.00) has an expected downside of 26.1% to N22.17, our 12 month target price. Our target valuation is based on the DCF and DDM methodology, 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 dividend payout and good corporate governance.

Investment Thesis
Market leadership unchallenged across niches: The expected increased, albeit slight, growth in consumer spending and credit environment should 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 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 market, where Unilever has an estimated market share of 80%, Close Up has been performing quite impressively with innovative variants to ward-off competition. 2011 recovery, hinged on cost savings: On the average, Unilever secures about 48% of its input needs from import and this dependency has resulted in the exposure of margin to the combined risk of commodity volatility and FX movement. Savings have been achieved on finance cost which reduced by 77% over the past year following the 2009 deleveraging of its US$20 million loan which infused some FX risk to earnings. Barring additional uptake of more expensive domestic borrowing, there should be no pressure on margin from finance cost. Apt to say that our expectation of sustained earnings rebound in 2011 is hinged on effective cost management. 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 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 in double-digit sales growth, powerful base effect and efficiency gain. Forecast Summary
Earnings Per Share (N) YoY Change (%) Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
Unilever vs Conglomerates vs NSE ASI Performance
Rebased to December 31, 2009 1.8 UNILEVER CONGLOMERATES

3,783.3 30.00 113,498.9 760.9 50.00 53,524.5 358.8 31.29 19.00

7,394.0 30.4 14.4 2.4 12.0 3.8

1.6

1.4

1.2

1

FY'09A
1.08 57.66% 25.78 1.07 57.48% 3.84% 2.17 22.77% 12.87

FY'10F
1.12 3.96% 23.91 1.11 4.08% 4.14% 2.38 9.97% 11.28

FY'11F
1.40 24.54% 21.41 1.39 24.54% 4.62% 2.66 11.37% 11.30

FY'12F
1.59 13.41% 18.88 1.57 13.41% 5.24% 3.00 13.10% 9.99

FY'13F
1.80 13.39% 16.65 1.78 13.39% 5.95% 3.39 12.79% 8.86

0.8 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Source: NSE, Vetiva Research

Source: Company Financial; Vetiva Research

January 2011

98

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit S & D Expenses Administrative Expenses Core Operating Profit EBITDA Depreciation EBIT Interest Payable & Charges Profit Before Taxation Exceptional Item Taxation Profit After Taxation

2007
33,991 -22,578 11,413 -1,484 -7,376 2,553 3,411 -858 2,553 -540 2,013 -717 1,297

2008
37,377 -24,361 13,017 -1,692 -6,853 4,472 5,243 -770 4,472 -327 4,145 -1,548 2,597

2009
44,481 -27,092 17,389 -2,076 -8,252 7,061 7,750 -689 7,061 -836 6,225 -563 -1,567 4,094

2010 F
47,150 -28,762 18,389 -2,829 -8,016 7,544 7,544 -951 6,593 -335 6,259 -2,003 4,256

2011 F
53,280 -32,501 20,779 -2,984 -8,525 9,271 9,271 -1,074 8,197 -402 7,795 -2,494 5,301

2012 F
60,206 -36,726 23,480 -3,372 -9,573 10,536 10,536 -1,214 9,322 -482 8,840 -2,829 6,012

BALANCE SHEET (N'Mill) Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Assets Total Assets Trade creditors Other Creditors and accruals Due to related companies Bank Overdraft Taxation Long Term Liabilities Deferred Taxation Retirement Benefits Obligation Total Liabilities Share Capital Share Premium Revenue Reserves Revaluation Reserves Total Equity Current

2007 8,641 5,083 3,463 1,562 1,604 20,353 2,365 4,782 1,069 4,036 490

2008 9,056 4,632 4,369 2,706 2,729 23,493 3,711 4,859 1,553 2,615 1,005

2009 9,975 4,927 3,495 1,981 3,304 23,682 2,255 4,952 1,928 1,500 1,769

2010 F 11,316 4,632 4,019 2,080 3,449 25,496 2,030 5,581 1,966 1,650 2,043

2011 F 12,787 5,002 4,212 2,184 3,533 27,718 1,827 6,136 2,006 1,815 2,544

2012 F 14,449 5,352 4,414 2,293 3,680 30,189 1,644 6,764 2,046 1,997 2,886

747 1,833 15,322 1,892 46 237 2,856 5,031

1,290 1,778 16,811 1,892 46 237 4,507 6,682

1,148 1,927 15,479 1,892 46 237 6,028 8,203

1,240 1,965 16,475 1,892 46 237 6,846 9,021

1,339 2,004 17,671 1,892 46 237 7,872 10,047

1,446 2,044 18,826 1,892 46 237 9,188 11,363

January 2011

99

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit S & D Expenses Administrative Expenses Core Operating Profit EBITDA Depreciation EBIT Interest Payable & Charges Profit Before Taxation Exceptional Item Taxation Profit After Taxation

2007
228 -151 77 -10 -49 17 23 -6 17 -4 13 -5 78

2008
251 -163 87 -11 -46 30 35 -5 30 -2 28 -10 120

2009
298 -182 117 -14 -55 47 52 -5 47 -6 42 -4 -11 412

2010 F
316 -193 123 -19 -54 51 51 -6 44 -2 42 -13 690

2011 F
357 -218 139 -20 -57 62 62 -7 55 -3 52 -17 1,333

2012 F
404 -246 157 -23 -64 71 71 -8 62 -3 59 -19 1,854

BALANCE SHEET Fixed Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Borrowings Trade creditors Other Creditors and accruals Due to parent company Taxation Long Term Liabilities Deferred Taxation Minority Interest Total liabilities Share Capital Share Premium Revenue Reserves Revaluation Reserves Total Equity

2007 58 34 23 10 11 136 16 32 7 27 3

2008 61 31 29 18 18 157 25 33 10 18 7

2009 67 33 23 13 22 159 15 33 13 10 12

2010 F 76 31 27 14 23 171 14 37 13 11 14

2011 F 86 34 28 15 24 186 12 41 13 12 17

2012 F 97 36 30 15 25 202 11 45 14 13 19

5 12 103 13 0.3 1.6 19 34

9 12 113 13 0.3 1.6 30 45

8 13 104 13 0.3 1.6 40 55

8 13 110 13 0.3 1.6 46 60

9 13 118 13 0.3 1.6 53 67

10 14 126 13 0.3 1.6 62 76

January 2011

100

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Growth (%) Turnover growth Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Margins (%) EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin Liquidity Ratios Cash Ratio Current ratio Inventory Coverage (x) Days in inventory Days in accounts payable Days in receivables Cash Conversion Cycle Asset Utilization Sales to Cash (x) Inventory Turnover (x) Asset Turnover (x) Fixed Assets Turnover (x) Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 39.5 15.3 2.5% 19.5 25.8 12.9 3.8% 13.6 23.9 11.3 4.1% 13.4 21.4 11.3 4.6% 12.2 18.9 10.0 5.2% 10.7 0.69 0.68 1.77 9.9 1.08 1.07 2.17 11.8 1.12 1.11 2.38 12.5 1.40 1.39 2.66 14.1 1.59 1.57 3.00 15.9 13.8 5.0 1.6 0.4 22.5 5.7 1.9 0.4 22.7 6.0 1.8 0.4 24.4 6.7 1.9 0.5 26.3 7.1 2.0 0.5 0.2 1.1 13.7 69.4 36.2 42.7 75.8 0.2 1.1 8.4 66.4 18.5 28.7 76.6 0.2 1.1 19.7 58.8 15.7 31.1 74.2 0.2 1.0 20.4 56.2 12.5 28.9 72.5 0.1 1.0 19.3 53.2 10.0 26.8 70.0 14.0% 12.0% 11.1% 6.9% 17.4% 15.9% 14.0% 9.2% 16.0% 14.0% 13.3% 9.0% 17.4% 15.4% 14.6% 9.9% 17.5% 15.5% 14.7% 10.0% 44.3% 11.8% 55.0% 17.4% 49.4% 17.3% 55.6% 19.9% 56.2% 20.8% 10.0% 53.7% 105.9% 141.0% 19.0% 47.8% 50.2% 57.7% 6.0% -2.7% 0.6% 4.0% 13.0% 22.9% 24.5% 24.5% 13.0% 13.6% 13.4% 13.4%

January 2011

101

VETIVA
CAPITAL MANAGEMENT LIMITED
BASIC INFORMATION Address UAC House 1-5 Odunlami Street, Lagos Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) Directors' Interest Actis Africa Fund LLP Others 0.9 9.0 90.1 www.uacnplc.com Udoma Udo Udoma Larry E. Ettah December Nigerian Stock Exchange Bloomberg: UAC N:NL C onglometrates Nigeria

2011 Outlook
The Tipping Point UACN Plc Diversified Conglomerate, Straining for the Top
At current price (N39.00), a 6% upside to our N42.17 one year target price, we are “NEUTRAL” on UACN. Our valuation is based on the DCF methodology, with the target price rolled forward by the weighted average cost of capital.

Investment thesis
Restructuring in the Offing; UACN announced plans to restructure its businesses, unbundling operating divisions into limited liability companies in order to transform into a holding company by 2012. The first move in this direction is the merging of the UAC Foods and UAC Dairies divisions, along 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 company’s priority of growing the logistics business, boosting the Grand Cereals and Oil Mills business as well as repositioning the UAC Restaurants division. We expect growth in the properties arm of the company (UPDC), to be muted this year as credit to the private sector for mortgages may remain slow, boosted slightly by annuity property such as the Golden Tulip Hotel and cost savings from cheaper, longer term financing. Brand Portfolio Expansion on New Joint Venture with Tiger Brands: The resultant lower consumer discretionary spending, tighter credit as well as higher energy costs following the economic downturn significantly affected the dairy products, real estate and restaurant businesses. UACN’s Joint Venture agreement (in principle) with Tiger Brands Limited of South Africa to sell 49% of the authorized shares of the resulting UAC Foods Limited is expected to provide brand portfolio expansion as well as renewed growth prospects and efficiencies for the business and its contribution to the UACN Group. Earnings Outlook: With its vibrant agri-business, the inherent potential for 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 Forward EPS of N2.81 implying a Forward PE of 14.41x and Dividend of N1.98.

SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
UACN vs Conglomerates vs NSE ASI Performance
Rebased to December 31, 2009 1.8 UACN 1.6 CONGLOMERATES NSE ASI

1,280.6 39.00 49,942.5 334.8 90.13 55,692.2 373.3 58.48 36.16

39,527.8 20.2 1.5 3.2 23.8 28.8

1.4

1.2

1

Forecast Summary
Earnings Per Share (N) YoY Change (%)
Mar-10 Jun-10 Sep-10 Dec-10 Source: NSE, Vetiva Research

FY'09A
3.14 -4% 11.71 1.30 -35% 3.54 29.27 -3% 0.83

FY'10F
2.38 -24% 15.79 1.19 -9% 3.17 24.69 -16% 1.20

FY'11F
2.81 18% 14.14 1.69 42% 4.24 25.82 5% 1.54

FY'12F
3.30 17% 12.05 1.98 17% 4.98 27.14 5% 1.47

FY'13F
3.98 21% 9.99 2.39 21% 6.01 28.73 6% 1.39

0.8 Dec-09

Price to Earnings (x) Dividend Per Share (N) YoY Change (%) Dividend Yield (%) Net Assets Per Share (N) YoY Change (%) Price to Book (x)

Source: Company Financial; Vetiva Research

January 2011

102

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit S & D Expenses Administrative Expenses Core Operating Profit Other Operating Income EBITDA Depreciation EBIT Interest Payable & Charges Finance Income Share of profit of associated companies Profit from disposal of assets Profit Before Taxation Taxation Profit After Taxation Minority Interest Profit Attributable to Members BALANCE SHEET (N'Mill) Intangible Assets Fixed Assets Investment Properties Long term investments Properties under construction Stocks & work in progress Debtors & Prepayments Cash & bank balances Total Assets Trade creditors Bank loans/overdrafts Taxation Other Creditors and accruals Dividends Payable Deferred Taxation Creditors(due after one year) Provision for liabilities and charges Total Liabilities Share Capital Share Premium Capital Reserve Revaluation reserve Other reserve Retained Profit Total Equity

2007
37,155 -27,409 9,746 -819 -4,782 4,145 918 6,798 -1,735 5,063 -584 408 13 1,105 6,005 -1,450 4,555 -954 3,601 2007 201 22,260 32,255 2,123 7,528 9,520 5,233 79,120 4,519 6,250 1,875 9,608 1,362 1,078 18,392 1,487 44,572 640 4,255 1,984 13,946 127 8,736 29,688

2008
53,489 -39,033 14,456 -1,215 -4,645 8,596 509 11,150 -2,045 9,105 -922 263 11 324 8,781 -2,005 6,776 -2,605 4,171 2008 167 27,272 27,861 2,074 15,275 9,621 9,045 4,092 95,406 11,979 9,521 2,404 12,837 1,283 3,042 6,879 1,941 49,887 640 4,255 1,984 21,234 142 10,503 38,760

2009
56,496 -40,754 15,742 -1,436 -6,016 8,289 198 10,683 -2,196 8,487 -1,448 517 12 508 8,076 -1,899 6,177 -2,158 4,019 2009 134 30,131 24,206 2,204 14,511 10,245 7,105 5,531 94,067 7,689 12,857 2,565 12,751 1,616 2,450 6,933 2,243 49,104 640 4,255 1,984 18,503 148 11,956 37,487

2010 F
50,234 -36,319 13,915 -1,256 -5,526 7,133 504 10,137 -2,499 7,638 -1,001 276 12 559 7,485 -1,721 5,763 -1,959 3,804 2010 F 100 31,520 25,610 2,265 15,760 10,835 8,865 3,544 98,498 8,865 12,625 2,462 13,790 1,674 2,462 7,612 2,364 51,856 800 4,255 1,984 18,503 127 13,858 39,528

2011 F
59,914 -43,138 16,776 -1,498 -6,591 8,687 602 11,925 -2,636 9,289 -1,351 300 13 615 8,866 -2,039 6,827 -2,321 4,506 2011 F 67 33,552 31,155 2,157 19,172 13,181 10,784 9,759 119,827 10,784 26,027 2,996 15,578 2,037 2,996 7,765 2,876 71,058 800 4,255 1,984 18,503 127 15,660 41,330

2012 F
72,073 -51,893 20,181 -1,802 -7,928 10,451 724 14,017 -2,843 11,174 -1,820 360 15 677 10,406 -2,393 8,012 -2,724 5,288 2012 F 33 36,692 34,071 2,228 20,967 14,284 11,794 10,974 131,043 11,794 31,838 3,276 17,036 2,228 3,276 7,185 3,145 79,777 800 4,255 1,984 18,503 127 17,776 43,445

January 2011

103

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit S & D Expenses Administrative Expenses Core Operating Profit Other Operating Income EBITDA Depreciation EBIT Interest Payable & Charges Finance Income Share of profit of associated companies Profit from disposal of assets Profit Before Taxation Taxation Profit After Taxation Minority Interest Profit Attributable to Members BALANCE SHEET Intangible Assets Fixed Assets Investment Properties Long term investments Properties under construction Stocks & work in progress Debtors & Prepayments Cash & bank balances Total Assets Trade creditors Bank loans/overdrafts Taxation Other Creditors and accruals Dividends Payable Deferred Taxation Creditors(due after one year) Provision for liabilities and charges Total liabilities Share Capital Share Premium Capital Reserve Revaluation reserve Other reserve Retained Profit Total Equity

2007
249 -184 65 -5 -32 28 6 46 -12 34 -4 3 0.1 7 40 -10 31 -6 24 2008 1.3 149 216 14 0 50 64 35 530 30 42 13 64 9 7 123 10 299 4 29 13 93 0.9 59 199

2008
359 -262 97 -8 -31 58 3 75 -14 61 -6 2 0.1 2 59 -13 45 -17 28 2009 1.1 183 187 14 102 64 61 27 640 80 64 16 86 9 20 46 13 334 4 29 13 142 1.0 70 260

2009
379 -273 106 -10 -40 56 1 72 -15 57 -10 3 0.1 3 54 -13 41 -14 27 2010 0.9 202 162 15 97 69 48 37 631 52 86 17 85 11 16 46 15 329 4 29 13 124 1.0 80 251

2010 F
337 -243 93 -8 -37 48 3 68 -17 51 -7 2 0.1 4 50 -12 39 -13 25 2011 F 0.7 211 172 15 106 73 59 24 660 59 85 17 92 11 17 51 16 348 5 29 13 124 0.9 93 265

2011 F
402 -289 112 -10 -44 58 4 80 -18 62 -9 2 0.1 4 59 -14 46 -16 30 2012 F 0.4 225 209 14 129 88 72 65 803 72 174 20 104 14 20 52 19 476 5 29 13 124 0.9 105 277

2012 F
483 -348 135 -12 -53 70 5 94 -19 75 -12 2 0.1 5 70 -16 54 -18 35 2013 F 0.2 246 228 15 141 96 79 74 878 79 213 22 114 15 22 48 21 535 5 29 13 124 0.9 119 291

January 2011

104

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

2008 Growth (%) Turnover growth Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Average Equity Return on Average Assets EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin Liquidity Ratios (x) Current ratio Inventory Coverage Days in inventory Days in accounts payable Days in receivables Asset Utilization (x) Inventory Turnover (x) Asset Turnover (x) Fixed Assets Turnover Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 10.9 1.2 5.6 5.2 3.3 2.0 30.3 41.8 4.1 0.6 0.5 0.6 9.9 90.0 112.0 39.7 19.8% 7.8% 20.8% 17.0% 16.4% 12.7% 44.0% 64.0% 46.2% 48.8%

2009

2010 E

2011 E

2012 E

5.6% -4.2% -8.0% -8.8%

-11.1% -5.1% -7.3% -6.7%

19.3% 17.6% 18.5% 18.5%

20.3% 17.5% 17.4% 17.4%

16.2% 6.5% 18.9% 15.0% 14.3% 10.9%

15.0% 6.0% 20.2% 15.2% 14.9% 11.5%

16.9% 6.3% 19.9% 15.5% 14.8% 11.4%

18.9% 6.4% 19.4% 15.5% 14.4% 11.1%

0.6 5.9 91.8 68.9 68.8

0.6 7.6 108.9 89.1 84.2

0.6 6.9 111.5 91.3 86.0

0.6 6.1 100.5 83.0 77.2

4.0 0.6 0.5

3.4 0.5 0.6

3.3 0.5 0.6

3.6 0.6 0.5

3.1 1.3 29.3 44.1

2.4 1.2 24.7 31.4

2.8 1.7 25.8 37.4

3.3 2.0 27.1 45.0

11.7 1.3 3.5 5.7

15.8 1.5 3.2 7.6

14.1 1.5 4.2 6.7

12.0 1.5 5.0 6.0

January 2011

105

VETIVA
CAPITAL MANAGEMENT LIMITED

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 be responsible for the completion of the major tariff review. The review which comes ahead of its initial 2013 schedule is expected to fully reflect the 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).

Implementing the power sector roadmap in 2011, we expect the retail tariff structure to be increased by as much as 100%

Relative Electricity Tariffs in other African Countries…
Naira/kwh

50

51.00 44.36 38.22

40

30
26.61 27.82 24.77 24.51 23.33 16.85 22.00

20

15.48 13.05 7.00

10

0

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
CAPITAL MANAGEMENT LIMITED

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 generating companies, were initially scheduled for end January 2011, we believe that the reform process is still much on track. More progress would be made in the course of the year, which we anticipate would lead to the completion of key milestones such as the privatisation and concessioning of the 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.

Despite delay in achieving key milestones, we believe progress will be made in the course of year. This will be well supported of the incumbent president returns to power after the April elections

Upstream Oil Sector – Waiting on the Elections
Amidst the expected rise in oil prices, revenues from the upstream segment are expected to improve the government’s fiscal positioning, especially as production volumes have experienced some form of stability, on the back of early successes of the Amnesty Program. However, we note that some 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 recurrent 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 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.

Reforms, when completed would re-organise the players and the operational framework in the industry

Passage of the PIB will likely stall till H2’11

January 2011

107

VETIVA
CAPITAL MANAGEMENT LIMITED

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 confidence from the participating Oil and Gas companies, who can recall the litigations and license withdrawals that trailed the 2007 licensing rounds. 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.

The Next oil licensing rounds are likely to held post – elections and passage of the PIB

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 2013. Subsequently, these increments would be guided by the country’s 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 support the gas production initiatives from the Oil Companies. Also, the implementation of robust commercial agreements between the power plants and the oil companies, as well as a partial risk guarantee by the World Bank, should increase the confidence level in gas suppliers that they would receive payments for their supplies, especially from the government controlled power 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.

2011 ushers in a new pricing regime for natural gas

With the new gas pricing initiative, the traditional complain of inadequate gas supply to the power plants should subside, as the pricing framework can support the gas production initiatives from the Oil Companies.

January 2011

108

VETIVA
CAPITAL MANAGEMENT LIMITED

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 We expect the retail subsidiary of the NNPC to play a more conspicuous role in the distribution of petroleum products The retail subsidiary of the Nigerian National Petroleum Corporation, NNPC Retail Limited is positioned to play more actively in the distribution of refined petroleum products through its acquired retail outlets. From under 200 retail 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 4% 29% 5%

Independents 6% 28%

NNPC Retail 7% 10%

30%

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 products into Nigeria would again reach high levels, with similar impacts on the Federal Governments subsidy exposures.

We expect the costs of refined petroleum products to incease following the trajectory of the high crude oil prices

January 2011

109

VETIVA
CAPITAL MANAGEMENT LIMITED

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 candidate in the Presidential elections is unlikely to attempt the policy shift preelection, as the immediate impact would be public outcry, which would greatly 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

Concerns on the Federal Governments execution of the deregulation policy is likely to wait till after the election.

Current Retail Price 150 129.37 120

Expected Market Price 138.34

99%
90 65.00 60

176%

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
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Oando Plc

BASIC INFORMATION Address 2, Ajose Adeogun Street Victoria Island, Lagos, Nigeria Website Management www.oandoplc.com J A Tinubu (Group Chief Executive) O Boyo (D/Group Chief Executive) Financial Year End Exchange Listing December Primary Listing: Nigerian Stock Exchange Secondary Listing: Johannesburg Stock Exchange Bloomberg: OANDO:NL Petroleum Marketing Nigeria

An Outlet to Ride the Opportunities in the Energy Space
At our slightly revised DCF valuation for the energy conglomerate, we obtain a target range of N95.79 – N105.28. This indicates a midpoint of N100.38, which underpins an upside potential of 32% relative to the stock’s current price. We note also that our valuation on its high margin Exploration & Production Business is based on a conservative $80/bbl crude oil price and moderated growth rates in oil production volumes, peaking at 9,080 bpd in 2015. We judge that near term acquisitions of producing assets through various outlets and the inflow of funds from its marketing subsidiary (OML) divestment has the potential of increasing our valuation range by >20%. Thus, we maintain a “BUY” rating.

Symbol Sector Country OWNERSHIP STRUCTURE Shareholders Ocean & Oil Invstmnts Others SHARE STATISTICS Shares in issue (Mn) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year High (N) Year Low (N) VALUATION METRICS Book Value (N'm) P/E (x) Price/Book (x) Div. Yield (%) ROE (%) Debt/Equity (%)

Investment Thesis
% Ownership 24.67 75.33

1,810.17 75.00 135,762.75 910.12 75.33 147,238.56 987.05 128.50 53.00

The upstream and midstream upside. Oando has invested extensively in the upstream and midstream segments of the energy value chain. This gives the company interests in 11 upstream assets and ownership of an extensive 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 business segments proffer a >20% PBT CAGR to 2015, in both Exploration & Production and Gas & Power Divisions, while the Energy Services Division has an intrinsic potential PBT CAGR of >50%. Industry reforms should provide added advantage. Favourable conclusion of the ongoing reforms in Nigeria’s Oil and Gas sector, which would result in the passage of the much debated Petroleum Industry Bill (PIB), should increase, geometrically, the company’s potential. As an indigenous player, the legislation, would allow more upstream acquisitions, international partnerships’ and favourable fiscal terms. 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 more aggressively, by c.31% to N13.9 billion. Fuelled by increased contributions from its Exploration & Production Division, improved margins in its Gas & Power and Energy Services Divisions, we believe that aggregate EBIT and PBT margins would improve to 7.6% and 5.2% in FY’11, from our estimates of 7.3% and 4.7% respectively in FY’10.
Forecast Summary
EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div. Yield (%) NAPS (N)

78,961.00 12.78 1.57 3.19% 20.56 303.31

OANDO vs PM INDEX VS NSE ASI
1.50 OANDO PLC 1.30 PMIndex NSE ASI

FY'09A
11.16 21.00 8.43 3.00 -50.00 3.19 58.91 18.77 1.60

FY'10F*
5.87 -47.37 13.45 1.46 -51.32 1.85 47.69 -19.05 1.66

FY'11F
7.67 30.58 10.30 1.91 30.58 2.41 53.51 12.21 1.48

FY'12F
9.60 25.26 8.22 2.39 25.26 3.02 60.81 13.63 1.30

FY'13F
11.34 18.09 6.96 2.82 18.09 3.57 69.42 14.17 1.14

FY'14F
12.87 13.50 6.14 3.20 13.50 4.05 79.20 14.08 1.00

1.10

0.90

0.70

YoY Change (%) P/B (x)

0.50 4-Jan 4-Apr 3-Jul 1-Oct 30-Dec

Source: NSE; Vetiva Research

Source: Company Financials, Vetiva Research *The Company’s FY’10 outstanding shares includes additional shares from its scrip and right issues, effectively doubling in its issued shares with obvious effects on its’Per Share’ metrics

January 2011

111

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

Income Statement (N' Mill) Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable & Similar charges Interest received Profit Before Taxation Taxation PAT

2007 185,892 -164,443 21,449 6,249 2,471 8,720 7,239 -1,297 871 6,814 -1,333 5,480

2008 339,420 -295,714 43,706 20,838 1,816 22,655 16,862 -10,668 4,549 10,743 -2,399 8,343

2009 336,860 -301,283 35,577 15,824 11,713 27,538 21,767 -11,826 3,571 13,512 -3,415 10,097

2010F 376,984 -326,092 50,893 30,152 2,945 33,097 27,384 -13,600 3,928 17,713 -7,085 10,628

2011F 432,291 -373,931 58,359 36,582 2,724 39,306 33,022 -14,960 4,321 22,383 -8,506 13,878

2012F 485,625 -420,066 65,559 42,693 3,066 45,759 38,847 -16,007 4,753 27,593 -10,209 17,383

Balance Sheet (N'Mill) Fixed Assets Intangible Assets Long term investments Long term receivable Deferred Tax Asset Total Non-Current Assets Inventories Debtors & Prepayments Loan receivable Bank and cash balances Total Current Assets Total Assets

2007 33,070 29,714 10 11,138 73,932 24,730 46,813 17,209 88,752 162,684

2008 89,903 22,351 2 14,545 1,044 127,845 16,069 93,703 1,180 48,982 159,933 287,778

2009 131,713 23,970 1 18,783 1,944 176,411 9,693 96,743 6,923 25,760 139,120 315,531

2010F 144,884 26,367 2 18,783 1,944 191,980 19,387 87,069 20,997 127,452 319,433

2011F 166,617 29,003 2 18,783 1,944 216,350 21,325 82,715 14,997 119,038 335,387

2012F 191,610 30,454 2 18,783 1,944 242,792 23,458 78,580 11,303 113,341 356,133

Total Current Liabilities

95,354

191,384

226,272

134,846

131,625

129,669

Total Liabilities

115,268

242,899

262,211

233,108

238,520

246,060

Share capital Share premium account Revaluation Reserves Retained Earnings Shareholders' Equity

377 29,878 10,653 6,321 47,229

452 29,717 7,215 7,343 44,728

453 29,735 7,215 14,909 52,312

905 50,401 10,653 22,839 84,799

905 50,401 10,653 33,196 95,155

905 50,401 10,653 46,168 108,127

January 2011

112

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
1,246 -1,102 144 42 17 58 49 -9 6 46 -9 37

Income Statement ($' Million)
Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable & Similar charges Interest received Profit Before Taxation Taxation PAT

2008
2,275 -1,982 293 140 12 152 113 -72 30 72 -16 56

2009
2,258 -2,020 239 106 79 185 146 -79 24 91 -23 68

2010F
2,527 -2,186 341 202 20 222 184 -91 26 119 -47 71

2011F
2,898 -2,507 391 245 18 263 221 -100 29 150 -57 93

2012F
3,256 -2,816 439 286 21 307 260 -107 32 185 -68 117

Balance Sheet (N'Mill) Fixed Assets Intangible Assets Long term investments Long term receivable Deferred Tax Asset Total Non-Current Assets Inventories Debtors & Prepayments Loan receivable Bank and cash balances Total Current Assets Total Assets Total Current Liabilities

2007 222 199 0 75 496 166 314 115 595 1,091 639

2008 603 150 0 98 7 857 108 628 8 328 1,072 1,929 1,283

2009 883 161 0 126 13 1,183 65 649 46 173 933 2,115 1,517

2010F 971 177 0 126 13 1,287 130 584 141 854 2,141 904

2011F 1,117 194 0 126 13 1,450 143 555 101 798 2,248 882

2012F 1,285 204 0 126 13 1,628 157 527 76 760 2,387 869

Total Liabilities Share capital Share premium account Revaluation Reserves Retained Earnings Shareholders' Equity

773 3 200 71 42 317

1,628 3 199 48 49 300

1,758 3 199 48 100 351

1,563 6 338 71 153 568

1,599 6 338 71 223 638

1,650 6 338 71 309 725

January 2011

113

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2008 2009 -0.8% -21.7% 21.6% 25.8% 21.0% 20.6% 3.3% 4.5% 44.3% 7.2% 10.6% 8.2% 6.5% 0.0% 4.0% 3.0% 13.1 34.8 1.1 2.6 0.1 0.6 0.6 1.8 10.5 98.7 104.8 16.6 0.5 0.8 3.0 0.3 0.2 0.7 5.9 11.16 3.00 58.91 372.19 30.43 2010F 11.9% 5.0% 20.2% 31.1% 5.3% 15.2% 3.3% 4.8% 39.2% 8.6% 13.5% 8.8% 7.3% 0.0% 4.7% 2.8% 18.0 19.4 1.2 2.6 0.2 0.9 0.8 2.0 18.8 82.1 84.3 21.0 0.4 0.6 1.6 0.2 0.3 0.8 3.7 5.87 1.46 47.69 208.26 18.28 2011F 14.7% 5.0% 18.8% 26.4% 30.6% 15.2% 4.2% 5.8% 36.1% 10.1% 13.5% 9.1% 7.6% 0.0% 5.2% 3.2% 28.8 20.3 1.3 2.6 0.1 0.9 0.7 2.2 18.0 64.4 69.8 23.4 0.5 0.6 1.6 0.2 0.3 0.8 3.5 7.67 1.91 53.51 238.81 21.71 2012F 12.3% 5.0% 16.4% 23.3% 25.3% 16.8% 5.0% 6.6% 37.5% 11.2% 13.5% 9.4% 8.0% 0.0% 5.7% 3.6% 43.0 20.7 1.4 2.5 0.1 0.9 0.7 2.4 17.6 51.6 59.1 25.1 0.5 0.6 1.5 0.2 0.3 0.8 3.2 9.60 2.39 60.81 268.28 25.28

Growth Turnover Growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT Profitability Return on Equity Return on Assets Return On Total Capital Operating ROE Operating ROA Margins Gross Profit EBITDA/Sales EBIT/Sales Exceptional Item Pretax Income/Sales Net Profit Margin Asset Utiisation Sales to Cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets (x) Liquidity Ratios Cash ratio (x) Current ratio (x) Acid Test (x) Interest Coverage (x) Days in inventory (x) Days in accounts payable (x) Days in receivables (x) Cash Conversion Cycle Capital Structure Interest bearing debt/Total assets Debt to Total Capital Debt to Equity Payout ratio Total equity/Total assets Retention ratio Financial Leverage Per Share Data EPS DPS NAPS Sales/Share EBITDA/Share 9.22 6.00 49.60 375.10 25.04 0.6 0.8 4.1 0.7 0.2 0.3 6.4 0.3 0.8 0.8 1.6 17.3 55.8 100.8 62.2 6.9 21.1 1.2 3.8 12.9% 6.7% 5.0% 0.0% 3.2% 2.5% 18.1% 3.7% 4.8% 36.5% 7.5% 82.6% 65.9% 159.8% 57.7% 52.2%

January 2011

114

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Mobil Oil Nigeria Plc

BASIC INFORMATION Address 1, Mobil Road Apapa Lagos, Nigeria Website Management Fiscal Year End Exchange Listing Symbol Sector Country OWNERSHIP STRUCTURE Shareholders Mobil Oil C orp. U.S.A Others SHARE STATISTICS Shares in issue (Mn) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year High (N) Year Low (N) VALUATION METRICS Book Value (N'm) P/E (x) Price/Book (x) Div. Yield (%) ROE (%) Debt/Equity (%)
MOBIL VS PM INDEX VS NSE ASI
2.20 MOBIL 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 4-Jan 4-Apr 3-Jul 1-Oct 30-Dec PMIndex NSE ASI

Hedging Downstream Risks With Real Estate
We revise our “Neutral” rating on Mobil Oil Nigeria Plc to “ACCUMULATE”, premised on depreciation in the company’s share price. Our DCF based valuation methodology for the company indicates a target price range of N170.45 – N177.93. Thus, our midpoint of N174.09 supports a 23% upside to the stock’s current market price.

www.exxonmobil.com O A Onakoya ( C hairman/MD) December Primary Listing: Nigerian Stock Exchange Bloomberg: MOBIL:NL Petroleum Marketing Nigeria

Investment Thesis
Streamlined for efficiency; Coming off a manpower rationalization in 2008, with resultant labour cost reduction in 2009, Mobil is positioned for efficiency going forward. The company is increasing investments in technology driven processes, to boost efficiency in the low margin downstream business, while expanding capacity in the higher margin lube segments. However, we expect a marginal contraction in FY’11 margins, as higher fixed operating costs outpaces revenue growth. Real estate as succour for downstream business; Mobil currently has the highest profitability margins in the downstream marketing space, as it earns 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 invested about N1.1 billion and N1.2 billion in 2008 and 2009 respectively in modernising the asset, as part of a program which was to be completed in 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. 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 our assumption of an 85% payout over our forecast period. Thus, we 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%). Earnings Outlook. We expect revenues to be somewhat flat in 2011, projected at N62.2 billion, YoY growth of 5%. Similarly, we expect PAT to record a 2% YoY growth to N3.9 billion. Though remaining relatively high in its sector, we expect PBT and PAT margins to slow from 9.2% and 6.4% in FY’10 to 8.9% and 6.3% respectively in FY’11.
Forecast Summary
EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div. Yield (%) NAPS (N) YoY Change (%) P/B (x)

% Ownership 60.00 40.00

300.50 141.00 42,369.94 284.04 40.00 13,294.04 89.12 182.99 93.00

5,006.00 10.31 8.46 4.96% 81.04 50.69

FY'09A
9.46 65.34 10.45 7.00 40.00 7.09 13.90 47.23 7.11

FY'10F
12.68 34.11 11.12 10.78 54.01 7.65 15.80 13.69 8.92

FY'11F
12.93 1.95 10.90 10.99 1.95 7.79 17.74 12.27 7.95

FY'12F
14.34 10.87 9.84 12.19 10.87 8.64 19.89 12.12 7.09

FY'13F
17.22 20.12 8.19 14.64 20.12 10.38 22.47 12.99 6.27

Sources: Company Financials, Vetiva Research

Source: NSE; Vetiva Research

January 2011

115

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
54,542 -48019 6523 1258 1972 3230 2666 -274 262 2654 -889 1765 -634 1,131

Income Statement (N' Million)
Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable & Similar charges Share of Profit of Associated Companies Profit on Ordinary Activities Exceptional Item Profit Before Taxation Taxation PAT

2008
66,741 -59334 7407 2341 1873 4214 3682 -404 -97 3182 -638 2544 -825 1,719

2009
62,032 -54300 7732 2656 2332 4987 4372 -526 219 4066 0 4066 -1224 2,842

2010F
59,241 -50947 8294 3554 2681 6236 5584 -578 439 5445 0 5445 -1633 3,811

2011F
62,203 -53494 8708 3732 2950 6682 6060 -619 110 5551 0 5551 -1665 3,886

2012F
67,179 -57774 9405 4199 3156 7355 6683 -650 121 6154 0 6154 -1846 4,308

Balance Sheet (N'Million)
Non-Current Assets Fixed Assets Total Non-Current Assets Stocks Debtors Deferred Tax Asset Cash and short term deposits Total Current Assets Total Assets Total Current Liabilities Total Assets Less Current Liabilities

2007
8,698 10,456 3,264 4,673 35 133 8,105 18,561 13,486 5,075 1,276 1,550 2,826 16,313 120 14 2,114 2,248 18,561

2008
10,092 11,082 3,899 4,374 499 60 8,832 19,915 12,886 7,029 1,206 2,221 766 4,192 17,078 150 14 2,672 2,837 19,915

2009
11,669 12,557 4,378 4,687 426 22 9,513 22,070 12,558 9,512 1,297 4,253 -215 5,335 17,893 150 14 4,012 4,177 22,070

2010F
12,486 13,437 4,816 5,155 448 257 10,676 24,114 15,133 8,980 1,297 2,552 383 4,232 19,365 150 14 4,584 4,748 24,114

2011F
13,360 14,380 5,298 5,671 470 16 11,455 25,835 15,576 10,258 1,297 3,190 440 4,927 20,504 150 14 5,166 5,331 25,835

2012F
14,295 15,381 5,828 6,238 494 113 12,672 28,053 16,732 11,322 1,297 3,541 506 5,344 22,076 150 14 5,813 5,977 28,053

Non-Current liabilities
Deferred Tax Liability Deferred Revenue Provision for Liabilities and Charges Total Non-Current Liabilities Total Liabilities Share capital Share premium account Reserves Shareholders' Fund Total Equity & liabilities

2008 Growth Turnover Growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT 7.3% -2.3% -0.4% -30.4% -34.1%

2009 22.4% 86.1% 30.5% 44.1% 51.9%

2010F -7.1% 13.4% 18.3% 59.9% 65.4%

2011F -4.5% 33.8% 25.0% 33.9% 34.1%

2012F 5.0% 5.0% 7.2% 1.9% 1.9%

2012F 8.0% 12.5% 10.1% 10.9% 10.9%

January 2011

116

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

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

January 2011

117

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Total Nigeria Plc

BASIC INFORMATION
A ddress 4, Afribank Street Victoria Island, Lagos, Nigeria We bsite M a nageme nt F is cal Yea r End Exc hange Listing www.ng.total.com D Thiolo n (M anaging Director) December Nigerian Sto ck Exchange B loomberg: TOTA L:NL Petroleum M arketing Nigeria

Good Market Position...But Overpriced
Whilst Total’s business size, consistent market share retention and efficiency attract us to the stock, we believe the counter is fully valued. From our DCF 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 downside potential of 17% (relative to its current market price), thus compelling our “SELL” rating. However, we note that a depreciation in the 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 and look to partake in its desirable dividend payouts for our stable income portfolios.

Sym bo l Sec to r C o untry

OWNERSHIP STRUCTURE

Investment Thesis
Sha reho lde rs Total Societe Anonyme Elf A quitane S.A. Enifor Limited Others % Owners hip 45.24 16.48 8.12 30.16

SHARE STATISTICS
Shares in issue (M n) Share Price (N) M arket Cap. (N'm) M arket Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year High (N) Year Low (N) 339.52 234.00 79,448.11 532.60 30.16 13,294.04 89.12 254.10 142.50

Parent Company Support. Total benefits immensely from the relationship with its parent company in France, Total Societe Anonyme, which controls a 62% interest in the Nigerian downstream business. This ensures stable product supplies from its affiliate company, Total AMO Paris, France. Also, leveraging on the respected Total brand, the company currently controls the 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 accounted for 10.4% of its revenue in FY’09, relative to 8.7% in FY’08, whilst Gross Profit contribution from the segment increased to 27.5% in FY’09 from 21.5% in FY’08. We expect FY’10 numbers in the segment to also come in strong. A Play on Dividends. Total has consistently maintained a high dividend 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. 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 17% YoY to N4.4 billion. We recall that the FY’10 earnings were boosted by an 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% respectively in FY’11, whilst its DPS drops c.17% to N12.63 (Div. Yield – 5.4%).
Forecast Summary FY'09A
11.69 -9.68 12.75 11.68 -9.67 7.84 20.57 -3.94 7.24

VALUATION METRICS
Boo k Value (N'm) P/E (x) Price/Book (x) Div. Yield (%) ROE (%) Debt/Equity (%) 8,367.00 15.16 9.50 4.99% 55.69 60.54

TOTAL VS PM INDEX VS NSE ASI

FY'10F
15.50 32.60 15.10 15.19 30.03 6.49 20.88 1.51 11.21

FY'11F
12.89 -16.81 18.15 12.63 -16.81 5.40 21.13 1.24 11.07

FY'12F
15.82 22.74 14.79 15.51 22.74 6.63 21.45 1.50 10.91

FY'13F
18.03 13.98 12.98 17.67 13.98 7.55 21.81 1.68 10.73

2.00 TOTAL 1.80 1.60 1.40 1.20 PMIndex ASI

EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div. Yield (%)

1.00 0.80 0.60 4-Jan 4-Apr 3-Jul 1-Oct 30-Dec

NAPS (N) YoY Change (%) P/B (x)
Source: NSE; Vetiva Research

Sources: Company Financials, Vetiva Research

January 2011

118

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007 137,340 (120,410) 16,930 4,993 671 5,664 4,635 (77) 4,829 4,829 -1,573 3,255 2008 177,412 (158,265) 19,147 6,372 1,157 7,529 6,434 (269) 6,508 6,508 -2,115 4,393 2009 178,570 (156,571) 22,000 7,181 644 7,825 6,546 (516) 6,163 6,163 -2,195 3,968 2010F 164,285 (140,463) 23,821 7,237 709 7,946 6,538 (362) 6,338 1,400 7,738 -2,476 5,262 2011F 185,642 (159,652) 25,990 7,428 780 8,208 6,659 (416) 6,437 6,437 -2,060 4,377 2012F 207,919 (178,810) 29,109 8,992 858 9,850 8,146 (478) 7,900 7,900 -2,528 5,372

Income Statement (N' Million) Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable Profit on Ordinary Activities Exceptional Item Profit Before Taxation Taxation PAT

Balance Sheet (N'Million) Non-Current Assets Fixed Assets Total Non-Current Assets Current Assets Inventory Debtors and prepayments Due from related companies FX purchased for imports Bank balances, deposits and cash Total Current Assets Total Assets

2007

2008

2009

2010F

2011F

2012F

9,944 11,488

11,237 12,985

12,648 14,830

13,912 16,274

15,304 17,838

16,834 19,562

9,245 12,860 197 44 5,837 28,184 39,672

9,539 16,904 311 27 2,005 28,786 41,771

11,290 18,881 408 3,781 512 34,871 49,701

12,419 18,503 469 3,781 1,746 36,917 53,191

11,177 19,428 539 3,781 4,261 39,186 57,025

12,854 21,371 620 3,781 2,924 41,549 61,111

Total Current Liabilities

30,487

31,635

39,344

42,729

46,475

50,454

Share Capital Capital reserve General reserve Shareholder's Fund

170 263 5906 6,339

170 263 6836 7,269

170 263 6550 6,983

170 263 6655 7,088

170 263 6742 7,176

170 263 6850 7,283

January 2011

119

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

Income Statement ($' Million)
Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable Profit on Ordinary Activities Exceptional Item Profit Before Taxation Taxation PAT

2007
921 (807) 113 33 5 38 31 (1) 32 32 -11 22

2008
1,189 (1,061) 128 43 8 50 43 (2) 44 44 -14 29

2009
1,197 (1,050) 147 48 4 52 44 (3) 41 41 -15 27

2010F
1,101 (942) 160 49 5 53 44 (2) 42 9 52 -17 35

2011F
1,244 (1,070) 174 50 5 55 45 (3) 43 43 -14 29

2012F
1,394 (1,199) 195 60 6 66 55 (3) 53 53 -17 36

Balance Sheet ($'Million) Non-Current Assets
Fixed Assets Total Non-Current Assets Current Assets Inventory Debtors and prepayments Due from related companies FX purchased for imports Bank balances, deposits and cash Total Current Assets Total Assets

2007

2008

2009

2010F

2011F

2012F

67 77

75 87

85 99

93 109

103 120

113 131

62 86 1 0 39 189 266

64 113 2 0 13 193 280

76 127 3 25 3 234 333

83 124 3 25 12 247 357

75 130 4 25 29 263 382

86 143 4 25 20 279 410

Total Current Liabilities

204

212

264

286

312

338

Share Capital Capital reserve

1 2

1 2

1 2

1 2

1 2

1 2

General reserve
Shareholder's Fund

40
42

46
49

44
47

45
48

45
48

46
49

January 2011

120

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

2007 Growth Turnover Growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT Profitability Return on Equity Return on Assets Return On Total Capital Operating ROE Operating ROA Margins Gross Profit EBITDA/Sales EBIT/Sales Exceptional Item Pretax Income/Sales Net Profit Margin Asset Utiisation Sales to Cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets (x) Liquidity Ratios Cash ratio (x) Current ratio (x) Acid Test (x) Interest Coverage (x) Days in inventory (x) Days in accounts payable (x) Days in receivables (x) Cash Conversion Cycle Capital Structure Interest bearing debt/Total assets Debt to Total Capital Debt to Equity Payout ratio Total equity/Total assets Retention ratio Financial Leverage Per Share Data EPS DPS NAPS Sales/Share 9.59 9.50 18.67 404.51 0.1 0.2 0.3 1.0 0.2 0.0 6.3 0.2 0.9 0.6 60.2 28.0 49.9 34.2 12.3 24 15 3 14 9.6% 2.9% 2.0% 0.0% 1.4% 1.0% 53.8% 9.9% 41.6% 76.6% 14.1% 8.5% 31.4% 37.9% 48.6% 29.4%

2008 29.2% 27.6% 32.9% 34.8% 34.9% 64.6% 10.8% 52.1% 94.6% 15.8% 8.0% 3.2% 2.6% 0.0% 1.8% 1.5% 88 19 4 16 0.1 0.9 0.6 23.9 22.0 47.2 34.8 9.6 0.0 0.1 0.2 1.0 0.2 0.0 5.7 12.94 12.93 21.41 522.53

2009 0.7% 12.7% 3.9% -5.3% -9.7% 55.7% 8.7% 40.3% 91.9% 14.3% 11.5% 4.7% 3.9% 0.0% 3.7% 2.9% 349 16 4 14 0.0 0.9 0.6 12.7 26.3 49.0 38.6 15.9 0.1 0.4 0.6 1.0 0.1 0.0 7.1 11.69 11.68 20.57 525.95

2010F -8.0% 0.8% 1.5% 25.5% 32.6% 74.8% 10.2% 45.6% 92.9% 12.7% 12.9% 6.7% 5.0% 0.0% 3.2% 2.5% 94 13 3 12 0.0 0.9 0.6 18.1 32.3 60.1 41.1 13.3 0.1 0.4 0.7 1.0 0.1 0.0 7.5 15.50 15.19 20.88 483.87

2011F 13.0% 2.6% 3.3% -16.8% -16.8% 61.4% 7.9% 35.8% 93.4% 12.1% 9.0% 5.6% 4.2% 0.0% 2.8% 2.1% 44 17 3 12 0.1 0.8 0.6 16.0 25.6 58.2 38.2 5.6 0.1 0.4 0.8 1.0 0.1 0.0 7.9 12.89 12.63 21.13 546.77

2012F 12.0% 21.1% 20.0% 22.7% 22.7% 74.3% 9.1% 41.5% 112.7% 13.8% 9.0% 5.6% 4.2% 0.0% 2.8% 2.1% 71 16 3 12 0.1 0.8 0.6 17.0 26.2 57.1 37.5 6.6 0.1 0.5 0.8 1.0 0.1 0.0 8.4 15.82 15.51 21.45 612.39

January 2011

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2011 Outlook
The Tipping Point MRS Oil Nigeria Plc

BASIC INFORMATION Address 8, Macarthy Street Onikan, Lagos, Nigeria Website Management Fiscal Year End Exchange Listing Symbol Sector Country OWNERSHIP STRUCTURE Shareholders C orlay Global S.A. ZSLA/C FOZ Others SHARE STATISTICS Shares in issue (Mn) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year High (N) Year Low (N) VALUATION METRICS Book Value (N'm) P/E (x) Price/Book (x) Div. Yield (%) ROE (%) 3,963.00 16.04 4.27 1.88% 43.06 253.99 66.56 16,905.49 113.33 32.42 1,897.98 12.72 91.35 69.79 % Ownership 60.00 7.58 32.42 www.mrsoilnigplc.com L V Tanoe (Managing Director) December Nigerian Stock Exchange Bloomberg: CHEVRON:NL Petroleum Marketing Nigeria

Recovering Lost Market Share
Our DCF valuation methodology for the MRS Oil indicates a target price range of N86.02 – N89.44. This indicates a midpoint of N87.68, which underpins an upside potential of 32% relative to the stock’s current price. Thus, we maintain an “BUY” rating.

Investment Thesis
Leveraging on New Core Investor; MRS is gradually regaining market share, which was eroded during the transition period of the divestment process. Apart from receiving products from its primary supplier, the Petroleum Products Marketing Company (PPMC), the company also sources refined products through the extensive trading network of its parent company – MRS Holdings Limited. The company is currently growing awareness on its brand, as the divestment process also entailed a change in the Texaco branded stations and lubricant products to the MRS brand and product range. Strategic Expansions across the Retail Space; MRS is expanding its retail network, though with preference for the Retailer Owned Retailer Operated (RORO), which comes with little or no capital expenditure requirement. Whilst the company had initially disclosed its target expansion of 150 retail outlets per year, we believe that its expansion would be somewhat moderated due to relative competition in the downstream space. Dividend income still expected. Though the new Management is yet to come up with a specific dividend policy, we expect that it would maintain the 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%. Earnings Outlook. We expect revenues to increase marginally; rising 2% YoY 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 anticipate that PAT margin would slow from an estimate of 2.3% for FY’10 to 2.3% in FY’11.
Forecast Summary
EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div. Yield (%) NAPS (N) YoY Change (%)
S

FY'09A
4.14 n/a 38.65 1.25 n/a 0.78 11.68 54.87 13.69

FY'10F
6.45 55.82 10.32 2.12 69.41 3.18 16.62 42.31 4.01

FY'11F
5.77 -10.51 11.54 2.63 24.29 3.95 20.57 23.76 3.24

FY'12F
4.58 -20.60 14.53 4.17 58.50 6.27 24.74 20.28 2.69

FY'13F
5.07 10.71 13.12 5.10 22.37 7.67 29.84 20.64 2.23

P/B (x)

Sources: Company Financials, Vetiva Research

January 2011

122

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
72,628 (64,940) 7,688 (1,720) (1,386) (1,371) 181 3,392 (648) 2,744 2,995 (1,036) 1,959

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Selling and Distribution Costs Administrative Expenses Other Operating Expenses Other Income EBITDA Depreciation & Amortization EBIT/Operating Profit PBT Taxation PAT

2008
48,688 (44,419) 4,269 (1,231) (1,439) (1,435) 151 314 (703) (389) (306) 80 -225

2009
74,603 (68,973) 5,630 (916) (1,143) (1,363) 77 2,285 (597) 1,688 1,721 (670) 1,051

2010 F
76,841 (69,925) 6,916 (1,026) (1,223) (1,444) 31 3,253 (657) 2,596 2,637 (844) 1,793

2011 F
78,378 (71,324) 7,054 (1,129) (1,296) (1,531) 34 3,132 (722) 2,409 2,458 (786) 1,671

2012 F
84,648 (76,607) 8,042 (1,242) (1,374) (1,608) 37 3,855 (794) 3,061 3,116 (997) 2,119

BALANCE SHEET (N'Mill) Non-Current Assets Property, plant and equipment Prepayments (non-current) Total Non-Current Assets Current Assets Stock Receivables & Prepayments Cash & Cash Equivalents Total Current Assets TOTAL ASSETS

2007

2008

2009

2010 F

2011 F

2012 F

3,838 149 3,987 3,244 7,518 6,188 16,949 20,937

3,422 140 3,561 2,146 5,566 57 7,769 11,330

3,036 147 3,183 4,845 7,306 1,274 13,425 16,608

3,340 162 3,501 4,360 8,037 1,754 14,151 17,653

3,740 178 3,918 5,450 7,233 1,119 13,802 17,721

3,927 196 4,123 4,905 6,148 3,426 14,480 18,603

Total Current Liabilities Total Non-Current Liabilities

15,524 1,367

8,140 1,275

12,869 773

12,659 773

11,724 773

11,546 773

Net Assets

4,045

1,915

2,966

4,221

5,224

6,283

Capital and Reserves Share capital Retained Earnings Shareholder's Fund 127 2,013 4,045 127 1,788 1,915 127 2,839 2,966 127 4,094 4,221 127 5,097 5,224 127 6,156 6,283

January 2011

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
487 (435) 52 (12) (9) (9) 1 23 (4) 18 20 (7) 13

INCOME STATEMENT ($'Mill)
Turnover Cost of Sales Gross Profit Selling and Distribution Costs Administrative Expenses Other Operating Expenses Other Income EBITDA Depreciation & Amortization EBIT/Operating Profit PBT Taxation PAT

2008
326 (298) 29 (8) (10) (10) 1 2 (5) (3) (2) 1 (2)

2009
500 (462) 38 (6) (8) (9) 1 15 (4) 11 12 (4) 7

2010 F
515 (469) 46 (7) (8) (10) 0 22 (4) 17 18 (6) 12

2011 F
525 (478) 47 (8) (9) (10) 0 21 (5) 16 16 (5) 11

2012 F
567 (514) 54 (8) (9) (11) 0 26 (5) 21 21 (7) 14

BALANCE SHEET ($'Mill) Non-Current Assets Property, plant and equipment Prepayments (non-current) Total Non-Current Assets Current Assets Stock Receivables & Prepayments Cash & Cash Equivalents Total Current Assets TOTAL ASSETS

2007

2008

2009

2010 F

2011 F

2012 F

26 1 27 22 50 41 114 140

23 1 24 14 37 0 52 76

20 1 21 32 49 9 90 111

22 1 23 29 54 12 95 118

25 1 26 37 48 8 93 119

26 1 28 33 41 23 97 125

Total Current Liabilities Total Non-Current Liabilities

104 9

55 9

86 5

85 5

79 5

77 5

Net Assets

27

13

20

28

35

42

Capital and Reserves Share capital Retained Earnings Shareholder's Fund 1 13 27 1 12 13 1 19 20 1 27 28 1 34 35 1 41 42

January 2011

124

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2011 Outlook
The Tipping Point
2008 2009 53.2% 1253.1% 627.7% n/a n/a 2010 F 3.0% 45.9% 42.4% 53.2% 70.6% 2011 F 2.0% -3.9% -3.7% -6.8% -6.8% 2012 F 8.0% 23.3% 23.1% 26.8% 26.8%

Growth (%) Turnover Growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Equity Return on Assets Return On Total Capital Operating ROE Operating ROA Margins (%) Gross Profit EBITDA/Sales EBIT/Sales Exceptional Item Pretax Income/Sales Net Profit Margin ASSET UTILIZATION Sales to Cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets (x) Liquidity Ratios (x) Cash ratio (x) Current ratio (x) Acid Test (x) Days in inventory (x) Days in accounts payable (x) Days in receivables (x) Cash Conversion Cycle Capital Structure Payout ratio Total equity/Total assets Retention ratio Financial Leverage Per Share Data EPS DPS NAPS Sales/Share EBITDA 0.0 1.0 0.7 16.1 59.7 41.7 -1.9 0.1 1.0 0.7 23.7 61.0 35.7 -1.6 0.1 1.1 0.8 20.7 58.1 38.2 0.8 0.1 1.2 0.7 25.4 52.4 33.7 6.7 0.3 1.3 0.8 21.2 47.5 26.5 0.1 8.8% 0.6% -0.8% 0.0% -0.6% -0.5% 2008 858.9 22.7 4.3 14.2 7.5% 3.1% 2.3% 0.0% 2.3% 1.4% 2009 58.5 15.4 4.5 24.6 9.0% 4.2% 3.4% 0.0% 3.4% 2.3% 2010F 43.8 17.6 4.4 23.0 9.0% 4.0% 3.1% 0.0% 3.1% 2.1% 2011F 70.0 14.4 4.4 21.0 9.5% 4.6% 3.6% 0.0% 3.7% 2.5% 2012F 24.7 17.3 4.6 21.6 -7.6% -1.4% -7.6% -13.0% -2.4% 43.1% 7.5% 43.1% 69.2% 12.1% 49.9% 10.5% 49.9% 72.3% 15.2% 35.4% 9.4% 35.4% 51.0% 13.6% 36.8% 11.7% 36.8% 53.2% 16.9% -33.0% -94.9% -90.7% n/a n/a

0.0% 16.9% 100.0% 5.9

30.2% 17.9% 69.8% 5.6

30.0% 23.9% 70.0% 4.2

40.0% 29.5% 60.0% 3.4

50.0% 33.8% 50.0% 3.0

-0.89 0.00 7.54 191.69 1.24

4.14 1.25 11.68 293.73 9.00

7.06 2.12 16.62 302.54 12.81

6.58 2.63 20.57 308.59 12.33

8.34 4.17 24.74 333.28 15.18

January 2011

125

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Conoil Plc

BASIC INFORMATION Address Bull Plaza 38/39 Marina, Lagos. Website Management Financial Year End Exchange Listing Symbol Sector Country OWNERSHIP STRUCTURE Shareholders Conpetro Limited Others SHARE STATISTICS Shares in issue (Mn) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year High (N) Year Low (N) VALUATION METRICS Book Value (N'm) P/E (x) Price/Book (x) Div. Yield (%) ROE (%) Debt/Equity (%) 15,245.00 12.50 1.83 3.74% 18.20 66.77 693.95 40.14 27,855.15 186.73 25.60 4,675.89 31.35 56.14 27.63 % Ownership 74.40 25.60 www.conoilplc.com John Basikaran (Managing Director) December Primary Listing: Nigerian Stock Exchange Bloomberg:CONOIL:NL Petroleum Marketing Nigeria

Increased Investments to Improve Performance
We maintain our “BUY” rating on Conoil Plc, at its current market price. Using the DCF valuation methodology, we obtain a target price range of N49.37 – N52.09. This indicates a midpoint of N50.72, which underpins an upside potential of 26%.

Investment Thesis
On an expansionary thrust; Conoil has embarked on an expansion of its current retail distribution capacity through a combination of an upgrade of existing outlets, acquisition of additional outlets, as well a constructing a fullfledged service range mega stations. The company is also investing in the expansion of its storage capacity, through the upgrade of current depot facilities in Apapa, Warri and Kaduna, and the construction of new storage tanks in Apapa, Port-Harcourt and Calabar to complement the current storage capacities in the locations. This storage expansion is expected to save transportation costs. The company is also expanding into Togo and Ghana. These initiatives should improve the company’s near term top line 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 support Aviation Fuel sale. The company has historically maintained a sizeable 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 speed of its service delivery to airlines. It has also put up new and re-activated a number of aviation fuel stations at different locations to meet up the increasing demand of its customers. Earnings Outlook; We anticipate a 12% YoY growth in aggregate revenues to 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 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 rate assumption from 36% to 34%.

CONOIL VS PM INDEX VS NSE ASI
2.20 CONOIL 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 4-Jan 4-Apr 3-Jul 1-Oct 30-Dec PMIndex ASI

Forecast Summary
EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div. Yield (%) NAPS (N) YoY Change (%) P/B (x)

FY'09A
3.33 27.18% 23.53 1.50 50.00 1.91 19.47 13.59 4.03

FY'10F
3.21 -3.63 12.50 1.61 7.04 4.00 21.08 8.25 1.90

FY'11F
3.68 14.72 10.90 1.84 14.72 4.59 22.92 8.74 1.75

FY'12F
4.24 15.12 9.46 2.12 15.12 5.28 25.04 9.25 1.60

FY'13F
5.48 29.11 7.33 2.74 29.11 6.82 27.78 10.93 1.45

Sources: Company Financials, Vetiva Research

January 2011

126

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CAPITAL MANAGEMENT LIMITED

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

Income Statement (N' Million)

Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable PBT Taxation PAT

86,848 -74,992 11,855 6,658 372 7,029 5,371 -1,611 3,759 -1,166 2,593

124,214 -111,223 12,990 7,368 230 7,598 5,913 -2,631 3,282 -1,461 1,821

101,853 -89,022 12,831 6,613 1,406 8,019 6,298 -2,513 3,785 -1,473 2,312

87,594 -74,893 12,701 7,104 281 7,385 5,492 -2,010 3,482 -1,254 2,228

98,105 -84,370 13,735 7,858 309 8,167 6,085 -2,211 3,874 -1,317 2,557

112,821 -98,154 14,667 8,496 340 8,836 6,650 -2,322 4,328 -1,385 2,943

Balance Sheet (N'Million)
Fixed Assets Total Non-Current Assets

2007
8,991 8,991

2008
8,222 8,222

2009
8,139 8,139

2010F
8,953 8,953

2011F
9,848 9,848

2012F
10,833 10,833

Stocks Debtors & Prepayments Cash and bank balances Total Current Assets Total Assets Current Liabilities Total Current Liabilities Total Assets Less Current Liabilities Non-Current liabilities Deferred taxation Retirement benefit obligation Provision Staff Retirement benefits Total Non-Current Liabilities Total Liabilities Capital and Reserves Share capital Share premium account General reserve Revaluation Reserve Shareholders' Fund

7476 21961 952 30389 39,380

6516 27465 14592 48573 56,796

4095 16968 10572 31635 39,774

4464 18834 9373 32671 41,624

4821 21094 9097 35013 44,861

5303 23415 8865 37583 48,416

24,251 15,129

42,984 13,811

24,000 15,774

24,609 17,015

26,653 18,207

28,715 19,701

1,292 1,078 377 402 3,149 30,549

1,110 385 424 1,919 46,821

1,436 403 424 2,263 28,525

1,436 423 424 2,283 29,174

1,436 444 424 2,304 31,261

1,436 466 424 2,326 33,367

347 3,825 5,238 2,570 11,980

347 3,825 5,151 2,570 11,893

347 3,825 6,769 2,570 13,511

347 3,825 7,884 2,570 14,625

347 3,825 9,162 2,570 15,904

347 3,825 10,633 2,570 17,375

January 2011

127

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007
582 -503 79 45 2 47 36 -11 25 -8 17

Income Statement ($' Million)
Turnover Cost of Sales Gross Profit Core Operating Profit Other Operating Income EBITDA EBIT/Operating Profit Interest Payable PBT Taxation PAT

2008
833 -746 87 49 2 51 40 -18 22 -10 12

2009
683 -597 86 44 9 54 42 -17 25 -10 16

2010F
587 -502 85 48 2 50 37 -13 23 -8 15

2011F
658 -566 92 53 2 55 41 -15 26 -9 17

2012F
756 -658 98 57 2 59 45 -16 29 -9 20

Balance Sheet ($'Million)
Fixed Assets Total Non-Current Assets Stocks Debtors & Prepayments Cash and bank balances Total Current Assets Total Assets Current Liabilities Total Current Liabilities Net Current Assets/(Liabilities) Total Assets Less Current Liabilities Non-Current liabilities Deferred taxation Retirement benefit obligation Provision Staff Retirement benefits Total Non-Current Liabilities Total Liabiities Capital and Reserves Share capital General reserve Revaluation Reserve Shareholders' Fund

2007
60 60 50 147 6 204 264 163 41 101 9 7 3 3 21 205 2 35 17 80

2008
55 55 44 184 98 326 381 288 37 93 7 3 3 13 314 2 35 17 80

2009
55 55 27 114 71 212 267 161 51 106 10 3 3 15 191 2 45 17 91

2010F
60 60 30 126 63 219 279 165 54 114 10 3 3 15 196 2 53 17 98

2011F
66 66 32 141 61 235 301 179 56 122 10 3 3 15 210 2 61 17 107

2012F
73 73 36 157 59 252 325 192 59 132 10 3 3 16 224 2 71 17 116

January 2011

128

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007 2008 43.0% 10.7% 8.1% -12.7% -29.8% 15.3% 3.8% 7.2% 49.5% 12.3% 10.5% 6.1% 4.8% 2.6% 1.5% 8.5 19.1 2.2 15.1 0.3 1.1 1.0 2.2 21.4 5.5 80.7 96.6 0.6 0.9 2.9 0.4 0.2 0.6 4.8 2.62 1.00 17.14 178.99 10.95 2009 -18.0% -10.3% 5.5% 15.3% 27.0% 18.2% 4.8% 7.7% 49.6% 13.0% 12.6% 7.9% 6.2% 3.7% 2.3% 9.6 24.9 2.6 12.5 0.4 1.3 1.1 2.5 16.8 21.7 60.8 55.9 0.2 0.4 0.7 0.5 0.3 0.5 2.9 3.33 1.50 19.47 146.77 11.56 2010F -14.0% 7.4% -7.9% -8.0% -3.6% 15.8% 5.5% 9.9% 39.0% 13.5% 14.5% 8.4% 6.3% 4.0% 2.5% 9.3 19.6 2.1 9.8 0.4 1.3 1.1 2.7 21.8 28.4 78.5 71.8 0.2 0.4 0.6 0.5 0.4 0.5 2.8 3.21 1.61 21.08 126.22 10.64 2011F 12.0% 10.6% 10.6% 11.2% 14.7% 16.7% 5.9% 10.8% 39.9% 14.1% 14.0% 8.3% 6.2% 3.9% 2.6% 10.8 20.4 2.2 10.0 0.3 1.3 1.1 2.8 20.9 27.0 78.5 72.4 0.2 0.4 0.5 0.5 0.4 0.5 2.8 3.68 1.84 22.92 141.37 11.77 2012F 15.0% 8.1% 8.2% 11.7% 15.1% 17.7% 6.3% 11.5% 40.0% 14.3% 13.0% 7.8% 5.9% 3.8% 2.6% 12.7 21.3 2.3 10.4 0.3 1.3 1.1 2.9 19.7 24.8 75.8 70.7 0.2 0.4 0.5 0.5 0.4 0.5 2.8 4.24 2.12 25.04 162.58 12.73

Growth Turnover Growth Growth in Core Operating profit Growth in EBITDA Growth in PBT Growth in PAT PROFITABILITY Return on Equity Return on Assets Return On Total Capital Operating ROE Operating ROA MARGINS Gross Profit EBITDA/Sales EBIT/Sales Pretax Income/Sales Net Profit Margin ASSET UTILIZATION Sales to Cash (x) Inventory Turnover (x) Asset turnover (x) Fixed Assets (x) LIQUIDITY RATIOS Cash ratio (x) Current ratio (x) Acid Test (x) Interest Coverage (x) Days in inventory (x) Days in accounts payable (x) Days in receivables (x) Cash Conversion Cycle CAPITAL STRUCTURE Interest bearing debt/Total assets Debt to Total Capital Debt to Equity Payout ratio Total equity/Total assets Retention ratio Financial Leverage PER SHARE DATA EPS DPS NAPS Sales/Share EBITDA 3.74 2.75 17.26 125.15 10.13 0.4 1.1 1.2 0.7 0.3 0.3 3.3 0.0 1.3 0.9 3.3 36.4 11.4 92.3 117.3 91.2 11.6 2.2 9.7 13.7% 8.1% 6.2% 4.3% 3.0% 22.3% 7.1% 20.7% 46.1% 14.7% -4.1% 8.4% 5.6% -8.6% -7.7%

January 2011

129

VETIVA
CAPITAL MANAGEMENT LIMITED

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 in Nigeria. As, government remains the biggest spender on physical infrastructure, we expect new infrastructure spend to be at low levels for the 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 regarding the policies of the new government would typically shift focus away from capital expenditure. Notwithstanding, we still see project developments in the few states that will not hold elections this year. For instance, Edo state is 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.

Pre-elections federal government infrastructure spend would be considerably minimal

We expect to see continuing activity in infrastructure development amongst few states that would not hold gubernatorial elections in April

Prospects in the longer term
Sub-national governments - more pivotal to development: With Nigeria’s infrastructure development receiving more emphasis in recent times, we believe the potential for infrastructural development in Nigeria would be more realisable through sub-national governments (state and local governments). 2009 data from the CBN shows that state and local governments accounted for 52% of aggregate expenditure, implying that public spend is largely overweight on sub-national expenditure. On a broader note, governments’ expenses (subnationals 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.

Sub-national governments are pivotal to infrastructure development as they account for a larger portion of aggregate expenditure

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The Tipping Point

Governments aggregate expenditure and percentage composition of recurrent expenditure in total expenditure (2009)

Sources: CBN 2009 annual report, Vetiva Research

To fast-track the development of physical infrastructure, Subnational governments need to devise other means of funding beyond federal allocations

Financing gaps – still a major hurdle: Governments’ heavy reliance on crude oil revenue (approximately constitute 60% of governments aggregate revenue) poses major constraint on infrastructure financing. Following from our opinion that sub-national governments would be more pivotal to infrastructure development, it is expedient that sub-national governments need to devise 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 The cement sector is set to witness major boost in supply though minimal consumption growth is expected Our focus on the building materials sector is on the cement producers given their dominance in the sector. The outlook for the cement producers follows from our overall expectations of slow infrastructure development in the near 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. 131

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CAPITAL MANAGEMENT LIMITED

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 slowdown 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 AMCON activities, we hope to see major improvement in lending to the real sector post elections

With the speed of AMCON’s activities, we note that the banking sector may be faster positioned to resume strong lending to the real sector, than our expectation of 15% growth in private sector credit. Post elections, we believe 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 boost in cement demand post elections, our forecast for 2011 cement consumption stands at 17.7 million tonnes (33% growth over our 2010 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

Thus we believe cement demand would rally on the bank of credit accessibility in the real sector

Sources: Industry sources, Vetiva Research Estimates

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The Tipping Point Construction

Despite growing involvement of the private sector, players in the construction industry still depend more on access to government contracts

Although private sector participation in infrastructure development is growing, the construction sector still depends heavily on government capital expenditure. Typical of the seasonal pattern in the industry, we expect major activities in the first quarter of the year, partly because of the dry season and 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 government. The lower allocation to CAPEX in the proposed 2011 budget attest to this; though we do not rule out the possibility of increased allocation to CAPEX in subsequent supplementary budgets. Whilst noting the increasing number of players in the construction industry, we believe Julius Berger would still continue to dominate the sector given its unique advantage of having more experience and the implied economies of scale. Among the new entrants, we 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.

Whist acknowledging that supplementary budgets may still be passed, the 2011 budget draft supports lesser capital expenditure; this fuels our expectation minute growth in construction after election

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The Tipping Point Dangote Cement Plc

BASIC INFORMATION Address Alfred Rewane C lose, Ikoyi Lagos State www.dangotecement.com Aliko Dangote Daljeet Ghai

The titan of Nigeria’s cement industry
Following adjustments in our DCF valuation model, our one year target price range for Dangote Cement now stands at N133.20 – N148.70 with a midpoint of N139.35 obtained from a 20%/80% weighted EV/EBITDA and DCF target prices of N121.23 and N143.89 respectively. Thus, at its current price of N130.08 , the stock is trading at an expected upside potential of 5.4% to target price of N139.35, hence we downgrade our rating of DangCem to “NEUTRAL” from “Accumulate”.

Website Management C hairman MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) DIL Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'Mn) Market C ap. (USD'Mn) Free Float (%) Value Traded Daily Average (N'Mn) Daily Average Value Traded (USD'Mn) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)

Nigerian Stock Exchange Bloomberg: Dangcem:NL Building Materials Nigeria

Investment thesis
Dominant Market Share: Through its 5 million tonnes Obajana Plant, 3 million tonnes Gboko (BCC) Plant and 6 million tonnes import terminals in Lagos, Port/Harcourt and Onne, Dangote Cement controls close to 60% of the Nigerian cement market and it’s unarguably the giant of the industry. Dangote Cement’s Obajana plant is the biggest cement plant in Nigeria and the second largest in Africa. As stated by Dangote Cement’s management, an additional 6 million tonnes cement plant in Ibese, which is billed to be completed by Q1’11 and Obajana’s 3rd and 4th lines, also billed to be completed by H1’11, would push Dangote Cement’s market share to c.70% of the market, giving the company a relatively monopolistic advantage based on accretion of huge benefit of economies of scale. Modern and highly energy efficient plants: Dangote Cement Plants use the most modern technology in cement production as its rotary kilns employ the pre-calciner dry process for converting raw meals into clinker. The Plants 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 are among the most energy efficient globally. We see this as a key advantage given the incessant stoppage of production usually encountered by local 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 grow by 66.1% and 31.5% to N346 billion and N455 billion by FY’11 and FY’12 respectively. On profitability, we forecast that EBITDA margins would steadily 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 and FY’12 from FY’10 estimate of 51.3%.
Forecast Summary FY'09*
3.97 76.4 31.9 2 0 1.6 10.2 117 27

95.5 4.5

15,494 132.51 2,053,110 13,764 4.5 779.5 52.3 135 120

157,668.3 20.4 13.0 1.5 53.3 31.5

DANGCEM VS BM VS NSE ASI PERFORMANCE
Rebased 26/10/2010
1.05 Dangcem BMIndex ASI

FY'10F
6.64 67.3 19.9 4.98 149 3.8 12.23 19.9 10.8

FY'11F
12.83 93.2 10.3 9.32 87.1 7.1 15.74 28.7 8.4

FY'12F
17.85 39.1 7.4 12.96 39.1 9.8 20.61 30.9 6.4

FY'13F
20.65 15.7 6.4 14.99 15.7 11.3 25.42 23.3 5.2

EPS (N)
1.00

YoY Change (%) P/E (x)

0.95

DPS (N) YoY Change (%) Div. Yield (%) NAPS (N) YoY Change (%)
Nov-10 Dec-10

0.90

0.85 Oct-10

P/B (x)
Sources: NSE, Vetiva Research

Sources: NSE, Vetiva Research

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2007
34,596 (8,183) 26,413 (4,992) 21,420 21,420 (5,462) 15,958 (6,137) 9,820 (630) 11,623 2007 130,519 2,790 876 6,291 28,005 168,481 1,879 9,833 20,823 631 77,211 34 110,410 500 42,430 15,141 58,071 58,071

INCOME STATEMENT (N'Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation BALANCE SHEET (N'Mill) Fixed Assets Investments Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Creditors & Accruals Other Creditors Short Term Loan Taxation Long-Term Loans Provision for Gratuity Prior Year Dividend Deferred Taxation Total Liabilities Share Capital Share Premium Revenue and Capital reserve Shareholders Fund Minority Interest Total Equity

2008
61,906 (14,054) 47,852 (9,470) 38,382 38,382 (5,982) 32,400 (8,647) 23,753 (8,665) 17,960 2008 135,622 5,043 2,924 5,264 87,867 236,720 2,411 17,205 78,339 1,336 56,890 67 7,959 164,208 500 42,430 29,582 72,512 72,512

2009
189,621 (94,345) 95,276 (17,422) 77,853 77,853 (11,527) 66,326 (6,043) 60,283 (2,384) 61,392 2009 186,393 99 13,374 6,826 10,733 98,913 316,339 4,715 65,349 18,061 4,347 49,620 981 9,475 152,548 500 42,430 113,752 157,668 6,122 163,790

2010 F
208,500 (82,463) 126,037 (5,421) 120,616 120,616 (13,577) 107,039 (993) 106,046 (3,181) 102,864 2010 F 215,788 99 11,690 7,505 48,668 108,761 392,511 1,467 71,855 10,644 5,285 102,120 2,169 9,475 203,014 7,747 42,430 125,342 175,519 6,945 189,497

2011 F
346,332 (111,757) 234,575 (15,931) 218,643 218,643 (15,308) 203,335 (456) 202,879 (4,058) 198,821 2011 F 277,546 99 15,842 12,467 117,961 180,660 604,574 4,311 119,356 7,724 7,812 70,745 3,602 137,745 9,475 360,770 7,747 42,430 119,482 169,659 8,535 178,194

2012 F
455,590 (116,792) 338,798 (37,814) 300,984 300,984 (17,586) 283,398 (1,176) 282,222 (5,644) 276,577 2012 F 289,659 99 16,556 16,400 208,649 237,653 769,016 10,233 157,009 79,886 9,846 38,735 4,738 139,742 9,475 449,665 7,747 42,430 233,184 283,361 10,748 319,351

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The Tipping Point

INCOME STATEMENT (USD’Mill)
Turnover Cost of Sales Gross Profit Operating Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

2007
294 (70) 225 (42) 182 182 (46) 136 (52) 84 (5) 99

2008
497 (113) 384 (76) 308 308 (48) 260 (69) 191 (70) 144

2009
1,287 (641) 647 (118) 529 529 (78) 450 (41) 409 (16) 417

2010 F
1,345 (532) 813 (35) 778 778 (88) 691 (6) 684 (21) 664

2011 F
2,234 (721) 1,513 (103) 1,411 1,411 (99) 1,312 (3) 1,309 (26) 1,283

2012 F
2,939 (753) 2,186 (244) 1,942 1,942 (113) 1,828 (8) 1,821 (36) 1,784

BALANCE SHEET Fixed Assets Investments Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Assets Creditors & Accruals Other Creditors Short Term Loan Taxation Long-Term Loans Provision for Gratuity Prior Year Dividend Deferred Taxation Total Liabilities Share Capital Share Premium Revenue and Capital reserve Shareholders Fund Minority Interest Total Equity

2007 1,110 0 24 7 53 238 1,433 16 84 177 5 657 0 0 0 939 4 361 129 494 0 494

2008 1,089 0 40 23 42 706 1,901 19 138 629 11 457 1 0 64 1,319 4 341 238 582 0 582

2009 1,265 1 91 46 73 672 2,148 32 444 123 30 337 7 0 64 1,036 3 288 772 1,070 42 1,112

2010 F 1,392 1 75 48 314 702 3,337 12 611 91 45 868 18 0 81 1,726 66 361 1,066 1,492 59 1,611

2011 F 1,791 1 102 80 761 1,166 5,141 37 1,015 66 66 602 31 1,171 81 3,068 66 361 1,016 1,443 73 1,515

2012 F 1,869 1 107 106 1,346 1,533 6,539 87 1,335 679 84 329 40 1,188 81 3,823 66 361 1,983 2,409 91 2,715

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2008 2009 2010 E 2011 E 2012 E

Growth (%) Turnover growth Growth in EBITDA Growth in PBT Growth in PAT Profitability (%) Return on Average Equity Return on Average Assets EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Days in inventory Days in accounts payable Days in receivables Activity Ratios (x) Sales to cash Sales to inventory Sales to total assets Sales to total fixed assets Production Data Capacity(million tonnes) Production (million tonnes) Average Utilization Import terminal capacity Import terminal utilisation Revenue/tonne (N'000) Per Share Data Earnings/share Dividend/share1 Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 3.35 1.04 0.0% 53.35 31.9 27.0 1.6 26.30 19.9 10.8 3.8 16.98 10.3 8.4 7.1 9.29 7.4 6.4 9.8 6.80 35.92 0.00 116.114 123.81 122.78 2.00 145.02 379.24 6.64 4.98 12.23 13.46 12.83 9.32 15.74 22.35 17.85 12.96 20.61 29.40 8.00 3.19 39.9% 6.00 53.0% 25.00 8.00 5.00 62.5% 6.00 42.9% 25.35 8.00 6.18 77.3% 6.00 36.0% 25.35 19.00 11.58 60.9% 6.00 34.7% 25.35 20.00 16.10 80.5% 6.00 31.2% 25.20 11.76 22.19 0.26 0.46 17.67 37.60 0.60 1.02 4.28 15.59 0.53 0.97 2.94 29.63 0.57 1.25 2.18 28.76 0.59 1.57 27.5% 8.9% 62.0% 52.3% 43.0% 29.0% 1.06 0.19 1.14 101.72 1109.83 11.20 53.3% 22.2% 41.1% 35.0% 33.6% 32.4% 0.97 0.05 1.02 35.63 171.34 9.38 60.5% 29.0% 57.8% 51.3% 50.9% 49.3% 1.26 0.12 1.40 55.47 64.85 12.54 95.2% 39.9% 63.1% 58.7% 58.6% 57.4% 1.85 0.55 1.98 44.96 28.92 10.52 101.7% 40.3% 66.1% 62.2% 61.9% 60.7% 2.23 0.85 2.35 50.63 136.07 11.56 78.9% 79.2% 117.3% 54.5% 206.3% 102.8% 139.5% 241.8% 10.0% 54.9% 66.3% 67.6% 66.1% 81.3% 91.3% 93.3% 31.5% 37.7% 39.1% 39.1%

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2011 Outlook
The Tipping Point Lafarge WAPCO plc

BASIC INFORMATION Address Elephant C ement House, Ikeja, Lagos State Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) Lafarge (foreign) Odua Group of C ompanies Nigerian Public SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'Mn) Market C ap. (USD'M) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'Bn) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
WAPCO VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009

Unrelenting in defending market position
We maintain our “ACCUMULATE” rating on Lafarge WAPCO given that the stock is trading at an expected upside of 19% to N51.62 – the midpoint of our one year target price range N48.77 – N54.45 for the stock. Our target price is based on a one year target DCF and EV/EBITDA fair values weighted more towards the DCF methodology.

www.lafargewapco.com Olusegun Osunkeye S.A AbdelKader December Nigerian Stock Exchange Bloomberg: WAPC O:NL Building Materials Nigeria

Investment thesis
Robust Revenue Upside: Lafarge WAPCO’s on-going expansion to 4.2 million tonnes annual capacity implies a potential c.100% revenue upside from its current levels assuming that prices remain constant. Using a more realistic assumption that price would perhaps moderate slightly downwards, to make its cement competitive in comparison to Dangote Cement (as Lafarge WAPCO’s per tonne cement price is currently higher than Dangote Cement’s); we still 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 revenue wo uld more than double (110% growth relative to 2009 level) by 2014. Strong Parent Support: Also, being the biggest Nigerian subsidiary of the Lafarge Group is an added advantage given the leadership position of the group in the global building materials industry and the resultant gains in terms of product research, innovation and quality from which Lafarge WAPCO has been benefitting. We believe Lafarge’s product innovation would particularly be a key area in which Lafarge WAPCO can be competitively positioned against Dangote Cement in Lagos and south west market. Lafarge Group recently patented a new cement brand (Sensium® technological cements) which is 100% dust free and has started testing the product in the South-East France market. Earnings Outlook: We forecast that Lafarge WAPCO’s revenue would grow by 61% to N68.8 billion by 2011 from our FY’10 estimate of N42.8 billion; this would stem from ramping up of the new 2.2 million tonnes plant. At this point, we anticipate an average capacity utilisation rate of 60%. On profitability, we project that EBITDA margins would rise to c.33% by FY’11 from 21% at FY’09. Also, we expect EBIT margins to increase to 26.3% by 2011 from 18% as at FY’09 and FY’10E of 25.9%.
Forecast Summary
EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div. Yield (%)

60 10 30

3,001.60 43.4 130,269.4 873.30 29.99 52,951 354 46.17 29.55

50.3 19.4 2.6 0.2 11.3 56.7

1.8 WAPCO BMIndex ASI

1.5

FY'09
1.68 -55.1 25.8 0.1 -83.3 0.2 14.56 8.1 3.0

FY'10F
2.37 40.6 18.3 0.24 136.8 0.5 16.69 14.6 2.6

FY'11F
4.1 73.1 10.6 0.5 111.1 1.2 19.15 14.7 2.3

FY'12F
5.05 23.1 8.6 2.02 303.6 4.7 22.18 15.8 2.0

FY'13F
5.78 14.6 7.5 2.31 14.6 5.3 25.65 15.6 1.7

1.2

0.9 Dec-09 Apr-10 Aug-10 Dec-10
Sources: NSE, Vetiva Research

NAPS (N) YoY Change (%) P/B (x)

Sources: Company Financials, Vetiva Research

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INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Distr. & Admin. Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

2007 38,665 (21,945) 16,720 (4,843) 11,877 11,877 (1,378) 10,499 (831) 11,665 (1,358) 11,179

2008 43,274 (25,026) 18,247 (4,542) 13,705 13,705 (1,580) 12,125 (228) 12,769 (1,781) 11,252

2009 45,590 (30,513) 15,077 (5,224) 9,853 9,853 (1,576) 8,277 8,956 (4,182) 5,056

2010 F 42,864 (22,847) 20,017 (4,865) 15,152 15,152 (4,045) 11,107 11,107 (3,999) 7,109

2011 F 68,817 (35,785) 33,032 (10,323) 22,710 22,710 (4,618) 18,091 18,091 (5,789) 12,302

2012 F 74,200 (37,100) 37,100 (11,130) 25,970 25,970 (4,773) 21,197 (3,168) 18,029 (2,885) 15,144

BALANCE SHEET (N'Mill) Non-Current Assets Total fixed Assets Long Term Investments Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities Total Liabilities

2007

2008

2009

2010 F

2011 F

2012 F

33,356 60 8,572 4,220 4,388 17,180 50,596

43,121 60 10,083 166 5,974 2,364 18,587 61,769

69,681 60 12,517 185 3,628 1,092 17,422 87,163

87,301 60 9,372 174 2,871 1,715 14,132 101,494

93,115 60 14,680 280 7,006 2,753 24,719 117,894

95,674 60 15,220 302 5,414 2,968 23,903 119,638

7,732 1,461 4,713 1,842 15,748 1,748 294 2,042 17,790

8,353 1,422 7,113 1,212 18,099 1,758 1,455 3,213 21,312

8,573 1,056 1,044 10,674 24,793 2,801 5,183 32,778 43,452

7,985 1,341 9,325 24,793 717 2,072 27,582 36,907

16,941 2,152 8,632 27,726 24,793 3,661 4,225 32,678 60,404

18,266 2,321 15,519 36,106 9,274 3,680 4,001 16,955 53,062

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The Tipping Point
2007 329 (187) 142 (41) 101 101 (12) 89 (7) 99 (12) 95 2008 347 (201) 147 (36) 110 110 (13) 97 (2) 103 (14) 90 2009 310 (207) 102 (35) 67 67 (11) 56 61 (28) 34 2010 F 286 (152) 133 (32) 101 101 (27) 74 74 (27) 47 2011 F 444 (231) 213 (67) 147 147 (30) 117 117 (37) 79 2012F 479 (239) 239 (72) 168 168 (31) 137 (20) 116 (19) 98

INCOME STATEMENT (USD'Mill) Turnover Cost of Sales Gross Profit Distr. & Admni Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

BALANCE SHEET (USD'Mill) Non-Current Assets Total Fixed Assets Long Term Investments Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities Total Liabilities Net Assets

2007

2008

2009

2010 E

2011 F

2012F

284 0.5 73 36 37 146 430

346 0.5 81 1 48 19 149 496

473 0.4 85 1 25 7 118 592

582 0.4

621 0.4

638 0.4

64 1 19 12 96 678

100 2 48 19 168 789

103 2 37 20 162 801

66 12 40 16 134

67 11 57 10 145

58 7 7 72

53 9 62

109 14 56 179

118 15 100 233

15 2 17 151 279

14 12 26 171 325

168 19 35 223 295 297

165 5 14 184 246 431

160 24 27 211 390 371

60 24 26 109 342 430

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The Tipping Point

2007 Growth (%)
Turnover growth Growth in EBITDA Growth in PBT Growth in PAT -2.5% -15.2% -1.6% 4.7% 38.7% 22.6% 30.7% 27.2% 30.0% 28.9% 0.6 0.3 1.1 113.3 110.3 0.2 9.2 4.6 0.8 1.2 2.0 1.7 85.0 22.7 3.72 1.20 10.93 12.88 10.2 3.5 3.2% 9.7

2008
11.9% 15.4% 9.5% 0.7% 30.7% 20.0% 31.7% 28.0% 30.0% 26.0% 0.4 0.3 1.0 136.0 110.6 0.7 7.2 3.8 0.7 1.0 2.0 1.7 84.0 25.8 3.75 0.60 13.48 14.42 10.1 2.8 1.6% 11.4

2009 2010 E
5.4% -28.1% -29.9% -55.1% 12.0% 6.8% 21.6% 18.2% 20.0% 11.1% 0.2 0.3 1.6 135.2 93.8 1.4 12.6 3.5 0.5 0.7 2.0 1.6 80.0 28.5 1.68 0.10 14.56 15.19 25.8 2.6 0.2 3.0 -6.0% 53.8% 24.0% 40.6% 15.2% 7.5% 35.4% 25.9% 26.0% 16.6% 0.6 0.1 0.6 174.9 153.4 1.5 14.9 4.9 0.4 0.5 2.0 1.5 76.0 28.2 2.37 0.24 16.69 14.28 18.3 2.3 0.5 2.6

2011 E
60.5% 49.9% 62.9% 73.1% 22.9% 11.2% 33.0% 26.3% 26.0% 17.9% 0.3 0.3 0.9 122.7 110.7 1.2 9.8 2.9 0.6 0.7 4.2 2.5 60.0 27.5 4.10 0.50 19.15 22.93 10.6 2.0 1.2 2.3

2012 E
7.8% 14.4% -0.3% 23.1% 24.4% 12.8% 35.0% 28.6% 24.0% 20.4% 0.4 0.2 0.7 147.1 170.7 1.4 13.7 4.5 0.6 0.8 4.2 2.8 67.0 26.5 5.05 2.02 22.18 24.72 8.6 1.7 4.7 2.0

Profitability (%)
Return on Average Equity Return on Average Assets EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin

Liquidity Ratios (x)
Quick ratio Cash ratio Current ratio Days in inventory Days in accounts payable Days in receivables

Activity Ratios (x)
Sales Sales Sales Sales to to to to cash inventory total assets total fixed assets

Production Data
Capacity(million tonnes) Production (million tonnes) Average Utilization (%) Revenue/tonne (N'000)

Per Share Data (N)
Earnings/share Dividend/share Net Asset/share Sales/Share

Valuation Multiples
P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x)

January 2011

141

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point AshakaCem Plc

BASIC INFORMATION
Address Website Management (Chairman) MD/CEO Financial Year End Exc hange Listing Bloomberg Ticker Sec tor Country Ashaka Works, Ashaka Gombe State n/a E.E Ikwue M.M Daggash December Nigerian Stoc k Exchange AshakaCem:NL Building Materials Nigeria

Positive Outlook...But Rich Valuation
We downgrade our recommendation on Ashaka to a “SELL” (previous: “Reduce”) given that the stock (at a current share price at N29.49) now has 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 EV/EBITDA methodology.

Investment thesis
Rising costs savings: The most compelling attraction to Ashaka Cement, in our view, is its potential to sustain long term efficiency and profitability despite its relatively low scale of production. According to management’s insights, the company can achieve 60% -70% savings in energy costs, when full substitution of LPFO with coal is achieved. Nonetheless, we have discounted management’s expectation and assumed only a 55% savings in energy costs. Whilst noting that Ashaka will not likely meet its projection oncoal utilisation level in 2010, (management achieved only coal utilisation rate as at half year 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 time frame for the company to reach peak (c.100%) coal utilisation. 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 of 32% by FY’12 and 40% by FY’15, (from 5.9% at FY’09) Zero Debt Status: According to insights from Ashaka’s management, the coal mine project completed by the company last year was purely financed by internally generated cash-flows and funding from the parent company. The debt free status of the company implies that it can make significant savings from zero interest expense and boost bottom-line earnings. This, coupled with the expected rise in profitability from achieving higher operating efficiency, enhances the potential return, in form of dividend payments, to its shareholders. 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 operating efficiency; we project that EBITDA margins would rise to 35.8% by FY’11 from 8.9% at FY’09 and FY’10E of 24.6%. Also, we expect EBIT margins to increase to 31% by 2011 from 5.9% as at FY’09 and FY’10E of 19.3%.
Forecast Summary FY'09
0.47 -63 62.7 0 -100 0 6.6 3.1 4.5

OWNERSHIP STRUCTURE (%)
Lafarge (foreign) Others 50.2 49.8

SHARE STATISTICS
Shares in issue (M) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) 2,240 29.49 66,057.6 442.8 49.8 38,136.90 255.6 28.5 11.39

VALUATION METRICS
Book Value (N'Bn) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
ASHAKACEM VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009
2.5 Ashaka BMIndex ASI

15.9 39.9 4.2 0 12 0

FY'10F
1.13 140.4 26.1 0.5 n/a 1.7 6.49 -1.7 4.5

FY'11F
1.95 72.6 15.1 0.87 74 2.9 7.58 16.8 3.9

FY'12F
2.66 36.4 11.1 1.19 36.8 4 9.05 19.4 3.3

FY'13F
3.28 23.3 9.0 1.46 22.7 4.9 10.9 20.4 2.7

2.0

EPS (N) YoY Change (%) P/E (x)
1.5

DPS (N) YoY Change (%) Div. Yield (%)

1.0 Dec-09 Apr-10 Aug-10 Dec-10

NAPS (N) YoY Change (%) P/B (x)

Sources: NSE, Vetiva Research

Sources: Company Financials, Vetiva Research

January 2011

142

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Selling and distri. Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Work in Progress Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities Total Liabilities Net Assets

2006 16,772 (8,794) 7,978 (2,408) 5,570 5,948 (436) 4,016 4,952 (1,574) 3,378 1,087 2,291 2006

2007 16,473 (10,868) 5,605 (1,486) 4,120 4,452 (514) 2,183 2,513 (1,361) 1,153 1,106 47 2007

2008 21,378 (14,039) 7,339 (1,437) 5,902 2,697 (519) 3,265 3,430 (911) 2,519 597 1,922 2008

2009 F 17,194 (11,771) 5,423 (432) 4,991 3,785 (526) 1,007 1,324 (1,422) 943 943 2009

2010 F 18,189 (11,846) 6,343 (771) 5,572 1,533 (966) 3,515 3,515 (984) 2,531 1,126 1,405 2010 F

2011 F 21,025 (10,132) 10,893 (1,472) 9,421 4,481 (1,008) 6,521 6,521 (2,152) 4,369 1,944 2,425 2011 F

2012 F 23,358 (9,792) 13,566 (1,635) 11,931 7,529 (1,054) 8,774 8,774 (2,808) 5,966 2,655 3,311 2012 F

2,685 5,333 4,931 1,674 3,798 10,403 18,421 887 3,341 1,661 5,890 408 526 934 6,824 11,598

3,811 8,891 4,220 386 2,137 2,785 9,528 22,230 1,151 6,164 968 1,687 9,971 836 710 1,546 11,518 10,713

5,686 10,901 4,706 139 1,636 1,958 8,440 25,027 1,921 7,269 928 10,117 982 1,144 2,125 12,242 12,785

5,218 13,849 4,707 88 850 908 6,552 25,618 2,296 5,967 1,385 9,648 1,648 1,181 2,829 12,477 13,142

19,478 2,981 5,017 100 508 1,200 6,826 29,285 1,099 4,892 984 6,976 2,862 1,920 4,783 11,758 14,085

19,522 3,030 4,292 115 5,062 1,388 10,856 33,408 1,986 5,655 2,152 9,792 1,994 1,621 3,615 13,407 15,489

19,635 3,031 4,148 128 9,085 1,542 14,902 37,568 2,206 6,283 2,808 11,296 1,610 1,349 2,959 14,255 17,914

January 2011

143

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill) Turnover Cost of Sales Gross Profit Selling and distri. Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation Dividends Retained Earnings

2007 140 (92) 48 (13) 35 38 (4) 19 21 (12) 10 9 0

2008 172 (113) 59 (12) 47 22 (4) 26 28 (7) 20 5 15

2009 F 117 (80) 37 (3) 34 26 (4) 7 9 (10) 6 6

2010 F 121 (79) 42 (5) 37 10 (6) 23 23 (7) 17 8 9

2011 F 136 (65) 70 (9) 61 29 (7) 42 42 (14) 28 13 16

2012 F 151 (63) 88 (11) 77 49 (7) 57 57 (18) 38 17 21

BALANCE SHEET (USD'Mill) Non-Current Assets Fixed Assets Work in Progress Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities Total Liabilities Net Assets

2007 32 76 36 3 18 24 81 189 10 52 8 14 85 7 6 13 98 98

2008 46 88 38 1 13 16 68 201 15 58 7 81 8 9 17 98 98

2009 F 35 94 32 1 6 6 44 174 16 41 9 66 11 8 19 85 85

2010 F 130 20 33 1 3 8 46 195 7 33 7 47 19 13 32 78 78

2011 F 126 20 28 1 33 9 70 216 13 36 14 63 13 10 23 86 86

2012 F 127 20 27 1 59 10 96 242 14 41 18 73 10 9 19 92 92

January 2011

144

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

Financial Ratios – Actual and Forecasts
2007 Growth Turnover growth Growth in EBITDA Growth in PBT Growth in PAT Profitability Return on Average Equity Return on Average Assets EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Days in inventory Days in accounts payable Days in receivables Activity Ratios (x) Sales to cash Sales to inventory Sales to total assets Sales to total fixed assets Production data Capacity(million tonnes) Production (million tonnes) Utilization (%) Revenue/tonne ('000) Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 49.0 5.3 0.03 23.5 22.4 4.4 1.1 16.8 62.7 4.5 0.0 41.4 26.1 4.5 1.7 14.2 15.1 3.9 2.9 8.4 11.1 3.3 4 6.5 0.58 0.10 5.39 8.27 1.27 0.30 6.43 10.74 0.47 0.00 6.60 8.64 1.13 0.50 6.49 8.12 1.95 0.87 7.58 9.39 2.66 1.19 9.05 10.43 0.9 0.7 79.7 24.3 0.9 0.9 101.1 24.9 0.9 0.7 76.5 26.5 0.9 0.7 83.9 25.5 0.9 0.8 97.0 25.5 1.3 0.9 73.3 25.5 7.7 3.9 0.7 1.3 13.1 4.5 0.9 1.3 20.2 3.7 0.7 0.9 35.8 3.6 0.7 0.9 4.2 4.9 0.7 1.1 2.6 5.6 0.7 1.2 0.5 0.2 1.0 153.7 36.8 22.8 0.4 0.2 0.8 116.0 55.2 4.5 0.2 0.1 0.7 146.0 53.0 2.4 0.3 0.1 1.0 149.8 52.6 1.9 0.7 0.5 1.1 167.7 46.3 1.9 1.0 0.8 1.3 157.3 81.3 1.9 10.3% 5.7% 16.4% 13.3% 15.3% 7.0% 21.4% 10.7% 17.7% 15.3% 16.0% 11.8% 7.3% 3.7% 8.9% 5.9% 7.7% 5.5% 18.3% 9.7% 24.6% 19.3% 19.3% 13.9% 27.7% 15.4% 35.8% 31.0% 31.0% 20.8% 32.0% 18.4% 42.1% 37.6% 37.6% 25.5% 29.8% -39.4% -49.2% -65.9% -19.6% 40.3% 36.5% 118.6% 5.8% -59.5% -61.4% -62.6% 15.6% 192.3% 165.4% 168.4% 11.1% 68.0% 85.5% 72.6% 12.8% 30.5% 34.6% 36.6% 2008 2009 2010F 2011F 2012F

January 2011

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

BASIC INFORMATION Address Kilometre 10, Kalambaina Road, Sokoto State, Nigeria Website Management (C hairman) Managing Director Financial Year End Exchange Listing Symbol Sector C ountry OWNERSHIP STRUCTURE (%) BUA Group Nasdal Bap Limited Kebbi, Sokoto, Kaduna, others Other Nigerians Ferrostal A.G Dantata Invst. & Sec. SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'Mn) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B(x) Div. Yield (%) ROAE (%) Debt/Equity (%)
CCNN VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009
CCNN 2.1 BMIndex ASI

CCNN Plc Operational Uncertainties Dampen Earnings Outlook
We maintain a “SELL” rating on CCNN, given that the stock (at a current share price at N14.52) has an expected downside of 55% to N8.05 the midpoint of our target price range N7.60 – N9.30 Our target valuation is based on the DCF and EV/EBITDA methodology.

www.sokotocement.com Abdulsamad Rabiu Alf Karlsen December Primary Listing: Nigerian Stock Exchange Bloomberg: C C NN:NL Building Materials Nigeria

Investment thesis Present capacity inadequate to sustain market share: CCNN is the
last of the cement producers to announce definitive plans around its expansion. While there have been indications from management that the company may expand capacity to 1.4 million tonnes, timelines and funding for the expansion are still unclear. Compounded by its obsolete state, CCNN’s 500,000 tonnes plant is grossly inadequate to position the company competitively in the industry. We highlight that CCNN has one of the highest cement prices in the industry, evidently as a result of its higher energy costs, relatively obsolete technology and small production capacity. Due to supply deficit which has historically plagued the Nigerian cement industry and CCNN’s relative isolation in North-West Nigeria, revenue growth has been somewhat sustained through price increases. We recall in 2009 that the company 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 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. Increasing cost exert additional pressure on top-line: CCNN is still having challenges getting around its increasing energy costs to remain efficient and adequately profitable. In its FY’09 accounts, management had stated the huge increase in energy costs (c.40%) arising from transportation expenses incurred in moving imported LPFO from the south to its plant (located in Sokoto, North-West Nigeria). Earnings Outlook: We forecast that revenue would grow by 6.5% to N11.9 billion by 2011 from our FY’10E of N11.2 billion. We believe EBITDA margins would remain relatively flat at 14.5% based on our FY’10 and FY’11 estimates. Also, we project that EBIT margins would remain flat at 11.3% in FY’10 and FY’11.
Forecast Summary
EPS (N) YoY Change (%) P/E (x)

51 11.6 15 15 0.1 7.1

1,256 14.52 18,073.80 121.2 15 17,249.30 115.6 25.9 12.7

4,465.00 19.6 3.9 6.3 44.2 12

FY'09
1.44 18.0 10.08 0.90 0.0 6.2 3.36 5.0 4.3

FY'10F
0.62 -56.9 23.42 0.23 -74.4 1.6 3.74 11.3 3.9

FY'11F
0.66 6.5 22.00 0.25 8.7 1.7 4.15 11.0

FY'12F
0.72 9.1 20.17 0.27 8.0 1.9 4.6 10.8

FY'13F
0.88 21.8 16.56 0.33 22.9 2.3 5.15 11.9

1.8

DPS (N) YoY Change (%)

1.5

Div. Yield (%) NAPS (N)

1.2

YoY Change (%)
0.9 Dec-09 Apr-10 Aug-10 Dec-10 Sources: NSE, Vetiva Research

P/B (x)

3.2 2.8 S 3.5 Sources: Company Financials, Vetiva Research

January 2011

146

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CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Operating Expense Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Interest received Profit Before Taxation Taxation Profit After Taxation

2007 8,042 (5,759) 2,283 (591) 1,692 138 (321) (183) (387) 172 (34) 138

2008 9,878 (5,709) 4,169 (640) 3,530 1,611 (343) 1,268 (537) 1,681 (150) 1,531

2009 11,868 (6,704) 5,164 (762) 4,402 1,964 (369) 1,595 (346) 2,317 (505) 1,812

2010 F 11,200 (6,664) 4,536 (661) 3,875 1,635 (362) 1,273 (127) 1,146 (367) 779

2011 F 11,927 (7,097) 4,830 (716) 4,115 1,729 (387) 1,342 (127) 1,216 (389) 827

2012 F 12,509 (7,380) 5,129 (751) 4,378 1,876 (413) 1,463 (127) 1,337 (428) 909

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Capital work in progress Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities Total Liabilities Net Assets

2007 4,017 439 3,016 775 284 588 4,663 9,118 4,982 553 40 5,575 320 76 396 5,970 3,148

2008 4,655 4 2,424 717 400 597 4,137 8,795 2,500 1,092 39 3,631 633 360 195 1,188 4,819 3,976

2009 4,950 66 2,510 1,002 626 649 4,787 9,803 3,447 671 210 4,327 507 490 262 1,259 5,586 4,217

2010 F 5,452 2,823 1,066 447 739 5,075 10,526 3,124 1,218 367 4,709 380 802 1,182 5,891 4,635

2011 F 5,795 3,006 1,135 667 787 5,595 11,390 3,340 1,218 389 4,947 253 1,041 1,294 6,241 5,149

2012 F 6,605 3,126 1,191 968 826 6,110 12,715 3,503 1,218 428 5,148 126 1,727 1,853 7,001 5,714

January 2011

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2011 Outlook
The Tipping Point
2007 68 (49) 19 (5) 14 1 (3) (2) (3) 1 (0) 1 2008 79 (46) 33 (5) 28 13 (3) 10 (4) 13 (1) 12 2009 81 (46) 35 (5) 30 13 (3) 11 (2) 16 (3) 12 2010 F 75 (44) 30 (4) 26 11 (2) 8 (1) 8 (2) 5 2011 F 77 (46) 31 (5) 27 11 (2) 9 (1) 8 (3) 5 2012 F 81 (48) 33 (5) 28 12 (3) 9 (1) 9 (3) 6

INCOME STATEMENT (USD’Mill) Turnover Cost of Sales Gross Profit Operating Expense Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Interest received Profit Before Taxation Taxation Profit After Taxation

BALANCE SHEET (USD'Mill) Non-Current Assets Fixed Assets Capital work in progress Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities Total Liabilities Net Assets

2007 34 4 26 7 2 5 40 78 42 5 0 47 3 1 3 51 27

2008 37 0 19 6 3 5 33 71 20 9 0 29 5 3 2 10 39 32

2009 34 0 17 7 4 4 32 67 23 5 1 29 3 3 2 9 38 29

2010 F 36 19 7 3 5 34 70 21 8 2 31 3 5 8 39 31

2011 F 37 19 7 4 5 36 73 22 8 3 32 2 7 8 40 33

2012 F 43 20 8 6 5 39 82 23 8 3 33 1 11 12 45 37

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

Growth (%)
Turnover growth Growth in EBITDA Growth in PBT Growth in PAT 26.2% 1066.6% 878.3% 1012.4% 5.9% 1.6% 1.7% -2.3% 2.1% 1.7% 0.30 0.05 0.84 173.62 321.15 34.46 28.29 2.67 0.88 1.80 0.50 0.34 68.5% 23.48 0.12 0.10 2.51 6.40 118.90 5.59 0.7 127.38 22.8% 21.9% 37.8% 18.3% 43.0% 17.1% 16.3% 12.8% 17.0% 15.5% 0.47 0.11 1.14 173.90 241.67 27.57 24.71 4.08 1.12 2.12 0.50 0.38 76.0% 25.99 1.22 0.90 3.17 7.86 11.48 4.42 6.4 10.92 20.1% -16.7% -50.5% -57.0% 44.2% 19.5% 16.5% 13.4% 19.5% 15.3% 0.53 0.14 1.11 134.29 155.26 26.43 18.95 4.73 1.21 2.37 0.50 0.41 81.6% 29.09 1.44 0.90 3.36 9.45 10.08 4.3 6.2 8.96 -5.6% 5.8% 6.1% 6.1% 17.5% 7.6% 14.6% 11.4% 10.2% 7.0% 0.48 0.09 1.08 146.03 178.24 33.70 25.05 3.97 1.06 2.03 0.50 0.39 77.0% 29.09 0.62 0.23 3.74 8.92 23.42 3.9 1.6 10.75 6.5% 8.5% 9.9% 9.9% 16.7% 7.5% 14.5% 11.3% 10.2% 6.9% 0.52 0.13 1.13 149.89 164.63 33.68 17.89 3.97 1.04 2.03 0.50 0.41 82.0% 29.09 0.66 0.25 4.15 9.50 22.00 3.5 1.7 10.17 4.9% 16.6% 21.2% 21.2% 16.5% 7.5% 15.0% 11.7% 10.7% 7.3% 0.58 0.19 1.19 151.63 167.95 33.93 12.92 4.00 0.98 1.87 0.50 0.43 86.0% 29.09 0.72 0.27 4.60 9.96 20.17 3.2 1.9 9.37

Profitability (%)
Return on Average Equity Return on Average Assets EBITDA Margin EBIT Margin Pretax Profit Margin Net Profit Margin

Liquidity Ratios (x)
Quick ratio Cash ratio Current ratio Days in inventory Days in accounts payable Days in receivables

Activity Ratios (x)
Sales to cash Sales to inventory Sales to total assets Sales to total fixed assets

Production Data
Capacity(million tonnes) Production (million tonnes) Average Utilization Revenue/tonne (N'000)

Per Share Data
Earnings/share Dividend/share Net Asset/share Sales/Share

Valuation Multiples
P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x)

January 2011

149

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2011 Outlook
The Tipping Point Julius Berger Plc

BASIC INFORMATION
Address Utako District Berger Junction, Abuja Website Management (Chairman) MD/CEO Financial Year End Exchange Listing Bloomberg Ticker Sector Country

Strong fundamentals in the construction industry
We maintain an “ACCUMULATE” Rating on Julius Berger, given that the stock (at a current share price at N54.00) has an expected upside of 14.4% to N61.80, the midpoint of our target price range N57.40 – N66.20. Our target valuation is based on the DCF methodology, with Julius Berger fair value rolled one year forward at its weighted average cost of capital.

www.julius-berger.com
AVM (Dr.) Nura Imam (Rtd) Engr. W. Goetsch December Primary Listing: Nigerian Stock Exchange Bloomberg: JBERGER:NL Construction Nigeria

Investment thesis
Strong earnings prospect...Julius Berger remains the strongest listed construction firm; its history of proven job quality in the Nigerian construction space is largely unrivaled. In view of the rising emphasis on physical infrastructural development in Nigeria, we believe it is necessary for investors to have some exposure to such infrastructure-linked equities like Julius Berger in a bid to benefit directly from the expected boom in the longer term. The renewed interest in the power sector also offers Julius Berger some growth opportunities; we believe the company would participate actively in the construction works in the power sector due to its dominant market share in FG’s construction contracts ...though reputational risk calls for caution: Julius Berger, towards the tail end of Q3’10 agreed to a plea bargain over its alleged involvement in the $180 million bribery scandal between Halliburton and the Federal Government of Nigeria. The company was consequently required to pay $29.5 million fine (c. N4.425 billion), payable in two instalments. We had noted (in our previous earnings update on Julius Berger) the impact of Julius Berger’s rising reputational risk on its earnings profile. Though the company is given the opportunity to pay the legal fine in the Halliburton case in two instalments, we believe the liability would have some major impact on FY’10 and FY’11 net earnings and more importantly cash flows, especially because of the characteristically low profit margins of the business. Earnings Outlook: We forecast that Julius Berger’s revenue would grow by 15.0% to N184.3.0 billion by FY’11 from our FY’10E of N160.3 billion. On profitability we anticipate that EBITDA margins would somewhat be steady at 14.4% by FY’11, having declined from 15.4% to 14.4% (our estimate for FY’10). Also, we expect EBIT margins to decline 3.6% from our FY’10E of 5.7% and FY’09 figure of 3.6%.
Forecast Summary
EPS (N) YoY Change (%) P/E (x) DPS (N)

OWNERSHIP STRUCTURE (%)
Bilfinger Lagos State Govt. Benue State Govt. Others 49.9 10.1 5.3 34.8

SHARE STATISTICS
Shares in issue (M) Share Price (N) Market Cap. (N'm) Market Cap. (USD'M ) Free Float (%) Daily Average Value Traded (N'000) Daily Average Value Traded (USD'000) Year high (N) Year low (N) 1,200 54.00 62,388.00 418.2 34.8 23,099.90 154.8 61.88 25.79

VALUATION METRICS
Book Value (N'Mn) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) Debt/Equity (%)
JBERGER VS BM VS NSE ASI PERFORMANCE
Rebased 31/12/2009

6,972 20.7 9.3 4.7 45.6 0

2.5 JBerger Const. Index ASI

FY'09
2.70 28.6 9.55 2.40 33.3 9.3 6.50 18.2 4.0

FY'10F
2.80 3.7 19.3 2.40 0.0 4.4 6.90 6.2 7.8

FY'11F
2.90 3.6 18.6 2.50 4.2 4.6 7.40 7.2 7.3

FY'12F
4.00 37.9 13.5 3.40 36.0 6.3 8.00 8.1 6.8

FY'13F
5.02 25.5 10.8 4.28 25.8 7.9 8.70 8.7 6.2

1.9

1.3

YoY Change (%) Div. Yield (%) NAPS (N)

0.6 Dec-09 Apr-10 Aug-10 Dec-10

YoY Change (%) P/B (x)

Sources: NSE, Vetiva Research

Sources: Company Financials, Vetiva Research

January 2011

150

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point
2007 79,074 (66,243) 12,831 (4,435) 8,396 8,748 (5,595) 3,152 3,152 (1,384) 1,768 2008 114,029 (96,786) 17,243 (5,610) 11,632 12,736 (6,922) 5,814 (573) 5,241 (2,733) 2,508 2009 150,358 (123,102) 27,256 (6,437) 20,819 23,169 (12,977) 10,192 (747) 9,444 (6,144) 3,300 2010 F 160,282 (131,431) 28,851 (5,802) 23,048 23,048 (13,842) 9,207 (1,983) 7,224 (3,843) 3,381 2011 F 184,324 (151,146) 33,178 (6,673) 26,506 26,506 (19,858) 6,648 (1,464) 5,184 (1,659) 3,525 2012 F 221,189 (181,375) 39,814 (8,007) 31,807 31,807 (24,673) 7,134 7,134 (2,283) 4,851

INCOME STATEMENT (N'Mill) Turnover Cost of Sales Gross Profit Distr. & Admni Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

BALANCE SHEET (N'Mill) Non-Current Assets Fixed Assets Long Term Investments Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Total Non-Current Liabilities Total Liabilities Net Assets

2007 24,000 5,684 9,901 30,873 3,947 14,149 58,870 183,608 1,929 74,640 118 1,389 78,076 3,975 3,975 179,491 4,117

2008 28,574 12,146 45,171 22,844 29,694 109,854 246,894 5,334 114,530 4,290 2,184 126,338 4,582 4,582 241,258 5,635

2009 48,689 2,000 15,222 47,083 9,047 32,659 104,012 271,443 4,046 119,880 8,094 3,954 135,974 3,569 6,304 9,874 264,800 6,644

2010 F 60,574 2,000 17,463 58,754 32,183 108,401 312,821 3,896 146,691 10,458 3,843 164,888 1,740 8,066 9,806 304,993 7,829

2011 F 72,416 2,000 20,083 67,567 8,924 37,011 133,585 346,403 4,480 168,695 50,240 1,659 225,073 11,317 11,317 338,076 8,327

2012 F 85,700 2,000 24,100 81,081 44,413 149,593 380,260 5,376 202,434 35,692 2,283 245,784 14,727 14,727 371,414 8,846

Source: Company Financials, Vetiva Research

January 2011

151

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (USD'Mill) Turnover Cost of Sales Gross Profit Distr. & Admni Expenses Core Operating Profit EBITDA Depreciation & Amortization EBIT/Operating Profit Interest Payable & Charges Profit Before Taxation Taxation Profit After Taxation

2007 672 (563) 109 (38) 71 74 (48) 27 27 (12) 15

2008 916 (777) 138 (45) 93 102 (56) 47 (5) 42 (22) 20

2009 1,021 (836) 185 (44) 141 157 (88) 69 (5) 64 (42) 22

2010 F 1,034 (848) 186 (37) 149 149 (89) 59 (13) 47 (25) 22

2011 F 1,189 (975) 214 (43) 171 171 (128) 43 (9) 33 (11) 23

2012 F 1,427 (1,170) 257 (52) 205 205 (159) 46 46 (15) 31

BALANCE SHEET (USD'Mill) Non-Current Assets Fixed Assets Long Term Investments Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets Total Assets Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Total Non-Current Liabilities Total Liabilities Net Assets

2007

2008

2009

2010 F

2011 F

2012 F

204 48 84 263 34 120 501 1,561 16 635 1 12 664 34 34 1,526 35

229 98 363 183 238 882 1,982 43 920 34 18 1,014 37 37 1,937 45

331 14 103 320 61 222 706 1,843 27 814 55 27 923 24 43 67 1,798 45

391 13 113 379 208 699 2,018 25 946 67 25 1,064 11 52 63 1,968 51

467 13 130 436 58 239 862 2,235 29 1,088 324 11 1,452 73 73 2,181 54

553 13 155 523 287 965 2,453 35 1,306 230 15 1,586 95 95 2,396 57

Source: Annual Report, Vetiva Research

January 2011

152

VETIVA
CAPITAL MANAGEMENT LIMITED

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

Growth Turnover growth EBITDA Growth PBT Growth PAT Growth Profitability Return on Average Equity Return on Average Assets EBITDA Margin EBIT Margin PBT Margin PAT Margin Per Share Data Earnings Per Share Dividend Per Share Net Assets Per Share Sales Per Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) EV/EBITDA (x) 36.7 11.5 10.9 2.5 25.8 11.8 9.2 3.4 19.6 4.0 9.3 4.7 9.55 7.8 4.4 4.7 19.3 7.3 4.6 4.9 18.6 6.8 6.3 6.8 1.47 1.25 4.70 65.89 2.09 1.75 5.54 95.02 2.75 2.40 6.52 125.30 2.82 2.40 6.94 133.57 2.94 2.51 7.37 153.60 4.04 3.45 7.97 184.32 36.3 2.0 11.1 3.6 4.0 2.2 40.9 2.2% 11.2% 4.0% 4.6% 2.2 45.6 2.3 15.4 5.1 6.3 2.2 41.9 2.0 14.4 6.8 4.5 2.1 41.1 1.6 14.4 5.7 2.8 1.9 52.7 1.9 14.4 3.6 3.2 2.2 39.0 13.1 182.8 6008.9 44.2 45.6 66.2 41.8 31.9 81.9 80.2 31.6 6.6 -0.5 -23.5 2.5.0 15.0 15.0 -28.2 4.3 20.0 20.0 37.6 37.6

Source: Company Financials, Vetiva Research

January 2011

153

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

Insurance Sector: Searching for Value
We are cautiously optimistic about the demand for insurance products in 2011 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.

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 AfterTax Profits. As explained in our company updates (Custodian and Allied, GTAssur), we expect two major lines to adversely impair the profitability of Insurance companies: Investment Income and Provision for bad debts. Most local institutional investors (insurance companies inclusive), were 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.

We expect Investment Income and Provision for bad debts to impair the profitability of Insurance companies in 2010

What will shape performance in 2011 and beyond?
Better Enforcement of Mandatory Insurance Policies We expect the better enforcement of the six mandatory insurance policies in 2011 to provide a boost to industry gross premiums A major factor which has limited the Nigerian Insurance Market from reaching full potential has been the lax enforcement of insurance policies and laws in Nigeria. In Nigeria, between 1987 and 2004, 16 insurance products were 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
CAPITAL MANAGEMENT LIMITED

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 Content Development Act 2010 (“The Act”). The Act aims at increasing, and in certain cases gives exclusivity to Indigenous participation and use of local 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 recent times other channels such as bancassurance, direct marketing and direct sales channels, are gaining importance as a channel to reach out to other 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.

“Local capacity” to underwrite risks is defined as the aggregate capacity of all Nigeria registered insurers and reinsurers

We anticipate a gradual opening up of the retail market for insurance in 2011

January 2011

155

VETIVA
CAPITAL MANAGEMENT LIMITED

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 for lead underwriters and N6 billion for other underwriters. Nonetheless, less 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.

We believe there will be a need for industry consolidation in 2011 through M&A’s or Recapitalization

January 2011

156

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point Custodian and Allied Insurance Plc (CAI) Value Remains Intact
CAI has continued to blaze the trail amongst most insurers, surpassing the bottom-line performance of most of its peers; a trend we believe will be sustained owing to its traditionally strong performance and competitive edge. The company has consistently outperformed the Insurance index recording YTD return of 10.1% against the Insurance index’s -27.9%. The stock is 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 “BUY” rating on CAI Plc.

BASIC INFORMATION Address 14B, Keffi Street S.W. Ikoyi, Lagos Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector OWNERSHIP STRUCTURE (%) C hief M Ade Ojo Mr Oshin Mr 'Toni Ogunbor Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market Cap. (N'm) Market Cap. (USD'm) Free Float (%) Daily Average Value Traded (N'Mn) Daily Average Value Traded (USD'Mn) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%) 5101 3.2 16323.2 109.4 53.7 11.6 0.1 3.2 3.15 12,277.80 7.31 1.35 5.31 16.93 17.56 13.53 9.09 59.82

www.custodianinsurance.com
C hief Michael Ade Ojo Mr Wole Oshin December Nigerian Stock Exchange Bloomberg: CUSTODYINS:NL Insurance

Investment thesis
Strong premium growth: This growth is to be driven largely by CAI’s motor andenergy Insurance portfolios. We note that Motor has historically been the largest contributor to Gross Premiums (2009: 24%, 2008: 29%); however,CAI’s improving competence in energy underwriting is increasingly contributing to top line numbers 38% in 2009, up from 16% in 2008. CAI clinched the mandate as the lead underwriter for the Nigerian National Petroleum Corporation – Consolidated Insurance Policy (NNPC CIP) account in 2010 and this further ratifies their competence in the oil & gas space. We believe the company is well positioned to benefit from the Nigeria Oil and Gas Content Development act given its experience and competence (financial and technical), in underwriting oil and gas transactions. Possible inclusion to business line: In recent years, life insurance business 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 medium-long term to achieve this objective. Strong Earnings Outlook: We project that CAI’s Gross Premiums would grow 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 23.4% to N2.6 billion and N3.1 billion by FY’11 and FY’12.
Forecast Summary EPS (N) FY'09A 0.37 12.1 8.65 0.17 -5.6 5.31 2.17 16.0 1.47 FY'10F 0.44 18.9 7.27 0.18 5.8 5.62 2.37 9.2 1.35 FY'11F 0.45 2.27 7.11 0.21 16.9 6.57 2.82 19.1 1.13 FY'12F 0.56 24.4 5.71 0.26 23.4 8.11 3.24 14.8 0.99 FY'13F 0.65 16.1 4.92 0.30 16.3 9.43 3.70 14.3 0.86

CUSTODYINS VS INSURANCE INDEX VS NSE ASI PERFORMANCE
(Rebased 31/12/2009)
Custodyins 1.4 Insurance Index ASI

1.3

1.2

1.1

1

0.9

0.8

YoY Change (%)
0.7 Dec-09 Apr-10 Aug-10 Dec-10
Source: NSE; Vetiva Research

P/E (x) DPS (N) YoY Change (%) Div Yield (%) NAPS(N) YoY Change (%) P/B (x)

Source: Company Financials; Vetiva Research

January 2011

157

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill) Gross Premiums Premium Earned Commissions Earned Investment and Other Income Claims Incurred Management Expenses Underwriting expenses Other expenses Profit Before Taxation Taxation Profit After Taxation

2007 2,715 2,069 91 662 -565 -535 -515 -152 1,056 -139 919

2008 4,102 2,830 110 1,302 -847 -650 -726 -169 1,850 -290 1,559

2009 5,277 3,596 103 1,345 -1,021 -791 -752 -461 2,019 -132 1,887

2010F 8,086 5,145 162 1,080 -1,379 -1,214 -872 -573 2,350 -394 1,981

2011F 10,432 6,667 209 1,392 -1,765 -1,736 -959 -677 3,131 -492 2,639

2012F 13,457 8,359 269 1,795 -2,188 -2,483 -1,103 -916 3,734 -586 3,147

BALANCE SHEET (N'Mill) Assets Cash at bank and in hand Short-term deposits Due from Insurance Debtors Other Assets Fixed Assets TOTAL ASSETS Liabilities Current Liabilities Insurance Funds Deferred Taxation Other Liabilities TOTAL LIABILITIES Net Assets Companies, Agents and

2007

2008

2009

2010F

2011F

2012F

132 1,671 870 2,565 427 5,665

240 7,363 1,186 2,587 566 11,942

595 8,173 1,491 3,351 550 14,160

714 9,808 1,670 3,750 605 16,546

857 11,769 1,870 4,453 665 19,614

1,028 14,123 2,094 5,320 732 23,297

349 687 64 0 1,100 4,565

566 1,177 82 1,170 2,995 8,947

451 2,240 91 234 3,016 11,144

677 3,248 109 234 4,268 12,278

1,015 4,060 136 0 5,211 14,402

1,523 5,075 170 0 6,768 16,529

January 2011

158

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT ($'Mill) Gross Premiums Premium Earned Commissions Earned Investment and Other Income Claims Incurred Management Expenses Underwriting expenses Other expenses Profit Before Taxation Taxation Profit After Taxation

2007 18.10 13.79 0.61 4.41 -3.77 -3.57 -3.43 -1.01 7.04 -0.93 6.13

2008 27.35 18.87 0.73 8.68 -5.65 -4.33 -4.84 -1.13 12.33 -1.93 10.39

2009 35.18 23.97 0.69 8.97 -6.81 -5.27 -5.01 -3.07 13.46 -0.88 12.58

2010F 53.91 34.30 1.08 7.20 -9.19 -8.09 -5.81 -3.82 15.67 -2.63 13.21

2011F 69.55 44.45 1.39 9.28 -11.77 -11.57 -6.39 -4.51 20.87 -3.28 17.59

2012F 89.71 55.73 1.79 11.97 -14.59 -16.55 -7.35 -6.11 24.89 -3.91 20.98

BALANCE SHEET ($'Mill) Assets Cash at bank and in hand Short-term deposits Due from Insurance Companies, Agents and Debtors Other Assets Fixed Assets TOTAL ASSETS Liabilities Current Liabilities Insurance Funds Deferred Taxation Other Liabilities TOTAL LIABILITIES Net Assets

2007

2008

2009

2010F

2011F

2012F

0.88 11.14 5.80 17.10 2.85 37.77 2.33 4.58 0.43 0.00 7.33 30.43

1.60 49.09 7.91 17.25 3.77 79.61 3.77 7.85 0.55 7.80 19.97 59.65

3.97 54.49 9.94 22.34 3.67 94.40 3.01 14.93 0.61 1.56 20.11 74.29

4.76 65.39 11.13 25.00 4.03 110.31 4.51 21.65 0.73 1.56 28.45 81.85

5.71 78.46 12.47 29.69 4.43 130.76 6.77 27.07 0.91 0.00 34.74 96.01

6.85 94.15 13.96 35.47 4.88 155.31 0.00 10.15 33.83 1.13 0.00 45.12 110.19

January 2011

159

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point GTAssur plc

BASIC INFORMATION Address Santa C lara court Plot 1412, Ahmadu Bello Way, Victoria Island, Lagos

Emerging Retail Insurance Leader
GTAssur has gradually stamped its authority as an emerging retail insurance leader, supported by its bancassurance model. The stock is valued based on the excess return methodology thus obtaining a fair value range N1.73- N1.91. This indicates a midpoint of N1.82, which gives a “zero” return (relative to its current market price), thus compelling our “REDUCE” rating. However, we note that a decline in the company’s share price in the near to medium term would result in a revision of our rating, as we believe its strong fundamentals, relative to peers.

Website Management (C hairman) MD/C EO Financial Year End Exchange Listing Symbol Sector OWNERSHIP STRUCTURE (%) Guaranty Trust Bank Africinvest Limited Others SHARE STATISTICS Shares in issue (M) Share Price (N) Market C ap. (N'm) Market C ap. (USD'm) Free Float (%) Daily Average Value Traded (N'Mn) Daily Average Value Traded (USD'Mn) Year high (N) Year low (N) VALUATION METRICS Book Value (N'm) Trailing P/E (x) P/B (x) Div. Yield (%) ROAE (%)

www.gtaplc.com
Mr Victor Osibodu Mrs Yetunde Ilori December Nigerian Stock Exchange Bloomberg: GTAssure:NL Insurance 67.68 5.38 26.94

Investment thesis
10,000 1.82 18,200 122.01 26.94 8.8 0.1 1.82 1.52 12,851.00 31 1.44 4.84 6.82

Retail distribution supports premiums from the Non-Life segment: GTAssur’s direct distribution strategy through the bancassurance and agency platforms, which is primarily aimed at encouraging retail participation, has begun yielding positive results. We note that its motor insurance portfolio which drives retail sales growth, witnessed a 51.2% YoY increase in premium income to N1.3 billion in 2009 and contributed 28.9% to GPI. As at H1’10, retail sales contributed about 25% to topline numbers, a climb from 18% as at FY’09. We note there are concerns around GTBank’s divesture especially with the deployment of the bancassurance model, however, we do not expect any major alteration in the company’s strategy, especially relating to retail sales penetration. We believe the divestiture presents GTAssur with an opportunity 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 that has delivered strong investment income over the years. The company has also developed a wide bouquet of products and services that cover both corporate and individual insurance products. Strong Balance Sheet: GTAssur is well capitalized with an equity base of about N16.9 billion (Solvency Margin at FY’09 – 434%), well above the regulatory requirement. This enables the company underwrite relatively largesized risks and play in key sectors such as the oil and maritime. Earnings Outlook: We project that GTAssur’s Gross Premiums would grow by 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 and N1.7 billion by FY’11 and FY’12.
Forecast Summary FY'09A
0.05 -0.8 35.25 0.09 -40.0 4.95 1.26 -10.5 1.47

GTASSURE VS INSURANCE VS NSE ASI PERFORMANCE
(Rebased 31/12/2009)

1.6

GTAssure

InsurIndex

ASI

1.4

1.2

1

0.8

0.6 Dec-09 Apr-10 Aug-10 Dec-10
Source: NSE; Vetiva Research

FY'10F
0.09 0.7 20.90 0.07 -22.6 3.83 1.29 1.8 1.42

FY'11F
0.13 0.5 13.84 0.11 50.9 5.78 1.35 5.3 1.34

FY'12F
0.17 0.3 10.49 0.14 32.0 7.63 1.46 8.0 1.24

FY'13F
0.22 0.2 8.27 0.17 25.3 9.56 1.54 5.1 1.18

EPS (N) YoY Change (%) P/E (x) DPS (N) YoY Change (%) Div Yield (%) NAPS(N) YoY Change (%) P/B (x)

Source: Company Financials; Vetiva Research

January 2011

160

VETIVA
CAPITAL MANAGEMENT LIMITED

2011 Outlook
The Tipping Point

INCOME STATEMENT (N'Mill) Gross Premiums Premium Earned Commissions Earned Investment and Other Income Claims Incurred Management Expenses Underwriting expenses Other expenses Profit Before Taxation Taxation Profit After Taxation

2007 2,061.7 1,170.1 85.2 1,312.5 (362.7) (887.0) 210.7 (41.0) 1,100.5 (279.2) 821.2

2008 3,117.8 1,682.7 120.1 126.7 (585.3) (1,088.7) 350.5 (96.5) 2,001.3 (125.3) 1,876.0

2009 4,537.0 2,372.0 160.1 1,402.2 (947.6) (1,184.3) 520.3 (103.5) 1,312.2 (796.0) 516.2

2010F 7,013.0 3,927.3 179.3 700.0 (1,182.0) (1,706.0) 556.0 (216.7) 1,145.9 (275.0) 870.9

2011F 9,146.8 5,213.7 200.9 1,400.0 (1,737.9) (2,149.6) 914.7 (282.6) 1,729.8 (415.1) 1,314.6

2012F 11,311.8 6,674.0 225.0 1,722.0 (2,149.2) (2,708.5) 1,131.2 (349.5) 2,282.5 (547.8) 1,734.7

BALANCE SHEET (N'Mill) Assets Cash at bank and in hand

2007

2008

2009

2010F

2011F

2012F

188.3

350.3 10,465.4 2,618.4 2,261.0

459.4 8,657.0 2,010.2 5,134.0

292.9 10,861.2 2,650.0 3,750.0 605.0 18,159.0

384.1 13,544.9 3,492.7 4,687.5 724.0 22,833.3

503.9 16,891.9 4,603.4 5,859.4 866.4 28,724.9

Short-term deposits 5,338.5 Due from Insurance Companies, Agents and Debtors 988.0 Other Assets Fixed Assets TOTAL ASSETS Liabilities Current Liabilities Insurance Funds Deferred Taxation Other Liabilities TOTAL LIABILITIES Net Assets 424.7 555.3 50.2 647.0 1,677.1 6,298.7 797.0 664.3 7,976.1

794.9
16,490.0

910.0
17,170.7

2,195.6 932.4 30.0 1,023.0 4,181.0 12,309.6

673.5 1,595.0 191.6 2,086.0 4,546.1 12,625.0

677.0 2,437.0 112.6 2,806.0 6,032.6 12,901.0

846.9 3,723.5 90.0 3,774.1 8,434.5 13,534.0

1,059.5 4,758.3 111.7 4,698.7 10,628.1 14,621.0

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The Tipping Point
2007 13.7 7.8 0.6 8.8 (2.4) (5.9) 1.4 (0.30) 7.30 (1.90) 5.5 2008 20.8 11.2 0.8 0.8 (3.9) (7.3) 2.3 (0.60) 13.30 (0.80) 12.5 2009 30.3 15.8 1.1 9.4 (6.3) (7.9) 3.5 (0.70) 8.80 (5.30) 3.4 2010F 46.8 26.2 1.2 4.7 (7.9) (11.4) 3.7 (1.40) 7.60 (1.80) 5.8 2011F 61.0 34.8 1.3 9.3 (11.6) (14.3) 6.1 (1.90) 11.50 (2.80) 8.8 2012F 75.4 44.5 1.5 11.5 (14.3) (18.1) 7.5 (2.30) 15.20 (3.70) 11.6

INCOME STATEMENT ($'Mill) Gross Premiums Premium Earned Commissions Earned Investment and Other Income Claims Incurred Management Expenses Underwriting expenses Other expenses Profit Before Taxation Taxation Profit After Taxation

BALANCE SHEET ($'Mill) Assets Cash at bank and in hand Short-term deposits Due from Insurance Companies, Agents and Debtors Other Assets Fixed Assets TOTAL ASSETS Liabilities Current Liabilities Insurance Funds Deferred Taxation Other Liabilities TOTAL LIABILITIES Net Assets

2007

2008

2009

2010F

2011F

2012F

1.3 35.6 6.6 5.3 4.4 53.2

2.3 69.8 17.5 15.1

3.1 57.7 13.4 34.2

2.0 72.4 17.7 25.0 4.0 121.1

2.6 90.3 23.3 31.3 4.8 152.2

3.4 112.6 30.7 39.1 5.8 191.5

5.3
109.9

6.1
114.5

2.8 3.7 0.3 4.3 11.2 42.0

14.6 6.2 0.2 6.8 27.9 82.1

4.5 10.6 1.3 13.9 30.3 84.2

4.5 16.3 0.8 18.7 40.2 86.0

5.7 24.8 0.6 25.2 56.2 90.2

7.1 31.7 0.8 31.3 70.9 97.5

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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.

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

Adedoyin Adelakun

Analyst, Consumer Beverages) Analyst, Banking Analyst, Infrastructure Analyst, Consumer Conglomerates)

(Food

& a.adelakun@vetiva.com

Abiola Rasaq Tosin Oluwakiyesi Olamidun Laniyan

a.rasaq@vetiva.com t.oluwakiyesi@vetiva.com (Breweries, o.laniyan@vetiva.com

Vetiva Wealth Management Damilola Ajayi sales @ Vetiva Head, Wealth Management d.ajayi@vetiva.com 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
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2011 Outlook
The Tipping Point
DISCLOSURES SECTION
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