Monthly Highlights: January 2015

•  West African equities performed poorly on back of continued weakness in Nigeria
•  East African equities recorded gains amid strength in Kenya, Tanzania and Uganda
•  North African equities continue to perform well amid broad-based strength across the region
•  Southern African equity markets recorded positive gains as relative strength in Zimbabwe and Zambia offset weakness in Botswana
 

West African equities performed poorly on back of continued weakness in Nigeria

West African equities performed poorly on back of continued weakness in Nigeria. Mounting political and economic uncertainty continue to prove negative for investor sentiment although Nigerian equity valuations have grown considerably more attractive in recent months. On the earnings front, Guinness Nigeria released 1H15 results (T/O: +4.8% y/y; PAT: -32.1% y/y) as improved top-line growth was further buoyed by the introduction of Orjin, an alcoholic beverage targeting low-end consumers. Although increased distribution expenses and rising interest costs weighed down gross profit margin, we remain encouraged by the company’s recent performance and welcome recent changes to senior management. PZ Cussons released unimpressive 1H15 results (T/O: -2.5% y/y; PBT: -37.8% y/y) as weak sales, depressed margins (down -45bp y/y to 27.1%) and increased operating expenses (up +8.1% y/y) weighed down profitability during the period. The company’s poor performance can be partly attributed to challenging operating conditions as a result of recent Naira devaluation and instability in Northern Nigeria. Shifting to Ghana, the Cedi saw slight depreciation relative to the US Dollar, a scare that has forced the Bank of Ghana to almost double its weekly float in order to minimize the downside. On the earnings front, we digested weak FY14 results from Fan Milk (T/O: +27.9% y/y; PAT: -28.0% y/y) as improved top-line growth could not compensate for the rise in operating costs as electricity load shedding and water shortages weighed on profitability. On the positive side, management aggressively tightened its working capital cycle, generating substantial free cash flow to support its current operations. In the financial sector, CAL Bank reported impressive FY14 numbers (GE: +44.7% y/y; PAT: +52.6% y/y) as net interest income and non-interest income rose by +39.1% and +88.9% respectively on the year. Performance also benefited from improved operational efficiency as the bank’s cost-to-income ratio declined by 100bp from 33.5% to 32.5% at year-end.

East African equities recorded gains amid strength in Kenya, Tanzania and Uganda

East African equities recorded gains amid strength in Kenya, Tanzania and Uganda. In Kenya, Kenya Commercial Bank (KCB) issued optimistic forward guidance with regard to FY15 prospects as the bank looks to aggressively grow its SME business. If successful, management expects net interest margins to grow by c.9.5% on the year. In terms of profitability, KCB management is expecting double-digit growth of 15 – 20% with reasonable cost containment assuming inflation remains under control. In other action, Kenya Power & Light is planning a system upgrade designed to enhance reliability and reduce system loss with newly secured funding from the African Finance Corporation. It should be noted that the nation’s largest distributor of electricity expects transmission and distribution capacity to rise from 2,000MW to 5,000MW by 2020. On the economic front, the Central Bank of Kenya revised the Reference Rate from 9.13% to 8.54% as falling yields on 91-day treasury bills reflect diminished inflationary pressure. Shifting to Tanzania, the World Bank has urged the Government to deal with the nation’s growing fiscal deficit and take measures aimed at further stimulating economic growth. It should be noted that the Bank of Tanzania expects the economy to grow by 7.4% this year (up from its previous estimate of 7.2%).

North African equities continue to perform well amid broad-based strength across the region

North African equities continue to perform well amid broad-based strength across the region. In Egypt, the Central Bank is determined to choke off the black market for hard currency as it allowed the Egyptian Pound to weaken for the sixth consecutive auction. By month-end, EGP/USD rose to 7.5897 for a year-to-date loss of -5.86%. On the corporate front, GB Auto is seeking regulatory approval for a rights issue in the amount of US$125 million to fund future growth. Egypt’s largest auto manufacturer & distributor intends to use roughly US$53 million of the proceeds to finance an assembly facility for two- and three-wheel vehicles with the balance earmarked for various tire manufacturing projects. Although the company will need to take on additional debt, our view is positive as the planned assembly facility should be value accretive given the company’s dominant market position and growing demand for three-wheel vehicles in Egypt.

Southern African equity markets recorded positive gains as relative strength in Zimbabwe and Zambia offset weakness in Botswana

In Southern Africa, equity markets recorded positive gains as relative strength in Zimbabwe and Zambia offset weakness in Botswana. In Zimbabwe, Delta issued a disappointing 3Q15 update in which lager volumes exhibited a sequential decline of -20% q/q as domestic consumption remains subdued. On a year-over-year basis, volume and revenue at Delta for the nine-month period ending December have fallen by -9% and -6% respectively. Although conditions in Zimbabwe remain challenging, there have been some bright spots as we digested strong FY14 results from TSL (T/O: +18.7% y/y; PAT: +13.8% y/y) on back of improved performance in tobacco sales and healthy contributions from its logistics and agro-inputs businesses. Shifting to Zambia, Zambeef announced the US$25.7m disposal of its Zamanita Limited subsidiary. We spoke to management following news of the sale and they believe this transaction sharpens the company’s operational focus, reduces its foreign exchange exposure and strengthens the balance sheet. In other action, newly-elected Zambian president Edgar Lungu has confirmed his intention to uphold of a new mineral royalty tax despite fear that it could lead to greater mine closures. It should be noted that Africa's second largest copper producer hiked open pit mining royalties from 6% to 20% and underground royalties from 6% to 8% in its 2015 budget, a move that could threaten nearly 12,000 Zambian mining jobs.