By Vetiva Research

GUARANTY (₦39.50) HOLD TP: ₦39.15
Earnings beat – spurred by loan loss moderation
GUARANTY declined 25bps w/w to close at ₦39.50. GUARANTY trades at 7.6x 2017 P/E and 2.0x 2017 P/BV.
GUARANTY released its H1’17 results, recording strong growth across key line items. Beating already impressive Q1’17 run rate, H1’17 performance came in better than expected with top and bottom line beating our estimates by 7% and 22% respectively.

Particularly, Gross Earnings came in relatively flat (2% higher y/y) as strong Interest Income growth (up 51% y/y) outweighed the 53% moderation in Non-Interest Income. Non-Interest Income still came in 10% better than our estimate at ₦46.6 billion. In line with the general trend observed across the industry, Interest Income rose markedly y/y (albeit down 13% q/q) as the strong interest rate environment continues to support top line despite conservative loan growth (H1’17: -6%).

More importantly, loan loss provision (₦7.2 billion) came in better than our ₦12.8 billion estimate following huge write offs in prior year (FY’16: ₦65.3 billion – higher than the cumulative provision made over the previous 5 years). Operating Expense however continued its upward trend, rising 24% y/y to ₦67.8 billion (Vetiva estimate: ₦63.8 billion). Overall, PAT rose to ₦83.7 billion (H1’16 restated: ₦71.8 billion) – beating our ₦68.8 billion estimate.
We have updated our model to reflect the deviation across the key line items. Notably, with loan portfolio still sticky in H1’17 (down 6%), we cut our credit growth forecast to flat (Previous: 8%). Despite the cut, we revise our Interest Income forecast higher to ₦332 billion (Previous: ₦314 billion) to reflect the strong interest rate environment. We also raised our Non-Interest Income estimate marginally higher. Furthermore, adjusting for the lower than expected H1’17 provision, we revise our loan loss expectation to ₦20 billion (Previous: ₦26 billion).

Overall, we raise our FY’17 PAT forecast to ₦153 billion (Previous: ₦138 billion) – translating to an EPS of ₦5.20.

ZENITHBANK (₦24.53) BUY TP: ₦28.00
Earnings beat as FX income spike dwarfs huge provision
ZENITHBANK advanced 328bps w/w to close at ₦24.53. ZENITHBANK trades at 5.4x 2017 P/E and 1.0x 2017 P/BV.
ZENITHBANK released its audited H1’17 result posting marked deviations from our expectations across most line items. Notably, following a 58% q/q rise in Gross Earnings in Q2’17 standalone, the top line rose 77% y/y to ₦380 billion for the H1’17 period – beating our ₦282 billion estimate. Particularly, despite a 3% decline in loans and advances, Interest Income rose 45% y/y to ₦262 billion (Vetiva: ₦226 billion) – supported by a strong interest rate environment.

More conspicuously, Non-Interest Income rose to ₦118 billion (H1’16: ₦34 billion) – dwarfing our ₦55 billion estimate. Particularly, the bank recorded an FX trading income of ₦46 billion – largely driven by income from forward contracts within the period.
Amidst rising NPL ratio (H1’17: 4.3% vs. Q1’17: 3.2%), ZENITHBANK reported a significant rise in loan loss provision, up 198% y/y to ₦42 billion vs. our ₦16 billion estimate. Despite this, Operating Income rose 47% y/y to ₦215 billion – 22% ahead of our ₦176 billion estimate. Surprisingly however, Operating Expense rose substantially in Q2’17, up 54% q/q – a trend management attributed to inflation and currency pressure despite a relatively more stable FX environment and a sticky down inflationary trend within the period. Notwithstanding, PAT rose to ₦75 billion – beating our ₦65 billion estimate.
Whilst we cut our loan growth forecast for FY’17 to a mild 2% (Previous: 8%), we raise our Interest Income estimate to ₦535 billion (Previous: ₦452 billion). Also, following the outperformance in H1’17, we revise our NonInterest Income higher to reflect the spike in FX income from forwards and futures transaction recorded in Q2’17. Overall, our PAT forecast is raised to ₦143 billion (Previous: ₦131 billion).

UBA (₦9.35) SELL TP: ₦8.50
EPS accretion as bank cancels shares
UBA declined 536bps w/w at ₦9.35. UBA trades at 4.4x 2017 P/E and 0.7x 2017 P/BV.
UBA announced the crossing of 2,080,104,955 units of its ordinary shares from its Staff Share Investment Trust Fund (SSITF) to the bank at a price of ₦9.47/share which translates to a total value of ₦19.7 billion. We understand that this was part of the Special Resolution reached by the shareholders at its Annual General Meeting last year to cancel the shares held under the SSITF. Upon cancellation of the ordinary shares, the outstanding shares of UBA Plc will be reduced to 34.20 billion (Current: 36.28 billion).
We note that this transaction is not a share buyback but a cancellation of shares, hence it has no direct cash impact. After obtaining necessary regulatory approval, we expect the bank’s equity position to be reduced by the transaction value of ₦19.7 billion (Share Capital: ₦1.04 billion and Share Premium: ₦18.66 billion). Whilst we expect the corresponding entry to reduce the bank’s asset (previously classified as financial instrument), we highlight that the share cancellation will have no impact on the bank’s liquidity and capital adequacy ratios.

On the contrary, we expect an EPS accretion from the transaction. With the bank cancelling a portion of its outstanding shares, we estimate an increase in EPS. Although we do not expect this to impact H1’17 result as the bank is yet to get necessary regulatory approvals, we expect this to reflect in the post 9M’17 result. Whilst we maintain our FY’17 PAT forecast at ₦77 billion, our basic EPS estimate post-share cancellation is ₦2.25 (Pre-cancellation: ₦2.12).
At its recent meeting, the Board of UBA approved the payment of interim dividend subject to the approval of the CBN. We highlight that the decision is in line with our expectation. Supported by the impressive Q1’17 performance, we expect H1’17 numbers to come in strong despite our relatively weaker Q2’17 expectations – pressured by higher loan loss provision estimates. With our ₦77 billion PAT forecast for FY’17 (7% y/y growth forecast) and a dividend payout ratio expectation of 38.5%, we estimate a DPS (ex-share cancellation impact) of ₦0.75 (FY’16A: ₦0.60). Overall, we estimate an interim dividend of ₦0.25 for H1’17 (final for FY’17: ₦0.50).

ACCESS (₦9.86) SELL TP: ₦9.60
Earnings beat, supported by strong top line growth
ACCESS declined 565bps w/w to close at ₦9.86. ACCESS trades at 3.3x 2017 P/E and 0.6x 2017 P/BV.
Q1’17 results for ACCESS showed an impressive 44% y/y growth in Gross Earnings (₦116 billion) – 16% ahead of our ₦100 billion estimate. The strong top line performance was spurred by notable growth in both Interest and Non-Interest Income lines, up 43% and 47% respectively. We highlight that the 47% growth in Non-Interest Income was supported by a huge jump in FX Income to ₦17.1 billion (Q1’16: ₦6.1 billion) despite a notable moderation in Fees & Commission Income (down to ₦11.8 billion from the ₦18.0 billion reported in Q1’16).
However, retracing from a quarterly high of ₦9.6 billion in Q4’16, ACCESS reported a loan loss provision of ₦3.2 billion for Q1’17 – better than our ₦4.8 billion estimate. Consequently, Operating income rose 33% y/y to ₦76 billion, beating our ₦66 billion estimate. However, despite the unabated Operating Expense pressure (up 30% y/y), PAT came in strong – up 34% y/y at ₦26 billion, ahead of our ₦20 billion estimate.
We raise our Interest and Non-Interest Income estimates to ₦301 billion and ₦138 billion respectively (Previous: ₦280 billion and ₦120 billion). Despite the flat loan portfolio in Q1’17, we maintain our 5% credit growth for FY’17. Also, we cut our loan loss provision estimate to ₦22 billion (Previous: ₦24 billion) – albeit still higher than the Q1’17 run rate. Overall, we raise our FY’17 PAT forecast to ₦86 billion (Previous: ₦74 billion) – translating to an EPS of ₦2.97 (Q1’17 run rate: ₦3.60).

SKYEBANK (₦0.67) UNDER REVIEW
SKYEBANK announces late filing of 2016 results
SKYEBANK declined 290bps w/w at ₦0.67. Given the delayed release of results since Q1’16 (Last filing: FY15), we have placed SKYEBANK UNDER REVIEW. The Central Bank of Nigeria (CBN) extended its guarantee to SKYEBANK for another year as it assists it on its recapitalization drive.
On 4 July, the CBN effected changes to the key personnel on the Board and Management of SKYEBANK, citing failure of the bank to meet minimum thresholds in critical prudential and adequacy ratios, which has culminated in the bank’s permanent presence at the CBN Lending Window. The apex bank disclosed that SKYEBANK’s liquidity, capital adequacy, and NPL ratios have consistently been below regulatory requirement, threatening the bank’s going concern status. Following this, we understand that the CBN injected N100 billion into the bank.
Although we are yet to get a clear sense of how the SKYEBANK is faring in 2016 (particularly post-devaluation), we believe the impact of the weak macroeconomic and operating environment must have come in hard on the bank and foresee weakened margins amidst rising funding cost. We expect cost pressure to be a drag on efficiency in the short run as synergistic benefits of Mainstreet acquisition takes time to come through.

FBNH (₦6.02) BUY TP: ₦7.75
Mixed performances amidst impressive top line growth
FBNH declined 115bps w/w to close at ₦6.02. FBNH trades at 4.0x 2017 P/E and 0.3x 2017 P/BV.
BNH released its H1’17 results reporting mixed performances across key line items. Whilst Non-Interest Income moderated 46% y/y – largely due to the high base from last year (following significant FX revaluation gains reported post-currency devaluation – H1’16: ₦53 billion vs. H1’17: ₦5 billion), Interest Income grew 37% y/y to ₦232 billion– supported by the strong interest rate environment despite flat loan growth. Consequently, Gross Earnings (₦289 billion) rose 8% y/y, beating our ₦264 billion estimate. The Nigerian businesses continue to account for a significant portion of the Group’s earnings – 95% of Gross Earnings vs. H1’16: 90%. Although Interest Expense at ₦68 billion came in higher than our ₦63 billion forecast and up 2% q/q, we highlight that margins expanded, with the Group recording a Net Interest Margin (NIM) of 8.5% in H1’17 vs. Q1’16: 8.2%. Whilst loan loss expense moderated 11% y/y, the provision line was 12% higher than our estimate having risen 17% q/q. We however highlight the notable moderation in NPL ratio, down to 22% from the 26% recorded in Q1’17. Having said that, we note that asset quality challenge remains the key pressure point for earnings. Furthermore, following higher cost pressure in Q2’17, Operating Expense rose 12% y/y to ₦117 billion – deviating from recent cost containment trend and 6% higher than our estimate. Whilst PBT declined 22% y/y, the profit line was just in line with our ₦36 billion forecast.
However, with an effective tax rate of 17% vs. our 25% forecast, PAT came in at ₦29.5 billion – 10% better than our ₦26.7 billion, albeit down 18% y/y.
Our estimates have been revised marginally to reflect the deviations in top line, OPEX, and loan loss provision. Whilst we cut our FY’17 loan expectation to a flat growth (Previous: 4%), we raise our Gross Earnings forecast to ₦569 billion (Previous: ₦528 billion) – supported by the high interest rate environment. Despite the moderation in NPL ratio, we raise our loan loss provision marginally to reflect the miss. Also, we revise our OPEX higher due to the cost pressure observed in Q2’17. Despite lagging y/y at the end of H1’17, our FY’17 PAT forecast (₦53.5 billion) is a huge rise from prior year’s ₦17.1 billion amidst much lower loan loss expenses.

DIAMONDBNK (₦1.20) BUY TP: ₦3.55
Q1 Run rate maintained, PAT beats estimates
DIAMONDBNK declined 625bps w/w to close at ₦1.20. DIAMONDBNK trades at 1.7x 2017 P/E and 0.1x 2017 P/BV.
DIAMONDBNK released its H1’17 results, showing sustained earnings run rate in Q2’17 and posting a 3% y/y growth in PAT. Although bottom line growth is mild, we see the y/y growth as modestly impressive given that H1 had been a stronger half for the bank in 2016 and we had expected the y/y performance to be impacted by the prior year’s high base. Overall, whilst PBT was largely in line with our estimate at ₦10.8 billion, PAT came in at came in at ₦9.3 billion – ahead of our expected ₦7.5 billion driven by a more conservative effective tax rate.
Weak top line growth and loan loss pressure have been the biggest concerns for us in the last year. With both line items coming in better than expected, we are more optimistic about FY’17 performance. Whilst we take a conservative approach and maintain our loan loss provision estimate for FY’17 at ₦44.1 billion (FY’16: ₦59.0 billion), we raise our top line estimate to ₦224.3 billion (Previous: ₦220.5 billion). Also, we cut our loan growth expectation for FY’17 from our previous 5% to flat. However, we maintain our deposit growth expectation at a modest 2%. With a more optimistic macroeconomic outlook going forward and in line with the trend observed in H1’17, our cost of risk forecast of 4.2% is a significant improvement from prior year’s 6.7%. Hence, despite the mild bottom line rise recorded at the end of H1’17, our full year expectation of ₦16.6 billion is a huge improvement  from the dismal ₦3.5 billion reported in FY’16.
Despite the asset quality challenges around DIAMONDBNK, we are positive on the bank and believe the stock is significantly undervalued. We gathered that the bank is in talks to divest its international subsidiaries in Benin, Cote D’Ivoire, Senegal, and Togo in a bid to shore up its capital and qualify for a more conservative 10% regulatory capital adequacy requirement as a national bank.

FCMB (₦1.18) BUY TP: ₦2.93
Weak top line pressures earnings amidst rising interest cost
FCMB declined 248bps w/w to close at ₦1.18. FCMB trades at 2.6x 2017 P/E and 0.1x 2017 P/BV.
With Gross Earnings up 2% q/q to ₦39 billion in Q2’17, the top line came in just in line with our estimate albeit down 12% y/y. Whilst Interest Income rose 3% y/y to ₦62 billion – in line with our estimate, Non-Interest Income was down 50% to ₦12.9 billion – lagging our ₦16.2 billion estimate. On a positive note, however, Loan Loss Expense moderated 26% y/y to ₦10.0 billion – 18% better than our ₦12.1 billion estimate – having come in relatively flat q/q amidst a ₦2.3 billion provision write back. Overall, bottom line came in largely flat q/q, albeit down 81% y/y to ₦3.0 billion – 34% behind our ₦4.6 billion estimate.
In line with management’s guidance, we forecast a 3% y/y moderation in loan portfolio for FY’17 (Previous: 5% growth), Amidst constrained Interest Income, we expect Interest Expense to further pressure margins and estimate a Net Interest Margin of 7.3% for FY’17 (H1’17: 7.5% vs. H1’16: 8.7%).
However, we revise our loan loss provision forecast lower to ₦21.3 billion (Previous: ₦24.3 billion) – translating to 3.3% Cost of Risk. Similarly, we expect Operating Expense to remain contained in H2’17 and estimate an expense of ₦63.8 billion for FY’17. Overall, we forecast a PAT of ₦9.0 billion (Previous: ₦9.1 billion; FY’16: ₦14.3 billion) for FY’17– translating to an EPS of ₦0.45. Despite the weak earnings outlook for FY’17, we are optimistic about FCMB’s medium to long term outlook. We believe the stock is largely undervalued.

STANBIC (₦38.85) SELL TP: ₦25.74
Earnings beat consensus – PAT up 51% y/y
STANBIC declined 524bps w/w to close at ₦38.85. STANBIC trades at 8.7x 2017 P/E and 2.3x 2017 P/BV.
Q1’17 result for STANBIC indicated impressive performances across key line items with Gross Earnings up 35% y/y to ₦47 billion – 15% ahead of our ₦41 billion estimate. The strong top line performance was spurred by striking y/y growth in both Interest and Non-Interest Income line – beating our expectations by 14% and 17% respectively.

Non-Interest Income surged 31% q/q to ₦20 billion – supported by growth in trading revenue on the back of FX margins from forward transactions. Net Interest Income remained strong (up 79% y/y) as attractive yield environment continues to support top line. Furthermore, amidst a combined loan loss recovery and credit impairment reversal of ₦2.5 billion, STANBIC recorded a loan loss provision of ₦3.3 billion – better than our ₦3.9 billion estimate. With Operating Expense also coming in better than expected and amidst a moderated effective tax rate of 14% (Vetiva estimate: 18% and Prior year’s 24%), PAT doubled to ₦16.1 billion.
Whilst we raise our Deposit and Total Assets growth forecast to 11.3% (Previous: 7.5%) and 14% (Previous: 8.0%) respectively, we cut our loan growth forecast to 5% (Previous: 8.0%). Despite our more conservative credit growth forecast, we revise our top line estimate upward to reflect the stronger yield environment. We note the moderation in CoF observed since 2016 and expect this to drive earnings going forward. Although we remain cautious of the risk environment, we revise our loan loss provision estimate to ₦15.7 billion (Previous: ₦19.6 billion) – translating to a Cost of Risk of 4.3% (FY’16: 5.6%). We are optimistic about STANBIC’s performance in FY’17 and expect earnings from the Corporate and Investment Banking business to continue to support bottom line.

NB (N181.02) SELL TP: ₦120.72
H1’17 EPS up 25% y/y as FX losses moderate
NB declined 523bps w/w to close at ₦181.02. NB trades at 3.0% 2017 dividend yield.
Contrary to our 6% q/q revenue growth estimate, NB recorded a 2% q/q decline in Q2’17 amidst slightly weaker than expected volume roll-out in the quarter. Nonetheless, revenue for the half year was up 15% y/y to ₦181 billion amidst stronger average selling prices.
Amidst the brewer’s dedicated cost savings program however, operating expenses (OPEX) continues to chart a different path, with OPEX to sales ratio declining 141bps y/y to 24% in H1’17. Earnings were further supported by a surprising surge in Other income (H1’17: ₦1.8 billion vs. H1’16: ₦0.3 billion). With this, H1’17 EBIT rose 16% y/y and 2% above our estimate to ₦39.3 billion. Further helped by much lower FX losses in H1’17, net finance expense moderated 37% y/y in H1’17 to ₦5.3 billion, albeit this figure came in 45% higher than our estimate as we had expected the more stable FX environment in Q2’17 to keep a lid on FX losses. Given this, H1’17 PBT fell 3% below our estimate, but 33% higher y/y. Overall, with a 30% tax rate (Vetiva: 32%), PAT for the half year came exactly in line with our expectation at ₦23.8 billion – implying a 25% y/y rise.
Whilst revenue growth fell below our expectation in Q2’17, we are optimistic for better volume performance in the latter part of the year and as such retain our FY’17 revenue estimate at ₦346 billion. Also, with gross margin consistently bettering our estimate, we revise FY’17 gross margin estimate slightly higher to 44.5% (Previous: 44.0%). Following an upward revision to both our Other income and net finance expense estimates, our FY’17 EPS is revised 2% higher to ₦5.69 (Previous: ₦5.58).

GUINNESS (₦85.00) SELL TP: ₦72.92
Q3’17 earnings recover on margin improvement
GUINNESS declined 710bps w/w to close at ₦85.00.
After reporting losses for four consecutive quarters, GUINNESS recorded an impressive rebound in Q3’17 with profit after tax coming in at ₦2.1 billion, beating Vetiva and Bloomberg consensus of another loss. This performance was driven by a significant expansion in gross margin within the quarter to 55% vs. Q2’17: 25% and our 26% estimate. Coupled with a better than expected revenue figure of ₦30 billion (Vetiva estimate: ₦26 billion), Q3’17 gross profit rose to its highest level since Q2’13, up 87% y/y.
We highlight the huge 952bps jump reported q/q. Specifically, this jump was solely as a result of a 220% q/q rise in marketing expenses. Furthermore, net interest charges rose 207% y/y to ₦2.1 billion (50% of operating profit). Nevertheless, the improvement in gross margin overshadowed these pressure points with Q3’17 profit before tax up 190% y/y to ₦2.2 billion (Vetiva estimate: ₦1.8 billion loss). Cumulative earnings for the year however remained repressed by the huge losses recorded in earlier quarters with 9M’17 PBT coming in at a ₦2.5 billion loss, albeit better than Consensus estimate of ₦4.9 billion loss.
GUINNESS continued to draw down on its intercompany dollar loan facility in Q3’17, with total borrowings now at ₦48.5 billion and current debt/equity ratio of 1.26x (4-year average: 0.6x, Industry average: 0.4x). Whilst the company is in the process of raising equity capital in tune of ₦40 billion via Rights Issue to unladen earnings and reduce FX exposure, the entire capital raise process is expected to be completed by the beginning of its FY’18 financial year. That said, given the improvement recorded in Q3’17, we are more optimistic for FY’17 earnings and forecast a mild loss after tax of ₦219 million for the period.

UACN (₦16.00) BUY TP: ₦25.68

Earnings dip as input and interest costs bite

UACN declined 588bps w/w to close at ₦16.00. UACN trades at 11.4x 2017 P/E and 4.8% 2017 dividend yield.

UAC of Nigeria recently released its H1’17 financial results showing a strong 32% y/y growth in topline to ₦48 billion, driven by a mix of stronger prices and volume growth across the conglomerate’s operating divisions. UACN’s margins continued to reel under significant cost pressures. Gross margin contracted 638bps y/y to 16% in H1’17.

Contrary to our expectation and the sector wide margin recovery trend, UACN’s gross margin declined even further in Q2’17 to 15% (Q1’17: 17%). According to Management, the Food businesses are still unwinding expensive inventory procured at the peak of cost pressures in Q4’16/Q1’17. Coupled with a 56% decline in contribution from UPDC’s Real Estate Investment Trust, H1’17 PAT came in 40% below estimate and 55% lower y/y at ₦1.2 billion.

Despite the underperformance in Q2’17, we remain optimistic on strong performances across the business segments in the latter part of the year (Food and Paints categories especially), and as such retain our FY’17 revenue forecast of ₦96 billion (Guidance: ₦100 billion, FY’16: ₦85 billion). With management stating that its expensive inventory stock pile will last till September, we expect gross margin improvement to be skewed towards the final quarter of the year. As such, we revise H2’17 gross margin to 18% (Previous: 20%).

The Group is in the process of raising ₦15.4 billion via a Rights Issue, which is currently awaiting regulatory approvals. A major portion of the proceeds raised will be channeled towards funding requirements for the highly working capital intensive Agro-allied businesses. Also, for the highly leveraged Real Estate business (UPDC),

Management has stated its intention to raise a 3-yr ₦20 billion corporate bond. Both the Rights and Bond issues are scheduled for September/October period in 2017.

UNILEVER (₦45.50) SELL TP: ₦25.01

Margin improvement spurs impressive H1’17

UNILEVER advanced 55bps w/w to close at ₦45.50. UNILEVER trades at 0.7% 2017 dividend yield.

Beating our 31% y/y revenue growth expectation, UNILEVER released its Q2’17 financial results showing an impressive 48% y/y growth in revenue. With the Q2’17 top line coming in at ₦23 billion, revenue for H1’17 came to ₦45 billion, 6% ahead of our estimate. Whilst the price increases taken earlier this year continue to support y/y growth, we believe volume must have been stronger q/q as the company bucked the historically weaker Q2 trend to post an 8% q/q rise in revenue. Looking at the Q2’17 result, the company recorded notable improvements on production and operating costs. Whilst we had expected a 30% gross margin for the quarter, gross margin improved to 33% – higher than 28% recorded in both Q1’17 and Q2’16. Though the OPEX to sales ratio at 17% comes in higher than 16% recorded in Q1’17, the ratio is much better than the 26% recorded in the same period in the prior year. Despite the interest cost pressure, PAT for Q2’17 came to ₦2 billion (Vetiva: ₦1.3 billion), a major improvement from the low base in Q2’16 where a surge in production and operating costs constrained PAT to ₦52 million. Coupled with the outperformance recorded in Q1’17, H1’17 PAT rose 236% y/y to ₦3.7 billion.

As we are more optimistic for topline growth through the year (particularly in the HPC segment), we revise our revenue growth figure higher to ₦88.8 billion – implying 27% y/y growth (Previous: 12%). We also revise our margin estimates slightly higher to reflect the consistent cost efficiency from the HPC leader. Whilst UNILEVER recently obtained regulators’ approval for a ₦58 billion rights offering aimed at repaying its outstanding liabilities, we are yet to include this in our valuations as we await the eventual outcome of the process. Thus, we expect finance expenses to remain the major earnings dampener in the near term – pending the completion of the rights issue. Nonetheless, with a strong boost from revenue and better margins, we revise our FY’17 PAT estimate from ₦5.1 billion to ₦6.9 billion.

PZ (₦26.93) SELL TP: ₦16.85

Lower OPEX supports Q3 earnings

PZ declined 26bps w/w to close at ₦26.93. PZ trades at 2.2% 2017 dividend yield.

Supported by traditionally stronger volumes in the period and increased prices, PZ recorded its strongest third quarter revenue figure on record as Q3’16/17 (period ended February 2017) revenue rose 44% q/q to ₦23.8 billion– outperforming Vetiva estimate of ₦20.4 billion. With this, 9M’16/17 topline (₦57.2 billion) came in 13% higher y/y and 7% better than our ₦53.7 billion estimate. According to PZ Cussons UK (Parent company) in its last management update, PZ (Nigeria) continues to benefit from its diverse brand portfolio (Food & Nutrition, Home & Personal Care, and Electricals segment) with product offerings across all price segments.

 We are more optimistic on PZ for FY’16/17 given the improved revenue growth and cost moderation. We revise our FY’16/17 revenue estimate higher to ₦78.3 billion (Previous: ₦73.2 billion). Also, following the traction gained in the last quarter, we cut our OPEX estimate to 19.5% (Previous: 21%). Consequently, we estimate EPS and DPS of ₦0.78 (Previous: ₦0.61) and ₦0.60 (Previous: ₦0.46) respectively for FY’16/17.

FLOURMILL (₦28.51) BUY TP: ₦33.07

Earnings beat despite lingering cost pressures

FLOURMILL declined 169bps w/w to close at ₦28.51. FLOURMILL trades at 6.0x 2017 P/E and 6.5% 2017 dividend yield.

Despite the strong base from Q1’16/17, FLOURMILL began its FY’17/18 financial year on an impressive note, with Q1’17/18 revenue printing in line with Vetiva estimate at ₦149 billion – up 25% y/y and 11% q/q. According to Management, the sustained growth was majorly driven by higher volumes and a more favorable product mix across most product categories. Amidst a more stable FX environment, gross margin for the quarter came in 176bps higher q/q at 11.6%, albeit below our 12.2% estimate and the 12.8% recorded in Q1’16/17. Overall, Q1’17/18 PAT rose by a mild 3% y/y to ₦4.5 billion (Vetiva: ₦2.5 billion).

Noting the strong revenue performance recorded in Q1’17/18 in spite of some operational challenges, we are more optimistic on topline growth in the year and revise our FY’17/18 revenue growth estimate slightly higher to 11% (Previous: 9%). Whilst we expect the cost pressure observed to persist, we are more confident that the miller’s revenue growth will continue to offset the higher cost pressure. As such, we revise our OPEX to sales ratio to 4.0% (Previous: 4.7%). With this, coupled with the boost from FX gains, we revise our FY’17/18 PAT estimate higher to ₦13 billion (Previous: ₦10 billion).

That said, we note that the company is actively trying to improve its debt position through its ₦100 billion Commercial paper issuance program and possibly an equity capital raise. Furthermore, in a bid to reduce dependence on short term bank facilities, the miller is also working on optimizing working capital position (via increased local aggregation, improved inventory turnover).

DANGSUGAR (₦12.81) SELL TP: ₦11.12

Margins strengthen, earnings beat in H1’17

DANGSUGAR declined 176bps w/w to close at ₦12.81. DANGUSUAR trades at 4.6x 2017 P/E and 5.2% 2017 dividend yield.

Dangote Sugar PLC released its H1’17 results showing a 68% y/y rise in revenue to ₦118.7 billion. Like prior quarters, the topline performance was supported by higher average selling prices amidst triple digit price increases implemented in 2016. On a quarterly basis however, Q2’17 revenue fell 8% below our expectation despite seasonally stronger volume roll out during the Muslim festive season. Amidst an improved macroeconomic environment in Q2’17, we had expected Q2’17 gross margin to rise 380bps q/q to 17%. Surprisingly however, margins recorded a much stronger leap within the period with gross margin up to 32% (Q1’17: 13%) – much higher than pre-recession average of c.24% and Management’s 20% guidance.

Also, supported by improving operational efficiency, OPEX to Sales ratio moderated 87bps q/q to 2.4% (Vetiva: 4.0%). Overall, coupled with already positive Q1’17 result, EBIT rose from ₦11 billion in H1’16 to ₦25 billion in H1’17. With a 32% tax rate, H1’17 PAT came to a record high of ₦17 billion (Vetiva: ₦11 billion, H1’16: ₦7 billion).

The Board of Directors have recommended an interim dividend of ₦0.50/share for the H1’17 period. We cautiously forecast a 24% gross margin for H2’17 and revise our FY’17 EBIT estimate to ₦50 billion (Previous: ₦34 billion; H1’17: ₦25 billion). However, we retain our medium term gross margin expectations for FY’18 – FY’20 at 20% (5-year average: 19.5%), with our FY’17 EPS revised higher to ₦2.79 (Previous: ₦1.89, FY’16: ₦1.20).

NESTLE (₦1,210.00) SELL TP: ₦819.95

Jump in PAT in H1’17

NESTLE advanced 17bps w/w to close at ₦1,210.00. NESTLE trades at 3.1% dividend yield.

Maintaining the run rate from Q1’17, NESTLE reported another strong topline growth in Q2’17 with cumulative revenue for the H1’17 period up 37% y/y to ₦121.9 billion (Vetiva: ₦121.4 billion). Whilst the lower pricing base from H1’16 was a major driver of this robust performance, Nestlé’s parent company had also stated that volume growth in its Nigerian subsidiary was likewise strong.

Maintaining the run rate from Q1’17, NESTLE reported another strong topline growth in Q2’17 with cumulative revenue for the H1’17 period up 37% y/y to ₦121.9 billion (Vetiva: ₦121.4 billion). Whilst the lower pricing base from H1’16 was a major driver of this robust performance, Nestlé’s parent company had also stated that volume growth in its Nigerian subsidiary was likewise strong. Nonetheless, supported by the ₦5.1 billion interest income on bank deposits, net finance cost moderated significantly y/y to ₦2.2 billion (H1’16: ₦14.1 billion). Given the foregoing, NESTLE recorded a strong bottom line rebound from the low base in H1’16: ₦536 million, with PAT up to ₦16.5 billion (Vetiva: ₦16.8 billion).

With revenue largely in line with our estimate, we have retained our FY’17 estimate at ₦241 billion – implying a 33% y/y growth. Whilst we revise our net interest expense estimate higher to reflect the negative surprise in Q2’17, we reduce our OPEX to sales ratio from 19.6% to 18.4% on an improved cost outlook.

WAPCO (₦59.00) BUY TP: ₦79.26

Earnings beat on strong Q2 numbers

WAPCO declined 635bps w/w to close at ₦59.00. WAPCO trades at 10.7x 2017 P/E and 2.8% 2017 dividend yield.

Lafarge Africa wrapped up the first half of the year on a strong note, reporting H1’17 PAT of ₦19.7 billion. This result is not only impressive from a y/y perspective (H1’16: ₦30.2 billion loss), but also when compared to estimates – Vetiva: ₦17.5 billion, Consensus: ₦12.9 billion. Q2 standalone generated a bottom line of ₦14.6 billion, thanks to a ₦5.9 billion tax credit recognized over the quarter. However, even without the tax credit, earnings would still have come in very decent with PBT printing 8% above consensus. Although administrative expenses (up 52% y/y) and net finance costs (up 118% y/y) served as pressure points over the half-year, the impact was largely muted on bottom-line due to strong earnings from operations and the tax credit boost.

Whilst potential economic recovery and expected increase in FG’s building and construction activities post-budget approval provide some upside to Nigeria’s cement consumption in H2’17, we believe strong cement prices and the intense rainfall outlook would significantly cap volume roll out at Q2 levels. As such, we cut our FY’17 volume for Nigeria to 4.8 million MT (Previous: 5.5 million MT; Ytd: 2.5 million MT). Despite the volume pressure, we expect topline to remain strong; forecast FY’17 revenue growth of 34% to ₦294.4 billion (previous: ₦294.9 billion). We revise our FY’17 EBITDA higher to ₦72.1 billion (Previous: ₦63.4 billion) amidst increasing traction in the use of cheaper alternative fuels as well as strong cement price outlook, but our PBT lower to ₦31.6 billion (Previous: ₦33.2 billion) after revising our debt projections.

Although management highlighted that there are more capital allowances available to be recognized, we however take a more conservative approach in our H2’17 forecast and thus subject total expected earnings to tax. We therefore revise our FY’17 tax forecast lower to ₦2.5 billion (previous: ₦5.2 billion) after adjusting for the effect of tax credit in H1’17. Consequently, we revise our FY’17 PAT slightly higher to ₦29.1 billion (Previous: ₦28.0 billion).

CCNN (₦9.22) SELL TP: ₦7.88

Strong H1 earnings amidst pricing boost

CCNN declined 13.91% w/w to close at ₦9.22. CCNN trades at 6.4x 2017 P/E.

CCNN released its H1’17 results with profit lines coming in ahead of our estimates. As expected and in line with other cement manufacturers, stronger cement prices (over 70% y/y) continued to support topline growth with revenue up 31% y/y to ₦8.5 billion – beating our ₦8.2 billion estimate. Buoyed by the price support, H1’17 gross margin strengthened to 36% (H1’16: 29%), yielding a 61% y/y increase in gross profit to ₦3.0 billion (Vetiva: ₦2.9 billion). Despite a 26% q/q moderation in operating expenses in Q2’17 standalone, the cost lines remained elevated in H1’17, up 86% y/y to ₦1.6 billion (Vetiva estimate: ₦1.5 billion). Notwithstanding the cost pressure, bottom-line remained strong largely due to the impressive topline performance. Notably, the ₦1.0 billion H1’17 PAT recorded (7% above our estimate) is only slightly shy of the ₦1.2 billion reported for the whole of FY’16.

After cutting our H2’17 price estimate slightly and raising our volume estimate on expectation of recovery, our revenue remains largely unchanged at ₦15.8 billion (Previous: ₦15.6 billion). Whilst we maintain our OPEX estimates, we have revised our interest charges higher to ₦103 million (Previous: ₦76 million) in line with higher interest charges observed in H1’17. Notwithstanding, our FY’17 PBT and PAT estimates remain relatively unchanged at ₦2.4 billion and ₦1.8 billion respectively.

DANGCEM (₦225.00) HOLD TP: ₦240.58

Earnings surge on pricing, improved fuel mix

DANGCEM declined 625bps w/w to close at ₦225.00. DANGCEM trades at 14.3x 2017 P/E and 2017 5.3% dividend yield.

DANGCEM reported a 54% increase in H1’17 EBITDA (₦204 billion), coming in slightly behind our ₦206 billion estimate. Strong cement prices and cheaper fuel mix in the Nigerian operations as well as improving contribution from Pan-African operations (save for Tanzania) amidst capacity ramp-up remain the key performance drivers.

However, the cement giant reported a net finance cost of ₦7.9 billion vs. the N26.8 billion net finance income reported in the prior year. Despite this, H1’17 PBT rose 25% y/y to ₦155.6 billion (Vetiva: ₦145.1 billion) buoyed by the strong earnings from operations (EBIT up 67% y/y). Coupled with pioneer tax exemption on production from lines 3&4 in Ibese and Obajana plants, PAT rose 39% y/y to ₦144 billion, 7% above our estimate.

EBITDA margin in Nigeria remained very strong at 66% (Q1’17: 65%; H1’16: 59%). Apart from strong cement prices, improvement in fuel mix continued to support margins. The cement giant continues to diversify away from the use of LPFO (a more expensive energy source) in favour of gas and locally mined coal. Whilst gas usage in H1’17 improved to 58% (Q1’17: 48%) at Obajana and to 55% (Q1’17: 53.5%) at Ibese, the use of LPFO was lower at 4% (Q1’17: 6%) for Obajana and 2% (Q1’17: 3.4%) for Ibese. More importantly, the company stopped the use of imported coal at the Obajana plant – replacing with cheaper locally sourced supply (from Dangote Industries Limited and other third party suppliers).

We are optimistic about the long term prospect of the cement giant. We expect margins to remain strong in the near term – buoyed by strong cement price outlook and increasing efficiency in fuel mix across the entire group.

Management’s guidance on the use of gas turbines at Tanzania (starting September) is further supportive of margins; Tanzania currently generates negative EBITDA amidst heavy reliance on expensive diesel. After updating our model to account for the earnings outperformance, we revise our PAT estimate to ₦265 billion (Previous: ₦251 billion). Whilst the stock is fairly-valued based on fundamentals, we believe the strong market sentiment will continue to support demand on the counter.

JBERGER (₦35.99) SELL TP: ₦24.79

FX improvement lifts H1 results

JBERGER remained unchanged w/w to close at ₦35.99.

JBERGER reported H1’17 loss of ₦364.7 million, a modest improvement from the ₦426.9 million loss recorded in the first quarter of the year. The reported bottom line also came in better than our estimated loss of ₦1.3 billion, driven by stronger-than expected Q2’17 PAT of ₦72 million vs. our ₦711 million loss estimated for the period.

Whilst revenue grew a modest 4% q/q to ₦35.5 billion, earnings were further pressured (EBIT down 17% q/q) by a 20% rise in OPEX. This is particularly worrying given that ex-other gains and losses, operating margin declined to 0.6% vs 5-year Q2 average of 9.4%. However, the impact on bottom line was cushioned by a moderation in FX acquisition losses to ₦628 million (Vetiva estimate: ₦750 million) and a lower than expected tax expense. We recall that the FX translation loss reported in previous results had been due to the difference between the official FX rate and the rate at which the currency is being sourced in the parallel market. However, we have seen notable appreciation in parallel market rates since the introduction of the I&E FX window. We believe this must have been largely responsible for the moderation in FX losses.

In line with our previous expectation, we expect revenue to pick up in the second half of the year spurred by capital releases following the passage of the 2017 budget in Q2. As such, we keep revenue estimate unchanged at ₦148.8 billion. We maintain our finance costs and FX translation forecasts as we anticipate a relatively stable FX environment. We continue to monitor the rising operating expenses (OPEX as a % of sales at 23.5% in H1’17; Q2’17: 25.1%) and maintain the H1’17 run rate for administrative costs in the second half of the year.

Consequently, we revise our FY’17 bottom-line estimate to a Loss after tax of ₦1.8 billion (Previous: ₦104 million profit).

PRESCO (₦71.98) UNDER REVIEW

Impressive start to FY’17, ahead of estimates

PRESCO remained unchanged w/w to close at ₦71.98. PRESCO reported H1’17 earnings showing a 41% y/y jump in revenue to ₦12.8 billion to bring H1’17 PAT up to ₦5.6 billion (H1’16: ₦3.0 billion). We have placed PRESCO under review while we analyze the results.

PRESCO’s Q1’17 earnings came in very strong with all profit lines more than doubling y/y. In line with the trend observed in 2016, the impressive performance was primarily driven by strong domestic palm oil prices amidst the inclusion of the product on CBN’s 41-item list not eligible for official FX funding. Buoyed by the price effect, Q1’17 revenue rose 125% y/y to ₦7.2 billion, beating our ₦6.2 billion estimate. Excluding Gains on revaluation of Biological Assets (up 150% y/y to ₦633 million), EBIT over the three-month period rose 167% y/y to ₦4.7 billion (Vetiva: ₦3.1 billion) – c.70% of the profit recorded in FY’16. With finance expenses coming just in line with expectation, PBT (without revaluation gains) rose 185% y/y to ₦4.4 billion, 49% ahead of our estimate.

PRESCO plans to spend ₦13 billion on CAPEX in 2017 through a mix of debt and internally generated funds, with 85% going into acquisition of Plant & Equipment. We see this as an important move in improving the growth prospect of the company given that its refinery is currently operating at near maximum capacity; management guides on 100% capacity utilization for FY’17. More importantly, PRESCO’s CPO production is poised for a boost from FY’18 as more plantations roll into maturity phase, further justifying the need for a larger refining capacity.

OKOMUOIL (₦69.09) UNDER REVIEW

Earnings jump in H1’17

OKOMUOIL declined 499bps w/w to close at ₦69.09. OMOMUOIL reported H1’17 earnings showing a 65% y/y jump in revenue to ₦12.5 billion to bring H1’17 PAT up to ₦6.2 billion (H1’16: ₦3.6 billion). We have placed OKOMUOIL under review while we analyze the results.

OKOMUOIL’s Q1’17 earnings showed impressive performance across board. Strong domestic Crude Palm Oil (CPO) prices continued to lift the company’s Oil Palm business, with the segment’s revenue up 73% y/y to ₦5.1 billion, beating our estimate of ₦4.0 billion. The Rubber business (export) reported a much stronger topline growth (albeit 8% lower than our estimate), up 112% y/y to ₦773 million (Vetiva: ₦838 million) – supported by currency depreciation and higher international rubber prices. Overall, total revenue rose 77% y/y to ₦5.9 billion, 21% ahead of our estimate. Although cost of sales more than doubled to ₦1.3 billion, the strong topline growth and a well contained rise in OPEX (up 11% y/y) ensured EBIT doubled to ₦3.4 billion, 60% better than our estimate. Overall, Q1’17 PAT rose 92% y/y to ₦3.1 billion, beating our ₦1.8 billion estimate.

Strong domestic CPO price remains the biggest upside to OKOMUOIL’s earnings as the company continues to benefit from favourable government policies. Whilst we are excited about the recent and ongoing investments, we note that this would take about 4-5 years to start yielding results. Meanwhile, although average CPO prices remained strong in Q1’17, we believe the recent improvement in the FX market and the resulting strengthening of the currency in the parallel market could cap the persistent rise in domestic CPO prices even as international CPO prices have been on the downtrend (down 12% ytd).

OANDO (₦7.13) UNDER REVIEW

Results show return to profit for half-year period

OANDO declined 594bps w/w to close at ₦7.13. OANDO recorded a 130% y/y jump in revenue to ₦227 billion, bringing PAT for H1’17 to ₦4.6 billion (H1’16: ₦27.0 billion LAT). We have placed OANDO under review while we review the results.

OANDO released a press release in response to media reports that the company was under SEC investigation for inappropriate filing of its reports. The company stated that it believed SEC was in possession of unsubstantiated claims with respects to the matter and it is cooperating fully with the regulatory body to provide all appropriate clarifications.

Oando Gas and Power Limited (OGP), a subsidiary of OANDO, is looking to raise $1 billion in capital to implement a number of projects, including the construction of a 20 mscd/d mini Liquified Natural Gas facility. The funds will be raised in partnership with Helios Investment Partners, an international private investment firm. This trails an earlier 49% divestment of the voting rights in OGP Limited to Glover Gas & Power B.V., a special purpose vehicle owned by Helios Investment Partners for $115.8 million.

SEPLAT (₦482.00) BUY TP: (₦582.70)

Earnings recovery looking more secure

SEPLAT advanced 253bps w/w to close at ₦482.00. SEPLAT trades at 25.3x 2017 P/E and 0.7x 2017 P/BV.

For the first time since Q1’16, SEPLAT reported profit from quarterly operations – posting an EBIT of $8.6 million.

Q2’17 performance was partly supported by the resumption of crude export at the Forcados Terminal following the lifting of the force majeure on June 6. Notwithstanding, the 3-month bottom-line remained negative as in previous quarters – pressured by finance expenses. In line with expectation, Liquids production post-resumption rose to the pre-force majeure working interest levels of 34,000 boed, propping up Q2 average production to 9,507 bpd (Q1’17: 5,112 bpd). However, revenue over the 6-month period was down 14% y/y to $131 million (after adjustment for crude over-lifting) amidst mild decline in average realized selling prices – Crude oil price: down 2% y/y to $45/bbl (20% of H1’17 volume hedged at $47/bbl), Gas price: down 3% y/y to $2.97/mcf.

We understand that SEPLAT has completed the upgrade and repair of its two jetties at the Warri refinery. The upgraded jetties can sustain exports of 30,000 bpd (gross), up from 15,000bpd pre-upgrade. Work is also ongoing on the 160,000 bopd Amukpe to Escravos pipeline with completion date now revised to Q1’18 (Previous: Q4’17).

SEPLAT signed an MOU on 12 July with the pipeline operator Pan Ocean to work in partnership on i) completion of the pipeline, ii) negotiation with the Escravos Terminal Operator (Chevron) on crude handling and iii) operation & maintenance of the pipeline going forward. Although crude liftings via the Warri refinery jetty attracts higher costs of around US$11/bbl, this higher expense is partly offset by the fact that liftings are not subject to reconciliation losses and crude handling & transport charges that are payable when exporting via Forcados. Overall, we expect SEPLAT to return to profit in FY’17 and forecast a PAT of $33 million (Previous: $10 million), supported by a more optimistic view on H2’17 crude production. Buoyed by our improved outlook, we raise our Target Price (considering 2P assets only) to ₦582.70Following the lifting of Force Majeure on Forcados exports, SEPLAT revealed that it has been able to successfully reinstate gross production at OMLs 4, 38, 41 to pre-Force Majeure levels of around 75,000 bopd and 290 MMscfd.

TOTAL (₦228.11) UNDER REVIEW

H1’17 results show weaker bottom-line for half-year

TOTAL declined 839bps w/w to close at ₦228.11. TOTAL recorded a slight 5% y/y rise in revenue to ₦153 billion.

Despite this, H1’17 PAT fell 48% to ₦4.6 billion. We have placed TOTAL under review while we review the results.

TOTAL continues to benefit off increased selling prices following the liberalization of the downstream market.

Following from Q3 performance, annualized EPS of ₦45.68 is already tracking well above Consensus estimate of ₦35.28 but slightly below Vetiva estimate (₦49.33).

TOTAL’s Q3 gross margin contracted to 12.2% compared to 16.3% in Q2. In our Nigeria outlook report, Seeking a Winning Formula (20 September 2016), we highlighted that the sustainability of the strong performance of Majors in Q2’16 is at risk due to weakening currency which is pressuring Marketers to demand an increase in the selling price for PMS. We think any form of price increase at this time when Nigeria is battling a recession could meet with strong public resistance.

MOBIL (₦225.06) UNDER REVIEW

H1’17 results show drop in profit

MOBIL declined 500bps w/w to close at ₦225.06. MOBIL recorded a 12% y/y rise in revenues to ₦56 billion but profit for the period declined from ₦4.4 billion in H1’16 to ₦2.5 billion in H1’17. Following the release, we have placed MOBIL under review.

Nipco Plc launched a ₦4.84bn offer for the shares it needs to take its stake in Mobil Oil to 70 percent to comply with Nigerian takeover rules. Nipco’s investment subsidiary bought 60 per cent of Mobil Oil Nigeria from Exxon Mobil Corporation in October 2016. It is offering minority shareholders ₦417.12 per share for the 3.23 per cent of the capital, or 11.6 million shares, it needs, the same price it paid Exxon last year.

MOBIL reported subdued earnings in the traditionally weak Q3. Despite a sizeable jump in retail prices following the liberalization of the PMS market, Q3 revenue came in below previous quarters (including a price-regulated Q1) suggesting to us that volumes must have been very weak during the quarter. Q3 revenue of ₦21.6 billion missed our ₦23.4 billion estimate. Beyond the traditional weakness in Q3 (due to rains), we believe that the tight currency situation may have capped MOBIL’s volumes. We recall that in Q1, management said it engaged in some PMS imports (after a long layoff) which supported revenue growth in H1. However, we think management could have scaled back importation due to the overall tight currency situation and despite the fact that Majors get priority allocations from related upstream companies. Nonetheless, 9M’16 revenue still came in at a record ₦71.9 billion, up 59% y/y due to strong prior quarters.