Monthly Highlights: January 2014

•  West African performance mixed as weakness in Nigeria offset by strength in Ghana & Francophone region
•  East African equities performed poorly amid weakness in Kenya & Mauritius
•  North African equity markets remain marred by political tension
•  Southern African equities declined on back of continued weakness in Zimbabwe
 

West African performance mixed as weakness in Nigeria offset by strength in Ghana & Francophone region

West African performance was mixed as weakness in Nigeria was largely offset by strength in Ghana and the Francophone region. Nigerian bank shares declined following yet another Monetary Policy Committee increase in the cash reserve ratio on public sector funds from 50% to 75% with hints of additional hikes to come. It should be noted that the Central Bank of Nigeria has been aggressively using this mechanism to tighten liquidity and defend the Naira. Although earnings season begins next month, we digested solid 1H13 results from PZ Cussons (T/O: +4.7% y/y, PBT: +52.7% y/y) as demand appears to be recovering a trend which we suspect will continue into next year’s general elections. Shifting to Ghana, the central bank is reviewing options aimed at stabilizing a deteriorating Cedi as the government has proven incapable of curbing expenditure amid accelerating inflation and a widening fiscal deficit. We digested weak FY13 results from Fan Milk (T/O: -5.7% y/y; PAT: -21.3% y/y) as domestic consumption weakened amid a challenging operating environment. Although we correctly forecasted the company’s generally uninspiring FY13 performance, we had hoped that the share price might witness near-term weakness given its relatively rich valuation. Unfortunately, this never materialized and we will continue to look for an attractive entry point as Fan Milk’s dominant market position and strong brand portfolio make it an appealing mechanism through which to gain exposure to forward-looking growth in Ghanaian disposable income levels.

East African equities performed poorly amid weakness in Kenya & Mauritius

East African equities also performed poorly as weakness in Kenya and Mauritius offset solid performance in Tanzania. In Kenya, Scan Group announced a listing of additional shares in order to accommodate an increased holding by global communications firm WPP to 50.1% of the company. We also received an update from new CFO Jon Egger and were encouraged to learn of new business from the firm’s multinational clients as Scan Group offers a strong Pan-Africa solution to cross-border operators. Shifting to financial sector, liquidity remains tight as Kenya’s newly devolved county governance system encumbered the flow of funds from the central government. The tide appears to be turning however and we suspect that the Kenya Revenue Agency will soon release funds as it is required to distribute at least 15% of its tax receipts to the 47 county administrations. Equity Bank and Kenya Commercial Bank are well positioned to grow their loan books in FY14 as a number of new infrastructure projects (i.e. power, roads, etc.) are poised to come on stream. Nevertheless, net interest margins are expected to tighten as loan yields decline and funding costs come under pressure due to increased competition. In Tanzania, we received an update from CEO Mark Wiessing of National Microfinance Bank (NMB) who remains optimistic with regard to the bank’s FY14 prospects. The key driver is cheap funding and although NMB exhibited above average 14% y/y deposit growth last year, management is targeting 20% growth going forward. Bank penetration is low in Tanzania (c.15%) and although NMB has implemented a number of new initiatives aimed at expanding its footprint (i.e. integration with M-Pesa and Tigo, mobile money transfer, agency banking, etc.), rural distribution remains a challenge.

North African equity markets remain marred by political tension

In Northern Africa, we remain cautious in the run-up to Egyptian presidential elections which are tentatively scheduled for late March or early April. Although Egypt remains marred by political tension, activism is increasingly frowned upon and we expect Field Marshall Abdul-Fattah el-Sisi to emerge as the nation’s next president with parliamentary elections to follow in August. It should be noted that there has been a crackdown on individual freedoms in recent months and the local police have emerged as a growing force in day-to-day dealings. Nevertheless, the risk of violence and uprisings in Egypt remain high as the Muslim Brotherhood appears committed to cannibalizing the current political system. On the corporate front, Juhayna revealed its FY14 capex plans as management intends to invest roughly US$60 million to complete its dairy farm, start operations at its 6th of October yogurt plant and expand production capacity of juices and fruit concentrate. The company has already secured roughly US$70 million from the European Bank of Reconstruction & Development and the company’s debt-to-equity ratio remains solid at 55%. In other news, Palm Hills returned to profitability in FY13, as the Egyptian real estate market has begun to exhibit tentative signs of recovery amid renewed construction, new development and improved access to financing.

Southern African equities declined on back of continued weakness in Zimbabwe

In Southern Africa, equity markets declined on back of continued weakness in Zimbabwe as the ZSE Industrial shed -6.4% on the month. Although we have grown increasingly cautious on Zimbabwe, our core holdings continue to deliver and our long-term conviction remains unchanged. Just this month, Econet has confirmed that its EcoCash mobile money transfer platform has successfully registered over three million subscribers (c.31% of Zimbabwe’s adult population) and is now transacting more than US$200 million per month. It should however be noted that the operator is under significant pressure to open access to its mobile banking gateway as local banks appear unwilling to transact with Steward Bank, Econet’s wholly-owned banking unit. Although EcoCash remains firmly positioned as the nation’s leading provider of mobile banking and money transfer services, we expect competition to intensify as Telecel has finally launched its Telecash mobile banking platform. In Malawi, international donors continue to withhold much-needed foreign aid pending the progress of investigations into the “Cashgate” corruption scandal where more than US$250 million in public funds have been misappropriated.