Monthly Highlights: November 2014

•  West African equity markets retreated amid weakness in Nigeria
•  East African equities were broadly weaker as Kenya, Mauritius and Tanzania led markets lower
•  North African equities exhibited mixed performance as strength in Egypt was offset by weaknesses in Tunisia and Morocco
•  Southern African equity markets were broadly weaker as Zimbabwe and Botswana continue to underperform
 

West African equity markets retreated amid weakness in Nigeria

West African equity markets retreated amid weakness in Nigeria as weaker oil prices, deteriorating foreign currency reserves and increased uncertainty surrounding next year’s presidential elections continue to weigh on investor sentiment. The NGN/USD cross rate rose to an all-time high of 178.70 by month-end as the Central Bank of Nigeria (CBN) looked to reassure investors of its commitment to policy stability. In an effort to curb US Dollar demand, the CBN adjusted the mid-point of its target exchange rate band from NGN 155.00/US$ to NGN 168.00 NGN/US$ whilst raising the corridor from +/-3% to +/-5%. The CBN also tightened the monetary policy rate by 100bp to 13% and increased the cash reserve requirement on private sector funds deposited with commercial banks by 500bp to 20%. On the corporate front, the reporting season continues as Dangote Cement released mixed 3Q14 results as solid top-line growth was offset by declining profits (T/O: +11.9% y/y; PAT: -7.0% y/y). Gross margin contracted by -624bp as the result of a lower gas-to-total fuel ratio relative to the prior year. PAT growth was held in check by base effects as the 3Q13 tax credit of NGN 4.4bn was replaced by a tax charge of NGN 1.9bn in 3Q14. Flour Mills posted weak 1H15 results (T/O: -1.5% y/y; PAT: -25.1% y/y) as management’s expansion drive in sugar, pasta, edible oils, snacks, animal feeds and rice was partially financed by debt resulting in a +79.9% increase in interest expense. Going forward, we expect interest expense to moderate as borrowings decline following the divestment from Unicem. We are projecting cash inflows in the range of US$275 – 325 million which will be used to retire debt and fund ongoing projects. Within the banking sector, Fidelity Bank reported impressive 3Q14 results (G/E: +9.7% y/y; PAT: +61.5% y/y) on back of gains in net interest income (+70.1%) and a -47.5% decline in impairments. Nigerian Breweries announced plans to merge with Consolidated Breweries as the company expands into the fast growing value segment. We expect the newly-combined entity to dominate the Nigerian brewery sector as it benefits from increased bargaining power on back of joint procurement, enhanced distribution capabilities and economies of scale in production. In Ghana, inflation reached a four-year high of 16.9% on back of rising prices for non-food items and imported goods. Although Ghana's economy has grown rapidly in recent years (due primarily to increased exports of oil, cocoa and gold), a high budget deficit and rapidly depreciating currency are creating significant headwinds.

East African equities were broadly weaker as Kenya, Mauritius and Tanzania led markets lower

East African equities were broadly weaker as Kenya, Mauritius and Tanzania led markets lower. In the Kenyan financial sector, we digested healthy 3Q14 results from Kenya Commercial Bank (GE: +26.6% y/y; PAT: +18.9% y/y) on back of higher non-interest income (+47.7% y/y) and a reduction in expenses as the bank’s cost-to-income (CTI) ratio (from 53.9% in 3Q13 to 45.8% in 3Q14). By contrast, Co-Operative Bank of Kenya posted weak 3Q14 results (GE: -3.4%% y/y; PAT -28.2% y/y) on back of lower net interest income (-10.8% y/y) and poor cost management as the bank’s CTI ratio rose from 59.1% to 63.4% y/y. Standard Chartered Kenya also posted poor results (GE: -0.8% y/y; PAT: -5.2% y/y) as growth in net interest income was offset by weaker non-interest income (-3.7% y/y) and rising operating costs, as the CTI ratio deteriorated (from 39.1% in 3Q13 to 43.5% in 3Q14). Shifting to telecoms, we digested strong 1H15 results from Safaricom (T/O: +14.6% y/y; PAT: +30.6% y/y) on back of strong growth in mobile data (+52.9% y/y) and M-Pesa (+24.7% y/y). We also saw improved cost efficiencies as the operator’s EBITDA margin widened by 70bpto 42.0%. Going forward we expect momentum to be maintained and anticipate earnings growth of +29.2% y/y at year end. In Mauritius, Mauritius Commercial Bank released in-line 1Q14 results (GE: +4.4% y/y; PAT +6.3% y/y) as non-interest income rose (+18.4% y/y) with net interest income up marginally (+1.2% y/y) on back of rising expenses and provisioning.

North African equities exhibited mixed performance as strength in Egypt was offset by weaknesses in Tunisia and Morocco

North African equities exhibited mixed performance as strength in Egypt was offset by weaknesses in Tunisia and Morocco. In Egypt, inflation soared to 11.8% amid rising prices for services such as education and health care. On the earnings front, Commercial International Bank of Egypt reported strong 3Q14 earnings (GE: +14.3% y/y; PAT: +5.6% y/y) as net interest income rose by +21.8% y/y. Non-interest income declined by -9.1% and PAT growth was limited to single digits amid rising provisions (+42.9% y/y) and a less favorable effective tax rate. Although not unexpected, Juhayna posted weak 3Q14 results (T/O: +15.1% y/y; PAT: -42.3% y/y) as strong top-line performance was driven by the dairy segment as volumes rose by +12% y/y. Earnings were negatively impacted by a +23.7% surge in cost of goods sold as rising raw materials prices, coupled by a +42.7% y/y rise financing costs and a higher effective tax rate (from 12.7% in 3Q13 to 24.4% in 3Q14) weighed on bottom-line performance. Looking ahead, we are confident that management will deliver strong growth in FY15 as the company capitalizes on its EGP 392m investment program.

Southern African equity markets were broadly weaker as Zimbabwe and Botswana continue to underperform

Southern African equity markets were broadly weaker as Zimbabwe and Botswana continue to underperform. In Zimbabwe, Delta reported 1H15 results (T/O: -7.6% y/y; PAT: -6.6% y/y) that were in-line with our estimates as decelerating lager sales (-15% y/y) and a more challenging economic environment saw consumers shift to less expensive sorghum beer (+24.0% y/y sales growth). With the continued migration of consumers down the value chain to more affordable products, operating margins at Delta declined by 148bp to21.56% in 1H15. It should be noted that management has reducing the prices for its lager product suite (e.g. Castle Lager, Golden Pilsner, Eagle lager and Bohlingers) in an effort to drive volume expansion. In Zambia, we digested weak FY14 earnings from Zambeef (T/O: 3.0% y/y) as 1H14 performance was adversely impacted by macroeconomic challenges and external influences. It should however be noted that 2H14 saw a strong turnaround as PBT rose to ZMW 15.6m vs. a loss ZMW 36.8m in 1H14.