Monthly Highlights: February 2014

•  West African equities declined amid continued weakness in Nigeria
•  East African equities performed well on back of strength in Kenya & Tanzania
•  North Africa posted solid gains as Egyptian equities continue to outperform
•  Southern African equity markets exhibited mixed performance as the region attempts to regain its footing
 

West African equities declined amid continued weakness in Nigeria

West African equities declined amid continued weakness in Nigeria. Nigerian equity markets sold off as investors come to terms with President Jonathan’s decision to suspend CBN Governor Sanusi before his term expires in June. Although we were surprised by the suddenness of Sanusi’s dismissal, we do not believe these events portend a sharp devaluation in the Naira as: (i) the CBN is expected to maintain its hawkish policy stance and (ii) the implications of missing oil revenues are not material to the currency’s medium-term trajectory. Looking ahead, we view these events as positive and expect greater transparency with regard to the government’s collection and management of oil revenue. On the corporate front, earnings season is now in full swing as Nigerian Breweries' FY13 results (T/O: +6.3% y/y; PAT: +13.2% y/y) benefited from a strong 4Q13 as supply chain improvements drove sequential revenue growth of +38.6% q/q. Although margins improved only slightly, we are encouraged by the company's forward-looking prospects as management continues to build upon its industry-leading position through the introduction of new and innovative products. Just this month, the company rolled out Star Lite Ice Cold Filtered, an extension of the Star brand which includes Nigeria's first beer temperature indicator on its colour-coded front label. By contrast, Guinness Nigeria released weak 1H14 results (T/O: -13.3% y/y; PAT: -22.2% y/y) as its limited product offering in the low-end lager segment has led to a loss in market share as value-conscious consumers shift from lager to less expensive corn and sorghum-based beers. Nestle Nigeria released mixed FY13 results (T/O: +14.0% y/y; PAT: +5.3% y/y) as stronger-than-expected revenue growth was offset by deteriorating margins amid large increases in input prices and interest costs. Flour Mills released disappointing 3Q13 results (T/O: +16.9% y/y; PAT: -28.1%) as profits fell on back of rising operating expenses and higher-than-expected finance charges. As anticipated, depreciation charges from the recently commissioned Golden Sugar refinery increased significantly as the brand is still nascent and a corresponding rise in revenue has not yet materialised. Shifting to Ghana, the Bank of Ghana introduced new currency restrictions aimed at stemming the slide of the Cedi, which has depreciated by -9.5% YTD in USD terms. We feel that such restrictions fail to address the underlying drivers of GHS weakness (i.e. weak external position, rising fiscal deficit, etc.) and could very well aggravate the situation by forcing exporters to keep receipts offshore while locals hoard currency outside the banking system.

East African equities performed well on back of strength in Kenya & Tanzania

East African equities performed well on back of strength in Kenya and Tanzania. In Kenya, Equity Bank posted strong FY13 results (GR: +10.5% y/y; PAT: +9.9% y/y) on back of exceptional 4Q13 performance as acceleration in non-interest income, improved operating efficiency and a decline in provisions fueled ROAE of 28.1% at year-end. Although Equity Bank's South Sudan operations have exceeded expectations in FY13, we are also mindful of the potential for prolonged conflict as this could negatively impact group performance this year. KCB also posted healthy FY13 results (GR: +13.7% y/y; PAT: +17.5% y/y) as falling loan yields failed to weigh on net interest margins as the bank's cost of funds improved. Although KCB's deteriorating NPL coverage remains a concern, we were encouraged by the pick-up in non-interest revenue as contributions from the bank's new mobile product (M-Banki) fueled a stronger-than-expected ROAE of 24.4% at year-end.  Shifting to the consumer sector, we digested lackluster 1H14 results from EABL (T/O: +4.0% y/y; PAT: +4.5% y/y) as top-line growth came under pressure from implementation of the excise tax on Senator Keg, the company's flagship pale lager targeted at value-conscious consumers. Yet despite the adverse tax-related impact, our forecasts of EABL's forward-looking volume growth have grown more optimistic as the successful introduction of new brands such as Jebel Gold (a spirit sold for KES10 - 15 per 30ml tot) should enable the company to regain lost market share amongst low income households.

North Africa posted solid gains as Egyptian equities continue to outperform

North Africa posted solid gains as Egyptian equities continue to outperform. Although many suspected that this month’s resignation of Egyptian PM el-Beblawi was an elaborate maneuver designed to pave the way for Field Marshall el-Sisi’s ascension to the presidency, we believe that it is more likely the result of growing discontent with the interim government’s poor performance (i.e. labour strikes, power outages, terrorist incidents, etc.). On the earnings front, CIB Egypt posted strong FY13 results (GR: +31.1% y/y; PAT: +35.1% y/y) as net interest margins expanded by 24bp on back of lower funding costs. Although loan growth remains subdued, deposits continue to rise and asset quality remains healthy. Looking ahead, we are forecasting modest growth in the bank's loan book although we are unlikely to see a strong pick-up in corporate lending until elections have taken place. We digested disappointing FY13 results from Juhayna (T/O: +8.0% y/y; PAT: -76.5% y/y) as a surge in input prices (i.e. milk powder, cocoa) weighed heavily on profit margins. Despite the challenging operating environment, 4Q13 volumes came in well short of expectations as the company was unable to pass through higher raw material costs. Although Juhayna's long-term prospects remain outstanding, management's ability to successfully execute the company's vertical integration strategy will now be put to the test.

Southern African equity markets exhibited mixed performance as the region attempts to regain its footing

In Southern Africa, equity markets exhibited mixed performance as the region attempts to regain its footing. The Zimbabwe economy continues to worsen as inflation rises, remittances decline and indigenisation keeps foreign investors away. Yet on the heels of President Mugabe's 90th birthday, we remain encouraged by the country's long-term prospects and are positioned for his eventual succession with VP Mujuru and Justice Minister Mnangagwa emerging as the leading candidates to replace him.  It should be noted that Ms. Mujuru is considered more amenable to reconciliation with the MDC and renewing relations with the West.  On the earnings front, we digested weak FY13 results from CBZ (GR: +4.5% y/y; PAT: -18.6% y/y) as the subdued economic environment led to a rise in non-performing loans with provisions growing by more than three-fold. In Zambia, we have grown increasingly disheartened by the current administration's abuse of statutory instruments as they have emerged as the preferred means through which to implement economic policy. It should be noted that statutory instruments do not require parliamentary approval and have been used to execute a number of highly questionable initiatives, including the removal of tax exemptions for NGOs (i.e. churches, health organisations, etc) and deposit of all export earnings over US$10,000 in a central bank account before making withdrawals. These have, in turn, led to mounting criticism as inconsistent economic planning and suspect policy motives threaten to derail the country's investment appeal and long-term growth potential.