Monthly Highlights: August 2014

•  West African equities underperformed on back of weakness in Ghana and Nigeria
•  East African equities performed well amid broad-based strength across the region
•  North African equities rose amid continued strength in Egyptian equities
•  Southern African equities continued their upward trajectory amid continued strength in Zimbabwe, Zambia and Malawi
 

West African equities underperformed on back of weakness in Ghana and Nigeria

West African equities underperformed on back of weakness in Ghana and Nigeria. In Nigeria, Flour Mills reported FY14 results (T/O: up +10% y/y; PAT: -28.8% y/y) as management continues to ramp up production at the newly commissioned Golden Sugar refinery. We were encouraged to learn that the refinery is now operating at break-even (48% capacity utilisation) as after-tax profit would have grown by +22.4% y/y in 1H14 after excluding the loss from Golden Sugar. Looking ahead, management will proceed with its backward integration programme as it seeks to support Flour Mills’ diverse range of food products (i.e. snacks, pasta, cereals, powdered drinks, etc). By way of reference, the company is expanding its flour milling capacity (West Mills), oil refining operation (Edo State) and cassava processing capabilities (Thai Farms). In addition, the company has recently acquired an additional 7.5k ha of land to support its vegetable oil refineries (where output has quadrupled) and rice milling operations (Sunti Farms) while commissioning a new animal feed plant in Calabar that will double capacity to 5mtpa 1H13. By contrast, PZ Cussons reported disappointing FY14 results (T/O: +2.2% y/y; PAT: -5.8% y/y) as gross profit margins declined to 23.5% (from 31.7% in FY13) on back of +15.1% y/y growth in cost of sales. Performance was also weighed down by a +8.3% increase in operating expenses although management’s route-to-market strategy is expected to support revenue growth going forward. In the banking sector, we digested weaker-than-expected 1H14 results from GTB (GE: +6.7% y/y; PAT: -10.2% y/y) as impairments rose largely attributed to exposure to one borrower (Lister Flour Mills). Death of the promoter triggered front-loading of the Lister impairments although there could well be a write back of these charges in 2H14. Looking ahead, GTB management anticipates a stronger 2H14 as non-interest income recovers from a solid pipeline of deal origination. By contrast, Access Bank reported strong 1H14 results (GE: +15.8% y/y; PAT: +7.1% y/y) as net interest margins improved by +120bps y/y and non-interest income rose by +14.7% y/y. For FY14, we expect Access Bank’s after-tax profit to rise on back of lower operating expenses with the cost-to-income ratio expected to improve to 63.1% (from 73% in FY13). Shifting to Ghana, Standard Chartered Ghana reported impressive 1H14 results (GE: +18.5% y/y; PAT: +30.1% y/y) on back of higher net interest income (+32.1% y/y) and improved cost management as the bank’s cost-to-income ratio declined to 41% (from 44% in 1H13).

East African equities performed well amid broad-based strength across the region

East African equities performed well amid broad-based strength across the region. In Kenya, we digested strong 1H14 results from Standard Chartered Kenya (GE: +11.8% y/y; PAT: +34.2% y/y) as interest expense fell by -10.3% y/y and non-interest income rose by +31.2 % y/y. Earnings were further supported by strong control over operating expenses (up +1.4% y/y) as the bank’s cost-to-income ratio improved to 35.1% (down from 40.2% in 1H13). By contrast, Co-Operative Bank released disappointing 1H14 results as after-tax profit exhibited little to no growth despite a +21.1% y/y increase in operating income. Operating costs increased by +27.2% y/y with the bank’s cost-to-income ratio rising to 55.9% in 1H14 (from 53.2% in 1H13). Shifting to the consumer sector, EABL released uninspiring FY14 results (T/O: +3.8% y/y; PAT: +5.2% y/y) as a one-off restructuring cost of KES 1.2bn and higher-than-expected tax rate weighed on profitability. Scan Group posted impressive 1H14 results (T/O: +25.4% y/y; PAT: +318.8% y/y) as a result of the consolidation of the WPP owned subsidiaries. In addition, revenue from the company’s existing agencies grew +10% y/y. It should also be noted that interest income rose by +471.6% y/y on back of interest earned on the subscription amount received from WPP. Going forward, we expect healthy returns as the company’s client base expands amid consolidation of the Experiential Marketing (EMPL) acquisition and a broader service offering to its clients. Shifting to industrials, TransCentury reported weak 1H14 results (T/O: -30.1% y/y; PAT: -528.1% y/y) stemming from a KES 1.0bn fair value loss from sale of the company’s stake in Rift Valley Railways. The KES 3.8bn sale proceeds will be used to fund the company’s ongoing investment in a 35MW geothermal power plant and reduce its borrowings. In Tanzania, Tanzania Breweries reported good FY14 results (T/O: +9.8% y/y; PAT: +15.2% y/y) as volumes rose by +4.1% y/y. Although volume expansion was supported by double-digit growth in the premium and affordable beer segments, a decline in wine and spirits volumes weighed on overall performance. Nevertheless, gross profit margins widened to 51.3% (from 49.6% in FY13) amid greater production and cost efficiencies. In another action, National Microfinance Bank reported strong FY13 results (GE: +25.3% y/y; PAT: +31.2% y/y) as improved credit growth (+33% y/y) led to a +21.9% increase in net interest income, as well as good cost control.

North African equities rose on back of renewed strength in Egypt

North African equities rose amid continued strength in Egyptian equities. Despite the long-anticipated cut in national fuel subsidies, Egyptian asset prices remain on the upswing as the North African nation maintains its standing as this year’s star performer. The Egyptian government is projecting roughly EGP 40bn in savings from fuel subsidy reform as it seeks to reduce the nation’s massive budget deficit. On the earnings front, we digested lackluster results from Juhayna (T/O: +9.3% y/y; PAT: -61.4% y/y) as a +16.4% y/y surge in cost of goods sold outpaced top-line growth amid a sharp rise in the price of raw materials (+50% y/y rise in powdered milk costs) and +27.1% y/y rise in marketing expenses. Although Juhayna’s gross margins continue to deteriorate (down -390bp y/y to 27.1%), the rise in marketing expenses was not altogether unexpected as upcoming product launches and support for existing stock were projected to weigh on overall performance. Going forward, we expect margins to recover on back of declining powdered milk prices (down 40% from their peak) and significant improvement in volumes as Juhayna’s medium-term potential is characterized by low penetration levels for processed diary and fruit juice products in Egypt.

Southern African equities continued their upward trajectory amid continued strength in Zimbabwe, Zambia and Malawi

Southern African equities continued their upward trajectory amid continued strength in Zimbabwe, Zambia and Malawi. In Zimbabwe, the Reserve Bank of Zimbabwe established the Zimbabwe Asset Management Corp (ZAMCO), an entity whose goal will be to purchase non-performing debt from local banks and financial institutions. ZAMCO will purchase the loans under commercial terms, assigning collateral and all other rights to existing creditors. As such, it will seek to strengthen banks’ balance sheets and unlock liquidity for lending purposes. It should be noted that non-performing loans at Zimbabwean banks increased to 18.5% of total loans, or USD 705m, in June 2014. On the corporate front, we digested weak 1H14 results from CBZ (GE: +14.8% y/y; PAT: -18.4% y/y) amid increased impairment charges (up +14.3% y/y) and higher operational costs (cost-to-income ratio rose to 58.5%). Shifting to the consumer sector, Delta Corporation continued its backward integration programme as management spent roughly US$13m during the summer cropping season in support of sorghum and barley production as the beverages manufacturer seeks to reduce its reliance on costly raw material imports.