Monthly Highlights: March 2015

•  West African equities performed well on back of a modest rebound in Nigeria
•  East African equities underperformed on back of weakness in Kenya, Tanzania and Mauritius
•  North African equities were broadly weaker as contagion from the conflict in Yemen weighed on valuations across the MENA region
•  Southern African equities made little contribution amid sluggish performance from Zimbabwe and Zambia
 


West African equities performed well on back of a modest rebound in Nigeria

West African equities performed well as President-elect Muhammadu Buhari’s victory marks Nigeria’s first transfer of power across political parties since shifting to a civilian democracy in 1999. Despite the economic and fiscal challenges which lie ahead, the smooth transition from People’s Democratic Party (PDP) to All Progressives Congress (APC) control bodes well for Buhari’s reformist agenda. Over the coming months, we believe Buhari will employ a strong anti-corruption campaign to consolidate APC power and prepare the military for a counterinsurgency push in the north. Achieving popular support will be absolutely critical as Buhari’s administration has limited resources with which to push austerity measures given Nigeria’s deteriorating fiscal condition and the near-depleted excess crude account. Should Buhari prove successful in overcoming the threat of Boko Haram whilst suppressing any latent potential for unrest in the Niger Delta, he will face less resistance in formulating policy on key economic issues such as fuel subsidies and oil sector reform. On the earnings front, GTB reported better-than-expected FY14 results (GE: +14.8% y/y; PAT: +9.6% y/y) as strong growth in non-interest income (up +36.7% y/y) fueled the bank’s full-year performance. We similarly digested strong FY14 results from Zenith Bank (GE: +14.8% y/y; PAT: +4.3% y/y) as non-interest income rose by +39.2% y/y. Shifting to the energy sector, Seplat posted weak FY14 results (T/O: -23.1% y/y; PAT: -77.4% y/y) as top-line performance was impaired by unbudgeted downtime as the result of outages with the Trans Forcados System, the NNPC-operated pipeline responsible for transporting roughly 11,000 bbl of crude and 6.5 MMcf of gas per day. Looking ahead, we expect greater revenue contribution from the company’s gas business as Seplat’s newly installed 150mmscf/d gas processing facility at Oben comes on-steam. In other news, Dangote Cement posted weak FY14 results (T/O: +1.4% y/y; PAT: -18.1% y/y) as margins contracted by -274bp as the result of a +6.1% y/y rise in operating expenses. Profitability at Africa’s largest cement producer was further reduced by expiration of tax credits as Dangote Cement faced a tax charge of US$126 million on the year. In Ghana, the nation’s sovereign rating was downgraded to B3 by Moody’s as the country was placed on negative watch given its deteriorating debt dynamics and increasing liquidity risks. On the earnings front, Ghana Commercial Bank reported strong FY14 results (GE: +40% y/y; PAT: +23.1% y/y) on back of a +115.8% y/y rise in non-interest income.

East African equities underperformed on back of weakness in Kenya, Tanzania and Mauritius

East African equities underperformed on back of weakness in Kenya, Tanzania and Mauritius. In Kenya, Bamburi Cement released better-than-expected FY14 results (T/O: +6.2% y/y; PAT: 6.3% y/y) as net earnings improved by +35% on a sequential basis in 2H14. Management attributes 2H14 revenue growth to improved market conditions in Uganda and the resumption of government infrastructure projects in Kenya. Athi River Mining posted mixed FY14 results (T/O: -3.1% y/y; PAT: +10.7% y/y) as weaker cement prices weighed on overall performance. Although a reduction in the company’s effective tax rate ensured bottom-line growth in FY14, we expect capacity gains from the commencement of clinker production at Tanga to result in improved margins going forward. Shifting to financials, Equity Bank posted impressive FY14 results (GE: +13.9% y/y; PAT: +29.2% y/y) as strength in non-interest income (+20.2% y/y) resulted from gains in foreign exchange trading (+28% y/y) and merchant & payment processing commissions (+66% y/y). In Mauritius, the central bank revoked the license of Bramer Banking Corp citing evidence of links to a US$690 million Ponzi scheme. Although MCB appears to be well insulated from the ensuing scandal, the risk that investors shun the Mauritian banking sector is real and recent events threaten to undermine the nation’s efforts to position itself as a regional hub for African financial services.

North African equities were broadly weaker as contagion from the conflict in Yemen weighed on valuations across the MENA region

North African equities were broadly weaker as contagion from the conflict in Yemen weighed on valuations across the MENA region. In Egypt, we have been monitoring the nation’s emerging relationship with Ethiopia as ongoing construction of the Grand Ethiopian Renaissance Dam jeopardizes its access to the Nile and has emerged as a clear threat to national security. Although Ethiopia has the right to use its water resources for economic development, its upstream locale provides it with a distinct geopolitical advantage. In effect, the dam would give Ethiopia the ability to cut off flow from the Blue Nile, which supplies 85% of water to the Nile Valley, where nearly all of Egypt’s 84 million people live. Although the dam in unlikely to be completed by the 2017 deadline, Egypt’s diminished military influence and inability to garner foreign opposition may render any agreement governing the principles of Nile water cooperation unenforceable in our view. On the earnings front, we digested positive results from TMGH (T/O: +8.5% y/y; PAT: +16.5% y/y) as tourism continues to recover amid increased demand for luxury and resort accommodations. In other action, Palm Hills Developments (PHDC) and Medinet Nasr Housing (MNHD) have signed a Memorandum of Understanding to jointly develop a land plot with built up area of 484,100sqm. As per the agreement, PHDC will perform all construction and development with MNHD providing the infrastructure and land which is located in its KM45 project at the Cairo-Suez desert highway. The project is expected to generate c.US$700 million in revenue over the next 10 years.

Southern African equities made little contribution amid sluggish performance from Zimbabwe and Zambia

Southern African equities made little contribution amid sluggish performance from Zimbabwe and Zambia. In Zambia, inflation slowed to 7.2% y/y in March as President Lungu is reconsidering recent changes to the nation’s tax system which has led to mine closures and multinational departures. Lungu’s ministries are in the process of negotiating interim tax deals with the individual mines most affected, and more extreme measures are expected, including: modifying existing laws, deferring the new regime, or temporarily reverting to the old tax regime while a new one is negotiated. In Zimbabwe, constrained brewing capacity and utility outages continue to hamper performance at Delta volumes remain under pressure. On the earnings front, we digested weak 1H15 results from Innscor (T/O: -2.3% y/y; PAT: -62.9% y/y) amid an increasingly challenging environment characterised by low disposable income. It should be noted that the figures are skewed to the downside by a fair value adjustment of US$39m in 1H14. After adjusting for this, Innscor’s actual earnings were down a more modest -7.1% y/y.

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