Monthly Highlights: November 2015

•  West African underperformed amid broad based weakness across the region
•  East African equities exhibited mixed performance as strong performance in Kenya was offset by weakness in Tanzania
•  North African equities performed poorly as the economic recovery in Egypt continues to lose momentum
•  Southern African equity markets were broadly weaker on the month as Zimbabwe continues to underperform
 

West African underperformed amid broad based weakness across the region

West African underperformed amid broad based weakness across the region. In an effort to stimulate growth in response weakening economic fundamentals, the Central Bank of Nigeria embarked on a significant easing of monetary policy as evidenced by a 200bp cut in the monetary policy rate and 500bp reduction in the cash reserve ratio. On the corporate front, we digested weak 3Q15 results from Stanbic IBTC (GE: +10.5% y/y; PAT: -58.7%) as net interest income declined by -8% and non-performing loans rose by +702.4%. The bank was forced to take additional provisions given its heavy exposure to the energy sector, and Afren in particular, as the African energy company was placed into receivership. On the consumer front, UAC of Nigeria reported weak 3Q15 results (T/O -15.1 y/y; PAT n/a) as gross margins contracted -113bp y/y to 21% on back of a +15.6% increase in operating expenses and a +264% rise in interest expenses. When broken down by business segment, UACN’s paint and property businesses drove the poor performance as the company’s PBT was up +22% y/y after excluding the contributions from CAP (paint) and UPDC (property). CAP experienced a 20% decline in PBT, which is the first time we have seen a decline in many years. In other action, we heard from the management team at Nigerian Breweries as the company reiterated its focus on the value segment, where it is now the industry leader.

East African equities exhibited mixed performance as strong performance in Kenya and Uganda was offset by weakness in Tanzania and Mauritius

East African equities exhibited mixed performance as strong performance in Kenya and Uganda was offset by weakness in Tanzania and Mauritius. In Kenya, we digested exceptional 1H16 results from Safaricom (T/O: +22.5% y/y; PAT: +22.9% y/y) on back of strong growth in mobile data (+40.9% y/y) and M-Pesa (+24.1% y/y). The operator also benefited from a healthy boost in customer numbers (up +15% y/y) as Safaricom’s 3.3 million new subscribers may be attributed to a mix of organic growth and improved market share. Looking ahead, we expect momentum to be sustained and anticipate full-year earnings growth of +21.6% y/y in FY15. Shifting to Mauritius, Mauritius Commercial Bank released in-line 1Q16 results (GE: +11.1% y/y; PAT +12.5% y/y) as net interest income rose by +14.7% y/y. By contrast, State Bank of Mauritius reported weak 3Q15 results (GE: -8.1% y/y; PAT -30.4% y/y) amid a +870% rise in provisions and -30.3% decline in non-interest income. In Tanzania, CRDB Bank posted healthy 3Q15 results (GE: +23% y/y; PAT: +19.7% y/y) as +39.5% y/y growth in net interest income offset a +154% y/y jump in provisions.

North African equities performed poorly as the economic recovery in Egypt continues to lose momentum

North African equities performed poorly as the economic recovery in Egypt continues to lose momentum. Inflation accelerated on back of rising food prices and weaker oil means GCC nations will be increasingly reluctant to fund Egypt’s twin deficits. Despite the government’s efforts to ease food price inflation through discounted food distribution, a mid-December rate hike by the Central Bank of Egypt (CBE) is now a definitive possibility. On the earnings front, Edita Food Industries reported strong 3Q15 results (T/O: +20.5% y/y; PAT: +163% y/y) as margin improvement was supported by +58.1% y/y growth in the croissant segment. Of note, the croissant segment’s top-line contribution increased to 35% (up +20.7% y/y) on back of improved capacity (two new line additions in 1H15) and a better-than-expected 96% utilisation rate. Integrated Diagnostics Holdings also posted healthy 3Q15 results (T/O: +19% y/y) as number of patients and tests rose by 6.1% and 7.2% respectively as the health care provider continues to roll out new labs with another twenty added over the nine-month period ending 30th September. Shifting to the materials sector, Arabian Cement post mixed results (T/O: -10% y/y; PAT: +20% y/y) as the weaker top-line was driven by a lower selling price (-18.3% y/y) while profitability benefited from a tax credit booked during the quarter. Looking ahead, we believe the company has a significant cost advantage over many of its peers given the shift in fuel mix to 70% coal / 30% RDF. Of note, Arabian Cement has yet to benefit from this cost advantage as its imported clinker inventory must first be depleted. MNHD also reported mixed performance (T/O: -23.3% y/y; PAT: +28.5% y/y) as lower deliveries and land sales were offset by write backs and a decline in tax expenses on the quarter.

Southern African equity markets were broadly weaker on the month as Zimbabwe continues to underperform

Southern African equity markets were broadly weaker on the month as Zimbabwe continues to underperform. In Zimbabwe, we digested lackluster 1H16 results from Delta Corporation (T/O: -7.7% y/y; PAT: -19% y/y) as margins deteriorated amid weak discretionary spending and depressed consumer demand. Similarly, OK Zimbabwe reported weak 1H16 results (T/O: -7.9% y/y; PAT: -72% y/y) as increased consumption from low value basic goods weighed on margins following the entry of Meikles Megastores, Choppies, Horizon Ivato and the expansion of Pick N Pay. Shifting to Zambia, economic activity remains volatile amid rising inflation, depressed copper prices and speculation regarding a stabilisation programme with the IMF. On the earnings front, we digested weak full-year results from Zambeef Products as the company was adversely impacted by FX losses stemming from a sharply weaker Kwacha. Although the company posted pre-tax profits of US$15.1 million on the quarter, the net impact of a rapidly deteriorating currency was a pre-tax loss of US$5.0 million. Despite the disappointing results, operating profits at Zambeef rose by +140% y/y in USD terms as management adroitly navigates the challenging economic environment.