Monthly Highlights: October 2011

•  West African equities rose on back of strength in Nigeria and the Francophone region
•  East African equities rebounded as Kenya was this month’s leading performer
•  Southern Africa underperformed despite strong corporate earnings and improved economic fundamentals
 

West African equities rose on back of strength in Nigeria and the Francophone region

West African equities performed well as the NSE ASI (Nigeria) posted its first positive month since May rising +3.02% on the month. Although the NSE ASI remains -18.8% lower over the past six-month period, we were encouraged by this month’s strong earnings data as well as bold policy initiatives designed to support the ailing Naira. On the macro front, the Central Bank of Nigeria (CBN) hiked the Monetary Policy Rate by +275bp to 12.0% whilst maintaining the symmetric corridor at +/- 200bp. Yet while the CBN reaffirmed the +/- 3.0% band around the NGN/USD 150 target level, recent comments from Governor Sanusi indicate a willingness to raise the official target to NGN/USD 155 over the next year. Healthy 3Q11 bank sector earnings were generally in-line with market expectations although ETI (Gross Earnings [GE] +18.1% y/y; Profit After Tax [PAT] +262.0% y/y) and FCMB (GE +23.45%; PAT +72.83% y/y) reported stronger-than-expected results. First Bank (GE +19.26% y/y; PAT +31.72% y/y) and Zenith (GE +31.06% y/y; PAT +37.97% y/y) reported strong results that were generally in-line with estimates whilst UBA (GE -2.6% y/y; PBT -28% y/y) continues to underperform and remains the only Tier I bank whose profits have not fully recovered from the banking crisis. Unilever Nigeria reported strong 3Q11 results (Turnover [T/O] +18.15%; PAT +25.52% y/y) as improving power and logistics infrastructure continues to eliminate operating inefficiencies. Unilever’s performance was especially notable when taken in comparison to PZ Cussons (T/O +30.94% y/y; PAT -23.62% y/y) where deteriorating margins weighted heavily on the company’s bottom line. In other action, Oando (T/O +41.36% y/y; PAT +34.37% y/y) posted strong results on back of strong upstream production and higher crude oil prices. Shifting to Ghana, the GSE Composite fell -3.23% as the index posted its second straight monthly decline. Nevertheless, we remain encouraged by recent performance as Ghana is home to the best performing African equity market in FY11 - up +7.07% over the past six month period. The Bank of Ghana kept rates at 12.5% this month as a weaker Cedi offset declining food prices. Although inflation remains surprisingly sanguine, we expect price pressures to accelerate through year-end as rising wage, water and electricity costs feed into the broader economy. On the earnings front, GGBL returned to profit in 1Q11 as revenue rose +20.55% y/y. Of note, the company forecasts 9.0 – 9.5% demand growth through year-end and expects to double production after adopting a pasteurizer designed to reduce water and electricity consumption. We also digested healthy 3Q11 results from SG-SSB (Revenue +14.81% y/y; PAT +6.09% y/y) as the bank’s deposit base and loan book rose by +19.6% y/y and +20.11% y/y respectively. In other action, the BRVM Composite posted its first monthly increase since April as the index rose by +7.73% in October.

East African equities rebounded as Kenya was this month’s leading performer

East African equities rebounded on back of strength in Kenya as the NSE20 rose +8.04% in October - its first positive month since April. The NSE20 remains the second worst performing equity index in Africa this year having lost -26.93% of its value over the past six months. On the macro front, the Bank of Kenya (BoK) took bold policy action by increasing its key interest rate by +400bp to 11.0%. The BoK also reduced commercial lenders’ foreign exchange exposure limits from 20.0% to 10.0% in an effort aimed at reducing currency volatility and stemming the Shilling’s slide. It should be noted that KES is the worst performing currency in the world on a year-to-date basis as Kenyan motor vehicle dealers, importers of heavy machinery and computer retailers have begun quoting prices of consumer goods in USD. As a result, yields on 91-day T-Bills are 15.3% - their highest level since March 2001. On the earnings front, Equity Bank (PAT +42.9% y/y) and KCB (PAT +43.05% y/y) announced strong 3Q11 results despite the highly unstable operating environment. In utilities, we digested soft 3Q11 results from KenGen (T/O +30.8% y/y; PAT -36.7% y/y) and relatively uninspiring FY11 results from KPLC (T/O -4.70% y/y; PAT + 13.6% y/y). On a separate note, KenolKobil continues to expand its storage capacity as this month’s acquisition of the Lubumbashi Oil Terminal in the Southern Katanga Province will enable it to commence downstream operations within the DRC. We are encouraged by the company’s most recent expansion as Lubumbashi has significant mining activities which require large quantities of petroleum products. Shifting to Mauritius, the SEM-7 (Mauritius) rose +0.33% in October as SBM posted relatively uninspiring results (PAT +3.47% y/y) despite a +15% y/y rise in operating income. In other action, the USE ASI (Uganda) rose +0.86% while the DSEI (Tanzania) fell by -4.09% on the month.

Southern Africa underperformed despite strong corporate earnings and improved economic fundamentals

Southern Africa exhibited broad-based weakness as the Gaborone DCI (Botswana), LuSE ASI (Zambia), MSE DCI (Malawi) and ZSE Industrial Index (Zimbabwe) declined by -2.18%, -3.68%, -0.12% and -7.86% on the month. In Botswana, the economy exhibited sequential growth of +12.4% q/q as construction and mining activity rose considerably. We digested strong 1H11 earnings from Letshego (PAT +36.0% y/y) as domestic outperformance and a lower tax rate drove half-year results. Looking ahead, we anticipate strong demand for the IPO of Choppies, Botswana’s largest retail grocery chain, which promises to list on the BSE by year-end. Shifting to Zambia, we are still digesting newly-elected President Sata’s recent ministerial appointments as he has been very active in rearranging various parastatals. Of note, Sata recently overturned the previous administration’s decision by cancelling FirstRand’s acquisition of Finance Bank Zambia. In Zimbabwe, the markets shrugged off 1H11 results from Econet Wireless (Revenue +23.5% y/y; PAT +15.0% y/y) as ARPU rose +1.6% y/y despite data’s declining top-line contribution. Of note, EBITDA margins fell by -8.33% y/y as operating costs increased on back of upfront data purchases for high-speed internet and rising fuel costs at base stations.