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Executive Summary
Global Economy: A shot at recovery
2020 was an unprecedented year, no thanks to the coronavirus outbreak, as the global
economy was suspended in Q2 and most of Q3-2020 to safeguard human health. Oil
prices plummeted to levels never seen before, airlines were grounded, hotels shut down,
and all forms of congregational economic activity halted. This triggered a global
recession across advanced and low-income countries, as GDP growth numbers printed
negative amid demand and supply shocks. As such, the IMF estimates global GDP to
contract by -4.4% in 2020. Surprisingly, stock markets in many advanced and emerging
economies surged amid massive monetary and fiscal stimulus. In Q3-2020, the global
economy began to reopen as countries looked to recover from the sharp blow dealt by
the pandemic. However, the cost of reopening was evident in Q4-2020, as the second
wave of infections began in many advanced markets, particularly in the United States
and Europe. This forced some countries to halt economic reopening and, in some cases,
reintroduce lockdowns. As of the end of the year, the global Covid-19 caseload count
was above 83 million, including 1.83 million deaths and more than 47 million recoveries.
In 2021, we expect the global economy to take ‘a shot at recovery’, thanks to the
announcement and approval of effective Covid-19 vaccines. The risks of re-emerging
infections remain high, however, and much will depend on the speed, scale, and long-
term effectiveness of vaccination. Away from the virus, the outcome of the recent US
presidential election which will see Joe Biden replace President Trump from January 2021
greatly reduces political risk. Also, a Joe Biden presidency is positive for global trade and
efforts against climate change.
Overall, global growth is projected by the IMF to rebound by 5.2% in 2021, buoyed by
recoveries in emerging markets (+6.0%) and advanced economies (+3.9%). Recovery will
be aided by bold economic stimulus packages and a massive accommodative policy
stance by central banks. Similarly, oil prices are expected to continue northwards but
may be stuck within the $45-$55/b range if demand fails to keep up with supply.
Sub-Saharan Africa: Much depends on the pandemic
In 2020, the SSA region slumped into its first recession in three decades. Although SSA
countries were the least infected by the virus, the global economic shutdown left a huge
imprint on economic activities across the region due to slump in key commodities prices.
Thus, recovery is projected to be slower than peers. Tourism dependent economies
(Mauritius: -32.9%, Seychelles: -17.0%) were the hardest hit, with sharp GDP contractions in
Q2-2020, followed by oil-exporting countries such as Nigeria and Angola. Also, South
Africa, a more diversified economy, recorded a -17.1% contraction in Q2-2020.
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In 2021, growth in the region will be driven by a few factors. Firstly, the capacity of SSA
economies to keep the spread of the coronavirus pandemic at bay amid potential
vaccination bottlenecks and financial distress will be a significant factor, as the region
must avoid another round of unaffordable lockdowns. Secondly, the implementation of
the AfCFTA trade agreement, now scheduled to begin from Jan- 2021 rather than Jul-
2020, and the commitment of major economies such as Nigeria and South Africa to the
success of the pact are key. Finally, fiscal policy operations, supported by access to more
concessional financing, relief, and private financing amid bold policy reforms, will help
bolster recovery.
Overall, slower than required recovery in key markets, notably South Africa, Nigeria and
Angola, will drag SSA growth in 2021. The IMF expects regional growth to rebound to 3.1%
in 2021 but insists that many SSA countries will not return to 2019 output levels until 2022–24.
Nigeria: Tough times, tough takes!
Covid-19 took its toll on the Nigerian economy in 2020, after the FGN imposed widespread
nationwide lockdowns in Q2-2020 to contain the virus. The oil market collapse wiped out
export earnings and 50.0% of government revenue, even as domestic economic activities
were ground to a halt in the country’s largest commercial hubs. The CBN devalued the
Naira on its official and I&E windows in the face of the pandemic, launched a series of
intervention programs, slashed the monetary policy rate and kept the system inundated
with liquidity. Similarly, amid pressure on both oil and non-oil revenue, the FGN was forced
to take bold actions. The pump price of petrol was somewhat deregulated, electricity
tariffs were hiked, and the closure of the land borders was reviewed.
Despite the concerted efforts, the economy slipped into another recession as GDP
contracted in Q2 and Q3-2020. Inflation galloped to a 33-month high of 14.89% y/y in Nov
-2020, amid sharp food price increases and the currency market crisis. Also, the CBN
imposed administrative measures to curb the depletion of the external reserves, which slid
to $35.4bn (down $3.2bn YTD) in Dec-2020. As such, the parallel market rate crossed
N500/$ in Q4-2020 while foreign capital inflows hit rock bottom.
In 2021, we expect GDP growth to rebound by 1.7% to 2.0%, buoyed by increased
economic activity and some improvements in the oil market. Although the reopening of
the borders in Q4-2020 should ease pressures on food prices, other structural factors such
as FX market illiquidity, potential increases in petrol price, etc. may keep general prices
elevated. As a result, we expect the headline inflation rate to peak at around 16.0%
before pulling back, if no further policy adjustment is made. Again, the high base effect
of the headline inflation spike in Q3 and Q4 2020 should moderate further increases in
price levels. In response to rising inflation and in a bid to attract FPI inflows to the market,
we imagine that the CBN would begin to tighten its monetary policy stance at some point
in Q2-Q3 2021. Finally, on the exchange rate, we expect a potential convergence of
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rates when the CBN begins full intervention at the I&E window. As such, we anticipate that
the parallel market will appreciate from N470/$ towards the NAFEX rate which has now
been adjusted to N410/$.
Naira Assets: Vibing to Emefiele’s orchestra
Nigerian financial markets continued dancing to the tune of monetary policy actions in
2020. The CBN through its heterodox policy actions, following restrictions on OMO bills in
late 2019, arguably remained the conductor of the orchestra, setting the tempo for
capital flows. Matured bills issued in 2019 flooded the financial markets, overloading the
system with liquidity in 2020. With sustained net OMO inflows, a dearth of investment
outlets, and rate cuts by the CBN, the stop rate across all tenors for Treasury bills at the
primary auction crashed from high single digit in Jan-2020 to less than 1.0% (91-Day: 0.01%,
182-Day: 0.09% and 364-Day: 0.15%) in Dec-2020. Accordingly, the equity market surged
50.0% in 2020 - its best performance in over a decade and well above its global peers - as
local investors shifted from risk-free to riskier assets. Similarly, Nigerian sovereign bonds
outperformed EM peers with the S&P/FMDQ Sovereign Bond Index returning a record
42.3% as at 23rd Dec-2020 compared to 3.2% on the JPM EM Government Bond Index.
Driven by buoyant system liquidity and an extremely low yield environment, corporate
and non-sovereign issues increased significantly in 2020. Data from FMDQ indicated that
over N1.0trn was issued in the form of Commercial Papers or CPs (N610.0bn), Corporate
Bonds or CBs (N152.0bn), Sub-National Bonds (N100.0bn) and Sukuk (N150.0bn) in 2020.
Notably, CP issues were led by blue chips like Dangote Cement (N100.0bn), MTNN
(N100.0bn), and Nigerian Breweries (N91.2bn).
In 2021, sentiment for stocks depends on the direction of monetary policy, particularly in
relation to the yield environment. A sharp reversal of rates is likely to trigger a sell-off in the
equities market considering that the current average market price-to-earnings (P/E)
valuation multiple (15.2x) is considerably higher than the 5-year historical average (11.9x).
While we predict that the rate reversal, which appeared to have been triggered in
Dec2020, will become more apparent from Q2-2020, the yield environment may not
reverse to double digits until late 2021 or later. Accordingly, our prognosis for the Nigerian
stock market in 2021 is that domestic interest, fueled by dividend expectations, is likely to
sustain the market rally in Q1-2021. However, in the absence of foreign demand, we see a
short-term bear market from Q2 to Q3-2021.
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Analysts
Wale Olusi
Ebitonye Atte
Ayorinde Akinloye
Oluwashina Akinremi
Ayooluwa Aseweje
Team
+234-1-631-7892
United Capital Plc Securities Trading:
+234-1-631-7874
Investment Banking
+234-1-631-7883
Asset Management:
+234-1-631-7875
Trusteeship:
+234-1-631-7886
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Table of Content
Global Economy ······································································································· 8
Still largely about the virus ··············································································································· 9
Key global themes to watch in 2021 ······························································································ 10
Global Outlook: V-shaped or W-shaped recovery ·········································································· 13
Financial Markets: The bull rages on in the equities market with no real threat in sight ························ 15
Oil market review and outlook: Vaccine is good news, but price recovery may be mellow in 2021……..15
Sub-Saharan Africa ································································································· 18
Unprecedented crisis, SSA economies 2020 descent ······································································· 19
SSA Growth Outlook: Much depends on the pandemic ··································································· 20
Africa Continental Free Trade Area: An actual game changer or just playing to the gallery? ·············· 21
Eurobond Market: Yield on recovery path? ···················································································· 24
SSA Equity Market: Sellers’ market, save for Nigeria ········································································· 25
SSA Currency Market: Broad depreciation across board ································································· 25
Domestic Macro and Policies ··················································································· 29
Domestic Macroeconomic Overview: Tough times, tough takes! ····················································· 31
Nigeria policy overview in 2020: Bold steps ···················································································· 33
Monetary & Interest rate policy: Going for growth ·········································································· 34
Fiscal Policy: Hobbled by oil market demand shock ······································································· 36
GDP Growth: V-shaped or a potential W-shaped recovery? ···························································· 39
Inflation rate, Consumption Spending & Disposable Income ···························································· 41
Capital flows and Foreign Exchange Rate: Still the elephant in the room ·········································· 43
Financial Markets ···································································································· 48
Fixed Income: A record-breaking year for Nigerian sovereign bond ················································· 49
Equities: The only game in town ···································································································· 56
Sectors ··················································································································· 65
Agricultural Sector ······················································································································· 66
Banking Sector ··························································································································· 70
Consumer Goods Sector ············································································································· 77
Cement Sector ··························································································································· 81
Oil & Gas Sector ························································································································· 85
Companies ············································································································· 91
Disclosure Appendix ······························································································· 106
Global
Economy
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Global Economy
Still largely about the virus
2020 was an unprecedented and challenging year, no thanks to the outbreak of the
coronavirus which forced governments across the world to shut down their economies.
This triggered a global recession amid demand and supply shocks. Oil prices plunged to
levels never seen before, airlines were grounded, hotels shut, and all forms of
congregational economic activities halted. The global economy was literally suspended
for the sake of our lives. Surprisingly, stock markets, especially in advanced economies,
performed relatively well amid monetary and fiscal stimulus implemented by authorities.
In H2-2020, the reopening of economies came at a cost, a 2nd wave of Covid-19 cases
began to spike in many advanced markets, particularly in the United States and Europe.
This forced some countries to stall reopening their economies and in some cases re-
impose lockdowns. Overall, global Covid-19 cases reportedly amounted to 73.6 million as
of 16th Dec-2020, this includes over 1.6 million deaths and 41.7 million recoveries.
As noted above, the hardest hit sectors were Aviation, Tourism, Hospitality, Oil &Gas and
Manufacturing. Accordingly, global PMI dropped below the 50-point mark from Apr-2020
to Jun- 2020 but rebounded to 53.3 in Oct-2020, its highest since Sept-2018. This was
bolstered by China, where economic activity resumed much earlier than the rest of the
world as the country was able to contain the virus much quicker.
Amid the outbreak of the virus, the US held its highly anticipated election which saw the
incumbent president, Donald Trump, defeated. The Democrat candidate and Former
Vice President Biden will become the new President of the United States in 2021. The
election of Biden could affect trade, policy, and other geopolitical issues. However, the
1.6m
4.4m
11.3m
21.4m
29.5m
Africa
Eastern Mediterranean
South Asia
Europe
Americas
The Americas have become the
Epicentre for COVID-19 COVID-19 caseload by region
The global economy
was literally suspended
for the sake of our lives
Global Economy
Source: John Hopkins, IMF, United Capital Research
Figure 1
Source: IBIS World, United Capital Research
Life & Health
Insurance
$4,894.8bn
Pension Funds
$4,221.0bn
Commercial
Real Estate
$3,963.9bn
Car &
Automobile
Sales
$3,978.6bn
Oil and Gas
Exp & Pro.
$3,325.4bn
Wireless
Telecom
$1,155.0
bn
Hotel & Resorts
$1,109.5bn
Coal
Mining
$909.8b
Internet
Service
Providers
$686.5bn
Auto Parts & Accessories
Manu.
$2,500.4bn
Direct General
Insurance
$2,580.7bn
Car &
Automobile Manufacturing
$2,976.5bn
Pharma & Medicine
Manufacturing
$1,260.4bn
Tourism
$1,703.3
Engineering Services
$1,372.7bn
Commercial Banks
$2,341.0bn
Consumer Electronics
$1,436.0bn
Semi-
conductors
$755.0bn
Aircraft
Manu.
$712.1bn
Airlines
$824.9bn
Bad
Good
Covid-19 losers and winners by Sector Figure 2
Aviation, Tourism,
Hospitality, Oil &Gas
and Manufacturing
were the hardest hit
sectors
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president-elect’s number one priority will be the containment of the virus and global
economic recovery.
As it stands, the IMF expects global GDP to contract by -4.3% in 2020. Global forecasts
assume that Covid-19 infections will continue to rise towards the end of the year. China is
expected to perform better than most advanced countries. The IMF forecasts most major
economies such as the UK (-5.8%), Euro Area ( -8.3%), Germany (-6.0%), Brazil (-5.8%), and
India (-10.3%), to slump in 2020, but China is projected to grow by 2.0%.
Key global themes to watch in 2021
Covid-19 vaccine vs 2nd wave of infections
2020 showed that full economic recovery would prove to be impossible without a
vaccine. At the start of the outbreak, some governments had mulled the idea that herd
immunity would be the preferred choice to avoid a total shutdown of global economies.
That strategy proved to be disastrous as the UK, one of the countries that championed this
idea, became the epi-center of the virus in Western Europe.
In Q4 2020, Pfizer and BioNtech, Moderna and AstraZeneca, in collaboration with Oxford
University, have all announced effective vaccines for Covid-19. For a vaccine-induced
herd immunity to be effective, around 70% of the population must be vaccinated. As
such, the swiftness of government regulators to approve vaccines and the handling of
the huge scale deployment of the vaccine to ensure it reaches the poorest areas of the
globe would also be critical. This position is extremely important within the context of the
rising cases of 2nd wave of the virus infection in many advanced economies as well as
some emerging and frontier markets. For instance, aside from the US and most of Europe
which were already dealing with the 2nd wave of the virus, as at mid-Dec-2020, Nigeria,
S/Africa, Pakistan, Israel, S/Korea amongst others have all confirmed a 2nd wave of the
virus.
As such, we believe that Covid-19 remains a big threat in 2021, however, the news of
vaccination brightens the outlook. Accordingly, we are of the view that global recovery
Global GDP
is expected to contract
by -4.3% in 2020
The speed of
vaccination and the
deployment to the
poorest countries
would be critical
Global Economy
0
20
40
60
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0
Global PMI Slumped in Q2-2020Manufacturing vs Services PMI
Global Manufacturing PMI
Global Services PMI-31.7%
-23.9%-21.7%
-17.1%
-11.4%-11.3%-8.0% -7.8% -6.1%
3.2%
US
Ind
ia
UK
S/A
frica
Bra
zil
Ge
rma
ny
Ru
ssia
Ca
na
da
Nig
Ch
ina
Broad-based contraction signals
recession by Q3-2020GDP Growth across the World
Sources: IHS Markit, Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research
Figure 4 Figure 3
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in 2021, hangs on a balance between the severity of the 2nd or 3rd wave of the infection
and the speed of vaccination. For vaccination, it appears there would be a priority list of
countries. For instance, the EU has ordered 700 million doses, the US and India have
ordered 700 million and 500 million doses respectively, while the UK has ordered 145
million doses. Evidently, high-income countries dominate the list for vaccine orders; this
shows that, perhaps, economic recovery may end up being directly correlated with
wealth. As such, access for the poorest regions remains a concern. To mitigate this, the
G20 at its meeting in November assured it would spare no effort to ensure fair distribution
of the virus worldwide, however there is no specific funding target set for this objective.
Moreover, we are of the opinion that logistical constraints in countries with poor
infrastructure and storage capabilities for storage and deployment of the vaccine may
lead to a lopsided recovery in 2021
Monetary and fiscal policies
Building on the broad-based expansionary monetary policy in 2020, we expect policy
stance in major economies to remain dovish as countries recover from the virus. The US
Federal Reserve (the Fed) has stated that it would maintain its low-interest-rate
environment most likely till 2023. The Bank of England (BOE) has released forward-looking
forecasts for the year ahead, and it is expected to maintain its near-zero interest rate
policy. Dovish monetary policy indicates that fund flow to Emerging Markets with
structurally stable economies will increase. On the fiscal side, however, although inflation
has largely been contained, some demand-pull inflation pressures are expected to return
in 2021, as economic activity picks up. Hence, fiscal authorities may begin to relax
massive injections of direct cash transfers or helicopter money as well as bond purchase
programs.
Global trade flows
The WTO and UNCTAD forecast global trade to fall by 9.2% in 2020. However, this will be
reversed in 2021 as we expect global trade to improve significantly. Leading
manufacturing indicators such as global PMI and commodity demand continue to
Covid-19 threat
remains a big factor to
watch, but vaccination
brightens the outlook
Global Economy
127.7%
114.6%
108.7%
106.0%
87.6%
78.2%
72.0%
65.2%
30.0%
26.2%
Canada
Japan
UK
US
Australia
EU
Mexico
Chile
Costa Rica
Swizterland
Rate of Vaccine Coverage pre ordered from Pfizer/BioNtech,
Moderna and Astrazeneca/Oxford Vaccine preorders heavily skewed towards rich countries
Figure 5
Source: Company website, United Capital Research
The outlook for
global monetary
policy remains
dovish
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foreshadow improvement. However, the increased restrictions adopted by countries,
especially in Western Europe amid the 2nd wave of Covid-19 signals that this optimism
may be dampened if the threat of the 2nd wave outpaces the speed of vaccination.
Data from the UNCTAD showed that trade between developed regions was hit harder
than developing regions. Trade between developing nations has been more resilient,
mostly due to the East Asian region, where trade flows only fell marginally compared to
the West and South Asia region. This can be attributed to the early containment of the
outbreak in China, bolstered by Chinese decision to also distribute PPE equipment
globally to aid the rest of the world. In H2-2020, 15 Asia-pacific countries, including China,
signed a trade pact - the Regional Comprehensive Economic Partnership (RCEP). The
trade deal covers about a third of the world’s population and similarly, a third of the
global economy. Interestingly, as trade tensions have risen between some countries in
the Asian pacific and the United States, Asia pacific neighbours seemed to have opted
for free trade. We expect intra-regional trade to boost output in this region in the near-
term.
Joe Biden’s presidency and US/China trade relationship
The US elections are all but sorted and concluded, with the transition period in process. In
2021, global attention is expected to turn to the White House for direction concerning
global trade. The US, oft-regarded as the world’s flag-bearer for free trade, saw that
perception diminish with the rise in populism across the country. The Trump administration
adopted an America-first trade policy which was broadly protectionist and disruptive to
global trade. Although the President-elect has disclosed his intension to make China
understand the need to play by the rules with regards to trade, his plan towards China
has not been very clear. Markets do not expect a significant reset button with regards to
China’s trade war policy, but the consensus view is that a calmer rhetoric towards the
East, considering Biden’s more diplomatic approach to issues, would ensure stability in the
markets. Accordingly, Biden’s stance would most likely not be as tough on China as
Trump’s administration. A recent survey of business leaders by the American China
Chamber of Commerce in Shanghai showed that most business leaders are optimistic
about trade with China.
Unfortunately for China, toughness on Chinese trade is a bi-partisan issue in a deeply
divided America, perhaps one of the most profound issues most Americans on both sides
agree upon. For instance, Joe Biden’s “Buy America Plan” is set to see his administration
use $700bn of taxpayers’ dollars to buy American goods. There is also a prerequisite for
firms looking for government contracts to manufacture their goods in the US. At best, the
former VP may call for a more multilateral approach with the US traditional allies to form a
coalition against China and its use of their intellectual property rights.
We expect global
trade to improve
significantly in 2021
Global Economy
Biden’s stance on
China would most
likely not be as
tough as Trump’s
administration.
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Global Outlook
V-shaped or W-shaped recovery
Global growth is projected by the IMF to rebound by 5.2% in 2021, buoyed by recoveries
in Advanced Economies (+3.9%) and Emerging Markets (+6.0%). Notably, China (+8.0%),
India (+8.2%) and the ASEAN-5 (+6.2%) are projected to report the fastest growth.
Recovery will be boosted by bold economic stimulus and massive accommodative policy
stance by central banks. Again, the news of a vaccine would buoy recovery as
economies become more confident to completely ease lockdown measures. However,
with the 2nd wave of Covid-19 ravaging the world, the outlook for growth hangs on a
balance between the virus and the vaccine. While economic recovery in 2021 is hugely
dependent on the effective distribution of vaccines, a poorly managed 2nd wave may
counterbalance any gains accumulated on the back of the vaccine.
United States: Biden’s win and the US economy
The United States is the epi-center of the coronavirus, having seen cases spiral and surpass
pre-spring levels. Rising caseloads continue to affect economic indicators such as job
creation and PMI, indicating a bumpier recovery. Rising cases meant jobs created
decelerated for five months through to December 2020. Despite the Biden win, a divided
US government lowers the potential for significant policy changes, potentially weakening
policy-induced market volatility. Government spending in the early days of the pandemic
averted a deep recession. However, the outgoing government passed a second stimulus
package worth $900.0bn (CARES Act was $2.0tn). The market expects additional fiscal
stimulus when the Biden administration takes office in Jan-2021. In terms of monetary
policy, the Fed is expected to continue its monetary stimulus into 2021. As such, the US
recovery is broadly based on the degree to which monetary and fiscal authorities
combine the instruments at their disposal, and the effective distribution of vaccines in the
face of a 2nd wave of Covid-19 and swelling death rate. Overall, we expect the US
economy to rebound in 2021 amid wide-spread vaccination. The IMF expects the US to
rebound by 3.8% in 2021.
Global growth is
projected to rebound
by 5.2% in 2021 by the
IMF
Global Economy
Despite the Biden win,
a divided US
government lowers the
potential for significant
policy changes,
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16
20
17
20
18
20
19
20
20F
20
21F
Global GDP projected to contract for the first time since 2009 Global GDP growth trend
Figure 6
Source: World Bank
Nigeria Outlook 2021: A Shot at Recovery
14 www.unitedcapitalplcgroup.com
EU & the UK: Brexit’s done!
With the change of guard in the white house, there was an even increased urgency for
the UK and the EU to finalise a trade deal before the end of the transition period, which
ended on 31st Dec-2020. A failure to secure a trade deal would have meant that the UK
and the EU would trade on WTO agreed terms-bilateral trade would have been more
expensive for both parties. Thankfully for both parties, a zero tariff, zero quota trade deal
was struck in Dec-2020. The deal comes with some increased concerns for producers in
the UK, in the short-term at least, as there are bound to be higher costs from increased
red-tape-ism at border checks and a potential disruption in the supply chain. These may
increase imported inflation for some customer segments.
Other outstanding agreements, such as the financial services deal will need to be
negotiated, outside the trade agreement. London, the world’s financial capital has lost its
automatic right to trade in the single market. Negotiations on financial services are
expected to resume in 2021. Lastly, the deal restricts free movement of people, which
means that EU citizens will no longer have the automatic right to live and work and work
in the UK and vice versa. As such, visas would be issued on a points-based system. Since
the scheme opened in Aug-2018, 4.4million EU citizens have applied for visas and 3.8
million have been granted. We expect the impact of Brexit to be muted on both parties in
2021 asides the occasional red-tape.
Apart from Brexit, growth outlook for the EU and the UK is also threatened by the spread
of 2nd/3rd wave of Covid-19. The UK on its part became the first country to vaccinate its
citizens, unveiling vaccines through the mass vaccine program whilst simultaneously
addressing its future trade relationships. Germany also shut down schools to implement
vaccination. Germany is also mounting pressure on EU drug regulator to quickly approve
the vaccines by Christmas of 2020.
Give or take, recovery in the EU and UK rest firmly on the speed of vaccination and the
way infection rate is managed. The BOE and the UK Office of National Statistics (ONS)
have warned of a less optimistic winter due to increased restrictions. The BOE is expected
to keep the interest rate environment low, to boost inflation and GDP, after initially cutting
interest rates by 65bps to 0.1%. Thus, the IMF sees growth in the UK rebounding by 5.9% by
FY-2021. For the EU, the ECB maintained the interest rate on the main refinancing
operations and the interest rates on the marginal lending facility and the deposit facility
will remain at 0%, 0.25% and -0.50% respectively. The ECB hinted that rate will remain low
until inflation converge sufficiently to or below 2.0%. Again, the ECB increased the
envelope of the pandemic emergency purchase programme (PEPP) by €500bn to a total
of €1.85trn. It also extended the horizon for net purchases under the PEPP to at least the
end of Mar-2022. Accordingly, the IMF predicts the Euro area to rebound by 5.2% in 2021.
Global Economy
the IMF predicts the
Euro area to rebound
by 5.2% in 2021
The UK & the EU struck
a zero tariff, zero
quota trade deal in
Dec-2020
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15 www.unitedcapitalplcgroup.com
However, with the rising caseload of Covid-19 as well as the lockdown measures being re-
implemented due a 2nd or 3rd wave of Covid-19, recovery may be lopsided across the
region.
Financial Markets
The bull rages on in the equities market with no real threat in sight
Global financial markets in 2020 were largely bullish as fiscal and monetary measures
bolstered liquidity and triggered a sentiment for stocks amid low yields on bonds. After an
initial downturn, major stock indices around the world returned positive. The Dow Jones
Industrial Average (+7.3%), S&P 500 (+16.3%), tech-heavy Nasdaq (+43.6%) and the MSCI
emerging market index (+15.8%) all gained in 2020, despite the pandemic. Again, markets
seemed to welcome the Biden win alongside the announcement of the vaccine, as
indices around the world surged to near all-time highs in Q4 2020.
In 2021, the outlook for global stocks remains positive amid the reopening of economies,
positive vaccine news and the rebound in household spending which the demand
outlook for household expenditure. Although, we expect government fiscal programs and
interventions to be reduced in 2021, a dovish monetary stance expected to be sustained
throughout 2021 continues to brighten the outlook for stocks.
Oil Market review and outlook
Vaccine is good news, but price recovery may be mellow in 2021
The oil market witnessed another downturn in 2020, down to $20.0/b before recovering to
$30.0/b in May-2020 after OPEC+ and NOPEC countries all reached an agreement to cut
production. With the announcement of the vaccine in Nov-2020, oil price recovered
further to $50/b to close the year 20% down YTD. Although the Declaration of
Cooperation (DOC) agreement to curb production, signed by 13 OPEC+ countries in
Global Economy
Global financial
markets in 2020 were
largely bullish on fiscal
and monetary stimulus
The outlook for global
stocks remains positive
amid the reopening of
economies,
vaccination and
rebound in household
spending
0.00
0.40
0.80
1.20
1.60
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
Major equity markets have enjoyed a strong year Relative movement of key stock indices
MSCI Emerging Market S &P 500 DOW Jones Nasdaq
Markets rebound as governments
employ monetary and fiscal
packages
Lockdown restrictions outbreak
spreads acrooss western world
Rally continues on the back of
vaccine news
Figure 7
Source: Bloomberg, United Capital Research
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16 www.unitedcapitalplcgroup.com
2016, was slightly threatened in Mar-2020, following a spat between Russia and Saudi
Arabia, a later meeting of OPEC+ ministers on the extension of the DOC resulted in an
agreement to adjust output by +/- 500,000 bpd monthly, restoring market stability.
The recent surge in global coronavirus caseloads and reintroduced lockdowns continues
to be a worry for OPEC. Vaccine news, nonetheless, is positive for the market and for the
industry. The IEA and OPEC expect that any vaccine-related effects will only impact
demand in the second half. However, the uncertainty about the distribution and
efficiency of vaccines and rising production in Libya (production is up 0.9mbpd since
August 2020), does pose a potential issue for market balance.
On the plus side, it is expected that shale production in 2021 which has been one of the
biggest threats of OPEC’s goal to achieve market stability in the last decade will decline.
The lower pricing environment is anticipated to trigger high-cost wells to shut down, as
they remain unprofitable in the lower pricing environment. OPEC expects market supply
to increase in 2021, due to inventory pile-up (caused by demand shocks witnessed in
2020), and increased market supply from increased Libya and Iranian crude. However, in
light of recent events, OPEC estimates global oil demand to rise 6.9% to 96.26mbpd (as at
Dec 2020), higher than the 90.01mbpd forecasted to be consumed in 2020. Overall, we
expect the oil market to see marginal improvement as demand recovers to bring prices
to a range of $45-$55/b in 2021.
Emerging Markets
A potential recovery in sight?
In 2019, Emerging Markets (EMs) danced to the tune of external headwinds and
idiosyncratic shocks, as the global trade environment walked on eggshells, the IMF
projects the classification’s growth to come in higher at 4.6% for 2020, up from 3.9%
projected for 2019.
Global Economy
The IEA and OPEC
expect that any
vaccine-related effects
will only impact
demand in the second
half of 2021
20
60
100
140
-2
3
8
13
Q1
-08
Q2
-09
Q3
-10
Q4
-11
Q1
-13
Q2-1
4
Q3
-15
Q4
-16
Q1
-18
Q2
-19
Q3-2
0
Q4
-21
Oil price expected to rise improve marginally in 2021World oil balance and oil price
World Oil Balance Brent Price
mb/d US$/bbl
Figure 8
Source: IEA, Bloomberg, United Capital Research
Sub-Saharan
Africa
Nigeria Outlook 2021: A Shot at Recovery
19 www.unitedcapitalplcgroup.com
Sub-Saharan Africa (SSA)
Unprecedented crisis, SSA economies 2020 descent
The global outbreak of coronavirus in 2020 precipitated an economic crisis in the SSA
region as demand for key export commodities of most countries within the region
slumped while economic activities were grounded by restrictive measures designed to
curb the spread of the virus. Accordingly, for the first time in 3 decades, regional GDP for
SSA economies slumped into a recession.
Examining the spread of the virus across Africa, we note that all 54 countries in Africa
have reported cases of infection, with more than 2.8million confirmed cases recorded (as
at 31st Dec-2020), over 2.3million had recovered and the number of deaths had cross the
65,000 mark. Across regions, Southern African (+1.3million) countries had recorded the
highest number of confirmed cases, followed by the Northern Africans (+950 thousand).
Contrariwise, Central, Western and Eastern African countries were the least infected with
roughly 600 thousand cases all together.
In a bid to curtail the spread of the virus, African countries imposed lockdown measures,
with 42 countries within the region imposing partial or full lockdowns on the movements of
people and economic activities. The lockdowns came at an economic cost that in turn
risked livelihoods and exacerbated poverty. Notably, Economic Commission for Africa
(ECA) estimated that a one-month full lockdown across Africa would cost the continent
about 2.5% of its annual GDP. This is equivalent to about $65.7bn per month, aside the
wider external impact of Covid-19 on the region due to the lower commodity prices and
investment flows.
Unsurprisingly, the IMF revised 2020 growth estimate for SSA region downwards steeply to
-1.6% in Apri-2020 and subsequently to -3.0% in Oct-2020. Notably, tourism dependent
economies (Mauritius: -32.9%, Seychelles: -17.0%) were the hardest hit, followed by
oil-exporting countries (Nigeria: -6.1%, Angola: -8.1%). Also, non-oil exporters and the
...for the first time in 3
decades, regional GDP
for SSA economies
slumped into a
recession.
Sub-Saharan Africa
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
SSA Economy slipped into a reccession for first since the 90sSub-Saharan Africa GDP Growth 30-Year Trajectory
Figure 9
Sources: World Bank
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20 www.unitedcapitalplcgroup.com
relatively diversified economies such as S/Africa recorded a -17.1% contraction as at Q2-
2020.
Looking ahead, the likelihood of 2nd wave of Covid-19 as observed across the western
world and indeed key markets in Africa such as South Africa and Nigeria, remains a key
risk factor. As such, though consensus forecast sees a rebound in the economic activities,
the strength of this recovery rests firmly on the severity of the 2nd wave of infections and
the probability of a lockdown. Nevertheless, the region has been the least affected,
hence, may very well able to ride out of the curve again.
SSA Growth Outlook
Much depends on the pandemic
The IMF expects SSA’s regional growth to rebound to 3.1% in 2021 but insists that many
countries in SSA will not return to 2019 levels of output until 2022–24. However, this
outcome is subject to some key downside risks, particularly in relation to the Covid-19
pandemic, the resilience of the region’s hard-pressed health systems, and the outlook for
external financing. Notably, growth in the region is expected to be weaker than the rest
of the world, with global growth projected at 5.2%, led by Emerging Markets (+8.0%), Euro-
Area (+5.2%) and the US (+3.1%). Again, the tepid projection for the region is driven by a
faltering outlook for the largest economies (Nigeria, South Africa and Angola) in the SSA
region, as real GDP is unlikely to return to pre-crisis levels until 2023 or 2024. Overall, outlook
for growth in Sub-Sahara Africa will be driven by a number of factors. These include:
1. The ability of the region to continue to keep the spread of the coronavirus
pandemic at bay amid financial distress across the continent and the level to
which western power would consider donating the vaccine to poor SSA
countries;
2. The seriousness of the implementation of the AfCTA and the commitment of
large economies such a Nigeria and S/Africa to its success;
3. The continued effectiveness of monetary policy in the face of worrisome
debt profiles, rising inflationary pressure and faltering growth across the
Sub-Saharan Africa
Tourism-dependent
economies were the
hardest hit
Growth in SSA is
expected to be weaker
than the rest of the
world
0.1m
0.2m0.3m
0.7m
0.9m
Central Western Eastern Northern Southern
Africa total confirmed cases hit
2million, southern region hardest hitTotal confirmed cases in Africa as at 23rd
November 2020
-3.2%-5.7% -6.1%
-8.8%-12.4%
-14.9%-17.2%
-20.8%
Gh
an
a
Ke
nya
Nig
An
go
la
Rw
an
da
Mo
roc
co
S/A
frica
Tun
isia
COVID-19 left an imprint on the SSA
growth across boardQ2-2020 GDP of major SSA economies
Sources: Africa CDC, United Capital Research Sources: Bloomberg, United Capital Research
Figure 11 Figure 10
Nigeria Outlook 2021: A Shot at Recovery
21 www.unitedcapitalplcgroup.com
continent as well as the appropriate timing of policy tightening; and
4. Finally, fiscal policy operation supported by access to more concessional
financing, reliefs, and private financing as well as bold well thought-out
policy reforms.
Africa Continental Free Trade Area (AfCFTA)
An actual game changer or just playing to the gallery?
The AfCTA which was scheduled to begin in Jul-2020 was put on hold due to the outbreak
of Covid-19. In Aug-2020, the AfCFTA Secretariat was officially opened in Accra.
Nevertheless, free trade across the continent is now scheduled to begin from Jan- 2021.
With the AfCFTA, tariffs on 90% of goods produced on the continent will be eliminated,
non-tariff barriers to trade will be also be tackled and free movement of persons will be
guaranteed. Fundamentally, the AfCFTA should put African economies on a better
economic footing. The agreement will enhance competitiveness and stimulate
investment, innovation, and economic growth by increasing efficiency and eliminating
barriers to trade (like protectionist policies) in the continent.
Despite the promise of the AfCFTA and the obvious commitment displayed by African
nations, historical precedents, and an unwillingness to match words with deeds suggest
none commitment and cast a shadow on the optimistic outlook. Additionally, failure to
address infrastructure deficits and security challenges are significant threats to the long-
term efficacy of the agreement. However, countries like Nigeria seem to be making
efforts to remove barriers to trade with the recent announcement that key borders will be
opened from Dec-2020.
Looking ahead, we believe that if successfully implemented, the AfCTA may hasten the
development of trade infrastructure such as trans-African road construction and make
way for the removal of many trade barriers in the short to medium term. However, the
downside risks for the AfCFTA remains the concern about dumping, smuggling and the
need to protect local manufacturers due to porous borders.
Monetary policy: Policy stance to stay dovish
In the light of fiscal policy limitations, monetary policy took the centre stage in many of
the economies as central banks moved to provide emergency support facilities while
adopting a broadly loose policy stance in line with global realities. Looking through the
spectrum, total reduction in policy rate was as high as 500bps in S/Sudan and Zambia,
close to 300bps in S/Africa and the Rand Zone, 200 bps in Uganda, 150 bps in Ghana and
100bps in Nigeria (accompanied by massive liquidity injection via OMO maturities. Other
measures included direct facilities intervention to SMEs and businesses directly affected
by the pandemic, moral suasion to Banks to increase or implement moratorium on
existing credits to buffer job losses and limit financial burden on corporates.
Sub-Saharan Africa
The implementation of
the AfCTA would be a
key growth factor for
SSA economies going
forward
...historical precedents,
and an unwillingness to
match words with
deeds suggest
noncommitment and
cast a shadow on the
optimistic AfCFTA
outlook
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22 www.unitedcapitalplcgroup.com
In 2021, we expect monetary policy actions to remain broadly accommodative to spur
growth and limit the impact of the pandemic from evolving into a W-shaped growth
outcome in the face of limited vaccination for Africans as well as fiscal policy
vulnerability. We imagine that monetary authorities will further ease or maintain policy
rates at current level till Q2-2021 to allow the economy recover fully before contemplating
tightening from Q3-2021.
Fiscal policy: On a rescue mission
In a bid to keep the economy running in the wake of the global pandemic, government
authorities used the limited fiscal measures available to them to salvage their economies
from the potential damage from the spread of the virus by providing health care services
and other form of fiscal support to their economies. According to the IMF , Nigeria and
South Africa implemented packages worth 0.7% and 3.0% of their GDPs respectively.
Côte d’Ivoire, Namibia, and Senegal, all have stimulus packages amounting to 4.0% of
their respective GDPs, while Niger has announced a package exceeding 7.0% of its GDP.
In all, the SSA region injected total of $8.8bn fiscal palliative (as at the time of writing this
report) into their various countries.
Sub-Saharan Africa
Sources: African Union, United Capital Research
60.0
70.0
80.0
90.0
100.0
110.0
2013 2014 2015 2016 2017 2018 2019
Intra-African trade has been dawdling for the past decade
Trend of Intra Africa Trade ($'bn)
Export Import
Figure 12
Sources: Cbrates, United Capital Research
2550
100150 150 150 150
200 200250 250
275 275
350
Mo
roc
co
Rw
an
da
Bo
tsw
an
a
Ma
law
i
Ke
nya
Ma
uritiu
s
Gh
an
a
Nig
eria
Ug
an
da
Mo
zam
biq
ue
Ga
mb
ia
Na
mib
ia
S/A
fric
a
Za
mb
ia
SSA went dovish in a bid to stimulate growth amid pandemicMonetary policy rate cut across SSA (bps)
Figure 13
...the SSA region
injected total of $8.8bn
fiscal palliatives
Nigeria Outlook 2021: A Shot at Recovery
23 www.unitedcapitalplcgroup.com
For context, Zimbabwean authorities launched a $2.2bn domestic and international
humanitarian appeal on April 2, 2020, to cover the period April 2020 to April 2021.
Tanzanian Prime Minister’s office announced a Covid-19 Multi-Sectoral response plan
estimated at $1.64bn (about 1.6% of GDP). Also, South Africa’s government assisted
companies and workers facing distress through the Unemployment Insurance Fund (UIF)
and special programs from the Industrial Development Corporation (IDC). Additional
funds are being made available for the public health response to Covid-19. Also, the
need to cushion the impact of the restrictions implemented to curb the spread of the virus
has spurred government spending across the region and this widened the need for
governments to borrow in 2020, even as debt sustainability and fiscal vulnerability indices
worsen. While the IMF has disbursed c.$17bn in 2020, the funding gap remain wide.
Closing the gap requires a mix of more concessional financing, reliefs, and private
financing vis-à-vis bold reforms.
GDP growth projection
While we expect SSA growth to rebound in 2021, we note that recovery will uneven and
will vary on a country-by-country basis. Furthermore, we highlighted improvement in
exports and commodity prices as key growth driver for the region in 2021 as global
demand recovers from the devastating impact of the pandemic.
We expect household consumption and investment to also rebound, thus, providing the
necessary stimulus for oil dependent economies such as Nigeria and Angola to recover,
supported by uptick in oil prices. However, recovery in tourism dependent markets may
take a bit longer amid fears of the virus infection. The above notwithstanding, a 2nd
wave of Covid-19 lockdown remain a significant threat to these projections due to the
regions’ limited access to vaccines.
Sub-Saharan Africa
0.0%
50.0%
100.0%
150.0%
200.0%
Erite
raC
ab
o V
erd
eM
oza
mb
iqu
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ng
ola
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mb
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ep
. C
on
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-Bis
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ica
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on
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o T
om
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an
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iaE.
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aN
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soth
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.A.R
.B
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ad
ag
asc
ar
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'Ivo
ire
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zan
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ige
ria
Co
mo
ros
Bo
tsw
an
aC
on
go
, D
.R.
Zim
ba
bw
eSo
ma
lia
As at 2020, 27 SSA countries had surpassed IMF's threshold for
prudent debt levelsDebt to GDP ratio viz. IMF' 60.0% prudent threshold
Debt to GDP ratio, 2020 IMF's prudent threshold
Figure 14
Sources: IMF, United Capital Research
...the SSA region
injected total of $8.8bn
fiscal palliatives
Nigeria Outlook 2021: A Shot at Recovery
24 www.unitedcapitalplcgroup.com
Financial Markets Overview
Eurobond market: Yield on recovery path
Early in 2020, the Eurobond Market started on a great note for the region as countries in
the SSA demonstrated their continuous appetite for foreign-denominated debt with the
latest issuers in 2020 being Gabon and Ghana. Collectively, the two countries raised a
total of $4.0bn from the international debt market. The new instruments attracted a lot of
interest as evidenced by the oversubscription in all the issues, with the Ghana issue
recording the highest subscription rate of 4.7x oversubscription.
However, as a result of the unprecedented outbreak of Covid-19, Eurobond spreads have
tracked higher than the levels at the start of the year, prompting many countries to delay
their planned return to the market, on the back of a higher risk premium. Notably, the
adverse effects of the pandemic have seen countries like Zambia which faced an
unprecedented liquidity crunch that resulted in a default, and making the country the
first African coronavirus-era defaulter. Nigeria, which had planned to issue a new
Eurobond worth $3.3bn for budgetary purposes and to refinance existing loans have had
to postpone their issue due to the high yields in the market which would increase
borrowing costs especially given that the country is highly reliant on oil exports.
Going into 2021, we expect a combination of fiscal imbalance caused by Covid-19,
especially for oil exporting countries, and the penalty for the Zambian default to keep the
risk premium for the region high. As such, the international debt market will price any issue
coming from the region in the light of these realities. That said, we think most SSA issuers
particularly Nigeria will remain reluctant to raise USD-denominated debt in light of the
prevalent fiscal pressures, exchange rate concerns and widening risk premium. The
implication for Nigeria largely revolves around sustained local debt capital raising to
finance long term and short-term obligations. Nevertheless, we expect the impact on
local yields to be muted given CBN’s staunch stance on maintaining a low interest-rate
environment. Also, we do not rule out possible issuance from the region come 2021 as
Sub-Saharan Africa
Zambia became the
first African
coronavirus-era
Eurobond defaulter
Source: IMF, United Capital Research
-12
-7
-2
3
8
13
IMF growth projections for key SSA countriesRecovery insight for 2021 but below pre-COVID 19 era
2019 2020 2021
Figure 15
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25 www.unitedcapitalplcgroup.com
Ghana is planning to issue at least $3.0bn of Eurobonds in the first quarter. In addition,
Ivory Coast and South Africa have also hinted that they might patronize the international
debt market come 2021.
SSA equity market: Sellers’ market, save for Nigeria
The performance of the Sub-Saharan Stocks indices were broadly bearish in 2020 as
foreign investors exited their positions. While sentiment for stocks improved around the
world in H2-2020, sentiment for majority of the bourses in SSA remained broadly negative,
save for the Nigerian Bourse, which witnessed a major correction in H2-2020.
While the Nigerian bourse was an outlier (up +50.0%) due to the heterodox monetary
policy framework which crashed rates on TBills to record lows, equity market indices in
Mauritius (-26.2%), Ghana (-19.4%), the Francophone West African BVRM (-17.3%) and
Kenya (-13.2%), all closed the year negative, amid poor monetary stimulus and weak
domestic demand. Looking ahead, we expect broad based rebound in 2021 as the
macro environment improves.
SSA currency market: Broad depreciation across board
In 2020, SSA currencies under our watch depreciated against the US dollar except for CFA
franc that firmed 7.5% against the greenback (as at the time of writing this report). The
depreciation recorded by the currencies was majorly attributable to the Covid-19
pandemic, amid the demand shock which affected export demand for commodities
from China, one of the most important trading partners for SSA countries. Apart from
Zambia (-36.8%) which reported the worst performance due to the debt crisis, currency
pressure on the region was reflected more vividly on the performance of the largest
economies within the SSA region: Angola (-26.3%), Nigeria (-7.7% I&E rate, -19.5% official
rate, and -23.4% parallel rate), S/Africa’s rand (-8.9%) and Kenya (-8.4%). Clearly, oil
exporters were hit harder compared to non-oil commodity exporters as the oil market
crash resulted in a severe dollar crisis in Nigeria and Angola. For Kenya, the shilling
...sentiment for majority
of the bourses in SSA
was broadly negative,
save for the Nigerian
bourse
Sub-Saharan Africa
Source: Bloomberg, United Capital Research
2.0%
7.0%
12.0%
17.0%
22.0%
27.0%
32.0%
37.0%
42.0%
S/A
fric
a
Ivo
ry C
oa
st
Se
ne
ga
l
Eth
iop
ia
Be
nin
Ke
nya
Nig
eria
Gh
an
a
Rw
an
da
Co
ng
o
Mo
zam
biq
ue
An
go
la
Za
mb
ia
SSA yields on path to Pre-covid level amid spike in March-2020 Yield to maturity of outstanding SSA countries Eurobond
31/12/2019 31/3/2020 26/11/2020
Figure 16
Nigeria Outlook 2021: A Shot at Recovery
26 www.unitedcapitalplcgroup.com
depreciated by 7.9% against the US dollar as demand from merchandise importers who
had entered contracts before the coronavirus-related disruptions was halted. This
prompted the Central Bank of Kenya (CBK) to sell dollars, against an earlier plan to
purchase dollars from the market to improve forex reserves. Also, Mauritius’ currency fell
8.7% due to the harsh impact of the pandemic on the tourism sector, the country’s main
foreign currency earner.
Going forward, we expect most local currencies in SSA to remain relatively weak over the
course of 2021. Specifically, we expect South African rand to remain highly volatile as the
currency continue to weaken due to carry trade, coupled with potential bounce-backs
arising from the lifting of restrictions in Europe, the US and other economies to which South
Africa economy is largely exposed to.
For the Zambian kwacha, falling copper exports (which accounted for c. 72.4% of total
exports in 2019) coupled with the absence of investor confidence, no thanks to the fiscal
crisis, will keep the kwacha particularly vulnerable amid global risk-off sentiment for
Zambian notes. In Nigeria, we expect a moderate depreciation of the official rate as the
apex bank continues to defend the currency using an unorthodox approach. In the West
African Economic and Monetary Union (WAEMU) region, while no definite date has been
set for the circulation of the new ECO currency, we expect the regions currency to be
relatively stable. As for the planned transitioning from the use of CFA franc to the
adoption of the ECO, we expect the conversation to remain muted amid the myriads of
structural issues yet to be finalized within and amongst different economic blocs in the
ECOWAS sub-region.
Emerging and Frontier
Market equities to
thrive well come 2020
Sub-Saharan Africa
..oil exporters
experienced severe
dollar shortages,
weakening their
currencies
Nigeria Outlook 2021: A Shot at Recovery
27 www.unitedcapitalplcgroup.com
Sources: Bloomberg, United Capital Research *GDP ($’b): Annual GDP by World Bank
** GDP Growth: Latest Quarterly y/y GDP Growth
Macroeconomics | Equities | Fixed Income | Currencies | Commodities
Px_Last CHG_PCT_1D CHG_PCT_WTDCHG_PCT_YTD PE_Ratio EQY_DVD_YLD_12MPx_to_book_ratio
Equities Level Mcap ($'bn) WTD (local) YTD (local) P/E P/B Div. Yield
Botswana 6,879.4 3.3 -0.1% -8.2% 9.7 1.3 5.5%
BRVM 145.4 8.3 3.1% -8.7% 9.0 1.3 7.5%
Egypt 10,845.3 20.2 2.5% -22.3% 11.6 1.5 2.9%
Ghana 1,939.1 9.3 2.3% -14.1% na 1.2 nm
Kenya 152.1 21.1 1.5% -8.6% 11.3 1.6 4.4%
Mauritius 1,648.6 4.9 1.0% -24.3% na 0.3 2.3%
Morocco 11,287.4 65.5 1.1% -7.3% 26.9 2.4 2.9%
Nigeria 40,270.7 53.0 3.8% 50.0% 15.2 1.8 4.6%
South Africa 59,408.7 1,030.0 0.7% 4.1% 27.1 1.8 2.6%
Tunisia 6,884.9 6.9 0.4% -3.3% 20.7 2.3 0.6%
Global Market 2,690.0 103,299.3 1.5% 14.1% 33.3 3.0 1.8%
Frontier Market 571.6 -- 1.6% -2.4% 14.3 1.8 3.4%
Emerging Market 1,291.3 -- 2.6% 15.8% 25.5 2.1 1.9%
Dollar Eurobonds Amt Out ($'bn) Average YTM WTD YTD
Angola 8.0 9.1% -0.47% 1.9%
Egypt 30.2 5.0% -0.06% -0.5%
Ghana 11.0 6.5% -0.01% -0.6%
Iv ory Coast 4.6 4.4% -0.09% -0.9%
Kenya 6.1 5.4% -0.15% -0.8%
Morocco 2.3 2.7% -0.02% -0.5%
Nigeria 11.2 5.2% 0.01% -1.0%
Senegal 2.9 3.7% -0.16% -0.9%
South Africa 20.0 4.1% -0.05% -0.7%
Zambia 3.0 37.3% 2.10% 19.0%
Currencies (vs. USD) Spot Rate WTD MTD YTD 6M Forward 12M Forward
Angola AOA: Kwanza 651.0 0.7% 0.5% -25.9% na na
Egypt EGP:Pound 15.7 -0.4% -0.3% 1.9% 16.4 17.2
Ghana GHS:Cedi 5.9 0.1% -0.3% -2.7% 6.3 6.9
Kenya KES: Shilling 109.2 -0.4% 0.8% -7.2% na na
Mauritius MUR: Rupee 39.7 -0.5% 0.5% -8.4% na na
Morocco MAD: Dirham 8.9 0.8% 2.1% 7.4% 9.0 9.0
Nigeria NGN: Naira 397.8 -3.9% -1.7% -8.9% 435.4 465.6
South Africa ZAR: Rand 14.7 -0.6% 5.3% -4.7% 15.0 15.3
Tunisia TND: Dinar 2.7 0.3% 1.5% 3.8% na na
WAMU CFA: Franc 535.3 0.8% 2.7% 9.3% na na5
Commodities Spot Rate WTD MTD YTD 52 Week High 52 Week Low
Brent Crude USD/bbl. 51.8 1.2% 8.8% -21.5% 71.8 16.0
Gold USD/ t oz 1,895.1 1.1% 6.7% 24.4% 2,063.0 1,450.9
Copper USD/lb. 351.9 -0.9% 2.9% 25.8% 363.4 206.0
Cocoa USD/MT 2,665.0 0.0% -11.4% 8.0% 2,870.0 2,115.0
Macro & Fixed Income 10Yr Bnd Yld Inflation Real Return Policy Rate *GDP ($'b) **GDP Growth Reserves ($'b)
Angola 8.8% 1.8% 7.0% 18.0% 88.8 -8.1% 14.7
Egypt 14.0% 5.7% 8.3% 9.3% 303.1 5.6% 39.2
Ghana 19.0% 9.8% 9.2% 14.5% 67.0 -1.1% 6.9
Kenya 12.0% 5.6% 6.4% 7.0% 95.5 -5.7% 8.7
Mauritius 1.4% 3.1% -1.8% 1.9% 14.0 -13.0% 7.0
Morocco 2.4% 0.2% 2.2% -7.2% 119.7 -7.2% 28.3
Nigeria 7.3% 14.9% -7.6% 11.5% 448.1 -3.6% 35.4
South Africa 8.7% 3.2% 5.5% 3.5% 351.4 -6.0% 53.8
Tanzania 11.5% 3.3% 8.1% 12.0% 63.2 6.1% 5.3
Performance Summary
December 31, 2020
Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20
Movements in Global Indices vs Africa
MSCI World S&P 500
FTSE 100 MSCI Africa
Domestic
Macro and
Policies
Nigeria Outlook 2021: A Shot at Recovery
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Domestic Macroeconomic Overview
Tough times, tough takes!
Economic realities in Nigeria were projected to sustain a gradual but stronger recovery in
2020. This was predicated on a relatively stable socio-political environment, following the
successful completion of the 2019 election. Regrettably, most projections downplayed or
outrightly ignored the possibility that the coronavirus outbreak, which was brewing in
Wuhan city, China in late 2019, would evolve into a pandemic, with the capacity to
deliver a devastating blow to economic outcomes across the world. To put it in proper
context, the impact of the global health crisis was a double whammy for Nigeria, as the
oil market collapse wiped off export earnings and 50.0% of government revenue, while
domestic economic activities were grounded to a halt in the largest commercial hubs
across the country for months.
As a result of the lockdown measures imposed by the federal government to contain the
spread of the virus in Q2-2020, economic activities were grounded in Lagos and some of
the most important economic cities across the country. According to the National Bureau
of Statistics (NBS), real GDP declined by -6.1% y/y in Q2-2020 (significantly higher than our
estimate), the steepest economic decline in Nigeria’s recorded history . Notably, of the 19
sectors in the NBS’ GDP classification, 13 sectors recorded contraction while 6 sectors
recorded expansion. Unsurprisingly, the bright spots included Financial Services, Telecoms,
Coal Mining, Utilities, and Agriculture. Specifically, the Financial services and
Telecommunication sectors were stand-out performers with 28.4% and 18.1% expansion
respectively. For context, the strategic positioning of these sectors supported their
performance as most corporates had to quickly resort to virtual operations with massive
dependence on data connectivity, online transactions, zero-contact services and so on.
On the contrary, Oil Refining, Road, Air, Rail & Pipelines Transports, Accommodation &
Food Services, as well as Construction were the worst hit with over 30.0% contraction each
and -52.0% on average.
As a policy response to the economic crisis that followed the harsh reality of the lockdown
and the health crisis, the fiscal authorities announced various interventions, ranging from
restriction of movement, the adjustment to the 2020 budget, as well as various stimulus
packages, to palliate the economic impact of the pandemic. In addition, the President
Nigeria was hit by the
pandemic and oil
market collapse
...real GDP declined
-6.1% y/y in Q2-2020
the steepest decline in
recorded history .
Domestic Macro Overview
Figure 17 Nigerian Covid-19 caseload as of 31st December 2020
Source: NCDC
Nigeria Outlook 2021: A Shot at Recovery
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constituted an Economic Sustainability Committee (ESC) chaired by Vice President
Professor Yemi Osinbajo, to develop a comprehensive economic plan in response to the
disruptions and dislocations caused by the Covid-19 pandemic.
Similarly, the CBN implemented direct/targeted liquidity injections (intervention loans) to
sectors that were negatively impacted by the pandemic. Specifically, the CBN launched
a N3.5tn (or 2.4% of GDP) stimulus program in Mar-2020 to support Nigeria’s Covid-19
response, including a 400bps interest rate cut on its c. N3.0tn loan book to 5.0%. Also, a
private sector coalition against Covid-19(CACovid) was also launched to further support
the most vulnerable members of the public.
Domestic Macro Overview
The CBN doubled down
on its expansionary
monetary policies
Source: United Capital Research
Figure 18
Source: United Capital Research
Figure 19
Nigeria Outlook 2021: A Shot at Recovery
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Nigeria policy overview in 2020: Bold steps
As a fallout of the public health cum economic crisis created by the coronavirus
pandemic, policy reforms in Nigeria have been bold. Notably, the Nigerian authorities
have had to implement sweeping policy reforms to adjust to the new reality. With the
sudden plunge in crude oil prices (down 56.0% YTD), which contributes above 80.0% and
50.0% to Nigeria’s export and FG’s earnings, respectively, the CBN weakened its official
exchange rate (for the first time since mid-2016) by 15.0% (from N307.0/$ to N360.0/$) and
commenced a convergence of its various foreign exchange (FX) windows. Notably , in
April-2020, the IMF approved Nigeria’s request for emergency financial assistance, and
disbursed SDR2.45bn ($3.4bn, 100% of quota) under the Rapid Financing Instrument (RFI),
to support the economy against Covid-19 shock. It is worth noting that the $3.4bn RFI is
the country’s first lending arrangement with the IMF since becoming a member in 1961
and the largest emergency financing provided by the IMF to any country since the Covid
-19 pandemic. However, to further access an additional World Bank facility, the CBN
further devalued the naira from N361/$ to N379/$-N390/$. By Dec-2020, the world bank
approved a $1.5bn facility to help bolster Nigeria’s recovery effort post Covid-19.
Additionally, the Ministry of Power implemented the long-awaited cost-reflective power
tariff while working with the German government and Siemens AG to overhaul Nigeria’s
power generation, transmission, and distribution infrastructure, under the 3-phase
Presidential Power Initiative (PPI). Specifically, the President kicked off the implementation
Domestic Macro Overview
Nigerian authorities
implemented sweeping
policy reforms to adjust
to the new reality.
Figure 20
Source: United Capital Research
Nigeria Outlook 2021: A Shot at Recovery
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of the phase 1 part of the deal as he directed the power and finance ministers to
commence the pre-engineering and concessionary financing aspects of the project.
Further-out, the Ministry of Petroleum Resources deregulated the pricing of petrol and
eliminated petrol subsidy, which cost the federation N731.0bn in 2018 (0.6% of GDP) and
N405.0bn in H1-2019 (0.6% of GDP). Finally, the Monetary policy committee voted for the
reduction of the benchmark rate of interest (the MPR) from 12.5% to 11.5% in a bid to
stimulate growth following a -6.1% contraction in GDP.
Domestic Policy Outlook in 2021
Monetary & interest rate policy: Going for growth
Monetary policy remained broadly accommodative in 2020. The monetary policy
committee (MPC) during the year, voted to reduce the MPR twice; in its May meeting
and its September meeting, following a CRR hike in its January meeting. As such, the MPR
was slashed by 200bps to 11.5% and the asymmetric corridor around the MPR was revised
to +100/-700bps. The Cash Reserves Ratio (CRR) was hiked to 27.5% while the liquidity ratio
was retained at 30.0%, amid the combination of a devastating public health crisis, oil
market crash, rising inflation, currency market divergence, and GDP contraction. Notably,
the committee insisted that rising inflation is driven by structural rather than monetary
factors. Hence, the committee favoured supply-side policies of the CBN and lauded the
Apex bank’s intervention funding & FX management in the wake of the negative impact
of the lockdown triggered by Covid-19. Overall, the impact of the MPC’s monetary policy
stance can be observed in the net OMO inflow of close to N4.0trn into the system in 2020,
compared to net OMO mop-ups over the last five years.
On the back of buoyant system liquidity as well as easier policy stance, interest rates
across funding segments tumbled to record lows. At the SLF & SDF window, bank-to-CBN
lending and deposits rates fell from 14.5% and 7.5% to 12.5% and 4.5% respectively.
Similarly, rates on Fixed Term deposits (FTDs) worth N1.0bn or above crashed below 1%.
Savings rate was revised to 10% of MPR, hence also fell to 1.15%. Furthermore, NTBs and
Domestic Macro Overview
Source: CBN
Net OMO inflow surged
to N4.0trn in 2020,
compared to a net
OMO mop-ups over the
last five years.
(0.58)(1.28)
(2.12)(1.82)
(0.12)
3.58
2015 2016 2017 2018 2019 2020
Close to N4.0trn liquidity was injected into the system in 2020
contrary to frequent mop-up in prior years
Net OMO Liquidty Inflow/Outflow from 2015 to 2020 (Trn' N)
Figure 21
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OMO rates at the primary auction and secondary market all tumbled to low single digits,
averaging 10bps in Nov-2020 even as Bond yields slid to mid-single digits. Notably,
negative real interest rates in the economy approached -10% (estimated against 10years
bond yield) by November as inflation rate galloped to 14.8%.
While the policy stance of the apex bank remained largely easy as of the time of writing
this report, the CBN announced its intention to create a special bill for banks with excess
CRR. According to the circular, the CBN plans to release the excess cash reserve
requirement (CRR) of banks above the regulatory minimum CRR. This will be done via the
introduction of special bills. The special bill will qualify as a zero-coupon liquid asset with a
90-day tenor whose implied yield will be worked out by the Bank. This will be subject to roll
-over at the discretion of the CBN and will be tradable and discountable at the CBN
window. By Dec-2020, the CBN sold 81-Day special bills worth N4.12Trn to banks at 0.5%, to
mature on 1st Mar-2021. The special bills will be used for liquidity ratio computation only
and will not be used for Loan -To-Deposit (LDR) ratio.
In our view, the outlook for monetary policy in 2021 will be driven by the need to urgently
stimulate growth in the face of a recession. As such, the MPC/CBN will sustain its
accommodative stance, to ensure a V-shaped recovery and avoid a W-shape. Apart
from the MPR and OMO which has so far depressed yields and bolstered equity returns,
the CBN can still make use of a number of policy tools within its disposal. For instance, the
circular on special bills will only address the excess reserves on the official CRR of 27.5%.
This will inject over N4.0trn liquidity into the system by Q2-2021. However, easing the
regulatory CRR from 27.5% to further boost liquidity remains an option for the Apex bank.
To back up this position, the MPC had insisted that headline inflation rate, or most
importantly, the food inflation sub-index is driven by structural factors outside its control,
and rightfully so. As such, the policy stance of the MPC is clearly to stimulate growth rather
than check galloping price levels. Accordingly, we expect rates to remain low, up to at
least Q1-2021, due to sustained monetary easing. Again, the drive to increase private
sector credit will be sustained. Thus, deposit money banks will continue to be encouraged
...the MPC/CBN will
sustain its
accommodative
stance, to ensure a V-
shaped recovery and
avoid a W-shape
recovery
Domestic Macro Overview
Real interest rates in the
economy stood at
-10%, as 10years bond
yield fell short of
inflation rate of 14.8%.
Sources: Bloomberg, CBN, NBS
0
100
200
300
400
500
-10
-5
0
5
10
15
20
Jan
-06
Se
p-0
6
Ma
y-0
7
Jan
-08
Se
p-0
8
Ma
y-0
9
Jan
-10
Se
p-1
0
Ma
y-1
1
Jan
-12
Se
p-1
2
Ma
y-1
3
Jan
-14
Se
p-1
4
Ma
y-1
5
Jan
-16
Se
p-1
6
Ma
y-1
7
Jan
-18
Se
p-1
8
Ma
y-1
9
Jan
-20
Se
p-2
0
Monetary Policy and Macros indices in NigeriaTrend of key macro indicators
GDP MPR Inflation FX Rate (RHS)
Figure 22
Nigeria Outlook 2021: A Shot at Recovery
35 www.unitedcapitalplcgroup.com
to lend to the real sector despite a weak appetite for aggressive loan growth given
elevated macro fragilities. That said, we do not rule out the possibility of a return to
monetary tightening particularly from Q3-2021 if exchange rate remains pressured and
inflation remains out of control.
Fiscal Policy: Hobbled by oil market demand shock
Oil prices averaged US$43.2/bbl. in 2020 compared to the 2020 initial budget assumption
of US$57.0/bbl. Meanwhile, oil production also averaged 1.85mb/d compared to the
initial budget assumption of 2.18mb/d. As a result, the Federal government consequently
reviewed its estimates lower to US$28.0/bbl. (for crude oil price benchmark) and 1.9mb/d
(for crude oil production) respectively. Thus, oil revenue in 2020 came under severe
pressure, significantly underperforming the target due to the global impact of the
coronavirus pandemic. However, the official exchange rate was devalued from the
initially projected N305/$ to N379/$, implying that government revenue was supported by
exchange rate translation gains.
Nigeria’s 2021 budget proposal
As a response to the FG’s rising recurrent spending, bloated public debt profile and
weaker oil revenue, President Buhari signed the Finance Bill, 2019 (now Finance Act) into
law in January 2020, thus, introducing some sweeping changes to Nigeria’s tax laws.
Some of the notable changes include; the increase in the VAT rate from 5.0% to 7.5%,
elimination of double taxation risk by exempting dividends paid out of; retained earnings
already taxed under CIT, PPT , and CGT Act, exempted profits/income, franked
...oil revenue in 2020
came under severe
pressure
Domestic Macro Overview
Clearly, the
government remained
overly optimistic with
their assumptions
despite current
economic realities
Sources: Nigerian Budget Office, FMoF, United Capital Research
Expend.
Revenue
2020
Deficit
Oil Prod. FX Rate Oil Price
2020 Budget
1.9mbpd
1.86mbpd
2021 Proposal
N360/$
N379/$
$28.0/b
$40.0/b
N5.9tn
N10.8tn
N5.0tn
N7.89tn
N13.08tn
N4.48tn
2021
Domestic
N2.14trn
External
N2.14trn
Others
(Multilateral &
privatization)
0.9trn
Borrowing Plan and Fiscal Deficit
Figure 23
Nigeria Outlook 2021: A Shot at Recovery
36 www.unitedcapitalplcgroup.com
investment income, and rental income received by REITs for their shareholders; repeal of
the minimum tax exemption granted to companies with 25.0% imported equity; and
imposition of custom & excise duty on goods imported into Nigeria to incentivize local
production. The above notwithstanding, Nigeria entered a recession in 2020 while
headline inflation galloped to 14.8%. Overall, the implication of the above is that despite
the effort of the government to accelerate non-oil revenue growth via the finance act,
non-oil revenue remained challenged. Accordingly, Nigeria’s fiscal deficit widened in
2020, as the FGN resorted to increased borrowing to fund expenditure. Notably, Nigeria
also jumped at the IMF $3.4bn facility after backtracking on its initial position to approach
the Eurobond market for another round of issuance.
Going forward, the 2021 Appropriation Bill (themed, Budget of Economic Recovery and
Resilience) pegged budgetary spending at N13.1tn, implying a 21.3% increase from 2020
(N10.8tn revised budgeted). The proposed budget is designed on the assumption that oil
prices will average $40/b, oil production of 1.87mbpd (inclusive of condensates),
Exchange rate of N379/$, GDP growth projected at 3.0%, and Inflation rate pegged at
12.0% for the fiscal year of 2021. Clearly, the government remains overly optimistic with
their assumption despite current economic realities.
Looking at the revenue projections, the federal government expects to generate revenue
of N7.9tn, with oil revenue and non-oil revenue estimated at N2.0tn and N1.5tn,
respectively. The balance is expected to come from Grants & Aid and revenue
from MDAs. Thus, this leaves a budget deficit of N5.2tn (3.6% of GDP), to be funded by
domestic (N2.1trn), external (N2.1trn), and multilateral (N702xxbn) borrowings with the
balance expected from privatization. Notably, the current Covid-19 health crisis shifted
focus to the health sector as we observed a whopping 157.0% increase in allocation to
the sector. Also, the Education sector saw a significant 65.0% increase in allocation on a
y/y basis. Furthermore, Capital expenditure jumped 54.0% relative to last year’s
projections.
Overall, while the fiscal plan of the government mirrors the need to reflate the economy
following the devastating effect of the Covid-19 pandemic, we think the 2021 budget
remains outrageously optimistic. This is clearly reflected in the revenue, GDP growth and
exchange rate assumptions when compared to current and projected realities.
Debt profile: Still a debt to revenue concern
For Nigeria’s rising debt profile, data from the Debt Management Office (DMO) revealed
that Nigeria’s total debt stock rose 20.6% y/y and 8.3% q/q to N31.0tn ($85.9bn) as at the
end of June-2020. Also, the country’s external to domestic debt-mix stood at 36.7%
(N11.4tn) and 63.3% (N19.6tn), respectively. By Dec-2020, total debt stock is projected to
rise to N32.5trn. Notably, the strong increase in public debt stock was driven by the
devaluation of the official exchange rate from N306.0/$ to N361.0/$ (later adjusted to
Domestic Macro Overview
Nigeria’s total debt
stock rose 20.6% y/y
and 8.3% q/q to
N31.0tn ($85.9bn) as at
the end of June-2020.
The 2021 budget
remains outrageously
optimistic
Nigeria Outlook 2021: A Shot at Recovery
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N379/$) as well as external and domestic borrowing used to plug the large fiscal deficit in
the revised budget. In terms of debt servicing, total payments in Q2-2020 rose 42.6% y/y to
N416.4bn, driven by both domestic and external debt.
In all, total public debt is expected to increase to 34.8% of GDP in 2020 (including the RFI
purchases), and to reach 37.4 % in 2022 before moderating to 36.3% in 2025. The critical
point to note here however is that at 35%-38%, Nigeria’s debt to GDP ratio remains
significantly below most emerging market peers’ debt levels. Nevertheless, government
interest payments would continue to absorb a large share of federal government
revenues in the medium term under current policies, making the otherwise low debt-to-
GDP ratio highly vulnerable to shocks. For instance, debt service to revenue ratio as of Q2
-2020 stood at 62.0%. Assuming full receipts of the proposed budget revenue in 2021, debt
service to revenue will be at 48% in 2021, but revenue assumptions remained broadly
optimistic as always, implying that this may not be achieved. By IMF’s estimates, the debt
service to government revenue ratio is likely to reach 96% in 2020 and moderate to 81% in
2021. This suggests that debt service burden or debt service expenditure to revenue ratio
would continue to worsen, amid a weaker revenue profile and sustained pressure on the
local currency.
Nevertheless, recent policy adjustments, including the removal of subsidies in the power
sector and the downstream oil sector, are likely to improve the oil revenue profile of the
government going forward. Contrariwise, the persistent rise in general prices, increasing
Domestic Macro Overview
Source: IMF, Nigerian Budget Office, FMoF
Total public debt is
expected to increase
to 34.8% of GDP in 2020
Federal Government Fiscal Operations - 2017 to 2021 (Bn 'N)
2017 2018 2019 2020e 2021f
Revenue 2,665 3,602 4,080 3,261 7,886
Oil Rev. 1,132 2,076 2,209 1,147 2,010
Non-oil Rev. 1,533 1,526 1,871 2,021 5,876
Total expendi-
ture 7,406 9,082 11,087 11,516 13,588
Recur. Exp. 6,164 7,400 9,002 9,833 5,642
Debt Serv. 1,557 2,186 2,347 3,126 3,324
Capex 1,242 1,682 2,084 1,682 4,125
Stat Transfer 497
Financing 4,742 5,480 7,006 8,255 5,196
External 2,183 1,820 725 1,805 2,141
Domestic 913 2,864 4,718 6,450 2,141
CBN/Others -307 344 3,603 5,001 915
Debt 25,767 32,232 38,536 48,222 56,698
Domestic 19,989 24,018 29,541 36,453 43,906
Foreign 5,778 8,214 8,995 11,769 12,792
Debt to GDP 25% 28% 29% 35% 36%
Debt Service
to Revenue 58% 61% 58% 96% 81%
Figure 24
Nigeria Outlook 2021: A Shot at Recovery
38 www.unitedcapitalplcgroup.com
number of unemployed and underemployed people as well as the worsening incidence
of poverty, are likely to weaken tax revenue.
GDP Growth
V-shaped of potential w-shaped recovery?
As expected, the economy slipped into a recession for the second time in the last five
years in Q3-2020. Real GDP declined by 3.6% y/y, a significant improvement from the Q2-
2020 figure. Clearly, this improvement was attributed to the relaxation of lockdown
measures across the country, especially in the three key states (Lagos, Abuja, and Ogun).
We are of the view that the sharp contraction recorded in Q2-2020 represents the worst-
case scenario considering the marked improvement observed in the Q3-2020 numbers. If
the Purchasing Managers Index is anything to go by, the recent improvement observed in
manufacturing and non-manufacturing PMI, which indicated a rebound to the 50point
threshold foretells a more optimistic future. For context, we expect the growth observed in
the ICT, Financial services, Agric and Utilities to not only be sustained but further supported
by the improvement in the Oil & Gas sector considering the announcement of a vaccine
for Covid-19. Although, we imagine that compliance to the OPEC+ production cut
agreement (capped at 1.50mbpd from August-2020 to Dec-2020) and compensation for
Domestic Macro Overview
Source: NBS
Figure 25
...the sharp contraction
recorded in Q2-2020
represents the worst-
case scenario
considering the
marked improvement
observed in the Q3-
2020 numbers.
Nigeria Outlook 2021: A Shot at Recovery
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prior months overproduction with a deeper cut may limit production to below pre-Covid-
19 levels of 2.0mbpd. Overall, we think an improvement in oil prices will further soften
contraction in the oil & gas sector.
The above notwithstanding, the worsening state of macro indicators including rising
inflation, exchange rate divergence as well as other policy constraints will continue to
limit the pace of recovery due to the direct impact on disposable income. Thus, we
estimate real GDP growth for FY-2020E to come in between -2.5% and -3.1%.
In 2021, we expect the Nigerian economy to rebound to positive GDP growth, albeit soft.
This is projected to be bolstered by significant improvement in the oil & gas sector,
following the announcement of an effective vaccine for Covid-19. Notably, this has seen
oil prices rebound to c.$51.0/b as at December 2020. Increased acceptance of the
vaccine is expected to ensure a full opening of the global economy in 2021. This implies
that demand for oil will improve significantly to enable OPEC further relax its cap on
supply (as observed in the Dec-2020 meeting) as well as support domestic output. Though
the Oil & Gas sector accounts for less than 10% of Nigeria’s GDP, improvement in the
sector historically has a snowball effect on the rest of the economy, due to its direct
contribution to FX earnings of the country. Thus, we anticipate improvement in the Trade
and manufacturing sectors, whose performances rest significantly on developments in the
currency market.
Again, the recent improvement in the ICT sector is also expected to be sustained, while
the Agric sector is expected to stay resilient. Overall, we project GDP growth in Nigeria to
potentially rebound to 1.8%-20% in 2021, supported by a low base effect.
Sector Weight 2016 2017 2018 2019 2020 2021 Drivers Outlook
• Food security
• Supportive policy
• Seasonal factors
• FX availability
• Trade Policies
• Consumption spending
• FX availability
• Consumption spending
• Business confidence
• Global oil prices
• Covid-19/Vaccination
• Production/OPEC
• Govt. spending
• Borrowing costs
• Operating environments
• Digital economy
• Demographics
• Huge market
• Borrowing costs
• Govt. spending
• FX liquidity
GDP Growth 82.5% -1.6% 0.8% 1.9% 2.3% -2.5% 1.7%
Agriculture 25.2% 4.4% 3.5%
Real Estate 6.3% -6.9%
Manufacturing 10.9% -4.3%
Trade 15.4% -0.2% -1.1%
8.5% -14.5%
-2.4%
2.1% 0.7%
-4.7%
5.0%4.6%
11.1% 10.5%
-13.9%
2.8%
-1.5%
-13.4%
14.6%
-0.2%
2.4%
-0.6% -0.4%
2.0%
-5.0%
1.4%
-12.1%
Construction 5.2% -5.95% 1.0% 2.3% 1.8%
-4.3% -4.0%
2.0%
-0.2%
Oil & Gas 4.7% 1.1%
2.1%
ICT 11.0% 2.0% -1.0% 9.7%
Domestic Macro Overview
Source: NBS, United Capital Research
Figure 26
...the threat of a 2nd
wave of Covid-19,
despite the vaccine,
remains a downside
risk factor
In 2021, we expect the
Nigerian economy to
rebound to positive
GDP growth, albeit soft
Nigeria’s GDP drivers by sector
Nigeria Outlook 2021: A Shot at Recovery
40 www.unitedcapitalplcgroup.com
The above notwithstanding, the threat of a 2nd wave of Covid-19, despite the vaccine,
remains a downside risk factor to this projection given that another round of lockdown
may overturn recovery.
Inflation rate, Consumption Spending & Disposable Income
Headline Inflation: Galloping on tough policy calls
Much in line with expectations, headline inflation in Nigeria maintained an uptrend
throughout 2020, rising from 12.0% in Dec-2019 to hit a 33-Month high of 14.89% y/y in Nov-
2020 amid weaker output growth, domestic supply shortages and monetary policy
easing. Notably, price increases were observed across all components of the index with
the cost of food being the major driver. Certainly, the critical factors responsible for
pressure on food prices included:
1. Supply shortages linked to the continued closure of land borders since August
2019, which has significantly worsened food prices amid inadequate local
supplies.
2. Expansionary monetary policy stance by the CBN despite month on month
increases in general price level.
3. Transition to a more cost-reflective electricity tariff in September 2020.
4. The adjustment of the local currency from N360/$ to N390/$ and the
widening divergence between the official and parallel market rate amid
administrative policy measure by the CBN.
5. The removal of subsidy on petrol prices, or deregulation of the downstream
oil sector, which has resulted into an increase in pump price from N145 to
N163/litre.
6. Flooding, lockdown and farming season distortion, all of which hampered the
production of food crops and supply chains during the year.
Domestic Macro Overview
Source: NBS, United Capital Research
Headline inflation in
Nigeria galloped to
14.8% in Nov-2020
20
35
50
65
Ju
l-14
De
c-1
4
Ma
y-1
5
Oc
t-15
Ma
r-16
Au
g-1
6
Ja
n-1
7
Ju
n-1
7
No
v-1
7
Ap
r-18
Se
p-1
8
Fe
b-1
9
Ju
l-19
De
c-1
9
Ma
y-2
0
Oc
t-20
PMI points to a Q420/Q1-21
rebound in GrowthTrend in CBN's Manufacturing and Non-
Manufacturing PMI
Manufacturing PMI
Non-Manufacturing PMI
50 points threshold
Figure 27 Figure 28
Source: CBN, United Capital Research
Nigeria Outlook 2021: A Shot at Recovery
41 www.unitedcapitalplcgroup.com
Wage increase or purchasing power decimation?
In April 2019, President Muhammadu Buhari signed the new minimum wage bill into law
amid rising living costs and poverty levels, thus increasing minimum wage by 62.2%, from
N18,500 to N30,000. This came amid agitations from the National Labour Congress (NLC).
While this was implemented across board in the public sector, it must be noted that the
private sector operates with a different template, which may mean that minimum wage
would be complied with but not necessarily adjusted across board for all cadres. With
the devastating impact of the coronavirus pandemic, Nigerian authorities took tough
decisions, the net impact of which has invariably crushed disposable income of Nigerians
and led to a decimation of real wage rate in the country.
For context; FGN’s border closure, which worsened food prices; VAT increment, from 5.0%
to 7.5%; the removal of petrol subsidy which led to an increase in pump price by 12.4% to
N165.0; a 28% devaluation of the naira and electricity tariffs hike by c61.3% from c.N31.0/
kwh to c.N50.0/kwh, have all taken a huge toll on the citizenry. Despite the arguable
necessity of these reforms, these policy actions explain the pressure on the headline
inflation rate, which rose to a 33-month high with an incredibly harsh impact on
purchasing power in Nigeria. As a reaction to this, the President ordered the immediate
reopening of four key land borders – a welcome move that would likely reduce
inflationary pressures. Going forward, as the wider inflationary impact continues to worsen
welfare, the FG is likely to further review some of the recent reforms to palliate the
economic woes of Nigerians.
Inflation Outlook
Our outlook for headline inflation rests on several factors which complicate projections or
make estimating a pullback or expansion in the interim difficult. More so, given that some
of the most critical factors driving inflation rate northwards are fiscal policy and reform
Domestic Macro Overview
Source: NBS, United Capital Research
Domestic Macro Variables
2019 2020 % change
GDP 2.3% -3.6% -5.9%
VAT 5.0% 7.5% 2.5%
Food Inflation 14.7% 17.6% 2.9%
Inflation 12.0% 14.2% 2.2%
FX - I&E Rate (N/$) 360 390 -7.7%
Official rate 305 379 -19.5%
Parallel 360 470 -23.4%
Petrol (N/L) 145 163 12.4%
Electricity (N/Kw) 31 50 61.3%
Remittances ($bn) 23.8 21.7 -8.8%
Yield 11.60% 4.1% -7.5%
Equity 26,842.1 40,270.7 50.0%
Min Wage (N) 18,500 30,000 62.2%
Figure 29
While minimum wage
was recently
increased, the recent
hikes in electricity
tariffs, higher food
prices and bump in
petrol prices have
dampened real wage
growth.
Nigeria Outlook 2021: A Shot at Recovery
42 www.unitedcapitalplcgroup.com
driven, projections are likely to be distorted by policy backflip. This view is supported by
the recent reopening of four key land borders after more than one year of closure as well
as the N5/liter reduction in pump price of petrol after the sector was supposedly
deregulated. That said, recent policy calls such as petrol price deregulation, electricity
tariff, sustained pressure on exchange rate, accommodative monetary policy stance are
potentially inflationary if sustained in 2021. Clearly, a review of some of these policies, as
observed recently, may have a calming impact on the speed of price increases,
potentially allowing the headline rate to peak at about 16.0%. Yet, another round of
electricity tariff hike, a spike in crude oil prices and softer than expected growth in
domestic food output level, could drive the headline rate to a high of 19.0%.
External Sector
Capital flows and Foreign Exchange rate: Still the elephant in the room
Nigeria witnessed another episode of currency market crisis in 2020 as exchange rates
depreciated across segments despite the CBN’s effort to stabilize rates. As always,
currency crisis in Nigeria is linked to the global crude oil price plunge. This time around, the
oil market crash was triggered by the inability of the OPEC+ leading parties (Saudi Arabia
and Russia) to step in quickly, amid the demand shock created by the coronavirus
pandemic. This devastated Nigeria’s oil exports and strained the ability of the CBN to
continue to intervene at the FX market.
For obvious reasons, capital flow was grounded. Looking through the capital importation
data for Q3-2020 published by the NBS, the total capital imported into the Nigerian
economy tumbled 74.0% y/y to $1.5bn in Q3-2020 from $5.6bn in Q3-2019. The breakdown
of the data revealed that inflows from portfolio investments which had dominated gross
investment inflows (averaging 67% since 2018 to Q1-2020) thinned out to $407.3m (vs.
$4.3bn in Q1-2020 alone) or 10% of 2019 quarterly average. Meanwhile, loans and other
Domestic Macro Overview
Figure 29
Source: NBS, NERC, United Capital Research
0.0%
10.0%
20.0%
Headline inflation hit another record
highInflation Rate Trajectory + Projection
Headline Inflation Foreast
Figure 30
2019 2020 2021 2019 2020 2021
Eko 26 39 42 36 45 48
P/Harcourt 30 40 43 47 59 65
Jos 30 39 49 46 60 75
Kaduna 28 39 41 38 48 51
Yola 25 31 41 44 55 74
Abuja 24 32 33 47 61 63
Benin 34 45 46 38 50 51
Kano 30 44 41 40 60 56
Ibadan 25 32 36 42 55 61
Ikeja 22 32 33 38 49 51
Enugu 34 45 40 45 59 53
Proposed Electricity Tarrif Hikes in Nigeria
Disco
Residential (N/Kw) Commercial (N'Kw)
Figure 31
Source: NERC, NERC, United Capital Research
Inflation outlook will be
shaped by policy
reforms including petrol
price regulation, border
reopening as well as
other critical factors
like FX liquidity.
Nigeria Outlook 2021: A Shot at Recovery
43 www.unitedcapitalplcgroup.com
claims accounted for the bulk of the inflows at $639.4mn in Q3-2020. Surprisingly, FDIs
inflows spiked to $414.8mn in Q3-2020.
Interestingly, FX reserves remained broadly unchanged compared to the end of March
2020, at $35.7bn, albeit partly supported by the $3.4bn IMF inflow during the year. Despite
sweeping policy reforms implemented by the authorities in Nigeria, the exchange rate
remains the elephant in the room. Even with multiple adjustments of the naira to N379/$-
N390/$ during the year, the FX market has remained technically inactive for most of the
year, as the CBN kept intervention at the I&E window market soft. As such, pent up
demand for FX by FPIs continued to mount. Again, the initial resumption of FX sales to
BDCS when international travels commenced in Sept-2020 brought a temporary reprieve
to the market. However, with intervention at $10,000 per BDCs/twice a week (or $20,000)
compared to $75,000 previously, the excitement fizzled out almost immediately.
Observably, the CBN’s strategy is to buy time, hoping that oil prices recover rather than
increase interest rates to attract FPIs to restore normalcy.
Notably, Nigeria has had two episodes of export crash in the past two decades: 34% y/y
decline in 2009, and a 58% contraction between 2014 and 2017 Both episodes required a
large exchange rate adjustment to rebalance the current account: 22% in 2009 and 56%
between 2014 and 2017. Thus, considering the magnitude of the 2020 export shock, and
the pre-existing imbalance in the current account, the CBN adjusted the official market
rate three times in the 2020 episode of oil market crash. The last devaluation brings the
official market rate to N379/$, representing a 23.5% weakening of the currency in 2020.
Meanwhile, with the CBN’s effort to ration FX and limit access to the official market
auction, the divergence between the parallel market rate and the official segment
widened to levels last seen during the 2016 currency market crisis. Notably, the parallel
market rate depreciated to N475/$ - N505/$, amid speculation, increased demand for
eliminated items from official market auctions and FX rationing. We note that despite
clear indications of a crisis, the CBN was quite reluctant to adjust the official market rate
Domestic Macro Overview
Capital inflow into
Nigeria tumbled 74.0%
y/y to $1.5bn in Q3
2020.
Source: NBS
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2015 2016 2017 2018 2019 2020
Capital importation into Nigeria was grounded in 2020Capital importation into Nigeria 2014 to Q2-2020
FPI Equity
FPI Money market
FDIs
Loans & other Claims
Figure 32
Nigeria Outlook 2021: A Shot at Recovery
44 www.unitedcapitalplcgroup.com
and has mostly adjusted the local unit against the dollar amid pressure from the IMF and
the World Bank as a criteria for debt facilities from both institutions.
By November 2020, the CBN announced that recipients of diaspora remittances through
the International Monetary Transfer Operators (IMTO) will now have inflows in foreign
currency through the designated bank of their choice, a move targeted at improving
liquidity in the market. With a large, growing and highly energetic diaspora population
spread world over from the US, UK, Canada, EU, UAE, South Africa and several other
advanced economies, Nigeria commands the largest remittance volume in Sub-Sahara
Africa. For context, Nigerians in the US are amongst the most educated and
entrepreneurial migrants with significant earning capacity out of which are sent back to
families and loved ones at home. By World bank estimates, personal remittances
received in Nigeria peaked at $24.3bn in 2018 before dropping to $23.8bn in 2019. In
2020, total remittance is projected to fall to $21.6bn due to the impact of the coronavirus
pandemic. In spite of the projected decline, we are of the view that this move will help
improve liquidity in the system, and help reduce the pressure on parallel marker rate
going forward.
If the past is any indication of the future, we think an additional 6% - 10% currency
adjustment (to bring the official rate to roughly N400-N415/$) will be needed to
structurally rebalance the current account by year-end or Q1-2021. On a rather positive
note, we expect the optimism around the coronavirus vaccine, which seemed to be
supporting the oil prices so far, to help strengthen the external reserves going forward,
thus improving the Nigerian currency market outlook. If the vaccine is able to successfully
scale through the acceptance phase, we imagine that oil prices should improve even
further - to say $55/b, or perhaps pre-crisis level - if OPEC+ is able to find an optimal Supply
-Demand ratio to maximize prices.
Domestic Macro Overview
Source: World Bank, United Capital Research
16.9
18.0
19.2
18.4
19.7
20.6 20.520.8 21.0
20.6
19.7
22.0
24.323.8
21.6
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Remittances may slip to N21.6bn in 2020Nigeria Personal remittances, received ($'bn)
Figure 33
The official exchange
rate was devalued by
23.5% to N379/$ in
2020.
Nigeria Outlook 2021: A Shot at Recovery
45 www.unitedcapitalplcgroup.com
Accordingly, our projection is that official rate should find its level around N400/$-N415/$
in 2021. Again, other upside factors that may support the market includes recent $1.5bn
inflow from the World Bank, the proposed bilateral facilities expected from Brazil and a
possible Eurobond issuances in 2021. We expect this to significantly improve the CBN’s
ability defend the currency at N400/$-N415/$.
For the parallel market, if history is anything to rely on as a looking glass for what the future
holds, we imagine a potential convergence of rates - when the CBN begins to fully
intervene - will result in a possible appreciation from the market rate N470/$ -N500/$ rate
towards the official rate. The fact is that the Nigerian economy has been here before, in
2016, when the parallel market rate climbed as high as N500/$ but converged to N360/$
after the I&E window was introduced.
Domestic Macro Overview
Source: CBN, FMDQ, Bloomberg, United Capital Research
50.0
150.0
250.0
350.0
450.0
550.0
Jan
-00
Oc
t-00
Jul-01
Ap
r-02
Jan
-03
Oc
t-03
Jul-04
Ap
r-05
Jan
-06
Oc
t-06
Jul-07
Ap
r-08
Jan
-09
Oc
t-09
Jul-10
Ap
r-11
Jan
-12
Oc
t-12
Jul-13
Ap
r-14
Jan
-15
Oc
t-15
Jul-16
Ap
r-17
Jan
-18
Oc
t-18
Jul-19
Ap
r-20
Naira devaluation correlates with export crashesHistorical Naira/$ trend
I&E (NAFEX Rate) Official rate BDC/Street rate SMIS
Figure 34
We anticipate a
convergence between
parallel market rate
and the I&E window in
2021.
Policy
induced
conver-
gence
Conver-
gence is
immi-
nent
Financial
Markets
Nigeria Outlook 2021: A Shot at Recovery
48 www.unitedcapitalplcgroup.com
Financial Markets Review and Outlook
Easy monetary policy takes the lead in 2019
The yield environment in Nigeria tumbled to a record low across maturities in 2020, despite
elevated macroeconomic fragilities aided by the spread of Covid-19 across the world.
This was amid an unprecedented level of financial market volatility which triggered a
flight to safety by FPIs and local investors. To give context, average yield compressed by
485bps to 5.1% (with the yield on 90-day NTbill crashing to a low of 0.10%) as at 31 Dec-
2020 from 10.0% in 31 Dec-2019. It must be noted that contrary to last recession in 2016
where the CBN took a hawkish stance, the Apex Bank went all dovish in 2020, in a bid to
salvage the economy.
Thus, the record low yield which was triggered by the CBN’s earlier decision to bar locals
from the OMO market, was amplified by elevated system liquidity (driven by huge net
OMO inflows), as well as policy rate cuts in response to the unavoidable economic
recession. Consequently, Nigerian sovereign bonds outperformed EM peers with the S&P/
FMDQ Sovereign Bond Index returning a record 42.3% as at 23 Dec compared to 3.2% on
the JPM EM Government Bond Index.
Primary Market: FG averages down borrowing cost
At the primary market segment, the Debt Management Office (DMO), through the CBN,
sold 1.6x of the amount of NTBs that matured in 2020. Notably, the DMO capitalized on
the robust demand for NTBs amid limited alternative outlets for local investors, to
significantly average down borrowing costs. Hence, average stop rate for the period
came at 2.6% (vs. 11.1% in 2019). On the flip side, the CBN was able to mop up only N6.9tn
(via OMO sales) implying 52.2% of the N13.2tn OMO maturities that hit the system in 2020,
at an average stop rate of 7.9% (vs. 12.3% in 2019). which closed 2018 at 15.37% and
15.31%, moderated to 13.55% and 14.07% respectively as at the end of Mar-19.
Eurobond Market: A Covid-19 driven narrative
Based on our 2020 outlook report, we expected Nigeria to tap into the international debt
market as the FG guided on their plan to issue $3.3bn worth of Eurobond in the early part
Nigerian sovereign
bonds outperformed
EM peers in 2020.
Financial Markets
Average stop rate on
NT-Bills issuances
printed at 2.6% vs.
11.1% in 2019.
The yield environment
in Nigeria tumbled to a
record lows across
maturities in 2020
0.0
3.0
6.0
9.0
12.0
1M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 20Y 30Y
Yield touches record low across the
curveNigerian Soverign Yield Curve (%) - NTB &
Bond
Dec-19 Mar-20 Jun-20
0.8
1.0
1.2
1.4
1.6
De
c-1
9
Jan
-20
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Ju
l-20
Au
g-2
0
Se
p-2
0
Oc
t-20
No
v-2
0
FGN Bonds outperformed EM peers in
2020LCY Bonds Index Vs. EM Peers
S&P/FMDQ Sovereign Bond Index
JPM EM Government Bond Index
Sources: FMDQ, Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research
Figure 36 Figure 35
Nigeria Outlook 2021: A Shot at Recovery
49 www.unitedcapitalplcgroup.com
of the year. Unfortunately, the outbreak of Covid-19 which triggered the downturn in oil
prices raised the risk premium for Nigeria’s USD-denominated bonds. As a result, the
Federal government had to opt for multilateral loans from IMF and World Bank as the
preferable route of bridging the fiscal imbalance.
At the secondary Eurobond market, performance in H1-2020 mirrored that of the
domestic market, as average yield on sovereign Eurobonds spiked from 6.3% as at Dec-
2019 to 13.3% as at Mar-2020, as sell off was the language of the investors considering
Nigeria exposure to crude oil. Also, credit rating downgrade by Fitch and S & P, and a
change in outlook by Moody’s and S&P, from stable to negative stoked further bearish
sentiments. The spike in Eurobond yields to double digit levels became very attractive for
local investors who have had to settle for lower naira bond yields. Consequently, this
fueled a surge in demand and drove Eurobond yields lower. As a result, average yield at
the sovereign segment declined to 5.5% as at 21 Dec. Similarly, the corporate Eurobond
segment improved, as average yield dropped to 5.8% as at 21 Dec.
CPs, Sukuk, Corporates & Sub-National Issues: Leveraging the low yield environment
Elsewhere, as noted in our 2020 outlook report, 2020 was a corporate issuer market, driven
by buoyant system liquidity and the extremely low yield environment. According to data
from FMDQ, over a N1.0trn was issued by corporates in form of Commercial Papers or CPs
(N610.0bn), Corporate Bonds or CBs (N152.0bn), Sub-National Bonds (N100.0bn) and
Sukuk (N150.0bn) in 2020. Notably, CP issuances were led by blue chips like Dangote
Cement (N100.0bn), MTNN (N100.0bn), and Nigerian Breweries (N91.2bn). Interestingly,
most of these offers were significantly oversubscribed, evidencing the limited alternatives
available to lenders in 2020. Notably, financial services firms such as Union Bank, Stanbic
and United Capital plc all took advantage of the near-zero yield on Treasury Bills in Nov-
2020, raising CPs at record low rates of 0.75%, 1.0% and 1.26% respectively.
Average yield on
Eurobonds fell to 5.5%
as of 31 Dec 2020 from
6.3% as of 31 Dec 2019.
Financial Markets
Source: FMDQ, United Capital Research
3.42.93.3
4.4
0.81.1
0.1
0.0
2020201920182017
FG took advantage of the low yield environmentTrend of total issuances (NTB & Bond)
NTB BOND
Figure 37
According to FMDQ,
Corporate, Sub-
National & Sukuk
issuances worth over
N1.0tn was issued in
2020.
Nigeria Outlook 2021: A Shot at Recovery
50 www.unitedcapitalplcgroup.com
In the bond market, the FGN issued an additional 7-year N150.0bn Sukuk Bond (at 11.2%),
a follow up on the N100.0bn issued in 2018 and 2017 each, at a much shorter maturity
and higher rental rate of 15.7% and 16.5% respectively. While Lagos State was the only sub
-national to successfully approach the market for N100.0bn bond in 2020, we observed a
significant increase in the number of Private Bond issues by Sub-national, due to their
fiscal vulnerability. Some notable private bond issues included Ondo state. In the
Corporate Bond space, Dangote Cement Plc conducted a debut bond issuance of
N100.0bn under its N300.0bn program, with an oversubscription of 1.55x and 12.5% yield. In
addition, Flour Mills of Nigeria (N20.0bn), United Capital (N9.25bn), LAPO MFB (N6.2bn),
FBNQuest Merchant Bank (N5.0bn) and AXXELA (N11.5bn) all jumped on the opportunity
presented by the low yield environment to raise long term liabilities. At the time of writing,
BUA Cement had also indicated plans to raise N100.0bn in bonds under its N200bn bond
program.
Fixed Income Outlook and Strategy
After a record-low yield environment; The only way is up?
Looking ahead to 2021, the gut thought is that yields can only go up from here. That said,
we think yields in the fixed income market will be largely shaped by a horde of factors
including Financial system liquidity dynamics, Monetary policy guidance, and FG’s 2021
borrowing program. We discuss some of these factors in subsequent sub-sections and
then provide a guidance on our expectations for yield direction and strategy
implications.
System liquidity may normalize from Q2 2020
Going into 2021, OMO maturities are significantly lesser than 2020. As at Dec 23, 2020,
total OMO maturities for 2021 printed at N4.1tn which is 69.2% lesser than 2020’s N13.2tn.
Thus, the lower OMO maturities would aid drawdown on system liquidity particularly if CBN
resumes aggressive OMO sales to attract foreign capital flows. That said, we think FAAC
inflows which are expected to rise on improved government revenues and natural growth
in PFAs assets, bank deposits and bond coupons remain the major catalyst for elevated
system liquidity. However, on a balance of factors, we think liquidity levels will on average
print lower than 2020 and consequently support uptick in yields.
Financial system
liquidity may tighten on
reduced OMO
maturities.
Financial Markets
Source: CBN, United Capital Research
2.1
1.3
2.3
0.7 0.7 0.6 0.9
0.1
0.6 0.2
0.5 0.1
0.3 -
0.4 0.3
1.3
0.2
1.6
0.3 0.6
0.2
1.8
0.1
Jan
-20
Jan
-21
Feb
-20
Feb
-21
Ma
r-2
0
Ma
r-2
1
Ap
r-2
0
Ap
r-2
1
Ma
y-2
0
Ma
y-2
1
Jun
-20
Jun
-21
Jul-2
0
Jul-2
1
Au
g-2
0
Au
g-2
1
Se
p-2
0
Se
p-2
1
Oc
t-2
0
Oc
t-2
1
No
v-2
0
No
v-2
1
De
c-2
0
De
c-2
1
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
OMO maturity sum in 2021 is 69.2% less than 2020's figuresMonth-Month OMO maturities (2020-2021
Figure 38
Nigeria Outlook 2021: A Shot at Recovery
51 www.unitedcapitalplcgroup.com
A hawkish CBN in H2 2021 supports rate reversal
The CBN maintained a staunch dovish position all through 2020 in the face of elevated
macroeconomic fragilities with the Monetary Policy Committee (MPC) cutting its policy
rate by 200bps (last seen in 2015). However, the economy is expected to rebound in 2021
on possible improvement in oil market sentiments, gradual return to economic normality
as well as 2020 low base. In the face of the rebound, inflation is expected to remain
elevated while FPIs are expected to continue to loathe Nigerian assets on poor risk
premiums thus limiting capital flows. As a result, we think the CBN may revert course to a
hawkish tone from its July 2021 meeting in bid to attract improved FPI flows as well as
contain inflation reminiscent of the committee’s 300bps hike in 2016 following historic cuts
in 2015. Reverting to a hawkish tone supports the case for a rate reversal in 2021.
Eurobonds: Nigeria may be priced out of the market
Nigeria’s economic managers reversed plans to explore the international debt market in
2020 as macroeconomic vulnerabilities were exacerbated by Covid-19 induced pressures
on crude oil prices. The country opted to raise funding from multilateral organisations like
the IMF and World Bank. Yet, the possibility of visiting the international debt market in 2021
remains a popular rhetoric in the face of recovery in the domestic economy. However,
we struggle to see how attractive Nigerian debt instruments are to FPIs. Thus, while the
secondary Eurobond market prices Nigerian Eurobonds at a premium, investors could
make a case of a steep divergence between economic realities and market pricings to
demand for huge risk premiums. As a result, we retain the possibility that Nigeria may be
priced out of the international debt market next year particularly if recovery in oil prices
taper out.
…forcing reliance on local debt market
Following our conclusion that there exists a strong possibility that Nigeria may be priced
out of the Eurobond market coupled with limited scope for loans from multilateral
organisations, we think the Federal government may be forced to rely heavily on the
Financial Markets
Galloping inflation and
sustained pressure on
FX may trigger a
hawkish CBN in H2 2020
supporting a case for
rate reversal.
Elevated
macroeconomic
fragilities and FPI
apathy could see
Nigeria’s risk premium
rise, pricing it out of the
international debt.
-200.0
-50.0
0.00.0
300.0
-200.0
100.0
2020201920182017201620152014
A repeat of 2016 has a decent probability on historical rate
policiesHistorical rate cuts or hikes per annum
Figure 39
Source: DMO, United Capital Research
Nigeria Outlook 2021: A Shot at Recovery
52 www.unitedcapitalplcgroup.com
local debt market for its financing needs. With the 2021 budget carrying an estimated
deficit of N5.2tn (which we consider optimistic due to revenue pressures), we think the
Federal government may be forced to raise most of its debt needs from local market
compared to the initially planned 41.2% (at N2.1tn). As a result, the increased deficit
financing pressures could raise the supply of bonds and NTBills to run the 2021 deficit
financing program which could possibly stoke a climb in yields.
That said, we note that historically, the level of liquidity in the fixed income market has
grown faster than the depth of instruments available. CBN’s recent policies on market
segregation has further fueled the imbalance. Thus, we think the natural growth from
Pension contributions, FAAC inflows, bank deposits and bond coupons could enable the
DMO raise FG’s debt finance needs without repricing yields higher (depending on the size
of its debt program). This could give the DMO more headroom to sustain its financial
repression tactics.
Overall outlook: CBN holds the wild card but…
Our overall outlook for the yield environment in 2021 is biased towards an upward reversal
from current levels. From our review of underlying factors, we expect hawkish monetary
policy in the later part of the year, increased deficit funding pressure, and downward
pressure on liquidity levels to guide yields higher in 2021. However, we note two other key
factors which could serve as the tipping point for a change in yields; CBN’s “Special Bills
Arsenal” and market’s desire for better rates.
The CBN issued N4.1tn worth of special bills to DMBs who have above regulatory CRR as it
attempted to securitise some of the bank’s reserves it held in custody which stood at
record highs. The bills are set to mature on 1 Mar 2020 with the CBN retaining the
prerogative to rollover the bills. We expect the CBN to sustain rollover of the bills but at
smaller sizes in form of a graduated release of liquidity back to the banks. We think this
serves as a substantial downward pressure factor for rates. On the other hand, recent
auctions as at 16 Dec 2020 and (NTBills and Bonds), show that investors desire improved
Financial Markets
The tipping point for
yield direction remains
CBN’s preference for
yield movements and
market’s desire for
higher rates.
FG may be forced to
raise most of its deficit
needs from the
domestic debt market.
1.2
0.91.0 1.0
1.11.0
1.3
1.7
1.0
1.6
2.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FG raised a record N2.0tn in bonds
(FGN Bonds and FGN Savings Bonds)
Historical FGN bond issuances
Sources: DMO, United Capital Research Sources: Budget Office, United Capital Research
Figure 41 Figure 40
Nigeria Outlook 2021: A Shot at Recovery
53 www.unitedcapitalplcgroup.com
yields to release liquidity. Thus, we think investors may begin to demand higher yields at
the primary market which would subsequently guide secondary market yields higher.
Thus, we think the yield environment will remain lower for longer but we favour a
subsequent reversal during the year (from Q2 2021) as we think government’s deficit
financing needs and a hawkish monetary policy tone could guide yields higher. That said,
we note CBN holds the wild card in the “yields game” given its significant ability to
influence system liquidity with its special bills & OMO auctions as well as guide auction
rates through “no sale” auctions.
Strategy: Buy the dip on long maturities but sell the reversal
By way of strategic implications, we note the CBN holding the wildcard will continue to
stoke uncertainty in the fixed income market. However, we think for investors to gain
clarity, particular focus should be kept on CBN’s language at auctions as well as DMO’s
borrowing calendar for 2021. That said, we think CBN has decent headroom to retain its
financial repression tactics at least till Q1 2020. Thus, we think recent market plays which
has fed bearish sentiments in the fixed income market may subside and consequently
guide yields lower till Q1 2021. Accordingly, we advise investors to buy long dated bonds
that have been oversold with a Q1 2021-end holding period in view. Subsequently, we
advise investors to play at the short end of the curve in the face of elevated concerns on
yield reversals.
Financial Markets
We recommend
investors buy the dip on
sold down mid to long
dated bonds with a Q1
2021 investment
horizon.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y
We forecast the yield curve will compress further by 57bps
across maturities in Q1 2021, expand 200bps by the end of 2021 FGN Yield Curve
24-Dec-20 31-Mar-21 31-Dec-21
Source: FMDQ, United Capital Research
Figure 42
The yield curve is
expected to remain
normal amidst a little
longer period of
contraction in rates
before full reversal in
Q2 2020.
Nigeria Outlook 2021: A Shot at Recovery
54 www.unitedcapitalplcgroup.com
Financial Markets
Figure 37
Equities Market Review & Outlook
The only game in town
2020 was an exciting year for stock markets around the world, as equities defied
expectations and maintained a high level of attractiveness for the most part of the year,
even amid the coronavirus pandemic. In Nigeria, like most of the world, a key driver of the
market’s performance was the unprecedented monetary policy response from the
Central Bank which gave rise to low interest rates. Contrary to the prior two years where
risk free assets were the toast of local investors - to the detriment of equities - due to their
attractive yields - appetite for equities improved as the local stock market printed a 50.0%
YTD return, ending the year as the best performing exchange in the world. Yet, the 20.0%
coronavirus-triggered market crash between March and April 2020 was clearly a
landmark event for the year. Noteworthy to mention, the stock market went into
overdrive on 12th of Nov-2020, triggering a historic market-wide circuit breaker, after
appreciating above the 5.0% threshold in one day, at the peak of the “Fear of Missing-
Out (FOMO)”. Overall performance of local bourse was shaped by three key factors.
1. Monetary policy stance and a depressed yield environment
The CBN’s decision in Oct-2019 to restrict the sale of OMO instruments to banks and bar
local investor participation forced investors to turn their attention to the stock market, in
search of positive real return on investment. Sustained policy easing by the CBN, following
a reduction in MPR to 11.5% amid massive liquidity injection, resulted in a depressed yield
environment. This triggered a sector-wide market rally and sent the local bourse 10.7%
northwards in the first three weeks of the year. Although the reality of the Covid-19
pandemic and the ensuing crude oil market crisis which brought oil prices to an all-time
low, resulted in a market crash in Mar-2020, as foreign investors fled the market, amid
heightened devaluation risk, sustained policy easing by the CBN resulted in a post
lockdown market rally.
Financial Markets
The Nigerian stock
market was the best
performing bourse in
2020 across the globe.
Depressed yield
environment and
accommodative
monetary policies
supported a record
year for Nigerian
equities.
0
7,000
14,000
21,000
28,000
35,000
42,000
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Se
p-1
6
No
v-1
6
Jan
-17
Ma
r-1
7
Ma
y-1
7
Jul-1
7
Se
p-1
7
No
v-1
7
Jan
-18
Ma
r-1
8
Ma
y-1
8
Jul-1
8
Se
p-1
8
No
v-1
8
Jan
-19
Ma
r-1
9
Ma
y-1
9
Jul-1
9
Se
p-1
9
No
v-1
9
Jan
-20
Ma
r-2
0
Ma
y-2
0
Jul-2
0
Se
p-2
0
No
v-2
0
The strength of the CBN's monetary easing rekindled local
interest in equitiesTrend of the NSEASI since 2006
Figure 43
Source: NSE, Bloomberg, United Capital Research
Nigeria Outlook 2021: A Shot at Recovery
55 www.unitedcapitalplcgroup.com
Although the market had started recovering from April-2020, the decision of the monetary
policy committee to slash the policy rate by 100bps in May and Sept-2020, while keeping
the system awash with liquidity drove stop rates at primary market auction all time low,
amplifying local interest in the stock market. With local investors locked out of the OMO
market, and market liquidity in form of NTB maturities hitting the system periodically, stocks
were the obvious winner. Notably, average yields crashed from 10.2% at the end of
March 2020 to 5.1% at the end of 2020. Accordingly, the NSE-ASI rallied 94.8% from its April
lows of 20,669.38 points to close the year at 40,270.72 points, with much of the rally
happening in Q4 as local participants hunted for bargains and positive real returns in the
face of a galloping inflation rate.
2. Domestic vs. foreign portfolio investor participation
The pandemic fed risk-off sentiment among foreign investors, as such, domestic
institutional and retail participation surged to 63% as Oct-2020, the first time since 2010.
Without accounting for the huge transaction volume observed in November and
December 2020, further breakdown indicated that of the total transaction of N1.58trn
(Oct-2020) from both foreign and domestic participants, local institutions accounted for
N537.9bn, the largest proportion while local retail participation was N451.2bn. Meanwhile,
Financial Markets
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
The NSE-ASI and NTB Yields have exhibited an inverse relationship over
time
NSE-ASI vs Average NTB Yields
NSE-ASI Average FGN Bond Yield
Figure 44
The NSE rallied 94.8%
from its low point in Apr
-2020 to close at
40,270.72 points
Domestic participation
in the local bourse
surged to levels last
seen in 2010.
Source: NSE, FMDQ, United Capital Research
36%
67%
61%
51%
58%
54%
45%48%
51% 49%
37%
64%
33%39%
49%
42%
46%
55%52%
49% 51%
63%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Oc
t 2020'
Local Participation surged in 2020NSE YTD market particpation
Foreign Domestic
1,905.6
1,151.4
2,542.92,404.4
1,627.6 1,581.7
2015 2016 2017 2018 2019 2020
Domestic Players will remain dominant
NSE YTD Market particpation
FPI inflow FPI Outflow Local Retail
Local Institutions Total Transaction
Sources: NSE, United Capital Research Sources: NSE, United Capital Research
Figure 46 Figure 45
Nigeria Outlook 2021: A Shot at Recovery
56 www.unitedcapitalplcgroup.com
Financial Markets
foreign inflow tumbled to N200.6bn while outflow settled at N392.0bn. Overall, net foreign
flows in 2020 hit a 5-year low of N-191.4bn compared to a surge in local interest.
3. Corporate Actions
Also defying expectations in 2020 were major corporates, reporting stronger-than-
expected earnings in H1-2020, undeterred by the pandemic and the economic recession.
Again, the strong showing in 9M-2020 fueled risk-on sentiment aiding an already bullish
market. As prospects of attractive dividend yields improved, investors piled into bellwether
names and drove the market higher. The year also saw a series of corporate actions. In
the Industrial Goods space, BUACEMENT listed on the NSE in Jan-2020, adding a whopping
N1.2tn in market capitalization to the bourse, having consolidated its cement businesses
and assets. The listing made the company the third most capitalized on the exchange.
Also, DANGCEM announced modalities for implementing its much-anticipated share
buyback program in Dec-2020, resulting in a 10.0% rise in the share price between the
date of announcement (21 Dec 2020) and its peak of N253.40/s on 22 Dec 2020.
However, the company ended up not conducting the buyback program.
The performance of AIRTELAFRICA is also worth mentioning, following the 259.1% surge in
share price between the end of H1 2020 and 31 Dec 2020. Notably, having listed on the
local bourse in 2019, the Telco benefited significantly from its dual-listed status in 2020, as
foreign investors took advantage of the said status for capital repatriation and currency
hedging given the currency market crisis in Nigeria.
In the Banking sector, GTBank, Access and Sterling Bank plc all announced decisions to
adopt a HoldCo structure. Moreso, Access Bank plc continued its shopping spree,
securing approval and completing the acquisition of Transnational Bank Plc in Kenya. The
bank also announced the plan to acquire Atlas Mara assets in Botswana, Zimbabwe and
Zambia as well as Cavmont Bank in Zambia. For the Insurance firms, Law Union & Rock
and AXA Mansard Insurance Plc were acquired by Verod Group. In the Consumer Goods
sector, Nestle S.A (Global) increased its stake in Nestle Nigeria during the year. Finally, in
Mar-2020, the Nigerian Stock Exchange passed the necessary resolutions for the
demutualization of the exchange, a move which will see them become a public
company listed by shares, almost two decades after initiating the process.
Outlook: Can the stock market rally be sustained in 2021?
Following the monumental upsurge in the benchmark index in 2020, one of the toughest
questions our clients are asking us is whether the market will crash soon, or rather, can the
stock market rally be sustained? Rightfully so, the last time the market rallied in a similar
fashion in 2017/18, it was followed by a long bear market, which bottomed out in Mar-
2020, no thanks to the coronavirus pandemic. Again, policy uncertainty and a potential
reversal of rates in the fixed income market despite the possibility of economic recovery
lends more credence to this concern. Accordingly, we look at some of the possible
BUACEMENT was the
lone equity debutant
on the Nigerian Stock
Exchange in 2020.
Airtel Africa surged
remarkably in H2 2020
as FPIs used the stock
as a capital repatriation
mechanism due to its
dual listed status.
Nigeria Outlook 2021: A Shot at Recovery
57 www.unitedcapitalplcgroup.com
demand drivers for equities in 2021 in this section.
1. Technical analysis; is the rally over?
On a technical basis, the medium-term market resistant level can be pegged at
45,000pts, the peak level of the index in 2018. Looking into 2021, a trend analysis suggests
that the All-Share Index is yet to breach this point, but fast approaching the psychological
line. Hence, by technical analysis, our view is that the rally is not over but on its last lap. As
such, the market can still potentially appreciate by 11.7% in 2021.
2. Market valuation and the macro environment
Notwithstanding the above, further uptrend depends on a few fundamental factors.
Despite economic fragility, market valuation appears to have improved significantly,
implying that the market maybe potentially overbought. As such, valuation is a critical
factor to watch. For context, in contrast to poor sentiment for stocks in 2019, where the
market PE ratio of the Nigerian bourse was significantly undervalued at 7.8x compared to
its 5-year historical average as well as emerging or frontier markets peer averages, market
PE ratio was 15.2x in Dec-2020, well above it’s its 5-historical average of 11.9x. This
Financial Markets
Trend analysis suggests
the NSE rally may be on
its last lap to 45,000
points.
18000
28000
38000
48000
58000
68000
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
9
De
c-2
0
Technicals suggests sustained uptrend in the near term15-Year Trend of NSEASI
NSEASI 45000Pts Line
Source: Bloomberg, United Capital Research
Figure 47
Sources: Bloomberg, United Capital Research Sources: Bloomberg, United Capital Research
20.6
11.9
15.2
12.7
33.3
15.2
25.5
14.3
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
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 49
11.9
1.5
15.2
1.7
0
5
10
15
20
P/E P/B
Nigerian equities are currently trading
below their 5-year averagesNigerian equity current vs. 5-year historic
valuation
5-year average valuation Current valuation
Figure 48
Market PE of 15.2x
above 5-year average
suggests market
valuations may be
stretched.
Nigeria Outlook 2021: A Shot at Recovery
58 www.unitedcapitalplcgroup.com
indicates that from an historical point of view, or to a local investor, the market may be
overvalued compared to the past.
However, this trend is not peculiar to Nigeria, as both the Emerging and Frontier market PE
ratios seemed to have also moved above their historical averages. Accordingly, viewed
from a global point of view, the Nigerian market PE remains undervalued compared to
Emerging market peers (25.5x) but overvalued relative to Frontier market’s (14.3x)
average PE. Therefore, the inference here is that for the local bourse to sustain its
uptrend, demand is unlikely to come from local investors (both retail & institution) but from
FPIs looking for opportunities in frontier markets. Sadly, unless specific structural policy
responses/measures are implemented to attract FPI investors, we struggle to see the
return of FPIs to the Nigerian market in 2021 given the state of the currency market.
Besides, the Nigerian market trade a premium to frontier market average PE. Compared
to Nigeria where a huge amount of foreign capital is trapped due to the CBN’s
administrative measures, many frontier markets are well placed to receive more inflows
due to lower structural constraints to inflows. As such, apart from dividend yield which is
expected to sustain local demand up until Mar-2021, recent rally is unlikely to continue
beyond Q1-2021.
3. Low yield environment: How much longer?
While we imagine that the current low yield environment may last a little longer, we
believe that yields in the treasury markets have bottomed-out. Thus, we suspect that the
recent developments in the primary debt market suggests that the reversal of rates on T-
bills may have started and should become clearer in Q1-2021. Yet, a few factors suggest
that the tipping-point for a yield reversal will be Q2 2020, given relative thin amount of
OMO maturities expected in Q2-2021 (N250.0bn) compared to Q1-2021 (N2.5trn).
Reduced system liquidity is likely to moderate the level of oversubscription for government
treasuries, ebbing the pricing power from the CBN to the dealers. This may spur the
reversal in yields, potentially shifting flows into risk-free assets in 2021.
Financial Markets
The low yield
environment may last a
little longer but a
reversal is imminent
which portends danger
to equities from Q2
2020.
2,552.1bn
250.0bn 287.3bn
Q1 2020 Q2 2020 Q3 2020
OMO Maturties in Q2 and Q3 are just a Fraction of Q1 OMO Maturties in 2020
Source: FMDQ, United Capital Research
Figure 50
Nigeria Outlook 2021: A Shot at Recovery
59 www.unitedcapitalplcgroup.com
Again, with inflation rate galloping out of control, we expect the apex bank to tighten its
policy stance later in 2021 to curb inflationary pressures. Potentially, this may include a
moderate increase in interest rates to attract foreign flows to stabilize the FX market.
Overall, potential changes in the yield environment, especially from Q2-2021 suggests
that the recent market rally may simmer after Q1-2021 as the yield environment become
attractive again.
3. Foreign portfolio investors: May exit Nigeria if given a chance
A peculiar feature of the 2020 global downturn was the equity market rally. Yet, flow of
foreign funds into Nigerian equities was hugely limited. In the face of the pandemic,
Nigeria’s foreign reserves remained mostly stable, excluding a decline at the start of the
pandemic. The CBN stopped the onslaught on foreign exchange reserves by limiting
outflows from the capital accounts. These market interventions reduced the
attractiveness of the Nigerian market to FPIs. In the absence of a viable alternative, the
CBN continued to rollover OMO bills for FPIs to palliate the pain of long wait. Certainly, the
availability of an exit window would have to be gradual to avoid a currency disaster. A
further devaluation makes the NSE ASI price cheaper but increases pressure on
government debt financing. Give or take, we do not think the currency market will remain
inactive forever, hence, we imagine that at some point in 2021, the CBN will resume FX
supply to FPIs. As such, we expect foreign portfolio investment into equities to remain
muted in H1-2021. On the contrary, a potential reopening of the I&E window fully by H2-
2021 may depress the market amid massive exodus of trapped foreign hot money in the
system.
Our Projection for 2021
Overall, our prognosis for the Nigerian stock market in 2021 is that domestic interest, fueled
by dividend expectations is likely to sustain market rally in Q1-2021, but in the absence of
foreign demand our analysis sees short bear-market from Q2 to Q3-2021. Potentially, the
return of foreign portfolio inflow in Q3/Q4-2021 if the currency market becomes active
again, as well as renewed local demand may lift the market in Q4-2020. Viewed
differently, the movement of the 15 most capitalized stocks accounting for c.90% of the
Financial Markets
Foreign investors may
exit the market should
FX liquidity improve.
0
200
400
600
800
1000
1200
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
18
Q1
20
19
Q2
20
19
Q3
20
19
Q4 2
019
Q1
20
20
Q2
20
20
Q3
20
20
Capital Importation into Equities was non-existent from Q2 2020 Capital Importation into equities since 2018
Source: NBS, United Capital Research
Figure 51
Nigeria Outlook 2021: A Shot at Recovery
60 www.unitedcapitalplcgroup.com
NSE All Share Index (UCAP/NSE 15 index) will ultimately determine the overall trend of the
market. While we expect most of the key counters to retain their value by year end 2021,
we suspect that AIRTELAFRICA may print a major correction in 2021, thus dragging the
broader index.
In all, we base equities market return projection for 2021 on developments in the global
economy - Covid-19 and the oil market-, the potential return to a relatively higher yield
environment in the local economy, currency market developments and fund flows as well
as corporate earnings.
Overall, our base case scenario sees these factors moving from “Bad” as there were in
2020, to “Muted” or “moderate” in 2021. On the other hand, the yield environment which
significantly favoured the stock market in 2020 is likely to turn from Q2-2021, hence,
moving from “Improve” to “Muted” or “Moderate”. Thus, our base case projection is that
equities may appreciate 4.3%, in 2020. If all or some of these factors deteriorate from
Financial Markets
We expect the
direction of the top 15
most capitalized stocks
to guide broader
market direction.
Our Base case
projection is that
equities will gain 4.3%
in 2021
Source: NSE, United Capital Research
Source: NSE, Bloomberg, United Capital Research
Figure 51
S/N Tickers
Shares
Outstanding
Current
Price Mkt Cap
NSEASI
Weight
2021
Target
Price
Mkt Cap
Based
2021 TP
Potential
Up/Downs
ide
1 Dangcem 17.04 244.90 4,173.2 21% 261.50 4,456.09 7%
2 MTN 20.35 169.90 3,458.2 17% 177.00 3,602.75 4%
3 Airtel 3.76 851.80 3,201.2 15% 500.00 1,879.08 -41%
4 BUA 33.90 64.00 2,169.6 9% 59.10 2,003.49 -8%
5 Nestle 0.79 1,505.00 1,192.9 6% 1,363.30 1,080.63 -9%
6 GTB 29.43 32.25 949.2 5% 39.90 1,174.30 24%
7 Zenith 31.40 24.80 778.6 4% 29.90 938.76 21%
8 Stanbic 11.11 44.05 489.2 2% 50.10 556.41 14%
9 NB 8.00 56.00 447.8 2% 45.30 362.26 -19%
10 WAPCO 16.11 21.05 339.1 2% 32.50 523.50 54%
11 ACCESS 35.55 8.45 300.4 2% 10.50 373.22 24%
12 UBA 34.20 8.65 295.8 1% 9.00 307.79 4%
13 FBNH 35.90 7.15 256.7 1% 7.40 265.63 3%
14 SEPLAT 0.59 402.30 236.7 1% 571.50 336.30 42%
15 DANGSUGAR 12.15 17.60 213.8 1% 27.00 327.97 53%
Sum 18,502.4 88% 18,188.2 2%
The UCAP/NSE 15 Index
Performance
Drivers Weight 2020 Bear Base Bull
Improve COVID-19 10%Domestic Macro
Moderate Oil Market 15%
Muted Yield Environment 30%
Bad Capital Flows & FX Market 25%
Corporate Earnings 20%
All Share Index 100% 40,270.72 30,000.00 42,000.00 45,092.83
YTD Return 50.0% -25.5% 4.3% 12.0%
2021 Scenerio
Key
Figure 52
Figure 53
Nigeria Outlook 2021: A Shot at Recovery
61 www.unitedcapitalplcgroup.com
‘muted’ or “Moderate” back to “Bad”, or the yield environment surge rapidly to double
digit, our bear case scenario estimates a 25.5% correction in the market. Notably, the
bear case scenario also paints a picture of the inherent risk factors in the market in 2021.
Ultimately, a better than expected improvement in most of these variables implies that
our best-case scenario of 12.0% may be achieved.
Action for Investors: Overweight equities in Q1-2021, Buy defensive stocks
Overweight equities in Q1 2021.
We anticipate continued buy-interest going into Q1-2021. We advise investors to
overweight equities in Q1-2021 while awaiting clarity in the treasury markets. Q1-2021
presents an opportunity for investors to strategically benefit from the last wave of the
recent rally before a potential correction in Q2-2020.
Accumulate defensive stocks in Q1 -2021.
We recommend investors accumulate defensive stocks in this current cycle due to the
uncertainty and anticipated limited inflows into the economy. We recommend stocks
with history of consistent dividend payment, resilient revenue performance and earnings
stability.
The market will reward growth
We think the market would reward companies with healthy financial performance in 2021
given that while we expect yield reversals we expect investors to retain some level of
interest in the equities market. Thus, we advise investors to focus on buying stocks with
decent potential to grow earnings in the current macroeconomic climate.
Financial Markets
We advise investors to
play bullish on equities
in Q1 2021 but
underweight equities in
subsequent quarters.
Sectors
Nigeria Outlook 2021: A Shot at Recovery
64 www.unitedcapitalplcgroup.com
Agricultural Sector
Constrained by poor operating structure
Nigeria’s agriculture sector output growth stayed positive through 2020 but at a
considerably slower pace. Despite increased government attention, growth remained at
a low single digit level. Compared to a 3.0% 5-year average growth rate, the sector grew
by 2.2% in Q1-20, majorly driven by crop production (+2.4%), and forestry (+1.7%).
However, the emergence of the coronavirus pandemic which brought restrictions in the
movement of goods and people, dragged growth in Q2-2020 as the crop production sub
-sector, which accounted for over 85.0% of the sector slowed to 1.4%. The agriculture
sector growth further tapered in Q3-2020 (+1.4%) as flooding and low harvest yields
impeded output growth for farmers.
Rising food prices: Any end in sight?
According to data from the Nigerian Bureau of Statistics (NBS), food inflation climbed to
18.3% (highest level since 2018) at the end of Nov-2020. The pressure on food prices is
reflective of supply shortages due to the closure of the land borders by the Federal
government amid efforts to curb illegal smuggling of food items into the country.
Furthermore, persistent flooding & insecurity in food-producing North eastern states
(Farmers-herdsmen clashes & Boko haram attacks) negatively impacted harvests. These
constraints weighed on the supply of food items and consequently fed into higher prices.
More specifically, data on selected food prices published by the NBS put shows that the
prices of staple food items such as Yellow Garri (+57%), Maize (+48%), Imported Rice
(+39%), Yam (+35%), and Onion (+33%), reported the sharpest uptick over the last 12
months. To ease the growing pressure on food prices, the FGN has announced the
reversal of the land border closure as the net effect of the closure undoubtedly had a
harsh effect on the populace. Nevertheless, while the reopening of the border would
...sector output growth
stayed positive through
2020 but at a
considerably slower
pace
Sectors
Source: NBS, United Capital Research
...pressure on food
prices is reflective of
supply shortages.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Q1-1
5
Q2-1
5
Q3-1
5
Q4-1
5
Q1-1
6
Q2-1
6
Q3-1
6
Q4-1
6
Q1-1
7
Q2-1
7
Q3-1
7
Q4-1
7
Q1-1
8
Q2-1
8
Q3-1
8
Q4-1
8
Q1-1
9
Q2-1
9
Q3-1
9
Q4-1
9
Q1-2
0
Q2-2
0
Q3-2
0
Covid-19 and planting season dragged Agriculture sector
growth Agriculture sector quarterly growth rate
Agric. GDP 5-year average
Figure 54
Nigeria Outlook 2021: A Shot at Recovery
65 www.unitedcapitalplcgroup.com
provide some respite for food prices, we think the insecurity in the north and sustained
abnormalities in weather conditions (inadequate rainfall and in some cases abnormal
rainfall which leads to farmlands flooding) would weigh on output and consequently
keep prices elevated.
Basking in the FGN’s favourable policy environment
2020 was the year for the Palm Oil operators as the closure of land borders as well as
other favourable government policies (35% levy on imported palm oil, import ban on
refined oil, the exclusion of palm oil and related products from sourcing dollars from the
official FX) supported revenue expansion. Also, Nigeria’s huge population continued to
create market for the players to exploit. Nigeria consumed c. 3.0mn metric tons (MT) of
fats and oils as of 2018, with palm oil accounting for 44.7% (1.34mn MT). In the same
period, palm oil production stood at 1.02mn MT, resulting to a supply shortfall of 0.32mn
MT. Thus, indicating opportunities for local production expansions.
The future of the Palm oil industry in Nigeria remains bright as the key players continues to
invest aggressively in capacity expansion. For instance, OKOMUOIL has a c.9,000 hectares
of mature plantation from its extension II. Also, PRESCO recent move to expand its existing
Palm Oil mill from 60 ton/hour to a 90 ton/hour milling plant by year-end 2020,
construction of a new 60 ton/hour Palm Oil mill in Sokoban estate, which is to be
completed in 2023, and expansion of the company’s palm kernel oil plant to 350 ton/day
PKO plant (current capacity: 60 ton/day), will support their topline growth. Despite the
recent rally in the stock market, we believe that the key tickers in the Palm oil industry
offer an opportunity for investors to position. To further buttress our stand, valuation
multiples of Nigerian players are at a discount to African and Middle Eastern peers.
Sectors
...the reopening of the
border would provide
some respite for food
prices
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
4.0%
8.0%
12.0%
16.0%
20.0%
Ap
r-18
Jul-1
8
Oc
t-18
Jan
-19
Ap
r-19
Jul-1
9
Oc
t-19
Jan
-20
Ap
r-20
Jul-2
0
Oc
t-20
Land border closure left an imprint
on food inflationTrend of food m/m inflation
Y/Y M/M
Figure 55
Source: NBS, United Capital Research
Select Food Items % Chg Gari (Yellow) 57%
Maize Grain (Yellow) 48%
Rice (imported high quality) 39%
Yam Tuber 35%
Onion Bulb 33%
Local Rice (Sold loose) 32%
Tomato 32%
Broken Rice (Ofada) 22%
Irish Potato 21%
Vegetable Oil:1 Bottle 20%
Sweet Potato 18%
Ripe Plantain 15%
Groundnut Oil: 1 Bottle 15%
Unripe Plantain 13%
Iced Sardine 11%
Palm Oil: 1 bottle 11%
Chicken Wings 10%
Frozen Titus 10%
Wheat Flour: Golden Penny 2kg 10%
Sliced Bread 500g 9%
Figure 56
Nigeria Outlook 2021: A Shot at Recovery
66 www.unitedcapitalplcgroup.com
Outlook
Still a growth story
Looking ahead, we expect the Agricultural sector to continue to be at the forefront of
Nigeria’s diversification plan. Thus, we think the Federal government in conjunction with
the CBN will sustain its fiat-led interventions in the sector as part of efforts to drive growth.
In addition, we expect improved policy response from the Federal government
particularly on long standing issues such as land use, farming methods as well as quality of
farming inputs. As the threat of coronavirus induced lockdown continues to abate across
the world and Nigeria, without ruling out the potential impact of a 2nd wave, we expect
growth in the Nigerian Agriculture sector to further improve, estimated to be sustained at
c.2.0% in 2020 on the back of favourable policy interventions by government. In 2021, we
anticipate an annual growth of 2.5% in 2021, lower than the 5-year average growth rate
of 3.0% due to overall instability in the key food producing state of federation. That said,
we still highlight the long-term growth potentials of investing in the sector, given Nigeria’s,
c.60% unutilized arable land, weak mechanization rate and low fertilizer penetration..
However, we note that for the sector’s potential to be fully realized, adequate
investments must be made across the entire agro-business value chain in conjunction with
supporting policies as well as resolving age-long structural challenges like land laws,
farming inputs & methods, security bottlenecks, storage facilities as well as route to
markets.
In the oil palm sub-sector, we expect increased palm oil supply in the medium term, as
players continue to benefit from favourable government policies and the low-yield
environment which supports capex investments. Demand for palm oil is set to recover as
lockdown restrictions across the world begin to moderate particularly in top consuming
markets like China and India. For the key players in the palm oil sector (OKOMUOIL and
PRESCO), we see upside potential for sales volume, especially on the domestic front
driven by rising global crude oil prices. However, our concerns for operators in 2021
include the reopening of the borders and the implementation of the Africa Free Trade
Continental Agreement (AfCFTA) which may drag volumes and hurt margins.
Favourable
government policies
and tight FX conditions
should support growth
story but reopening of
land borders portends
a key downside risk.
Sectors
Nigeria Outlook 2021: A Shot at Recovery
67 www.unitedcapitalplcgroup.com
Banking Sector Review and Outlook
Beating the odds
The Nigerian banking sector dynamics continued to change in 2020. By the NBS’s
estimates, the financial services sector came through as one of the best performing
sectors in the economy despite the recession. The sector printed a 28.4% growth in Q2-
2020 (Vs. -6.1% contraction for the broader economy). However, operators in the banking
sector continued to endure rash policy action which kept their performance broadly
muted. While the never-ending regulatory pressure which drove both asset yields and
cost of funds to record lows persisted, the unexpected outbreak of Covid-19 mounted
fresh pressure on asset quality due to the ensuing global economic lockdown. In the local
economy, activities in the aviation, hospitality, non-essential manufacturing, and related
sectors were grounded for at least two months. More importantly, the oil market witnessed
another episode of price plunge due to an initial breakdown in supply management
agreement by OPEC+, global supply chain disruption and demand shock. Effectively, the
currency market slumped into another crisis as the CBN re-imposed its demand
management policy, while limiting supply to the I&E window market and was then forced
to devalue the naira.
Amid fresh pressure on asset quality triggered by the pandemic and the CBN’s aggressive
policy easing ( such as slashing MPR to 11.5% amid a massive amount of liquidity injection
into the system), the naira was devalued twice, while a new policy to allow beneficiaries
of personal remittances access their dollar inflows in cash via their domiciliary accounts
was introduced. Notably, total assets for banks saw double-digit growth, thanks to
massive expansion in cash & cash equivalents, amid increased system liquidity and
exchange rate devaluation. With pressure from the CBN for banks to lend, Nigerian banks
expanded their loan books by a massive N4.0trn while interest rates on lending and
deposits fell to record levels. In 2021, asset quality concerns, capital adequacy, direction
of monetary policy around tightening and rate reversal as well as exchange rate volatility
would be critical areas to watch.
Financial Performance: Revenue, efficiency ratios, and profitability
The performance of Nigerian Banks in 9M-2020 was broadly muted. Save for ACCESS,
which reported a 15.4%y/y growth during the period, average Gross Earnings (GE) growth
for top players sampled settled at 2.2%. Unsurprisingly, muted GE growth was driven by a
sector wide decline in interest income, which declined 1.0% on average for our sampled
Banks, thanks to UBA and ETI who reported 6.5% and 6.7% uptick each due to their Pan
African presence. Recall that the CBN’s monetary stance, including LDR policy and
liquidity influx, favoured a low interest rate environment during the year. This drove lending
rates as well as asset yields to record lows as T-bills rates crashed below 1%, while the
reference rates for commercial loans (prime lending rate, for instance) fell to 11.3% as at
Oct-2020, the lowest level in more than 15 years. Beyond regulatory pressure, poor GE
Financial services
sector growth
outpaced broader
economy in 2020
Sectors
Gross earnings across
our sample banks grew
2.2%.
Nigeria Outlook 2021: A Shot at Recovery
68 www.unitedcapitalplcgroup.com
growth is traceable to a conservative approach to risk creation amid asset quality
pressure created by the coronavirus pandemic which devastated many businesses. On
the flip side, monetary policy stance favoured interest expense which fell even faster,
down -13.9% on average as Cost of Funds (CoF) tumbled by the same token. Notably,
deposits rate for 1-month to 12-month placements all fell to the lowest levels since 2010,
as 12-M deposits rate hit 4.9% while 1-month deposit rate settled at 2.2%. Accordingly, Net
interest margins expanded 7.7% on average for our sampled banks.
Interestingly, non-interest income surged across the sector, save for GUARANTY, jumping
by more than 30% on average. Notably, this was attributable to stronger contributions
from electronic banking and trading income during the year. Aside E-Business income,
trading income also surged in 2020 amid increased activities in the Fixed income and
currency market space.
Increased default risk created by the pandemic was reflected in a spike in impairment
charges across the sector, up 128.7% on average, as banks booked billions of naira in
loan losses as at 9M-2020, ahead of the full year result. ETI(N61.5bn), FBNH (N46.7bn),
ACCESS (N34.2bn) and ZENITH (N25.1bn) recorded the largest loan losses with over N25bn
worth of impairment charges. The above notwithstanding, Nigerian Banks continued to
beat the odds, resiliently printing impressive profitability numbers during the period.
Despite PBT & PAT growth as at 9M-2020 being mixed with a positive bias, PBT and PAT
numbers remained strong. ZENITH (N177.3bn), GUARANTY (N167.4bn), ACCESS (N116.6bn),
UBA (N90.4bn), STANBIC (N76.9bn) and FBNH (N63.3bn) all reported PBT and PAT numbers
in excess of N50bn naira as 9M-2020, implying that the FY-2020 number may at least
match that of 2019. Also, Cost to income ratio for our sampled banks averaged 57.0% as
of 9M-20, slightly below 60.1% as of 9M-19, suggesting that efficiency improved across the
sector. Also, NIM slipped to 6.6% relative to COF, which average 2.8% as of 9M-2020.
Loan losses surged by
an average of 128.7%
across our sample
banks due to elevated
default risks in the face
of the pandemic
Sectors
Source: CBN
0.0
10.0
20.0
30.0
40.0
Jan
-06
De
c-0
6
No
v-0
7
Oc
t-08
Se
p-0
9
Au
g-1
0
Jul-1
1
Jun
-12
Ma
y-1
3
Ap
r-14
Ma
r-15
Feb
-16
Jan
-17
De
c-1
7
No
v-1
8
Oc
t-19
Se
p-2
0
Dovish stance drove TBills to sub-1%Policy Rate, Tbills and Lending Rates (%)
MPR Prime Lending Rate
Max Lending Rate Tbills
0.0
5.0
10.0
15.0
20.0
Jan
-06
De
c-0
6
No
v-0
7
Oc
t-08
Se
p-0
9
Au
g-1
0
Jul-1
1
Jun
-12
Ma
y-1
3
Ap
r-14
Ma
r-15
Feb
-16
Jan
-17
De
c-1
7
No
v-1
8
Oc
t-19
Se
p-2
0
Deposit rates hit all time lowDeposit Rates trend from 2006 to 2020
(%)
1-M Rate 3-M Rate
6-M Rate 12-M rate
Figure 57 Figure 58
Nigeria Outlook 2021: A Shot at Recovery
69 www.unitedcapitalplcgroup.com
Assets Quality, Liquidity and Capital Adequacy
Nigerian Banking sector Total Assets stood at N47.82trn as at the end of June 2020.
Compared to Nigeria's GDP total banking assets as a ratio of GDP remained quite low
compared to the size of the economy as well as regional peers. A review of bank
balance sheets showed that the improvement in total asset is traceable to a sector wide
jump in cash & cash equivalents, averaging 52.0% for our sampled banks. We note that
this may be connected to the net increase in OMO maturity injections into the system,
which was followed by excess CRR debits and an eventual introduction of special bills to
further spur system liquidity going forward. More importantly, total banking sector credit
witnessed a dramatic increase in the last 12-Month, thanks to the CBN’s Loan-to Deposit
Ratio (LDR) policy which mounted pressure on Banks to lend. Recall that the CBN revised
its guideline on LDR in Jul-19 to 60.0% (then revised to 65.0% in Oct-19) to compel the
banks to lend to the private sector. As of Nov-2020, gross credit in the books of the banks
stood at N19.5trn, expanding by a whopping N4.0trn from N15.1trn in Q2-2019, just before
the apex bank launched its LDR policy.
While previous episodes of aggressive increase in loan growth appear to have been
associated with a surge in Non-Performing loans ratios, it is interesting to note that industry
NPLs sustained a downtrend so far in 2020, sliding from 9.3% in Q2-2019 to 5.7% as at Q3-
2020, despite the threat of Covid-19 pandemic on asset quality across the sector.
However, this remains higher than the 5.0% threshold. We also observed an increase in
cost of risk, as Banks booked billions of naira in impairment losses in line with IFRS 9,
implying that audited result for FY-2020 may print higher NPL ratios for individual banks.
In terms of credit allocation, the oil & gas sector remained the most attractive for Nigerian
banks, with a lion share of 25.8% (previously 28.2%), followed by the Manufacturing sector
with 15.3% (previously 15.2%), while General Businesses (8.4%) and Government (8.0%)
ranked as the third/fourth priority for the banks. Financial Services (7.1%), Trade (6.4%), ICT
Total banking assets to
GDP ratio continues to
lag regional peers.
Sectors
Asset quality remained
strong in 2020 with NPLs
declining to 5.7% aa of
Q3 2020 from 9.3% in
Q2 2019.
Source: CBN, NBS, United Capital Research
5.0%5.3%
10.7%
14.8%
15.0%
14.8%
14.2%
11.7%
9.3%
6.7%6.4%
5.7%
4%
6%
8%
10%
12%
14%
16%
12.0
14.0
16.0
18.0
20.0
22.0
Q1 2
015
Q2 2
015
Q3 2
015
Q4 2
015
Q1 2
016
Q2 2
016
Q3 2
016
Q4 2
016
Q1 2
017
Q2 2
017
Q3 2
017
Q4 2
017
Q1 2
018
Q2 2
018
Q3 2
018
Q4 2
018
Q1 2
019
Q2 2
019
Q3 2
019
Q4 2
019
Q1 2
020
Q2 2
020
Q3 2
020
Trn
'N
Industry NPLs sustained a downtrend so far in 2020
Nigeria Banking Sector Credit vs. NPL Ratios Trend
Total Credit NPL Ratio
Figure 59
Nigeria Outlook 2021: A Shot at Recovery
70 www.unitedcapitalplcgroup.com
(4.8%), Agriculture (4.7%), Construction(4.7%) and Power(3.7%), fell within the 7% to 3%
allocation range. On the flip side, Mining & Quarrying, Educational services, Transport
Services, and Real Estate, were the least attractive sectors for the banks.
Capital adequacy ratio (CAR) amongst banks within our coverage remained well ahead
of the minimum threshold. According to the CBN, industry CAR was 15.5% as at Q3-2020
due to its rather stricter requirements. Liquidity ratio for the banks also stayed above the
30% threshold at 35.6%. In line with the LDR policy, effective CRR for Nigerian banks was
well above the 27.5% threshold, estimated to be above 50% for many banks. Hence, CBN
introduced the special bills, selling c.N4.1tn at 0.5% with 81 days maturity, reportedly
refunding between 50% - 80% excess CRR surplus of banks in the apex bank’s position.
Sector Outlook: Not bad, not so shiny
Slower loan growth
As observed above, the CBN’s LDR policy triggered an upsurge in credit to the tune of
c.N4.0trn as at Q3-2020. According to the CBN, these loans were granted mainly to
manufacturing (N738.0bn), General Commerce (N874.0bn), Agric and Forestry
(N301.0bn), Construction (N291.0bn), and the ICT (N231.0Bn). With the CBN sticking to its
current policy stance, we imagine that the banks will be compelled to sustain credit
expansion to the real sector with the main beneficiary being the abovementioned
sectors, considering the CBN’s increased efforts to reduce credit expansion to the oil &
gas sector while expanding credits to other sectors. Nevertheless, we think asset quality
concerns in the sector will worsen as the loan book continues to expand. As such, NPL
ratios are likely to retrace northwards.
Capital Adequacy
Ratio (CAR) remained
above regulatory
requirement of 15.0%.
Sectors
Source: NBS
28.3
15.2
7.4 8
.7
7.2
6.8
4.6
4.2
4.3
4.1
3.7 5
.4
25.8
15.3
8.4
8.0
7.1
6.4
4.8
4.7
4.7
3.7
3.4
7.7
OIL
& G
AS
MA
NU
FA
CT
UR
E
GE
NE
RA
L
GO
VT
FIN
AN
CE
TR
AD
E
ICT
AG
RIC
CO
NS
TR
UC
TIO
N
PO
WE
R A
ND
EN
ER
GY
RE
AL
E
ST
AT
E
OT
HE
RS
The O i l & Gas secto r remained the mos t a t t rac t ive fo r banks
Bank i ng Sec to r C red i t D i s t r i bu t i on I n 2019 Vs . 2020 (%)
2019 2020
Figure 60
Nigeria Outlook 2021: A Shot at Recovery
71 www.unitedcapitalplcgroup.com
Lower interest income
In 2021, we expect interest income to remain pressured amid the low interest rate
environment driven by the CBN’s sustained dovish stance. Although we imagine that
policy tightening will return before the end of the year, we expect the low-rate
environment to be sustained till Q2-2021, as the special bills recently introduced by the
CBN matures from Q2-2021. On the flip side, this also implies that cost of funds will stay low,
albeit with a slight uptick. Accordingly, net interest margin is likely to weaken compared
to the rather stable performance observe in 2020.
Weaker non-interest income
Observably, non-interest income growth was driven by e-banking and trading income in
2020. On one hand, e-banking income was boosted by the widespread adoption of
digital and agent channels, such as mobile Apps, POS, ATM, USSD and Chat bots, which
were well supported by an increased preference for zero contact banking amid the
pandemic- induced social distancing. On the other hand, increased income from fixed-
income trading, buoyed by the lower yield environment and exchange rate gains, drove
trading income. However, in 2021, we do not expect non-interest income to sustain the
same momentum for two reasons. Firstly, growth in digital banking and related income is
likely to moderate going forward, except the banks continue to innovate or diversify into
related business which has started materialising, considering the recent rush towards
Holdco structure. Secondly, trading gains are unlikely to generate the same level of
income in 2021 as dynamics in the bond trading space changes. With changes in the
yield environment going forward, dealers are likely to begin to exit their position resulting
in a potential realised mark-to-market losses.
Profitability to be pressured
With the expected pressure on interest and non-interest income, we think bank profit
margins will be weaker in 2021, albeit marginally. Although, Nigerian banks were able to
maintain resilient profit margins in 2020 due to the upsurge in non-interest income and a
stable net interest margin, we see profit numbers softening mildly in 2021, due to softer
growth in e-banking and trading income as well as muted interest income growth.
Sound capital base and liquidity
Overall CAR ratio for Nigerian banks stood at 15.5% as at Q3-2020 while liquidity ratio
settled at 35.6%. In 2020, we expect CAR to be moderately pressured due to a likely
uptick in NPLs which trended southwards despite the threat of Covid-19 in 2020. While the
CBN seems satisfied with the capital ratios for the banks, we note that recapitalizing the
banks remains an agenda of the current leadership of the CBN. Recall that the CBN
governor, on his second-term reappointment, hinted his intention to recapitalize the
Banks. The last capitalization exercise done in Nigeria was back in 2004, wherein the
banking sector’s minimum capital base was revised upward from N2.0bn to N25.0bn. With
Non interest income
may come under
pressure in the face of
weaker trading gains.
Sectors
Net Interest Margin
may weaken in 2021 as
against the fairly stable
performance observed
in 2020.
Pressure on interest and
non-interest income is
expected to weigh on
profitability.
Nigeria Outlook 2021: A Shot at Recovery
72 www.unitedcapitalplcgroup.com
more than three episodes of exchange rate devaluation since 2004, we note that the
current minimum capital base for banks in dollar terms is down from c. $250.0mn in 2004
to less than $65m today. Although most of the tier-1 banks, and some tier-2 banks, will be
in a good position to withstand a recapitalization exercise if adjusted to reflect the
current exchange rate environment, some tier-2 banks and more importantly unlisted
banks may not stand a chance.
The proliferation of HoldCo structure
With persistent changes in the dynamics of the core banking environment, Nigerian banks
seem to be opting to restructure their operations into a holding company (“HoldCo”)
structure. As noted above, with a potential slowdown in e-banking income growth going
forward, the need to continue to innovate or diversify into new growth areas will be
critical for performance going forward. In Q3-2020, ACCESS announced plans to adopt a
HoldCo structure, following a similar announcement by GUARANTY much earlier in the
year. GUARANTY on its part, plans to acquire a PFA and Asset Management arm,
reorganize its FinTech business as well as strengthen its base in Africa as a separate
subsidiary. Similarly, Sterling Bank announced a similar decision, with plans to restructure
into FinTech, Islamic Banking Etc. The HoldCo move appears driven by changing
dynamics in the economy, and especially, the increasing opportunity in the technology
space. To buttress this point, operating a separate FinTech subsidiary appears to be a
common factor across board. If this move goes as planned, HoldCos will account for the
majority of Banks in 2021 and beyond, as FBNH, Stanbic and FCMB already operate as
HoldCos.
Evolution of Payment Service Banks (PSBs)
The evolution of payment service banks (PSBs) was expected to shape the banking sector
landscape in Nigeria in 2020. Currently, the CBN has granted approvals-in-principle to
three new PSBs: Hope PSB (a subsidiary of Unified Payment), Money Master PSB (a
subsidiary of Global telecommunications) and 9PSB (a subsidiary of 9Mobile
Telecommunications). However, the penetration of these PSBs remains low. A PSB is usually
a subsidiary of a telecommunications company, supermarket chain or a similar large
business-to-consumer (B2C) firm that acquires a license to provide financial services by
leveraging its existing telecommunications or distribution infrastructure. PSBs are permitted
to offer banking services such as deposit-taking, remittances, payments processing and
mobile wallets. The objective of these banks is to increase financial inclusion and depth in
Nigeria by providing tailored financial products to unserved and underserved customers.
The guidelines allow mobile network operators to obtain PSB licenses which would enable
them to receive customer deposits - similar to guidelines in other mobile-led markets like in
East Africa. However, unlike other markets, the guidelines prohibit PSBs from issuing loans
to customers.
Banks begin to
embrace the HoldCo
structure with Fintech
as focal point as board
Sectors
Nigeria Outlook 2021: A Shot at Recovery
73 www.unitedcapitalplcgroup.com
Agency and retail banking on the rise
Apart from the adoption of PSBs, which is one of the variations of a telco led financial
inclusion model, the usage of mobile money agents to facilitate banking services such as
Account Opening, Instant Card Issuance, Cash Deposit, Cash Withdrawal, Funds Transfer,
Airtime Recharge, Bills Payment etc., rose faster in 2020. For the sake of simplicity, agency
banking is essentially a cost-effective solution to the problem of financial inclusion and
financial access to the unbanked and underbanked population. While Telcos seem
better positioned to solve the problem of financial inclusion for the unbanked rural and
remote Nigerians, with a reach far surpassing banks’, the banks are racing to outpace the
Telcos using the agency banking model. First Bank and FCMB alone have over 50,000 and
1,350 agents, respectively. However, MTN, with its Super-Agent license, is well ahead of
the game, boasting of 180,000 Mo-Mo Agents. After rolling out in Lagos, Kano, Rivers and
Oyo, MTN hinted that it has 3,000 agents in Kano alone. As such, it appears that telcos
can leverage existing airtime retail outlets to quickly expand their agent networks.
Banks relying on
agency banking model
to catch up with telco
footprints in mobile
money services
Sectors
Nigeria Outlook 2021: A Shot at Recovery
74 www.unitedcapitalplcgroup.com
Consumer Goods Industry
2020 review: Sluggish recovery persists amidst Covid-19 pressures
The sluggish recovery in the Food, Beverage & Tobacco sector persisted in 2020 despite
the severe impacts of Covid-19 on the economy. The outbreak of the coronavirus
pandemic in Nigeria impacted several businesses, leading to widespread layoffs and
wage cuts, as businesses struggled to stay afloat. According to data from the National
Bureau of Statistics (NBS), unemployment rate printed at 27.1% at the end of Q2 2020 from
23.1% in Q3 2018. The NBS report highlighted a significant surge in the underemployment
rate to 28.6% in Q2 2020 (from 20.1% in Q3 2018) which painted a clearer picture of the
job pressures created by the pandemic. As a result, consumers have had to grapple with
weakening nominal income growth.
Furthermore, consumers had to take in the impact of the full deregulation of the
downstream oil & gas sector and the hike in electricity tariffs by the National Electricity
Regulatory Commission (NERC). Considering the strategic impact of these items on
transportation and energy costs, consumers have had to reshuffle spending patterns.
Compounding consumer woes was the rapid surge in food prices which exacerbated the
already fragile purchasing power.
The weakness in consumer income, and consequently, spending, resulted in a dip in the
Food, Beverage & Tobacco sector GDP which dipped 3.0% y/y in Q2 2020, albeit slower
than the 6.1% y/y decline in overall GDP. In addition, the sector rebounded significantly in
Q3 2020, climbing higher by 5.6% y/y (the highest quarterly growth in 10 quarters). We
believe strategies implemented by many consumer firms particularly with “sachetisation”
of products supported demand recovery in Q3 2020.
Food, Beverage &
Tobacco sector
outpaces broader
economy recovery
post-lockdown.
Sectors
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
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
Q1
20
Q2
20
Q3
20
2015 2016 2017 2018 2019 2020
Food, Beverage & Tobacco recovery outpaces broad economy Food, Beverage & Tobacco GDP
Food, Beverage & Tobacco GDP Growth
Source: NBS, United Capital Research
Figure 61
Nigeria Outlook 2021: A Shot at Recovery
75 www.unitedcapitalplcgroup.com
FMCGs
Poor market underpins poor performance
The performance of FMCG firms within our coverage was largely tepid in 2020, reflecting
the myriad of challenges they had to tackle. The widespread weakening in consumer
income, selective impacts of Covid-19on some business segments (for example, Nestle
and Unilever saw weaker demand for bouillon cubes due to limited Quick Service
Restaurants (QSR) operations and social gatherings), increased dollar costs of raw
materials due to recent devaluations combined to undermine the performance of
FMCGs in 2020. Based on 9M 2020 numbers, Nestle and UACN reported a marginal 0.7%
y/y and 1.7% y/y growth in Revenue while cost pressures weighed on profitability as Pre-
Tax profits dipped 12.9% y/y and 68.2% y/y, respectively. The narrative was more severe
for Home & Personal Care (HPC) exposed companies like Unilever (Revenue: -13.4% y/y
while recording a Pre-Tax loss of N2.6bn) as consumers aggressively traded down by
buying discount and unbranded alternatives in the face of pressured income.
Brewers
Covid-19 disrupts brewery promise
Heading into 2020, beer producers were expected to deliver strong performances,
following price adjustments by Nigerian Breweries and Guinness in November in a bid to
pass on some of the pressures from the new ad-valorem excise regime. However, the
occurrence of the Covid-19 pandemic disrupted the promise expected from the sector
as Revenue across all our coverage companies dipped. Nigerian Breweries (-0.7% y/y to
N234.0bn), Guinness (-27.1% y/y to N90.6bn) and International Breweries (-1.5% y/y to
N95.8bn) all saw revenue decline in the first nine months of the year. The decline in
Revenue was particularly pronounced in Q2 2020 (Apr – Jun) as the nation was in total
lockdown. Covid-19restrictions implied social gatherings (like parties & concerts) were
barred while on-trade channels like bars, clubs, restaurants etc. were shut. Nevertheless,
as the restrictions were gradually lifted, sales for brewers began to recover in Q3 2020.
Food Processors
Border closure supports segment despite Covid-19 pressures
The food processing segment of the consumer goods sector was the least pressured, as
closure of the nation’s land borders provided adequate support for the industry against
Covid-19 pressures. We recall that in August 2019, President Muhammadu Buhari
announced the closure of Nigeria’s land borders in a bid to curb the illegal smuggling of
products and weapons into the nation. The closure of the borders implied that frequently
smuggled products like sugar, flour, oil, and rice were largely restricted all through 2020.
As a result, food processors under our coverage benefitted significantly, as they regained
greater pricing power and saw volumes surge on the back of subdued competition from
Nigeria’s poor market
underpinned the poor
performance of
Nigerian FMCGs in
2020.
Sectors
Covid-19 restrictions on
on-trade channels and
social gatherings
disrupted brewers
promise.
Closure of the borders
provided adequate
support for Food
processors against
Covid-19 pressures.
Nigeria Outlook 2021: A Shot at Recovery
76 www.unitedcapitalplcgroup.com
smuggled products. For perspective, Dangote Sugar recorded 36.7% y/y increase in
Revenue to N160.5bn in 9M 2020 from N117.4bn in 9M 2019. In addition, Flour Mills of
Nigeria (FMN) recorded Revenue growth of 27.1% to N505.4bn in the first nine months of
2020.
Sector outlook
Consumer income remains key concern…Food processors still bright spot
Going into 2021, the purchasing power of the Nigerian consumer remains the highlight for
the sector. Consumer struggles persist, as SMEs who are vital in maintaining the
employment balance continue to struggle amidst several business challenges. Thus, we
struggle to see an immediate rebound in consumer income. The minimum wage, which
was expected to raise the level of wages particularly in the public sector, is yet to
permeate consumer pockets largely due to rising consumer living cost pressures. In
addition, petrol prices are forecasted to sustain an uptrend in 2020 as oil prices have
started to climb above US$50/bbl. Meanwhile, the cost-reflective electricity tariffs appear
to be here to stay, despite pressure from labour unions. Furthermore, the rising spate of
insecurity (via Boko haram attacks & herdsmen attacks) in the North is expected to
cripple food production. As a result, food prices are expected to be elevated in the first
half of the year. Considering these challenges, the average consumer would be bracing
up for a challenging 2021 with regards to spending power and budget flexibility.
For our FMCG coverage firms, we expect firms within our coverage to be severely
pressured in 2021. The rising level of poverty and weaker consumer income is expected to
push more of their products into the premium end of the market. That said, the expected
Food Processors (Flour
& Sugar) was the least
impacted segment of
the consumer goods
industry.
Sectors
Weak consumer
income dents sector
outlook but Food
processors remain
bright spot.
Food &
BeverageElectricals
Home &
Personal
Care
Sugar &
Flour
SevereMildLittle
Brewers
Measuring the impact of Covid-19 on
Consumer Goods segments
Source: NBS, United Capital Research
Figure 62
Nigeria Outlook 2021: A Shot at Recovery
77 www.unitedcapitalplcgroup.com
increase in their product elasticity will likely limit their capacity to raise prices as volumes
may suffer considering soft consumer incomes. To improve their prospects, we expect
increased product launches in the discount end of the market. Increased deployment of
“sachetisation” is expected to take the forefront in 2021 as focus on affordability
increases. This is particularly important considering the growing footprints of unlisted as
well as unbranded substitutes.
For brewers, we project a strong rebound in 2021 as the full impact of price adjustment
will bolster revenue while volumes are expected to recover. With on-trade channels back
in full operation and social gatherings now back in full swing, we expect a strong recovery
in volumes while the low base effect in 2020 would contribute to a decent level of growth.
Downside risks remain possible increase in restrictions on on-trade channels and
restoration of limits on social gatherings in the event of a widespread second wave of the
coronavirus in Nigeria.
Lastly, for our food processing coverage, we expect sustained decent performance in
2021, albeit at a slower pace, as volume recovery maintains an uptrend. We do not
expect performance to be as solid as the current year due to increasing pressure on
consumer income and the likelihood of border reopening (which could see the return of
smuggled products).
Sectors
Nigeria Outlook 2021: A Shot at Recovery
78 www.unitedcapitalplcgroup.com
Cement Sector
Building Resilience
The year 2020 saw the Cement sub-sector ward off formidable challenges. As a sector
dependent on easy movement of goods, the lockdown measures led to lower demand
amid cancelled and delayed construction projects. This decline in demand was
apparent in Q2 GDP numbers, as the Construction sector and the Cement sector GDPs
declined by -31.8%y/y and -5.5%y/y, respectively. Expectedly, H1-2020 financial
performance of players in the sector also reflected this. The CBN’s Manufacturing PMI also
indicated that demand for new orders in the Cement subsector declined to 63.6pts at the
end of Q2 from 70.0pts in the previous quarter. However, the essential nature of cement
led to pent up demand since Q2-2020. This resulted in a strong recovery in the subsector
in Q3-2020 amid partial reopening of the economy. As such, this saw players printing an
average growth of 23.8% y/y in sales volumes in Q3 2020 while the cement sector
recorded real GDP growth of 12.0% y/y in Q3 2020. The recovery in the Cement sub-sector
came as no surprise considering the robust volume growth recorded by major players
operating within the sub-sector. Accordingly, based on historical precedents, we expect
the Cement subsector to finish 2020 on a strong note (Q4 numbers have historically made
up the largest portion of overall output). More so, demand for new orders, as proxied by
the CBN’s monthly PMI data, in the sub-sector showed growth from Aug-20 to Nov-20,
emphasizing further expansion in the sector.
Performance Review: Beating the odds
Cement players across our coverage recorded volume growth in 9M-20, driven by a
strong rebound in private sector demand due to the easing of movement restrictions and
a short rainy season. Beyond the uptick in volumes, players also doubled down on
deleveraging and cost efficiency through energy diversification. DANGCEM, the largest
company within the space, recorded a 10.2% y/y growth in Nigerian sales volume
supported by a 3.7% growth in the Pan-African market, culminating in a 6.6%y /y growth in
Cement sector staged
a remarkable recovery
in Q3 2020 following
unprecedented dip in
Q2 2020.
Sectors
Source: NBS, ICRC, United Capital Research
-9.0
-6.0
-3.0
0.0
3.0
6.0
-10.0
-7.0
-4.0
-1.0
2.0
5.0
8.0
Q1-1
6
Q2-1
6
Q3-1
6
Q4-1
6
Q1-1
7
Q2-1
7
Q3-1
7
Q4-1
7
Q1-1
8
Q2-1
8
Q3-1
8
Q4-1
8
Q1-1
9
Q2-1
9
Q3-1
9
Q4-1
9
Q1-2
0
Q2-2
020
Q3-2
020
Cement's show of resilienceConstruction and Cement Sector GDP vs Aggregrate GDP (%)
Cement Construction Aggregrate GDP (RHS)
Figure 63
Cement players
recorded decent
volume growth in 2020
due to strong rebound
in private sector
demand in Q3 2020.
Nigeria Outlook 2021: A Shot at Recovery
79 www.unitedcapitalplcgroup.com
revenue. In terms of energy consumption, the firm successfully migrated to locally sourced
gas (53.0%) and coal (47.0%) from LPFO (Low Pour Fuel Oil), hence limiting the impact of
foreign exchange volatility on margins. Consequently, this boosted gross margins by 1.0%
to 58.3%. Thus, the firm recorded a 12.3% y/y and 2.7% y/y growth in PBT and PAT
respectively.
Similarly, WAPCO recorded topline growth of 10.3% buoyed by growth in Q3 sales volume.
Furthermore, bottom line performance also came in stronger as PBT margin improved to
19.1%, from 12.4% in 9M 2019, thanks to the reduction in finance cost (down 54.6% y/y to
N7.5bn) further highlighting the benefit of the decision to divest from loss-making SA
operations and settlement of related party debt in 2019.
Lastly, BUACEMENT, following its consolidation and listing on the floor of the Nigerian Stock
Exchange in Q1-2020, continued on its impressive growth path as revenues grew 21.0%y/y
to N156.6bn on the back of an increase in cement sales volumes which improved by
16.0%y/y from 3,291Kt in 9-months 2019 to 3,816Kt in 9-months 2020. The Company posted
18.5%y/y growth in PBT from N50.2bn N59.5bn. This was primarily as a result of +15.7%
growth recorded in operating profit on the back of a significant increase in insurance
claims by the firm (from N0.7m to N66.4m in 9M-2020). Notably, BUACEMENT’s share of the
cement market continues to increase, at the expense of WAPCO, on the back of its
consolidation with Kalambiana Cement and merger with OBU Cement.
Leading the charge in a bullish year
The Industrial Goods sector emerged as the best performing sector (+90.8%), largely
driven by cement players outperforming the broader All Share Index (+50.0%). This was
buoyed by the positive sentiments that trailed the strong earnings recorded by the three
players. Notably, BUACEMENT was the best performer in the sector with a year end return
of 121.0%
Outlook
Cementing Resilience
Cement is a critical building material for development of physical infrastructural, which
remains a huge problem in Nigeria and Africa at large. The IMF estimates Nigeria's
infrastructure stock at c. 20-25% of GDP, far below the 70% benchmark internationally. This
has brought about to the introduction of initiatives such as the Presidential Infrastructure
Development Fund, Road Trust Fund, as well as Sukuk financing, among others to bridge
the deficit. Notably, cement demand in Nigeria is primarily driven by the public sector.
The proposed 2021 budget makes a N3.9tn provision for capital projects, 43% higher than
2020, with the major chunk going into works and housing, and transportation. Over the
next five years, we estimate more aggressive capex implementation by the FG. Private
sector demand for cement is also expected to improve, given the rapid urbanization rate
All key listed cement
companies in Nigeria
reported decent
topline growth.
Sectors
Nigeria Outlook 2021: A Shot at Recovery
80 www.unitedcapitalplcgroup.com
which continues to exacerbate the housing deficit in the country, which according to the
Federal Mortgage Bank of Nigeria is estimated at c.17.0mn.
As urbanization brings about increased demand in Africa, we expect capacity expansion
to remain a major theme in the sector, with supportive government policies such as tax
relief programs, a ban on importation and more recently, an exemption from the country-
wide border closure indicating a willingness to spur growth in the sector. We anticipate
the dynamics of the local and regional demography fueling topline growth for
companies in the cement sector. Again, the commencement of the Africa Trade
Continental Agreement (AFCTA) in Jan-2021 may further unlock the massive opportunity
of the continent’s market of c1.2bn people. After recording relatively muted growth in
export earnings in 2020, we expect a stronger showing in 2021 from industry players.
In line with the capacity expansions in Nigeria, we expect the competitive landscape to
become wider as companies continue to play on volumes. Notably, Lafarge’s
management declared plans to resume the construction of the Ashaka power plant,
after suffering pandemic-induced setbacks, with operations expected to commence by
Q3 2021. Also, increased investment in transportation and route to market as well as
diversification into local, cheaper energy sources should continue to improve profitability.
Overall, we expect the sector’s performance to build up on 2020 as the proposed budget
for 2021 indicates a record CAPEX estimate of N3.9tn (29.0% of total proposed spend).
Although the concerns remain the rather optimistic assumptions and projections. Also, the
expected improvement in pan-African exports buoyed by the AfCFTA will increase the
sectors’ output and revenue. All these suggest headroom for medium to long-term
volume growth. Even as competition intensifies and volumes continue to determine
market share, we expect players with higher energy and cost efficiency to benefit from
the increasing competition. The above notwithstanding, coronavirus-related restrictions
and the unpredictable weather are key downside risk factors which may hurt demand for
cement and may weaken profitability.
Improved government
and private sector
demand due to
increasing urbanisation
is expected to keep
cement demand
upbeat in 2021.
Sectors
The implementation of
AfCTA may further
unlock continent’s
market to Nigeria’s big
cement players.
Source: MTEF, Budget Office, United Capital Research
5.0%
15.0%
25.0%
35.0%
45.0%
55.0%
65.0%
75.0%
50.0
550.0
1,050.0
1,550.0
2,050.0
2,550.0
3,050.0
2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E
Trend of FGN capital expenditure (N'bn)Performance Percentage
Budget Actual Performance
Figure 64
Higher energy and cost
efficiency critical to
staying ahead of the
industry.
Nigeria Outlook 2021: A Shot at Recovery
81 www.unitedcapitalplcgroup.com
Oil & Gas Industry
Review: 2020 was a year of reform
In the early days of the pandemic, there was a looming oil supply glut sparked by a price
war between Russia and Saudi Arabia. That fire was eventually quenched when OPEC+
agreed to curb supply in response to unprecedented demand shocks caused by the
Coronavirus outbreak. It looked as though 2020 was going to be marred by headwinds for
the energy/oil and gas industry in Nigeria. Closing off the year, it could be argued that
the idiosyncrasies of this virus have led to these factors being a tailwind for the local oil
sector. The pandemic has pushed the Nigerian oil and gas industry to quicker adoption of
reforms which may encourage investments in the industry.
With economies and energy-reliant industries shutting down in Q1 2020, OPEC+
introduced production cuts in a bid to achieve market balance, and this affected
Nigeria’s oil and gas sector. As a result, unfavorable pricing and increased drilling costs
reduced margins of producers. Also, international, and local companies began reducing
their capital budgets, halting production in some wells and decreasing rig/well counts. All
these shutdown activities led to a contraction of 13.8% y/y in the Oil and Gas sector in Q3
2020. As such, the Oil and Gas sector was one of the worst-hit sectors even as oil share of
GDP remained significant at 8.7% (a significant drop from 9.7% in Q3 2019). Banking credit
exposure to the sector totaled 25.8% in Q3 2020.
Policy Reforms: Laudable, but more is required
The Oil and Gas sector was one the hardest hit sectors by Covid-19, as such, the
pandemic forced the authorities to take critical reforms. For instance, Nigeria removed
subsidy payment on petrol amid unprecedented pressure on oil revenue which
weakened the capacity of the FGN to sustain the subsidy program. In turn, the FGN,
through the Petroleum Products Pricing Regulatory Agency (PPPRA), introduced a price
modulation plan for the downstream sector, where prices of firms would be set on a
monthly basis, reflective of costs in the crude oil markets and other financing, storage and
transportation costs. This move was welcomed by oil marketers, as the subsidy regime
Oil glut at the start of
the pandemic was
remedied after
members of the OPEC+
alliance agreed to
historic production
cuts.
Sectors
The pandemic forced
historic policy reforms
in the oil & gas sector.
13.0
68.0
32.0
0
20
40
60
80
100
120
Jan
-13
Jun
-13
No
v-1
3
Ap
r-1
4
Se
p-1
4
Feb
-15
Jul-1
5
De
c-1
5
Ma
y-1
6
Oc
t-1
6
Ma
r-1
7
Au
g-1
7
Jan
-18
Jun
-18
No
v-1
8
Ap
r-1
9
Se
p-1
9
Feb
-20
Jul-2
0
Oil Rig Count has declined since the
outbreak of the pandemicHistorical Oil Rig Count
0.0
0.5
1.0
1.5
2.0
Bonny Light has lost its premium to
Brent since the early days of the
Pandemic Chart showing Bonny Light to Brent
Premium
Figure 66 Figure 65
Sources: Bloomberg, United Capital Research
Nigeria Outlook 2021: A Shot at Recovery
82 www.unitedcapitalplcgroup.com
discouraged true cost recovery.
Although the move to deregulate pricing is laudable, there is a major challenge. The
NNPC, through the PPMC, remains the major importer of white petroleum products (PMS,
AGO). Fundamentally, there are two major reasons for this. Firstly, oil marketers remain
concerned about a potential government back-flip (the government has already
pointed its objective is to stabilize pricing of PMS at the pumps), this is a potentially
worrying message, as the new pricing regime should depend on crude oil pricing,
meaning government’s role in the pricing mechanism is limited. The other major reason for
the NNPC still being the major importer of crude is the lack of clarity around the provision
of foreign exchange for imports of petroleum products, with the I&E window largely
muted in 2020. The Ministry of Finance has suggested that it would do everything in its
power to assist marketers in gaining access to foreign exchange to source imports.
However, there has been little quantified action on this move in 2020.
Elsewhere in the upstream, the Department of Petroleum Resources (DPR) declared new
marginal field bidding rounds. Wood Mackenzie estimates the reopening of marginal
fields in the industry, could attract about $9.4 billion of investments in Nigeria and $38.0bn
in revenue. However, IOCs remain skeptical about investment in Nigeria’s Oil and gas
sector. The protracted process of updating the laws and structures, such as the PIGB,
which govern the oil and gas industry has put-off new investment into complex offshore
developments in the country. Total Engina remains the only major deep-water investment
in the best part of a decade. The authorities also attempted to deepen gas usage with
the unveiling of the Nigerian Gas Infrastructure Network, which aims to deepen gas
penetration in Nigeria through the midstream infrastructure fund.
Outlook
Upstream sector drivers
The Federal government has announced its plans to expand production output to 3mbpd
in 2023. This expansion seems implausible in this current production cycle. As mentioned
Despite the move to
fully deregulate the
downstream oil & gas
sector, worrying signs
show government’s
desire to retain some
form of control.
Sectors
145.3 145.4 145.4 145.4
130.8 129.7
140.8
148.0145.0
151.7
161.0
168.0
162.0
Pump Price of PMS has responded to changes in Crude
PMS Pump Price Year-to-Date
Source: NBS, PPPRA
Figure 67
Nigeria Outlook 2021: A Shot at Recovery
83 www.unitedcapitalplcgroup.com
earlier, proposed OPEC quotas in a bid to rebalance oil markets saw cuts for the NNPC’s
JVs and marginal fields. In the most recent OPEC meeting, which concluded in the early
days of December 2020. Ministers agreed to adjust productions levels by +/- 500,000 bpd
monthly, reviewing market fundamentals. OPEC+ also do not expect vaccine-related
news to impact demand in the market until H2-2021. The reason for the delay considers
vaccine distribution and roll-out. There are also other supply-side concerns/constraints
which are to be considered. These has led to the Nigeria 2021 budget assumption to be
cut to 1.8mbpd from 2.3mbpd. Besides production cuts which adversely impacted the
Nigerian upstream industry in 2020, Nigeria has long held a dismal record of compliance
with OPEC+ production output quotas.
Additional cuts will have adverse effects on the profitability of the NNPC’s joint ventures
and Independent wells. OPEC has warned that countries with a history of production cut
non-compliance would need to compensate in the future. In practice, the outcome is
different, as other countries play a big brother role by covering for cuts. For instance,
Saudi Arabia recently agreed to cut output by 1.0mbpd to restore oil balance. Another
important factor is that Nigeria’s budget is benchmarked at $40. OPEC and the EIA
expect average oil price in 2021 to be at $47 and $48, respectively. However, oil taxes
(petroleum profit taxes) alone accounted for 78.1% of total Non-tax revenue (sum of CIT
and VAT) in 2019. As such, the continued shutdown of oil rigs with production quotas will
pressure government revenue. For Seplat, which operates in the upstream space, our
outlook for 2021 is moderate. We expect margins across earnings to improve, buoyed by
increased production output and rising prices amid market volatilities. Seplat’s annualized
drilling output in 2020 was 53kboepd as against 46kboepd and 49kboepd in the previous
two years. We see a moderate outlook in production output in 2021, owing to reduced
global demand and supply gluts.
Downstream Sector: Subsidies removed but structural issues remain.
In 2020, we observed fiscal tightening in some quarters which was triggered by pandemic
Oil cuts to comply with
OPEC+ agreement
continues to weigh on
budget implementation
and NNPC’s JV
profitability.
Sectors
With oil prices
expected to remain
fairly stable in 2021,
budget oil price
assumption of $40/bbl.
appears realistic.
0
50
100
150
200
250
300
350
Q1
20
16
Q2
20
16
Q3
20
16
Q4
20
16
Q1
20
17
Q2
20
18
Q3
20
17
Q4
20
17
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
18
Q1
20
19
Q2
20
19
Q3
20
19
Q4
20
19
Q1
20
20
Q2
20
20
FDI inflows into the OIl and Gas Industry slowed on the back of delayed
reform. Chart showing Capital information for Oil and Gas , MN USD
Source: NBS
Figure 68
Nigeria Outlook 2021: A Shot at Recovery
84 www.unitedcapitalplcgroup.com
related headwinds. It was clear that the NNPC would be unable to continue its fuel
subsidy program in the downstream sector. The regulatory authorities announced an end
to the PMS subsidy program, since March 2020. After the PPPRA announced monthly
prices. In Q4 2020, the Ministry of Petroleum Resources has announced it would no longer
conduct monthly price announcement but rather, it would allow market forces determine
prices. The Ministry’s role will be reduced to advising marketers on a price bound.
However, Petroleum Products Marketing Company (PPMC), a subsidiary of the NNPC,
which has been the sole importer of petroleum in the industry has revised prices twice
since the subsidy removal was announced in March. There are still calls for increased
transparency with regards to the pricing template for petrol or Premium Motor Spirit (PMS)-
changes in the months of November and December were not dependent on changes in
market fundamentals, as the NNPC increased Storage costs in November spiking pump
prices, before the FGN agreed to take out NIMASA and NPA costs in December to please
labour unions.
True liberalisation of prices has still not been achieved. Allowing the markets to determine
the true price of petroleum products will improve investments and spur increased interest
in local refining. The concerns around policy backflip remain a major worry for oil
marketers, who want price deregulation. In the near-term, the outlook for the
downstream firms in our coverage universe, Total and Ardova PLC, remains moderate
due to expected improvement in margins, which should have an immediate effect on
earnings. Increased sales volumes will also brighten the outlook for the downstream sector
in 2021. The absence full liberalisation and full cost recovery in the sector are still hindering
increased investments and growth in the downstream segments.
Another major factor expected to improve supply fundamentals in 2021 is the Dangote
refinery which is projected to be operational before the end of 2021 with a processing
power of 650,000 barrels per day. This is significantly expected to drive NNPC importation
of the white products down. In 2020, according to available data, the NNPC imports
Our outlook for
downstream
companies in our
coverage remains
moderate.
Sectors
205.3
430.6
503.6 475.7
305.4
626.8
282.3
362.2
193.1133.2
378.4
122.4 100.9
Au
g-1
9
Se
p-1
9
Oc
t-19
No
v-1
9
De
c-1
9
Jan
-20
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
NNPC Proceeds to the FGN have shrunk in 2020 NNPC Remitances to Federation in MN USD
Source: NNPC
Figure 69
Nigeria Outlook 2021: A Shot at Recovery
85 www.unitedcapitalplcgroup.com
445,000 barrels petroleum product which turns out to about 19 billion litres of refined oil
products annually.
There are also calls regarding the efficiency in the pricing band and the petroleum
equalisation fund (PEF) setting price bands for marketers, considering that marketing costs
to different parts of the country vary. The PIB bill passed second reading and there is
optimism, this time around that due to the needed reform in the Oil and Gas industry, the
bill could be passed in 2021. The bill would consolidate issues such as under-recovery in
the industry liberalizing the downstream sector into law. The bill looks to make the
upstream oil and gas in Nigeria more attractive, the government is looking to renegotiate
already existing PSC agreements with IOCs. The PIB also repeals the PPPRA and the PEF
Acts which are the major subsidy regulations which have prevented full cost recovery in
the downstream oil and gas sub-sector.
Sectors
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Se
p-1
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Oc
t-19
No
v-1
9
De
c-1
9
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-20
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-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
Dangote refinery is looking to reduce Petroleum Products deficit Nigeria Petoleum Prodcuts supply in Thousand Litres
Source: NNPC
Figure 70
Companies
Nigeria Outlook 2021: A Shot at Recovery
88 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital
Okomu Oil Palm Plc: HOLD Bloomberg: OKOMUOIL NL, Reuters: OKOMUOIL.LG, NSE:
OKOMUOIL revenue for 9M-2020 grew 19.8%y/y to N18.6bn. This increase was fueled by the sustained closure of land
borders which limited the influx of smuggled low-quality products, as well as increased pricing power in the absence of
competition from smuggled alternatives. Cost of sales declined 2.5% y/y to settle at N2.2bn. Hence, the gross profit
increased by 23.5%y/y to N16.5bn. Notably, Finance cost surged by 109.4% y/y to N0.5bn amid a significant decline in
finance income by 97.2%y/y to N0.01bn. Hence, PBT and PAT increased by 11.8% and 21.6% to settle at N6.8bn and 5.0bn,
respectively. Going forward, we expect growth in revenue to be fueled by continued volume growth as the firm continues
to leverage its brand equity to drive volumes amid favourable FX regime. However, the re-opening of land borders
remains a major downside risk. Accordingly, we rate the ticker a HOLD.
Source: Company Financials, United Capital Research Source: Bloomberg, United Capital
Presco Plc: BUY Bloomberg: PRESCO NL, Reuters: PRESCO.LG, NSE: PRESCO
PRESCO 9M-2020 result was impressive as a confluence of factors including border closure, FX scarcity and favourable
government policy continued to support business growth. 9M 2020 Revenue increased by 24.5%y/y to N18.9bn while Cost
of sales increased at a slower pace of 19.9% to N7.0bn. Hence, the gross profit jumped 27.3% to N11.9bn. Also, finance
cost declined by 7.6% to N1.2bn. Consequently, the profit before and after tax improved by 51.0% and 56.4% to N6.6bn
and N5.0bn, respectively. Going forward we expect to see continued improvement in the topline of PRESCO as the com-
pany recently concluded plans to diversify the business in a bid to play in the rubber and cocoa markets. This move will
help the broaden revenue base and presents opportunity for forex earnings via export. However, the major downside risk
to its revenue base remains the re-opening of the land border that create an avenue for smugglers.
Value Traded*: 6M Average daily value traded
Value Traded*: 6M Average daily value traded
Source: Company Financials, United Capital Research
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Relative Price Movement-OKOMUOIL
OKOMUOIL NSE ASI
Figure 70
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Relative Price Movement: PRESCO
PRESCO NSE ASI
Figure 71
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
91.0 94.3 3.7% 1.0 229.0 86.8 15,732,310 94.6%
Price TP Upside NOSH(bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
72 80.6 13.7% 1.0 189.8 72.0 32,072,500 39.9%
Key Stats FY-18 FY-19 FY-20E FY-21F
EPS 4.3 3.9 7.3 10.7
DPS 2.0 2.0 3.0 3.5
BVPS 30.2 26.0 33.3 45.1
Dividend Payout 46.7% 50.8% 41.1% 32.6%
Dividend Yield 4.9% 4.8% 4.1% 5.4%
P/E (x) 9.6 10.7 10 5.5
P/BV (x) 1.2 2.5 2.2 1.4
ROAE 16.5% 32.3% 21.9% 26.3%
ROAA 8.2% 12.2% 10.4% 15.9%
Key Stats FY-18 FY-19 FY-20E FY-21F
EPS 8.9 5.29 8.3 11.3
DPS 3.0 5.0 4.0 3.7
BVPS 31.6 30.7 33.2 31.5
Dividend Payout 33.7% 94.5% 48.4% 33.0%
Dividend Yield 3.9% 5.4% 4.4% 4.7%
P/E (x) 1.1 2.0 2.8 1.8
P/BV (x) 1.4 1.4 1.9 1.1
ROAE 29.8% 17.2% 17.5% 15.4%
ROAA 22.1% 11.6% 14.9% 15.0%
Nigeria Outlook 2021: A Shot at Recovery
89 www.unitedcapitalplcgroup.com
Companies
Source: Bloomberg, United Capital
Access Bank Plc: BUY Bloomberg: ACCESS NL, Reuters: ACCESS.LG, NSE: ACCESS
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
8.45 10.5 25% 35.5 792.5 300.4 195,298,300 95%
Access Bank Plc reported a 15.4% y/y growth in earnings to N592.8bn in its 9M 2020 result driven by a 100.0% jump in non-interest income
(NII). Increase in NII relates to gains on derivative assets i.e currency forwards, swaps and future contracts, as well as trading gains on
fixed income securities. Notably, PBT and PAT expanded 15.7% apiece, despite pressure on interest income and asset quality. As such,
reported 9-Month PAT stood at N102bn. Gross loans rose 2.5% funded by a 12.8% increase in customer deposits in Q3-2020. Annualized
ROE and ROA were 21.2% (FY-19: 17.9%) and 1.8% (FY-19: 1.6%), respectively. CAR inched higher to 21.1%, above the 15.0% regulatory
limit. In Q3-2020, ACCESS announced plans to adopt a HoldCo structure, following its sustained expansion drive across Africa. Our EPS
forecast is estimated to improve to N3.3 on the back strong PAT performance. Dividend payment is expected to be maintained at 65kobo
implying an 7.7% dividend yield at current price. P/E & P/B ratios are projected at 2.9x and 0.5x compared to 3.7x and 0.6x for peers. As
such, we place a BUY rating on ACCESS.
Source: Company Financials, United Capital Research Value Traded*: 6M Average daily value traded
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Relative Price Movement-ACCESS
ACCESS NGSEINDX NGSEB10 Index
Figure 73
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
FBN Holding Plc: HOLD Bloomberg: FBNH NL, Reuters: FBNH. LG, NSE: FBNH
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
7.15 7.41 4.0% 35.9 677.2 256.7 194,994,000 97%
Gross Earnings (GE) rose 5.0% y/y as at 9M-2020, to N439.3bn. While Net Interest Margin was pressured by the low yield environment, NII
surged 50.0% to N127.0bn. As such, PBT and PAT continued to recover, up 16.2%y/y and 31.7%y/y to N63.3.0bn and N68.2bn respectively,
despite a 64.0%y/y growth in loan loss expense to N46.7bn. To forestall unforeseen spike in NPLs by year-end, FBNH injected a fresh Tier-1
capital into First Bank Ltd, to boost CAR to 15.7% (previously 15.1%). Meanwhile, CAR for the merchant banking division surged from 15.2%
to 17.2% as at 9M-2020. Notably, this is a direct impact of the 65% divestment from FBN Insurance. Overall, FBNH’s balance sheet position
looks reasonably healthy amid the sustained increase in customer deposits, up 15.2%Ytd to N4.6tn, however, resurgence in NPL ratio by FY
-2020 is worrisome. FBNH trades at a discount to peers with PB & PE ratios of 0.4x and 3.3x compared to peer (tier 1) average 0.6x and 3.7x
respectively. However, we place a HOLD rating on FBNH in 2020 due to low upside to target price.
Value Traded*: 12M Average daily value traded
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FBNH NGSEINDX NGSEB10 Index
Figure 72 Key Stats FY18 FY19 FY20 FY21f
EPS 1.7 2.1 2.2 2.0
DPS 0.3 0.4 0.4 0.4
BVPS 14.4 18.0 18.6 20.5
Dividend Payout (%) 15% 18% 20% 20%
Dividend Yield (%) 2.4% 6.1% 6.1% 5.3%
P/E (x) 6.4 3.0 3.3 3.8
P/BV (x) 0.7 0.3 0.4 0.4
ROAE 9.8% 12.6% 11.8% 10.0%
ROAA 1.1% 1.3% 1.3% 1.1%
Key Stats FY18 FY19 FY20e FY21f
EPS 3.3 3.3 3.0 3.3
DPS 0.5 0.7 0.7 0.7
BVPS 16.7 17.1 17.6 18.0
Dividend Payout (%) 15.2% 19.6% 22.0% 21.2%
Dividend Yield (%) 4.3% 6.5% 7.7% 6.7%
P/E (x) 3.5 3.0 2.9 3.2
P/BV (x) 0.7 0.6 0.5 0.6
ROAE 15.7% 17.9% 21.2% 20.1%
ROAA 2.1% 1.6% 1.8% 1.7%
Nigeria Outlook 2021: A Shot at Recovery
90 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: GUARANTY
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
32.4 39.9 23.4% 29.4 2,516.0 953.6 668,734,100 99.8%
Value Traded*: 6M Average daily value traded
9M-2020 GE rose 1.3%y/y/ to N328.4bn, supported by 9.7% jumped in net interest income to N189.7bn. Performance was buoyed by a 24.9%
reduction in interest expense and stable non-interest income, reinforcing the bank’s position as a cost leader in the sector. We expect
GUARANTY to sustain its solid NIM and Cost of Funds (COF) positioning in its FY-2020 result and in 2021 due its huge Current and Savings
Account (CASA) deposit base. However, bottom-line was pressured by an uptick in operating expense, as well as a surge in impairment
charges, possibly reflecting the impact of Covid-19 and CACOVID donation. Thus, PBT and PAT dipped 1.9%y/y and 3.2%y/y to N167.4bn and
N142.3bn. We expect GUARANTY’s solid NIM and COF positioning to sustain its performance in 2021, however, we continue to watch the
recent decision to adopt a HoldCo structure. Dividend yield is expected to remain attractive, estimated at 7.5% in 2020 respectively. Overall,
valuation rating is retained as a BUY.
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Relative Price Movement-GUARANTY
GUARANTY NGSEINDX NGSEB10 Index
Figure 75
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 (Nbn) Value Traded* Free Float
24.5 29.9 22.1% 31.4 2,030.6 769.2 779,946,500 88.2%
Our views on ZENITH remain positive, buoyed by efficient Cost to Income ratio (CIR) and stable margins. Although Interest Income was
pressured in 2020, down 1.0%y/y to N318.8bn, sustained improvement in Non-Interest Income, up 10.7y/y to N173.5bn, supported GE (up
3.2%y/y to N492.3bn) as at 9M-2020. Again, cheaper funding cost supported profitability despite a surge in impairment charges. As such,
PAT is expected to close the FY-2020 above N200.0bn, reinstating the position of the lender as the most profitable bank in Nigeria. Also,
low Cost of Risk (CoR) at 1.3% and NPL ratio of 4.8%, buttresses our position, as this implies that asset quality will remain stable. In 2021,
performance is expected to be broadly stable with muted growth in NII while interest income should begin to witness marginal
improvement. 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, based on its operational efficiency, earnings stability and dividend consistency, we maintain a BUY rating.
Value Traded*: 6M Average daily value traded
Key Stats FY18 FY19 FY20e FY21f
EPS 6.3 6.1 5.5 6.1
DPS 2.8 2.7 2.4 2.7
BVPS 19.6 19.9 20.1 22.5
Dividend Payout (%) 44% 44% 44% 44%
Dividend Yield (%) 12.0% 10.7% 7.5% 6.6%
P/E (x) 3.7 4.1 5.8 6.6
P/BV (x) 0.9 0.8 0.6 0.6
ROAE 30.8% 30.9% 24.7% 23.6%
ROAA 5.6% 5.3% 4.7% 4.9%
Key Stats FY18 FY19 FY20e FY21f
EPS 6.2 5.7 5.5 5.5
DPS 2.5 2.3 2.2 2.2
BVPS 26.0 28.8 29.9 31.1
Dividend Payout (%) 40.6% 40.6% 40.6% 40.6%
Dividend Yield (%) 10.0% 12.5% 9.1% 8.5%
P/E (x) 4.1 3.3 4.5 4.8
P/BV (x) 1.0 0.6 0.8 0.8
ROAE 22.3% 23.6% 21.0% 18.7%
ROAA 3.3% 3.3% 3.0% 2.7%
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ZENITH NGSEINDX NGSEB10 Index
Figure 74
Nigeria Outlook 2021: A Shot at Recovery
91 www.unitedcapitalplcgroup.com
Companies
Sources: Bloomberg, United Capital
Stanbic IBTC Plc: BUY Bloomberg: STANBIC NL, Reuters: IBTC.LG, NSE: STANBIC
9M-2020 results showed a 11.2% y/y and a 19.1% y/y expansion in PBT and PAT respectively which was faster than the 4.0%y/y growth in
Gross Earnings (GE). Growth was supported by Non-interest income which jumped 20.2%y/y/ to N98.5bn in contrast to net interest income
which dipped 4.1%y/y despite reduction in interest expense. Nevertheless, PBT and PAT growth was very impressive at 11.2%y/y and 19.1%y/
y to N76.9bn and N66.2bn, respectively. Looking ahead, we expect the diversified nature of the Group in Capital market, Pensions, Banking
and lately Insurance, to continue to sustain performance, driven by the Wealth and Corporate & Investment Banking divisions. In 2021,
Trading income maybe pressured as the market readjust to changes in the macro environment, however, Fee income from the Asset
management business should continue to absorb pressure on NIM and related income lines. With a 15.0% potential upside on Stanbic, we
place a BUY rating on the ticker.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
FCMB Plc: HOLD Bloomberg: FCMB NL, Reuters: FCMB.LG, NSE: FCMB
Price Target Price Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
44.1 50.1 15.0% 11.1 1,295.1 489.2 94,355,440 41.4%
Price TP Upside NOSH(bn) Mkt Cap ($mn) Mkt Cap (N’bn) Value Traded* Free Float
3.03 3.02 0% 19.8 596.1 65.9 18,586,320 83.7%
The 9M-2020 result of the tier-2 bank was quite impressive as PAT surged 28.8%y/y to N13.9bn despite pressure on asset quality which
triggered a 70% y/y jump in net impairment loss to N13.3bn as at 9M-2020. Notably, Gross Earnings (GE) improved by 8.0% from N135.8bn to
N146.4bn driven by interest income which improved from N101.8bn to N112.1bn, as well as trading and other income. GE remained broadly
driven by commercial & retail banking which accounts for N96.3bn of total GE and bulk of PBT (N15.7bn) in 9M-2020 while the Corp &
Investment Banking division contributes N44.7bn to GE. Although the Investment management business continue to witness lots of activities,
the segment contributes only N3.2bn to GE as at 9M-2020. AUM for the segment surged 22.0% to N462bn ahead of regulatory approval for the
acquisition of AIICO Pensions which will bring AUM to N614.0bn by FY-2020. Overall, we recommend a HOLD on the stock given that market
price currently trades at par with our model estimate for 2021.
Sources: Company Financials, United Capital Research Value Traded*: 6M Average daily value traded
Value Traded*: 6M Average daily value traded
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Relative Price Movement-STANBIC
STANBIC NGSEINDX NGSEB10 Index
Figure 76
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FCMB NGSEINDX NGSEB10 Index
Figure 77
Key Stats FY18 FY19 FY20e FY21f
EPS 7.27 7.14 7.25 7.30
DPS 1.50 3.00 2.40 2.19
BVPS 22.99 28.21 34.28 40.62
Dividend Payout (%) 20.6% 42.0% 33.1% 30.0%
Dividend Yield (%) 3.5% 7.3% 5.4% 4.3%
P/E (x) 5.85 5.74 6.08 6.95
P/BV (x) 1.85 1.45 1.29 1.25
ROAE 34.4% 28.9% 23.2% 19.5%
ROAA 4.9% 4.2% 2.9% 2.3%
Key Stats FY18 FY19 FY20e FY21f
EPS 0.76 0.88 1.03 0.98
DPS 0.14 0.14 0.16 0.16
BVPS 9.3 10.1 11.2 12.1
Dividend Payout (%) 18.5% 16.0% 16.0% 16.0%
Dividend Yield (%) 12.7% 7.6% 5.4% 6.5%
P/E 1.5 2.1 2.9 2.5
P/BV 0.1 0.2 0.3 0.2
ROAE 8.0% 10.4% 9.7% 8.4%
ROAA 1.1% 1.1% 1.1% 1.0%
Nigeria Outlook 2021: A Shot at Recovery
92 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital Source: Company Financials, United Capital
Fidelity Bank Plc : HOLD Bloomberg: FIDELITY NL, Reuters: FIDELITY.LG, NSE: FIDELITY
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
2.52 2.67 6.1% 29.0 192.7 73.0 30,485,030 98.7%
Fidelity bank 9M-2020 results showed a 3.7% decrease in Gross Earnings to N155.0bn. However, PBT and PAT grew by 3.6% and 7.1% to
N213bn and N20.4bn respectively despite a 28.8%y/y increase in impairment charges to N75.0bn. Pressure on GE was traceable to weak-
er interest income which dipped by -2.0%y/y to N132.5bn and a -17.9%y/y decline in non-interest income to N18.2bn. Decline in Non-
Interest Income can be further traced to lower fees and commission income as well as net loss recognition on financial assets. Neverthe-
less, net loans improved 12.9% to N1.3trn with NPL at 4.7%, below the 5.0% threshold. The bank also remained well capitalized with a CAR
of 18.2%. Liquidity ration settled at 35.0% as customer deposits jumped 22.3% to N1.5trn. Going forward, pressure on interest income as
well as the significant increase in impairment charges is a concern for us with cost to income ratio at 66.3%. With a PE ratio of 2.8x com-
pared to peer average of 2.8x, our rating for FIDELITY is a HOLD.
Value Traded*: 6M Average daily value traded
Key Stats FY18 FY19 FY20F FY21F
EPS 0.79 0.98 0.87 0.90
DPS 0.11 0.20 0.15 0.16
BVPS 6.71 8.08 8.95 9.83
Dividend Payout (%) 13.9% 20.4% 17.4% 17.4%
Dividend Yield (%) 5.4% 8.9% 6.0% 5.8%
P/E 2.56 2.28 2.88 2.99
P/BV 0.30 0.28 0.28 0.27
ROAE 10.5% 20.0% 10.2% 9.5%
ROAA 1.5% 1.5% 1.2% 1.2%
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FIDELITY NGSEINDX NGSEB10 Index
Figure 78
Nigeria Outlook 2021: A Shot at Recovery
93 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital
Nigerian Breweries Plc: SELL Bloomberg: NB NL, Reuters:NB.LG, NSE: NB
Price TP Upside NOSH(bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
56.0 45.31 -19.1% 8.0 1,181.6 447.8 95,283,580.0 46.8%
Nigeria Breweries (NB) 2020 performance was affected by the lockdown which limited activities of on-trade channels (bars & clubs) as
well as social gatherings. Nevertheless, Revenue performance was fairly resilient declining marginally by 0.7% y/y to N234.0bn in 9M 2020.
Pre-Tax profit declined by 36.3% y/y to N11.0bn in 9M 2020 from N17.2bn in 9M 2019. Similarly, Net income plunged 43.5% y/y to N6.9bn in
9M 2020 from N12.3bn in 9M 2019. The steep decline in profitability relative to Revenue was largely due to huge operating leverage (high
depreciation expense) as well as huge finance costs. Going forward, we expect the FY 2020 numbers to come in weak particularly as
major markets like Lagos re-introduced restrictions during the festive period. In 2021, we expect volumes to recover which would
complement recent price increases to support decent Revenue recovery. In addition, with excise payments now flat on a y/y basis,
margins should receive some succor and thus support healthy profit recovery. Nevertheless, the recent rally in the local bourse has seen
market price moving beyond our model estimates. Thus, we place a SELL rating on the ticker.
Source: Company Financials, United Capital Research Value Traded*: 12M Average daily value traded
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Relative Price Movement: NB
NB FMCGs NSE-ASI
Figure 80
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
Guinness Nigeria Plc: HOLD Bloomberg: GUINNESS NL, Reuters:GUINNESS.LG, NSE: GUINNESS
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
19.0 18.4 -3.4% 2.2 109.2 41.6 31,488,720.0 49.8%
Guinness in its Q1 2021 report recorded an 11.6% y/y increase in Revenue to N30.0bn from N26.9bn in Q1 2020. The recovery was also
impressive on a q/q basis, surging 259.2% q/q. We note that this was supported by gradual removal of restrictions on on-trade
consumption channels as well as resumption of social gatherings in major markets across the country. Nevertheless, the company
reported a Pre-tax loss of N0.3bn in Q1 2021 as well as a negative PAT of -N0.5bn for the period. The losses was largely due to cost
pressures from raw material imports (impacted by FX devaluation) as well as increase in excise duties on spirits (c.18% of Revenue).
Looking ahead, we think the company would benefit from the recent price increases implemented, as volumes also continue to recover
in the near term. That said, we expect the company’s return to profitability to be largely influenced by cost management. Indeed, excise
payments by centilitre is now flat y/y while recent price increases would help cover FX-induced increase in costs. We place a HOLD rating
on the ticker.
Value Traded*: 6M Average daily value traded
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Relative Price Movement: GUINNESS
GUINNESS FMCGs NSE-ASI
Figure 79 Key Stats FY-18 FY-19 FY-20e FY-21e
EPS 3.3 2.5 -5.7 0.6
DPS 1.8 1.5 0.0 0.3
BVPS 43.0 40.7 33.3 33.6
Dividend Payout 55.7% 60.7% nm 55.0%
Dividend Yield 2.6% 5.1% Nm 1.8%
P/E (x) 21.8 12.0 Nm 30.2
P/BV (x) 1.7 0.7 0.6 0.6
ROAE 10.3% 6.2% Nm 1.9%
ROAA 4.5% 3.5% nm 1.0%
Key Stats FY-18 FY-19 FY-20e FY-21e
EPS 2.4 2.0 1.2 2.4
DPS 2.4 2.0 1.2 2.4
BVPS 20.9 21.0 21.3 20.9
Dividend Payout 100.0% 100.0% 100.0% 100.0%
Dividend Yield 2.8% 3.9% 2.6% 5.2%
P/E (x) 35.2 25.9 38.7 19.1
P/BV (x) 4.1 2.5 2.1 2.2
ROAE 11.3% 9.6% 5.5% 11.2%
ROAA 5.0% 4.2% 2.4% 4.6%
Nigeria Outlook 2021: A Shot at Recovery
94 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital Source: Company Financials, United Capital
Nestle Nigeria Plc: HOLD Bloomberg: Nestle NL, Reuters: Nestle.LG, NSE: Nestle
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
1,505.0 1,363.3 -9.4% 0.8 3,129.3 1,192.9 113,311,400.0 33.8%
Value Traded*: 6M Average daily value traded
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Relative Price Movement: NESTLE
NESTLE FMCGs NSE-ASI
Figure 82
In the company’s 9M 2020 financials, the company reported a 0.7% y/y growth in Revenue to print at N212.7bn from N211.3bn in 9M 2019.
The growth in Revenue was driven by 12.3% growth in Beverage Revenue as Food products disappointed (down 6.4% y/y). Pre-Tax profit
dipped 12.9% y/y to N49.3bn in 9M 2020 from N56.5bn in 9M 2019. Similarly, Net Income declined 13.3% y/y to N31.9bn in 9M 2020. The
weak performance in 9M 2020 was largely reflective of cost pressures across all major cost items as Cost margin grew 330bps to 57.7% in
9M 2020 due to higher raw material costs feeding from high food prices locally (Nestle sources c.80.0% of its Raw materials locally).
Looking ahead, we think the company would report a downbeat FY 2020 performance based on evidence of the first nine months. In
2021, we think volume growth will be hampered on weak consumer pockets but the recent price increases by the company should
provide some support for Revenue. Lastly, we think improved cost management would further support the company’s profitability.
Key Stats FY-18 FY-19 FY-20e FY-21e
EPS 54.3 57.6 54.7 57.9
DPS 54.2 51.8 49.2 52.1
BVPS 63.4 57.5 75.8 83.0
Dividend Payout 99.9% 89.9% 89.9% 89.9%
Dividend Yield 3.8% 3.8% 3.6% 3.8%
P/E (x) 26.4 23.7 24.9 23.5
P/BV (x) 22.6 23.7 18.0 16.4
ROAE 90.4% 95.4% 82.0% 73.0%
ROAA 26.5% 23.6% 22.9% 21.8%
Source: Bloomberg, United Capital Source: Company Financials, United Capital Research
International Breweries Plc: SELL Bloomberg: INTBREW NL, Reuters:INTBREW.LG, NSE: INTBREW
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
5.95 4.75 -20.1% 26.9 421.7 159.8 8,893,325.0 99.2%
Like the brewery industry narrative, International breweries (INTBREW) Revenue was hit by lockdown and restrictions (particularly in Q2
2020) on bars, clubs, and social gatherings across the country. Nevertheless, the company staged an impressive Revenue recovery in Q3
2020 as lockdown measures were eased. Consequently, Revenue edged lower by 1.5% y/y to N95.8bn in 9M 2020 from N97.3bn in 9M
2019. The company remained loss-making through 9M 2020 with a Pre-Tax loss of N17.7bn and Loss for the period of N10.9bn. On the
positive, we note the declining pace of losses (Pre-Tax loss and Net Loss declined 26.4% y/y and 33.9% y/y respectively). The company
remains loss-making due to the huge fixed costs associated with its operations (depreciation on plants relative to Revenue as well as
promotional costs). Looking ahead, we do not expect the company to achieve profitability in 2021 as the beer maker maintains its
volume growth approach to gain market share. Thus, we place a SELL rating on the ticker.
Value Traded*: 6M Average daily value traded
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INTBREW FMCGs NSE-ASI
Figure 81 Key Stats FY-18 FY-19 FY-20e FY-21e
EPS -0.5 -3.2 -0.5 -0.3
DPS 0.0 0.0 0.0 0.0
BVPS 4.1 0.9 5.5 6.2
Dividend Payout 0.0% 0.0% 0.0% 0.0%
Dividend Yield 0.0% 0.0% 0.0% 0.0%
P/E (x) nm nm nm nm
P/BV (x) 13.6 65.1 10.3 9.1
ROAE nm nm nm nm
ROAA nm nm nm nm
Nigeria Outlook 2021: A Shot at Recovery
95 www.unitedcapitalplcgroup.com
Sources: Bloomberg, United Capital
Flour Mills of Nigeria Plc: BUY Bloomberg: FLOURMIL NL, Reuters:FLOURMI.LG, NSE:FLOURMILL
Flour Mills reported its best ever quarter in Q2 2021 as the company reported a quarterly record N200.5bn Revenue (up 47.4% y/y). This
supported H1 2021 Revenue which surged higher by 31.2% y/y to N355.1bn from N270.7bn in H1 2020. The growth in Revenue was driven
by broad based increase across the various business units as Food (up 27.0% y/y), Agro Allied (up 45.7% y/y), Sugar (up 29.5% y/y) and
Support Services (up 40.6% y/y) surged. The company’s Pre-Tax profit grew by 69.2% y/y to N14.6bn in 9M 2020 while Net Income grew
68.3% y/y to N9.9bn in 9M 2020. The company’s investment in its B2C channels, improved efficiency in Agro Allied business and new
product launches have helped support Revenue and margins. Looking ahead, we expect Flour Mills to sustain the performance on
market acceptance of the new products and continued traction from B2C channel investments. That said, we note that the reopening of
the country’s land borders poses significant threat to the company’s sugar, fertilizer, and pasta businesses.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Dangote Sugar Refinery Plc: BUY Bloomberg: DANGSUGA NL, Reuters: DANGSUGA.LG, NSE: DANGSUGAR
Price Target Price Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
26.0 46.0 77.0% 4.1 281.3 106.6 107,262,900.0 99.6%
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
17.60 27.0 53.2% 12.1 564.1 213.8 80,951,450.0 27.7%
Dangote Sugar in its 9M 2020 numbers reported a 36.7% y/y growth in Revenue to N160.5bn in 9M 2020 from N117.4bn in 9M 2019. The
growth in Revenue was supported by decent volume growth (up 15.3% y/y) as well as improved pricing power. Largely, the closure of the
border has limited influx of smuggled sugar into the market giving the company improved pricing power and market control. Furthermore,
Pre-Tax profit grew 26.6% y/y to N29.1bn in 9M 2020 from N23.0bn in 9M 2019. In addition, Net Income surged 81.1% y/y to N26.6bn in 9M
2020 from N14.7bn in 9M 2019. Looking ahead, we think the company’s fortunes is hinged on tightened border security following opening
of the land borders. Also, we note that the recent reversal of increase in import duties on raw sugar is supportive of lower Cost margins.
That said, we expect the company’s effective tax rate to normalize in 2021 and as a result would dent earnings mildly. As a result, we
retain our positive outlook on the stock albeit with slower growth pace.
Sources: Company Financials, United Capital Research
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DANGSUGAR FMCGs NSE-ASI
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FLOURMIL FMCGs NSE-ASI
Figure 83 Key Stats FY-18 FY-19 FY-20 FY-21e
EPS 3.3 1.0 2.8 4.6
DPS 1.0 1.2 1.4 1.9
BVPS 36.7 36.8 38.0 47.2
Dividend Payout 30.1% 123.0% 50.5% 40.0%
Dividend Yield 4.3% 6.7% 7.3% 4.0%
P/E (x) 7.0 18.5 6.9 9.9
P/BV (x) 0.6 0.5 0.5 1.0
ROAE 10.8% 2.7% 7.4% 10.9%
ROAA 3.1% 1.0% 2.7% 3.9%
Figure 84 Key Stats FY-18 FY-19 FY-20e FY-21e
EPS 1.8 1.9 3.0 2.8
DPS 0.7 1.1 1.8 1.7
BVPS 8.2 9.8 11.1 12.4
Dividend Payout 55.0% 57.9% 60.0% 60.0%
Dividend Yield 7.0% 8.0% 10.3% 9.5%
P/E (x) 8.4 7.4 5.9 6.3
P/BV (x) 1.8 1.4 1.6 1.4
ROAE 22.7% 20.7% 28.5% 23.5%
ROAA 11.8% 11.6% 15.1% 11.8%
Nigeria Outlook 2021: A Shot at Recovery
96 www.unitedcapitalplcgroup.com
Source: Bloomberg, United Capital Source: Company Financials, United Capital
PZ Cussons Nigeria Plc: BUY Bloomberg: PZ NL, Reuters: PZ.LG, NSE: PZ
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
5.3 9.9 85.9% 4.0 55.2 21.0 3,567,544.0 99.9%
In its recently released H1 2021 numbers, PZ Cussons sustained its Revenue recovery as H1 2021 Revenue grew 10.1% y/y to N37.4bn from
N33.9bn in H1 2020. The company recorded Pre-Tax profit of N1.0bn in H1 2021 as against a Pre-Tax loss of N1.6bn in H1 2020. In addition,
Net income printed at N0.8bn in H1 2021 compared to a Net loss of N1.6bn in H1 2020. The impressive performance of PZ Cussons in the
current financial period is reflective of rebound in demand post Covid-19 recovery, which is reflected in volume growth. We also note that
the company has raised prices on several of its products based on our last market round-up while employing the “sachetisation” strategy
on some of its household products. Looking ahead, we note that the company’s volume growth slowed in Q2 and was largely supported
by price increases. Thus, we think the narrative will remain the same in the rest of the financial year. In addition, we expect the price in-
creases to provide decent support for margins and consequently a return to profitability after a loss-ridden 2020.
Value Traded*: 6M Average daily value traded
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PZ FMCGs NSE-ASI
Figure 85 Key Stats FY-18 FY-19 FY-20 FY-21e
EPS 0.5 0.3 -1.8 0.3
DPS 0.2 0.2 0.0 0.2
BVPS 10.9 11.0 8.7 10.0
Dividend Payout 30.9% 51.5% nm 47.3%
Dividend Yield 1.2% 2.8% 0.0% 1.6%
P/E (x) 24.9 18.5 nm 29.5
P/BV (x) 1.1 0.5 1.1 1.0
ROAE 4.4% 2.7% nm 3.6%
ROAA 2.2% 1.4% nm 1.7%
Unilever Nigeria Plc: HOLD Bloomberg: Unilever NL, Reuters: Unileve.LG, NSE: Unilever
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
13.9 15.0 7.9% 5.7 210.7 79.9 21,090,600.0 27.6%
Value Traded*: 6M Average daily value traded Source: Bloomberg, United Capital Source: Company Financials, United Capital nm: Not Meaningful
Unilever in 9M 2020 reported weaker Revenue, declining 13.4% y/y to N44.7bn from N51.6bn in 9M 2019 as Food (down 5.9% y/y) and
Home & Personal Care (down 21.3% y/y) businesses disappointed. Further reflecting the disappointing year, the company recorded a Pre-
Tax loss of N2.6bn in 9M 2020 as against a Pre-Tax profit of N0.6bn in 9M 2019. The company’s performance was largely hampered by
bump in Operating expenses as well as further Impairment on receivables (up 239.6% y/y to N1.1bn) booked by the company. These
compounded the slump in the company’s Revenue. Looking ahead, although we expect Unilever to record another disappointing year in
2020, we think decline in Revenue may have tapered out on evidence of the Q3 2020 numbers and market sentiments from our recent
market round ups. Furthermore, recent Revenue growth have been cash backed which paints a sustainable Revenue level. In addition,
we expect the quantum of impairments on receivables to simmer while cost efficiency improves, thus supporting profitability.
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UNILEVER FMCGs NSE-ASI
Figure 86 Key Stats FY-18 FY-19 FY-20e FY-21e
EPS 2.0 -2.9 -1.2 0.1
DPS 1.5 0.0 0.0 0.1
BVPS 14.5 25.8 21.8 21.8
Dividend Payout 75.8% 50.0% 70.0% 70.0%
Dividend Yield 4.1% nm nm 0.5%
P/E (x) 18.7 nm nm 137.9
P/BV (x) 2.6 0.6 0.7 0.7
ROAE 14.3% nm nm 0.5%
ROAA 8.2% nm nm 0.3%
Nigeria Outlook 2021: A Shot at Recovery
97 www.unitedcapitalplcgroup.com
Dangote Cement Plc: HOLD Bloomberg: DANGCEM.NL, Reuters: DANGCEM.LG, NSE:
DANGCEM recorded a 12.0% increase in Revenue, to N761.4bn, as at 9M-20. This was fueled by a surge in Q3 topline growth, a
result of pent-up demand induced in Q2-2020 by the lockdown instituted in Nigeria, its primary market. Increase in sales volume
(+6.6%) was driven by the Nigerian market, which rose 10.2% y/y. Pan-African sales volumes also improved (+3.2%). Thus, PAT
jumped 35.2% to N208.7bn. Looking into 2021, with the recent border closure reversal, we expect continued demand recovery in
Nigeria and growth in pan-African exports to drive sales volume growth. In Dec-2020, DANGCEM initiated its much-awaited share
buyback program, a move that will see the company potentially mop up 10% of its 17.0bn outstanding shares in 2 tranches.
Going forward, the expectation for the 2nd tranche will support valuation. Against this backdrop, we review our 12M TP to N261.5
and place a HOLD recommendation on the stock.
Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded Sources: Company Financials, United Capital Research
Lafarge Africa Plc: BUY 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
Demand recovery in Q3-2020 led to topline recovery for Lafarge Africa, as the firm recorded Revenue growth of 10.3% in
9M-2020, buoyed by a 29.7% surge in Q3 sales volume. The firm saw a strong uptick in costs, however, an offshoot of
Naira devaluation which drove Cost of Sales up 37% in Q3-2020 as USD-denominated energy and raw material costs went
up. Notably, PBT margin improved to 19.1%, from 12.4% in 9M 2019, thanks to the reduction in finance cost (down 54.6% y/
y to N7.5bn), a result of the firms’ decision to divest from its loss-making SA operations and settle some related party debt
in 2019. In 2021, we expect further contraction in finance costs as the firm further strengthens its balance sheet. We also
anticipate increased sales volumes from sustained demand recovery, which will offset Lafarge’s cost exposure to
currency fluctuations. Overall, we are optimistic on the stock and place a BUY recommendation.
Companies
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
244.9 261.5 6.8% 17.0 11,011.1 4,173.2 307,421,300 14.7%
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
21.1 32.5 54.3% 16.1 894.6 339.1 133,156,700 99.9%
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DANGCEM NSE ASI Industrial Goods Index
Figure 87
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Relative Price Movement: WAPCO
WAPCO NSE ASI Industrial Goods Index
Figure 88 Key Stats FY-18 FY-19 FY-20e FY-21f
EPS (N) -1.05 7.2 2.3 2.5
DPS (N) na 1.0 1.4 1.8
BVPS (N) 15.48 21.4 22.7 23.6
Dividend Payout na 13.9% 62.6% 70.0%
Dividend Yield na 4.8% 6.7% 6.7%
P/E (x) nm 15.9 10.1 13.0
P/BV (x) 0.8 0.71 1.01 1.4
ROAE nm -6.0% 0.3% 0.1%
ROAA nm 2.4% 3.0% 3.6%
Key Stats FY-18 FY-19 FY-20e FY-21f
EPS (N) 22.8 11.8 12.5 19.7
DPS (N) 16.0 16.0 10.0 13.1
BVPS (N) 57.22 52.03 48.58 55.30
Dividend Payout 70.1% 136.0% 80.0% 66.4%
Dividend Yield 6.3% 7.4% 4.1% 6.6%
P/E (x) 8.0 12.1 19.7 13.2
P/BV (x) 3.2 2.7 5.0 4.7
ROAE 44.2% 20.3% 22.5% 24.0%
ROAA 23.2% 11.8% 12.4% 15.3%
Nigeria Outlook 2021: A Shot at Recovery
98 www.unitedcapitalplcgroup.com
Companies
BUACEMENT: SELL Bloomberg: BUACEMENT NL, Reuters: CCNN.LG, NSE: BUACEMENT
BUACEMENT’s 9-month 2020 revenues grew 21.0%y/y to N156.6bn on the back of an increase in cement sales volumes which
improved by 16.0%y/y from 3,291Kt to 3,816Kt. However, a +23.1%y/y surge in energy costs due to devaluation and a +13.3%
y/y rise in Selling and Distribution costs weighed on margins. Notwithstanding, the Company posted 18.5%y/y growth in PBT
from N50.2bn to N59.5bn, and a 23.9%y/y growth in PAT to N53.6bn due to a decrease in interest expense. In 2021, with the firm
already tapping into the debt market amid the low-interest environment, raising N115.0bn in corporate debt in Q4-20, we
expect BUACEMENT’s focus to remain on its expansion drive. Thus, we anticipate sustained volume growth through the year. As
with all cement players, we expect higher energy costs to maintain pressure on margins, while BUACEMENT’s Selling and
Distribution expenses should continue to drive OPEX. The above not withstanding, BUACEMENT currently trades a PE of 41.0x
compared to peer average of 15.2x, implying that the stock is overvalued. Thus, we place a SELL rating on the ticker.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital Value Traded*: 6M Average daily value traded
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BUACEMENT NSE ASI Industrial Goods Index
Figure 89
Price TP Upside NOSH (bn) Mkt Cap ($’mn) Mkt Cap (N’bn) Value Traded* Free Float
77.4 59.1 -23.7% 33.9 6,923.1 2,623.9 66,612,570 43.8%
Key Stats FY-18 FY-19 FY-20e FY-21f
EPS (N) 1.89 1.79 1.89 2.63
DPS (N) 0.21 1.75 1.51 2.11
BVPS (N) 9.11 10.74 11.12 11.64
Dividend Payout na 97.3% 80.0% 80.0%
Dividend Yield na 5.4% 2.0% 4.2%
P/E (x) 8.4 18.1 41.0 22.5
P/BV (x) 3.3 3.0 7.0 5.1
ROAE 36.4% 18.0% 17.3% 23.1%
ROAA 17.9% 12.6% 13.3% 17.8%
Nigeria Outlook 2021: A Shot at Recovery
99 www.unitedcapitalplcgroup.com
Companies
MTNN Plc: HOLD Bloomberg: MTNN NL, Reuters:MTNN LG, NSE: MTNN
MTN Nigeria (MTNN) reported a 13.0% increase in revenue as of 9M-2020. This was spurred by the increase in Voice and Data revenue in
the period under review. Voice data was up 4.2% y/y to N654.0bn from N628.0bn. Data revenue and digital revenue, which continue to
be the biggest drivers of revenue grew by 57.0% and 114.3% in the period under review. Fintech revenue increased by 20.3% to N32.36 bn
from N25.22bn in Q3 2019. With EBITDA margin at c.40.0%, supported by a rather stable OPEX, operating profit seemed very strong.
However, PBT was pressured by significant finance charges, which came in at N107bn as at 9 Month 2020. We understand that this is
linked to the dollar- denominated borrowing (around N188.5bn in naira equivalent) in the books of the telco. As such, PAT dropped 2.7%
to N144.23bn in Q3 2020 from N148.32bn in Q3 2019. The Telco also has a consistent dividend payment history (final DPS of N4.97 for FY-19
and interim DPS of N3.50). Again, from a return on equity point of view, MTNN is incredibly profitable, with an average ROE of 102% in the
last five years, and 150% as of 2020. As such, we place a HOLD rating on the counter.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
174.7 179.0 2.4% 20.3 85.4 33.6 346,212,890.17 14.4%
Value Traded*: 6M Average daily value traded
Key Stats FY18 FY19 FY20e FY21f
EPS 7.2 9.9 10.4 11.4
DPS N/A 7.9 8.3 9.1
BVPS 10.8 7.1 9.4 12.3
Dividend Payout (%) N/A 79.8% 79.8% 79.8%
Dividend Yield (%) N/A 7.5% 5.0% 5.1%
P/E N/A 10.6 15.8 15.6
P/BV N/A 14.8 17.6 14.5
ROAE 87.7% 111.0% 126.6% 105.4%
ROAA 24.6% 16.4% 14.0% 15.3%
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Relative Price Movement : MTNN
MTNN NSE
Figure 90
Nigeria Outlook 2021: A Shot at Recovery
100 www.unitedcapitalplcgroup.com
Companies
11 Plc (Mobil): HOLD Bloomberg: MOBIL NL, Reuters: MOBIL.LG, NSE: MOBIL
Over 9M-2020, 11 PLC’s turnover declined by 18.9%, primarily due to the drop off in revenue from petroleum products in Q3-2020 . Profit
margins dipped slightly as Gross profit was down to 6.9% from 8.1% due to the drop-off in Q3 2020. Gross profit declined by 30.1% to N
7.1bn. Operating income fell by -33.4% to N6.3 bn. Again, Net finance cost surged by 62.1% in Q3-2020. Accordingly, PBT and PAT
declined by 34.7% and 35.0% respectively. Our outlook for 11 PLC is largely positive, considering the dip in sales in 2020. In 2021, we
expect revenue to rebound on the back of improvement in economic activities relative to 2020. Again, the downstream oil & gas sector
could potentially be fully deregulated amid pressure on government revenue, following the recent adoption of price modulation regime.
In Oct-2020, the shareholders of 11 Plc approved the proposed voluntary delisting of the company from the NSE. Accordingly, we
maintain our HOLD rating on the ticker.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (N’bn) Value Traded* Free Float
228.0 242.0 6.1% 0.4 216.9 82.2 17,021,940 100.0%
Value Traded*: 12M Average daily value traded
Key Stats FY18 FY19 FY20f FY21f
EPS 25.9 24.6 17.7 24.5
DPS 8.3 8.4 6.0 8.3
BVPS 93.4 71.4 65.9 72.1
Dividend Payout (%) 31.9% 34.0% 34.0% 34.0%
Dividend Yield (%) 4.5% 3.5% 2.5% 3.4%
P/E 9.3 7.1 9.8 13.7
P/BV 2.0 3.4 3.7 3.4
ROAE 30.6% 29.9% 25.8% 35.4%
ROAA 12.8% 11.1% 6.7% 8.7%
Seplat Petroleum Devt. Company Plc: BUY Bloomberg: SEPLAT NL, Reuters: SEPLAT.LG, NSE: SEPLAT
Reduced margins marred SEPLAT’s result in 2020 due to a fall in oil prices which consequently led to a reduction in gains from hedged
products. Total revenue was down 10.0% to N135.0bn from N150.0bn y/y (crude oil sales were up 7.9% in Q3 2020, gas sales were down
10.9% and oil processing revenue fell by 100.0%, SEPLAT has stopped processing gas for the NNPC). Average hedge price fell to $38.6 vs
$64.22 in 9M-2019, a 39.9% drop. However, production increased in 2020. The decline in realized revenue affected margin efficiency.
Consequently, the operating profit margin came in at -20.4% from 42.6% in the corresponding period in 2019. For our outlook on SEPLAT,
we are optimistic that increased production levels stemming from demand recovery and uptick in oil prices will bode well for 2021
performance amid removal of OPEC quotas. As such, we expect the company to return to profitability in 2021. Again, with decent
improvement in the oil market, we expect sentiment for the ticker to improve. As such, we rate SEPLAT a BUY.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
402.3 571.5 145.1% 0.6 624.6 236.7 39,538,090 44.2%
Value Traded*: 12M Average daily value traded
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NSE Seplat Oil and Gas Index
Figure 92
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NSE Mobil Oil and Gas Index
Figure 91
Key Stats FY18 FY19 FY20F FY21F
EPS ($) 0.26 0.46 -0.09 0.32
DPS ($ 0.1 0.1 0.1 0.1
BVPS 0.27 0.31 0.49 0.51
Dividend Payout 38.50% 21.70% nm 31.30%
Dividend Yield 5.60% 6.60% 9.40% 6.60%
P/E 6.77 3.89 nm 4.71
P/BV 0.5 0.6 0.4 0.5
ROAE 9.40% 16.20% 13.50% 13.00%
ROAA 5.70% 9.60% 1.50% 5.60%
Nigeria Outlook 2021: A Shot at Recovery
101 www.unitedcapitalplcgroup.com
Companies
Total Nigeria Plc: HOLD Bloomberg: TOTAL NL, Reuters:TOTAL.LG, NSE: TOTAL
Over 9M-20, TOTAL’s turnover fell by 13.6% y/y to N226.9bn. All major income lines declined as demand for petroleum products, and
lubricants declined by 35.4% and 10.6% decline y/y. Even with reduced sales, Total recorded expansion in margins as Gross margin grew
to 13.9% from 11.3% emanating from improved cost efficiency. Operating margins were down to 0.8% in 9M 2020 from 2.5% in 9M 2019,
mainly due to the drop-off in total revenue. However, the decline in operating margins was compensated for further down the income
statement by a 93% increase in net finance costs. Financial income was up 666% driven by inflow of N2.0bn Petroleum Equity Fund (PEF).
Against this backdrop, PBT and PAT grew by 888% and 344% year-on-year. Our outlook for TOTAL is positive as we expect decent
improvement going forward, on the back of policy changes in the sector. Overall, our rating on the ticker is a HOLD.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
130.5 142.3 9.0% 0.3 116.5 44.13 10243160 37.7%
Value Traded*: 12M Average daily value traded
0.50
1.00
1.50
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Relative Price Movement :Total
NSE Total Oil and Gas Index
Figure 93
ARDOVA PLC: BUY Bloomberg: ARDOVA NL, Reuters: ARDOVA LAG, NSE: ARDOVA
Ardova PLC (AP) is currently undergoing rebranding after a recent takeover in 2019. In 2020, Ardova announced a product expansion,
signing lubricant deal with Shell to market its Shell lubricant product. AP saw a marginal boost in its topline by 4%, driven by a 4.8%
increase in fuel purchases. Other income lines like lubricants and solar system revenues fell by 5.7% 74.3% respectively. The improvement
in revenue and moderation in the cost of sales by 3% led to a slight uptick in gross profit, which was up by 10.0% in the period under
review. However, operating profit was down 30.1%. As seen in 2019, gains from Ardova’s divestment sales were reflected in its operating
profit. Net finance cost was down by 68.0% , due to less interest-bearing assets and a depressed yield environment. PBT and PAT
moderated and were down 62.1% and 64.0% in the 9M-2020 period . Our outlook for AP is positive, with the regulatory environment for
downstream oil and gas being a key downside risk.
Sources: Company Financials, United Capital Research Sources: Bloomberg, United Capital
Price TP Upside NOSH (bn) Mkt Cap ($mn) Mkt Cap (Nbn) Value Traded* Free Float
13.5 18.9 39.9% 1.3 46.6 17.6 6,671,866 11.2%
Value Traded*: 12M Average daily value traded
0.0
0.5
1.0
1.5
2.0
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Relative Price Movement : ARDOVA
NSE Ardova Oil and Gas Index
Figure 94 Key Stats FY-17 FY-18 FY-19e FY-21
EPS 0.3 3.0 2.4 2.5
DPS 0.0 0.0 0.0 0.0
BVPS 10.5 12.3 12.9 13.2
Dividend Payout (%) 0.0% 0.0% 0.0% 0.0%
Dividend Yield (%) 0.0% 0.0% 0.0% 0.0%
P/E 126.9 11.0 13.8 13.2
P/BV 3.3 2.7 2.5 2.5
ROAE 1.0% 26.2% 18.8% 19.1%
ROAA 0.3% 7.2% 6.7% 7.1%
Key Stats FY18 FY19 FY20F FY21F
EPS 23.4 6.7 8.8 13
DPS 17 6.7 6.7 8.8
BVPS 90.5 83.4 78.2 94
Dividend Payout (%) 72.5% 100.0% 76.1% 61.2%
Dividend Yield (%) 8.5% 6.5% 5.1% 6.2%
P/E 8.5 15.3 14.8 11.0
P/BV 2.2 1.2 1.67 1.51
ROAE 27.0% 7.7% 10.9% 15.2
ROAA 6.6% 1.7% 3.1% 3..8%
Disclosure
Appendix
Nigeria Outlook 2021: A Shot at Recovery
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
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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, 3rd & 4th Floor, Afriland Towers, 97/105 Broad Street, Lagos. ©United Capital Plc 2018.*
Disclosure Appendix
Company Disclosure Dangote Cement Plc g Fidelity Bank Plc d Flour Mills of Nigeria Plc j Forte Oil Plc g Stanbic IBTC Plc g, j Zenith Nigeria Plc a FBNH Plc a Access Bank Plc a, j Lafarge Africa Plc a UBA j Dangote Sugar Plc a Ardova Plc g