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 naira
remained 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 positive
effects, although the liquidity squeeze
in the system made the effects short
lived. To salvage the liquidity crisis and
NI GERI A| CORPORATE GUI DES 108
CAPI TAL MARKETS
Capital Markets Overview
Economic Overview
... the naira remained relatively stable
against the USD with an average exchange
rate of about NGN118/USD until November
and hits NGN/129USD in December.

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 NSE
to 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 good
stocks, 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-book
value of 9.18x and a forward PE of
23.96x. Even though a number of the
large-cap companies posted good
CAPI TAL MARKETS
109 CORPORATE GUI DES| NI GERI A
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, which
is also fuelling the increase in prices, has
attracted short-term investors
Q
1
-
2
0
0
8
Q
2
-
2
0
0
8
Q
3
-
2
0
0
8
18
16
14
12
10
8
6
4
2
0
NSE Average Daily
Turnover Trend, Q1:08 Q3:08
Source: NSE, Stanbic IBTC Research
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.
NI GERI A| CORPORATE GUI DES 110
CAPI TAL MARKETS
... 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 fast track
24 25 June 2009
Sandton Convention Centre, Johannesburg, South Africa
www.africa-rail.com
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CAPI TAL 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?
e We 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 NGN12.28
trillion (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 in
order 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 Nigerias
Capital Market Sound and Robust
This is expected to make the
Nigerian capital market an
investment destination in line with
Financial System Strategy (FSS) 2020.
CAPI TAL MARKETS
113 CORPORATE GUI DES| NI GERI A
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 was
adjudged by the International
Financial Corporation (IFC) as one
of the most rewarding in terms of
returns on investment.
NI GERI A| CORPORATE GUI DES 114
CAPI TAL 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 capital
market will continue to play a promi-
nent role in the steadily growing
Nigerian economy.
CAPI TAL MARKETS
115 CORPORATE GUI DES| NI GERI A
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 Nigeria
into 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 for
Shareholders 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
NI GERI A| CORPORATE GUI DES 116
CAPI TAL MARKETS
CN: You are a World Bank Economist, the chairman of BGL and
have served as Minister of Finance, Minister of National
Planning and Minister of Transport as well as the Board of
Governor of the African Development Bank and Member of the
Development Committee of the World Bank. Is the success of
the financial sector having a positive effect on the other sec-
tors of the economy? How can growth in the financial sector be
leverage to grow the economy as a whole?
Dr Idika Kalu: First, the financial sector witnessed many major
changes in recent years. One of the most important of course
was the consolidation of the banks. Essentially the normal
thing is for banks to undertake syndication when they have to
undertake large projects, but its also necessary at times to
deliberately beef up the capital capacity of the banking sector
as individual entities so they can fund, look out for, appraise
and finance larger projects. Essentially, despite the fact that
there were pros and cons as to whether you do this in a delib-
erate manner, or you allow the system to grow with the rest of
the economy. You get big banks and the economy gets bigger.
Nonetheless I think it has been accepted that the deliberate
effort to reduce the multiplicity of banks from about 85 to 25
has been good in itself, because you are setting up in individ-
ual banks a greater financial muscle than you would have had
otherwise.
Of course this has been one of the reasons a few of us have also
cautioned this notion that the Nigerian financial sector will
become a hub. You have to look at the whole metrics. You cant
just take the financial sector and leave other sectors. You have
to think of how the other sectors will also be viable sectors.
This will need to be done and it takes time to build the human
capacity, grow the critical infrastructure like power, water for
domestic and industrial use, access roads, and education. All
these require deliberate planning and even though some of us
started talking about liberalization, globalization, that didnt
mean you didnt have to plan. That is the basic economic con-
strain that you have so many needs and you dont have enough
resources to meet them, so you have to continue to plan.
Planning will make the economy more attractive for foreign
investors.
More and more projects are being financed after the PPP model.
What do you think are the benefits of the PPP financing?
e There has always been public-private partnership whether
they work together or separately in the same sector. The whole
idea of privatization in the first instance is that in many coun-
tries, including the well advanced countries, the governments
were into so many things that are better done by the private
sector, particularly in the developing countries.
Interview:
Corporate Nigeria (CN) talks to
Dr. Kalu Idika Kalu
Chairman BGL Limited
Planning is the Key to Success
Planning will make the economy
more attractive for foreign investors.
These are the things that the new
set-up in the financial sector has to
be alive in order to leverage fully
every resource that they have.
CAPI TAL MARKETS
117 CORPORATE GUI DES| NI GERI A
NI GERI A| CORPORATE GUI DES 118
CAPI TAL MARKETS
What has changed now?
e A 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?
e By 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 agriculture
contributes 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 and
the 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. These
government 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 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.
CAPI TAL MARKETS
119 CORPORATE GUI DES| NI GERI A
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?
e At 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 you
dont 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 they
should 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.
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-annual
coupon 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, Refuge
Insurance Limited, Trust and Guarantee
Insurance Company Limited, and
Admiral Insurance Company Limited.
NI GERI A| CORPORATE GUI DES 120
CAPI TAL MARKETS
Crusader Nigeria Plc
Strategic approach in a bearish market

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, investment
banking, 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 real
estate 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
CAPI TAL MARKETS
121 CORPORATE GUI DES| NI GERI A
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 insurance
business with shareholders funds well in
excess of regulatory requirement.
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 of
the 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 funds
and 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 time
frame 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 stands
at 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.
NI GERI A| CORPORATE GUI DES 122
CAPI TAL MARKETS
Source: Companies financials, Stanbic IBTC Research
R
o
y
a
l

E
x
c
h
a
n
g
e
C
r
u
s
a
d
e
r
G
T
A
M
b
e
n
e
f
i
t
L
a
s
a
c
o
C
o
r
n
e
r
s
t
o
n
e
40%
30%
20%
10%
0%
Net Premium-to-Capital Ratio
for 2007 FY
Source: Companies financials, Stanbic IBTC Research
R
o
y
a
l

E
x
c
h
a
n
g
e
C
r
u
s
a
d
e
r
G
T
A
M
b
e
n
e
f
i
t
L
a
s
a
c
o
C
o
r
n
e
r
s
t
o
n
e
80%
60%
40%
20%
0%
Equity Cushion
for 2007 FY
Source: Companies financials, Stanbic IBTC Research
Quoted
Investment
30%
Investment
Poperties
27%
Unquoted
Investment
9%
Money Market
Instruments
34%
30% 27%
Unquoted
vestment
Money Mark
Instruments
Crusaders Investment Holding
for 2007 FY
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 net
operating 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 generation
from 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.
CAPI TAL MARKETS
123 CORPORATE GUI DES| NI GERI A
Source: Companies financials, Stanbic IBTC Research
C
r
u
s
a
d
e
r
G
T
A
L
a
s
a
c
o
M
b
e
n
e
f
i
t
R
o
y
a
l

E
x
c
h
a
n
g
e
C
o
r
n
e
r
s
t
o
n
e
80%
60%
40%
20%
0%
22%
26%
30%
41%
43%
64%
Expense Ratio
for 2007 FY
Source: Companies financials, Stanbic IBTC Research
G
T
A
M
b
e
n
e
f
i
t
R
o
y
a
l

E
x
c
h
a
n
g
e
C
r
u
s
a
d
e
r
L
a
s
a
c
o
C
o
r
n
e
r
s
t
o
n
e
40%
30%
20%
10%
0%
31.93% 31.84%
31.00%
29.93%
14.94% 13.85%
Loss Ratio
for 2007 FY
Source: Companies financials, Stanbic IBTC Research
Bond 0% Engineering 4%
Accident
13%
Motor 38%
Marine
24%
Fire
17%
Oil and
Gas 4%
nt
%
Marine
re
%
Oil and
Gas 4%
Components of Non-Life Gross
Premium for Crusader in 2007
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 of
sugar 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 Plc
supplying over 80% of Nigerias sugar
demand, relegating the remaining 15-
20% to Church Gate Limited under the St
NI GERI A| CORPORATE GUI DES 124
CAPI TAL MARKETS
Nigerian Sugar Market Dangote
Together their total capacity of 2.4 million
metric tons of sugar annually fails to meet
Nigerias demand for sugar at an estimated
3.0-3.5 million metric tons per annum.

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 demand
large 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 by
industries 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 they
can 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 view
of 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 stable
energy supply which forces a rise in the
cost of production.
CAPI TAL MARKETS
125 CORPORATE GUI DES| NI GERI A
2004A 2005A 2006A 2007A 2008E 2009E
Turnover 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.
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 research
in 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 and
Europe (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 gradual
diversion 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 parent
company, 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 readily
planning to expand production capacity
to capture regional and domestic mar-
kets growth.
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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 sup-
ply 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.
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 West
African countries. This is mainly through
informal cross-border trading. It is how-
ever worthy to mention that the compa-
ny accomplished its first shipment of
1,500 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 the
international market declined by about
25% in 2007. DSR accordingly trans-
ferred this reduction to its customers by
selling its white sugar at a relatively low
price 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-
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127 CORPORATE GUI DES| NI GERI A
... 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 crystallization, separation and drying,
sugar recovery, sugar conditioning, and
finally fortification (the mixture of the white
sugar with vitamin A).
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 with
capacity 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 publicly
available 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 sugar
as 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% AYGR
and 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% to
NGN174.36 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 to
NGN30.66 billion in 2007.
DSRs Profit After Tax (PAT) was the
NI GERI A| CORPORATE GUI DES 128
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... currently planning a product expansion
where packaged sugar would be made
available to them. To achieve this, the com-
pany has embarked on building a small
packaging plant, which is billed for com-
missioning in the second half of 2008.
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 billion
in 2007 representing 51.22% AYGR and a
Compounded Annual Growth Rate (CAGR)
of 38.62%.
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 the
fact 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 from
20.95% 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 in
the 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 its
level 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 of
4.53%. 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 current
assets. 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 operations
revealed that Operating cash flow to
sales ratio improved from 9.73% in 2006
to 48.35% in 2007 indicating an improve-
CAPI TAL MARKETS
129 CORPORATE GUI DES| NI GERI A
The company however appears to be more
efficient in 2007 as its GPM improved to
40.25% from 24.05% in 2006.
ment in the ability of the company to
generate cash from the sale of its prod-
ucts. Operating cash flow to total debt for
the 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 and
beverages 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) and
projected 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 the
current 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 NGN21.58
and 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 DSR
since its raw materials are imported, are
some potential risks which are all
unlikely.
NI GERI A| CORPORATE GUI DES 130
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... to generate cash from its operations
revealed that Operating cash flow to sales
ratio improved from 9.73% in 2006 to
48.35% in 2007 indicating an improvement
in the ability of the company to generate
cash from the sale of its products.