Monthly Highlights: February 2015

•  West African equities strengthened as Nigeria outperformed amid rising oil prices and improved investor sentiment
•  East Africa posted solid gains as Kenya and Tanzania continue to outperform
•  North African equity markets retreated as Egypt’s upcoming parliamentary elections were suspended
•  Southern African equities performed well amid broad based strength throughout the region
 

West African equities strengthened as Nigeria outperformed amid rising oil prices and improved investor sentiment

West African equities strengthened as Nigeria outperformed amid rising oil prices and improved investor sentiment following removal of the RDAS Foreign Exchange Window. On the earnings front, we digested disappointing 3Q15 numbers from Flour Mills (T/O: +9.1% y/y; PAT: n/a) as revenue growth was offset by increased margin pressure and rising costs. Gross margins at Flour Mills have deteriorated by -2,908bp to 6.2% as the weakening Naira has resulted in rising input costs, in particular the cost of wheat imports. Nigerian Breweries released weak FY14 results (T/O: -0.8% y/y; PAT: -1.3% y/y) as the challenging economic environment led to a decline in demand for the company’s premium brands.  Nestle Nigeria released mixed FY14 results (T/O: +7.7% y/y; PAT: -0.1% y/y) as stronger-than-expected revenue growth was offset by deteriorating margins amid rising input prices. On the economic front, the Central Bank of Nigeria (CBN) terminated its bi-weekly currency auctions by closing the RDAS/WDAS foreign exchange window. With this announcement, the CBN has effectively shifted all foreign exchange demand to the interbank market and eliminated the ability for authorized dealers to engage in speculative practices designed to take advantage of structural arbitrage opportunities which had formed between the two. In Ghana, the Bank of Ghana left its key interest rate unchanged at 21% as inflationary pressures appear to be abating somewhat. It should be noted that the government has secured a US$1 billion IMF financial package designed to support the economy with the goal of bringing the fiscal deficit down from 9.5% of GDP to between 3.5% - 4% by 2017.

East Africa posted solid gains as Kenya and Tanzania continue to outperform

East Africa posted solid gains as Kenya and Tanzania continue to outperform. In Kenya, Kenya Commercial Bank posted strong FY14 results (GE: +18.3% y/y; PAT: +17.5% y/y) driven by an acceleration in non-interest income (+28.5% y/y) and improved operating efficiency with the bank’s cost-to-income ratio declining from 54.0% to 50.2%. We also digested healthy 1H15 results from EABL (T/O: +9.1% y/y; PAT: +11.1% y/y) as volume growth was recorded across nearly all of the company’s brands. Shifting to the utilities sector, Kengen reported impressive 1H15 results (T/O: +37.4% y/y; PAT: +384.2% y/y) as installed capacity rose by +28% y/y from 1,231MW to 1,575MW by year-end. Looking ahead, Kenya is targeting national power output of 5,000MW by 2016 as it seeks to keep pace with the nation’s industrial growth potential. In Mauritius, MCB Group posted strong 1H15 results (GE: +8.0% y/y; PAT +16.8 y/y) as non-interest income rose by +20.6% y/y and margins improved amid a -0.1% y/y decline in operating expenses. In Tanzania, National Microfinance Bank posted good FY14 results (GE: +18.8% y/y; PAT +16.3 y/y) on back of a +14.7% y/y rise in net interest income and -28.7% y/y decline in provisions. By comparison, CRDB Bank announced relatively sanguine FY14 results (GE: +21.3% y/y; PAT +6.7 y/y) amid rising provisions (+17.1% y/y) and an increase in operating expenses as evidenced by deterioration of the bank’s cost-to-income ratio from 57.2% to 60.4% by year-end.

North African equity markets retreated as Egypt’s upcoming parliamentary elections were suspended

In North Africa, equity markets retreated as Egypt’s upcoming parliamentary elections were suspended by the Administrative Court following a Supreme Court ruling which deemed the vote unconstitutional. It should be noted that Egypt has operated without Parliament since the House of Representatives was dissolved in June 2012. On the earnings front, CIB Egypt posted record FY14 results (GE: +31.1% y/y; PAT: +35.1% y/y) as net interest income rose by +23.8% y/y on back wider net interest margins amid lower funding costs and an improved cost-to-income ratio. Looking ahead, we are projecting c.18% growth in CIB’s loan book as net interest margins remain above 5% and earnings achieve double-digit growth. We digested disappointing FY13 results from Juhayna (T/O: +11.8% y/y; PAT: -48.2% y/y) as top-line growth was offset by an uptick in cost of goods sold as margins faced pressure from higher input prices and increased energy costs. Looking ahead, we expect the ongoing economic recovery in Egypt to stimulate demand growth for the company’s dairy and juice products.

Southern African equities performed well amid broad based strength throughout the region

Southern African equities performed well amid broad based strength throughout the region. In Zimbabwe, CBZ Bank announced FY14 results that were slightly above our expectations (GE: +12.5% y/y; PAT: -9.9% y/y). After a weak 1H14, the bank’s performance improved materially through 2H14 as operating expenses declined and profitability improved. In Zambia, Zambia Sugar plans to spend US$82 million to construct a refinery that would double refined production to approximately 100,000 tonnes per annum. Africa’s top sugar cane producer expects the refinery to come on-stream by May 2016 and will be financed with a combination of debt and internal resources.