Monthly Highlights: June 2015

•  West African equities posted mixed performance on back of continued weakness in Nigeria
•  East African equities closed the month on a positive note as Kenya performed well
•  North African equity markets were mixed as gains in Tunisia were offset by poor performance in Egypt
•  Southern African equities underperformed amid broad-based weakness across the region
 


West African equities posted mixed performance on back of continued weakness in Nigeria

West African equities posted mixed performance on back of continued weakness in Nigeria. On the consumer front, we digested good FY15 earnings from 7UP (T/O: +5.9% y/y; PAT: +10.7% y/y) as operating and gross margins improved to 13.6% and 37% respectively (from from 11.7% and 36.6% in FY14). The company has performed impressively despite the challenging operating environment. International Breweries delivered weak FY14 results (T/O: +11.7% y/y; PAT: -7.6% y/y) as profitability was affected by rising input costs given the company’s reliance on imported raw material. Despite strong revenue growth, the brewer was unable to pass on the higher costs to consumers. In the materials sector, Dangote Cement commissioned its 2.5mmt cement plant in Ethiopia as the company pursues its goal of 62mmt in total production capacity by FY17. With a presence in 14 African countries, Dangote Cement will seek to expand its African footprint over the coming years and has earmarked roughly US$5 billion for future investment across the continent. On the economic front, the Central Bank of Nigeria has restricted access to the interbank currency market for local importers across a range of industries from rice to cement. We applaud the move as it not only supports a weakening Naira, but also encourages the growth of domestic suppliers and local manufacturing capabilities going forward; thus, reducing Nigeria’s dependence on imports. Companies that have pursued a strategy of backward integration (e.g. Flour Mills and UACN) are well positioned to benefit from this policy shift over the medium-term.

East African equities closed the month on a positive note as Kenya performed well

East African equities closed the month on a positive note as Kenya scrapped the newly-introduced 5% capital gains tax less than six months after it was instituted. Although the levy will be replaced by a 0.3% withholding tax on the value of share transactions, this is a positive development for investors. On the earnings front, Standard Chartered Bank Kenya posted weak 1Q15 results (GE: -5.7% y/y; PAT: -28% y/y) on back of lower non-interest income (-17.3% y/y) and a +249% y/y increase in provisions. Shifting to Mauritius, inflation dropped to 0.5% y/y in May on back of declining prices for both staples (i.e. food and beverages) and discretionary items (i.e. restaurants and hotels). In Tanzania, CRDB seeks to raise US$68 million through a rights issue to fund the bank’s expansion into eastern and central Africa. Looking ahead, CRDB plans to add new branches in Tanzania, Burundi and the Democratic Republic of Congo.

North African equity markets were mixed as gains in Tunisia were offset by poor performance in Egypt

North African equity markets were mixed as gains in Tunisia were offset by poor performance in Egypt. In Egypt, the government completed its first Eurobond sale in five years, underlining a return of economic and political stability following the Arab Spring. Egypt sold US$1.5 billion 10-year bonds at a yield of 6% on back of more than US$ 4.5 billion in orders. On the earnings front, we digested better-than-expected 1Q15 results from El-Sewedy (T/O: -8.3% y/y; PAT: +127.7% y/y) prior to adjustments. It should be noted that El Sewedy did not report any extraordinary items as such one-off adjustments have severely impacted the company’s profitability in previous quarters. The company’s weak top-line performance may be attributed to weakness in wire & cable (-14.1% y/y) as these failed to offset stronger turnkey revenues (+32.2% y/y). Shifting to financials, CIB Egypt has agreed to acquire Citigroup’s retail business in Egypt. Although the transaction remains subject to regulatory approval, the acquisition will enable the bank to significantly expand its retail presence and establish CIB Egypt as market leader in the domestic credit cards.

Southern African equities underperformed amid broad-based weakness across the region

Southern African equities underperformed amid broad-based weakness across the region. In Zimbabwe, Seedco reported mixed FY15 results (T/O: -11.1% y/y; PAT: +26.8% y/y) as bottom-line performance was driven by a -11.4% y/y decline in operating expenses and a -55.8% drop in finance charges. In Botswana, Choppies plans to buy ten stores in Kenya for US$10 million as it expands into East Africa. The company has entered into a conditional agreement with Kenya's Ukwala Supermarkets as it seeks to expand its existing footprint of 125 stores in Botswana, South Africa and Zimbabwe. Shifting to Zambia, Zambeef reported sanguine 1H15 results (T/O: -27.2% y/y; PAT: N/A) as gross margins improved from 32.7% to 38.3% as EBITDA rose by +91.9% y/y. Nevertheless, the company remains in the red as ZMK depreciation led to exchange losses of US$8 million. Looking ahead, we believe the company is well positioned to both reduce its debt load and unlock additional value following the successful disposal of Zamanita for US$26.4 million.

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