Monthly Highlights: February 2011

•  West African equities underperformed amid increased profit taking in Nigeria
•  East African equities retreated as earnings season swings into action
•  Southern Africa performed well on back of strength in Zambia and Botswana
 


West African equities underperformed amid increased profit taking in Nigeria

In West Africa, equity performance was largely weaker as the NSE ASI (Nigeria) and BRVM Composite (Francophone region) fell by -3.76% and -2.43% respectively. In Nigeria, we remain cautious ahead of the April elections as ethno-religious contention and geographical divides pose a near-term threat to political stability. On the corporate front, the market digested earnings from Guinness Nigeria, Flour Mills and Nestle Nigeria. Although Guinness underperformed amid lacklustre sales growth, top line weakness was significantly impacted by a packaging disruption and should not be attributed to increased competitive pressure and consumer switching. By contrast, Flour Mills exhibited a -7.4% decline in sales as the +20% q/q rise in wheat prices led to greater consumption of alternative staples such as yam and cassava. Nestle rebounded from a weaker Q3 to post +28.6% earnings growth in FY10. Although sales growth for the company’s flagship food seasoning product (Maggi) remain strong, the company was able to maintain price stability and successfully expand its margins despite rising input costs. Shifting to the Francophone region, Sonatel released weaker-than-expected earnings amid slightly deteriorating margins and declining ARPUs. Nevertheless, the operator added over 2m subscribers in FY10 amid an increasingly volatile political environment. In Ghana, the GSE ASI (Ghana) rose by +3.46% as the market digested stronger-than-expected results from Stanchart and Fan Milk which posted EPS growth of +26% and +23% respectively. From a macro perspective, we remain cautious over the near-term as inflationary headwinds pose a near-term risk given high fiscal spending and the recent run-up in food & energy prices.

East African equities retreated as earnings season swings into action

East African equities underperformed as the NSE 20 (Kenya), SEM-7 (Mauritius) and USE ASI (Uganda) declined by -6.84%, -2.44% and - 3.57%, respectively. In Kenya, earnings season was in full throttle as the market digested results from Barclays Kenya, Equity Bank, KCB and EABL, to name but a few. Barclays benefited from solid operational performance as net interest margins improved whilst Equity Bank posted strong results as higher interest rates and a strong loan book drove a +27.7% y/y rise in net interest income. In the case of KCB, the bank has clearly benefited from last year’s recapitalization as deposits rose +21.0. The bank contained costs and NPLs improved as KCB posted PAT growth of +76% and EPS growth of +50%. Shifting to EABL, we are encouraged by the brewer’s gross margin expansion as it reflects management’s success in reducing the company’s reliance on barley. Should the company maintain its competitive position while successfully diversifying into the far less expensive sorghum, we believe lower input costs could drive significant margin expansion in the months to follow. In Mauritius, bank sector earnings from MCB and SBM were broadly in-line with investor expectations. In the case of SBM, there is talk that the bank may look to unbundle its non-core holdings (e.g. Mauritius Telecom and SICOM) so as to unlock additional shareholder value. In Uganda, we continue to see upward pressure on prices as adverse weather conditions and rising commodity prices drove headline inflation higher by 100bps to 6% y/y in Feb.

Southern Africa performed well on back of strength in Zambia and Botswana

In Southern Africa, equity markets performed favourably as the LuSE ASI (Zambia), and Gaborone DCI (Botswana) rose by +10.60% and +3.49%, respectively. Despite overall market strength, Zambeef declined by -18.5% on the month as investors reacted negatively to management’s announcement that the company will pay USD 47.4 million to acquire three wheat and soya farms from ETC Bio-Energy in the northwestern Copperbelt region. While the notional dollar amount has certainly given investors room for pause, the acquisitions will significantly expand Zambeef’s cropping division, and thus allow for greater product diversification (e.g. flour, bread, edible oils, et al) and synergies within the group (e.g. reduce the import of soya, increase the output of soya cake for stock-feed, et al). In Botswana, the market was led higher by BIHL as the share price rose +11.4% on back of strong FY10 results which revealed a +40.8% y/y rise in earnings growth. Shifting to Zimbabwe, the ZSE Industrial Index retreated by -1.28% as investors booked profits following last month’s surprisingly strong performance.

 

 

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