Analyst Expects a Mixed Week as Corporate Earnings Releases Balances Tendency for Profit-taking


Monday, March 14, 2016 05:35PM / Vetiva Research            

Breakfast Report

The Week Ahead


The Minister of State for Petroleum Resources, Dr. Ibe Kachukwu, stated this weekend that Nigeria is targeting 2.4 million barrels per day (mbpd) oil output in 2016 with current production at about 2.3mbpd last week (up from 2.16 mbpd recorded in Q4’15) before a recent attack on a Shell pipeline.


Whilst this projection comes in higher than the 2016 budget benchmark of 2.2 mbpd, the Minister stated that this is the production volume the ministry will be targeting for the rest of the year. The minister further stated that about 200,000 bpd of the planned total will be dedicated to domestic refining, while 2.2 mbpd would be dedicated as export.


This comes in after a statement from the Economic and Commercial Counsellor of the Chinese Embassy in Nigeria, Mr Zao LingXiang, stating that China seeks to increase its crude oil purchase from Nigeria. Mr. LingXiang further stated that irrespective of Iran’s re-entry into the global oil market, Chinese companies want to import more crude from Nigeria, noting that the total amount of oil export to China was only one million barrels in 2015 (1.3% of Nigerian annual oil exports).


Amidst sustained uptrend in oil prices at week open, the Nigerian equity market witnessed renewed positive momentum with gains particularly weighted to the Financial Services sector.


However, the bourse came under sell pressure on Tuesday, posting its first loss in nine sessions as profit taking, concentrated in the Industrial Goods and Consumer Goods sectors, surfaced. Mid-week through Friday however, the bourse rebounded thanks to Financials and Industrials. Overall the NSE ASI maintained a positive week on week close, climbing +65bps w/w.


We expect a mixed week as corporate earnings releases balances tendency for profit taking following recent gains.




FY’15 EPS beats estimates


         GUARANTY advanced 163bps w/w to close at N16.25. On 14 March, GUARANTY reported FY15 earnings showing EPS of N3.51 (Prev: N3.32), above Bloomberg Consensus of N3.37.

         Amidst a market leading YoA and a modest funding cost (YoA and CoF averaged 12.0% and 3.2% respectively in 9M’15), GUARANTY’s impressive efficiency with an average CIR of 44% sets the bank aside. In our erstwhile Gross Earnings growth of 5% for FY’16 (weakest top line growth in the last 5 years), we had forecast a modest 10bps improvement in CIR (down from our estimated 43.9% for FY’15E to 43.8%) to support bottom line. Also, we anticipate a mild moderation in CoF in FY’16 supported by the healthy system liquidity environment.

         Although we note that GUARANTY’s exposure to the oil and gas sector remains above our coverage banks’ average (36% vs. our average of 25%), we highlight that a significant portion of the asset portfolio is to quality oil & gas names. However, with the persistent pressure on oil prices (testing well below the $40bbl psychological benchmark), the possibility of rising NPLs remain likely. Also, given the uncertainty around the currency, we are wary of GUARANTY’s 17% exposure to the manufacturing sector and foresee an uptick in default.


ZENITHBANK (N12.35) BUY TP: N24.72


Healthy balance sheets to support earnings


         ZENITHBANK advanced 148bps w/w to close at N12.35. ZENITHBANK trades at 4.3x 2016 P/E and 10.4% 2016 dividend yield. We await the release of FY’15 results.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for ZENITHBANK to N2.85 and N1.28. Our target price is cut to N24.72 (Previous: N28.02).

         Given its relatively conservative approach, ZENITHBANK focuses on creating high quality loan with exposure to large corporates. However, in line with the trend observed across the industry (notably in oil & gas and manufacturing sectors), we anticipate a modest deterioration in asset quality in FY’16. Our erstwhile N14 billion loan loss provision for FY’16 translates to a 0.8% CoR. Also, whilst we expect a rise in NPL across the sector, we had estimated a modest 2.0% NPL ratio for FY’16, ahead of our coverage bank’s erstwhile forecast of 4.5%.

         Whilst we expect further compression in CoF in FY’16 due to the liquidity boost from CBN’s easing stance, we anticipate that NIM would remain under pressure as we foresee moderation in YoA. With income from government bonds and bills account for about 25% of Interest Income (as at 9M’15), we estimate that the recent downward shift in treasury yield curve would further compress YoA in FY’16 – particularly in the first half.


UBA (N3.44) BUY TP: N5.16


Conservatism paying off

         UBA advanced 11% w/w to close at N3.44. UBA trades at 2.3x 2016 P/E and 6.4% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for UBA to N1.48 and N0.22. Our target price is cut to N5.16 (Previous: N7.75).

         Although we highlight the mild improvement in UBA’s margin amidst rising funding cost (in H1’15 and 9M’15), we note that the bank’s margin still lags peers largely due to its below average YoA. Given UBA’s large exposure to government securities (with a loan to deposit ratio of 47% vs. our coverage banks’ average ratio of 71%), we expect the easing stance of the monetary authority to further impact YoA. Although we also estimate a modest moderation in funding cost in line with the trend observed in Q4’15, we expect the reduction in YoA to outweigh the moderation in cost. Consequently, we estimate NIM of 5.9% for FY’16, down 30bps from our 6.2% estimate for FY’15.

         Whilst we anticipate deterioration in asset quality across the industry amidst oil price pressure, we believe UBA is well positioned to cope given its relatively lower exposure to Oil & Gas (21% as at 9M’15 compared to 25% average for our coverage banks).


ACCESS (N4.42) BUY TP: N7.07


Non-Interest Income to lift Earnings

         ACCESS advanced 524bps w/w to close at N4.42. ACCESS trades at 2.2x 2016 P/E and 11.1% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for ACCESS to N1.98 and N0.49. Our target price is cut to N7.07 (Previous: N8.56).

         Fitch Ratings has upgraded Access Bank’s long term National Ratings to “A” from “A-“with a stable outlook. This was to reflect the improvement in creditworthiness over time relative to peers and to the best credits in Nigeria.

         Amidst our constrained forecast for YoA, we estimate that ACCESS’ above peer funding cost (CoF as at 9M’15: 5.4% vs. our Tier I average CoF of 4.0%) will continue to pressure margin in FY’16. Although we expect a moderation in CoF (FY’16F: 4.7%) supported by robust system liquidity, we anticipate that the tepid interest rate environment would also impact asset yield. That said, we foresee modest improvement in efficiency (supported by contained operating cost).

         Amidst tighter margins, we expect Non-Interest Income to continue to support earnings in line with the trend observed in 9M’15. Although we had forecast moderation in Non-Interest Income in FY’16, we expect the line item to support earnings in FY’16 and estimate a 30% contribution to Gross Earnings vs. the average 26% recorded in the last 3 years (excluding FY’15).


SKYEBANK (N0.98) BUY TP: N2.49


Strategic decision – “Hold Co” or “Bank Only”

         SKYEBANK remained unchanged w/w at N0.98. SKYEBANK trades at 1.6x 2016 P/E and 6.1% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for SKYEBANK to N0.62 and N0.06. Our target price is cut to N2.49 (Previous: N3.23).

         Following the successful acquisition of Mainstreet Bank, SKYEBANK became Nigeria’s 4th largest bank by branch network. The management has indicated plans to make a strategic decision on the banking structure to adopt (“Bank only” or “HoldCo”) as well as the decision to divest or retain its subsidiaries in Q2’16. We expect SKYEBANK to opt for the HoldCo structure as it gives the Group a more diversified earnings base.

         Although we foresee mild moderation in CoF in FY’16, particularly in H1, we estimate that SKYEBANK’s CoF would remain above our coverage average. Whilst we expect the mild top line growth to support efficiency as the bank seeks to keep cost low, we expect the cost pressure from the integration of Mainstreet to be a drag on efficiency in the short run.


FBNH (N3.69) BUY TP: N8.86


Management Issues Profit Warning

         FBNH advanced 543bps w/w to close at N3.69. FBNH’s management stated that FY’15 earnings will be materially below prior year’s performance largely due to the reassessment of the bank’s loan portfolio within the commercial banking business. FBNH trades at 1.9x 2016 P/E and 2.4% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for FBNH to N1.98 and N0.09. Our target price is cut to N8.86 (Previous: N10.52).

         FBNH has the highest exposure to the oil and gas sector (45% vs. our coverage banks’ average of 25%) and therefore we expected the impact of the dwindling oil price to be more significant on the bank. Consequently, we anticipated a rise in loan loss provision particularly in Q4’15. With a loan loss provision of N46 billion as at 9M’15, we had forecasted a N68 billion provision for FY’15. Whilst PAT was down 10% y/y as at 9M’15, we had forecasted a 25% y/y decline in bottom line for FY’15.

         We are not aware of how material FY’15 earnings underperformance will be. However, we will be cautious on FBNH as we expect the stock to remain under pressure.




Management Issues Profit Warning

         DIAMONDBNK declined 65bps w/w to close at N1.52 after management stated that FY’15 earnings will be lower than the prior year’s performance largely due to higher than expected impairment charges on loans made to the Energy and Commercial Business sectors. DIAMONDBNK trades at 2.4x 2016 P/E and 2.0% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2015 FY EPS and DPS forecast for DIAMONDBNK to N0.63 and N0.03. Our target price is cut to N4.78 (Previous: N5.73).

         DIAMONDBNK has been known for its strong retail focus with retail loans accounting for 10% of its gross loan portfolio. DIAMONDBNK has reiterated its willingness to maintain its retail-led strategy by spreading its footprint and increasing the volume of asset finance loans and advances. Asset quality risk remains a significant concern for FY’16. Consequently, we are on the lookout for a possible breach of the industry benchmark NPL ratio of 5% as credit portfolio gets pressured by non-performance.

         With funding cost up (CoF up 10bps from 3.2% in H1’15 to 3.3% in 9M’15) amidst constrained YoA, margins remain constrained as NIM declined 10bps to 6.4%. Whilst we anticipate possible moderation in funding cost in in FY’16 due to the easing stance of the apex bank, we expect margins to remain tight as we foresee pressure on YoA, particularly due to the moderation in yield on government securities.


FCMB (N0.82) BUY TP: N3.39


Loan provision stifles profit as default spikes

         FCMB advanced 16% w/w to close at N0.82. FCMB trades at 1.6x 2016 P/E and 12.2% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for FCMB to N0.52 and N0.10. Our target price is cut to N3.39 (Previous: N3.46).

         Having delayed the release of the 9M’15 result due to the audit of the banking subsidiary, FCMB finally released earnings showing significant pressure across key line items. Although the Group had earlier warned that Q3’15 earnings will be materially below Q3’14 due to spike in impairments (particularly in the Energy sector) and the significant reduction in trade finance-related revenues largely as a result of the illiquid foreign exchange market, FCMB’s performance still came in weaker than most analysts had anticipated. Whilst Gross Earnings (N109 billion) rose mildly by 2% y/y, it was 5% behind our N115 billion estimate and 16% lower q/q.

         In line with management’s warning, loan loss provision rose 290% y/y to N15.3 billion (ahead of our N5.4 billion forecast) - largely due to a specific impairment of N5.4 billion on a contracted receivable that the bank is hopeful of recovering in future. Although we have seen spikes in loan provisioning across most of our coverage banks, the 2.6% CoR recorded is significantly higher than the 0.6% reported as at H1’15. Operating Expense was constrained to a 3% y/y rise (just in line with our forecast), PBT and PAT declined 85% and 87% to N2.7 billion and N1.9 billion respectively – largest profit decline recorded within our coverage for the period.

         With loan book down 8% in Q3’15 amidst constrained yield environment and pressured Non-Interest Income, we expect top line growth to remain weak. Consequently, we anticipate a modest deterioration in efficiency.


STANBIC (N15.00) SELL TP: N15.05


Loan loss provision to hurt earnings further

         STANBIC advanced 601bps w/w to close at N15.00. STANBIC trades at 8.2x 2016 P/E and 6.1% 2016 dividend yield.

         Following recent profit warnings by some banks, we anticipate more negative earnings surprises across the banking sector. Hence, we have reviewed our 2016 FY EPS and DPS forecast for STANBIC to N1.84 and N0.92. Our target price is cut to N15.05 (Previous: N19.26).

         Despite STANBIC’s modest exposure to the oil & gas sector (17% vs. coverage banks’ average of 25%), the Group continues to struggle with rising NPLs as increasing loan loss provision weighs on profitability. Although we had anticipated an overall rise in loan loss provision across the sector in FY’15 and FY’16, STANBIC has been one of the most impacted with loan loss provisions rising over 300% y/y and NPL ratio at 8.8% as at 9M’15 (highest amongst our coverage). We foresee further pressure on earnings in FY’16 and expect the bank’s asset quality to hurt performance. In line with management’s guidance, we expect the bank to take a conservative approach to risk asset creation.

         With a CAR of 15.7%, STANBIC’s solvency ratio lags our coverage bank’s average of 18.3%. Whilst we expect credit growth to remain weak given the economic conditions, we expect the bank to create capital buffers for future growth opportunities. We also expect STANBIC to revisit capital raising sometime in 2016.

         We anticipate that return would remain behind recent trend, pressured by weaker efficiency and higher provisions.


NB (N100.00) BUY TP: N139.54


Another weak Q4 performance

         NB advanced 204bps w/w to close at N100.00. NB trades at 19.3x 2016 P/E and 4.9% 2016 dividend yield.

         NB reported FY’15 consolidated financial results showing an 11% y/y revenue growth but a 10% decline in net profit. Normalised revenue was however down 4% y/y amidst declining volumes in the mainstream and premium segments. We note that NB has launched new brands, mostly in the mainstream segment, but given continued pressure in this segment and the potential for brand cannibalization with the brand extensions, volumes are likely to remain weak in the near term.

         Gross margin improved significantly in Q4 to 53% from 47% for 9M’15 though it remained slightly lower at 49% for FY’15 from 51% in FY’14. However, net Interest expense remained significantly ahead of our estimate, bucking our expectation for a compression in this expense item following the commencement of NB’s Commercial Paper programme in November. Nonetheless, we still expect interest expense to trend lower in 2016 amidst the lower interest rate environment and lower borrowings. The Board of Directors has recommended final dividend of N3.60/share, bringing total dividend to N4.80/share, c.100% earnings payout and ahead of our N4.50/share estimate.

         Following this result and given that the operating environment remain challenging, we have revised our FY’16 revenue and EPS forecast to N295.9 billion (Previous: N334.2 billion) and N5.15 (Previous: N5.83), taking into account the faster growing economy segment with lower revenue/hectoliter and narrower margins. The most significant risk to our earnings forecast is a potential currency devaluation in the year. Consequent to the revision to our estimates, our 12-month target price is revised downward to N139.54, BUY (Previous: N158.04, BUY).


GUINNESS (N113.00) BUY TP: N132.77


Settles N1 billion NAFDAC fine for N11.4 million

         GUINNESS declined 44bps w/w to close at N113.00. GUINNESS trades at 49.6x 2016 P/E and 1.5% 2016 dividend yield.

         Following media reports on 10 March that GUINNESS had reached a resolution with the National Agency for Food and Drug Administration (NAFDAC) which had on 9 November slammed a N1 billion ($5 million) as administrative charges for various clandestine violations of NAFDAC rules, regulations and enactments over a long period of time, we reached out to the Brewer’s management to confirm the story. We have since confirmed that GUINNESS has indeed reached an amicable resolution with NAFDAC which includes the payment of N11.4 million for administrative and service charges. GUINNESS also filed a Notice of Discontinuance for the law suit it had earlier filed against NAFDAC and the Attorney General of the Federation.

         We think this is positive news for GUINNESS shares noting that we had earlier estimated the initial N1 billion fine to amount to 22% of our erstwhile net earnings estimate. Recalling our conservative stance in accounting for the fine in our forecasts, we have now revised our estimates to reflect this event. As such, our FY’15/16 EPS estimate is revised upwards to N2.28 (Previous: N1.59) with a consequent upward revision to our 12 month target price to N132.77 (Previous: N124.47).

         We note that proposed tender offer by parent company, Diageo to increase its stake to 70% from 54.3% at a maximum tender offer price of N175/share is still pending regulatory approval and a meeting of shareholders. However, given the recent downturn in prices, we think the tender offer price could come in materially lower than the proposed upper limit of N175/share.


UACN (N19.96) BUY TP: N43.42


Resolving the cost, UPDC dilemma

         UACN declined 77bps w/w to close at N19.96. UACN trades at 6.7x 2016 P/E and 8.9% 2016 dividend yield.

         Whilst the slowdown in Group top line was not surprising given the general slowdown in the economy and the persistent security challenges in North Eastern Nigeria, the acceleration in costs in FY’15 raised concerns. With normalized EBIT (excluding one-time N2.56 billion impairment charge) of 12% as at Q3’15 coming short of UACN’s 15% EBIT target for 2015, Management stated that it would pursue aggressive and ambitious cost targets over the next 24 months. In addition, the proceeds of a planned N20 billion capital raising is expected to be used to deleverage UPDC’s balance sheet which should help reduce financing pressure on Group earnings. Despite management’s earlier commitment to, at the very least, maintain the previous year’s DPS, we think it would not be prudent at this time in light of the earnings decline and given the Group’s capital requirement.

         UPDC has been the major drag on Group performance in the last two years as the softness in residential real estate and increased competition from other property developers have contributed to declining sales. We think resolving the real estate dilemma would be critical in the future performance of the Group. In addition to deleveraging the balance sheet, Management also announced a shift in marketing strategy from residential to commercial real estate. Whilst we have maintained our FY’16 revenue forecast at N82.9 billion, our EPS forecast is revised downward to N2.96 (Previous: N3.15) to reflect the sustained elevated cost environment.


UNILEVER (N28.06) SELL TP: N20.24


Earnings outlook remains underwhelming

         UNILEVER advanced 204bps w/w to close at N28.06. UNILEVER trades at 41.9x 2016 P/E and 2.3% 2016 dividend yield.

         Unilever has continued to hemorrhage earnings amidst the steady decline in topline and increasing costs. With a general increase in the trifecta of production, operating and financing costs expected to remain elevated amidst a still challenging macro and operating environment, we expect earnings to remain pressured in 2016. Similarly, with cash flows still under significant pressure, we expect borrowings will remain elevated with attendant impact from finance charges on earnings. Nonetheless, we highlight the modicum of improvement as at Q3’15 in the level of production and financing costs that if sustained, could contribute to earnings growth in FY’16.

         Despite its leading market position, UNILEVER has posted underwhelming revenue performance in the last 7 quarters, with revenue shrinking 2.6% in Q3’15 compared to 0.4% for PZ. Whilst we agree with parent company UNILEVER Overseas Holdings that the long term fundamentals for Nigeria’s consumption growth remain positive, we think earnings performance for UNILEVER will continue to underperform the sector amidst the relatively lower rate of innovation in the HPC leader. Though we do not expect to see the steep earnings decline of 2015, we think UNILEVER is long way from returning to its pre-2012 performance.

         We have maintained our FY’15 revenue forecast N60.6 billion but revise downward our EPS forecast to N0.60 (Previous: N0.64) due to an upward revision to our cost of sale estimates.


PZ (N25.00) SELL TP: N22.18


Tight FX a drag on electricals segment

         PZ advanced 373bps w/w to close at N25.00. PZ trades at 40.3x 2016 P/E and 1.8% 2016 dividend yield.

         PZ’s Q2’15/16 revenue was a slight improvement over Q1, recording a 5% q/q growth, however, it remained lower y/y, posting a 6% decline from Q2’14/15 numbers. This performance is largely reflective of the tougher consumer environment. Parent company, PZ Cussons UK, reported that revenue performance in the Home and Personal Care (HPC) segment continues to be robust despite the extremely competitive environment whilst revenue for the Electricals segment declined sharply by 12.4% to £45.4 million.

         Profit after tax declined by a sharp 46% y/y due to sustained elevated operating and financing expenses. The higher operating expenses has been attributed to continued investments in IT upgrades and higher remittances to the parent company stemming from the 2015 naira devaluation. Also, whilst PZ continued to carry a zero borrowings balance, net finance charges remained higher (from overdrafts), tracking about 6% behind our estimate. Given what we expect will be an even tougher second half, we have revised our FY’15/16 revenue estimate to N67.8 billion (Previous: N74.1 billion) and our EPS estimate revised downward to N0.62 (Previous: N0.96).


FLOURMILL (N20.16) BUY TP: N43.93


Normalised loss swells to N5.3 billion on FX

         FLOURMILL advanced 18% w/w to close at N20.16. FLOURMILL trades at 3.5x 2016 P/E and 10.4% 2016 dividend yield.

         FLOURMILL sustained its high single digit y/y growth (9M: 7.9%, Q3: 9.3%) in this nine months result for the period ended December 31 despite the 9.7% slow down q/q. The q/q slowdown in revenue is not surprising given that the October - December harvest season usually sees consumers switch to substitutes like yam from flour based products like bread.

         Whilst reported earnings for the 9 month period amounted to N19 billion, supported by the N23.8 billion gains booked on the Unicem sale in Q2, normalized loss swelled to N5.3 billion (from N988 million as at H1) from what we believe to be FX related losses of over N4.9 billion in Q3 (FY’14/15: N5.1 billion). On a positive, operating expenses remained lower y/y despite inching higher in the quarter. However, despite total cash inflow of N38 billion from the Unicem sale, net interest charges remained 38% higher y/y even as total borrowings inched up to N165.2 billion (H1: N158.9 billion, FY’14.15: N188.5 billion). We think the planned N30 billion Rights Issue which is still pending regulatory approval is less likely to be pushed through under current market conditions.

         We have slightly revised downward our FY’15/16 revenue estimate to N335.9 billion (Previous: N341.6 billion) to reflect ongoing challenges in the operating landscape. Also, given our more conservative assumptions on the pace of debt reduction, our EPS estimates have been revised downward to N5.78 (Previous: N9.15) and N0.98 (Previous: N1.66) for FY’15/16 and FY’16/17 respectively. Consequently, our 12-month target price is revised downward to N43.93 (Previous: N54.48).




Sule appointed MD, project on course

         DANGSUGAR advanced 169bps w/w to close at N6.01. DANGSUGAR trades at 5.3x 2016 P/E and 8.3% 2016 dividend yield.

        Noting that some of the factors that contributed to the volume decline reported in 2015 were more transient, we are cautiously optimistic that DANGSUGAR will deliver volume growth in 2016. Similarly, we do not anticipate any further price increases in early 2016 amidst the relative stability in the naira and continued downtrend in raw sugar prices. Whilst, we note factors such as the continuing traffic gridlock in the Apapa area of Lagos (site of DANGSUGAR’s factory), which has constrained product delivery to consumers and continued tightness in consumer wallets, we think DANGSUGAR can deliver volume growth of 7% in 2016 supported by increased exports and production.

         Earnings have been supported by tax incentives on its backward integration project, which we expect will remain the case in the near – medium term. We note concerns over rising interest charges even as we still await a comprehensive financing plan for the backward integration project that has been estimated will cost between $1.5 billion and $2 billion over the next 5 to 10 years but recall that Management has guided to plans that would limit the impact of the project financing on margins all things being equal.

         Following revision to some of our assumptions, our FY’16 revenue and EPS forecasts are revised to N104.9 billion (Previous: N103.8 billion) and N1.14 (Previous: N1.21) respectively.


NESTLE (N690.00) BUY TP: N888.83


Earnings stabilize as FX pressures ease

         NESTLE declined 350bps w/w to close at N690.00. NESTLE trades at 21.0x 2016 P/E and 4.3% 2016 dividend yield.

         NESTLE’s surprise outperformance in the usually slow Q3’15, is a rebound that came at a time when the management states that it has retained its market share across all product categories despite recent headwinds. Whilst the operating environment remains challenging, we are cautiously optimistic that NESTLE will be able to maintain this traction in topline. NESTLE has also shown increased focus on exporting its finished products, including Maggi and Golden Morn to the US and the UK. The reported export sales as at Q3’15 was N2.5 billion compared to N1.6 billion for FY’14 and 2015 export target of between N3 and N4 billion.

         Noting that FX losses related to dollar denominated loans were the major driver of the earnings decline in H1’15, we expect earnings to continue to rebound amidst the recent stability in the naira. Most impressive has been NESTLE’s expanding gross margin performance despite limited price increases in the past year which was supported by the front loading of imported raw materials ahead of the naira devaluation in November 2014 and February 2015. However, amidst limited price increases, we see little room for further expansion in gross margin. Furthermore, with effective tax rate set to increase as NESTLE’s pioneer tax status expires on some of its capacities, earnings growth may be more modest than otherwise

         We have slightly revised upward our FY’16 EPS estimate to N33.64 (Previous: N33.26), which implies a 10% y/y growth.


WAPCO (N85.50) BUY TP: N108.10


Earnings to recover on operational efficiency

         WAPCO advanced 364bps w/w to close at N85.50. WAPCO trades at 8.4x 2016 P/E and 5.8% 2016 dividend yield.

         As at 9M'2015, WAPCO's capacity utilisation was quite decent across Nigeria operation, buoyed by stable energy supply as its plants and in fact, lower cement pricing was the major dampener to decent operational performance. Whilst we might not be able to guarantee the continued supply of gas without disruption in 2016, what we are more confident about is an improvement in alternative energy supply in case of disruption to gas. On the back of this, we think WAPCO is well positioned to tap into the rosy outlook on Nigerian cement sector in 2016.

         Whilst we like the continuous improvement in the operational performance of Nigerian plants, we highlight our concerns over possible challenges to earnings in UNICEM. We recall that similar to Q1’15, the unit’s contribution to the group earnings (accounted for using equity method) was again muted in Q3’15 due to unrealized foreign exchange loss on revaluation of foreign currency denominated borrowings; UNICEM’s contribution in the Q3 period was a loss of N0.2 billion compared to a profit of N2.6 billion in Q2. With currency not expected to be fully out of woods in 2016 amidst broader macroeconomic challenges, we remain cautious of UNICEM’s contribution to group earnings in 2016.

         We maintain our 2016 earnings outlook for WAPCO with revenue of N218.9 billion and EPS of N10.18.


CCNN (N8.88) BUY TP: N10.58


Overcoming energy challenges key to recovery

         CCNN declined 133bps w/w to close at N8.88. CCNN trades at 6.3x 2016 P/E and 3.5% 2016 dividend yield.

        Regardless of how CCNN plans to grow top line in 2016, we think the overall success of such plans will be largely determined by the extent of LPFO supply over the course of the year. Across our coverage stocks, we highlight that CCNN has the weakest logistics around energy supply; CCNN depends mostly on imported LPFO. According to the management, cost of LPFO alone accounted for c.70% of the company’s total cost of sales for 2014. Whilst the Kaduna refinery which supplies CCNN’s domestic LPFO is said to have resumed operations in December after a tough 2015 (capacity utilization: 2%), we think reliability may be in challenge given risk surrounding crude deliveries to the refinery (far from the oil producing fields in the Niger Delta). Thus, operations in 2016 would be tough, even as sourcing FX for LPFO imports would remain challenging. In fact, as at Q3’15, CCNN recorded the steepest quarterly revenue decline amongst the cement companies in our coverage over the three-month period, 33% q/q to N2.7 billion, and indeed its lowest quarterly revenue recorded since Q3’11.

         We have not considered the ongoing expansion in our model as we await clarity on progress. Consequently, our estimates and valuation are still based on the current 0.5 million MT capacity. After updating our model to reflect our conservative stance on CCNN’s topline, we revise our 2016 revenue and PAT forecasts to N13.3 billion (N14.3 billion) and N1.8 billion (N2.0 billion).


DANGCEM (N164.00) HOLD TP: N182.35

Earnings miss despite strong Q4 volume

         DANGCEM declined 238bps w/w to close at N164.00. DANGCEM trades at 14.6x 2016 P/E and 5.1% 2016 dividend yield.

         DANGCEM reported a 14% growth in FY’15 EPS to N10.64, behind our estimate of N12.00 and consensus estimate of N11.87. The Board of Directors has proposed DPS of N8.00/share, higher than N7.07 consensus estimate. We note the positive surprise in Nigerian operations in Q4 where volumes rose 34% q/q to record 4.0 million MT, outpacing the 2.9 million MT we were expecting. In all, Group cement shipment for the year was up 35% y/y to 18.9 million MT (Vetiva: 17.2 million MT) even as non-Nigerian operations remained resilient. FY’15 revenue at N491.7 billon was up 26% y/y, in line with our estimate as Group average price (N26,019/tonne) fell short of the N28,490/tonne we had estimated.

         From our discussion with management, we understand that the strong Q4 volume recovery in Nigeria has filtered into the first 2 months of 2016 with shipment for the period up 55% y/y to 4.5 million MT. We forecast shipment from Nigeria to reach 15.8 million MT in 2016. Additionally, we forecast the Rest of Africa to deliver 8.9 million tonnes (a potential 77% y/y growth) to put our Group volume estimate for the year at 23.7 million MT.

         Whilst we note weaker prices across Nigeria (we estimate N23,000/tonne vs average N29,285/tonne in FY’15) and Rest of Africa (Q4’15 average: N17,265/tonne vs FY’15 average N18,279), we see a likelihood of price increases further out in the year to mitigate currency weakness and protect cash flow from lower gas utilization. We adopt N25,000 average price for Nigeria which is still below our previous N27,000 amidst higher volume. As such, we revise FY’16 revenue to N564.1 billion (Previous: N565.1 billion). Our target price is cut to N182.35, HOLD (Previous: N189.11, BUY). Catalysts for rating upgrade include higher cement prices, faster than expected volumes and stability in gas supply.


JBERGER (N41.50) SELL TP: N39.10


Casting a new path for earnings recovery

         JBERGER remained unchanged w/w at N41.50. JBERGER trades at 8.1x 2016 P/E and 5.8% 2016 dividend yield.

         Considering our positive outlook on public sector construction activities, the expected resurgence in private sector building activities and 2015 low base, we see 2016 as a year of recovery for JBERGER.

         In recent years, JBERGER management’s has repeatedly shown commitment to maintaining profitability over growth. From where we stand, the commitment looks set to grow even stronger in 2016 as JBERGER strives to protect margins amidst the increasing case of non-payment for ongoing and completed construction projects. Although we acknowledge FG’s recent assurance of settling genuine outstanding payments due to contractors, we think the lower-for-longer oil price could further inhibit quick payments. According to management, the challenge has weighed on JBERGER’s capacity in meeting its obligations to staff and subcontractors, hence, cost savings measures will have to be taken going forward. From JBERGER’s projected financial statement for Q1’16, we note that despite a projected 25% y/y decline in revenue and an 18% y/y decline in Operating profit, operating margin is projected at 8.3% - a potential improvement over the 7.5% recorded in Q1’15. We think this reinforces our stance on management’s cost cutting measures in 2016.

         With JBERGER’s projected Q1’16 margins in line with our erstwhile estimate, we maintain our forecast for FY’16. Consequently, we forecast FY’16 revenue to grow 10% y/y to N190.5 billion and PAT to grow 26% y/y to N6.8 billion.


OANDO (N5.35) BUY TP: N9.94


Rise in oil prices boost shares

         OANDO advanced 53% w/w to close at N5.35 as oil prices strengthened. OANDO trades at 48.6x 2016 P/E and 0.6% 2016 dividend yield.

         Oando Energy Resources Inc. announced that its shareholders have approved the previously announced transaction where Oando PLC and Oando E&P Holdings Limited would acquire all of the issued and outstanding common shares of Oando Energy Resources Inc. As part of this transaction, the Company has notified the TSX and applied for the delisting of the Common Shares upon completion of the Arrangement.

         Based on our estimates, the successful completion of the ongoing part-divestment (51% stake) of Oando downstream could reduce consolidated debt by some $423 million (N85 billion) as OANDO Downstream is taken off Group balance sheet as guided by management. Nonetheless, we still expect OANDO to continue pursuing equity capital raise in the near term to improve capital structure distorted from the 2014 and 2015 impairments.


SEPLAT (N350.00) HOLD TP: N374.88


TP raised on stronger production outlook

         SEPLAT remained unchanged w/w at N350.00. SEPLAT trades at 11.4x 2016 P/E and 1.7% 2016 dividend yield.

         On 29 January, SEPLAT announced that the Supreme Court of Nigeria has delivered its judgement in favour of SEPLAT and Chevron Nigeria Limited (CNL) in a litigation brought against both parties by Brittania-U Nigeria Limited that had to date prevented the full transfer to SEPLAT of a 40.00% working interest in OML 53 and effective 22.5% working interest in OML 55 (held through 56.25% ownership of the share capital of Belemaoil Producing Limited) that the Company had acquired from CNL in February 2015.

         SEPLAT’s full year 2015 working interest (WI) production at 43,372 boed (liquids: 29,003 bopd, gas: 86 mmscfd) beat management guidance of 32,000 boed – 36,000 boed and Vetiva estimate of 36,526 boed. The outperformance, compared to our estimates, is in both oil (22% positive variance) and gas (11% positive variance) production amidst lower than expected realized oil price of $47/bbl (Vetiva estimate: $53/bbl).We have revised our FY’15 revenue estimate to $557 million (oil: $476 million, gas: $81 million), EBITDA at $220 million (Previous: $206 million) and PAT at $86 million (Previous: $84 million). Our DPS estimate is maintained at $0.03.

         SEPLAT reported net debt of $537 million for the period ended 31 December 2015 comprising of $863 million borrowings and cash balance of $326 million. Despite the 34% fall in the oil price in 2015, SEPLAT generated adequate earnings to cover debt servicing and return profit to shareholders. We calculate SEPLAT’s FY’15 interest coverage at 2x.

         SEPLAT's target price has been raised to N374.88 (Previous: N371.55) given the stronger production outlook and gas performance.


TOTAL (N150.00) HOLD TP: N161.86


2016 earnings looking up

         TOTAL advanced 889bps w/w to close at N150.00. TOTAL trades at 7.1x 2016 P/E and 9.8% 2016 dividend yield.

         With the eventual clearing of subsidy backlogs (we recall FG approval for N407 billion in December 2015) and the introduction of new pricing for key product PMS, we expect that the supply disruptions that plagued much of 2015 will ease. Amidst marginally lower PMS price (from N87.00/litre to N86.50/litre), we expect that the improvement in the subsidy management should help boost volume.

         A combination of factors should help improve TOTAL’s margins. First, we highlight the PMS margin increase for retailers from N4.60/litre to N5.00/litre. Secondly, the fall in crude oil prices has led to a corresponding fall in base oil prices which should be supportive of lubricants and specialty segment margin; we recall that this category accounts for an average 24% of sales over the last three years. Also, we think an improvement in the subsidy management scheme should help working capital management. However, we think margin gains would be capped by increasing distribution and administrative expenses which we estimate to reach double digit percentage of sales the first time in TOTAL’s history. We estimate TOTAL’s EBITDA margin will improve from an estimated 3.4% in FY’15 to 4.8% in FY’16.

·         We forecast FY’16 revenue to pick up 10% from the FY’15 slump to N233.4 billion, whilst FY’16 EPS is estimated at N16.10, up 55% from FY’15. In its usual custom, we estimate interim and final DPS of N2.50 and N9.93 respectively to bring total FY’16 DPS to N12.24 – a 70% payout ratio.


MOBIL (N171.00) SELL TP: N116.31


Earnings supported by strong rental income

         MOBIL advanced 691bps w/w to close at N171.00. MOBIL trades at 9.4x 2016 P/E and 5.8% 2016 dividend yield.

         We view MOBIL’s averseness to fuel importation as a risk to volume growth and market share. We estimate that MOBIL’s revenue slumped 18% in FY’15 as tightness in fuel supply rocked the downstream market. As at Q3’15 results, revenue declined 12% q/q in what is the slowest quarter in recent history. We have to go all the way back to the first quarter of 2011 to find quarterly revenue that came close to the N13.5 billion recorded in Q3. Even though revenue was down, OPEX continued in the Q2 trend of around N2.1 billion, resulting to just N141 million profit from core petroleum marketing operations compared to N874 million and N965 million reported in Q2 and Q1 respectively.

         Following the completion of the Mobil Court Residential Project which we estimate raked in strong income (N4.2 billion) in 2015, we are more constructive on MOBIL’s rental income and estimate earnings from this line item would reach N4.3 billion in FY’16. On our estimates, this line item would account for 48% of operating profit for the year and would serve to cushion the impact of weak earnings from petroleum marketing.

         We estimate that FY’16 revenue would rise 10% from FY’15 low base to N72.3 billion. At this level, revenue will still fall below 2012 record. We forecast FY’16 EPS at N18.10 with DPS at N9.95


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