Dangote Cement mulls Eurobond issue: Dangote Cement is considering issuing a Eurobond or a local debt issue and will make a decision towards the end of the year, its chief financial officer, Brian Egan said yesterday. Egan said 70% of the company’s N389bn (US$1.1bn) debt was short-term and from its parent firm, Dangote Industries Limited, adding that the company wanted to change the loan mix. (Source: Thisday)
FG gets US$29bn from SPDC as NDDC gulps US$1.8bn in four years: Shell Petroleum Development Company (SPDC) and its Joint Venture (JV) partners contributed US$29bn to the Nigerian government between 2012 and 2016. The company also said that it contributed US$1.8bn to the Niger Delta Development Company (NDDC) funds within the same period for the development of the oil-bearing communities in the Niger Delta region. (Source: Guardian)
Nigerians may repay US$5.5bn loan for 30 years, says FG: The federal government (FG) has said its external borrowing plan, for which it is seeking the approval of the National Assembly, will take Nigeria between 5 and 30 years to repay. The government also insisted it would have to borrow more to complete a number of ongoing infrastructural projects. (Source: Punch)
Budget: FG to spend N1.2trn more in 2018: The country’s national budget will rise by N1.2trn (US$3.3bn) in 2018, according to projections contained in the 2018-2020 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy (FSP) submitted to the National Assembly by President Muhammadu Buhari. (Source: Punch)
Solar power: FG attracts investors with pioneer status: The minister of power, works and housing, Babatunde Fashola, has said investors can now manufacture solar power systems in the country following the recent review of the pioneer status incentive. Fashola stated this in Lagos on Thursday, adding that solar power had become the energy for tomorrow, affirming the federal government’s (FG) commitment to encouraging investors in the space. (Source: Punch)
Shell Nigeria lifts force majeure on Bonny Light crude: Shell Petroleum Development Company of Nigeria Limited, a subsidiary of Royal Dutch Shell, has lifted force majeure on the exports of Bonny Light crude oil, one month after it was declared. A spokesperson for Shell said the force majeure was lifted on Thursday. It was reported that Shell declared the force majeure last month following the shutdown of the Nembe Creek Trunk Line, one of the two main pipelines taking Bonny Light grade to the export terminal. Exports have been continuing via the Trans Niger Pipeline. (Source: Punch)
This afternoon GT Bank (GTB) published its Q3 2017 results. Although the bank’s results showed that PBT and PAT declined y/y, relative to our estimates, PBT and PAT beat by 7% and 15% respectively, thanks to positive surprises in opex and loan loss provisions. On a y/y basis, PBT and PAT declined by -6% y/y and -10% y/y to N48.9bn and N43.8bn respectively. The y/y decline in earnings was driven by a 73% y/y reduction in non-interest income due to negative base effects in the prior year (GT Bank’s 9M 2016 earnings were boosted by fx revaluation gains of N93.6bn vs. N11.7bn 9M 2017). Funding income grew by 12% y/y. However, the reduction in non-interest income proved significant and was the major driver behind the 27% y/y decline in pre-provision profits. Although opex and loan loss provisions declined by 20% y/y and 94% y/y respectively, partially offsetting the reduction in non-interest income, PBT still fell by -6% y/y. Further down the P&L, PAT declined even more, by -10% y/y, because of a 66% y/y decline in other comprehensive income (OCI). Sequentially, PBT and PAT showed single digit percentage changes relative to Q2. Again non-interest income which was down by 53% q/q underpinned the sequential decline in earnings.
Despite the y/y decline in earnings, we expect the market to focus on the broad positives, particularly the y/y decreases in opex and loan loss provisions. Notwithstanding, theweakness in non-interest income and the q/q decline in funding income will concern investors.
When annualised, GT Bank’s 9M 2017 PAT implies a respectable ROAE of around 32%; this is among the highest in our universe of bank stocks.
Although the bank’s shares have gained 65% ytd (vs. a 36% ytd return on the NSE ASI), we expect a slight positive reaction from the market.
Our estimates are under review. We rate GT Bank shares Neutral.
GT Bank Q3 2017 results: actual vs. FBNQuest Research estimates (N millions)
We’re on the same page with FG on borrowing – W’Bank: The World Bank says it is not in disagreement with the federal government (FG) on the need to borrow to finance infrastructure. In a letter to the minister of finance, Kemi Adeosun, in Abuja on Wednesday, the World Bank Country Director for Nigeria, Rachid Benmessaoud, said the bank had commended the FG for efforts to rebalance the nation’s debt portfolio. (Source: Punch)
Nigerian regulator suspends Oando shares, orders audit: Nigeria’s Securities and Exchange Commission (SEC) said on Wednesday it had ordered the suspension of Oando shares, citing concerns about possible insider trading and the oil company’s shareholding structure. (Source: Reuters)
House probes TCN’s US$1.5bn, US$500m foreign loans: The House of Representatives has queried loans totalling US$1.5bn taken from foreign creditors by the Transmission Company of Nigeria. This is in spite of a separate US$500m loan which the power firm is already negotiating with the Islamic Development Bank. (Source: Punch)
PowerGas, Delta collaborate on gas-to-power project: PowerGas and the Delta State Government have struck a partnership to develop gas-to-power projects in the state. A statement said the firm had come up with a sustainable solution to the power problem facing industries and other consumers with its gas-to-power infrastructure. (Source: Punch)
Agip pushes ahead with 150,000bpd refinery plan: The Nigerian Agip Oil Company, a subsidiary of Italian oil major, Eni, said it had begun feasibility studies for the construction of a new 150,000 barrel-of-oil-per-day refinery in the Niger Delta. (Source: Punch)
Investment flows in need of a major lift
On Monday we commented on the current account in the balance of payments (BoP) for Q2 2017. Today it is the turn of the capital/financial account, and the investment flows in particular. These are gross flows (ie those in the reporting economy before investment by Nigerian residents offshore). Direct, portfolio and other investment were again positive on this basis in Q2. The chart shows portfolio flows peaking above US$4bn in Q2 2013, when Nigeria was still basking in the glow of its inclusion in the JP Morgan indices for local currency, emerging sovereign debt.
- Direct investment in 2016 amounted to US$4.5bn, equivalent to 1.1% of GDP. This is pitifully low. The numerous structural flaws in the economy and the investment climate are barriers for the direct investor although they are not always the preoccupation of the offshore portfolio community.
- The short-term prospects are better for the two other components. The Eurobond issuance, we assume, explains the improvement in other investment in Q1 2017, and is set to be repeated this quarter. We should shortly see the impact of the NAFEX experiment on portfolio investment.
- When we adjust for the assets on the capital account (Nigerian investment offshore) in Q2, all three components remain positive on a net basis: direct investment of US$580m, portfolio investment of US$1.48bn and other investment of US$2.58bn.
- · We focus on the investment components because they provide a narrative. For the record, the broader picture in Q2 2017 shows a current-account surplus of US$1.41bn, a capital/financial-account surplus including the movement in reserves of US$4.34bn, and net errors and omissions (negative) of –US$5.75bn. The last item, which is effectively the balancing item, is often revised: an outflow of -US$1.63bn in Q1 is now shown as -US$4.09bn.
Event: Zenith Bank reports Q3 2017 results
Implications: Mixed/delayed positive reaction by the market likely
Positives: PBT up 26% q/q, beat our forecast by 32%
Negatives: Weaker-than-expected funding income
Zenith Bank’s Q3 2017 results which have just been published show low single digit y/y declines in both PBT and PAT. Although profit before provisions of N114bn showed a greater decline (-8% y/y), those on the provisions and opex lines proved significant, helping to limit the decline on the PBT line. Both revenue lines contributed to the decline in profit before provisions: while funding income was flattish, non-interest income fell -16% y/y because of base effects. Also on a q/q basis, because of base effects again, the bank recorded a marked fall of -42% q/q for non-interest income. Notwithstanding, non-interest income actually surprised positively, coming in much stronger than we had expected. Given a lackluster performance in funding income however, the impact of the better-than-expected non-interest income result was not felt. A significant positive surprise in loan loss provisions was the main reason for Zenith’s better-than-expected PBT (and PAT) result.
The market is likely to take some time to digest these results. On the one hand, the y/y comparables show declines on revenues and earnings. And the q/q changes in revenue are also weak, similar to what we have observed for other tier 1 banks. On the other hand, the positive surprise on the provisions line is significant. Some will argue that Q4 may throw up some major negative surprises on this line in particular – effectively a justification to discount the surprise in Q3. While we would not dismiss this view completely, we doubt the extent of a q/q jump in provisions in Q3 will be of such magnitude to validate consensus’ N173bn FY 2017E PBT estimate. To our mind, this forecast is very conservative. As such, we expect a positive reaction to these results, even if delayed. We would encourage investors to buy into any sell-off on the back of these results.
Event: Dangote Cement reports Q3 2017 results
Implications: Slight downward revisions to consensus 2017 earnings forecast likely
Positives: Sales and PBT up by 27% y/y and 171% y/y respectively
Negatives: Negative surprises in gross margin and opex
This morning the NSE published Dangote Cement’s (DangCem) Q3 2017 results which showed that PBT grew strongly by 171% y/y to N64.6bn. The stellar growth in PBT was driven by sales growth of 27% y/y and a 1,859bp expansion in gross margin to 56.9%. These completely offset a 10.1x increase in net interest expense to -N5.0bn. We note that net interest expense was boosted by fx gains of N54bn in 9M 2016. Despite the triple-digit y/y growth in PBT, PAT declined by -37% y/y due to negative base effects stemming from other comprehensive income (OCI) (arising from fx translation gains of N106bn in 9M 2016). Sequentially, sales, PBT and PAT fell by -7% q/q, -18%q/q and -54% q/q respectively. Relative to our forecast, sales were in in line. While PBT missed by 28%, PAT missed by a wider margin of 46%, mainly because of a higher effective tax rate of 24% vs. the 6% that we had in our model. The 24% tax rate is the highest rate paid by the company in recent times. To put the tax rate into proper perspective, it is far higher than the average taxation run rate of 7.4% over H1 2017 and the 13.6% tax rate for 2014 – one of the highest tax rates ever paid by the company.
Despite the stellar sales growth, what is clear is that the unit volumes in Nigeria continue to be under pressure, due to the effect of weak private demand and elevated prices. Based on management’s statement, unit volumes for Nigeria declined by 16% to 2.8 million metric tonnes (mmt) in Q3 2017. On a 9M basis the decline was even more at around 19% y/y to 9.6mmt. In contrast, unit volume growth for the pan-African operation was up by around 5% y/y in Q3 to around 2.3mmt. DangCem’s group EBITDA margin expanded by 1,686bps to 47.5% in Q3 2017, mainly driven by a 2,324bp y/y expansion in EBITDA margin for Nigeria to 64.4%. Similar to Q2, we believe that the marked expansion in gross margin in Nigeria was driven by the combination of higher pricing and a favourable fuel mix in favour of coal and gas as compared with low-pour fuel oil (LPFO). DangCem’s fuel mix shows that LPFO accounts for just about 2% and 1% of the total fuel mix in Obajana and Ibese compared with around 37% and 21% in 2016.
DangCem’s 9M 2017 PBT of N220.2bn tracks behind consensus 2017 PBT forecast of N286bn. As such, we expect to see downward revisions to consensus 2017E earnings forecast and a broadly neutral reaction from the market. DangCem shares have underperformed the index this year. They have gained 26.4% ytd compared with the 36.3% return delivered by the ASI. At current levels, on our published estimates, DangCem shares are trading on a 2017E P/E multiple of 13.6x for 14% EPS growth in 2018E.