Monthly Highlights: May 2015

•  West African equity performance was mixed as strength in Ghana and the Francophone region was offset by weakness in Nigeria
•  East African equities were broadly weaker as Kenya, Tanzania, Uganda and Mauritius each contributed negatively on the month
•  North African equity markets rebounded on back of strength in Egypt
•  Southern African equities disappointed as Zimbabwe and Zambia continue their downward trajectory
 

West African equity performance was mixed as strength in Ghana and the Francophone region was offset by weakness in Nigeria

West African equity performance was mixed as strength in Ghana and the Francophone region was offset by weakness in Nigeria as investors growing increasingly frustrated with the nation’s lack of economic direction following Muhammadu Buhari’s ascension to the presidency. On the earnings front, Nestle posted uninspiring 1Q15 results (T/O: -32.2% y/y; PAT: -50.8% y/y) as revenue growth remains challenged by rising competition across various products segments amid declining discretionary income. Gross margins contracted by 24bp and a +230% rise in finance costs weighed down profitability. Dangote Cement delivered solid 1Q15 results (T/O: +10.8% y/y; PAT: +44.1% y/y) as profits were driven by FX gains on non-NGN assets following the Naira devaluation. Looking ahead, we remain cautious as the Nigerian cement sector faces short-term headwinds, most notably declining public sector capital expenditure as many major projects have been put on hold due to a slowdown in Federal disbursements. Additional challenges include weather-related disruptions, insufficient power and inadequate diesel supply. Shifting to financials, Skye Bank posted strong 1Q15 results (G/E: +23.4% y/y; PAT: +90.5% y/y) on back of +64.2% y/y growth in non-interest income and a -32.1% y/y decline in provisions. Looking ahead, we remain cautious as management is likely to face rising costs related to integration of Mainstreet Bank’s operations and the quarterly decline in provisions could reverse at year-end. Overall, we feel that the Nigerian banking sector will face numerous challenges over the coming quarters, including: declining loan growth, deteriorating asset quality, margin compression, weaker non-interest revenue and the increased possibility of tax hikes. In the Francophone region, we digested lackluster FY14 earnings from Société Africaine de Plantations d'Hévéas (T/O: -35.9% y/y; EBITDA: -87.6% y/y) as profitability declined amid declining rubber prices (-31% y/y) and the six-month shutdown of its Rapide-Grah rubber factory.

East African equities were broadly weaker as Kenya, Tanzania, Uganda and Mauritius each contributed negatively on the month

East African equities were broadly weaker as Kenya, Tanzania, Uganda and Mauritius each contributed negatively on the month. In Kenya, KCB posted strong 1Q15 numbers (GE: +8.6% y/y; PAT: +11.8% y/y) on back of higher net interest income (+11.3% y/y) and gross fees and commissions (+18.8% y/y). Co-Operative Bank also posted solid 1Q15 results (GE: +18.5% y/y; PAT: +28.7% y/y) as net interest income rose by +21.3% y/y and the bank’s cost-to-income ratio declined from 53.6% to 47.2% y/y. ­In Mauritius, MCB Group posted impressive 3Q15 results (GE: +10.4% y/y; PAT +98.1% y/y) as net interest income rose by +17.1% y/y and provisions declined by -58.1% y/y. By comparison, SBM Group’s 1Q15 numbers (GE: +6.6% y/y; PAT -5.4% y/y) disappointed amid a +12.3% y/y rise in provisions and a +37.5% y/y increase in the bank’s effective tax rate.

North African equity markets rebounded on back of strength in Egypt

North African equity markets rebounded on back of strength in Egypt following the government’s announcement that it will be delaying implementation of the capital gains tax. On the earnings front, we digested solid 1Q15 numbers from Juhayna (T/O: +6.7% y/y; PAT: +50.9% y/y) as a decline in the cost of raw materials contributed to improved gross profit margins. Management has also announced that Juhayna will form a joint-venture partnership with European dairy cooperative Arla Foods to foster production and distribution of cheese, butter, infant formula and other dairy products in Egypt. The partnership will also explore opportunities for expansion into the Middle East and Africa. Edita reported mixed 1Q15 results (T/O: +17.3% y/y; PAT: -4.6% y/y) as top-line growth was offset by higher operating expenses (+48% y/y). It should be noted that Edita has agreed to acquire c.55,000 sqm of land at Polaris Al Zamil Industrial Park in Sixth of October City for its new production line. We believe this provides much-needed visibility on capacity additions and volume growth at Edita from FY17 onwards. Shifting to the financial sector, Commercial International Bank continues to perform strongly as 1Q15 earnings (GE: +38.8% y/y; PAT: +37.6% y/y) were fuelled by non-interest income growth (+47.5% y/y) and a decline in the bank’s cost-to-income ratio (from 22.5% to 19.3% y/y). Looking ahead, we believe that public and private sector credit growth will continue to accelerate while the recovery in Egyptian corporate loan growth remains firmly on track.

Southern African equities disappointed as Zimbabwe and Zambia continue their downward trajectory

Southern African equities disappointed as Zimbabwe and Zambia continue their downward trajectory. In Zimbabwe, we digested weak FY15 results from Delta (T/O: -4.3% y/y; PAT: -13% y/y) as constrained consumer spending, declining capacity utilisation and deteriorating regional currencies weighed on overall performance. Econet also reported disappointing FY15 results (T/O: -0.9% y/y; PAT: -41.1% y/y) although the operator’s performance was largely in-line with our expectations. OK Zimbabwe also reported disappointing FY15 results (T/O: -4.3% y/y; PAT: -24.1% y/y) as increased competition from Meikles Megastores, Choppies, Horizon Ivato and Pick n Pay led to lower-than-expected consumption of basic goods.