Monthly Highlights: January 2016

•  West African equities performed poorly on the back of broad-based weakness across the region
•  East African equities performed poorly as weakness in Kenya, Tanzania and Uganda offset solid performance in Mauritius
•  North African equities were dragged down by Egypt despite strong returns from Morocco and Tunisia
•  In Southern Africa, equities continue to underperform amid broad-based weakness across the region
 

West African equities performed poorly on the back of broad-based weakness across the region

African equities performed poorly on the back of broad-based weakness across the region. On the economic front, the market anxiously anticipated an initial devaluation from the Central Bank of Nigeria (CBN) as practitioners meticulously dissected every political movement as oil revenues shrink and the US dollar shortage grows. To the dismay of many, the CBN maintained the status quo, leaving the Monetary Policy Rate (MPR) at 11%, cash reserve ratio (CRR) at 20% and asymmetric corridor at +2% / -7% on the MPR. Unfortunately, we do not see investment returning to the West African nation until further clarity on the exchange rate is provided. At present, the 12m non-deliverable NGN/USD forward is priced at 280.00. Although earnings season begins next month, we digested solid 3Q16 results from International Breweries (T/O: +20.5% y/y, PAT: +1,029.6% y/y) driven by 753bp y/y gross margin expansion and a -66% y/y decline in net finance costs. Guinness Nigeria released 1H16 results (T/O: -9.8% y/y; PAT: -65.5% y/y) as the combination of weak top-line growth and contraction in gross margin offset improved operating expenses and finance costs - down -4.8% y/y and -25.8% y/y respectively. Shifting to the financial sector, FCMB reported disappointing 9M15 numbers (G/E: +2.4% y/y; PBT: -86.9% y/y) on back of a +290.7% y/y spike in loan loss provisions, coupled with a -4.1% decline in non-funded income. In the energy gas sector, Seplat released a better-than-expected trading update for FY15 with total working interest production up +41% y/y to 43,372 barrels of oil equiv per day (boepd) despite unplanned downtime on the Trans-Forcados export route. The expansion of Seplat’s Oben gas facility continues to support growth with gas and oil production increasing +119% and 20% y/y, respectively.

East African equities performed poorly as weakness in Kenya, Tanzania and Uganda offset solid performance in Mauritius

East African equities performed poorly as weakness in Kenya, Tanzania and Uganda offset solid performance in Mauritius. In Kenya, we digested healthy 1H16 results from EABL (T/O: +8.2% y/y; PAT: +67.3% y/y) as outstanding sales growth from its economy brand Senator grew by +106% following an excise duty reduction and improved price points for the Brand's bottle and keg offering. On the economic front, the Central Bank of Kenya (CBK) retained the benchmark lending rate at 11.50% for the fifth consecutive meeting as it seeks to anchor inflation and ensure stability within the financial sector. In Tanzania, NMB released FY15 results which were largely in-line with our expectations (GE: +7.3% y/y; PAT -3.2 y/y) amid lower net-interest income (-2.1% y/y) and an increase in operating expenses. The Bank’s cost-to-income ratio deteriorated to 57% by year-end, following tough competition for deposits amid a difficult election year. We are optimistic about Tanzania’s FY16 outlook with the World Bank forecasting 7.7% GDP growth.

North African equities were dragged down by Egypt despite strong returns from Morocco and Tunisia

North African equities were dragged down by Egypt despite strong returns from Morocco and Tunisia. In Egypt, the Central Bank of Egypt (CBE) left rates unchanged although we expect monetary policy to tighten amid a weaker EGP and greater fiscal consolidation. On the earnings front, we digested impressive FY15 results from Juhayna (T/O: +14.8% y/y; PAT: +64.6% y/y) as gross profit margins improved to 35% on back of a continued decline in raw material prices and greater operational efficiency. Eastern Company, the local Egyptian tobacco company, also posted strong 1H16 numbers (T/O: +12.5% y/y; PAT: +38.1% y/y) amid margin expansion and a lower tax rate. Heliopolis Housing reported better-than-expected 1H16 results (T/O: +85.6% y/y; PAT: +189.2% y/y) on back of improved margins and higher revenue from the delivery of units in Heliopolis, Obour city and Sheraton.

In Southern Africa, equities continue to underperform amid broad-based weakness across the region

In Southern Africa, equities continue to underperform amid broad-based weakness across the region. In Zimbabwe, Delta Corporation issued a disappointing 3Q16 update amid subdued volume and revenues for the period. Volumes fell -6% amid depressed demand and lower disposable income in what is typically the beverage company’s best quarter. We expect the Zimbabwean economic environment to remain challenging in FY16 as negative GDP growth, tight liquidity conditions, slower consumer demand, deflationary pressure and the increased possibility of a weather-related drought. TSL reported lackluster results for FY15, in light of the tough prevailing economic environment and adverse weather conditions (T/O: +0.9% y/y; PAT: -10.8% y/y). The group reclassified its 30% investment in Cut Rag Processors to a held for sale investment and terminated its joint venture with Classic Leaf, which contributed to the fall in profits. In other action, Innscor Africa sold its interest in the six SPAR stores it operated in Zimbabwe, pursuant to the company’s strategy of focusing on core business.