Corporate Nigeria 2009 Cap-markets

8/12/2019 Corporate Nigeria 2009 Cap-markets

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Nigerias foreign reserves grew by

about 22.71% to USD63.00 billion in

September 2008 from USD51.34 billion

in January 2008 and by 31.44% between

September 2007 and September 2008.

The primary cause of the decline is the

consistent drop in the world price of

crude oil which fell from USD88.35 in

January to USD48.50 as at November

21st 2008. It actually reached a high of

USD145 in July. Nigerias situation is fur-

ther aggravated with disruption in the

Niger Delta region of the country. This

led to the number of barrels of crude oil

produced per day declining from 2.2m

bpd in January to about 1.82-m bpd as at

the second quarter of the year.

Against the backdrop of the increase in

Nigerias foreign reserves, the nairaremained relatively stable against the

USD with an average exchange rate of

about NGN129/USD until November and

hits NGN/129USD in December.Owing to

this factor and other strong fundamental

ratios of the country such as continuous

growth of the non-oil sector, Fitch main-

tained a BB-rating for Nigeria while the

Local Currency Issuer Default rating

(IDRs) were upgraded by international

rating agencies from BB- to BB (as at

May 2008).

During the year, the year on year

growth rate of the all items index was on

an upward trend; currently the inflation

rate is 14.7% (based on available infor-

mation as at October). At the beginning

of the year, the rise in the inflation rate

was caused by the rise in the world

prices of oil, food stuffs such as rice,

maize etc and other household com-

modities. Government measures to

combat the rising prices had positiveeffects, although the liquidity squeeze

in the system made the effects short

lived. To salvage the liquidity crisis and

NIGERIA| CO RPO RATE GU IDES108

CAPITAL MARKETS

Capital Markets OverviewEconomic Overview

... the naira remained relatively stableagainst the USD with an average exchangerate of about NGN118/USD until November

and hits NGN/129USD in December.


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also to combat the inflationary pres-

sures, the CBN during an emergency

monetary policy committee meeting,

reduced the monetary policy rate to

9.75% from 10.25%. The CBN has ear-

lier increased the rate to 10.25% from

10%.

At the end of October, the CBN had

issued FGN bonds valued at NGN475 bn.

Stock Market Review

Similar to 2007, the Nigerian Stock

Exchange (NSE) continued to be a choice

source of long-term funding for compa-nies. From January 2008 to November

2008, over NGN530 billion has been

raised through the primary market com-

pared to NGN.2 trillion in 2007.

Problems such as lengthy primary offer

process and returning of funds due to

over subscription was responsible for

the reduction in the amount raised in

2008 when compared to 2007. Like most

emerging markets, performance in the

secondary market of the NSE has been

unimpressive unlike the performance in

2007. The stock market indices such as

the NSE ASI, market capitalisation and

turnover have declined this year. Table 1

below shows that the NSE ASI has

declined by 40.23% compared to 74.73%

in 2007. Market capitalisation has also

declined despite the increase in the

number of listed companies during the

year. Market capitalisation currently

stands at 7.64 trillion compared to 10.18

trillion at the end of 2007. Average daily

turnover has also declined significantly.Figure1 shows that average turnover

has declined significantly in 2008 when

compared to 2007.

We believe that the following factors

were responsible for the decline in the

stock market:

Liquidity squeeze in the market as

banks reduce their loan portfolio

exposure to margin: Early in the year,

a number of banks decided to reduce

their exposure to the NSE through

margin lending. By March 2008, it

was estimated that about N2 trillion

of bank loans was in the stock mar-

ket in the form of margin lending.

Risk mitigation steps by some banks

resulted in margin calls which were

partly responsible for the decline in

the market. During the same period,

a suspension was placed on the fin-

ancier account from which stockbro-

kers borrowed money from financial

institutions for the sole purpose of

buying shares from the floor of the

NSE at a determined interest rate.

The suspension was later lifted in

order to increase liquidity in the NSE.

Increase in deposit rates resulted in

the diversion of funds from the NSEto the money market: The increase

in returns from the money market

as rates climbed has resulted in

investors diverting their funds from

the NSE to the money market.

Real estate yields higher returns:The high demand for housing in the

country especially in Lagos the

commercial capital has resulted in

an increase in the price of property.

Speculation in the property market,

which is also fuelling the increase in

prices, has attracted short-term

investors.

Market correction due to the seem-

ingly high market valuations: With

huge capital chasing few goodstocks, the ASI appreciated by

74.73% in 2007 and 8.67% in the first

quarter of 2008. At the end of 2007,

the Stanbic IBTC stockselect, which

represents over 90% of the NSE in

terms of market capitalisation, had a

trailing PE of 32.1x and price-to-bookvalue of 9.18x and a forward PE of

23.96x. Even though a number of the

large-cap companies posted good

CAPITAL MARKETS

109CO RPO RATE GU IDES|NIGERIA

Q1 Q2 Q3 Q4 Annual return

2004 13.75% 27% -21.28% 0.30% 18.46%

2005 -13.26% 4.27% 14.24% -2.23% 1.01%

2006 -3.11% 112.10% 24.44% 1.95% 37.80%

2007 30.93% 18.12% -2.15% 15.31% 74.73%

2008 8.67% -11.22% -17.40% NA -40.23%

Source: NSE, Stanbic IBTC Research

NSE Performance, 20042008

Speculation in the property market, whichis also fuelling the increase in prices, hasattracted short-term investors

Q1-2008

Q2-2008

Q3-2008

18

16

14

12

10

8

6

4

2

0

NSE Average Daily

Turnover Trend, Q1:08 Q3:08

Source: NSE, Stanbic IBTC Research


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results, the market has experienced

a sharp decline since the beginning

of the second quarter 2008. By

November 24th 2008, the Stanbic

IBTC stockselect had forward PE of

14.59x.

In a bid to curb the incessant decline

in stock prices, the federal government

convened a meeting with capital market

stakeholders, including the CBN, the

Securities and Exchange Commission

(SEC), the NSE, the Ministry of Finance

and top bank executives to formulate

policy measures that will restore confi-dence in the stock market. In particular,

the CBN appealed to banks to consider

extending the tenor of margin facilities in

order to stall the glut of the supply of

shares in the market which has been

outstripping demand and causing share

prices to decline. The NSE also reduced

its transaction costs. Investors were for-

merly subject to an NSE fee of 0.5% on a

transaction as well as value added tax

(VAT) of 0.0250% on the NSE charge. This

was in addition to a SEC fee of 0.6% (for

purchases), stamp duty of 0.075%

(charges on both buy and sell orders),

VAT of 0.075% on the stamp duty, a CSCS

fee of 0.1% (buy order) and 0.45% (sell

order) and 0.005% VAT on the CSCS fee

for every transaction. NSE trading rules

on share price movements, which had

formerly allowed a maximum of 5%

upward/downward movement in price,

have been reviewed to a maximum

upward movement of 5%, but maximum

downward movement of 1%. The 1%

downward limit was later reverse on

October 28th 2008.

Outlook

Despite the poor performance of the

ASI, a number of the companies listed on

the NSE delivered impressive corporate

earnings. The decline in stock prices

coupled with the impressive results

released by most of the companies has

made their valuations very attractive. We

expect valued investors to take advan-

tage of this opportunity.


CAPITAL MARKETS

... the CBN appealed to banks to considerextending the tenor of margin facilities inorder to stall the glut of the supply ofshares in the market which has beenoutstripping demand and causing shareprices to decline.


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CAPITAL MARKETS

CN: What policy do you see as being your highest priority for

2009?

Mr. Musa Al-Faki : Uppermost in my priorities in 2009 is to con-tinue to ensure zero tolerance for malpractices in the market.

Also, to put in place all necessary infrastructure to ensure that

investors protection is guaranteed. Furthermore, we are com-

mitted to enhancing market competition by improving on the

regulatory and legal environment considering the dynamic

nature of the market. This is expected to make the Nigerian

capital market an investment destination in line with Financial

System Strategy (FSS) 2020.

For my achievements, I do not think I am the best man to begin

to read them out. However, we at the Securities and Exchange

Commission (SEC), have continued to develop new instru-

ments and processes to further deepen the market which we

believe will, in the long run, translate to overall economic

development. We have also continued to sustain the relative

stability of the market with significant investor awareness.

How has the global financial crisis affected the Nigerian capital

markets?

eWe are convinced that what is happening in our market is a

crisis of confidence, arising from the global financial crisis

which affected the Nigerian capital market marginally in rela-

tion to the entire market capitalization, which was NGN12.28trillion (USD105.65 billion) as at the end of March, 2008 and

now NGN7.47 trillion (USD64.33 billion) as at November 26,

2008.

The fundamentals of the Nigerian Capital Market are very

strong. Besides, efforts are on to deepen the market and make

it more efficient with the entrenchment of sound corporate gov-

ernance practices. To this end, we are awaiting the reports of

the Committees on the Review of the Capital Market Structures

and Processes and Review of Corporate Governance, for us to

know the next line of action. The outcome of the work these two

Committees would help us to put some policies in place, to

strengthen the market and avoid a repeat of the current crisis.

What Policies have you put into effect to reduce corruption?

The Commission, in collaboration with Corporate Affairs

Commission mid-wife the production of the Code of Best

Practices on Corporate Governance for Public Companies

in Nigeria. This code is currently being reviewed by an

industry wide committee inaugurated by the SEC on 15th

September 2008.

Constant review of our laws and rules and regulations inorder to reduce breaches of market rules.

Zero tolerance for market infractions

Interview:Corporate Nigeria (CN) talks to

Mr. Musa Al-Faki

Director General of the

Nigerian Securities and Exchange Commission (SEC)

Strong Fundamentals Have Made NigeriasCapital Market Sound and Robust

This is expected to make the

Nigerian capital market aninvestment destination in line withFinancial System Strategy (FSS) 2020.


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CAPITAL MARKETS


What are the biggest challenges facing the SEC in its drive to

stamp out unethical practice in the market?

The Commission does not have adequate funds to carry out

its objectives.

There is need to strengthen the legal environment with SEC

having the legal backing to arrest and prosecute. SEC

should be given power of arrest like EFCC.

Inadequate knowledge by the populace on the operations

and benefits of the capital market.

Capacity building for the regulators and operators, partic-

ularly in the areas of new products and processes being

introduced to deepen the Nigeria market, which is cur-

rently dominated by equity trading.

How do you see Nigerian Financial system developing in the

future?

eThe prospects of the Nigerian Capital Market are very bright.

First and foremost, the market operates in an economy that

has a very large natural resource base, attractive to both local

and foreign entrepreneurs, large population which constitutes

a strong market for goods and services and substantial pool

of investible funds most of which are held outside the finan-

cial sector.

Another prospect of the capital market is in its attractive return

on investment. As far back as year 2003, the Nigerian Stock

Market was adjudged by the International Financial

Corporation (IFC) as one of the most rewarding in terms of

returns on investment. A capital market that is perceived by

foreign investors as vibrant, well regulated as well as possess-

ing investment potentials will continue to attract foreign par-

ticipation.

Perhaps the most important argument for the positive

prospects of the Nigerian capital market derives from the

vision of the present government to make the Nigerian econ-

omy one of the largest twenty economies of the world. The ben-

efits of this vision would naturally attract much more capital

for development. All these suggest that the capital market will

continue to play a prominent role in the steadily growing

Nigerian economy.

The Nigerian Bond market is currently quite underdeveloped.

You recently said that the financial system was 95 percent

equity based. Do you see this as a problem?

e Yes we recognize it and as such, the commission through

the bond market steering committee is making efforts to

resuscitate the bond market.

... the Nigerian Stock Market wasadjudged by the InternationalFinancial Corporation (IFC) as oneof the most rewarding in terms ofreturns on investment.


7/24


CAPITAL MARKETS

It must be noted that in July this year, the Securities and

Exchange Commission, the Nigerian Stock Exchange and the

Association of Issuing Houses of Nigeria jointly organized a

conference, on financing the 7-point Agenda of the Federal

Government through the Capital Market. We are convinced

that our recommendations arising from the conference would

further encourage the Federal, States and Local Governments,

even corporate bodies, to take advantage of the bond market

to meet their financing needs especially in the area of infra-

structure development.

Earlier this year, the SEC suspended its recapitalization exer-

cise for capital market operators. Why was it necessary to take

this decision?

e It was necessary to allow for a total review of the policy in

view of the misgivings and perceptions by some stakeholders

and also in light of the global financial meltdown.

The Board of the Commission will also revisit the recapitaliza-

tion at a later date, because we are convinced that companies

operating in the capital market must be well capitalized to be

internationally competitive.

Why should foreign investors consider investing in Nigeria?

Relatively stable political environment

The economic reforms which led to banking consolidation

that now enables our banks to operate at international

level.

Relatively easy entry and exit mechanism

Favorable international rating by Fitch Rating Agency and

Standard & Poors.

What advantages can foreign companies get from listing on the

Nigerian stock exchange?

It would have multiple ways of raising fund from the capi-tal market.

It enables it to enjoy tax incentives.

For publicity purpose on one of Africas largest market.

Good Returns on Investment.

Regulation is in line with international best practice as

Nigeria is the second African country to qualify as signato-

ry to Appendix A of the International Organization of

Securities Commission (IOSCO) Multilateral Memorandum

of Understanding (MMOU).

All these suggest that the capitalmarket will continue to play a promi-

nent role in the steadily growingNigerian economy.


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CAPITAL MARKETS


The Securities and Exchange Commission (SEC) is the apex

regulatory authority of the Nigerian capital market charged

with the dual responsibilities of regulating and developing

the market. The Commission is one of the major institutions

that has keyed into the Federal Governments Financial

System Strategy (FSS) 2020, aimed at transforming Nigeriainto an international centre and Africas financial hub.

Standardization of Practice

In line with international best practice and standards, SEC

has an Advisory Industry wide Committee on Auditing and

Financial Reporting, charged with providing leadership on

new auditing and reporting standards and considering case

of non-compliance by quoted companies. This is in accor-

dance with International Auditing and Assurance Standard

Board (IAASB). As part of the consolidation efforts within the

capital market, SEC has prescribed a new capital base for

capital market operators. This is designed to enhance oper-ators efficiency and competitiveness. In addition, it is posi-

tioning players in the capital market to have access to more

capital in order to reap the benefits accruable from financial

market globalization. In its determined effort to ensure that

the domestic capital market is made competitive to attract

both local and foreign investment, the Commission has

reduced the capital market fees for both primary and sec-

ondary markets transactions.

Progressive Report

The Nigeria capital market has witnessed tremendous

growth in recent years. For instance, the all-share index has

risen steadily from 5,672.7 points in 1998 to close at a mete-

oric highest point of 51,330.46 as at the end of October 2007.

The total market capitalization equally increased consider-

ably from NGN262.5 billion in 1998 to NGN8.04 trillion as at

October 2007. The admission of SEC Nigeria into Appendix

A signatory to the Multilateral Memorandum of Under-

standing (MMoU) of the International Organisation of

Securities commissions (IOSCO) in 2006 in Hong Kong is a

testimony to the Commissions compliance with interna-

tional standards. The Commission has also signed bilater-

al MoU with several jurisdictions, including South Africa,

Ghana, China, Uganda, Tanzania among others. The

Commission is also set to launch a Code of Conduct forShareholders Association. This is intended to strengthen

them, while enhancing shareholders value and good corpo-

rate governance of public companies.

New Products

The SEC Nigeria, in line with the increasing demands of

clients, has launched new products to cater for specific

needs of the individuals and corporate organizations. The

Mortgage Backed Securities (MBSs) and Real Estate

Investments Trusts (REITs) are the latest in the market,aimed at providing affordable mortgage finance to clients.

The Commission is making several efforts to make the

Nigerian market a preferred investment market for all

investors. For instance, the Commission is encouraging

investors to embrace e-dividend to tackle the unclaimed

dividend problem.

In partnership with Debt Management Office (DMO) and the

International Finance Corporation (IFC), the Commission

has played active roles in promoting the development of the

Bond market in Nigeria. This has further deepened the mar-

ket and enhanced the economic growth of the country.

The Prospects / Challenges

The SEC Nigeria has recorded solid achievements, especial-

ly with the countrys stable democratic governance and the

reforms in the financial sector. Investor confidence and

awareness has increased with the upsurge in capital mar-

ket activities.

The quality of service delivery has also been enhanced. A lot

of progress has been made with respect to the automation

of its processes through electronic filing, e-trading, remote

trading, e-bonus, e-dividends and electronic issuance of

securities among others. To ensure that the Nigerian capi-

tal market performs satisfactorily under the imperative of

globalisation, liberalisation, innovation and deregulation,

the challenge before SEC is to establish internationally com-

petitive market structures in areas of payment, trading,

clearing and settlement systems, listing requirements and

minimum infrastructural standards. In line with the FSS

2020, SECs vision is to transform Nigeria into a leading

international capital market centre and preferred invest-

ment destination in Africa.

Head Office: SEC Complex, Plot 272 & 273, Samuel Adesujo

Ademulegun Street, Central Business District, PMB315, Garki, Abuja

In Focus:

Securities and Exchange Commission nurturing Africas preferred capital market


9/24


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What has changed now?

eA lot of it is a lot of talk, particularly changes in the financial

sector where it is not easily appreciated the kind of lumpy

investment you really need, the kind of structured finance you

really need in terms of lower costs, because the economy

itself cannot absolve the high cost of commercial investment,

so you need public service long-term fund to get the quality of

infrastructure that you need. But people dont understand that

and they think the private sector can just move into building

bridges and power stations.

The much talked about public-private partnership is really

rehashing what has always been the case. What is very impor-tant is that we should recognize them. Government cannot do

everything and government should not seek to do everything.

The private sector cannot abandon its profit motive, more or

less profit maximization mode.

The other question is the capacity, manpower, the engineer-

ing skill, management skills and the technology that is involved

in all of these. All of these have to come together for PPP to

work, otherwise we just spend a lot of time talking and the

bridges, roads, railways, ports etc. are not built. We talk about

concessioning but unless the private sector can see the pro-

file of returns, we should try and see the efficacy of medium

and long-term financing, that gives you the grace period which

also permits substantial learning period to develop the skills,

managers and technologies.

Manufacturing Sector contributes with a relatively low per

centage to GDP. Would it be healthier to invest more in the

manufacturing area?

eBy now the agriculture sector should have been much more

developed and diversified, should really have declined in an

absolute sense in terms of its proportion of GDP. There is so

much confusion. We are taking pride in how much agriculturecontributes to GDP. That is not something to be proud of. That

shows you that the GDP is still very low. The agriculture sector

should grow and contribute even more, but its relative size in

line with what has happened worldwide, should really be shrink-

ing. There should be less people going into agriculture, the pro-

ductivity should be rising. There should be corresponding shifts

in the structural composition of agricultural production. That is

how you measure progress, not just in the fact that it is still con-

tributing 30-40 per cent when it shouldnt be less that 16 per

cent. It shows that the sector is not moving and even more so

that the overall economy is not growing, that is why - despite the

fact that agriculture is not modernized - it is still contributing

so much.

Education and Health Care are two major federal and state

government responsibilities. How should the private sector be

involved in improving these sectors?

e These are two areas where you dont even need to preach.

It is the normal thing that education is such a big industry andthe health sector a big service sector that we cannot expect

every facility to be owned by government or to be run by gov-

ernment. That is why government has to make sure it mobi-

lizes resources to build up the private sector so the private sec-

tor can now play its own part in this. The public private

partnership subsumes a very important critical seminal role

by the public sector and then the private sector can take it over,

where the private sector is providing funds to build classes and

hospitals, but you dont just start before the private sector has

matured enough to be able to have reinvestible surplus that you

need. Finance is one thing but also to groom the technical skill

and the managerial skill, to just take over these things. Thesegovernment funds should be used to build up the private sec-

tor. When they are grown up, they take over from there. But

before you do that you cant just start talking PPP and expect

the private sector to start doing all sorts of things.

Due to the relative poor performance, relative in the sense that

by general African standard, and you are looking at macro

aggregate, Nigeria is one of the growing countries. But in rela-

tions to potentially what was possible, as I worked in Korea in

the 70s as a staff of the World Bank. Korea had nothing. In

those days, they imported air for windmills, imported leathers

to make shoes, imported petrochemicals to make plastics for

sells. By the mid-seventies it was clear to them that those that

own those things - the Malaysians and Philippines - were now

in the position to compete with them because they didnt have

the raw materials. That was the origin of the structural adjust-

ment. They had to restructure their economy to move up the

technological scale into capital goods, into shipping, electron-

ics, refineries etc. That is the meaning of structural adjustment

and that has been totally misunderstood in developing coun-

tries. One example is Nigeria. To restructure an economy, so

that it can stay competitive means you have to change skills,

watch your exchange rate, and watch your monetary and fis-

cal policies and above all your manpower because you have to

retrain your people to move into your new line of enterprise.Now, in all of these, education is important. As I said we had

the opportunity of maintain the high standard we inherited

from the British. It was not exactly European standard but it

The private sector essentially has tobehave just like the foreign investorexcept that he is an indigenousemployer. He has to show the exampleto the foreign investors, whether interms of meeting up his obligation togovernment, maintaining thefacilities given by government.


12/24

CAPITAL MARKETS


was fairly comparable by just sticking to those standards. To

train the teachers properly, to maintain the merit system, to

maintain the space-more chairs, more space, more labora-

tory space, more library, more teachers etc. in proportion to

the growth. We didnt do that. If you see African classrooms,

whether in Nigeria, Ghana or Somalia they all look the same,

very few exceptions. But if it is excusable for some of them, it

cannot be excusable for Nigeria, because we had not only the

wherewithal but also the basis for leverage to make the naira

or dollar go as far as it can go within the financial premise. You

can provide more for a given cash element. That is the basis of

modern credit but here we still pride ourselves in buying a car

with cash.

The aim of Corporate Nigeria is to inform the global business

community about business, trade and investment opportuni-ties in Nigeria. What are the key reasons for foreign investors

to invest in Nigeria?

eAt this stage of our development, which is 48 years after

independence, it would seem as if this question will become

so obvious. Perhaps the reason why it is still relevant, is a

measure of what we have failed to do. As you know this is one

of the largest economies by the broad indicators of population

size. Resource endowment evenly distributed among the

regions cotton, leather, tin, columbite, oil, palm-oil, cocoa

as well as other agricultural products and on top of that the oil

and gas. Many investors want to invest in a country, where youdont have to be looking at exporting to the neighboring coun-

try or region, where if the plant is just set up here, the prod-

ucts can be bought off here and you dont have to worry about

trade and export problems. So the issue of scale, resource size,

economic size, differential vegetation, is important. I think

there are many reasons foreign investors will invest here.

What should the government and the Nigerian private sector,

be doing to encourage investment in Nigeria?

e First, we look at what government should do. For some for-

eign investors, who are already trapped here, obviously no

matter what you do they cant just leave. So we are not just

talking about keeping those who are here but also attract new

people. It is not just writing an investment code that is com-

petitive on paper, it has to be dynamically competitive so that

the investor would know that he is not at a disadvantage for

coming here or staying here instead of going to Ghana, Angola

or South Africa. So the laws have to be dynamic with an eye to

what obtains everywhere. In many cases some of our politi-

cians dont really understand this. They think that everybody

is trapped so they can just do anything and weve seen that in

the oil sector because I have made a point that if government

feels that oil companies are not doing what they should do theyshould call them together and rewrite the regulations and

make sure they obey the rule. The legal regime must be right,

it must be competitive and there should be security. Security

is very important. I dont care what kind of rating you get from

Standard or whatever organization; if you dont have security

those ratings dont mean anything. There has to be security,

there has to be legal process that is competitive because the

investors can lose all he has or hell be discouraged from

investing if he thinks that once he puts in his money there is

no redress, anybody can literally bash him over the head. So

the legal system, the security system, the infrastructure must

be right.

The developing countries that attract a lot of investment are

those countries that have made it attractive for the investors.

Its almost like where an industrial area is in place and you just

bring your equipment and plug-in. You dont expect the guy to

come and has to literally build his road into the jungle. Security

is very important.

The private sector has to learn the rules of the game. The pri-

vate sector essentially has to behave just like the foreign

investor except that he is an indigenous employer. He has to

show the example to the foreign investors, whether in terms

of meeting up his obligation to government, maintaining the

facilities given by government. I think that a good private sec-

tor would immediately begin to see how it can work with the

public sector to advance the overall goals of the economy. But

right now, it is more talk.


13/24

Crusader Nigeria plc (Crusader) has

been on a technical suspension on the

floor of Nigerian Stock Exchange (NSE)

since 15 February 2008 following its

plans to embark on a public offer. The

planned offer, which is coming two years

after the company raised NGN3 billion

from the capital market, was however

over-delayed by the bearish trend of the

market and the purported moves by the

company to restructure its business as

a group of companies. But since the bear

appears to have overstayed its domi-

nance of the market, Crusader decided

to restructure its planned offer in form

of a debenture instead of ordinary

shares.

With the offer, the company intends to

rake in NGN4 billion at a semi-annualcoupon rate of 12% to investors. In addi-

tion to this, Crusader is also offering a

total of 797,884,198 ordinary shares in

form of rights at NGN4.50/share.

According to the company, the 5-year

debenture stocks can be converted to

ordinary shares at any point post allot-

ment but at the current market price of

NGN7.35/share.

Purpose of the offer:

The expected combined net issue

proceeds of about NGN7.086 billion is

to be utilized as follows (see table).

Method of offer:

Rights issue and offer for subscrip-

tion of convertible debenture stock

Payment:

In full on application

Price:

convertible debenture stock mini-

mum of NGN5,000; rights issue NGN4.50 per share

Opening date: 22 September, 2008

Closing date: 31 October, 2008

Company details History

Crusader Nigeria plc formerly

Crusader Insurance (Nigeria) plc com-

menced business in Nigeria as a branch

of Crusader Insurance Company,

Reigate, United Kingdom in 1965 and

was incorporated in Nigeria as a

Nigerian private limited liability compa-

ny in 1970. The company started opera-

tion as a life company offering life and

pension products and services. The

recent recapitalization directive of the

insurance regulatory body in the country

National Insurance Commission

(NAICOM) resulted in mergers/acquisi-

tions agreements between Crusader

and four insurance companies namely

Royal Trust Assurance Limited, Golden

Insurance Company Limited, RefugeInsurance Limited, Trust and Guarantee

Insurance Company Limited, and

Admiral Insurance Company Limited.


CAPITAL MARKETS

Crusader Nigeria PlcStrategic approach in a bearish market


14/24

Business and services restructured

One of the developments triggered by

the recent recapitalization exercise in

the insurance industry is the evolving of

insurance companies into financial serv-

ices companies. Accordingly, Crusader

together with its subsidiaries recently

restructured its business to a financial

service group with different components

focusing on businesses in areas such as

general (property and casualty insur-

ance), life insurance, pension fund

administration, trusteeship, investmentbanking, and real estate management.

With the current group structure, each

subsidiary is well positioned to leverage

on the strengths and services of the oth-

ers. Crusader has over the years devel-

oped its products and services particu-

larly its long term business through

innovative products such as Annuity

Pensions Plans and a Funeral Policy (the

first funeral policy in Nigeria).

As part of its efforts to restructure its

property business, the company has

secured access to about 9,500 square

metres in Ikoyi Lagos and is deter-

mined to invest in properties for com-

mercial purposes. Even though real

estate investment in Nigeria has high

potentials to deliver substantial returns,

we do not expect the real estate business

of the company to transform to improved

profitability in the short term given the

turnaround time for Crusader to fully

transform its subsidiary Crusader

Properties Limited to manage realestate holdings outside the Crusader

group. Part of the companys intent is to

invest in an investment banking firm and

finance house. While this appears as a

flourishing business, earnings and prof-

itability from this business segment is

tightly tied to not only the level and vol-

ume of transactions which are dictated

by competition and other factors but also

the trend in the capital market. In our

opinion, the business segmentation of

Crusader will translate to improved

profitability in the medium to long term

given that business transformation, in

many cases, takes longer time than

expected to translate to improvement in

earnings and profitability.

Strengths and opportunities

Highly experienced in risk underwrit-

ing business and pension adminis-

tration

Well positioned subsidiaries leverag-

ing on each others strengths and

competence

Well focused to increase earnings by

way of business reformation

Strong capital base well in excess

of regulatory requirement

Good control of underwriting

expenses

Very strong solvency margin

Weaknesses and threats

Decline in readiness to meet claims

in 2007

Low penetration of insurance busi-

ness in Nigeria

Profitability may be hampered by

volatilities of the financial markets

Slow rate of implementation of iden-

tified growth-driving policies in the

insurance business

Capital adequacy

Crusader remains one of the highly

capitalized companies involved in insur-ance business with shareholders funds

well in excess of regulatory requirement.

The companys shareholders fund has

consistently grown in the last five years

from NGN474.14 million in 2003 to

NGN8.37 billion in 2007 representing an

average annual growth rate of 122%. The

impressive growth is on account of reval-

uation of reserves and the capital raising

activity of 2006. Crusader gradually min-

imized its exposure to risk against avail-

able funds to bear same as the net pre-

mium-to-capital ratio declined steadily

from 106.48% in 2003 to 13.09% in 2006

before rising to 21.49% in 2007. Among its

CAPITAL MARKETS


Diamond Bank plc

BGL Securities Limited

Chapel Hill Advisory Partners Limited

Ecobank Nigeria plc

Fidelity Bank plc

Lead Capital Limited

Partnership Investment Company limited

Profound Securities Limited

Spring Capital Markets Limited

Sterling Capital Markets Limited

Summary of the offers

Issuing houses

Activities Approximate Approximate Expected

amount percentage completion

(NGN'000) period

Information technology upgrade 55,000 0.78% 18 months

Office expansion and upgrade of branches 200,000 2.82% 24 months

Working capital 410,728 5.80% continuous

Investment in real estate 2,000,000 28.22% 12 months

Acquisition of new financial services business 2,421,026 34.16% 6 months

Investment in insurance companies 2,000,000 28.22% 6 months

Total 7,086,754 100.00%

Source: Company financials

Utilization of Proceeds

Crusader remains one of the highly

capitalized companies involved in insurancebusiness with shareholders funds well inexcess of regulatory requirement.


15/24

peers, this ratio is higher than 17.55%

for Royal Exchange Nigeria plc (Royal

Exchange), lower than 36.36% for

Cornerstone Insurance plc (Cornerstone)

and comparable to 21.91% for Guaranty

Trust Assurance plc (GTA). The company

has also shown substantial improvement

in financing a substantial part of its

assets by equity. This is on account of its

equity cushion which steadily gravitated

to 64.33% in 2007 from 12.95% in 2003.

This ratio is however lower than the

peers average of 76.60%.

Asset quality

As at 31 December 2007, Crusaders

total investment stood at NGN6.46 bil-

lion (N5.59 billion in 2006) higher than

GTA total investment of NGN5.55 billion

but slightly lower than NGN6.8 billion

for Cornerstone. Until 2005 when long

term investment began to account for

50%-75%, Crusaders investment was

skewed towards short term investment

which accounted for about 64% and 60%

of total investments in 2003 and 2004

respectively. However, an appraisal ofthe long term investment revealed that

the company is not insulated against

equities market risks as quoted invest-

ment accounts for 40% of its long term

investment. On a larger scale, however,

the companys equities-to-total assets

ratio was as low as 5.47% in 2003 and

highest at 18.97% in 2007 suggesting

that the exposure of the companys

assets to equities market risk is not too

massive. The companys ratio of debtors

to gross premium and reinsurance

recoveries however calls for concern

(since debtors has high potentials to

overstate assets) as the ratio ballooned

to 121.82% in 2007 from 36.57% in 2004.

Reinsurance and actuarial issues

The risk retention rate of Crusader

has continued to improve since 2005 to

stand at 82.95% in 2007 ceding about

7% to reinsurers. Since this is within

what is obtainable in the industry,

Crusaders risk retention rate is neither

low nor too high. Crusaders net premi-

um-to-risk reserves (insurance fundsand shareholders funds) ratio consis-

tently dwindled from 67.36% in 2003

to12.27% in 2006 before improving to

about 20% in 2007. This is a good devel-

opment for the company since it indi-

cates that its exposure to risks relative

to its reserves was becoming lower and

is comparable to GTAs 20% and lower

than Cornerstones 33%. Furthermore,

the ratio of net technical reserves to net

claims paid has been upbeat at (2005:

515.87%, 2006: 870.22%, and 833.76%)indicating that technical reserves have

been adequate relative to average

claims paid in the last five financial

years.

Earnings and profitability

Gross premium income for Crusader

which stood at NGN2.16 billion by the

end of 2007 has grown annually (except

2006 when it declined by 16.26% to stand

at NGN1.099 billion). Many composite

insurance companies generate the chunk

of their premium from their non-life busi-

ness. The case is similar for Crusader

with non-life business accounting for

70.72% of gross premium. A breakdown

of non-life insurance gross premium

shows that motor insurance was respon-

sible for 38% of the gross premium in the

business segment in 2007.

In the short term, we believe that the

bulk of Crusaders earnings will still be

from its non-life insurance business

given its long established experience in

this business segment and the timeframe required for it to complete the

planned business re-segmentation. For

the period under review, total underwrit-

ing expenses (which consists of claims

and direct underwriting expenses) has

witnessed a rather slow rate of increase

(an average of 30.23% between 2003 and

2007) when compared to the growth rate

of premium, commission and invest-

ment incomes (an average of 67.67%

between 2003 and 2007). Accordingly,

underwriting profit for Crusader standsat an average of 102.92% during the

review period.

The loss ratio of Crusader in 2007

(31.93%) is comparable to that of Royal

Exchange 31.84%, although it is much

higher than that of Mutual Benefits

Assurance plc (MBenefit) 13.85%. This

suggests that for every NGN1 generat-

ed by Crusader as premium, 31.93 kobo

went straight into claims settlement.


CAPITAL MARKETS

Source: Companies financials, Stanbic IBTC Research

RoyalE

xchang

e

Crusade

rGT

A

Mbenef

it

Lasaco

Corn

erston

e

40%

30%

20%

10%

0%

Net Premium-to-Capital Ratio

for 2007 FY


RoyalE

xchang

e

Crusade

rGT

A

Mbenef

it

Lasaco

Corn

erston

e

80%

60%

40%

20%

0%

Equity Cushion

for 2007 FY


QuotedInvestment

30%

InvestmentPoperties27%

UnquotedInvestment

9%

Money MarketInstruments34%

nquotedes men

oney Marns rumen s

Crusaders Investment Holding

for 2007 FY


16/24

The expense ratio of Crusader improved

significantly in 2007 29.86% down from

88.50% in 2006 on account of substantial

growth in net premium income and the

fact that no direct underwriting expense

was incurred during the year. Measured

by return on asset in 2007, Crusader is

ranked the best among its peers as

shown below. Similarly, return on equi-

ty in 2007 also indicated that the compa-

ny was the most efficient of all its peers

as shown below.

Liquidity

Crusader has maintained positive netoperating cash flow except in 2007 when

its net cash flow was a deficit of NGN3.2

billion following huge cash outflows as

surrenders on secured funds NGN3.22

billion as well as cash payment to and on

behalf of employees NGN1.46 billion.

Nevertheless, cash premium received

from policy holders in 2007 stood at

NGN1.62 billion and implies that about

74% of its gross premium income was

converted to cash during the year. This is

however lower than 91% cash generationfrom gross premium for GTA. As a further

test of liquidity, the liquid asset-to-total

asset ratio declined in 2007 to 48.84%

from 55.53% in 2006 indicating a decline

in the companys readiness to meet its

claims and other obligation. It is however

noteworthy that the company was able to

record a positive cash flow NGN1.16 bil-

lion from its investing activities in 2007

compared to negative figures it reported

between 2003 and 2006.

Share price analysis

Crusaders share price has been on

technical suspension for about eight

months now. The companys share price

has however witnessed an impressive

appreciation for long term investors

appreciating by 368% since 2006, 175%

since 2007 and 8.8% since the beginning

of 2008. In addition, the company has

paid annual dividend for five financial

years and established itself in the for-

mer sector it belonged on the NSE

insurance sector as one of the few com-

panies with competitive dividend pay-

ment. Thus, Crusader has yielded sub-stantial returns to investors in the long

term.

Earnings forecasts and valuations

Our earnings projection for Crusader

is based on its current strategy to diver-

sify its stream of income, our feel of the

opportunities and growth potentials of

real estate business in Nigeria, and the

future of the current pension fund

administration business in the country.We have also considered fluctuations in

securities values in the financial mar-

kets (particularly the equities market)

given the companys exposure to them.

We expect Crusaders profit after tax

to be NGN1.2 billion by the end of

December 2008. Given that the compa-

nys financial year is close to an end and

the turnaround time for the proceeds of

the current offer to be fully remitted

from brokers and agents, we do not

expect the current offer to have a signif-

icant effect on the profitability of the

company this year.

Our fair value calculation is based on

a combination of valuations, including

the discounted cash flow valuation

model, dividend-pricing model and price

earnings valuation model. The average

of all our valuations gives us a fair value

of NGN10.27/share. This represents a

39.73% upside potential when compared

to the current market price on the

Nigerian Stock Exchange. On the other

hand, NGN4.50/share right issue of ordi-nary shares appears attractive (and may

pay off in the short term) as it repre-

sents 38% discount to the current mar-

ket price and indicates 128.22% upside

potential given our calculated fair value

of NGN10.27/share. Accordingly, we

assign a BUY recommendation in the

long term to investors with low risk

appetite and interest in stable biannual

coupon (interest) income.

Risk

Risks to our forecasts and valuations

include political and economic risks and

fluctuations of the values of securities

in the financial markets (where the

company is an active player) as they

may affect the earnings and profitabil-

ity of Crusader.

CAPITAL MARKETS



Crusade

rGT

A

Lasaco

Mbenef

it

RoyalE

xchang

e

Corn

erston

e

80%

60%

40%

20%

0%

22%26%

30%

41%43%

64%

Expense Ratio

for 2007 FY


GTA

Mbenef

it

RoyalE

xchang

e

Crusade

r

Lasaco

Corn

erston

e

40%

30%

20%

10%

0%

31.93% 31.84%31.00%

29.93%

14.94% 13.85%

Loss Ratio

for 2007 FY


Bond 0%Engineering 4%

Accident13%

Motor 38%

Marine24%

Fire17%

Oil andGas 4%

nt%

Marine

e%

Oil anGas 4%

Components of Non-Life Gross

Premium for Crusader in 2007


17/24

The Nigerian Sugar industry is one of

the most inefficiently run and under

developed in Africa. Surprisingly, this

situation has persisted despite the fact

that Nigeria with a population of about

140 million is a huge sugar consuming

population. Accordingly, Nigeria re-

mains a country dependent on imported

sugar. Since the oil boom in the 1970,

Nigerias focus on agriculture has

dropped significantly such that sugar

cane is barely cultivated. At the same

time, the lack of sufficient capacity to

convert sugar cane into refined sugar

hinders sugar production in the country

and as a result whatever little amount of

sugar cane is produced is used for direct

consumption or in the production of infe-

rior local brown sugar.

Presently there are only six inte-

grated sugar companies operating in

Nigeria. These include the Nigerian

Sugar company, Sunti Sugar Company,

Savannah Sugar Company (recently

acquired by Dangote Industries Limited

under the BPE privatization scheme),

Lafiagi Sugar all established by the

Federal Government post independence

to promote the countrys self-reliance

on local sugar production and recently,

BUA Sugar Refinery. Together their total

capacity of 2.4 million metric tons ofsugar annually fails to meet Nigerias

demand for sugar at an estimated 3.0-

3.5 million metric tons per annum.

Most of the increase in production

capacity has been as a result of recent

investments which have expanded DSR

and BUA combined supply to 2.16 million

metric tons per annum. Three years ago,

the total production capacity stood at

about 0.4 metric tons per annum.

The Nigerian sugar market is monop-

olized by Dangote Sugar Refinery Plcsupplying over 80% of Nigerias sugar

demand, relegating the remaining 15-

20% to Church Gate Limited under the St


CAPITAL MARKETS

Nigerian Sugar Market Dangote

Together their total capacity of 2.4 millionmetric tons of sugar annually fails to meetNigerias demand for sugar at an estimated3.0-3.5 million metric tons per annum.


18/24

Louis brand and smugglers from neigh-

boring countries.

Sugar is a product, which has few or

no substitutes. However, there are other

sweeteners such as honey, which are

rarely used by manufacturers because of

their high prices and unavailability of

large quantity. Hence foods and bever-

ages companies have found sugar as the

most economically suitable raw materi-

al for the sweetening of their products.

Accordingly, industrial users such as the

brewing companies usually demandlarge volumes of sugar. The brewing

companies, the confectioneries, and the

pharmaceuticals account for an estimate

of 30% of the Nigerian sugar market.

Government policies to promote local

industries particularly the implementa-

tion of the common external tariff (CET)

within West Africa, and others, such as

the ban on importation of confectioner-

ies, beverages and other food items has

encouraged investment in the local

sugar industry. However, the policies

have also intensified smuggling since

the supply of sugar has continued to trail

demand making smuggling attractive.

The CET for example, imposes tariffs

on imported white sugar at 50% and

imported raw sugar at 5%; encouraging

the refining of sugar in Nigeria to the

detriment of companies that merely

import, package and market refined

sugar.

Whats more, the ban on importation

of confectioneries has also spurred the

local production of confectioneries and

food item that use sweeteners. This in

turn has bolstered the use of sugar byindustries and households.

Recent investments in the sugar

industry include the expansion of

Dangote Sugars refinery in Lagos to a

1.44 million-metric tons factory and the

construction of 600,000-mt refinery by

BUA Nigeria Limited in Tincan Island,

Lagos have however continued to reduce

the gap between sugar demand and sup-

ply. Nevertheless, the industry still con-

tinues to face significant challenges,

some self imposed and outside its control

such as volatile sugar prices (mainly from

imported raw and white sugar) in the

presence of insufficient sugar cane pro-

duction to meet local demand, govern-

ment neglect of the sector and high cost

of borrowing.

Although sugar prices have been rel-

atively stable due to recent develop-

ments in the international market where

prices of raw and white sugar have con-

tinued to put pressure on local produc-

tion. While players in the industry are

able to mitigate some of this volatility by

hedging, there are limits to which theycan protect themselves from sharp

movements in prices. Ultimately, the

final consumer feels the effect of hikes

in prices, as sugar is a price inelastic

commodity in Nigeria, especially in viewof the demand- supply gap, the import

substitution strategy of the Federal

Government and the fact that there are

no effective substitutes to sugar in

Nigeria. Additionally the cost of ship-

ping, coupled with bottlenecks at local

ports continues to inflate local sugar

prices; but for the appreciation in the

naira in over the last year, domestic

sugar prices would probably have risen

over 40% between 2005 and 2008.

Evidently, the external shocks to the

industry can be rectified if its dependence

on imported raw sugar is minimized. The

problem of insufficient cultivation of

sugar cane in Nigeria is however one

that spans the whole of the continent.

The problem stems from lack of incen-

tives that guarantee reasonable return

on investments especially as sugar

farmers in more advanced economies

are heavily subsidized. Accordingly, the

product is usually oversupplied to the

international market thereby keeping

prices low. Adding to this problem is the

poor state of infrastructure in Nigeria

such as good roads, water and stableenergy supply which forces a rise in the

cost of production.

CAPITAL MARKETS


2004A 2005A 2006A 2007A 2008E 2009ETurnover NGN000 36,576,000 58,494,000 83,767,906 80,649,442 104,844,275 125,813,130

PAT NGN000 7,371,000 9,379,000 16,158,249 21,478,561 27,000,000 31,716,519

EPS 0.74 0.94 1.67 2.15 2.25 2.64

PE 45.93 36.16 20.31 15.81 15.10 12.88

ROA% 34.44 31.31 42.71 42.85 53.87 63.28

ROE % 29.09 27.02 59.54 82.75 86.11 87.20

Source: Companys Annual Report and Stanbic IBTC Estimates, A Actual, E - Estimates

Selected Data for DSR Based on Current Market Price of NGN33.99

The brewing companies, the confectioneries,and the pharmaceuticals account for an esti-mate of 30% of the Nigerian sugar market.


19/24

To improve this situation government

would have to create an enabling envi-

ronment for potential investors and for-

mulate policies that would guarantee

reasonable returns on investment.

However most of the recent drives by

the government to encourage invest-

ment in sugar cane farming have been

directed towards ethanol production in a

bid to substitute local consumption of

petroleum fuels with ethanol in order to

boost crude oil export. Nevertheless, the

scheme is expected to involve researchin sugar cane production that should see

the production of higher yielding sugar

cane that will influence sugar cane

farming for sugar production.

Furthermore, the difficulty of access-

ing capital has remained a critical prob-

lem for the industry by creating a disin-

centive to potential investors in the

highly capital intensive sector. Five years

following the successful banking con-

solidation in Nigeria, loans from local

banks are still only available at extreme-

ly high interest rates, although this has

declined to about 17% from 22%.

Our analysts are of the opinion how-

ever, that there is high growth prospect

for sugar refinery in Nigeria given the

continuing shortfall in demand for sugar

(which we estimate will reach 4.8 million

metric tons by the end of 2009) and the

opportunities of existing industry players

to expand their operations (or export

sugar) to other African countries andEurope (where sugar production is

expected to decline significantly follow-

ing gradual reduction in subsidies to

European Union producers and selected

importers) and other countries where

demand for sugar is substantially high-

er than supply. As demand for biofuels

increases following rising oil prices,

ethanol is increasingly being considered

as a possible transport fuel worldwide.

Brazil, a key manufacturer and con-

sumer of ethanol is witnessing strong

ethanol demand, driven by flexi-fuel

demand.

We are already witnessing a gradualdiversion of sugarcane from sugar to

ethanol production, which is leading to

decline in white sugar supply in the

international market. Countries like

China and India (which consume about a

quarter of annual global sugar output)

are most likely to witness increasing

gaps in sugar demand and supply which

domestic production may not be enough

to fill given the fact that the growth rate

of demand in these countries is about

4% faster than global demand. This may

eventually result in dependence on

importation of sugar which Nigerian

producers can leverage on.

Company Background

Dangote Sugar Refinery Plc (DSR)

began business in March 2000 as the

sugar division of Dangote Industries

Limited (DIL) with initial installed capac-

ity to process 600,000 Metric Tone (MT)

of raw sugar at its refinery factory locat-

ed at Apapa. Although DSRs parentcompany, DIL has been in sugar busi-

ness since 1978 through importation of

white sugar, the emergence of DSR as a

company fully engaged in sugar refining

followed a Scheme of Arrangement in

2006, which transferred all assets, liabil-

ities and undertaking attributable to the

sugar division of DIL to DSR. Hence DIL

and DSR have about 30 years experience

of selling white sugar in Nigeria. In 2006,

the company had an Initial Public Offer

(IPO) to raise NGN54 billion through the

Nigerian capital market by offering a

total of 3.00 billion shares at NGN18 per

share to the public. An analysis of the

companys shareholding structure as at

end of 2007 financial year shows that

DIL held 6.9 billion or 69% of issued

shares of DSR while the remaining 31%was held by other individual and institu-

tional investors with no other investor

(except DIL) holding not more than 5% of

the issued capital of the company. DSR

became listed on the Nigerian Stock

Exchange (NSE) in 2007 following the

successful completion of its IPO.

Installed Capacity

The company has since beginning of

operations of sugar refining in 2000/2001 undergone two expansions by in-

creasing its production capacity to 1.44

million MT which consequently ranked

the company as the largest sugar refin-

ery company (by production capacity) in

Sub-Saharan Africa and the second

largest (coming behind Al Khaleej Sugar

of the United Arab Emirate, Dubai) in the

world. Historically, the companys oper-

ations show an increase in production by

74.42% from 520,000 MT in 2003 to

907,600 MT in 2007. This indicates that

the companys production in 2007 was

about 63% of its installed capacity.

Further breakdown of the companys

production on a monthly basis showed

that the company recorded the highest

production of 96,600 MT in the July 2007

while the lowest production was of

42,700 MT was recorded in January

2007. Currently, DSR is working towards

completing further expansion of its

refinery by an additional 1 million MT

annual capacity. This is an indication that

the companys management is readilyplanning to expand production capacity

to capture regional and domestic mar-

kets growth.


CAPITAL MARKETS

Countries like China and India (whichconsume about a quarter of annual globalsugar output) are most likely to witnessincreasing gaps in sugar demand and sup-ply which domestic production may not beenough to fill given the fact that the growthrate of demand in these countries is about4% faster than global demand.


20/24

DSRs Business Lines and Strategy

The operations of DSR consist of two

major business areas, which are the

refining process and marketing and dis-

tribution. With the raw sugar imported

from Brazil, the whole process of sugar

refining comprises 9 stages (excluding

packaging) from raw sugar handling to

melting, taloclarification and filtration,

decolorisation, evaporation and crystal-

lization, separation and drying, sugar

recovery, sugar conditioning, and finally

fortification (the mixture of the white

sugar with vitamin A).

About 82% of the refined white sugar

produced by DSR is sold (in 50kg bags)

through distributors to households and

other small industrial users while close

to 18% of sales is attributable to blue

chip companies, which include Nestle

Nigeria Plc, Cadbury Nigeria Plc, Seven

Up Bottling Company Plc and Nigerian

Bottling Company Plc. While all the

white sugar produced by the company is

sold in Nigeria, the companys products

are still found in the neighbouring WestAfrican countries. This is mainly through

informal cross-border trading. It is how-

ever worthy to mention that the compa-

ny accomplished its first shipment of1,500 MT of sugar to Ghana before the

end of the last financial year. The com-

panys marketing strategy vastly focus-

es on market development via its grow-

ing distribution network. From our

observation, DSR has been as cost effec-

tive as possible in its marketing and dis-

tribution processes. The Dangote group

is generally known to adopt the strategy

of price reduction in their products in

order to sell more volumes. From our

investigation, the prices of sugar in theinternational market declined by about

25% in 2007. DSR accordingly trans-

ferred this reduction to its customers by

selling its white sugar at a relatively lowprice during the year.

Growth and Expansion Plans

Our investigation about the growth

plans of DSR showed that in addition to

its plans to increase its production

capacity (by 2009) by 1 million MT per

annum, the company also has a strate-

gic intent to intensify sugar exports

(which it began in December 2007) into

West African region and beyond.Accordingly, the company has conclud-

ed arrangements to extend its opera-

tions to Algeria (where domestic pro-

CAPITAL MARKETS


... the raw sugar imported from Brazil, thewhole process of sugar refining comprises9 stages (excluding packaging) from rawsugar handling to melting, taloclarificationand filtration, decolorisation, evaporationand crystallization, separation and drying,sugar recovery, sugar conditioning, andfinally fortification (the mixture of the whitesugar with vitamin A).


21/24

duction is about 0.55 million as against

annual consumption of about 1.2 million

metric tons so that the gap is being filled

via importation) with a refinery plant withcapacity of 1 million MT. DSR seems to

have strategically increased its focus on

its retail customers (considering the fact

that a substantial portion of its sales is

attributable to retail customers) as it is

currently planning a product expansion

where packaged sugar would be made

available to them. To achieve this, the

company has embarked on building a

small packaging plant, which is billed

for commissioning in the second half of

2008.

The Dangote-branded sugar, which

is expected to be available in 250g, 500g

and 1.0kg, will surely be competing with

the imported packed sugar of Saint

Louis Sucre based in France. In addition

to this, there is a possible opportunity for

the company to produce ethanol instead

of molasses, which will generate more

income than molasses. This may not be

unconnected with the fact that initiatives

to use ethanol as a transport fuel are on

the rise worldwide. In the medium to

long term, DSR is considering the inte-

gration of Savannah Sugar Company

Limited (which is owned by DIL and

presently operating at 2,000 metric tons

per annum). DIL is also planning to

increase the present capacity of

Savannah Sugar Company Limited from

the present capacity to about 200,000-

250,000 metric tons per annum.

Financial Characteristics:

Earnings and Profitability

The financial analysis of DSR has

been based on the companys perform-

ance alone between 2003 and 2007 as a

result of its rather monopolistic state

since it accounts for over 80% of the

industry and given the lack of publiclyavailable information on the activities of

its competitors.

Turnover for DSR grew from

NGN27.87 billion in 2003 to NGN83.76

billion in 2006 as a result of the various

increases in the companys production

capacity during that period and a con-

comitant rise in sugar demand in Nigeria

but declined by 3.72% to NGN80.64 bil-

lion in 2007 largely due to reduction in

the selling price of the companys sugaras well as a cut in the refinerys output

to further facilitate expansion. An inves-

tigation of the selling price of a bag of

sugar in 2007 showed a price reduction

by about 10% from an estimate of

NGN5,100 to NGN4,600 (estimate) per

bag as against an estimated price of

NGN5,100 maintained almost through-

out 2006 but with volume of sales stand-

ing at about 0.90 billion metric tones in

both years. On the whole, the trend in

turnover for the period under review

shows 32.65% Average Yearly Growth

Rate (AYGR).

DSR appears to have a good control of

its costs as cost of sales increased at a

rather lower rate than turnover. For the

period under review, while turnover

grew at 32.65% AYGR, cost of sales grew

lower at 27.74%. In particular, while

turnover in 2007 declined by 3.72%, cost

of sales witnessed a decline of 24.27%.

The decline in cost of sales for 2007 was

due to decline in global price of raw

sugar by about 25% in the later part of

the year, which might have stemmed

from decline in global demand during

that period of the year. As a result of

decline in cost of sales, gross profit for

DSR has grown progressively from

NGN6.34 billion in 2003 to NGN32.46 bil-

lion in 2007 representing 51.22% AYGRand a Compounded Annual Growth Rate

(CAGR) of 38.62%. Administrative and

distribution expenses in 2006 and 2007

stood around NGN3 billion as it only

inched up by 3.67% in 2007. Other oper-

ating income for DSR grew by 181.66%

from NGN348.99 million in 2006 to

NGN1.19 billion in 2007. The growth was

largely aided by interest income, which

grew by over 240% in 2007. Income gen-

erated by DSR is another constituent of

other income, which grew by 29.3% toNGN174.36 million in 2007 from

NGN134.83 million in 2006. Following

the healthy growth of gross profit and

other operating income with increase in

distribution and administrative expens-

es kept as low as 3.76% between 2006

and 2007, operating profit for DSR grew

by 74.70% from NGN17.55 billion in 2006

to NGN30.66 billion in 2007. Since gross

profit and other operating income wit-

nessed impressive growth rates, Profit

Before Tax (PBT) has accordingly grown

by a CAGR of 46.48% and 62.76% AYGR

from NGN4.54 billion in 2003 toNGN30.66 billion in 2007.

DSRs Profit After Tax (PAT) was the


CAPITAL MARKETS

... currently planning a product expansionwhere packaged sugar would be madeavailable to them. To achieve this, the com-pany has embarked on building a smallpackaging plant, which is billed for com-missioning in the second half of 2008.

As a result of decline in cost of sales, grossprofit for DSR has grown progressively fromNGN6.34 billion in 2003 to NGN32.46 billionin 2007 representing 51.22% AYGR and a

Compounded Annual Growth Rate (CAGR)of 38.62%.


22/24

same as PBT before 2007 (since it

enjoyed tax holiday up till end of finan-

cial year 2006). Accordingly, PAT for 2007

stood at NGN21.47 billion in 2007 (up by

28.95% from the tax free profit of 2006).

Margins and Measures of Efficiency

The ability of DSR to squeeze profits

from the use of its raw materials, labour

and fixed assets that are related to pro-

duction was relatively impressive

between 2003 and 2006 as Gross Profit

Margin (GPM) improved from 22.74% in

2003 to 29.45% in 2004 but declined to

24.00% in 2005. The decline is due to thefact that the year witnessed the highest

growth (72.3%) in cost of sales, which

may have stemmed from high cost of raw

sugar. The company however appears to

be more efficient in 2007 as its GPM

improved to 40.25% from 24.05% in 2006.

This shows that management demon-

strated a good control of cost of sales in

2007. The Operating Profit Margin (OPM)

for DSR also showed an improvement in

managements ability to manage operat-

ing expenses as the ratio improved from20.95% in 2006 to 38.02% in 2007. The

improvement in 2007 was due to the fact

that while gross profit and other income

grew at higher rates of 61.16% and

181.66% in 2007, distribution and admin-

istrative expenses were as a result of

control grew by 3.67%. Net Profit Margin

(NPM) for the company improved from

16.31% in 2003 to 26.63% in 2007

(although the ratio had earlier declined

from 20.15% in 2004 to 16.03% in 2005).

One possible conclusion from this is that

for every NGN1 generated by the compa-

ny in 2007, 20.15 kobo went directly into

PAT. In terms of returns generated from

the use of its assets, DSR also proved

efficient as Return on Assets (ROA),

which stood at 28.57% in 2003 climbed to

42.71% in 2006 and inched up to 42.85%

in 2007. Although the ratio declined to

31.31% in 2005 from 34.44% in 2004

basically because of faster growth of

assets than profits in 2005, profits gen-

erally grew faster than assets for the

period under review, and that resulted inthe relatively high returns. The trend in

Return on Equity (ROE) for the company

is much similar to that of the returns on

assets as the ROE improved from

25.30% in 2003 to 59.54% in 2006 and

then to 82.75% in 2007 (although the

ratio witnessed a decline from 29.09% in

2004 to 27.02% in 2005 before climbing

to 59.54% in 2006). The implication of

the 82.75% ROE in 2007 is that for every

naira of shareholders equity, DSR made

82.75 kobo. Accordingly, DSR appears to

have performed up to an acceptable

standard in terms of ROE considering

the fact that professional investors con-

sider ROE of at least 15%.

Financial Leverage

DSR can be said to be less risk prone,

as the company does not appear to be

highly leveraged. As a measure of itslevel of financial leverage, debt ratio for

the company stands at an average of

38.24% for the period under review. This

appears as a relatively moderate ratio

considering the capital-intensive nature

of the sugar business. When debt-equi-

ty ratio is considered as a further deter-

minant of leverage ratio, our investiga-

tion shows that the ratio stands at an

average of 66.25% for the period under

review. The implication of this is that

DSR used an average of 66.25 kobo of

liabilities for every naira of shareholders

equity in the business. In other words the

shareholders of DSR have confidence in

the company and so have committed

more to it than lenders, creditors and

other obligors to the company. That is,

the company has used more equities to

finance its operations than debts.

Capitalization ratio (which measures the

debt component of a companys capital

structure to support its operations and

growth) for the company for the period

under review stands at an average of4.53%. Thus DSR can be ranked among

financially fit companies, which have

capitalization ratios of as low as 5%.

Liquidity Measurement

An appraisal of the ability of DSR to

pay off its short-term debts obligation

showed that current ratio for the compa-

ny reduced from 2.29 in 2006 to 1.65 in

2007. Although a current ratio of 2 to 1 is

generally considered adequate, our ana-

lysts are of the opinion that the 1.65 ratio

of 2007 is not worrisome since the com-

panys inventory and accounts receiv-

able are not enormous given the fact that

a company with small inventory and

accounts receivable can operate safely

with a lower current ratio. To buttress

our opinion on this, a breakdown of the

companys current assets in 2007 shows

that bank and cash balances accounted

for the chunk (about 55%) of currentassets. Quick ratio for the company

declined marginally from 1.98 in 2006 to

1.47 in 2007. For the financial year 2007,

the ratio indicates that for every naira of

current liabilities, there is 1.47 naira

available in quick assets in 2007. As a

further test of working capital adequacy,

cash ratio (which is more stringent and

conservative than any of the previous

ratios as it considers the most liquid cur-

rent assets of a company) for DSR mar-

ginally improved from 0.36 in 2006 to

0.92 in 2007. Cash conversion cycle (a

basic measure of the number of days a

companys cash is tied down in produc-

tion and sales of products and the bene-

fit the company derives from payment

agreements with its creditors) for DSR

shows that the number of days increased

slightly from 41 in 2006 to 43 in 2007.

Cash Flow Analysis

Our investigation on the ability of DSR

to generate cash from its operationsrevealed that Operating cash flow to

sales ratio improved from 9.73% in 2006

to 48.35% in 2007 indicating an improve-

CAPITAL MARKETS


The company however appears to be more

efficient in 2007 as its GPM improved to40.25% from 24.05% in 2006.


23/24

ment in the ability of the company to

generate cash from the sale of its prod-

ucts. Operating cash flow to total debt forthe company stood at 73.93% in 2006 but

improved to 161.35% in 2007.

Investment Analysis

With the last trade at NGN33.99 per

share, the share price of DSR has appre-

ciated by 6.22% since the beginning of

2008, and 136.04% since the beginning

of 2007. DSR has a market capitalization

of NGN407.88 billion (presently the most

capitalized stock in the food tobacco andbeverages sector) representing about

3.42% of the Nigerian Stock Exchange

total market capitalization. The compa-

ny also issued bonuses to its sharehold-

ers in the ratio of 1 for 5 (which was

responsible for the 11.97% appreciation

in share price since beginning of 2008)

after releasing the 2007 financial results

thereby increasing its issued shares from

10.00 billion to 12.00 billion. The shares

currently trade at a historical PE of 15.81x

earnings (based on a trailing EPS of

NGN2.15) as against industry average PE

of 31.7x earnings. Recently, DSR released

its operating results for the first quarter

ended 31 March 2008 showing a 4.53%

growth in turnover to NGN20.943 billion

in 2008 from NGN20.036 billion in 2007.

While PBT grew by 24.76% PAT grew by

24.62% from NGN5.368 billion in 2007 to

NGN6.69 billion in 2008. Our analysts are

projecting a PAT of NGN27.00 billion for

2008 and NGN31.71 billion for 2009 for

the company, which we believe are con-

servative and are based on an estimat-ed growth rate of about 25% in 2008 and

a corresponding CAGR of about 17%

thereafter. These translate to projected

EPS of NGN2.25 and NGN2.64 for 2008

and 2009 respectively (assuming the

number of shares remains constant) andprojected PE ratio of 15.10 and 12.88

respectively. The 2008 projected PE of

15.10 for DSR is low when compared to

its industrys projected average PE of

25.48 and a market projected PE of about

24.50.

Since the company became public in

2006, it has paid dividend twice, NGN1.15

in 2006 and NGN1.70 in 2007. The latest

dividend per share of NGN1.70 repre-

sents a dividend yield of 5.00% at thecurrent market price. Also, the 2007 div-

idend represents a payout ratio of

79.15% of PAT. Going by our full year

projection of NGN27 billion PAT and a

dividend payout ratio of 80%, we expect

a dividend per share of NGN1.80, which

translates to a projected dividend yield of

5.30%, which is 2.75% higher than the

industrys projected dividend yield of

2.55%. The liquidity of the shares of the

company is adjudged medium due to its

shareholding structure. In terms of con-

sideration for investment by institution-

al investors, the company having paid

dividend for two consecutive years will

not qualify for investment consideration

by institutional investors such as pen-

sion fund administrators until it pays div-

idend for the financial year 2008. Our

fair value calculation is based on a com-

bination of valuations, which includes

the discounted cash flow valuation

model, dividend-pricing model and price

earnings valuation models. These mod-

els produced a price range of NGN21.58and NGN76.86. Based on our calcula-

tions, we arrived at a fair value of

NGN48.70 per share. Going by this, the

stock appears to be trading at a discount

of about 43% of its fair value at the cur-

rent market price of NGN35.50 per

share. Accordingly, our recommenda-

tion for the stock is therefore a short

term HOLD and long term BUY.

Risks to Share Price Target

Our analysts are of the opinion that

risks to our share price target are low as

it is conservative. However, slower eco-

nomic growth rate and changes in gov-

ernment policies on tariffs coupled with

fluctuations in the value of naira which

can make costs unpredictable for DSRsince its raw materials are imported, are

some potential risks which are all

unlikely.


CAPITAL MARKETS

... to generate cash from its operationsrevealed that Operating cash flow to salesratio improved from 9.73% in 2006 to48.35% in 2007 indicating an improvementin the ability of the company to generatecash from the sale of its products.


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