Monthly Highlights: November 2013

•  West African equity markets posted mixed results in November
•  East African equity markets recorded gains amid continued strength in Kenya
•  North African equity markets were broadly weaker as Morocco and Tunisia led markets lower
•  Southern African equities performed well on back of strength in Zimbabwe and Zambia
 

West African equity markets posted mixed results in November

West African equity markets posted mixed results in November as strength in Nigeria and the Francophone region was offset by subpar performance in Ghana. In Nigeria, we digested impressive 3Q13 results from across the cement sector led by Dangote Cement and Lafarge WAPCO. Dangote Cement announced strong 3Q13 results (T/O: +29.3% y/y; PAT: +33.7% y/y) as increased capacity (Obajana & Ibese plants) and relatively stable ex-factory prices drove +29.5% y/y volume growth during the period. Nevertheless, profit before tax lagged management’s guidance by more than 10% and EBITDA margins are trending lower – from 65.9% in 1Q13 to 59.4% in 3Q13. Lafarge WAPCO also posted solid 3Q13 numbers (T/O: +5.5% y/y; PAT: +187.8% y/y) as the +71% y/y rise in operating expenses was more than offset by margin expansion with gross margins widening by 1,120bp to 39.9%. As such, it appears our concerns with respect to gas supply (i.e. ongoing power sector reform, pipeline vandalism etc.) were misplaced. Shifting to financials, Access Bank reported disappointing 3Q13 results (G/E: +1.0% y/y; PAT: -19.3% y/y) as net interest margins came under pressure and impairments rose significantly following several quarters of write backs. Although management is finally beginning to take advantage of the bank’s increased lending capacity, we believe that a declining yield on assets will weigh down net interest margins over the medium-term. By contrast, Stanbic IBTC reported impressive 3Q13 results (G/E: +27.9% y/y; PAT: +193.0% y/y) on back of gains in non-interest income. Although we have reduced our exposure to Nigerian banks in recent months, the sector remains attractive as evidenced by mounting speculation that former Barclays’ CEO Bob Diamond has raised US$250 million to take control of a leading Nigerian bank. It should be noted that Nigerian banks continue to attract institutional capital as evidenced by the successful launch of GTB’s 5-year USD 400m Eurobond and Access Bank's placement of USD 100m in Tier II capital. In Ghana, the annual inflation rate reached a three-year high of 13.2% in November as the country continues to grapple with policy inertia and diminished credibility. It should be noted that we recently met with Dr. Charles Mensa, Founder & Chairman of the Institute of Economic Affairs (IEA), one of Ghana’s leading local think tanks. The IEA has been fairly consistent in its criticism of the Ghanaian government as internal wrangling and party politics have resulted in unrealistic revenue targets, underestimation of expenditure and numerous forecast inaccuracies. Ghana’s credibility is becoming a major issue as increased uncertainty is leading to delays in key infrastructure projects and generally uninspiring levels of foreign direct investment.

East African equity markets recorded gains amid continued strength in Kenya

East African equity markets recorded gains amid continued strength in Kenya. In the Kenyan financial sector, we digested mixed 3Q13 results as Co-operative Bank posted relatively healthy performance (GE: +34.2% y/y; PAT: +29.9% y/y) on back of higher net interest income (+32.8% y/y) and expanding net interest margins. We have taken note of the bank’s asset growth as aggressive marketing and improved delivery channels (i.e. agency banking model, mobile banking, etc.) have made significant contributions. Looking ahead, we remain somewhat cautious as net interest margins are likely to come under pressure amid increased competition and a rising cost of deposits. Standard Chartered Kenya also posted healthy 3Q13 results (GE: +5.8% y/y; PAT +19.7% y/y) on back of higher net interest income (+24.5% y/y) and improved cost management as the bank’s cost-to-income (CTI) ratio declined from 41.4% to 39.1 y/y. By contrast, Barclays Kenya posted mixed results (GE: +4.8% y/y; PAT: -5.2% y/y) as top-line growth was offset by weaker profitability amid a rise in impairments (+303.6% y/y). In Mauritius, Mauritius Commercial Bank released 1Q14 results (GE: +10.3% y/y; PAT +14.0% y/y) that were in-line with our expectations as other income rose by +113% y/y on back of strength in the bank’s trade finance activities. By contrast, State Bank of Mauritius reported weak 1Q14 results (GE: -0.8% y/y; PAT +0.2% y/y) amid a +145.6% rise in provisions. In Tanzania, CRDB Bank posted weak 3Q13 results (GE: +16.7% y/y; PAT: -0.4% y/y) as the CTI ratio rose from 52.9% to 55.3% on back of a +19.1% y/y rise in operating expenses.

North African equity markets were broadly weaker as Morocco and Tunisia led markets lower

We are beginning to view valuations in Morocco as increasingly attractive and are focused on opportunities in the energy and consumer space. Recent headwinds have led to disappointing 1H13 results for Label Vie and Centrale Laitiere as operating margins contracted amid a highly challenging environment. Although we rightly predicted such results, valuations have not depreciated to a comfortable entry point in our view. By contrast, we see a number of high growth opportunities across Morocco’s energy sector and view the nation’s underexplored offshore territories as a high impact exploration opportunity over the coming years. From an investment perspective, the key is identifying a strong management team with sufficient resources and access to acreage. We have witnessed a sharp uptick in corporate activity over the past year with a number of IOCs and large independents securing offshore acreage. Given the limited availability of unlicensed acreage, we see increased potential for farm-ins and acquisitions of smaller companies so as to gain exposure to the opportunity. Shifting to Egypt, inflation soared to 13.0% in November – the highest level in nearly four years. On the earnings front, Commercial International Bank of Egypt reported impressive 3Q13 earnings (GE: +17% y/y; PAT: +50.5% y/y) amid a decline in provisions (-69.6% y/y) and more favourable effective tax rate. Although not unexpected, Juhayna posted weak 3Q13 results (T/O: +4.2% y/y; PAT: -23.1% y/y) as general instability and imposition of a curfew disrupted production, distribution and consumer purchasing patterns.

Southern African equities performed well on back of strength in Zimbabwe and Zambia

Southern African equities performed well on back of strength in Zimbabwe and Zambia. In Zimbabwe, we digested healthy 1H14 results from Delta (T/O: +5.3% y/y; PAT: +12.8% y/y) as margin expansion offset decelerating volume growth in lager (-4% y/y) as a more challenging economic environment saw consumers shift to less expensive sorghum beer (+24% y/y). Looking ahead, we expect Chibuku (sorghum beer) and Maheu (non-alcoholic beverage) sales will drive top-line growth over 2H14 as down-trading continues. Management has thus far done an excellent job at realising production efficiencies and implementing cost controls. As Delta seeks to overcome short-term pricing challenges in a coinless environment, we suspect management will prove equally adept when tweaking pack sizes, growing the alternative beverages segment and realising continued economies of scale.