nigeria outlook 2021: a shot at recovery

Nigeria Outlook 2021: A Shot at Recovery

3 www.unitedcapitalplcgroup.com

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.



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



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.



Analysts

Wale Olusi

[email protected]

Ebitonye Atte

[email protected]

Ayorinde Akinloye

[email protected]

Oluwashina Akinremi

[email protected]

Ayooluwa Aseweje

[email protected]

Team

[email protected]

+234-1-631-7892

United Capital Plc Securities Trading:

[email protected]

+234-1-631-7874

Investment Banking

[email protected]

+234-1-631-7883

Asset Management:

[email protected]

+234-1-631-7875

Trusteeship:

[email protected]

+234-1-631-7886



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



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



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

De

c-1

7

Ma

y-1

8

Oc

t-18

Ma

r-19

Au

g-1

9

Jan

-20

Jun

-20

No

v-2

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



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



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.



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,

2.0 2.2

3.0

4.3

1.9

-1.7

4.3

2.7 2.6 2.5

-4.4

5.2

20

01

20

02

20

03

20

04

20

05

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06

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07

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18

20

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20

20F

20

21F

Global GDP projected to contract for the first time since 2009 Global GDP growth trend

Figure 6

Source: World Bank



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



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



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



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



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



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



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



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

Za

mb

iaM

au

ritiu

sR

ep

. C

on

go

Se

yc

he

lles

Ma

urita

nia

Ga

mb

iaG

uin

ea

-Bis

sau

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ine

aSo

uth

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ica

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na

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ala

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iaK

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iop

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ine

aN

ige

rEsw

atin

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urk

ina

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soC

ha

dU

ga

nd

aM

ali

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me

roo

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ad

ag

asc

ar

Be

nin

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te d

'Ivo

ire

Tan

zan

iaN

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



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



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


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



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



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



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



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.


The CBN doubled down

on its expansionary

monetary policies

Source: United Capital Research

Figure 18


Figure 19



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


Nigerian authorities

implemented sweeping

policy reforms to adjust

to the new reality.

Figure 20




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


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



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


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



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


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



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


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



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


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



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


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.



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%


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



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.



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



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 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.



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


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.



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


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



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.


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.



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.


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



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



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.



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



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



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



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


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.



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



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



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.



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


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.



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


Figure 50



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


Figure 51



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



‘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.

https://play.google.com/store/apps/details?id=com.ng.investnow.android

Sectors



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


...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



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


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



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



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%.



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



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



(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



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.



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



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



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


Figure 61



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.



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


Figure 62



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



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

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Q3-1

7

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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.



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



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.



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

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p-1

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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

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Jun

-18

No

v-1

8

Ap

r-1

9

Se

p-1

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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



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



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

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250

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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



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

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g-1

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p-1

9

Oc

t-19

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g-2

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NNPC Proceeds to the FGN have shrunk in 2020 NNPC Remitances to Federation in MN USD

Source: NNPC

Figure 69



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

-

400,000.0

800,000.0

1,200,000.0

1,600,000.0

2,000,000.0

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g-1

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Dangote refinery is looking to reduce Petroleum Products deficit Nigeria Petoleum Prodcuts supply in Thousand Litres

Source: NNPC

Figure 70

https://investnow.ng/

Companies



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


Source: Company Financials, United Capital Research

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Relative Price Movement-OKOMUOIL

OKOMUOIL NSE ASI

Figure 70

0.7

0.9

1.1

1.3

1.5

1.7

1.9

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%



Companies


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


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.


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Relative Price Movement : FBNH

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%



Companies

Source: Bloomberg, United Capital Source: Company Financials, United Capital

Guaranty Trust Bank Plc: BUY Bloomberg: GUARANTY NL, Reuters: GUARANT.LG, NSE: GUARANTY


32.4 39.9 23.4% 29.4 2,516.0 953.6 668,734,100 99.8%


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


Zenith Bank Plc: BUY Bloomberg: ZENITHBA NL, Reuters: ZENITHB. LG , NSE: ZENITHBANK


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.



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%


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



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


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STANBIC NGSEINDX NGSEB10 Index

Figure 76

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FCMB NGSEINDX NGSEB10 Index

Figure 77


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%


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%




Fidelity Bank Plc : HOLD Bloomberg: FIDELITY NL, Reuters: FIDELITY.LG, NSE: FIDELITY


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.


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




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


Guinness Nigeria Plc: HOLD Bloomberg: GUINNESS NL, Reuters:GUINNESS.LG, NSE: GUINNESS


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.


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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%




Nestle Nigeria Plc: HOLD Bloomberg: Nestle NL, Reuters: Nestle.LG, NSE: Nestle


1,505.0 1,363.3 -9.4% 0.8 3,129.3 1,192.9 113,311,400.0 33.8%


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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%


International Breweries Plc: SELL Bloomberg: INTBREW NL, Reuters:INTBREW.LG, NSE: INTBREW


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.


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INTBREW FMCGs NSE-ASI


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



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.


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%


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%


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%




PZ Cussons Nigeria Plc: BUY Bloomberg: PZ NL, Reuters: PZ.LG, NSE: PZ


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.


0.4

0.6

0.8

1.0

1.2

1.4

1.6


Relative Price Movement: PZ

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 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


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.

0.4

0.6

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1.2

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1.6


Relative Price Movement: UNILEVER

UNILEVER FMCGs NSE-ASI


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%



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%


21.1 32.5 54.3% 16.1 894.6 339.1 133,156,700 99.9%

0.5

1.0

1.5

2.0

Dec-19 Mar-20 Jun-20 Sep-20 Dec-20

Relative Price Movement: DANGCEM

DANGCEM NSE ASI Industrial Goods Index

Figure 87

0.5

1.0

1.5

2.0

Dec-19 Mar-20 Jun-20 Sep-20 Dec-20

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%



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

0.5

1.0

1.5

Jan-20 Mar-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20

Relative Price Movement: BUACEMENT

BUACEMENT NSE ASI Industrial Goods Index

Figure 89


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%



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.



174.7 179.0 2.4% 20.3 85.4 33.6 346,212,890.17 14.4%



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%

0.50

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1.50


Relative Price Movement : MTNN

MTNN NSE

Figure 90



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.


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%


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.



402.3 571.5 145.1% 0.6 624.6 236.7 39,538,090 44.2%


0.30

0.80

1.30


Relative Price Movement : Seplat

NSE Seplat Oil and Gas Index

Figure 92

0.50

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2.00


Relative Price Movement : 11 PLC

NSE Mobil Oil and Gas Index

Figure 91


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 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%



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.



130.5 142.3 9.0% 0.3 116.5 44.13 10243160 37.7%


0.50

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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.



13.5 18.9 39.9% 1.3 46.6 17.6 6,671,866 11.2%


0.0

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2.0


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%


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%

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Disclosure

Appendix



Investment Rating Criteria and Disclosure

United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;

Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR

of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor

around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).

Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.

NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking

relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.

Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in

activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition,

research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s

Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published

research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable

conflicts of interest that may arise in the course of its business relationships.

Risk Rating

Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in

significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk.

Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from

government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets.

Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.

These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest,

government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.

United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem

applicable the company of focus. The ratings are defined below;

High: High probability of an imminent systematic risk or/and unsystematic risk

Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk

Low: Low probability of an imminent systematic risk or/and unsystematic risk

Analyst Certification

The research analysts who prepared this report certify as follows:

1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this

report.

2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in

this report.

Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,

potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report

are disclosed:

• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report

Disclosure keys a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report

b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence on the company’s operating

decision directly or through proxy arrangements

c. UCAP is a market maker in the publicly traded equities of the Company

d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company

e. UCAP beneficially own 1% or more of the equity securities of the Company

f. UCAP holds a major interest in the debt of the Company

g. UCAP has received compensation for investment banking activities from the Company within the last 12 months

h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months

i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution

j. The Company is a client of UCAP

k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer

United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets

and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)

nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell

securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is

registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact

United Capital Plc, 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

nigeria outlook 2021: a shot at recovery

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