Monthly Highlights: August 2016

•  West African equity performance was broadly mixed with weakness in Nigeria continuing
•  East African equities underperformed amid broad-based weakness across the region
•  North African equities rose, spurred by positive performance from Egypt and Tunisia
•  Southern African equities posted mixed results as Zambia and Zimbabwe were positive while Malawi underperformed
 

West African equity performance was broadly mixed with weakness in Nigeria continuing

West African equity performance was broadly mixed with weakness in Nigeria continuing as official data from the National Bureau of Statistics confirmed that the economy is in a recession, reporting two consecutive quarters of negative GDP. On the earnings front, we digested impressive 1H16 results from GTBank (GE: 37.3% y/y; PAT: +45.1% y/y) as non-interest revenues rose +160%, largely driven by revaluation gains of NGN 61.2bn (+834% y/y). Access Bank also reported strong 1H16 results (GE: +3.2% y/y; PAT: +26.2% y/y) as net interest income rose by +42% y/y and cost to income ratio improved to 53.7% from 57.9% in 1H15. By contrast, Zenith Bank released weak 1H16 (GE: -6.2% y/y; PAT:-15.7% y/y) driven by lower non-interest income (-37.1% y/y) as a result of pressure on fees and commission income and sustained FX losses. Profitability was also weighed down by higher impairment charges (+97.6% y/y). Shifting to the consumer sector, PZ Cussons reported uninspiring FY16 results (T/O: -4.9% y/y; PAT: -48.5% y/y) as the devaluation of the naira drove gross margins down by -306bp y/y to 24.9% and led to a +74.3% y/y rise in net interest charges. Similarly, International Breweries reported poor 1Q17 (T/O: +31.6% y/y; PAT: n/a) as strong y/y sales growth was offset by a NGN 2.9bn net finance charge vs. NGN 251m in 1Q16. Dangote Sugar reported positive 1H16 (T/O: +37.9% y/y; PAT:+16.9% y/y) as a +28% y/y rise in operating expenses offset benefits coming from sales growth delivered during the period. Total Nigeria reported impressive 1H16 results (T/O: -29.9% y/y; PAT: +270.6% y/y) as sales for the Aviation and Corporate Customer segments grew by +43.8% and +13.3% respectively, driving a 438bps improvment in gross margin A -62% reduction in finance charges ( also drove profits higher. Shifting to Ghana, Fan Milk reported impressive 1H16 results (T/O: +25.6% y/y; PAT: +17.8% y/y) on the back of healthy volume expansion and a positive contribution from finance income (+81.6% y/y).. Whilst the pan-African bank, Ecobank, also reported disappointing 1H16 numbers (GE: +0.2% y/y; PAT: -37.6% y/y) as impairments increased by +78.5% y/y and non-interest income fell -15.5% y/y on the positive side a large portion of the impairment charge relates to the Tema Oil Refinery in Ghana and we anticipate that the Government will clear this debt and we should see a significant write-back prior to year end.

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

East African equities underperformed amid broad-based weakness across the region led by Kenya after President Uhuru signed into law a banking amendment Bill to cap banks lending rates at 400 bps above the Central Bank of Kenya’s base rate and impose a deposit floor at 70% of the CBR. We are still awaiting a pronouncement from the CBK as to the workings of this Bill which has created significant uncertainty in the sector. On the earnings front, we digested impressive 1H16 results from Equity Bank (GE: +22.8% y/y; PAT: +27.6% y/y) on back of higher net interest income (+36.9% y/y) and improved operating efficiencies as the bank’s cost-to-income ratio declined to 49.6% from 51.4% in 1H15. In contrast, KCB reported disappointing 1H16 results (GE: +13.2% y/y; PAT: -1.0% y/y) on back of lower non-interest income (-7.7% y/y). COOP released solid 1H16 results (GE: +30.1% y/y; PAT: +24.8% y/y) on back of a +26.4% y/y increase in operating income & a decline in cost to income ratio to 45.3% from 46.2% in 1H15. In the materials sector, Bamburi Cement reported muted 1H16 results (T/O: -1.1% y/y; PAT: -6.0% y/y) driven by slow growth in the individual home builder segment which constitutes approx. 65% of sales in Kenya. Sales volumes into the landlocked neighbouring export markets also fell. ARM Cement reported poor 1H16 numbers (T/O: -13.2% y/y; PAT: n/a) attributed to increased competition in the Tanzania market following the entry of a Dangote Cement, which initiated a price war resulting in -33% price collapse relative to the previous year. In Tanzania, Tanzania Breweries reported in-line FY16 results (T/O: +3.6% y/y; PAT: +5.7% y/y) as TZS depreciation in the early part of the financial year led to higher raw material costs & reduced gross margins. Profitability was aided by a +3,057% increase in finance income.

North African equities rose, spurred by positive performance from Egypt and Tunisia

North African equities rose, spurred by positive performance from Egypt and Tunisia. In Egypt, we saw some weakness in the consumer names after Parliament approved a long-awaited law introducing a value-added tax of 13%, rising to 14% in the next fiscal year which replaces an existing sales tax regime. On the earnings front, we digested positive 1H16 results from Integrated Diagnostic Holdings (T/O: +12.0% y/y; PAT: +645% y/y) on back of patient revenue/test growth of +12% y/y. Recurring earnings were up +12% y/y as 1H15 numbers included non-recurring IPO expenses of EGP122.9m. Arabian Cement reported mixed 1H16 results (T/O: -1.6% y/y; PAT +15.0% y/y) as top-line growth was flat while profits rose on back of a lower effective tax rate. In the consumer sector, EDITA also reported mixed 1H16 results (T/O: +2.4% y/y; PAT -41.3% y/y) as results were weighed down by fx losses EGP 48m.

Southern African equities posted mixed results as Zambia and Zimbabwe were positive while Malawi and Botswana underperformed

Southern African equities posted mixed results as Zambia and Zimbabwe were positive while Malawi and Botswana underperformed. In Zimbabwe, CBZ reported weak 1H16 results (GE: -11.0% y/y; PAT: -10.2% y/y) amid declining net-interest income (down -18.8% y/y) & higher operational costs with cost-to-income ratio increasging to 72.2%. By contrast, Barclays released strong 1H16 results (GE: +26.2% y/y; PAT: +128.4% y/y) on back of a +12.1% growth in net interest income buoyed by +12% y/y loan growth. Non-interest income also increased by +16.7% y/y as a result of a +111.6% y/y growth in net foreign exchange income. In Zambia, President Lungu is set to be inaugurated for a new 5-year term in September after the country's constitutional court threw out an attempt by the defeated presidential candidate to annul August's election results, in which opposition leader, H. Hichilema, lost by 100,000 votes. On the corporate front, Zambeef announced a USD 65m investment by the U.K.’s Commonwealth Development Corp (CDC). The CDC funds will allow Zambeef to pay off USD 23m to Rainbow Chicken, which gave notice that it was exercising a put options forcing Zambeef to buy it out of the Zam Chick and Zam-hatch joint ventures.