Edward Akinlade

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Special report on Nigerian economy

SPECIAL REPORT OF THE NIGERIAN ECON OMY
THE AGRICULTURAL SECTOR
OUT LOOK
Recently, the federal Government has shown greater commitment to the development
of the Agricultural sector and there are more signals pointing to it gradual
improvement. The recent lunch of the Government commercial Agriculture credit
scheme through the Two Hundred Billion Naira (200Billion) Agric fund is one of
such development. Similar initiatives in the past have not necessarily yielded the
desired results but we expect better implementation of this scheme, giving the
precipitation of more commercial banks and the private sector at large. As a result, we
anticipate a significant increase in activities relating to commercial agriculture in
Nigeria in the medium to long term.
RECENT DEVELOPMEN T
Growing interest of Nigerian Banks in Agricultural export: as part of effort to support
Government initiatives to rejuvenate the agricultural sector, Nigerians Banks of
industry and some commercial Banks have shown interest in Agricultural export in
Partnership with the US Government, The partnership which falls under the African
growth opportunity Act, will focus on Trade, Industry and Commerce between the
countries.
More involvement to develop Agriculture at State level: in addition to the Federal
Government in various initiatives to encourage commercial Agriculture in Nigeria,
more involvement is beginning to at State level. Sokoto State Government recently
embarked on some initiatives to encourage greater investment in commercial
agriculture in the State. In partnership with the federal Government, the state is
granting some incentives related to the enhance capital allowance of Agro: allied
equipment, a 100% tax- free period of five years, an interest drawback fund program
(which provides a 60% repayment of interest paid by those who borrow for the
purpose of Cassava Production and processing under the agricultural credit guarantee
scheme: ACGS – and repay their loan as scheme on) Similarly, Akwa-ibom State was
guaranteed the loan of 5 Billion Naira from UBA in the bid to participate in the
federal governments ACGS, to develop commercial Agriculture in the state.
THREATS TO SUBSTANABLE DEVELOPME NT
Lack of effective implementation and monitoring: while we anticipate a significant
improvement in commercial agriculture in Nigeria in the long term, effective
monitoring and implementation are important to its realisation. In the past, ineffective
implementation has left various Agricultural development initiatives and project with
the little positive impact: thus, we recognised this as a key to threat to be sustainable
growth of the sector.
Poor infrastructure development: Bad access to roads, Power instability and lack of
other basic infrastructure has remained major challenges affecting most sectors of the
economy. While we anticipate increase activities in commercial agriculture in long
run, this may not translate into cheaper food stuff for the Nigeria population if basic
infrastructure is not in places.
SHARE PRICE PERFORMA NCE
In line with the upward movement of the market for the majority of the quarter under
review the stocks of presco, FTN Coco and lives stock recorded appreciation of
75.26%, 2.04%, and 52.43%,respectively while Okomu’s price declined by 10.47%
during the same period.
THE BA NKI NG SECTOR
We expect a significant improvement in disclosure, banking supervision and risk
management in the banking sector. In June, Lamido Sanusi assumed office as the
governor of the Central Bank of Nigeria (CBN); His appointment has been hailed by
industry players and investors in the Nigerian banking sector due to his experience in
risk management. Considering that the Nigerian financial system has been under
pressure due to the liquidity squeeze, and the threat of bad loans from the downstream
oil sector and stock market-related loans, we believe that a focus on risk management
is crucial.
INCREASED FOREIGN INVESTMENT EXPERTED
We anticipate an increase in foreign investment in Nigerian banks as the CBN intends
to relax it’s restriction on foreign investment. In our view, this is a welcome
development which will increase the quality of services in the sector and the number
and quality of products. However, we do not expect European and American banks to
acquire any Nigerian banks in the near future due to the crises they are facing.
However, we anticipate that European and American bank to acquire any Nigerian
banks in the near future due to the crisis they are facing. However, we anticipate firms
will increase their investments in the sector: we also foresee South African and
Chinese banks acquiring or merging with Nigerian banks. Given that some South
African banks, such as First Rand Bank, are already making plans to begin operations,
relaxation of this policy would bolster their efforts

WE EXPECT MORE CON SERVATIVE APPROACH TO CONSOLIDATION
We expect more traditional approach to mergers and acquisitions, bearing in mind
that a few banks have bad loans due to their exposure to the stock market and the
downstream oil and gas sector. Even though the CBN has stated that it will encourage
mergers between weaker banks and strong banks, we do not expect a significant
shrink in the number of listed banks in the short term due to the aforementioned
problem of bad loans. We anticipate that banks will place greater focus on asset
quality than branch network when planning acquisitions in order to reduce write-offs
which could result from bad loans.
MORE STRINGENT REGULATION EXPECTED
In our view, the CBN will increase regulation in the near future as it intensifies its
efforts to improve supervision in the sector. We have already seen signs of increased
supervision, with the CBN limiting credit to the public sector to 10% and also
requesting for commercial papers and banker’s acceptances for values higher than
N10 billion . Even though we expect these measures to improve the sector in the
medium to longer term, we believe that weak banks will find it tough operating in this
strict environment. That being said, these regulations will likely help accelerate the
FSS 2020 which aims to move the Nigerian financial services industry into the top 20
in the world by 2020.
STRONG SHARE PRICE PERFORMA CE
Wema Bank, those board was changed following the acquisition of a majority stake
by SW8 Investment Limited, was the only bank whose share price declined during the
quarter. We foresee the bank merging with one of the 2nd- tired banks as merger will
increase its efficiency. We also believe that the bank’s network of 137 branches will
make it a suitable target for stronger banks.
THE BREWERIES SECTOR
OUTLOOK
We expect earnings to rise during the latter part of the year because the sector still has
high growth prospects. Despite strains in disposable income due to rising inflation, we
anticipate increased revenue for the key stocks in the industry, given the several
expansion projects which have recently been rolled out. At the same time, distribution
channels have been extended to reach interior parts of the country which have
previously been underserved. Based on the above and the fact that the second half of
the year coincides with various Christian and Muslim holidays, we maintain a positive
outlook for the sector. Also, we expect better pricing and more quality products,
especially now that competition appears to be intensifying in the industry. Growing
competition appears to be intensifying in the industry. Growing competition in the
breweries sector was really heightened during Q2:09, particularly with the entry of
South African Breweries (SAB Miller) into the market. The breweries plc and
Guinness Nigeria plc controlling over 95% of the industry’s market share. SAB Miller
– through its acquisition of a majority stake in Pabod Breweries – made a grand entry
into the breweries market with the re-lunch of Grand larger beer. Although we believe
that industry incumbents, such as Nigerian Breweries and Guinness Nigeria plc, are
better positioned by virtue of their expertise and length of stay in the Nigerian
breweries market, we also recognise that SAB Miller is a well-known resilient player
in the countries in which it operates. At the same time, industry sales are highly
dependent on customer loyalty dependent on customer loyalty. Grand larger beer is a
product of Pabod Breweries which in the past was controlled by the Rivers State
government and we anticipate that in the long run it could pose a threat to existing
products.
Industry players have responded to the new threat by carrying out several expansion
projects in their plants, with the aim of increasing production and distribution
channels. For example, Nigerian Breweries plc recently expanded its canning line and
increased the production and distribution channel of one of its new products
“Fayrouz”
IMPRESSIVE RESULTS DURING THE QUARTER
In spite of the harsh economic environment (high energy costs, increasing transport
cost as well as inaccessibility to credit and high interest charges) leading to increasing
production costs, brewery stocks have continued to perform relatively well. During
the quarter, Guinness Nigeria plc released its unedited Q3 results for the period ended
31 March 2009, while international Breweries released its full-year results for the
2008 financial year-end.
ACTIVITY ON THE NSE
The breweries industry continued to be a toast to investors during the quarter,
appreciating by 36.79%. Apart from banking, this was the second best performing
sector on the NSE during the quarter: The only hitch experienced was in terms of the
liquidity of stocks on the exchange. Guinness Nigeria plc has an estimated free float
of 46.20%: Nigerian Breweries plc has about 45.32% free float. At the end of the
quarter, a total turnover of 407,046,841 stocks worth N15, 710,837,152.11 and
exchange by investors in 14,013 deals was recorded. This represents 1.50% of the
NSE’s value traded.
THE BUILDING MATERIALS INDUSTRY
INCREASE INSALES ANTICIPATED
We expect the current increase in construction and infrastructural development to
continue to spur the demand for cement. This will translate into a rise in the volume
of sales and revenue. Partnerships with various construction companies of regional
construction activities include the construction of the Isolo-Mile 2 expressway, and
the Lekki-Epe expressway. Also the government’s 40.64% budgetary allocation to
critical infrastructure in 2009 from 17.35% in 2008 will result in further revenue
growth for the cement industry. Moreover, the heightened demand for houses by
middle income earners and real estate developers-due to the easy access to mortgage
loans – will boost revenue growth fro industry players.
While energy problems in the industry persist, we expect that partnership with
independent power providers (IPPs) as well as petroleum marketers will ensure a
regular supply of power and low pour fuel oil (LPFO). This will lead to minimal or
zero loss of production days.
We do not expert fierce competition, given the increase in the number of industry
players following the issuance of licences to private cement importers. This is because
the demand for cement still outstrips supply which ensures that the price of cement
remains fairly inelastic.

HITCHES I THE WHEEL OF PROGRESS
Infrastructural issues continue to remain major challenge to local cement
manufacturing companies. Erratic energy supply remains a major hitch in production.
Therefore, most industry players partner with an IPP to ensure constant supply of
power which is usually at a cost. Therefore, operating expenses for the industry are
likely to remain on the high side. Furthermore, LPFO is an unregulated petroleum
product that is generally in high demand by manufacturing companies. These also
contribute to the industry’s operating expenses. While some industry players like
Lafarge WAPCO have resorted to using gas as an alternative energy source,
production to full capacity is yet to be achieved as disruptions in gas supply by
militant activities are a regular occurrence. In 2007, Lafarge Wapco lost 100 days of
production and the company lost 60 days in the first five months of the current year as
a result of militants cutting off gas supply to plants. Exchange rate fluctuations could
result in exchange loss for cement importers, while local cement manufactures are not
excluded as most of them resort to importing gypsum because the locally sourced
gypsum is rather low in purity.
RECENT UPDATE ON THE SECTOR
During the quarter, Lafarge WAPCO signed a 225 million euro (N45 billion)
syndicated underwritten multi-currency medium-term facility with a consortium of
Nigerian banks through which the company intends to expand its Ewekoro plant. The
project will include the construction of a 90MW power plant which will produce an
additional 2.2 million metric tones of cement per annum.
Benue Cement Company plc (BCC) release it FY and Q1:09 results during the
quarter. The company recorded tremendous growth in revenue and earnings following
the completion of it Expansion project. BBC now has two production lines with an
estimated capacity of 3.0 million metric pour fuel oil (LPFO) at reasonable prices for
its production processes. However, we believe the decline in expenses is not
sustainable as LPFO remains an unregulated petroleum product.
BUILDING MATERIALS SECTOR AND THE NSE
The bearish trend in 2008 continued in Q1:09, with the NSE ASI Losing 36.88% for
the quarter. WAPCO topped the losers table in the sector, depreciating by 6.54% for,
while Cement Company of Northern Nigeria plc (CCNN) appreciated by 40.15%.
However, by the end of Q2 :) 09, BBC led the gainers for the sector, appreciating by
117.83%, far exceeding the NSE ASL’s appreciation of 35.31% for the quarter BBC
and WAMPCO remain the most liquid stocks in the sector as they accounted for the
higher value traded as well as appreciation for Q2:09. The price trend of the building
materials sector and the ASI indicates that the stocks in the building materials sector
have a fairly high positive beta value.
THE CHEMICALS AND PAINT INDUSTRY
LOW MARGINS TREND EXPECTED TO CONTINUE
While increased construction continues to drive the earnings growth of industry
players, margins are still heading south as a result of recurrent infrastructural
problems in the country. An increase in production to meet the ever-rising demand for
industry products will also drive up production costs remain on the high side.
Therefore, while we expect while we expect higher growth in revenue, profitability
margins will continue to remain low. The paint industry is characterised by a number
of fragmented players which will continue to ensure fierce competition.
CHALLENGES FACED BY THE PAINT INDUSTRY
As is the case with most manufacturing industries in Nigeria, inadequate
infrastructure still cripples earnings growth. Erratic Power supply, resulting in a
greater dependence on alternative energy sources and higher distribution costs
associated with the bad road network, continues to contribute to operating expenses
growth.
The ease of entry and exit in the industry ensures the proliferation of “mushroom
paint makers” that produce adulterated products. However, the persistent efforts of the
Standards of Nigeria CSON) in tackling the problem of fake and substandard products
will eventually eliminate producers of such goods. The SON uses the Mandatory
Conformity Assessment Programme to regulate Local Manufacturers and ensure that
they comply with the required standards, while the Standards Organisation of Nigeria
Conformity Assessment Programme is used to regulate imported products. While
some Industries players import finished paint products, others import raw materials.
The industry is therefore not immune to foreign exchange losses induced by exposure
to exchange rate fluctuations.
ACTIVITIES ON THE NSE
Trading was rather low as the value and volume traded in the sector were less than 1%
of the total volume and value traded of the ASI since January 2009 till date. Also,
from January 2009 till date, stocks in the chemical and paint sector recorded a higher
depreciation in value in comparison to the ASI. While the ASI recovered inQ2:09,
most stocks in the paint sector are still on the road to recovery.
During the quarter, CAP plc released its FY 08 and Q1:09 results. Increased
production costs associated with alternative energy generation and exchange rate
fluctuations accounted for the decline in growth at the bottom-line.
THE CONGLOMERATE SECTOR
OUTLOOK
Economic polices aiming to encourage growth in the grassroots manufacturing sector,
such as the ban on imported consumable goods, have shifted consumers’ focus to
locally available substitutes. Besides, consumable goods manufactures are continually
re-branding and expanding their capacity in order to deepen their presence in the
market. We believe local markets still offer huge growth potential, given the
increasing population.
Though results released by companies in the sector did not meet expectations in terms
of turnover and profit after tax growth rates, we believe that these companies are well
positioned to meet investors’ medium-to long-term expectations.

CHALLENGES
Inaccessibility to credit facilities poses a big threat to manufacturing and
conglomerate companies operating within the country. This has led to some
companies having to shut down their factories and, as a result, lots of people have lost
their jobs. Infrastructural deficiency, especially in terms of power supply and good
road network systems, is also a major hindrance to the growth of these companies.
The dearth of infrastructure is a challenge to industrial and economic growth because
most of these companies spend fortunes to maintain their power generating set s as
operating cost thus keeps soaring. Some major manufacturing conglomerates have
begun setting up plan outside Nigeria, given the adverse economic environment. We
believe that immediate action by the federal government is required in order to restore
some confidence in manufacturing that have had to contend with the increasing costs
of doing business in Nigeria.
However, some companies have been able to brave the odds by posting good returns
for shareholders. During the quarter, Unilever plc, UAC of Nigeria PLC and PZ
Cussons plc relaesed audited and un-audited quarterly results which show their
resilience, despite the environment.
THE CONSTRUCTION SECTOR
OUTLOOK
We envisage a rise in construction activities in the latter part of the year. This is on
the back of an expected rise in government revenue, especially now that oil prices
have risen to about US$70 from US$35 at the end of Q1:09. Based on this, we
anticipate that federal allocations to states might increase during the following
months. This is an addition to other revenue derived from internally generated
sources, should provide sufficient funds for states to engage in construction activities.
Lagos State has already embarked on several construction activities with bulky of
contractors being the major players in the industry. Several public private partnerships
(PPPs) are also being established in order to revive Nigeria’s decaying infrastructure.
Given all these factors, we project a steady rise in the construction industry’s revenues
and ultimately the bottom-line.
INDUSTRY VALUATIONS
Only seven construction firms in Nigeria are listed on the NSE, which makes the
calculation of industry valuations arduous considering that unquoted stocks are not
mandated to make their result public. At the same time, several of the listed stocks are
not consistent in releasing their financial result to the public on time. We thus limit
our industry valuations to just Julius Berger Nigeria plc and Costain W.A. plc (see
Chart 15). On the average, the construction industry is trading at a forward P/E of
14.26x, a P/BV of 2.84x and a dividend yield of 7.39% as against the market P/E of
11.27x, P/BV of3.27x and dividend yield of 5.15%

ACTIVITIES ON THE NSE DURING THE QUARTER
The construction industry accounts for a mere 0.69% of the NSE’S market
capitalisation. During Q2:09, the only active construction stocks on the NSE were
Julius Berger Nigeria plc, Costain W.A plc and Multiverse Resources plc (see Table
25). On average, the construction industry recorded a turnover of about 355 million
stocks, traded in 6,656 deals and valued at N2922 million, for the quarter. During the
quarter, Cappa & D’Alberto plc requested delisting from the NSE. The stock is
currently on suspension, while the delisting process continues.
APPRECIATION OF STOCKS DURIN G THE QUARTER
It is clear that Costain appreciated by 75%, Julius Berger and Multiverse appreciated
by 15.73% and 34%, respectively. The ASL however gained 35.31% at the end of the
quarter.
THE FOOD, BEVERAGES A D TOBACCO SECTOR
OUTLOOK
There is huge potential in the food beverages and tobacco sector in terms of product
demand and industry attractiveness in the long term, given the enormity of the
Nigerian market. Although some companies in the sector may reach the mature stage
of the industry’s lifecycle, there are immense opportunities for integration and
diversification through which further growth and expansion could be achieved. If
government’s recent move to develop commercial agriculture is sustained, the food
and beverages sector is undoubtedly positioned to benefit through the provision of
cheaper locally sourced raw materials like cocoa, sugar, wheat, maize and dairy
products.
SOME CHALLENGES FACING THE INDUSTRY
Declining capacity utilisation: Most Manufacturing companies in Nigeria operate
below maximum utilisation because of power instability and inadequate
infrastructure. Illegal imports and influx of substandard products: While most local
food processing and manufacturing companies struggle to turn profits in the face of
rising expenses, growth in illegal imports of cheaper substandard products has led to
stiffer competition and greater threats to the profitability of the local industry.
REVIEW OF Q2:09
The sector’s market capitalisation was approximately N473.716billion at the quarter,
representing 7.71% of total market capitalisation –down from 8.45% at the beginning
of the quarter. The sector’s performance (as measured by the STANBIC IBTC Food,
Beverages and Tobacco Index – SIFBT) lagged slightly when compared to the ASL in
the quarter under review. The sector appreciated by 23.46%, while the ASI
appreciated by 35.31%. Similarly, most food, beverages tobacco stocks appreciated in
Price during the quarter.

THE HEALTHCARE SECTOR
OUTLOOK
We believe t6here are prospects for growth in healthcare, given favourable economic
policies, increased literacy and westernisation, as well as a large and growing market
size. Such factors will have a positive long-run impact on healthcare companies’
earnings and, ultimately, their valuations. Relative to the start of year, most share
prices in the sector have dipped significantly. As result, prices are generally low and
attractive to prospective in investors. We anticipate stock prices within the sector to
move in the general market direction during Q3:09, with low expectations for above
average market returns. Current market trends suggest that stock prices have recently
been driven by yields- the companies in this sector are generally not known to have
strong dividend payments polices.
Finally, the generally market downturn has had an adverse impact on the sector’s
performance. We do not expect a significant improvement in the sector activities in
Q3:09.
The federal government recently implemented polices that will assist companies in
expanding their product base, resuscitated abandoned product lines and increase
volumes, turnovers and profit margins within the sector. We believe this will continue
to serve as an incentive to local healthcare companies, particularly manufacturers,
such as GlaxoSmithKline Consumer (Nig.) plc, as cost are the operating environment
is more favourable.
A FEW OF THESE POLICIES INCLUDE:
• The abolition of Value Added Tax (VAT) on pharmaceutical raw materials;
• The reduction of tariffs on raw materials and equipment
• The ban on the importation of certain drugs, thereby encouraging local
producing capacity to meet demand.
CHALLENGES
Constraints in meeting globally accepted manufacturing standards continue to reduce
the possibilities of export. The country is still far from self-sufficient – for example,
Neimeth Pharmaceuticals continues to import 60% of its essential drugs.
Increased foreign exchange rates have made it more expensive to import raw
materials, thereby adversely affecting profit margins. Furthermore, the unavailable of
locally produced raw materials has heightened the foreign exchange risk experienced
by market participants, alongside increasing operating costs.
Most companies in this sector offer their products to distributors/ wholesalers on
credit in a bid to encourage sales in a competitive business environment. However,
they often need to pay ahead in purchasing raw materials from foreign sources (except
in cases where a special relationship exists between the importer and the supplier, as
is the case with GlaxoSmithKline Consumer Nig. Plc and Neimeth Pharmaceuticals).
This often results in a negative cash flow for the company, which affects its ability to
meet its short-term financial obligations and thus threatens expansion possibilities.
The scourge of counterfeit healthcare products in the market continues to be a major
setback to the industry. The availability of alternative medicines also poses a threat to
the businesses of industry players as they have to compete for market share.
Lastly, infrastructural challenges, such as irregular power supply and inefficient
transportation systems continue to have a stifling effect on the production capacity of
local manufactures.
REVIEW OF Q2; 09
Investors and speculators have shown interest in a number of stocks in the sector since
the beginning of the year. The sector traded over N618.936 million in value Q2:09. A
total volume of 101.204 million shares was exchanged during the period in 3,414
deals. Measured by turnover, Fidson Healthcare plc traded 34 million shares in 750
deals while May & Baker plc traded 34 million shares in 1,114 deals. The shares of
GlaxoSmithKline Consumer Nigeria plc were significantly less active, 16 million
shares traded in 795 deals.
Neimeth plc led the price gainers in the sector, recording an increase of 88.42% to
close at N3.58 up from N1.90 at the start of the quarter.
THE INSURANCE SECTOR
Insurance awareness becomes common goal
Concerted efforts are being made by insurance companies to increase public
awareness about insurance and its benefit because many Nigerains carry huge risk
with little or no insurance cover. According to our estimates, the Nigerian insurance
only controls 1.45% of the entire African Market, 0.24% of emerging markets, and
0.02% of the global market. In addition, Nigerian insurance penetration (insurance
premium to GDP) stands at about 0.5%, which indicates opportunities for industry
growth.
FY 08 RESULTS- HOW LONG SHOULD INVESTORS WAIT?
We believe the industry should keep investor hopes of a gradual economic recovery
alive through improvements in financial reporting and publication. Late publication of
financial information of the public is one of the areas we have identified as a major
weak point of the insurance industry. We recommend that insurers make financial
results available no later than the end of the first quarter of every year. For example,
as at the end of June 2009, only very few insurance companies had published
financial results for the period ended December 2008. We believe this lateness can
result in less robust growth and developments for the industry. This is because
investors (both local and foreign), financial advisers, and other users of financial
accounts have to rely on obsolete financial results when making decisions.

THE MORTGAGE & REAL ESTATE SECTORS
OUTLOOK
The mortgage sector currently faces a liquidity problem and the lack of an enabling
environment which has dipped its operations. Nevertheless, we believe there are vast
investments opportunities in the real estate and mortgage sectors, especially in the
light of the apparent gap between demand and supply. With the high demand for
houses, the sector continues to grow, thus creating a market for mortgage institutions
to enhance returns. Besides, government efforts to encourage an enabling
environment for private sector participation will boost confidence in the sector.We
believe that the listing of mortgage securities on the NSE would greatly assist the
sector in the long term. This would make housing more affordable to the masses in the
context of home ownership.
We also expert that the broadening of the capital market to encourage the sales and
exchange of mortgage/ real estate related securities could generate additional leverage.
We believe this is a significant way of attracting short- or medium –term
investments opportunities.
CHALLENGES
Increasing deficiency in urban infrastructure and the rising cost of building materials
continue to impact the development of the mortgage and real estate sectors.
Affordable mortgage able homes are in short supply, while the country awaits the
development of the bond market to finance urban infrastructure. The national
population growth rate presents another great challenge. Currently, there is a massive
national housing deficit of about 16 million units, according to the United Nations
Centre for Human Settlement. Unlike some emerging countries whose housing
contribution to GDP is about 40%, mortgage lending as a percentage of total bank
lending is significantly low.
The cost of housing delivery is another teething challenge faced by the mortgage and
real estate sectors. Significant affordability problems arise because of the current high
cost of housing delivery relative to income levels. Title ownership and transfer
processes are still expensive and cumbersome, which adds significantly to transaction
costs in terms of resources and time. Property transaction costs in Nigeria account for
about 20% of property costs, but transaction costs are considerably lower in some
emerging economise.
For the mortgage sector, perennial challenges which need to be addressed include
liquidity risks, absence of long term funding, poor credit information and collateral
systems, an absence of credit risk management tools, human resource capacity and the
lack of standardised loan products that allows borrowing against mortgage assets or
its securitisation. Macroeconomic challenges include the level of interest rates (which
is derived by the inflation rate) and sustainable long term lending.
Overall, the mortgage sector has not received the same level of attention received by
sectors like banking, insurance, pension funds and micro finance institutions. This is
because, unlike the banking and insurance sectors, the regulators of the mortgage
sector have not recently initiated any major kind of reform.
REVIEW OF THE SECTORS
For these two sectors, share prices fluctuation was minimal compared to the previous
quarter when they dropped significantly. In the mortgage sector, Union Homes and
Loans plc (Union Homes) recorded 63.83% price appreciation, while Aso Savings
and loans plc (Aso Saving) gained 44.21% in the same period. The share price of
UAC Property Development Company plc (UPDC) – the only listed real estate
Company on the NSE – appreciated by 7.12% over the quarter. In measuring the
performance of the sectors against the NSE ASI, the mortgage companies
outperformed the index towards the end of the quarter, while UPDC underperformed
the benchmark.
THE PETROLUEM –MARKETING SECTOR
OUTLOOK
As we had predicted in our last Quarterly review of the capital market, some major
petroleum –marketing companies seem to have identified opportunities for backward
integration and even greater participation in the distribution activities of other
independent marketers.
In the short term, we expert revenues of most individual companies to appreciate by
an average of 20% -25%. Considering the gradual deregulation in the sector, we
believe the transition from regulation (price ceiling and subsidy) to deregulation may
see prices gravitating towards a free market – determined (equilibrium) price which
will be a mark –up from the landing cost.
Our medium –term expectation is that many more independent petroleum marketers
will enter the market, thereby decreasing the market share by volume of the present
players. However, this reduction in volume will be compensated by more revenue due
to a higher equilibrium price.
We expert the markets to stabilise in the long term at price lower than those of the
medium term, considering that more suppliers should come into the market.
We must point out that in a deregulated market, the prices of petroleum products
would be dependent on the effective cost production, which in turn would be tied to
the landing cost of the products. This landing cost is also determined by the price of
crude oil and the cost of refining. We therefore expect short- term changes in
petroleum prices.
CHALLENGES WE HAVE IDENTIFIED IN THE SECTOR INCLUDE:
• Low profit margins due to the capital- intensive nature of the sector.
Businesses are often highly leveraged with debt;
• Difficultly in standing out to due to product homogeneity and fixed prices;
• High entry barriers. The cost of establishing profitable outfits has been on the
high side considering the cost of fabricated storage tanks and chains of retail
outlets. Exchanged rate violability also comes into play as it involves
importation;
• Militant activities in the Niger- Delta are a threat to crude oil production and
therefore a threat to the efficient running of refineries in the postderegulation
era;
• Pipeline vandalism;
• Time gap between import expenses and subsidy payments.
Listing and suspension
In Q2:09, there was no new listing of shares in the petroleum –marketing sector.
There were, however, two supplementary listings.

1) On 15 April 2009, a total of 200,000 shares were added to all the shares
outstanding in the name of Oando plc, as part of the company’s Staff Equity
Participation share scheme.
2) On 12 May 2009, a total of 740,000,000 shares were added to the shares
outstanding in the name of capital Oil plc, having concluded the placement with
Proven Insight Consultants Limited and True bond Energy Limited.
No company in the sector was placed on technical or full suspension during the
quarter.
THE TELECOMMUNICATIO S SECTOR
OPPORTUNITIES FOR CONSOLIDATIONS
Telecoms firms in Nigeria have until now focused on market share growth. We
anticipate that, given the highly competitive performance pressure in the sector, the
next wave will be that of consolidation, as operators will seek ways to reduce
spending as revenues and profit margins decline in Q3:09 and beyond. As industry
player expand into rural areas, the increased need for infrastructure will raise the
costs of business, thereby creating opportunities for strategic collaborations (such as
infrastructure sharing/collocation) among players.
Accommodating growth requires network expansion, which in turn requires funding.
As funding becomes scarce and expensive, there is the likelihood that smaller
operators will smuggle to keep the pace, thereby further simulating consolidation
opportunities during the quarter. We believe that this will result in the emergence of
larger scale of competition within the industry.
Generally, the performance in the code division multiple access (CDMA) industry is
generating a great deal of tension and we expect support in Q3:09 in order to achieve
a more competitive stance among peers.
EARNING FORECAST
We expect continued rapid growth for the industry in Q3:09 in order to mmet the
rising demands of Nigeria’s growing population.We expect competitors to continue
to aggressively target one another’s subscribers through innovative strategies in
order to increase their market shares and revenues. As a consequence, we expect
average revenue per user (ARPU) to decline in Q3:09 and beyond, while many value
added services are introduced into the industry, by both GSM and CDMA operators.

We anticipate the use of fixed rate contract lines to rise as subscribers become more
dependent on voice and data communication to aim and reduce their spending on air
time. With the introduction of the prepaid service for Blackberry users by Zain
Nigeria in Q2:09, we believe that sales in this category will increase.
Telecommunication companies that are unable to come up with sound innovative
strategies to compete effectively may be unable to keep up with developments in the
saturated market, and will inevitably have difficulty in generating sales and making
profit.
LIKELIHOOD OF EAR-TERM COST REDUCTION STRATEGIES
The cost of debt has clearly risen, and the industry will thus need to be crystal clear
about its ability to service its debt in both the near and long term. We believe this
may give rise to the possibility of negotiating new and financially sound structures
and transaction. Telecommunication operators may be forced to divest from nonprofitable
operations into the sharing of higher quality assets. We expect cost
reductions across the sector (as was experienced in Q2:09) through managed
serviced contract. In the longer term, we anticipate that weaker businesses may be
forced into disposals and mergers, creating opportunities for stronger operators to
prosper.
Even through the challenging macroeconomic outlook is presently driving many
emerging markets telecom operators to adopt a more cautious stance on capital
spending, we expert Nigerian telecoms infrastructural investments to increase by
about 20% in 2009.
OUTLOOK FOR TELECOMMUNICATION EQUIPMENT
On the telecommunications equipment front, players may also need to engage in
some form of strategic collaboration, joining forces with competitors in order to
carry out common or largely undifferentiated functions. This would reduce
inefficiencies that will result from the large –scales, possibly wasteful, duplication of
compete on the basis of services, or service levels, but not infrastructure levels.
CHALLENGES
The telecommunications industry faced its own share of challenges during the
quarter. Generally, it is becoming increasingly difficult to obtain funding, which is
placing financing constraints on this capital- intensive sector. If this trend continues,
operators may be forced to resort to cost – cutting strategies, such as employee
layoffs and managed services agreements. One such agreement was established
between Zain Nigerian and Ericsson during the quarter and we anticipate more
drastic measure to occur in Q3:09. Such arrangements will allow operators to focus
on their core service delivery business.
During the quarter, operators recorded a continual decrease in minutes of use by
subscribers. This has the undesired impact of reducing operator’s revenues. Even
though operators may still be able to increase revenue in the urban market by
developing value added services that will encourage subscribers to spend more on
basic voice and text messaging service, the urban market is becoming mature by the
day. Operators will need to expand in order to add new subscribers in underserved
markets. However, the inadequate supply of power poses a major challenge in these
areas and suppresses the momentum of telecoms growth. Innovative strategies in the
Nigerian market may include the installation of handset-charge points at base
stations in rural areas where there is limited access to electricity and generators.
In additions, operations could also offer solar- powered handset charges as has been
done by Intel in Guinea. Other growth inhibitors in these areas include the relatively
low income per capita as well as the high illiteracy rate which leaves even the most
basic data services, such as SMS, unexploited.
Finally, the devaluation of the naira has made imported network equipment a lot
more expensive.
REVOCATION OF NITEL’S SALE TO TRANSCORP
The sale of Nigeria Telecommunications Limited (NITEL) to Transcorp, for US$
750 million was revoked during the quarter, following the alleged breach of the
Shares Sales Agreement (SSPA) by Transcorp as follows:
• The exit of British Telecommunications as the technical operator, a
condition precedent in the SSPA;
• Failure to inject the sum of N8.9bn cash into NITEL within 100 days of its
takeover;
• Failure to pay staff salaries over the past 11 months;
• Failure to maintain NITEL as a going concern, resulting in a loss of market
share from 15% to 0.03%.
Globacom, alongside other operators, has since bid to acquire NITEL and its mobile
arm, MTEL.
Expansion opportunities for MTech Communications
MTech Communication plc’s 4.96 billion ordinary shares of 50kobo atN2.50 per
share were listed by introduction under the information
communication/telecommunication sector of the NSE’s tier securities. With access to
over 70 million subscribers across Africa, the company – whose key operators’
partners in Nigeria include MTN, Zain Nigeria, Mtel, Globacom, Multilinks Telkom
and Starcoms- has major expansion opportunities. Its current operator partners outside
Nigeria include MTN Ghana, MTN Cote D’Ivoire MTN Uganda Safaricom Kenya,
and Celtel Kenya.
ANTICIPATED REDUCTION IN BUSINESS COSTS
Even though the depreciated of the naira against the dollar has so far raised the cost of
business for mobile operators, we expect that the political issues in major oil producer
Iran as well as a sharp decline in crude inventories (which may indicate a rise in
energy demand in the US) will help to keep oil prices high. This would likely lead to a
strengthening of the naira against the dollar and a reduction of business costs for
mobile operators.
GROWTHN ON THE HORIZON FOR THE DATA SERVICES MARKET
The Africa Finance Corporation and other investors recently agreed an equity
financing deal for a US$240 million fibre optic cable. If successfully implemented,
this will go along way in improving voice and data quality in the west-African
telecommunication industry.
DECLINING ARPU LEVELS, LOW CHURN RATES
With over 70 million subscribers by the end of the quarter, Nigeria’s mobile
subscriber base is growing at its fastest rate ever. As anticipated, average revenue per
user (ARPU) has started decline. We expect this to continue, given the competition
among telecoms firms and its operators reach out to lower-end users whose spending
tends to dilute ARPU levels.
In our opinion, the increase in subscribers during the quarter was partly due to
Nigerians buying multiple SIM cards as well as flexible disconnection polices, which
means subscribers remain active even if users stop making calls – this results in a
lower churn rate. This in turn implies that the real penetration rate in Nigeria may
actually be below the often quoted 40%.


Copy: THISDAY, the Sunday N ewspaper, July 19, 2009.

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