Monthly Highlights: July 2015

•  West African equities declined on back of continued weakness in Nigeria
•  East African equities under-performed as weakness in Kenya, Tanzania and Mauritius fueled this month’s negative performance
•  North African equities retreated as inflationary risk in Egypt rose in line with the government’s plan to introduce a value-added tax
•  Southern African equity performance was mixed as strength in Botswana and Zambia was offset by weakness in Zimbabwe
 

West African equities declined on back of continued weakness in Nigeria

West African equities declined on back of continued weakness in Nigeria where negative sentiment prevailed on back of policy stagnation and generally unimpressive 1H15 results. In the financial sector, Ecobank reported strong 1H15 results (GE: +0.7% y/y; PAT: +32.5% y/y) as operating expenses declined by -8% y/y resulting in a cost-to-income ratio of 62.5% (from 68.1% in 1H14). Skye Bank also reported solid 1H15 results (GE: +33.3% y/y; PAT: +47.4% y/y) as non-interest income grew by +42% and net interest income rose by +16% y/y. On a sequential basis, net interest income increased by +49% q/q on back of healthy loan growth (+8.5% q/q). By contrast, Diamond Bank reported uninspiring 1H15 results (GE: +6.4% y/y; PAT: -11.8% y/y) as weak margins (NIMs declined from 7.1% to 6.5%) and rising provisions (+44% y/y) weighed on performance.  Stanbic IBTC also released disappointing 1H15 results (GE: +10.7% y/y; PAT: -40.1% y/y) as the bank’s cost-to-income ratio rose to 64% in 1H15 (from 57.7% in 1H14) and provisions soared by +449%. In the consumer sector, Nestle reported lackluster 1H15 results (T/O: +11.6% y/y; PAT: -26.2% y/y) as operating expenses and financing costs rose by +4.3% y/y and +240% y/y respectively. Nigerian Breweries exhibited mixed 1H15 results (T/O: +7.2% y/y; PAT: -10% y/y) as gross margins contracted to 46% (from 49.6% in 1H14) and financing costs rose by +63.5% y/y. It should be noted that top-line growth at the nation’s leading brewer was driven by more favorable pricing toward the end of 1Q15. UACN posted disappointing 1H15 results (T/O: -7.2% y/y; PAT: -70.2% y/y) as a US$10.5 million impairment charge at UPDC, the company’s real estate subsidiary impacted the bottom line. Flour Mills reported mixed FY15 results (T/O: up -5.2% y/y; PAT: +57.7% y/y) as earnings were supported by a one-off US$71 million gain following the successful sale of its stake in UNICEM. Dangote Cement performed well in 1H15 (T/O: +15.9% y/y; PAT: +27.6% y/y) as Africa’s largest cement company ramps up production outside of Nigeria. Sales rose by +13.7% y/y to 8.1mt in 1H15 as factories located outside Nigeria contributed 22.4% to group sales (from 4.6% in 1H14). Seplat reported weak 1H15 results that were in-line with our expectations (T/O: -36.1% y/y; PAT: -78.2% y/y) as performance was negatively impacted by weak oil prices and downtime at the Trans Forcados pipeline. In the Francophone region, we digested strong 1H15 results from Sonatel (T/O: +7.8% y/y; PAT: +15% y/y) as EBITDA margins expanded by 110bp despite increased regulatory costs and taxes. The operator reported +11.4% growth in free cash flow supported by a stable capex profile. Shifting to Ghana, we digested strong 1H15 results from Ghana Commercial Bank (GE: +24.5% y/y; PAT: +28.9% y/y) as interest income grew by +33% y/y and provisions declined (-2% y/y). The bank’s capital adequacy ratio improved from 18.9% to 20.4% along with improving asset quality improving as NPL ratio fell to 9.2% (from 14.5% in 1H14).

East African equities under-performed as weakness in Kenya, Tanzania and Mauritius fueled this month’s negative performance

East African equities declined as weakness in Kenya, Tanzania and Mauritius fueled this month’s negative performance. In Kenya, we digested good 1H15 results from Kenya Commercial Bank (GE: +13.2% y/y; PAT: +13.1% y/y) on back of a +13.5% y/y rise in net interest income and decline in the bank’s cost-to-income ratio (to 48.6% from 49.6% in 1H14). Looking ahead, we expect net interest income to grow as margins expand on back of higher rates and a commensurate rise in loan yields. Looking at the consumer sector, East Africa Breweries reported impressive FY15 results (T/O: +6.1% y/y; PAT: +39.2% y/y) as a result of strong performance in the premium beer and spirits segments. Operating expenses declined as a result of ongoing efficiencies: improved raw material usage, low heavy fuel prices and greater production efficiencies whilst profitability was boosted by a reduction in administrative expenses following last year’s successful re-organization. We digested uninspiring 1H15 results from Scangroup (T/O: +2.3% y/y; PAT: +1.4% y/y) as an increase in operating expenses and higher effective tax rate weighed down profitability. In the materials sector, we digested weak results from ARM Cement (T/O: +1.6% y/y; PAT: n/a) as a rise in finance costs (+183.8% y/y) and large unrealized exchange losses (KES 1.4bn in 1H15 vs. KES 25.8m in 1H14) weighed on performance. Shifting to Tanzania, Tanzania Breweries reported in-line FY15 results (T/O: +9.5% y/y; PAT: +5.6% y/y) as lager volumes fell by -6.5% y/y amid a 20% increase in the excise tax. In addition, TZS depreciation led to higher raw material costs and weighed down gross margins.

North African equities retreated as inflationary risk in Egypt rose in line with the government’s plan to introduce a value-added tax

North African equities retreated as inflationary risk in Egypt rose in line with the government’s plan to introduce a value-added tax (VAT). The new VAT will target a wide range of goods and services with most companies looking to pass through the price increase to end consumers. On the earnings front, we digested impressive 1H15 results from CIB Egypt (GE: +31.5% y/y; PAT: +29.8% y/y) as ROAE and ROAA rose to 32.2% and 3.0% respectively (from 29.4% and 2.9% in 1H14). Net interest income rose by +35% y/y after a pick-up in corporate and consumer lending, and looking ahead, we expect loan growth to continue on back of strong capex-driven demand. In other action, Juhayna reported strong 1H15 results (T/O: +11.6% y/y; PAT: +57.1% y/y) as a drop in raw material prices led to a rebound in gross profit margins (from 27% in 1H14 to 34% in 1H15). In the real estate, we digested healthy 1H15 results from Emaar Misr (T/O: +56.1% y/y; PAT: +283.8% y/y) as improved revenue from higher-margin units and healthy growth in selling prices begin to take hold. Looking ahead, we expect Egyptian real estate demand to be supported by fundamental factors such as rising population growth, increased urbanisation and a greater number of marriages.

Southern African equity performance was broadly mixed as strength in Botswana and Zambia was offset by weakness in Zimbabwe

Southern African equity performance was broadly mixed as strength in Botswana, Zambia and Malawi was offset by weakness in Zimbabwe. In Zimbabwe, GDP growth was revised lower as fiscal revenue fell short of previous forecasts as tax collections a declined. On the corporate front, Delta issued a 1Q16 trading update as deteriorating macroeconomic conditions (i.e. deflationary headwinds, corporate retrenchment, etc) weigh on demand for lager and sparkling beverages. Looking ahead, we believe Delta will benefit from a Specific Customs Duty of $0.50 per litre on imported carbonated soft drinks as the government attempts to shield the local industry. Shifting to the telecom sector, Econet has asked its local and foreign suppliers to reduce prices by at least 15% while announcing a 20% pay cut as the company attempts to cushion itself from government-induced price reductions and ad hoc taxes. On the earnings front, BAT reported impressive 1H15 results (T/O: +7.5% y/y; PAT: +43.3% y/y) as top-line revenue rose despite the drop in volumes. Management successfully passed on the excise duty and trade price increases to consumers and profitability was fueled by improved raw material pricing, greater operational efficiencies and lower depreciation charges.