Monthly Highlights: March 2014

•  West African equities declined amid continued weakness in Nigeria and Ghana
•  East African equities underperformed on back of weakness in Tanzania
•  North African equities declined as Egypt softened following last month’s strong performance
•  Southern African equity markets were broadly weaker as Zimbabwe and Botswana continue to underperform
 

West African equities declined amid continued weakness in Nigeria and Ghana

West African equities declined amid continued weakness in Nigeria and Ghana. Despite the recent downturn in Nigerian equity market performance, the International Finance Corporation (IFC) has unfolded plans to invest roughly US$1.5bn across critical sectors of the economy while the African Development Bank (AfDB) has increased the size of its partial risk guarantee to the Nigeria Bulk Electricity Trading Company (NBET). We have been playing close attention to developments across the Nigerian power sector and were pleased to learn that the IFC funds are earmarked for natural gas infrastructure and distribution. Note that access to gas is the primary obstacle facing Nigeria’s independent power producers (IPPs) and this has severely constrained electricity generation across the country. Similarly, the size of NBET’s partial risk guarantee is an essential ingredient to the government-sponsored agency’s long-term viability and will go a long way toward ensuring that newly privatised NIPP generating companies are able to secure the debt funding required to operate profitably and grow over time. On the earnings front, we digested strong FY13 results from UACN (T/O: +13.1% y/y; PAT: +39.4% y/y) as top-line performance was driven by capacity gains from Grand Cereals and improved distribution from Chemical & Allied Paints. Although margins contracted slightly amid higher input costs from the company’s animal feeds business, we remain encouraged by recent initiatives aimed at consolidating UAC Foods’ leadership position in the snacks market such as the launch of Gala Tinkies. Shifting to financials, we digested impressive FY13 results from Diamond Bank (GE: +31.1% y/y; PAT: +29.1% y/y) on back of +17.1% y/y growth in net interest income and +47.0% y/y growth in non-interest revenue. GTB reported results that were in-line with our expectations (GE: +8.8% y/y; PAT: +3% y/y) as impairments weighed down 4Q13 performance. Zenith Bank released FY13 results (GE: +14.5% y/y; PAT: -5.3% y/y) that were in-line with expectations as a rise in the bank’s effective tax rate led to the decline in profitability. In Ghana, inflation continues to climb as the producer price index rose sharply amid rising utility and food prices. Ghana Commercial Bank reported strong FY13 results (GE: +24.3% y/y; PAT: +60.3% y/y) on back of a +41.4% y/y rise in net interest income. In the Francophone region, Sonatel released strong FY13 results (T/O: +11.3%; PAT: +11.1% y/y) as the operator’s subscriber base rose to 22.4 million (+22.5% y/y) with significant contributions from Mali, Guinea and Bissau.

East African equities underperformed on back of weakness in Tanzania

East African equities underperformed on back of weakness in Tanzania. In Kenya, Bamburi Cement released poor FY13 results (T/O: -9.5% y/y; PAT: -21.5% y/y) as the Goma/Kivu conflicts caused a decline in export volumes to Rwanda and the DR Congo. Despite healthy top-line performance from Athi River Mining (T/O: +24.4% y/y; PAT: +8.3% y/y), margins declined by 160bp as the company was forced to utilise more expensive, imported clinker. Shifting to financials, Co-Operative Bank posted results (GE: +3.9% y/y; PAT: +17.9% y/y) that were in-line with expectations as a sharp decline in interest expenses (-31.8% y/y) fueled +18.8% y/y growth in net interest income. Gross earnings were further supported by strength in non-funded income (+13.4% y/y) as gains in foreign exchange trading (+13.9% y/y) and commission-based income (+18.5% y/y) drove performance. In telecom, Kenya’s two largest operators (Safaricom & Airtel) have made a joint bid for Essar Communications’ Yu Mobile, the nation’s 3rd largest mobile operator. Although details surrounding the proposed transaction remain unclear, we understand that the motivation behind Safaricom’s bid is acquisition of additional spectrum and infrastructure whereas Airtel is focused on absorbing Yu’s 2.7 million subscribers.

North African equities declined as Egypt softened following last month’s strong performance

North African equities declined as Egypt softened following last month’s strong performance. We digested better-than-expected results from Talaat Moustafa Group as margins improved and 4Q13 deliveries accelerated as management attempts to make up for delays experienced over the preceding three quarters. Although political instability and the imposed curfew had restricted the pace of construction, revenues almost doubled in 4Q13 as the curfew ended and consumer confidence recovered. Lecico also delivered strong revenue growth (T/O: +15.7% y/y; PAT: -8.8% y/y) as sales of sanitary ware (+6.1% y/y) and tile (+18.2% y/y) fueled the company’s double-digit revenue growth. Although the company suffered a write-off related to divestment of its France operations, the EGP 103 million charge was roughly 21% below management’s previous guidance causing after-tax profit to fall. Oriental Weavers posted good FY13 results (+13.3% y/y; PAT: +9.8% y/y) as volumes rebounded, margins expanded and debt coverage improved. Looking ahead, we believe the company’s prospects are gathering momentum amid improved domestic confidence and a gradual recovery across the US and Europe.

Southern African equity markets were broadly weaker as Zimbabwe and Botswana continue to underperform

Southern African equity markets were broadly weaker as Zimbabwe and Botswana continue to underperform. Despite our recent cynicism, Zambia was the month’s leading performer as Fitch reaffirmed Zambia’s strong growth prospects and maintained the country’s ‘B’ rating with stable outlook. It should be noted the country is prepping for a second Eurobond and while yields on the first installment (5.375% 9/22) rose to an all-time high of 8.33% at mid-month, they reversed sharply to close at 7.66% by month-end. Given the improved global risk environment and overall lack of supply in USD-denominated African fixed income, we believe the market will easily digest the projected US$1bn offering. In Botswana, Letshego issued a cautionary indicating that margin pressures would weigh on earnings for the full-year period through 31 Jan. Although this was already factored into our valuation, the company’s share price reacted negatively and downward pressure is likely to remain in place until management releases its annual results mid-April.