Monthly Highlights: June 2014

•  West African equities rose on back of strength in Nigeria and the Francophone region
•  East African equity markets performed well as Tanzania and Uganda contributed positively on the month
•  North African equities retreated amid weakness in Egypt
•  Southern Africa performed well amid broad-based strength across the region
 

West African equities rose on back of strength in Nigeria and the Francophone region

West African equities continued their upward trajectory on back of strength in Nigeria and the Francophone region. In Nigeria, Godwin Emefiele ascended to the role of Central Bank Nigeria (CBN) Governor and proceeded to outline his vision and policy goals. Emefiele espoused a dovish bias stating that the CBN will seek to gradually ease interest rates over the medium- to long-term in an effort aimed at fueling bank lending to the real economy. Emefiele faces no small challenge and will be judged by his ability to accomplish the aforementioned while satisfying the CBN’s need maintain a stable exchange rate regime. On the corporate front, Diamond Bank seeks to raise over US$300 million via rights issue on a 3:5 basis at NGN 5.80 per share. Should this exercise prove successful, the bank’s capital adequacy ratio will increase to 23.8% (from 17.3% in FY13). No longer capital-constrained, Diamond Bank should be able to grow its loan book by roughly 25% this year as a result we anticipate that there will only be slight dilution in earnings with ROE falling to c.18% this year from our initial forecast of 21.1%. However, the bank will see the full benefit in FY15 where we anticipate ROE of c.23%. In Ghana, the Cedi remains under pressure and declined by another -10.1% as Moody’s downgraded the nation’s sovereign rating to B2. At present, mining companies are supplying most of the nation’s foreign currency as rating agency Fitch admonished Ghana for funding its budget deficit via central bank dollars equivalent to 10% of FY14 government revenue.

East African equity markets performed well as Tanzania and Uganda contributed positively on the month

East African equity markets performed well as Tanzania and Uganda were solid contributors on the month. In Kenya, investors shrugged off terrorist attacks in two Kenyan coastal towns as the government successfully issued its debut US$2 billion Eurobond. The issue was extremely well received with bids totaling in excess of US$5bn. By month-end, the 10yr 6.875% 6/24 had declined by -46bp to 6.41%. It should also be noted that the World Bank has agreed to lend Kenya US$4 billion over the next four years, mostly at below commercial rates, to help finance new infrastructure across the transport and energy sectors. In Tanzania, shares of National Microfinance Bank continue to perform well as management has effectively leveraged its expertise in food and agribusiness by providing trade finance, foreign exchange and related advisory services to hundreds of emerging and commercial farmers across the country. Non-interest revenues are expected to grow significantly over the coming quarters as the bank currently has over 600,000 SME customers. Shifting to Uganda, private equity firm Actis successfully reduced its stake in Umeme to 15% as roughly US$98 million was sold to institutional and retail investors. Looking ahead, management has announced that it will invest US$440 million in an effort aimed at doubling its customer base over the next six years.

North African equities declined as elections in Egypt weigh on sentiment across the region

North African equities retreated amid weakness in Egypt as the government instituted a 10% Capital Gains Tax on all equity market capital gains. On the political front, Ibrahim Mehleb was sworn in as Prime Minister while a number of key economic and security ministers were retained for President El Sisi’s new cabinet. Although inflation fell to 8.2% on back of declining food prices, El-Sisi is expected to slash energy subsidies over the coming months as the government spends roughly one quarter of the annual budget in support of such measures. Over the past decade, the Egyptian government has spent roughly US$100 billion on energy subsidies and the expected savings will significantly lower the nation’s budget deficit. In Morocco, the government issued its first euro-denominated bond in four years as yields fell to all-time lows and stimulus measures in Europe help boost demand for riskier assets. Although Morocco’s state planning agency is now projecting economic growth of 2.5% in FY14 (from 4.4% in FY13) on softening agricultural output and higher energy prices, the government has taken measures aimed at reducing its budget deficit by removing subsidies on diesel fuel. Looking ahead, the agency expects economic growth to rebound in FY15 although we have yet to see any meaningful evidence that a recovery in export demand will take hold.

Southern African equities recorded gains amid strength in Zimbabwe and Botswana

Southern Africa performed well amid broad-based strength across the region. In Zambia, we digested weak 1H14 results from Zambeef (T/O: -2.5% y/y; PAT: -210% y/y) as the agrifinance company’s gross and operating margins shrunk to 32.7% and 1.9% (from 36.3% and 8.3%) respectively. Kwacha devaluation played a significant role in the company’s performance as unrealised currency losses impacted the bottom line. Rising input prices also played a role as the company faced difficulty in passing these costs onto consumers. In other news, First Quantum has delayed investment projects in Zambia due to uncertainty over the fiscal regime. It should be noted that the Zambian government announced plans to review mining taxes in an effort aimed at boosting government revenues after inadequate receipts from the mining sector in FY13. Shifting to Zimbabwe, our holdings in Delta and Econet performed well. Delta remains one of the most attractively valued beverages companies in our universe whilst Econet continues to grow its EcoCash offering despite the challenging operating environment. In other action, we digested poor 1H14 earnings from African Sun (T/O: -4.2% y/y; PAT: -184% y/y) as a -9.0% decline in RevPAR and -6.0% drop in occupancies fueled the company’s performance. Similarly, OK Zimbabwe reported lackluster FY14 results (T/O: +0.8% y/y; PAT: -21.7% y/y) as the challenging economic environment weighed heavily on disposable incomes amid elevated price pressure. It should be noted that although product prices across the company’s retail outlets declined as both local and foreign suppliers reduced their prices in an effort to stimulate the sluggish demand, little of this was evidenced in the numbers. Seedco announced mixed FY14 results (T/O: +8.6% y/y; PAT: -5.0% y/y) as impairments had a negative impact on the company’s bottom-line. Notably, the company wrote off approximately US$5.1 million in receivables from a Zimbabwean financial institution and various domestic retailers and farmers.