Monthly Highlights: April 2015

•  West African equity markets recorded gains amid continued strength in Nigeria
•  East African equity markets were broadly weaker as Kenya, Uganda and Mauritius each contributed negatively on the month
•  North African equities declined as weakness in Egypt and Morocco offset strength in Tunisia
•  Southern African equities exhibited mixed performance in April
 

West African equity markets recorded gains amid continued strength in Nigeria

West African equity markets recorded gains amid continued strength in Nigeria. The reporting season is in full swing as we digested 1Q15 results for a number of our portfolio holdings. In the financial sector, GTB reported strong 1Q15 performance (GE: +16.9% y/y; PAT: +14.9% y/y) as non–funded and net interest income grew by +26.2% and +12.7% respectively on the year. Zenith Bank also posted decent 1Q15 results (GE: +20.1% y/y; PAT +16.9% y/y) as a +39.5% increase in non-interest income offset the -7.1% decline in net interest income. ETI posted impressive 1Q15 numbers (GE: +21.4% y/y; PAT: +64% y/y) on back of improved operational efficiency as the bank’s cost-to-income ratio has fallen from 69% in 1Q14 to 63% in 1Q15. In contrast, Stanbic IBTC posted weak 1Q15 results (GE: +11.6% y/y; PAT: -38.9% y/y) as a +70.3% rise in interest expense weighed on net-interest income as a result of an unexpected +229.8% spike in provisions. Diamond Bank also posted unimpressive 1Q15 results (GE: +5.3% y/y; PAT -15.1% y/y) as operating expenses rose by +4.3% and the bank revealed a 30% increase in the impairment charge on its loan book.  Shifting to the consumer sector, Unilever reported weak 1Q15 results (T/O: +7.8% y/y; PAT -21.3% y/y) as higher finance costs weighed on PBT margin (down -399bp to 33.9%) despite growth in sales. UACN also reported lackluster 1Q15 results (T/O: -10.9% y/y; PAT -15.1% y/y) although improved operational efficiency resulted in a +168bp expansion in operating margins. Nigerian Breweries reported flat 1Q15 numbers (T/O: +1.4 y/y; 0.4% y/y) as demand has been slow to recover given the challenging operating environment. By contrast, Guinness Nigeria reported impressive 3Q15 results (T/O: +16.7% y/y; PAT +92.3% y/y) as the newly-introduced Orijin brand continues to gain favor amongst consumers. Gross profit margin expanded by +367bp to 47.4% as Orijin has effectively capitalized on the widely held perception amongst Nigerian consumers that bitters contain body purifiers, anti-malaria components and ingredients that strengthen the virility of men. Lafarge Africa reported mixed 1Q15 results (T/O: +15.4% y/y; PAT -21.8% y/y) as top-line expansion was offset by growth in other expenses, most notably a US$10 million loss from its share in Unicem. In Cote d’Ivoire, SGBCI delivered impressive FY14 results (GE: +14.8% y/y, PAT: +112.4% y/y) as lower funding costs led to +13.8% growth in net interest income. Customer loans rose +39.1% y/y and deposits grew by +15.9% y/y as the bank’s network expanded to 67 branches by year-end.

East African equity markets were broadly weaker as Kenya, Uganda and Mauritius each contributed negatively on the month

East African equity markets were broadly weaker as Kenya, Uganda and Mauritius each contributed negatively on the month. In Kenya, we digested poor FY14 results from TransCentury as stalled projects led to weakness from its Engineering Division and fueled a -13.2% y/y decline in turnover. The company’s results were also impacted by the sale of its stake in Rift Valley Railways as management announced its intention to finance repayment of outstanding debt through a rights offer before year-end. Looking ahead, we are encouraged by the potential for continued spectrum monetization at Safaricom as the operator’s new digital TV business provides increased valuation support. We expect data revenue to rise on back of increased migration to digital TV following the formal launch of Safaricom’s internet-enabled digital TV decoders in May. Shifting to financials, Equity Bank posted encouraging 1Q15 results (GE: +20.2% y/y; PAT +10.7% y/y) as non-funded revenue grew by +36.2% and now contributes roughly 42% of total operating income. Equitel, Equity Bank’s fast growing MVNO, maintained an impressive trajectory on back of +81% growth to close the period with over 650,000 subscribers. In Tanzania, NMB posted strong FY14 results (GE: +17.9% y/y, PAT: +16.5% y/y) as non-interest income grew +19.5% and provisions fell -28.7% on the year. CRDB also delivered healthy FY14 results (GE: +22% y/y, PAT: +13.4% y/y) as net interest income and non-interest income rose by +17.2% and +22.5% respectively on the year.

North African equities declined as weakness in Egypt and Morocco offset strength in Tunisia

North African equities declined as weakness in Egypt and Morocco offset strength in Tunisia. In Egypt, we digested strong 1Q15 results from Palm Hills (T/O: +82.7% y/y; PAT: +330% y/y) as sales in West Cairo and the North Coast fueled performance. Looking ahead, we expect Palm Hills will perform well given its strong project pipeline, continued recovery in off-plan sales & deliveries, and an improved balance sheet. In other action, Edita Food Industries has expanded ownership of Hostess’ Twinkies, HoHo’s and Tiger Tail brands to twelve additional MENA markets in a US$12 million deal. We believe the company’s expanded footprint will enable management to further consolidate Edita’s position as the market leader in packaged snack foods both in Egypt and North Africa.

Southern African equities exhibited mixed performance in April

Southern African equities exhibited mixed performance in April as strength in Botswana and Malawi were offset by weakness in Zimbabwe and Zambia. In Botswana, Letshego posted solid FY14 results (GE: +22.6% y/y; PAT +14.2% y/y) as the microfinance lender’s East African operations recorded solid +117% growth in advances. We remain encouraged by Letshego’s deposit-taking capabilities as operations commenced in Mozambique and Rwanda whilst a provisional Namibian license was granted in July. Shifting to Zimbabwe, we have reduced our exposure amid a challenging operational environment as evidenced by the country’s widening trade deficit. For the three months to March 2015, Zimbabwe’s total exports were valued at US$716.6 million as the country recorded a cumulative US$853.6m trade deficit during the quarter. Despite a dearth of actionable earnings data, Innscor has invested US$7 million in its Irvine poultry chain to increase production of day-old chicks by 66% over the next two years. Despite the challenging operating environment, management remains committed to expanding its Zimbabwe operations and Innscor has the potential to emerge as an industry leader when the country’s macro headwinds subside.