Monthly Highlights: November 2012

•  West African equity markets rose on back of broad-based strength across the region
•  East African equities retreated amid weakness in Kenya
•  North African equities plummeted as violence erupted across Egypt
•  Southern African equity markets were largely weaker amid modest profit-taking into year-end
 

West African equity markets rose on back of broad-based strength across the region

West African equity markets rose on back of broad-based strength across the region. In Nigeria, foreign appetite for strategically positioned consumer companies continues remains strong as evidenced by GlaxoSmithKline’s offer to purchase roughly 30% of GSK Nigeria’s outstanding shares at a 28% premium to the market. Over the past few months, we have pared back our exposure to the Nigerian consumer sector as valuations have richened to the point where best case growth expectations are fully priced in at current levels. Nevertheless, we remain constructive on Nigerian Breweries as the company maintains roughly 70% of market share with top-line growth projected to exceed 6% p.a. over the foreseeable future. On the earnings front, we digested lackluster results from Flour Mills (T/O: +5.1% y/y; PAT: -13.1% y/y) as rising wheat prices and higher import duties weighed on quarterly performance. In Cote d’Ivoire, President Ouattara reduced the size of his cabinet and appointed a new Prime Minister as he looks to speed up the pace of economic reform. On the earnings front, we digested improved 1H12 results from SGBCI (Gross Revenue: +20.1% y/y; NI: +189.6% y/y) as the bank continues to rebuild following last year’s civil strife.

East African equities retreated amid weakness in Kenya

East African equities retreated amid weakness in Kenya. We digested generally in-line results from across the Kenyan banking sector with Equity Bank (Operating Income: +30.3% y/y; PAT: +13.8% y/y), Standard Chartered (Operating Income: +41.8% y/y; PAT: +66.6% y/y), and Barclays Bank (Operating Income: +4.6% y/y; PAT: +2.3% y/y) releasing 3Q12 earnings. While we believe the banking sector is positioned to benefit from a dovish rate environment over the coming months, margin compression remains a concern as competition for deposits is likely to intensify. We remain intrigued by the sharp selloff in Base Resources following last month’s announcement that at least 35% of all mineral rights must be locally owned by Kenyan citizens. While management contends that its rights to the Kwale mineral sands project are protected from recent legislative changes, we remain skeptical and are presently awaiting further clarification on the issue. Although we do not presently own shares of Base, we have performed some preliminary work on the company and view it as a high-quality, fully-financed development story with the potential for significant upside from current levels.

North African equities plummeted as violence erupted across Egypt

North African equities plummeted as violence erupted across Egypt in response to Morsi’s executive decree granting the president’s office absolute power over the nation’s Supreme Judicial Council, including immunity from legal rulings. In effect, Morsi’s decree removes the legal obstacles which had previously prevented the Muslim Brotherhood from regaining control of parliament and integrating itself within the country’s powerful civil service agencies and state-run institutions. Fundamentally, the ongoing political turmoil only worsens the state of Egypt’s already strained economy and may well undercut Morsi’s ability to implement the social reforms (i.e. removal of fuel and food subsidies) required to finalize Egypt’s USD 4.8 billion IMF loan. Despite Egypt’s deteriorating socio-political backdrop, we were encouraged by strong 3Q12 results from CIB as exceptional returns from the bank’s treasury investment portfolio fueled record profitability amid improved margins and income gains.

Southern African equity markets were largely weaker amid modest profit-taking into year-end

Southern African equity markets were largely weaker amid modest profit-taking into year-end. In Zimbabwe, we digested impressive results from Delta (T/O: +18.1% y/y; PAT: +42.0% y/y) as margin expansion offset decelerating volume growth. We also reviewed 1H13 results from Econet Wireless (Revenue: +16.7% y/y; EBITDA: +16.5% y/y), and have slightly lowered our forward-looking earnings expectations given margin compression amid higher-than-expected D&A charges and a less favourable tax environment. Nevertheless, subscriptions rose +24.4% y/y to over 7 million while EcoCash, the operator’s mobile money transfer service, registered unprecedented sequential h/h growth of +70%. In Zambia, rising inflation and declining copper production has weighed on economic growth although we believe the economy is poised to improve notably in FY13 as President Sata’s reform agenda takes hold and the BoZ downshifts to a less hawkish bias on interest rates.