Monthly Highlights: July 2011

•  West African equities led lower by increased selling pressure in Nigeria
•  East African equities continued their slide as rising inflation weighs on investor sentiment
•  Southern Africa held up relatively well amid strength in Zambia & Botswana
 

West African equities led lower by increased selling pressure in Nigeria

West African equities came under increased selling pressure as the NSE ASI (Nigeria), BRVM Composite (Francophone) and GSE Composite (Ghana) fell by - 4.93%, -1.73% and -1.32% respectively. In Nigeria, the Central Bank of Nigeria tightened its key benchmark rate by another 75bp to 8.75% as it attempts to draw savers back into the banking system whilst softening the impact of a new national minimum wage and expected policy reform throughout the oil sector. On the earnings front, 1H11 bank sector results were strong amid rising net interest margins as ETI (Gross Earnings [GE] +27.0% y/y; Profit After Tax [PAT] +36.5% y/y), FCMB (GE +17.6% y/y; PAT +91.6% y/y) and Zenith (GE +26.8% y/y; PAT +43.9% y/y) outperformed whilst FBN (GE +14.2% y/y; PAT +23.3% y/y) and Skye (GE +3.1% y/y; PAT +28.0% y/y) delivered results that were broadly in-line with consensus. Of note, we are growing increasingly constructive on UBA (GE -6.4%; PAT +67.4%) although we expect further downside in what looks to be a turbulent August. In other action, Flour Mills (Turnover [T/O] +15.6% y/y; PAT - 44.24% y/y) posted soft numbers as input costs rose amid rising global wheat prices. Similarly, Nestle Nigeria (T/O +18.9% y/y; PAT +3.7% y/y) saw its margins slide as costs appear to be rising amid the company’s product expansion. Nigerian Breweries (T/O +24.6% y/y; PAT +17.9% y/y) continues to exhibit strong top-line growth as volume expansion continues amid low levels of per capita beer consumption whilst PZ Cussons (T/O +5.1%, PAT +1.8%) continues to perform well – up +31.25% over 3mo period through 31 July. In Ghana, the Central Bank cut rates by an additional 50bp despite an upward revision of its year’s-end inflation target from 8.5% to 9.0%. Although more than USD 600 million in oil revenue is expected during FY11, the brisk pace of government expenditure remains a concern as the government has thus far proved incapable of balancing its budget. On the earnings front, GCB released mixed 1H11 results (GE - 18.1%; PAT +96.5%) as the dovish rate environment led to an expected decline in net interest income and expanding net interest margins. It should be noted that GCB’s profitability was buoyed by the absence of previous impairment charges relating to Tema Oil. Standard Chartered released slightly positive 1H11 results as PAT rose +9.0% on back of rising net interest income (+5.2% y/y) and commissions/fees (+2.6% y/y). In other action, Unilever Ghana released strong 1H11 results (T/O: +37.2%; PAT +83.0%) and the stock extended its winning streak to 12 straight months over which the company’s share price has risen +109.2%. In Cote d’Ivoire, we are growing increasingly more comfortable with the forward-looking outlook as increased foreign aid and stronger-than-expected tax receipts promise to offset the decline in commodity exports. On the BRVM, equity market performance was led by shares of PALMCI and SOGB – up +28.22% and +15.91% respectively on the month.

East African equities continued their slide as rising inflation weighs on investor sentiment

East African equities continued their slide amid deteriorating investor sentiment as the NSE 20 (Kenya), SEM-7 (Mauritius) and USE ASI (Uganda) fell by -7.50%, -4.20% and -9.42% respectively. This month’s lone bright spot was Tanzania as the DSEI rose +1.66% on the month. Inflation continues to be a cause for concern throughout the region as consumer price indices rose from 14.5% to 15.5% in Kenya, 1.7% to 5.1% in Mauritius, 4.5% to 5.8% in Rwanda, 9.7% to 10.9% in Tanzania and 15.7% to 18.7% in Uganda (its highest level since Feb 1993). In Kenya, the Central Bank left its benchmark interest rate unchanged at 6.25%, and in so doing, conceded monetary policy’s ineffectiveness at controlling rising food and transport prices. On the earnings front, Equity Bank posted strong 1H11 numbers as operating income rose +29.9% y/y on back of +15.2% y/y growth in net interest income (loans up +26.1% y/y; deposits +6.9% y/y) and +54.2% y/y growth in non-funded income (commissions/fees +30.3%; forex +135.4%). Although PAT rose +57.4% y/y, the bank’s shares continue to underperform – down -10.68% on the month and -26.1% YTD. KCB also posted strong 1H11 results as PAT rose +39.7% y/y on back of growth in net interest income (+20.3% y/y) and commissions/fees (+41.3% y/y). In other action, KenolKobil released outstanding 1H11 results (T/O: +38.1% y/y; PAT +82.9% y/y) as regional expansion has successfully enabled management to minimize earnings volatility and diversify its overall exposure. Of note, Kenya now accounts for only 53% of pre-tax profit with KenolKobil’s regional subsidiaries in Rwanda, Tanzania and Uganda comprising the balance.

Southern Africa held up relatively well amid strength in Zambia & Botswana

Southern Africa continues to exhibit strong relative outperformance as the LuSE ASI (Zambia) and Gaborone DCI (Botswana) rose by +4.07% and +3.68% respectively. In Zambia, inflation was unchanged at 9.0% as the strong corn harvest should provide the Bank of Zambia with enough ammunition to keep food prices under control amid generally resilient mining activity. On the earnings front, Zambeef released strong 1H11 results (Revenue +26.1% y/y; PAT +93.0%) in the wake of its recent London listing while CEC released uninspiring FY10 results (Revenue +8.5% y/y; PAT -7.5%) despite increased demand from mining companies seeking to expand their local operations. In Botswana, diamond exports rose by +82% y/y as the Bank of Botswana will likely keep rates unchanged at 9.0% amid the decline in June inflation. In Zimbabwe, the ZSE Industrial Index declined by -2.09% on back of weakness in Econet Wireless as the operator’s shares slid -11.2% following concerns of an international competitor entering the market via acquisition of government-owned operator, NetOne. On the earnings front, Delta posted a +42% y/y jump in 1Q11 revenue as volumes grew by +27.0% on back of stronger-than-expected lager and sorghum sales.