financial derivatives company limited economic... · financial derivatives company limited 35 . nse...

Presented by Bismarck Rewane

Financial Derivatives Company Limited

December 3, 2013

Outline

2013 –A Year of Mixed Fortunes

2014 - The Year of a Gathering Storm

Leading Economic Indicators

The Macroeconomic Trilemma

Stock Market

Sectors to Watch

Political Risk Analysis

Summary

Financial Derivatives Company Limited 2

Q1

Q2

Q3 Q4

2013 Kaleidoscope

3

2013- A Year of Mixed

Fortunes

Cheers, Fears, Tears and Jeers

Improving: Inflation, Money Supply, Stock Market Capitalization

Flatlining: GDP, Oil Price, Official Exchange Rate

Declining: Government Revenue, Parallel Exchange Rate,

External Reserves, ECA, Aviation Safety

Troubling: Boko Haram, ASUU and Labour, Kidnap and Ransom

Unfinished business: PIB, SWF

Winners: Green Eagles, Nollywood


Oil Revenue to Decline

Soft oil prices, decline in production, less revenue from PSC

Source: CBN, FDC Research

4.00

7.00

10.00

13.00

Q1-13 Q2-13 Q3-13 Q4-13 Q1-14

Oil Revenue ($'bn)

4.00

7.00

10.00

13.00

16.00

Q1-12 Q2-12 Q3-12 Q4-12

Oil Revenue ($'bn)


Soft Oil Prices, Declining

Production

0

50

100

150

WTI Bonny Benchmark

Price $’pb

1

1.5

2

2.5

3

Q1 Q2 Q3

Benchmark Production Actual Production

Production’ mbpd

Oil prices averaged $112pb in the year

Bonny was $33 above the Nigerian

benchmark of $79pb

The premium above WTI reached a high of

$20pb

24% below the benchmark estimate of

2.5mbpd

11.76% above the OPEC quota of 1.7mbpd

Source: OPEC, EIA, CBN, FDC Research


Oil Prices Set to Decline

OPEC meets December 4

The question is- is the oil market now set for a correction?

Oil market structure is oligopolistic, with 30% control of

market supply

Facing a price leadership challenge

Global oil demand for OPEC crude expected to drop by

300,000bpd or 10% of OPEC’s production


OPEC


OPEC – Supply Pressure not

from Iran Alone

Rapprochement between Iran and the west

Likely to influence lifting of sanctions and increase

production from 715,000bpd to 1.5mbpd

Supply pressure from Iraq and Libya

Oil production slack to be picked up by Saudi Arabia,

Kuwait and the UAE who account for 50% of OPEC

output

US production expected to increase to 11.13mbpd in 2014

– Making it the world’s largest producer by 2015

The increased supply from US, Iraq and Libya could slash

prices considerably


If Oil Prices fall Below $100pb

and Production is Flat

Increased rate of depletion of external reserves

20-25% revenue shortfall resulting in a wider

fiscal deficit beyond benchmark of 3% of GDP or

$9bn

Depreciation of the naira in all market segments

Increase domestic and foreign borrowing by 2%

Initial tinkering with exchange control regulations


External Reserves

15

20

25

30

35

40

45

50

Q1'13 Q2'13 Q3'13 Q4'13 2014a 2014b 2014c

48.57 48.04

45.48 44.58

33.33

50.00

24.58

External Reserves $’bn

Oil Price

decline to

$80pb

Oil Price

rise to

$120pb

US tapering

and continuous

global oil

supply glut


Inflation

Inflation to be within single-

digit band in 2014

Influenced by

Cost push factors- security

spend, election spend

Demand pull factors

Money supply growth

Possible rise in pre-2015-

election spending may push

up inflation

0

2

4

6

8

10

12

H1 H2 Full year

2014 Inflation Rate (%)


CBN Governor Exit

New CBN Governor designate in Q1’14

Key qualities:

Political ally or neutral to President

Respected by international financial community

Policy continuity

Ability to respond to economic adjustment timing and extent

Jury is out as to possible candidates

President is keeping his cards close to his chest

New MPC to be formed

– President is allowed to appoint 3 members

– CBN governor appoints 2


The Macro-Economic

Trilemma

There are three possible scenarios in

solving the macro-economic trilemma

– Stimulus

– Consolidation (austerity)

– Monetary stability


Stimulus

You can’t save your way out of a recession

The answer is spending and borrowing and the

multiplier effect

Nigeria has no SWF

ECA is fast depleting, below $5bn


Consolidation

MTEF is too conservative

– Benchmark output down to 2.39mbpd from 2.53mbpd

– Aggregate expenditure down 9.82% to N4.5trn from

N4.99trn

Declining oil revenue raises concerns for budget framework

Likely outcomes:

– Increase taxes

– Subsidy removal

– Institute due process


Stability

CBN targets a low-inflation rate of 6-9% in 2014

Further monetary policy tightening anticipated in January

– Due to high liquidity in the money market

– Threat of fiscal overdrive

Coordination between fiscal and monetary policy required

to ensure stability


NSE Rounding out 2013

The NSE ASI has increased 38.6% for the year

– Now at 38,920.85 compared with 28,078.81 at the end of 2012

– The bourse grew 6.38% QTD

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Days to Year's End

NSE ASI Performance 2013 Versus 2012 ASI at End of Q3 = 100

ASI 2013 ASI 2012


How’s the Recovery Coming?

The equities market have shown significant growth, since their

Q1 2009 trough

– NSE ASI has increased 96% from Q1 2009

Some have reached all-time highs

– S&P 500 crossed 1,800

– Dow Jones breached 16,000 in 2013

– FTSE 100 approached pre-crisis level of 6730.71 in 2013

NSE ASI isn’t fully recovered from 2008 crash


Pre-Crash Peak Still Far From

Reach

NSE ASI yet to recover from 2008 crash – Markets need to increase by 60% to realize its pre-crash peak

– Currently at 38955.42

Q1’08 peak =

62121.93 Today =

38955.42


NSE Relative to Global Markets

Stock Market P/E Ratio

NSE (Lagos) 13.60

S&P 500 (USA) 16.91

JSE (Johannesburg) 19.26

NSE (Nairobi) 14.75

NSE price/earnings at 13.60x

– Cheap relative to regional and international markets

– May increase attraction of foreign investors to the

Nigerian equity market


Global Markets on the Move

38.61%

26.72%

12.76%

14.59%

77.02%

-13.89%

18.86%

-2.97%

23.55%

48.82%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Global Markets Year-to-date change

NSE ASI

S&P 500

FTSE 100

JSE AASI

Ghana SE

IBOVESPA

MSCI Frontier

Shanghai CI

DAX

Nairobi ASI

Dow Jones breaches 16,000 reaching an all-time high – S&P 500 also increases to pass the 1,800 mark for the first time

– The MSCI Frontier markets index has increased 18.86% year-to-date Financial Derivatives Company Limited 28

Foreign Investors Still

Dominate Transactions

FPI transactions accounted for 52.3% of total transactions in August

– At 36.9% in January

– Peaked at 64.48% in April

– Market now striking a balance with transactions

• Transactions almost evenly distributed between domestic and foreign investors

36.89% 39.65% 52.78%

64.48% 48.68% 51.13%

62.33% 52.26%

63.11% 60.35% 47.24%

35.52% 51.32% 48.87%

37.47% 47.74%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

January February March April May June July August

Foreign Investors Domestic Investors

NSE Investments Composition


Leaders and Laggards (YTD) Stock Current Price Change in Q3 (YTD)

FORTE OIL PLC. N114.00 1306.60%

CHAMPION BREW. PLC. N16.95 289.16%

TRANSNATIONAL CORPORATION N3.56 274.29%

EVANS MEDICAL PLC. N3.22 270.11%

CONOIL PLC N67.93 231.37%

Stock Current Price Change in Q3 (YTD)

COSTAIN PLC N0.93 -66.54%

JOHN HOLT PLC N1.29 -62.06%

TRANS-NATIONWIDE EXPRESS PLC N1.22 -53.96%

DEAP CAPITAL MANAGEMENT N0.99 -50.99%

VONO PRODUCTS N1.76 -38.89%

Gainers & Losers


Forte Oil Forte oil’s stock price is up 1306% for the year so far

The stock rallied on a positive 9-month earnings release

Forte reported a 28.9% increase in revenues to N92bn from N71bn

Also reported a 316% increase in PAT to N2.7bn from N656mn

Noteworthy is the 7% decrease in distribution expenses, positively impacting the bottom line

The petroleum marketer recently took over Geregu Power Plant with operational generating capacity of 414mw

Investors clearly expect increased earnings resulting from the plant’s operations

Increased earnings, however, seem priced in with P/E at 76.04 and recent declines suggest a medium term peak has already been attained

Forte Oil


Transcorp Transcorp reported a PBT of N5.1bn for the first 9 months of the year which is significant when compared with N3.9bn reported for all of 2012

The company’s stock is now trading at multi-year highs now at N3.56

The company has now taken over Ughelli Power plant

Expects to ramp up generation from 160mw to about 650mw by August 2014 and 1500mw in 3-5 years

The stock has increased 96% since its November 1 takeover

But recent declines reflect investor sentiment that not much upside is expected in the medium-term

Transcorp


Possible Listings in 2014

Following the successful listing of Computer

Warehouse Group (CWG) in 2013, other companies

may follow in 2014

– Much anticipated Seplat IPO may come in 2014

– Telcos seeking renewal of license in 2016 may be

required to list


2014:Events to Watch

Oil price shock – Prices to decrease on increased supplies and relative calm in the Middle-

East

– Translates to less revenue to the Nigerian Government

– Possibility of Naira depreciation

Further CRR Hike – CBN increases public deposits CRR, thus mopping up liquidity

– Impacting profitability of banks, eroding 30%

– Banks may remain attractive despite impact on profits

Fed tapers on QE – Contingent on improvements in the U.S. Labor general macro situation

– Negatively impacting the Nigerian bourse and reducing liquidity

Political and Social Instability – Upcoming 2015 elections

– Boko Haram Menace


NSE Distribution by Sector

Consumer goods dominate

the NSE accounting for over

31% of the bourse

– However, FMCG stocks seem

overpriced

Financial services dominate

activity in the market and

account for about 30% of

market capitalization

Industrial goods have a

significant weighting in the

NSE led by Dangote

Cement Financial Derivatives Company Limited 36

Sector Vulnerability

Risk Level

Sectors Financial services

Consumer goods

Conglomerates Construction/Real estate

Agriculture

Political instability

Low Low Low Low Low

CRR Hike High High High High Medium

QE tapering High Medium Medium Medium Low

Boko-Haram Insurgence

Low Medium Medium Low High


•Aviation & Hospitality

•Retail

•Breweries


Growing African economy and favourable prospects for 2014

4.2% growth in 2012, projected to accelerate to 4.5% in 2013 and 5.2% in

2014

Driven by oil production, mining, agriculture, services and domestic demand

Mitigating the adverse effects from global turbulences

9 African countries are among the 20 fastest growing economies

in the world

Three of the fastest are:

Rwanda (9.9%)

Angola (7.4%) and

Nigeria (6.81%)

Africa Grows- Traffic Grows


Increasing FDI flows

FDI to SSA is $48.3bn in 2012 with 46% going to West Africa- Deutsche

Bank

Grew by 266% from 2003 to 2012

Increasing passenger traffic across major airports

Currently air travel and GDP in Africa are growing at the same

rate of 6%

Increasing regional integration

Influx of global reputable brands

Africa Grows- Traffic Grows


Busiest Airports in Africa

Country Airport City Annual No.

of Passengers Growth

(2011/2010) Rank

South Africa OR Tambo International Airport, J.burg Johannesburg 18,922,346 2.9% 1

Egypt Cairo International Airport Cairo 13,037,541 -19.3% 2

South Africa Cape Town International Airport Cape Town 8,436,562 4.1% 3

Morocco Mohammed V International Airport,

Cassablanca Casablanca 7,290,314 0.6% 4

Nigeria Murtala Muhammed International, Lagos Lagos 6,748,290 7.6% 5

Egypt Hurghada International Airport, Egypt Hurghada 5,875,423 -25.9% 6

Nigeria Nnamdi Azikiwe International Airport, Abj Abuja 4,216,147 7.5% 12

Ghana Kotoka International Airport, Accra Accra 1,585,602 14.3% 20

Nigeria Port Harcourt International Airport Port Harcourt 1,206,492 -0.4% 24

OR Tambo is the busiest airport in Africa with 18.9m passengers in 2011

Three Nigerian airports are among Africa’s top 25 airports:

Murtala Muhammed International- 5th, Nnamdi Azikiwe International Airport- 12th, and Port Harcourt International Airport- 24th



An

nu

al N

o. of

Pass

enger

s

2011/2

010 G

row

th

Lagos and Abuja airports have more traffic than Kotoka International, Accra

Which is a top destination for Nigerians

Kotoka International however witnessed the highest passenger traffic growth of

14.3%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

OR Tambo International

Airport, J.burg

Cairo International

Airport

Cape Town International

Airport

Mohammed V International

Airport,

Cassablanca

Murtala Muhammed

International,

Lagos

Hurghada International Airport, Egypt

Nnamdi Azikiwe

International

Airport, Abj

Kotoka International

Airport, Accra

Port Harcourt International

Airport

Axis Title



Arik Air recorded the highest growth (28.1%) from 2010 to 2011

Higher than British Airways (11.1%) and Ethiopian airlines (3.4%)

As a result of passengers flight to safety

Nigerian aviation still not out of the woods in terms of safety

Top 10 Airlines Operating in Africa – Weekly Seats Departing African Airports


*EIU

Airlines Others

Routes:

• Unserved

• Under-served

Airports:

• Pax & Cargo

Airports

• Un-served

• Under-served

Ground Handling

Ground Handling Fuel Supply

Catering Lounges / Seating

Cargo Transit Hotels

Restaurants

Health Services

Shops

Aviation Business Opportunities


Nigerian aviation sector will be in global spotlight

With the election of a Nigerian (Dr. Olumuyiwa Babatunde Aliu) as the President

of the International Civil Aviation Organisation (ICAO)

May imply increased regulation

Increased competition

Due to the influx of operators (especially in the domestic space)

Increased passenger traffic

Riding on increased number of operators and possible price wars

Greater liberalisation

To be driven by increased discussions and dialogue on open skies

Possible slowdown in airport rehabilitation

As 2015 elections take centre stage

Impact on Nigerian Aviation


Financial constraints

Operators still struggling under huge debt burdens

Weak infrastructure, which is limited and unable to keep pace

According to Scott Plumb, Beechcraft’s VP for EMEA, of the 3,500-plus airports in Africa, more than 75 percent have runways that are too short or facilities that are otherwise insufficiently prepared to cater to jet operations

Fragmented nature of the regulatory environment

Leading too little inter-Africa traffic, trade, and investments

Exploitative tax and fee structure by government

Security risks

Dominance of foreign airlines

Obsolete technology platforms

Challenges


Nigeria is expected to be the fastest-growing African market over the

next five years*

Exceeding SA and Mauritius

More international hotel brands are in the pipeline

Sector will continue to be dominated by foreign brands

Lagos is the most preferred destination

Some international brands expected in 2014

Marriott Hotel (Lagos), Swiss International Hotels (Lagos and Port Harcourt),

Park Inn by Radisson (Abeokuta)

More hotel rooms already in the pipeline for 2015

Signifying increased business confidence

Already intense competition in the sector is expected to increase further

*PWC

Hospitality Sector


Acquisition will almost double Marriott’s hotel chains

globally

Involves 116 hotels in South Africa and six other Sub Saharan

African countries

Namibia, Malawi, Nigeria, Tanzania, Uganda and Zambia

Will give Marriott more than 23,000 rooms in Africa

Protea is an established brand in Africa

Owns at least 11 hotels across Nigeria

Poses significant competitive threats to big brands already in

participating in the sector

Intercontinental, Sofitel, Sheraton, Hilton, Radisson

Marriott to acquire Protea Hotels


Growing Internet Penetration

Favourite Website

Rank Kenya Nigeria South

Africa

1. OLX Google OLX

2. Amazon Jumia Zando

3. eBay eBay Kalahari

4. Google Konga eBay

5. WapTrick Amazon GumTree

Source: Jana Research, April 2013

Rapidly growing internet penetration

Increasing use of smart phones and tablets

Number of active mobile GSM lines rose to approx. 118m in September 2013

– From 109m at the end of 2012

Mobile internet data subscription improved to 50m subscribers in July 2013

– From 31m subscribers in 2012


Source: UCS Solutions Financial Derivatives Company Limited 54

So

uth

Afr

ica

N

iger

ia

K

enya

So

uth

Afr

ica

N

iger

ia

K

enya

Convenience Ease of Use Price Selection

Cost Delivery Time Internet Connection Lack of options Lack of

Security

Shopping Experience

Source: UCS Solutions


Getting it Right: Engage the Customer

Source: UCS Solutions


The Cardinal Sins of Online Shopping

Pretty pictures not linking to a product for sale

Ratings and reviews that are empty

Presenting a limited catalogue

Giving consumers less than the minimum product

information they need to commit to the sale

Exposing too much of my payment/ personal information

Not matching the online customer promise with the offline

reality

Abusing customer’s personal information as spam


Opportunities in the Retail Industry

Growing Population:

179m by 2014 Growing Middle Class

Rising Household

Consumption Expenditure: $158.5bn by

2014

Increasing Demand for Retail Robust GDP

Growth : 6.6% in

2014

Power to spur

growth

Declining poverty

Rapid Urbanisation:

55.3% by 2017

NIGERIA


Challenges in the Retail Industry

Huge Infrastructure deficit: Estimated at $360bn

Lack of inclusive growth

Weak productivity compared to global standards

Inadequate access to finance

High Administrative Costs

Export performance dampened by slowdown in commodity prices

Regulatory pressure & Political Impasse


Beer makes up 96% of all alcohol sales in Nigeria

Nigeria’s Beer Per Capita Consumption (BPCC) is rated below

regional and global comparative consumption

– Low rank can be attributed to culture and religion

– Expected CAGR of 23.45% between 2011 and 2014

62

Breweries

0

10

20

30

40

50

60

70

Nigeria South

Africa

Namibia Tanzania Kenya Angola

BPCC

Global Averge


Work hard , Drink hard!


Omitting Muslim countries, GDP per capita and alcohol per capita have a

correlation coefficient of 0.566

According to the analysis, the result is statistically significant

Nigeria’s Beer Per Capita Consumption (BPCC) is low due to the limited

disposable income per adult

Adversely affected in 2012/2013 due to the increase in living expenditure from

fuel subsidies and trade policies

Expected to improve as the economy grows with projected growth rate of 6.2%

According to UBS, correlation between GDP and beer volume growth is

highest in emerging markets

Countries such as Nigeria are sweet spots for global beer

64

GDP


Breweries

Market Structure Nigerian Brewers Market Share

65

Gradual shift from duopoly to

an oligopoly

– Heineken controls 71% of the Nigerian market share through its subsidiaries, Nigerian Breweries and Consolidated Breweries

Heineken also leads the industry

in the most important defining

factors:

– Innovation:

– Scale

61%

27%

10%

2%

NB Plc

Guinness Nigeria

Plc

Consolidated

Breweries

Others


66

SAB Miller Plc

– 2nd largest brewer globally

In alignment with its company strategy of approaching beer business as a local business, SABM has acquired 3 local breweries

– Intafact Beverages (Onitsha)

– International Breweries (Ilesha)

– Pabod Breweries (Port Harcourt)

Its major brands “Hero” and “Trophy”

are gaining popularity in the low-end segment

As with the rest of the market, currently experiencing slow growth, which impedes its market entry objectives

New Brewers: Gaining Ground?


Two main parties:

nPDP + APC + dithering Governors

The House of Reps is dominated by APC

Senate is controlled by PDP

The Battle Lines are Drawn


Voters’ Strength & Leaning-

PDP

Kebbi 1,603,468

Katsina 2,,931,668

Jigawa 1,852,698

Niger 721,478

Kaduna 3,565,762

Bachi 1,835,562

Gombe 1,266,993

Kogi 1,215,405

Plateau 1,983,453

Taraba 1,308,106

Benue 1,415,162

Enugu 1,301,185

Delta 1,900,055

Ebonyi 876,249

Bayelsa 427,389

Akwa Ibom 1,714,781

Cross River 1,018,550

Abia 1,481,191

FCT 886,323

TOTAL 29,350,346

The 3 most populous states are APC

PDP will give APC a fight for their money in the South West

No party can achieve 25% in 24 states

A run-off is inevitable Financial Derivatives Company Limited 69

Voters Strength & Leaning

Sokoto 2,065,508

Zamfara 1,746,024

Yobe 1,182,230

Borno 2,730,368

Adamawa 1,714,860

Kano 5,135,415

Kwara 1,115,665

Oyo 2,577,490

Osun 1,293,967

Ekiti 750,753

Ogun 1,869,326

Lagos 6,247,845

Edo 1,412,225

Imo 1,611,715

Rivers 2,419,057

Nasarawa 1,224,206

TOTAL 35,096,654

APGA- Anambra: 1,758,220

Only 400,000 voters in the last 2

governorship elections

APC

LP- Ondo: 1,558,975


Cabinet reshuffle in January to allow Ministers seeking office to campaign

The PDP primaries in August

Selection of APC candidate for Presidential race after PDP convention

The Anambra election appeal process is a potential flash point

The voters registration exercise will be contentious

Ekiti election and the battle for the southwest

Labour party and APGA are PDP proteges

Political Milestones


The factors that will determine

2014

Political struggle

– Emergence of a formidable opposition and

transformation of the PDP

The battle ground will be defined by the economic message

The Nigerian electorate want a team that will confront the 3 I’s

– Insecurity

– Incompetence

– Insincerity


2014 Economic Outlook

Real GDP growth to expand to 6.6%, according to EIU

Oil output to remain flat at approximately 2mbpd

Further tightening in monetary policy expected in January

– CRR on private sector deposits up to 20%

– CRR on government deposits up to 75%


2014 Economic Outlook

Inflation will be flat in Q1 but spike in Q2 to 11%

Naira official trading band will be N155-165 with midpoint at N160

Stock market rally will continue in first half of Q1

Before the fizzle of the sizzle

New import tariff will generate public outcry by car dealers

Government likely to postpone effective date


Corporate Humour


A positive attitude may not solve all your

problems, but it will annoy enough people to

make it worth the effort.

Beautiful young people are

accidents of nature, but beautiful old

people are works of art.

- Eleanor Roosevelt

Keep your eyes wide open before marriage, half shut

afterwards.

Herm Albright

Benjamin Franklin


He who is carried on another’s back does not

appreciate how far off the town is.

Rudeness is the weak man’s imitation of strength.

When a stupid man is doing something he is

ashamed of, he always declares that it is his duty.

African Proverb

- Eric Hoffman

- George Bernard Shaw

Corporate Humour


One must desire something to be alive.

The shifts of Fortune test the reliability of

friends.

Don’t go around saying the world owes you a living. The

world owes you nothing. It was here first.

- Cicero

- Mark Twain

- Margaret Deland

Corporate Humour


Never fight with someone who buys ink by

the barrel.

To get something you never had, you have to

do something you never did.

A government that robs Peter to pay Paul can always

depend on the support of Paul.

- Unknown Author

- George Bern Shaw

- Unknown Author

Corporate Humour

Bismarck J. Rewane MD/CEO Financial Derivatives Company

Victoria Island, Lagos. 01-7739889

Merry Christmas

82

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