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Executive Summary
Global Economy in 2020: A potential recovery in sight?
Away from a synchronized growth story in 2018, global growth reverted to a synchronized
slowdown in 2019, as growth in major Advanced Economies (AE) and Emerging Markets
(EM) decelerated. In 2020, the IMF forecasts global growth to be stronger, driven largely
by recoveries in the EM countries. By our estimates, better trade terms between the US
and China, as well as an accommodative monetary policy stance by global central
banks, supports improvement in the global growth outlook.
On trade, we expect a mild improvement, on the assumption that President Trump may
be willing to fast-track negotiations with China as well as other bilateral trade agreements
to score political point ahead of his 2nd term bid. Additionally, the prospect of a no-deal
BREXIT seemed out of the way as the UK parliament voted to back the Prime Minister’s
deal. According to PM Boris Johnson, who won a resounding victory at the Dec-19 polls,
the deal “paves the way for an ambitious free trade deal with the EU”. In all, our outlook
for the trade remains mildly positive. However, the potential for further escalation, which
could slow the pace of recovery remains significant.
Elsewhere, global monetary policy is expected to remain accommodative in 2020 amid
concerns around the fragility of global growth. However, the pace of easing will
moderate as monetary authorities around the world wait to see the impact of their recent
policy actions.
On global crude oil prices, we see reasons to believe that prices will hover around $60.0/b
-$65.0/b, supported by recent output cut by Saudi Arabia and OPEC. However, slower
growth in key demand markets (China & India) is a cause for concern.
Sub-Saharan Africa: AfCFTA, the real deal?
The economic performance in the Sub-Saharan Africa (SSA) region was soft in 2019, no
thanks to faltering momentum in key markets such as Nigeria, South Africa and Angola.
However, the countries with the fastest GDP growth were Rwanda, Ivory Coast, Benin,
Ghana, Tanzania and Kenya.
Elsewhere, the Africa Continental Free Trade Agreement (AfCFTA) aimed at expanding
intra-African trades, gained further ground in 2019. Notably, 54 of the 55 African Union
(AU) member states (Eritrea being the only exception) signed the deal while 28, including
Egypt, Ghana, Kenya, and South Africa, ratified the deal in 2019. Trading under the
AfCFTA framework is slated to start in July 2020, even though regional developments in H2
-19 suggests that many African countries are unprepared to implement the commitments
of the deal. The re-emergence of xenophobic attacks in South Africa (Services), and the
closure of all land borders by the Nigerian government (Goods), just three months after
celebrating its signing of the AfCFTA, buttress this position. Relatedly, the 8 - member
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francophone West African countries dropped the CFA franc late in Dec-19 and voted to
adopt the ECO in 2020.
Looking ahead, the World Bank forecasts growth in the region to improve from 2.6% in
2019 to 3.1% in 2020, driven by stronger growth among non-resource intensive countries
and modest expansion in resource-intensive countries. For us, slow recoveries in the larger
economies will continue to constrain the pace of growth in the region amid long-delayed
reforms.
Nigeria: …in need of a coordinated and coherent policy framework
Momentum in the Nigerian economy remained soft in 2019 despite increased clarity in
the political space after the 2019 general elections. In 2020, the outlook for the Nigerian
economy hangs on a framework of a well-intended but slightly uncoordinated policy
outline. Notably, the recent amendment of the Deep Offshore and Inland Basin
Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews of the Tax
Acts via the finance bill, will support the implementation of the 2020 Budget and beyond
in the face of sharp rising debt profile. Again, the unprecedented early passage of the
2020 budget by the senate in Dec-19, to return the economy to a January to December
budget cycle, effective 1st of Jan-20, is a positive development. Also, a lower yield
environment, triggered by the CBN’s recent mix of heterodox policy actions, will not only
ease the cost of rolling over government borrowings but also stimulate domestic private
sector investment.
On the back of the above, GDP growth is expected to sustain a gradual uptick in 2020,
anticipated to expand above 2.3%, faster than 2019 but below 3.0%. Also, inflationary
pressure will persist due to supply shortages and the shutdown of the border, given the
direct impact on food prices. Again, increased money supply by the CBN may keep the
core inflation sub-index elevated due to pressure on FX. In all, we expect the headline
inflation rate to average 11.9% in 2020, higher than 11.4% in 2019, in the absence of further
structural changes that may trigger a fresh uptick in m/m inflation. While the benchmark
interest rate (MPR) may be kept unchanged or reduced marginally, we imagine that the
CBN will sustain its recent framework of heterodox policy mix until conditions necessitate
policy normalization. Hence, interest rates in the fixed income market may remain low,
especially in H1-2020.
On the exchange rate and capital flows, we expect the CBN to continue to support the
naira at N360-N365/$1 levels, by selling OMO bills to Foreign Portfolio Investors (FPIs) as a
strategy to preserve the reserves at decent levels. At the current run rate, this can be
sustained for another 7 to 9 months, all things being equal. Nevertheless, we
acknowledge the growing concern about an impending devaluation of the naira. In our
opinion, while a currency devaluation is unlikely in the immediate-term, there is a
possibility for the harmonization of the official rate from N305.5/$1 to something very close
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to the I&E window rate of N360.0/$1, in the medium term. Hence, the adjustment may not
really affect the market rate by more than a spread of 2% to 5% to the official rate.
Overall, our outlook for the naira is stable in the near term with a potential harmonization
in the medium - to - long term.
On capital flows, no significant change is expected in the current dynamics. More
specifically, the CBN is likely to sustain its OMO sale to FPIs in support of the reserves. This
may keep FPIs interest dominant in money market funds at the expense of equity flows.
Notably, we expect an upsurge in Loans & Other Claims to continue, given the low
interest rate environment in the international debt market. However, Foreign Direct
Investment (FDI) flow may remain broadly muted.
Naira Assets: A different playing field
Notably, a quick sequence of monetary policy actions, particularly those relating to sales
of CBN’s OMO bills announced since Jul-19, changed the dynamics in the Nigerian
financial market in H2-19. While the currency market remained broadly stable, supported
largely by the CBN’s sustained FX intervention, the equities market tumbled 14.6%y/y. Also,
the average yield in the fixed income market moderated from 14.5% in Dec-18 to 9.7% in
Dec-19
2020 is a different playing field for capital market players. The fixed income market will be
a corporate/ private issuer market due to the buoyant level liquidity and the low yield
environment. Yields on FGN T-bills are projected to stay in the mid-to-high single-digit
levels and Bonds yields at low double-digit levels, especially in H1-20. Hence, interest in
riskier assets (mostly corporate papers) will increase. The rate on OMO bills (solely for FPIs
and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its
set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in
Q1-20 while preserving the stock of reserves above the $30.0bn threshold. Overall, we
expect the sovereign yield curve to remain normal in H1-20. However, this may reverse to
a hump-shaped curve from Q3-20.
For equities, the continued auction of high yield OMO bills to FPIs may keep foreign
interest in local equity market tepid amid fears of a naira devaluation and confidence
deficit in the economy. Again, FPIs are likely to continue their flight to safety by swapping/
selling equities for low-risk OMO bills. Yet, our outlook for stocks in 2020 is anchored on
developments in the domestic and global economy with monetary policy as the biggest
factor to watch. From all indications, the only justification for an uptick in the equities
market is the lower yield environment, supported by increased local currency liquidity.
However, this will not be enough to trigger a major rally in the absence of the demand
from FPIs. Overall, our base case scenario, sees equities market return at +5.3% in 2020,
driven by local demand for high-quality dividend-paying stocks and increased system
liquidity.
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Analysts
Wale Olusi
[emailprotected]
Yinka Ademuwagun
[emailprotected]
Oluwabusola Jeje
[emailprotected]
Oluwashina Akinremi
[emailprotected]
Ayobami Omole
[emailprotected]
Oluwatoyin Fajemiyo
[emailprotected]
Team
[emailprotected]
+234-1-280-8125
United Capital Plc
Securities Trading:
[emailprotected]
+234-1-280-7443
Investment Banking
[emailprotected]
+234-1-280-7583
Asset Management:
[emailprotected]
+234-1-277-7511
Trusteeship:
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Table of Content
Global Economy ······································································································· 8
Navigating the world’s new economic milieu ··················································································· 9
United States: Entering a period of lower growth? ········································································· 12
Euro Area: At the mercy of fiscal reforms? ···················································································· 13
United Kingdom: Year 2020 - Get Brexit done! ··············································································· 14
Emerging Markets: A potential recovery in sight? ············································································ 14
Oil Prices: A long way from $100/b levels ························································································ 16
Sub-Saharan Africa ································································································· 19
Macro Overview: An unsynchronized growth story ·········································································· 20
AfCFTA: SSA’s biggest win in 2019! ································································································· 22
External Debt: Sustainable? ·········································································································· 23
Eurobond Market: SSA sovereign bonds rally ··················································································· 24
Foreign Exchange: UEMOA adopts Eco, drops CFA franc ································································ 25
Equity Market: Lack of reform to spook investors ············································································· 27
Domestic Macro and Policies ··················································································· 30
Domestic Macroeconomic Overview: In need of a coordinated and coherent policy framework ······· 31
Fiscal policy: Nigeria’s Strategic Revenue Growth Initiative ······························································ 32
Monetary Policy: CBN’s Balance sheet unwinding and monetary policy unorthodoxy ························· 38
Domestic Output and Price Level: Will revenue reforms spur faster growth? ······································· 39
Inflation rate: Higher wage bill, any impact on price? ······································································ 42
Interest rate: Lower for longer? ······································································································ 43
External Sector: Foreign exchange rate and reserves - Will the CBN harmonize Forex windows ············· 43
Funds flow: Flowing to assets with the best return ············································································ 45
Financial Markets ··································································································· 47
Fixed Income: Easy monetary policy takes the lead in 2019 ······························································ 48
Equities: Lower fixed income yields… higher stock prices? ································································ 55
Sectors ··················································································································· 62
Agricultural Sector ······················································································································· 63
Banking Sector ··························································································································· 67
Consumer Goods Sector ············································································································· 73
Cement Sector ··························································································································· 77
Oil & Gas Sector ························································································································· 81
Companies ············································································································· 88
Disclosure Appendix ······························································································· 103
Global
Economy
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Global Economy
Navigating the world’s new economic milieu
Away from a synchronized growth story in 2018, economic themes in the global space
such as rising trade protectionism, political discord, inter-regional conflicts and reactive
policy responses, gave birth to the world’s new economic milieu - “uncertainty”. As a
result, global economic growth in 2019 tilted towards a synchronized slowdown, as growth
in some major Advanced Economies (AEs) and Emerging Markets (EMs) decelerated.
Manufacturing and trade sectors were the most impaired by general policy uncertainty,
as global manufacturing PMI remained in the contractionary region and growth in world
merchandise trade for H1-19 stood at 0.6% y/y, its weakest level in recent years.
According to the IMF, global growth for 2019 is projected to slow to 3.0%y/y amid slower
growth in AEs and key EM economies.
In 2020, the IMF forecasts global growth to be stronger at 3.4% y/y, driven by recoveries
across EMs, which are projected at 4.6% y/y. On the other hand, AEs are expected to
slow to 1.7% y/y. No doubt, the IMF’s forecast is a sweeter tale than 2019. Though, it
remains below the 5-year and 20-year average of 3.41% and 3.8% respectively, indicating
a gap from long-term potential. Bearing the above in mind, the global economy is stuck
between two possibilities; the first is that of an unsynchronized rebound, to be driven by
easy monetary policy, improved trade relations, a more supportive fiscal policy and
recovery in emerging market economies. The second possibility remains a broad-based
weaker growth if the factors above fail to materialize. In summary, as activities in the new
year begin to unfold, we examine some of the global economic themes that will
determine the pace of world growth below.
41
44
47
50
53
56
Jan
-19
Feb
-19
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun-1
9
Jul-1
9
Aug
-19
Sep
-19
Oc
t-19
No
v-1
9
Global growth remains weakTrend of Manufacturing PMI
U.S. Germany U.K. ASEANEM Eurozone Global Turning point
Rising trade
protectionism, political
discord, inter-regional
conflict and reactive
policy responses, gave
rise to economic
uncertainties in 2019
Global Economy
Source: IHS Markit, Bloomberg, United Capital Research
2019 Growth Trends across economiesPosition based on Q2-19 and Q3-19 (y/y) figures
Global
Growth
Cycle
Brazil
Italy
South
Korea
Russia
Mexico
Turkey
CanadaChina
Germany
Eurozone
France
U.K.
IndiaU.S.
Argentina
Figure 1 Figure 2
Source: Bloomberg, United Capital Research
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Trade
Following the history of China’s trade practices with the U.S., one thing remains very clear;
the full settlement of the trade dispute is nowhere in sight in 2020. In 2019, the global
economy witnessed multiple escalation of tariffs on an estimated $470.0bn worth of
goods and abrupt fallouts in agreements. What can be considered as a win for the U.S. in
the trade war was the 22.4% YTD decrease in monthly international trade deficit (as at
Oct-19), a major victory for President Donald Trump. On the flip side, financial markets
witnessed renewed volatility, evident by the significant drop in global yields, downturn in
global production sectors and weakened investment spending.
However, towards the end of 2019, what could be termed a ‘last minute miracle’
occurred, as negotiations relating to the fundamental issues - market access, forced
technology transfer and intellectual property (IP) theft – witnessed some progress. The two
economic powerhouses settled on a phase one agreement in Dec-19, canceling the
planned tariff hike which was set to take effect in the last month of the year. Reported
details of the agreement included China’s promise to purchase at least $200.0bn of U.S.
outputs over the next two years, the U.S. to slash its 1st of Sept-19 tariffs on $120.0bn of
Chinese goods by half to 7.5%, China to implement more reforms to curb intellectual
property theft, forced technology transfers and both sides agreeing to refrain from
intentionally manipulating their currencies. As such, the two parties are set to formally sign
the deal in Jan-20, with President Trump indicating that negotiations for a phase-2 trade
deal will start immediately. While a permanent solution to the trade dispute remains in the
long-term, the kick-off of phase-1 deal will reduce the global volatilities in 2020. Also, the
addition of a roll back of some tariffs in the deal will relieve pressures on the two
economies, as their growth is slowing considerably.
Another interesting factor to watch, is the race towards the 2020 U.S. election. In a bid to
win, coupled with the scrutiny emanating from the impeachment inquiry, we could see a
more ‘receptive’ President Trump, willing to fast-track phase two negotiations and score a
huge card for the U.S. economy. However, previous indications have shown it is difficult to
predict the stance of the President. If the odds are increasingly in the Democrats’ favour,
Trade tensions between
U.S and China
dominated activities in
the global economy
U.S. and China to
formally sign a Phase 1
deal in Jan-20
Global Economy
Jan
-18
Feb
-18
Ma
r-18
Ap
r-18
Ma
y-1
8
Jun-1
8
Jul-1
8
Aug
-18
Sep
-18
Oc
t-18
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun-1
9
Jul-1
9
Aug
-19
Sep
-19
Oc
t-19
No
v-1
9
De
c-1
9
US Tariffs on Chinese Goods China Tariffs on U.S. Goods
Tradewar TimelineAverage Tariff rate (%)So far,
U.S. has imposed tariffs on over
$360bn worth of Chinese imports
China has imposed tariffs on over
$110bn worth of U.S. imports
If 15th of Dec-
19 tariffs had
kicked in
8.0
3.1
3.2
8.3
3.8
7.2
14.4
8.2
18.2
12.0
16.5 20.7
17.621.8
21.0
25.1
23.8
Figure 3
Source: Reuters, Peterson Institute for International Economics, United Capital Research
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we could see a less erratic approach to trade dealings, with China willing to hold off and
negotiate with a new head of state.
Elsewhere, the European Union (E.U.) and Japan remain will remain cautious going into
2020, as the decision on auto-tariffs by the U.S. hangs in the balance. In all, our outlook
for trade remains mildly positive as we do not expect a positive headway or damaging
escalation. However, we do not rule out the possibility of a further escalation (given the
erratic nature of President Trump), which could slow the pace of recovery and send the
global economy on another dark path.
Monetary Policy
In contrast to the widespread tightening of monetary policy observed in 2018, the tone of
global central banks struck a dovish chord in 2019. In the face of weaker growth and
lower inflation rates compared to targets, the need to provide support was apparent. As
such, monetary policy became broadly accommodative in 2019, with extensive
measures to increase money supply added to the policy mix.
Diving deeper into the actions of policy authorities, for the first time since the global
financial crisis, the U.S. Federal Reserve (the Fed) delivered three rate cuts in 2019, with
the Federal Funds rate at 1.50% - 1.75%. Also, the apex bank started a ‘mini’ quantitative
easing program, purchasing short term bills till Q2-20. Reviewing the communique of its
Oct-19 meeting, it seems the Fed will adopt a wait and see approach in 2020, assessing
the impact of its extensive policy measures on inflation and investment. However,
wherever the trade war goes, the Fed goes with it. As such, more ‘insurance’ cuts might
be needed to sustain the current expansion of the U.S. economy.
Discarding its proposed rate-hike at the start of 2019, the European Central Bank (ECB)
also turned 180° in its decision making, slashing its deposit rate deeper into the negative
region, resuming quantitative easing and long-term refinancing operations. With the exit
of Mario Draghi and entry of Christine Lagarde, as ECB president, the outlook for policy
...our outlook for trade
remains mildly positive
Global Economy
0.0
0.5
1.0
1.5
2.0
2.5
Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19
Growth dilemma: Inflation below targets
Trend of CPI y/y in Major Economies
U.S. E.U.U.K. JapanInflation Target (%)
Figure 5 Figure 4
Sources: Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research
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decisions is still expansionary, as the growth of the Euro Area will remain under pressure.
Also, fresh signals from the Bank of England (BOE) and the Bank of Japan (BOJ) - both
banks held rates all through 2019 - suggest possible rate cuts in 2020. This is because of the
surprise division among BOE policy members as at its Nov-19’s meeting and BOJ’s
guidance that it will ease policy stance, should the economy lose momentum. Finally, in
order to sustain the slowing growth recorded in China, marred by trade uncertainty and
domestic challenges, the People’s Bank of China is expected to continue easing,
following its efforts in reducing rates across key policy variables to spur credit growth and
business activity. In summary, for 2020, we expect the current monetary policy stance to
remain accommodative, however, at a lower magnitude than the previous year.
Accordingly, the direction of funds flow will favour high yielding EMs with stable socio-
political outlook. By implication, this will imply that the US dollar may weaken against other
currencies amid net outflow of funds.
Geopolitics
Lastly, geopolitical disputes and intra-country conflicts will remain in the limelight, as
uncertainty over BREXIT proceedings, Tehran-Riyadh relations and the alarming spree of
street protests as well as civil unrest across the world, remain detrimental to global growth.
With the conservative party’s victory at the U.K. general elections, all roads lead to an
eventual BREXIT in 2020. Elsewhere, tensions between Saudi Arabia and Iran will continue
to shake up sentiments in the Middle East, with oil prices and production caught in the
middle. Although its occurrence is slated towards the end of the year, the buildup to the
U.S. elections is also an outcome to watch.
United States
Entering a period of lower growth?
Contrary to the booming state observed in 2018, the growth trend in the U.S. economy is
losing steam. Clearly, the effect of 2017’s tax cuts is evaporating. While growth in Q1-19
was impressive, driven by the country’s greatest weapon -the American Consumer, Q3-19
annualized GDP slowed to 2.1%, with a surprise lull in personal consumption expenditures.
Labour market conditions continued to improve, albeit at a slower rate, with average jobs
added in 2019 at 167,000 (down 26% y/y) and unemployment rate at its lowest since 1969.
Accordingly, below target inflation and low unemployment rates, remained a quandary
for policy makers. On the business side, the prolonged trade spat crippled growth in
investment, as corporates assessed negative impacts on global supply chains. As a result,
trends in manufacturing and industrial activities flashed worrisome signs, evident by the
continuous contraction in new export orders and industrial production growth at a multi-
year low of -0.14%. Putting all the information together, it is apparent that the U.S. is
entering a period of lower growth.
The outlook for
global monetary
policy remains
accommodative
Global Economy
Geopolitics will
remain a concern in
2020 with Brexit, the
middle east crisis
and civil unrest
around the world as
pointer
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With a forward view to 2020, the IMF expects growth to moderate to 2.1% y/y, a 0.3%
decrease from 2019’s forecast. In a bid to sustain the positive growth trajectory, we
expect fiscal policy to do some weight lifting, as the recently signed 2-year budget deal,
which sees an increase of $320.0bn in government spending and a suspension of the
$22.0tn debt ceiling through mid-2021, should contribute to growth. Also, while the
incoming elections are in Nov-20, its imminent result is a significant pointer to future policy
directions beyond 2020. Furthermore, we expect clarity in H2-20, as to which of the major
contenders is likely to sit in the oval office, and implications for fiscal policy.
In terms of monetary policy, as noted above, we expect the FOMC to act as appropriate
in sustaining the economic expansion, in addition to making information driven decisions.
Also, with the positive developments in the trade war, and the race to the elections, the
FOMC will remain on the sidelines. However, with possible adverse developments on the
trade war front and its impact on business investment, the Fed might take on more
‘insurance’ cuts.
Euro Area
At the mercy of fiscal reforms
The economic performance of the Euro Area remained tepid, recording a Q3-19 growth
of 1.2% y/y in real GDP. This was expected, given the incessant decline in manufacturing
PMI, political uncertainty and weaker exports, underscored by the trade war ‘hullabaloo’.
Germany, the region’s economic engine recorded its weakest industrial production since
the financial crisis, as auto manufacturers struggled with severe disruption from the recent
emission standards. However, a surprise rebound in its Q3-19 GDP, subdued the fear of a
recession. Additionally, growth in the region continued to falter across member countries,
with quarterly growth hovering around 1.0% levels for France.
In 2020, a few factors point to a persistent albeit feeble momentum in growth of the Euro
Area. The imminent threat of U.S. tariffs on automobiles, recent tariffs on its aircraft industry
and restructuring across car production to meet up with emission standards remain sour
patches for the enervated manufacturing sector, causing potential supply challenges.
Fiscal policy inactions could further elevate pressures, with Germany’s government
sticking to its stringent balanced budget policy in the face of slowing growth, and Italy’s
2020 budget assumptions being a challenge to EU fiscal rules.
Given the above, a ray of light is arising from the continued monetary policy support, with
the ECB decisions likely to soothe the ailing growth. However, fiscal reforms remain a
critical success factor, as monetary policy is limited. Accordingly, the IMF forecasts a
pickup of growth in 2020 to 1.4%, a 0.2% increase in its 2019 forecasted value.
The US growth is hinged
on the sustainability of
fiscal policies
Global Economy
In 2020, a few factors
point to a persistent
albeit feeble
momentum in growth
of the Euro Area
...ECB decisions likely
to soothe the ailing
growth
Nigeria Outlook 2020: A Different Playing Field
14 www.unitedcapitalplcgroup.com
United Kingdom
Year 2020 - Get Brexit done!
Judging by the decelerating growth in the U.K., which was 1.0% y/y in Q3-19, the
economy took a hit, as negative sentiments emanating from its seemingly inextricable
divorce from the E.U weighed on growth. As such, growth in business investment
remained subdued, with its manufacturing sector following the contractionary trend
observed across the globe. With political uncertainty driving most of its enfeebled growth,
2020 seems a bit clearer, following the outcome of the Dec-19 general elections.
The Conservative party, which Prime Minister Boris Johnson belongs to, won a sweeping
victory at the polls, amassing a majority of 365 out of 650 seats. As such, the deadlock in
parliament was resolved, PM Johnson’s deal was passed and the U.K. is likely leaving the
E.U. earlier than the 31st Jan-20 deadline.
Elsewhere, inflation continued to trend lower, reaching 1.5% y/y in Oct-19, below the
BOE’s 2.0% target point. Consequentially, inflation expectations, coupled with potential
outcomes of BREXIT, could spark a change in the Bank of England’s current ‘wait and see’
approach.
Emerging Markets
A potential recovery in sight?
In 2019, Emerging Markets (EMs) danced to the tune of external headwinds and
idiosyncratic shocks, as the global trade environment walked on eggshells, with
commodity exporters being heavily affected. However, in 2020, two key trends are
positive for EMs. First, the easing cycle across global central banks will create significant
interests in EM assets, building up capital inflows. Secondly, EM central banks have more
room to ease policies, spurring economic activity. As a result, we could see mild recovery
from 2019’s level. Accordingly, the IMF projects the classification’s growth to come in
higher at 4.6% for 2020, up from 3.9% projected for 2019.
Global Economy
The BREXIT timeline in 2020
Jan 1st - 15th Jan 15th - 31st Early June Late June Dec 31st
• Withdrawal Agreement
(WA) expected to be passed
• European Parliament
expected to ratify WA
• U.K. expected to exit the EU
• U.K. and E.U. to convene at a
high-level conference to take stock of
progress on negotiations
• Deadline for requesting
extension of transition period as
provided for in WA
• End of transition period (unless
extended)
Sources: The Economic Standard, Bloomberg, United Capital Research
Figure 6
PM Johnson’s deal
was passed in Dec-19
and the U.K. is likely
leaving the E.U. earlier
than the 31st Jan-20
deadline
EMs danced to the
tune of external
headwinds and
idiosyncratic shocks in
2019
Nigeria Outlook 2020: A Different Playing Field
15 www.unitedcapitalplcgroup.com
Looking at the constituent economies in the BRICS classification, the Brazilian economy is
currently on the path of acceleration, as output growth in Q2-19 expanded by 1.0% y/y,
augmented by higher fixed investment and industrial production. Following cries of a
huge fiscal boost, the Senate passed the final amendments to the long-awaited pension
reform, a big win for the Jair Bolsonaro-led administration. Notably, according to
widespread reports, the changes in the pension reform are estimated to result in $195.0bn
worth of savings over the next 10 years, which will ease pressures on public deficit, shore
up public finances and create headroom for fiscal policy redirection. Also, the current
stance of monetary policy is expected to further strengthen growth, as 2019 witnessed a
150bps shed in policy rate. Nevertheless, signals from policy members indicate a less
aggressive approach in 2020. With the above in mind, the economic outlook for the South
American giant is auspicious, with the IMF and OECD forecasts showing a 2.0% and 1.7%
growth in 2020 respectively, an increase from their 2019 forecast.
In the same vein, the Russian economy resumed an uptrend in Q3-19 (1.7% y/y), due to
improved fiscal spending and stronger exports which subdued the effect of the VAT hike
in Q1-19. The recovery is expected to be maintained, following the implementation of
national development plans. Also, given the declining rate of inflation, currently below
the Central Bank’s target of 4.0% (3.8% as at Oct-19), we see a further decrease in policy
rate, with the monetary authority maintaining its neutral range of 6%-7%. As such, growth
is expected to improve to 1.9% y/y in 2020, according to the IMF. However, downside risks
remain on the horizon, due to oil price instability and possible further production cuts by
the OPEC+.
India was displaced as the fastest-growing economy among the G-20 countries, as
growth went on a downward spiral, from 6.6% y/y in Q4-18, to 5.8% y/y in Q1-19, 5.0% y/y
in Q2-19 and finally 4.5% in Q3-19, its lowest level in six years. As a result, International
rating agency, Moody’s, downgraded the economy’s outlook from stable to negative.
The effects of the previous structural reforms have clearly diminished, as consumer
demand – the main engine of growth, has weakened. In 2020, favourable policies should
spur increased domestic demand while the recently enacted corporate tax cuts should
encourage private investment. However, concerns surrounding limitations of fiscal policy
remains an elephant in the room, as the country is nearing its fiscal deficit target of 3.3%.
Meanwhile, monetary policy remains a strong growth propellant, with room to cut rates
further to sustain the nation’s expanding growth. In all, broad expectations for economic
performance in 2020 are skewed towards an above 6% growth GDP, with the Reserve
Bank of India projecting a 6.1% y/y growth, below IMF’s forecast of 7.0% y/y.
Finally, in China, policy measures are tilting towards mitigating the extent of the
economy’s slowdown. From its Q3-19 growth figure of 6.0% y/y, the lowest in 27 years, the
negative pressure from U.S.’s imposed tariffs (which has seen an increase in average tariff
rate to 21.0% in Nov-19 from 12.% in Jan-19) and domestic risks - such as its aging
Global Economy
The IMF projects EMs
growth to come in
higher at 4.6% in 2020,
relative to 3.9% for 2019
In China, the recently
signed phase-1 trade
deal with the U.S.
could contribute to
investments and
improve export
Nigeria Outlook 2020: A Different Playing Field
16 www.unitedcapitalplcgroup.com
population and swine fever epidemic - are clearly dampening investment and output
growth. On the plus side, the recently signed phase one trade deal could ignite
investment going forward and improve exports, with the U.S. set to reduce some existing
tariffs. Although growth is expected to slow 5.8% y/y in 2020, efforts by the People’s Bank
of China (PBOC) in reducing rates across key policy variables could also palliate the
slowdown, spurring credit growth and business activity.
Oil Prices
A long way from $100/b levels
Amid OPEC+ production cuts and swings in U.S. crude inventories, oil prices responded
more to new factors affecting supply and demand. In H1-19, Brent crude oil prices
averaged $66.2/b, broadly supported by the extension of OPEC output cuts in Jan-19.
However, its performance deteriorated in H2-19, as the global economy was caught in
the web of escalating tariffs and the synchronized slowdown. As such, average prices in
H2-19 slowed to $62.2/b.
As widely anticipated, the OPEC+, in its Dec-19 meeting, agreed to deepen production
cuts by 500,000b/d, to be sustained till March-20. Interestingly, Saudi Arabia voluntarily
decided to take an additional 400,000b/d off its new quota. This bought total production
cuts to 1.7mb/d. As such, oil prices rallied in Dec-19. Also, Saudi Aramco, the largest state
owned oil company, concluded its Initial Public Offering (IPO) on the Riyadh Stock
Exchange, hitting the $2.0tn market capitalization, two days after its debut.
Looking into 2020, we see reasons to believe that oil prices will hover around $60-$65/b,
with a greater probability lying in the mid-value of the band. On the demand side,
decelerating growth in key demand markets (China & India), fueled by the increased
trade tensions remain a key cause for concern. As a result, in its Nov-19 Monthly Oil Market
Report, OPEC revised its outlook for growth in global oil demand downward, from initial
estimates of 1.14mb/d to 1.08mb/d.
Global Economy
Brent crude oil price
averaged $63.7/b in
2019
20
40
60
80
100
120
140
-2
-1
1
2
3
Q1-0
8
Q2-0
9
Q3-1
Q4-1
1
Q1-1
3
Q2-1
4
Q3-1
5
Q4-1
6
Q1-1
8
Q2-1
9
World oil balance and oil price
World Oil Balance Brent Price
mb/d US$/bbl
25
35
45
55
65
75
85
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun-1
9
Jul-1
9
Aug
-19
Sep
-19
Oc
t-19
No
v-1
9
Oil Price amid OPEC Production CutsOne year Trend in Brent Crude Oil Price
Cuts extended
to March 2020OPEC cuts
by 1.2m/d
Attack on
Saudi Arabia's
facilities
Figure 7 Figure 8
Sources: IEA, Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research
Saudi Arabia
voluntarily decided to
take an additional
400,000b/d off its new
quota
Nigeria Outlook 2020: A Different Playing Field
17 www.unitedcapitalplcgroup.com
Analyzing supply dynamics, the positive effects emanating from deepened OPEC+
production cuts which remain in place till Mar-20, and possibly an extension after the
stipulated date provides room for oil prices to rise even further in H1-20. Following Saudi
Aramco’s IPO, we could see OPEC’s de-facto leader, Saudi Arabia, push for compliance
to established cuts, in maintaining the company’s attractive valuation. Also, tensions in
the Middle East serve as short term positive shocks to our oil forecast, as unforeseen supply
disruptions may resurge. The above notwithstanding, downside risks remain. As further
production cuts weaken OPEC’s market share, should price climb to attractive levels, we
could see renewed production from U.S. shale entities, fueling a supply glut. Also, with
regulations increasingly in support of lower emissions and cleaner energy (such as the
new International Marine Organization (IMO) rules set to kick off in Jan-20), aimed at
reducing Sulphur content for shipping vessels, global demand for oil might follow a
decelerating trend, going forward. In all, the EIA forecasts Brent price to average $61.0/b
in 2020, down from a 2019 average of $64/b.
Global Economy
Tensions in the Middle
East serve as short term
positive shocks to our
oil forecast as
unforeseen supply
disruptions may
resurge
Sub-Saharan
Africa
Nigeria Outlook 2020: A Different Playing Field
20 www.unitedcapitalplcgroup.com
Sub-Saharan Africa
Macro Overview: An unsynchronized growth story
The economic performance in the Sub-Saharan Africa (SSA) region remained broadly
divergent in 2019, as most economies within the region tracked the performance of their
key export commodities. Notably, per capita GDP growth for the region remained
relatively flat, with no gain expected in 2019. Specifically, the economic fortune of crude
oil dependent nations and OPEC members like Nigeria, Angola, Gabon and Republic of
the Congo, were not too far apart as economic growth among these countries remained
unimpressive amid supply constraints from OPEC, despite mild improvements in average
crude oil prices. Meanwhile, the narrative is dis-similar for the non-oil exporters. In South
Africa, deterioration in power condition across the country hampered overall activities
and affected mining output negatively.
Thanks to growth in agricultural exports, Rwanda, Ivory Coast, Benin, Ghana, Tanzania
and Kenya remained fastest growing economies in Nigeria. Though no official GDP report
was published by Ethiopia (one of the SSA’s highflyers) in 2019, we expect the persistent
foreign exchange shortages and rising civil unrest to have weighed on economic
activities within the country. Also, two devastating cyclones —Idai and Kenneth— which
hit the Southern and Eastern Africa regions in March and April 2019, severely affected
economic activities within the region. This was as it disrupted the functioning of major
ports, and added pressure to inflation, fiscal balances, as well as trade balance in the
Comoros, Malawi, Zimbabwe, and in particular, Mozambique. In all, global commodity
price swings, extreme weather events and domestic policy uncertainties clouded the
broader economic growth.
Some countries continued to deal with security challenges. Notably, IMF report showed
that military and security spending doubled in the Sahel region (especially in Burkina Faso,
Mali, and Niger), representing c. 4.0% of GDP and absorbing 20.0% of fiscal revenues.
Rwanda, Ivory Coast,
Benin, Tanzania and
Kenya remained the
fastest growing in
Africa.
Sub-Saharan Africa
-5.0%
0.0%
5.0%
10.0%
15.0%
Rw
an
da
Ivo
ry C
oa
st*
Be
nin
*
Tan
zan
ia*
Se
yc
he
lles*
Nig
er*
Ca
pe
Ve
rde
*
Bu
rkin
a F
aso
*
Gh
an
a
Ke
ny
a*
Se
ne
ga
l*
Gu
ine
a B
issa
u*
Tog
o*
Ma
li*
Ca
me
roo
n*
Ma
uritiu
s
Bo
tsw
an
a
Ug
an
da
Nig
eria
Mo
zam
biq
ue
So
uth
Afr
ica
An
go
la*
Na
mib
ia
Nigeria, South Africa and Angola, still a drag on the overall region
Annual real GDP growth (y/y)
Q3-19 Q3-18
Figure 9
Sources: Bloomberg, United Capital Research
N.B: *Q2-19 and Q2-18 numbers
Nigeria Outlook 2020: A Different Playing Field
21 www.unitedcapitalplcgroup.com
Also, eight countries within the region (Nigeria, South Africa, Senegal, Malawi, Botswana,
Mozambique, Benin and Comoros) held their presidential elections, with all countries
remarkably re-electing their incumbents for another tenure in office. Save for sporadic
cases of violence during the Mozambican, Nigerian, Malawian and Comorian
presidential polls, elections were generally peaceful across the board. Meanwhile, results
were widely contested by opposition parties in at least four of the eight countries, adding
to uncertainty within those economies.
Output Growth Outlook: Overall momentum to remain soft
Looking ahead, the World Bank published a forecast for growth in the region to rise from
2.6% in 2019 to 3.1% in 2020. This assumption relies on stronger growth among non-
resource intensive countries offsetting a modest expansion among resource intensive
countries. In our opinion, we expect slow recoveries in the larger economies to continue
to constrain the strength of the regional growth amid long-delayed reforms. Among the
regional giants, we expect growth in South Africa to remain weak, as cases of load
shedding or blackouts continue to impair industrial growth. Also, we expect growth to
remain tepid in Nigeria and Angola as both economies remain exposed to the vagaries
of the oil market. The situation is however worst for Angola, as the country continue to
struggle to diversify its economy from oil. Election uncertainties may dampen fresh foreign
investment in seven countries (Ghana, Ivory Coast, Burkina Faso, Burundi, Seychelles,
Tanzania, and Togo) scheduled to hold Presidential elections in 2020.
Nonetheless, we expect growth in the smaller economies to continue to support the
region’s growth. Specifically, we project that economic activity in Rwanda will remain
supported by export growth (resulting from the Made in Rwanda policy) and continued
public investments. Also, we opine that the recent removal of interest rate caps, which
have constrained credit supply in Kenya for years, should spur new lending to private
sector and impact overall growth positively. Additionally, we expect the completion of
the debt restructuring exercise by Mozambique in Oct-19 - that had dragged on since it
defaulted on $727.0mn of Eurobonds in early 2017 - to pave the way for the government
to raise the funding it needs for its portion of multi-billion-dollar gas projects and boost the
economy of the country.
Sub-Saharan Africa
...elections were
generally peaceful
across the board
The World Bank
published a forecast for
growth in the region to
rise from 2.6% in 2019
to 3.1% in 2020.
Nigeria Outlook 2020: A Different Playing Field
22 www.unitedcapitalplcgroup.com
Africa Continental Free Trade Area (AfCFTA)
SSA’s biggest win in 2019!
Elsewhere, the AfCFTA, aimed at expanding intra-African trades, gained further ground in
2019. This was as the agreement entered into force in May-19, a month after the requisite
22 states deposited their instrument of ratification with the Chairperson of the African
Union (AU) Commission. Notably, 54 of the 55 AU member states (Eritrea being the only
exception) signed the deal while 28, including major economies such as Egypt, Ghana,
Kenya and South Africa ratified the deal in 2019. This marked a critical milestone in the
Pan-African trade journey.
Though trading under the AfCFTA framework is not slated to start until July 2020, regional
developments in H2-19 suggests that many African countries are unprepared to
implement their commitments by then. This was buttressed by the re-emergence of
xenophobic attacks in South Africa (Services), and the closure of all land borders by the
Nigerian government (Goods), just three months after celebrating its signing of the
AfCFTA. Also, the government of Kenya closed a border with neighbouring Somalia
indefinitely (due to insecurity concerns) with cross-border trade banned in the process. In
East Africa, Eritrea who continue to remain on the sidelines of the AfCFTA deal, shut all
border crossings with neighbouring Ethiopia (that had been reopened only for months)
without any prior notice, for the major part of 2019.
Outlook: The real deal?
Looking ahead, we doubt the overall success of the AfCFTA amid a perceived lack of
political will to resolve trade conflicts through dialogue before unilateral trade restriction.
For instance, we expect Nigeria to have explored dialogue before unilaterally shutting
down its land borders – hurting neighbouring economies. Also, we expect the
neighbouring economies to stay true to the rule of origin commitment in the ECOWAS
protocol. Accordingly, we believe without a willingness by countries to take commitments
made under the AfCFTA seriously and match their words with concrete deeds, the AfCFTA
Sub-Saharan Africa
Figure 10
Sources: Bloomberg, United Capital Research
AfCFTA which is aimed
at expanding intra-
African trades, gained
much ground in 2019
If the AfCFTA is to
succeed, African states
must embrace more
liberal trans-national
trade policies.
Nigeria Outlook 2020: A Different Playing Field
23 www.unitedcapitalplcgroup.com
risks not being the game changer it could be. Also, if the AfCFTA is to succeed, African
states – especially South Africa, Nigeria and Egypt – must embrace more liberal trans-
national trade policies. This will require sustained efforts from governments, the private
sector and civil society, to digest and disseminate information about the potential of the
AfCFTA to generate jobs, improve infrastructure and boost economic growth.
External Debt: Sustainable?
Over 2019, the fiscal narratives across the region remained broadly similar, as fiscal deficit
widened, owing to shortfalls in actual revenue generation amid rising expenditures. Thus,
to cater for the rising recurrent spending and spur economic activities, public debt levels
stayed elevated in 2019. More countries continued to tap into the international debt
capital market without necessarily neglecting funds from traditional concessional sources.
Notably, Benin was the “new kid on the block” as the West African country issued its
debut sovereign Eurobond in H1-19 while the DRC received its first IMF lending since 2012,
in H2-19.
In our view, the borrowing spree is expected to pick up in 2020 as we anticipate a wider
fiscal deficit – spurred by continued rise in overall expenditures during the period.
Specifically, we expect the implementation of an upward review of national minimum
wage to add further pressure on Nigeria and Ghana’s government financing needs.
However, we note that the increased magnitude of market-based lending has a higher
risk content, as captured by greater vulnerability to commodity prices, global interest
rates, and currency movements. Accordingly, policies and reforms that build resilience to
these risks and use foreign capital to raise medium-term potential growth are needed.
Sub-Saharan Africa
Sources: World Bank, United Capital Research
56 61 62 70 73 77 81 94 99
107 117 120 135 146 155 175201 21143 54 73
76 85 9296
122 135
8391
104119
128 128135
142148
1921
2222
20 1919
2122
4948
6065
62 6561
7068
2010 2011 2012 2013 2014 2015 2016 2017 2018
SSA bond stock has grown by more than 2.0x, over 2010-2018
SSA external debt status ($'bn)
Concessional -Official Creditor Non-concessional - Official Creditor
Bonds -Private Creditors Commercial Banks and other Private Creditors
Use of IMF credit Short-term external debt
Figure 11
Benin was the “new kid
on the block” as it
issued its debut
sovereign Eurobond
Nigeria Outlook 2020: A Different Playing Field
24 www.unitedcapitalplcgroup.com
Eurobond Market: SSA Sovereign Bonds rally
The overall narrative at the Eurobond market shifted from only issuances to repayments in
2019 as South Africa ($1.7bn) and Kenya ($750.0mn) both repaid their Eurobonds that
matured in May-19 and Jun-19 respectively. Surprisingly, despite a more accommodative
monetary policy environment in the developed market, primary market issuance by SSA
countries failed to touch 2018 levels. This was as the number of new issuances dropped to
seven issues (South Africa, Angola, Ghana, Benin, Kenya, Ivory Coast, and Mozambique)
from eight in 2018. Also, the total value of new issuances decline by 11.5% y/y to $16.5bn.
Elsewhere, secondary market performance rebounded from 2018 lows, as average yield
on all the outstanding notes (except for Zambia) trended lower. In H1-19 alone, average
yield fell 150bps from around 7.8% at the start of 2019. The bullish performance was
spurred by the growing accommodative stance across the developed market which
spurred foreign investors interest in African Eurobond. Senegal (-2.3%), Cameroon, Ivory
Coast and Nigeria were the best performers YTD. Other the hand, Zambia was the worst
Sub-Saharan Africa
52 5251
47
41
35
3029
28
2010 2011 2012 2013 2014 2015 2016 2017 2018
Sustainability of the rising debt stock remains a key concern
Reserves to external debt stocks (%)
Figure 11
Source: World Bank, United Capital Research
5.0
0.0
3.0 3.0
2.1
0.0
1.9
0.90.6
0.0
2.0
5.4
3.5
2.0 2.0 2.01.7
0.0 0.0 0.02
So
uth
Afr
ica
Nig
eria
An
go
la
Gh
an
a
Ke
ny
a
Se
ne
ga
l
Ivo
ry C
oa
st
Mo
zam
biq
ue
Be
nin
Se
yc
he
lles
$16.5bn worth of Eurobond was issued across SSA in 2019
Eurobond issuance in SSA by country ($'bn)
2019 2018
Figure 13
Sources: Bloomberg, United Capital Research
Zambia was the worst
performer for the year,
fuelled by the
increased default risk
and credit rating
downgrades
The overall narrative at
the Eurobond market
shifted from only
issuances to
repayments
Nigeria Outlook 2020: A Different Playing Field
25 www.unitedcapitalplcgroup.com
performer for the year, and this was fueled by the heightened risk of default, after credit
rating downgrades by the three global credit rating agencies.
With an outlook for easier monetary policy conditions in advanced economies (especially
in the U.S) the outlook for SSA’s sovereign Eurobonds is likely to remain bullish in 2020.
However, domestic macroeconomic volatilities might cap the strength of the bullish
interest. Additionally, we believe the growing track record of consistent coupon
payments and capital repayments will send a positive signal to investors while the need to
raise capital to fund rising fiscal deficit might spur another round of Eurobond issuances.
Notably, an unexpected monetary policy tightening at a time when countries need to
rollover large amounts of bonds could force a sharp adjustment in domestic spending,
with attendant adverse consequences on growth.
Foreign Exchange: UEMOA adopts Eco, drops CFA franc
Analysis of SSA region’s foreign exchange condition showed that the performance was
broadly negative in 2019. Over the review period, only South Africa and Kenya recorded
a currency appreciation against the US dollar, thanks to a rise in Foreign Portfolio
Investment (FPI) inflows as well as trade resolution between the US and China towards the
later part of the year. Meanwhile, a continued intervention by the Central Bank of Nigeria
kept naira largely stable through 2019. Notably, the South African rand emerged as the
region’s best performing currency in 2019, shrugging off a raft of negatives including a
stagnant economy, the risk of a credit-rating downgrade to junk, and a failing state-
owned electricity and aviation company. Elsewhere, the Angolan kwanza was the
region’s worst performing currency as the Central Bank continued to pursue its controlled
adjustment of the exchange rate since abandoning the peg to the USD in Jan-18. In
Ghana, the cedi struggled to recover the losses recorded in H1-19, which was stimulated
by a surprise 100bps rate cut by the Bank of Ghana in Jan-19 that spurred FPI outflows
during the early part of the year. Additionally, weak Q3-19 GDP growth further added
pressure on the cedi. The West African CFA franc also depreciated against the dollar in
2019, as uncertainty around the adoption of the Eco currency clouded the year.
Sub-Saharan Africa
Source: Bloomberg, United Capital Research
9.2%
8.3% 8.3%7.8%
7.5% 7.2% 7.0% 5.3%
6.0%
7.5%
6.2%6.9%
5.4%
6.3%
4.7%
2.2%
4.7%
9.0%
Angola Nigeria Ghana Ivory
Coast
Kenya Senegal Tanzania South
Africa
Zambia
Save for Zambia, yields on SSA Eurobond decline across the board
Average yield in Dec-18 vs Dec-19
31/12/2018 31/12/2019
Figure 14
South African rand
emerged as the
region’s best
performing currency in
2019
Nigeria Outlook 2020: A Different Playing Field
26 www.unitedcapitalplcgroup.com
Notably, late in Dec-19, West African Economic and Monetary Union (also known by its
French acronym, UEMOA) adopted the Eco as its official currency ahead of the Jun-20
timeline set by ECOWAS. This was as they cut some of their financial ties with France that
had underpinned the region’s previous common currency, CFA franc. Specifically, under
the new deal, the Eco will remain pegged to the euro but the African countries in the
bloc would not have to keep 50.0% of their reserves in the French Treasury and there will
no longer be a French representative on the UEMOA board. However, the changes will
only affect the West African form of the currency as the Central African counterpart -
Economic and Monetary Union of Central Africa (CEMAC), continues to adopt CFA franc
as their official currency.
Our overall outlook for currencies within the region is weak. In Nigeria, we expect the
Apex bank to continue to use non-conventional policies to support the naira. In the
Central African CFA franc zone, given that the currencies are pegged to the euro by a
fixed exchange rate, we could see further weakening in the CFA franc amid faltering
growth in the Eurozone. In the WAEMU region, while no definite date has been set for the
circulation of the new eco currency, we expect the currency to come under immediate
pressure once implemented amid uncertainty that continues to trail the complete
adoption by other ECOWAS members. Similarly, we expect the Ghanaian cedi (GHS),
South African rand (ZAR) and Kenyan shilling (KES) to weaken (the degree of weakening
will vary per country) relative to the USD, due to a probable increase in FX demand to
meet import needs, poor growth dynamics in South Africa, and continued political
uncertainty in Ghana.
Currency outlook
across the region
remains weak
Sub-Saharan Africa
Source: Bloomberg, United Capital Research
2.4%0.4% 0.0%
-2.1%
-14.0%
-36.0%
South Africa Kenya Nigeria W/A CFA franc Ghana Angola
Rand defies economic challenges, emerge as SSA's best performing
currency in 2019
YTD performace against the US$
Figure 15
UEMOA adopted the
Eco as its official
currency ahead of the
Jun-20 timeline set by
ECOWAS
Nigeria Outlook 2020: A Different Playing Field
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Equity Market: Lack of reform to spook investors
Over 2019, equities in global, emerging and frontier markets bucked the 2018 bearish
trend as most indices ended in the green territory on the back of the global easing
narratives. However, most equities in the SSA region underperformed their EM and FM
peers as FPIs piled into high yielding emerging market debt instruments. Of the six
exchanges under our watch, only the South African and Kenyan exchange closed 2019 in
the positive territory. The performance in Kenya was buoyed by its strong economic
growth in H1-19 and the possibility for the removal of interest rate caps that have
constrained banking sector earnings, in H2-19. Meanwhile, for South Africa, it was a tale of
two halves as the continued re-assurance by the President to commit to reforms,
provided investors with some fundamental justifications for buying South African equities
in H1-19 but the continued drag to commit to those reforms spurred some capital
reversals in H2-19. On the other hand, the benchmark indices in Ghana, Nigeria, BRVM
bloc and Mauritius all closed 2019 in the negative territory, largely due to risk-off
sentiments by foreign investors and the lack of pro-market reforms.
Looking ahead, we believe the outlook for Emerging and Frontier Market equities will
remain positive through 2020 on the back of the expectation for a more dovish global
monetary policy. Specifically, for SSA, we expect interest in equities to remain
fundamentally driven as the heavy-weight market movers – FPI – continue to look for bold
economic reforms as fundamental reason for buying equities. Thus, in absence of any
new reforms in 2020, we expect sentiments to remain weak.
Emerging and Frontier
Market equities to
thrive well come 2020
Sub-Saharan Africa
Source: Bloomberg, United Capital Research
18.5%15.8%
13.2%
8.2%
-1.9%
-7.5%-9.7%
-14.6%
Kenya EmergingMarket
FrontierMarket
South Africa Mauritius BRVM Ghana Nigeria
Only Kenya and South Africa close 2019 in the green territory
YTD equity market performance (local)
Figure 15
...most equities in the
SSA region
underperformed their
EM and FM peers
...we believe the
outlook for Emerging
and Frontier Market
equities will remain
positive through 2020
Nigeria Outlook 2020: A Different Playing Field
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Px_Last CHG_PCT_1DCHG_PCT_WTDCHG_PCT_YTDPE_RatioBEST_DIV_YLDPx_to_book_ratio
Macroeconomics | Equities | Fixed Income | Currencies | CommoditiesPx_Last CHG_PCT_1D CHG_PCT_WTDCHG_PCT_YTD PE_Ratio EQY_DVD_YLD_12MPx_to_book_ratio
Equities Ticker Level Mcap ($'bn) YTD (local) P/E P/B Div. Yield
ICXCOMP IndexBRVM ICXCOMP 159.2 8.2 -7.5% 8.0 1.4 6.8%
EGX100 IndexEgypt EGX100 1,398.1 32.9 -19.1% 13.9 1.8 4.3%
GGSECI IndexGhana GGSECI 2,257.2 8.0 -9.7% 15.2 1.6 0.7%
NSEASI IndexKenya NSEASI 166.4 24.5 18.5% 12.5 1.9 5.9%
SEMDEX IndexMauritius SEMDEX 2,177.1 6.7 -1.9% 17.4 0.9 3.1%
MOSENEW IndexMorocco MOSENEW 12,171.9 65.4 7.1% 21.1 2.7 3.6%
NGSEINDX IndexNigeria NGSEINDX 26,842.1 35.5 -14.6% 7.1 1.3 6.1%
JALSH IndexSouth Africa JALSH 57,084.1 1,054.1 8.2% 15.8 1.8 4.1%
TUSISE IndexTunisia TUSISE 7,122.1 7.2 -2.1% 19.6 2.4 2.1%
ZHIALLSH IndexZimbabwe ZHIALLSH 230.1 1.6 57.3% na na 0.2%
MXWO IndexGlobal Market MXWO 2,353.3 50,450.8 24.9% 20.6 2.6 2.4%
MXFM IndexFrontier Market MXFM 584.1 341.8 13.2% 10.5 1.9 3.9%
MXEF IndexEmerging Market MXEF 1,118.4 18,422.0 15.8% 15.4 1.7 2.6%
Eurobonds Amt Out ($'bn) Average YTM WTD YTD
Angola 8.0 7.4% -0.4% -1.6%
Egypt 27.6 5.5% -0.3% -1.8%
Ghana 11.0 6.7% -0.1% -1.6%
Iv ory Coast 6.6 5.3% -0.4% -2.5%
Kenya 9.7 6.2% 0.0% -1.3%
Morocco 3.4 3.1% 0.0% -1.6%
Nigeria 11.2 6.2% 0.0% -2.1%
Senegal 2.9 4.5% -0.1% -2.6%
GHS BGN CurncySouth Africa 23.4 4.4% 0.0% -0.9%
Tunisia 3.0 6.8% 0.0% -1.5%
Currencies (vs. USD) Spot Rate WTD MTD YTD 6M Forward 12M Forward
AOA BGN CurncyAngola AOA: Kwanza 482.2 0.0% 1.2% -36.0% na na
EGP CurncyEgypt EGP:Pound 16.0 0.0% 0.5% 11.7% 16.6 17.4
GHS BGN CurncyGhana GHS:Cedi 5.7 0.0% -1.9% -14.0% 6.2 6.8
KES BGN CurncyKenya KES: Shilling 101.4 -0.1% 1.2% 0.4% na na
MUR BGN CurncyMauritius MUR: Rupee 36.3 0.6% 1.4% -5.6% na na
MAD BGN CurncyMorocco MAD: Dirham 9.6 0.4% 1.1% -0.1% 9.5 9.6
NGN BGN CurncyNigeria NGN: Naira 362.6 -0.2% -0.5% 0.0% 377.7 396.7
ZAR BGN CurncySouth Africa ZAR: Rand 14.0 0.1% 4.7% 2.4% 14.4 14.7
TND BGN CurncyTunisia TND: Dinar 2.8 0.3% 2.4% 7.7% na na
XOF BGN CurncyWAMU CFA: Franc 585.2 0.5% 1.7% -2.1% na na5
Commodities Spot Rate WTD MTD YTD 52 Week High 52 Week Low 12M Forward
CO1 ComdtyBrent Crude USD/bbl. 66.2 -2.8% 6.2% 23.2% 75.6 52.5
GC1 COMB ComdtyGold USD/ t oz 1,523.2 0.6% 3.9% 18.9% 1,559.8 1,266.0
HG1 COMB ComdtyCopper USD/lb. 279.8 -1.4% 5.9% 6.3% 299.6 246.8
CCH0 ComdtyCocoa USD/MT 2,540.0 1.7% -1.1% 2.8% 2,694.0 2,188.0
Macro & Fixed Income 10Yr Bnd Yld Inflation Real Return Policy Rate *GDP ($'b) **GDP Growth Reserves ($'b)
Angola 8.8% 1.5% 7.2% 18.0% 105.8 2.5% 17.6
Egypt 16.0% 3.6% 12.4% 14.3% 250.9 5.3% 45.4
Ghana 19.0% 8.2% 10.8% 16.0% 65.6 5.6% 6.6
Kenya 12.3% 5.8% 6.5% 8.5% 87.9 5.1% 9.4
Mauritius 4.4% 0.3% 4.1% 3.4% 14.2 2.9% 7.3
Morocco 2.9% 0.4% 2.5% 2.1% 117.9 2.1% 25.3
Nigeria 11.6% 11.9% -0.3% 13.5% 397.3 2.3% 38.6
South Africa 9.0% 3.6% 5.4% 6.5% 368.3 0.1% 54.9
Tanzania 14.5% 3.6% 10.9% 12.0% 58.0 7.7% 4.7
Tunisia 9.8% 6.3% 3.5% 7.8% 39.9 1.0% 7.1
Performance Summary
December 31, 2019
Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19
Movements in Global Indices vs Africa
MSCI World S&P 500
FTSE 100 MSCI Africa
Sources: Bloomberg, United Capital Research *GDP ($’b): Annual GDP by World Bank
** GDP Growth: Latest Quarterly y/y GDP Growth
Domestic
Macro and
Policies
Nigeria Outlook 2020: A Different Playing Field
31 www.unitedcapitalplcgroup.com
Domestic Macroeconomic Overview
…in need of a coordinated and coherent policy framework
Momentum in the Nigerian economy remained at a snail’s pace in 2019 despite
increased clarity in the political space. While issues surrounding the 2019 general election
subdued economic activities in Q1-2019, investment and business decisions were hushed
by policy uncertainty and incoherent policy pronouncements in the remaining part of the
year. As such, output growth remained at the recovery phase, projected at 2.24% for FY-
2019. Though the headline inflation rate moderated significantly, consumption spending
remained weak. Also, actual government revenue continued to underperform budget
estimates (at N2.0trn vs N2.9trn), thus constraining spending. As such, fiscal deficit
remained elevated, keeping cost of capital high and necessitating direct central bank
financing of the government. Monetary policy stance was largely unconventional as the
Central Bank of Nigeria (CBN) opted to focus on domestic liquidity management via
increased OMO sales, exclusion of non-banking institutions to force down rates while
compelling Deposit Money Banks (DMBs) to lend to the real sector.
In the external sector, Nigeria reluctantly signed the African Continental Free Trade
Agreement (AfCFTA) but trade relations with bordering economies became tense in Aug-
19 as the Nigerian authorities ordered the closure of all land borders to check smuggling,
boost revenue from trade and protect local production. Additionally, investment flows
remained broadly in favour of foreign portfolio investment (FPIs), dominated by carry
traders looking to exchange cheap liabilities in the advanced market for the CBN’s short
term bills (OMO), while foreign direct investment (FDIs) remained on the sidelines. In the oil
market, Brent prices averaged $63.7/b for the year amid escalation of trade war
between the US and China. This pressured funds flow and prompted the CBN to create a
special window for FPIs, offering them higher OMO rate (compared to equivalent FGN’s T-
Bills rate) to support the position of the external reserves. Yet, Nigeria’s dollar reserves
suffered a +$5.0bn diminution in H2-19 on the back of the apex bank’s intervention in the
currency market to keep exchange rate relatively stable.
In 2020, the outlook for the Nigerian economy hangs on a framework of poorly
coordinated and incoherent policy outlines. Evidently, a quick sequence of monetary
and trade policy actions, particularly those relating to sales of CBN bills and complete
closure of land borders, announced since Aug-19, is seemingly changing the dynamics in
the financial market. As such, we align with the position of the IMF in its Article IV on
Nigeria in Oct-19, that the country must implement a coherent and coordinated set of
policies to urgently reduce vulnerabilities and hasten output growth over the medium
term. To achieve this, the IMF recommends maintaining a tight monetary policy stance
through more conventional tools as well as an ambitious revenue-based fiscal
consolidation in the face of increasing CBN financing of government expenditure.
Government revenue
continued to
underperform budget
estimates
The Nigerian economy
hangs on a framework
of poorly coordinated
and incoherent policies
Domestic Macro Overview
Nigeria Outlook 2020: A Different Playing Field
32 www.unitedcapitalplcgroup.com
Fiscal Policy
Nigeria’s Strategic Revenue Growth Initiative
In response to rising recurrent spending, fiscal deficit and weaker oil revenue, Nigeria’s
Minister of Finance, Budget, and National planning, Mrs. Zainab Ahmed, launched the
Strategic Revenue Growth Initiative (SRGI) in 2019. According to the Minister, the
implementation of the SRGI is targeted at rapidly boosting government revenue across
the oil and non-oil sectors in the face of sharp rising debt profile. By the Debt
Management Office’s (DMO) account, national debt stock as at H1-2019 stood at
N25.7tn (up 15.9%y/y), of which FGN’ outstanding debt settled at N20.4tn (up 14.8%y/y).
What is more worrisome is that debt service to revenue continues to rise, at 54% as at Jun-
19, implying that the FG spent N54.0 out of every N100.0 revenue on debt servicing.
Clearly, the above provides an insight into the need for the fiscal authorities to be more
aggressive at mobilizing revenue. As such, this has resulted in several announcements
lately, some of which includes; proposed increase in VAT from 5.0% to 7.5%, possible return
of toll gates on federal roads, duty on imported personal items with a value of N50,000,
excise duty on Alcohol & Carbonated drinks, proposed tax on luxury goods, amendment
of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC)
agreements and the revision of NNPC stake in JVs to 40.0% among others. Looking at the
actual revenue performance of the FGN as of H1-19 versus the budgeted revenue for
2019, only 29.1% of the projected revenue has been achieved. Shockingly, the minister of
finance noted that it is impossible to meet 80.0% revenue performance by year-end.
To buttress the point above, a review of the CBN’s balance sheet indicated that FGN’s
deposits with the apex bank entered a negative balance in Q3-19, the first time since
2009, settling at c.N2.0bn as at Mar-19, after dipping by 441% since January 2018. In the
face of revenue pressures, recurrent spending continues to spike due to rising wage bill
and cost of borrowing. Notably, the FGN and the Nigerian Labour Congress (NLC)
reached an agreement to peg minimum wage in the country at N30,000/month as well
The fiscal authorities
are to drive aggressive
mobilization of
revenue.
Domestic Macro Overview
Debt servicing to
revenue is alarmingly
high
Source: World Bank, United Capital Research
Figure 16
Nigeria Outlook 2020: A Different Playing Field
33 www.unitedcapitalplcgroup.com
as adjust the salaries of civil servants across Grade Levels (GL 7-17) by an average of
18.0% in Oct-19, effective from Apr-19.
To gain further insight into the fiscal policy outlook of the Nigerian government, a review
of the 2020 budget showed that total expenditure of the federal government will increase
to N10.59tn in 2020, larger than the 2019 budget. Also, a whopping sum of N4.9tn (or
47.6%) is budgeted for non-debt recurrent spending alone. Particularly, salaries, pensions
and other overheads such as insurance will account for 74.0% of non-debt recurrent
spending, with the wage bill of the FGN projected to hit N2.9tn following the new
minimum wage agreement. Capital expenditure (excluding the statutory spending of
N0.56tn) is estimated at N2.5tn (vs. N2.7tn for 2019) above planned borrowing of N2.18tn
but well below debt service cost of N2.7tn. As such, it is worthy of note that debt servicing
cost is already crowding out capital expenditure. Yet, the need for massive investment in
human and physical resources such as education, health care, roads, power, and port
facilities, is a must for Nigeria to achieve its desired level of economic development.
Domestic Macro Overview
Total expenditure will
increase in 2020 to
N10.59tn
Figure 17
Source: World Bank, United Capital Research
Nigeria Outlook 2020: A Different Playing Field
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Reflecting on the realities above, revenue estimates in the 2020 budget, though largely
optimistic, was accompanied by a finance bill that proposes sweeping modifications to
tax laws in Nigeria. According to budget estimates, Nigeria hopes to mobilize a record
revenue size of N8.15tn, on the assumption that oil revenue will contribute only N2.6tn
(32.2%) while non-oil tax revenue will account for N1.8tn (22.0%). The bulk of the 2020
revenue is expected to come in via other sources (expected to account for N3.7tn or
45.1%) which includes signature bonuses from concessions, surpluses of Government-
Owned Enterprises (GOEs), independent revenues, recoveries and grants.
The above notwithstanding, the FGN is leaving no stone unturned in its effort to boost oil
and non-oil revenue. On oil revenue, Nigeria has made two significant changes that will
affect its oil revenue profile in 2020. On tax revenue, the fiscal authority has pushed a
finance bill to the National Assembly alongside the budget, to review fiscal rules around
taxes in Nigeria to further shore-up government revenue.
Domestic Macro Overview
Source: FMF, Budget Speech, United Capital Research
The finance bill
proposes sweeping
modifications to tax
laws in Nigeria
Source: FMF, 2020 Budget Speech, United Capital Research
Figure 18
Figure 19
NON-OIL TAX REVENUE
✓ CIT: N0.8 trn (58%)
✓ CUSTOMS N0. 3 trn(22%)
✓ VAT: N0.23 trn 16%)
✓ FED LEVIES: N0.06 trn(4%)
BUDGETED FEDERAL
GOVERNMENT REVENUE
✓ OIL PRICE : $57/B
✓ OIL PROD.: 2.18MB/D
✓ FX RATE : N305/$1
OIL AND GAS REVENUE
N 8.2 trillion(vs. N7.6tn in 2019)
N2.64 Trillion N1.81 Trillion
OTHERS REVENUE
✓ SIGN BONUS/
✓ RENEWAL N0.9 trn
✓ GOES: N0.85 trn
✓ INDEPENDENT : N0.6 trn
✓ RECOVERIES: N0.24 trn
✓ STAMP DUTY: N0.2 trn
✓ GRANT & FX DIFF N0.16 trn
N3.7 Trillion
INCLUDING
NASS N125BN
JUDICIARIES N110BN
UBEC N111.8BN
NDDC N80.9BN
BHCPF N44.5BN
NEDC N37.8BN
(FOR COMPLETIONS OF
MOST ON-GOING
PROJECTS,
EXCLUDING CAPEX
PORTION OF STATUTORY
TRANSFER OF N318.1BN)
CAPITAL
EXPENDITURE
TOTAL BORROWINGS
SOURCE FROM
DOMESTIC MKT N0.8TRN
FOREIGN MKT N0.8TRN
MULTI/BILATERAL N0.3TRN
PRIVATIZATION N0.13TRN
N2.1 Trillion N0.556 Trillion
(UP 14.4% VS. 2019
ESTIMATE , 24% OF THE
BUDGET)
N2.45 Trillion
(PROGRAM SEEKS TO LIFT
MANY FROM POVERTY &
CREATE OPPORTUNITY FOR
PEOPLE TO FEND FOR
THEMSELVES)
SOCIAL INVESTMENT
PROGRAM
N0.03 Trillion
N2.18 Trillion
(COMPRISING OF OIL AND
NON-OIL REVENUES,
INDEPENDENT REVENUES AND
OTHERS )
BUDGETED FEDERAL
GOVERNMENT REVENUE
N8.2 Trillion
N10.5TRILLION
STATUTORY
TRANSFERS
DEBT
SERVICE
(74% SALARIES & PENSIONS INCLUDING
MIN WAGE INCREASE, OTHERS ARE OVERHEADS
SUCH AS INSURANCE ETC,
RECURRENT
EXPENDITURE
N4.88 Trillion
Nigeria Outlook 2020: A Different Playing Field
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Some changes to oil production contracts
To reduce the burden of cash calls on Joint Venture (JV) Agreements between the NNPC
and IOCs, President Buhari ordered the NNPC to reduce its stake in JVs to 40.0% following
his victory at the 2019 general election. The NNPC currently holds a majority stake of 55%
to 60% in JVs, hence the proposed reductions are estimated at 15% to 20%. As such, this
will create a one-time windfall for the implementation of the budget. According to the
minister of Budget, farm downs were expected to happen in 2019 but whether the stakes
were offered outside the current partners are unclear.
Secondly, Nigeria also passed the amended Deep Offshore and Inland Basin Production
Sharing Contract (DOIBPSC) 1993 Act. While the Act was initially created to encourage
investment in Nigeria’s offshore assets, by providing lower royalties, taxes and allowances,
the amended bill target shoring up Nigeria's oil earnings, especially with respect to the
implementation of the 2020 budget. Notably, for royalty payable on a field basis, the
amended bill reviewed royalties for Inland Basin downwards from 10.0% to 7.5%. However,
in contrast to the initial bill which assigned a variable rate, depending on the depth
(12.0% for areas from 201–500 meters water depth, 8.0% for 501-800 meters, 4.0% for 801-
1000 meters and 0.0% for below 1000 meters) of the off-shore explorations, the amended
bill assigns a fixed rate of 10.0% on all oil fields below 200 meters. Additionally, to capture
market volatilities, the new bill introduced a specific price reflective royalty, such that at
prices ranges between $20/b - $60/b, $60 - $100/b, $101 to $149/b and above $150,
royalty charge will vary from 2.5%, 4.0%, 8.0% and 10.0% respectively.
It is worthy to note that the Attorney General of the Federation and Minister of Justice,
Abubakar Malami, has been making a case for the recovery of over $62.0bn from the
IOCs as arrears of revenues that should have accrued to Nigeria over the years that oil
sold above $20/b, in accordance to the provision of the 1993 Act, which allows for a
review of royalty rate when crude oil prices exceeded $20.0/b. Overall, the amended bill
is expected to increase oil revenue going forward. This may however increase the
operating cost of the players within the PSC contract, discourage new investments, and
further delay Final Investment Decisions on pending offshore projects, 11 of which are yet
to commence production.
…the amended bill
assigns a fixed rate of
10.0% on all oil fields
below 200 meters
Domestic Macro Overview
NNPC to reduce its
stake in JVs from 55%-
60% to 40%
JVs with NNPC
Sources: NNPC, Fitch solution, United Capital Research
Figure 20
Companies Stakes Region
Shell Petroleum Development Company of Nigeria NNPC (55%) Shell (30%), Elf (10%), Agip (5%) Onshore Swamp
Chevron Nigeria NNPC (60%), Chevron (40%) Warri, Niger River, Shallow Water
Mobile Producing Nigeria Unlimited NNPC (60%), Mobil (40%) Akwa Ibom
Nigeria Agip Oil Company NNPC (60%), Agip (20%), Philip (20%) Onshore
Elf Petroleum Nigeria Limited NNPC (60%), Elf (40%) On and offshore
Texaco Overseas Petroleum Company of Nigeria Unlimited NNPC (60%), Texaco (20%), Chevron (20%) Offshore
Nigeria Outlook 2020: A Different Playing Field
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Sweeping changes proposed by the finance bill
The finance bill is designed with the objective to reform domestic tax laws, promote fiscal
equity, incentivize investments in infrastructure & capital markets, support small businesses
and raise revenues for the Government. To achieve these objectives, key changes were
made to Nigerian tax laws which include; the Companies Income Tax (CIT), Value Added
Tax (VAT), Petroleum Profits Tax (PPT), Personal Income Tax (PIT), Capital Gains Tax (CGT),
Customs and Excise Tariff Etc. (Consolidation) and the Stamp Duties Acts.
To optimize tax revenue on CIT, some of the changes proposed include:
1. Expansion of the basis for taxing Non-Resident Companies (NRCs) with significant
economic presence in Nigeria by including digital/electronic services and services
rendered outside Nigeria to a Nigerian beneficiary;
2. Introduction of a 2.0% and 1.0% bonus on early payment by medium-sized (with
revenue of N25.0bn to N100.0bn) and large (revenue above N100.0bn) companies
respectively, where CIT liability is paid 90 days before the due date of filing;
3. Exemption of small companies (with revenue <N25.0m) from minimum tax payment;
4. Repealed min tax exemption granted to companies with 25.0% imported equity;
5. Interest on foreign loans from related parties should not exceed 30.0% of EBITDA in
any given tax year and interest expense not fully utilized can be carried forward for a
maximum of 5 years;
6. To eliminate the risk of double taxation, dividends paid out of retained earnings
already taxed under CIT Act, PPT Act, and CGT Act, exempted profits/income,
franked investment income, and rental income received by Real Estate Investment
Companies for distribution to their shareholders, are all exempted.
On Value Added Taxes, the finance bill proposes to:
1. Increase in the VAT rate from 5.0% to 7.5% and expand the definition of goods to
include intangible products (properties and assets but excluding land);
2. Exempted small companies from VAT registration and filing obligation;
3. Introduced "place of supply" rules for goods and services rendered by NRCs and
imposed an obligation on Nigerian customer of an NRC to self-account for the VAT;
4. Added basic food items (cereals, cooking oils, culinary herbs, fish, flour & starch, fruits,
live or raw meat & poultry, milk, nuts, pulses, roots, salt, vegetables, and water), locally
manufactured sanitary towels, tuition (primary, secondary and tertiary education)
and services rendered by Microfinance Banks, to the exemption list.
Some of the changes to Other Tax laws are:
1. Deletion of tax relief for children and dependent relatives in the PIT Act
2. Deletion of exemption for dividends paid out of petroleum profit in the PPT Act
3. Goods imported into Nigeria to incentivize local product now subject to Customs &
The finance bill aims to
promote fiscal equity,
incentivize investments
in infrastructure &
capital markets,
support SMEs and raise
government revenues
Domestic Macro Overview
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Excise Tariff
4. Increased the maximum amount exempted from tax due to compensation of loss of
office to N10.0m
From all indications, the Nigerian government is clear in its determination to review its tax
laws to optimize revenue. As such, the finance bill captures items that will increase both
the tax rate (as in the case of VAT) and the base while promoting equity. We think this is
laudable, considering that the review of the tax laws as proposed by the finance bill is
unprecedented. If successfully passed into law, the bill will bolster revenue from VAT which
is currently less than 1% of GDP. Non-oil revenue as a ratio of non- oil GDP should also
improve.
Clamping down on informal cross border trades
Concerned about the negative effect of informal cross border trade, the FGN ordered a
complete shutdown of land borders in between Nigeria and its neighbours, most notably
Republic of Benin and Niger. The decision halted legal and illegal trade flows through
land borders, leaving air and seaports as the only available option for external trade in
goods. While this devastated economic momentum in the Republic of Benin, built around
entrepôt trade, trade flows by road with not too distant neighbours like Ghana and
landlocked Republic of Niger were also affected. The reasons behind the decision
according to government officials included: checkmating the smuggling of staple food
and subsidized petrol products; preventing illegitimate movement of weapons and drugs
into the country; protecting local producers from unfair competition from cheaper but
illegally imported substitutes; and ending significant custom/trade revenue loss. While
negotiations are on-going, the Nigerian government noted that the border may remain
closed till 31st of January 2020 to ensure that the strategic initiatives behind the decision
are achieved while getting the assurance of neighbouring countries to firm up their end
of the bargain.
Undoubtedly, same way cheaper staple food is fueling smuggling into Nigeria from the
neighbouring hubs, petrol price differences create the incentive to smuggle petrol out of
Nigeria. For instance, while official importation of rice in Nigeria crashed to record low in
2018 compared to the level in 2015, importation of rice in the Republic of Benin increased
dramatically over the same period. To curb the problem of subsidized petrol being
smuggled out of Nigeria, all petrol stations within 20km around the borders were also shut
down. Consequently, the NNPC reported that a total of 6mn liters of fuel is saved daily
following the action.
Certainly, local producers of staple food are one of the biggest winners, as they can push
more volumes. Nonetheless, consumers will suffer relatively higher prices amid supply
shortages. Fiscal authorities will also benefit, judging by increased custom revenue and
huge amount of savings on subsidy payment. In 2020, the outcome of the on-going
negotiation between the Nigerian authorities and its neighbours will affect government
Domestic Macro Overview
Border closure has
helped Nigeria cut
down illegal petrol
consumption &
smuggling
Local producers of
staple food are the
biggest benefactors of
the border closure
Nigeria Outlook 2020: A Different Playing Field
38 www.unitedcapitalplcgroup.com
revenue positively, due to lower oil subsidy and higher custom revenue. However, this
keep food prices relatively elevated, until local production is enough to meet demand.
Monetary policy
CBN’s Balance sheet unwinding and monetary policy unorthodoxy
From 2015 to Q3-19, monetary policy was mostly tight, judging by aggressive sales of
Open Market Operations (OMO) bills which totaled N13.0tn as at Aug-19, the CBN
commenced the process of unwinding its balance sheet in Q3-19. Rather than go the
route of conventional policy tools, the apex bank announced the exclusion of local
corporates and individuals from participation, both at the primary and secondary OMO
markets from Oct-19. Of the N13.0tn OMO bill outstanding as of Aug-19, c.25.0% are in
the hands of the local corporates and individuals. Technically, by not rolling over some
maturing bills, the CBN flooded the system with liquidity, thus crashing market interest rates
to single digit. Meanwhile, OMO sales to FPIs are maintained at a relatively competitive
rate as a strategy to preserve the external reserves and keep the exchange rate stable.
As of Aug-19, FPIs hold about 50.0% of OMO bills.
To spur credit to the real sector, the CBN had earlier ordered banks to maintain a loan to
deposit ratio of 60%, later reviewed to 65.0%, to compel the banks to expand credit or risk
being penalized, given a moderate improvement in the credit quality. Notably, a
whopping sum of N499.0bn was debited from 12 erring banks for failure to meet the initial
60.0% minimum LDR requirement. With stricter rules around credit growth, banks are
forced to either reduce their fixed term deposit rates to moderate deposit growth or
revise their lending rates lower to aggressively grow credit or simultaneously pursue both in
a bid to hit the CBN LDR target.
With huge OMO maturity in Q4-19, lower money market rates and weaker appetite for
deposits on the part of the banks, a massive influx of naira liquidity spurred interest in the
local equity market which had hitherto been bearish. Clearly, there are concerns around
inflationary pressure and the implication for real interest rate as market rates collapsed to
Domestic Macro Overview
Source: Trade Map, United Capital Research
Figure 21 Figure 22
CBN compels banks to
maintain a Loan-to -
Deposit ratio of 65.0%
to expand credit
Nigeria Outlook 2020: A Different Playing Field
39 www.unitedcapitalplcgroup.com
single digits. However, huge system liquidity appears to be having the upper hand so far.
A total of N7.7tn worth of OMO bills are expected to mature between Jan-20 and Aug-20.
According to the IMF, managing vulnerabilities arising from large amounts of maturing
CBN bills, including those held by FPIs, requires stopping direct interventions by the apex
banks, the introduction of longer-term government instruments to mop up excess liquidity
and moving towards a uniform market-determined exchange rate. Should the CBN
decide to sustain its decision to unwind its balance sheet, the outlook for interest rates is
certainly southwards.
Domestic Output and Price Level
Will revenue reforms and CBN’s balance sheet unwinding spur faster growth?
Unsurprisingly, the momentum in the Nigerian economy remained tepid in 2019. GDP
growth continued at a slower pace compared to population, printing a 2.3% growth as at
Q3-19 relative to the population growth of c.2.7%. Notably, GDP growth was weaker in Q1
-19 and Q2-19 compared to the Q4-18 as electioneering and political activities
moderated economic momentum in H1-19. Evidently, impediments to growth in the
economy continued to be linked to poor investment confidence, tougher operating
environment and weaker consumer wallets, which constrained investment and corporate
output growth in the absence of fiscal stimulus.
In terms of sector performance, oil GDP spiked in 2019, thanks to the 0.2mb/d addition
from the Egina oil field which began production in Jan-19 and less disruption in the Niger-
Delta region. On the other hand, activities in the non-oil sector continued to falter. Non-oil
GDP growth was at the mercy of the Agriculture, Trade, and Manufacturing sectors –
accounting for c.50.0% of the GDP, which printed underwhelming outcomes in 2019,
amid poor crop yield, attributable to continued incidence of banditry and insecurity in
Domestic Macro Overview
Source: CBN, United Capital Research
Figure 23
A total of N7.7tn worth
of OMO bills are
expected to mature
between Jan-20 and
Aug-20
Overall momentum in
the Nigerian economy
remained tepid in 2019
...electioneering and
political activities
moderated economic
momentum in H1-19
Nigeria Outlook 2020: A Different Playing Field
40 www.unitedcapitalplcgroup.com
the middle belt and northern regions of the country. Notably, Trade – c.15.2% of the
overall GDP, recorded a second consecutive contraction in Q3-19, traceable to difficult
operating environment, constrained consumer wallets, partial closure of land borders and
poor economic stimulus. Overall, of the nineteen activity sectors making up the GDP, five
posted negative growth numbers in Q3-19, four sectors printed slower y/y growth while
ten witnessed faster growth compared to Q2-19.
Certainly, efforts to reform government finances via the finance bill and the recent
amendment of the DOIPSC Act must be commended alongside the CBN’s resolve to
boost private sector credit. However, GDP growth is expected to maintain a gradual
uptick in 2020 due to several factors. First, the absence of a well-coordinated and
coherent strategic policy framework that can hasten output growth is worrisome. Instead,
current policy efforts are seemingly disjointed and occasionally conflicting in our opinion.
For instance, a handshake between fiscal and monetary policy seems to be missing in
terms of policy objective. While the CBN is looking to aggressively drive real sector lending
and accelerate GDP growth, fiscal policy efforts such as increased taxes, border closure
and wage increment, are likely to hurt aggregate demand, thereby muting output
growth. Again, President Buhari’s broad policy objective is to lift a 100million people out of
poverty over the next 10 years. To achieve this, recent reform effort is focused on
incentivizing SMEs, boosting local production and the retail sector. However, recent
increase in food prices, due to supply shortages and the shutdown of the border may
stoke inflationary pressures within the country.
Using the expenditure approach at measuring GDP, we argue that the net impact of
recent government policy action may not hasten output growth significantly. For context,
higher fiscal spending on wages for civil servants and increased consumption taxes (via
VAT, POS charges, excise duties and possibly toll gates) on c.200 million Nigerians, may
have conflicting impact on consumption (C) which account for c.60.0% of GDP. Give or
take, consumption growth may be weak. Again, at 5.6% of GDP, the multiplier effect of
higher government spending (G) may not be enough to bolster GDP, with 25.0%
expended on debt servicing relative to 21.0% on capital spending. For investment (16.0%
of GDP), while gross domestic local investments (Id) may be supported by the CBN’s
Domestic Macro Overview
Source: NBS, United Capital Research
6.2%6.5%
6.2%5.9%
4.0%
2.4%2.8%
2.1%
-0.7%
-1.5%
-2.3%
-1.7%
-0.9%
0.7%1.2%
2.1% 2.0%1.5%
1.8%
2.4%2.0% 2.1% 2.3% 2.4%
2.2%2.4%
Q1
-14
Q2
-14
Q3
-14
Q4
-14
Q1
-15
Q2
-15
Q3
-15
Q4
-15
Q1
-16
Q2
-16
Q3
-16
Q4
-16
Q1
-17
Q2
-17
Q3
-17
Q4
-17
Q1
-18
Q2
-18
Q3
-18
Q4
-18
Q1
-19
Q2
-19
Q3
-19
Q4
-19
FY
-19e
202
0f
Nigeria is stuck in the recovery phase of economic cycle
Quarterly GDP growth rate viz. 3-m onth m oving average
Boom
Contraction Recession
Slowing recovery
Figure 24
…we argue that the net
impact of recent
government policy
action may not hasten
output growth
significantly
...current policy efforts
are seemingly
disjointed and
occasionally
conflicting in our
opinion
Nigeria Outlook 2020: A Different Playing Field
41 www.unitedcapitalplcgroup.com
recent effort to drive credit growth and lower interest rates, Foreign Direct Investment
(FDI) growth is unlikely to improve drastically in the absence of policy clarity and
deliberate policy actions to pull investors. Even so, gross domestic investment may remain
challenged by hostile operating environments relating to port congestion, high cost of
capital, poor transport network and huge cost of haulages and logistics. Hence,
investment growth may stay muted. Finally, Net Export (Xn), accounting for 19.4% of GDP,
is unlikely to expand significantly given that total export, which is crude oil & gas product-
led, may remain stable due to OPEC output cap and border closure. However, import
may shrink if negotiation between the Nigerian Authorities and its neighbours countries
result in a tighter control around the land borders even as the CBN continues to add more
to the list of items excluded from FX sales.
Overall, our view is that while the CBN’s recent unorthodox monetary policy will keep cost
of capital low by compelling banks to lend, faster GDP growth is unlikely in the near term.
Given the ongoing necessary but conflicting fiscal policy actions (e.g. the recent move to
increase taxes & trade restrictions) may hurt consumption and net export. Also, subsisting
concerns around policy unpredictability which have been one of the biggest
impediments to FDI flows and investment generally, as well as the reluctance to
implement reforms that will spur private sector growth is worrisome. Finally, the time span
required to fix power and other critical infrastructure that will ease the cost of doing
business and other structural impediments is a factor that may subdue growth in the
interim. Overall, our GDP growth forecast is pegged at 2.3% in 2020, slightly higher than
our 2.2% projection for 2019.
Domestic Macro Overview
Source: NBS, United Capital Research
Overall, our GDP
growth forecast is
pegged at 2.3% in
2020, slightly higher
than our 2.2%
projection for 2019
FDI growth is unlikely to
improve drastically in
the absence of policy
clarity and deliberate
policy actions to pull
investors
Figure 25 Figure 26
Nigeria GDP composition by expenditure approach Figure 27
Source: NBS, United Capital Research
Nigeria Outlook 2020: A Different Playing Field
42 www.unitedcapitalplcgroup.com
Inflation rate
Higher wage bill, any impact on price?
From 12.8% in Dec-18, the headline inflation rate moderated to a 43-month low of 11.02%
y/y in Aug-19 on the back of tighter monetary policy. However, the scenario was different
from September and the rest of Q4-19 as the headline rate bucked the southward trend,
spiking to 11.85%y/y in Nov -19 following a complete shutdown of land border to check
activities of smugglers which had kept local price of staple food relatively low. In contrast
to our expectation that m/m inflation rate was likely to moderate in H2-19 as observed
over the last 5years, due to seasonality, an unexpected shutdown of the border pressured
food prices northwards. For context, the price of a bag of 50kg rice surged from
c.N16,000/50kg bag in June 2019 to c.N28,000/50kg bag following a clampdown on
smuggling activities at the border. Additionally, expansionary monetary policy in Q4-19 as
well as increased demand associated with year-end festivities further pressured prices. As
such, headline inflation averaged 11.4% in 2019 compared to 12.2% in 2018.
In 2020, the CBN is likely the sustain its OMO sale to FPIs, a decision that may continue to
keep FPI interest dominant in money market funds. In the absence of low yield on money
market bills sold to FPIs, foreign interest in local equity market may remain tepid amid
fears of a naira devaluation and confidence deficit in the economy. Notably, we expect
upsurge in loans and other claims to continue given the low interest rate environment in
the international debt market. However, FDI flow may remain broadly muted.
We expect headline inflation rate to climb northwards in the first-half of the 2020 even if
m/m inflation moderates from 1.0% to 0.8%. The structural issues that may sway outlook for
inflation northwards include the tighter conditions around the land border as an outcome
of the trade talks between the Nigeria and its neighbouring counterparts. Again, the
implementation of cost-reflective electricity tariff in Q1-20 as well as monetary expansion
by the CBN during the period may keep prices elevated. As such, we estimate headline
inflation to peak at 12.16% in H1-20 and potentially moderate to an average of 11.06% in
H2-20. This is however, in the absence of further structural changes that may trigger fresh
Domestic Macro Overview
Headline inflation
averaged 11.4% in
2019 compared to
12.2% in 2018
Source: NBS, United Capital Research
Figure 28
We estimate headline
inflation to peak at
12.16% in H1-20 and
potentially moderate to
an average of 11.06%
in H2-20.
Nigeria Outlook 2020: A Different Playing Field
43 www.unitedcapitalplcgroup.com
Source: CBN, FMDQ, United Capital Research
uptick in m/m inflation. In all, we expect headline inflation rate to average 11.9% in 2020.
Interest Rate
Lower for longer?
As noted above, monetary policy in 2020 is expected to be broadly expansionary, amid
efforts by the CBN to boost credit to private sector, hasten GDP growth and reduce cost
of debt servicing. Although the monetary policy committee held all policy rates
unchanged at the last meeting in 2019, the committee favoured the position of the apex
bank to restrict local corporates and individuals from participation in the periodic OMO
auction or trade OMO bills in the secondary market. With huge OMO maturities expected
to hit the system for most of H1-20, we expect massive system liquidity to keep interest
rates in the Nigerian economy at record lows. While MPR as well as other policy variables
may be kept at their current levels, market rates on government Treasury bills should stay
at single digit levels in H1-20. Also, Bank lending rates will trend southward amid increased
efforts by the banks to expand their loan book in a bid to bolster interest income. Yields
on bonds across maturities will also moderate and stabilize around 10.5%-11.5% in H1-20 as
demand for higher yielding medium to long term instruments increases.
External Sector
Foreign exchange rate and reserves: Will the CBN harmonize Forex windows?
Currency market conditions were relatively stable in 2019 as the Apex Bank stayed
committed to defending the naira via frequent wholesale and retail FX intervention. This
buoyed liquidity and kept the local currency relatively stable compared to widespread
pressure on currencies among peers within Sub-Saharan Africa. Despite jitters of a rout
during the general election in Q1-19, the local unit firmed against the greenback amid a
sustained uptrend in oil prices, which bolstered Nigeria’s external reserves to $45.0bn
during the period. Notably, while the external reserves improved 4.5% in H1-19, driven by
stronger than expected uptick in oil prices and increased FPI inflow, Nigeria’s dollar
reserves tumbled 8.5% in H2-19, pressured by weaker oil prices and a reduction in net
Domestic Macro Overview
…we expect massive
system liquidity to keep
interest rates in the
Nigerian economy at
record lows, especially
in H1-20
3.8%
7.8%
11.8%
15.8%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
CBN's recent regulation on OMO sale triggered a sharp drop in borrowing rate
Nigeria Fixed Income Market Yield Curve
Dec-19 (OMO) Jun-19 Dec-18 Dec-19 (NTB/Bond)
Figure 29
Nigeria Outlook 2020: A Different Playing Field
44 www.unitedcapitalplcgroup.com
portfolio inflows. Accordingly, while the naira depreciated 0.1% y/y to N364.5/$, parallel
market rates appreciated by 0.1%y/y to N360.5/$ and remained flat at N307.0/$ at the
official window.
The above notwithstanding, concerns around the stability of the naira and the likelihood
of a near term adjustment remained the biggest issues on the mind of investors interested
in Nigeria. Our interaction with many investors revealed that there are three key concerns
about the outlook of the naira. The first relates to the multiple exchange rates regime
where the official rate trades at a wide margin to the I&E rate, alongside 2 to 3 other
windows with rates trading at marginal spreads. The second concern relates to the
possible harmonization of rates across all windows or a collapse to the I&E rate (which is
considered the market rate) as a strategy to boost government naira revenue and
support allocations to States. The final concern is tied to the complexity and transparency
of the current exchange rate regime as well as the need for simplification and more
clarity. Again, while the list of 41 items excluded from FX sales was proposed to be a
temporary fix, the CBN has continued to add more items to the list.
With the above in mind, our view remains that the apex bank will maintain the status quo
for now, so long as the unorthodox methodology of selling OMO bills to FPIs as a strategy
to preserve the reserves is working. We note that while the biggest argument for the CBN
to devalue the naira remains pressure on oil revenue, recent fiscal policy efforts aimed at
boosting revenue may keep a devaluation off the table. As such, we maintain that the
CBN is unlikely to take a major adjustment in the currency for now. Nevertheless, a
medium-term adjustment of the current policy framework by the CBN remains imminent.
Even so, we insist that this will mostly affect the official segment of the market where the
local unit is fixed at a huge discount to market rate. Hence, what we are likely to see in
the medium to long term will be the harmonization of the official rate from N305.5/$1 to
N360.0$1, to rebalance FGN’s revenue/expenditure profile in the face of dwindling
revenue while the I&E window rate is maintained at current level or allowed to weaken by
2% to 5%. Overall our outlook for the naira is stable in the near term with a potential
Domestic Macro Overview
Naira remained
relatively stable across
the FX segments in
2019
…we maintain that the
CBN is unlikely to take
a major adjustment in
the currency for now
Figure 30 Figure 31
Source: CBN, FMDQ, United Capital Research
Nigeria Outlook 2020: A Different Playing Field
45 www.unitedcapitalplcgroup.com
harmonization in the medium to long term.
Funds Flow: Flowing to assets with the best return
A review of foreign capital inflow into Nigeria since 2013 suggests that the bias of foreign
capital into Nigeria has historically tilted in favour of portfolio investments (FPIs). However,
this has shifted from interest in equities between 2013 and 2017 (with 2016 as an
exception) to low risk but high yielding money market instruments from 2018 to 2019. On a
quarter-by-quarter basis, NBS’s data shows that Interest in equities accounted for more
than 50.0% of capital importation into Nigeria between 2013 and 2015, fell to 11% in 2016
and rebounded to 40.0% in Q2-17. However, the bias of foreign capital flow to favour
money market bills was driven by the apex bank’s aggressive liquidity management
strategy via OMO sales to not just the deposit money banks, but also to FPIs, to stabilize
the exchange rate and preserve the reserves. Notably, foreign capital flow into Nigeria hit
a record high in Q1-19, as a total $8.5bn came into Nigeria with portfolio flow into money
market bills accounting for 70% or $5.9bn while interest in equities fell to record low of
8.0%.
For other components of capital inflow into Nigeria, data suggests that while the
contribution and quantum of Foreign Direct Investments (FDIs) continued to wane from
2014 to Q3-19, down from an average of $515.0mn per quarter in 2014 and 2015 to less
than $250.0mn since 2016, capital flows in form of loans and other claims continue to rise.
Domestic Macro Overview
Source: NBS, United Capital Research
Figure 32
...foreign interest in
local equity market
might remain tepid
amid fears of a naira
devaluation
Financial
Markets
Nigeria Outlook 2020: A Different Playing Field
48 www.unitedcapitalplcgroup.com
Financial Markets Review and Outlook
Easy monetary policy takes the lead in 2019
The year 2019 was not short of interesting themes for the Nigerian fixed income market, as
the co*cktail of easy monetary policy in the global market and CBN’s unorthodox
monetary policies kept system liquidity buoyant as well as guided fixed income rates
lower.
Carry traders dominate Nigeria’s money market in H1-19
The renewed fears of a global growth slowdown helped set the tone for easier monetary
policy decisions across the globe in 2019. These actions suppressed yields on fixed income
assets globally and spurred foreign investors’ appetite for the high-yielding emerging and
frontier market debts. Notably, with a stable outlook for FX in 2019 coupled with slowing
inflation rate and attractively high interest rate (above 14.0% level), Nigeria became an
investment destination for most carry traders in Q1-19. Accordingly, despite the election
uncertainties that characterized Q1-19, the total value of foreign portfolio capital
imported into Nigeria spiked (up 412.4% q/q to $7.1bn) during the quarter and was
concentrated in fixed income investments (90.8% of total FPI inflow). Also, demand for
FGN and CBN bills outweighed supply. Thus, average yield on treasury bills and bonds
which closed 2018 at 15.37% and 15.31%, moderated to 13.55% and 14.07% respectively
as at the end of Mar-19.
Additionally, a 50bps rate cut in Mar-19 – the first rate cut in more than 3 years – by the
Nigerian Monetary Policy Committee (MPC), predicated a further moderation in the yield
environment in Q2-19 and mildly weakened the investment case for carry traders. Hence,
FPI inflows into the debt market declined by 41.5%q/q to $3.8bn in Q2-19. Also, average
treasury bill and bond yields further declined to 12.13% and 13.92% respectively, at the
end of H1-19.
The total value of
foreign portfolio capital
imported into Nigeria
surged in Q1-19
Financial Markets
The MPC eased policy
rate to 13.5% in Q2-19,
first time in 3 years
3.8%
7.8%
11.8%
15.8%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Naira yield curve elongates as two Interest rates emerged in 2019
Nigeria Sovereign Yield Curve
Dec-19 (OMO) Jun-19 Dec-18 Dec-19 (NTB/Bond)
Figure 33
Source: FMDQ, United Capital Research
System liquidity was
buoyant in 2019
Nigeria Outlook 2020: A Different Playing Field
49 www.unitedcapitalplcgroup.com
CBN - The swing player in H2-19
In Q3-19, offshore appetite for naira debt weakened as pressure on inflation and FX rate
resurfaced during the period. Accordingly, average T-bill and Bond yields tracked higher
by 185bps and 25bps q/q to end Q3-19 at 13.28% and 14.15% respectively. However,
yields resumed a downtrend in Q4-19, following a series of unexpected policy changes
from the Apex bank aimed at lowering government’s borrowing cost and supporting
credit growth. Notably, the exclusion of non-bank local corporates and individuals from
participating at the CBN’s OMO market in Oct-19, heralded a rotation of excess funds
from large-sized OMO market (47.6% of local debt market) into the small-sized NTB (8.8%
of local debt market) and bonds market (38.6% of local debt market). Also, this led to the
separation of OMO bills from T-Bills. Consequently, OMO bill yields and T-bill yields, which
once tracked each other, parted and the spread widened to 7.3% as average T-bills stop
rate and yield closed the year at 4.8% and 4.9% respectively, while average OMO stop
rate and yield settled at 12.1% and 13.2% respectively. Average bond yield also fell from
14.2% level as at Q3-19 to 10.8% as at Dec-19 ending. In all, the extra yield foreign
investors get when buying Nigeria’s local fixed income instrument rather than their home
country’s treasuries, narrowed in H2-19 and made the investment case for carry trade less
compelling.
Primary Market: Issuers take advantage of low interest rate environment
Elsewhere, in the primary market segment, the FG successfully rolled over all maturing
Nigerian Treasury Bills (T-bill) during the period, worth N3.0tn at an average stop rate of
11.08% (vs. 11.99% in 2018). However, the Apex bank mopped up only N15.1tn (via OMO
sales) of the c. N15.9tn OMO maturities that hit the system during the year. Also, the OMO
stop rates came in marginally lower at 12.80% (vs 12.88% in 2018).
Yields declined in Q4-
19 due to unexpected
policy changes from
the Apex bank
Financial Markets
Source: Bloomberg, United Capital Research
5.0%
9.0%
13.0%
17.0%
1Y 3Y 5Y 7Y 10Y
Yie
ld S
pre
ad
Investment case for carry trade weakened in 2019, especially in Q4-19
Spread between Nigeria's treasury yields and developed market yields
U.S: Dec-19 U.K: Dec-19 E.U: Dec-19 JAPAN: Dec-19
U.S: Dec-18 U.K: Dec-18 E.U: Dec-18 JAPAN: Dec-18
Figure 34
The FG successfully
rolled over all maturing
T-bills at the primary
market in 2019
Nigeria Outlook 2020: A Different Playing Field
50 www.unitedcapitalplcgroup.com
Source: DMO, United Capital Research
In the bond space, the FGN was able to raise a total of N1.7tn at an average marginal
rate of 14.1%, a 15bps decline from 2018 levels. Notably, the Debt Management Office
(DMO) during its Apr-19 bond auction elongated the Nigeria’s yield curve by 10 years, as
it successfully issued its debut 30-year bond. Also, the FGN took advantage of the low
interest rate environment in Q4-19 to front-load its bond issuance at an average stop rate
of 13.0%. Similarly, the low yield environment spurred corporate issuances during the
period as we saw further activities at the commercial paper and corporate bond space.
Eurobond Market Activities: A weak appetite for dollar borrowing
Despite the low global interest rate environment, the FG stayed off the Eurobond market
in 2019, prioritizing loans from concessional sources and borrowing from the CBN. At the
secondary market segment, average yield on Nigerian sovereign Eurobonds declined,
down 210bps y/y to 6.4%, as foreign investors sought alpha in Emerging Market (EM)
assets. Similarly, interest in corporate Eurobonds was positive as average yield declined by
249bps y/y to 7.5%. However, an economic outlook downgrade from Stable to Negative
by Fitch and Moody’s (two renowned global credit rating agencies) dampened investors’
Low yield environment
further led to increased
issuances at the
Commercial paper and
corporate bond space
in Q4-19
Financial Markets
Source: CBN, United Capital Research
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5D
ec
-16
Fe
b-1
7
Ap
r-17
Ju
n-1
7
Au
g-1
7
Oc
t-1
7
De
c-1
7
Fe
b-1
8
Ap
r-18
Ju
n-1
8
Au
g-1
8
Oc
t-1
8
De
c-1
8
Fe
b-1
9
Ap
r-19
Ju
n-1
9
Au
g-1
9
Oc
t-1
9
De
c-1
9
Trill
ion
s
CBN unwinds its Balance Sheet in H2-19
Monthly net OMO flows (N)
Net OMO inflows/(outflows) 5-year Average
Figure 35
10%
11%
12%
13%
14%
15%
16%
10
60
110
160
210
260
310
Ja
n-2
Fe
b-2
Ma
r-20
Ap
r-20
Ma
y-2
Ju
n-2
Ju
l-2
Au
g-2
Se
p-2
Oc
t-2
No
v-2
De
c-2
Billio
ns
FGN front-loads bond issuance in Q4-19
Monthly bond issuance result in 2019
Allotment Offer Marginal Rates
Figure 36
Nigeria Outlook 2020: A Different Playing Field
51 www.unitedcapitalplcgroup.com
appetite for Nigerian Eurobond later in the year.
Elsewhere, we observed a weak appetite for dollar borrowing by corporates in 2019. This
was as Zenith bank ($500.0mn) and the defunct Diamond bank ($200.0mn) successfully
repaid their maturing dollar notes while Access bank ($400.0mn), Ecobank Nigeria
($250.0mn) and First bank ($450.0mn) successfully recalled their 2021 notes during the
period. Also, Zenith bank repurchased 78.5% of its only outstanding Eurobond worth
$500.0mn. Thus, the outstanding value of Nigeria’s corporate Eurobonds shrank to c.
$1.5bn in 2019 from US$3.5bn as at Dec-18.
2020 Outlook
Caught between domestic and global policies
For us, 2020 is a corporate issuer market, driven by buoyant system liquidity and a low
yield environment in H1-20. With tighter liquidity going into H2-20, we expect yields to
witness a gradual uptick from Q3-19. Accordingly, we project yield on FGN T-bills to stay in
the mid-to-high single digit levels in H1-19 and Bonds yields at low double-digit levels.
Yet, 2020 will be a play of demand side-factors (global and domestic monetary policy
actions) and supply-side factors (domestic financing needs and CBN mop up decisions).
Demand Side Factors
Global Monetary Policy: The fundamental backbone
2020 promises to be an interesting year as there are plenty unknowns to look at in the
developed market. For instance, US presidential elections, new ECB leadership, a likely
Brexit, oil price performance as well as trade agreement between US and China, are key
factors to watch in 2020. Yet, like 2019, we expect the tone of global central banks and
the action of their monetary policy committees to majorly set the pace of global demand
for EM debts, in 2020.
Financial Markets
Appetite for both
sovereign and
corporate Eurobond
issuance was weak in
2019
For us, 2020 is a
corporate issuer
market, driven by a low
yield environment in H1
-20.
Eurobond Issuer Rating/Agency Issue Date Maturity Date Value ($’mn) Coupon
Yield
(31/Dec/2019
)
Yield
(31/Dec/2018
)
Status
Federal Governememt of Nigeria BB-/Fitch; BB-/S&P 28-Jan-11 28-Jan-21 500.0 6.8% 3.4% 6.2% Outstanding
Federal Governememt of Nigeria B1/Moody's; B/S&P; B+/Fitch 27-Jun-17 27-Jun-22 300.0 5.6% 4.0% 6.7% Outstanding
Federal Governememt of Nigeria BB-/Fitch; BB-/S&P 12-Jul-13 12-Jul-23 500.0 6.4% 4.3% 7.5% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 21-Nov-18 21-Nov-25 1118.4 7.6% 5.5% 7.6% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 28-Nov-17 28-Nov-27 1500.0 6.5% 6.2% 8.4% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 23-Feb-18 23-Feb-30 1250.0 7.1% 6.9% 8.8% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 21-Nov-18 21-Jan-31 1000.0 8.7% 7.4% 9.1% Outstanding
Federal Governememt of Nigeria B1/Moody's; B/S&P; B+/Fitch 16-Feb-17 16-Feb-32 1500.0 7.9% 7.4% 7.9% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 23-Feb-18 23-Feb-38 1250.0 7.7% 7.7% 9.1% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 28-Nov-17 28-Nov-47 1500.0 7.6% 7.9% 9.2% Outstanding
Federal Governememt of Nigeria B2/Moody's; B/S&P; B+/Fitch 21-Nov-18 21-Jan-49 750.0 9.2% 8.2% 9.2% Outstanding
Corporate Eurobond
ZENITH BANK PLC B+/Fitch; BB-/S&P 22-Apr-14 22-Apr-19 500.0 6.3% na 7.2% Matured
DIAMOND BANK PLC B/Fitch; B/S&P 21-May-14 21-May-19 200.0 8.8% na 20.3% Matured
ACCESS BANK PLC II B-/Fitch; B/S&P 24-Jun-14 24-Jun-21 400.0 9.3% na 10.2% Recalled
FIRST BANK LTD B-/Fitch; B/S&P 23-Jul-14 23-Jul-21 450.0 8.0% na 9.2% Recalled
ECOBANK NIG. LTD B-/S&P 14-Aug-14 14-Aug-21 250.0 8.8% na 9.7% Recalled
ACCESS BANK PLC III B/Fitch; B/S&P 19-Oct-16 19-Oct-21 300.0 10.5% 3.9% 8.0% Outstanding
ZENITH BANK PLC II B/S&P; B+/Fitch 30-May-17 30-May-22 500.0 7.4% 4.2% 7.7% Repurchased 78.5%
UBA PLC B/S&P; B/Fitch 08-Jun-17 08-Jun-22 500.0 7.8% 5.1% 8.1% Outstanding
SEPLAT PETROLEUM DEV CO B-/S&P; B-/Fitch 21-Mar-18 01-Apr-23 350.0 9.3% 7.3% 9.5% Outstanding
Source: Bloomberg, United Capital Research
Three corporates recalled their Eurobond in 2019 Figure 38
Nigeria Outlook 2020: A Different Playing Field
52 www.unitedcapitalplcgroup.com
Accordingly, given our expectation for global monetary policy easing to continue in 2020
(but at a slower pace compared to 2019), we see moderated inflows into EM/FM assets.
However, in Nigeria, we believe expected macroeconomic uncertainty in 2020,
especially in H1-20, will continue to scare the FPIs off equity investment. Meanwhile, the
allure of double-digit OMO rate and the resolve of the CBN to keep naira stable, should
tilt foreign interest towards the money market – specifically to CBN bills.
Domestic Monetary Policy: At the mercy of FX stability?
Evidently, the expected dovish bias by the developed market central banks will create
more room for an accommodative CBN in 2020, especially as it aims to boost overall
economic growth. However, higher inflation rate and exchange rate volatilities are
downside risk for a more accommodative monetary policy in 2020. As such, we expect a
more cautious CBN, as it tries to strike a balance between stimulating economic growth
and maintaining price, as well as FX stability. To this end, we expect the Apex bank to
keep average interest rate on its 1-year OMO bill at an attractive level, while using other
non-conventional methods to spur growth. This is in a bid to continue to lure FPIs and
preserve FX reserves.
Supply Side Factors
Fiscal Policy: Will government ramp up borrowings?
The 2020 budget which was approved in Dec-19, projects a N1.9tn borrowing- split
equally between domestic and foreign sources. However, based on the analysis in the
macro section of this report and if historical trends are anything to go by, revenue
mobilization is expected to continue to underperform budgeted estimate. Hence, overall
fiscal deficit will widen in 2020. Looking at the above narratives, it is evident that the FG is
likely to pace up both domestic and foreign borrowings to fill up the expected revenue
gap. Also, based on reports from the Ministry of Finance in Dec-19, Nigeria is likely to return
to the international debt capital market, early 2020. If successful, we expect this to
Financial Markets
Early 2020, Nigeria may
return to the Eurobond
market
2.12.3
0.70.9
0.6 0.50.2
0.4
1.2
1.6
0.50.7
Ja
n-2
Fe
b-2
Ma
r-20
Ap
r-20
Ma
y-2
Ju
n-2
Ju
l-2
Au
g-2
Se
p-2
Oc
t-2
No
v-2
De
c-2
Bulk of 2020 OMO inflows are tilted towards Q1-20
OMO Maturity in 2020 (N'tn)
OMO Maturity in 2020 Average OMO maturity - 2020
Average OMO maturity - 2019
Figure 37
Source: CBN, United Capital Research
In 2020, there are
plenty unknowns to
look at in the
developed market
Nigeria Outlook 2020: A Different Playing Field
53 www.unitedcapitalplcgroup.com
improve FGN’s bargaining power at the local debt market and exert less pressure on the
domestic yield curve.
CBN: All eyes on me!
Like 2019, we believe the CBN and its decision on liquidity management will remain
critical to the direction of interest rate in 2020. While the impact of the OMO restriction is
expected to continue in 2020, we expect the trend of net OMO inflows to be sustained till
Q1-20, due to the low size OMO maturity lined up from Q2-20. Accordingly, we expect
money market rates to remain at sub-5% level in Q1-20. However, as the impact of net
inflows of funds from maturing OMO bills begins to wane in Q2-20, we expect the
bargaining power of the CBN to weaken. Thus, money market rates should begin to
reflect the risks in the environment. Again, we do not rule out the ability of the CBN to use
its discretionary power to keep rates lower throughout the period.
Fixed income strategy for 2020: Active Portfolio Management
Aside from the development in the global monetary policy space and credit ratings
decision by global credit rating agencies, we believe that the major economic metric
that investors will be watching, especially the Eurobond investors, will be oil price and
production data, as fortunes of the country remain dependent on oil. However, given the
volatile nature of the oil market, a below $57.0/b price of global crude oil during 2020 is
likely to be trailed by sell-offs.
We expect the yield curve to remain normalized or upward sloping, as fundamental
factors highlighted above keep yields at the short end of the curve low. Meanwhile,
average yield is expected to further reduce by c. 30-50bps in H1-20, as the CBN intensifies
its effort to reduce interest rates, drive real sector investment and promote economic
growth by encouraging private sector borrowings. Consequently, high-yielding
corporates issuances, expected to flood the market in Q1-20, will be the sweetest play for
investors in 2020.
Financial Markets
The yield curve is
expected to remain
normal , while dropping
by c.30-50bps in H1-20
Source: United Capital Research
Possible Triggers of Yield Movement in 2020 Figure 39
We expect the trend of
net OMO inflows to be
sustained till Q1-20,
Nigeria Outlook 2020: A Different Playing Field
54 www.unitedcapitalplcgroup.com
Financial Markets
Figure 40
Source: FMDQ, NBS, United Capital Research
Heatmap of Nigeria’s Sovereign real yield
Nigeria Outlook 2020: A Different Playing Field
55 www.unitedcapitalplcgroup.com
Financial Markets
Figure 37
Equities Market Review & Outlook
Lower fixed income yields… higher stock prices?
In 2019, the investment case for Nigerian equities included; the cheap market valuation,
a post-election repricing of naira assets as well as an anticipated renewed inflow of
foreign capital into Nigerian equities market. Contrary to the above, while equities market
performance in the rest of the world closed broadly positive, investors continued to snub
Nigerian equities. Cheap market valuation was ignored for less risky and more attractive
yield on short-dated money market bills. As such, the Nigerian stock market benchmark
under-performed its global peers in 2019. Still, the performance was shaped by sequence
of events ranging from developments in the macroeconomic policy environment to
heavy listings and series of corporate actions and primary markets activities.
In terms of corporate actions, the Nigerian market was treated to a co*cktail of mergers,
acquisitions, divestments, heavyweight listings, IPO and several delistings. Notably, the
year started with the completion of the scheme of merger between the defunct
Diamond Bank Plc and Access Bank Plc in Mar-19 and eventual delisting of the DIAMOND
shares. Also, Olam International, a global food and agribusiness company, acquired
Dangote Flour Mills at N24/share and took the company private. Similarly, SEPLAT is set to
acquire Eland Oil & Gas at £382mn. Ellah Lakes Plc, a fish farming business, also
consummated a take-over deal with Telluria Ltd., via the issuance of 1.88bn units of
ordinary shares.
After months of speculations, MTN Nigeria Communication Plc (MTNN), Nigeria’s biggest
telco, set the market on fire in May-19, listing a total of 20.4bn units of ordinary shares
worth N1.8tn to become the 2nd largest entity on the Nigerian bourse. The listing brought a
temporary reprieve to market sentiment, as massive demand for the ticker, which was
listed at N90.0/share drove the market price to a high of N150.0/share.
Unsurprisingly, the MTN’s listing was followed by Airtel Africa Plc announcement of its
Financial Markets
The NSE benchmark
index under-performed
its global peers in 2019
Nigerian Equities underperform Global Peers Figure 41
2019 witnessed a good
number of M&As,
divestments,
heavyweight listings,
IPO and delistings
Source: Bloomberg, United Capital Research
Equities Index Mcap ($'b) YTD Rtn P/E (x) P/B (x) Div. Yield
Egypt 13,961.6 47.8 7.1% 11.2 1.8 2.5%
Ghana 2,257.2 3.9 -9.7% 15.2 1.6 0.7%
Kenya 166.4 24.5 18.5% 11.7 1.9 5.9%
Nigeria 26,842.1 31.6 -14.6% 7.1 1.3 6.1%
South Africa 57,084.1 441.2 8.2% 16.0 1.8 4.0%
MSCI BRIC 340.0 8.4 19.8% 14.9 1.9 2.1%
UK FTSE 7,542.4 1.6 12.1% 18.3 1.8 0.2%
S & P 500 3,230.8 28,115.8 28.9% 21.8 3.7 1.8%
Global Market 2,358.5 87,167.7 25.2% 20.8 2.6 2.3%
Frontier Market 586.0 342.1 13.5% 10.6 1.9 3.8%
Emerging Market 1,114.7 18,605.7 15.4% 15.6 1.7 2.6%
Nigeria Outlook 2020: A Different Playing Field
56 www.unitedcapitalplcgroup.com
global IPO of ordinary shares worth $780m (or N270.0bn), to be listed on the floor of the
London Stock Exchange (LSE) and the Nigerian bourse.
The market also witnessed a series of corporate actions, with the most notable being the
divestment of Forte Oil Plc’s (now Ardova plc) downstream segment to Prudent Energy,
through Ignite Investments and Commodities Limited during the year. Also, Lafarge Africa
Plc (WAPCO) divested from its South African operation to its parent company Lafarge
Holcim Group in a bid to resolve its protracted challenges around financing. The
company issued a Rights offering worth N7.4bn to execute the divestment. Similarly,
UACN announced the unbundling of its real estate business, UPDC. Additionally, the
company issued a Rights offer worth N15.96bn to recapitalize UPDC.
The above notwithstanding, sentiment for equities worsened amid concerns in the
macroeconomic environment. Notably, delayed announcement of ministers after the
2019 election, concern around the outlook of the local currency and the predominance
of double-digit yield on both the fixed income markets, skewed interest of both domestic
and foreign investors in favour of money market investment at the expense of equities.
This continued even after the CBN opted to crash rates on T-bills via the exclusion
domestic corporate and non-bank entities from participation in the OMO market in Q4-
19.
A breakdown of the performance of the Nigerian bourse by sector indicated that all sub-
indices closed negative, as at 24th Dec-19. The Agric sector printed the largest loss of
26.4%. The Consumer Goods sector followed with -20.8% decline. The Oil & Gas as well as
the industrial good sector indexes fell 13.1% apiece. Finally, the Banking and Insurance
sector indices were the best of the worst, depreciating 10.6% and 0.1% respectively.
Financial Markets
0.4
0.7
1.0
1.3
Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19
All indicies on the Exchange trended southwards in 2019
Relative price movement of the NSE against Key sectors
NSE-ASI Banking Consumer goods
Oil and Gas Insurance Industrial goods
Figure 42
FO, WAPCO and UACN
all implemented large
ticket corporate
actions in 2019
All sector sub-indices
declined in 2019,
mirroring the NSE-ASI
Source: NSE, Bloomberg, United Capital Research
Nigeria Outlook 2020: A Different Playing Field
57 www.unitedcapitalplcgroup.com
Financial Markets
Outlook: What is the investment case for 2020?
From a glorious performance in 2017 to a sustained downward spiral in 2018 and 2019,
one of the toughest questions from our clients in 2019 was whether the equities market has
fallen out of grace? And rightfully so, increasing stability in the polity following the
conclusion of general election and the gradual uptick in the broader macroeconomy
was theoretically expected to sway sentiment for equities northwards.
However, facts are changing due to the policy environment in the domestic financial
market, with clear implications for the local bourse. Accordingly, the biggest questions
begging for answers going into 2020 include:
1. Has the negative trend bottomed out?
Certainly, the biggest concern for equity market investors is the potential of a further
depreciation, given that the factors responsible for the weaker appetite in 2018 and 2019
may persist in 2020. As such, a clear understanding of the sweet spot between the bottom
and a rebound becomes important for discerning investors. Technically analyzing the
performance of the NSEASI over the last decade, we observed that the probability of a
rebound seems more likely than a further downturn.
Looking closely, while the lowest level of the index over the last 10 years can be traced to
20,000pts in 2011, we strongly believe realistic support level or the bottom can be pegged
at 22,465pts index levels in 2016. An aftermath of plunging oil prices which hit a record low
of c.$27.0/b in Jan-16, elevated currency crisis and poor policy responses. On the other
hand, the index peaked at 45,000 index point in 2018, following changes in the policy
framework at the time. At the Dec-19 year-end of the index level (26,842.1 points), we
think the potential downtrend is pegged at -16.3% in 2020. By the same token, the
potential upside comes to a whopping 67.6% if policy framework adjusts in favour of
demand for equities. While technical analysis highlights the possible frontiers of the market
The biggest concern for
equity market investors
is the potential for a
further depreciation
...potential downtrend
is pegged at -16.3% in
2020.
Figure 43
Source: NSE, United Capital Research
Nigeria Outlook 2020: A Different Playing Field
58 www.unitedcapitalplcgroup.com
returns, we are more inclined to fundamental analysis and developments in the operating
environment which often tell a more insightful story about how the market perform. This
leads to the second question.
2. Is market valuation and the macro environment supportive?
A clear implication of continued absence of appetite for equities for two straight years
(2018 and 2019) is that market valuation continues to dip to new lows. As of Dec-19, the
spread between the market P/E ratio of the Nigerian bourse (at 7.1x vs. 9.0x in 2018)
continue to widen compared to its 5-year average of 12.2x. Comparatively, the Nigerian
market now trades at a deeper discount to EM(14.3x) and FM(12.2x) peers, despite the
two major listing in 2019.
Thus, we are tempted to insist that from a valuation point of view, Nigerian equities are
increasingly attractive for patient discerning investors willing to hold their position for a
medium to long-term return. However, for attractive market valuation to trigger a rally, the
macro picture must look good to spur domestic and foreign investment.
In 2020, our expectation is that GDP growth will remain modest amid policy changes in
the fiscal and monetary policy space. For context, a low interest rate environment, driven
by the decision of the apex bank to boost money supply, will bolster investment, increase
output, ease funding cost, and support profitability. On the demand side, increased wage
bill as well as tighter border control is expected to support demand and corporate
turnover. However, pressure on disposable income as well as a segmented money market
which favors FPIs, distorts the expectation. In all, the macroeconomic picture seems to be
improving but not compelling enough for the return of the FPIs.
3. Would the market continue to ignore fundamentals?
Aside valuation, another trend observed in the market over the last two years is the
continued inversion of the historical positive correlation between the equities market and
fundamental variables such as the EPS and the earnings yield. Notably, while the 5-year
historical average correlation between the market index and trailing EPS stood at +39.7%
prior to 2018, the relation has remained inverted over the last two years.
Financial Markets
12.2
1.5
7.1
1.30
5
10
15
P/E P/B
Nigerian equities are currently trading
below their 5-year averagesNigerian equity current vs. 5-year historic
valuat ion
5-year average valuation Current valuation
Figure 44
19.5
12.014.3
12.2
20.6
7.1
15.4
10.6
-3.00
2.00
7.00
12.00
17.00
22.00
World Nigeria EM FM
ASI is trading at the sharpest discount to
the worldNigerian equity valuation vs. world
5-year average valuation Current valuation
Figure 45
Source: Bloomberg, United Capital Research
The macro outlook must
be attractive to spur
domestic and foreign
portfolio investment
Nigeria Outlook 2020: A Different Playing Field
59 www.unitedcapitalplcgroup.com
Put differently, market EPS has surged 44.8% since 2018 and the Nigerian benchmark
equity index has tumbled 30.3% over the same period. Understandably, uncertainty
around the expectation of the 2019 general election may have been responsible for the
aberration observed in the 12 months till Jun-19. However, the sustained anomaly in the
post-election period appears to be more complicated, with the lack of FPIs push being
the biggest factor. In 2020, whether FPIs will be back to the equity market will be one of
the most watched trends. For us, the major drag to FPI demand for equity in 2020 is the
existence of the CBN window which allows FPIs to access the OMO bills at a double-digit
rate. While we align with the belief that the current framework is unsustainable, we see
the likelihood of this being sustained till mid-2020 or beyond. While increased demand
from the exempted locals may support demand for equities, the hack for the market
remains the complete reduction of OMO rate for all market participants rather than
segmenting the market.
CBN’s unorthodox policy stance, liquidity and the equities market
Putting everything together, the macro policy framework expected to shape the
performance of the market in 2020 comes down to the elephant in the room, CBN’s
unorthodox monetary policy. More specifically, the apex bank’s decision to keep the
system awash with liquidity and lower the yield environment but create a preferential
window for FPIs, is by far the most significant event to watch. In theory, a lower yield
environment implies that investors will look towards riskier assets in search for higher
returns. Clearly, stocks as well as other riskier non-sovereign papers such as sub-national
bonds, commercial papers, corporate bonds, structured notes and syndicated loans, will
become more attractive. More so, increase in money supply, a feedback effect of the
CBN’s resolve not to roll-over OMO bills held by non-bank domestic corporate and
individual is positive trigger for equity market performance. To put this in perspective,
about N10.0trn worth of OMO Bills is anticipated to mature before the end of 2020, with
close to N2.25trn held by the excluded market participants. Thus, the question is, will a
significant portion of this amount filter into the equities market?
Financial Markets
In 2020, whether FPIs
will be back to the
equity market will be
one of the most
watched trends
In theory, a lower yield
environment implies
that demand for riskier
assets increases amid
appetite for higher
returns
Source: Bloomberg, United Capital Research
Figure 46
Nigeria Outlook 2020: A Different Playing Field
60 www.unitedcapitalplcgroup.com
In economic theory, the nature of the relationship between money supply and stock
prices is highly debated. However, several studies established that unexpected changes
in money supply and stock returns are mostly positively related, but the degree to which
their relationship can be measured is dependent on other economic variables operating
within the system. In the case of a frontier market like Nigeria, the role of foreign portfolio
capital and the fact that a special window is created to attract FPI flows to OMO bills as a
strategy to preserve the dollar reserves, complicates this relationship. If history is anything
to go by, demand from FPIs remains the most significant driver of equities in Nigeria, with
the performance of the market significantly positively correlated with FPI flow to equities.
On the contrary, domestic money supply does not indicate any clear relationship with
market index, implying that expected increase in domestic system liquidity may not have
a significant impact on market return in 2020. In sum, while increased domestic currency
liquidity may support demand for equities, especially from local asset managers, the
absence of deep pocket FPIs in the Nigerian market in 2020 may keep return tepid.
Our Projection for 2020
We base our equities market return projection for 2020 on developments in the global
economy, domestic policy reforms, overall monetary policy stance and corporate
fundamentals. Our Base case scenario sees equities market return at 5.3%, driven by low
rate environment and increased system liquidity in 2020. Notably, this scenario assumes
that the CBN will sustain its unorthodox policy stance, particularly in relation to OMO sales
to FPIs. However, the index may further depreciate, if developments in the
macroeconomic environment deteriorate. Thus, our bear case scenario estimates a 16.3%
decline in the market. Finally, we do not rule out the possibility of rebound, if development
in the economy improves considerably, as such, our Bull case scenario projects a 23.6%
upside for the Nigerian bourse.
Financial Markets
Studies have
established that
unexpected changes
in money supply and
stock returns are mostly
positively related,
subject to other
variables within the
Our Base case
projection is that
equities will rebound
5.3% in 2020
Equities market outlook scenario analysis
Performance
Drivers Weight 2019 Bear Base Bull
Improv ed Global Economy 15%#REF!
Moderate Policy Reforms 25%
Muted Monetary Policy 40%
Bad Corporate Earnings 20%
All Share Index 100% 26,842.07 22,465.00 28,265.98 33,181.90
YTD Return -14.6% -16.3% 5.3% 23.6%
2020 Scenerio
Key
Source: United Capital Research
Figure 47
Sectors
Nigeria Outlook 2020: A Different Playing Field
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Agricultural Sector
Will stricter border control buoy growth?
The Agriculture sector remained at the center of the Nigerian government’s diversification
and economic growth plan in 2019. To buttress this point, the new Minister of State for
Agriculture and Rural Development, Mustapha Baba Shehuri, stated clearly that farmers
will soon be buying equipment at 50% discount, a strategic plan to boost productivity.
More so, the CBN noted it disbursed c. N817.0bn in 2019 from various agricultural
intervention schemes such as the Agriculture Credit Guarantee Scheme, Commercial
Agriculture Credit Scheme and Anchor Borrowers Program, to support growth in the
sector.
Overall, Agriculture sector output growth remained positive in 2019. Specifically, the
sector grew by 3.2% in Q1-19 as farmers ramped up crop production (+3.3%) to meet 2019
election campaign demands, and livestock production (0.9%) ahead of 2019 Easter
celebration. However, the re-occurrence of insecurity in the northern and middle belt
states coupled with seasonal boom and bursts of the planting season dragged growth in
Q2-19 as crop production sub-sector, which accounted for over 85.0% of the sector,
slowed to 1.9% (previously: 3.3%). The agriculture sector rebounded in Q3-19 (+2.28%) from
the slow growth seen in Q2-19 as border closure boosted the sector performance.
Border Closure: A relief for Nigerian farmers?
As an attempt to check the smuggling of food and related commodities (rice, chicken,
fish, and vegetable oil) into Nigeria, the Federal Government (FG) ordered the partial
closure of land border with Republic of Benin in Aug-19, and later extended the blockade
to all other land borders until a trade agreement is reached with neighbouring countries.
Interestingly, the closure of the border left an imprint on the Nigerian economy, as food
inflation rate which had moderated from 13.5% in Jan-19 to 13.4% in Jul-19, rose to 14.5%
The Agricultural sector
remained at the center
of the Nigerian
government’s
diversification and
economic growth plan
in 2019
Sectors
Source: NBS, United Capital Research
...border closure
boosted the sector
performance in Q3-19
Figure 48
Nigeria Outlook 2020: A Different Playing Field
64 www.unitedcapitalplcgroup.com
in Nov-19 amid supply shortages. Staple food items such as rice, chicken, and other frozen
dietary items were the hardest hit, judging by the sharp jump in the prices of these items
across the country. While this has kept the economies of countries such as the republic of
Benin on the edge, local farmers and manufacturers in Nigeria are the biggest winners.
Certainly, they will benefit from the windfall emanating from price hike so long as supply
shortfall remained unmet. Over a medium to long term period, increased investment will
create a leeway for prices to normalize.
Much ado about a bag of Rice?
As a fall-out of the border closure, development in the Nigerian rice market made
headlines in 2019. Rightfully so; rice is the third-most consumed staple food (behind Maize
and cassava) in Nigeria according to Ricepedia. Hence, rice has become a strategic
commodity for food security in the country. Nevertheless, USDA data noted that domestic
supply deficit from 2007-2018 average 43.5%. More specifically, deficit in 2018 stood at a
high of 45.2% as annual consumption came in at 6.8mn tonnes relative to domestic
production of 3.7mn tonnes. Logically, protracted supply shortfall in the domestic market
necessitated massive importation over the period. Notably, restriction on the importation
of rice from 2015 by the current administration resulted in a 115% surge in price between
2014-2018 amid large scale smuggling across all the porous border towns.
In 2019, the FG beamed its searchlight on the activities of smugglers or informal cross-
border traders who have historically frustrated the growth of local producers. According
to FG, the need to spur local production is one of the strategic reasons behind the border
closure even though local consumers continue to show preference for the imported
substitute. Riding on the massive opportunity in the Nigerian rice industry, the operators in
the Nigerian rice industry continue to ramp-up production capacity. However, growth has
remained muted by competition from international market, majorly due to smuggling. As
such, despite being the largest producer of rice in West Africa and 2nd in Africa as at
Food inflation rate rose
from 13.4% in Jul-19 to
14.5% in Nov-19 amid
supply shortages
Sectors
Source: USDA,United Capital Research
172 178
290
350370
2014 2015 2016 2017 2018
Price of rice increased by 115% in 5 years
Average Price of rice (N/kg)
Average price of rice per kg
Figure 49
The restriction on the
importation of rice from
2015 by the current
administration resulted
in a 115% surge in price
between 2014-2018
Nigeria Outlook 2020: A Different Playing Field
65 www.unitedcapitalplcgroup.com
2018, domestic production remained well below demand.
Oil Palm Sector Overview: Will border closure support sector players performance?
According to the World Bank, Nigeria is the largest consumer of palm oil in Africa given its
huge population. In 2018, Nigeria consumed c. 3.0mn metric tons (MT) of fats and oils,
with palm oil accounting for 44.7% (1.3mn MT). In the same period, production stood at
1.02mn MT, resulting to a supply shortfall of 0.32mn MT. Thus, indicating opportunities for
local production expansions. In a bid to increase local production, the federal
government through the CBN included palm oil as part of the prohibited goods in Nigeria
and disbursed about N30.0bn to oil palm farmers in other to enhance production.
The above notwithstanding, the performance of key players in the palm oil sector
remained underwhelming in 2019 as the activities of smugglers of more competitive
substitutes continued to hurt revenue. OKOMUOIL and PRESCO both printed weaker
revenue numbers, reporting -6.8% and -5.2% declines in turnover which came in at
N15.4bn and N15.4bn respectively. Profit After Tax (PAT) also followed, declining by 43.2%
and 30.9% to N4.1bn and N3.6bn respectively. Notably, as a fallout of the border closure,
the Q3-19 standalone financial performance of the two players came in stronger relative
to what was observed in the first six months of the year. OKOMUOIL showed significant
improvement across key lines in the Q3-19 stand-alone earnings– Revenue (+86.3%), PBT
(+83.8%), and PAT (+21.8%) surged compared Q3-18 stand-alone. PRESCO on the other
hand, saw a revenue growth of 5.0% while inefficient cost management eroded the
bottom-line as PBT and PAT return a negative of 48.0% and 51.0% respectively. In all, we
expect stricter control around the border in 2020 to continue to support the sector
players performance.
Activities of smugglers
constrained PRESCO
and OKOMUOIL
performance for the
major part of 2019
Sectors
Source: KPMG, USDA, United Capital Research
Key Player Location Milling Model
Curr.
Capacity
(MT/Annual)
Stallion Group Lagos,Kano Milling 430,000
Dangote Jigawa Integrated 240,000
Stine Rice Anambra Milling Only 141,000
Labana Kebbi Integrated 96,000
Mkap Nigeria Benue Milling Only 44,880
Tara Agro Enugu Milling Only 42,000
Olam Nasarawa Integrated 36,000
Ebony Agro Ebonyi Milling Only 30,000
Wicklow Group Kwara Milling Only 16,250
1
3
5
7
9
200
7
200
8
200
9
201
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
(000‘0
00 t
on
ne
s)
Rice consumption continues to outweigh supply
Rice Production & Consumption in Nigeria ('mn tonnes)
Production Consumption
Figure 50
Nigeria Outlook 2020: A Different Playing Field
66 www.unitedcapitalplcgroup.com
Outlook
An Auspicious Year Ahead?
Looking into 2020, we expect the Agricultural sector to remain one of the centerpieces of
the current administrations economic policy. As the issues around insecurity continue to
abate across the northeast to middle belt region of the country, we expect growth in the
Nigerian Agriculture sector to further improve, estimated to be sustained above 3.0% on
the back of border closure and policy intervention by government.
Specifically, we expect investment in the sector to increase as operators mobilize finance
required to ramp up production in a bid to close the supply shortfalls created by the
closure of the border. No doubt, investment will track supply shortages in staple food such
as Rice, Frozen Food, Palm Oil as well as other hitherto imported food items affected by
the recent border crisis. For instance, the future of Nigerian local rice industry is looking
bright, given that two of the biggest players (Stallion Group and Dangote) in the space
are planning massive capacity expansion, estimated to be 3.7x their current capacity.
This will be supported by the recent announcement by the CBN to make funds available
to rice farmers to reduce production cost. In the past sub-national governments have
shown intention to support the sector via partnerships (as in the case of Lagos-Kebbi LAKE
rice) direct investment and other initiatives, we imagine that the sector will witness
increased interest from international investors from Brazil, Russia, and the Netherlands,
judging by recent headlines.
For the key players in the palm oil sector (OKOMUOIL and PRESCO), we see a potential for
upside in sales volume, especially from the domestic segment on the back of rising global
crude palm oil prices and likely demand surge resulting from border closure in H1-20.
However, H2-20 may be a bit competitive if the implementation of Africa Free Trade
Continental Agreement (AfCFTA) grant access to other players within the agriculture
space on the continent to the Nigerian market.
Nigeria Agric sector is
set to improve in 2020
as a result of the border
closure and
government
interventions
Sectors
Nigeria Outlook 2020: A Different Playing Field
67 www.unitedcapitalplcgroup.com
Banking Sector Review and Outlook
Ready to open the tap?
Dynamics in the Nigerian Banking space continued to change in 2019 amid changes in
the monetary policy environment. As the impact of oil price plunge between 2014 and
2016 fizzles out, asset quality appears to be improving. However, appetite for loan growth
remained weak. While banks were beginning to get comfortable with massive
deployment of funds to government securities, a series of unconventional monetary
policy actions deployed by the apex bank to compel banks to lend to the private sector,
resulted in an uptick in loan book from Q3-19. Meanwhile, overall weakness in loan
growth, as well as sharp moderation in the yield environment continued to constrain the
growth of Gross Earnings. In the competitive landscape, Access Bank took the lead in
terms of balance sheet size, following its consolidation with the defunct Diamond Bank
Plc. This is coming after the industry witnessed the regulatory takeover of Skye Bank plc by
the CBN in 2018. The sector also witnessed the licencing of new operators as the CBN
approved licences for two commercial and one non-interest bank, viz.: Titan Trust Bank
Limited, Globus Bank Limited and Taj Bank Limited.
In 2020, stricter regulation on credit expansion to the real sector, further consolidation in
the sector, regulatory recapitalization and stiffer competition among operators, are top
factors to watch in the Nigerian banking landscape.
Financial Performance: Revenue, Efficiency Ratios, and Profitability
The performance of Nigerian Banks in 9M-19 remained broadly positive but was pressured
by the weak macroeconomic environment. Save for UBA, ACCESS and FIDELITY which
reported double-digit revenue growth, Gross Earnings (GE) was muted across the sector
as of 9M-19. GUARANTY was the hardest hit, reporting a 3.3% y/y decline in GE, followed
by FBNH with a 0.4% decline. Evidently, muted growth in loan book alongside a
moderation in the yield environment weakened y/y growth in GE across the sector to
9.2% on average. As a result Interest Income reduced amid unrelenting deployment of
funds to financial securities at the expense of loans. Meanwhile, Non-Interest Income
grew 8.6% y/y on average, attributable to stronger contribution from E-Business income.
Notably, ZENITH reported a whopping N35.3bn in E-Business income in 9M-19, followed by
UBA and FBNH. Aside E-Business income, trading income also surged in 2019 amid
increased activities in the fixed income and currency market space.
Nevertheless, Nigerian Banks reported impressive after-tax profit during the period amid
increased writebacks. Save for STANBIC which reported a 7.0% y/y decline in PAT, all other
operators within our coverage recorded positive PBT & PAT growth in 9M-19. Aside lower
impairment booking which supported bottom-line numbers, average Cost to Income
Ratio (CIR) for the banks within our coverage settled at 60.1% as of 9M-19, suggesting that
Muted loan growth was
a major factor that
dragged Gross
Earnings growth in 2019
Sectors
UBA, ACCESS and
FIDELITY recorded
double digit revenue
growth in 2019
Nigeria Outlook 2020: A Different Playing Field
68 www.unitedcapitalplcgroup.com
efficiency improved across the sector. Also, Net Interest Margin (NIM) averaged 7.1%
relative to Cost of Funds (COF) which settled at 4.4% on the average as at 9M-19.
Assets Quality, Liquidity and Capital Adequacy
Total banking sector asset was N35.1tn as at the end of 2018, still quite low compared to
Nigeria's GDP of N127.8tn ($416.16bn). This implies that the banking sector depth (Banking
Sector Assets/GDP) stood at 27.5% of GDP. Nonetheless, asset quality continued to
improve as industry NPL ratio moderated to 6.8% in Q3-19 from 9.30% in Q2-19. Notably,
FBNH’s NPL ratio moderated to 14.5% in Q2-19, further down to 12.6% in Q3-19 and is on
track to single digit from a whopping 25.9% in Dec-18. FBNH’s NPL ratio moderated to
14.5% in Q2-19, further down to 12.6% in Q3-19 and is on track to a single digit from a
whopping 25.9% in Dec-18.
The total banking
sector asset remained
considerably low when
compared to Nigeria’s
GDP
Sectors
9M-19 financial summary of select Nigerian banks Figure 51
Source: Company Report, United Capital Research
9Month 2019 Financials Access FBNH UBA ZENITH GTBANK Fidelity STANBIC FCMB
Gross Earnings 513,656 439,854 428,219 491,268 326,034 161,054 176,157 135,799
GE growth 9M- 19 36.9% -0.4% 14.2% 3.5% -3.3% 15.9% 4.4% 2.2%
Interest Income 405,025 327,469 297,903 321,938 224,188 135,116 91,038 101,802
Interest Expense (194,807) (116,031) (138,989) (107,311) (51,250) (76,870) (32,366) (45,570)
Net Interest Income 210,218 211,438 158,914 214,627 172,937 58,246 58,672 56,231
Impairment Loss (10,611) (28,460) (6,663) (18,259) (2,762) 4,843 90 (7,852)
Non-Interest Income 108,630 98,769 107,080 156,756 99,964 22,168 81,939 33,997
Non- interest income growth 7.8% 6.0% 5.5% 21.8% 2.8% 38.6% 2.5% -16.5%
Operating Expenses (194,248) (221,735) (161,621) (176,941) (99,599) (57,411) (71,593) (63,194)
Profit/Loss Before Tax 103,104 60,029 98,233 176,183 170,652 23,003 69,108 12,803
Taxation (12,364) (8,193) (16,605) (25,460) (23,662) (1,542) (13,556) (2,012)
Profit/Loss After Tax 90,740 51,836 81,628 150,723 146,990 21,461 55,552 10,791
Annualized PAT 120,986 69,115 108,837 200,964 195,986 28,615 74,069 14,388
Cash and Balances with Banks 625,542 697,446 1,242,260 913,830 627,224 418,295 453,358 149,254
Net Loans & Advances to customers 2,937,803 2,585,204 1,985,213 2,728,223 1,378,002 1,214,550 542,453 638,065
Investment Securities 760,590 1,503,182 1,396,175 491,984 741,208 246,631 468,293 270,512
Total Assets 6,606,271 4,519,332 3,540,393 3,951,829 2,552,188 1,116,416 1,002,492 954,078
Deposits from customers 4,931,102 5,734,484 4,960,895 5,978,444 3,519,427 1,970,621 1,832,942 1,516,115
Net Assets 614,841 604,927 555,528 871,901 636,752 221,728 292,210 187,964
Ratios
Cost to Income Ratio 63.1% 71.5% 60.8% 47.6% 37.8% 73.7% 50.9% 75.4%
Gross Loan to total Deposits 59.6% 57.2% 56.1% 69.0% 54.0% 108.8% 54.1% 73.9%
Trailing 12M ROAE 22.2% 18.3% 18.6% 23.7% 31.2% 12.8% 26.4% 7.8%
Net Margin 17.7% 11.8% 19.1% 30.7% 45.1% 13.3% 31.5% 7.9%
Other Ratios
NIM 6.8% 7.3% 6.1% 8.7% 9.4% 6.0% 4.6% 7.5%
COF 5.2% 3.6% 4.4% 3.0% 2.0% 6.7% 3.5% 5.5%
ROA 1.8% 1.5% 3.1% 5.1% 7.7% 2.6% 7.4% 1.0%
CAR 20.3% 15.1% 27.8% 23.8% 23.6% 16.4% 21.2% 17.6%
Loan to Funding Ratio 67.4% 54.2% 62.7% 55.8% 54.0% 68.4% 62.9% 73.9%
NPL Ratio 6.3% 12.6% 5.7% 5.0% 5.6% 4.8% 2.7% 3.5%
COR 0.7% 1.9% 0.5% 1.2% 0.2% 0.0% 0.0% 1.1%
Nigeria Outlook 2020: A Different Playing Field
69 www.unitedcapitalplcgroup.com
Evidently, Tier-2 banks remained very aggressive in terms of loan growth, with an average
Loan to Deposit Ratio (LDR) ratio of 76.6% in 9M-19 compared to Tier-1 Banks which were
broadly conservative with an average LDR ratio of 59.2%. Frustrated at the refusal of the
banks, especially the Tier-1 banks, to lend, the CBN revised its guideline on LDR in Jul-19 to
a minimum of 60.0% (then revised to 65.0% in Oct-19) to compel the banks to lend to the
private sector. According to the CBN, the new LDR rule has resulted in a 7.3% (N1.13tn)
growth in credit to the private sector as the banks move to meet the CBN’s target or risk
being debited at zero interest rate.
While Capital Adequacy Ratio (CAR) among banks within our coverage remained well
ahead of a minimum threshold, many Nigerian banks opted to recall their dollar liabilities
in the face of growing dollar liquidity. For context, Eurobond redemption by Nigerian
Banks totalled $700.0bn in 2019. Notably, ZENITH ($500.0m) and DIAMOND ($200.0mn)
issuances both matured in Q1-19, taking out $700.0mn from the corporate Eurobond
capitalization. However, ACCESS 2021 ($400.0mn), FBNH 2021 ($450.0mn), ECOBANK
($250.0mn) and ZENITH ($300.0bn) were all recalled in 2019. This shrank the value of
outstanding banking sector Eurobond to $1.3tn.
Regulatory Environment
A sequence of regulatory changes which affected the banks was the biggest driver of
activities in the sector in 2019. After launching the Real Sector Support Facility in 2018, the
apex bank is clearly forceful in its approach at driving real sector lending in 2019. To signal
the direction of policy, the Monetary Policy Committee (the MPC) voted for a rate cut
from 14.0% to 13.5% in Mar-19, and then, the CBN liquidity mop-ups became less
aggressive with OBB and ON rates moderating to 11.4% in Q2-19 compared to 16.7% in
Q1. In its meeting in May-19, the MPC recommended the restriction of banks participation
in the debt market, followed by an administrative adjustment of the minimum LDR for
Banks to 60% (and subsequently, 65.0% with speculations of further increase to 70.0%), with
a penalty of risking 50.0% of liquid assets to a further increase in Cash Reserve Ratio (CRR)
at zero interest rate. A follow-up regulation further restricted Bank deposits at the SDF
Tier-2 banks remained
very aggressive in
terms of loan growth
reporting a higher LDR
compared to Tier-1
banks
Sectors
A sequence of
regulatory changes
which affected the
banks was the biggest
driver of activities in the
sector in 2019
Source: CBN, NBS, United Capital Research
Figure 52
Nigeria Outlook 2020: A Different Playing Field
70 www.unitedcapitalplcgroup.com
window to N2.0bn from N7.5bn. According to the CBN, this regulation is necessary to
rebalance credit distribution in the country, which currently favours the Oil & Gas (28.0%),
Manufacturing (15.8%) and the Public (8.30%) sectors, at the expense of the more
strategic sectors such as Agriculture (4.1%), SMEs (2.3%) and Trade & General Commerce
(6.8%) sectors.
Sector Outlook
Loan growth and asset quality: A modest growth story
While appetite for loan growth had been muted in the past due to tighter operating
environment, recent regulatory pronouncements compel the banks to do more. In 2020,
we expect banks to be more aggressive at growing their loan books. When considered in
the context of the banks that were penalized in Sept-19, the 65.0% regulatory LDR
guideline has more implication for the Tier-1 banks as well as many of the international
banks. They are more liquid and better capitalized but broadly less aggressive compared
to their smaller counterparts whose LDR currently run ahead of the regulatory minimum.
Accordingly, we expect a more aggressive lending drive by the larger Banks in 2020.
Again, this implies that fixed term deposit rates will be low as the banks move to optimize
deposit growth to meet the required LDR. To aggressively grow their loan books, we
expect the banks to strengthen their risk management framework to support credit
origination.
Beyond regulation, the CBN’s expansionary stance which is expected to keep the yield
environment low, will also propel banks to seek out outlets for funds, especially in riskier
assets to optimise earnings yield. Notably, observed improvement in industry NPL, which
moderated to a four-year low of 6.7% in Q3-19, gives an impression that default rate is
moderating. Hence, bank should be more willing to expand their loan books. The above
notwithstanding, we do not expect loan growth to revert to the 2012-2015 levels, given
that banks will be more cautious in their credit origination and deployment going forward.
...the 65% regulatory
LDR has more
implication for the Tier-
1 and most of the
international banks
Sectors
Figure 53
Source: CBN, NBS, United Capital Research
Nigeria Outlook 2020: A Different Playing Field
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Interest Income: Lower yield and harsh macro may hush growth
In 2020, interest income may stay pressured for 3 reasons. First, lower yield environment,
driven by CBN’s OMO regulation as well as increased demand for T-bills and bonds by
local investors, will hurt asset yield on financial instrument. Secondly, despite regulation on
minimum LDR and SDF (an attempt to bolster credit specifically to Retail, SMEs and Agric
sectors), loan growth is unlikely to spike. This is mainly because expansion of loans to these
sectors, which together account for c.15.0% of industry credit distribution, may not
significantly drive up asset yield. To plug the pressure on interest income growth, credit
deployment to more important sectors such as oil & gas, power and manufacturing must
be de-risked or replaced by new outlets. Lastly, business environment in Nigeria remains
harsh, keeping credit origination soft. As such, yield on risk assets may not jump as desired.
Non-interest income growth: CBN tightens grip on easy channels
In the past year, E-Business and trading income drove Non-Interest Income (NII). In 2020, E-
Business income, the fastest growing component of revenue, will come under pressure
due to a last minute review of guideline for transaction charges issued by the CBN in Dec-
19. The new guideline slashes all charges by banks across payment and transaction
channels. While we view this as a further attempt to compel banks to lend to the private
sector and support overall economic growth, the impact is expected to hurt NII badly in
2020. According to the new guideline, electronic transfers (previously N50 flat) will attract
graduated or progressive charges from Jan-20 (N10.0: for transfers below N5,000, N25 for
N5,001 to N50,000 and N50 for transfer above N50,000). ATM withdrawal charge is slashed
to a maximum of N35 after third withdrawal within the same month (previously: N65).
Finally, debit card maintenance fees linked to current account will attract zero charge
while a maximum of N50/quarter will be charged on cards linked to savings accounts
(previously: N50/month). Overall, driving NII growth in 2020 will be down to the game of
volume. Give or take, product innovation, building on recent efforts to drive convenient
banking via channels such as USSD, Chat Bots, and further digitization of transaction
services will come in more handy for the banks.
Capital: Is another industry consolidation in view?
Following his reappointment, Governor Emefiele, in his plan for the second term in office,
hinted his intention to recapitalize the banks. This brings back the memory of the 2004
banking sector recapitalization wherein the banking sector minimum capital base was
revised up from N2.0bn to N25.0bn. In our view, the most rational basis for newly planned
recapitalization to is the weaker value of the naira against the dollar, at N100.0/$ in
2004 vs. N305.0/$ currently. Clearly, this suggests that the current minimum capital base
for banks in dollar terms is down from c. $250.0mn in 2004 to c. $82.0mn today. For the
CBN to restore the capital base to c.$250.0mn, the dollar equivalent in 2004, the bank will
be required to have a minimum capital base of c. N75.0bn ($250.0mn at N306.0/$). In our
opinion, most of the Tier-1 banks and a few Tier-2 banks, will be in a good position to
E-business income will
come under severe
pressure in 2020 due to
the recent reduction in
transaction charges by
the CBN
Sectors
Interest income growth
is likely to stay muted
in 2020
To recapitalize banks to
c.$250.0mn equivalent
in 2004, a minimum
capital base of
c.N75.0bn ($250.0mn at
N306.0/$), will be
required
Nigeria Outlook 2020: A Different Playing Field
72 www.unitedcapitalplcgroup.com
withstand a recapitalization exercise if targeted at merely reflecting the
current exchange rate environment. However, some of the Tier-2 banks, unlisted and
newly licensed players may have to merge to meet a new capital requirement.
Evolving trends: Payment Services Banks, Digital Banks and Pay-Day Loans
In 2020, we expect the evolution of Payment Service Banks (PSBs) to further shape the
banking sector landscape in Nigeria. MTNN was awarded a PSB license – super agent
license through its subsidiary – Y’ello Digital Financial Services Limited. The telco is
expected to leverage its customer base to deliver financial services to rural areas in
Nigeria in a plan to include the financially excluded. The increasing evolution of
momentum in the digital banking space is also expected to gain more impetus, with
operators such as Kuda bank luring young Nigerians with stress-free banking. Pay-Day
Loan (PDL) service providers are also worth a mention, with many of them flooding the
market with numerous collateral-free credit to individuals. With tighter regulation by the
apex bank for deposit money banks to expand credit to the consumer space, the large
banks are becoming increasingly innovative in their product offerings to actively incubate
parallel start-up type lending platforms to compete with these evolving operators. While
the evolution of these Pay Day Loan operators will continue in 2020, it is important to note
that these innovations will continue to rely largely on the existing traditional banking
infrastructure.
Pay-Day Loan (PDL)
service providers are
increasingly gaining
momentum
Sectors
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Consumer Goods Industry
Food and beverage output struggles to outperform the broader economy
In 2019, overall economic performance in the consumer goods space was a tale of two
halves, as momentum waned in H1-19 before picking up in H2-19. Specifically, the
consumer goods sector output, measured by Food, Beverage and Tobacco GDP,
underperformed growth in the broader economy in Q1-19 and Q2-19, up 1.8% y/y and
1.2% y/y compared to 2.1% y/y and 1.9% y/y growth for the aggregate economy during
the respective periods. Meanwhile, the sector growth in Q3-19 outpaced broad
economic growth, thanks to closure of land borders which reduced competition from
smuggled goods.
The narrative was similar for the listed players on the stock exchange as performance was
underwhelming in H1-19 before improving mildly in Q3-19. The weaker H1-19 performance
was spurred by the unforeseen election postponement and uncertainties that clouded
Q1-19 performance, growing infrastructural deficits that drove up Operating Expenses
(OPEX) as well as rising competition from cheaper unlisted brands and smuggled goods.
Meanwhile, the improvement in the traffic situation at Apapa and the closure of land
border which helped to restrain competition from smuggled goods, boded well for the
sector players in Q3-19. Also, the introduction of smaller product units at lower retail prices
to better capture the growing value segment supported the overall sector performance
in 2019.
FMCGs
Operating environment remains challenging
9M-19 earnings of consumer goods players under our coverage were divergent. Despite
weak consumer wallet, NESTLE performance remained strong (Revenue: +4.0%y/y to
N211.3bn, PBT: +17.6%y/y to N56.6bn), thanks to the firm’s cost-cutting strategy and
In 2019, overall
economic
performance in the
consumer goods space
was a tale of two
halves
Sectors
Source: NBS, United Capital Research
Figure 54
NESTLE’s performance
remained strong with a
PBT of 17.6%y/y to
N56.6bn
Nigeria Outlook 2020: A Different Playing Field
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product innovations - as it launched Milo Ready-To-Drink (RTD) and new Maggi Signature
brand - during the period. For UACN (Revenue: +12.6%y/y to N60.5bn, PBT: +30.7%y/y to
N6.6bn), topline growth was supported by higher revenue from its Animal Feeds segments
while bottom-lines were supported by the marked reduction in finance expenses that
trailed the firm’s debt repayment . Elsewhere, performance of the other sector players
remained underwhelming, largely dragged by poor H1-19 outcomes. This was as the
gridlock at the Apapa Port, activities of smugglers, increased competition, weak
consumer wallet, rising OPEX and elastic product portfolio weighed heavily on H1-19
numbers while the improvement in some of these variables (smuggling and Apapa
gridlock) in Q3-19, lessened the overall pressure as at 9M-19.
According to the latest results, while FLOURMIL (Revenue: +0.4%y/y to N270.7bn, PBT:
+4.0% to N8.6bn) recorded marginal growth in both its top and bottom-line numbers,
DANGSUGAR (Revenue: +0.6%y/y to N117.4bn, PBT: -12.4% to N23.0bn) performance was
mixed as rising operating cost pressured the bottom-line numbers. Also, PZ continues to
struggle as Revenue dipped further by 0.5%y/y to N15.8bn and Loss-before-Tax worsened
from N0.2bn in 9M-18 to N1.1bn in 9M-19. More surprising, UNILEVER underperformed as
Revenue and PBT dipped 28.6% and 94.9% y/y to N51.6bn and N0.6bn respectively. This
was largely weighed by the poor outcome in Q3-19 wherein Revenue slumped 62.9% y/y
which according to management was linked to tighter credit terms with key distributors in
a bid to minimize non-performing receivables. Notably, DANGFLOUR was voluntarily
delisted from the Exchange following its acquisition by Crown Flour Mills Ltd. during the
year.
Brewers
A challenging competitive landscape
Unsurprisingly, the performance of brewers in 9M-19 was driven by developments in the
competitive landscape. The intense competition, especially from INTBREW, created no
room for other players to increase prices and pass on the impact of the graduated excise
duty to consumers, which grew further in Jun-19. This was as INTBREW continued to ramp
up capacity at its new plant in Sagamu to flood the market with its regional and
international premium beer brands, Trophy lager and Budweiser, while undercutting
competitors market share. Thus, INTBREW recorded a strong Revenue growth of 16.7% y/y
to N97.3bn while NB and GUINNESS saw their Revenue declined by 1.0% in 9M-19 and
4.3% in Q1-20 respectively.
Notably, NB was able to wrestle back some market share from INTBREW in Q2-19 and Q3-
19 as they embarked on a massive advertisem*nt campaign around Heineken, Star, and
Maltina brands. Also, the rollout of Tiger brand late in Q3-19 also supported NB’s topline
growth. However, GUINNESS suffered the most as it continued to lose beer market share
to the other two players while focusing on growing its high yielding Spirit segments.
...Apapa Port gridlock,
increased activities of
smugglers, among
other factors
contributed to the low
performance of
consumer goods
players in H1-19
Sectors
The intense
competition, especially
from INTBREW, hindered
other sector players
from increasing prices
in 2019
Nigeria Outlook 2020: A Different Playing Field
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Commodity Market
Food and Beverage: A tale of two halves
Commodity prices strengthened in H1-19 as supply shortfalls outweighed the slowing
global demand. Notably, the cool-off in the trade spat between the world’s two largest
economies over the period also provided some demand impetus. In H2-19, slower global
economic activities and reduced price volatilities dragged the overall commodity market
performance in FY-19. To buttress the above, energy prices which had trended
northwards in H1-19 (up 0.6%), on account of the varying impact of OPEC output accord
and geopolitical tensions, moderated in H2-19 (down 3.0% as at Oct-19) amid slowing
demand. Also, non-energy commodity prices which rebounded in H1-19 (up 2.2%) from its
2018 lows, trended southwards in H2-19 (down 2.6% as at Oct-19) as production
expectations were revised upward and global stocks of key commodities touched
multiyear highs.
Sector outlook
Outlook remains soft
Our overall outlook for the consumer goods sector is not overly positive due to myriads of
macro bottlenecks that ranges from inadequate infrastructure, strained consumer wallet
and stiffer competitions. Pressure on volume growth and transport cost is likely to persist as
the nation-wide logistics issues are unlikely to go away soon. However, the recent
improvements in the traffic situation at the Apapa port, if sustained, is positive for Food
manufacturers in the axis as well as others who depend on the importation of their ware
(e.g. PZ, BUA, FLOURMIL and DANGFLOUR). Also, all local market participants are
expected to see further pressure on input cost as electricity tariffs are expected to be
reviewed higher and the likelihood of petroleum sector deregulation, also adds to the
worries.
Raw material cost pressures, especially imported raw materials, are expected to be
muted in 2020. According to the World Bank’s commodity outlook, Agricultural prices are
expected to stabilize in 2020 following a projected fall in 2019, on reduced crop plantings.
The major downside risk remains the potential escalation of the trade war between US
and some of its key trade partners, which may affect global demand negatively and
pressure prices higher.
Notably, the possible gains from the full implementation of the new minimum wage are
likely to be erased by the proposed upward revision of Value-Added-Tax from the current
5.0% to 7.5% in 2020. Similarly, we note that the recent government drive to shore up tax
revenue will further add pressure on sector players top and bottom-line performance.
Amid all the above-highlighted downside risk, we believe much of the growth we are
likely to see in 2020 will be driven by higher prices (inflationary), rather than higher
consumer demand. Meanwhile, tighter border control, if properly implemented in 2020 is
The World Bank
forecast Agricultural
prices to increase by
1.7% in 2020
Sectors
The overall outlook for
consumer goods sector
is not too positive
Nigeria Outlook 2020: A Different Playing Field
76 www.unitedcapitalplcgroup.com
positive for the overall sector players topline growth as this will help reduce competition
from smuggled goods.
In all, our best picks in the sector remain NESTLE buttressed by their solid balance sheet
position, product innovations and brand durability. Also, we are positive on FLOURMIL and
DANGSUGAR, as our short-term expectation is dampened by the feedback effect of the
Apapa gridlock which we expect to improve in 2020. For the brewers, we believe
competitive landscape will remain challenging. This is as we see further pressure on NB’s
numbers going forward. We expect INTBREW to continue to report positive revenue,
however, pressure on cost lines remain a concern. GUINNESS’ performance may be
supported by its growing Spirit line, but this may not be enough to boost bottom-line
growth. Additionally, as the drum roll of naira devaluation continues to roil on, players with
large FCY loan exposures, such as PZ, will remain disadvantaged.
...players with large
FCY loan exposures,
such as PZ, will remain
disadvantaged
Sectors
Nigeria Outlook 2020: A Different Playing Field
77 www.unitedcapitalplcgroup.com
Cement Sector
Macro Overview: Can the Future be cemented?
The cement sector in Nigeria has grown from a net importer to a net exporter. With a
whopping 69.0% of Nigeria’s 195,000km road network still unpaved, increasing calls for
alternative to road as a means of transportation, especially rail, in major cities in the
country and a housing deficit of c.17.0million, the headroom for growth is clearly
compelling in the Nigerian cement sector. To bridge the infrastructural gap in Nigeria, the
National Integrated Infrastructure Master Plan (NIIMP) estimated that a huge sum $3.0tn
would be required over a period of 30 years. Another estimate suggested that Nigeria
requires an annual investment of $15.0bn (or N4.6tn) - 45.0% of the 2020 of budget - for 15
years to adequately develop its infrastructure nationwide. The above notwithstanding,
the installed capacity of operators in the sector continued to expand, thanks to
government polices such as tax relief programs and a ban on importation of cement
which continues to encourage capacity expansion among local players.
In terms of performance, the growth in the Nigerian cement sector mirrored the gradual
uptick observed in the broader economy. Specifically, the Cement and Construction
sector GDP expanded 6.8% and 2.4% y/y in Q3-19 from 1.6% and 0.7% y/y in Q2-19
respectively. This was aided by the disbursem*nt of fund for CAPEX by the Federal
Government (FG) during the third quarter.
Demand Drivers: Between FGN capex spend and rising private sector consumption
According to CemNet, Nigeria's aggregate cement consumption rose by an average of
2.8% between 2009-2018 to c. 20.7mmt. Meanwhile, the average growth rate of
consumption in the last 4 years ending 2018 declined by 0.04% due to economic
slowdown and government revenue challenges that characterized the period.
Nigeria requires an
annual investment of
$15.0bn (or N4.6tn) for
15 years to adequately
bridge its infrastructural
deficits
Sectors
Source: NBS, ICRC, United Capital Research
Figure 55 Figure 56
Economic slowdown
and government
revenue downturn led
to a decrease in the
average growth rate of
cement consumption in
the last 4 years
Nigeria Outlook 2020: A Different Playing Field
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In 2019, pressure on consumer wallet which had a knock-on effect on private investment
in housing as well as public sector spending on infrastructure dragged demand for
cement in H1-19. However, H2-19 saw a mild improvement judging by the Q3 -19
standalone sales volumes of the key players in the cement industry.
Nevertheless, demand from the public sector remains one of the strongest drivers of
cement consumption in Nigeria. While the execution of capital expenditure continued to
underperform the budgeted figure, government spending on road and rail transport has
been sustained lately. Over the last 8 years, the FG spent an average of N0.9tn or $2.0bn
per annum on infrastructure. According to the National Planning Commission (NPC), the
bulk of the spending is concentrated in ICT (28%), transport (23%), and energy (19%). Over
the next 4 years, Nigeria hopes to invest heavily in several projects. According to
President Buhari, some of the projects Nigerians should expect to come upstream from
2020 include: 47 road projects scheduled for completion in 2020/21, substantial work on
the Second Niger Bridge; and completion of 13 housing estates. Additionally, President
Buhari is seeking senate approval for c.$30.0bn loan in order to close the infrastructural
gap in the country. Accordingly, a moderate implementation of the 2020 budget to
complete ongoing projects may buoy public sector demand for cement in 2020.
Sectoral Performance: Smiling amid tough time
Cement players within our coverage had a challenging year based on their 9M-19
financials. Broadly, tougher operating environment, increased competition and a flurry of
corporate actions shaped the performance of operators in the industry. Lafarge Africa
(WAPCO), the second largest player in the sector by capacity reported a 30.4% y/y
decline in Revenue in 9M-19 while after tax profit surged by 298.5% y/y to N20.6bn,
following the divestment of its loss-making South African business.
Similarly, Cement Company of Northern Nigeria Plc (CCNN), reported a 117.2% y/y surge
in Revenue on the completion of its consolidation with Kalambaina cement, while PBT
and PAT followed with a 104.0% and 118.5% y/y upsurge to close at N11.7bn and N8.8bn
respectively. Notably, the management hinted about its plan of reducing cost of
Public sector demand
has contributed to a
rise in cement
consumption in Nigeria
Sectors
Source: MTEF, Budget Office, United Capital Research
Figure 57
A flurry of corporate
actions shaped the
performance of
cement players in 2019
Nigeria Outlook 2020: A Different Playing Field
79 www.unitedcapitalplcgroup.com
transportation and energy going forward in order to boost bottom line. Also, plans are in
place to implement another merger with OBU cement by Jan-20
Lastly, Dangote Cement (DANGCEM), the biggest player in the space, printed a marginal
decline in its 9M-19 Revenue which settled at N679.8bn for the period. This was largely due
to poor performance in its home market, Nigeria, which accounted for about 70.0% of
group revenues. The PAT also followed, declining 2.5% y/y to N154.4bn during the period.
Outlook
Still a growth story
As noted above, the Nigerian cement industry remains a growth story into the medium to
long term amid a huge deficit in the infrastructure space across the continent. For
context, cement consumption per capita in Nigeria stands at 150kg compared to global
average of 561kg. In 2020, we expect to see improvements in the 2019 figure on the back
of the renewed commitment of the federal government to invest heavily in transport
(including road, rail and ports) and housing infrastructure. For instance, the N2.5tn
approved for 2020 capital expenditure is 47.1% higher than the actual average capex
spent in the last eight years. (2012-2019). Additionally, increased system liquidity driven by
the central bank’s recent expansionary monetary stance, may bolster increased real
estate and construction activities, which should support demand for cement.
On Competitive landscape, we expect the stiff competition among the players in the
sector to be sustained. This will include a possible increase in installed capacity (as hinted
by the 3 key players) which would bring the battlefield for market share to a game of
volumes with the use of price war. We expect the fundamentals in the Nigerian and
regional demographic environment to continue to fuel revenue growth for the players in
the cement sector. Also, increased investment in transportation and distribution channel
as well as cheaper energy sources should trickle into margin improvement with a knock-
DANGCEM, the biggest
cement player,
reported a marginal
decline in its 9M-19
revenue
Sectors
Government
commitment to
transport and housing
infrastructure will
improve demand for
cement in 2020
1500
800
500 450 400 400310 304 300 290
210 150
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Afr
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a
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al
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So
uth
Am
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en
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Nig
eria
Per capita cement consumption (kg)
Growth potential still massive for Nigeria
Source: CemNet, United Capital Research
Figure 58
Nigeria Outlook 2020: A Different Playing Field
80 www.unitedcapitalplcgroup.com
on effect on bottom lines. Additionally, the implementation of Africa Trade Continental
Agreement (AFCTA) in 2020 is positive for players in the cement market as it avails them
opportunity to tap into the continent’s market with ease.
More specifically, following the series of corporate action observed across the sector,
especially WAPCO and CCNN, we expect market valuation to improve on the listed
tickers. Notably, the current valuations of the player in the Nigerian cement space signify
opportunities for investors to key in given that average PE at 12.0x relative to the Middle
East and Africa peers PE of 26.4x. Overall, our top picks in the sector remains DANGCEM;
with an upside of 42.0% and a 12M TP of N199.0.
In 2020, stiff
competition among the
players in the sector is
expected to deepen
Sectors
Nigeria Outlook 2020: A Different Playing Field
81 www.unitedcapitalplcgroup.com
Oil & Gas Industry
Trapped between two opposing forces
2019 came with a mixed narrative for the Nigerian oil & gas sector, across notable
metrics, as developments in the domestic and global space, fueled a different
performance in crude oil production and prices. On the positive side, an increase in
production propelled the sector out of a recession in Q2-19 (+7.2% y/y growth), with Q3-19
numbers at 6.5% y/y. Consequently, its contribution to GDP improved marginally to 9.8% of
total GDP, up from 9.0% in Q2-19. On the negative side, oil prices were caught in the web
of lower demand, trade war jitters and weakened OPEC influence, as Brent crude
dropped by -13.4% y/y, to average $63.7/b in 2019. As a result, Oil GDP in nominal terms
declined by 11.4% y/y as at 9M-19, as the effect of lower prices outweighed larger
production. Government revenue was also caught in the cross fire, as actual oil revenue
came in lower at N900.4bn in H1-19, compared to prorated budget figure of N1.5tn,
adding about 44.1% of total retained revenues to the government’s coffers. This was as oil
production for the period averaged 2.01mb/d, compared to the budgeted benchmark
of 2.3mb/d in 2019.
Elsewhere, in terms of financial flows, lower prices coupled with regulatory uncertainty
and lack of clarity in fiscal terms - an age-long issue - weakened the influx of foreign
investments into the oil & gas sector, as capital imported declined by 27.3% y/y as at 9M-
19, to about $85.9mn. In the same vein, the proportion of banking sector credit directed
to the total oil & gas industry, as at Q3-19, fell to about 28.0% of total loan book (31.0% in
Q3-18). Finally, Nigeria’s position as an exporter of crude oil (80.1% of exports as at H1-19)
and an importer of petroleum products (15.8% of imports as at H1-19) remained a
conundrum, as the NNPC continued its Direct Sale, Direct Purchase program, amid the
continued underutilization of existing refineries and loss of foreign exchange from crude oil
swapped.
Crude oil production
expansion propelled
the Oil & Gas sector out
of recession in Q2-19
(+7.2% y/y growth)
Sectors
Figure 59
Sources: NBS, Bloomberg, United Capital Research
Banking sector credit to
oil & gas industry fell to
28.0% (vs. 31.0% in Q3-
18) of total loan book
as at Q3-19
Nigeria Outlook 2020: A Different Playing Field
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Upstream Sub-sector
Finally a reform! – Not just the one we hoped
Similar to previous years, upstream production activities was impaired by the occurrences
of pipeline vandalism and oil theft, amid ceasefire with Niger Delta militants. Nevertheless,
production ramped up significantly in 2019, reinforced by new output from Total’s Egina
Offshore facility (0.2mb/d) and lower cases of supply disruptions (y/y decline).
Accordingly, average crude oil production peaked 2.04mb/d in Q3-19, by NBS estimates.
Notably, this was the highest level of production since Q1-16. Also, rig activity witnessed
remarkable improvements, touching a 4-year high, as total rig count reached 18 in Oct-
19 .
In terms of regulation, while progress on the Petroleum Industry Governance Bill (PIGB) has
been slow, President Buhari signed the amended Deep Offshore and Inland Basin
Production Sharing Contract (DOIBPSC) Act into law. Key highlights in the amended bill
are the decrease of royalty rate for inland basin production from 10.0% to 7.5% and the
creation of a two-tier royalty structure for deep offshore production. The first tier, a price-
based royalty, addresses changes across different price ranges, such as a 2.5% royalty on
crude prices between $20.0/b - $60.0/b and a 4.0% on prices between $60.0/b - $100.0/b.
Average crude oil
production peaked at
2.04mb/d in Q3-19
Sectors
Figure 61 Figure 60
Sources: NBS, United Capital Research Sources: NBS, United Capital Research
Sources: Baker Hughes, Bloomberg, United Capital Research Sources: NBS, OPEC, United Capital Research
Figure 62 Figure 63
Nigeria Outlook 2020: A Different Playing Field
83 www.unitedcapitalplcgroup.com
The other tier maintains a 10.0% royalty on any water depth in excess of 201m, differing
from the graduated scale previously in place. While the new legislation is not expected to
be applied retrospectively, a key clause in the previous contract mandated a review of
the revenue sharing formula, when the price of crude oil exceeded $20/b. Although
previous administrations failed to revisit the contract and enforce the change in revenue
sharing, International Oil Companies (IOCs) could not claim negligence. As such, dry
bones have risen, with Nigeria seeking $62.0bn in arrears from IOCs.
No doubt, the amended DOIBPSC Act is set to add revenue to the government’s purse,
especially towards the funding of the 2020 budget, however this might severely affect
investments, especially by IOCs. For context, over 80.0% of all ‘producing’ deep offshore
fields, under the production sharing contract, are below 1,000 meters water depth.
Therefore, companies previously paying 0.0% royalty under the 1993 Act, are subjected to
pay 14.0%, going forward, given that crude oil prices have averaged $62.4/b in Q4-19.
This comes at a time when major foreign oil producers are gradually divesting their interest
in Nigeria’s oil & gas sector.
Outlook
Old problems to remain
Looking ahead, the newly signed DOIBPSC Act could have a negative effect on
investments, as IOCs move to countries with better fiscal terms or channel resources
towards American shale production. However, new licensing rounds are set to kick off in
2020, with the government planning to sell offshore and onshore blocks, in a bid to meet
the desired 3.0mb/d output target in 2023. As such, we could see increased domestic
presence in existing and new assets, which is positive for local content development,
while investments by IOCs might remain on the sidelines.
Drilling down to other idiosyncratic risks, the sub-sector remains plagued by vast
operational challenges ranging from inadequate pipeline facilities, oil theft, vandalism,
and sabotage. Also, the high cost of crude oil production, which is estimated at over
$20.0/b, remains a sour patch in boosting investment and gaining a competitive edge
over other exploration destinations. However, the Ministry of Petroleum has reiterated its
current efforts to drive costs to a low point of $10-$15/b, required to keep the sector
globally competitive.
In terms of pricing, the increased OPEC+ production cuts will provide a floor for oil prices.
Although, the elephant in the room remains a potential supply glut, with shale producers
willing to fill the output gap and non-compliant members, such as Nigeria, producing in
excess of their caps. As such, prices might not rise to rosy levels, limiting revenue and
profits for upstream players.
The amended DOIBPSC
Act is set to increase
FG’s revenue in 2020
Sectors
New licensing rounds
are set to kick off in
2020
Nigeria Outlook 2020: A Different Playing Field
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Downstream Sub-sector
Still marred by government regulation
For the most part of 2019, the operational dynamics of the downstream sector remained
the same – surviving in a fixed petrol or Premium Motor Spirit (PMS) price regime - amid
changes in market reality. Clearly, the underlying assumptions of the 2016 PPPRA
template drastically changed, as the actual landing cost and market price were N151.0/
litre and N170.4/litre (as at 4th Dec-19), a huge disparity from the estimated retail price
band of N135.0/litre to N145.0/litre. Judging by the above, the NNPC remained the only
importer of PMS, bearing the losses, with cumulative under-recovery for 2019 as at July
amounting to N383.3bn.
Clearly, the current regulated price of N145/litre creates an incentive for oil marketers to
smuggle subsidized fuel to neighbouring countries. However, with the closure of the
border and the ban of PMS sales across all fueling station within 20km of the border,
revenue from those illegal sources have been blocked. According to the President,
domestic fuel consumption in Nigeria dropped by 30.0%, since the closure of the land
borders. Also, importation of PMS dropped to 1.5bn litres in Sept-19, its 2nd lowest point in
2019.
Outlook
Decreasing drumbeats of a deregulation
In spite of the huge margin between the fixed price of PMS and the expected open
market price, the potential for deregulation in 2020 is looking less likely. This is buttressed
by the recent drive of the government to boost non-oil revenue and curb unnecessary
expenditures, with deregulation being the last card on deck. Most importantly, fiscal
buffers, which could limit the impact of a deregulation on consumer wallets, are lacking.
Elsewhere, we doubt the completion of the 650,000b/d crude oil refinery – being built by
Dangote Group – in 2020. While we await its final takeoff, with commercial operations
Domestic fuel
consumption in Nigeria
dropped by 30.0%
since the border
closure
Sectors
Sources: PPPRA, United Capital Research
The pegged price of PMS vs current market reality Figure 64
Nigeria Outlook 2020: A Different Playing Field
85 www.unitedcapitalplcgroup.com
expected in 2022, the Direct Sale - Direct Purchase program remains in place to supply
products to the Nigerian market. Additionally, about 10 modular refineries are reported to
be at advanced stages of development, which could also add capacity to the existing
underperforming refineries. Finally, in a bid to survive, many downstream players will
continue to expand their product portfolio, into other by-products, to offset the effect of
capped PMS prices on margins.
The Gas sector
Structural challenges mask potential for investments
Data from the NNPC showed that between Jan-19 to Jul-19, the daily average natural
gas production marginally increased by 1.9% y/y to 8,032.7 mmscfd, as finalized
investments in gas production slowed during the period. Dissecting the segments of gas
supplied, the bulk was skewed towards exports (43.0%), compared to a meagre 15.4% to
domestic sources. This was expected, as inadequate gas pipeline infrastructure continued
to disrupt supply chains, with gas players left to bear the high cost of transporting gas as
Liquified Natural Gas (LNG). Also, the liquidity issues in the power sector, coupled with
pegged Domestic Supply Obligation (DSO) prices gave reasons to limit exposure to the
domestic market.
The last component, non-commercialization uses (reinjection and gas flaring), accounted
for 41.7%. Diving deeper into non-commercialization sources, sustained levels of gas
flaring (8.8%) continued to be a cause for concern, as the ultimate goal of eliminating
routine gas flaring or reducing it to 2.0% by 2020, through the Nigerian Gas Flare
Commercialization Programme, remain unachieved. To further understand the issue, using
a DSO price of $2.5/’000scf, the cumulative total gas flared as at Jul-19 was 1,658.9bcf,
translating to $4.1bn – completely lost in the air.
As 2020 unwraps, similar to what we identified in our H1-19 report, a number of recent
developments have come to fore, slowly unlocking the hidden potential in the operations
of gas production. Seplat has identified these opportunities, with its investment of $700mn
Inadequate gas
pipeline infrastructure
continues to disrupt the
gas supply chain
Sectors
Sources: NNPC, United Capital Research Sources: NNPC, United Capital Research
Figure 66 Figure 65
Nigeria Outlook 2020: A Different Playing Field
86 www.unitedcapitalplcgroup.com
in the Assa North-Ohaji South project, a gas hub targeting a production of 300 mmscfd by
April-20. In terms of refining, the long awaited Nigeria LNG Train 7 project’s Final
Investment Decision (FID), was achieved late in Dec-19. Additionally, the agreement
between Siemens and the Federal Government on the electrification roadmap, has the
potential to create massive domestic demand for natural gas, as it is a core component
in the power value chain. However, gas transportation remains a key obstacle, owing to
lack of state-of-the-art pipelines and huge expenses associated with transporting through
liquified natural gas. Fully aware of this deficiency, Nigeria signed a Pipeline Cooperation
Agreement (PCA) with Morocco, hoping to ease difficulties in transportation, and create
access to a broader market.
Sectors
…12 years after, NNPC,
Shell, Total, and other
multinationals make
FID for Nigeria’s LNG
Train 7 project to raise
gas output
Companies
Nigeria Outlook 2020: A Different Playing Field
89 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital
Okomu Oil Palm Plc: BUY Bloomberg: OKOMUOIL NL, Reuters: OKOMUOIL.LG, NSE: OKOMUOIL
The re-occurrence of smuggling of cheaper palm oil into the country and falling CPO prices in the early part of the year
played out in the financial performance of Okomu oil for 2019. The revenue for 9M-19 decline y/y by 6.8%. However, the
financial performance of Okomu oil for the third quarter standalone rebounded, buoyed by the closure of the border and
rising global CPO prices. Looking into 2020, we see a potential for further upside in sales volume, especially in the
domestic market on the back stricter border policy. Also, our expectation of a rise in global CPO prices and favourable
government policies toward the sector is positive for the performance of the players therein. Overall, our view for
OKOMUOIL remains positive, as it continues to leverage on it strong local brand and favourable government policies
toward the sector. We place a BUY rating on the stock, which provides an upside of 52.9% to our 12M-TP of N85.0/share.
Source: Company Financials, United Capital Research Source: Bloomberg, United Capital
Presco Plc: BUY Bloomberg: PRESCO NL, Reuters: PRESCO.LG, NSE: PRESCO
PRESCO remained the only fully integrated oil palm company in Nigeria; with oil palm plantations, palm oil mills, a palm
kernel crushing plant, and a vegetable oil refining plant. The 9M-19 earnings was unimpressive, as revenue declined by
5.2% y/y to N15.4bn with PAT following suit, down by 30.9% to N3.6bn. On a standalone basis , Q3-19 performance
showed a revenue growth of 5.0% y/y, supported by border closure which took effect from Aug-19. However, increased in
cost of sales (28.4%) and selling and distribution (13.7%) eroded the bottom-line as PBT and PAT declined 48.0% and 51%
respectively. In 2020, we expect the firm investment in its plantation coupled with border closure and favourable
government polices toward the sector to support revenue growth for the company. Hence, we rate the stock a BUY with a
12M-TP of N57/share.
Value Traded*: 6M Average daily value traded
Value Traded*: 6M Average daily value traded
Source: Company Financials, United Capital Research
0.4
0.6
0.8
1.0
1.2
Nov-18 Feb-19 May-19 Aug-19 Nov-19
Relative Price Movement: OKOMUOIL
OKOMUOIL NSE ASI
Figure 67
0.4
0.6
0.8
1.0
1.2
1.4
Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19
Relative Price Movement: PRESCO
PRESCO NSE ASI
Figure 68
Key Stats FY-17 FY-18 FY-19f FY-20f
EPS (N) 14.1 12.3 10.2 10.7
DPS (N) 2.4 2.1 1.4 1.5
BVPS (N) 25.9 31.6 22.1 23.8
Dividend Payout 17.3% 16.9% 14.0% 14.0%
Dividend Yield 4.5% 3.8% 2.6% 2.7%
P/E (x) 3.9 4.4 5.4 5.1
P/BV (x) 2.1 1.7 2.5 2.3
ROAE 53.5% 36.0% 26.5% 32.5%
ROAA 41.6% 28.4% 20.5% 24.4%
Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 5.7 4.3 7.7 9.3
DPS (N) 2 2 3.6 4.3
BVPS (N) 21.9 24.2 25.8 27.2
Dividend Payout 35.1% 46.5% 46.8% 46.2%
Dividend Yield 4.9% 2.3% 6.4% 7.6%
P/E (x) 1.6 6.2 5.6 6.1
P/BV (x) 0.5 1.2 2.5 1.2
ROAE 15.5% 16.5% 32.3% 29.2%
ROAA 8.9% 8.2% 12.2% 10.1%
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
55.6 85.0 52.9% 1.0 172.8 53.0 7,652,072 94.6%
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
47.5 57.0 20.0% 1.0 154.7 47.5 2,020,589 39.9%
Nigeria Outlook 2020: A Different Playing Field
90 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital
Access Bank Plc: BUY Bloomberg: ACCESS NL, Reuters: ACCESS.LG, NSE: ACCESS
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
10.0 12.2 22.0% 35.5 1,157.8 355.5 223,545,900 95.7%
With the completion of its merger with the defunct Diamond Bank Plc in Apr-19, ACCESS is now Nigeria’s largest bank by total asset. 9M-19
Gross Earnings surged 36.9% y/y to N513.6bn, buoyed by Interest Income which increased 47.6% y/y to N405.0bn.Notably, Non-Interest
Income also grew 7.8% y/y to N108.0bn. Overall, gradual improvement in Cost to Income ratio to 63.1%, supported profitability as PBT and
PAT jumped 46.7% and 44.2% y/y to N103.0bn and N90.7bn respectively. ROE increased to 22.2% (previously: 16.9%) while net margin also
improved marginally to 17.7% (previously: 16.8%). Loans jumped 37.5% in 9M-19 to N2.9tn. Looking ahead, the Bank has indicated its
intention to expand its footprint in Africa via the acquisition of Transnational Bank Ltd in Kenya. This may further dilute EPS but strengthen its
foothold across the continent. Lower yield in Nigeria may slow Interest Income growth despite expected expansion in loan book.
Notably, our EPS forecast is estimated to slow to N3.0 due to pressure on Interest Income and regulatory constraints. P/E & P/B ratios stand
at 2.5x & 0.6x compared to 4.6x & 0.7x for peers. As such, we place a BUY rating on ACCESS.
Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded
0.6
0.8
1
1.2
1.4
Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19
Relative Price Movement: ACCESS
NGSEINDX NGSEB10 ACCESS NL
Figure 69 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 2.1 3.3 3.3 3.0
DPS (N) 0.7 0.5 0.5 0.4
BVPS (N) 17.4 16.7 17.1 17.6
Dividend Payout 31.3% 15.2% 15.0% 15.0%
Dividend Yield 6.2% 7.4% 5.0% 3.6%
P/E (x) 5.0 2.1 3.0 4.1
P/BV (x) 0.6 0.4 0.6 0.7
ROAE 18.5% 15.7% 22.4% 18.7%
ROAA 1.6% 2.1% 2.0% 1.5%
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
FBN Holding Plc: BUY Bloomberg: FBNH NL, Reuters: FBNH. LG, NSE: FBNH
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
6.2 7.4 19.5% 35.9 719.1 220.8 93,397,670 97.5%
FBNH’s Gross Earnings (GE) growth was tepid as at 9M-19, down 0.4%y/y to N439.9bn. Notably, Interest Income fell 3.0%y/y to N327.5bn
amid hesitant loan growth and poor yields on interest-bearing assets. However, PBT and PAT continued to rebound, up 16.9%y/y and
15.3%y/y to N60.0bn and N51.8bn respectively. We are bullish on FBNH following the full write-off of the Atlantic Energy Loan. This should
support FY-19 profitability margins as well as ROE. As such, earnings and dividend yield outlook is more positive. While pressure on Interest
Income growth is a concern for banks in 2020, FBNH must check rising OPEX which may worsen Cost to Income ratio to sustain
improvement in margins. Overall, we expect expansion of loan book and the stability of Non-Interest Income to support performance in
2020. FBNH trades at a discount to peers with PB & PE ratios of 0.4x and 3.9x compared to peer (Tier-1) average 0.7x and 4.6x
respectively. Accordingly, we place a BUY rating on FBNH in 2020.
Value Traded*: 6M Average daily value traded
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Relative Price Movement: FBNH
NGSEINDX NGSEB10 FBNH NL
Figure 70 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 1.1 1.7 2.7 2.4
DPS (N) 0.3 0.3 0.4 0.4
BVPS (N) 19.0 20.1 22.5 25.6
Dividend Payout 22% 16% 15% 15%
Dividend Yield 2.8% 16.8% 13.3% 12.1%
P/E (x) 7.9 4.8 2.3 2.2
P/BV (x) 2.2 2.5 3.6 4.8
ROAE 17.7% 9.8% 16.8% 13.3%
ROAA 1.0% 1.1% 1.7% 1.5%
Nigeria Outlook 2020: A Different Playing Field
91 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital Source: Company Financials, United Capital
Guaranty Trust Bank Plc: BUY Bloomberg: GUARANTY NL, Reuters: GUARANT.LG, NSE: GUAR-
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
29.7 41.7 40.5% 29.4 2,847.3 874.1 650,510,300 99.8%
Value Traded*: 6M Average daily value traded
We retain our BUY rating on GUARANTY on the basis of the sustained operational and cost management efficiency. As observed in its 9M-
19 earnings, we expect GUARANTY to sustain its solid Net Interest Margin (NIM) and Cost of Funds (COF) positioning by FY-19 and in 2020
due its huge Current and Savings Account (CASA) deposit base. Also, PAT will continue to be supported by the bank’s outstanding CIR
ratio which ensured a net margin of 45% as of 9M-19 earnings. In terms of market valuation, we observe that market pricing is weighed by
the overall bearish sentiment for equities despite GUARANTY’s solid company fundamental. Despite regulatory constraints we expect EPS
to increase to N6.2 and N6.5 in 2019 and 2020 respectively due to stable Non-Interest Income growth and efficient cost management.
Dividend yield is expected to remain attractive, estimated at 9% and 5.8%in 2020 respectively .
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RelativePrice Movement: GUARANTY
NGSEINDX NGSEB10 GUARANTY NL
Figure 72 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 5.8 6.3 6.1 5.5
DPS (N) 2.7 2.8 2.7 2.4
BVPS (N) 21.2 19.6 19.9 20.1
Dividend Payout 47.0% 44.0% 44.0% 44.0%
Dividend Yield 6.6% 8.0% 9.0% 5.8%
P/E (x) 7.0 5.5 4.8 7.5
P/BV (x) 1.9 1.8 1.5 2.1
ROAE 30.2% 30.8% 30.9% 24.7%
ROAA 5.3% 5.6% 5.3% 4.7%
Sources: Bloomberg, United Capital
FCMB Group Plc: HOLD Bloomberg: FCMB NL, Reuters: FCMB.LG, NSE: FCMB
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
1.85 1.87 1.1% 19.8 119.3 36.6 14,920,940 83.7%
The 9M-19 result of the tier-2 bank was underwhelming as PAT declined by 4.8% despite a 2.2% growth in Gross Earnings. This is on the
back of an 8.0% increase in Interest Expense and an 11.0% increase in operating expenses. In terms of asset quality, NPL moderated from
5.1% in the previous year to 3.5% in Q3-19 on the back of write off of NPL related to commerce and oil & gas industries. Also, Cost of Risk
improved from 1.6% to 1.1% on the back of higher recovery. Loan growth (1.5%) failed to match deposit growth (5.1%), pushing Loan to
deposit ratio down from 79.6% to 73.9%. Nevertheless, the LDR still remains well above the regulatory required minimum. We expect that
profit will continue to grow moderately as the bank works to reduce cost of funds significantly and expand the asset under management
of the Asset and Wealth Management business. FCMB possesses a P/BV ratio of 0.2x, low when compared to peers whose P/BV averaged
0.7x. We recommend a HOLD on to the stock as our target price (N1.87) is a 4% upside to the current price.
Sources: Company Financials, United Capital Research Value Traded*: 6M Average daily value traded
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Relative Price Movement: FCMB
NGSEINDX NGSEB10 FCMB NL
Figure 71 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 0.4 0.8 1.0 1.1
DPS (N) 0.1 0.1 0.2 0.2
BVPS (N) 9.4 9.3 10.2 11.3
Dividend Payout 23.6% 13.8% 24.8% 20.0%
Dividend Yield 6.8% 7.2% 10.4% 11.2%
P/E (x) 3.5 2.6 1.8 1.7
P/BV (x) 0.2 0.2 0.2 0.2
ROAE 6.0% 8.0% 10.0% 10.2%
ROAA 0.7% 1.1% 1.3% 1.5%
Nigeria Outlook 2020: A Different Playing Field
92 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital Source: Company Financials, United Capital
Fidelity Bank Plc: BUY Bloomberg: FIDELITY NL, Reuters: FIDELITY.LG, NSE: FIDELITY
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
2.1 2.5 22.0% 29.0 193.5 59.4 12,680,220 98.7%
Fidelity bank 9M-19 results showed a 15.9% increase in Gross Earnings. PBT and PAT also grew by 14.7% and 20.2% respectively. The GE
growth was driven by both interest income and non-interest income. Non-Interest Income growth impressive as we observed a 43.0%
growth in digital income. In its core business, we observed a loan growth of 26.4% as loan to funding ratio expanded from 64.2% to
68.4% which is well above the 60% and subsequent 65% benchmark introduced by the CBN in June and September respectively. The
bank’s asset quality position improved as the Cost of Risk was down to 0.0% and NPL ratio reduced from 5.7% to 4.8% to meet CBN’s
benchmark. Although liquidity ratio and Capital adequacy ratio reduced to 32.6% and 16.4% respectively, it remains above the respec-
tive regulatory minimum. We remain optimistic about the stock. and we recommend a BUY as our target price is a 17% upside from cur-
rent price.
Value Traded*: 6M Average daily value traded
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Relative Price Movement: FIDELITY
NGSEINDX NGSEB10 FIDELITY NL
Figure 73 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 0.61 0.79 1.27 1.34
DPS (N) 0.11 0.11 0.19 0.20
BVPS (N) 6.95 6.71 7.99 9.33
Dividend Payout 17.9% 13.9% 15.0% 15.0%
Dividend Yield 4.5% 5.4% 9.1% 8.3%
P/E (x) 4.0 2.6 1.6 1.8
P/BV (x) 0.35 0.30 0.26 0.26
ROAE 10.8% 10.5% 17.1% 15.4%
ROAA 1.3% 1.5% 2.0% 1.9%
Stanbic IBTC Plc: HOLD Bloomberg: STANBIC NL, Reuters: IBTC.LG, NSE: STANBIC
9M-19 results showed a 7.0%y/y and a 1.8%y/y decrease in PAT and PBT respectively despite a 4.4%y/y growth in Gross Earnings
(GE). Non-interest income and net interest income grew by 2.5% and 0.4% respectively. We observed a slight decrease in asset yield to
12.3% from 12.7% in the previous year, attributed to competitive asset pricing and the general decline in the yield environment. Also, cost
of funds declined by 30bps to 3.5% as the bank deliberately sought to replace expensive liabilities with cheaper and stable ones. There
was a recorded 24% loan book growth and Loan to funding ratio of 62.9% which was well above the CBN’s requirement for Sept-19. We
expect to see growth in loan book due to the various CBN tactics to boost lending to the real sector. Further supported by impressive asset
quality as NPL ratios reduced to 2.7% from 3.9% and Cost of Risk stands at -0.2%. Our target price (N43.8) implies a 21.6% upside from the
current market price of N36.1. Hence, we place a HOLD rating on the ticker.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Price Target Price Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
41.0 43.8 6.8% 10.5 1,402.9 430.7 48,723,080 38.0%
Value Traded*: 6M Average daily value traded
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Relative Price Movement: STANBIC
NGSEINDX NGSEB10 STANBIC NL
Figure 74 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 4.81 7.27 5.97 6.47
DPS (N) 0.50 1.50 1.23 1.33
BVPS (N) 18.1 23.0 29.0 35.4
Dividend Payout 10.4% 20.6% 20.6% 20.6%
Dividend Yield 1.2% 3.1% 3.4% 2.7%
P/E (x) 8.6 6.6 6.1 7.6
P/BV (x) 2.3 2.1 1.3 1.4
ROAE 33.0% 37.7% 23.9% 20.8%
ROAA 4.0% 4.9% 3.5% 3.5%
Nigeria Outlook 2020: A Different Playing Field
93 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
Zenith Bank Plc: BUY Bloomberg: ZENITHBA NL, Reuters: ZENITHB. LG , NSE: ZENITHBANK
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
18.6 26.7 43.5% 31.4 1,902.2 584.0 542,935,600 88.3%
Our views on ZENITH remain positive, buoyed by efficient Cost-to-Operating Revenue profile and stable margins. Although Interest Income
is unlikely to improve by FY-19, stronger Non-Interest Income growth, cheaper funding cost and stable Cost to Income ratio (CIR) are
expected to keep profitability attractive. For context, PAT is expected to close the year around N200.0bn, again in 2019. Also, low Cost of
Risk (CoR) at 1.2% and NPL ratio of 4.95%, buttress our position as this implies that asset quality will remain stable. In 2020, regulation
constraints may compel the bank to further expand credit. Also, with an efficient cost management structure, we expect the bank to
sustain its position as one of the most profitable banks in the market. Finally, at current price, dividend yield is estimated at 15% while
Annualized ROE remains well above industry average. The bank trades at a P/B ratio of 0.7x less than 1.4x for GUARANTY implying that
the ticker remains fairly underpriced at N18.7. Overall, we maintain a BUY rating on the basis of its operational efficiency, earnings
stability, dividend consistency and attractive market valuation.
Value Traded*: 12M Average daily value traded
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Relative Price Movement: ZENITH
NGSEINDX NGSEB10 ZENITHBA NL
Figure 75 Key Stats FY17 FY18 FY19e FY20f
EPS (N) 5.4 6.2 5.7 5.5
DPS (N) 2.7 2.5 2.3 2.2
BVPS (N) 26.2 26.0 28.8 29.9
Dividend Payout 49.8% 40.6% 40.6% 40.6%
Dividend Yield 10.5% 10.8% 12.7% 8.3%
P/E (x) 4.7 3.7 3.2 4.9
P/BV (x) 1.0 0.9 0.6 0.9
ROAE 22.3% 23.6% 21.0% 18.7%
ROAA 3.3% 3.3% 3.0% 2.7%
Nigeria Outlook 2020: A Different Playing Field
94 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
Guinness Nigeria Plc: SELL Bloomberg: GUINNESS NL, Reuters:GUINNESS.LG, NSE: GUINNESS
Price TP Upside/Downside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
30.1 28.2 -6.2% 2.2 214.4 65.8 25,827,260.0 49.8%
GUINNESS’ most recent Q1-19/20 result reflected the negative impact of rising competition and elevated cost of excise duties on its top-
line numbers as Revenue declined by 4.3%y/y to N26.9bn. Notably, export revenues declined (-75.2% y/y to N692.5mn) as primary export
of Malta Guinness to Guinness Ghana was cut-off because Guinness Ghana now owns its own canning line. Meanwhile, the moderate
decline in Cost of Sales and OPEX, down 0.2% and 3.4% y/y respectively failed to reflect on the company's bottom-line numbers. This was
as Finance cost skyrocketed by 117.0%y/y to N1.3bn. Accordingly, the company reported a loss of N370.4mn in Q1-20 compared to a
profit of N835.7m in Q1 2019. Looking ahead, we expect the competition in the brewery space, coming largely from INTBREW, to intensify
and impact negatively on GUINNESS’ top-line. Also, we expect cost pressures to return in 2020 amid our outlook for a rise in the company’
key inputs. On a balance of these factors, we estimate 12M TP at N22.8/share, translating to 12.0% downside. We rate GUINNESS a SELL.
Value Traded*: 12M Average daily value traded
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Relative Price Movement: GUINNESS
GUINNESS NSEASI FMCGs
Figure 76 Key Stats FY-17 FY-18 FY-19f FY-20f
EPS (N) 1.3 3.3 2.5 2.9
DPS (N) 0.6 1.8 1.5 1.6
BVPS (N) 28.5 43.0 40.7 42.0
Dividend Payout 50.1% 55.7% 60.7% 55.0%
Dividend Yield 0.8% 2.6% 5.1% 5.7%
P/E (x) 61.5 21.8 12.0 9.7
P/BV (x) 2.8 1.7 0.7 0.7
ROAE 4.5% 10.3% 6.2% 7.1%
ROAA 1.4% 4.5% 3.5% 4.1%
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
International Breweries Plc: BUY Bloomberg: INTBREW NL, Reuters:INTBREW.LG, NSE: INTBREW
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
9.5 11.3 18.9% 8.6 266.0 81.7 4,196,121.0 97.5%
Over 9M-19, INTBREW rapidly grew Revenue, up 16.7%y/y to N97.3bn, as overall volume expansion outweighed the impact of rising excise
duties. The volume expansion was on the back of its larger operating capacity and expansion in Sagamu plant. However, the positive
topline performance failed to trickle down to the bottom-line numbers. This was due to the company’s cost inefficiencies as post merger
cost synergy is yet to materialize. Also, the additional debt raised to ramp up capacity in Sagamu and its attributable interest expense,
further worsen the bottom-line position. Against this backdrop, Loss before and after Tax worsened, from N9.2bn and N7.1bn in 9M-18 to
N24.1bn and N16.4bn, respectively. Looking ahead, we expect the balance sheet restructuring carried out in Dec-19 to impact the
company’s bottom-line positively in 2020. Also, we expect a stronger Revenue growth in FY-20, especially if the company join its other two
competitors (NB and GUINNESS) in increasing retail prices of beer. On a balance of all the above factors, we rate the stock a BUY as we
expect EPS to settle at -N0.5 by FY-20 and improvement compared to an expected -N1.2 in FY-19.
Value Traded*: 12M Average daily value traded
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Relative Price Movement: INTBREW
INTBREW NSEASI FMCGs
Figure 77 Key Stats 9M-17 FY-18 FY-19e FY-20f
EPS (N) 0.2 -0.4 -1.2 -0.5
DPS (N) 0.0 0.0 0.0 0.0
BVPS (N) 4.6 4.1 3.1 4.9
Dividend Payout 0.0% 0.0% 0.0% 0.0%
Dividend Yield 0.0% 0.0% 0.0% 0.0%
P/E (x) 335.8 nm nm nm
P/BV (x) 11.9 13.6 18.1 11.4
ROAE 3.6% -11.0% -39.4% -9.5%
ROAA 0.6% -1.2% -0.6% 0.6%
Nigeria Outlook 2020: A Different Playing Field
95 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital
Nestle Nigeria Plc: BUY Bloomberg: NESTLE NL, Reuters: NESTLE.LG, NSE: NESTLE
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
1,469.9 1,643.1 11.8% 0.8 3,795.2 1,165.1 241,783,400.0 33.8%
Value Traded*: 12M Average daily value traded
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Relative Price Movement: NESTLE
NESTLE NSEASI FMCGs
Figure 79
NESTLE submitted an impressive 9M-19 result as it recorded growth in both top-line and bottom-line numbers. Revenue was up by 4.0%y/y
to N211.3bn while Pre-and-post tax profit was up by 17.6%y/y and 11.2%y/y to N56.6bn and N36.8bn respectively. This was as all the cost
items, save for Marketing & Distribution cost, declined across the board. Notably, we observed significant uptick in Trade and other
Receivables (+32.8% y/y) during the period which implies Revenue growth has been buoyed by extension of favourable credit terms to
key trade partners amid rising competition, and we struggle to see the sustainability of this strategy. In 2020, our outlook for NESTLE is
stable amid gradual improvements in the overall economy. Revenue and Profit margins are also expected to be stable due to further
improvements in volumes as demand remains stable. Meanwhile, we expect Marketing and Distribution spend to continue to pressure
operating margin due to a largely competitive operating environment. In all, NESTLE is rated a BUY.
Source: Company Financials, United Capital
Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 42.5 54.3 59.4 60.3
DPS (N) 27.7 54.2 53.4 54.2
BVPS (N) 56.6 63.4 69.5 75.8
Dividend Payout 65.0% 99.9% 89.9% 89.9%
Dividend Yield 1.8% 3.8% 3.3% 3.3%
P/E (x) 36.6 26.4 27.7 27.3
P/BV (x) 27.5 22.6 23.6 21.7
ROAE 89.0% 90.4% 89.4% 83.0%
ROAA 22.97% 26.49% 27.69% 82.96%
Source: Bloomberg, United Capital
Nigerian Breweries Plc: HOLD Bloomberg: NB NL, Reuters:NB.LG, NSE: NB
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
59.0 59.5 0.8% 8.0 1,536.9 471.8 196,640,400.0 46.8%
NB’s top-line was hugely affected by the elevated excise duty payment in 2019. As at 9M-19, NB’s Gross Revenue rose by 1.9% y/y to
N259.9bn. However, a 43.2% y/y rise in Excise Duty expense drag Net Revenue lower by 1.0% to N235.7bn. Meanwhile, Cost of Sales
decreased marginally by 2.7%y/y while Operating Expenses and Finance Cost grew 6.1% and 48.6% y/y respectively. The higher OPEX
was mainly due to increased Advertising and Distribution cost (+11.9%y/y) in a bid to recover lost market share from INTBREW. Also, the
higher Finance cost was driven by higher Interest-Bearing Liabilities (up 70.9% y/y to N72.8bn) due to the Jun-19 commercial paper
issuances done by the company to finance working capital. Overall, PBT and PAT fell by 23.4%y/y and 17.0%y/y to N17.2bn and N12.3bn
respectively and net margin deteriorated by 1.0% to 5.2%. In 2020, we expect NB to finally pass on the elevated excise duty to consumers
amid the expected implementation of the new national minimum wage. This should impact the topline numbers positively and trickle
down to the bottom-line numbers. Against this background, we review our 12M TP to N59.5 and place a HOLD rating on the brewer.
Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded
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Relative Price Movement: NB
NB NSEASI FMCGs
Figure 78 Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 4.1 2.4 2.1 3.6
DPS (N) 4.1 2.4 2.1 3.6
BVPS (N) 22.3 20.9 20.9 22.1
Dividend Payout 100.0% 100.0% 100.0% 100.0%
Dividend Yield 4.0% 2.8% 4.0% 6.8%
P/E (x) 24.9 35.2 24.9 14.7
P/BV (x) 4.6 4.1 2.5 2.4
ROAE 19.2% 11.3% 10.0% 16.5%
ROAA 8.8% 5.0% 4.2% 6.9%
Nigeria Outlook 2020: A Different Playing Field
96 www.unitedcapitalplcgroup.com
Sources: Bloomberg, United Capital
Flour Mills of Nigeria Plc: HOLD Bloomberg: FLOURMIL NL, Reuters:FLOURMI.LG, NSE:FLOURMILL
FLOURMIL’s performance improved in the 6-months to Sep-19. This was as Group Revenue grew mildly by 0.4% to N270.8bn while Post-Tax
rose faster by 16.4% y/y to N5.9bn. Notably, the Group Revenue recovery was supported by topline growth in Sugar (+15.1%) and Agro-
allied segments (+5.1%) while the highly weighted Food segment (-2.0%) as well as Support Services segment, lagged. Meanwhile, the
growth in Revenue was eroded by higher Cost of Sales (+0.6%) and OPEX (+7.3%y/y). Thanks to lower, Net Finance Cost (-25.2%) and Tax
Expense (-15.5%) PBT and PAT rose 4.0%y/y and 16.4%y/y to N8.6bn and N5.9bn respectively. Going forward, while gains from strategic re
-arrangement lie in the medium to long term, we think near term pressure from competition and operating environment will continue to
weigh. Overall, we maintain our TP at N21.5/share with a HOLD recommendation.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Dangote Sugar Refinery Plc: HOLD Bloomberg: DANGSUGA NL, Reuters: DANGSUGA.LG, NSE: DANGSUGAR
Price Target Price Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
19.7 21.5 9.1% 4.1 236.1 80.8 25,647,950.0 99.6%
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
13.3 18.6 36.8% 12.0 531.6 163.2 17,189,760.0 26.8%
DANGSUGAR’s performance improved slightly in 9M-19 as reduction in the influx of smuggled sugar amid the closure of land borders
drove volume growth in Q3-19. Accordingly, Revenue grew mildly by 0.6% y/y to N117.4bn. However, operational challenges remained
during the year, eroding gains from the Revenue growth. Cost of Sales (+1.5%) rose faster than growth in Revenue and Gross Profit
declined by 2.2%y/y. The rising cost pressure emanated from higher raw sugar price as well as freight costs due to the Apapa wharf
gridlock. Consequently, bottom-line remained under the water, as PBT and PAT declined 12.4%y/y and 12.0%y/y to N23.0bn and N14.7bn
respectively. Looking ahead, we expect the restructuring around the Nigerian border to bode well for the company’s volume growth in FY
-19 and FY-20E. However, cost pressures are expected to persist as Apapa gridlock continue to drive freight cost higher. Adjusting our
model for the above assumptions, resulted in an uptick in TP to N18.6 (from N11.0) which implies a HOLD recommendation.
Sources: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded
Value Traded*: 12M Average daily value traded
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Relative Price Movement: FLOURMILL
FLOURMILL NSEASI FMCGs
Figure 80
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Relative Price Movement: DANGSUGAR
DANGSUGAR NSEASI FMCGs
Figure 81
Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 3.4 3.3 1.0 2.5
DPS (N) 1.0 1.0 1.2 0.8
BVPS (N) 39.1 36.7 36.5 38.3
Dividend Payout 29.7% 30.1% 123.0% 30.0%
Dividend Yield 3.4% 4.3% 6.2% 3.5%
P/E 8.6 7.0 20.0 8.5
P/BV 0.7 0.6 0.5 0.6
ROAE 8.9% 10.8% 2.7% 6.8%
ROAA 2.1% 3.1% 1.0% 2.6%
Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 3.3 1.8 1.6 2.0
DPS (N) 1.1 0.7 0.6 0.7
BVPS (N) 7.7 8.2 9.7 10.4
Dividend Payout 33.2% 37.4% 35.3% 36.4%
Dividend Yield 5.5% 4.5% 4.2% 4.1%
P/E (x) 6.0 8.3 8.5 8.9
P/BV (x) 2.6 1.8 1.4 1.7
ROAE 50.1% 22.9% 18.2% 19.5%
ROAA 21.7% 11.9% 10.6% 11.8%
Nigeria Outlook 2020: A Different Playing Field
97 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital Source: Company Financials, United Capital
PZ Cussions Nigeria Plc: HOLD Bloomberg: PZ NL, Reuters: PZ.LG, NSE: PZ
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
5.7 5.8 2.7% 4.0 73.1 22.4 2,452,972.0 27.1%
PZ continue to struggle with competition in 2019 as Gross Income and PAT declined sharply by 30.1% and 40.0% y/y in FY-18/19 (ending
May) to N17.1bn and N1.2bn respectively. Also, earnings scorecard for Q1-19/20 (ending August) showed operational challenges remain
a drag on the company’s performance. This was as Cost of Sales spiked by 15.2% y/y while Revenue declined marginally by 0.5% y/y.
Thus, dragging Gross Income lower by 40.1%y/y to N2.7bn. Management explained that this contraction was caused by exceptionally
high port charges/demurrage incurred during the quarter. Accordingly, the situation at the Apapa port – a major route for PZ’s raw mate-
rial import is another source of pressure to be watched in FY-19/20. Over FY-19/20, we expect operational challenges to intensify as an
upward review of the minimum wage is likely to be counter-balanced by the upward review in VAT and other levies/tax. Also, the likely
increase in electricity tariffs by 2020 will further add pressures on PZ’s operational cost while concerns around FX devaluation by 2020
adds to the uncertainty. Factoring all of the above, we place a HOLD rating on the ticker as operating fundamentals continue to falter.
Value Traded*: 12M Average daily value traded
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Relative Price Movement: PZ
PZ NSEASI FMCGs
Figure 82
Unilever Nigeria Plc: BUY Bloomberg: Unilever NL, Reuters: Unileve.LG, NSE: Unilever
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
22.0 27.7 25.9% 5.7 411.7 126.4 9,658,865.0 32.1%
Value Traded*: 12M Average daily value traded Source: Bloomberg, United Capital Source: Company Financials, United Capital
UNILEVER’s 9M-19 Revenue slumped by 28.6%y/y to N51.6bn, following an underwhelming Q3-19 wherein Revenue dipped sharply by
62.9%y/y to N9.0bn. The Q3-19 slump was its weakest performance for as far back as we can track. Our findings indicated that the steep
Revenue decline in Q3-19 may be partly due to the tighter credit terms with key distributors in a bid to minimize non-performing receiva-
bles. A 33.7% q/q decline in Trade Receivables supports this findings. In all, PBT and PAT dipped 94.9% and 94.3% respectively. Clearly, we
expect FY-19 performance to grossly underperform even as we anticipate a better Q4-19 performance. However, we expect FY-20 perfor-
mance to come in stronger, buoyed largely by the low base effect of FY-19. Gradual improvement in consumption spending is also ex-
pected to support volume growth, although cost pressure may persist. In all, we place a BUY rating on UNILEVER.
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Relative Price Movement: UNILEVER
UNILEVER NSEASI FMCGs
Figure 83 Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 1.8 1.8 1.8 1.8
DPS (N) 0.5 1.5 0.9 1.3
BVPS (N) 18.1 14.5 30.2 29.1
Dividend Payout 28.1% 84.9% 50.0% 70.0%
Dividend Yield 1.2% 4.1% 3.2% 4.6%
P/E (x) 23.0 20.9 15.8 15.2
P/BV (x) 2.3 2.6 0.9 1.0
ROAE 17.0% 12.8% 5.6% 6.4%
ROAA 6.2% 7.3% 3.6% 3.8%
Key Stats FY-17 FY-18 FY-19E FY-20f
EPS (N) 0.9 0.5 0.3 0.3
DPS (N) 0.5 0.2 0.2 0.1
BVPS (N) 11.4 11.4 11.5 10.2
Dividend Payout 53.9% 30.9% 51.5% 47.3%
Dividend Yield 3.4% 2.4% 1.2% 2.8%
P/E 22.2 24.9 18.5 20.9
P/BV 1.8 1.1 0.5 0.6
ROAE 8.3% 4.3% 2.5% 2.6%
ROAA 4.5% 2.2% 1.4% 1.4%
Nigeria Outlook 2020: A Different Playing Field
98 www.unitedcapitalplcgroup.com
Dangote Cement Plc: BUY Bloomberg: DANGCEM.NL, Reuters: DANGCEM.LG, NSE: DANGCEM
DANGCEM performance saw a marginal decline in revenue (-0.8%) to N679.8bn as at 9M-19. This was fueled by faltering growth
in its major market, Nigeria, which accounted for about 70.0% of group revenues. The above notwithstanding, the cement giant
saw an improvement in volume sold (+1.1%) driven by volume sold in Nigeria which was up by 0.6% y/y. Notably, countries like
Tanzania and Sierra Leone saw an increase of 106% and 108% respectively in volume sales to support the group volume growth.
PAT followed suit, declining 2.5% y/y to N154.4bn,. Judging by historical, we believe that the ticker is currently underpriced couple
with our expectation of improved growth in volume sales in 2020 and absence of one-off spike in cost as seen in advertisem*nt
and promotion cost in 9M-19. Hence we retain a BUY rating with a TP of N199 and 40.1% upside.
Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded Sources: Company Financials, United Capital Research
Lafarge Africa Plc: HOLD Bloomberg: WAPCO.NL, Reuters:WAPCO.LG, NSE: WAPCO
Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded Sources: Company Financials, United Capital Research
Following the selloff of the loss making South African operation, Lafarge Africa plc (WAPCO) reverted to profitability 2019
financial results. Though 9M-19 declined by 30.0% y/y to N234.3bn owing to the south African divestiture, Profit after tax
(PAT) reverts to profitability, to N20.6bn. Further analysis revealed that long term borrowings reduced by 78.4% to N65.3bn,
thanks to the proceed from the divestiture which off set the contentious foreign debt that has being a bone in the neck of
the bottom line. The reduction in borrowings fueled the massive reduction in leverage (using: debt/equity), to 18.7%
(previously: 224.1%). In 2020, we want to pay close attention to how the company will perform post divestment coupled
with the stiff competition among the players in the sector as our model suggest a mild improvement . Overall, we remain
cautiously optimistic on the stock and retain our HOLD recommendation.
Companies
Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 12 22.9 14.5 12.8
DPS (N) 10.5 11 12.3 10.2
BVPS (N) 45.9 57.9 55.5 81.1
Dividend Payout 87.6% 48.0% 84.8% 79.7%
Dividend Yield 4.6 8.3 6.5 5.1
P/E (x) 19.2x 8.4x 17.6x 6.4x
P/BV (x) 5.0x 3.3x 4.0x 2.5x
ROAE 26.1% 44.2% 22.9% 20.8%
ROAA 12.3% 10.1% 11.1% 13.3%
Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) -6.2 -1.6 0.3 0.8
DPS (N) 1.5 NA 0.1 0.3
BVPS (N) 28.2 33.4 13.9 14.5
Dividend Payout nm nm 39.4% 40.0%
Dividend Yield 3.0% na 0.9% 2.3%
P/E (x) nm Nm 42.3x 17.4x
P/BV (x) 1.6 x 1.1x 2.2x 2.2x
ROAE -17.0% -6.0% 0.3% 0.1%
ROAA -6.4% -1.6% 0.9% 2.4%
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Nov-18 Feb-19 May-19 Aug-19 Nov-19
Relative Price Movemnet: DANGCEM
DANGCEM Industrial Goods Index NSE ASI
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
142 199 40.1% 17.0 7,881.9 2,419.8 393,992,200.0 14.7%
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
15.3 16.6 8.5% 16.1 802.8 246.4 67,274,940.0 90.4%
Figure 84
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Relative Price Movement: WAPCO
WAPCO Industrial Goods Index NSE ASI
Figure 85
Nigeria Outlook 2020: A Different Playing Field
99 www.unitedcapitalplcgroup.com
Companies
CCNN: BUY Bloomberg: CCNN NL, Reuters: CCNN.LG, NSE: CCNN
CCNN’s Revenue surged 117.2% y/y to N42.5bn in 9M-19, operating profit also grew 105.1% y/y to N11.8bn. Additionally, PBT
and PAT spiked 104.0% and 118.5% respectively. The above were on the back of the its merger with Kalambaina Cement.
Looking ahead, CCNN has announced intention to merge its operations with BUA’s Obu Cement ltd, the consolidation will
result in the delisting of CCNN and the surviving entity will be listed on the NSE as Obu Cement. In all, the consolidation will
increase the installed capacity to 11.0MMT from the current 8.0MMT and position the company as the second largest cement
producer in Nigeria. Accordingly, we expect the consolidation with Obu cement to have massive impact on the company’s
topline in FY-20E, as seen in the merger with Kalambaina. We place a BUY rating on the stock, which provides an upside of
49% to our 12M-TP of N28/share.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded
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Relative Price Movement: CCNN
CCNN Industrial Goods Index NSE ASI
Figure 86 Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 12 22.9 14.5 12.8
DPS (N) 10.5 11 12.3 10.2
BVPS (N) 45.9 57.9 55.5 81.1
Dividend Payout 87.6% 48.0% 84.8% 79.7%
Dividend Yield 4.6% 8.3% 6.5% 5.1%
P/E (x) 19.2x 8.4x 17.6x 6.4x
P/BV (x) 5.0x 3.3x 4.0x 2.5x
ROAE 26.1% 44.2% 22.9% 20.8%
ROAA 12.3% 10.1% 11.1% 13.3%
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
18.1 28.0 54.7% 13.1 777.4 237.9 11,213,180.0 3.0%
Nigeria Outlook 2020: A Different Playing Field
100 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
Seplat Petroleum Dev. Com. Plc: BUY Bloomberg: SEPLAT NL, Reuters: SEPLAT.LG, NSE: SEPLAT
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
657.8 838.1 27.4% 0.6 1,260.8 387.1 15,891,140.0 50.6%
SEPLAT’s 9M-19 Revenue declined by 12.6 y/y to N151.9bn, due to lower crude oil sales (-26.5%y/y), despite a 35.9%y/y increase in total
gas revenue. Notably, the increase in total gas sales was buoyed by a one-off recognition of gas tolling receivables. Also, lower realized
prices across its two segments (oil & gas), coupled with lower working interest production at 47,163 boepd (-6.2%y/y), affected revenue.
However, PAT surged by 102.5% to N56.6bn, driven by efficient cost management, reduced leverage and tax credit on gas operations.
Looking ahead, SEPLAT has secured a £382.0mn takeover bid of Eland Oil & Gas Plc. By our estimates, the acquisition will boost SEPLAT’s
2020 working interest production to 70,876 boepd, mainly from its liquids production. We believe this offers significant potential for cost
synergy and operational efficiency. Also, Eland’s low leverage and similar export route is a plus for the enlarged entity. Overall, we
maintain a BUY rating on the stock, with a 12M TP of N838.1.
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Relative Price Movement: SEPLAT
NSE-ASI OIL & GAS Index SEPLAT
Value Traded*: 12M Average daily value traded
Figure 87 Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 169.5 89.7 183.8 196.7
DPS (N) 0.0 36.0 36.8 39.3
BVPS (N) 960.4 979.4 1318.8 1476.2
Dividend Payout 0.0% 40.1% 20.0% 20.0%
Dividend Yield 0.0% 6.7% 4.4% 4.7%
P/E (x) 3.7 6.0 4.6 4.3
P/BV (x) 0.7 0.5 0.6 0.6
ROAE 17.6% 9.2% 13.9% 13.3%
ROAA 10.1% 5.9% 10.5% 10.9%
Source: Bloomberg, United Capital Source: Company Financials, United Capital
11 (MOBIL) Plc : BUY Bloomberg: MOBIL NL, Reuters: MOBIL.LG, NSE: MOBIL
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
147.9 219.4 48.3% 0.4 173.7 53.4 4,719,342.0 100.0%
11 Plc (MOBIL) recorded an impressive N141.5bn in Revenue for 9M-19, with its 5-yr CAGR at 25.4%, evident by its constant aggressive
revenue drive. For the period under review, Revenue grew by 13.2%y/y, riding on increased sales across all product segments. Its major
drivers recorded double digit growth (Fuels: +11.8%y/y, Lubes: 14.9%y/y). We also saw sustained momentum in sales of its new product
line, LPG, by a whopping 59.2%q/q to N967.2mn, likely to touch N1.0bn by FY-19. Elsewhere, benefits from MOBIL’s property business
weakened on the back of lower rental income, as Other Income declined 7.6%y/y. Thus, lower OPEX (-1.1%y/y) was unable to support
profitability. In all, with lower realized income from investment property and marginal Net Finance costs (N133.4mn), Profit before Tax fell
by 19.3%y/y to N9.4bn, with 9M-19 EPS at N17.6 (-19.4%y/y). In spite of the current tepid dynamics of the downstream segment, we are
comfortable with MOBIL’s business operations. In the near term, we might see continued growth in sales, with LPG volumes likely to gain
traction. Additionally, incomes from investment properties could continue to downplay volatilities associated with petroleum products
marketing, and shoring up profitability. Overall, we maintain a BUY rating on the stock with a 12M TP of N219.4.
Value Traded*: 12M Average daily value traded
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Relative Price Movement: MOBIL
NSE-ASI OIL & GAS Index MOBIL
Figure 88 Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 20.8 25.9 29.4 33.7
DPS (N) 8.0 8.3 10.0 11.5
BVPS (N) 75.9 93.4 89.5 96.6
Dividend Payout 38.4% 31.9% 34.0% 34.0%
Dividend Yield 4.1% 4.5% 4.6% 5.2%
P/E (x) 9.3 7.1 7.5 6.5
P/BV (x) 2.6 2.0 2.5 2.3
ROAE 30.8% 30.6% 32.1% 36.2%
ROAA 11.0% 12.8% 13.4% 13.3%
Nigeria Outlook 2020: A Different Playing Field
101 www.unitedcapitalplcgroup.com
Companies
For 9M-19, TOTAL recorded a 2.2% y/y drop in its Revenue to N221.8bn, as declines in its General (-15.2%y/y) and Aviation (-2.8%y/y)
segments, which account for 30.0% of Revenue, outweighed a modest increase in its Network (+2.5%y/y) segment (70.0% of total
Revenue). Constrained by the consequences of operating in a market with capped PMS prices, Cost of Sales remained sticky (+0.4%y/y),
resulting in a 19.0% decline in Gross profit. Elsewhere, the combination of higher OPEX (Admin expenses up 22.7%y/y) and the overkill of
short term borrowing (110.0% surge in Net Finance costs) was a burning hole in TOTAL’s pocket. With little financial buffer from Other
Income (-29.9%y/y), TOTAL reported a first-time Loss before Tax of N117.omn, a huge drop from its N7.7bn profit position in 9M-18.
Accordingly, 9M-19 Loss per share (LPS), was N0.6. Overall, we note that the current unfavourable business environment being operated
in, by downstream companies, coupled with the company’s peculiar issues, being inefficient management of short-term borrowing costs,
will weigh on 2020’s performance. Additionally, its negative cash balance signals the need to refinance short term borrowings, majorly
from the banks or at the currently low rates in the debt capital market to boost profitability. With the drumbeats of a deregulation watering
down, we expect the company to continue to drive growth in Lubricant sales and petroleum products with unregulated prices.
Nevertheless, we remain cautiously optimistic on the stock, with a HOLD rating on a 12M TP of N139.6.
Total Nigeria Plc: HOLD Bloomberg: TOTAL NL, Reuters: TOTAL.LG, NSE: TOTAL
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
110.9 139.6 25.9% 0.3 122.6 37.7 3,698,049.0 38.0%
Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded Source: Bloomberg, United Capital
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Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19
Relative Price Movement: TOTAL
NSE-ASI OIL & GAS Index TOTAL
Figure 89 Key Stats FY-17 FY-18 FY-19e FY-20f
EPS (N) 23.6 23.4 -0.4 2.6
DPS (N) 17.0 17.0 0 1.6
BVPS (N) 83.1 90.5 65.4 100.8
Dividend Payout (%) 72.0% 72.5% 0.0% 61.2%
Dividend Yield (%) 7.4% 8.5% 0.0% 1.1%
P/E (x) 9.7 8.5 nm 54.3
P/BV (x) 2.8 2.2 2.1 1.4
ROAE 31.0% 27.0% -0.5% 3.1%
ROAA 6.5% 6.6% -0.1% 0.6%
Disclosure
Appendix
Nigeria Outlook 2020: A Different Playing Field
104 www.unitedcapitalplcgroup.com
Investment Rating Criteria and Disclosure
United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;
Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR
of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.
Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor
around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).
Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.
NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking
relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.
Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.
Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in
activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition,
research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s
Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published
research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable
conflicts of interest that may arise in the course of its business relationships.
Risk Rating
Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in
significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk.
Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from
government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets.
Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.
These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest,
government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.
United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem
applicable the company of focus. The ratings are defined below;
High: High probability of an imminent systematic risk or/and unsystematic risk
Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk
Low: Low probability of an imminent systematic risk or/and unsystematic risk
Analyst Certification
The research analysts who prepared this report certify as follows:
1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this
report.
2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in
this report.
Other Disclosures
United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,
potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report
are disclosed:
• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report
Disclosure keys
a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report
b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence
on the company’s operating decision directly or through proxy arrangements
c. UCAP is a market maker in the publicly traded equities of the Company
d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company
e. UCAP beneficially own 1% or more of the equity securities of the Company
f. UCAP holds a major interest in the debt of the Company
g. UCAP has received compensation for investment banking activities from the Company within the last 12 months
h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months
i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution
j. The Company is a client of UCAP
k. The Company owns more than 5% of the issued share capital of UCAP
Disclaimer
United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets
and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)
nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell
securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is
registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact
United Capital Plc, 12th Floor, UBA House, 57 Marina, Lagos. ©United Capital Plc 2018.*
Disclosure Appendix
Company Disclosure
Dangote Cement Plc a,h
Fidelity Bank Plc h
Flour Mills of Nigeria Plc h
Forte Oil Plc g
International Breweries Plc a,h
Nigerian Breweries Plc h
PZ Nigeria Plc h
Stanbic IBTC Plc g
Total Nigeria Plc h
UAC of Nigeria Plc h
Zenith Nigeria Plc a