Monthly Highlights: March 2010

•  Broad-based gains across the West Africa region with Nigeria leading the way higher
•  Strong earnings results helped buoy Kenyan equity markets
•  Zambia posted exceptional performance as Southern Africa rebounded nicely
 

Broad-based gains across the West Africa region with Nigeria leading the way higher

West Africa performed well as the NSE ASI (Nigeria), GSE ASI (Ghana) and BRVM Composite (Francophone) rose by +13.3%, +9.0% and +3.5% respectively. Nigerian equity markets were driven by improved political sentiment as acting President Goodluck Jonathan firmly took control of the federal government. In an attempt to solidify his power base, President Jonathan announced a new National Security Advisor and reappointed members to the Federal Executive Council, with strong warnings surrounding performance expectations. In an attempt to boost bank lending and stimulate economic growth, the Central Bank of Nigeria (CBN) cut rates for the Standard Deposit Facility from 2% to 1%. Furthermore, CBN Governor Sanusi openly stated that he now expects the Asset Management Company (AMC) Bill to be passed by the Senate. AMC operations are expected to begin in Sep 2010 with capital base of USD 8 billion. In effect, the AMC Bill is a modified legacy loan program designed to free up capital for Nigerian banks through the purchase of underperforming loans. In the capital markets, we saw a number of promising earnings results led by Nigerian Breweries with 13% growth in sales and healthy 25% operating margins. In Ghana, equity market strength was led by financials where most stocks are presently trading well below book value. In the Francophone region, equity markets were driven by strength in telecommunications bellwether Sonatel following the company’s announcement of a 10% dividend yield.

Strong earnings results helped buoy Kenyan equity markets

East African equity markets were led by Kenya as the NSE 20 rose +11.1% on the month. Given the impact of the previous year’s prolonged drought on Kenyan economic growth, local weather patterns continue to weigh heavily on equity market performance and sentiment. Following this month’s announcement from the Kenya Meteorology Department that most parts of the country will exceed normal rainfall during the March – May season, hopes have been raised for increased agricultural activity and improved economic performance. In the Kenyan capital markets, we are encouraged by this month’s round of earnings as positive results from Bamburi and EAPC drove interest in the cement sector. Furthermore, Kenyan bond yields continue to compress as we are expecting an asset allocation shift away from fixed income and into equities. In other action, the SEM-7 rose +2.74% on back of currency-related strength as the Mauritian Rupee appreciated by +3.58% on the month. Unfortunately, the banking sector posted disappointing earnings results as Mauritius Commercial Bank and State Bank of Mauritius each posted a decline in half year earnings through Dec 2009. Having met with both management teams earlier this month, we feel that they are each well positioned looking forward. In other action, the UGX ALSI (Uganda) rose by +6.99% and the DSEI (Tanzania) declined by -0.6% on the month.

Zambia posted exceptional performance as Southern Africa rebounded nicely

In Southern Africa, the LuSE ASI (Zambia) returned +11.2% on back of gains Zain Zambia, the leading mobile operator. Zain Zambia gained +19.6% in March on back of strong earnings results and news of a potential acquisition by Bharti. In short, the company’s shareholders stand to gain significantly as Zain Zambia’s current valuation of 3.3x EV/EBITDA is a far cry from the implied Bharti acquisition price (10.5x EV/EBITDA). Although there is no specification as to how an offer should be priced, we believe that an independent appraisal is most likely. ZANACO also posted exceptional earnings with PAT growth of +53% amid an improving cost-to-income ratio of 61% and ROE of 20%. In other action, the Malawi DCI (Malawi) and Gabarone DCI (Botswana) retreated by -3.61% and -0.2% amid little attention from investors.