Monthly Highlights: August 2012

•  West African equities performed well as Nigeria extended gains
•  East African equity markets exhibited broad-based strength with Mauritius the lone exception
•  North African equities continued their impressive run
•  Southern African equity markets retreated amid weakness in Zambia
 

West African equities performed well as Nigeria extended gains

West African equities performed well as Nigeria extended gains on back of solid 1H12 results and an improving fundamental backdrop. Structurally speaking, Nigerian oil production has returned to trend and agricultural output appears to be rising amid improved access to financing and inputs. Further, we remain encouraged by central bank action as hawkish monetary policy has proven successful at keeping inflation under control despite elevated soft commodity prices, rising import tariffs and lower fuel subsidies, among other factors. On the earnings front, we digested 1H12 results from GTB (Gross Earnings: +25.2% y/y; PAT: +69.7% y/y) as the bank continues to lead its peers in both profitability and operating efficiency. Shifting to the industrials sector, Lafarge Wapco posted exceptional 1H12 results (Revenue: +57.0% y/y; PAT: +175.7% y/y) as the company benefits from capacity expansion, cost management and product specialization. Dangote Cement also reported 1H12 results showing stable growth patterns (Revenue: +26.0% y/y; PAT: +24.1% y/y)) although management appear to be struggling with its cost control initiatives, and fuel inputs in particular, follows large increases in both capacity expansion and volume growth. Nevertheless, we remain bullish on the Nigerian cement sector as strong demand combined with newly-imposed importation limits creates a highly favourable environment for domestic producers. Shifting to Ghana, newly inducted President John Mahama has begun laying out the NDC administration’s vision for forward-looking economic policy ahead of the upcoming December elections. Given the opposing NPP party has been aggressively campaigning on the premise that Ghanaians are failing to reap the benefits of recent economic growth, we suspect President Mahama will seek to implement public-sector pay increases as evidenced by FM Duffour’s request for supplementary budget spending of USD 1.34 billion. We therefore believe that a pre-emptive rate hike is increasingly likely given the resulting impact of higher inflation and a depreciating cedi.

East African equity markets exhibited broad-based strength with Mauritius the lone exception

East African equity markets exhibited broad-based strength with Mauritius the lone exception. In Kenya, inflation remains fairly well contained on the heels of last month’s hefty 150bp rate cut although currency volatility is likely to advance as international investors retreat amid declining yields. On the earnings front, we digested in-line FY12 results from EABL (Revenue: +23.7% y/y; PAT: +24.0% y/y) as attributable earnings rose +44.6% following the one-off exceptional gain resulting from the sale of Tanzania Breweries. Although the impact on EABL performance from rising distribution and input costs was not immaterial, we take note of management’s performance in Uganda, Tanzania and the Great Lakes region which delivered top-line growth of +38%, +76% and +30% respectively. Shifting to the consumer sector, Scan Group posted 1H12 results (Revenue: +32.4% y/y; PAT: +8.6% y/y), again we see strong revenue growth on back of increased advertising spending across the region, however earnings were eroded as the group continued to spend on its regional expansion strategy while diminished purchasing power weighed on Deacons 1H12 results (Revenue: +10.0% y/y; PAT: -76.7% y/y) following its announced joint-venture with Woolworths. In Mauritius, the economic backdrop continues to deteriorate with the rupee off –3.6% on the year while tourist arrivals remained relatively unchanged over the seven-month period through July. New Mauritius Hotels posted disappointing 3Q12 results as net income fell by one-third on the back of inadequate air transport and continued economic difficulties in Europe.

North African equities continued their impressive run

North African equities continued their impressive run as Egypt was this month’s best performing market. Yet despite the run up in Egyptian asset prices, we remain cautious as the newly elected government is beginning to encounter growing pains as evidenced by the murder of 16 Egyptian soldiers stationed in the Sinai on 5th August. This conveniently provided President Mursi with an opportunity to reshuffle the nation’s military commanders, and resulted in the forced retirement of Egypt’s defense minister, armed forces’ chief of staff and head of intelligence. Further, the Islamist-dominated upper house of parliament appointed new editors-in-chief of state-run media in a move that many believe will lay the foundation for Mubarak-era media restrictions. On the earnings front, we digested strong results from CIB (NII: +47.9% y/y; PAT: +18.1% y/y) as NIMs rose, NPLs dropped and cost-to-income improved.

Southern African equity markets retreated amid weakness in Zambia

Southern African equity markets retreated amid weakness in Zambia as maize output declines and policy uncertainty weighs on investor sentiment. Looking ahead, we remain bullish of the Zambia’s medium-term prospects as growth in the agricultural and mining sectors fuel investment in the nation’s construction and power industries. In Zimbabwe, we digested 1H12 results from CBZ as attributable earnings rose +115% y/y on back of a +59% y/y rise in total income. By contrast, OK Zimbabwe delivered a quarterly update which revealed a relatively healthy +31.0% y/y rise in 1Q12 revenue although a poor harvest forced Zimbabwe’s largest supermarket chain to rely on more expensive imported goods from South Africa.