Monthly Highlights: May 2013

•  West African equities posted exceptional returns with all markets generating positive attribution on the month
•  East African equity markets recorded strong gains on back of continued strength in Kenya
•  North African equity markets continue to stabilize amid increased Egyptian aid from abroad
•  Southern African equities rose as strength in Malawi, Zambia and Zimbabwe offset poor performance in Botswana
 

West African equities posted exceptional returns with all markets generating positive attribution on the month

In Nigeria, we digested impressive 1Q13 results from UACN (T/O: +30.4% y/y; PAT: +41.2% y/y) as Grand Cereals accounted for approximately 40% of total sales. Going forward, we believe that UACN will benefit from the company’s recent expansion as both UAC Foods and Grand Cereals as these two should continue to drive top-line expansion. Guinness Nigeria released weaker-than-expected 3Q13 results (T/O: 0.0% y/y; PAT: -24.3%) as sales remain stagnant amid declining volume growth (-3.1% y/y) and higher financing charges (+289.2% y/y). Nestle posted uninspiring 1Q13 results (T/O: +6.71% y/y; PAT: -2.9% y/y) as earnings were impacted by a larger-than-expected increase in finance costs. Lafarge WAPCO suffered from increased competition in 1Q13 although weak top-line growth (T/O: +3.1% y/y; PAT: +49.1% y/y) was offset by improved efficiencies and lower finance charges. Shifting to the banking sector, UBA managed to sustain its upward earnings momentum as 1Q13 results (G/E: +19.8% y/y; PAT: +19.1% y/y) were driven by strong growth in net interest income (+23.6% y/y). In the Francophone region, we digested lackluster FY12 earnings from Palm CI (T/O: +3.34% y/y; PAT: -17.67% y/y) as profitability declined amid the drop in Crude Palm Oil prices. It is worth noting that an improved product mix enabled the company to successfully grow turnover as manufactured products comprised a greater portion of annual sales. Unfortunately, costs were not well contained and management needs to optimize transport expenses and curtail other overheads.

East African equity markets recorded strong gains on back of continued strength in Kenya

Safaricom exhibited better-than expected FY13 results (T/O: +16.2% y/y; PAT: +38.9% y/y) on back of strong growth in all four revenue segments (Voice: +12.6% y/y; SMS: +30.4% y/y; Data: +27.7% y/y; M-PESA: +29.4% y/y). The operator also posted a notable improvement in cost efficiency as EBITDA margins rose from 35% to 39.6% y/y. In the financial sector, we digested mixed 1Q12 results as Equity posted exceptional performance (GE: +6.4% y/y; PAT: +21.9% y/y) on back of higher net interest income (+20.7% y/y) and improved cost management as the bank’s CTI ratio declined from 50.9% to 49.5% y/y. KCB also posted a strong quarter (GE: +0.9% y/y; PAT: +25% y/y) amid growth in non-funded income as forex revenue rose +26.9% y/y (+26.8% q/q). Co-Operative Bank also exceeded expectations as net interest income grew +23.4% y/y despite a marginal decline in gross earnings (GE: -1.6% y/y; PAT: +33.5% y/y). By contrast, Standard Chartered posted weak 1Q13 results (GE: -2.2% y/y; PAT -19% y/y) as net interest income was flat and operating expenses rose +15.9% amid deterioration in the bank’s CTI Ratio – up from 38% to 44.7% y/y. In Mauritius, SBM posted decent 3Q13 results (GE: +0.4% y/y; PAT +12.8% y/y) as net interest income rose by +16.1% y/y. On the other hand, MCB’s 3Q13 numbers (GE: +2.3% y/y; PAT -5.6% y/y) disappointed amid an unexpected +69.8% rise in provisions. Although we remain on the sidelines, NMH’s weak 1H13 results (T/O: -3.78% y/y; PAT: -16.39% y/y) cannot be overlooked as inadequate air transport and slower than expected tourist arrivals continue to weigh on the nation’s leisure sector.

North African equity markets continue to stabilize amid increased Egyptian aid from abroad

In North Africa, equity markets rose as Qatar invested USD 3bn in Egyptian treasuries. Egypt has now received USD 5bn in financial assistance from Qatar since President Morsi rose to power in July 2012. On the corporate front, OCI submitted updated documentation to the Egyptian Financial Supervisory Authority as it pursues a tender offer for all of the company’s shares on the Egyptian Stock Exchange. OCI N.V. has offered OCI S.A.E. shareholders the option to convert their shares or accept a cash alternative of EGP 255 per share. Shifting gears, CIB reported impressive 1Q13 earnings (GE: +31.6% y/y; PAT: +30.1% y/y) as non-interest income grew (+47.5% y/y), net interest margins rose and the CTI ratio fell (from 35.9% to 29.5% y/y).

Southern African equities rose as strength in Malawi, Zambia and Zimbabwe offset poor performance in Botswana

In Zimbabwe, we digested strong FY13 results from Delta (T/O: +14.0% y/y; PAT: +38.4% y/y) as the company benefited from an improved product mix with consumers moving from low-margin sorghum to lager and premium brands. As a result, the brewer’s EBIT margin rose from 20.5% to 24.7% y/y. Although we expect volume growth to remain relatively subdued in 1H14, an improved product mix and continued migration into higher margin beverages has the potential to drive continued margin expansion in the coming months. In other action, Econet reported mixed results as solid top-line growth was offset by a decline in net income (T/O: +13.7% y/y; PAT: -16% y/y) as higher depreciation charges coupled with a rise in financing costs weighed on overall performance. Econet remains a core part of the portfolio as we believe the operator will benefit from implementation of value-added products such as Ecocash. It should be noted that Econet reported a 62% increase in Ecocash users and the total number of subscribers now stands at 2.1m. Econet is attractively valued at 8x trailing 12m earnings and EV/EBITDA of 3.85x. In Zambia, Zambeef sold 49% of Zam Chick to Rainbow Chickens, South Africa’s largest poultry producer for USD 14.3m. Despite the relatively small cash consideration, we believe the proceeds will help improve the company’s liquidity situation given its tight reserves and high gearing. While this removes a quantum of potential upside from the company’s existing operations, this was a prudent course of action and Rainbow’s technical assistance should prove beneficial to the company over time.