Afrin Ves 2014 Out Look

8/11/2019 Afrin Ves 2014 Out Look

1/74Nigerian Capital Market: 2013 Review & 2014 Outlook

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February 2014

Nigerian Capital Market: 2013 Review & 2014 Outlook

Poised to Soar?


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Executive Summary 4

Credit Flows and Regional Integration 4Domestic Highlights 42014 - We are Cautiously Optimistic 5

Section 1: The Global Economy 7

Global Overview - Any Surprises? 8Market - A Bullish Run 9The United States: Outspending a Recession with an Oily Edge 10Europe - Sprouting out the Bud 11Asia: The Panting Tigers 12Emerging Economies - Regionalizing Africa 12

Section 2: The Nigerian Economy and Indicators 14

Mapping Out the Landscape 2013 Parameters 15Liquidity Developments - Prospects of a Trend Reversal 16Credit Growth and Lending Rates - Trending Higher 17Fiscal Indicators Downsides of a Single Stream 18The Cocktail - MPR, CRR, NOP, STA& RDAS 20Market Vulnerabilities -Global Impact 21Unforeseen Domestic Consequences 22

Section 3: The Capital Market 24

The Fixed Income Market- Bond Yields to inch Higher 25

2013 in Retrospect Upping the Liquidity Game 25 FGN Bonds: The Leaders and Laggards 26 State and Corporate Bonds 28 The Growing Appetite for Eurobonds 29 AMCON Bonds: An Early Call 30 Trends to watch in 2014 32

The Equity Market 34

Global Equity Market Dynamics 34 Nigerian Equity Market A Repeat of History? 37 Key Market Drivers 38 Sector Performance: Whither Funds Flow? 40 2014 Expectations: 14.2% Market Return 44 Potential Risks in 2014 47 2014 - Scenario Analysis 48

Section 4: Company Profiles 49

5 Sectors | 20 Companies

Section 5: Appendix 71

List of Tables and Charts 72

Table of Content


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Credit Flows and Regional Integration

Various events in 2013 impacted the global and domestic economy, as developing

and emerging economies have had to contend with lateral credit flows across capital

markets. Fiscal policies were however designed to absorb the resultant exogenous

shocks and safeguard economic growth. These dynamics dominated the scene and

are likely to be replayed in 2014 considering the feeble global growth recorded in

2013. Global economic growth declined moderately in 2013, replacing the hitherto

engine of global growth (Brazil, Russia, India and China), the BRICs, with a new

league (Mexico, Indonesia, Nigeria and Turkey), the MINTs.

While the economic growth trajectory varied globally, equity markets grew

impressively in 2013 with the MSCI, S&P 500, UK FTSE 100, NIKKEI, CAC 40 and

XETRA gaining 34.1%, 29.6%, 16.7%, 28.3%, 23.3% and 30.9% respectively. This

performance was driven by improved confidence moderating some of the downside

risk to global growth.

In 2014, the likely decision of the U.S. Federal Reserve on the Q.E program will

expose the downsides to global capital flows particularly in emerging economies.

These economies (the BRICs) will have to weigh the benefits of a buoyant market

against the currency effect of hot money outflows.

Sub Saharan Africa (SSA) continues to show huge economic potentials with vast

natural resources and favorable demographics. However, the downside risk to the

region includes the weakening socio-economic and political conditions coupled with

worrisome global policy direction. Despite these threats, we expect the region to

pick-up pace in 2014 and grow at an average 6.1% from the 5.1% growth in 2013.

Domestic Highlights

The stable macroeconomic milieu (exchange rate and inflation) in Nigeria has been

identified as the anchor of 2013 performance achievements. The increased interest

of foreign investors in the economy and the success recorded in price and foreign

exchange stability are commendable memorabilia for the year. These achievements

were facilitated by the hawkish policy of the Monetary Policy Committee (MPC) of

the CBN.

Executive Summary


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Despite the revenue shortfalls in the oil and gas sector, the domestic economy

rebounded impressively in the 3rd quarter of 2013 on the back of various policesdesigned to boost productivity, particularly in the Agricultural sector. Other sectors

of the economy are also poised to receive a boost from the ongoing transformations

in the power sector which could very quickly bring down the cost of manufacturing

significantly. The sale of the power assets will have a direct impact on the entire

economy in 2014, boosting growth to 7.0%.

We observe that the Nigerian stock market has tracked the same path within the

last for 5 years. The Nigerian Capital Market naturally peaks and dips in quarters

that coincide with the release of earnings data. Investors typically follow this cycle

and bet on impressive performance scorecards. This highlights the significance of

earnings and dividends in investors strategy but also presents direction for arbitrage

opportunity for discerning investors.

Our 2014 Outlook

The macroeconomic landscape is poised to witness another year of crucial political

and economic themes. We highlight the key events that will significantly shape the

markets in 2014.

Fiscal tapering in the U.S. will continue to define the pulse of the Nigerian

capital market in 2014. While the market is conscious of the likely implications,

we believe that the tempo of the tapering will be the key determinant of

market direction.

We anticipate that key policy rates will stay within the current region in

Q1:2014, with no momentous changes in the nuance of the monetary

authority. Nevertheless, we expect the MPC may tweak the CRR (to 90.0% -

100.0%) and MPR (to 12.5% - 13.0%) in response to the liquidity dynamics of

2014. However, the direction of monetary policy may shift significantly if the

stance of the successor to Governor Sanusi Lamido Sanusi varies, come June

2014.

We anticipate a 3.0-4.5% depreciation in the Naira in 2014 considering the

aforementioned downside risks. In addition, we forecast an average inflation

rate of 9.5% in 2014.

The equity market is poised to witness another rally, albeit sub 2013 levels. We


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anticipate a 14.2% base case market return, and an optimistic 20.0% bull case.

We expect portfolio inflows (both foreign and domestic) to drive the marketin 2014, facilitated by increased access to a wider market through the new

XGEN trading platform.

The bond market will swing with caution in 2014 as yields are poised to trend

higher considering the medium term threats to stability i.e. political

uncertainty, a change of guard at the CBN and the impact of the U.S. Fiscal

stimulus tapering. These factors will mount pressure on domestic borrowing

cost, creating an avenue for Alpha seeking investors and therefore requires an

active stance in the market.


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Section 1The Global Economy


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Global Overview - Any Surprises?

2013 was anticipated as the year of inflection, considering the previous periods offinancial, economic and social distress. This period has been a learning curve for

global economies given the time spent in search of the right policy balance. Policy

makers (particularly in Europe and the U.S.) have had to contend with the

implementation of flexible, timely and credible adjustments against reoccurring

monetary shocks. A blend of monetary and fiscal policies has remained a necessary

tool in absorbing these shocks.

Paradoxically, monetary policy setting across regions varied, while fiscal policyspecifically took cognizance of the need to implement cut-backs in spending. Policies

were designed to either checkmate excesses or achieve targeted objectives.

Monetary policy in the U.S. and Europe were designed to promote growth (through

the near zero interest rates and monthly bond purchases), while emerging

economies targeted price and exchange rate stability. The year however delivered

valuable lessons that highlight the need to conquer institutional constraints (as seen

in the consistent deadlock at the U.S. Congress).

2013 Economic Growth

Economic growth across regions exhibited a mixed pattern in 2013 while capital

markets generally trended positively. Some developed economies (I.e. France, Japan

and the UK) ticked higher while growth in Germany and the US tapered. Developed

economies grew by 1.3% in 2013 and are expected to grow by 2.2% in 2014,

according to IMF forecasts. Growth in emerging economies moderated to 4.7% in

2013 (4.9% in 2012), while Sub Saharan Africa (SSA) grew by 5.1% (4.8% in 2012). A

new acronym was introduced, the MINT, to delineate a new league of countriesemerging as global engines of growth (Mexico, Indonesia, Nigeria and Turkey).

Chart 1 below shows the growth trends across select economies as well as forecasts

for 2014.

The Global Economy


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The moderation in economic expansion across emerging economies i.e. Brazil, India

and China was predicated on several challenges, most important being the flat

growth in China (7.7% in both 2012 and 2013) due to internal adjustments within

the Chinese economy.

This impacted growth in the global economy which relies on Chinese trade flows,

with the E.U and the US feeling the greatest pinch. Nevertheless, the MINTeconomies (MINT GDP Growth - 2012: 4.3%, 2013: 4.7%) are poised to drive the

global growth trends within the next decade. Economic expansion within the BRIC

nations, with the exception of China, appears to have reached a point of inflection

and trending downwards.

In absolute terms, we do not foresee any major threats to growth in emerging

economies in the medium term. Growth in this region will be driven by moderate

growth in exports and supportive fiscal and monetary policies. However, events inthe US and Europe might precipitate lower portfolio inflows to emerging

economies. However, social and political risks remain a key source of concern

Global Markets - A Bullish Run

While the economic growth trajectory varied across regions, global markets

generally had a bullish run in 2013 with equities outperforming all other asset

Chart 1: Growth Trends across Select Regions and Economies

Source: IMF, Afrinvest Research

1.4%

4.9%

2.8%

0.3%

-0.7%

7.7%

4.8%

1.3%

4.7%

1.9% 1.7%

-0.4%

7.7%

5.1%

2.2%

5.1%

2.8%2.4%

1.0%

7.5%

6.1%

-3.0%

0.0%

3.0%

6.0%

9.0%

AdvancedEconomies

DevelopingEconomies

U S U K Eu ro Are a China SS A

20 12 20 13 20 14


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classes globally. The MSCI, S&P 500, UK FTSE 100, NIKKEI, CAC 40 and XETRA all

closed the year higher in 2013 (with 34.1%, 29.6%, 16.7%, 28.3%, 23.26% and30.9% gain respectively).

This bullish run in equity markets was driven principally by improved investor

confidence, moderating some of the downside risks to global growth. Although,fiscal policy seemingly acted as a drag to growth, monetary conditions softened the

blow. In addition, the constant review of fiscal policies buffered market confidence,

indicating that authorities were constantly engaged in designing inventive ways to

solve the unending economic challenges.

The United States: Outspending a Recession with an Oily Edge

The fiscal stress in the U.S, led to long drawn out debates on the need to raise the

debt ceiling which took center stage in 2013 with a climax in November when theU.S government shut down partially. The likelihood of a debt default questioned

the erstwhile risk free status of sovereign bonds although this event was more of

a political attack rather than a logical disagreement with the terms of the spending

bill.

Notwithstanding, the U.S economy gained momentum with 2.5% and 4.1% growth

reported in Q2:2013 and Q3:2013 respectively. The U.S manufacturing data followed

the same positive path growing by a 0.4% average in 2013. A rebound in the U.S in

Chart 2: Performance of Global Equity Indices

Source: Bloomberg, Afrinvest Research

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Emerging Markets Global Markets Frontier Markets Nigeria


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2014 will have a positive impact on other regions globally particularly China.

Afrinvest Research foresees a moderate global growth trend, with increasing focuson the U.S. market. In addition, we believe the prices of U.S. manufactured goods

will drop gradually due to cheaper energy prices. The discovery of Shale Oil in the

U.S is changing the global oil map. Despite the moderate increase in global oil

supplies, the challenges to production in the Middle East and North Africa might

erode the gains of the new discovery. However, the U.S. still stands at a vantage

position as we commence 2014.

Europe - Sprouting out the BudThe European economy is beginning to expand after an 18-month long subzero GDP

growth. The 18-member region has had to grapple with slumping indicators

including: financial destabilization as well as economic and social unrest. However,

conditions in the region have gradually begun to gain traction, albeit feeble.

Interest rate forward guidance and various proactive policy actions have reduced

major risks, stabilized financial conditions and deepened market confidence. The

Euro areas (EU18) GDP contracted by 0.4% in 2013 (0.7% in 2012), but is forecast to

grow by 1.0% in 2014. The regions biggest economies i.e. Germany, Italy and Spaingrew 0.5%, -1.8%, and -1.2 % in 2013, but are expected to grow by 1.6%, 0.6%,

0.6% in 2014 respectively. The UK also grew by 1.7% in 2013 and is expected to

grow by 2.4% in 2014.

Chart 3: EU GDP Growth


-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4EU GDP Growth rate


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Asia: The Panting TigersThe Asian albatross, China, remains the key driver of the region. China fell short of

its extraordinary growth trajectory in 2013 to record a flat unimpressive 7.7%

growth in 2013, after attaining a 10.4% quarterly average in 2010 (see Chart 4). This

slowdown in economic performance can be linked to internal regulatory issues and

global demand dynamics. For instance, the vigor with which the Chinese economy

grew in 2012 dipped at the start of the year (7.7% Q1:2013) but moderately gained

momentum in Q3:2013 (7.8%).

Despite these downsides to growth, Asia is poised to benefit from the ongoing

expansion in Europe and the U.S, due to increasing demand for Asian exports. Other

Asian counterparts i.e. Indonesia, India, Japan, and South Korea all grew by 6.1%,

4.4%, 1.7% and 0.6% respectively in 2013. Asia and the Pacific region is expected to

pick up and is likely to remain the worlds economic engine despite the recent soft

patch in global growth and increasing volatility in international financial markets.

Emerging Economies - Regionalizing Africa

Sub - Saharan Africa (SSA) grew at a decent 5.1% in 2013. This growth was fairly

moderate despite bubbling political tensions across the region. This positive trend is

a reflection of commendable macroeconomic policies as well as robust domestic

demand. The SSA region continues to show huge economic potential with vast


Chart 4: Declining GDP in Asia

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012

IndonesiaIndiaChinaSouth Korea


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natural resources and favorable demographics. However, the downside risks to the

region include: the weakening socio-economic and political conditions ofneighboring countries and global policy direction. Despite these threats, the IMF

expects the region to pick-up pace in 2014, growing at an average 6.1% in 2014,

from 5.1% in 2013; supported by investment in infrastructure and production

capacity.


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K

Section 2The Nigerian Economy


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Mapping Out the Landscape 2013 Parameters

The Nigerian operating environment in 2013 has been uniquely defined by certainfactors that predetermine growth dynamics, highlighting its uniqueness in

comparison to other countries. These internal or external factors have shaped the

outcome thus far and sustained the growth trajectory of the economy. These

include: the policy landscape (fiscal and monetary), liquidity dynamics, capital flows,

security challenges, political and sociocultural environment and global growth

trends. These factors define the operating business environment; potential

opportunities and market size. We present an analysis of the key indicators that

characterize the investment climate in Nigeria, highlighting the significance andimpact of each on the economic growth trend in 2013, as well as our outlook for

2014.

Economic Developments A Range Economic Signals

Developments in various segments of the real economy have varied generally, but

the sum of all parts yields a positive trend. For instance, economic activities

moderately declined in Q1:2013 to 6.2% (from 7.0% in Q4:2012), remained flat

marginally in Q2:2013 (6.2%) but rose sharply in Q3:2013 (6.8%). In contrast, the oil

and gas sector, which accounts for over 80.0% of government revenues, lost

significant traction in 2013. The sector grew (-0.5%) in Q3:2013, higher than

Q2:2013 (-1.2%) but below the 0.1% growth in Q1:2013. The sector contributed

12.5% to the countrys GDP in Q3:2013, lower than 12.9% in Q2:2013. Adding to the

woes of the Nigerian oil and gas sector is the U.S.s shift to improve oil

self-sufficiency through the increased exploration and production of Shale oil. This

development will continue to change the global oil map in 2014 and beyond.

The agricultural sector delivered an impressive outing in 2013, stimulated by variousgovernment policies that have consistently boosted output by 5.1% in Q3:2013 from

4.5% in Q2:2013. The sector contributed 37.4% to the GDP in Q3:2013, up from

33.1% and 28.4% in Q2:2013 and Q1:2013 respectively.

The range of signals in the oil Sector, agricultural sector and the economy in general

presents mixed outlook for the economy. However, there are some positive

The Nigerian Economy & Indicators


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highlights that are likely to take 2014 by storm, including the successful sale of

subsidiaries of PHCN as part of the transformation in the power sector.

The manufacturing industry currently contributes approximately 5.0% to the

countrys GDP. We anticipate that positive developments in the power sector will

catalyse growth in the GDP for the economy as a whole. The chart below shows the

contribution of oil & gas and agriculture to GDP in 2013.

Liquidity Developments - Prospects of a Trend Reversal

Within the last 5 years, monetary aggregates (narrow and broad money) grew

annually by approximately 33.0% and 55.0% respectively. This growth occurred

during very tumultuous times in the economy, particularly within the financial

market. The financial industry witnessed series of challenges that led to the collapse

of weaker institutions. However, in 2013, monetary aggregates took a different turn

as indicated in the 5.4% and 5.2% decline of M1 and M2 to N6.3tn and N14.4tn

respectively. The decline in broad money supply can be associated with the CBNstightening measures targeted at price stability. We also observed the effect of these

drastic measures in the overnight lending rates, which spiked as high as 56.6%

during a trading day on September 18, 2013.

The chart below depicts a correlated trend between Narrow Money (M1) and Broad

Money (M2). M2 marginally ticked higher and stabilized at the end of 2012, but

subsequently declined at the end of Q2:2013. M1 also picked up pace at the end of

Chart 5: Quarterly GDP Growth

Source: CBN, Afrinvest Research

-2.3

-0.7

0.1

-0.8 -0.5 -1.2 -0.5

6.3 6.4 6.5 7.0 6.6 6.2

6.8

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

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8.0

Q1:2012 Q2:2012 Q3:2012 Q4:2012 Q1:2013 Q2:2013 Q3:2013

Agriculture Oil and Gas Country GDP


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Credit Growth and Lending Rates - Trending Higher

Credit to the private sector increased considerably by 6.8% in 2013 (from N15.2tn in

Dec. 2012 to N16.5tn in Dec. 2013). A key driver of this growth is the recent

participation of financial institutions in the purchase of power assets; worth

N480.0bn. The government also offered single digit interest rates (7.0%) credit to

the agricultural sector in an attempt to boost productivity, and build on plans to

diversify the economy. We anticipate the credit scheme will further boostcontribution from the agricultural sector in 2014.

Chart 6: Broad and Narrow Money (20122013)



Chart 7: Credit to the Private Sector

14.6

14.0 14.1 14.2

14.514.7

14.814.7 14.8

14.9

15.3 15.215.0 15.1

15.315.4 15.5

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16.5 16.5

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Jan-12

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Credit to Private SectorTn Naira

13.5

14

14.5

15

15.5

16

5.6

5.8

6

6.2

6.4

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Narrow Money Broad Money


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Despite these credit developments in the agricultural sector and the general

economic growth trend, the maximum and prime lending rate has not beenimpacted significantly. This assumes that market players do not re-price risk

irrespective of economic trends. In addition, rates are likely to respond to negative

shocks as opposed to positive developments in the financial system. The anticipated

overhaul of the Micro-Finance Banking (MFB) system is also poised to buffer credit

expansion to the private sector.

Fiscal Indicators Downsides of a Single Stream

The Nigerian federal governments 2013 annual budget assumptions werepredicated on a deficit but with relatively prudent assumptions. The assumptions

showed the budget was driven primarily by oil revenue, thereby exposing the

narrow income-base of the government. The viability of the budget assumptions,

with the exception of oil prices, was short-lived and quickly flawed due to adverse

circumstance (oil theft and pipeline vandalism) in oil production. Governments

revenues thus faced significant pressure in 2013 due to the inability to meet the

2.5mbpd budgets target (Actual output - Q1:2013 2.29mbpd, Q2:2013 2.11mbpd

and Q3:2013 1.89mbpd) This pressure point has questioned the direction ofgovernments policy and highlighted the lapses associated with a mono-product

economy with less emphasis on diversification.

Source: OPEC, Afrinvest Research

Chart 8: Crude Oil price and Output in 2013

2.0

1.7

1.9

1.7

1.71.7

1.8

1.7

1.8

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1.9

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Domestic Production (mbpd) Crude Oil Price (Bonny Light, $)


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The proposed 2014 budget is estimated at N4.6tn, 7.4% lower than the N5.0tn

budgeted for the 2013 fiscal year. The federal government moderated itsassumptions in the 2014 budget as presented by the coordinating minister of

finance on behalf of the president. The benchmark oil price was also reduced to

US$74.00 per barrel (from US$79.00 per barrel in 2013), indicating further

improvements in consolidating governments savings. A downward review in the

estimated level of oil production (2.38mbpd from 2.53mbpd), implies that the

government is conscious of the challenges in the oil sector i.e. illegal bunkering,

pipeline vandalism and potential reduction in demand by the U.S.

Other assumptions include an estimated GDP growth rate of 6.8% (from 6.5% in

2013) and a N160.00/US$1.00 exchange rate. The budget allocated 73.8% to

recurrent expenditure, 3.6% higher than the amount allocated in 2013 while the

amount allocated to capital expenditure declined 34.0%.

Source: Budget Office, Afrinvest Research

Chart 9: Government Budget in 2013 and 2014 (Proposed)

Key Budget Items 2013 2014 Change (%)

Total Revenue (N in Trn) 11.04 10.10 -8.5%

Gross Oil Revnue 7.73 6.81 -11.9%

Gross Non-Oil Revenue 3.31 3.29 -0.6%Total Expenditure (N in Trn) 4.99 4.64 -7.0%

Recurrent Expenditure 3.37 3.54 5.1%

Non-debt 2.39 2.43 1.7%

Debt Service 0.59 0.71 20.3%

Statutory Transfer 0.39 0.40 3.1%

Capital Expenditire 1.62 1.10 -32.1%

% of Recurrent to Total Exp 67.5% 76.3% 8.8%

% of Capital to Total Exp 32.5% 23.7% -8.8%Budget Deficit as % of GDP 1.85 1.90 5.0%

Assumptions

Benchmark Oil Price per barrel ($) 79.00 77.50 -1.9%

Oil Production (mbpd) 2.56 2.39 -6.7%Projected Real GDP Growth 6.50% 6.75% 0.3%

Average Exchange Rate (N) 160.00 160.00 0.0%


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A number of events in 2013 moderately rattled the economy, requiring the design

of hawkish policies that defined the liquidity dynamics through the year. The CBNmaintained a vigilant watch over monetary indicators in order to ensure a stable

and conducive environment for investments. These policies, particularly the 50.0%

CRR, have occasionally been drastic, thereby necessitating sudden adjustments and

leaving the market somewhat liquidity challenged.

The Cocktail - MPR, CRR, NOP, STA& RDAS

The focus of monetary authorities in 2013 was consistently around ensuring price

stability. The year was therefore shaped by a cocktail of policies designed to preventany fiscal overdrive arising from the governments spending profile, high powered

money or market liquidity dynamics. The policies included a 38.0% increase in the

Cash Reserve Requirement (CRR) on public sector deposits and MPR maintained at

12.0% for 27 consecutive months. These policies were necessitated by the growing

need to reestablish confidence in the economy, stabilize the macro economy, boost

real returns on investments and attract foreign portfolio investments (FPI).

The combination of these hawkish policies resulted in the decline in the inflation

rate to single digit (8.5% average in 2013) as depicted above. In addition, the 30.7%

Q-o-Q reduction in subscriptions at the Treasury Bills (TBs) market (PMA and OMO)

in Q3:2013 to N3.7tn is indicative of the impact of these monetary policies. This

effectively reduced the funds available to DMBs for participation in the fixed income

market.

Monetary Indicators


Chart 10: CBN Rates and Inflation

6.0%

8.0%

10.0%

12.0%

14.0%

Jan

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MPR Inflation

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MPR

CRR (Public)

NOP


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Market players remain unsure as to how current trends in the economy might shape

future MPCs decisions. A potential unlikely scenario in 2014 is the reduction in theMPR in an attempt to score political points by easing credit to the real sector.

However, this scenario constrained by the trade-off of triggering a capital inflow

reversal, hence losing grip of successes made on price and exchange rate stability. In

the meantime, the current market dynamics i.e. high MPR and stable exchange rate

favours the inflow of capital desirous of competitive return on their investments.

Despite the progress made with monetary policy, a key relationship has emerged as

a crucial threat to economic stability. The dwindling synergy between fiscal and

monetary policy has underscored the need for a balanced approach to managing

the economy. This disconnect can be observed in the rising public debt, growing

government spending, weakening revenue profile and the depletion of reserves. We

believe that the success of monetary and fiscal policies require a hand shake to

ensure a sustainable objective is achieved.

Finally, we expect the key policy rates to stay within the current region in H1:2014

with no significant changes in the nuance of the monetary authority. Nevertheless

we expect the MPC to tweak the CRR (to 90.0% - 100.0%) and MPR (to 12.5% -13.0%) in response to the liquidity dynamics of 2014. However, the direction of

monetary policy relies primarily on the stance of the successor at the CBN, come

June 2014. With the current governors tenure expiring in May, the challenge

remains identifying and appointing an eligible successor that can fill the shoes of

the outgoing Governor Sanusi Lamido Sanusi.

Market Vulnerabilities -Global Impact

It is acknowledged that CBNs monetary policy has stabilized the value of the naira,

a 1.5% depreciation at the interbank market in 2013, compared to peers (Indian

Rupee: - 30.0%, Indonesian Rupiah: - 20.0% and South African Rand: - 22.0%).

However, global monetary policy, particularly in the U.S, continues to exert pressure

on other economies, especially smaller countries with an open economy. For

instance, indications of a reduction in the U.S bond purchase drove the Naira

southwards (to an all-time low of 162.35/US$1.00 at the interbank in September

2013), as investors rebalanced portfolios to minimize the perceived risk. This


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highlights the significance of global macroeconomic themes in setting and adjusting

domestic policies.

The U.S Federal Reserve has delivered a clearer scope for the tapering process,

easing pressure in the market by emphasizing the reason for tapering rather than

the need to taper. We foresee a moderation in capital reversal and despite the

$10.0bn reduction in the bond buying program in the near term. However, an

increase in the tempo of tapering (to $20.0bn) will have a significant effect on the

market.

Unforeseen Domestic Consequences

The CBN brought back the Retail Dutch Auction System, in October 2, 2013 to

replace the Wholesale Dutch Auction System (WDAS). This was intended to curtail

excessive loopholes in the WDAS and avert money laundering and the dollarization

of the economy by campaign funds. This policy was also accompanied by a Know

Your Customer (KYC) requirement that mandates the reporting of all foreign

exchange transactions to the CBN. Consequently, this reduced the dollar demand atthe CBN auction by 42.0% W-o-W from October.

However, the adoption of RDAS, effective October 2nd 2013, tightened the supply

of the dollar at the parallel market segment, as seen in the 5.5% and 3.0%

depreciation at the BDC and parallel market segments respectively in Q4:2013,

yielding a 7.9% spread between the interbank and the BDC. This suggests that

either the size of the unregulated segment of the economy was underestimated or


Chart 11: Emerging Market Currencies Under Pressure

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Naira Rupee Rupiah Rand(%)


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the period of short term policy pains precedes the benefits of this policy in the long

run. If the later were the case, then this policy will eventually reveal various winnersand losers, however the policy objective essentially requires more winners than

losers.


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Section 3The Nigerian CapitalMarket


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2014 Bond Yields to inch Higher

Global credit flows and various events in the US and Europe have sustained the

inverted shape of the yield curve of various emerging economies including Nigeria

in 2013. Investors have shown a preference for short to mid-term instruments as

long term interest rate outlook remained downward. 2014 presents interesting

investment themes in the bond market although a repeat of 2012 or 2013

impressive returns is highly unlikely. Nevertheless, the market will swing with

cautious skepticism (when 2015 politics and fiscal spending increases country risk

premium) or mixed optimism (when the CBN and DMO insist on keeping primary

market rate at above 13.0%). While the near default of U.S. Sovereign debt

instruments in October 2013 questioned the validity of a risk free investment,

bonds remain the key instrument for de-risking portfolios. We expect bond yields

to trend northwards in 2014 (towards 14.0%) as political uncertainties, transition at

the CBN and US Fiscal stimulus tapering mounts pressure on domestic borrowing

cost. Consequently, a passive stance on the market beta is unlikely to generate

alpha in 2014.

2013 in Retrospect Upping the Liquidity Game

Yields in the Nigerian fixed income market declined from a peak of 18.0% in 2012

to 12.5% by year end. This gradual decline was stimulated by the continued interest

of offshore and domestic fund managers in FGN bonds given its high risk adjusted

return relative to other frontier markets. This was further boosted by the inclusion

of FGN bonds on the JP Morgan Emerging Market Bond Index and Barclays

Emerging Markets Local Currency Bond Index (EM-LCBI) in October 2012 and March

2013 respectively.

The relatively lower yield volatility experienced in 2013 was due to a stable

monetary policy environment particularly with regards to the benchmark interest

rate (the MPR) which was held at 12.0% throughout the year. Consequently, the

capitalization of the bond market increased to N7.4tn by December 2013 comprising

of corporate bonds (N200.4bn), state government bonds (N319.0bn) and FGN bonds

(N6.9tn).

The Fixed Income Market


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The table above presents a historical representation of the size of Nigerian debt

market.

The Leaders and Laggards

The bond market gained 6.0% in 2013 compared to 5.8% 2012, driven partly by the

inclusion of some FGN bonds on international market indices. In addition to the

attractive yields, declining inflation (averaged 8.5% in 2013) and greater liquidity

have improved the daily transaction values and volumes significantly. Total foreign

investments in FGN bonds now stand at $5.1bn, compared to $500.0m as at the

beginning of 2012. Nevertheless, the 6.0% performance of the bond market was

dwarfed by the 47.2% return recorded by the equity market. However, the countrys

inverted sovereign yield curve maintained a step-like downward shift Q-o-Q as

illustrated below.

3% 4%

93%

Corporate

Bonds

State Govt.

Bonds

FGN Bonds

Chart 12: Trend of FGN Treasury Issuances (2008 2013)

Source: DMO, Afrinvest Research

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

1M 2M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 20Y

March JuneSept. Dec.

Chart 13: The declining Sovereign Yield Curve (Q-o-Q)



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A closer look at the secondary market in 2013 shows an impressive outing for most

of the benchmark bonds particularly the 3-year and 10-year maturities. Investorsappear skeptical on the long term interest rate outlook, given that expected

liquidity dynamics of 2014 may necessitate further tightening. In addition, the

inauguration of the Financial Markets Dealers Quotation (FMDQ) brought fresh

liquidity to the secondary market, pushing market volumes to new high of above

1,000 deals per week. The 13.05%AUG2016 bond emerged the best performing FGN

bond for the year, with a 12.8% price appreciation; followed by the 10.75%

MAR2014 with a gain of 12.3%. The table below outlines the performance of FGN

bonds in the secondary market during 2013.

Secondary Bond Market Environment

Chart 14: FGN Bonds Market in 2013

Source: NSE, Bloomberg, Afrinvest Research

FGN Bonds Maturity Size Tenor TTM DurationCurrent

YieldCoupon

2012 Price

ChangeTotal Return

Benchmark Bonds

13.05%FGNAUG2016 16/08/2016 160.5 3yr 2.59 2.04 12.9% 13.1% -0.3% 12.8%

16.00% FGN JUN 2019 29/06/2019 320 7yr 5.46 3.67 13.0% 16.0% -5.5% 10.5%

4.00% FGN APR 2015 23/04/2015 485.0 5yr 1.27 1.17 12.9% 4.0% 6.5% 10.5%

16.39% FGN JAN 2022 27/01/2022 463.71 10yr 8.04 4.39 13.1% 16.4% -6.9% 9.5%

10.70% FGN MAY 2018 30/05/2018 232.22 10yr 4.38 3.31 12.9% 10.7% -2.8% 7.9%

10.00% FGN JUL 2030 23/07/2030 499.56 20yr 16.52 6.59 13.2% 10.0% -6.3% 3.7%

Other FGN Bonds

10.75% FGN MAR 2014 30/03/2014 35.0 7yr 0.21 0.22 14.0% 10.8% 0.5% 11.3%

10.50% FGN MAR 2014 18/03/2014 320.0 3yr 0.18 0.17 10.3% 10.5% 0.7% 11.2%

9.20% FGN JUN 2014 29/06/2014 45.0 7yr 0.46 0.44 11.7% 9.2% 1.8% 11.0%

9.25% FGN SEP 2014 28/09/2014 100.0 7yr 0.71 0.64 12.1% 9.3% 1.5% 10.8%

15.10% FGN APR 2017 27/04/2017 351.5 5yr 3.29 2.49 13.0% 15.1% -4.8% 10.3%

15.00% FGN NOV 2028 28/11/2028 65.0 20yr 14.87 6.22 13.1% 15.0% -6.6% 8.4%

9.85% FGN JUL 2017 27/07/2017 20.0 10yr 3.53 2.73 12.9% 9.9% -1.7% 8.2%

9.35% FGN AUG 2017 31/08/2017 80.0 10yr 3.63 2.83 12.9% 9.4% -1.3% 8.0%

9.35% FGN DEC 2017 14/12/2017 20.0 10yr 3.92 3.10 13.0% 9.4% -1.8% 7.5%

12.49% FGN MAY 2029 22/05/2029 115.4 20yr 15.35 6.48 13.1% 12.5% -6.5% 6.0%

7.00% FGN OCT 2019 23/10/2019 188.9 10yr 5.77 4.32 13.0% 7.0% -2.7% 4.3%

8.50% FGN NOV 2029 20/11/2029 110.0 20yr 15.85 7.04 13.1% 8.5% -6.3% 2.2%

EUROBONDS

FGN Maturity Size ($mn) Tenor TTM Duration Yield Coupon Mid Price Rating

FGN 6.38% JUL 12,2023 12/07/2023 500 10yr 9.49 7.11 5.81% 6.38% 104.09 BB-

FGN 6.75% JAN 28,2021 28/01/2021 500 10yr 7.04 5.48 5.26% 6.75% 108.67 BB-

FGN 5.13% JUL 12,2018 12/07/2018 500 5yr 4.49 3.99 4.41% 5.13% 102.89 BB-


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The Growing Appetite for EurobondsThe past 3 years has witnessed an unprecedented surge in appetite for dollar

denominated Eurobonds amongst sovereign and corporate borrowers. The banks

have particularly topped the chart in an attempt to raise additional Tier-2 capital.

This has facilitated the issuance of longer term Eurobonds to meet the growing

demand for US Dollar denominated credit facilities. In addition, the increasing

participation of Nigerian banks in syndicated lending is equally a major driver of

Eurobond issuances. Meanwhile, the Federal Government (through the DMO) has

issued $1.5bn Eurobonds in 3 tranches of $500m since 2011. Chart 17 below capturesthe Eurobond issuances so far, while Chart 18 shows the trend in FGN Eurobond

yield in 2013.

Corporate Issuances whyare they off the market?

The interest rate environment

has been quite unfavorable

for corporates keen on raising

funds in the debt market.

Since investors are likely to

demand a 5-7% risk premium

on the MPR, the resulting

bond coupon remains a huge

deterrent. However, theexisting corporate bonds in

the market are currently

performing as no case of

default has been published in

recent times.

Chart 16: State Government Bonds


Issue Year State Size (N'bnMaturity Coupon

Lagos 57.5 2017 10.0%

Bayelsa 50.0 2017 13.5%

2010 Kaduna 8.5 2017 12.5%

Ebonyi 16.5 2015 13.0%

Edo 25.0 2016 14.0%

Benue 13.0 2016 14.0%

Delta 50.0 2018 14.5%

2011 Ekiti 25.0 2018 14.0%

Niger 9.0 2018 14.0%

Ondo 27.0 2018 15.5%

Gombe 20.0 2019 15.5%

2012 Lagos 80.0 2019 14.5%Osun 30.0 2019 14.8%

Lagos 87.5 2020 12.3%

2013 Osun 10.0 2020 n/a

Ekiti 5.0 2020 14.5%

Niger 12.0 2020 14.0%

Nasarawa 5.0 na na

Kogi 5.0 2020 15.0%

State Bond Issuances (2010 - 2013)


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AMCON Bonds: An Early Call

Another event that shaped 2013 was the redemption of N1.7tn of AMCON bonds

through the bonds for T-Bills exchange to the tune of the face value of individual

bond holdings. AMCON also announced the early redemption (at December 30,

2013) of a total of N3.0tn of Series II, Series III and Series IV bonds scheduled to

mature in 2014. This bond refinancing program effectively delivered a 7.0% costsavings to AMCON relative to the 13.0% cost of the bonds as at December 2013. The

balance of N1.0tn of Series V bond will be redeemed by October 2014 making the

CBN the sole creditor to AMCON. This should create a more sustainable footing for

AMCON in managing its debt portfolio.

Chart 17: Corporate and FGN Eurobonds


Chart 18: FGN Eurobond Yield in 2013


5.31%

3

4

5

6

76.75% US$500M JAN 2021

Issue Date Coupon Size ($m) Tenor MaturityGTBank May-11 7.50% 500 5 2016

Access Jul-12 7.30% 350 5 2017

Fidelity May-13 6.80% 300 5 2018

First Ban Jul-11 8.30% 300 7 2020

FGN1 Jan-11 6.75% 500 10 2021

FGN2 Jul-13 5.13% 500 5 2018

FGN3 Jul-13 6.38% 500 10 2023


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Since DMBs hold over 60.0% of AMCON bonds, there were concerns regarding the

impact of the bond for T-Bills swap on banks balance sheet and liquidity ratios in2014. In our view, this should not be of major concern as the balance sheet impact is

simply a decline in AMCON bonds holdings (mostly held to maturity) which is offset

by an increase in T-Bills (often held for trading). However, from a liquidity

perspective, the banks should witness marginal improvement in liquidity ratios as

T-Bills are included in the computation of liquidity ratio. Interestingly, the swap

makes the banks creditors to the federal government, thus neutralizing the default

risk on the corporate character of AMCON bonds.

Naira: Sailing Close to the Wind

The Naira had an impressive outing in 2013 with a 1.5% marginal depreciation

relative to a 10.0% average decline across emerging markets. However, 2014 is

looking like it will be a tough year for the naira. A stable naira in 2013 was

facilitated by the $26.6bn (sold by the CBN at an average of N155.75/$1.00) in

defense of the naira in 94 auctions. This was supported with the replacement of the

WDAS with the RDAS in a bid to unmask contrived demand for the greenback.

Consequently, while the official exchange rate traded between N153.00 andN156.00, the parallel market from N158.50 depreciated faster to N173.00 during the

year. As a result, the official/street rate deviation increased from N6.23 in January to

N14.03 in December; creating a mouth-watering N7.40 average arbitrage

opportunity throughout the year. The chart below captures the trend in the

exchange rates across different market segments.

Source: FDHL Analytics, Afrinvest Research

Chart 19: Naira/Dollar Rates in 2013

155

157

159

161

163

165

167

169171

173

175

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

WDAS/RDAS BDC Interbank

N12.97/US$or 8.3%spread


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The Yuletide induced dollar demand kept rates at a N169.90 average in December at

the parallel market while the closely monitored interbank rates remained atN159.00/US$1.00.

Looking ahead, we expect the naira to depreciate further in 2014 closing the year at

about N175.00/US$1.00 at the parallel market. The pressure on the local currency

will emanate from the reduction in the tempo of capital inflows as foreign investors

factor in the impact of the gradual tapering of U.S. Fed QE program. Political

activities in 2014 ahead of the 2015 election would equally put more pressure, all of

which will test CBNs capacity to continue to defend the naira, thus, we anticipate

that the combined effect of these pressure points might induce the CBN to allow a

monitored depreciation of the local currency.

Trends to watch in 2014

We highlight a few themes we anticipate will come to fore in 2014:

1. Increased QE- tapering in the U.S. is expected in 2014 coupled with an end to the

zero interest rate regime in Europe. This might induce capital inflow reversals as

foreign portfolios (which hold $5.1bn of FGN bonds) rebalance risk.

Consequently, investors will demand higher yields particularly at the primarymarket where we expect the government to borrow approximately N1.0tn in

2014.

2. The CBN is likely to sustain a contractionary monetary policy stance in pursuit of

its price and exchange rate stability objectives. Accordingly, an increase in the

MPR seems highly probable.

3. We anticipate inflation will inch higher in 2014 (mainly due to high liquidity

stance and low base effect). The average inflation for 2014 should be

approximately 10.0%.4. State governments are likely to approach the bond market to raise finance

through municipal bonds issuances. This will elevate the capitalization of that

market segment by N200.0bn to approximately N500.0bn.

5. The naira will likely come under intense pressure being it is the first casualty of

capital flight and an expansion in imports. Although the CBN appears committed

to defending the local currency using the countrys dollar reserves and other


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monetary policies, intense pressures in 2014 might justify a monitored

devaluation.6. The 2015 elections will widen the countrys risk premium stimulating the quest

for higher risk adjusted returns across various asset classes.

7. The market will also experience improved liquidity as the new FMDQ OTC

platform becomes an increasingly ubiquitous trading window. The price

discovery advantage will go a long way in improving the liquidity and efficiency

of the market.

8. Ultimately, we expect the Nigerian capital market to sustain its generous

compensation for the embedded risks at both the primary and secondary marketsegments during 2014.


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Global Equity Market Dynamics

The global market peaked and dipped at various points in 2013 owing tospeculations that pervaded the global economy. A significant beast of burden in

the global market was the anticipation that the U.S. Federal Reserve will taper its

monthly Quantitative Easing (QE) measures i.e. a reduction in the $85.0bn monthly

bond purchase program. The impact of the QE speculations in May 2013 dampened

the Morgan Stanley Capital International (MSCI) Emerging Market Index by 20.1%

(between 08/05/2013 24/06/2013).

Despite weak economic growth (1.9% in 2013), the U.S. bourse was upbeat in 2013

with the NASDAQ and S&P 500 Indices gaining a respectable 36.0% and 29.1%

respectively. The UK equity market was not far behind, being supported by strong

valuations and rising dividends. The FTSE 100 garnered a 16.6% return in 2013. The

Asian market followed a similar trend with the Japanese Nikkei Index returning an

impressive 59.3% in 2013. This performance was bolstered by the speculation of

further monetary easing by the Bank of Japan which is expected to lift Japan from a

15-year deflation and tepid growth. The chart below shows the performance of

major market indices around the world.

The Equity Market

Chart 20: Global Equity Markets Performance


3.7%

16.2%

18.7%

23.0%

26.7%

29.1%

36.0%

59.2%

-5.0% 5.0% 15.0% 25.0% 35.0% 45.0% 55.0% 65.0%

Hang Seng

FTSE100

CAC-40

DAX

DJIA

S&P 500

NASDAQ

NIKKEI 225


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Within the SSA region, the Ghanaian equity market was the best performing with

an impressive 81.0% growth while the Nigerian bourse followed with 47.2%.However, the MSCI Emerging Markets (EM) Index dipped 5.7% (compared to

+15.1% in 2012) in 2013 on sell-offs from foreign portfolio investors as they reduced

their exposure in view of the U.S. tapering.

Market Return: Staying Green

The Nigerian equity market maintained its impressive form in 2013 on the back of

tighter regulations, greater transparency, better earnings and improved liquidity.

The countrys GDP growth momentum has clearly began to impact many sectors as

evidenced by the double digit growth being reported by many listed companies,

with the exception of the Banking sector (which has been affected by tighter

regulation). In addition, the introduction of a new trading platform by the NigerianStock Exchange (NSE), X-GEN, enhanced market access for foreign investors further

buoying the market performance.

The NSE-ASI which commenced the year on an aggressive note rose to a year high of

42.5% on June 11, 2013, slid to 27.38% by September, and finally settled at 47.2%

by the end of the year. As seen in chart 19, the NSE-ASI stayed fairly stable and

consistently upbeat in Q1:2013. The subsequent volatility in Q2:2013 can be

Chart 21: Emerging Market Performance

21.0%

24.2%

47.2%

81.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

JSE

EGX 30

NSE

GSE-CI



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associated with FPIs reaction to QE speculations. However calm returned in Q3 with

the Feds initial resolve to sustain QE.

The Nigerian stock market grew at a strong pace in January 2013 recording a

monthly 17.2% appreciation (the highest monthly gain in 2013). This was bolstered

by expectations of impressive FY:2012 results, corporate actions and the inflow of

foreign capital. However, profit taking took precedence the following months. The

market leapt (12.7%) in May on the back of a stable macroeconomic environment,

impressive earnings and positive regulatory reforms. The Feds subsequent

Chart 22: NSE-ASI Movement in 2013

Source: NSE, Afrinvest Research

Chart 23: NSE-ASI YTD Return (2000-2014f)


54.0%

34.3%

10.7%

65.8%

18.5%

1.0%

37.8%

74.7%

-45.8%

-33.8%

18.9%

-16.3%

35.5%

47.1%

14.2%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

01

-Jan-1

3

21

-Jan-1

3

10

-Feb-1

3

02

-Mar-1

3

22

-Mar-1

3

11

-Apr-1

3

01

-May-1

3

21

-May-1

3

10

-Jun-1

3

30

-Jun-1

3

20

-Jul-1

3

09

-Aug-1

3

29

-Aug-1

3

18

-Sep-1

3

08

-Oct-1

3

28

-Oct-1

3

17

-Nov-1

3

07

-Dec-1

3

27

-Dec-1

3

NSE-ASI Movement in 2013

Max DailyLoss: 3.9%

Max DailyGain: 3.4%


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announcement dampened the index marginally by 4.2% in June. In addition, the

increase in the CRR on public sector funds to 50.0% in July drove the index further

south by an additional 4.5% in August. The NSE rounded off the year on a very

strong note owing to FPI and institutional investment in large cap stocks in view ofthe FY: 2013 scorecard.

Nigerian Equity Market A Repeat of History?

An analysis of the NSE ASIs 6-year quarterly performance reveals a recurrence of

periodic market trends. Afrinvest Research established that Q1 and Q4 are the most

bullish periods with the exception of 2009 (See Chart 23). However, Q2 and Q3

display mixed signals especially in years with weaker H1 performance. Premised on

this, we expect the Nigerian bourse to follow the same pattern in Q1 and Q4 2014.We attribute this seasonal bull-runs to earnings expectations by investors especially

corporate actions (dividends and bonuses), given that most listed companies on the

NSE have December as their financial year end.

We have also observed that investors tend to take profit in Q2 culminating into

selling pressures that dampen the NSE ASI. This trend spills over to Q3 making it the

most bearish quarter in the year on average. In summary, this analysis reasserts the

Chart 24: NSE Monthly Returns and Drivers


17.2%

-0.7%

1.4%

-0.4%

12.7%

-4.2%

4.8%

-4.5%

0.9%

2.8%3.4%

8.3%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

NSE Monthly R eturns and Drivers

Sustained bypositiveQ1:2013

earnnigs andFPIs

Driven byFY:2012Earnings

expectationsand FPIs

Bolstered byforeigninvestment inLarge Cap stocks

Effect of the Fedstatement about QEtapering

Effect of the CBN

decision to increase

CRR on public sector


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38

strong correlation between company scorecards and market performance. The chart

below gives a schematic overview of our analysis.

Key Market Drivers

The FPI Effect

The participation of Foreign Portfolio Investors in the Nigerian stock market

increased significantly during the year moving from 36.9% in January to 46.6% as at

November 2013. As depicted in Chart 23, foreign investors dominated transactions in

April and July with 64.5% and 62.5% respectively. These months reported a net

flows of N13.7bn and (N30.9bn) in that order. The significant outflow recorded in

July can be linked to speculation of the Feds tapering which led to massive sell-offsacross emerging markets. However, the decision of the Fed to extend QE in the U.S.

delivered relief to emerging markets as foreign investors participation improved in

subsequent months. Chart 24 below shows the total value held by FPI on the Nigeri-

an bourse from 2007 to November, 2013.

Technology: The Milestone Platform

Chart 25: 6 years NSE-ASI Trend Analysis- 2008-2013


-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Q0 Q1 Q2 Q3 Q4

2008

2009

2010

20112012

2013

January Effect and Q1Earnings anticipation


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39

The Nigerian Stock Exchange migrated from its old trading platform (Horizon),

which has been operation since 1999, to a new trading platform, (X-GEN), inSeptember 30, 2013. This new platform brings with it a new securities business

model and new market participants that will change the way all stakeholders

interact in Africa's largest capital market. This technology advancement is expected

to increase foreign investors participation and transparency in the Nigerian bourse.

In addition, the platform should facilitate NSEs 2016 $1.0tn market capitalization

target. This should equally drive the Nigerian capital market's aspirations to migrate

Chart 26: Domestic and Foreign Portfolio Participation in Equity Trading


Chart 27: Foreign Portfolio Investments (2007 Nov 2013)


61.5

76.080.1

123.0

91.9

150.2

93.7

70.9

54.0

82.388.9

105.1

115.6

71.867.7

96.9

143.6

56.264.8

54.258.8

101.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13

Foreign N' Bn Domestic N' Bn

616

787

425

577

848808

972

0

200

400

600

800

1000

1200

2007 2008 2009 2010 2011 2012 Nov-13


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40

from a frontier market to an emerging market, gaining membership at the World

Federation Exchanges (WFE) and confirm its inclusion on the Morgan Stanley CapitalInternational (MSCI) Emerging Market Index.

Sector Performance: Whither Funds Flow?

In line with the broad index, all the NSE sector indices concluded 2013 in positive

territory. The Oil & Gas index topped the chart with a whopping 122.3% gain,

owing to significant appreciation in the price of Forte Oil Plc (1164.6%) and Conoil

Plc (231.4%).The NSE-Lotus Islamic Index (NSE LII), a Sharia compliant equity index,

followed with an appreciation of 55.1% bolstered by gains in the shares of Presco

(126.5%), Julius Berger (108.6%) and Cadbury (103.5%). The NSE Insurance Index

was the least performing with a 29.0% return.

The Liquidity Upside

Activity levels measured by average market volume rounded off 2013 with a 24.4%

gain after three years of consecutive decline (2010:4.1%, 2011:1.5% and 2012:1.3%).

We attribute this to increased investor confidence, improved FPI participation,

impressive company performance scorecards as well as the early adoption of IFRS by

listed companies.

Average volumes increased to 447.0m in 2013 from 359.0m recorded previous year.

Chart 28: NSE Sector Performance - 2013


29.0%

31.1%

31.9%

42.7%

47.2%

61.8%

122.3%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0%

NSE INSURANCE

NSE CONSUMER GDS

NSE BANKING

NSE-30

NSE-ASI

NSE LII

NSE OIL/GAS


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Similarly, average market value improved significantly by 55.1% in 2013 compared

to 2.7% in 2012.

Top Gainers and Losers

Forte Oil Plc was the best performing stock in 2013 due to its investment in the

power sector (i.e. $132m acquisition of Geregu power plant). The price appreciated

by an impressive 1,301% within 3 months (Oct Dec), to close at N108.30 in 2013. In

the same vein, Champion Breweries Plc rallied 308.4% on the back of an agreement

with Heineken (the worlds 3rd largest brewer) to purchase a 57.0% stake of the

company. Other gainers include Evans Medical Plc (285.1%), Transnational

Corporation Plc (252.4%) and Conoil Plc (231.4%).

On the flip side, John Holt Plc was the least performing stock in in 2013 dipping

65.6%, followed by Costain (West Africa) Plc with 64.7% loss due to an alleged

liquidated takeover by First Bank. In 2013, a total of 86 gainers and 5 losers wererecorded, while 66 companies closed flat. Hence, market breadth stood at 1.9x for

2013. This is summarized in the table below.

Activity Level: Why Transcorp?

The top ten most active stocks by volumes in 2013 accounted for 54.6% of the total

market transaction. Similarly, the financial service sector was the most active sector

Chart 29: NSE Average Volumes and Values Traded (2009 2013)


385370 364 359

447

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

50

100

150

200

250

300

350

400

450

500

2009 2010 2011 2012 2013

Volume (mn) Value (N bn)


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accounting for 68.6% of the total market transactions. Transcorp shares were the

most sought after in 2013 with 13.7bn shares traded on the NSE, valued at N28.5bn.Investors are optimistic about the future prospects of the firm following the

successful acquisition of $300.0m Ughelli power plant. Other top traded stocks in

2013 include Unity Bank (8.5bn), UBA (6.6bn) and Zenith Bank (5.5bn).

Ticker Open

Price

Close

Price

Change

(N)

%Change Ticker Open

Price

Close

Price

Change

(N)

%Change

FO 7.73 97.75 90.02 1,164.60 JOHNHOLT 3.4 1.12 -2.28 -67.1

EVANSMED 0.87 3.85 2.98 342.5 TRANSEXPR 2.78 1.28 -1.5 -54

TRANSCORP 1.05 4.35 3.3 314.3 COSTAIN 2.66 1.24 -1.42 -53.4

CHAMPION 4.15 16.91 12.76 307.5 DEAPCAP 2.02 0.99 -1.03 -51

CONOIL 20.5 67.93 47.43 231.4 MULTITREX 0.95 0.5 -0.45 -47.4

JOSBREW 1.53 4.6 3.07 200.7 MORISON 3.3 1.91 -1.39 -42.1

LIVESTOCK 1.44 4.3 2.86 198.6 VONO 2.88 1.73 -1.15 -39.9

FIDSON 1.06 2.79 1.73 163.2 THOMASWY 1.32 0.87 -0.45 -34.1

UNIONDICON 4.22 10.45 6.23 147.6 NPFMCRFBK 1.18 0.8 -0.38 -32.2

WEMABANK 0.52 1.22 0.7 134.6 ETRANZACT 3.65 2.56 -1.09 -29.9

Top 10 Best Performing Stocks in 2013 10 Least Performing Stocks in 2013

Chart 30: Market Leaders and Laggards (2013)


TickerVolume

(bn)

Value (N

bn)Close Price

TRANSCORP 13.7 28.5 3.97

UNITYBNK 8.5 5.6 0.5

UBA 6.6 50.6 8.55

ZENITHBANK 5.5 115.3 22.7

ACCESS 4.8 50.6 9.6

FBNH 4.4 79.6 15.6

GUARANTY 4.1 105.7 28.15

FIDELITYBK 3.3 9.9 2.66

FCMB 3.1 13.2 3.85

DIAMONDBNK 3 20 7.67

Top 10 Most Active Stocks in 2013

Chart 31: Top Traded Stocks



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Chart 32: Nigerian Stock Market Snapshot


2012 2013 % Change

Total Market Capitalization N14.8tn ($95.2bn) N19.1tn ($119.9bn) 29.1%

Equities Market Capitalization N9.0tn ($57.8bn) N13.2tn ($82.9bn) 46.7%

NSE All Share Index 28,078.81 41,329.19 47.2%

NSE Lotus Islamic Index 1,769.07 2,863.12 61.8%

NSE 30 Index 1,336.07 1,907.17 42.7%

NSE Consumer Goods 838.97 1100.25 31.1%

NSE Banking Index 339.63 447.84 31.9%

NSE Insurance Index 118.49 152.87 29.0%

NSE Oil/Gas Index 152.92 339.88 122.3%

Total Volume (units) - Equities 89.2bn 110.5bn 23.3%

Total Value (Turnover) - Equities N658.2bn ($4.2bn) N1.0tn ($6.3bn) 51.9%Avg. Daily Volume - Equities 359.5m 447.2m 24.4%

Avg. Daily Value (Turnover) - Equities N2.7bn ($17.1m) N4.0bn ($25.1m) 48.1%

No. of Listed Equities 197 197 0.0%

No. of Listed Bonds 57 55 -3.5%

No. of Listed ETFs 1 1 0.0%

No. of Listed Securities 255 253 -0.8%

No. of Trading Days 248 247 -0.4%

Avg. Exchange Rate (Naira:USD) 155.44 159.29 2.5%

NIGERIAN STOCK MARKET SNAPSHOT


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The performance of the NSE-ASI in 2013 exceeded analysts expectations (47.1% vs.

average: 28.0%). We expect Q1:2014 to trend the historical profitable outing.However, we expect the NSE-ASI to trade softly in Q2 as investors maintain short

term positions as a result of number of local and foreign uncertainties. Based on our

market forecasts, we anticipate the Index will close the year at approximately

47,197.93, yielding 14.2% by year end. We continue to see numerous opportunities

in the equity market on the back of improved corporate performance, attractive

valuations and tighter regulations which we believe this will spur investor interest.

The chart below depicts the key market drivers in 2014.

2014 Expectations: 14.2% Market Return

Market

Drivers

in 2014


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New X-GEN Trading Platform

The recent introduction of a new trading platform has equipped the NSE with thefastest trading engine in Africa. This platform will offer investors real-time access to

market prices, portfolios and also enable the execution of market orders in

real-time. It also provides access on a wide range of devices i.e. computers, tablets

and mobile devices. The X-GEN platform should encourage wider market

participation (particularly among the growing middle-class) as well as support global

investor participation in 2014.

Impressive Corporate Scorecards

Earnings have been a major driver of market performance in Nigeria. Although, the

NSE-ASI is far from perfect, stock prices fairly reflect the performance of listed

companies. Companies with high dividend payout ratio and consistent dividend and

bonus history have remained the toast of investors. However, recent policies that

have constrained non-interest income of banks are expected to compress earnings in

the sector. We anticipate a single digit earnings growth rate for the banks in

FY:2013.

Easing Listing Requirements

The management of the Nigerian Stock Exchange has begun the review of the

listing requirements for equities on the Main Board as well as on the Alternative

Securities Exchange Market (ASEM). This is to encourage more listings and improve

liquidity on the exchange.

Robust Investor Protection

Investors anxiously await the approval of rules of the Investors Protection Fund. This

will permit the Board of Trustees (BoT) of the NSE to compensate aggrieved

investors and consolidate market transparency and confidence in 2014.

SWF Funds - A Welcome Injection

The Nigeria Sovereign Fund kicked off in 2013 with an initial $1.0bn investment. This

made the fund the third largest in sub-Saharan Africa (Botswana: $6.9bn and

Angola: $5.0bn). We expect the Federal Government to increase injections to the


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fund in 2014 of which the NSIA is expected to allocate a percentage to the listed

equities on a long term basis. This should deepen domestic participation and reduceexposure to FPIs thereby guiding against significant decline in stock prices in event

of any external shocks.

Elimination of VAT and Stamp Duty

Following the announcement (December 2012) of the Federal Governments

elimination of stamp duties and VAT on stock market transactions (VAT: 5.0% and

Stamp Duty: 7.0%), we expect the Securities and Exchange Commission to complete

the implementation of this new directive during 2014. This will reduce the

transaction cost and increase activity level. Consequently, portfolio investors would

increase turnover ratio, creating liquidity in the NSM.

Robust Inflation Adjusted Return

The NSE was ranked as the 3rd best performing stock market globally in 2013 with a

47.2% return trailing the Ghanaian Stock Exchange (GSE) and Japanese Nikkei 225

with 81.0% and 59.2% returns respectively. This impressive form is expected to

attract new entrants to the stock market, hence, increase activity levels and boosting

liquidity. We expect inflation to average 9.5% in 2014 thus permitting a 4.7% real

return on our 14.2% base case market return expectation.

Sustained Regulatory Effectiveness

An increasing number of listed companies are being compliant with the rules of the

NSE in terms of timely release of earnings. This has been achieved by the

enforcement of sanctions on erring companies. The early release of corporate

earnings has enabled investors X-ray the performance of companies, thus,

facilitating prompt and informed investment decisions. In addition, we expect theNSE to ensure that company forecasts are reasonably guided going forward.


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Based on our analysis, the potential risks to the stock market in 2014, we see capital

inflow reversals as the major downside risk which could be triggered by increasedQE tapering in the U.S. and an increase in interest rates in Europe. This risk is

compounded by the dominant proportion of FPI (over 50%) in Nigerian equities. A

second risk factor is the new capital requirements for dealing member firms which

should streamline local participation in the short term.

We expect the of licensed broker dealers to reduce to 50 firms from the current 200.

Thirdly, in view of the election funds that are expected to flood the financial system

in 2014, we anticipate further tightening by the CBN especially on public sectorfunds (to 100%). The liquidity risk inherent in this policy should shrink bank earnings

further with consequences on share prices. The embedded risk associated with the

2015 elections is equally material. Investors are generally on red alert with regards

to the direction of the election and its implications on macroeconomic policies.

This necessitates a higher country risk premium to justify the risks. Overall, we

envisage three potential scenarios in Nigerias equity market over 2014,

Potential Risks in 2014


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specifically:

A Bull Case Scenario (30.0% probability), NSE-ASI at 49,595.03 (+20.0%)

This scenario assumes an optimistic performance by equities in Q1 and Q4, riding on

the back of sustained macroeconomic stability and increased participation of FPIs.

We assume a more positive bias in Q1 and Q4, driven by impressive corporate

earnings. This scenario equally assumes that global markets and commodity prices

continue to re-rate upwards, supported by sound government policies and sustained

economic recovery.

A Base Case Scenario (50.0% probability), with NSEASI at 47,197.93 (+14.2%)

This scenario assumes a dreary equity market performance in the first half of 2014 as

the U.S. continues to taper QE at moderate levels. In addition, the MPCs stance on

liquidity tightening may further dampen investors sentiment. Our base case

scenario assumes a positive bias in the second half of the year premised onencouraging corporate earnings. In addition, the body language of the MPC is

assumed to be in favour of further tightening. This scenario also assumes global

markets and commodity prices remain at current levels.

A Bear Scenario (20.0% probability), with NSEASI at 43,850.27 (+6.1%)

This scenario assumes a negative performance by equities in Q1 and Q4 on the back

of massive capital inflow reversals, higher interest rates in Europe and the U.S.,

tighter monetary policies and heightened political uncertainty. However, we assume

a positive bias in Q3 and Q4 on impressive corporate earnings. This scenario equally

assumes that global markets and commodity prices decline sharply as global growth

softens.

Overall, our probability weighted average return for the three scenarios delivers a

14.2% return for the NSE ASI in 2014, bringing the index to 47,247.53 by year end.

2014 - Scenario Analysis

Bull Base BearNSE-ASI Forecast 49,595.03 47,197.93 43,850.27

Expected Market Return 20.0% 14.2% 6.1%

Probability 30.0% 50.0% 20.0%

Chart 33: 2014 Market Forecast

Source: Afrinvest Research


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Section 4Company Profiles

Banking Insurance Oil& Gas Consumer Goods Industrial Goods

Access Bank AIICO MRS Guinness Ashaka Cement

Diamond Bank Custodian Oando Nigerian Breweries Dangote Cement

ETI Mansard Total Dangote Sugar CCNN

FBN Holdings Continental Re

GT Bank

UBA

Zenith Bank


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Navigating the Tide

Access Bank Plc (Access or the Bank) has inorganically evolved from

the Tier-2 space to the league of Nigerias top 5 banks, with a balance

sheet size of N1.7tn in 2013. The Bank grew from 32 operating branches

in Nigeria to 349 branches in 9 countries. Given this level of growth, the

Bank has emerged as one of Nigerias systemically important banks. The

Group recently appointed Mr. Herbert Wigwe to succeed Mr. Aigboje

Aig-Imoukhuede, in compliance with CBNs regulation that limits the

tenure of banks CEO to 10 years. The Banks customer service focus and

optimistic outlook continues to sustain its growth trajectory.

PROFITABILITY: A Modulating Slope

The Banks 9-month 2013 gross earnings dipped 3.7% Y-o-Y, from

N160.3bn to N154.4bn, partly due to restrictive monetary policies.

Interest Income declined 10.6% to N109.9bn, while interest expense

increased 8.2% to N50.3bn, leaving the Net Interest Income 22.0% lower

Y-o-Y to N59.6bn. We forecast a further 9.0% decline in interest income

and a 16.0% increase in interest expense in FY:2013 due to tighter

regulations. We are cautiously optimistic and believe the bank will

weather the storm ahead.

FY:2013 & FY:2014 Cost Drivers

Despite the increasing competition for deposits in the banking space, the

Cost of Funds declined to 4.6% in Q3:2013 (H1:2013 - 4.9%). However,the interest expense increased 8.0% Y-o-Y in the 9M:2013 period. We

anticipate a 16.0% and 17.0% respective increase in Accesss interest

expense and operating expense to N87.5bn and N102.71bn by FY:2013.

Asset Utilization: Increasing Loan to Deposit Ratio

The Bank reported an increase in loan to deposit ratio, from 51.0% in

FY:2012 to 62.0% in Q3:2013. The Bank equally grew its loan books Y-o-Y

by 25.8% in 9M:2013, above Tier-1 average of 5.8%. We highlight the

shrinking CAR, berthing at 18.0% in Q3:2013, 3.0% higher than the

15.0% statutory requirement. Similarly, its Liquidity Ratio declined to

40.0%.OUTLOOK: 22.9% Upside, 14.1% ROAE and 1.9% ROAA

Despite various policy hurdles, Access is fundamentally stable with sound

risk management practices. The stock currently trades at a forward P/E

and P/BV of 6.5x and 0.9x respectively. We arrived at a fair value of N8.31

and a 2014 target price of N11.80 using a blend of DDM and DCF

valuation methodologies. This presents a 22.9% upside, hence our

ACCUMULATE recommendation.

80

90

100

110

120

130

140

150 Access Bank NSE Bank 10 NSE

NSE: ACCESS

Bloomberg: ACCESS NL

ISIN NGACCESS0005

ACCESS BANK PLC

RATING ACCUMULATE

Price as at 31-12-2013 (NGN) 9.60

Target price (NGN) 11.80

Upside/Downside(%) 22.912 month High/Low (NGN) 10.60/9.15

LIQUIDITY

Market Cap (NGN) 219,669.6

Market Cap (USD) 1,372.9

Outstabding Shares (mn) 22,882.3

Free Float (%) 58.9

Ave Daily Volume 19,648.1

Ave Daily Value Traded(NGN) 204,056.6

Ave Daily Value Traded(USD) 32.6

SHARE PRICE PERFORMANCE

6 months (%) 20.4

Relative Change (%) (8.4)

12 Months (%) 7.9

Relative Change (%) (39.3)

* Relative to NSE index

FINANCIALS(NGN mn) - FY 31 DEC 2012 2013E 2014F

Gross Revenue 207.7 227.2 272.2

Interest Income 161.4 165.7 190.3

OPEX 87.5 102.7 117.6

PAT 42.3 34.0 46.5

EPS (NGN) 1.9 1.5 2.0

Total Assets 1,745.2 1,861.4 2,044.7

NAV/Share (NGN) 10.2 10.9 12.2

PROFITABILITY RATIOS 2012 2013E 2014F

RoAE 20.8 14.1 17.6

RoAA 2.5 1.9 2.4

NIM (%) 46.4 39.5 38.1

PAT Margin (%) 21.4 18.8 21.0

Cost/Income (%) 68.9 75.0 69.2

VALUATION MATRICS 2012 2013E 2014F

PE (x) 5.2 6.5 4.7

P/BV (x) 0.9 0.9 0.8

Dividend Yield (%) 8.9 7.0 9.5

Dividend Pay-out Ratio (%) 50.0 50.0 50.0


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Maximizing Retail and SME Banking

Diamond Bank Plc (Diamond or the Bank) takes a prominent position

in the Retail and SME banking space. The Bank operates with a balance

sheet size of N1.4tn, offering services along its 3 core business lines:

Business Banking, Corporate Banking and Retail Banking. Diamond was

the first African bank to list its Global Depository Receipts (GDR) on the

London Stock Exchanges Professional Securities Market. The Bank

operates from 277 offices spread across Africa: Nigeria (250), Benin (19),

Togo (3), Senegal (3) and Cote Divoire (2), from where it serves over 3.1

million customers.

PROFITABILITY: Buffered by Interest Bearing Assets

In its 9-month 2013 results, Diamond recorded an impressive 19.0% Y-o-Y

growth in gross earnings to N131.0bn. This was driven by the 224.0%

growth in financial assets held for trading, as well as the 16.5% growth

in Loans to customers. This crystallized to a 23.0% growth in operating

income for the period, an EPS of N1.53 and an ROE of 22.4%. We believe

the bank will attain our N30.0bn PBT target for 2013, given our 22.0%

forecast growth in Net interest Income to N109.0bn.

Expenses: The cost of Business Expansion

Operating expenses was up 29.0% in the 9M:2013 period, owing to the

increase in branch expansions and employee benefits. Impairment

charges were down 28.6% Y-o-Y, despite the 26.4% growth in loans tocustomers, signifying strong asset quality. Nevertheless, CIR declined

from 60.6% in FY: 2012 to 58.9% in Q3:2013. Diamond Banks Cost of

Funds (3.4%) and Cost of Risk (3.4%) remain one of the lowest in the

industry.

Capital Structure and Ratios

Diamond Bank is likely to shore up its Tier-2 capital soon (possibly

through the issuance of a Eurobond) to compete effectively in the dollar

denominated credit market. The NPL ratio (4.3%) and Coverage ratio

(108.4%) all showed an improvement from FY: 2012; whereas the NIM

(8.6%) and Liquidity Ratio (48.2%) were adversely impacted by the 50.0%

CRR policy in 2013.

OUTLOOK: 52.3% Upside

Diamond arguably has the best fundamental numbers in the Nigerian

banking sector. Our blend of DDM and DCF valuation methodologies

placed Diamond at a N9.42 intrinsic value, and a 12-month target price of

N11.19 (52.3% upside to the price as at 31/12/2013). The Banks forward

P/E and P/BV are attractive at 3.8x and 0.7x respectively, hence our BUY

recommendation.

90.0

110.0

130.0

150.0

170.0 Diamond Banking Sector NSE

NSE: DIAMOND

Bloomberg: DIAMOND NL

ISIN NGDIAMONDBK6

DIAMOND BANK PLC

RATING BUY

Price on 31-Dec-13 (NGN) 7.35

Target price (NGN) 11.19

Upside/Downside(%) 52.312 month High/Low (NGN) 7.66/4.94

LIQUIDITY(mn)

Market Cap (NGN) 106,393.0

Market Cap (USD) 665.0

Outstanding Shares 14,475.2

Free Float (%) 70.0

Ave Daily Volume 12

Ave Daily Value Traded (NGN) 82

Ave Daily Value Traded (USD) 514,745

SHARE PRICE PERFORMANCE

6 months (%) 106.5Relative Change (%) 97.1

12 Months (%) 48.8

Relative Change (%) 1.6

* Relative to NSE index

FINANCIALS(NGN bn) - FY 31 DEC 2012 2013E 2014F

Gross Earnings 138.8 176.8 212.8

Net Interest Income (NII) 89.3 109.0 131.0

OPEX 68.5 88.4 106.4

PAT 22.1 27.8 32.8

EPS (NGN) 1.55 1.92 2.27

Total Assets 1,178.0 1,402.4 1,514.5NAV/Share (NGN) 7.5 10.9 12.5

PROFITABILITY RATIOS

RoA 2.5 2.1 2.0

RoE 22.7 22.5 23.0

Net Interest Margin (%) 11.0 10.2 10.5

Cost to Income (%) 60.6 62.5 65.0

PBT Margin (%) 23.9 22.8 22.6

VALUATION MATRICS

PE (x) 4.8 3.8 3.2

P/BV (x) 1.0 0.7 0.6

Dividend Yield (%) - 10.5 12.3Dividend Pay-out Ratio (%) - 40.0 40.0


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A Pan African Scale Advantage

Afrin Ves 2014 Out Look

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