Monthly Highlights: July 2013

•  West African equities rose on back of strength in Nigeria
•  East African equity markets exhibited broad-based strength with Mauritius the lone exception
•  North African equities rebounded from last month’s weakness as Egypt adjusts to life after Morsi
•  Southern African equity markets were mixed amid positive performance in Zimbabwe and Malawi
 

West African equities rose on back of strength in Nigeria as reporting season moves into full throttle

ETI delivered strong 1H13 performance (Net Revenue: +23.7% y/y; PAT: +94.8% y/y) as loans and deposits expanded and non-interest income rose sharply (+27.5% y/y). The bank’s cost-to-income ratio continues to improve and asset quality improved amid successful recovery efforts of impaired loans. In Nigeria, we digested disappointing 1H13 results from UBA (GE: +16.7% y/y; PAT: +9.9% y/y) as interest income declined -0.3% q/q amid declining yields and new tariff regulations. Nevertheless, interest income grew +20.1% y/y and although loan growth is expected to pick up in 2H13, management’s 30% FY target seems somewhat aggressive. Diamond Bank posted excellent 1H13 results (GE: +34% y/y; PAT: +26.5% y/y) as net interest income expanded by +24.0% amid strong loan growth and higher yields. Looking ahead, we are growing cautious as the increased contribution from non-interest income (+38.0% y/y) may result in volatile performance over the coming quarters. Skye Bank reported weaker-than-expected 1H13 results (GE: +19.3% y/y; PAT: +5.7% y/y) amid a +51.0% y/y rise in operating expenses and a +39.3% increase in NPLs. Shifting to the cement sector, Dangote Cement posted exceptional 1H13 results (T/O: +28.5% y/y; PAT: +52.1% y/y) as gross margins rose by +7.1% amid improved cost management and more efficient gas utilization. By contrast, Lafarge Wapco posted lackluster 1H13 results (T/O: +6.7% y/y; PBT: +13.0% y/y) as slower top-line growth was offset by a rise in profitability as tax-related gains fueled the +65.6% y/y gain in PAT. Shifting to the consumer sector, we digested strong 1H13 results from UACN (T/O: +23.6% y/y; PAT: 60.8% y/y) as the rise in profitability was driven by stellar results from UPDC, the company’s real estate division. The quarterly contribution from UAC Foods declined on back of rising input costs as a sharp increase in the price of local grains weighed on earnings from Grand Cereals, the company’s feeds business. Nestle reported uninspiring 1H13 numbers (T/O: +10.2% y/y; PAT: +13.5% y/y) as earnings growth reflects operating efficiencies from new facilities and operating leverage from volume expansion. Although management remains cautious, the market is pricing in a disproportionate rebound in consumer spending over 2H13 and the company’s shares remain expensive. Unilever reported weak 1H13 results (T/O: +10.3% y/y; PAT: -3.2% y/y) as impressive top-line growth was offset by rising administrative costs and a burdensome debt load. Nigerian Breweries reported lackluster 1H13 results (T/O: +7.4% y/y; PAT: +6.6% y/y) as volumes continue to moderate amid a challenging operating environment. Moving to Ghana, inflation accelerated for the fifth consecutive month as a deteriorating Cedi fuels the rise in import prices. Although the coming harvest season should help alleviate the pressure on domestic food prices, we expect the Bank of Ghana to keep rates at a 3 ½ year high of 16% so as to offset recent currency-related weakness. On the earnings front, GCB reported impressive 1H13 results (GE: +61.05% y/y; PAT: +80.1% y/y) on back of higher net interest income (+64.22% y/y) and improved cost management as the bank’s CTI ratio declined from 57.9% to 51.3% y/y. Although deposit growth slowed in 1H13, we expect net interest income to remain high as retail sector growth and the bank’s position in government securities fuel 2H13 gains in funded income.

East African equity markets exhibited broad-based strength with Mauritius the lone exception

In Kenya, we digested relatively sanguine 1H13 results from Equity Bank (GE: +7.3% y/y; PAT: +16.7% y/y) driven by a +15.3% y/y increase in operating income amid stronger loan growth and improved cost management. Net interest income rose +17.6% y/y although NIMs compressed on back of lower yields as the Central Bank of Kenya cut rates by 250bp in 1H13. Shifting to the materials sector, ARM Cement posted strong 1H13 results (T/O: +28.1% y/y; PAT: 27.7% y/y) despite a slowdown in cement consumption as the result of March elections. Although margins remain under pressure from imported clinker, the medium-term outlook remains compelling as a rise infrastructure spending by the Kenyan government is expected to fuel demand. Shifting to Tanzania, TBL reported weaker-than-expected FY12 results (T/O: +11.4% y/y; PAT: +4.8% y/y) as volumes declined by -8.0% y/y and a +25% increase in excise duty weighed on the company’s margins.

North African equities rebounded from last month’s weakness as Egypt adjusts to life after Morsi

Egyptian equities rose as support packages totaling more than US$12 billion from Saudi Arabia, Kuwait and the UAE helped stabilize the Pound. On the corporate front, Orascom Construction moved closer to delisting from the EGX as 89% of local shareholders agreed to OCI’s buyout offer. As discussed previously, we remain concerned about the medium-term political stability of a military-run Egypt and hope to receive clear guidance from the newly elected president on the path to democracy.

Southern African equity markets were mixed amid positive performance in Zimbabwe and Malawi

In Zimbabwe, national elections brought an end to the 2008 Government of National Unity culminating with Mugabe’s re-election as president. On the corporate front, Delta reported a +8% increase in 1Q14 revenue as volumes rose amid a tax increase on lager. Lager beer sales declined by -8% as consumers down traded to more affordable brands such as traditional Maheu, sparkling beverages and sorghum beer rose significantly. In Zambia, margins at Zambeef remain under short-term pressure following rising wage and fuel costs. Nevertheless, we are encouraged by recent results and expect the company’s cropping, edible oils, dairy and pork divisions to offset any near-term weakness. Despite higher-than-expected capex requirements and rising interest expense, shares of Zambeef appear relatively inexpensive on back of recent concerns related to the company’s beef offal imports.