Nahco Plc 5-Year Review

ISSN 1597 - 8842 Vol. 1 No. 39

5 Year Review up to Q1 2010 Results Issued on June 14, 2010

Contents

NAHCo - Fast Facts 03

Recent Developments in the Company 05

The Operating Environment/ NAHCo’s Response 06 o Background o Market Structure o Recent Trends o Market SWOT o Market Realities o Market Outlook o Managing Change – The Value Paradigm

Fundamental Analysis 18

Technical Analysis 28

The Analyst’s Insight/Opinion 31

Appendix 34

ISSN 1597 - 8842 Vol. 1 No. 39

1. NAHCo - Fast Facts

NAHCo was incorporated as a Private Limited Liability Investment Summary Highlights Company on December 6th, 1979 under the then As at 11, June, 2010 Nahco Price 11.20 Nigerian Enterprises Promotions Decree, with Nigerian Price Traget/Fair Value N14.36 - N15.49 and foreign equity ownerships in the proportion of Ratings [email protected] 60% and 40% respectively. The Federal Airports YTD Performance 55.99% Authority of Nigeria ( FAAN ) represented the Nigerian Recommendation [email protected] ownership of 60% while four foreign airlines (Air France, British Airways, Lufthansa and Sabena - in Stock Data liquidation) owned the remaining 40%. 5- years EPS CAGR 18.06% Dividend Yield 4.02% PEG Ratio 0.47 The corporate vision of the firm is to be the Outstanding Shares 1,230,468,750 preferred aviation handling company, globally Free Float 80.28% competitive, adopting world class practises. 52-week high N14.85 52-week low N6.12 NAHCo commenced operations in 1979 simultaneously Lifetime High 70.05 with the opening of the Murtala Muhammed Market Cap(N) 13,781,250,000.00 Market Cap(US$) 92,059,118.24 International Airport . The firm’s main activities at the Year End December start revolved around the following four main Shares held by Directors activities: as at Feb 2010 242,605,556 1. Aircraft handling operations % share of total shares 20% 2. Passenger handling activities Investment Grade B 3. Ramp (baggage) handling Source: Company Financials/Proshare Research 4. Cargo handling services through its customs bonded warehouses and mail handling through the postal authorities.

The company’s privatisation took effect in August 2005 in response to the privatisation policy of the Federal Government of Nigeria. 60% of the Company's shares which were held by the Federal Airports Authority of Nigeria ( FAAN ) on behalf of the Federal Government were accordingly offered for sale to the public by the Bureau for Public Enterprises ( BPE ) at N5.50 per share through an Initial Public Offering. The 180 million ordinary shares were fully bought up.

The shares were officially listed on November 27th, 2006 on the Nigerian Stock Exchange ( NSE ) and have remained an actively traded stock till date; with over 83,500 individual shareholders, three foreign airlines and Rosehill Group Nigeria Limited. The current share ownership structure of the company is as follows:

Nigerian Public : 68% British Airways: 10.7% Rosehill Group Nigeria Ltd: 9.5% Lufthansa: 6.0%; and Air France: 5.8%

Since its privatization, NAHCo Aviance has developed processes and strategies to enable it compete locally and regionally; including forging global alliances through its membership of AVIANCE and The International Air Cargo Association ( TIACA ).

Nigerian Aviation Handling Company (NAHCo Aviance) renders the following main services to twenty-nine ( 29 ) out of the thirty-five ( 35 ) leading domestic and international airlines operating in Nigeria :

Passenger and baggage handling;

Cargo handling through its customs bonded warehouse and mail handling through postal authorities; and, Ramp and other ground handling services through the provision of ground support equipment.

NAHCo has over 1,550 employees stationed in its outstations in Abuja, Kano, Lagos and Port Harcourt.

NAHCo has won many local and international awards – the most recent being the International Star Award for Quality in Geneva, Switzerland and the West African Direct Marketing Award by the institute of Direct Marketing of Nigeria.

The company has equally been exploring regional opportunities (through the planned merger with Aviance Ghana – to service operations in Accra , Monrovia and Abidjan ) and is awaiting a board approval for its take off.

NAHCo is reputed to be the market leader (70%) in aviation ground handling services in Nigeria in terms of flights handled and revenue/balance sheet size. Specifically, Independent findings indicate that NAHCo’s operation advantage is as below:

International Operations - 90% share of market size Regional Operations - 40% share of market size Local Operations - 40% share of market size

The above data is further addressed in section three of the report under the operating environment.

The company’s board of directors comprising eleven members has Senator (Dr) Ike Omar Sanda Nwachukwu (CFR) - a 2008 nominee of Rosehill Limited - as the chairman. On May 27, 2010 , he succeeded Ambassador Patrick Dele Cole who voluntarily resigned as Chairman and was subsequently not re-elected by shareholders as a Director of the company.

The Management team comprising seven members is ably led by its Managing Director, Mr. Bates Sarki Sule (MD/CEO) who has been in charge and responsible for the transformation of the company since the privatisation exercise.

Proshare examined the volumes of data, information, analysis and records available directly and indirectly on the quoted firm to access the performance and investment implication in the company.

This report therefore represents our factual examination of data available to evaluate an investment decision in the company; and is presented in three sections – the fast facts and review, the analysis and the insight/opinion.

We encourage your feedback on the report for necessary review and update.

Thank you.

2. Recent Developments in the Company

NAHCo - Change in Directorate: NAHCo Plc recently effected a change in the company’s board composition with Senator (Dr) Ike Omar Sanda Nwachukwu as the new chairman of the company’s board to take over from Ambassador (Dr) Patrick Dele Cole who retired from the board with effect from May 27, 2010.

NAHCo – Financials and Corporate Action: NAHCo Plc released its FY’09 and Q1’10 results recently. Its FY’09 Turnover of N6.07bn led to a PAT of N1.25bn (YoY growth of 55%). However, its performance moderated in Q1 2010, for which it posted a Turnover of N1.52bn ( +5% YoY ) and PAT of N395.99 million ( -6% YoY ). Following the release of the Company’s FY’09 results, NAHCo declared a final cash dividend of N0.45 . In Q2 2009, it had paid an interim dividend of N0.25 and a scrip dividend of 1 for 4. The final dividend payment therefore brings its total cash payment to N0.70 (representing a 64% payout ratio ).

NAHCo – New Clients: NAHCo continued to expand the range of its contracts to some airline operators, while also taking on some new clients in the 2009 financial year. Specifically, it secured long term handling rights for Ethiopian Airlines , exclusive rights for Aero Contractors and Dana Air in all their stations and additional handling contracts with Delta Airlines and Egypt Air . More recently, the company was selected by the China Southern Airlines to provide a broad range of ground handling services.

NAHCo – N3bn Corporate Bond: The shareholders approved the issuance of a N3bn corporate bond or other capital instruments for the purposes of business development and expansion. The company's MD/CEO, Mr. Bates Sule said that “the new funds would be invested in boosting the company's business through acquisition of more brand new equipment, expansion and modernization of the cargo import shed in Lagos, expansion of the business into selected airports in Nigeria and some West African countries, as well as diversification.

NAHCO – Increase in Authorised Share Capital: NAHCo Plc has proposed an increase in its authorised share capital from N500m to N750m through the creation of additional 500 million ordinary shares of 50 kobo each .

NAHCO - Change in Corporate Logo: NAHCo Plc changed its corporate logo to NAHCOAVIANCE, a product of the company's membership of Aviation Alliance, the first global alliance of airport service providers in the world which was formed in 1999. NAHCo would still retain its registered name of Nigerian Aviation Handling Company Plc.

NAHCO - Proposed Share Reconstruction: NAHCo Plc is considering a possible capital reconstruction of its shares though which achieved a 9.33 YTD change (140610) and 3.97 (150610).

NAHCO – Appoints Executive Director and COO: The board of NAHCo Plc has announced the appointment of Mr. Kayode Ojo (February 15, 2010) as its Executive Director, Finance and Strategic Planning. Mr. Norbert Bielderman (May 17, 2010) as Chief Operating Officer with overall responsibility for the company’s aircraft and cargo handling operations. Ojo and Bielderman’s appointments are some of the strategic initiatives of the Board of the company to strengthen Management and re-position the company for the next stage of its growth and ascension. The former Chief Financial Officer, Mr. Tunde Balogun left the services of the firm in January 2010.

3. The Operating Environment/NAHCo’s Response

BACKGROUND 3.1 Industry Definition Cargo airlines (or airfreight carriers, and derivatives of these names) are airlines dedicated to the transport of cargo in its widest definition. The industry also consists of Agents who act as intermediaries between the air-freighters and customers and handlers who provide aviation logistics and necessary infrastructure.

3.2 Industry History The rise of international trade has fuelled continued growth for the global air cargo market. At the same time, the increasing emphasis on just-in-time delivery has added to the importance of managing this growth and improving service and delivery times.

3.3 Economic Relevance The air cargo industry is a US$50bn business that transports 35% of the value of goods traded internationally. It is a critical part of an airline’s value chain that supports 32 million jobs and US$3.5 trillion of economic activity. It is an important industry that is critical to global business.

With time-definite international transactions, production flexibility and speed characterizing much of the new economy, it is nearly certain that air cargo industry will continue to play an increasingly vital role in the global economy. No other means of transportation is better equipped to meet the economic realities of the new era where global sourcing and selling, and just-in-time logistics, require that producers receive and ship smaller quantities more frequently, quickly and reliably over long distances .

Global exports (by volume and value) have outpaced production volume which has, in turn, outpaced economic growth indicating a substantial restructuring of production and distribution mechanics. Air cargo has outpaced all, increasing by approximately 80 percent, over the last decade despite recessions and other setbacks to air transport. Scheduled air cargo service providing an estimated 4,396,353 tons of weekly air cargo capacity is available at over 3,400 airports in 220 countries. Charter and integrated express companies provide additional capacity.

3.4 MARKET STRUCTURE

The Nigerian air cargo industry can be categorized into three broad categories: Freighters, Agents (clearing and forwarding) and Handlers.

3.4.1. Air Cargo Freighters: These are companies dedicated to the transport of cargo. Air cargo can be categorized into three namely: • Express/time definite: small packages (less than 100 lb.); • Heavyweight freight shipments (greater than 100 lb.); and • Mail transport.

Players in this industry are mainly foreign companies and are usually classified into two: a) All-Cargo Airlines

Integrated Express Carriers (express/small packages; door to door service) Non-integrated Freight Carriers (heavyweight freight shipments; work with freight forwarders, etc.) Examples include Al Dawood and Allied Air

b) Passenger (Combination) Airlines: Can carry air freight, express packages and mail in passenger aircraft belly or on “combo” aircraft Also can have dedicated freight aircraft

The market is currently dominated by passenger airlines offering cargo services See the list of major players in the appendix 1 below .

3.4.2. Agents: Clearing and Forwarding agents” means any person who is engaged in providing any service, either directly or indirectly, concerned with the clearing and forwarding operations in any manner to any other person and includes a consignment agent. A clearing and forwarding agent normally undertakes the following activities: Receiving the goods from the factories or premises of the principal or his agents; Warehousing these goods; Receiving dispatch orders from the principal; Arranging dispatch of goods as per the directions of the principal by engaging transport on his own or through the authorized transporters of the principal; Maintaining records of the receipt and dispatch of goods and the stock available at the warehouse; Service Tax is payable on above services.

Freight forwarding is a service used by companies that deal in international or multi-national import and export. While the freight forwarder doesn't actually move the freight itself, it acts as an intermediary between the client and various transportation services.

An understanding of this sub-sector is vague at the moment as there are many undocumented aliens operating in the industry. Dedicated commissioned agents to the various air-freighters in Nigeria could be seen in the appendix 1 below.

3.4.3. Air Cargo Handlers : According to ICAO Doc. 9569c, air cargo handling operations can be described as the provision of logistics in facilitating the carriage of cargo by air . Export cargo by air forms an integral part of the cargo system. It is the process of acceptance, packaging documentation and shipment by air after due process of compliance with international statutory requirements.

The air cargo handling industry in Nigeria is a duopoly with only two companies dominating the market viz: Nigerian Aviation Handling Co. Plc. ( NAHCo Aviance ) and Skypower Handling Co. Ltd. ( SAHCOL ) owned by the SIFAX Group – concessionaires to the country’s sea ports and major players in the haulage business. Other fringe players include Precision Aviation Handling Co Ltd ( PAHCOL ), formed in 1999, now granted Government license to carry out ground handling services for flights in the Country starting from Lagos – to expand into Abuja, Kano, Port Harcourt, Kaduna, Owerri, and Calabar. NAHCo Aviance controls over 75% (as at December 2009) of the aviation ground

handling market in Nigeria, offering ground support services covering aircrafts handling, passenger/baggage handling, cargo handling and mail handling to a over 30 airlines.

3.5 RECENT TRENDS

Changes Imminent in the Business Model for Nigerian Ground Handling Business Operations:

In this era when airlines all over the world are concerned with cutting down on operating cost, it makes more economic sense to make use of GPU on ground than have the aircraft run its APU which consumes four times more fuel and encourage them to use larger aircrafts based on proper ground handling facilities at airports; The airlines are groaning under the yoke of high tariff regimes - landing/parking fees, airport taxes, handling charges, aeronautical charges etc.; The various agencies must look at ways of reducing these tariffs in the overall interest of aviation development in the country; and In the area of handling charges, the first thing to note is that there must be a dichotomy between charges for international airlines operators/flights and those carrying out domestic airlines operations/flights. This is of necessity because the workload involved in the handling of domestic flights is much less than that of international flights for the same category of aircraft and number of passengers; and Studies have shown that a reduction in handling tariff for Domestic flight by at least 20 - 25% is feasible to retain volume and market sustainability.

Rapid Growth in Demand for Air Cargo:

Intra-Asia is the largest true air freight market; Even during Asian economic crisis air freight traffic grew; and Forecasts for continued traffic growth at 6% per year

Falling Real Yields (revenue per ton-mile):

Average 2.5% decline in yields (CPI adjusted); Growth in international trade has increased trip length, associated with lower tariffs per mile; Wide-body aircraft have unused belly capacity, viewed by passenger airlines as virtually “costless”; Passenger airlines have become price leaders in air freight; Regulatory liberalization has spurred price competition; and Lower tariffs further stimulate demand, but also cause airlines to focus on lowering unit costs

Integrator Expansion:

Integrated express carriers own air and ground assets to handle entire shipment journey; FedEx and UPS , facing competition and decreasing yields in express documents, has now expanded to international markets;

With limited international small package growth, carry standard air freight (airport to airport) as “filler”; and Trying to develop products for higher-yield industrial traffic

Consolidation of Freight Forwarders:

Non-integrated carriers receive majority of traffic from freight forwarders – FFs handle retail marketing and pick-up/delivery; and Number of mid-sized freight forwarders has been shrinking, leaving largest operators and niche competitors

3.6 MARKET SWOT

CCCLIENTELE NAHCo enjoys the patronage of major international airlines operating in Nigeria including: British Airways, Air France,/KLM, Lufthansa, Virgin Atlantic, Virgin Nigeria, Emirates, Qatar, Turkish Airlines, South African Airline, Royal Air Maroc, Kenyan Airways, Ethiopian Airways, Dana Air, and Aero Contractors.

BBBUSINESS Passenger handling: this covers pre-flight check in formalities, passenger care services, and baggage handling ( loading and un loading) Cargo handling: import and export cargo facilitation through Nigeria biggest network of custom bonded warehouses in Lagos, Kano, and Port Harcourt, using the Hermes Computerization system which ensures safe storage and easy retrieval of cargoes. Aircraft Handling: Services include aircraft cleaning, baggage loading/unloading and aircraft pushback.

SSSTRENGTHS Membership of AVIANCE , the first global alliance of airport service providers in the world which was formed in 1999. NAHCo is the only Nigerian member of the Alliance; Benefits of Aviance membership include access to market intelligence, joint marketing, cross selling, common purchasing, pooling equipment, exchange of best practice, staff exchange, opportunities for joint venture, leverage to increase market share and enhanced branding; Market leadership – For now, NAHCo controls over 75 percent of the aviation ground handling market in Nigeria. It however has plans to provide ground handling services for China Southern Airlines, Egypt Air, Aero Contractor Airlines and Delta Air – possible expansion outlets; Easy access to capital. It is the only quoted company among the aviation handlers. Above norm corporate governance; Well trained and skilled staff who has benefited from the expansive capacity development programme embarked upon after the privatization; and Robust cash position.

WWWEAKNESSES Below the average return on asset; Below par service issues largely driven by inability to strategically adapt to challenges thrown up by FAAN; Declining Return on capital employed; Restricted market size and a relative slow response to growing diversification opportunities in the market scope; and Consistent high dividend payout ratio relative to its required asset replacement growth funding.

OOOPPORTUNITIES Along the value chain of the aviation cargo industry, a number of opportunities exist in the domestic market. This is as a result of the growing international and domestic trade and weak aviation infrastructure in the Nigerian airports. A study by McKinsey estimates that the 20% of manufactured goods that are traded internationally has a potential to rise to 80 % by 2020. Therefore, the air cargo industry is poised for continuing rapid growth at an expected rate of 5.9% annually for the next 20 years (according to recent estimates by Airbus ) and at 6.2% (according to analyses by Boeing ).

Locally, a study by Proshare reveals a re-convergence of the service delivery mantra with additional opportunities for related, ancillary and synergistic services adjudged by customers/consumers as value laden.

As with demand for passenger air travel, demand for air cargo shipment is a “derived” demand. Primary drivers of air cargo demand include:

1) Economic growth and trade (especially imports/exports) a) Economic recovery should be positively impacted by the massive stimulus packages passed by global economies – and even with the planned austere measures, should reveal a growing need to keep commerce alive as a competitive advantage. b) Historically, 2 to 2.5% increase in world trade with each 1% increase in total GDP c) Air freight trade has been growing even faster, due to regional differences in economic growth d) Since 1993, average 7-10% annual growth in world air freight traffic

2) Relative prices of air cargo versus alternatives – ocean, truck, rail

3) Globalization a) Increasingly integrated and interdependent national economies b) Liberalized (free) trade and reduced protectionism

4) Lean Inventory Strategies a) Reduced order-cycle times: “just in time” and “make to order” b) Less stock on hand to avoid production shutdowns, retail stock outs c) The inventory overhang has diminished and purchasing managers in industries around the major economies are saying they will increase orders, further boosting air freight. However, growth seems narrowly based at the moment.

5) Air freight shortens delivery times to customer

OTHER LOCAL VARIABLES Increased preference for air freight

Growth in trade: Nigeria is mainly a trading economy. Opportunity to merge freight and trucking at a cheaper cost for customers and at a faster delivery time, with proper insurance cover for necessary peace of mind.

RRRISKS 1) Economic recession: Reduced production, demand for goods, international trade 2) Trade barriers: Tariffs or protectionism designed to limit free trade 3) Aircraft regulations: Air cargo operators have used older aircraft that are most affected by new regulations on noise, emissions and safety. For example, noise hush-kits reduce cargo payloads 4) Modal competition: Air freight has tremendous speed advantage for long distances, but is highest- cost option Trucks very competitive for short haul (1000 miles, overnight) Development of new “fast ships” for ocean cargo

Other Threats: NAHCo’s Board - now altered in composition and dynamics; is now into a new era that it has no benefit of experience from – a central ownership and decision making apparatus that would challenge its corporate governance and general leadership. The change in Board Chairmanship may also witness a change in the CEO position (after the expiration of the renewable tenure of the current MD) which would further pull the company away from the 5years culture built to date. NAHCo’s leadership position in the market will benefit from being broken down from aggregates to sectoral distribution (3) to better appreciate where competition is and will affect its position in the industry. It is not uncommon for industry watchers to infer a threat to this leadership position with the entrance of new players particularly from the newly privatized SAHCOL – backed by a market-led knowledge of the key areas of diversification, strategic leveraging and energized growth through better relationship and consumer management backed by a sound asset build-up plan for capacity advantage. High operating cost will put pressure on margin. Vulnerable to policy reversal from the Federal Government Soaring price of aviation fuel and the lack of alternatives or effort by the Govt to either provide subsidy or reduce cost. Shortage of quality manpower – competitors will poach already trained staff and the time-to-convert employees for NAHCo will be elongated as it has very few succession lines within the company.

3.7 MARKET REALITIES

The aviation industry in Nigeria has undergone very significant changes overhaul in recent times following the unfortunate air disaster of 2005 and 2006 which has placed necessity on the government to place a closer watch on the industry through its stricter regulation of airline operators.

As a result of this, all airlines were forced to recapitalize by April 30th, 2007. Five airlines’ licenses were revoked as a result of their inability to recapitalize. A lot of key staff in government-owned aviation parastatals was either redeployed or sacked.

As a result of market opportunities in the country, many foreign airline operators have made entrance into the Nigerian market: Turkish airlines, Chinese Southern airlines, North American Airlines and a new domestic airline taking the industry by storm—Arik Air.

The global financial crisis has posed several challenges to the operators of the industry as such had led to dwindling turnover which has forced some airlines operators to resort to staff rationalisation and other cost cutting measures to remain in business.

The expected turnaround for the global aviation sector has been beset with new challenges thrown up by the global market downturn but this has not severely affected the Nigerian ground handling business which posted a 114% increase in volume of activities and an 86% increase in value of earnings .

We believe that a threshold has therefore been set below which, economic activities may not fall without dire consequences for other sectors and the Nigerian economy at large. This gives room for optimism for businesses in this industry and unless something catastrophic occurs, businesses in the sector should be able to define current operating positions as support levels – bottoms base metric.

The aviation sub-sector has begun the early phase of the changes needed in strategy, tactical operations and disclosures. These changes can be gleaned from the following market realities firms in the sub-sector must confront (in addition to those provided above):

The Airline support service industry, despite being a relative small market, is still highly competitive, regulated and with restrictive opportunities. Growth opportunities in the industry is highly influenced by developments in the airline industry which is facing reduced margins and costs not easily passed to customers but to outsourced operations. Competition in the industry will get tougher as global players expand their horizon to compete in local markets like ours as a size and scope strategy for their survival. The time has come to move beyond the cut-throat business model to a more demanding but sustainable model to create a game-changer for the company.

Noteworthy is the example provided by the fallout of the firms management approach to debts owed it by airlines – leading to a switch in service provider by the airline. A case in point is the 2007/08 debt of about N280m owed NAHCo by Arik Air which remains outstanding but led to the movement to SAHCOL after NAHCo refused to continue servicing the airline. The debt remains unpaid till date and ironically, Arik Air incurred over a billion naira debt with SAHCOL which the latter, under a new management has agreed to waived down considerably in reward for more business from its fast expanding growth in its regional business. Already, SAHCOL is the leader in the local operations segment of the market.

This debt status equally applies to Virgin Airlines as well as other operations in various degrees. We will take a look at the debtor position of NAHCo in the fundaments analysis section.

3.8 MARKET OUTLOOK

Short-term outlook is mixed, uncertain: Returns in Q1 2010 indicates a tightening of revenue growth;

The International Air Transport Association (IATA) says that it expects global air cargo volumes to increase by 7 %to 37.7 million tonnes in 2010; Economic slowdown, with less than 20-25% gains in 2009 over much weaker 2008 figures for the Asian markets; Total tonnage returning to 2000 levels, but yields are much lower; but continued economic weakness and threat of war globally will delay air cargo recovery

Longer term fundamentals support growth: China’s economy grew 7.8% in 1st half 2002, air cargo grew 14%; “Normal” growth rates of 6-7% worldwide possible by 2010 and Boeing predicts 6.4% annual air cargo growth for next 20 years; and locally Impact of N3bn bond investment in asset replacement and new growth areas should more or else guarantee returns relative to overall market size. Diversification will begin to show yield in 2012 thereon;

3.9 MANAGING CHANGE – THE VALUE PARADIGM

The market is uniquely poised to embrace a player with a leadership mindset focused on creating new value-linkages for customers at a lower cost of service than hitherto obtainable. Events in the recent times provide an insight into how to determine such firms.

Such firms will have to make capital investment and funding decisions in preparation for years ahead. This is expected to invariably impact on the results and returns permissible in the accounting year-ends in the future. Some factors worth considering for the investor in this sector include players’ response to the following:

The completion of the SAHCOL privatisation and the amount of investments being made by the new company to position it to compete – building of new bonded warehouses, investments in new capital assets, staff development initiatives including head hunting, the strategic impact of the synergy in the operations of the acquiring group – SIFAX; and the service delivery pedigree of its new MD/CEO; The options taken by Swissport, already with a licence, making its entry into the market by aligning with one of the majors to reduce its capacity building curve. Unregulated fringe operators who continue to grow and provide a ‘market’ for the coping with increasing cost of doing business and would welcome such ‘price under-cuts’. Declining activity and margins for ‘core customers’ leading to cost reduction measures which will be taken off firms providing outsourced services. Entrance of new players with global alliances, licensing of new players and possible mergers of existing competitors. Human resources challenges driven on two fronts by staff poaching and labour unrests. Service delivery issues as exemplified by the frequent shut downs in alternate electricity supply to the main shed at Ikeja, pilferages and collusion amongst agents and staff members; non-linkage in delivery service chain and other administrative limitations. Equipment replacement and funding issues. Restricted market space within traditional definitions.

NAHCo – A strategic engagement overview – The early years to date

National Aviation Handling Company’s deep and fundamental restructuring programme launched in April 2007 had four main pillars: simplify and right-size the business as well as re-skill and incentivise management and staff;

The first year was largely focussed on tackling inherited unresolved internal issues, disruptions and culture & capacity challenges arising from privatisation and business repositioning imperatives in the plan;

The company was able to deliver a good result in 2007 (N0.59bn, 16% of Turnover). The results were achieved based on a focus on cost reduction and a growth of revenue (-3.6% from target)/share of market; the company in the current financial year account under review further grew its turnover by 36.94%

The relentless rise of the oil price affected carriers in the industry in a year where the focus for NAHCO shifted to improving customer service & operational efficiency to cope with cost cutting/price cutting in the market;

NAHCO in 2008 achieved some landmark developments in operations that saw the company deliver a 21% increase in Turnover and 36% increase in PAT over 2007 results; much more growth has been recorded in the 2009 financial year with 55.92% and 55.35% growth recorded in Profit before tax and after tax respectively.

The year 2008 held out its own unique challenges and disruptions that threatened its going concern. These included sustained industrial disharmony, problems with government, cargo clearing agents, negative press, sabotage, and unattained milestones. In the year 2009, challenges in the area of fiancé could be noticed due to the trying periods the banks went and are still most probably going through.

The 2009 operational reality reflects an improvement in the internal conditions under which NAHCO functions. The disruptions of 2008 revealed the need for a deepening of the capacity of the company to play successfully at the leadership level it desires;

Externally, the company has been able to identify the variables it needs to manage in order to compete actively;

We expect the current board to sustain its focus in the areas of competitive advantage it has or seeks to play in to continue delivering business results showing a deliver a sustainable business.

Generally, the last five (5) years represent the glory years of the company and it is expected that this new initiatives should help it sustain the outlook.

3.10 NAHC O – THE BUSINESS EXPANSION DRIVE

Objective 1: Building and operation of cargo warehouses in Owerri, Asaba, Uyo and Ilorin. Timeframe: Q2 2010.

Objective 2: Handling of the proposed mid-west Airlines owned by the Imo State Government. Timeframe : Q1 2010

Objective 3: Regional collaboration through the provision of ground handling services in Monrovia, Sudan and Angola. Timeframe : Q2 2010

Objective 4: Partnership with Aviance Ghana . Timeframe: Q1 2010.

People (Passengers)

Our Cargo Business Airlines (Goods) Environment (Partner)

Airport (Service)

Source: NAHCo Corporate Business Plan 2010 and Beyond

NAHC O BUSINESS DIVERSIFICATION DRIVE

This should see to NAHCo emerging as a holding company to allow specific operations set out shop as Strategic Business Units (SBUs) to deliver on the key objectives in the growth and diversification plan 2010 - 2015.

From the little that has been gleaned from public pronouncements and activities observed, we believe the following signposts define the diversification thrust of the company.

Objective 1: Haulage business – creating a seamless engagement with and for the consumers – agents, end-users and transport firms, all working together to develop a competitive service. LONG OVERDUE.

Objective 2: Courier & door to door business in Lagos and Abuja. Due to have been flagged off and executed by the end of Q1 2010.

Objective 3: Executive Airport Facilitation Service (EXAFS). Due to have been flagged off and executed by the end of Q1 2010.

Objective 4: Aviation Security profiling. Due to have been flagged off and executed by the end of Q4 2009.

Objective 5: Baggage Tracing Services: Due to have been flagged off and executed by the end of Q4 2009.

Objective 6: Offshore cargo marketing. Due to have been flagged off and executed by the end of Q4 2009.

Objective 7: Printing and packaging. Due to have been flagged off and executed by the end of Q4 2009.

Objective 8 : Commercialisation of Training School. Due for flagging off and execution by the end of Q2 2010..

Objective 9: Aviation Insurance. Due to have been flagged off and executed by the end of Q3 2009.

NAHCo, we understand, will employ a combination of merger/acquisition of existing companies, outsourcing, and establishment of start-up (to be administered as strategic business units) in achieving the above objective.

NAHC O STRATEGIC OBJECTIVES /PERFORMANCE GOALS

Grow NAHCo’s portfolio to become one of the top three handling companies in Africa, by service quality, turnover and client base. Achieve turnover of N7.04B and N7.7B by the end of 2010 and 2011, respectively. Transform NAHCo into an employer of choice in the Nigeria aviation sector with highly professionalized, dedicated and efficient workforce. Create successful and viable subsidiaries to support NAHCo’s one-stop-shop aspiration as well as enhance its profit standing Create autonomous strategic business units (SBUs), who reports to the group CEO for effective management of subsidiaries Install an effective client relationship management system to foster cordial relationship with clients Put in place a transparent and effective people’s management as well as performance measurement systems, capable of attracting, retaining, motivating and rewarding quality staff. Achieve significant improvement in staff attitude to work in general and service delivery in particular. Minimum of 20% average and aggregate increase in all performance fundamental ratios and indices. Achieve significant expansion of existing cargo sheds and automate its processes and procedures with minimal human intervention. Achieve at least 85% equipment availability for all operations equipment demands

IMPERATIVES OF THE 2010 – 2011 CORPORATE BUSINESS PLAN The 2010 -2011 CBP will deliver the following three critical goals for NAHCo:

Articulate and oversee the actual implementation of NAHCo’s business expansion and diversification plans.

Provide definite response to the threat posed by competition as envisaged in the domestic ground handling market.

Continue to fine-tune procedures and process towards achieving better internal service delivery, client satisfaction, ‘error free handling’ in NAHCo’s core businesses and ultimately enhanced stakeholder value

SPECIFIC OBJECTIVES OF THE 2010 – 2011 PLAN

Nigeria Plc

4. Fundamental Analysis

The Objective: To examine in a snapshot, the bank's financials and operations, especially earnings, growth potential, assets, debt, management, products, and competition through financial ratios arrived at by studying the balance sheet and profit & loss account over a number of years. This analysis is more effective in fulfilling long – term growth objectives of shares, rather than their short – term price fluctuations. In the Nigerian Stock Market, this has traditionally been the key focus of most players and it remains a guiding beacon as to what could possible happen to a stock. Our approach to fundamental analysis therefore takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data, the former of which was reviewed in section 2 above and the latter, a subject for review in section 4 below.

BALANCE SHEET FOR THE PERIOD ENDED 31ST DECEMBER, 2009 GROUP 2009 GROUP 2008 Variance Description N' million N' million % Assets Employed Fixed Assets 3,450 3,143 9.77% Investments 0 0 0.00% Total Non-Current Assets 3,450 3,143 9.77% Current Assets Stocks 35 53 -33.96% Debtors and Prepayments 1,083 1,567 -30.89% Cash at bank and in hand 2,195 1,225 79.18% Total Current Assets 3,313 2,845 16.45% TOTAL ASSETS 6,763 5,988 12.94% Current Liabilities Bank Overdraft 0 0 #DIV/0! Creditors and accruals 925 1,057 -12.49% Taxation 460 215 113.95% Total Current Liabilities 1,385 1,272 8.88% Net Current Assets / (Laibilities) 1,928 1,573 22.57% Total Assets Less Current Liabilites 5,378 4,716 14.04% Non-Current Liabilities Deferred retirement benefits 0 0 Deferred tax -701 -499 40.48% Total Non-Current Liabilities -701 -499 40.48% Net Assets 4,677 4,217 10.91% Capital and Reserves Share capital 615 492 25.00% Share premium 1,915 1,915 0.00% Dividend reserve 554 541 2.40% Revenue reserves 1,593 1,269 25.53% Shareholders' Fund 4,677 4,217 10.91% Source: Proshare/Company Financials

PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED 31ST DECEMBER, 2009 GROUP 2009 GROUP 2008 Variance Income Statement (N'Million) N' million N' million % Turnover 6,067 4,430 36.95% Cost of operations -2,920 -2,397 21.82% Gross profit 3,147 2,033 54.80% Administrative Expenses -791 -639 23.79% Trading Profit 2,355 1,395 68.82% Other income 134 186 -27.96% EBITDA 2,489 1,581 57.43% Depreciation -514 -461 11.50% EBIT 1,975 1,119 76.50% Interest Payable & Similar Charges -223 -187 19.25% Interrest receivable & Similar incomes 146 199 -26.63% Exceptional items 0 85 -100.00% Profit Before Taxation 1,898 1,217 55.96% Taxation -650 -414 57.00% PAT 1,247 803 55.29% Proposed Dividend -800 -541 47.87% Retained profit/(loss) for the year 448 262 70.99% Source: Proshare/Company Financials

GENERAL COMMENTS AND OBSERVATION

Gross Earnings and Profitability: In the period under review, NAHCo Plc notwithstanding the challenging operating environment recorded turnover growth of +36.95% to close at N6.067 billion compared with N4.430 billion recorded in the preceding comparable period. The company recorded higher profitability growth of +55.29% to close at N1.247 billion compared with N803 million recorded in the preceding period.

Close observation of the figures in the last six financial years showed that since the company recovered from the downturns in both the turnover and profitability of 2006 financial year, the trends in the two indices has been on the increase. There seems to be an overriding influence of turnover growth on the operating costs of the company which in way aided its ability to grow profit.

This is evident in the relationship between operating costs and turnover in the period under review; operating cost to turnover assumed declining trend in the last two financial years.

2005

Operating Cost and Operating Profit Trend : In the last five financial years, Nigerian Aviation Handling Company Plc operating income growth has been at a higher rate above the operating expense trend, suggesting improved operational efficiency. The only year when the company recorded slack in operational efficiency was in 2006 when the growth in costs was above that of the income.

Financial Efficiency : The Company’s overall financial efficiency measured by cost to income ratio showed consistent improvement in the last six financial years as the cost to income continues to post declines to date. A company that is able to generate higher returns through reduced costs shows indications of more robust earnings to the investors. The impact of the company’s financial efficiency is also seen in the growth recorded in its earnings per shares in the year under review.

Investment in Assets : There was trend of consistent growth in the company’s assets in the last five financial years to date. However, close comparison of classes of assets showed that huge investment in the company’s assets were in the non-fixed (non- tangible assets). This in our opinion does not support the company’s claims of expansionary drive which we think should reflect more in huge investment in tangible assets.

THE FINANCIALS REVIEWED

Turnover Trend

NAHCO in the last six financial years has consistently maintained turnover growth improved on its turnover over the past five years. The company recorded a 5-year compounded annual growth rate (CAGR) of 20.16% in turnover from N2.34 bn in 2004 to N6.067 bn in 2009. The most impressive turnover growth was recorded in the 2009 financial year with 36.94% growth to surpass the previous highest growth of 30.16% recorded in 2005.

NAHCO Cargo Handling segment contributed 78% to revenue growth in the year up by 55.56% to overall turnover from 47.31% contribution recorded last year. The company has obviously invested heavily in its cargo business capacity but needs to start thinking of diversifying the revenue base.

Profitability Trend

The company’s has recorded positive growth in its profitability in the last six financial years. Besides the 326.55% unusual profitability growth recorded in 2005, the company has maintained consistent moderate profitability growth in the last four financial years with 2009 financial year been the highest growth. Higher growth in profits been commensurate with growth in turnover could be indications of prudent cost management. . Profit before tax grew faster at 55.92% up from 54.84% in the previous year.

Profit Margins

The profitability margins which measure the portion of turnover attributable to the profit has been on the consistent growth in the last six financial years. This applies to profit before tax and profit after tax margins. This in our own opinion is encouraging and should be sustained the more by the management as companies with robust profit margin show indications of making more returns from its sales.

Return or Equity and Return on Assets

Nacho’s earnings performance, as measured by the returns on average assets and returns on average equity in the year under review resumed upbeat in the year under review .

While Return on Assets sustained its upbeat without a break, Return on Equity recovered from decline to 19.04% to close at 26.67% as at 31 st December 2009. This shows that earnings derived from both the assets and shareholders’ fund were on the positive note, and indications of profitable usage of both the assets and investors’ fund in the business. The Management should see the necessity of raising the profile of ROE in the coming years.

Assets Management and Efficiency

The both fixed assets turnover ratio and current assets turnover ratio recorded decline of different rate in the year under review when compared with the preceding year’s figures. Current assets turnover and fixed assets turnover closed at 54.62% and 56.87% of the total sales for the year respectively compared with 64.22% and 70.95% recorded in the previous year in that order. This trend shows that the assets were not put to more optimal use to generate sales in the period - a case of assets under-utilisation. This trend should be reversed to much more positive outlook.

Operational Efficiency The OE ratio measures the relationship between operations cost and operation income - a gauge of efficiency in business operations. In the last two financial years to date, NAHCo Plc recorded consistent improvement in its operational efficiency as the operations costs to operating income in the period maintained southward trend. This shows that operating costs were generating much more that its commensurate burden. This trend should be maintained and even improved as such contributes to leverage for improvement in the company’s profitability.

Also, the evidence of such could be seen in the relationship between operating income and the aggregate turnover; the trend was on consistent upward trend till 2008 financial year when it declined to 79.37% from 80.19% recorded in 2007. It however closed on a positive note in the year under review at 80.69%.

Liquidity and Solvency

Liquidity and solvency trend of NAHCo Plc in four financial years to 2007 were below average as the trend in the period showed that the company might be having challenges in meeting its short term obligations; the current liabilities in the period posted higher figures when compared with current assets.

However, in the last two financial years, there were improvements in both current ratio and quick (Acid Test) ratios. In our opinion, the Management should maintain the trend and improve more on it - since sufficient liquidity would guaranty sustenance of business operations.

The company long-term debt seemed to have increased in the year under review as its total debt–asset ratio spiked marginally to 30.84% in the year under review from 29.58% recorded in the preceding year. In the same vein total–debt-to-equity ratio rose from 42.01% to 44.60% in 2009.

Trade Debtors

Debtors Analysis 2009 2008 Trade Debtors 632,793,000 748,975,000 Prepayment and Accrued Income 58,836,000 46,464,000 Staff and Other Debtors 118,407,000 159,094,000 Deposit for fixed assets 17,353,000 395,146,000 Withholding Tax recoverable 255,880,000 217,382,000 Total 1,083,269,000 1,567,061,000 Sales 6,066,549,000 4,430,035,000 0.104308562 0.169067513 Average Collection Period 38.07 61.71

The table above shows the NAHCo debtors’ items as collated from the company’s financials. In the year under review, trade debtors declined by 15.51% to close at N632.793 million compared with N748.795 million recorded in the preceding year comparable period. The figure represented 10.43% of the total turnover for the financial year compared 16.91% of the same rate recorded in the preceding year.

This may be indications of improvement in the credit management of the company as shown by decline in the debt average collection period from 61.71 days recorded last year to as low as 38.07 days.

It may however, for a credit based business, reflect a declining business from the big debtors who may move to other players to weather the financial challenges. This aspect of the debtors balance requires further work/break-down to properly understand the nature, timing and recoverability of these debts.

FINANCIAL RESULTS FOR Q1 2010 – YTD to MARCH 31 ST 2010

FIRST QUARTER REPORT FOR THE PERIOD ENDED MARCH-10 Income Statement GROUP 2010 GROUP 2009 Variance (N'Million) N' million N' million % Turnover 1,518 1,449 4.91% Profit Before Tax 582.35 617.08 -5.63% Taxation -186.35 -197.47 -5.63% Profit After Tax 396 419.61 -5.63% Q1 2010 Balance SHEET GROUP 2010 GROUP 2009 Variance N' million N' million % Fixed Assets 3,926 3,449 13.83% Stocks 58 35 63.62% Trade Debtors 1,291 1,083 19.21% Cash and Bank Balances 1,987 2,194 -9.43% Trade Creditors 842 925 -8.98% Other Credit Balances 1,347 1,161 16.02% Working Capital 1,847 1,927 -4.15% Net Assets 5,072 4,676 8.47% Source: Company Financials

First Quarter Results

Comparing the Q1 2010 results with the preceding year comparable period - Q1 2009, Nahco Plc recorded marginal turnover growth of 4.91% to close at N1.518 billion compared with N1.449 billion. This seems to be below expectation performance and perhaps an indicator of a slow start to the year or reflection of business conditions suggesting no growth in market.

The unimpressive performance of turnover reflected in the Company’s profitability trend as profit after tax declined marginally by 5.63% to close at N396 million compared with N419.61 million recorded in the preceding year comparable period. This consequently led to decline in both the PBT and PAT Margins to 38.36% and 26.09% respectively in Q1’10 lower than 42.63% and 28.99% in Q1’09 respectively. NAHCo’s EPS based on its Q1’10 results stands at N0.32, using 1.230 billion unit shares in issue.

Estimates 2007A 2008A 2009A 2010E 2011E Naira EPS 0.79 0.82 1.01 1.09 1.37 EPS Change (YOY) -45.64% 3.69% 24.28% 7.16% 26.27% Dividend Payment (DPS) 0.30 0.55 0.70 0.65 0.82 Payout ratio 38.14% 67.43% 64.12% 60.00% 60.00%

Valuation 2007A 2008A 2009A 2010E 2011E P/E 34.96 14.21 7.08 10.56 8.36 P/Book 12.13 2.71 1.89 2.71 2.40 Dividend Yield 1.09% 4.75% 9.75% 5.68% 7.18% Source: Company Financials/Vetiva Research

NAHCo Plc - Corporate Actions Profile Bonus: Dividend: Declared: 1 for 4 in 2009-08-14 Declared: 0.45 in 2010-05-18 Declared: 1 for 8 in 2008-04-30 Declared: 0.25 in 2009-08-14 Declared: 1 for 8 in 2008-04-30 Declared: 0.55 in 2009-04-27 Declared: 3 for 2 in 2007-05-16 Declared: 0.3 in 2008-04-30 Declared: 3 for 2 in 2007-05-16 Declared: 0.3 in 2007-05-16 Declared: 0.3 in 2006-11-29 Source: Company Financials/Proshare Research

5. Technical Analysis

The Objective: To review the stock valuation by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future ( usually short-term ) market trends. Unlike fundamental analysis, the intrinsic value of the stock is not part of the consideration here. More and more investors are beginning to appreciate and rely on technical analysis in reviewing stocks on the Nigerian Stock Exchange because of the proven fact that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, technical analysis are market timed based and predicated on the belief that technical analysis can be applied just as easily to the market as a whole as to an individual stock.

MOST RECENT STOCK PERFORMANCE OF NAHC O PLC SHARES

NAHCo Plc’s share price in the last sixteen months to June 11th, 2010 recorded marginal growth of +0.45% to close at N11.20 from N11.15 it closed at the end of January 2 nd , 2009 trading session. This performance when juxtaposed with the realities of the overall market performance shows that the company’s stock is one of the least performing stocks on the NSE at this time .

The overall market performance measured by the ASI recorded -18.93% in the last sixteen months from 31.357.24 it closed on 2 nd January, 2009 to close at 25,422.79 on the 11 th June, 2010. The performance though in the positive of 0.45% was minute, when compared with appreciations recorded in some other stocks in the period, yet above the negative performance of the entire market (ASI). The stock closed far behind so many other stocks in the market.

In the year 2009 alone, the share price of the company closed with -35.61% depreciations, compared with -33.80% depreciations recorded in the entire market in the period . This negative performance indicates an overbearing influence of bears in the stocks, even beyond the overall negative market performance in the period.

A closer observation of the stock price trend showed that between August 14 th 2009 when the crisis in the banking sector hit the market; NAHCo Plc’s share price shed a sizeable -23.62%; yet it was able to record a year to date appreciation of +55.99% from N7.18 it closed as at 4th January, 2010 to close at N11.20 on 11 th June, 2010. This was above the +31% sector average appreciations for the same period, a ration impacted by the lower performance recorded by Air Service Plc.

The trend indicates that NAHCo’s price movement places it as one of the top performing stocks both in the sector and the entire market, a reverse of the 2009 price trend recorded.

THE ASI AND NAHC O PLC

The All-Share Index and Nahco Plc share price are moving almost in the same direction. In the year 2009 alone, the share price of the stock closed on -35.61% depreciation compared with the lower depreciation of -33.80% recorded in the entire market in the period.

In the year 2010, Nacho Plc share price appreciated by +55.99% to outperform the market which recorded +22% appreciations for the All-Share Index.

As illustrated from the graph below, the NAHCo Plc share price now trades below its 20 days, 50 days moving averages which closed at N11.94 and N12.58 while it trades above its 200 day moving average of N9.17 as at 11 th June, 2010. The stock resumed trading above its 200 day moving average on March 3 rd , 2010 and has since maintained the trend to date.

Technically, with the NAHCo Plc shares trading above its 200 days moving average, a bullish outlook can be inferred, one that appears sustainable based on the forecast performance figures in section 4 above.

People (Passengers)

Our Cargo Business Airlines (Goods) Environment (Partner)

Airport (Service)

6. The Analyst’s Insight

Nigerian Aviation Handling Company (NAHCo) Plc’s performance over the last five years, since privatisation, has been commendable with year-on-year relative growth metrics that provided some relief to its numerous shareholders. This is all the more significant when the performance is juxtaposed against other companies in the market who continue to be challenged by profitability and real growth issues.

The Sule Bates led management and board of directors have provided a success story of a privatised firm that must now begin to think about sustainable growth in top line revenue streams to match its ambitions.

Why is this important? The NAHCo Plc success so far has been a based on its ability to read very quickly market trends and opportunities. It will have to respond to the 2010 and beyond challenges in the same breadth but with an understanding that the business model has been significantly altered by the restricted market size and caps on revenue earnings relative to the airline industry’s fortunes/buoyancy.

This is evident in: the reality of the Q1 2010 performance and the need to sustain forecast; the realisation that the company will have to deal with the twin impact of an alternate service quality offering to consumers (or competition not defined by size and scope but by the critical service offerings available to increasingly discerning clients in areas including non-traditional airline businesses) and the reduction in the time it would take for new initiatives to start contributing to turnover metrics; the ability to manage change at the board and management levels and the relative settling down to positively impact the performance of the company in 2010 and beyond; the realisation that access to cheaper sources of funding i.e. equity market may not be there to finance the much needed asset replacement needs of the company; leading to a resort to borrowing – a new learning curve for the company.

We see the management of three key issues as significant in delivering sustainable profitability for the company – its dividend policy, operating cost control and asset replacement and investment decisions.

The Dividend Policy The 45k final dividend with 25k interim dividends to make an aggregate of 70k dividend per share is commendable. This we believe will raise the profile of the company in the market. Moreover, the fact that the company still maintain its 2.230 billion shares in issue is a welcome development, a form of leverages for higher returns in the coming years, all things being equal.

The path of caution adopted by the company in resisting the urge to tow the generic line by indulging in the issuance of float-bloating scrip issue to investors/shareholders is in our opinion a positive attribute.

Yet, one must acknowledge that with the planned bond issue of N3bn to N5bn planned by the company, the board and management who has built up a long dividend history would apparently view dividend reduction or omissions as particularly unattractive, perhaps because it would signpost them as the managers under whose tenure and policies generated insufficient cash to pay dividends. If we follow this assumption, it will be wise to assume that NAHCo may opt for a retention of its high dividend payout policy which, it appears, will hurt it as it deals with debt covenants – a step in itself that could have been reduced by years of prudence in managing the fine line between

dividend payouts and profit retention for asset replacement purposes – a major driver and outlay for the bond sourced.

Some form of dividend reductions may seem imminent and strategic in the light of this reality – unless of course, the firm is able to step up its revenue generation capacity based on current levels of operations. This is the first test for the new board of directors.

Beyond Repairs & Maintenance: Assets Replacement and Investment Funding The impression of more investment in fixed assets as a means of business expansions has been created above, and rightly so, as management has touted this as the strategic imperative of 2010 and beyond. To deliver on this, a significant investment needs to be made and funded – quite unlike what has been done in the five (5) years past. We are of the view that investments in this regards seem to be below expectations. In the company’s value added allocations in the period under review, only 11% of the total value added were expended on business development and expansions .

Informed minds agree that most of NAHCo’s equipments are either too old to deliver the efficient and effective service desired leading to service disruptions. The direct causes are – the age of the old equipments and the attendant increase in repairs and maintenance cost – use of obsolete equipments; over use of the equipments which in turn stretch man hours per day outside the recommendations of the equipment manufacturers; purchase of ‘used-equipments’ as a cost saving measure – a shot-in-the-foot approach; intermittent breakdown of new equipments due to over use – resulting from poor contingency planning; and a higher than average rate of accidents coupled with a finance-challenged maintenance culture.

Generally, the planned bond offer therefore must be used to leverage the potential of the firm based on identifiable investments in equipments, replacement of aged machinery and assets for new business ventures.

Prudent Cost Management The management of the company will do well to maintain the present prudent cost management stance which has resulted in improving efficiency ratio both at the operations level and the overall cost levels. Improved cost efficiency serves as a relief of sort and leverage for improved profitability. This in our opinion will contribute to sustaining the profit-cost metric of the company.

OTHER INVESTMENT RISKS

The business model’s dependency on strict aviation sector buoyancy: The aviation ground handling business is easily impacted by vagaries in the world economy just as it is heavily slowed down by lack of access to local funding support. This always presents a low load factor on flights with subsequent drop in frequencies. As the airlines go so does the ground handling business. NAHCo Plc must therefore contain this risk by accelerating its diversification plan into non-airline related ventures like haulage, mail handling, Diaspora cargo services, consultancy services, Aviance Ghana, executive passenger services, courier services and loyalty programmes it has planned.

Economic and Service Factors: The likelihood of accidents, disruptions to operations owing to power outages and failed generating power to the Lagos shed, stretching the man hours per day, new equipments breakdown due to overuse, air crashes, load factors, airport closures due to strikes or political upheaval, increase in crude oil prices and acts of god; will surely have an impact on the company’s earnings forecast.

Regulatory oversight and Political Factors: The NCAA is prone to knee-jerk reactions and may put in place a rule that will impact negatively airlines and/or ground handling companies like NAHCo. The NCAA is largely dependent on the government for financing and direction; the government may instil policies that work against the ground handling companies such as allowing conditions that make it easy for airlines and other players to challenge key business interests of NAHCo.

Overdependence on Lagos Airport: NAHCo’s operations (passenger traffic, flights, mail handling and cargo) are over 85% based on activity at the Lagos Airport. The vulnerability of its prime revenue contributor – cargo handling – in a Lagos airport beset with poor and near abysmal service quality, airport closures due to repairs, aviation fuel issues and other unforeseen events expected from an airport way past due for a major overhaul. These events will likely reduce NAHCo’s earnings significantly if it causes reduction in flights or outright closure of the airport. This is a reality that will happen one day and NAHCo needs to factor this into its business projections. In response to this over-dependence (driven by the reality of air traffic and cargo transportation destinations which skews the usage of airports to few airports in the country); NAHCO has take steps to expand to other domestic airports. This can only be a worthwhile move if the expansion goals also include new businesses.

VALUATION

Discounted Cash Flow (DCF) method of valuation is one of the valuation methods employed in arriving at NAHCo intrinsic value. Using a five-year scenario analysis with forecast free cash flows, we arrived at intrinsic value of N11.81 with Discount rate of 17% and terminal growth rate of 8%. Using the dividend discount valuation model, with projected dividend per share of 76k, we arrived at intrinsic value of N14.36.

PE ratio multiples valuation model generated an intrinsic value of N14.53 with our forward EPS and PE ratio of N1.12 and 13 respectively. In using this valuation method, our projected profit after tax of N1.375 billion arrived at was based on the view that the company will grow its returns in the remaining period in the year; otherwise our projected PAT would have been N1.17 billion due to the fact that the profitability trend recorded in the first quarter (2010) showed a downside.

Using EPS growth rate valuation method, we arrived at five year compounded annual EPS growth rate of 23% with projected EPS of N2.85 in five years time; this gives fair value of N21.26.

Therefore, combining the four valuation models gives average of N15.49. We are of the opinion that the share price of NAHCo Plc under normal market condition should trade between N14.36 and N15.49 . The use of multiple approaches to generate our fair value estimate helps us to avoid model bias and maintenance research which becomes more likely when one valuation approach is used to determine fair value of a firm.

Appendix 1: Aviation Cargo Freighters and Agents in Nigeria

ABSA Cargo Airline (M3/TUS/549) Website: www.absacargo.com.br/en/Charter.asp General Sales Agents: Cavok Aviation Services Ltd

AeroVis (VIZ) Cargo Handling Agents: Interair Flight Support Services Ltd General Sales Agents: Interair Flight Support Services Ltd

Africa West (FK/WTA/858) Cargo Handling Agents: 3Q Aviation Nigeria Ltd General Sales Agents: Base

Air France (AF/AFR/057) Website: www.airfrance.com/cargo General Sales Agents: SAY

Al Dawood (LIE) Lagos , 41/43 Bombay Crescent, Apapa, Lagos Tel: +234 (0)1 473 1236, +234 (0)1 545 2356, +234 (0)1 775 4567 email: [email protected] Website: www.aldawoodgroup.com Freighter Fleet: 1x DC-8-63F

Allied Air (AJK) Lagos , 2nd Floor, Murtala Mohammed Airport, Ikeja, Lagos Tel: +234 (0)1 493 2430, +234 (0)1 493 0852, +234 (0)1 470 3001 Fax: +234 (0)1 493 2431 email: [email protected] Freighter Fleet: 3x B727-200, 1x DC-10-30 Hubs: Lagos Network: Accra, Kotoka; Entebbe; Freetown; Malabo; Monrovia, Roberts; Ostend Branch Offices - Kano , Mallam Aminu Kano International Airport, Kano Tel: +234 (0)64 636 564 Fax: +234 (0)803 328 5911 email: [email protected] Port Harcourt , Port Harcourt International Airport, Port Harcourt, Rivers State Tel: +234 (0)8 423 1922

Aviacon Zitotrans Website: www.aviacon.ru Cargo Handling Agents: Cavok Aviation Services Ltd General Sales Agents: Cavok Aviation Services Ltd

Avient Aviation (Z3/SMJ/757) Cargo Handling Agents: Base General Sales Agents: Base, Mercy Express Freight Nigeria Ltd

Azal Avia Cargo (J2/AHC) General Sales Agents: Interair Flight Support Services Ltd

Bellview Airlines (B3/BLV/208) Lagos , Bellview Plaza, 66B Opebi Road, PMB 21766, Ikeja, Lagos Tel: +234 (0)1 270 2700/1, +234 (0)1 493 1731/5 Fax: +234 (0)1 270 7936

email: [email protected] Website: www.flybellviewair.com President/CEO Kayode Odukoya Finance Director/Manager Mr Sobande Operations Director/Manager Capt Chimara Imediegwa Commercial Director/Manager Gabriel Olowolajuogbon Marketing Director/Manager Dido Olufemi Cargo Director/Manager Mr Ezeagu Charter Director/Manager Gabriel Olowolajuogbon Chief Route Planner Samson Fatokun Executive Director: Gabriel O Olowolajuogbon Branch Offices - Abuja , Abuja International Airport, Abuja Tel: +234 (0)9 810 0089 Fax: +234 (0)9 810 0088 email: [email protected]

Bright Aviation Services (BRW) Website: www.brightaviation.om Cargo Handling Agents: Easthern Aviation Service Nigeria Ltd General Sales Agents: Easthern Aviation Services Nig Ltd

British Airways (BA/BAW/125) Website: www.baworldcargo.com General Sales Agents: SAY

Cargo Air (11/VEA) Cargo Handling Agents: Cavok Aviation Services Ltd , TS International Services Ltd General Sales Agents: Cavok Aviation Services Ltd

Cargo Plus Aviation (8L/CGP) Cargo Sales Agents: CFS Aviation Logistics Services Ltd

Chanchangi Airlines (3U/NCH) Kaduna , Plot A 5/6 Kachia Road, Kaduna South, 8200001 Tel: +234 (0)703 533 1135 email: [email protected] Website: www.chanchangi.com

Emirates SkyCargo (EK/UAE/176) Lagos , Room 116, NAHCO Complex Building, M/M Int´l Airport, Ikeja, Lagos Tel: +234 (0)1 774 9641 Mobile: +234 (0)805 501 7000 Website: www.skycargo.com Cargo Controller: Donald Enitan Adekunle

Ethiopian Airlines (ET/ETH/071) Lagos , PO Box 1602, Lagos Lagos , 3, Idowu Taylor Street VI, Lagos Tel: +234 (0)1 263 7655, +234 (0)1 263 2690 Fax: +234 (0)1 263 4550 email: [email protected] Website: www.flyethiopian.com or www.ethiopianairlines.com SITA: LOSSSET Area Manager: Mr Esayas W Hailu General Sales Agents: SAY Branch Offices - Lagos Airport , PO Box 4563, Murtala Mohammed Airport, Lagos Tel: +234 (0)1 774 4710

email: [email protected] SITA: LOSKKER

Kenya Airways (KQ/KQA/706) General Sales Agents: SAY

KLM Cargo (KL/KLM/074) Website: www.klmcargo.com Cargo Handling Agents: Airfreight General Sales Agents: SAY

LAN Cargo (UC/LCO/145) Cargo Handling Agents: Cavok Aviation Services Ltd General Sales Agents: Cavok Aviation Services Ltd

Lufthansa Cargo (LH/GEC/020) Website: www.lufthansa-cargo.com General Sales Agents: SAY

Northwest Air Services (NWD) Kano , PO Box 4160, Kano Kano , Room 13 Nacho Shed Complex, Kano International Airport, Kano Tel: +234 (0)80 3327 9688 Fax: +234 (0)80 3327 9688 email: [email protected] or [email protected] SITA: KANTAXH President/CEO Ambrose Foy Managing Director/VP Ambrose Foy Finance Director/Manager Mathew Ityo Operations Director/Manager Samuel Abioye Cargo Handling Agents: Northwest Branch Offices - Ikeja , PO Box 4160, Kano Tel: +234 (0)80 3327 9688 email: [email protected] or [email protected] SITA: KANTAXH Executive Operations Officer: Samuel Abioye

Orex Airlines (ORX/720) email: [email protected]

Phoenix Airlines (PHN) General Sales Agents: Cavok Aviation Services Ltd

Russian Sky Airlines (P7/ESL/215) Cargo Sales Agents: Easthern Aviation Services Nig Ltd

Safair (FA/SFR/640) Website: www.safair.co.za General Sales Agents: Interair Flight Support Services Ltd

South African Airways Cargo (SA/SAA/083) General Sales Agents: CFS Aviation Logistics Services Ltd , Jl Focus Aviation Services Ltd , SAY Mighty Nigeria Ltd

Turkish Airlines (TK/THY/235) Website: www.turkishairlines.com or www.thy.com General Sales Agents: SAY

United Arabian Airlines (UAB) Cargo Sales Agents: CFS Aviation Logistics Services Ltd

Virgin Atlantic Cargo (VS/VIR/932) Lagos , C/O ACP Nigeria, Etiebets Place, 21 Mobolaji Bank, Anthony Way, Ikeja, Lagos Tel: +234 (0)8 033 462 179 Fax: +234 (0)1 271 7712 email: [email protected] Website: www.virgin.com/cargo Head of Cargo: Sylvester Henry General Sales Agents: ACP Worldwide

Virgin Nigeria Airways (VK/VGN/786) Lagos Airport , Etiebets Place, 21 Mobolaji Bank Anthony Way, Ikeja, Lagos Tel: +234 (0)1 271 111 Fax: +234 (0)703 494 7786 email: [email protected] Website: www.virginnigeria.com Cargo Director/Manager Sylvester Henry Commercial Manager: Sale M Pashi

Volare (F7/VRE) Website: www.volare.kiev.ua Cargo Sales Agents: Interair Flight Support Services Ltd

Volga-Dnepr Airlines (VI/VDA/412) Website: www.vda.ru Cargo Sales Agents: Interair Flight Support Services Ltd

Appendix 2: Aviation Handlers and Their Clientele in Nigeria

Appendix 3: REFERENCES/ACKNOWLEDGMENTS Financial analysis and data assembled and dissected by Reshu BAGGA and Gbemiga ADEYEMO – Proshare Analyst Services Vetiva Research Analysis for Q1 2010 Corporate Research work on airline industries by FDC Limited commissioned by Proshare Other information from CSL Securities, NAHCo public presentations and financials, NSE data, FSDH reviews and Daily market monitoring analysis by proshare NI Authored by Olufemi AWOYEMI, FCA – CEO of Proshare.

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