Monthly Highlights: April 2013

•  West African equities generally unchanged on the month
•  East African equities exhibited little to no change in performance on the month
•  North African equity markets stabilized amid increased Egyptian aid from abroad
•  Southern African equities rose as strength in Botswana, Zambia and Zimbabwe offset poor performance in Malawi
 

West African equities generally unchanged on the month

In Nigeria, we digested relatively healthy 1Q13 earnings from a number of Tier 1 banks with Zenith (GE: +20.2% y/y; PAT +21.8% y/y) and First Bank (GE: +13.5% y/y; PAT +22.0% y/y) leading the way as better-than-expected loan growth offset the rise in funding costs and operating expenses. Zenith stands out as management successfully expanded the bank’s loan book by +11% q/q whereas most Tier I banks had flat to no loan growth on the quarter. GTB also posted strong 1Q13 results (GE: +20.8% y/y; PAT +16.8% y/y) amid a notable contribution from non-interest income up +53.2% y/y. ETI also delivered strong 1H13 results (GE: +25.8% y/y; PAT +132.8% y/y) as net interest income rose by +17% y/y and the bank’s cost-to-income ratio declined to 73% (from 81% in 1Q12). Access exhibited weak 1Q13 results (GE: -0.70% y/y; PAT: -21.6% y/y) amid lackluster loan growth and a decline in interest income. We were not surprised by Access’ results and have been concerned about the integration process following the bank’s Jan 2012 acquisition of Intercontinental. From amongst the Tier II banks, Diamond posted healthy 1Q13 earnings (GE: +31.3% y/y; PAT: +23.4% y/y) as steady loan growth and increased operating efficiency fuel an improvement in margins. By contrast, Skye Bank posted weak 1Q13 results (GE: +24.6% y/y; PAT +6.7% y/y) as net interest income was flat and operating expenses rose. We believe the bank will need to exhibit strong improvement in asset quality and operational efficiency in order to successfully build confidence amongst its various shareholders and constituents. Shifting to Ghana, GCB delivered strong results (GE: +59.2% y/y, PAT: +118.4% y/y) as net interest income rose by +83.4% y/y. We also digested strong 3Q13 earnings from Guinness Ghana (T/O: +12.9% y/y; PAT: +60.9% y/y) as a favourable product mix allowed management to offset the company’s rising cost of sales.

East African equities exhibited little to no change in performance on the month

In Kenya, we digested strong FY12 results from TransCentury (T/O: +26.0% y/y; PAT: +20.2% y/y) amid growth in the company’s power and engineering divisions. Although Rift Valley Railways has yet to contribute, East African Cables posted +65.9% y/y earnings growth while gains from mining and upstream oil & gas exploration fueled the contribution from engineering. In other action, Deacons received approval to partner with Woolworths as the two appear closer to formalizing a partnership that has been in the making since last year. We view this as a positive given Woolworths’ desire to establish on-the-ground operations in Kenya. Shifting to financials, KCB opened subsidiaries in Ethiopia and Somalia as the bank attempts to expand its regional footprint. In Mauritius, the IMF expects the Mauritius' economy to expand by +3.7% in FY13 as subdued tourist arrivals and modest private investment are expected to weigh down overall performance. In Tanzania, inflation maintained its downward trend amid a moderation in food and energy prices.

North African equity markets stabilized amid increased Egyptian aid from abroad

In North Africa, equity markets stabilized as Egypt negotiated a USD 2bn five-year, interest-free loan from Libya while Qatar pledged another USD 3bn in exchange for Egyptian government bonds. Although Egypt is still engaged with the IMF over a USD 5bn loan programme, any such agreement will likely carry policy constraints including the partial removal of energy subsidies, tax hikes and fiscal reform. As it stands, the Muslim Brotherhood appears incapable of implementing such reforms given deteriorating domestic sentiment and diminished public support. On the earnings front, OCI reached a settlement with the Egyptian authorities over a tax claim arising out of the sale of Lafarge in 2007. The company agreed to pay over USD 1bn to the Egyptian Tax Authority across ten scheduled installments with the first payment of USD 360m to be made before July. We expect this to clear the way for OCI NV to launch a tender offer for OCI’s shares on the Egyptian bourse. On the earnings front, management announced weak 4Q12 results (T/O: +5.3% y/y; PAT: -165.3% y/y) on back of extraordinary charges relating to OCI’s USD 181.2m delayed interest payment for the years 2007 – 10 in addition to a one-off USD 99.2m goodwill impairment for Egyptian Fertilizer Company.

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

In Zimbabwe, Delta announced that total beverage volumes will remain flat on a y/y basis when the company reports earnings next month. Despite the announcement we remain optimistic about the company’s forward-looking potential given an improved product mix with consumers moving from low-margin sorghum beer to lager and premium brands. On the earnings front, CBZ Holdings posted encouraging 1Q13 results (GE: +22.4% y/y; PAT +12.0% y/y) on back of +240% growth in underwriting income as the bank’s loan-to-deposit rose by +6.1%. The bank’s cost-to-income ratio declined by -0.9% and remains attractively valued at T12m P/E and P/B of 1.7x and 0.5x respectively. In Botswana, Letshego posted solid FY13 results (GE: +22.6% y/y; PAT +14.2% y/y) as the microfinance lender’s East African expansion proceeds successfully. Nevertheless, we were discouraged to learn that the bank’s application for a banking license in Botswana was rejected as the central bank cited “a problem” with the company’s proposed business model. While the company has adequate financing in place over the medium-term, its success in acquiring banking licenses will prove critical as management attempts to lower the company’s funding costs over the long-term.