Monthly Highlights: August 2011

•  West African equities declined as Nigeria underperformed the broader market
•  East African equities continued their descent although inflationary pressures appear to be moderating
•  Southern African equities retreated on back of weakness in Zambia & Malawi
 

West African equities declined as Nigeria underperformed the broader market

West African equities came under pressure as the NSE ASI (Nigeria), BRVM Composite (Francophone) and GSE Composite (Ghana) fell by - 10.84%, -2.14% and -3.23% respectively. In Nigeria, the NSE ASI was positioned for its worst month in nearly two years when a violent terrorist attack on the UN building in Abuja caused the index to shed an additional 2.2% on the last trading day of the month. On the earnings front, Dangote Cement reported lacklustre results (Turnover [T/O]: +12.8% y/y; Profit After Tax [PAT]: +8.9% y/y) as aggressive positioning drove the price of an ex-factory 50kg bag of cement to levels last seen in June 2008. Investors also digested 2Q11 earnings from Access Bank (Gross Earnings [GE]: +29.9% y/y; PAT: +47.2% y/y), Diamond Bank (GE: +10.3% y/y; PAT: -95.9% y/y), and Stanbic IBTC (GE: +22.0% y/y; PAT: -23.9% y/y). In Ghana, inflation fell to its lowest level since 1992 as food prices retreated amid government induced subsidies designed to reduce fertilizer costs for local farmers. In the Francophone region, Sonatel reported lacklustre 1H11 earnings (Revenue: +5.7% y/y; PAT: down -20.2% y/y) as tax-related charges weighed down overall performance. In other action, rubber producer Societe Africaine de Plantations d’Heveas (SAPH) reported a surprisingly strong +20.0% y/y rise in 1H11 profits amid a highly challenging operating environment.

East African equities continued their descent although inflationary pressures appear to be moderating

East African equities continued their descent as the NSE 20 (Kenya), USE ASI (Uganda), SEM-7 (Mauritius), and DSEI (Tanzania) fell by - 10.03%, -11.56%, -3.40%, and -0.85% respectively. Inflation remains the overriding concern for investors although conditions in Kenya appear to be improving as June CPI slowed from 24.0% y/y to 23.9% y/y on the month. In Kenya, EABL released disappointing FY11 earnings (Revenue: +16.1% y/y; PAT: +2.4% y/y) as a more challenging operating environment caused volume expansion to slow. Yet when we take into account the large tax increase on malt beer and implementation of the Alcohol Control and Distribution Act (ACDA), top-line growth was actually quite impressive. Weaker-than-expected earnings are primarily attributed to one-off costs incurred during the EABL’s acquisition of Serengeti Breweries. Results from Mumias Sugar (Revenue: +0.1% y/y; PAT: +22.9% y/y) were negatively impacted from weather-related dry spells which resulted in low cane production. Bamburi Cement posted relatively strong 1H11 earnings (T/O: +25.9% y/y; PAT: +21.6% y/ y) although higher costs and increased competition are expected to weigh on forward-looking performance. Investors also digested mixed 1H11 earnings from across the banking sector as Barclays (Total Income [TI]: -5.5% y/y; PAT: -2.0% y/y), Co-Op Bank (TI: +33.1% y/y; PAT: +41.3% y/y), NIC Bank (TI: +23.3% y/y; PAT: -0.8% y/y) and StanChart Kenya (TI: +1.2% y/y; PAT: -11.9% y/y) released results. In Mauritius, headline inflation rose marginally from 6.6% to 6.7% as a sharp increase in transportation costs were offset by declining food prices. New Mauritius Hotels reported disappointing 3Q11 numbers as the company posted a wider than expected loss amid rising costs and generally low occupancy levels. In Uganda, inflationary pressures continue to weigh on sentiment as core inflation rose from 12.2% y/y to 15.6% y/y in July. Despite this month’s 200bp rate increase by The Bank of Uganda (BoU), we envisage high short rates over the near-term on back of hawkish rhetoric from BoU Deputy Governor Kasekende. In Tanzania, inflation rose from 10.9% to 13.0% y/y on back rising energy and food prices – up +34.0% and +14.8% respectively.

Southern African equities retreated on back of weakness in Zambia & Malawi

Southern African equities retreated as the LuSE ASI (Zambia), MSE DCI (Malawi), Gaborone DCI (Botswana) and ZSE Industrial Index (Zimbabwe) declined by -9.97%, -9.14%, -1.15% and -1.93% respectively. In Zambia, inflation slowed from 9.0% y/y to 8.3% y/y as nonfood inflation reached a three-year low. Nevertheless, short rates are expected to rise and the currency will face upward pressure as public sector borrowing increases ahead of next month’s elections. In Malawi, the Reserve Bank devalued the Kwacha by approximately 10% amid fuel and currency shortages following diminished donor support from both the UK and US. We remain concerned as this month’s devaluation is unlikely to alleviate short-term currency shortages amid mounting civil unrest and widespread anti-government protests. In Botswana, inflation fell from 7.9% to 7.8% y/y as the Bank of Botswana elected to keep it benchmark lending rate on hold. On the earnings front, ABC Holdings reported strong 1H11 results as net income rose +32.0% y/y. In Zimbabwe, CBZ Holdings reported strong 1H11 results as net income rose +114.1% y/y. By contrast, Dariboard reported a -21% y/y decline in 1H11 net income whilst PG Industries saw its operating loss widen 10.3% in 1H11 amid frequent breakdowns and repeated plant closure.