Monthly Highlights: October 2015

•  West African equities came under pressure amid continued weakness in Ghana and Nigeria
•  East African equity markets suffered from poor performance in Kenya, Mauritius and Uganda
•  North African equities underperformed amid broad based weakness across the region
•  Southern African equities declined on back of weakness in Zambia
 


West African equities came under pressure amid continued weakness in Ghana and Nigeria

West African equities came under pressure amid continued weakness in Ghana and Nigeria. The IMF has revised Nigeria's GDP growth forecast lower to 4% in 2015, due to weak oil prices and limited Federal activity. In the financial sector, GTB reported 3Q15 earnings that were largely in-line with our expectations (G/E: +14.6% y/y; PAT: 12.6% y/y) costs were kept under control and below inflation whilst loan loss impairments crept up slightly 5.8% q/q. Given the difficult macro environment there is a risk of further deterioration in 4Q15. Ecobank reported unimpressive 3Q15 results (GE: -8.6% y/y; PAT: -52.1% y/y) as non-interest income declined by -19.9% y/y. Diamond Bank also posted disappointing 3Q15 results (GE: -10.5% y/y; PAT: -53.5% y/y) as non-funded income fell by -33.6% y/y and provision increased 14.4% y/y. In contrast, Zenith Bank posted impressive 3Q15 results (G/E: +21.1% y/y; PAT: +26.7% y/y) as non-funded revenue grew by +75.9% y/y. UBA also reported strong results (GE: +10.3% y/y; PAT: +16% y/y) as +36.2% y/y growth in net interest income offset a -4.2% y/y decline in non-interest income and +536% y/y rise in provisions. Skye Bank reported disappointing 3Q15 results (GE: +32.5% y/y; PAT: -15.8% y/y) as a sharp rise in operating expenses (+69.9% y/y) outweighed the increase in non-interest income (+136% y/y). It should be noted that the bank’s cost-to-income ratio deteriorated from 67.9% to 81.5% by quarter-end. On the consumer front, Nestle Nigeria delivered stronger-than-expected 3Q15 performance (T/O: +18.6% y/y; PAT: +66.1% y/y) on back of an improved distribution and inclusion of Wyeth Nutrition products. Nigerian Breweries posted mixed results (T/O: +18.8% y/y; PAT: -21% y/y) as profits declined on back of a 47% y/y rise in operating expenses and 43% y/y increase in net interest expense. It should however be noted that these figures are not like-for-like as the Consolidated Breweries acquisition was not previously reflected. Guinness Nigeria also reported disappointing 1Q15 results (T/O: +3.3% y/y; PAT: -75.5%) with gross margins declining by 732bps to 42.8% on back of a +18.4% y/y rise in cost of sales. Weak sales growth is reflective of a challenging operating environment and resulting squeeze on discretionary income. Shifting to the energy sector, Seplat released 3Q15 results that were in-line with expectations (T/O: -15.7% y/y; PAT: -60.4% y/y) as oil sales declined by -26% y/y on back of the oil price decline. It should however be noted that the company recorded only two days of downtime during the third quarter as compared with 25 and 27 days of downtime in the first and second quarters respectively. As a result, average oil and gas production rose by 15% y/y and 44% y/y respectively to 27,270bbd and 65.5mmscf/d. In Ghana, we digested disappointing 3Q15 results from Ghana Commercial Bank (G/E: -3.8% y/y; PAT: -81.0% y/y) on back of a -60.1% y/y decline in non-interest income and a significant rise in provisions.

East African equity markets suffered from poor performance in Kenya, Mauritius and Uganda

East African equity markets suffered from poor performance in Kenya, Mauritius and Uganda. In Kenya, Equity Bank released impressive 3Q15 results (GE: +33.4% y/y; PAT: +19.4% y/y) on back of strong growth in both net interest income (+34.1% y/y) and non-interest income (+28.5% y/y). Similarly, Kenya Commercial Bank released relatively sanguine 3Q15 results (GE: +8.2% y/y; PAT: +4.2% y/y) as interest expense rose by +56.6% and non-funded income declined by -7.3% y/y. In utilities, KenGen reported strong FY15 results (T/O: +45.1% y/y; PAT: +307.5% y/y) as additional geothermal capacity came on stream. It should be noted that installed capacity rose by +20% y/y from 1337MW to 1611MW. In Tanzania, we digested weak 3Q15 results from National Microfinance Bank (GE: +6.4% y/y; PAT: -6.5% y/y) as operational efficiency deteriorated as evidenced by a rise in the cost to income ratio from 52.1% to 60.4%.

North African equities underperformed amid broad based weakness across the region

North African equities underperformed amid broad based weakness across the region. In Egypt, the country continues to suffer from rising poverty, election fatigue and mounting tension within al-Sisi’s political apparatus. Despite news of a US$3 billion loan from the World Bank, the nation’s budget deficit is expected to rise to 8.9% of GDP in FY16. On the earnings front, we digested impressive 3Q15 results from Juhayna (T/O: +12.7% y/y; PAT: +64.2% y/y) as margins expanded on back of stable milk prices. The company’s gross margin rose by 11% y/y whilst EBIT and PAT margins expanded by 5% and 3% respectively. In other news, GB Auto entered into a triparty agreement with Chinese manufacturer Chery International and local distributor Aboul Fotouh Automotive as it becomes the exclusive distributor of Chery cars in Egypt. The Chery deal will strengthen GB Auto’s position in the local market via a low-risk addition that should contribute to both passenger car & after-sale revenue.

Southern African equities declined on back of weakness in Zambia

Southern African equities declined on back of weakness in Zambia with the Kwacha shedding another –3.61% as weak commodity prices and local power shortages take their toll on the domestic economy. On the corporate front, Zambeef guided that USD revenue will be lower than previously expected and we expect similar announcements from other local companies over the coming weeks. In Zimbabwe, we digested weak 1H16 numbers from Econet Wireless (T/O: -17.7% y/y; PAT: -52% y/y) as regulatory changes (i.e. 35% reduction in voice tariffs, 5% excise duty on airtime sales, etc.) have had a negative impact on the company’s operations. When combined with lower disposable incomes and the migration of customers from voice to data, it should come as no surprise that management have announced a number of initiatives aimed at defending the company’s margins. Examples include a 15% reduction in all supply costs, 20% reduction in staff-related costs and decline in air time commissions. On the consumer front, Delta provided a trading update for the six-month period through 30th September with volumes declining across all beverage categories amid depressed consumer demand and deteriorating disposable income.

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