Monthly Highlights: August 2013

•  West African equities underperformed despite solid 1H13 results
•  East African equities were broadly weaker on the month
•  North African equities continued their rebound as Egypt performed well
•  Southern African equities retreated amid weakness in Zimbabwe
 

West African equities underperformed despite solid 1H13 results

On the earnings front, we digested 1H13 results from GTB (GE: +9.0% y/y; PAT: +7.6% y/y) as interest income rose by +10.6% y/y to NGN 92.0bn. Although the bank’s cost-to-income ratio rose from 40.3% to 41.4% in 1H13, GTB remains the leading Nigerian bank in terms of both cost management and operating efficiency. FBN posted weak 1H13 results (GE: +6.6% y/y; PAT: +1.7% y/y) as the bank’s cost-to-income ratio rose sharply (to 70.2% in 2Q13 from 60.5% in 1Q13) and the decline in fees and commissions (-15.9% y/y) weighed down the contribution from non-interest income. By contrast, Zenith Bank reported strong 1H13 results (GE: +13.2% y/y; PAT: +7.1% y/y) as interest income grew by +15.7% y/y. Looking ahead, we expect the bank’s cost of funds to come under pressure although loan growth should help cushion the impact of declining net interest margins. Shifting to the consumer sector, Flour Mills Nigeria (FMN) posted a mixed set of 1Q14 results as strong top-line growth was offset by a decline in profitability (T/O: +42.8% y/y; PAT: -8.2% y/y) amid a +54% y/y rise in cost of sales. The company’s volume growth may be attributed to capacity gains in its underlying food business, specifically FMN’s flour milling (addition of three new mills at the Apapa factory) and pasta subsidiaries (additional output capacity of 350,000 MT at the Ogun State factory). FMN also commissioned its 750,000 MT sugar refinery in 1Q14 while the company’s feeds business (Premier Feed Mills) also witnessed capacity expansion. PZ Cussons reported strong growth in profitability (T/O: -1.1% y/y; PAT: +109.6% y/y) as the company’s internal reorganization resulted in efficiency gains amid lower commodity prices and a -7.4% y/y decline in cost of sales. On the political front, Nigeria’s ruling PDP party is suffering from internal dissension with seven state governors openly opposing President Jonathan’s 2015 re-election bid. In effect, Jonathan’s control has been reduced to only 16 out of 36 states, and we suspect fiscal policy will grow increasingly loose in the months ahead as government expenditure rises ahead of the 2015 elections. In Ghana, 1H13 profits at Fan Milk improved despite a drop in top-line growth (T/O: -2.6% y/y; PAT: +13.7% y/y) as the company increased prices in response to higher input costs. Looking ahead, we expect turnover at Fan Milk to increase as the impact of rising petrol prices begins to subside. Yet we also remain mindful of power deregulation as rising utility prices are likely to have an adverse impact on the company’s cost of sales while hindering demand for its dairy and juice products.

East African equities were broadly weaker on the month

In Kenya, we digested strong 1H13 results from Co-Operative Bank (GE: -4.6% y/y; PAT: +17.2% y/y) as net interest income rose by +19.0% y/y. Profits were further buoyed by a -4.5% y/y decline in interest expense following the Central Bank of Kenya’s move to cut the key rate by 250bps to 8.5%. Similarly, KCB reported impressive 1H13 performance (GE: +0.1% y/y; PAT: +18.2% y/y) as diminished funding costs fuelled a rise in net interest margins amid a -21.8% y/y decline in provisioning. In contrast, Standard Chartered Kenya released disappointing 1H13 results (GE: +4.7% y/y; PAT: -0.3% y/y) as the bank’s cost to income ratio rose to 40.0% in 1H13 (from 37.6% in 1H12). Shifting to the consumer sector, EABL released uninspiring FY13 results (T/O: +6.4% y/y; PAT: -37.9% y/y) as NSV growth weighed on margins and profitability. Scan Group also posted weak 1H13 results (T/O: +14.1% y/y; PAT: -89.3% y/y) as legal challenges tied to the company’s Nigerian subsidiary (one-off charge of KES 91.3m) and consolidation of existing operations drove operating expenses higher by +23.8% y/y to KES 1.8bn. Looking ahead, we remain constructive with respect to the advertising firm’s 2H13 performance amid an improving business environment. In industrials, Transcentury reported good 1H13 results (T/O: +0.3% y/y; PAT: 16.9% y/y) amid a lower effective tax rate and improved operating margins. In the materials sector, Bamburi released weak 1H13 performance (T/O: -17.5% y/y; PAT: -10.2% y/y) as the Goma / Kivu conflicts caused a decline in cement exports from Rwanda to the DRC. In Tanzania, the government announced plans for a USD 500m Eurobond in FY14 to fund infrastructure projects across the country. Tanzania, which has large undeveloped natural gas reserves, plans to complete its gas pipeline in FY14 and begin exporting power to its energy-starved east African neighbours.

North African equities continued their rebound as Egypt performed well

While many analysts have attributed recent stock market strength to Egypt's changing political climate, we believe that excess liquidity generated from the delisting of Orascom Construction has been the primary catalyst. Yet despite recent equity market strength, a short-term economic recovery appears unlikely as violence has interrupted the activities of Egypt’s major foreign investors with GM, Toyota, BASF and Electrolux suspending their activities amid continued political instability. In addition, civil unrest has begun to weigh on the nation’s tourism sector as evidenced by the decision of TUI AG, Europe’s largest tourism company, to suspend travel to Egypt for its German visitors (c.10% of all visitors into the country). It should be noted that the Egyptian tourism sector employs roughly 12% of the nation’s current workforce. On the earnings front, we digested lacklustre results from GB Auto (T/O: -0.5% y/y; PAT: -72.4% y/y) as challenging economic conditions drove a -6.4% y/y decline in passenger car revenue (c.65% of overall earnings) while pressure from rising SG&A expenses weighed on margins.

Southern African equities retreated amid weakness in Zimbabwe

Southern African equities retreated amid weakness in Zimbabwe following the re-election of Robert Mugabe in the country’s presidential election. Although reports of intimidation and illegal ballot stuffing were widespread, the results have been accepted internationally. Looking ahead, we suspect a power struggle may materialize between VP Mujuru and Defence Minister Mnangagwa with the two vying for position and patronage in what may well be 89-year old President Mugabe’s last cabinet. On the corporate front, we digested weak results from CBZ (GE: +15.4% y/y; PAT: -12.9% y/y) amid increased impairment charges (up +115.5% y/y) and rising operational costs (cost-to-income ratio rose from 57.8% to 60.2% 1H13). In Zambia, the country's trade surplus declined by -37.3% to ZMK 94m although real GDP growth is forecast to improve as copper production recovers, wages increase and infrastructure investment grows rapidly. Nevertheless, political tension remains high as President Sata and the Patriotic Front attempt to consolidate their power and suppress the opposition amid elevated unemployment and deteriorating relations with Western donors.