Monthly Highlights: March 2013

•  West African equities closed on a mixed note
•  East African equities rose on back of strength in Kenya amid relatively peaceful general elections
•  North African equities remain volatile as markets retreated on back of deteriorating investor sentiment
•  Southern African equity markets rose despite weakness in Zimbabwe
 

West African equities closed on a mixed note

West African equities closed on a mixed note with gains in Ghana and Nigeria offset by subpar performance in the Francophone region. In Nigeria, we continue to digest FY12 results with ETI (GE: +51.3% y/y; PAT: +38.6% y/y) posting record PBT amid +47% y/y growth in net interest income and +46% y/y growth in non-interest revenue. We are finally being rewarded for our confidence in management’s ability to integrate the operations of Oceanic Bank (Nigeria) and TTB (Ghana) as ETI is poised to emerge as the 6th largest domestic bank in Nigeria (in terms of assets) and undisputed market leader in Ghana (#1 in total assets). Shifting to industrials, UACN completed its acquisition of a majority stake in Livestock Feeds, the third-largest animal feed producer in Nigeria. In addition to consolidating its share of the local feeds market, we believe the Livestock acquisition offers significant medium-term earnings potential should management prove successful at drawing upon UACN leadership in raw material procurement and distribution. Over the longer term, we expect UACN to scale the animal feeds business as capacity modernization has the potential to deliver considerable capacity gains given Livestock’s relatively low level of output. Although Livestock’s contribution to FY13 earnings will remain small, earnings quality should improve as the result of various operational and administrative synergies once Livestock is merged with UACN’s Grand Cereal subsidiary. Despite the recent uptick in inflation, the MPC kept policy rates unchanged as weaker capital inflows reflect relatively low short-term yields (T-Bill, NIBOR, OMO) amid elevated currency pressure. We suspect that rates will rise gradually over the coming quarters as the CBN attempts to attract larger capital inflows whilst defending the 160 level in USD/NGN. Shifting to Ghana, we digested strong FY12 results from Ghana Commercial Bank (GE: +38.5% y/y; PAT: +695.5% y/y) as net interest income rose +57.2% y/y amid a -7.7% decline in operating expenses and a reduction in the cost of risk.

East African equities rose on back of strength in Kenya amid relatively peaceful general elections

East African equities rose on back of strength in Kenya as relatively peaceful general elections resulted in the Jubilee Coalition’s Uhuru Kenyatta emerging as the nation’s next president. Despite IEBC-related irregularities and a subsequent challenge by former PM Raila Odinga, the Supreme Court upheld Kenyatta’s nomination amid a notable absence of political violence, protests and demonstrations. Despite no parliamentary majority in either the National Assembly or Senate, we are pleased with the overall outcome as Kenyan investment and trade is poised to resume with Nairobi consolidating its position as the political and economic hub of East Africa. We met with the management team of Athi River Mining (ARM), East Africa’s 2nd largest cement company, and have grown increasingly bullish on the company’s forward-looking prospects. Despite its rich share price valuation, capacity will rise exponentially once the Tanga plant comes on-line and margins should exhibit meaningful improvement amid a reduced reliance on imported clinker. Although ARM’s EBITDA margins averaged 25.4% from FY08 – 12, they are expected to remain flat at 23.8% in FY13; yet with capacity expected to rise from 1.1mmt to 1.8mmt, margins could conceivably approach +30.0% in FY14. Shifting to financials, SCB Kenya announced strong FY12 results (GE: +45.3% y/y; PAT: +38.2% y/y) as the bank’s +40.8% y/y rise in net interest income fueled performance. In Tanzania, we remain encouraged by the nation’s prospects as inflation maintained its downward trend amid food disinflation and general moderation in commodity prices.

North African equities remain volatile as markets retreated on back of deteriorating investor sentiment

North African equity markets remain volatile as markets retreated on back of deteriorating investor sentiment amid the increasingly negative political and economic backdrop. In Egypt, the central bank raised interest rates, hoping to curb soaring inflation and slow the EGP slide (down –6.9% YTD). Moody's cut Egypt's credit rating to Caa1, citing unsettled political conditions and deteriorating public finances, as the probability of default within five years has risen to nearly 40%. On the corporate front, we have tapered our expectations for corporate lending growth in Egypt as continued political and economic uncertainty weighs on overall performance. Nevertheless, CIB’s long-term fundamentals remain compelling as asset quality has yet to deteriorate meaningfully and the bank’s strong provision coverage should safeguard shareholder RoE over the medium-term.

Southern African equity markets rose despite weakness in Zimbabwe

With the exception of Zimbabwe, Southern African equities were broadly stronger on the month. In Zimbabwe, Econet Wireless reduced the cost of money transfer via EcoCash as a new tariff regime is expected to accelerate growth of the service. It should be noted that EcoCash successfully secured over 2 million subscribers in its first 14 months of operation and currently processes over 7 million transactions (US$150 million in value) per month. Although EcoCash is currently paying over 80% of its top line to distribution agents in the form of commissions, the extraordinary speed of customer acquisition highlights the strategic importance of mobile money and its ability to overcome the structural challenges faced by everyday citizens living in Zimbabwe. Despite the recent outperformance of Econet shares, we believe the fundamental value of EcoCash has yet to be reflected in the company’s current share price. Shifting to Botswana, ABC Holdings posted impressive FY12 results (GE: +68.5% y/y; PAT +54.1% y/y) on back of strong performance in Zimbabwe which contributed to a +48.4% y/y rise in attributable income.