Monthly Highlights: August 2015

•  West African equities underperformed as Nigeria and Ghana led the way lower
•  East African equities underperformed amid broad-based weakness across the region
•  North African equity markets declined amid broad-based weakness across the region
•  Southern African equities disappointed as Zimbabwe and Zambia continue their downward trajectory
 

West African equities underperformed as Nigeria and Ghana led the way lower

West African equities underperformed as Nigeria and Ghana led the way lower. In Nigeria, we digested impressive 1H15 results from GTBank (GE: +15.1% y/y; PAT: +21.3% y/y) as non-interest revenues rose +17.7% while operating costs declined by -12.9% q/q and -9.1% y/y. As a result, the bank’s cost-to-income ratio fell to 41.5% from 43.7% in 1H14. Zenith Bank also reported strong 1H15 results (GE: +24.2% y/y; PAT: +12.1% y/y) as net interest margin improved by +250bps y/y and net interest income rose by +14.2% y/y. Shifting to the consumer sector, Flour Mills reported disappointing 1Q16 results (T/O: -2.0% y/y; PAT: -65.6% y/y) as finance costs weighed materially on profitability. Revenue declined despite the company’s introduction of on-the-go snacks and breakfast products as consumer spending remains weak. Similarly, PZ Cussons reported uninspiring FY15 results (T/O: +0.3% y/y; PAT: -10.1% y/y) as finance charges weighed on profitability and the weak operating environment resulted in little-to-no revenue growth. International Breweries reported weak 1H15 results (T/O: +0.2% y/y; PAT: -40.6% y/y) as higher operating and interest expenses (up +17.1% & 63.2% y/y) caused gross, operating and PAT margins to contract by -1.5%, -6.3% and -5.5% respectively. Of note, UACN has notified the Nigerian Stock Exchange that it will be looking to raise an as yet unspecified amount of capital for business expansion and continued development. Shifting to Ghana, Standard Chartered Ghana reported lacklustre 1H15 results (GE: +7.6% y/y; PAT: -34.0% y/y) on back of increased operating expenses (+32.1% y/y) and higher provisions (+107% y/y). In contrast, Fan Milk reported impressive 1H15 results (T/O: +91.9% y/y; PAT: +208.9% y/y) on back of healthy volume expansion and a positive contribution from finance income (+302.8% y/y). On the economic front, Ghana's annual producer price inflation fell sharply in July (from 23.1% to 10.6%) although the overall level of inflation remains high when compared to its West African peers.

East African equities underperformed amid broad-based weakness across the region

East African equities underperformed amid broad-based weakness across the region. In Kenya, we digested disappointing 1H15 results from Standard Chartered Kenya (GE: -10.6% y/y; PAT: -36.0% y/y) as the company suffered from both a +50.8% y/y increase in credit impairments and a -31.2% y/y decline in non-interest income. In contrast, Co-Operative Bank released impressive 1H15 results (GE: +13.9% y/y; PAT: +32.3% y/y) on back of higher net interest income (+18.6% y/y) and improved operating efficiencies as the bank’s cost-to-income ratio declined to 47.3% (from 55.7% in 1H14). Barclays Kenya released solid 1H15 results (GE: +10.4% y/y; PAT: +7.5% y/y) on back of a +6.2% y/y increase in operating income and -18.6% decline in provisions. Shifting to materials, Bamburi Cement reported strong 1H15 results (T/O: +11.7% y/y; PAT: +85.9% y/y) as operating margins improved to 20.9% (from 12.8% in 1H14). We remain encouraged by the underlying performance of Bamburi’s Uganda unit which continues to drive both revenue and profit growth at the company level. In Tanzania, National Microfinance Bank reported weak 1H15 results (GE: +6.5% y/y; PAT: -6.7% y/y) as higher interest expense (+120.7% y/y) led to a -4.3% decline in net interest income.

North African equity markets declined amid broad-based weakness across the region

North African equities declined amid broad-based weakness across the region. In Egypt, Eni announced the historic discovery of a massive natural gas field containing an estimated 30tcf off the coast of Egypt. Should the size of Eni’s Egyptian “superfield” prove correct, it will be the largest known gas field in the Mediterranean accounting for nearly 40% of Egypt’s current proven natural gas reserves. This discovery represents a major boost for Egypt and has the potential to transform the country’s energy situation as power cuts caused by gas and oil shortages have often fuelled unrest. On the earnings front, we digested results from Integrated Diagnostic Holdings (T/O: +18.3% y/y; PAT: +11.1% y/y) on back of new lab openings (26 in 2014, 12 in 1H2015), patient growth (+7% y/y), increased number of tests (+8% y/y) and revenue/test expansion (+9.5% y/y). Arabian Cement reported mixed 1H15 results (T/O: -0.34% y/y; PAT +15.4% y/y) as lower selling prices led to weak top-line growth while profits rose on back of a lower effective tax rate. In the consumer sector, EDITA reported mixed 1H15 results (T/O: +13.1% y/y; PAT -0.12% y/y) as revenue growth was offset by rising SG&A expenses which rose +35.8% y/y.

Southern African equities disappointed as Zimbabwe and Zambia continue their downward trajectory

Southern African equities declined amid continued weakness in Zimbabwe, Zambia and Malawi. In Zimbabwe, Dairibord reported strong 1H15 results (T/O: +9.5% y/y; PAT n/a) as the company swung back to profitability following the net loss incurred during the previous period. Management’s strategy to support volumes by adding new product lines and increasing capacity in constrained lines was particularly successful over the past six months as the beverages segment grew by c.63% and consolidated group volumes expanded by c.25%. Shifting to financials, CBZ reported better-than-expected 1H15 results (GE: +14.0% y/y; PAT: +6.6% y/y) despite a highly constrained liquidity environment as net-interest margins rose to 6.4% from 4.3% in 1H14. NMB also released strong 1H15 results (GE: +26.2% y/y; PAT: +128.4% y/y) on back of a broadening in the bank’s market share, better cost containment and improved credit controls. Non-interest income increased by +44.2% y/y as a result of a +63.1% y/y increase in retail banking customer fees and net interest income rose +13.7% y/y as loans grew by +12.2% y/y. In Zambia, Dangote Cement announced its intention to double investment in the country through construction of a second cement plant. It should be noted that Dangote has nearly completed the construction of its first cement plant in Masaiti (300mi north of Lusaka) and is expected to produce 1.5m tonnes of cement p.a. when the plant reaches full capacity at year-end.