Monthly Highlights: December 2010

•  West African equity markets pulled back amid political unrest in Cote d’Ivoire
•  East African equities exhibited mixed performance on the month
•  Southern Africa was broadly higher despite increased profit taking in Botswana

West African equity markets pulled back amid political unrest in Cote d’Ivoire

West African equity markets were held back by political headwinds in West Africa, as investors in Cote d’Ivoire watched from afar as the confrontation between Gbagbo and the popular Outtara continued. President Gbagbo has thus far refused to step down as president of the country despite persistent lobbying from international governments and African nations across the region. Fear of renewed civil war is mounting as a UN convoy was attacked and Ivorians flee to neighbouring countries, most notably Liberia. Of note, Cote d’Ivoire defaulted on the coupon payment on its recently renegotiated CI Eurobond as the price fell -34.7% from a high of 64.089 in Oct 2010 to 41.875 by year end. Shifting to Ghana, the long anticipated Jubilee Oil Field began production with output expected to rise above 100,000 bpd by end of April. Fan Milk successfully listed additional shares following a 5:1 bonus issue which ought to result in improved trading volumes. In other action, Total Petroleum Ghana released 9M10 results which revealed a +42.3% increase in earnings whilst 9M10 results from Aluworks continued to show a loss. In Nigeria, oil production rose to 100,000 bpd – the highest level in four years – while inflation slowed to 12.8% in November. In capital markets related news, Flour Mills successfully raised USD 250m through a bond issue at 12% fixed over 5 years whilst UBA announced that its USD130m bond issue was fully taken up by the market. On the final day of the year, AMCON issued a USD 6.8bn “Consideration” Bond which we believe is very positive for the country and places the banking sector in a strong capital position entering 2011. Of note, Nigeria delayed the placing of a USD 500m Eurobond until January 2011 citing “unfavourable international market conditions, particularly the debt crisis in Europe” although we believe the nation is experiencing difficulties when attempting to explain away the dwindling excess crude account in light of rising crude oil prices.

East African equities exhibited mixed performance on the month

East African equity markets were highlighted by the successful issuance of Brasseries et Limonaderies due Rwanda (“Bralirwa”). Bralirwa was the first equity listing on the Rwanda Stock Exchange and is the first of several other proposed listings for this exchange. The offer size was small at USD 29.5m although the company now maintains a market capitalisation of approximately USD118m, an attractive PER of 10.6x (2009), dividend yield of 9.1% (2009) and EBITDA margins of 28%. Of note, we witnessed significant foreign interest via local brokers in Rwanda. Other potential candidates that are rumoured to be considering a possible Rwandan listing in 2011 include Banque de Kigali, Banque Commerciale Du Rwanda and MTN Rwanda. In Kenya, the price war amongst mobile operators continues to escalate. Industry earnings are now under significant pressure as operators explore other areas of revenue including data. This is having a wider impact across the TMT space as indicated by this month’s profit warning from Access Kenya as the company is expecting a 25% decrease in FY11 earnings. Shifting gears, Kenya Power and Lighting successfully concluded its rights offer, Safaricom raised USD 55m in the second tranche of its Medium Term Note Programme and CFC Kenya is looking to raise USD 30m via a second bond issue. In Mauritius, strong tourist arrivals resulted in improved market sentiment with Air Mauritius stating that it had benefitted from a +15% increase in 3Q10 traffic. Although inflation rose to 3.9%, the Mauritius Central Bank left its benchmark interest rate unchanged at 4.75%.

Southern Africa was broadly higher despite increased profit taking in Botswana

Southern Africa was relatively sanguine although we were discouraged by events in Zambia as CelTel delisted following a mandatory offer to minorities by Bharti. Although disappointed in the pricing, we elected to accept the tender so as to avoid the risk of holding an illiquid security – a sentiment shared by many of our fellow investors. In effect, Bharti acquired Zain’s African assets on an EV/EBITDA of 11.6x and made an offer to minorities in CelTel at an EV/EBITDA of 6.1x. We actively engaged the LuSE regarding the disadvantageous pricing, but unfortunately there was little recourse for investors other than to reject the offer and be left holding an illiquid security. Zambian inflation accelerated to 7.9% on the month although the nation is well positioned to achieve its year-end target of sub-8% inflation. In other action, the Botswana Central Bank cut its benchmark interest rate to 9.5% although economic growth appears to be picking up amid increased mining output. In Namibia, the Central Bank reduced its benchmark interest rate by 75bp to 6% as Fitch upgraded the country’s outlook to positive.



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