Monthly Highlights: May 2016

•  West African equity performance was mixed as weakness in Ghana and the Francophone region was offset by strength in Nigeria
•  East African equity markets were broadly weaker as Kenya and Mauritius led markets lower
•  North African equities declined as we witnessed a slowdown ahead of Ramadan
•  Southern African equities recorded losses amid weaknesses across the region
 

West African equity performance was mixed as weakness in Ghana and the Francophone region was offset by strength in Nigeria

West African equity performance was mixed as weakness in Ghana and the Francophone region was offset by strength in Nigeria as Vice President, Prof. Yemi Osinbajo indicated that the Government was considering adopting a more flexible exchange rate. On the earnings front, Nestle posted impressive 1Q16 results (T/O: +31.1% y/y; PAT: +126.2% y/y) driven by both the beverage and food segments where revenues increased +35% y/y and +29% y/y respectively as the company benefited from relatively weaker competition with importers struggling to meet FX requirements and also reaping the rewards of its import substitution programme and focus on local inputs. Currently, Nestle sources approx 70% of its inputs locally. As a result it does not have the same FX requirement that other FMCG companies do, this coupled with some price increases has resulted in 499bps margin expansion. International Breweries delivered solid FY15 results (T/O: +12.7% y/y; PAT: +36.3% y/y) as a +22% rise in operating expenses was not enough to offset strong sales growth and gross margin expansion of 214bps y/y to 46%. In the materials sector, Ashaka Cement posted weak 1Q16 results (T/O: -20.7% y/y; PAT: -75.1% y/y) as growth was impacted by lower prices, largely on the back of the pricing action from market leader Dangote Cement coupled by a +12.4% growth is cost of sales which led to a -2592bps gross margin contraction. In the Francophone region, we digested lacklustre FY15 earnings from Société Africaine de Plantations d'Hévéas (T/O: -2.7% y/y; PAT: -53.2% y/y) as profitability declined amid lower rubber prices (-20.1% y/y) and increasing finance costs (+200%).

East African equity markets were broadly weaker as Kenya and Mauritius led markets lower

East African equity markets were broadly weaker as Kenya and Mauritius led markets lower. In Kenya, Safaricom released sturdy FY16 results (T/O: +19.8% y/y; PAT: +19.6% y/y) as strong growth in mobile data (+42.7% y/y) and MPESA (+27.2% y/y) fuelled the top-line. EBITDA margins expanded to 44.6% (up +98bps) as costs were well managed. The financial sector witnessed further turbulence with a Tier 2 bank, Chase Bank being put into receivership, largely due to irresponsible lending to insiders and a tight interbank market with overnight rates spiking to 22%. KCB posted uninspiring 1Q16 performance (GE: +22.5% y/y; PAT: +6.1% y/y) as profitability was affected by a +149% increase in impairments (NPL's increased to 8.1%) offsetting strong growth in net interest income (+23.7%). The new Governor of the Central Bank has stated that industry NPL's of 6% are the new normal. CO-OP posted 1Q16 results that were in line with our expectations (GE: +28% y/y; PAT +8.3% y/y) on back of +20.7% y/y growth in non-interest income. Shifting to Mauritius, MCB posted impressive 3Q16 results (GE: +4.9% y/y; PAT +18.1% y/y) fuelled by lower provisions (-15.1% y/y) and a decline in the bank’s cost-to-income ratio (from 52.3% to 46.2% y/y).

North African equities declined as we witnessed a slowdown ahead of Ramadan

North African equities declined as we witnessed a slowdown ahead of Ramadan. On the corporate front, we digested strong earnings from CIB Egypt (GE: +15.3% y/y; PAT +17% y/y) amid declining provisions (-31.7% y/y) and higher net interest income (+22% y/y), which resulted in widening net interest margins to 5.8%. Cheese & fruit juice manufacturer, Domty, reported mixed results 1Q16 (T/O: +19.7% y/y; PAT: +7.1% y/y) as solid top-line growth and gross margin gains were offset by a +58% surge in SG&A expenses. Snack food producer, Edita reported disappointing 1Q16 numbers (T/O: -2.0% y/y; PAT: -46.3% y/y) as cake revenues dropped -15% y/y as the company changed format for its Twinkies brand, upsizing to Twinkies Extra and doubling the price point to EGP1/pack, in an effort to improve margins. In the materials sector, Arabian Cement posted weak 1Q16 earnings (T/O: -6% y/y; PAT: -40.5% y/y) mainly attributed to an exceptional FX loss of EGP76m, (from the revaluation of foreign currency debt) following the 13% depreciation of the Egyptian pound. In the healthcare sector, EIPICO reported a solid set of results in 1Q16 (T/O: +10.6% y/y; PAT: +37.6% y/y) as gross profit margin improved by 7.6 percentage points to 52% driven by a drop in cost of sales thanks to a better product mix (focus on reducing the production of low margin products). Similarly, IDH published its 1Q16 update which showed revenue growth of 16% to EGP274m, driven by: i) 11.5% y/y increase in average revenue per patient; and ii) 4% y/y increase in number of tests to 5.9m (tests per patient up 3.5% to 4.16).

Southern African equities recorded losses amid weaknesses across the region

Southern African equities recorded losses amid weaknesses across the region. In Zimbabwe, the Central Bank announced plans to introduce a new local currency in an attempt to ease cash shortages. On the earnings front, we digested relatively weak FY16 results from Delta (T/O: -6.7% y/y; PAT: -12.9% y/y) driven by pressure on aggregate volumes (down -5% y/y to 6.47m hls) as the business remained captive to the larger macro-picture in the country. Shifting to the telecommunications sector, Econet reported poor FY16 results (T/O: -14.1% y/y; PAT: -42.6% y/y) as performance was negatively impacted by a -35% decrease in voice tariffs, reduced MoU, increased depreciation & amortisation as well as the change in sales mix. In Zambia, Zambeef finally settled its long outstanding case relating to the edibles oils business with the Zambia Revenue Authority (ZRA). Zambeef agreed to pay ZMK 14.4m in six monthly instalments. This follows an appeal of the judgment of the Tax Appeals Tribunal for Zambeef Products to pay ZMK 49.15m value added tax (VAT) assessment. This agreement will allow Zambeef to reverse provisions of aprox ZMK33.6m (c USD3.2m).