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A Member of the Uganda Securities Exchange

ReNaissance Capital Limited 1



Abbreviations …………………………………………………………………………………..3

Economic Outlook………………………………………………………………………………4

Equity Market Outlook………………………………………………………………………...8

Equity Research:
Uganda Clays Limited………………………………………………………….9
New Vision Group……………………………………………………………..16
Banking Sector………………………………………………………………...21
British American Tobacco……………………………………………………29
National Insurance Corporation……………………………………………..33

ReNaissance Capital does and seeks to do business with the companies covered in ReNaissance Research. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of
ReNaissance Research. Investors should consider Renaissance Research only as a single factor in making their
investment decision

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BOU Bank of Uganda

bpd Barrels per day
CAGR Compound Annual Growth Rate
CFO Cash flow from Operations
DCF Discounted Cash flows
DDM Discounted Dividends Model
DNOPAT Discounted Net Operating Profit After Tax
EBIT Earnings Before Interest and Tax
EBITDA Earnings Before Interest, Tax, Depreciation and Amortization
EBT Earnings Before Tax
EV Enterprise Value
FCFE Free Cash flow to Equity
FDI Foreign Direct Investment
FY Fiscal Year
GDP Gross Domestic Product
HY Half Year
IMF International Monetary Fund
NOPAT Net Operating Profit After Tax
PE Price-Earnings ratio
PEG Price Earnings-Growth ratio
ROE Return on Equity
RV Relative Value
UBOS Uganda Bureau of Statistics
WACC Weighted Average Cost of Capital
WEO World Economic Outlook

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Economic Outlook;

The global economic recovery has been faster than predicted. The International Monetary
Fund (IMF) forecast global growth at 4.5% which is a 1% upwards revision from the October
2009 World Economic Outlook report. The recovery will be largely led by emerging and
developing economies with an estimated 6.3 % growth according to the WEO April 2010
report. Uganda’s economic growth is projected to rebound to the long-term average of 7%.

More worrisome, austerity measures in Europe sparked off by the debt crisis in Greece and
Ireland, is forcing governments to cut back on spending and yet private consumption and pri-
vate credit remain subdued. With sovereign credit coming into question coupled with a bank-
ing system riddled with bad debt, growth particularly in Europe should be slow. A recent
rebound in oil prices will fuel inflationary pressures for the local economy.

The Ugandan economy has continued to enjoy strong inter-regional trade and also trade with
China and India (who together make the 3rd most important trade block for Uganda accord-
ing to Bank of Uganda). South Sudan which forms an important trade partner, surpassing
Kenya as an export destination in 2008/09, is most likely to become an autonomous state.
Increased export earnings from Uganda going forward, will be dependent on the stability of
the new South Sudan state.

Particular challenges will be met in the foreign exchange markets (Figure 1) despite the
stability in reserves over the past year. At about five months of import cover over the year
2010, this represents a drop from a previous two year average of seven months according to
Bank of Uganda data. Portfolio inflows searching for higher yields, as the central banks
raises interests rates to control inflation, could help temporarily stabilize the foreign
exchange market. The specter of inflation and asset bubbles should however be watched as
result, leaving short term uncertainty a challenge for monetary policy.

Over the year 2010, headline inflation dropped to 4% from 13% the previous year (Uganda
Bureau of Statistics — UBOS). This was on the back of reduced fuel prices globally and
negative food inflation. A recent rebound in commodity prices (oil at USD 100 per barrel) as
a result of floods, predictions of drought and severe winters, will negatively impact inflation.

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Figure 1: Exchange rate and reserve trends Figure 2:Inflation and short term rate trends

2500 8 25
2000 20
5 15
1000 3
2 5
0 0

























Inflation-Headline 91-Day
USD:UGX Reserves

Source: Bank of Uganda Source: Bank of Uganda

The recent divergence in reserves cover of imports has translated The current trend of rising inflation in low interest rate environ-
into exchange rate volatility. Policy initiatives should strongly gear ment could indicate policy movement towards higher short term
towards building reserves to higher levels. Presently. The cover is rates. This should favor equities and short term securities, in the
at 5 months of cover which coupled with a growing import bill is short to medium term.
turning out to be insufficient.

Despite the short term uncertainty, our long term Tax revenue is expected to double within 6-10
view suggests that the Ugandan economy is years as a result of investment in the oil sector,
strongly positioned within the East African according to the same report. As a result, it is
region to benefit from a resurgence in the global expected that there will be increased investment
economy. Central to this has been capital flows in the infrastructure, energy and the resource ser-
into the local economy, the principal drivers of vices sectors of the economy. From a residual
which have been foreign direct investment, point a view the construction and banking sectors
remittances from Ugandans working abroad of the economy should benefit from overall FDI
(which have not been affected by the global eco- inflows.
nomic slow down) and credit flows. To a lesser
degree portfolio flows should make a contribu-
tion. FDI inflows according to the Uganda Investment
Authority (UIA) have experienced a CAGR of
38% from 2002-2009. The planned investments
Uganda enjoyed the third fastest growth in the for 2010, stood at USD 1.7 billion up from USD
African region after Ethiopia and Congo in 2009 1.6 billion in 2009. As such the impact of the oil
according to IMF statistics. Uganda’s nominal sector should be significant on the local econ-
GDP ranks in the top one third among 52 mem- omy; growing FDI four-fold approximately from
ber states. With the emergence of the oil sector, the current levels.
the local economy could easily get catapulted
into a middle income economy according to
Global Witness-2010 Report. (View Box 1; Page

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According to Bank of Uganda data, the expected We should also anticipate a rebound in private
remittances into the local economy were pro- flows in response to expected and actual higher
jected to reach USD 980.9 million in 2010 from yields both in the equity and debt markets in
USD 732 million in 2008 (34% CAGR). This developing markets as compared to developed
should cushion consumption and investments markets.
gaps within households to a larger extent. The
construction sector is positively impacted by re-
mittance inflows. Despite a persistent current account deficit, we
forecast a marginal surplus in the overall bal-
ance going forward as a result of capital flows
According to fig.3 below, Uganda’s total invest- into the economy, In the short term, uncertainty
ment (comprised of credit flows, foreign direct should remain, affecting the stability of the
investment, private inflows into the equity market local currency. Over the medium to long term
and portfolio inflows) as a proportion of GDP has the exchange rate could revert to the mid-term
been one of the fastest growing in the East Afri- average of USD:UGX 2000 as reserves
can and Sub-Saharan Africa region, a trend that is improve.
poised to continue to impact expected capital
flows into the economy.

Figure 3: Total investment to GDP across selected regions in comparison to


2003 2004 2005 2006 2007 2008 2009 2010est 2011f

Uganda EAC SSA

Source: IMF, African Department database and WEO database

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Box 1: UGANDA’S Budding Oil Sector

There are six sedimentary basins in Uganda, out of which the Albertine Graben is the most prospective for petro
leum exploration. Currently, the graben is subdivided into ten Exploration Areas (EAs), out of which five are li-
censed. The companies operating in Uganda include Tullow Oil plc, Tower Resources Ltd and Dominion Petroleum
Ltd. Licensing has been suspended since early 2006 awaiting update of the country’s regulatory framework for the
upstream petroleum sector. A National Oil and Gas Policy for the country was approved by Cabinet in 2008. In an
effort to operationalise the policy, formulation of a new legislation for the oil and gas administration is underway.

Since 2002, 39 deep wells have been drilled in the area, 36 of which have encountered hydrocarbons in multiple res-
ervoir intervals in the subsurface, representing a remarkable drilling success rate of over 92%. To date, 16 discoveries
of oil and/or gas have been made in the country in excellent quality reservoir sands, 11 of which have been flow
tested and some of the wells have registered cumulative flow rates of over 14,000 barrels of oil per day. The discov-
ered resources in the graben are currently estimated at over 2 billion barrels of oil equivalent in place.

The government of Uganda has contracted Foster Wheeler Energy Ltd, a UK-based firm to carry out a refinery feasi-
bility study to address, among others, the size, configuration, location, cost, financing options and markets for refined

The proposed investment in the commercialization of the sector is in the region of USD 8 billion, almost 50% current
GDP. The impact on the local economy will be immense. It is estimated that government revenues should double in 6
-10 years according to the World Bank. Increased investment in infrastructure and energy should ensue as a result of
the sector.

Banking and financial institutions should build capacity to finance the derivative sectors from the oil economy. There
will be an immense need to develop a fiscal and financial institutional framework that can absorb a potential revenue
in excess of USD 30 billion over 20 years.

The oil sector is expected to contribute 15% of the country’s GDP at peak production. Credit growth and production
could slow among sectors not directly linked to the oil sector, such as agriculture which would have a negative eco-
nomic and social impact in the medium to long term. It will be incumbent upon government to utilize oil revenues to
develop infrastructure and social services, and put in place policies that avoid over concentration on one sector (oil) at
the expense of other priority sectors.
Figure 1.1: Comparison of proven reserves among Figure 1.2: Comparison of daily production
major African oil producers

Proven Reserves (million barrels) Daily production, 000' bpd

45,000 2000
40,000 1800
35,000 1600
15,000 600
10,000 400
5,000 200
- 0

Source: OPEC 2009 Annual Statistical Bulletin, Tullow Oil.

*Proven to date Source: OPEC 2009 Annual Statistical Bulletin, Tullow Oil.
*Estimated at commercial level

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Equity Market - Outlook

The equity market maintained a strong performance over the year 2010. This was on the back
of return of capital inflows, in search of higher yield in generally undervalued companies fol-
lowing the unusually high withdrawal of investors in 2009. The returns on the equity market
should remain robust, though we should see some short term volatility as investors take
profits and as headwinds from the 2008-2009 slowdown reflect in corporate performance.

In the short to medium term a rise in inflation should favor equity as compared to longer-
term fixed income instruments. As earlier mentioned, a rise in food and oil prices and the
need to contain the increased money supply during the election period, is likely to drive up
the level of inflation in 2011. We anticipate that banking stocks, which are generally more
responsive to inflation and the associated increase in treasury bill and bond interest rates, and
are therefore considered as securities that have traditionally protected against inflation,
should perform well in the short to medium term

We advance the financial sector as a fundamentally strong investment opportunity in the

medium term. Credit flows should rebound as small and big business make investment deci-
sions in light of expected upward revision of the growth in the underlying economy. The
rebound in trade and commodity prices, should result into credit growth to finance activities
these sectors.

While we view a general rise in the equity market for the year, aided by foreign flows to the
equity market in search for higher yields, the impact will not be felt across all listed stocks.
Growth in media should remain slow as competiveness picks up in 2011. Uganda Clays
faces unique business risks related to capacity expansion despite strong performance in the
real estate sector.

The previous slowdown revised valuations downwards reducing the attractiveness of the
public equity market as a viable option for firms seeking to float their shares in the stock ex-
change. With optimism in the recovery and higher PE ratios, its fair to say that the conditions
for public listings (IPOs) have improved and are likely to be more prevalent in the medium to
long term as firms get more acquainted with the pros and cons of listing.

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Equity Research-Uganda Clays Limited;

Investment rationale and risk;

Uganda Clays Limited, just completing a massive three MANUFUCTURING
year expansion period stands in a very precarious posi-
tion .The company has almost doubled the current liability
position, from UGX 7.7 billion to UGX 13.6 billion with Recommendation: SELL
increasing strain from the cost of short term debt in 2009. Price Band (UGX) 26.4-12.2
The liquidity and default risk profile of the company has Target Price (UGX) 14.7
moved from stable to adverse, and there is an imminent need to
re-engineer the capital structure of the company. Current Price (UGX) 50
2 Year High 250
2 Year Low 40
Operational costs in the period 2009, outpaced revenue
growth by a massive 28%. Commendably cost margins
remained stable despite the difficult environment. The only Shares outstanding (000) 900,000
revenue driver in 2009, was the Kajjansi plant: 93% of total MarketCap(UGX000,000) 54,000
revenue for the year 2009. Our long term outlook on the cost- Float (%) 100
revenue profile indicates a 10% CAGR in revenue ahead of
operational costs, as the Kamonkoli plant commenced full Float (UGX 000,000) 45,000
operation later in 2010, as announced by management. Float (USD 000) 19,560

PE (forward) 58.3
Increasing roofing substitutes threaten clay tiles as the
sole roofing material. Roofing tile contribute 50% of the com- PEG: 2.45
pany revenue and yet tiling products from alternative markets
continue to shrink the company’s roofing tile market share. This
was principally as a result of a slow response to demand over
the previous 3-7 years which allowed room for substitutes.

Major Shareholders (Percentage)

Growth in the housing sector and ability to meet bigger
market needs will benefit the company. Demand for housing
with an estimated backlog 600,000 units is still driving growth National Social Security Fund 32.52
in the construction sector. The growing mortgage sector is ex-
pected to drive demand for housing which should benefit the
National Insurance Corporation 18.86
long-term growth of the company.

The commissioning of the Kamonkoli plant should yield

productivity dividends for the company. The plant requires
only 1 quarter of the labour force presently at Kajansi to pro-
duce in 3 days what is a 3 week production cycle in Kajansi.
The deposits of high quality clay around the plant are estimated
to be worth 100 years of production at the current levels. These
benefits will be long in coming, with a forecast of 2012 as a
normal production year, after all the teething commission-
ing problems have been full addressed.

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The price history of the company has been largely divorced Currently trading at a premium
from the performance of the company. This was mainly a of UGX 50, the counter should
function of illiquidity and speculative market activity during perform more closely to intrinsic
the 2008 share split and rights issue (Figure 4). From 2004- value going forward. The factors
2008, earnings CAGR was 8.9% against the a price CAGR of below reinforce our opinion as
98% in the same period. In 2009 and 2010 the price closed at they will hold in the medium
UGX 50. A loss was recorded in 2009. The price behavior of the term;
counter far outpaced the underlying performance of the company
during the period 2007-2008.
Massive debt assumption
has almost doubled the financial
Figure 4: Historical Price performance on the UCL counter risk of the company, placing a
strain on profitability;

250 The resumption of dividend

payments is more likely in 2012
as the company would need to
retain earnings so as re-build the
100 capital base;

The need to conclude the
investment in Kamonkoli and
the automation of the Kajjansi
plant places more emphasis on
Source: Uganda Securities Exchange (USE)
capital investment in the me-
dium term. This should have a
negative impact on cash flows
Case Scenario

Optimistic Assume aggressive revenue growth at over Key drivers of growth:

30% yoy in 2012 and a sustainable annual
Target Price: UGX 26.4
growth in FCFE at 15%.
A resumption in revenue
growth at 30% is expected in
Base Assume growth in revenues at 20% in 2012 2012. This will be a combina-
Target Price: UGX 14.7
and beyond. FCFE grows sustainably 10% tion of new markets and a higher
annually thereafter. production capacity;
Company grows revenues at under 15% yoy,
which should challenge the capability to ser-
vice debt and therefore attain profitability. Efficiency gains from auto-
Target Price: UGX 12.2 FCFE is assumed to grow sustainably at 8%. mation should yield a higher
turnover in production, and
hence economies of scale over
Intrinsic Value: UGX 14.7 the long term.
In arriving at an intrinsic value of UGX 14.5, we assumed that a long
term growth rate in revenue will be achieved after 2012. In the interim
period, (2010-2012) the company will engage in capital expenditures as
the primary strategy for revenue growth and value addition. This will
come with a high operating cost environment.

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Box 2:The Economics of the Housing Sector

Uganda Clays has derived on average 51% of Figure 2.1: Book value of the mortgage industry from
its revenue from roofing tiles. The other 2005-2009 in USD million:
products;- maxpans, half bricks, ridges among
others, contribute the rest. The company’s key MN
customer is the residential housing sector, with
limited industrial & commercial customers. 252.4
Key players on supply side are National Housing
Construction Company (NHCC), development 150
companies such as Akright and individual devel- 100 86.2
opers. While on the demand side are mortgage
providers (commercial banks) and private build- 50

ers of property. 0
2005 2006 2007 2008 2009

The housing market in Uganda had shortage esti- Source: IFC, Uganda Primary Mortgage Market Initiative
mated 522,000 in 2003 with the shortage in Kam-
pala alone at 80,000 units according to The 2002 The impressive growth in the value of mortgages has not
translated into wide scale homeownership. This largely
Uganda Population & Housing and Uganda reflects that values of single mortgages are high; a sign
National Household Survey 2002/2003. We of chronic residential shortage. Development has not
estimate that national housing demand currently ensured, reflecting the high cost of construction, which is
stands at 630,592 units and Kampala at 110,936 a stumbling block to demand for modern construction
units. This should grow between present material.
population and urbanization growth rates; 3.2%
and 5.6% respectively. However, in spite of the The expected demand in the formal sector for
strong need to fill the gap, affordability of housing can best be reflected as 200,000 units,
housing units has hampered the response from the which is about half the number of reported
demand end. The key player on the demand side NSSF subscribers. According to the 2002
has traditionally been individual private develop- report, only about 40% are able to afford tiles
ers. as an option for roofing. Our research reveals
the demand for mortgages in the formal sector
almost equals demand in the informal sector,
The growth of the mortgage sector, 30% from which places the demand for modern roofing
2005-2009 year on year, is largely in part in material at 160,000 units.
response to the funding gap (Figure 2.1). Key
players in the sector are Housing Finance Bank
(60%) followed by DFCU Bank and Stanbic There also exists strong competition from syn-
Bank that now provide the various classes of thetic products that are imported. While the
mortgage products. Nonetheless this has failed to company enjoys a monopoly in clay roofing
satisfy the market demand/shortage for tiles, the past inability to meet market demand
homeownership, primarily because of the rela- created the opportunity for alternatives. Over-
tively small number of formally employed work- all, the challenges of reaching the entire market
ers—banks’ principal targets. and strong competition offered from a mix of
alternatives implies a competitive market that
is further weighed down by affordability.

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Company Performance and Position EBIT-EBT margin variance has grown from
a conservative average of 1.4% from 2006-
The operating environment for the company still
2008 to 11.95% from 2009-2012e (Figure
posses tremendous challenge at present. Cost of
6).The interest cost represents a 10% erosion
sales grew 46.5% in 2009 particularly as a result
on profitability and constrained the ability of
of depreciation cost. Cost of sales margin should
the company to meet financial obligations.
only decline towards historical levels after 2010.
Weakened coverage ratios from cash flow gen-
In 2009, Kamonkoli made a modest 7% contribu-
erated continue to affect performance.
tion to total revenue, as the factory was only par-
tially operational in the last quarter of 2009
Overall the financial risk of the company
has doubled from the average 1.05 in 2006-
EBITDA margins in 2009 dipped to 25.3%
2008 to an average forecast of 2.57 in 2009-
from 32.2% in 2008. (Figure 5). Operating costs
2012, as measured by the degree of financial
as a proportion of revenue, has nonetheless main-
leverage. As a result of reliance on overdraft
tained a stable average margin of 25%. As a result
facilities to support working capital require-
the company should be in position to recover
ments the financing cost are set to remain high.
EBITDA margin in 2010 to 32% in light of faster
The company has since restructured its debt to
revenue growth and a return to lower cost of
longer term tenure through debt financing from
its major equity partner, NSSF.

Revenue growth should hit the base case level

The balance sheet position reveals that short
of 30% by 2012 as a result of more efficient asset
term creditors to the company are bearing the
utilization at Kamonkoli and development of both
burden of the company’s current liabilities,
local and regional markets in Rwanda, Southern
60.5% in 2009. The company will also be un-
Sudan and Western Kenya.
der considerable pressure to improve its pay-
ables turnover that has reduced from an
2010e 2011e 2012e average of 2.84 for the period 2006-2008 to
1.65 in 2009.
Sales 20,679,693 26,194,277 34,052,560
Annual growth 23.7% 26.7% 30.0%
Fixed asset turnover 38.3% 46.4% 58.0%
Return on assets 1.5% 2.7% 3.9%

Figure 5: EBITDA margins bottomed out in 2009 and Figure 6: EBIT-EBT margin variance should recover
should revert to historical levels of 32% in 2010 albeit very gradually.

EBITDA % of sales
% of sales
margin 35.0%
90.0% 40.0%
80.0% 30.0%
70.0% 25.0%
60.0% 20.0%
50.0% 15.0%
15.0% 10.0%
10.0% 5.0%
10.0% 5.0% 0.0%
2006 2007 2008 2009 2010e 2011e 2012e
0.0% 0.0% -5.0%
2006 2007 2008 2009 2010e 2011e 2012e
Opex Cost Of sales EBITDA EBIT Margin EBT Margin

Source: Company Reports, ReNaissance Research estimates Source: Company Reports, ReNaissance Research estimates

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The liquidity position of the company particularly Management of credit sales has been conser-
in 2009 as seen from the average ratio during the vative, a trend we hope will be maintained
period from 2006-08, worsened. going forward.
Figure 7:Working capital ratios

2006-2008* 2009 2010e 2011e 2012e

Valuation and Outlook;
Quick Ratio 0.58 0.44 0.58 0.75 0.87 The business risk points to a grim picture for
Liquidity Ratio 0.66 0.52 0.66 0.83 0.92
the company in the immediate future. We are
nonetheless confident that beyond 2012,
NCA/Equity 1.11 0.85 1.00 1.05 0.97
growth will reflect the capital investments
Source: Company Reports, ReNaissance Research estimates. that the company has made in the new opera-
* Average
tion at Kamonkoli.

Level of gearing will remain almost unchanged as We have arrived at a target price of UGX
seen above from the Net Current Assets (NCA)/ 14.7 per share based on a 10-11% p.a. sus-
Equity ratio, which will be combination of two tainable growth in free cash flows to eq-
factors; 1) Increasing long term liabilities/debt uity.
which is necessary to reduce pressure from short
term liabilities, 2) Slowly growing the equity of
the company through retained earnings, which Assumptions:
could imply no dividend payments before 2012. The required return on equity of 27.9%
reflects the business risk of the company,
which we noted has doubled. This is particu-
Improvement in working capital management will
larly because of the debt assumed by the
be critical in limiting the short term strain on the
company, to which equity is subordinate;
company. Emphasis should be placed on receiv-
ables turnover that worsened from an average of
8.98 to 7.83 in 2009. Our forecast depicts a grad- Strong performance in revenues and cash
ual improvement. flows will be realized after 2012, a time we
believe that the company can sustainably
Figure 8: Working capital management estimates
perform at that level. The estimated sustain-
able growth of 11% in cash flows can be re-
2006-2008* 2009 2010e 2011e 2012e alized.
Inventory Turnover 3.33 2.58 2.32 2.36 2.45
Receivables Turnover 8.98 7.83 7.87 7.97 8.67
Discounted free cash flows to equity
Payables turnover 2.84 1.65 1.60 1.77 1.80
defined the cash flow valuation basis. This
Source: Company Reports, ReNaissance Research estimates. offers the most conservative valuation of the
* Average company’s equity given the debt position

Efforts by management to demonstrate a strong

regional and local demand for the product can As a result of these three factors we advance a price
only be reflected in higher inventory turnover of UGX 14.7 as fair value for the company in the me-
which however seems stagnant from our forecast, dium to long term. At the current price of UGX 50,
going into 2012. the company is trading at a huge premium.

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Risks and Concerns The roofing market should remain highly

competitive with imported alternatives eroding
We still remain skeptical about the ability of
market share. There are cheaper substitutes
the company to sustain profitability in the short
to medium term. This is primarily as a results now coming from as far as China;
Financial obligations that the company has A wider distribution network and logistical
assumed which place an interest burden on op- infrastructure to reach a diverse market may
erating profit. The company has taken steps to disproportionately increase the company’s op-
secure long term funding from the largest erating expenses if not well managed.
shareholder National Social Security Fund
(NSSF). This will ease the strain on the com-
pany’s cash flows in the short term and reduce
profitability erosion;

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Figure 9: Financial statements and forecasts and ratios

Income Statement Summary

2009 2010e 2011e 2012e
Sales 16,722,124 20,679,693 26,194,277 34,052,560
Cost of Sales (9,975,577) (11,580,628) (14,406,852) (18,047,856)
Gross Profit 6,746,547 9,099,064 12,049,367 16,004,703
Other income 145,298
Operating costs (5,348,520) (5,169,923) (6,548,569) (8,513,140)
EBIT 1,543,325 3,929,141 5,500,798 7,491,563
EBITDA 4,237,334 6,628,779 8,281,685 10,288,962
Interest expense/Finance Cost (2,322,069) (2,606,135) (2,917,453) (3,440,000)
Net Profit (707,099) 926,104 1,808,341 2,836,094

Balance Sheet Summary

Non Current Assets 50,320,298 53,993,629 56,423,342 58,680,276
Current Assets 7,141,346 9,159,845 11,449,806 14,083,262
Total Assets 57,461,644 63,153,474 67,873,148 72,763,537
Non Current Liabilities-Debt 20,164,671 24,701,903 27,648,106 28,256,699
Current Liabilities 13,619,320 13,847,813 13,812,944 15,258,645
Equity 23,677,653 24,603,757 26,412,098 29,248,192

Cashflow Summary
CFO 4,518,128 348,082 5,990,417 4,909,305
FCInv 6,560,261 5,113,755 3,994,096 3,583,227
FFCF (416,684) (2,941,376) 4,038,538 3,734,078
FCFE (757,500) (2,432,044) 1,919,249 1,945,184

Ratio Analysis
EBITDA Margin 25.3% 32.1% 31.6% 30.2%
EBIT Margin 9.2% 19.0% 21.0% 22.0%
Net Margin -4.2% 4.5% 6.9% 8.3%
ROE -3.0% 3.8% 6.8% 9.7%
ROA -1.2% 1.5% 2.7% 3.9%
Liquidity Ratio 0.52 0.66 0.83 0.92
NCL/Equity 0.85 1.00 1.05 0.97
NCL/Total Assets 0.35 0.39 0.41 0.39
Source: Company Reports, ReNaissance Research estimates. Figures in ‘000

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Equity Research-New Vision Group;

Investment rationale and risk;

After a dismal fiscal year (FY) performance for 2008/9,
the most recent results demonstrate improving earnings MULTI-MEDIA
quality and a slowly improving operational environment.
The economic outlook for the media industry nonetheless still
remains gloomy in the medium term. It is estimated that the
company will take 2-3 years to reach optimum revenue generat- Recommendation: SELL
ing capacity following the over UGX 27 billion rights issue in Target Price (UGX) 292
2008. The company’s earnings are still lagging its asset base. Current Price (UGX) 550
Two Year High 2480
There is pressure to boost Return on Equity in the short Two Year Low 440
term. The company achieved a 1.5% ROE in 2009/10, less than
a tenth of the 2008 ROE of 23.3%. Our forecast for 2010/11
shows that ROE will remain largely unchanged.
Shares in issue (000) 72,500
Market Cap (UGX 000,000) 40,162
Reducing advertising revenues due to a preference for Float (UGX 000,000) 1 8,75 5
price wars amongst the traditionally largest advertises (the Float (USD 000) 8,154
telecom companies) continue to plague the media industry .
Industry projected growth is at a mild 5% according to market
consensus in the media industry based on the 2009 industry per- PE (Trailing) 54.7
formance. Though inflation in the broader economy has re- PEG: 5.07
duced, the company’s underlying performance is expected to EV/MKT CAP: 1.54
improve in the medium term.

Currently trading at UGX 550, up from UGX 460 a year

ago (a 19% increase), the counter seems to be in a recovery.
Major Shareholders (Percentage)
Nonetheless this does not reflect the fundamentals of the
company and the media industry. Earnings and dividend
should grow at 20% in perpetuity in order to justify the Government of Uganda (GOU) 53.3
current price level, much higher than the current projected
growth rate of 2-3%.

A value of UGX 292 reflects the tough operating environ-

ment the company is in. We have used a combination of rela-
tive valuation and discounted earnings. Using Net Operation
Profits after Taxes reflects better the Return to Equity, as the
company employs insignificant debt and capital expenditures
are pre-funded. Coming from a low base in 2009, the funda-
mentals of the industry will gradually improve in the short
to medium term as the economy gets more competitive. We
nonetheless recommend SELL.

ReNaissance Capital Limited 16


Looking at the price behavior of the counter Figure 10 , there Key fundamental risks;
seems to be a recovery in the price that remains divorced from
The company invested
required and expected levels of growth both the company and
heavily in multi-media
the industry can sustain. (television, radio and expanded
printing capacity) Growth in
Figure 10: Historical price performance on NVL counter revenues for the media industry
have shrunk particularly as
UGX result of low advertising spend
3000 and fragmented media markets.
This directly affects growth in
the company’s revenues.
1000 High operating costs rela-
tive to revenue generated against
a high capital investment, will
0 define the next earnings phase of
the company. Management is
keenly aware of the need to fo-
Period cus on cost rationalization, so as
to improve earnings;
Source: Uganda Securities Exchange (USE)

According to a 2009 Uganda Category Review by Synovate, ad- Drivers of value:

vertising revenue grew an approximate 14% in 2009, supported
An expanded media plat-
by particularly the Telecom industry. For the year 2010, the tele-
form guarantees access to differ-
com industry was more focused on price wars and their advertis-
ent market segments across the
ing spend slowed markedly. Industry experts contend that
country, simultaneously. This
growth shrunk to 5% on a pessimistic scenario to 10% on an op-
will prove crucial in promo-
timistic scenario.
tional campaigns across the
Overall, Vision Group has over the past five year earned at least
50 % of its revenue from print media. Print media only contrib-
The capital structure of the
utes 11% of the total industry revenue (Figure 11), of which
company implies a minimal or
Vision Group has a market share of 30% by optimistic standards.
no exposure to financial risk.
Figure 11: Showing total revenue share by media segment This has given management lati-
tude to create long-term value
from the current expansion.

TV, 22%

Radio, 67% 11%

Source: Synovate 2009, Category Review Presentation

ReNaissance Capital Limited 17


In an effort to capture revenue streams across the We agree that the expansion of equity base was
board, the company has made the commitment to a result of the 2008 Rights Issue. Nonetheless
expand in radio and television. These are none- the Du Pont analysis below demonstrates that
theless high capital investment venture that do not the reduction in ROE was more a result of a
translate immediately into profitability. Worse drastic change in profitability and asset effi-
still, radio remains a highly segmented sector, ciency.
with very diverse audiences.

Figure 13: Du Pont analysis of ROE trends

The return on these investments will remain low 2007 2008 2009 2010
in the short to medium term as operating costs
shrink the margin. We are nonetheless confident Net Margin 10% 12% 5% 1.47%
that from 2013 and beyond the company can Asset Turnover 1.53 1.45 0.78 0.84
achieve 11% return on invested capital (ROIC).
Leverage 1.287 1.328 1.139 1.24
ROE 20.4% 23.3% 4.5% 1.53%
Return on Equity (ROE) Source: Company Reports, ReNaissance Research estimates

Equity is the preferred mode of financing for the

company. The average equity to debt for the four The asset efficiency as measured from 2008,
year period (2009-2006) stood at 92:8. The cur- has dropped an estimated 42% and the profit-
rent ratio is up at 97: 3 as seen in 2010. The sta- ability margin is down 10.5%. Management
bility in the capital structure for the company has noted the difficult environment for industry
places a high premium on the return on equity revenue going into 2011 though they contend
(ROE) as a fundamental measure of performance that the economy will be more competitive in
for the company. The company achieved a paltry 2012, thus boosting advertising revenue.
1.53% in 2009/10, with an immediate forecast for
2010/11 showing a similar performance.
The cost profile for the business over the
period 2007-2010 depicts a high cost environ-
ment. The table below shows that administra-
Figure 12: ROE trend shows a marked decline tive costs have increased fastest over the period
at CAGR 20%. Revenues in the same period
realized a CAGR of 15% This depicts a costly
ROE media integration process. Distribution costs
25.00% 23.30% and cost of sales will remain aligned to infla-
20.40% tionary trends in the broader economy, and the
20.00% 18.45% expectation is that they should take a down-
ward trend in the medium term.

Figure 14: Operating cost profile.


5.00% 3 Yr
1.53% 2007 2010 CAGR
Cost of Sales 21,494,649.00 35,606,222.00 18%
2006 2007 2008 2009 2010
Distribution Costs 871,253.00 1,157,785.00 10%
Source: Company Reports, ReNaissance Research estimates
Administrative 5,851,996.00 10,077,477.00 20%

. Source: Company Reports, ReNaissance Research estimates

ReNaissance Capital Limited 18


Management has noted that cost containment will Relative valuation compare the company
drive the strategic direction of the company while to regional multi-media companies, Nation Me-
at the same time boosting revenue by maintaining dia Group and Standard Group. The ratios
incremental investments in the most productive which in our opinion demonstrate comparable
segments of the media industry such as mass tele- circumstances are; Sales-to-Assets, Enterprise
vision and regional radio stations. Value to Sales, Price to Sales and Enterprise
Value to EBITDA;

Valuation Methodology;
Sales figures are based on FY forecasts for
most recently released HY figures Asset fig-
We have used a combination of discounted opera- ures are based on most current released figures
tions earnings after tax and relative valuation to for either company i.e. Vision Group: Decem-
reach an intrinsic value for the company. ber 2009; NMG and SG : June 2010;
Reliance on NOPAT (net operating profit We combine a weight of 0.3:0.7 with a
after tax) as a valuation metric is as a result of bias for discounted NOPAT because ROE is a
high prefunded capex expenditure through the crucial metric for the performance measure-
Rights Issue. NOPAT closely reflects the return ment as literally the sole source of capital.
on equity, should the level of debt remain low.
The tax rate is 30%.

We estimate that ROIC (return on invested

capital) should reach a decent level of 11% in the
long term (2013), a weighted average cost of
capital of 23% and the long term sustainable
growth justified from payout ratios and ROE at

Figure 15: Relative and Summary Valuation

PBV Sales/Assets EV/Sales P/Sales EV/EBITDA Total Prem/Dist.

Nation Media Group 4.68 1.59 2.72 2.87 11.43
Standard Group 4.89 0.96 1.45 1.08 7.09
Vision Group 0.82 0.83 1.30 0.85 15.75
Average 4.79 1.28 2.09 1.98 9.25
Discount/Premium -82.94% 53.49% -37.59% -57.27% 70.09% -10.84%

Price Weight Effective Price

Relative Price 581.92 0.3 174.58
DNOPAT 167.97 0.7 117.58
Total 292.16
Source: USE, NSE, Company Reports, ReNaissance Research estimates

ReNaissance Capital Limited 19


Though we have a minimal discount on the relative valuation, the inclusion of ROE and PE as comparative
ratios shows that the company is trading at significant premium to its intrinsic value. We have excluded these
ratios in the relative valuation as the company grapples with a high cost environment in the value addition drive
to grow the media platform, which differentiates it from industry competition. As mentioned though, we as a
result, bias the valuation weight towards discounted earnings

The combined valuation yields a target price of UGX 292 places a significant premium vis a vis the current
trading price of UGX 550. We recommend SELL at the current level for NVL as the prevailing earnings are
expected to catch up with the company’s large asset base in the medium to the long term.

Figure 16: NOPAT forecast:

2010 2011e 2012e 2013e

Revenue 49,947,578 54,275,966 61,753,331 67,928,664
Cost of Sales (35,606,222) (37,762,927) (41,767,015) (45,943,717)
Gross Profit 14,343,366 16,513,039 19,986,315 21,984,947
Other income 869,174
SG&A costs (12,674,703) (14,096,339) (16,124,554) (17,689,586)
EBIT 2,537,837 2,416,699 3,861,762 4,295,361
Finance Costs
NOPAT 1,776,486 1,691,690 2,703,233 3,006,752

Source: Company Reports, ReNaissance Research estimates; figures in ‘000

ReNaissance Capital Limited 20


Equity Research-Banking Sector;

Investment rationale and risk: FINANCIAL SERVICES SECTOR

The financial services sector was the fastest growing sector

as at fiscal year 09, with a registered 21.1% growth from SBU
the. Only Transport and communication was close at 20%. The
sustainability of the growth can be maintained in an environ-
Recommendation HOLD
ment that continues to innovate around the opportunity of low
Target Price (UGX) 238
penetration in the sector. Current Price (UGX) 280
2 Year High 280
2 Year Low 115
Commercial bank assets over a 5 year period (FY04-FY09) Shares in issue (000) 5,118,867
have registered a CAGR of 20%. Loans and advances in the Market Cap (UGX 000,000) 1,228,528
Float (UGX 000,000) 245,706
same period advanced 30% with recent growth being the major Float (USD 000) 111,684
contributor as banks move out of more traditional asset building Float (%) 20
strategies in government treasuries to retail credit according to
PE (forward) 18.79
BOU statistics.

This impressive growth despite a turbulent period in the global

financial sector, remains unabated. The sovereign rating for
Uganda was upgraded to a B+ stable, the highest in the EA
region according to the Standard and Poor’s rating (Figure Recommendation HOLD
17). The industry end of year 2009 capital adequacy ratio (Total Target Price (UGX) 928
qualifying capital/Risk Weighted Asset) was at 21.05% against Current Price (UGX) 870
2 Year High 870
a requirement of 12% by Bank of Uganda, according to BOU. 2 Year Low 420
Figure 17: Comparative Sovereign Ratings Shares in issue (000) 248,600
Market Cap (UGX 000,000) 200,124
Country Domestic Foreign Float (UGX 000,000) 40,024.8
Float (USD 000) 18,193
Botswana A A- Float (%) 20
Egypt BBB- BB+
PE (forward) 9.58
Ghana B B
Kenya B B
Nigeria B+ B+
South Africa A+ BBB+ BOBU
Uganda B+ B+

This leaves tremendous room for the banking sector to absorb Recommendation BUY
credit risk overall. Target Price (UGX) 956
Current Price (UGX) 800
2 Year High 1160
Customer demand deposits define the source of funding for the 2 Year Low 275
Shares in issue (000) 400,000
sector which has generally reduced the cost of funds (that stood Market Cap (UGX 000,000) 176,000
at 3.62% at the end of 2009 compared 3.33% in Kenya). Deposit Float (UGX 000,000) 35,200
gathering and retention will be a major concern for new entrants Float (USD 000) 16,000
and established banks respectively. Overall shrinking interest Float (%) 20
margins and asset issues of lower asset quality should arise from PE (forward) 16.43
the competitive environment.

ReNaissance Capital Limited 21


Industry Overview: Key drivers of future growth;

The banking industry stands on the threshold of great opportu-
nity in spite of past growth figures. A surging working and edu-
Retail banking remains a
cated population, resource discovery particularly in oil and gas
key source of growth and expan-
sector and the strong need for infrastructure financing stand out
sion. Established banks plan to
particularly. grow their product range so as to
retain deposits while new en-
During the period FY04-FY09, credit grew annually at 30% trants will expand consumer/
while assets and deposits registered a 20% growth in the same retail credit to attract deposits;
period (Figure 18) This represents a strategic shift away from a
safe banking model (investing in government securities) to a
Trade finance, which had
more aggressive approach of credit. The loan to deposit ratio at
the lion share of private sector
66.4% (Dec 2009) shows that there should be more room for ex-
credit as at June 2009 (20.6%) is
pansion to a comfortable 80%. Kenya stands at 70% and South
fast becoming a growth center
Africa at 101% according to respective central bank data for established commercial

Figure 18: Deposit, Loan and Asset trends…

UGX Billions
Quality of credit has
6,000.00 declined in the recent past and
5,000.00 yet if the sector is to grow
4,000.00 strongly it must expand to non-
3,000.00 traditional models of banking;
- Cost of funds is set to rise
FY04 FY05 FY06 FY07 FY08 FY09
as banks seek longer term funds
Deposits Loans and Advances Assets through time deposits or more
expensive demand deposits.
Source: BOU This will impact on profitability;
The case for expansion is further compounded by a largely
unlevered sector (Figure 19), which depends on low cost funds Competition for deposits on
in the form of deposits to fund liabilities. In comparison to the liabilities will undermine equity
Kenyan economy shows that the Ugandan banks still have room bases and ability to lend and
to boost credit as a percentage of assets and at the same time thus future growth
gather deposits so as to reduce cost of funds.

Figure 19: A highly unlevered sector

The recent Bank of Uganda
increase in minimum capital is
Leverage Ratio Kenya Uganda likely to spur corporate activity
Loans: Assets 0.54 0.43 (rights issues and bank consoli-
Loans: Deposits 0.70 0.66 dations) in the sector.
Deposits:Liabilities 0.90 0.77
Source: Central Bank Data (respective countries)

ReNaissance Capital Limited 22


Figured 20: Private sector Credit profile

Jun-07 Jun-09 Jun-07 Jun-09
Sector Credit (UGX Billions) 2 Yr CAGR Percentage of Total
Agriculture 121 163 15.7% 6.8% 4.5%
Building and Construction 112 415 91.9% 6.2% 11.4%
Manufacturing 257 549 46.1% 14.3% 15.2%
Mining and Quarrying 44 11 -50.7% 2.4% 0.3%
Trade 284 747 62.0% 15.8% 20.6%
Transport & Energy 119 233 40.2% 6.6% 6.4%

Other services & Personal 864 1504 31.9% 47.9% 41.5%

Total 1803 3622 41.7% 100.0% 100.0%
Source: BOU, ReNaissance Research

Retail banking has become more competitive. Figure 21: Low penetration indicating that a huge
Banks with large branch networks, wider plat- quantity of economic output is informally financed...
forms and product ranges are likely to be more
profitable. The extension of branches as well as
14% Private Sector Credit/GDP
more efficient operations such as ATM’s and 12.3%
internet banking should define the next invest- 12%

ment phase for the sector. Personal loans and 10%

other services as a percentage of total credit as at 8% 7.2% 7.2%
June 2009 was 41.5%. Although this is a general 6%
allocation, it depicts the growing importance of
personal loans from formally employed workers, 4%

to bank balance sheets (Figure 20). 2%

2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9
Business banking tailored to the informal and
Source: BOU, ReNaissance Research
SME sectors is also a huge growth area. The
credit profile as at June 2009, depicts a lion share
of total advances to a single sector, trade, which
defines the major economic activity of the SME Figure 22: The deposit base, that is largely short term
sector. At 20.6% of total advances to the private also has room to grow
sector it comes second to personal loans and other
services (Figure 20).
While these growth figures and opportunity show
20.0% 17.8%
great promise, the level of penetration in the 15.7% 15.9% 16.4%

sector has remained stubbornly stagnant after a 15.0%

surge in 2007 (Figure 21&22). Private sector 10.0%

credit and deposits to GDP stood at 12.3% and
25.9% respectively as at end 2009. In Kenya as at
June 2010, the figures were 32.5% and 47.8% re- 0.0%
2003/4 2004/5 2005/6 2006/7 2007/8 2008/9
spectively. This indicates significant room for
growth in the Ugandan banking sector and im- Source: BOU, ReNaissance Research
proved performance. Also the recent advent of the
Credit Reference Bureau addresses issues of asset

ReNaissance Capital Limited 23


Figure 23: Asset share for selected top banks as at 2009 Figure 24: Deposit share for the top banks as at 2009

0% 5% 10% 15% 20% 25% 0% 5% 10% 15% 20% 25% 30%

Stanbic 22% Stanbic 25%

Standard Chartered 15% Standard Chartered 15%

Barclays 12% Barclays 14%


Crane 7% Crane 7%


Baroda 5%
Baroda 4%

Figure 25: Loan and Advance share of the top banks as at Figure 26:Wide margins between deposits and lending
2009 rates

0% 5% 10% 15% 20% 25% 30%
Stanbic 25%
Standard Chartered 15% 15

Barclays 12% 10

Crane 6%

















Baroda 4%
Demand Deposits Time Deposits Lending Rates

Source for All: BOU, Sector Data & ReNaissance Research

The competitive structure further hinders the While the opportunity to expand the sector exists,
level of penetration of the sector. The top three our view is that the traditional banks will be bent
banks controlled 50% of the market as at end of on attracting deposits through increasing customer
2009 (Figure 23-25). They have the largest plat- convenience through services like ATM’s, inter-
forms (branches and ATM’s) to attract and retain net banking and mobile banking
customer deposits.

By implication, the smaller banks will have to in-

With three banks controlling 50% (measured by vest heavily in similar platforms so as to attract
assets, loans and deposits) of the market space, deposits. In the medium to long term, deposit
the room to innovate and expand within the tradi- competition will be fierce and banks will need to
tional banking model so as to access the offer attractive yields for longer term deposits,
unbanked may require extensive capital invest- shrinking net interest margin (NIM) in the proc-
ments in the sector. ess. Though the industry as a whole still benefits
from wide interest spreads (figure 26)

ReNaissance Capital Limited 24


We anticipate downward pressure on lending rates Another possible and very likely scenario is
as yields, particularly on time deposits, increase, the consistent rise of the risk appetite in the
shrinking net interest margins. The Ugandan sector. In the expansion of retail and SME
banking sector has comparatively higher rates in credit, the sector is likely to face worsening
the region and competition from particularly Ken- performance of loans. The banking sector has
yan and Nigerian banks should be a major factor quite an impressive latitude on risk, an industry
in shrinking net interest margins (Figure 27) capital adequacy

Figure 27: Comparative rate spread (Tier 1 & 2) ratio at 21.05% against a BOU
Uganda Kenya Nigeria requirement of 12%. However the provision
Deposit Rate 2.35 3.59 4.63 for non-performing loans (NPL’s) has shown a
recent upward surge, even among the more es-
Lending Rate 20.14 13.87 15.74
tablished banks
Source: Central Bank Data (respective countries)

2010 was characterized by very low treasury bill Increasing provisions quarter-on quarter in
interest rates. The results of banks with significant 2009 is evidence of generally falling asset
funds in this asset class, which did not respond by quality. The ratio of NPL/Gross loans stood at
increasing loans & advances, are likely to be ad- 4.1% in 2007, then reverted downwards to
versely affected. The 2011 inflation outlook is 2.1% in 2008 before closing 2009 at 4.2%. The
expected to revert to double digit percentages in Kenyan economy in the same period moved
view of the high oil prices, over 17% devaluation from 10.5% to 9.0% and then 7.8% as at end of
of the UGX to the USD and increased liquidity in 2009, according to Central Bank of Kenya
the economy following the election period. Bank data. This has been on the back of credit to
of Uganda is therefore very likely to react by sig- retail and SME sectors. Increasing provisioning
nificantly increasing treasury bill interest rates in will, in the long term, affect the NIM.
order to mop up the excess liquidity and control
inflation and further devaluation of the UGX,
which will now greatly favour banks with signifi- We are however particularly attracted to the
cant exposure to treasury bills. overall conservatism in the sector. Capital ade-
quacy ratios represent a wide margin through
which the banks can and should take on more
In the medium term, the profile of funding re- risk. The change in the asset mix for the sector,
mains very attractive, deposits represent 78% of from risk free government securities to more
the sector liabilities of which demand deposits are risky asset classes (loans) will proceed with
approximately 70%. This placed the cost of de- caution.
posits to an average of 3.62% in 2009 which
compares reasonably with Kenya at 3.3%.
However as interest rate risk rises, other sources
of funds like debt and equity should come into

ReNaissance Capital Limited 25


Box 3: Summary factors showing strategic and competitive position

Strengths and Weaknesses

We assume the bank will maintain a sustainable impressive growth of 14.7% in income and the highest
ROE in the industry which has averaged 42.1% over the past three years. With the lowest cost of funds at
1.39%, the bank should maintain market leadership

The bank has the largest platform through which to serve and reach customers of different categories.
Stanbic Bank Through ATM’s alone the bank can provide the greatest outreach through card services that greatly reduce
Target Price: UGX 238 operating costs and are a huge growth center for the banking industry;
The bank has to move out of traditional and comfortable sectors of asset growth, i.e. government treasuries
and corporate lending. Retail credit and SME lending are fast becoming the mantra of the sector’s expan-
sion yet remain more risky banking areas;

Impressive branch expansion and deposit growth for the bank have been key to the growth of the bank and
establishing its brand in the industry;

Investment in the new IT system should give the bank the opportunity has increased efficiencies across
banking operations and enabled the bank initiate new products and services;

DFCU Bank The bank should continue to achieve an ROE of 26.8% upwards which is higher than industry average of
Target Price: UGX 928 18.9% in 2009. Sustainable growth in earnings should remain an impressive 16% over the short to medium;
The bank has a high cost of funds at 5.7% against an industry average of 3.6% in 2009. The bank has made
an extensive investment in branches to reach more deposits as confirmed by management;

The bank has no regional footprint, and should have challenges taking advantage of opportunities in cross
border transactions

This has been a largely ignored bank in the equity market despite impressive ROE at 24% upwards and an
impressive sustainable growth in earnings at 17%. This is comparable to its peers is asset size such as
DFCU Bank;

Bank of Baroda There is a move to replicate rural banking models as in India, so as to extend reach and boost customer
Target Price: UGX 965 deposit bases. These are expensive ventures but a step in the right direction for long term growth;
Customer niche among the SME or the Business banking segment. This is mainly characterized by trade
finance (largest private credit center) that the bigger banks are just getting the hung of;

Conservativeness of management; Baroda ranked second on capital adequacy in 2009 with a ratio of

High cost of funds at 5.4% implies extensive effort to collect deposits, which will prove costly.

Small Brach network

ReNaissance Capital Limited 26


Valuation Continuation: DFCU has consistently delivered on achieving

lower cost funds through deposits attraction.
In a continuation of our valuation on the bank-
The bank still has a upside potential. DFCU
ing sector (A Banker’s Economy, 20 May 2010)
bank is now poised to obtain the full benefits
we would contend that there has been an im-
of its newly installed Finnacle system, which
provement in the medium term prospects of the
should see improved utilisation of customer
banking sector. The particular banks we shall
review in concluding this report are Stanbic deposits to further drive increase earnings
Bank (USE:SBU), DFCU Bank (USE:DFCU) At the current level we maintain DFCU as a
and Bank of Baroda (USE:BOBU). HOLD in the short to medium term with a tar-
get price of UGX 928.

Our basic assumptions in arriving at our con-

clusions are; Bank of Baroda is a strong though risk averse
performer. Despite a conservative dividend
The banks will maintain robust dividend
policy and smaller branch network, our recom-
policies that will mirror their past 4-5 years
mendation for Bank of Baroda is further sup-
ported by the following;
The banks can maintain sustainable levels
of growth given the low level of penetration in
Uganda and opportunity in retail and SME sec- Faster growth in loans and advances (the
tors for financing; key banking sector revenue driver) relative to
her peers, an indication of increased aggres-
Banking peers in Kenya are a relevant
sion. Between 2007 and 2009, their loans and
benchmark for a relative valuation of these
advances grew at an annualised rate of 32%
(52% from 2009HY-2010HY) as compared to
Cost of equity (COE) has reduced from DFCU’s and Stanbic’s which grew at 19% and
21% to 18.8% as a result of a much controlled 39% respectively over the same period. Over
single-digit inflationary environment; the same period, customer deposits for Bank of
Our COE for DFCU and BOBU stands Baroda, DFCU and Stanbic grew at 25%, 43%
2.5% higher at 21.3% as a result of higher cost and 17% respectively. The 2009HY-2010HY
of funds for these banks; growth for all three banks was 30%, 48% and
45% respectively.
DDM model has weight of 0.6 and RV has
a weight of 0.4. For BOBU the weight is 0.3 to
0.7; DDM:RV because of BOBU’s low divi- At a cost to income ratio of 34% for
dend payout. Over the last 5 years, SBU, 2010HY,( an average of 34% from 2008-2009)
DFCU and BOBU had payouts of 68%, 40% BOBU is more competitive that DFCU and
and 22%, respectively. SBU whose cost to income ratios over the
same period was 59% and 55% respectively
(against a respective average of 57% and 49%
Stanbic the biggest bank in the sector has a from 2008-2009)
massive advantage in attracting and retaining
the lowest cost of funds in the sector. We
maintain SBU as a HOLD in the short term We recommend ACCUMULATE for Bank of
with hindsight that earnings growth has slack- Baroda in the current market environment.
ened, following the profit warning. Nonethe-
less the growth in the banking sector should
overcome the headwinds of the 2008-2009
volatility in the economy. Over the medium
term investors should find value in the bank.

ReNaissance Capital Limited 27


Figure: 28: Selected comparative ratios in the banking sector

Industry Stanbic Bank DFCU Bank Bank of Baroda

Return on Average Assets 3.0% 5.7% 3.5% 4.3%
Return on Equity 18.9% 45.1% 24.7% 23.7%
Net Interest Margin 10.5% 13.0% 9.0% 8.1%
Cost of Deposits 3.6% 1.4% 5.7% 5.5%
NPL/Gross Loans 4.2% 1.7% 3.6% 0.9%
Total Qualifying Capital/RWA 21.0% 18% 20% 36.3%
Source: Industry Data, Company results, ReNaissance Research Estimates (Figures as at 2009)

ReNaissance Capital Limited 28


Equity Research-BAT Uganda;

Investment rationale and risk:

Since our last report on the company in October 2008, we
viewed the return to profitability as a realistic possibility. MANUFUCTURING-TOBACCO
Management strongly stressed the importance of mitigating risk
within the value chain. The key risks at the time were weak
Recommendation LIGHTEN
relationships with the farmers and illicit trade in the cigarette Target Price (UGX) 1310
market. Current Price (UGX)* 1740
Two Year High 1740
Two Year Low 250
Looking closely over the period, it is quite impressive that the
company has retuned to operational profitability announcing a
dividend per share (DPS) at year end 2009 of UGX 56.7 and an
interim DPS of UGX 70 in 2010. Cash flows have in the re- Shares in issue (000) 49,080
Market Cap (UGX 000,000) 34,365
cent period maintained a positive level and all indications we Float (UGX 000,000) 3,463.5
are that this will continue in the medium to long term. Float (USD 000) 1,573
Float (%) 10

Leaf Processing has recently become a key driver of perform-

ance with margins of 19% in 2009 against 5% for Cigarette Dis- PE (forward) 10.67
PEG: 0.75
tribution in the same period. Cigarette distribution margins EV/MKT CAP: 1.43
are eroded by high excise duty and a costly distribution net-
work. This logistical challenge in the distribution chain
should remain a medium to long term concern.

Major Shareholders (Percentage)

This increases the pressure of the company to facilitate the
farmers network to make a sustainable contribution to leaf vol-
umes year on year. Management's target of upwards of 20 British America Tobacco 70
million Kgs of leaf sales a year, though achievable, has actu- Investments Ltd
ally hovered between 14-19 million Kgs a year. As much as
leaf processing and export remains an important source of prof-
itability, it poses great risk in the form of weather vagaries that Precis 1970 BV 20
could reduce quality, and unstable relationships with the farmer
network which could affect supply.

Despite these risks, we have a good impression of the restructur-

ing the company has been going through since 2007. The busi-
ness model in its present form can continue to deliver an opera-
tional profit for the company in the medium to long term. Pro-
ductivity as reported by management was up 15% in 2009
particularly on the back of more efficient leaf processing

*The counter had an average trading price

of 882 in 2010.

ReNaissance Capital Limited 29


In response to a highly uncertain business environment the his- The fundamental drivers of growth
torical price performance on the counter had long moved down- are;
wards in 2008-2009 (Figure 29) Intense investor aversion to a
non-dividend payment regime, coupled with thin liquidity (only Increased productivity in the
10% free float) was principally the cause. This has only recently leaf processing unit as replace-
reverser in 2010 to a high of UGX 1740. ments of machinery was
achieved in 2009. We are confi-
dent that going forward the com-
Figure 29: Historical Price performance to-date pany should achieve upwards of
20 million Kgs of leaf sales,
which is necessary to maintain
2000 operational profitability;
Stronger relationships with
1000 farmers through farm inputs and
800 guaranteed tobacco market
600 should ensure a consistent sup-
ply of quality leaf. Management
0 has shown willingness to
30-Dec-07 30-Dec-08 30-Dec-09 30-Dec-10 strengthen these relationships;

Source: Uganda Securities Exchange

Key Risks;
The company recently suf-
The summary valuation of the company uses a combination of fered a loss of 2 million Kgs of
free cash flows to equity, a prediction of dividend payments and leaf, meant for export in a fire.
relative valuation. Our target price is UGX 1310. The stock is This represents 11% of annual
currently trading at UGX 1740. The average trading price for production and could impact on
2010 was UGX 880, despite the close on a high. We recom- profitability in the short term
mend LIGHTEN as a result of a sharp upwards price move-
ment in the recent past. Profitability of the business
is dependent on a functioning
farmer model that is highly
Segment Performance;
prone to unstable relationships;
The business model of the company is built around two seg-
ments;- leaf processing and cigarette distribution. As early as
2007 the strategy was to move away from cigarette manufactur- Weather vagaries could
ing into processing high quality leaf for distribution within the affect leaf supply in a single sea-
group. son drastically affecting profit

On the cigarette distribution side, the company promotes pri-

marily what it refers to as Global Drive Brand. These identify Cigarette distribution is af-
with consumers the world over and enables the company sale to fected by illicit trade, high ex-
an international market from a local setting. cise duty and increasing distribu-
tion costs. These factors should
continue to depress margins of
this segment.

ReNaissance Capital Limited 30


Both segments have an equal importance in terms While cigarette distribution has the potential
of revenue contribution to the company (Figure for high growth, particularly among newer
30) . The ratio has averaged 52:48 over the last 5 brands, the company has no control over excise
years in favor of cigarette distribution. Thus reve- duty and yet distributions costs will remain a
nue performance on both fronts is critical for the challenge. This operating cost environment im-
business model to remain sustainable. plies a lower margin segment. The distribution
segments is also challenged by illicit trade that
shrinks market share.
Figure 30: Revenue contribution as a percentage of total

In our estimation, leaf exports should be a
highly profitable segment though single period
60.0% 55.8% 55.5% 55.9%

52.1% effects could imply a loss making period for
44.2% 44.5% 44.1% the company. Cigarette distribution is a more
40.0% stable operating segment, though on its own,
30.0% the company cannot remain profitable in the
20.0% long term.

0.0% Our view is that management is able to miti-

2009 2008 2007 2006 2005
Cigarettes Tobacco Leaf gate the risk that could lead to an operating
loss in the leaf segment. Over the medium
Source: Company Reports term, working with this business model, well
managed farmer relationships can be counted
From the HY2010 performance figures, the com-
on to deliver a sustainable supply of quality
pany noted that revenue was primarily driven by
leaf exports as a result of higher than usual inven-
tory in that segment. Our optimistic forecast for
the company in 2010 is primarily driven by ex- Figure 31: Operating margin comparison
pectations of good performance in this segment.
The leaf segment though erratic as seen from the
15.00% 11.32%
margin movements (Figure 31), is critical to the 10.00%
9.23% 10.21%
5.55% 5.53%
overall profitability of the company. This was 5.00%
5.10% 4.71%

mainly as a result of a weak farmer network and 0.00%

weather vagaries. An operating profit in the leaf -5.00% 2009 2008 2007 2006 2005
segment delivers an expected profit for the overall -10.00%
company. This has been the trend since 2007, as is -15.00% -11.37%

the strategy that defined the process of restructur- -20.00%

ing the business of the company. -24.87%

Cigarettes Tobacco Leaf

Reinforcement of relationships particularly with
farmers through providing inputs and value chain Source: Company Reports
support, the company can guarantee upwards of
20 million Kgs of leaf a year in sales at a risk of
farmers opting to sale their green leaf to compet-
ing firms. Furthermore improvements in leaf proc-
essing equipment has boosted productivity by
15% in 2009 as reported by management.

ReNaissance Capital Limited 31


A resumption of dividend payments going

Valuation: forward. This is a highly risky assumption we
In arriving at our valuation of the company, as- have therefore accounted for with a cost of eq-
sumptions were made about the company’s sus- uity of 24.8%. We assume a long term payment
ceptibility to wide seasonal variations in earnings. ratio of 50% and sustainable growth rate in
dividend at 9.9%;

Our model returned a discount at the current trad-

ing price on all counts. We assumed:- In establishing free cash flows to equity
assumptions about working capital could differ
from reality. This is mainly as a result of over-
A lower inflation level at 5.5% and a GDP reliance on working capital in a light fixed as-
growth rate of 6%. The risk premium for the com- set operation as a business model. We thus
pany is assumed at 13%. give discounted cash flows a lower weight in
the combined valuation;

The weighted average cost of capital

(WACC) is estimated at 14.3%. The company just We compare BAT Uganda to BAT Kenya
building equity as a result of past losses, has re- as a benchmark for the relative valuation. Fig-
lied on short term borrowing primarily to fund ures are as at end of 2009 except for dividend
working capital. Though the leverage ratio is high, for BAT Uganda where we considered the
81% as at 2009, we are confident that this does 2010 interim dividend of UGX 70;
not pose any business risk as investment is in
working capital;
We use a weight distribution of 0.2:0.4:0.4
for DCF:DDM:RV, reasons as explained in
assumptions above.

Figure: 32: Relative valuation and Summary Valuation

Net Sales/
PE PBV ROE Div Yield Assets EV/Net Sales P/Net Sales EV/EBITDA
BAT Uganda 10.7 9.90 92.8% 4.0% 0.65 1.09 0.76 5.57
BAT Kenya 13.8 4.37 31.6% 7.2% 1.05 1.99 1.84 8.04
Discount/Premium -22.7% 126.8% -65.9% 79.7% 60.9% -45.3% -58.5% -30.8% 5.5%

Value Weight Weighted Average

DCF 1754.07 0.20 350.81
DDM 755.31 0.40 302.12
Relative Valuation 1643.70 0.40 657.48
Total 1310.42

Source: Company Reports, ReNaissance Research Estimates

ReNaissance Capital Limited 32


Despite operating in a high business risk environment, we are of the opinion that the company offers underly-
ing value over the long term. This is the view we hold in light of the restructuring process that commenced in
2007. Management has delivered on the strategic plans and is set for a more predictable performance going
However the recent price behavior in the equity market and low liquidity on the counter with a float of just
under 10%, has introduced risk for investors in the company.
Overall we recommend LIGHTEN for BAT Uganda

Figure 33: Income statement forecasts

2009 2010f 2011f 2012f

Sales (net) 111,783,077 154,762,250 139,368,600 137,123,718
Cost of Sales (65,691,567) (89,762,105) (81,391,262) (80,080,251)
Gross Profit 46,091,510 65,000,145 57,977,337 57,043,467
Operating costs (28,143,317) (38,690,562) (33,448,464) (31,675,579)
EBIT 18,191,164 26,309,582 24,528,873 25,367,888
EBITDA 21,905,909 29,985,639 27,798,966 28,539,877
Interest expense/Finance Cost (6,447,477) (13,169,000) (10,664,727) (10,147,155)
PBT 11,743,687 13,140,582 13,864,146 15,220,733
Net Profit 8,014,115 9,198,408 9,704,902 10,654,513
Source: Company Reports, ReNaissance Research Estimates. Figures in ‘000

Figure 34: Cash flow forecasts

2009 2010f 2011f 2012f

Net Income (adj for gains) 7,848,307 9,198,408 9,704,902 10,654,513

CFO 671,497 9,991,218 20,261,200 (5,001,447)
FCInv 2,443,262 2,188,297 2,407,127 2,647,840

FFCF 3,192,010 17,021,220 25,319,382 (546,279)

FCFE 4,560,547 8,933,265 11,253,245 7,176,791
Source: Company Reports, ReNaissance Research Estimates. Figures in ‘000

ReNaissance Capital Limited 33


Equity Research-National Insurance Corporation (NIC);

Our short term forecast on NIC remains mildly optimistic. The

2010 HY results show that premiums earned in the 2010 first
half period were only 40% of premiums earned in 2009. Fur-
thermore, equity during the same period was down 37% from
2009. Our opinion is that could have been a draw down from
reserves or the life fund. This would imply the need to build re- Recommendation ACCUMULATE
serves from earnings or greater urgency to generate longer-term Target Price (UGX) 84
business. Current Price (UGX) 70
One Year High 75
One Year Low 60
Payments as a result of prematurely retiring long term contracts
will have a significant impact on the company performance in
the short to medium term. This should affect investment income
and could require asset sales so as to meet payments approxi- Shares in issue (000) 403,880
Market Cap (UGX 000,000) 28,271.6
mated at UGX 13-16 billion.
Float (UGX 000,000) 11.308.6
Float (USD 000) 4,916.5
Float (%) 40
With slower growth in revenues and anticipated lower invest-
ment income we forecast that earning should decline by 4% in
2010. There should be a marginal growth in 2011 in line with PE (forward) 8.83
settlements of long term positions.

The company has reconstituted the top management of the com-

pany with the replacement of the managing director. The current Major Shareholders (Percentage)
managing director Mr. Njoroge arrives with a wealth of experi-
ence from the more mature Kenya insurance industry. The com-
IGI Group 51
pany, under new leadership, needs to demonstrate greater client
responsiveness in order to remain competitive in the sector.

The company has a strong asset base of UGX 78.3 billion as at

2010HY, the industry’s largest. As a result, the impact of settle-
ments and possible asset sales so as to meet claims, should not
have a long term impact on the company. While the recent divi-
dend payment sent a positive signal to investors, this level of
dividend may not be sustainable going forward.

The short term (12 months) target for the price on the counter
stands at UGX 84, with a blend of target PBV and an average of
PE for comparables in the region. Over the shorter term per-
formance should remain stagnant though material changes in the
overall economy should boost growth for the insurance sector.
The company nonetheless has unique risks that can only be miti-
gated through increased competitiveness. In spite of the
potential upside from the current price, we recommend

ReNaissance Capital Limited 34


Figure 35: Relative Valuation Summary

EPS (est) PE (for) PBV ROE

PAN African Insurance 7.9 9.1 2.4 26.1%
Jubilee Holdings 16.0 12.3 2.0 16.4%
NIC 7.9 8.8 2.0 23.0%
Target/Average 7.9 10.7 2.4 22.6%

PE Target 84
PBV Target 83
Average 84

ReNaissance Capital Limited 35


RCL Recommendation codes

STRONG BUY: Highly undervalued / Strong fundamentals

BUY: Good value/strong fundamentals

ACCUMULATE: Buy on price dips

HOLD: Correctly valued with little pricing upside or downside

LIGHTEN: Overvalued by the market/reduce exposure/declining funda-

mentals/industry concerns

SELL: Weak fundamentals and challenging operating environment/

Highly overpriced

ReNaissance Capital Limited 36


\While all reasonable care has been taken to ensure the accuracy of the information contained herein, ReNaissance Capital accepts no re-
sponsibility for the inaccuracy nor incompleteness of any information nor for any recommendation or forecasts. ReNaissance Capital shall
not be responsible for any losses incurred on any investments arising from the recommendation , forecast or other information herein con-
tained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by ReNaissance
Capital or its Directors and Officers that one will profit from the strategies herein, or one’s losses in connection therewith can or will be lim-

ReNaissance Capital is a registered Fund Manager, Investments Advisor and Dealer/Broker.

ReNaissance Capital is regulated by the Capital Markets Authority Act.
ReNaissance Capital is a member of the Uganda Securities Exchange.

Keith Kalyegira

Felix Okoboi

David Ivan Wangolo

ReNasissance Capital Limited

Unit 3 Plot 15 Kitante Close, Lower Kololo
P.O. Box 893 Kampala
Tel: +(256) 312-264775/6
Tel:+(256) 414-340018/9
Fax:+(256) 414-340016

ReNaissance Capital Limited 37