industry insights - issue 01

8/2/2019 Industry Insights - Issue 01

1/13

Major Economic Indicators:

Quarterly Outlook

Inflation:StableInterestRates:StableExchangeRates:StableGDP Growth:StableEquityMarkets:StableBondMarkets:Stable

Economy into Neutral as Elections take Pole

Global Perspective

The global economy performed better than

expectedinthefirsthalfoftheyearprompting

the International Monetary Fund (IMF) to

revisegrowthprojectionsfor2010upwardsby

0.5%to

4.5%

at

the

start

of

quarter

three.

A

robust Asian recovery as well as wider im

provement in industrial activity and private

demand was held to be responsible for an

annualised growth of above 5% recorded in

the first quarter. The strength of the growth

data also thrust the International Energy

Agencytoreviseoildemandforecastsupby80

thousandbarrelsperday(kbpd)to86.6million

barrels per day (mbpd), translating to a 2.2%

growth for 2010 following the 1.1% decline

recorded in2009.Theupwardrevisionswere,

however,not

without

caveat;

with

both

bodies

warningofincreaseddownsiderisksasaresult

of thehighly fragilenatureof the globaleco

nomicrecovery.

Oil GDP

Crudeoilpriceshaveaveragedaround$75per

barrel inthe firstninemonthsof2010 incon

trasttoanannualaverageof$61 in2009.We

expectthepricetoremainatcurrentlevelsfor

the remainderof theyeargiven International

Energy Agencys forecast revision and ex

pected reaffirmation of cutbacks at the next

OPEC ministersmeeting inOctober.Nigerias

crude oil production is thought to be at its

highestlevelsinrecentyears,withthecurrent

climate of relative peace in the Niger Delta.

Thecountrysproductionisexpectedtoremain

strongfortherestoftheyearwithmoreprevi

ously lockedin onshore and shallow offshore

fieldsproducingclosertocapacity.Theradical

Petroleum IndustryBill (PIB) is stillawaitinga

third(andfinal)reading intheSenate.Thebill

is looking increasingly unlikely to be passed

beforetheendoftheyearasthegeneralelec

tionsslatedforearly2011approach.

NonOil GDP (Public Sector)

The government generated revenue of 2

trillioninthefirstfourmonthsof2010,afigure

which on a time apportioned basis is 25%

downonthe8trillionprojectedinthebudget

for2010.Thetotalfederallycollectedrevenue

is expected to be closer to6 trillion for the

year, with economic conditions unlikely to

Contents

The Macro Economy P.1

Electricity P.4

Oil& Gas P.6

Food & Beverage P.8

Real Estate P.10

Pharmaceuticals P.12

QUARTERLY REVIEW OF NIGERIAN INDUSTRIES

Industry Insights

Agusto & Co.RESEARCH, CREDIT RATINGS, CREDIT RISK MANAGEMENT

ISSUE 01, OCTOBER 2010

1


2/13

corded for the same quarter in 2009. The

Sectorisexpectedtoagainshowsolidgrowth

inthe

latter

part

of

the

year,

with

the

coming

harvest inthenorthernpartofNigeria.There

is, however, some concern that lower than

expected food inflation of 12.9% in the sec

ondquartercomparedto14.7% in2009may

deter farmers from significant expansionary

activities.

Money Markets

There is stillno signof thecredit squeeze in

theeconomyabatingat theendof the third

quarterof2010. Inspiteof theCBNsefforts

toreduce treasurybilland interbankrates

whichwentas lowas1.2%and1.3% respec

tivelyinAprilbanksremaincautiousregard

ing lending. The evidence suggests that the

economy,whichrecordedayearonyearrate

of inflation of 13.7% in August according to

the NBS, is in a liquidity trap; with the CBN

unabletostimulatelendingbyloweringinter

estrates.TheCBNcontinuestodrivethrough

what could be termed a quantitative easing

programme intheestablishmentof interven

tion funds to refinance existing bank loans.

TheMonetary

Policy

Committee

at

ameeting

attheendofSeptembertookthepreemptive

step of increasing the monetary policy rate

(MPR)by0.25% tocurbwhatcould turnout

tobeexcessiveinflationinlightofthecoming

electionsandexpectedincreaseinliquidityof

banks. The countrys external reserves have

been on a decline, hovering around $37 bil

lioninSeptemberfrom$42billionatthestart

of the year. The fears over the reserves rot

spread to the exchange rate in September

with the price of $1 rising above149after

settling

at

the

higher

end

of

148

formost

of

theyear.Ouroutlookforthemoneymarkets

for the remainderof theyear ismoreof the

same with the inflation rate, interest rates

and exchange rates all expected to remain

stable.

TheNigerianbondmarketcontinuesitscrawltogreaterdepthswiththeissu

anceoftwomoreStategovernmentbonds

change significantly in the latter months of

2010. The country generated lower than

expected oil revenues, with the PIB still not

yetpassed;receiptsfrompetroleumprofittax

androyaltieswereconsiderablydownonthe

2010

budget

estimates.

The

governments

nonoil revenues were also considerably

lower as there was a larger than expected

decline in customs and exercise duties and

companiesincometaxaswellasothertaxes.

The decline in these duties and taxes were

largely a reflection of the economic adversi

tiesthatwerefaced insomesegmentsofthe

countrys private sector in 2009 and early

2010.

NonOil GDP (Private Sector)Theprivatesectorhasshownimprovementin

2010with an8.41% realgrowth recorded in

thesecondquartercomparedto8.18%inthe

corresponding period of 2009 according to

the National Bureauof Statistics (NBS) quar

terlyestablishmentsurvey.Theslowlychang

ingfortunes

of

strategically

important

sectors

such as Banking and Telecommunications,

whichhadearlierledtherationalizationdrive,

positively impacted on other sectors of the

economy. The growth witnessed in the sec

ondquarterwaslargelydrivenbysignificantly

improvedactivities intheRetailSectorwhich

recordedarealgrowthof11.4%comparedto

11.18%recordedforthesameperiodin2009

accordingtotheNBSsurvey.TheAgricultural

Sector, as usual, showed solid growth of

5.84% in the second quarter following har

vestsin

the

southern

part

of

the

country,

although this was lower than the 5.94% re

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3/13

Capital Markets

TheNigerianbondmarketcontinues itscrawltogreaterdepthswiththe issuanceoftwomore

StategovernmentbondsKadunaandEbonyi inthethirdquarter.Themanner inwhichthe

municipalbondmarketcontinues to thrive is incontrast to thecorporatebondmarkets leth

argy;withonlyahandfulofissuescomingtomarketinthelastfewyears.Theequitymarkethas

remainedlargelybearishinthethirdquarter,withthe1.84%gainoftheNSEASIinJulyreversed

bya6.23%dropinAugust.TheAgusto40Index,whichisdesignedtorepresenttheperformanceofNigerianquotedequityandtheeconomy ingeneral,mirroredthedirectionoftheNSEASI in

thesetwomonths.TheAgusto40,however,as isexpected inabearmarket;outperformedthe

NSEASI,gaining3.92% inJulyanddroppingonly4.67% inAugust.The lowlystateoftheequity

markethascontinuedtodeterissuerswithUnionHomesRealEstateInvestmentTrustPlcsIPO

andSkye

Bank

Plcs

special

placement

the

only

cash

issues

in

the

third

quarter.

However,

our

outlook for the remainderof theyear for theequitymarket is stable.TheAssetManagement

CompanyofNigeria(AMCON) isexpectedtocommenceoperationsbeforetheendoftheyear,

mitigatingthebearishtrendcausedbybanksreducingtheirholdingsofmarginloans.Weexpect

thebondmarket tobestable,with thepossibilityofacoupleofmunicipalorcorporatebonds

beingissuedbeforetheendoftheyear.

Outlook

PoliticsissettodominateNigeriansocialandeconomicproceedingsoverthenexttwoquarters

with the impending general elections. The Independent National Electoral Commission (INEC)

receivedanapprovalinprinciplefromthelawmakerstorescheduletheelectionsforalaterdate

thanstipulated

by

the

countrys

constitution

to

allow

for

sufficient

time

to

make

the

prepara

tions.The traditionalhandoverdateof29Maydubbeddemocracyday is,however,ex

pected to remainunchangedunder thenewschedule tobeput forwardby INEC.Thegovern

mentsparticipation ineconomicactivities isexpectedtobe limitedoverthenexttwoquarters

asthepolitickingforcandidatureandcampaignforelectedofficesissettotakecentrestage.We

expectthistohaveanadverseknockoneffectonboththeOilandtheNonOilPrivateSectorfor

thenexttwoquartersmakingourotherwisepositiveoutlookonGDPstable.

3

Lagos,Nigeria

3


4/13

The Nigerian Power Industry Letsturnthelightson

Are the reforms enough?

Nigeriahassufficientenergyresourcestomeetthenationsdemand.Nonetheless,todoso,the

industryneeds investmentsofanestimatedUS$3.5 billionperannum inpower infrastructure

over

the

next

ten

years,

which

in

our

opinion,

cannot

be

achieved

without

sufficient

private

sec

tor investments.Overtheyears, thedearthof longtermfundinghasbeenoneofthekeycon

straintstotheperformanceofprivateplayersinthepower industry.WithCBNsrecentfunding

initiatives,weexpectsome improvements in thisarea in themedium termas these fundsare

deployed.

Tofurthersupportexternalfunding,electricitypurchasedfromthegenerationcompaniesbythe

bulk tradercompanywillbecoveredbyacreditguarantee from theFederalGovernment. It is

however important to note that this guaranteedoes not cover the full extentof the liability,

whichsomewhatnegates theattemptatmaking thepowerpurchaseagreementsbankable. In

ourview,forthereformstowork,theFederalgovernmentwillneedtofullycovertheseexpo

suresuntilefficiencyconstraintsareremovedtomake investorsmorecomfortable. Inaddition,

The Power Holding Company of Nigeria

(PHCN) supplies most of the electricity con

sumedin

Nigeria,

supplemented

with

power

generatedfromprivatelyownedplants.Nige

riacurrentlyhas8,300MWof installedgener

ating capacitybut is only able to generate a

maximum of 3,700MW. Most businesses in

Nigeria have been rendered globally uncom

petitive as a result of the high costs of self

generation.

Thepowerindustryhasundergoneaseriesof

reforms in the last tenyearsbutwithdismal

results.Privatesectorparticipationisstillvery

lowand

most

of

the

new

power

plants

are

yet

to be completed. In addition, most of the

operationalpowerplantsarefunctioningsub

optimally due to lack of maintenance, while

thetransmissionanddistributionsectorhave

been plagued by technical and financial

losses.

Upon resumption of office, President Good

luck Jonathanannounced thathewouldper

sonally oversee the industry to ensure the

effectiveimplementationofthenewreforms.

A committee was constituted to urgently

review the challenges faced by the power

industry and proffer solutions. In August

2010, thePresidentpresented theblueprint

forachieving

aminimum

target

of

40,000MW

by2020.Thekeypointsofthisstrategicinitia

tiveare:

Theprivatizationofthegeneration and

distributioncompaniesbyQ22011.

The transmissioncompanywillbeman

aged by a private company and trans

missionserviceswillberegionalized.

Abulktradercompanywillbeinstituted

to handle the purchase of electricity

from the generation companies for

onward sale to the distribution compa

niesbyyearend2010.

Electricity tariffs are to be increased

from 8.50 to 22//kWh effective Q1

2011.

TheCentralBankofNigeriahaspledged

thesumof200billionfortheresuscita

tion of the Power Industry. In addition

to this, the CBN Governorhasalsodis

closedthat400billionwillbedeployed

frompensionfundstowardscompleting

powerprojects.

44

Privatesectorparticipationisstillverylowandmostofthenewpowerplantsare

yettobecompleted.


5/13

powerpurchaseagreementsshouldbe fullymatched (i.e. in termsof tenors, fixedpricingetc)

with fuel supply agreements to minimize the risks inherent in the trading agreements. These

critical issuesneedtobeaddressedurgentlytomakethe industrymoreattractiveto investors.

Banksarealsowaryaboutlendingtothecompaniesduetothevaguepaymentterms.

Another major hurdle faced by intending entrants is the commercial viability of the industry,

whichthe

tariff

hike

aims

to

address.

Nonetheless,

analysts

have

questioned

the

affordability

of

thenewtariffsparticularlytolowincomeearnerswithoutthesupportofgovernmentsubsidies.

Inourview,consumersshouldbewillingtopaymoreas longaselectricitysupply issomewhat

guaranteed.It isestimatedthatNigeriansspend80/KWHoncandlesandkerosene lampsand

70/KWHondieselandpetrol.Furthermore,evenwiththehikeintariffs,Nigeriastillhasoneof

thelowesttariffsintheAfrica(seefigure1below).

Figure1:ElectricityTariffs

Source:PresidentialTaskForceonPower

Webelievethatthehugegapbetweenthedemandandsupplyforelectricity,coupledwithgov

ernmentsrenewedfocuspresentsa lotofopportunitiesforgrowth.Considerable investments

areexpectedtoflowintotheindustry,spurredbytherecentreforms.Sixforeignandlocalcom

panieshavealreadytenderedbidsforthemanagementofthetransmissioncompany.Whenfully

operational, the new transmission structure should reduce transmission losses. Privately run

distributioncompaniesshould improverevenuecollection,ultimatelymakingthe industrymore

profitable and thus more attractive. In Nigeria, transmission losses in the Power Industry are

currentlyestimatedat40%comparedtocountrieslikeGhanaandKenyaat10%.

Wehowevernote thatthepaceatwhich thereformsare implementedmaybeslowedbybu

reaucraticdelays and distractions caused by the impendingelections.Onekey point thatwas

omitted from the roadmap is the issueofcorruption.Over the lasteighteenyears,vast sums

havebeenspentwithoutcommensurateresults.Whileweexpectthatefficiencygainsshouldbe

derived in the medium to long term from the privatization of the unbundled companies, we

believethatthesuccessofthereformsarelargelydependentonGovernmentsabilitytoensure

accountabilityandstewardshipforallcontractsawarded.

0

5

10

15

20

25

30

35

40

45

50

BurkinaFaso

GuineaBissau

Liberia SierraLeone

Gambia Ghana Nigeria

55


6/13

InMay2010, theFederalGovernmentbegan

issuingSovereign

Debt

Notes

(SDNs)

to

im

porters of petroleum products (Premium

MotorSpirits(PMS)andHousehold Kerosene

(HKK), as guarantee for their subsidy pay

ments.ThenotesareissuedbytheDebtMan

agementOffice(DMO)tothelicensedimport

ers through thePetroleumProductPricing&

Regulatory Agency (PPPRA). The notes are

discountableshorttermbills,liketheGovern

ments treasurybills (Tbills),butunlikeTbills,

theyhaveashortertenorof45days.Toqual

ify for the SDNs, an importer must deliver a

cargoof

PMS

or

HHK

that

meets

regulatory

specifications. Once this is confirmed, the

note,whichcanbediscountedbycommercial

banks,isissuedtothepetroleumimporterby

thePPPRA.TheSDNsarebackedbytheGov

ernments treasury and cover the difference

betweenthelandingcostofPMSandHKKand

theofficialpumppricesof 65and50 re

spectively.

The Federal Government must be com

mended for the introductionof theSDNs. In

additionto

forestalling

the

buildup

of

unpaid

subsidies and ensuring some stability in the

supply of these petroleum products, it also

provides petroleum importers an alternative

sourceoffundingi.e.theycaneitherdiscount

thebillsiftheyareunableorunwillingtohold

themtomaturityorusethemtosecuretheir

short term bank borrowings. The initiative

buttresses Governments resolve to address

the issues of the downstream segment and

represents a step towards the full deregula

tion of the sector. Most of the petroleum

marketers/importers

have

received

their

outstandingpaymentsandarenowrecording

improved cash flows from operations. The

initiative has also reignited the interest of

certain marketers who had previously

stopped importation of petroleum products;

and as a result, have submitted applications

toobtainpetroleumimportlicenses.

However,afewissueshavedoggedtheintro

duction of the notes. Firstly, the notes are

only receivable after upfront payment of

administrative

and

Petroleum

Equalization

Fund claims.Previously these feeswereonly

deducted at source when the subsidy pay

ments were effected; somewhat like a with

holding tax. Some marketers have com

plained about this new method and are re

questing that the Federal Government re

versethispolicy.Secondly,theintroductionof

the notes was also accompanied by some

inconsistency in the allocation of the import

permits i.e. the withdrawal of petroleum

import licensesthathadbeen issuedandthe

reissuanceto

favor

some

marketers

that

had

earlierdiscontinued the importationofprod

ucts.ThePPPRAhasbeenchallengedtomake

the allocation process more transparent and

review the process of allocation of import

licenses. These marketers have also accused

thePPPRAof favoritism towards five import

erswhoreceivedmore thanhalfof the total

importquotaforeachofthesequarters.

Notwithstanding the furor over the granting

ofpetroleumimportlicenses,themostimpor

tantconcern

for

industry

stakeholders

is

the

sustainabilityoftheinitiative.Thisisbasedon

two factors. The first is the rising domestic

debtprofileofthecountry;GiventheFederal

Governments'planstoraisedebtintheinter

nationalcapitalmarketsaswellastoincrease

domestic debt issuances to fund a yawning

budgetdeficit, thereare fears that theSDNs

may add to this debt burden and may be

sacrificed for other seemingly more impor

tantcauses.Theupcomingelections in2011

alsoprovideanothercauseforconcerndueto

the

tendency

of

new

regimes

to

abandon

programsinitiatedby previousregimes.

These two factors could easily overturn the

progress recorded by the industry since the

introductionofthenotes.Thesecondquarter

performance (2010 Q2) of most operators

reveals significant improvement over both

2010 Q1 and the corresponding quarter in

2009. According to unaudited accounts for

thehalfyearended30June2010,fourofthe

66

Oil & Gas Sovereign Debt Notes: A Step In The

Right Direction

Marketers

havealsoac

cusedthe

PPPRAoffa

voritismto

wardsfiveim

porterswho

receivedmore

thanhalfof

thetotal

im

portquota.


7/13

majormarketers(OandoPlc,MRSOilNigeriaPlc,TotalNigeriaPlcandConoilPlc)recordedacom

binedturnoverof340.5billion,representinga50% increaseoverthecomparableperiod inthe

previous year. Profit after Tax (PAT) for these companies in this interim period is estimated at

12.9billion,representing a160%growthoverthecorrespondingperiodin2009andtranslating

to4%ofsales(2009:2%).Ifthistrendissustained,weexpectturnoverof681billionandPATof

25billion

at

31

December

2010.

In

addition

to

the

issuance

of

the

SDNs,

we

note

that

the

im

provement in sales is also attributable the absence of industrial actions, product scarcity and

greaterefficiencybyoperatorsamongotherfactors.

Inabid to sustain this trend, thePPPRAhas revised theguidelines for issuing import licenses/

allocationsforQ42010.Amongtherevisionstotheguidelinesistherequirementthattheimport

ersprovide proofof financialbackingora letterofundertaking fromabank to finance the im

ports.ThePPPRAhasalsosuspendedtheadmissionofnewfuelmarketersintotheimportalloca

tionprogramandpetroleum importers/marketerswillalsobeprohibited from transferring their

importquotastothirdparties.Thismoveisexpectedtocurtailtheactivityofportfoliomarketers

whoonlybidfortheimportpermitsinordertoselltheallocations toothermarketers.

OverallAgusto

&

Co

is

of

the

opinion

that

for

the

SDNs

to

continue

to

work

effectively,

the

process

ofawarding import licensestooperatorsmustbetransparentandefficientlymanaged.Thenew

guidelinesadoptedbytheregulatoryauthoritiesforthefourthquarterof2010 isamove inthis

direction and if sustained should reflect in improved performance of industry operators in the

nearterm.

77


8/13

WithanestimatedNigerianpopulationof150

milliongrowing

at

approximately

4%

per

an

num; thecountrysFoodandBeverage Indus

try(theF&BIndustryortheIndustry)wasestimated at 530 billion in 2009. Despite

prevailing market conditions, the Nigerian

marketremainsthedelightofindustryplayers

duetothelargenumberofconsumers.

Between 2005 and 2008, the F&B Industry

witnessed an influx of new entrants, who

alongside established companies increased

capacity and expanded their scope of opera

tionsdue

to

buoyant

economic

conditions

ultimatelyresultinginaveragerevenuegrowth

rates in the region of 22% within this period

(outpacingtheaveragenominalGDPgrowthof

20%). The growing sophistication and emer

genceofthemiddleclass,increasingdesirefor

convenience in the form of packaged foods

andgreatermarketpenetrationcontributedto

increased salesvolumes. Another factor that

impactedpositivelyontheIndustrysperform

ance was improvements in food quality as a

resultofincreasedcompetitionandregulatory

enforcementby

the

Standards

Organization

of

Nigeria (SON) and the National Agency for

Food & Drug Administration Commission

(NAFDAC).

In 2009, the Nigerian economy recorded

slower growth, with recessionary pressures

settinginandremainingin2010.Inadditionto

thedecline inpurchasingpowerof thepopu

lace and inflationary pressures, industry op

erators currently have to contend with in

creasesinoperatingcost,increaseinthecosts

of

raw

materials

and

for

some,

reduced

access

tofundingforbothworkingcapitalneedsand

business expansion. While the impact of the

depreciationoftheNairawasmostobvious in

2009, the costs of power generation in the

formofdiesel;rosesignificantlybyanaverage

of 21% between 2009 and August 2010. For

eign exchange rates have been relatively sta

ble in 2010, with US Dollar exchanging for

149.29/$ in August 2010 from150.91/$ a

yearearlier.TheNairaalsoappreciatedagainst

the Euro and Sterling, dropping to 191.90

and 232.94 respectively in August 2010.

Continuedstability

in

the

Naira

exchange

rate

could bode well for the Industry in the next

quarter,thoughitisunclearifpressuresonthe

externalfrontcouldresult infurtherdeprecia

tionin2011.

While overall industry growth remains sub

dued compared to previous years, 2010 con

tinuestoseeanimprovementonanumberof

fronts. Interim results for the 2nd

quarter,

show continued growth in sales, with some

improvement in margins over corresponding

periods

in

2009

for

some

operators.

But

as

is

expected, resultsappear tobemixedby seg

ment.Webelieve this isdue to thenatureof

products in each segment and the ability to

passoncost increasestoconsumers. Inaddi

tion, companies that have integrated back

wards and have a more diversified product

baseappeartohavefaredbetter.

Overall, competition remains keen and some

segmentscontinuetofarebetterthanothers,

withcontinuedgrowthridingonthebackofan

increaseinproductofferingsandthemodifica

tionofexistingones. Amongstsuchoperators

areNestle

Nigeria

Plc

(with

new

products

like

Milo chocolate bar and Milo readytodrink

canbeverage)andDangoteFlourMillPlc(new

pasta variants: Alphabet and Actilease). Cad

bury Nigeria Plc on the other hand has re

viewed product offerings and discontinued

less profitable products including Eclairs,

RichocoandBubbabubblegum,whiledirecting

effortsatbetterperformingproducts suchas

Bournvita,Buttermint,andTomTom.

88

What Is Happening In The Nigerian Food

And Beverage Industry?

ProfitafterTaxtoTurnoverRatio(HalfYearEndedJune2010)

Companies

thathavein

tegrated

backwards

andhavea

morediversi

fiedproduct

baseappear

tohavefared

better.


9/13

Repackagingof products into individual serving size is also a continuing trend,with the likesof

UnileverPlc,andFrieslandFoodsWamcorepackingestablishedproducts;Bluebandmargarineand

evaporatedPeakmilkintosinglesizeservings. Individualsizeservings,allowscompaniestocreate

markets

for

their

products

across

different

income

segments.

The

noodles

sub

segment

is

also

recording increased competition as the likes of Honeywell, DangoteFlourMillsPlc and May&

Baker PlctrytocapturemarketsharefromthedominantplayerDufilPrimaFoods;themanufac

turerofIndomieNoodles.

Weexpectbusinessvolumesofthefoodandbeverageindustrytopickupinthelastquarterofthe

year,with theapproachingholiday season.Theeffectof inflationarypressures,which increased

from11%in2009to13%in2010andledtochangesinthemonetarypolicyrateasofSeptember

2010to6.25%,isonlyexpectedtobemorepronouncedpostholidayseasonassalesnormalize.On

theforeignexchangefront,providedtheNairaremainsstableagainstmajorcurrenciesandother

operatingcostsremainrelativelyunchanged,thereshouldbesome improvementinperformance

formostindustryoperators.

Despitetheindustryssensitivitytoitsoperatingenvironment:poorinfrastructureandhighoperat

ingcosts;webelievethatasinpreviousperiodsofdownturn,theNigerianFood&Beverageindus

trywillprove tobemore resilient thanother industriesand thus remainamongst thebestper

forming in the short term.This isbasedon ouranalysisofcontinuedopportunities for market

penetration,theintroductionofnewproductsandthenecessarynatureoftheindustrysproducts.

9


10/13

Real Estate Industry Review What determines

where you live?

In 2010, the aftershocks of the financial crisis

and the shortage in commercial lending stalled

renovations,

building

conversions

and

new

office space developments around large cities,

particularly in Lagos State. Furthermore, the

economic downturn affected the emergence of

newresidencesandbusinesses,especiallysmall

andmediumscaleenterprises(SMEs),company

subsidiaries, branches and retail outlets. How

ever,theaveragerentalpriceforofficespace in

largecitieshavenotchangedsignificantly.

In the residential market however, population

growth, urban and intercity migration ensured

some

measure

of

volatility.

Nigeria

has

a

housing

deficit of well over 16 million units. In Lagos

State, 65% of the population lives in rented

accommodation,sometimesspendingashighas

40 percent of their monthly income on house

rent. Residential rent is the largest recurring

expenditure made by the average Nigerian be

tweentheagesof30and40.Thereasoncannot

bemoreobvious;housing isabasicneed, its in

shortsupplyandhouseownersdemandupto2

yearsadvancepayment.

In 2010, an analysis of the housing market re

veals

that

when

household

income

or

size

changed (as has happened to many Nigerians),

asides from affordability, the four prominent

nonostentatious determinants of choice of

residence are congestion, perceived environ

mentalsecurity,relativedistance(centrality)and

infrastructure provision. For instance, prior to

2010, the relative closeness of Ajah in Lagos

State to the commercial district sparked land

acquisition,constructionandinturn,anincrease

inrentalratesinthearea.However,subsequent

congestion in 2010 andan increase injourney

timeowing

to

road

work

have

adversely

affected

rentalrates.

Security

Ouranalysisrevealsthatsecurityisthestrongest

considerationinresidentialselection.Ofthefour

mainconsiderationsinrentalselection,asample

ofprospectivetenantsfeltthatsecurityconcerns

motivatedthemby43%torentaproperty.This

has given rise to the prevalence of residential

estates with heightened security facilities and

personnel.However,despitetheoptionofresid

ingwithinanestate,thegeneral senseofsecu

rityof

an

entire

area

is

still

held

by

many

as

the

greatest concern when making a residential

propertyselection.

As at September 2010, respondents surveyed

ranked Ikoyias the safestplace to live inLagos

state. Surulere and Yaba were perceived to be

less secure than Ikorodu, Ketu and Iyana Ipaja.

SurulereandYabassecurityrankingisattributed

totheirgrowingpopulationdensityduetointer

citymigration,which inrecenttimeshas largely

come fromAjahand the Lekkiaxis. Thismigra

tionofislandersappearstohaveraisedsecurity

concerns in the area, sparking fears that crimi

nalsmightbeattractedtothepresenceof new

comers.

In Port Harcourt, Rumibekwe ranked as the

safestresidentialareatrailedcloselybyGRA.As

aconsequenceofrecentRiverstateGovernment

efforts in reclaiming waterfronts, the Borokiri

areahasexperiencedan increase in security. In

contrast,incidencesofkidnappinginAdaGeorge

has led toadecline inperceivedsecurity in the

neighborhood.

Distance from thecentralbusiness

districts

The central business districts (CBD) in Lagos

StateareVictoriaIsland,MarinaandIkeja.How

ever,forthepurposeofthisresearch,Marina is

considered as the CBD of Lagos State. In Port

Harcourt, Township is regarded as the CBD

while Centralarea isreferred toas theCBD in

Abuja. We observed that residents in Lagos

considered distance to the central business

district injourney timeas the second most im

portantfactor

in

selecting

rental

property

and

felt itoffered29%motivationwhen choosinga

residence.

InLagosState,Yabaremainedthefirstchoicefor

proximitytothecenter,followedsequentiallyby

Ikoyi, Surulere, and Apapa. As a result of the

road construction on the LekkiEpe expressway

whichresults inheavytrafficcongestionatrush

hour, Ajah ranked further from the CBD than

Ogba/Agegeinjourneytime.

1010

Decision drivers in property

selection


11/13

Infrastructure

Social amenities such as roads, water and

electricityaffectthecostoflivingofresidents

inanareaandsomeareasaremoreprivileged

than

others

in

this

regard.

In

Lagos

State,

highbrow areas are popular for good road net

worksbutnotsomuch forelectricity supply.

Low income areas connote the thought of

poor infrastructure;however,middle income

neighborhoodsareacombinationofsorts.

Our research showed that tenants believed

infrastructure was the third strongest influ

ence on their rental decision and felt it of

fered 19% motivation when selecting rental

property. Most tenants were accustomed to

supplementing poor electricity supply with

personalgenerators,

poor

water

supply

with

bore holes and bad road networks with a

goodmechanicora fourwheeldrivevehicle

(whentheycanaffordone).Hence,infrastruc

ture is deemed less important to distance

from the CBD and security. For Lagos State,

Ikeja ranked as the second best location for

infrastructurebehindIkoyi.TheLekkiaxistied

at third with Surulere and Yaba. Apapa led

Festac Town in fourth place while Ketu and

Iyana Ipaja were seen as having the poorest

infrastructure among the areas sampled in

LagosState.

Congestion

Thelevelofcongestioninanareacontributes

tootherfactorsthataffectthechoiceofresi

dence in the large commercial cities suchas

noise pollution, waste disposal and traffic

congestion. Many of the respondents sam

pled believed this factor had the least influ

ence on their rental decision and felt it of

fered only 9% motivation when choosing

rentalproperty.

In Lagos State, Ikoyi and the Lekki axis were

rankedas

the

least

densely

populated

areas

of the state. Apapa ranked as the least

densely populated residential area on Lagos

mainland. The survey showed that Surulere,

Yabaand Iyana Ipajawereperceived tohave

equalpopulationdensitiesandwereonly less

densethanKetuarea.

1111

Infrastructure

isdeemed

less

importantto

distancefrom

thecentral

businessdis

trictsandse

curity.

Outlook

Inthe

third

quarter

of

2010,

the

economic

slow

down

affected

rental

yields;

firstly

by

restricting

growth inpropertypricesandsecondlyby limitingthe increase inrent.Morespecifically,rising

insecurity insomeareasofPortHarcourtcontributed tovolatility intheresidentialmarketand

affectedgrowth in rentalyieldsadversely. In LagosState, increasedjourney timewasamajor

influenceon rentalyieldsandareas along the LekkiEpeexpressway were mostaffected.Asa

resultofthesefactors,therentalyieldsintheresidentialmarketreducedslightlyfromtheprevi

ousyear.

OtherinhibitorstotheRealEstateIndustryin2010aretherestrictionincommerciallendingand

higherinflation. Asideslimitingthesupplyoffundsusedinbuildingconstruction,lowbanklend

inghasalsoaffectedtheprovisionof infrastructuretoanumberofnewhousingestates. Infra

structuraldevelopment intheseestates isnowcontingentonreceiptsfromthesubsequentsale

of properties, which has also dwindled under current economic conditions. As a result, many

earlybuyersanddevelopersintheestatesmaycontendwithpoorinfrastructureforlongerthan

anticipatedandthiswouldrestrictrentalpricegrowthintheseareas.

Domestic inflationandexchangerateshavealsoaffected theRealEstate Industryespeciallyby

increasingthecostofsomebuildingmaterialssuchaswood,steelandcertainchemicalsusedin

paintproduction.Theconsequentialhighercostofbuildingconstructionhasaffectedthesupply

ofnewhouses in theRealEstate Industry,particularly in Lagos state,during theperiodunder

review.

Inspiteof these factors,ouropinion is thatrental rateswouldremainstable in lesspopulated

areasofthemaincommercialcitiesovertheshortterm. InLagosstate,webelieverentalrates

wouldincreasearoundthemoredevelopedareasonthemainland.


12/13

Drugcounterfeiting

is

aglobal

problem,

ema

nating from a poorly regulated distribution

system. InNigeria,themainsourcesofcoun

terfeitdrugsarethemultitudeofunregulated

drug markets in its major towns and cities.

According to the drug regulatory authority

National Agency for Food, Drug Administra

tion&Control(NAFDAC),illegaldrugmarkets

haveexistedsincethe1960sandhavegrown

innumberovertheyears.

In dismantling these markets, a holistic ap

proachhas

been

proposed

by

some

interna

tionalhealth institutions WorldHealthOr

ganisation (WHO), the United States Food &

DrugAgency (USFDA)and theUnitedStates

National Association of Boards of Pharmacy

(NABP) which entails among other meas

ures, the effective regulation of wholesale

drug distribution. In most developed and

emerging pharmaceutical (pharma) mar

kets,drugcounterfeitinghasbeenmoderately

stemmed by establishing a well structured

drugdistributionsystem.

Inlinewiththisglobalpractice,in2001,NAF

DACproposed theestablishmentofawhole

sale Zonal Drug distribution system, as a

major tool for restructuring thecurrentdrug

distribution system in the country. This

wholesale distribution system involves the

establishment of drug marts in the six geo

political zones in the country for localdistri

butionandexport.Thesedrugmartsaretobe

regulatedbyNAFDAC,theStandardOrganiza

tion of Nigeria (SON), the Pharmaceutical

CouncilofNigeria (PCN)andNationalExport

ProcessingZones

Authority

(NEPZA).

How

ever, thisproposeddistributionsystem isyet

tobeimplementedduetowhatwegatherto

be the huge setup costs associated with it

(amongstotherfactors).

Agusto & Co. believes the crux of an ideal

drugdistributionsystem isgovernment legis

lationon

the

registration

of

key

distributors.

It

is our belief that if the Federal Government

adopts the proposed Zonal Drug distribution

system, as well as enacts legislation on the

compulsory registration of major drug dis

tributors, it would lead to a decline in the

presence of counterfeit drugs. Upon review,

Agusto&Co.findstheproposed distribution

system well structured, though it would re

quire a significant amount of will, resources

andmanpowertoregulate. This inouropin

ion, shouldnotbeadeterrent,ashealthcare

touchesevery

citizen

and

is

one

of

the

most

important determinants of a countrys stan

dardofliving;

Our interpretation of NAFDACs proposed

zonal drug distribution system is that regis

teredwholesaledealerswouldhave the sole

righttotrade inpharmaceuticalproductsand

tooperatewithinthesixgeopoliticalzonesin

the country.We expect that thesewholesal

ers would be compelled to register the

downlinks pharmacies and drug stores in

theirsupply

chain,

thereby,

creating

adata

base of the entire drug distribution chain in

thecountry.Ontheotherhand,drug import

ers and manufacturers in the country would

also be compelled to directly supply the six

ZonalDrugMarts,NonGovernmentalOrgani

sations(NGOs),public&privatehospitalsand

owned pharmacies, thus reducing the prob

ability of adulterated drugs infiltrating the

supplychain.Furthermore,theissueofsupply

shortfallscreatingpossibilitiesofcounterfeit

ingwouldbe avoidedunder this zonaldrug

distribution

system,

given

the

wholesale

deal

erstightmonitoringoftheirdownlinks.

Inconclusion,shouldtheFederalGovernment

adopt the Drug Mart distribution system in

the short tomedium term,weexpecta cut

down insupplies to the illegaldrugsmarkets

and a sharp decline in the penetration of

adulterated drugs in the country. These

1212

Laying The Foundation For An Ideal Drug

Distribution System In Nigeria Agusto &

Cos Perspectives


13/13

shouldbeachieved through theunrelentingenforcementactivitiesofNAFDAC and theStates

TaskForcesonFakeDrugs.Consequently,theseshould increasethefortunesofbothmanufac

turingandimportingpharmaceuticalcompanies.It isourbeliefthatwithamoreefficientdistri

bution system and the recentWorldHealth Organization Good Manufacturing Practice (GMP)

certificationofmostpharmamanufacturingcompanies inNigeria,theIndustrywillbepoisedto

exceedthe

16%

average

sales

growth

recorded

between

2004

and

2008.

However,

industry

players stillhave tocontendwith theharshbusinessenvironment inNigeria,which remainsa

majoroffsettingfactortoperformance.Currently, thecostsofimportation(ofbothrawmateri

als& finisheddrugs),conversion (production)anddistribution remain relativelyhigher than in

otheremergingpharmamarkets inAfrica ultimatelymakingpharmacompanies inNigeria less

competitivethansomeoftheirregionalpeers.

1313

Agusto & Co. Limited

Agusto & Co. is the foremost credit

rating agency in Nigeria, specializing

in financial institutions, corporate

and

bond

ratings.

We

are

also

a

research organization providing

business information forour various

clients.

As business information service

providers, we publish industry re

ports containing unbiased expert

analysis of various industries in the

Nigerian Economy. We gather infor

mation about the market size and

potentialofan industry, itskeyplay

ers,competitors,

products

and

finan

cial condition amongst others. In

providing a broad overview of the

industry and its key players, our

analysts interpretdatacollectedand

assign each industry a risk rating,

taking into cognisance Nigerias risk

profile.

We also conduct client specific de

tailedresearch.

ThecopyrightofthisdocumentisreservedbyAgusto&Co.Limited.Nomattercontainedhereinmaybe

reproduced,duplicatedorcopiedbyanymeanswhatsoeverwithoutthepriorwrittenconsentofAgusto

&Co.

Limited.

Action

will

be

taken

against

companies

or

individuals

who

ignore

this

warning.

The

infor

mationcontained inthisdocumenthasbeenobtainedfrom sourceswhichweconsidertobereliable

butdonotguaranteeassuch. Theopinionsexpressedinthisdocumentdonotrepresentinvestmentor

otheradviceandshouldthereforenotbeconstruedassuch.

Thecirculationofthisdocumentisrestrictedtowhomithasbeenaddressed.Anyunauthorizeddisclo

sureoruseoftheinformationcontainedhereinisprohibited.

Disclaimer

Agusto & Co. Limited

UBAHouse(5thFloor),57Marina

Lagos

P.O. Box56136,Ikoyi

Tel:(234)126435715

Fax:(234)12643576

E-mail:[email protected]

Website:www.agusto.com

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