Monthly Highlights: May 2012

•  West African equities retreated with all markets posting negative returns on the month
•  East African equity markets suffered broad-based weakness as events in Europe weighed on overall investor sentiment
•  North African equities declined as political events in Egypt weigh on sentiment across the region
•  Southern African equities were dragged lower on back of events in Malawi
 

West African equities retreated with all markets posting negative returns on the month

West African equities retreated with all markets posting negative returns on the month. In Nigeria, we digested better-than-expected 1Q12 results from Lafarge Wapco (T/O: +59.3% y/y; PAT: 151.1% y/y) as strong contribution from new Lakatabu plant supported cement volumes. Despite the rise in operating expenses and a higher-than-expected tax charge, Lafarge exhibited considerable margin expansion due to reduced energy costs as the result of its new 90MW power plant & use of palm kernel shells following disruptions in gas supply. Dangote Cement also posted healthy earnings (T/O: +17.6% y/y; PAT: +10.7% y/y) although uncertainty surrounding future share issuance remains an overhang. Guinness Nigeria released weaker-than-expected 3Q12 (31 Mar) results (T/O: +2.5% y/y; PAT: -24.0%) as sales declined amid supply side challenges with distributors stockpiling NB products in anticipation of price increases from its larger rival. Although additional capex should yield capacity gains going forward, margins remain under pressure as the result of higher advertising and related marketing costs. 1Q12 results from UACN (T/O: +23.5% y/y; PAT: +1.8% y/y) were in-line with estimates as +47% y/y growth in Grand Cereals lifted the foods business despite weak sales from Gala as consumers resisted the company’s most recent price hike. Looking ahead, higher fuel costs will likely weigh on personal consumption while elevated inflation has the potential to increase margin pressures at UACN. Shifting to the Francophone region, we assimilated earnings from Unilever CI (T/O: +3.8% y/y; PBT: +148.2% y/y) as PAT returned to positive territory on back of the improving socio-economic climate. We also digested earnings from Nestle CI (T/O: -12.1% y/y; PBT: -153.9% y/y) as PAT declined into negative territory on back of declining sales, higher input costs and tighter margins.

East African equity markets suffered broad-based weakness as events in Europe weighed on overall investor sentiment

East African equity markets suffered broad-based weakness as events in Europe weighed on overall investor sentiment. In Kenya, Safaricom exhibited stronger-than expected FY12 results (T/O: +12.8% y/y; PAT: -4.0% y/y) as last year’s tariff increase contributed to a near doubling of off-peak yields and a +8.6% y/y rise in voice revenue. Although we were impressed with the operator’s 2H12 performance, the potential for future tariff reductions as the result of lower mobile termination rates will likely lead to churning and an overall decline in market share given Safaricom’s premium pricing. Shifting to the banks, we digested generally healthy 1Q12 results from Barclays Kenya (NII: +19.0% y/y; PAT: +28.0% y/y), Co-Op Bank (NII: +22.7% y/y; PAT: +19.3% y/y) and SCB Kenya (NII: +66.0% y/y; PAT: +41.0% y/y). Despite rising NPL exposure, Barclays’ core capital remains strong and we take note of little-to-no growth in operating expenses despite double digit increases from amongst its peers. Co-Op posted a +75.9% y/y rise in interest income as strong loan growth outweighed higher financing costs and increased provisioning. SCB also posted healthy results as evidenced by its +240% y/y rise in loans and advances, -1.0% decline in loan loss provisions and industry leading net interest margins. Shifting to Rwanda, we assimilated strong FY11 results from Bralirwa (T/O: +23.2% y/y; PAT: +41.8% y/y) as higher volumes and better pricing drove significant growth in operating income. Looking ahead, the company will be introducing a new product line and upgrading its brewing facilities as competition from BMC, EABL and Crown threaten its leadership position in Rwanda.

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

North African equities declined as political events in Egypt weigh on sentiment across the region. With the Egyptian presidential primaries concluded, our focus now shifts to the June 16th run-off between Mohammed Morsi of the Muslim Brotherhood and Ahmed Shafiq, a former military commander and PM in Hosni Mubarak’s administration. Generally speaking, we were not at all surprised by Morsi’s candidacy given the Brotherhood’s dominance of parliamentary elections. We were however surprised by Shafiq’s nomination as fear of a Muslim Brotherhood President undermined consensus expectations with liberals coming together in support of the old regime. As a result, next month’s presidential run-off will not emerge as a catalyst for Western-style democracy, but instead serve as a battlefield between secular rights and religious extremism. Looking ahead, we do not expect the military council to relinquish its role as protector of the state. Should Morsi ascend to the presidency, we expect some aspects of religious law to be enacted, but do not expect it to dramatically affect the business environment because i) Egypt has a strong tourism sector and benefits from numerous other industries that require secular moderation, ii) mainstream Islamists are generally practical, and iii) continued influence of secularists and Christians remain prevalent across the private sector. We remain encouraged by recent developments as Egypt has successfully completed, in less than six months, a parliamentary election and one round of presidential elections which appear to have been largely free and fair. On the corporate front, we digested better-than-expected earnings from CIB as net income rose +64% y/y amid declining provisions, higher net interest margins and improved fee income. That said, lending weakened as the result of a struggling private sector as the bank’s loan book contracted by -2.0% q/q on back of a -3.5% q/q decline in corporate lending. GB Auto (T/O: +32.0% y/y; PAT: +137.0% y/y) posted generally healthy results despite weaker-than-expected tuktuk sales as the company’s motorcycles segment contributed strongly with volumes up +340% y/y on back of the newly released Boxer 150 model. Although the manufacturer continues to gain market share, we remain concerned that a partial removal of Egyptian fuel subsidies will lead to higher costs & reduced demand over the medium-term.

Southern African equities were dragged lower on back of events in Malawi

Southern Africa equities were dragged lower by events in Malawi where President Banda successfully engineered a -33% devaluation of the Kwacha so as to satisfy IMF guidelines and allow for financial aid to be unblocked. While this will unlock donor inflows over the medium-term, it should also provide near-term support to the nation’s struggling tobacco & tea producers. Shifting to Botswana, Sechaba Breweries released FY11 results (T/O: +25.0% y/y; PAT: +17% y/y) while ABC Holdings formally announced that African Development Corp will fully underwrite its USD 50 million rights offer. In Zimbabwe, we digested strong FY11 results from Seedco (T/O: +20.3% y/y; PAT: +9.5% y/y) as the company seeks to strengthen its breeding efforts and continue its East African expansion with a diverse product mix of higher performing varieties.