Monthly Highlights: July 2014

•  West African equities underperformed on back of weakness in Ghana and Nigeria
•  East African equities performed well amid broad-based strength across the region
•  North African equities rose on back of renewed strength in Egypt
•  Southern African equities were broadly higher as strength in Zimbabwe, Zambia and Botswana fueled this month’s strong performance
 


West African equities underperformed on back of weakness in Ghana and Nigeria

West African equities underperformed on back of weakness in Ghana and Nigeria. In Ghana, the Cedi continues to depreciate amid the nation’s inability to constrain debt accumulation, conflicting statements regarding the need for IMF assistance and deteriorating macroeconomic fundamentals. Despite the challenging environment, we digested strong 1H14 results from Ghana Commercial Bank (GE: +27.9% y/y; PAT: +29.7% y/y) as interest income and non-interest income exhibited year-on-year growth of +21.6% and +59.8% respectively. Although GCB’s capital adequacy ratio improved from 18.0% to 18.9%, the bank’s NPL ratio failed to exhibit any meaningful improvement (from 15.0% to 14.5%) as impairments nearly tripled. Shifting to Nigeria, earnings season is now in full swing as we digested results from a number of companies within the portfolio. In financials, ETI reported strong 1H14 results (GE: +13.6% y/y; PAT: +14.5% y/y) as interest and non-interest income exhibited year-on-year growth of +7.8% and +23.2% respectively. Although at 71.5%, the bank’s loan-to-deposit ratio is nearing the statutory limit, we believe management will continue to fund asset creation (loans & advances +10.5% y/y) as deposit growth remains buoyant (+8.7% y/y) given ETI’s strong brand and emerging regional footprint. ETI’s regional expansion continues to gather pace as the bank has now secured its banking license in Angola and commenced operations in Mozambique. By contrast, Skye Bank reported disappointing 1H14 results (GE: -10.2% y/y; PAT: -31.1% y/y) as performance remains constrained by the high cost of funds. Return on equity declined to 9.8% and the bank’s deposit base shrank by -0.6% y/y as management encounters difficulties in switching from high cost term deposits to less expensive demand and savings deposits. Similarly, Diamond Bank reported lackluster 1H14 results (GE: +13.6% y/y; PAT: +9.0% y/y) as weak margins (NIMs declined from 9.6% to 8.6%), soft non-interest revenue (-14.1% y/y) and increased operating expenses (+19.2% y/y) weighed on overall performance. Transcorp continues to perform well as the company’s strong 1H14 results (T/O: +176.5% y/y; PAT: +177.4% y/y) reflect increased capacity expansion at Ughelli which at 453MW (peak output) is up 160MW since its acquisition in November 2013. Looking ahead, management believes the plant is on target to reach available capacity of 715MW by year-end. Seplat reported 1H14 results that were in-line with management’s guidance as performance had been negatively impacted by 45 days of shut-in production due to force majeure at the Trans Forcados pipeline. It should be noted that Seplat’s new pipeline to the Warri refinery has now been completed and this promises to mitigate the impact of any future third-party pipeline or terminal shutdowns. Normalised production came in at 32/- Boe per day and despite 45 days of downtime, lifting costs of US$9/bl were better than expected. Production is on track to achieve a 72.5k b/d exit rate supported by an active development programme with 20 new wells planned in FY14. Looking ahead, we view Seplat’s investment thesis as attractive given its fully-funded operations, strong FCF generation (over US$200m in FY14e) and attractive valuation (FY14e P/E of 4.2x). On the consumer front, UACN exhibited mixed 1H14 results (T/O: +11.6% y/y; PAT: -26.2% y/y) as margins contracted (from 25.3% to 22.8%) and operating expenses rose (+10.3% y/y). Revenue was driven by UACN’s foods business (+18.0% y/y) while the properties division at UPDC weighed down top-line growth (-6.2% y/y). In the Francophone region, we digested strong 1H14 results from Sonatel (T/O: +11.7% y/y; PAT: +6.7% y/y) as EBITDA margin expanded by 184bp and free cash flow rose by +9.9% y/y. Although ARPU declined modestly, the resulting impact on Sonatel’s results were negligible and we were pleased to see notable increases in data usage and Orange Money (Sonatel’s mobile money platform) continues to expand with nearly 3.7 million customers.

East African equities performed well amid broad-based strength across the region

East African equities performed well amid broad-based strength across the region. In Kenya, we digested strong 1H14 results from Equity Bank (GE: +10.3% y/y; PAT: +21.5% y/y) on back of +19.3% y/y rise in non-funded income and a -64.7% y/y decline in impairments. The bank’s fee generating businesses have emerged as a key revenue driver with merchant processing, diaspora remittances, agency banking and foreign exchange performing well. Looking ahead, we expect non-funded revenue to grow as Equity Bank’s recently acquired MVNO license will enable the bank to “virtualise” its branch network through entry into mobile money services. It should also be noted that Equity Bank just announced a groundbreaking deal with American Express that makes it the exclusive issuer of AmEx-branded cards in Kenya, Uganda and Tanzania. We also digested 1H14 results from KCB (GE: +14.7% y/y; PAT: +13.6% y/y) although the bank’s heady +30.8% y/y growth in non-interest revenue was weighed down by a rise in impairments (+82.3% y/y). Although banc assurance and foreign exchange contributed to the rise in non-interest revenue, much of the gain may be attributed to commissions on loans and advances (+14.0% y/y). On a relative basis, KCB’s net interest margins remains low when compared to Equity Bank (9.6% vs.11.4%) although management’s recently announced joint-venture offering with Safaricom (Biashara Smart) is designed to increase penetration within Kenya’s high margin SME sector.

North African equities rose on back of renewed strength in Egypt

North African equities rose on back of renewed strength in Egypt as increased stability fosters improved business and investor sentiment. It seems the long-anticipated increase in lending activity has finally taken hold as we digested record 1H14 results from CIB Egypt (GE: +16.8% y/y; PAT: +30.8% y/y) as ROAE and ROAA rose to 29.4% and 2.89% respectively (from 26.0% and 2.66% in 1H13). Both corporate and consumer lending have picked up significantly in recent months as CIB Egypt’s deposit base grew to a record EGP 110.9 billion (up +15% YTD) without a corresponding sacrifice in bank NIMs which remain stable at 5.39% (5.35% in 1H13). Although we expect NIMs to decline modestly in 2H14, we expect loan growth to continue as companies revisit their capital expenditure plans and corporate borrowing increases substantially. In other action, Arabian Cement posted preliminary 1H14 results that were in-line with expectations. Looking ahead, we are forecasting a strong rebound in demand for cement and higher utilisation rates for clinker amid improved margins following the shift to coal.

Southern African equities were broadly higher as strength in Zimbabwe, Zambia and Botswana fueled this month’s strong performance

Southern African equities were broadly higher as strength in Zimbabwe, Zambia and Botswana fueled this month’s strong performance. In Zimbabwe, Delta announced that demand for lager and sparkling beverages continues to soften on back of deteriorating macroeconomic conditions, e.g. deflationary headwinds, corporate retrenchments and missed payroll obligations. For the quarter ending 30 June, revenue declined by -3.0% q/q on back of a -21.0% q/q drop in lager volume. Shifting to telecom, Econet announced the launch of its new MasterCard-enabled debit card which ought to successfully ease the burden of carrying large sums of cash when traveling abroad. In effect, the card will allow EcoCash customers to pay for goods and services at over 47 million points internationally. In other news, the Central Bank of Namibia awarded Letshego with a provisional banking license as the company seeks to transform itself into a deposit-taking institution in an effort aimed at reducing its overall cost of funds. The Botswana-based microfinance lender has successfully expanded its footprint and now maintains operations across ten countries in Southern and East Africa.

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